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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000950124-01-500488.txt : 20010425
<SEC-HEADER>0000950124-01-500488.hdr.sgml : 20010425
ACCESSION NUMBER: 0000950124-01-500488
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 17
CONFORMED PERIOD OF REPORT: 20010128
FILED AS OF DATE: 20010424
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: 1609263
BUSINESS ADDRESS:
STREET 1: 100 PHOENIX DRIVE
CITY: ANN ARBOR
STATE: MI
ZIP: 48108
BUSINESS PHONE: (734) 477-1100
MAIL ADDRESS:
STREET 1: 100 PHOENIX DRIVE
CITY: ANN ARBOR
STATE: MI
ZIP: 48108
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>k61366e10-k.txt
<DESCRIPTION>ANNUAL REPORT ENDED 01/28/01
<TEXT>
<PAGE> 1
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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 28, 2001
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)
<TABLE>
<S> <C>
MICHIGAN 38-3294588
(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)
</TABLE>
(734) 477-1100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF CLASS NAME OF EXCHANGE ON WHICH REGISTERED
-------------- ------------------------------------
<S> <C>
COMMON STOCK NEW YORK STOCK EXCHANGE
</TABLE>
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 $1,258,879,925 BASED UPON THE CLOSING MARKET PRICE
OF $16.50 PER SHARE OF COMMON STOCK ON THE NEW YORK STOCK EXCHANGE AS OF MARCH
22, 2001.
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 22, 2001: 79,944,489
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE MAY 17, 2001 ANNUAL
MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III.
THE EXHIBIT INDEX IS LOCATED ON PAGE 50 HEREOF.
- --------------------------------------------------------------------------------
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<PAGE> 2
BORDERS GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 11
Item 6. Selected Financial Data..................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 19
Item 8. Financial Statements and Supplementary Data................. 20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 41
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 42
Item 11. Executive Compensation...................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 45
Item 13. Certain Relationships and Related Party Transactions........ 45
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 46
</TABLE>
1
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
Borders Group, Inc. (the Company), through its subsidiaries, Borders, Inc.
(Borders), Walden Book Company, Inc. (Walden), Books etc., and others is the
second largest operator of book superstores and the largest operator of mall-
based bookstores in the world based upon both sales and number of stores. At
January 28, 2001, the Company operated 349 superstores primarily under the
Borders name, including nine in the United Kingdom, two in Australia, and one
each in Singapore, New Zealand, and Puerto Rico. The Company also operated 869
mall-based and other bookstores primarily under the Waldenbooks name and 31
bookstores under the Books etc. name in the United Kingdom. The Company is also
an online retailer of books, music, and video through the operation of its
Internet commerce site, Borders.com.
BORDERS
Borders is a premier operator of book and music superstores, offering
customers selection and service that the Company believes to be superior to
other book superstore operators. A key element of the Company's strategy is to
continue its growth and increase its profitability through the ongoing expansion
of its Borders book and music superstore operations, both domestic and
international. In 2000, the Company opened 44 new Borders book and music
superstores. Borders superstore operations achieved annual growth in net sales
and net income for the year ended January 28, 2001 of 14.1% and 13.3%
respectively. Borders superstores achieved average sales per square foot of $255
and average sales per superstore of $6.7 million in 2000, 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 28, 2001, and January 23,
2000, of 18.0% and 23.0%, respectively.
Each Borders superstore offers customers a vast assortment of books,
superior customer service, value pricing and an inviting and comfortable
environment designed to encourage browsing. Borders superstores carry an average
of 140,000 book titles, ranging from 85,000 titles to 170,000 titles, across
numerous categories, including many hard-to-find titles. As of January 28, 2001,
321 of the 335 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 40,000 titles of music, 5,500 titles
of videotapes and 1,400 titles of digital video discs.
Borders superstores average 24,500 square feet in size, including
approximately 5,000 square feet devoted to music, approximately 600 square feet
devoted to videos and digital video discs and approximately 1,400 square feet
devoted to a cafe. Stores opened in fiscal 2000 averaged 25,200 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
<PAGE> 4
The number of Borders domestic stores located in each state and the
District of Columbia as of January 28, 2001 are listed below:
<TABLE>
<CAPTION>
NUMBER OF
STATE STORES
----- ---------
<S> <C>
Alaska............................ 1
Arizona........................... 7
California........................ 50
Colorado.......................... 8
Connecticut....................... 5
District of Columbia.............. 3
Delaware.......................... 2
Florida........................... 22
Georgia........................... 13
Hawaii............................ 6
Iowa.............................. 2
Idaho............................. 1
Illinois.......................... 21
Indiana........................... 7
Kansas............................ 5
Louisiana......................... 1
Massachusetts..................... 11
Maryland.......................... 9
Maine............................. 2
Michigan.......................... 15
Minnesota......................... 5
Missouri.......................... 4
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
STATE STORES
----- ---------
<S> <C>
North Carolina.................... 6
Nebraska.......................... 2
New Hampshire..................... 3
New Jersey........................ 10
New Mexico........................ 2
Nevada............................ 4
New York.......................... 17
Ohio.............................. 16
Oklahoma.......................... 4
Oregon............................ 6
Pennsylvania...................... 18
Rhode Island...................... 2
South Dakota...................... 1
Tennessee......................... 4
Texas............................. 15
Utah.............................. 3
Virginia.......................... 10
Vermont........................... 1
Washington........................ 6
Wisconsin......................... 4
West Virginia..................... 1
</TABLE>
WALDEN
Walden is the leading operator of mall-based bookstores in terms of sales
and number of stores, offering customers a convenient source for new releases,
hardcover and paperback bestsellers, periodicals, and a standard selection of
other titles. Walden generates cash flow that the Company plans to use toward
financing the Company's growth initiatives. Walden had sales for the year ended
January 28, 2001 of $944.3 million, and generated net income of $40.2 million.
Walden achieved average sales per square foot of $269 and average sales per
store of $1.1 million for 2000, both of which are higher than its closest
competitor. Walden stores average approximately 3,500 square feet in size and
typically carry between 15,000 and 40,000 titles.
Walden operates one of the longest-running customer loyalty programs in the
nation, the Preferred Reader Program. The lessons learned via this program are
helping the Company to develop customer loyalty programs across its other
business channels.
3
<PAGE> 5
The number of Waldenbooks stores located in each state and the District of
Columbia as of January 28, 2001 are listed below:
<TABLE>
<CAPTION>
NUMBER OF
STATE STORES
----- ---------
<S> <C>
Alaska............................ 6
Alabama........................... 6
Arkansas.......................... 8
Arizona........................... 11
California........................ 70
Colorado.......................... 14
Connecticut....................... 14
District of Columbia.............. 2
Delaware.......................... 3
Florida........................... 50
Georgia........................... 25
Hawaii............................ 12
Iowa.............................. 13
Idaho............................. 4
Illinois.......................... 40
Indiana........................... 20
Kansas............................ 8
Kentucky.......................... 12
Louisiana......................... 10
Massachusetts..................... 27
Maryland.......................... 23
Maine............................. 2
Michigan.......................... 27
Minnesota......................... 8
Missouri.......................... 19
Mississippi....................... 7
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
STATE STORES
----- ---------
<S> <C>
Montana........................... 4
North Carolina.................... 31
North Dakota...................... 3
Nebraska.......................... 5
New Hampshire..................... 5
New Jersey........................ 26
New Mexico........................ 5
Nevada............................ 4
New York.......................... 47
Ohio.............................. 42
Oklahoma.......................... 13
Oregon............................ 10
Pennsylvania...................... 54
Rhode Island...................... 5
South Carolina.................... 14
South Dakota...................... 2
Tennessee......................... 16
Texas............................. 59
Utah.............................. 4
Virginia.......................... 31
Vermont........................... 4
Washington........................ 17
Wisconsin......................... 16
West Virginia..................... 9
Wyoming........................... 2
</TABLE>
In March 1999, Walden acquired for cash the stock of All Wound Up (AWU) for
a purchase price of $19.7 million. AWU operates kiosks, most of which are
seasonal, which sell interactive toys and other novelty merchandise. The
acquisition has been accounted for under the purchase method.
In January 2001, the Company adopted a plan to discontinue operations of
AWU. Accordingly, the operating results of AWU have been segregated from
continuing operations.
INTERNATIONAL
Borders international initiative began in 1997 with the acquisition of
Books etc. in the United Kingdom and the opening of a superstore in Singapore.
Since then, Borders has expanded its international operations to establish a
presence on four continents. The Company opened five international superstores
in 2000, and as of January 28, 2001, operated nine superstores in the United
Kingdom, two in Australia, and one each in Singapore, New Zealand, and Puerto
Rico.
International superstores range between 16,000 and 40,000 square feet in
size. International superstores tend to be multi-level facilities located in
older buildings in urban locations. The Company believes it has a competitive
advantage due to the depth of Borders' system-driven assortment and level of
service which currently does not exist in the international marketplace. In
2000, international sales increased 30% to $219.2 million. Currently, five of
the top ten highest volume Borders superstores are international stores.
4
<PAGE> 6
In February 2000, Borders opened its first bilingual superstore in San
Juan, Puerto Rico. This is a significant step for the Company in advancing the
Company's global growth strategy, as well as helping Borders build its domestic
Spanish language book and music assortment.
Books etc. operated 31 stores in the United Kingdom as of January 28, 2001,
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 8,000 square feet, and the
smallest being 650 square feet.
BORDERS.COM
The Company operates an Internet commerce site, Borders.com. This site
offers customers over 700,000 titles of book, music and video items in stock and
ready for immediate shipping.
Borders.com is a part of the Company's retail convergence strategy. The
Company's retail convergence strategy is to enhance the shopping experience by
offering products to customers in a variety of channels, whether it be retail
stores, the Internet, or special orders. The Company's rollout of Title Sleuth
in 2000 is a component of this convergence. Title Sleuth is a free-standing
computer kiosk based on Web technology that helps customers locate titles within
the store.
On April 11, 2001, the Company announced an agreement with Amazon.com, Inc.
to re-launch Borders.com as a co-branded Web site powered by Amazon.com's
e-commerce platform. Amazon.com will be the seller of record, providing
inventory, fulfillment, site content and customer service for the co-branded
site. Borders.com will continue operation in its current format until the launch
of the co-branded site planned in August 2001.
DISTRIBUTION
The Company believes that its centralized distribution system, consisting
of 13 distribution facilities worldwide, combined with Borders' use of its
proprietary "expert" system to manage inventory, significantly enhances its
ability to manage inventory on a store-by-store basis. Inventory is shipped from
vendors to one of the Company's distribution centers. Approximately 95% and 70%
of the books carried by Borders and Walden, respectively, are processed through
the Company's distribution facilities. Approximately 90% of the inventory that
arrives from publishers is processed within 48 hours for shipment to the stores.
Newly released titles and rush orders are processed within 24 hours. Borders
purchases substantially all of its music merchandise directly from manufacturers
and utilizes the Company's own distribution center to ship approximately 99% of
its music inventory to its stores.
The Company utilizes four distribution centers located in Harrisburg,
Pennsylvania, Indianapolis, Indiana, Columbus, Ohio and Nashville, Tennessee
that provide exclusive service to Borders' stores and one distribution center,
also in Nashville, that services Walden stores exclusively. The Company also
utilized a distribution center in Columbus that serviced the All Wound Up
seasonal kiosk operations in fiscal 2000. The distribution center in Columbus
closed in 2001 due to the discontinuance of operations of All Wound Up. In
addition, the Company has two distribution facilities in Mira Loma, California
and Ann Arbor, Michigan that service both Borders and Walden. Three
international distribution centers located in the United Kingdom, Australia, and
Singapore support the Company's growing international business.
The Company has a state-of-the-art 200,000 square-foot fulfillment center
in La Vergne, Tennessee that supports Borders.com and Borders and Walden stores.
This facility has over 700,000 titles of books, music and videos in stock and
available for immediate shipping. In addition to serving Borders.com customers,
the fulfillment center also provides delivery services for store-originated
special orders, institutional orders, and call center orders, with the
capability to ship direct to the customer or the store.
The Company announced an agreement on March 15, 2001, with Ingram Book
Group to make Ingram the primary provider of book fulfillment services for
Borders Group's special order sales. The transaction includes the sale to Ingram
of a large percentage of the book inventory housed in the Company's fulfillment
center in La Vergne, Tennessee, which currently handles the function to be
assumed by Ingram. Upon completion of the transition, Ingram will fulfill book
special orders for Borders and Walden stores. The Company plans to keep the La
Vergne facility open as the Company realigns its distribution assets. The
facility will use the additional processing capacity
5
<PAGE> 7
resulting from the Ingram agreement to support other products and retail store
growth. See Note 14 -- Subsequent Event in the Notes to Consolidated Financial
Statements.
Pursuant to the agreement with Amazon.com, Inc. as discussed above,
Amazon.com, Inc. will assume the fulfillment of online orders upon the
transition to a co-branded site planned in August 2001.
In general, books can be returned to their publishers at cost. Borders and
Walden stores return books to the Company's centralized returns center in
Nashville, Tennessee to be processed for return to the publishers. In general,
Borders can return music and videos to its vendors at cost plus an additional
fee to cover handling and processing costs.
COMPETITION
The retail book business is highly competitive. Competition within the
retail book industry is fragmented with Borders facing direct competition from
other superstores, such as Barnes & Noble, Inc., as well as regional chains and
superstores. In addition, Borders and Walden compete with each other, as well as
other specialty retail stores that offer books in a particular area of
specialty, independent single store operators, discount stores, drug stores,
warehouse clubs, mail order clubs and mass merchandisers. In the future, Borders
and Walden may face additional competition from other categories of retailers
entering the retail book market.
The music and video businesses are also highly competitive and Borders
faces competition from large established music chains, such as Tower Records and
the Musicland and Media Play divisions of Musicland Stores Corporation (which
also sell videos), established video chains, such as Blockbuster and Suncoast
Motion Picture Company (a division of Musicland Stores Corporation), as well as
specialty retail stores, video rental stores, discount stores, warehouse clubs
and mass merchandisers. In addition, consumers receive television and mail order
offers and have access to mail order clubs. The largest mail order clubs are
affiliated with major manufacturers of pre-recorded music and may have
advantageous marketing relationships with their affiliates.
The Internet has emerged as a significant channel for retailing in all
media categories that the Company carries. In particular, the retailing of books
and music over the Internet is highly competitive. Competitors on the Internet
include Amazon.com, barnesandnoble.com, and others. In addition, the Company
faces competition from companies engaged in the business of selling books and
music products via electronic means.
EMPLOYEES
As of January 28, 2001, the Company had a total of approximately 17,000
full-time employees and approximately 13,000 part-time employees. When hiring
new employees, the Company considers a number of factors, including education
and experience, personality and orientation towards customer service. All new
store employees participate in a training program that provides up to two weeks
of in-store training in all aspects of customer service and selling, including
title searches for in-stock and in-print merchandise, merchandising, sorting,
operation of point of sale terminals and store policies and procedures. The
Company believes that its relations with its employees are generally excellent.
None of the employees of the Company are represented by unions except that the
employees of two Borders stores have set dates in May 2001 to vote on whether or
not they will be represented by unions.
TRADEMARKS AND SERVICE MARKS
Borders(R), Borders Book Shop(R), and Borders Books & Music(R), among other
marks, are all registered trademarks and service marks used by Borders.
Brentano's(R), Coopersmith's(R), Longmeadow Press(R), Waldenbooks(R),
Waldenbooks Preferred Reader(R), Waldenkids(R) and Waldensoftware(R), among
other marks, are all registered trademarks and service marks used by Walden.
Books etc(R) is a registered trademark and service mark used by Books etc.
Borders.com(R) is a registered trademark and service mark used by Borders
Online, Inc. The Borders, Walden, Books etc and Borders.com service marks are
used as trade names in connection with their business operations.
6
<PAGE> 8
SEASONALITY
The Company's business is highly seasonal, with sales generally highest in
the fourth quarter and lowest in the first quarter. During 2000, 36.4% of the
Company's sales and 96% 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 of the Company.
Kmart and the Company continue to have the following contractual
relationships.
Tax Allocation and Indemnification Agreement. Prior to the completion of
its initial public offering ("the IPO"), the Company was included in the
consolidated federal income tax returns of Kmart and filed on a combined basis
with Kmart in certain states. Pursuant to a tax allocation and indemnification
agreement between the Company and Kmart (the "Tax Allocation Agreement") the
Company will remain obligated to pay to Kmart any income taxes the Company would
have had to pay if it had filed separate tax returns for the tax period
beginning on January 26, 1995, and ending on June 1, 1995, the date of the
consummation of the IPO (to the extent that it has not previously paid such
amounts to Kmart). In addition, if the tax liability attributable to the Company
for any previous tax period during which the Company was included in a
consolidated federal income tax return filed by Kmart or a combined state return
is adjusted as a result of an action of a taxing authority or a court, then the
Company will pay to Kmart the amount of any increase in such liability and Kmart
will pay to the Company the amount of any decrease in such liability (in either
case together with interest and penalties). The Company's tax liability for
previous years will not be affected by any increase or decrease in Kmart's tax
liability if such increase or decrease is not directly attributable to the
Company. After completion of the IPO, the Company continued to be subject under
existing federal regulations to several liability for the consolidated federal
income taxes for any tax year in which it was a member of any consolidated group
of which Kmart was the common parent. Pursuant to the Tax Allocation Agreement,
however, Kmart agreed to indemnify the Company for any federal income tax
liability of Kmart or any of its subsidiaries (other than that which is
attributable to the Company) that the Company could be required to pay and the
Company agreed to indemnify Kmart for any of the Company's separate company
taxes.
Lease Guaranty Agreement. Borders' leases for 30 of its retail stores and
its distribution center in Harrisburg, Pennsylvania have been guaranteed by
Kmart, on either a full or limited basis. Limited guarantees generally provide
for the release of Kmart's guarantee upon satisfaction by Borders of certain
financial requirements specified in the guarantee. Under the terms of a lease
guaranty, indemnification and reimbursement agreement entered into upon
completion of the IPO (the "Lease Guaranty Agreement"), until termination of all
of the lease guarantees, except during such time as the Company achieves and
maintains the investment grade status specified in the Lease Guaranty Agreement,
the Company will be subject to certain covenants and restrictive covenants under
the Lease Guaranty Agreement including restrictions on indebtedness, dividends,
mergers and certain liens.
Under the terms of the Lease Guaranty Agreement, the underlying leases will
be transferable by Borders, subject to a right of first refusal in favor of
Kmart with respect to sites within a three-mile radius of a Kmart store and,
with respect to all other sites, a right of first offer in favor of Kmart. The
Company and Borders are required to indemnify Kmart with respect to (i) any
liabilities Kmart may incur under the lease guarantees, except those liabilities
arising from the gross negligence or willful misconduct of Kmart, and (ii) any
losses incurred by Kmart after taking possession of any particular premises,
except to the extent such losses arise solely from the acts or omissions of
Kmart. Under the terms of the Lease Guaranty Agreement, in the event of (i) the
Company's or Borders' failure to provide any required indemnity, (ii) a knowing
and material violation of the limitations on transfers of guaranteed leases set
forth in the agreement, (iii) a breach of any of the financial covenants
described above or
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<PAGE> 9
(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.
The Company and Borders have entered into an agreement with Kmart pursuant
to which (i) the Company and Borders have agreed to take certain actions in
order to secure the release of up to 30 Kmart lease guarantees (including by
providing substitute lease guarantees from the Company in certain cases and by
assigning certain Borders' leases to Walden), and (ii) Kmart has agreed that, if
the Company and Borders are successful in their efforts to obtain the release of
at least three out of a group of 10 designated Kmart lease guarantees and
certain other conditions are satisfied, then the Lease Guaranty Agreement will
be amended to eliminate most of the restrictions described above which are
imposed on the Company by the Lease Guaranty Agreement. There can be no
assurance that the Company and Borders will be successful in such efforts or
that the Lease Guaranty Agreement will be amended.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. Forward-looking
statements reflect management's current expectations and are inherently
uncertain. The Company's actual results may differ significantly from
management's expectations. Exhibit 99.1, "Cautionary Statement Under the Private
Securities Litigation Reform Act of 1995", filed with this Annual Report on Form
10-K identifies the forward-looking statements and describes some, but not all,
of the factors that could cause these differences.
ITEM 2. PROPERTIES
Borders leases all of its stores. Borders' store leases have an average
initial term of 15 to 20 years with several five-year renewal options. At
January 28, 2001, the average unexpired term under Borders' existing store
leases was 13 years prior to the exercise of any options.
Walden leases all of its stores. Walden's store leases generally have an
initial term of 10 years. At present, the average unexpired term under Walden's
existing store leases is approximately 3.8 years. The expiration of Walden's
mall-based bookstore leases for its bookstores open as of January 28, 2001
expire as follows:
<TABLE>
<CAPTION>
LEASE TERMS TO EXPIRE DURING 12 MONTHS NUMBER OF
ENDING ON OR ABOUT JANUARY 31 MALL STORES
-------------------------------------- -----------
<S> <C>
2001........................................................ 192
2002........................................................ 127
2003........................................................ 112
2004........................................................ 110
2005........................................................ 79
2006 and later.............................................. 249
</TABLE>
Books etc. operated 31 stores in the United Kingdom as of January 28, 2001.
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
12.3 years.
8
<PAGE> 10
The Company has leased a portion of its corporate headquarters in Ann
Arbor, Michigan and owns the remaining building and improvements. The Company
leases all distribution centers.
ITEM 3. LEGAL PROCEEDINGS
In March 1998, the American Booksellers Association ("ABA") and 26
independent bookstores filed a lawsuit in the United States District Court for
the Northern District of California against the Company and Barnes & Noble, Inc.
alleging violations of the Robinson-Patman Act, the California Unfair Trade
Practice Act and the California Unfair Competition Act. The Complaint seeks
injunctive and declaratory relief; treble damages on behalf of each of the
bookstore plaintiffs, and, with respect to the California bookstore plaintiffs,
any other damages permitted by California law; disgorgement of money, property
and gains wrongfully obtained in connection with the purchase of books for
resale, or offered for resale, in California from March 18, 1994, until the
action is completed and prejudgment interest on any amounts awarded in the
action, as well as attorney fees and costs. The plaintiffs have provided a
report estimating damages against the Company, exclusive of interest, as
follows: (i) between an aggregate of approximately $2.8 million and
approximately $3.3 million (before trebling) with respect to the Robinson-Patman
Act claims of the 26 independent bookseller plaintiffs, and (ii) between an
aggregate of approximately $5.5 million and approximately $6.4 million with
respect to the disgorgement claims under California law for the geographic areas
of the California plaintiffs. The Company's pleadings in the action deny any
liability to plaintiffs, and the Company disputes plaintiffs' claims of damages.
On November 16, 2000, the court granted the motion of the Company and Barnes &
Noble to dismiss the disgorgement claims brought by the ABA under California law
on behalf of independent booksellers in the state of California who are not
named in the litigation. On March 19, 2001, the court dismissed all of the
damage claims of the plaintiffs. The trial of the remaining claims began on
April 9, 2001, and on April 19, 2001, the parties settled the litigation.
Under the terms of the Settlement Agreement, the Company and Barnes &
Noble, Inc. will each pay $2.35 million to the ABA as partial reimbursement for
its legal fees. The Settlement Agreement does not impose any restrictions on the
Company's business practices. The plaintiffs have released all claims against
the Company up to the date of the settlement relating to matters asserted in the
litigation, and have agreed not to sue the Company for three years over any
practices that were the subject of the litigation.
In August 1998, the Intimate Bookshop, Inc. ("Intimate") instituted an
action against the Company and Barnes & Noble, Inc. in the United States
District Court for the Southern District of New York, and, in December, 2000 and
Lucky, Inc. instituted an action against Waldenbooks and Barnes & Noble, Inc. in
the United States District for the District of Montana, Great Falls Division.
Both of these actions contain allegations and claims similar to those contained
in the ABA litigation described above. The Intimate Amended Complaint alleges
that Intimate has suffered $11.3 million or more in damages and requests treble
damages, injunctive and declaratory relief, interest, costs, attorneys' fees and
other unspecified relief. The Lucky, Inc. Amended Complaint alleges that the
plaintiffs have suffered more than $75,000 in damages and requests treble
damages, injunctive and declaratory relief, interest, costs, attorneys' fees and
other specified relief. The Company intends to vigorously defend these actions.
In April 2000, two former employees, Marissa Everett and Terry Blagsvedt,
instituted an action against Borders in the Superior Court of California for the
County of San Francisco. The Amended Complaint in the action was filed by four
plaintiffs, individually and on behalf of a purported class consisting of all
current and former employees who worked as assistant managers in Borders stores
in the state of California at any time between April 10, 1996, and the present.
The Amended Complaint alleges that the individual plaintiffs and the purported
class members worked hours for which they were entitled to receive, but did not
receive, overtime compensation under California law, and that they were
classified as "exempt" store management employees but were forced to work more
than 50% of their time in non-exempt tasks. The Amended Complaint alleges
violations of the California Labor Code and the California Business and
Professions Code. The relief sought includes compensatory and punitive damages,
penalties, preliminary and permanent injunctions requiring Borders to pay
overtime compensation as required under California and Federal law, prejudgment
interest, costs and attorneys fees and such other relief as the court deems
proper. The Company intends to vigorously defend the action, including
contesting the certification of the action as a class action.
9
<PAGE> 11
On May 31, 2000, Keith Markowitz instituted an action in the United States
District Court for the Eastern District of Pennsylvania as a purported class
action against Sony Music Entertainment Inc. ("Sony"), Warner-Elektra-Atlantic
Corporation ("WEA"), EMI Music Distribution ("EMI"), BMG Music ("BMG"),
Universal Music & Video Corp. ("UMVD"), WalMart Stores, Inc., ("WalMart") and
Borders, Inc., ("Borders", a subsidiary of the Company). The purported Plaintiff
Class is composed of all similarly situated purchasers who since May 31, 1996
(the "Class Period") purchased compact discs of prerecorded music distributed
and/or manufactured by defendants. WalMart and Borders are named as defendants
individually and as representatives of a purported Defendant Class consisting of
all retailers and other distributors of compact discs produced by defendants
Sony, WEA, EMI, BMG, and UMVD during the Class Period, and who conspired with
Sony, WEA, EMI, BMG, and/or UMVD to carry out the unlawful conduct alleged in
the complaint. The complaint alleges that Sony, WEA, EMI, BMG, and UMVD each had
agreements with retailers setting out minimum advertised price policies and the
benefits conferred on retailers for adhering to such policy, and that such
agreements amounted to vertical agreements in restraint of trade fixing a
minimum price for prerecorded music products, including CDs. The complaint
further alleges that the alleged agreements violated of the Sherman Anti-Trust
Act and caused the plaintiffs to pay supra-competitive prices for the CDs they
purchased. Plaintiffs seek a permanent injunction, treble damages, attorneys'
fees, costs and disbursements, pre- and post-judgment interest and such other
relief as the court may deem as appropriate.
Subsequent to the filing of the Markowitz case a number of other cases were
filed in other federal district courts. None of the other cases named Borders as
a defendant and all were transferred for pretrial purposes pursuant to the
Multi-District Litigation procedure to the United States District Court for the
District of Maine. Pursuant to that procedure the cases were consolidated under
the caption, "In re Compact Disc Minimum Advertised Price Antitrust Litigation,"
and a consolidated complaint was filed. This consolidated complaint did not name
Borders as a party to the suit. Thus, the Company's involvement in the case is
limited to that of a witness against whom no liability or damages can attach.
On October 10, 2000, Edward Michael O'Brien and Saviorg Corporation, as pro
se litigants, instituted an action in the United States District Court for the
Central District of California against Time Warner, Inc., Warner Music Group,
Warner-Electra-Atlantic Corporation, Warner Bros. Records, Inc, Atlantic
Recording Corp., Elektra Entertainment Group, Inc., Rhino Entertainment Company,
WalMart Stores, Inc., K-Mart Corporation, the Company and Morning Glory Music.
The Complaint contains allegations similar to those made in the Markowitz action
described above, and also alleges other violations of California and federal
laws. Plaintiffs seek treble damages, attorneys' fees, costs and disbursements
and such further relief as the court may deem just and proper. The complaint was
dismissed and the dismissal has been appealed to the United States Court of
Appeals for the Ninth Circuit. In the meantime, Mr. O'Brien, alone, filed
another suit, making essentially the same allegations. Efforts to dismiss the
complaint are underway. The Company denies the allegations of wrongdoing and
intends to vigorously defend this litigation.
In addition to the matters described above, the Company is from time to
time involved in or affected by other litigation incidental to the conduct of
its businesses. The Company does not believe that any such other litigation will
have a material adverse effect on its liquidity, financial position or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10
<PAGE> 12
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.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL QUARTER 1999
First Quarter............................................. $20.25 $13.56
Second Quarter............................................ $17.50 $14.25
Third Quarter............................................. $14.69 $11.88
Fourth Quarter............................................ $17.88 $12.25
FISCAL QUARTER 2000
First Quarter............................................. $17.25 $11.19
Second Quarter............................................ $18.50 $13.38
Third Quarter............................................. $14.44 $12.56
Fourth Quarter............................................ $13.94 $11.38
</TABLE>
The Common Stock is traded on the New York Stock Exchange.
As of March 22, 2001, the Common Stock was held by 4,163 holders of record.
The Company has not declared any cash dividends and intends to retain its
earnings to finance future growth. Therefore, the Company does not anticipate
paying any cash dividends in the foreseeable future. The declaration and payment
of dividends, if any, is subject to the discretion of the Board and to certain
limitations under the Michigan Business Corporation Act. In addition, the
Company's ability to pay dividends is restricted by certain agreements to which
the Company is a party. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources".
On January 29, 2001, the Company issued to Robert DiRomualdo, Chairman and
Director of the Company, options to purchase 53,191 shares of common stock with
an exercise price of $12.44 in lieu of salary for fiscal 2001. This transaction
involved an offer to Mr. DiRomualdo 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.
On January 29, 2001, the Company issued to George R. Mrkonic, Vice Chairman
of the Company, options to purchase 53,191 shares of common stock with an
exercise price of $12.44 in lieu of salary for fiscal 2001. This transaction
involved an offer to Mr. Mrkonic pursuant to the terms of his Employment
Agreement with the Company. Reliance was placed by the Company upon the
exemption from registration under Section 4(2) of the Securities Act of 1933,
which exempts transactions by an issuer not involving a public offering.
11
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Company's consolidated financial statements and the notes
thereto.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------------
JANUARY 28, JANUARY 23, JANUARY 24, JANUARY 25, JANUARY 26,
2001(1) 2000 1999 1998 1997
----------- ----------- ------------ ------------ -----------
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Borders Sales.............................. $2,080.3 $1,823.2 $1,521.0 $1,267.4 $ 979.1
Waldenbooks Sales.......................... 944.3 959.1 948.7 970.0 979.7
International Sales........................ 219.2 168.2 120.7 28.6 --
-------- -------- -------- -------- --------
Total Store Sales.......................... 3,243.8 2,950.5 2,590.4 2,266.0 1,958.8
Borders.com Sales.......................... 27.4 17.9 4.6 -- --
-------- -------- -------- -------- --------
Total Sales................................ $3,271.2 $2,968.4 $2,595.0 $2,266.0 $1,958.8
Operating Income Before Asset Impairments
and Other Writedowns..................... $ 171.3 $ 171.0 $ 167.3 $ 138.0 $ 103.1
Asset Impairments and Other Writedowns..... 36.2 -- -- -- --
-------- -------- -------- -------- --------
Operating Income from Continuing
Operations............................... $ 135.1 $ 171.0 $ 167.3 $ 138.0 $ 103.1
======== ======== ======== ======== ========
Income from Continuing Operations.......... $ 73.8 $ 94.0 $ 92.1 $ 80.2 $ 57.9
Discontinued Operations, Net of Tax
Loss from Operations of All Wound Up..... 10.8 3.7 -- -- --
Loss on Disposition of All Wound Up...... 19.4 -- -- -- --
-------- -------- -------- -------- --------
Net Income................................. $ 43.6 $ 90.3 $ 92.1 $ 80.2 $ 57.9
======== ======== ======== ======== ========
Diluted Earnings Per Common Share.......... $ 0.54 $ 1.13 $ 1.12 $ 0.98 $ 0.70
Diluted Earnings Per Common Share from
Continuing Operations.................... $ 0.92 $ 1.17 $ 1.12 $ 0.98 $ 0.70
Diluted Earnings Per Common Share Before
Asset Impairments and Other Writedowns
and Discontinued Operations.............. $ 1.21 $ 1.17 $ 1.12 $ 0.98 $ 0.70
BALANCE SHEET DATA
Working Capital............................ $ 217.2 $ 170.3 $ 144.5 $ 137.0 $ 225.1
Total Assets............................... $2,047.1 $1,914.8 $1,766.6 $1,534.9 $1,211.0
Short-Term Borrowings...................... $ 143.5 $ 133.4 $ 131.9 $ 122.5 $ 30.0
Long-Term Debt and Capital Lease
Obligations, Including Current Portion... $ 15.8 $ 18.8 $ 8.5 $ 10.0 $ 6.7
Shares Subject to Repurchase............... $ -- $ -- $ -- $ -- $ 34.1
Stockholders' Equity....................... $ 846.5 $ 802.6 $ 715.1 $ 598.1 $ 511.4
</TABLE>
- -------------------------
(1) The Company's 2000 fiscal year consisted of 53 weeks.
12
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Borders Group, Inc. (the Company), through its subsidiaries, is the second
largest operator of book and music superstores and the largest operator of
mall-based bookstores in the world based upon both sales and number of stores.
At January 28, 2001, the Company operated 349 superstores primarily under the
Borders name, including nine in the United Kingdom, two in Australia, and one
each in Singapore, New Zealand, and Puerto Rico. The Company also operated 869
mall-based and other bookstores primarily under the Waldenbooks name, and 31
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 2000 consisted of 53 weeks and ended on January 28,
2001. Fiscal 1999 and 1998 consisted of 52 weeks and ended on January 23, 2000,
and January 24, 1999, respectively. References herein to years are to the
Company's fiscal years.
RESULTS OF OPERATIONS
The following table presents the Company's consolidated statement of
operations data, as a percentage of sales, for the three most recent fiscal
years.
<TABLE>
<CAPTION>
JAN. 28, JAN. 23, JAN. 24,
2001 2000 1999
-------- -------- --------
<S> <C> <C> <C>
RESULTS OF OPERATIONS
Sales....................................................... 100.0% 100.0% 100.0%
Cost of merchandise sold (includes occupancy)............... 72.0 71.7 71.7
----- ----- -----
Gross margin................................................ 28.0 28.3 28.3
Selling, general and administrative expenses................ 22.5 22.1 21.5
Pre-opening expense......................................... 0.2 0.3 0.3
Goodwill amortization....................................... 0.1 0.1 0.1
----- ----- -----
Operating income before asset impairments and other
writedowns................................................ 5.2 5.8 6.4
Asset impairments and other writedowns...................... 1.1 -- --
----- ----- -----
Operating income............................................ 4.1 5.8 6.4
Interest expense............................................ 0.4 0.6 0.6
----- ----- -----
Income before income tax.................................... 3.7 5.2 5.8
Income tax.................................................. 1.4 2.0 2.3
----- ----- -----
Income from continuing operations........................... 2.3 3.2 3.5
Discontinued operations, net of tax:
Loss from operations of All Wound Up........................ 0.4 0.2 --
Loss on disposition of All Wound Up......................... 0.6 -- --
----- ----- -----
Net Income.................................................. 1.3% 3.0% 3.5%
===== ===== =====
</TABLE>
13
<PAGE> 15
CONSOLIDATED RESULTS
Consolidated sales increases in fiscal 2000 and 1999 resulted primarily
from the opening of new Borders superstores and increases in comparable store
sales for Borders superstores.
Consolidated gross margin decreased as a percentage of sales in 2000, but
was flat in 1999. The decrease in 2000 was driven by lower gross margin
percentages for both the Borders and Waldenbooks segments. Among the reasons for
the decrease in gross margin percentage of Borders was a change in sales mix to
lower-margin items. The decrease in gross margin percentage of Waldenbooks was
due to its fixed expenses (primarily store occupancy expenses) being spread over
a smaller store base and lower sales volume in 2000 compared to 1999.
Consolidated selling, general and administrative expenses increased in 2000
and 1999 primarily due to continued spending on the Company's strategic
initiatives, primarily international superstores and web-based convergence
initiatives. The 1999 increase also included a $5.5 million pre-tax charge
related to the resignation of the Company's former Chief Executive Officer.
In the fourth quarter of fiscal 2000, the Company took a pre-tax charge of
$36.2 million related to the impairment of certain long-lived assets and other
writedowns. The carrying value of long-lived assets are evaluated whenever
changes in circumstances indicate the carrying amount of such assets may not be
recoverable. In performing such reviews for recoverability, the Company compares
the expected cash flows to the carrying value of long-lived assets. If the
expected future cash flows are less than the carrying amount of such assets, the
Company recognizes an impairment loss for the difference between the carrying
amount and their estimated fair value. Fair value is estimated using expected
discounted future cash flows. The charge taken in 2000 primarily consisted of
$17.7 million for computer hardware and software of Borders.com and $12.5
million for leasehold improvements and furniture and fixtures primarily related
to 103 underperforming Walden stores. The remainder of the charge related to
employee severance, the costs of certain lease obligations for redundant
headquarter buildings, and the write-off of certain equity investments.
Interest expense decreased as a percentage of sales in 2000 as a result of
lower consolidated borrowing levels and was flat in 1999.
The effective tax rate for the years presented differed from the federal
statutory rate primarily as a result of state income taxes. The Company's
effective tax rate was 39.4% in 2000, as compared to 39.1% in 1999. The increase
is primarily due to changes in the mix of income subject to tax in the various
taxing jurisdictions. In 1998, the effective tax rate was 39.0%.
In January 2001, the Company adopted a plan to discontinue operations of
All Wound Up, a seasonal retailer of interactive toys and novelty merchandise
the Company had acquired in March 1999. The discontinuance and closure of All
Wound Up resulted in an after-tax charge of $19.4 million in the fourth quarter
of fiscal 2000, and is reflected in the Consolidated Statements of Operations as
a discontinued operation. The charge was substantially non-cash and related
primarily to the writeoff of goodwill, inventory and fixed assets.
The Company includes certain distribution and other expenses in its
inventory costs, particularly freight, distribution payroll, and certain
occupancy expenses. In addition, certain selling, general and administrative
expenses are included in inventory costs. These amounts approximate 2% of total
inventory.
SEGMENT RESULTS
The Company is organized based upon the following operating segments:
domestic Borders stores, Waldenbooks stores, international Borders and Books
etc. stores, online retailing through Borders.com, and other (consisting of
interest expense and certain corporate governance costs). See Note 13 of the
Notes to Consolidated Financial Statements for further information relating to
these segments.
14
<PAGE> 16
<TABLE>
<CAPTION>
BORDERS 2000 1999 1998
- ------- ---- ---- ----
<S> <C> <C> <C>
(DOLLAR AMOUNTS IN MILLIONS)
Sales....................................................... $2,080.3 $1,823.2 $1,521.0
Net income.................................................. $ 82.6 $ 72.9 $ 52.1
Net income as % of sales.................................... 4.0% 4.0% 3.4%
Depreciation and amortization expense....................... $ 52.9 $ 47.3 $ 42.3
Interest expense............................................ $ 12.8 $ 16.4 $ 16.5
Store openings.............................................. 44 46 43
Store count................................................. 335 291 245
</TABLE>
The increases in Borders sales for 2000 and 1999 are primarily the result
of new store openings and comparable store sales increases. Borders opened 44
and 46 new stores in 2000 and 1999, respectively, and experienced comparable
store sales increases of 2.3% and 5.4% in 2000 and 1999, respectively.
Net income for 2000 and 1999 increased primarily due to store openings and
Borders' ability to leverage fixed costs over a larger sales base. As a
percentage of sales, net income for 2000 was flat with 1999 despite a decrease
in gross margin percentage and an increase in non-payroll store expenses as a
percentage of sales. The decrease in gross margin as a percentage of sales was
due to a change in sales mix to DVDs and new-release music, a slight increase in
promotional costs, and less leverage of store occupancy costs resulting from
lower comparable store sales. Non-payroll store expenses as a percentage of
sales increased due to lower comparable store sales increases. These items were
offset by lower store payroll costs as a percentage of sales. Net income as a
percentage of sales for 1999 was greater than 1998 primarily due to an increase
in gross margin percentage resulting from improved shrinkage control and
merchandise mix.
Depreciation and amortization expense increased in 2000 and 1999 as a
result of the depreciation expense recognized on new stores' capital
expenditures.
Interest expense decreased in 2000 and 1999 due to lower average borrowing
levels.
<TABLE>
<CAPTION>
WALDENBOOKS 2000 1999 1998
- ----------- ---- ---- ----
<S> <C> <C> <C>
Sales....................................................... $944.3 $959.1 $948.7
Net income.................................................. $ 40.2 $ 55.5 $ 61.0
Net income as % of sales.................................... 4.3% 5.8% 6.4%
Depreciation expense........................................ $ 25.8 $ 23.9 $ 18.8
Interest income............................................. $ 26.2 $ 22.3 $ 18.9
Store Openings.............................................. 11 39 16
Store Closings.............................................. 46 35 39
Store Count................................................. 869 904 900
</TABLE>
The decrease in Waldenbooks sales in 2000 is primarily the result of the
decrease in store count during the year, coupled with a comparable store sales
decrease of 2.9%. The increase in sales in 1999 is primarily the result of an
increase in store count during the year, coupled with a comparable store sales
increase of 0.7%.
Net income decreased in 2000 primarily as a result of decreased sales and a
$7.8 million after-tax asset impairment charge primarily related to 103
underperforming stores. Net income in 1999 decreased due to a lower gross margin
resulting from increased store occupancy expenses. As a percentage of sales, net
income for 2000 decreased primarily due to the asset impairment charge and a
decrease in gross margin percentage. This was due to increased promotional costs
as a percentage of sales, and higher distribution and store occupancy costs as a
percentage of sales resulting from the smaller store base and lower sales
volume. Net income and net income as a percentage of sales decreased in 1999
primarily due to a lower gross margin percentage resulting from a change in
sales mix to lower-margin, best-seller merchandise and increased store occupancy
expenses.
Depreciation expense increased in 2000 and 1999 as a result of the
depreciation expense recognized on new stores' and refurbished stores' capital.
Interest income increased in 2000 and 1999 as a result of Waldenbooks'
continued positive cash flow in the years presented.
15
<PAGE> 17
<TABLE>
<CAPTION>
INTERNATIONAL 2000 1999 1998
- ------------- ---- ---- ----
<S> <C> <C> <C>
Sales....................................................... $219.2 $168.2 $120.7
Net loss.................................................... $ 10.2 $ 7.9 $ 3.2
Net loss as % of sales...................................... 4.7% 4.7% 2.7%
Depreciation expense........................................ $ 8.8 $ 6.5 $ 3.5
Interest expense............................................ $ 12.4 $ 8.9 $ 7.4
Superstore Store Openings................................... 5 4 4
Superstore Store Count...................................... 14 9 5
Books etc. Store Openings................................... 6 2 4
Books etc. Store Closings................................... 2 1 1
Books etc. Store Count...................................... 31 27 26
</TABLE>
The increases in International sales for 2000 and 1999 are primarily the
result of new superstore openings and comparable store sales increases. In 2000,
the Company opened three additional stores in the United Kingdom, one additional
store in Australia, and the Company's first store in Puerto Rico. In 1999, three
stores were opened in the United Kingdom, as well as the Company's first store
in New Zealand.
Net loss for 2000 increased as a result of higher depreciation and interest
expense, partially offset by increased operating income generated from the
maturation of the prior years' store base. Net loss for 2000 as a percentage of
sales remained flat to the prior year. The addition of four new stores in 1999,
nearly doubling the superstore count, led to an increased net loss from the
prior year. Similar factors led to the change in net loss as a percentage of
sales for 1999.
Depreciation and amortization expense increased in 2000 and 1999 as a
result of the depreciation expense recognized on new stores' capital
expenditures.
Interest expense increased in 2000 and 1999 due to higher average borrowing
levels necessary to finance investments in new stores.
Foreign currency transaction gains (losses) were $(0.8) million, $0.2
million, and $0.3 million in 2000, 1999, and 1998, respectively.
<TABLE>
<CAPTION>
BORDERS.COM 2000 1999 1998
- ----------- ---- ---- ----
<S> <C> <C> <C>
Sales....................................................... $ 27.4 $17.9 $ 4.6
Net loss.................................................... $ 29.7 $17.2 $ 10.5
Net loss as % of sales...................................... 108.4% 96.1% 228.3%
Depreciation expense........................................ $ 7.8 $ 5.5 $ 1.9
Interest expense............................................ $ 5.8 $ 4.4 $ 2.7
</TABLE>
Borders.com began operations in fiscal 1998. Sales increased 53.1% and
289.1% in 2000 and 1999 respectively.
Net loss for 2000 increased primarily as a result of an $11.3 million
after-tax asset impairment charge related to the computer hardware and software
at Borders.com. The increased loss in 1999 over 1998 was due to a full year of
the site's operating expense versus a partial year in 1998 due to the site's
start up in late 1998. The fluctuations in net loss as a percentage of sales are
driven by the same factors.
Depreciation expense increased in 2000 and 1999 as a result of the
depreciation expense recognized on the capital expenditures required to develop
and operate the site and to fulfill customer orders.
Interest expense increased in 2000 and 1999 due to higher average borrowing
levels necessary to finance the site's development and operation.
<TABLE>
<CAPTION>
OTHER 2000 1999 1998
- ----- ---- ---- ----
<S> <C> <C> <C>
Net loss.................................................... $9.1 $9.3 $7.3
Interest expense............................................ $8.3 $9.2 $8.5
</TABLE>
Net loss consists of various corporate governance costs and income. The
2000 net loss remained essentially flat with the prior year due to a $3.5
million after-tax charge related to employee severance and the costs of writing
off
16
<PAGE> 18
redundant headquarters buildings and certain equity investments. The change in
1999 was primarily due to a $3.4 million after-tax charge related to the
resignation of the Company's former Chief Executive Officer. Interest expense
represents corporate-level interest costs not charged to the Company's operating
segments.
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 web-based commerce technologies.
Net cash provided by continuing operations in 2000 was $152.8 million, as
compared to $181.3 million in 1999. 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 49 new Borders stores.
Net cash used by discontinued operations represents the cash needed for the
operations of All Wound Up in fiscal 2000 and 1999.
Net cash used for investing was primarily for capital expenditures for new
stores and the refurbishment of existing stores. Capital expenditures in 2000
primarily reflect the opening of 49 new superstores and 11 new Waldenbooks
stores. Additional capital spending in 2000 reflected the development and
installation of in-store web-based technology and spending on corporate
information technology infrastructure. Capital expenditures in 1999 reflect the
opening of 50 new superstores and 39 new Waldenbooks stores. Capital
expenditures in 1998 reflected the opening of 47 new superstores, 16 new
Waldenbooks stores, a new distribution center and expansion of the home office
facility.
Net cash provided by financing in 2000 was $19.5 million, resulting
primarily from net borrowings under the Credit Facility and the issuance of
common stock under the Company's employee benefit plans. Net cash used for
financing in 1999 was $15.0 million, resulting primarily from the repurchase of
common stock of $25.4 million, partially offset by the issuance of common stock
under the Company's employee benefit plans.
The Company expects capital expenditures will decrease to approximately
$110.0 to $120.0 million in 2001, resulting primarily from fewer domestic store
openings. In addition, capital expenditures will result from international store
openings, refurbishment of a number of existing stores, and investment in
information systems streamlining. The Company currently plans to open
approximately 25 to 30 domestic Borders superstores, five to seven international
stores, and ten new Waldenbooks mall stores in 2001. Average cash requirements
for the opening of a domestic prototype Borders books and music superstore are
$2.3 million, representing capital expenditures of $1.1 million, inventory
requirements, net of related accounts payable, of $1.1 million and $0.1 million
of pre-opening costs. Average cash requirements to open a new or expanded
Waldenbooks store range from $0.4 million to $0.7 million, depending on the size
and format of the store. The Company plans to lease new store locations
predominantly under operating leases.
The Company plans to execute its expansion plans for its Borders
superstores and other strategic initiatives principally with funds generated
from operations and financing through the Lease and Credit Facilities. 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. As
discussed below, the Credit and Lease Facilities expire in October 2002, but the
Company expects to be able to successfully renew the Facilities. The Company
believes that its borrowing costs may increase beginning in November 2002, if
financial market conditions are unchanged.
The Company currently has a share repurchase program in place with
remaining authorization to repurchase approximately $66.8 million. During 2000
and 1999, $9.2 million and $25.4 million of common stock was repurchased,
respectively.
The Company has a $472.8 million multicurrency credit agreement (the Credit
Facility) which expires in October 2002. Borrowings under the Credit Facility
bear interest at a base rate or an increment over LIBOR at the Company's option.
The Credit Facility contains covenants which limit, among other things, the
Company's ability to incur indebtedness, grant liens, make acquisitions, merge,
declare dividends, dispose of assets, issue or repurchase its
17
<PAGE> 19
common stock in excess of $100.0 million (plus any proceeds and tax benefits
resulting from stock option exercises and tax benefits resulting from restricted
shares purchased by employees from the Company), and require the Company to meet
certain financial measures regarding fixed charge coverage, leverage and
tangible net worth. The Company is prohibited under the Credit Facility from
paying cash dividends on common shares.
The Company has a $175.0 million lease financing facility (the Lease
Facility) to finance new stores and other property through operating leases
which expires in October 2002. The Lease Facility provides financing to lessors
through loans from a third party lender for up to 95% of a project cost. It is
expected that lessors will make equity contributions approximating 5% of each
project. Independent of its obligations as lessee, the Company guarantees
payment when due of all amounts required to be paid to the third party lender.
The principal amount guaranteed will be limited to approximately 89% of the
original cost of a project, so long as the Company is not in default under the
lease relating to such project. The Lease Facility contains covenants and events
of default that are similar to those contained in the Credit Facility described
above.
There were 40 properties financed through the Lease Facility, with a
financed value of $163.1 million, at January 28, 2001. 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 October 2000, the Company
transferred four properties previously financed under the Lease Facility, with a
total financed value of $13.8 million, to a new temporary facility with terms
similar to those of the Lease Facility. In February 2001, two of these
properties were transferred back to the Lease Facility, and two were permanently
financed through operating leases. Also in February 2001, ten additional
properties previously financed through the Lease Facility with a total financed
value of $44.6 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.
The Company is subject to risk resulting from interest rate fluctuations,
as interest on the Company's borrowings is principally based on variable rates.
The Company's objective in managing its exposure to interest rate fluctuations
is to limit the impact of interest rate changes on earnings and cash flows and
to lower its overall borrowing costs. The Company primarily utilizes interest
rate swaps and collars to achieve this objective, effectively converting a
portion of its variable-rate exposures to fixed interest rates.
LIBOR is the rate upon which the Company's variable rate debt, and its
payments under the Lease Facility, are principally based. If LIBOR were to
increase 1% for the full year in 2001 as compared to the end of 2000, the
Company's after-tax earnings, after considering the effects of its interest rate
swap agreements, would decrease $0.7 million based on the Company's expected
average outstanding debt, including its indirect borrowings under the Lease
Facility, as of January 28, 2001.
A portion of the Company's operations takes place in foreign jurisdictions,
primarily the United Kingdom, Australia, New Zealand and Singapore. As a result,
the Company's financial results could be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in the foreign
markets in which the Company operates. The Company has generally not used
derivative instruments to manage this risk.
18
<PAGE> 20
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. The information below excludes
discontinued operations and asset impairments and other writedowns.
<TABLE>
<CAPTION>
FISCAL 2000 QUARTER ENDED
---------------------------------------------
APRIL JULY OCTOBER JANUARY
(DOLLARS IN MILLIONS) ----- ---- ------- -------
<S> <C> <C> <C> <C>
SALES................................................... $679.7 $698.4 $701.0 $1,192.1
Operating income (loss)................................. 3.4 3.4 (0.1) 164.6
% of full year:
Sales................................................. 20.8% 21.4% 21.4% 36.4%
Operating income...................................... 2.0 2.0 0.0 96.0
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1999 QUARTER ENDED
---------------------------------------------
APRIL JULY OCTOBER JANUARY
(DOLLARS IN MILLIONS) ----- ---- ------- -------
<S> <C> <C> <C> <C>
SALES................................................... $617.9 $628.6 $651.1 $1,070.8
Operating income (loss)................................. (2.4) 1.8 5.8 165.8
% of full year:
Sales................................................. 20.8% 21.2% 21.9% 36.1%
Operating income...................................... (1.4) 1.1 3.4 96.9
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1998 QUARTER ENDED
---------------------------------------------
APRIL JULY OCTOBER JANUARY
(DOLLARS IN MILLIONS) ----- ---- ------- -------
<S> <C> <C> <C> <C>
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
</TABLE>
OTHER MATTERS
Subsequent Event
Subsequent to the Company's fiscal year-end, the Company entered into an
agreement with Ingram Book Group ("Ingram"), a wholesaler of books, spoken audio
and magazines, pursuant to which Ingram will provide book fulfillment services
for the Company's special order and online sales. The transaction includes the
sale of approximately $12.0 million of the Company's book inventory to Ingram,
and will result in an after-tax charge of approximately $15.0 to $20.0 million
to be taken in the first quarter of fiscal 2001. This charge is substantially
non-cash and is primarily related to the writedown of assets used by the current
Company-owned facility to fulfill special order and online sales, including
warehouse equipment, hardware and software, and a reduction of recorded
inventory.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
19
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Statements of Operations for the fiscal years
ended January 28, 2001, January 23, 2000 and January 24,
1999...................................................... 21
Consolidated Balance Sheets as of January 28, 2001 and
January 23, 2000.......................................... 22
Consolidated Statements of Cash Flows for the fiscal years
ended January 28, 2001, January 23, 2000 and January 24,
1999...................................................... 23
Consolidated Statements of Stockholders' Equity for the
fiscal years ended January 28, 2001, January 23, 2000 and
January 24, 1999.......................................... 24
Notes to Consolidated Financial Statements.................. 25
Report of Independent Auditors.............................. 39
</TABLE>
20
<PAGE> 22
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 28, JANUARY 23, JANUARY 24,
2001 2000 1999
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA) ----------- ----------- -----------
<S> <C> <C> <C>
Sales...................................................... $3,271.2 $2,968.4 $2,595.0
Cost of merchandise sold (includes occupancy).............. 2,354.5 2,127.6 1,859.4
-------- -------- --------
Gross margin............................................... 916.7 840.8 735.6
Selling, general and administrative expenses............... 736.2 659.2 557.6
Pre-opening expense........................................ 6.4 7.8 7.8
Asset impairments and other writedowns..................... 36.2 -- --
Goodwill amortization...................................... 2.8 2.8 2.9
-------- -------- --------
Operating income........................................... 135.1 171.0 167.3
Interest expense........................................... 13.1 16.6 16.2
-------- -------- --------
Income from continuing operations before income tax........ 122.0 154.4 151.1
Income tax provision....................................... 48.2 60.4 59.0
-------- -------- --------
Income from continuing operations.......................... 73.8 94.0 92.1
Discontinued operations (Note 3)
Loss from operations of All Wound Up, net of income tax
credits of $7.0 and $2.4.............................. 10.8 3.7 --
Loss on disposition of All Wound Up, net of deferred
income tax credit of $8.9............................. 19.4 -- --
-------- -------- --------
Net income................................................. $ 43.6 $ 90.3 $ 92.1
======== ======== ========
Earnings (loss) per common share data (Note 2)
Diluted earnings (loss) per common share:
Continuing operations................................. $ 0.92 $ 1.17 $ 1.12
Discontinued operations............................... (0.38) (0.04) --
-------- -------- --------
Net diluted earnings per common share................. $ 0.54 $ 1.13 $ 1.12
======== ======== ========
Basic earnings (loss) per common share:
Continuing operations................................. $ 0.94 $ 1.21 $ 1.20
Discontinued operations............................... (0.38) (0.05) --
-------- -------- --------
Net basic earnings per common share................... $ 0.56 $ 1.16 $ 1.20
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
21
<PAGE> 23
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------
JANUARY 28, JANUARY 23,
2001 2000
(DOLLARS IN MILLIONS EXCEPT SHARE AMOUNTS) ----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 59.1 $ 41.6
Merchandise inventories................................... 1,201.2 1,077.7
Accounts receivable and other current assets.............. 73.7 68.9
Deferred income taxes..................................... 1.1 10.0
-------- --------
Total Current Assets................................... 1,335.1 1,198.2
Property and equipment, net................................. 562.3 558.2
Other assets................................................ 34.2 36.5
Deferred income taxes....................................... 22.3 0.1
Goodwill, net of accumulated amortization of $53.1 and
$49.5, respectively....................................... 93.2 121.8
-------- --------
$2,047.1 $1,914.8
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings and current portion of long-term
debt................................................... $ 144.4 $ 136.1
Trade accounts payable.................................... 623.6 580.4
Accrued payroll and other liabilities..................... 256.6 232.2
Taxes, including income taxes............................. 93.3 79.2
-------- --------
Total Current Liabilities.............................. 1,117.9 1,027.9
Long-term debt and capital lease obligations................ 15.0 16.2
Other long-term liabilities................................. 67.7 68.1
Commitments and contingencies (Note 7)...................... -- --
-------- --------
Total Liabilities...................................... 1,200.6 1,112.2
-------- --------
Stockholders' Equity:
Common stock, 200,000,000 shares authorized; 78,649,501
and 77,687,829 shares issued and outstanding at January
28, 2001 and January 23, 2000, respectively............ 685.2 679.6
Deferred compensation and officer receivables............. (1.0) (3.9)
Accumulated other comprehensive income (loss)............. (8.0) 0.2
Retained earnings......................................... 170.3 126.7
-------- --------
Total Stockholders' Equity........................... 846.5 802.6
-------- --------
$2,047.1 $1,914.8
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
22
<PAGE> 24
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 28, JANUARY 23, JANUARY 24,
2001 2000 1999
(DOLLARS IN MILLIONS) ----------- ----------- -----------
<S> <C> <C> <C>
Cash Provided by (used for):
Operations
Income from continuing operations......................... $ 73.8 $ 94.0 $ 92.1
Adjustments to reconcile net income to operating cash
flows:
Depreciation and amortization.......................... 95.3 83.5 66.7
(Increase) decrease in deferred income taxes........... (4.6) 7.4 10.2
Increase (decrease) in other long-term assets and
liabilities.......................................... 6.0 8.2 1.9
Asset impairments and other writedowns................. 23.0 -- --
Cash provided by (used for) current assets and current
liabilities:
Increase in inventories................................ (136.5) (50.4) (140.5)
Increase (decrease) in accounts payable................ 45.0 (29.2) 126.5
Increase in taxes payable.............................. 35.2 60.8 2.9
Other -- net........................................... 15.6 7.0 6.4
------- ------- -------
Net cash provided by continuing operations............. 152.8 181.3 166.2
Net cash used for discontinued operations.............. (14.2) (8.3) --
------- ------- -------
Net cash provided by operations........................ 138.6 173.0 166.2
------- ------- -------
Investing
Capital expenditures...................................... (138.7) (143.5) (179.8)
Net investing activities of discontinued operations....... (2.4) (15.7) --
------- ------- -------
Net cash used for investing............................ (141.1) (159.2) (179.8)
------- ------- -------
Financing
Repayment of long-term debt and capital lease
obligations............................................ (4.2) (1.2) (4.6)
Increase in capital lease obligations..................... -- 0.5 3.0
Repayment of debt assumed in acquisition.................. -- (2.0) --
Proceeds from construction funding........................ -- -- 1.3
Net funding from credit facility.......................... 21.4 1.5 9.4
Issuance of common stock.................................. 11.5 11.6 33.9
Repurchase of common stock................................ (9.2) (25.4) (51.7)
------- ------- -------
Net cash provided by (used for) financing.............. 19.5 (15.0) (8.7)
------- ------- -------
Effect of exchange rates on cash and equivalents............ 0.5 -- --
Net increase (decrease) in cash and equivalents............. 17.5 (1.2) (22.3)
Cash and equivalents at beginning of year................... 41.6 42.8 65.1
------- ------- -------
Cash and equivalents at end of year......................... $ 59.1 $ 41.6 $ 42.8
======= ======= =======
Supplemental Cash Flow Disclosures:
Interest paid............................................. $ 15.8 $ 18.0 $ 16.2
Income taxes paid......................................... $ 38.6 $ 6.4 $ 42.1
Debt and liabilities assumed in business acquisition...... $ -- $ 6.5 $ --
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
23
<PAGE> 25
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFERRED ACCUMULATED RETAINED
COMMON STOCK COMPENSATION OTHER EARNINGS
------------------- AND OFFICER COMPREHENSIVE (ACCUMULATED
SHARES AMOUNT RECEIVABLES INCOME (LOSS) DEFICIT) TOTAL
------ ------ ------------ ------------- ------------ -----
(DOLLARS IN MILLIONS EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 25, 1998......... 75,395,998 $661.0 $(6.3) $(0.9) $(55.7) $598.1
---------- ------ ----- ----- ------ ------
Net income.......................... -- -- -- -- 92.1 92.1
Issuance of common stock............ 4,171,059 38.3 (6.6) -- -- 31.7
Repurchase and retirement of common
stock............................. (1,871,933) (51.7) -- -- -- (51.7)
Tax benefit of equity
compensation...................... -- 39.7 -- -- -- 39.7
Change in receivables and deferred
compensation...................... -- -- 5.2 -- -- 5.2
---------- ------ ----- ----- ------ ------
Balance at January 24, 1999......... 77,695,124 $687.3 $(7.7) $(0.9) $ 36.4 $715.1
---------- ------ ----- ----- ------ ------
Net income.......................... -- -- -- -- 90.3 90.3
Foreign currency translation
adjustments....................... -- -- -- 1.1 -- 1.1
------
Comprehensive income................ 91.4
Issuance of common stock............ 2,444,055 11.5 -- -- -- 11.5
Repurchase and retirement of common
stock............................. (2,451,350) (25.4) -- -- -- (25.4)
Tax benefit of equity
compensation...................... -- 6.2 -- -- -- 6.2
Change in receivables and deferred
compensation...................... -- -- 3.8 -- -- 3.8
---------- ------ ----- ----- ------ ------
Balance at January 23, 2000......... 77,687,829 $679.6 $(3.9) $ 0.2 $126.7 $802.6
---------- ------ ----- ----- ------ ------
Net income.......................... -- -- -- -- 43.6 43.6
Foreign currency translation
adjustments....................... -- -- -- (8.2) -- (8.2)
------
Comprehensive income................ 35.4
Issuance of common stock............ 1,596,475 11.5 -- -- -- 11.5
Repurchase and retirement of common
stock............................. (634,803) (9.2) -- -- -- (9.2)
Tax benefit of equity
compensation...................... -- 3.3 -- -- -- 3.3
Change in receivables and deferred
compensation...................... -- -- 2.9 -- -- 2.9
---------- ------ ----- ----- ------ ------
Balance at January 28, 2001......... 78,649,501 $685.2 $(1.0) $(8.0) $170.3 $846.5
========== ====== ===== ===== ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
24
<PAGE> 26
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, Australia, Singapore, New
Zealand and Puerto Rico. 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 subsidiaries
include Borders, Inc. (Borders), Walden Book Company, Inc. (Walden), Borders
(UK) Limited (formerly Books etc.) and Borders Online, Inc.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and all majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
Use of Estimates: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States 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 2000 consisted of 53 weeks and
ended on January 28, 2001. Fiscal 1999 and 1998 consisted of 52 weeks and ended
on January 23, 2000, and January 24, 1999, respectively.
Foreign Currency and Translation of Foreign Subsidiaries: All assets and
liabilities of the Company's foreign operations are translated into U.S. dollars
at fiscal period-end exchange rates. Income and expense items are translated at
average exchange rates prevailing during the year. The resulting translation
adjustments are recorded as a component of stockholders' equity and other
comprehensive income. The functional currencies of the Companies' foreign
operations are the respective local currencies. Foreign currency translation
gains/(losses) were $(0.8), $0.2, and $0.3 in 2000, 1999, and 1998,
respectively.
Cash and Equivalents: Cash and equivalents include short-term investments
with original maturities of 90 days or less.
Inventories: Merchandise inventories are valued on a first-in, first-out
(FIFO) basis at the lower of cost or market using the retail inventory method.
The Company includes certain distribution and other expenses in its inventory
costs, totaling $87.7 and $79.8 as of January 28, 2001, and January 23, 2000,
respectively.
Property and Equipment: Property and equipment are recorded at cost,
including capitalized interest, and depreciated over their estimated useful
lives on a straight-line basis for financial statement purposes and on
accelerated methods for income tax purposes. Most store properties are leased
and improvements are amortized over the term of the lease, generally over 5 to
20 years. Other annual rates used in computing depreciation for financial
statement purposes are 2% to 3% for buildings and 10% to 33% for other fixtures
and equipment. Amortization of assets under capital leases is included in
depreciation expense.
During fiscal 1999, the Company shortened the estimated depreciable lives
of certain categories of personal computer equipment to three years and extended
the estimated depreciable lives of certain store fixtures up to ten years. The
Company believes that these changes better reflect the useful lives of these
assets. The Company accounted for this as a change in estimate; accordingly, the
Company will utilize the new depreciable lives prospectively. These changes did
not have a material impact on the Company's financial position or results of
operations during fiscal 2000 or 1999.
The carrying value of long-lived assets and certain identifiable intangible
assets are evaluated whenever changes in circumstances indicate the carrying
amount of such assets may not be recoverable.
Goodwill: Goodwill is amortized over 20 to 40 years on a straight-line
basis. The Company evaluates the recoverability of goodwill using a fair value
methodology whenever events or changes in circumstances indicate that the
carrying amount of goodwill may not be recoverable. This methodology is applied
separately to each of the
25
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
businesses for which the Company has recorded goodwill. In determining the fair
value, the median price/earnings (P/E) multiple for similar growth retail
companies, or the median earnings before depreciation and amortization, interest
and taxes (EBITDA) multiple for mature companies, is calculated based upon
actual quoted market prices per share and analysts' consensus earnings estimates
for these companies. The applicable multiple is applied to earnings or EBITDA to
arrive at an overall fair value of the respective companies. The Company
evaluates any indicated impairment as temporary or permanent, and records
appropriate charges (if any) to operations for permanent impairments.
Financial Instruments: The recorded values of the Company's financial
instruments, which include accounts receivable, accounts payable, and
indebtedness, approximate their fair values.
The Company has entered into interest rate swap and collar agreements to
reduce the impact of changes in interest rates on its variable-rate debt and
amounts outstanding under the Lease Facility. The net cash amounts paid or
received by the Company resulting from these agreements are recognized as an
adjustment to interest expense in the period to which the amounts paid or
received relate.
Revenue: Revenue is recognized, net of estimated returns, at the point of
sale for all of the Company's segments except Borders.com, which recognizes
revenue upon the shipment of merchandise to customers.
Pre-Opening and Closing Costs: In fiscal 1999, the Company adopted the
American Institute of Certified Public Accountants' Statement of Position (SOP)
98-5, "Reporting on the Costs of Start-Up Activities," which requires store
pre-opening costs to be expensed as incurred. The Company had expensed store
pre-opening costs in the first fiscal month of a store's operations. This SOP
does not permit restatement of amounts recorded prior to the adoption of the
SOP; however, adoption of this SOP did not have a material impact on the
Company's financial position, results of operations, or liquidity in fiscal 2000
or fiscal 1999.
When the decision to close a store is made, the Company provides for the
future net lease obligation and other expenses directly related to
discontinuance of operations of the store.
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 11 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), as amended by Statement Nos. 137 and 138, which
the Company adopted effective January 29, 2001. Changes in derivative fair
values will either be recognized in earnings as offsets to the changes in fair
value of related hedged assets, liabilities and firm commitments or, for
forecasted transactions, deferred and recorded as a component of other
stockholders' equity until the hedged transactions occur and are recognized in
earnings. The ineffective portion of a hedging derivative's change in fair value
will be immediately recognized in earnings. The effect of adopting FAS 133 was
not material to the Company's financial position or results of operations.
Reclassifications: Certain prior year amounts have been reclassified to
conform to fiscal 2000 presentation.
26
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
NOTE 2 -- WEIGHTED-AVERAGE SHARES OUTSTANDING
Weighted-average shares outstanding are calculated as follows (thousands):
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Weighted-average common shares outstanding -- basic
earnings per share................................. 78,374 77,577 76,631
Dilutive effect of employee stock options............ 1,914 2,641 5,872
------ ------ ------
Weighted-average common shares outstanding--diluted
earnings per share................................. 80,288 80,218 82,503
====== ====== ======
</TABLE>
Unexercised employee stock options to purchase 14.3 million, 10.2 million
and 9.1 million common shares as of January 28, 2001, January 23, 2000, and
January 24, 1999, respectively, were not included in the weighted-average shares
outstanding calculation because to do so would have been antidilutive.
NOTE 3 -- DISCONTINUED OPERATIONS
In March 1999, the Company purchased All Wound Up, a seasonal retailer of
interactive toys and novelty merchandise for a purchase price of $19.7
(excluding debt repayment), allocated primarily to fixed assets, inventory, and
goodwill. The acquisition has been accounted for as a purchase.
In January 2001, the Company adopted a plan to discontinue operations of
All Wound Up. Accordingly, the operating results of the All Wound Up operations,
including a writeoff of leasehold improvements, equipment and deferred charges
of approximately $19.4, have been segregated from continuing operations and
reported as a separate line item on the statement of operations. The Company has
restated its prior financial statements to present the operating results of All
Wound Up as a discontinued operation.
Operating results (exclusive of the aforementioned provisions) from
discontinued operations are as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net sales................................................... $ 23.2 $30.8
Costs and expenses:
Cost of sales............................................. 25.4 20.5
Selling, general and administrative expenses.............. 12.0 14.4
Goodwill.................................................. 0.9 0.7
------ -----
Operating loss.............................................. (15.1) (4.8)
Other deductions............................................ 2.7 1.3
------ -----
Loss before income tax...................................... (17.8) (6.1)
Income tax credit........................................... (7.0) (2.4)
------ -----
Net loss from operations.................................... $(10.8) $(3.7)
====== =====
</TABLE>
The components of net assets of discontinued operations included in the
Company's consolidated balance sheets at January 28, 2001, and January 23, 2000,
are as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net assets.................................................. $14.6 $31.6
Net liabilities............................................. 2.7 8.3
----- -----
$11.9 $23.3
===== =====
</TABLE>
27
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
NOTE 4 -- ASSET IMPAIRMENTS AND OTHER WRITEDOWNS
In the fourth quarter of fiscal 2000, the Company took a pre-tax charge of
$36.2 related to the impairment of certain long-lived assets and other
writedowns. The carrying value of long-lived assets are evaluated whenever
changes in circumstances indicate the carrying amount of such assets may not be
recoverable. In performing such reviews for recoverability, the Company compares
the expected cash flows to the carrying value of long-lived assets. If the
expected future cash flows are less than the carrying amount of such assets, the
Company recognizes an impairment loss for the difference between the carrying
amount and their estimated fair value. Fair value is estimated using expected
discounted future cash flows. The charge taken in 2000 primarily consisted of
$17.7 for computer hardware and software of Borders.com and $12.5 for leasehold
improvements and furniture and fixtures of underperforming Walden stores. The
remainder of the charge was related to employee severance, the costs of certain
lease obligations for redundant headquarter buildings, and the writeoff of
certain equity investments.
NOTE 5 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Property and equipment:
Land...................................................... $ 10.2 $ 10.2
Buildings................................................. 3.5 5.3
Leasehold improvements.................................... 339.6 307.8
Furniture and fixtures.................................... 712.1 593.9
Construction in progress.................................. 12.8 36.4
-------- -------
1,078.2 953.6
Less -- accumulated depreciation and amortization........... (515.9) (395.4)
-------- -------
Property and equipment, net................................. $ 562.3 $ 558.2
======== =======
</TABLE>
NOTE 6 -- INCOME TAXES
The income tax provision from continuing operations consists of the
following:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Current:
Federal................................................... $46.0 $45.4 $40.9
State and local........................................... 5.3 7.4 7.9
Foreign................................................... 0.3 0.2 --
Deferred:
Federal................................................... (0.6) 10.2 11.7
State and local........................................... 1.0 0.7 --
Foreign................................................... (3.8) (3.5) (1.5)
----- ----- -----
Total income tax provision.................................. $48.2 $60.4 $59.0
===== ===== =====
</TABLE>
28
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
A reconciliation of the federal statutory rate to the Company's effective
tax rate follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate...................................... $42.8 $54.0 $52.9
State and local taxes, net of federal tax benefit........... 4.1 5.3 5.2
Other....................................................... 1.3 1.1 0.9
----- ----- -----
Total income tax provision.................................. $48.2 $60.4 $59.0
===== ===== =====
</TABLE>
Deferred tax assets and liabilities resulted from the following:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Federal benefit for state deferred taxes.................. $ 1.7 $ 0.9
Accruals and other current liabilities.................... 3.9 8.6
Deferred revenue.......................................... 6.1 7.0
Other long-term liabilities............................... 3.1 2.6
Deferred compensation..................................... 7.2 8.1
Deferred rent............................................. 21.2 19.4
Net operating losses...................................... 8.2 5.0
Asset impairments and other writedowns.................... 25.2 6.3
----- -----
Total deferred tax assets................................. 76.6 57.9
----- -----
Deferred tax liabilities:
Inventory................................................. 12.2 9.1
Property and equipment.................................... 37.9 35.3
Other..................................................... 3.1 3.4
----- -----
Total deferred tax liabilities............................ 53.2 47.8
----- -----
Net deferred tax assets..................................... $23.4 $10.1
===== =====
</TABLE>
The Company has tax net operating loss carryforwards in foreign
jurisdictions totaling $28.4 as of January 28, 2001, $16.3 as of January 23,
2000, and $5.7 as of January 24, 1999. These losses have an indefinite
carryforward period.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
During 1994, the Company entered into agreements in which leases with
respect to four Borders' locations serve as collateral for certain mortgage
pass-through certificates. These mortgage pass-through certificates include a
provision requiring the Company to repurchase the underlying mortgage notes in
certain events, including the failure by the Company to make payments of rent
under the related leases, the failure by Kmart Corporation to maintain required
investment grade ratings or the termination of the guarantee by Kmart
Corporation of the Company's obligations under the related leases (which would
require the mutual consent of Kmart Corporation and Borders). In the event the
Company is required to repurchase all of the underlying mortgage notes, the
Company would be obligated to pay approximately $36.6.
In March 1998, the American Booksellers Association ("ABA") and 26
independent bookstores filed a lawsuit in the United States District Court for
the Northern District of California against the Company and Barnes & Noble, Inc.
alleging violations of the Robinson-Patman Act, the California Unfair Trade
Practice Act and the California Unfair Competition Act. The Complaint seeks
injunctive and declaratory relief; treble damages on behalf of each of the
bookstore plaintiffs, and, with respect to the California bookstore plaintiffs,
any other damages permitted by
29
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
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 plaintiffs have provided a report estimating damages against the
Company, exclusive of interest, as follows: (i) between an aggregate of
approximately $2.8 and approximately $3.3 (before trebling) with respect to the
Robinson-Patman Act claims of the 26 independent bookseller plaintiffs, and (ii)
between an aggregate of approximately $5.5 and approximately $6.4 with respect
to the disgorgement claims under California law for the geographic areas of the
California plaintiffs. The Company's pleadings in the action deny any liability
to plaintiffs, and the Company disputes plaintiffs' claims of damages. On
November 16, 2000, the court granted the motion of the Company and Barnes &
Noble to dismiss the disgorgement claims brought by the ABA under California law
on behalf of independent booksellers in the state of California who are not
named in the litigation. On March 19, 2001, the court dismissed all of the
damage claims of the plaintiffs. The trial of the remaining claims is scheduled
for April 9, 2001. The Company intends to vigorously defend the action.
The Intimate Bookshop, Inc. ("Intimate") and Lucky, Inc. have instituted
actions against the Company and Waldenbooks, respectfully, containing
allegations and claims similar to those contained in the ABA litigation
described above. The Intimate Amended Complaint alleges that Intimate has
suffered $11.3 or more in damages and requests treble damages, injunctive and
declaratory relief, interest, costs, attorneys' fees and other unspecified
relief. The Lucky, Inc. Amended Complaint alleges that the plaintiffs have
suffered more than $75,000 in damages and requests treble damages, injunctive
and declaratory relief, interest, costs, attorneys' fees and other unspecified
relief. The Company intends to vigorously defend these actions.
Two former employees, individually and on behalf of a purported class,
consisting of all current and former employees who worked as assistant managers
in Borders stores at any time between April 10, 1996, and the present, have
filed an action against Borders in the Superior Court of California for the
County of San Francisco. The action alleges that the individual plaintiffs and
the purported class members worked hours for which they were entitled to
receive, but did not receive, overtime compensation under California law, and
that they were classified as "exempt" store management employees but were forced
to work more than 50% of their time in non-exempt tasks. The Amended Complaint
alleges violations of the California Labor Code and the California Business and
Professions Code. The relief sought includes compensatory and punitive damages,
penalties, preliminary and permanent injunctions requiring Borders to pay
overtime compensation as required under California and Federal law, prejudgment
interest, costs and attorneys fees and such other relief as the court deems
proper. The Company intends to vigorously defend the action, including
contesting the certification of the action as a class action.
The Company has not included any liability in its financial statements in
connection with the lawsuits described above and has expensed as incurred all
costs to date.
In addition to the matters described above, the Company is from time to
time involved in or affected by other litigation incidental to the conduct of
its businesses. The Company does not believe that any such other litigation will
have a material adverse effect on its liquidity, financial position or results
of operations.
NOTE 8 -- DEBT
The Company has a $472.8 multicurrency credit agreement (the Credit
Facility) which expires in October 2002. Borrowings under the Credit Facility
bear interest at a base rate or an increment over LIBOR at the Company's option.
The Credit Facility contains covenants which limit, among other things, the
Company's ability to incur indebtedness, grant liens, make acquisitions, merge,
declare dividends, dispose of assets, issue or repurchase its common stock in
excess of $100.0 (plus any proceeds and tax benefits resulting from stock option
exercises and tax benefits resulting from restricted shares purchased by
employees from the Company), and require the Company to meet certain financial
measures regarding fixed charge coverage, leverage and tangible net worth. The
Company is prohibited under the Credit Facility from paying cash dividends on
common shares. The Company had borrowings
30
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
outstanding under the Credit Facility of $143.5 at January 28, 2001, and $133.4
at January 23, 2000. The weighted average interest rate in 2000 and 1999 was
approximately 6.8% and 5.7%, respectively.
The Company's long-term debt obligations consist of capital lease
liabilities at January 28, 2001. Scheduled principal payments and capitalized
lease obligations as of January 28, 2001 are as follows: 2001 -- $0.9; 2002 --
$0.8; 2003 -- $0.8; 2004 -- $0.8; 2005 -- $0.8; 2006 and, thereafter, -- $11.7.
NOTE 9 -- 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 28, 2001, total $260.4 in 2001, $247.9 in 2002, $228.4 in 2003, $208.1
in 2004, $193.1 in 2005, $1,793.0 in all later years and, in the aggregate,
total $2,930.9.
Rental Expenses: A summary of operating lease rental expense and short-term
rentals follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Rental Expenses:
Minimum rentals................................... $277.7 $252.6 $222.3
Percentage rentals................................ 2.0 2.0 2.3
------ ------ ------
Total..................................... $279.7 $254.6 $224.6
====== ====== ======
</TABLE>
Capitalized Leases: The Company accounts for three stores and certain
computer equipment under capital leases. At January 28, 2001, the Company's
commitments under leases accounted for as capital leases aggregated $15.8.
Lease Financing Facility: The Company has a $175.0 lease financing facility
(the Lease Facility) to finance new stores and other property through operating
leases, which expires in October 2002. The Lease Facility provides financing to
lessors through loans from a third party lender for up to 95% of a project cost.
It is expected that lessors will make equity contributions approximating 5% of
each project. Independent of its obligations as lessee, the Company guarantees
payment when due of all amounts required to be paid to the third party lender.
The principal amount guaranteed is limited to approximately 89% of the original
cost of a project so long as the Company is not in default under the lease
relating to such project. The Lease Facility contains covenants and events of
default that are similar to those contained in the Credit Facility described
above. There was $163.1 and $162.9 outstanding under the Lease Facility at
January 28, 2001, and January 23, 2000, respectively. In October 2000, the
Company transferred four properties previously financed under the Lease Facility
with a total financed value of $13.8 to a new temporary facility with terms
similar to those of the Lease Facility. In February 2001, two of these
properties were transferred back to the Lease Facility, and two were permanently
financed through operating leases. Also in February 2001, ten additional
properties previously financed through the Lease Facility with a total financed
value of $44.6 were permanently financed through operating leases.
31
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
NOTE 10 -- EMPLOYEE BENEFIT PLANS
Employee Savings Plan: Employees of the Company who meet certain
requirements as to age and service are eligible to participate in the Company's
Savings Plan. The Company's expense related to this plan was $3.2, $2.9 and $2.5
for 2000, 1999 and 1998, respectively.
NOTE 11 -- 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. 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. At January 28, 2001, the Company has 34.5 million shares authorized for
the grant of stock options under these plans.
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.
32
<PAGE> 34
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:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
(NUMBER OF SHARES
IN THOUSANDS)
<S> <C> <C>
Outstanding at January 25, 1998............................. 21,297 16.58
Granted................................................... 3,549 27.17
Exercised................................................. 3,759 9.57
Forfeited................................................. 1,901 22.51
Outstanding at January 24, 1999............................. 19,186 19.36
Granted................................................... 5,468 14.49
Exercised................................................. 2,181 7.53
Forfeited................................................. 3,909 21.24
Outstanding at January 23, 2000............................. 18,564 18.89
Granted................................................... 4,811 13.25
Exercised................................................. 1,397 7.52
Forfeited................................................. 4,324 20.80
Outstanding at January 28, 2001............................. 17,654 17.82
Balance exercisable at:
January 24, 1999.......................................... 5,365 11.87
January 23, 2000.......................................... 4,639 14.26
January 28, 2001.......................................... 6,803 16.80
</TABLE>
The weighted-average fair values of options at their grant date where the
exercise price equals the market price on the grant date were $5.17, $5.84 and
$11.52 in 2000, 1999 and 1998, 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 $31.6, $68.3 and
$72.6 in 2000, 1999, and 1998, respectively. Pro forma diluted and basic
earnings per share would have been $0.39, $0.85 and $0.88 and $0.40, $0.88, and
$0.95 in 2000, 1999 and 1998, 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:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Risk-Free Interest Rate................................. 4.8-6.8% 4.9-6.7% 4.2-6.8%
Expected Life........................................... 2.5-10 years 3-10 years 3-10 years
Expected Volatility..................................... 33.3-40.9% 33.3-40.3% 33.3-40.7%
Expected Dividends...................................... 0% 0% 0%
</TABLE>
33
<PAGE> 35
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 28, 2001 (number of shares in thousands):
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------------------- ----------------------------
RANGE OF NUMBER OF WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
EXERCISE PRICES SHARES REMAINING LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- --------------- --------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$ 6.81-$10.22 2,993 4.4 $ 8.69 2,231 $ 8.69
$10.23-$13.63 4,154 5.5 12.78 137 12.31
$13.64-$17.03 3,809 7.4 14.54 1,704 14.53
$17.04-$20.44 1,226 5.0 17.60 750 17.55
$20.45-$27.25 1,081 5.5 24.11 731 24.11
$27.26-$30.66 3,456 6.7 29.79 926 29.75
$30.67-$34.06 935 6.9 31.64 324 31.36
</TABLE>
A summary of the information relative to the Company's stock purchase plans
follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES PURCHASE PRICE AT GRANT DATE FMV
--------- ---------------- -----------------
(NUMBER OF SHARES IN THOUSANDS)
<S> <C> <C> <C>
STOCK ISSUED UNDER STOCK PURCHASE PLANS
Management Plan
1998.......................................... 68 19.52 24.40
1999.......................................... 106 10.91 13.64
2000.......................................... 13 10.56 13.21
Employee Plan
1998.......................................... 115 24.78 29.15
1999.......................................... 118 12.79 15.05
2000.......................................... 65 12.38 14.56
</TABLE>
NOTE 12 -- FINANCIAL INSTRUMENTS
The Company enters into interest rate swap and collar agreements to reduce
the impact of changes in interest rates on its variable-rate debt and amounts
outstanding under the Lease Facility. The swap agreements are contracts to
exchange variable-rate for fixed-interest payments periodically over the life of
the agreements without the exchange of the underlying notional amounts. The
collar agreements are contracts to effectively limit the variability of interest
on a portion of the Company's variable-rate debt. The notional amounts of these
agreements are used to measure interest paid or received and do not represent
the amount of exposure to credit loss.
34
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
As of January 28, 2001, and January 23, 2000, the Company had the following
interest rate instruments in effect:
<TABLE>
<CAPTION>
JANUARY 28, 2001
----------------------------------------------------
FAIR
NOTIONAL STRIKE MARKET
AMOUNT RATE PERIOD VALUE
-------- ------ ------ ------
<S> <C> <C> <C> <C>
Interest Rate Swaps............... $50.0 6.0% 1/00-1/01 $0.0
$75.0 5.7% 1/00-1/03 $0.7
$33.0(a) 6.6% 10/98-10/03 $0.7
$33.0(a) 6.9% 9/98-9/03 $1.3
</TABLE>
---------------------------------------
(a) Notional amount is the U.S. Dollar equivalent of 20.0 British
Pounds.
<TABLE>
<CAPTION>
JANUARY 23, 2000
-----------------------------------------------------
FAIR
NOTIONAL STRIKE MARKET
AMOUNT RATE PERIOD VALUE
-------- ------ ------ ------
<S> <C> <C> <C> <C>
Interest Rate Swaps.............. $175.0 4.6% 1/99-1/00 $0.1
$ 33.0(a) 6.6% 10/98-10/03 $0.3
$ 33.0(a) 6.9% 9/98-9/03 $0.2
Interest Rate Collar............. $100.0 4.1%-5.5% 1/99-12/00 $0.7
</TABLE>
---------------------------------------
(a) Notional amount is the U.S. Dollar equivalent of 20.0 British
Pounds.
During fiscal 2001, the Company entered into interest rate swaps with
notional amounts of $50.0 and $100.0, which effectively converted variable rate
U.S. dollar-denominated borrowings to fixed rates of 5.1% and 5.2%,
respectively. These swap agreements expire one year from the date the Company
entered into the agreements.
NOTE 13 -- SEGMENT INFORMATION
The Company is organized based upon the following operating segments:
domestic Borders stores, international Borders and Books etc. stores, Walden
stores, online retailing through Borders.com, and other (consisting of interest
expense and certain corporate governance costs).
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. Transactions
between segments, consisting principally of inventory transfers, are recorded
primarily at cost. The Company evaluates the performance of its segments and
allocates resources to them based on anticipated future contribution. Amounts
relating to All Wound Up have been reclassified from the Waldenbooks segment to
discontinued operations.
35
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Sales:
Borders................................................... $2,080.3 $1,823.2 $1,521.0
Waldenbooks............................................... 944.3 959.1 948.7
International............................................. 219.2 168.2 120.7
-------- -------- --------
Total stores................................................ 3,243.8 2,950.5 2,590.4
Borders.com............................................... 27.4 17.9 4.6
-------- -------- --------
Total continuing operations................................. $3,271.2 $2,968.4 $2,595.0
======== ======== ========
Interest expense (income):
Borders................................................... $ 12.8 $ 16.4 $ 16.5
Waldenbooks............................................... (26.2) (22.3) (18.9)
International............................................. 12.4 8.9 7.4
Other..................................................... 8.3 9.2 8.5
-------- -------- --------
Total stores................................................ 7.3 12.2 13.5
Borders.com............................................... 5.8 4.4 2.7
-------- -------- --------
Total continuing operations................................. $ 13.1 $ 16.6 $ 16.2
======== ======== ========
Income tax expense (benefit):
Borders................................................... $ 52.8 $ 48.4 $ 34.6
Waldenbooks............................................... 24.2 34.7 36.8
International............................................. (6.8) (5.8) (3.8)
Other..................................................... (5.2) (6.7) (2.4)
-------- -------- --------
Total stores................................................ 65.0 70.6 65.2
Borders.com............................................... (16.8) (10.2) (6.2)
-------- -------- --------
Total continuing operations................................. $ 48.2 $ 60.4 $ 59.0
======== ======== ========
Depreciation and amortization expense:
Borders................................................... $ 52.9 $ 47.3 $ 42.3
Waldenbooks............................................... 25.8 23.9 18.8
International............................................. 8.8 6.5 3.5
Other..................................................... -- 0.3 0.2
-------- -------- --------
Total stores................................................ 87.5 78.0 64.8
Borders.com............................................... 7.8 5.5 1.9
-------- -------- --------
Total continuing operations................................. $ 95.3 $ 83.5 $ 66.7
======== ======== ========
Net income (loss):
Borders................................................... $ 82.6 $ 72.9 $ 52.1
Waldenbooks............................................... 40.2 55.5 61.0
International............................................. (10.2) (7.9) (3.2)
Other..................................................... (9.1) (9.3) (7.3)
-------- -------- --------
Total stores................................................ 103.5 111.2 102.6
Borders.com............................................... (29.7) (17.2) (10.5)
-------- -------- --------
Total continuing operations................................. 73.8 94.0 92.1
Discontinued operations................................... (30.2) (3.7) --
-------- -------- --------
Total net income (loss)..................................... $ 43.6 $ 90.3 $ 92.1
======== ======== ========
</TABLE>
36
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Total assets:
Borders................................................... $1,264.7 $1,136.7
Waldenbooks............................................... 432.0 416.0
International............................................. 216.1 200.9
Other..................................................... 75.4.... 72.6
-------- --------
Total stores................................................ 1,988.2 1,826.2
Borders.com............................................... 44.3 57.0
-------- --------
Total continuing operations................................. 2,032.5 1,883.2
Discontinued operations................................... 14.6 31.6
-------- --------
Total assets................................................ $2,047.1 $1,914.8
======== ========
Capital expenditures:
Borders................................................... $ 81.2 $ 64.1
Waldenbooks............................................... 19.3 26.5
International............................................. 16.0 24.4
Other..................................................... 15.8 17.1
-------- --------
Total stores................................................ 132.3 132.1
Borders.com............................................... 6.4 11.4
-------- --------
Total continuing operations................................. 138.7 143.5
Discontinued operations................................... 2.4 1.2
-------- --------
Total capital expenditures.................................. $ 141.1 $ 144.7
======== ========
</TABLE>
Total assets for the "Other" operating segment include certain corporate
headquarters asset balances which have not been allocated to the other segments;
however, depreciation expense associated with such assets has been allocated to
the other segments.
Long-lived assets by geographic area are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Long-lived assets:
Domestic.................................................. $566.8 $567.9 $510.8
International............................................. 145.2 148.7 122.5
------ ------ ------
$712.0 $716.6 $633.3
====== ====== ======
</TABLE>
NOTE 14 -- SUBSEQUENT EVENT
Subsequent to the Company's fiscal year-end, the Company entered into an
agreement with Ingram Book Group ("Ingram"), a wholesaler of books, spoken audio
and magazines, pursuant to which Ingram will provide book fulfillment services
for the Company's special order and online sales. The transaction includes the
sale of approximately $12.0 of the Company's book inventory to Ingram, and will
result in an after-tax charge of approximately $15.0 to $20.0 to be taken in the
first quarter of fiscal 2001. This charge is substantially non-cash and is
primarily related to the writedown of assets used by the current Company-owned
facility to fulfill special order and online sales, including warehouse
equipment, hardware and software, and a reduction of recorded inventory.
37
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
NOTE 15 -- UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL 2000 QUARTER ENDED
---------------------------------------
APRIL JULY OCTOBER JANUARY
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) ----- ---- ------- -------
<S> <C> <C> <C> <C>
Sales...................................................... $679.7 $698.4 $701.0 $1,192.1
Cost of merchandise sold (includes occupancy).............. 503.9 518.0 523.7 808.9
Operating income (loss).................................... 3.5 3.4 (0.1) 128.3
Income (loss) from continuing operations................... 0.7 -- (2.6) 75.7
Net income (loss).......................................... (0.9) (1.6) (5.0) 51.1
Diluted earnings (loss) per common share from continuing
operations............................................... 0.01 -- (0.03) 0.95
Basic earnings (loss) per common share from continuing
operations............................................... 0.01 -- (0.03) 0.96
<CAPTION>
FISCAL 1999 QUARTER ENDED
---------------------------------------
APRIL JULY OCTOBER JANUARY
----- ---- ------- -------
<S> <C> <C> <C> <C>
Sales...................................................... $617.9 $628.6 $651.1 $1,070.8
Cost of merchandise sold (includes occupancy).............. 456.7 467.2 479.5 724.2
Operating income (loss).................................... (2.4) 1.8 5.8 165.8
Income (loss) from continuing operations................... (4.0) (1.6) 0.7 98.9
Net income (loss).......................................... (4.1) (2.6) (1.5) 98.5
Diluted earnings (loss) per common share from continuing
operations............................................... (0.05) (0.02) 0.01 1.23
Basic earnings (loss) per common share from continuing
operations............................................... (0.05) (0.02) 0.01 1.28
</TABLE>
Earnings per share amounts for each quarter are required to be computed
independently and may not equal the amount computed for the total year.
38
<PAGE> 40
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Borders Group, Inc.
We have audited the accompanying consolidated balance sheet of Borders
Group, Inc. as of January 28, 2001, and the related consolidated statement of
operations, stockholders' equity, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the January 28, 2001 financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Borders Group, Inc. at January 28, 2001, and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
[/s/ ERNST & YOUNG LLP ]
Detroit, Michigan
March 15, 2001
39
<PAGE> 41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Borders Group, Inc.
In our opinion, the accompanying consolidated balance sheet as of January
23, 2000, and the related consolidated statements of operations, of cash flows
and of stockholders' equity for each of the two years in the period then ended,
present fairly, in all material respects, the financial position, results of
operations and cash flows of Borders Group, Inc. and its subsidiaries at January
23, 2000 and for each of the two years in the period then ended, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 our opinion. We have not audited the consolidated financial
statements of Borders Group, Inc. for any period subsequent to January 23, 2000.
[/s/ PRICEWATERHOUSECOOPERS LLP]
Bloomfield Hills, Michigan
March 6, 2000
40
<PAGE> 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 20, 2000, the Company's Board of Directors, acting upon the
recommendation of the Audit Committee of the Board, voted to dismiss its
independent auditor, PricewaterhouseCoopers LLP ("PwC"). The reports of PwC on
the Company's financial statements for 1999 and 1998 fiscal years did not
contain any adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles. During the
1999 or 1998 fiscal years and the period through October 20, 2000, there were no
disagreements between the Company and PwC on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of PwC, would have
caused it to make reference to the subject matter of the disagreements in
connection with its reports on financial statements. In addition, during the
1998 and 1999 fiscal years and the period through October 20, 2000, there were
no "reportable events" within the meaning of Item 304 of the Securities and
Exchange Commission's regulation S-K. The Company retained the accounting firm
of Ernst & Young LLP on October 20, 2000, to make an examination of the
financial statements of the Company for the 2000 fiscal year.
41
<PAGE> 43
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:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert F. DiRomualdo................. 56 Chairman and Director
George R. Mrkonic.................... 48 Vice Chairman and Director
Gregory P. Josefowicz................ 48 President, Chief Executive Officer and Director
Bruce A. Quinnell.................... 52 Vice Chairman
Vincent E. Altruda................... 51 President, International
Thomas D. Carney..................... 54 Vice President, General Counsel and Secretary
Tamara L. Heim....................... 43 President, Borders Stores and Borders Online, Inc.
Ronald S. Staffieri.................. 51 President, Waldenbooks Stores
Edward W. Wilhelm.................... 42 Senior Vice President and Chief Financial Officer
Kathryn L. Winkelhaus................ 44 President, Merchandising and Distribution
Joel J. Cohen........................ 63 Director
Peter R. Formanek.................... 57 Director
Victor L. Lund....................... 53 Director
Dr. Edna Greene Medford.............. 49 Director
Larry Pollock........................ 53 Director
Beth M. Pritchard.................... 53 Director
</TABLE>
The Company's Certificate provides, among other things, that Directors will
be elected annually for one year terms. Directors hold office until their
successors are elected and qualified.
Robert F. DiRomualdo has served as the Chairman and a director of the
Company since its formation in August 1994. Mr. DiRomualdo also served as Chief
Executive Officer of the Company from August 1994 until November 1998, and as
President and Chief Executive Officer from April 1999 until November 1999.
George R. Mrkonic has served as the Vice Chairman of the Company since
December 1994, and a director since its formation in August 1994. He has also
served as President of the Company from December 1994 until January 1997. Mr.
Mrkonic is also a director of Champion Enterprises, Inc., a manufacturer and
seller of manufactured homes, Syntel, Inc., a computer software and development
company, Cheap Tickets, Inc., a retail seller of discount tickets for domestic
leisure air travel, and Nashua Corporation, a manufacturer of specialty imaging
products and services to industrial and commercial customers.
Gregory P. Josefowicz has served as President, Chief Executive Officer and
director of the Company since November 1999. For more than five years prior to
joining the Company, he served in a variety of executive positions with
Jewel-Osco, a food and drug retailer that is currently a division of
Albertson's, Inc., most recently as President. Mr. Josefowicz also serves as a
director of Ryerson Tull, Inc., a distributor and processor of metals.
Bruce A. Quinnell has served as Vice Chairman of the Company since April
1999. Mr. Quinnell served as President and Chief Operating Officer of the
Company from February 1997 to April 1999. Mr. Quinnell served as President and
Chief Operating Officer of Walden from November 1994 to February 1997. From
January 1994 to November 1994, Mr. Quinnell held the position of Executive Vice
President and Chief Operating Officer of Walden. Prior to joining Walden, Mr.
Quinnell was Executive Vice President, Finance and Administration for PACE
Membership Warehouse, Inc., a former subsidiary of Kmart, from October 1992 to
January 1994. Mr. Quinnell is also a director of Hot Topic, Inc., a retailer of
music-licensed and music-related merchandise and apparel.
Vincent E. Altruda has served as President of the Company's international
operations since December 1997. From February 1997 through December 1997, Mr.
Altruda served as Senior Vice President of Borders Store
42
<PAGE> 44
Development. From February 1995 through February 1997, Mr. Altruda served as
Senior Vice President of Borders Store Operations. From December 1992 through
February 1995, Mr. Altruda served as Vice President of Borders Store Operations.
Thomas D. Carney has been Vice President, General Counsel and Secretary of
the Company since December 1994. For more than five years prior to joining the
Company, Mr. Carney was a Partner at the law firm of Dickinson, Wright, Moon,
Van Dusen & Freeman in Detroit, Michigan.
Tamara L. Heim has served as President of Borders Stores and Borders
Online, Inc. since January 2000. Ms. Heim served as Senior Vice President, Sales
and Marketing, of the Company from February 1999 to January 2000. From December
1996 to February 1999, Ms. Heim served as Territorial Vice President of Borders
stores.
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. Mr. Staffieri serves as
a director of Natural Wonders, Inc., a retailer of science and nature products,
which is in the process of liquidating.
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.
Edward W. Wilhelm has served as Senior Vice President and Chief Financial
Officer of the Company since August 2000. From 1997 through August 2000, Mr.
Wilhelm served as Vice President, Planning, Reporting, and Treasury for the
Company. From 1994 through 1997, Mr. Wilhelm served as Vice President, Finance.
Kathryn L. Winkelhaus has been named President, Merchandising and
Distribution, effective March 2001. Ms. Winkelhaus has served as President of
Borders Group Stores from April 1999 to March 2001. 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.
Joel J. Cohen became a director of the Company on March 30, 2001. Mr. Cohen
was Managing Director and co-head of Mergers and Acquisitions at Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ"), a leading investment and
merchant bank that was acquired by Credit Suisse First Boston, until his
retirement in November 2000. He had been associated with DLJ since October 1989.
He had previously served as General Counsel to the Presidential Task Force on
Market Mechanisms and as a partner of Davis Polk and Wardwell, attorneys. Mr.
Cohen also serves as a director of the Chubb Corporation, a major property and
casualty insurance company, and Maersk, Inc., an owner and operator of container
ships involved in the worldwide trade.
Peter R. Formanek has served as a director of the Company since August
1995. Mr. Formanek was co-founder of AutoZone Inc., a retailer of aftermarket
automotive parts, and served as President and Chief Operating Officer of
AutoZone, Inc. from 1986 until his retirement in May 1994. He currently is a
director of The Perrigo Company, a manufacturer of store brand over-the-counter
medicines and vitamins, and Gart Sports Company, a retailer of sporting goods.
Victor L. Lund has served as a director of the Company since July 1997. Mr.
Lund has served as Vice Chairman of Albertson's, Inc., a food and drug retailer,
since June 1999. Mr. Lund served as Chairman of the Board of American Stores
Company from June 1995 until its acquisition by Albertson's in June 1999, and as
its Chief Executive Officer since August 1992. Mr. Lund also serves as a
director of Service Corporation International, a provider of death care
services.
Dr. Edna Greene Medford became a director of the Company in September 1998.
Dr. Medford is an Associate Professor of History and a former Director of the
Undergraduate Program in History at Howard University.
Larry Pollock has served as a director of the Company since August 1995.
Since January 2000, Mr. Pollock has served as President and Chief Operating
Officer of Cole National Corporation, which operates retail vision and gift
stores. From September 1998 until June 1999, Mr. Pollock served as President and
Chief Executive Officer of HomePlace, Inc., a chain of home furnishings and
housewares superstores, which he joined in January of 1997 as
43
<PAGE> 45
Executive Vice President and Chief Operating Officer. From 1994 until 1996, he
served as the President, Chief Operating Officer and a director of Zale
Corporation, a jewelry retailer. Mr. Pollock is a partner of Independent Group
L.P., a privately-held radio broadcasting company based in Cleveland, Ohio.
In January of 1998, HomePlace, Inc. filed a voluntary petition in the
United States Bankruptcy Court for the District of Delaware for reorganization
under Chapter 11 of the Bankruptcy Code.
Beth M. Pritchard has served as a director of the Company since March 2000.
Ms. Pritchard has served as President and Chief Executive Officer of Bath & Body
Works, a division of Intimate Brands, Inc. since 1993.
Officers of the Company are elected on an annual basis and serve at the
discretion of the Board of Directors.
COMMITTEES
The Audit Committee was established for the purpose of reviewing and making
recommendations regarding the Company's employment of independent accountants,
the annual audit of the Company's financial statements and the Company's
internal controls, accounting practices and policies. The current members of the
Audit Committee are Mr. Lund, Dr. Medford and Ms. Pritchard.
The Compensation Committee was established for the purpose of making
recommendations to the Board of Directors regarding the nature and amount of
compensation for executive officers of the Company. The Compensation Committee
also administers certain of the Company's employee benefit plans. The current
members of the Compensation Committee are Mr. Formanek and Mr. Pollock.
COMPENSATION OF DIRECTORS
For service as a director during 2000, 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, except that the
number of shares is adjusted, if necessary, to provide a minimum value of
$40,000 and a maximum value of $75,000. The restrictions on such Restricted
Shares will generally lapse one year from the date of grant.
On the date of each of the Company's Annual Meetings, each eligible
director receives an option to purchase 5,000 shares of common stock of the
Company. The exercise price of options granted under the Plan is the fair market
value on the date of grant. To be eligible to receive option grants at the
Annual Meetings to be held in 2000 and thereafter, a director generally must
have held at least 20,000 shares of common stock, for the one-year period prior
to the date of the meeting except that the minimum share requirement is waived
in the year in which a director is initially elected.
Each option vests and becomes exercisable on the third anniversary of the
date of grant except that (i) an option is forfeited in its entirety if the
director ceases, at any time prior to his or her exercise of the option, to hold
the minimum number of shares that he or she was required to hold for the one
year period prior to the grant to be eligible therefor; (ii) all outstanding
options vest and become immediately exercisable in the event of a change in
control of the Company, and (iii) all options held by a director who has served
as a director for six years or more vest and become immediately exercisable as
of the date upon which he or she ceases to serve as a director.
An option may be exercised only during the period that the optionee serves
as a director of the Company or within three months after termination of such
service and only if it is vested and has not expired at the time of termination.
However, if the director ceases to serve as such as a result of death or if the
individual has served as a director of the Company for more than 10 years, such
three month period is extended to three years.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by
reference to the information under the caption "Executive Compensation" in the
Proxy Statement for the Company's May 17, 2001 Annual Meeting of Stockholders.
44
<PAGE> 46
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 17, 2001 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 17, 2001 Annual Meeting of Stockholders.
45
<PAGE> 47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith unless otherwise indicated:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1(6) Agreement and plan of Merger dated as of April 8, 1997
between Michigan Borders Group, Inc. and Borders Group, Inc.
3.1(11) Restated Articles of Incorporation of Borders Group, Inc.
3.2 Restated 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 Form of Severance Agreement
10.3(6) Borders Group, Inc. Stock Option Plan
10.4 Amendment to the Borders Group, Inc. Stock Option Plan
10.5(3) Tax Allocation Agreement dated May 24, 1995 between Borders
Group, Inc. and Kmart Corporation
10.6(3) Lease Guaranty Agreement dated May 24, 1995 between Borders
Group, Inc. and Kmart Corporation
10.7 Agreement dated January 25, 2001, among Borders Group, Inc.,
Borders, Inc. and Kmart Corporation
10.8(2) Borders Group, Inc. Management Stock Purchase Plan.
10.9(8) First Amendment to the Borders Group, Inc. Management Stock
Purchase Plan
10.10(9) Second Amendment to the Borders Group, Inc. Management Stock
Purchase Plan
10.11(11) Third Amendment to the Borders Group, Inc. Management Stock
Purchase Plan
10.12 Fourth Amendment to Borders Group, Inc. Management Stock
Purchase Plan
10.13(2) Borders Group, Inc. Employee Stock Purchase Plan
10.14(4) First Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan
10.15(11) Second Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan
10.16(11) Third Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan
10.17(15) Borders Group, Inc. Annual Incentive Bonus Plan
10.18(2) Borders Group, Inc. Director Stock Plan
10.19(9) First Amendment to the Borders Group, Inc. Director Stock
Plan
10.20(9) Second Amendment to the Borders Group, Inc. Director Stock
Plan
10.21 Third Amendment to Borders Group, Inc. Director Stock Plan
10.22 Fourth Amendment to Borders Group, Inc. Director Stock Plan
10.23(7) Amended and Restated Multicurrency Credit Agreement among
Borders Group, Inc., its subsidiaries and Parties thereto
10.24(7) Amended and Restated Participation Agreement among Borders
Group, Inc., its subsidiaries and Parties thereto
10.25(7) Appendix A to Participation Agreement among Borders Group,
Inc., its subsidiaries and Parties thereto
10.26(7) Amended and Restated Credit Agreement among Borders Group,
Inc., its subsidiaries and Parties thereto
10.27(7) Amended and Restated Guarantee Credit Agreement among
Borders Group, Inc., its subsidiaries and Parties thereto
10.28(12) Omnibus Amendment No. 1 to Amended and Restated Guarantee
Credit Agreement among Borders Group, Inc., its subsidiaries
and Parties thereto
10.29(5) Agreement dated April 19, 1996, between Borders Group, Inc.
and Bruce A. Quinnell
10.30(10) Borders Group, Inc. Stock Option Plan for International
Employees
10.31(11) 1998 Borders Group, Inc. Stock Option Plan
10.32 Agreement dated January 29, 2001, between Borders Group,
Inc. and Robert F. DiRomualdo
10.33 Agreement dated January 29, 2001, between Borders Group,
Inc. and George R. Mrkonic
10.34(14) Agreement dated November 15, 1999, between Borders Group,
Inc. and Gregory P. Josefowicz
</TABLE>
46
<PAGE> 48
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.35(11) Participation Agreement dated as of December 1, 1998 by and
among Borders Group, Inc., Borders, Inc. and Parties thereto
10.36(11) Agreement dated April 20, 1999, between Borders Group, Inc.
and Philip M. Pfeffer
10.37(12) Multicurrency Revolving Credit Facility Credit Agreement
dated July 9, 1999 among Borders Group, Inc., its
subsidiaries, and Parties thereto
10.38(13) Amendment No. 1 to 1998 Borders Group, Inc. Stock Option
Plan
10.39(14) Amended Schedule 1.01(B) to the Amended and Restated
Multicurrency Credit Agreement among Borders Group, Inc.,
its Subsidiaries and Parties thereto
10.40(14) Amended Schedule II to the Amended and Restated Credit
Agreement among Borders Group, Inc., its subsidiaries and
Parties thereto
10.41 Participation Agreement dated as of January 22, 2001 by and
among Borders Group, Inc., Borders, Inc. and Parties thereto
10.42 Form of Lease Guaranty Related to Lease Facility Agreement
10.43 Form of Environmental Indemnity Related to Lease Facility
Agreement
18.1(3) Letter of PricewaterhouseCoopers LLP dated July 17, 1995
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of PricewaterhouseCoopers LLP
99.1 Cautionary Statement under the Private Securities Litigation
Reform Act of 1995 -- "Safe Harbor" for Forward-Looking
Statements
</TABLE>
- -------------------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-4 (File No. 333-90016).
(2) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 333-90918).
(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. 333-80643).
(5) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 28, 1996 (File No. 1-13740).
(6) Incorporated by reference from the Company's Proxy Statement dated April 9,
1997 of Borders Group, Inc. (File No. 1-13740).
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended October 26, 1997 (File No. 1-13740).
(8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended October 22, 1995 (File No. 1-13740).
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 25, 1998 (File No. 1-13740).
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended July 26, 1998 (File No. 1-13740).
(11) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 24, 1999 (File No. 1-13740).
(12) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended July 25, 1999 (File No. 1-13740).
(13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended October 24, 1999 (File No. 1-13740).
(14) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 23, 2000 (File No. 1-13740).
(15) Incorporated by reference from the Company's Proxy Statement dated May 24,
2000 (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.
47
<PAGE> 49
(c) Reports on Form 8-K:
Two reports were filed on Form 8-K. One report was filed under Item
4 -- Changes in Certifying Accountants. This report was dated and filed on
October 25, 2000 (File No. 1-13740). The second report was filed under Item 7 --
Financial Statements and Exhibits. This report was dated and filed on April 13,
2001 (File No. 1-13740).
48
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
BORDERS GROUP, INC.
(Registrant)
BY: /s/ GREGORY P. JOSEFOWICZ
------------------------------------
Gregory P. Josefowicz
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ ROBERT F. DIROMUALDO Chairman and Director April 23, 2001
- ---------------------------------------------
Robert F. DiRomualdo
/s/ GEORGE R. MRKONIC Vice Chairman and Director April 23, 2001
- ---------------------------------------------
George R. Mrkonic
/s/ GREGORY P. JOSEFOWICZ President and Chief Executive April 23, 2001
- --------------------------------------------- Officer
Gregory P. Josefowicz
/s/ EDWARD W. WILHELM Senior Vice President and Chief April 23, 2001
- --------------------------------------------- Financial Officer (Principal
Edward W. Wilhelm Financial and Accounting Officer)
/s/ JOEL J. COHEN Director April 23, 2001
- ---------------------------------------------
Joel J. Cohen
/s/ PETER R. FORMANEK Director April 23, 2001
- ---------------------------------------------
Peter R. Formanek
/s/ VICTOR L. LUND Director April 23, 2001
- ---------------------------------------------
Victor L. Lund
/s/ DR. EDNA GREENE MEDFORD Director April 23, 2001
- ---------------------------------------------
Dr. Edna Greene Medford
/s/ LARRY POLLOCK Director April 23, 2001
- ---------------------------------------------
Larry Pollock
/s/ BETH M. PRITCHARD Director April 23, 2001
- ---------------------------------------------
Beth M. Pritchard
</TABLE>
49
<PAGE> 51
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1(6) Agreement and plan of Merger dated as of April 8, 1997
between Michigan Borders Group, Inc. and Borders Group, Inc.
3.1(11) Restated Articles of Incorporation of Borders Group, Inc.
3.2 Restated 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 Form of Severance Agreement
10.3(6) Borders Group, Inc. Stock Option Plan
10.4 Amendment to the Borders Group, Inc. Stock Option Plan
10.5(3) Tax Allocation Agreement dated May 24, 1995 between Borders
Group, Inc. and Kmart Corporation
10.6(3) Lease Guaranty Agreement dated May 24, 1995 between Borders
Group, Inc. and Kmart Corporation
10.7 Agreement dated January 25, 2001, among Borders Group, Inc.,
Borders, Inc. and Kmart Corporation
10.8(2) Borders Group, Inc. Management Stock Purchase Plan
10.9(8) First Amendment to the Borders Group, Inc. Management Stock
Purchase Plan
10.10(9) Second Amendment to the Borders Group, Inc. Management Stock
Purchase Plan
10.11(11) Third Amendment to the Borders Group, Inc. Management Stock
Purchase Plan
10.12 Fourth Amendment to Borders Group, Inc. Management Stock
Purchase Plan
10.13(2) Borders Group, Inc. Employee Stock Purchase Plan
10.14(4) First Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan
10.15(11) Second Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan
10.16(11) Third Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan
10.17(15) Borders Group, Inc. Annual Incentive Bonus Plan
10.18(2) Borders Group, Inc. Director Stock Plan
10.19(9) First Amendment to the Borders Group, Inc. Director Stock
Plan
10.20(9) Second Amendment to the Borders Group, Inc. Director Stock
Plan
10.21 Third Amendment to Borders Group, Inc. Director Stock Plan
10.22 Fourth Amendment to Borders Group, Inc. Director Stock Plan
10.23(7) Amended and Restated Multicurrency Credit Agreement among
Borders Group, Inc., its subsidiaries and Parties thereto
10.24(7) Amended and Restated Participation Agreement among Borders
Group, Inc., its subsidiaries and Parties thereto
10.25(7) Appendix A to Participation Agreement among Borders Group,
Inc., its subsidiaries and Parties thereto
10.26(7) Amended and Restated Credit Agreement among Borders Group,
Inc., its subsidiaries and Parties thereto
10.27(7) Amended and Restated Guarantee Credit Agreement among
Borders Group, Inc., its subsidiaries and Parties thereto
10.28(12) Omnibus Amendment No. 1 to Amended and Restated Guarantee
Credit Agreement among Borders Group Inc., its subsidiaries
and Parties thereto
10.29(5) Agreement dated April 19, 1996, between Borders Group, Inc.
and Bruce A. Quinnell
10.30(10) Borders Group, Inc. Stock Option Plan for International
Employees
10.31(11) 1998 Borders Group, Inc. Stock Option Plan
10.32 Agreement dated January 29, 2001, between Borders Group,
Inc. and Robert F. DiRomualdo
10.33 Agreement dated January 29, 2001, between Borders Group,
Inc. and George R. Mrkonic
10.34(14) Agreement dated November 15, 1999, between Borders Group,
Inc. and Gregory P. Josefowicz
10.35(11) Participation Agreement dated as of December 1, 1998 by and
among Borders Group, Inc., Borders, Inc. and Parties thereto
10.36(11) Agreement dated April 20, 1999, between Borders Group, Inc.
and Philip M. Pfeffer
</TABLE>
50
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.37(12) Multicurrency Revolving Credit Facility Credit Agreement
dated July 9, 1999 among Borders Group, Inc., its
subsidiaries, and Parties thereto
10.38(13) Amendment No. 1 to 1998 Borders Group, Inc. Stock Option
Plan
10.39(14) Amended Schedule 1.01(B) to the Amended and Restated
Multicurrency Credit Agreement among Borders Group, Inc.,
its Subsidiaries and Parties thereto
10.40(14) Amended Schedule II to the Amended and Restated Credit
Agreement among Borders Group, Inc., its subsidiaries and
Parties thereto
10.41 Participation Agreement dated as of January 22, 2001 by and
among Borders Group, Inc., Borders, Inc. and Parties thereto
10.42 Form of Lease Guaranty Related to Lease Facility Agreement
10.43 Form of Environmental Indemnity Related to Lease Facility
Agreement
18.1(3) Letter of PricewaterhouseCoopers LLP dated July 17, 1995
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of PricewaterhouseCoopers LLP
99.1 Cautionary Statement under the Private Securities Litigation
Reform Act of 1995 -- "Safe Harbor" for Forward-Looking
Statements
</TABLE>
- -------------------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-4 (File No. 333-90016).
(2) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 333-90918).
(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. 333-80643).
(5) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 28, 1996 (File No. 1-13740).
(6) Incorporated by reference from the Company's Proxy Statement dated April 9,
1997 of Borders Group, Inc. (File No. 1-13740).
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended October 26, 1997 (File No. 1-13740).
(8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended October 22, 1995 (File No. 1-13740).
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 25, 1998 (File No. 1-13740).
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended July 26, 1998 (File No. 1-13740).
(11) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 24, 1999 (File No. 1-13740).
(12) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended July 25, 1999 (File No. 1-13740).
(13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended October 24, 1999 (File No. 1-13740).
(14) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 23, 2000 (File No. 1-13740).
(15) Incorporated by reference from the Company's Proxy Statement dated May 24,
2000 (File No. 1-13740).
51
<PAGE> 53
(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:
Two reports were filed on Form 8-K. One report was filed under Item
4 -- Changes in Certifying Accountants. This report was dated and filed on
October 25, 2000 (File No. 1-13740). The second report was filed under Item 7 --
Financial Statements and Exhibits. This report was dated and filed on April 13,
2001 (File No. 1-13740).
52
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.2
<SEQUENCE>2
<FILENAME>k61366ex3-2.txt
<DESCRIPTION>RESTATED BYLAWS
<TEXT>
<PAGE> 1
EXHIBIT 3.2
RESTATED
BY-LAWS
OF
BORDERS GROUP, INC.
ARTICLE I
OFFICES
SECTION 1. Registered Office. The registered office of Borders Group,
Inc. (hereinafter called the "Corporation") shall be in the City of Ann Arbor,
County of Washtenaw, State of Michigan.
SECTION 2. Other Offices. The Corporation may also have offices at such
other places both within and without the State of Michigan as the Board of
Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. Place of Meetings. Meetings of the stockholders for the
election of directors or for any other purpose shall be held at such time and
place, either within or without the State of Michigan as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting.
SECTION 2. Annual Meetings. The Annual Meetings of Stockholders shall
be held on such date and at such time as shall be designated from time to time
by the Board of Directors and stated in the notice of the meeting, at which
meetings the stockholders shall elect by a plurality vote a Board of Directors,
and transact such other business as may properly be brought before the meeting.
Written notice of the Annual Meeting stating the place, date and hour of the
meeting shall be given to each stockholder entitled to vote at such meeting not
less than 10 days nor more than 60 days before the date of the meeting.
SECTION 3. Special Meetings. Unless otherwise prescribed by law or by
the Articles of Incorporation, Special Meetings of Stockholders, for any purpose
or purposes, 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 entire
Board of Directors. Written notice of a Special Meeting stating the place, date
and hour of the meeting and the purpose or purposes for which the meeting is
called shall be given not less than 10 days nor more than 60 days before the
date of the meeting to each stockholder entitled to vote at such meeting.
SECTION 4. Quorum. Except as otherwise provided by law or by the
Articles of Incorporation, the holders of a majority of the capital stock issued
and outstanding and entitled to vote thereat, present in person or represented
by proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business. If, however, such quorum shall not be present
<PAGE> 2
or represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed.
SECTION 5. Voting. Each stockholder represented at a meeting of
stockholders shall be entitled to cast one vote for each share of the capital
stock entitled to vote thereat held by such stockholder. Such votes may be
cast in person or by proxy but no proxy shall be voted on or after three years
from its date, unless such proxy provides for a longer period. The Board of
Directors, in its discretion, or the officer of the Corporation presiding at a
meeting of stockholders, in his discretion, may require that any votes cast at
such meeting shall be cast by written ballot.
SECTION 6. List of Stockholders Entitled to Vote. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make a complete list of the stockholders entitled to vote at the meeting,
arranged in alphabetical order, and showing the address of each stockholder and
the number of shares registered in the name of each stockholder. Such list shall
be open to the examination of any stockholder at the time and place of the
meeting during the whole time thereof.
SECTION 7. Stock Ledger. The stock ledger of the Corporation shall be
the only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 6 of this Article II or the books of the
Corporation, or to vote in person or by proxy at any 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, if any, on whose
behalf the proposal is made, and (c) as to
<PAGE> 3
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 a 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 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.
<PAGE> 4
ARTICLE III
DIRECTORS
SECTION 1. Number and Election of Directors. The Board of Directors
shall consist of not less than three nor more than eleven members, with the
exact number of directors to be determined from time to time by resolution
adopted by the affirmative vote of a majority of the directors then in office.
Except as provided in Section 2 of this Article, directors shall be elected by a
plurality of the votes cast at annual meetings of stockholders, and each
director so elected shall hold office until the next annual meeting and until
his successor is duly elected and qualified, or until his earlier resignation or
removal. Any director may resign at any time upon notice to the Corporation.
Directors need not be stockholders.
SECTION 2. Vacancies. Vacancies and newly created directorships
resulting from any increase in the authorized number of directors may be filled
by a majority of the directors then in office, though less than a quorum, or by
a sole remaining director, and the directors so chosen
<PAGE> 5
shall hold office until the next annual election and until their successors are
duly elected and qualified, or until their earlier resignation or removal.
SECTION 3. Duties and Powers. The business of the Corporation shall be
managed by or under the direction of the Board of Directors which may exercise
all such powers of the Corporation and do all such lawful acts and things as are
not by statute or by the Articles of Incorporation or by these By-Laws directed
or required to be exercised or done by the stockholders.
SECTION 4. Meetings. The Board of Directors of the Corporation may hold
meetings, both regular and special, either within or without the State of
Michigan. Regular meetings of the Board of Directors may be held without notice
at such time and at such place as may from time to time be determined by the
Board of Directors. Special meetings of the Board of Directors may be called by
the Chairman of the Board, if there be one, the President, or by a majority of
the directors then in office. Notice thereof stating the place, date and hour of
the meeting shall be given to each director either by mail not less than
forty-eight (48) hours before the date of the meeting, by telephone or telegram
or similar means of communication on twenty-four (24) hours notice, or on such
shorter notice as the person or persons calling such meeting may deem necessary
or appropriate in the circumstances.
SECTION 5. Quorum. Except as may be otherwise specifically provided by
law, the Articles of Incorporation or these By-Laws, at all meetings of the
Board of Directors, a majority of the entire Board of Directors shall constitute
a quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors. If a quorum shall not be present at any meeting of the
Board of Directors, the directors present thereat may adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present.
SECTION 6. Actions of Board Without a Meeting. Unless otherwise
provided by the Articles of Incorporation or these By-Laws, any action required
or permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all the members of the
Board of Directors or committee, as the case may be, consent thereto in writing,
and the writing or writings are filed with the minutes of proceedings of the
Board of Directors or committee.
SECTION 7. Meeting by Means of Conference Telephone. Unless otherwise
provided by the Articles of Incorporation or these By-Laws, members of the Board
of Directors of the Corporation, or any committee designated by the Board of
Directors, may participate in a meeting of the Board of Directors or such
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this Section 7 shall constitute
presence in person at such meeting.
SECTION 8. Compensation. The directors may be paid their expenses, if
any, of attendance at each meeting of the Board of Directors and may be paid a
fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall
<PAGE> 6
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees may
be allowed like compensation for attending committee meetings.
SECTION 9. Interested Directors. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because the votes of such
director are counted for such purpose if (i) the material facts as to the
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board of Directors
or committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors; or (ii) the
material facts as to the relationship or interest and as to the contract or
transaction are disclosed or are known to the stockholders entitled to vote
thereon, and the contract or transaction is specifically approved in good faith
by vote of the stockholders; or (iii) the contract or transaction is fair as to
the Corporation as of the time it is authorized, approved or ratified, by the
Board of Directors, a committee thereof or the stockholders. Common or
interested directors may be counted in determining the presence of a quorum at a
meeting of the Board of Directors or of a committee which authorizes the
contract or transaction.
ARTICLE IV
COMMITTEES
SECTION 1. Audit Committee. There shall be an audit committee
consisting of not less than two members of the Board of Directors who are not
officers of the Corporation or any of its subsidiaries with the members thereof
designated by the entire Board of Directors. The audit committee shall review
and make recommendations regarding the Corporation's employment of independent
accountants, the annual audit of the Corporation's financial statements and the
Corporation's internal controls, accounting practices and policies. From time to
time, as considered necessary and desirable, the committee shall confer with
such accountants for the exchanging of views relating to the scope and results
of the auditing of books and accounts of the Corporation and shall provide to
the Board of Directors such assistance as may be required with respect to the
corporate and reporting practices of the Corporation. The audit committee shall
perform such other duties as the Board of Directors may prescribe.
SECTION 2. Compensation Committee. There shall be a compensation
committee consisting of not less than two members of the Board of Directors who
are not officers of the Corporation or any of its subsidiaries with the members
thereof designated by the entire Board of Directors. The compensation committee
shall make recommendations to the Board of Directors regarding the nature and
amount of compensation for executive officers of the Corporation and, as may be
prescribed by the Board of Directors, administer certain of the Corporation's
employee benefit plans. The compensation committee shall perform such other
duties as the Board of Directors may prescribe.
<PAGE> 7
SECTION 3. Committee Vacancies; Quorum, Voting and Procedures. Each
member of a committee shall serve at the pleasure of the Board of Directors, and
vacancies on a committee may be filled by the Board of Directors at any time.
The Board of Directors may also increase the number of members of a committee at
any time. A majority of all members of a committee shall constitute a quorum,
and the affirmative vote of a majority of all the members of a committee shall
constitute the action of the committee. The Board of Directors may designate one
or more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of any such committee. In the
absence or disqualification of a member of a committee, and in the absence of a
designation by the Board of Directors of an alternate member to replace the
absent or disqualified member, the member or members thereof present at any
meeting and not disqualified from voting, whether or not a quorum is
constituted, may unanimously appoint another member of the Board of Directors to
act at the meeting in the place of any absent or disqualified member. Each
committee shall determine its own rules of procedure and shall meet as provided
by such rules, or by resolution of the Board of Directors, or on the call of any
member thereof. Each committee shall keep regular minutes and report to the
Board of Directors when required.
SECTION 4. Other Committees. From time to time, the Board of Directors
may constitute and appoint any other committee or committees which the Board of
Directors may deem necessary or proper for the conduct of the Corporation's
business. Any such committee created by the Board of Directors shall have such
duties, powers and authority as shall be specified in the resolution
constituting such committee.
ARTICLE V
OFFICERS
SECTION 1. General. The officers of the Corporation shall be chosen by
the Board of Directors and shall be a President, a Secretary and a Treasurer.
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. Any number of offices may be held by
the same person, unless otherwise prohibited by law, the Articles of
Incorporation or these By-Laws. The officers of the Corporation need not be
stockholders of the Corporation nor, except in the case of the Chairman of the
Board, need such officers be directors of the Corporation.
SECTION 2. Election. The Board of Directors at its first meeting held
after each annual meeting of stockholders shall elect the officers of the
Corporation who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board of Directors; and all officers of the Corporation shall hold office until
their successors are chosen and qualified, or until their earlier resignation or
removal. Any officer elected by the Board of Directors may be removed at any
time by the affirmative vote of a majority of the Board of Directors. Any
vacancy occurring in any office of the Corporation shall be filled by the Board
of Directors. The salaries of all officers of the Corporation shall be fixed by
the Board of Directors or a committee thereof.
<PAGE> 8
SECTION 3. Voting Securities Owed by the Corporation. Powers of
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the President or any Vice President and any
such officer may, in the name of and on behalf of the Corporation, take all such
action as any such officer may deem advisable to vote in person or by proxy at
any meeting of security holders of any corporation in which the Corporation may
own securities and at any such meeting shall possess and may exercise any and
all rights and power incident to the ownership of such securities and which, as
the owner thereof, the Corporation might have exercised and possessed if
present. The Board of Directors, may, by resolution, from time to time confer
like powers upon any other person or persons.
SECTION 4. Chief Executive and Chief Operating Officers. The Board of
Directors shall designate one of the Corporation's officers as the chief
executive officer and may, from time to time, but shall not be required to do
so, designate one of the officers as the chief operating officer. In the absence
of any designation, the President shall serve as the chief executive officer.
Subject to the direction of the Board of Directors, the chief executive officer
shall have general supervision of the Corporation's business, departments,
officers, and employees, and shall prescribe duties of other officers and
employees insofar as they are not specified by the By-Laws or by the Board of
Directors. The chief executive officer shall preside at all meetings of the
stockholders and Board of Directors. The chief operating officer shall have such
duties as may be designated by the chief executive officer or by the Board of
Directors.
SECTION 5. Chairman of the Board. The Chairman of the Board shall
perform such duties as may be designated by the chief executive officer or by
the Board of Directors. In the chief executive officer's absence or disability,
the Chairman shall preside at meetings of the stockholders and Board of
Directors.
SECTION 6. Vice Chairman of the Board. The Vice Chairman of the Board
shall perform such duties as may be designated by the chief executive officer or
by the Board of Directors. In the chief executive officer's and Chairman's
absence or disability, the Vice Chairman shall preside at meetings of the
stockholders and Board of Directors.
SECTION 7. President. The President shall perform such duties as may be
designated by the chief executive officer or by the Board of Directors, and
shall have authority to execute on behalf of the Corporation any and all
contracts, agreements, bonds, deeds, mortgages, leases or other obligations of
the Corporation. In the absence or incapacity of the President, the Board of
Directors shall determine which other officer shall perform the duties of that
office.
SECTION 8. Vice Presidents. The Vice Presidents shall perform such
duties as may be designated by the chief executive officer, subject to the
direction of the Board of Directors. Any Vice President shall have authority to
execute on behalf of the Corporation any and all contracts, agreements, bonds,
deeds, mortgages, leases or other obligations of the Corporation.
SECTION 9. Treasurer. The Treasurer shall have the custody of and the
responsibility for all funds and securities of the Corporation, subject to the
control of the Board of Directors. The Treasurer shall keep bank accounts in the
name of the Corporation. The Treasurer shall
<PAGE> 9
perform all duties incident to the position of Treasurer, subject to the control
of the Board of Directors, and shall have authority to sign and endorse all
notes, checks, drafts and other obligations of the Corporation.
SECTION 10. Secretary. The Secretary shall keep a record in proper
books provided for that purpose of all the meetings and proceedings of the Board
of Directors and the minutes of the stockholders meetings, and shall keep such
other records and shall perform such other duties as the Board of Directors or
the chief executive officer shall designate. The Secretary shall notify the
directors and stockholders of their respective meetings, shall attend to the
giving and service of all notices of the Corporation, and shall in general do
and perform all the duties pertaining to the office, subject to the control of
the Board of Directors.
SECTION 11. Other Officers. Such other officers as the Board of
Directors may choose shall perform such duties and have such powers as from time
to time may be assigned to them by the chief executive officer or the Board of
Directors. The Board of Directors may delegate to any other officer of the
Corporation the power to choose such other officers and to prescribe their
respective duties and powers.
ARTICLE VI
STOCK
SECTION 1. Form of Certificates. Every holder of stock in the
Corporation shall be entitled to have a certificate signed, in the name of the
Corporation (i) by the Chairman of the Board, the President or a Vice President
and (ii) by the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary of the Corporation, certifying the number of shares owned by
the holder in the Corporation.
SECTION 2. Signatures. When a certificate is countersigned by (i) a
transfer agent other than the Corporation or its employees, or (ii) a registrar
other than the Corporation or its employees, any other signature on a
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if such person was such officer, transfer agent or registrar at the date of
issue.
SECTION 3. Lost Certificates. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate, the
Board of Directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or such owner's legal representative, to advertise the same in such
manner as the Board of Directors shall require and/or to give the Corporation a
bond in such sum as it may direct as indemnity against any claim that may be
made against the Corporation with respect to the certificate alleged to have
been lost, stolen or destroyed.
<PAGE> 10
SECTION 4. Transfers. Stock of the Corporation shall be transferable in
the manner prescribed by law and in these By-Laws. Transfers of stock shall be
made on the books of the Corporation only by the person named in the certificate
or by such person's attorney lawfully constituted in writing and upon the
surrender of the certificate therefor, which shall be canceled before a new
certificate shall be issued.
SECTION 5. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the Board of Directors may fix, in advance, a record
date, which shall not be more than 60 days nor less than 10 days before the date
of such meeting, nor more than 60 days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
SECTION 6. Beneficial Owners. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person, whether or not it shall have express or
other notice thereof, except as otherwise provided by law.
ARTICLE VII
NOTICES
SECTION 1. Notices. Whenever written notice is required by law, the
Articles of Incorporation or these By-Laws, to be given to any director, member
of a committee or stockholder, such notice may be given by mail, addressed to
such director, member of a committee or stockholder, at his or her address as it
appears on the records of the Corporation, with postage thereon prepaid, and
such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Written notice may also be given personally
or by telegram, telex or cable.
SECTION 2. Waivers of Notice. Whenever any notice is required by law,
the Articles of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, a waiver thereof in writing, signed, by
the person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 1. Dividends. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Articles of Incorporation, if any,
may be declared by the Board of Directors at any regular or special meeting, and
may be paid in cash, in property, or in shares of the capital stock.
<PAGE> 11
SECTION 2. Disbursements. All checks or demands for money and notes of
the Corporation shall be signed by such officer or officers or such other person
or persons as the Board of Directors may from time to time designate.
SECTION 3. Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
SECTION 4. Corporate Seal. The corporate seal shall have inscribed
thereon the name of the Corporation and the words "Corporate Seal, Michigan".
The seal may be used by causing it or a facsimile thereof to be impressed or
affixed or reproduced or otherwise.
SECTION 5. Control Share Acquisitions. Chapter 7B of the Michigan
Business Corporation Act (being Section 450.1790 through 450.1799 of Michigan
Compiled Laws) shall not apply to control share acquisitions of shares of the
Corporation's capital stock.
ARTICLE IX
AMENDMENTS
SECTION 1. These By-Laws may be altered, amended or repealed, in whole
or in part, or new By-Laws may be adopted by the stockholders or by the Board of
Directors, provided, however, that notice of such alteration, amendment, repeal
or adoption of new By-Laws be contained in the notice of such meeting of
stockholders or Board of Directors as the case may be. All such amendments must
be approved by either the holders of a majority of the outstanding capital stock
entitled to vote thereon or by a majority of the entire Board of Directors then
in office.
SECTION 2. Entire Board of Directors. As used in this Article IX and in
these By-Laws generally, the term "entire Board of Directors" means the exact
number of directors determined pursuant to Section 1 of Article III.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>3
<FILENAME>k61366ex10-2.txt
<DESCRIPTION>FORM OF SEVERANCE AGREEMENT
<TEXT>
<PAGE> 1
EXHIBIT 10.2
June 6, 2000
(First_Name)(Last_Name)
Dear (First_Name):
This letter will confirm our understanding concerning your employment with
Borders Group, Inc. (the "Company"). You are sometimes referred to herein as the
"Executive."
1. Subject to the mitigation provisions set forth below and to paragraphs 8
and 9 hereof, if your employment with the Company is terminated by the
Company other than for Cause or Disability or if you terminate your
employment with the Company for Good Reason, the Company will pay to you:
(a) Your base salary through the month during which termination
occurred, plus any other amount due you at the time of termination
under any bonus plan of the Company; and
(b) Monthly severance payments equal to (i) your monthly base salary
at the time of termination, plus (ii) 1/12th of the "threshold"
bonus amount targeted for you for the fiscal year in which
termination occurred.
Such monthly severance payments shall commence in the month following
termination (to be paid on or about the 15th day of the month) and shall
continue for twelve months; provided however, that if termination of your
employment occurs within a one-year period following a Change in Control, the
severance payments shall continue for twenty-four months and, subject to the
mitigation provisions set forth below and to paragraphs 8 and 9 hereof, shall be
equal to (i) your monthly base salary at the time of termination or immediately
prior to the Change in Control, whichever base salary amount is greater, plus
(ii) 1/12th of the "threshold" bonus amount targeted for you for the fiscal year
in which termination occurred or the fiscal year immediately prior to the Change
in Control, whichever bonus amount is greater.
Notwithstanding the foregoing, you agree to make reasonable efforts to seek (and
to immediately notify the Company of) other employment and to the extent that
you receive compensation from other employment, the severance payments provided
herein shall be correspondingly reduced.
No payments shall be due if your employment with the Company is terminated
because of your retirement or death or is terminated by the Company for Cause or
Disability or by you other than for Good Reason (except for any benefits which
may be due you in normal course under any employee benefit plan of the Company
which provides benefits after termination of employment).
All payments hereunder shall be subject to applicable withholding and
deductions.
2. Termination by the Company for "Cause" means termination based on (i)
conduct which is a material violation of Company policy or which is
fraudulent or unlawful or
<PAGE> 2
which materially interferes with your ability to perform your duties,
(ii) misconduct which damages or injures the Company or substantially
damages the Company's reputation, or (iii) gross negligence in the
performance of, or willful failure to perform, your duties and
responsibilities.
3. Termination by you for "Disability" means termination based on inability
to perform your duties and responsibilities by reason of illness or
incapacity for a total of 180 days in any twelve-month period.
4. Termination by you for "Good Reason" means termination based on the
occurrence without your express consent of any of the following: (i) a
reduction in your base salary, other than for Cause or Disability and
other than as part of an across-the-board salary reduction generally
imposed on executives of the Company (unless such across-the-board salary
reduction occurs within a one-year period following a Change in Control
of the Company), or (ii) within a one-year period following a Change in
Control of the Company, a material diminution by the Company of benefits
(taken as a whole) provided to you immediately prior to the Change in
Control.
5. A "Change in Control" shall mean:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 20% or more of either (i) the then
outstanding shares of common stock of the Company (the "Outstanding
Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company
Voting Securities"); provided, however, that for purposes of this
subsection (a), the following acquisitions shall not constitute a
Change of Control: (i) any acquisition directly from the Company,
(ii) any acquisition by the Company, (iii) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by
the Company or any corporation controlled by the Company or (iv)
any acquisition by any corporation pursuant to a transaction which
complies with clauses (i), (ii) and (iii) of subsection (c) of this
Section 5; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election,
or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for
this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or
other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board; or
<PAGE> 3
(c) Consummation of a reorganization, merger or consolidation or sale
or other disposition of all or substantially all of the assets of
the Company (a "Business Combination"), in each case, unless,
following such Business Combination, (i) all or substantially all
of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more
than 60% of, respectively, the then outstanding shares of common
stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors,
as the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation which as
a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or
through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Business
Combination of the Outstanding Company Common Stock and Outstanding
Company Voting Securities, as the case may be, (ii) no Person
(excluding any corporation resulting from such Business Combination
or any employee benefit plan (or related trust) of the Company or
such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of
such corporation except to the extent that such ownership existed
prior to the Business Combination and (iii) at least a majority of
the members of the board of directors of the corporation resulting
from such Business Combination were members of the Incumbent Board
at the time of the execution of the initial agreement, or of the
action of the Board, providing for such Business Combination; or
(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
6. Payments shall be reduced to the extent, if any, determined in accordance
with the following provisions:
(a) For purposes of this Section 6: (i) a "Payment" shall mean any
payment or distribution in the nature of compensation to or for the
benefit of the Executive, whether paid or payable pursuant to this
Agreement or otherwise; (ii) "Agreement Payment" shall mean a
Payment paid or payable pursuant to this Agreement (disregarding
this Section); (iii) "Net After-Tax Receipt" shall mean the Present
Value of a Payment net of all taxes imposed on the Executive with
respect thereto under Sections 1 and 4999 of the Code and under
applicable state and local laws, determined by applying the highest
marginal rate under Section 1 of the Code and under state and local
laws which applied to the Executive's taxable income for the
immediately preceding taxable year, or such other rate(s) as the
Executive shall certify, in the Executive's sole discretion, as
likely to apply to the Executive in the relevant tax year(s); (iv)
"Present Value" shall mean such value determined in accordance with
Sections 280G(b)(2)(A)(ii) and 280G(d)(4) of Code; (v) "Reduced
Amount" shall mean the amount of Agreement Payments that (A) has a
Present Value that is less than the Present Value of all Agreement
<PAGE> 4
Payments and (B) results in aggregate Net After-Tax Receipts for
all Payments that are greater than the Net After-Tax Receipts for
all Payments that would result if the aggregate Present Value of
Agreement Payments were any other amount that is less than the
Present Value of all Agreement Payments; and (vi) "Code" shall mean
the Internal Revenue Code of 1986, as amended.
(b) Anything in the Agreement to the contrary notwithstanding, in the
event PricewaterhouseCoopers or such other accounting firm as shall
be designated by the Company (the "Accounting Firm") shall
determine that receipt of all Payments would subject the Executive
to tax under Section 4999 of the Code, the Accounting Firm shall
determine whether some amount of Agreement Payments meets the
definition of "Reduced Amount." If the Accounting Firm determines
that there is a Reduced Amount, then the aggregate Agreement
Payments shall be reduced to such Reduced Amount.
(c) If the Accounting Firm determines that aggregate Agreement Payments
should be reduced to the Reduced Amount, the Company shall promptly
give the Executive notice to that effect and a copy of the detailed
calculation thereof, and the Executive may then elect, in his or
her sole discretion, which and how much of the Agreement Payments
shall be eliminated or reduced (as long as after such election the
Present Value of the aggregate Agreement Payments equals the
Reduced Amount), and shall advise the Company in writing of his or
her election within ten days of his or her receipt of notice. If no
such election is made by the Executive within such ten-day period,
the Company may elect which of such Agreement Payments shall be
eliminated or reduced (as long as after such election the Present
Value of the aggregate Agreement Payments equals the Reduced
Amount) and shall notify the Executive promptly of such election.
All determinations made by the Accounting Firm under this Section
shall be binding upon the Company and the Executive and shall be
made within 60 days of a termination of employment of the
Executive. As promptly as practicable following such determination,
the Company shall pay to or distribute for the benefit of the
Executive such Agreement Payments as are then due to the Executive
under this Agreement and shall promptly pay to or distribute for
the benefit of the Executive in the future such Agreement Payments
as become due to the Executive under this Agreement.
(d) As a result of the uncertainty in the application of Section 4999
of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that amounts will have
been paid or distributed by the Company to or for the benefit of
the Executive pursuant to this Agreement which should not have been
so paid or distributed ("Overpayment") or that additional amounts
which will have not been paid or distributed by the Company to or
for the benefit of the Executive pursuant to this Agreement could
have been so paid or distributed ("Underpayment"), in each case,
consistent with the calculation of the Reduced Amount hereunder. In
the event that the Accounting Firm, based upon the assertion of a
deficiency by the Internal Revenue Service against either the
Company or the Executive which the Accounting Firm believes has a
high probability of success determines that an Overpayment has been
made, any such Overpayment paid or distributed
<PAGE> 5
by the Company to or for the benefit of the Executive shall be
treated for all purposes as a loan to the Executive which the
Executive shall repay to the Company together with interest at the
applicable federal rate provided for in Section 7872(f)(2) of the
Code; provided, however, that no such loan shall be deemed to have
been made and no amount shall be payable by the Executive to the
Company if and to the extent such deemed loan and payment would not
either reduce the amount on which the Executive is subject to tax
under Section 1 and Section 4999 of the Code or generate a refund
of such taxes. In the event that the Accounting Firm, based upon
controlling precedent or substantial authority, determines that an
Underpayment has occurred, any such Underpayment shall be promptly
paid by the Company to or for the benefit of the Executive together
with interest at the applicable federal rate provided for in
Section 7872(f)(2) of the Code.
(e) All fees and expenses of the Accounting Firm in implementing the
provisions of this Section 6 shall be borne by the Company.
7. The severance payments hereunder may not be transferred, assigned or
encumbered in any manner, either voluntarily or involuntarily. In the
event of your death, any payments then or thereafter due hereunder will
be made to your estate.
8. The payments provided hereunder shall constitute the exclusive payments
due you from, and the exclusive obligation of, the Company in the event
of any termination of your employment, except for any benefits which may
be due you in normal course under any employee benefit plan of the
Company which provides benefits after termination of employment, it being
understood and agreed that no severance plan shall be deemed to be an
employee benefit plan for this purpose.
The obligation to make the payments hereunder is conditioned upon your
execution and delivery to the Company of a release, in form satisfactory
to the Company, of any claims you may have as a result of your employment
or termination of employment under any federal, state or local law,
excluding any claim for benefits which may be due you in normal course
under any employee benefit plan of the Company which provides benefits
after termination of employment. The obligation to make the payments
hereunder is further conditioned upon the terms set forth in paragraph 9
hereof.
9. You agree that any right to receive severance payments hereunder will
cease if during the one-year period following your termination of
employment you directly or indirectly become an employee, director,
advisor of, or otherwise affiliated with, any other entity or enterprise
whose business is in competition with the business of the Company or any
of its subsidiaries or affiliates.
10. Notwithstanding anything herein to the contrary, your employment with the
Company is terminable at will with or without cause; subject, however, to
the obligations of the Company under this agreement.
11. If a dispute arises concerning any provisions of this agreement, it shall
be resolved by arbitration in Ann Arbor, Michigan in accordance with the
rules of the American Arbitration Association. Judgment on the award
rendered may be entered in any court having jurisdiction and enforced
accordingly.
<PAGE> 6
12. This letter agreement sets forth the entire understanding with respect to
the subject matter hereof and supersedes all prior agreements, written or
oral or express or implied, between you and the Company or any subsidiary
or other affiliate of the Company as to such subject matter. This letter
agreement may not be amended, nor may any provision hereof be modified or
waived, except by an instrument in writing duly signed by you and the
Company.
13. If any provision of this letter agreement, or any application thereof to
any circumstances, is invalid, in whole or in part, such provision or
application shall to that extent be severable and shall not affect other
provisions or applications of this letter agreement.
Please indicate your agreement by signing below and retain one copy for your
records.
Agreed and Accepted: Sincerely,
BORDERS GROUP, INC.
/s/ By: /s/ BRUCE A. QUINNELL
------------------------------ -----------------------
(First_Name) (Last_Name) Name: Bruce A. Quinnell
Its: Vice Chairman
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.4
<SEQUENCE>4
<FILENAME>k61366ex10-4.txt
<DESCRIPTION>AMENDMENT TO STOCK OPTION PLAN
<TEXT>
<PAGE> 1
EXHIBIT 10.4
AMENDMENT TO THE
BORDERS GROUP, INC. STOCK OPTION PLAN
The Borders Group, Inc. Stock Option Plan (the "Plan"), as restated in
the Proxy Statement of Borders Group, Inc. (the "Company") dated April 9, 1997
and approved by the shareholders of the Company on May 15, 1997, is hereby
amended as follows pursuant to a resolution duly adopted by the Board of
Directors of the Company:
1. Section 8 of the Plan is amended in its entirety to read as follows:
8. Term of Plan. No option shall be granted under the Plan after December
31, 2005. Options granted on or before December 31, 2005, however, may extend
beyond such date and the provisions of the Plan shall continue to apply
thereto. Notwithstanding the foregoing, no option may be granted after
December 31, 2000 to any executive officer or director of the Company in
contravention of any applicable rule of the New York Stock Exchange.
2. Except as herein amended, the Plan shall remain in full force and effect.
BORDERS GROUP, INC.
By: /s/
------------------------
December 14, 2000
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.7
<SEQUENCE>5
<FILENAME>k61366ex10-7.txt
<DESCRIPTION>AGREEMENT DATED JANUARY 25, 2001 WITH KMART CORP.
<TEXT>
<PAGE> 1
EXHIBIT 10.7
AGREEMENT
THIS AGREEMENT ("Agreement") dated as of January 25, 2001, by
and among KMART CORPORATION, a Michigan corporation ("Kmart"), having an address
at 3100 West Big Beaver Road, Troy, Michigan 48084, BORDERS GROUP, INC., a
Michigan corporation ("BGI"), and BORDERS, INC., a Colorado corporation
("Borders"), each of BGI and Borders having an address at 100 Phoenix Drive, Ann
Arbor, Michigan 48108.
A. Borders is a wholly-owned subsidiary of BGI.
B. Prior to the date hereof, Borders entered into certain
leases, as tenant, with various landlords, which leases are described on
Schedule "1", Schedule "2" and Schedule "3" attached hereto and incorporated
herein by this reference (the "Leases"), for certain real properties described
in the Leases and referenced by street address on said Schedules "1", "2" and
"3".
C. Prior to the date hereof, Kmart executed certain lease
guaranty agreements pursuant to which Kmart guaranteed certain obligations of
Borders under the Leases (the "Guaranties").
D. Prior to the date hereof, Kmart, Borders and BGI entered
into that certain Lease Guaranty, Indemnification and Reimbursement Agreement,
dated May 24, 1995 (the "LGIRA"), whereby Borders and BGI agreed, among other
things, to indemnify Kmart in connection with the obligations of Borders under
the Leases and to accept certain financial and other covenants in favor of
Kmart.
E. Borders and BGI have requested that Kmart waive certain
requirements of Borders and BGI under the LGIRA in consideration of the
agreement of BGI and Borders to cause Kmart to be released from certain of the
Guaranties, and Kmart desires to satisfy such request, subject to and in
accordance with the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and
for other good and valuable consideration the receipt and sufficiency of which
is hereby acknowledged, Kmart, BGI and Borders agree as follows:
1. Release of Kmart from Obligations under the Leases and Related
Guaranties.
1.1 Group A Leases. As soon as practicable after the date
hereof but in no event later than April 15, 2001, BGI shall cause Ernst & Young
LLP (or another national accounting firm) to prepare audited financial
statements (the "Financial Statements") for Walden Book Company, Inc., a
wholly-owned subsidiary of BGI ("Walden"), as of the end of Walden's current
fiscal year. If the Financial Statements confirm that Walden has a tangible net
worth in excess of $250 million, then (i) Borders shall promptly, after receipt
of the Financial Statements, assign the Leases described on Schedule "1"
attached hereto and incorporated herein by this reference (the "Group A Leases")
to Walden, and Walden shall assume the Group A Leases pursuant
<PAGE> 2
to an Assignment and Assumption Agreement with respect to each Group A Lease in
the form of Exhibit A attached hereto and incorporated herein by this reference
(the "Assignment Agreement"), and (ii) Walden shall send to the landlords under
the Group A Leases the Financial Statements, the Assignment Agreements and the
other documentation set forth in Exhibit B; provided, however, that the
foregoing requirements set forth in clauses (i) and (ii) shall not apply to any
Group A Lease as to which, subsequent to the date hereof, the applicable Kmart
Guaranty shall have previously been released; and, provided further, that,
notwithstanding the foregoing, in the case of the Group A Lease for the premises
in Aventura, Florida (Reference No. 83 on Schedule "1" hereto), in lieu of
taking the actions referenced in clauses (i) and (ii) of this sentence, BGI
shall guarantee to the applicable ground lessor the obligations of the ground
lessee under the underlying ground lease and shall provide such ground lessor
evidence that BGI's net worth exceeds $250 million and notice that BGI's
replacement guaranty has caused the termination of the applicable Guaranty from
Kmart. If the Financial Statements do not confirm that Walden has a net worth in
excess of $250 million, then this Agreement shall terminate and be of no further
force or effect, except with respect to the obligations of BGI and Borders
pursuant to Section 3 hereof.
1.2 Group B Leases. Commencing upon BGI's delivery of the
Financial Statements to Kmart pursuant to Section 1.1 to confirm that Walden's
tangible net worth exceeds $250 million, except to the extent the applicable
Guaranty shall have previously been released subsequent to the date hereof, BGI
and Borders shall use their reasonable best efforts (without the payment of
money other than for their own overhead and for the fees of their own counsel,
advisors, representatives and other third party service providers representing
BGI or Borders, and without being required to take any action other than as
described in the following clauses (i), (ii), (iii) and (iv)) to cause Kmart to
be fully, absolutely and unconditionally released from any and all obligations
and liabilities under the Leases described on Schedule "2" attached hereto and
incorporated herein by this reference (the "Group B Leases") and the related
Guaranties by (i) offering in writing (each such offer, a "BGI Guaranty Offer")
to each landlord under the Group B Leases, as a substitute for the applicable
Kmart Guaranty and in exchange for such landlord's release of Kmart as
aforesaid, a guaranty from BGI of the obligations of Borders under such
landlord's Group B Lease, (ii) responding diligently to requests for information
(including, without limitation, financial statements of BGI) and other queries
by landlords under the Group B Leases in connection with the BGI Guaranty Offer,
(iii) negotiating in good faith the terms of any guaranty to be issued by BGI,
and (iv) keeping Kmart apprised as to the progress of their efforts under this
Section 1.2 and seeking to effect and evidence any releases obtained pursuant to
this Section 1.2 with documentation in form and substance acceptable to Kmart in
Kmart's sole and absolute discretion.
1.3 Group C Leases. Each of BGI and Borders represents and
warrants that Kmart has been fully, absolutely and unconditionally released from
any and all obligations and liabilities under the Leases described on Schedule
"3" attached hereto and incorporated herein by this reference (the "Group C
Leases") and the related Guaranties pursuant to notices referenced in Schedule
"4".
1.4 Continuing Obligation. The rights and obligations of the
parties set forth in Sections 1.1 and 1.2 shall survive the effective date of
the Amendment (as defined below), if
<PAGE> 3
any, and shall continue until Kmart has been fully, absolutely and
unconditionally released from any and all obligations and liabilities under the
Leases and the related Guaranties.
2. Amendment of LGIRA.
2.1 Conditions. BGI, Borders and Kmart have executed an
amendment to the LGIRA in the form of Exhibit C attached hereto and incorporated
herein by this reference (the "Amendment"), which Amendment has been delivered
to Skadden, Arps, Slate, Meagher & Flom ("Escrow Agent") to be held in escrow
pending satisfaction of the following conditions (the "Conditions"):
(a) BGI shall have delivered the Financial Statements to
Kmart and the Financial Statements shall disclose
that Walden's tangible net worth exceeds $250
million;
(b) The Assignment Agreement shall have been executed by
Borders and Walden, to the extent required under
Section 1.1 hereof;
(c) Borders shall have sent to each landlord under the
Group A Leases a copy of the Financial Statements,
the applicable Assignment Agreement and the other
documentation (if any) set forth in Exhibit B, in
accordance with the provisions of Section 1.1 (or, in
the case of the Group A Lease for the Aventura,
Florida premises, the other documentation required
under Section 1.1 above);
(d) BGI and Borders shall have sent a BGI Guaranty Offer
to each landlord under the Group B Leases as required
under Section 1.2; and
(e) During the 120 day period following satisfaction of
the Condition set forth in clause (c) above (the
"Objection Period"), Objection Notices (as defined
below) shall have been received by the parties hereto
(and shall not have been withdrawn by the applicable
landlords) in respect of no more that seven Group A
Leases; provided, however, that if Objection Notices
shall have been received by any of the parties hereto
(and not withdrawn) during the Objection Period in
respect of more that seven Group A Leases but any one
or more of such Objection Notices shall have been
withdrawn in writing within 95 days following the end
of the Objection Period such that there shall be
seven or fewer Group A Leases in respect of which
Objection Notices are outstanding, then the Condition
set forth in this clause (e) shall be deemed to have
been satisfied as of the date following the Objection
Period on which there are seven or fewer Group A
Leases in respect of which Objection Notices are
outstanding. The term "Objection Notice" shall mean,
collectively, one or more notices from a landlord
under a Group A Lease which are received by any of
the parties hereto during the
<PAGE> 4
Objection Period and which contest the termination of
the Guaranty applicable to such landlord's Group A
Lease.
If any of the parties hereto shall receive an Objection Notice it shall promptly
provide written notice thereof (including a copy thereof) to the other parties
hereto and to Escrow Agent. The parties hereto and Escrow Agent have executed a
separate agreement of even date herewith to evidence the agreement of Escrow
Agent to hold the Amendment in trust in accordance with the terms hereof and to
release the Amendment to Kmart and BGI upon receipt of notice from BGI or Kmart
certifying that the Conditions have been satisfied. The Amendment shall not be
effective until it is released by Escrow Agent, and Escrow Agent is hereby
directed to date the Amendment (by filling in the date in the first paragraph
thereof) as of the date of its release from escrow (the "Effective Date").
2.2 Alternative Arrangement. If the Conditions shall have been
satisfied but Objection Notices in respect of more than three Group A Leases
shall have been received by any of the parties hereto prior to the Effective
Date, then (x) Borders and BGI shall exercise their reasonable best efforts
(without the payment of money other than for their own overhead and for the fees
of their own counsel, advisors, representatives and other third party service
providers representing BGI or Borders) to cause each landlord who issued an
Objection Notice to withdraw its Objection Notice by offering to provide such
landlord a guaranty from BGI of the tenant's obligations under such landlord's
Group A Lease and by taking such other actions as Borders or BGI shall determine
in their sole discretion to be appropriate, and (y) if, despite such efforts
described in clause (x), there shall remain more than three Group A Leases in
respect of which Objection Notices are outstanding on the date which is 90 days
after the Effective Date, then BGI or Borders shall provide Kmart an Acceptable
Letter of Credit (as defined below) as security for the obligation of Borders
and BGI under Section 2 of the LGIRA to indemnify Kmart for any payments Kmart
makes under any of the Guaranties. An "Acceptable Letter of Credit" shall be a
letter of credit which: (i) is issued by a national bank; (ii) has a face amount
equal to the lesser of (A) $3 million and (B) the product of (x) Six Hundred
Seven Thousand Four Hundred Thirty-Five Dollars ($607,435) multiplied by (y) the
number of Group A Leases in excess of three in respect of which Objection
Notices remain outstanding at the expiration of the aforesaid 90 day period
commencing on the Effective Date; (iii) shall be renewed annually for five years
following the Effective Date; and (iv) is otherwise in form and substance
reasonably acceptable to Kmart.
3. Payment of Legal Fees. BGI and Borders shall reimburse Kmart from
time to time for legal fees and costs incurred by Kmart in connection with this
Agreement, including legal fees and costs relating to: (i) review of the
Guaranties for termination rights, (ii) negotiation and drafting of this
Agreement and the Amendment, (iii) review of documentation effecting and
evidencing the release of Kmart from any and all obligations and liabilities
under the Leases and related Guaranties, and (iv) enforcement of the parties'
respective rights and obligations under this Agreement; provided, however, that
in no event shall BGI or Borders be required to reimburse Kmart more than
Fifty-Eight Thousand Dollars ($58,000) for legal fees and costs incurred
pursuant to subsections (i), (ii) and (iii) of this Section 3. There shall be no
such cap with respect to fees and costs incurred by Kmart pursuant to subsection
(iv) hereof. The obligations of the parties set forth in this Section 3 shall
survive termination of this Agreement pursuant to Sections 1.1 or 4.10 hereof,
with respect to fees and costs incurred pursuant to subsections (i), (ii) and
(iii)
<PAGE> 5
prior to the termination of the Agreement, and with respect to fees and costs
incurred pursuant to subsection (iv), whenever incurred.
4. Miscellaneous.
4.1 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given upon receipt if delivered personally or sent by facsimile
transmission (receipt of which is confirmed) or by courier service promising
overnight delivery (with delivery confirmed the next day) or three (3) Business
Days after sent by registered or certified mail (postage prepaid, return receipt
requested). Notices shall be addressed as follows:
To Kmart: Kmart Corporation
3100 West Big Beaver Road
Troy, Michigan 48084-33163
Attention: General Counsel
Facsimile: (248) 643-1054
Treasurer
Facsimile: (248) 643-5398
With a copy to: Skadden, Arps, Slate,
Meagher & Flom (Illinois)
333 West Wacker Drive
Chicago, Illinois 60606
Attention: John Wm. Butler, Jr., Esq.
Marian P. Wexler, Esq.
Facsimile: (312) 407-0411
To BGI or Borders: Borders Group, Inc.
100 Phoenix Drive
Ann Arbor, Michigan 48108
Attention: General Counsel
Facsimile: (734) 477-1285
With a copy to: Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Richard D. Katcher, Esq.
Robin Panovka, Esq.
Facsimile: (212) 403-2000
Any party may from time to time change its address for the purpose of notices by
a similar notice specifying the new address but no such change shall be
effective as against any person or entity until such person or entity shall have
actually received it.
4.2 Final Agreement. This Agreement contains the final and
entire agreement among the parties with respect to the transactions contemplated
hereby and supersedes all written or verbal representations, warranties,
commitments and other understandings prior to the date
<PAGE> 6
hereof. No reference shall be made to any draft of this Agreement for purposes
of interpretation or resolution of ambiguity or otherwise.
4.3 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
4.4 Unenforceability. If any provision hereof shall be held to
be unenforceable or invalid by any court of competent jurisdiction or as a
result of future legislative action, such holding or action shall be strictly
construed and shall not alter the enforceability, validity or effect of any
other provision hereof.
4.5 Successors and Assigns. This Agreement shall be binding
upon, inure to the benefit of, and be enforceable by, the parties hereto and
their respective successors and permitted assigns; provided, however, that in no
event shall any party to this Agreement assign or transfer any of its right,
title or interest in or to this Agreement without the written consent of the
other parties to this Agreement, which consent may be withheld in the sole and
absolute discretion of such parties.
4.6 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Michigan.
4.7 Further Actions. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use all commercially
reasonable efforts to take, or cause to be taken, all action, and to do, or
cause to be done, all things necessary, proper or advisable, whether under
applicable laws and regulations or otherwise, to make effective the transactions
contemplated by this Agreement. If at any time after the date hereof any further
action is necessary or desirable to carry out the purposes of this Agreement,
the parties hereto shall take or cause to be taken all such necessary action,
including the execution and delivery of such further instruments and documents
as may be reasonably requested by the other party for such purposes or otherwise
to make effective the transactions contemplated hereby.
4.8 Interpretation. The term "including" (and with correlative
"include") shall mean including without limiting the generality of any
description preceding such term.
4.9 Amendment. This Agreement may be amended only by a written
instrument duly executed by a duly authorized officer of each of the parties
hereto.
4.10 Termination. If this Agreement shall be terminated
pursuant to Sections 1.1 or if the Condition set forth in Section 2.1(e) hereof
shall not have been satisfied by the first anniversary of the date of the
satisfaction of the Condition set forth in Section 2.1(c), then Escrow Agent
shall promptly destroy the Amendment and this Agreement (including Section 1.4
hereof) shall terminate as of such date and the parties shall have no further
obligation hereunder, except with respect to the obligations of BGI and Borders
pursuant to Section 3 hereof.
4.11 Headings. The section headings contained in this
Agreement are for reference purposes only and shall not affect in any manner the
meaning or interpretation of this Agreement.
<PAGE> 7
IN WITNESS WHEREOF, the undersigned have executed and
delivered this Agreement as of the date first written above.
KMART CORPORATION
By:/s/
---------------------------------
Name:
Title:
BORDERS GROUP, INC.
By:/s/
---------------------------------
Name:
Title:
BORDERS, INC.
By:/s/
---------------------------------
Name:
Title:
<PAGE> 8
EXHIBIT "A"
ASSIGNMENT AND ASSUMPTION OF LEASE
ASSIGNMENT AND ASSUMPTION OF LEASE (this "Assignment") dated
as of ____________________, 2001, between BORDERS, INC., a Colorado corporation
having an address at 100 Phoenix Drive, Ann Arbor, Michigan 48101 ("Assignor")
and WALDEN BOOK COMPANY, INC., a ____________________ corporation having an
address at [100 Phoenix Drive, Ann Arbor, Michigan 48108] ("Assignee").
Background
Assignor has agreed to assign, and Assignee has agreed to
assume, from and after the date hereof, the obligations of the tenant under that
certain lease (the "Lease") dated ____________________, between Assignee, as
tenant, and ____________________, as landlord, with respect to premises located
at ____________________ [, as such lease has been amended by amendment[s] dated
___________________].
Assignment and Assumption
In consideration of Ten Dollars and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
Assignor and Assignee: (i) Assignor does hereby assign, transfer and set over
unto Assignee all of Assignor's right, title and interest in the Lease, and (ii)
Assignee does hereby assume the performance of all of the terms, covenants and
conditions of the Lease on Assignor's part to be performed thereunder from and
after the date hereof and agrees to perform all of the terms, covenants and
conditions of the Lease from and after the date hereof, all with the same force
and effect as though the Assignee had signed such Lease as the tenant named
therein.
TO HAVE AND TO HOLD, the same unto Assignee, its successors
and assigns, from and after the date hereof, subject to the terms, covenants,
conditions and provisions contained in the Lease.
This Assignment and Assumption of Lease shall inure to the
benefit of, and be binding upon, Assignor, Assignee and their respective
successors and assigns.
<PAGE> 9
IN WITNESS WHEREOF, the Assignor and Assignee have duly
executed this instrument as of the day first above written.
ASSIGNOR:
BORDERS, INC.
By:/s/
-----------------------------------------
Name:
Title:
ASSIGNEE:
WALDEN BOOK COMPANY, INC.
By:/s/
-----------------------------------------
Name:
Title:
<PAGE> 10
EXHIBIT "B"
NOTICE OF ASSIGNMENT
[Borders Letterhead]
[Date]
VIA CERTIFIED MAIL
RETURN RECEIPT REQUESTED
[Landlord Name and Address]
Re: [Describe Lease] (the "LEASE")
Dear [Landlord]:
This notice is delivered to advise you that the
above-referenced Lease has been assigned by the tenant, Borders, Inc.
("BORDERS"), to Walden Book Company, Inc. ("WALDEN"), an affiliate of Borders,
effective on [Effective Date of Assignment] (the "EFFECTIVE DATE"). Copies of
the Assignment and Assumption Agreement between Borders and Walden and the
audited financial statements for Walden as of the end of its most recent fiscal
year are enclosed herewith.
As you can see, Walden's financial statements indicate that,
as of the end of its fiscal year 2000, it had a net worth in excess of
[$250,000,000/FOR #79 and #89 - $200,000,000] [FOR #89 - and has maintained its
net worth in excess of $200,000,000 continuously throughout the prior fiscal
year]. Therefore, Walden has satisfied the net worth requirements set forth in
the Lease Guaranty Agreement dated [Date] between [Landlord] and Kmart
Corporation (the "GUARANTY"), and this letter shall constitute notice that the
Guaranty is hereby terminated as of the Effective Date.
Please address any and all notices and other communications to
the tenant under or in connection with the Lease to Walden at the address of the
tenant set forth in the Lease or otherwise provided to you pursuant to the terms
of the Lease. Thank you in advance for your cooperation.
Very Truly Yours,
BORDERS, INC.
By:/s/
------------------------
cc: Kmart Corporation
<PAGE> 11
EXHIBIT "C"
FIRST AMENDMENT TO LEASE GUARANTY, INDEMNIFICATION AND REIMBURSEMENT AGREEMENT
THIS FIRST AMENDMENT TO LEASE GUARANTY, INDEMNIFICATION AND
REIMBURSEMENT AGREEMENT ("Amendment") is made as of the _____ day of
___________, 2000, by and among KMART CORPORATION, a Michigan corporation
("Kmart"), having an address at 3100 West Big Beaver Road, Troy, Michigan 48084,
BORDERS GROUP, INC., a Michigan corporation ("BGI"), and BORDERS, INC., a
Colorado corporation ("Borders"), each of BGI and Borders having an address at
100 Phoenix Drive, Ann Arbor, Michigan 48108.
A. Prior to the date hereof, Kmart, Borders and BGI entered
into that certain Lease Guaranty, Indemnification and Reimbursement Agreement,
dated May 24, 1995 (the "LGIRA"), whereby Borders and BGI agreed, among other
things, to indemnify Kmart in connection with the obligations of Borders under
the Leases (as defined in the LGIRA) and to accept certain financial and other
covenants in favor of Kmart.
B. Prior to the date hereof, Kmart, Borders and BGI entered
into that certain Agreement, dated January ___, 2001 (the "Agreement"), whereby
Kmart agreed to amend the LGIRA upon the satisfaction of certain conditions set
forth in Section 2 of the Agreement.
C. The conditions set forth in Section 2 of the Agreement have
been satisfied, and thus Kmart, Borders and BGI desire to amend the LGIRA in
accordance with the Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and
for other good and valuable consideration the receipt and sufficiency of which
is hereby acknowledged, Kmart, BGI and Borders agree as follows:
1. Representation of Satisfaction of Conditions. Each of Borders
and BGI represent and warrant to Kmart that the conditions set forth in Section
2 of the Agreement have been fully satisfied. Without limiting the foregoing
sentence, BGI and Borders are unconditionally and irrevocably committed to
continue to take the actions required under Section 1.2 of the Agreement to seek
to cause Kmart to be fully, absolutely and unconditionally released from any and
all obligations and liabilities relating to the Group B Leases (as defined in
the Agreement) and related Guaranties (as defined in the Agreement).
2. Amendment of LGIRA. The LGIRA is amended as follows:
(a) Sections 5(a) and 5(b) of the LGIRA (other than the
definition of the term "Indebtedness") are hereby
deleted in their entirety;
(b) Clause (ii) of Section 5(c) is hereby deleted in its
entirety; and
(c) Clause (i) of Section 5(e) is hereby deleted in its
entirety.
<PAGE> 12
3. Prior Agreements/Conflicts. This Amendment contains all of the
agreements of the parties hereto with respect to the matters contained herein,
and no prior agreement (other than the Agreement and the LGIRA as modified by
this Amendment), arrangement or understanding pertaining to any of such matters
shall be effective for any purpose.
4. LGIRA Ratification. With the sole exception of the matters
expressly set forth in this Amendment, each and every one of the terms,
conditions, agreements and provisions of the LGIRA shall remain unchanged and in
full force and effect, and all of rights and obligations of the parties under
the LGIRA are hereby reaffirmed, ratified, and confirmed in their entirety.
5. Counterparts. This Amendment may be executed in several
counterparts and all such counterparts shall constitute one agreement binding on
the parties hereto.
6. Headings. The section headings contained in this Amendment are
for reference purposes only and shall not affect in any manner the meaning or
interpretation of this Amendment.
IN WITNESS WHEREOF, the undersigned have executed and
delivered this Amendment as of the date first written above.
KMART CORPORATION
By:/s/
---------------------------------------
Name:
Title:
BORDERS GROUP, INC.
By:/s/
---------------------------------------
Name:
Title:
BORDERS, INC.
By:/s/
---------------------------------------
Name:
Title:
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.12
<SEQUENCE>6
<FILENAME>k61366ex10-12.txt
<DESCRIPTION>4TH AMENDMENT TO MANAGEMENT STOCK PURCHASE PLAN
<TEXT>
<PAGE> 1
EXHIBIT 10.12
FOURTH AMENDMENT TO THE
BORDERS GROUP, INC.
MANAGEMENT STOCK PURCHASE PLAN
Borders Group Management Stock Purchase Plan (as amended, the "Plan")
is hereby amended in the following particulars effective as of December 14,
2000:
1. Paragraph (b) of Article 5 of the Plan is hereby amended to read as
follows:
"PRICE. Except with respect to Restricted Shares purchased pursuant to
Article 16 hereof, the price of each Restricted Share purchased under
the Plan by any Participant who is not a Section 16 Person shall be
discounted (i) twenty percent (20%) from its Fair Market Value, in the
event that the Participant elects a Restricted Period of two years
pursuant to Article 5(d) hereof; or (ii) thirty percent (30%) from its
Fair Market Value, in the event that the Participant elects a
Restricted Period of three years pursuant to Article 5(d) hereof; or
(iii) forty percent (40%) from its Fair Market Value, in the event that
the Participant elects a Restricted Period of four years pursuant to
Article 5(d) hereof. The price of each Restricted Share purchased under
the Plan by a Section 16 Person shall be discounted twenty percent
(20%)."
2. Paragraph (d) of Article 5 of the Plan is hereby amended to read as
follows:
"RESTRICTED PERIOD. Except with respect to Restricted Shares purchased
pursuant to Article 16 hereof, and subject to Article 5(h) hereof and
such exceptions as may be determined by the Committee in its
discretion, Participants who are not Section 16 Persons may elect a
Restricted Period for Restricted Shares purchased under the Plan of (i)
two (2) years, (ii) three (3) years, or (iii) four (4) years from the
date of purchase. The Restricted Period for Restricted Shares purchased
under the Plan by Section 16 Persons shall be three (3) years from the
date of purchase. For purposes of calculating the Restricted Period,
the date of purchase with respect to annual purchases shall be deemed
to be the date the Annual Bonus is payable. Any election described in
this paragraph shall be made in accordance with rules established by
the Committee."
3. Paragraph (a) of Article 16 of the Plan is hereby amended by the
addition at the end thereof of the following:
"Notwithstanding anything to the contrary in the Plan, the Restricted
Period for Restricted Shares purchased pursuant to this Article shall
be three (3) years."
Except as herein amended, the Plan remains in full force and effect.
BORDERS GROUP, INC.
By: /s/
------------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.21
<SEQUENCE>7
<FILENAME>k61366ex10-21.txt
<DESCRIPTION>3RD AMENDMENT TO DIRECTOR STOCK PLAN
<TEXT>
<PAGE> 1
EXHIBIT 10.21
THIRD AMENDMENT TO
THE BORDERS GROUP, INC.
DIRECTOR STOCK PLAN
The Borders Group, Inc. Director Stock Plan (the "Plan") is hereby amended in
the following particulars, effective as of December 14, 2000:
1. The word "nonemployee" is hereby deleted from Section 1.1 of the Plan, so
that directors who are employees of the Company may benefit from the Plan in
accordance with the terms of the Plan, as amended.
2. Paragraph (i) of Article 2 of the Plan is hereby amended in its entirety to
read as follows:
"Participant" shall mean a nonemployee member of the Board, except that such
term shall include a member of the Board who is an employee of the Company for
purposes of any Restricted Shares granted under Section 4.2(b) and (b) options
granted under Section 19.1 (b) and any related provisions of the Plan.
3. Section 4.2 of the Plan is hereby amended to make the existing provisions
paragraph (a) and to add the following paragraph (b):
"(b) The Committee, in its discretion, may grant Restricted
Shares to directors who are employees of the Company."
4. Article 19 is of the Plan is hereby amended in its entirety to read as
follows:
"19. Stock Options
19.1 Grant of Options.
(a) On the date of each Annual Meeting of shareholders of the
Company commencing with the May 16, 1996 Annual Meeting, each
eligible director shall receive an Option to purchase 5,000 shares
of common stock of the Company.
(b) The Committee, in its discretion, may grant options,
including compensation replacement options, to directors who are
employees of the Company.
<PAGE> 2
19.2 Eligibility for Annual Grants under Section 19.1(a).
Each director of the Company who (i) is not an officer or employee of
the Company , (ii) is serving as a director of the Company on the date
of an Annual Meeting, and (iii) has held at least of 10,000 shares of
common shares of common stock of the Company since the preceding Annual
Meeting, shall be eligible to receive Options on that date; provided,
however, that the minimum shareholding requirement shall not be
applicable to a director who is being initially elected on the date of
the applicable Annual Meeting. In calculating the number of shares
owned by a director for purposes of the minimum shareholding
requirement, all shares previously issued to the director under Section
4 of the Plan and then held by the director, whether restricted or
unrestricted, shall be deemed owned by the director.
19.3 Terms and Conditions of Options. The Options granted to
directors under this Plan shall have the following terms and
conditions:
(a) EXERCISE PRICE. The exercise price shall be the Fair
Market Value per Share on the date of grant.
(b) TERM OF OPTIONS. The term of each Option shall be ten
years from the date of grant or such other term as shall be
determined by the Committee.
(c) VESTING AND EXERCISE DATE. Each Option granted under
Section 19.1 (a) shall vest and become exercisable on the
third anniversary of the date of grant; provided, however,
that (i) such an Option shall be 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), and all such options held
by a director who has served as a director for six years or
more shall vest as of the date upon which he or she ceases to
serve as a director. Options granted under Section 19.1 (b)
shall vest as of a date or dates determined by the Committee
at the time of grant. In addition, all outstanding Options
shall vest and become immediately exercisable in the event of
a Change in Control.
(d) DISCONTINUANCE OF SERVICE AS A DIRECTOR. An Option
may be exercised by a director only while he or she is serving
as a director or employee or within three months thereafter
and only if the Option is fully vested and exercisable and has
not expired on the date of exercise; provided however, that if
on the later of date upon which the director ceases to serve
as a director or as an employee, he or she has ten or more
years of full time service as a director and/or an employee of
the Company, or if termination of service as a director or an
employee results from the death or Disability of the director,
such three month period shall be extended to three years. In
the event of a death of a director, either before or after
termination of his or her service as a director, an Option
which is otherwise exercisable may be exercised by
<PAGE> 3
the person or persons whom the director shall have designated
in writing on forms prescribed by and filed with the Board
("Beneficiaries") or, if no such designation has been made, by
the person or persons to whom the director's rights shall have
passed by the laws of decent and distribution ("Successors").
In the event of a Disability of a director, an option which is
otherwise exercisable may be exercised by the director's legal
representative or guardian. The Board may require an indemnity
and/or such other evidence or assurances as it may deem
necessary in connection with an exercise by a legal
representative, guardian, Beneficiary, or Successor.
(e) EXERCISE AND PAYMENT. Subject to the terms hereof, an
Option may be exercised by noticed in writing 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 per share exercise price and such
purchase price shall be paid by delivery to the Company of
cash (including check or similar draft), in United States
dollars or previously owned whole shares otherwise not subject
to holding periods under Rule 16b-3. Shares used in payment of
the purchase price shall be valued at their Fair Market Value
as of the date of notice of exercise is received by the
Company. Any shares delivered to the Company shall be in such
form as acceptable to the Company.
(f) WITHHOLDING TAXES. 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 the exercise of the Option. A director may pay
all or any portion of all taxes: (i) in cash; (ii) by having
the Company withhold whole Shares; (iii) by delivering to the
Company whole Shares previously owned by the director having a
Fair Market Value not greater than the amount to be withheld;
provided, however, that the amount to be withheld may not
exceed the director's estimated total Federal, State and local
tax obligations associated with the transaction.
(g) NON-TRANSFERABILITY. No Option or any rights with
respect thereto shall be subject to any debts or liabilities
of an Director, nor be assignable or transferable except by
will or the laws of decent and distribution, or be exercisable
during the Director's lifetime other than by him or her, nor
shall shares be issued to or in the name of anyone other than
the Director, provided, however that an Option may be
exercised after the death of an Director in accordance with
Section 19.3 above and, provided further that any shares
issued to an Director may be, at the request of the Director,
issued in the name of the Director and/or 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 Director or for the benefit of the Director and others.
(h) TERMINATION BY A DIRECTOR. A director may at any time
elect, in a written notice filed with the Board, to terminate
an Option
<PAGE> 4
with respect to any number of shares as to which such Option
shall not have been exercised.
(i) TYPE OF OPTION. All Options issued under the Plan
shall be non-qualified Options.
(j) RIGHTS AS A STOCKHOLDER. A director shall not have
any 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 exercise 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.
Except as herein amended, the Plan shall remain in full force and
effect.
Borders Group, Inc.
By /s/ BRUCE A. QUINNELL
---------------------
Vice Chairman
---------------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.22
<SEQUENCE>8
<FILENAME>k61366ex10-22.txt
<DESCRIPTION>4TH AMENDMENT TO DIRECTOR STOCK PLAN
<TEXT>
<PAGE> 1
EXHIBIT 10.22
FOURTH AMENDMENT TO
THE BORDERS GROUP, INC.
DIRECTOR STOCK PLAN
The Borders Group, Inc. Director Stock Plan (the "Plan") is hereby amended in
the following particulars, effective January 1, 2001:
1. Section 4.2 of the Plan is hereby amended in its entirety to read as follows:
4.2 Grants of Restricted Shares for Annual Fee. In the case of an
individual who is a Participant at the beginning of a Plan Year, his or
her fee for service as a director for the Plan Year shall be provided
in the form of a grant of 2,000 Restricted Shares made on the first
business day of the Plan Year, subject to adjustment as provided
herein. In the event that granting 2,000 Restricted Shares would result
in the Fair Market Value of such grant equaling more than $75,000, the
number of Restricted Shares granted shall be reduced so that the Fair
Market Value of the Restricted Shares granted equals $75,000. In the
event that granting 2,000 Restricted Shares would result in the Fair
Market Value of such grant equaling less than $40,000, the number of
Restricted Shares granted shall be increased so that the Fair Market
Value of the Restricted Shares granted equals $40,000. In the case of
an individual who is not a Participant at the beginning of a Plan Year,
his or her fee for service as a director for the Plan Year shall be
provided in the form of a grant of Restricted Shares made on the last
business day of the Plan Quarter in which he or she becomes a
Participant. The number of Restricted Shares granted to the director
shall be number of Restricted Shares granted to an individual who was a
Participant at the beginning of a Plan Year multiplied by a fraction,
the numerator of which is the number of days remaining in the Plan Year
from and after the date upon which the individual becomes a director
and the denominator of which is 365. Fractional Shares, if any, shall
be paid in cash. The number of Restricted Shares to be granted to
directors shall also be subject to adjustment as provided in Article 11
hereof.
Except as herein amended, the Plan shall remain in full force and
effect.
Borders Group, Inc.
By: /s/ BRUCE A. QUINNELL
------------------------
Bruce A. Quinnell
Its: Vice Chairman
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.32
<SEQUENCE>9
<FILENAME>k61366ex10-32.txt
<DESCRIPTION>AGREEMENT WITH ROBERT F. DIROMUALDO
<TEXT>
<PAGE> 1
EXHIBIT 10.32
January 29, 2001
ROBERT DiROMUALDO
Dear Bob:
This letter will confirm our agreement concerning your employment with Borders
Group, Inc. ("BGI").
1. During the term of this Agreement, you will be the Chairman of BGI and,
subject to your election by the shareholders, a director of BGI. You will report
to the Board of Directors of BGI (the "Board").
2. In lieu of any cash compensation, you have received options for 53,191 shares
granted on the Effective Date hereof under the Director Stock Plan. Such options
have an exercise price of $12.4375 per share (the closing price the New York
Stock Exchange on January 26, 2001), become exercisable on January 25, 2002 and
expire on April 28, 2003.
3. You shall have such duties as shall be assigned to you by the Board of
Directors. Such duties shall involve primarily consulting with the Chief
Executive Officer of the Company with respect to strategic and organizational
issues as requested by the Chief Executive Officer.
4. You shall not be eligible to participate in the Company's medical, dental,
life insurance and other welfare plans, subject to your COBRA rights. The
Company will pay your COBRA cost during the term of this Agreement.
5. The term of this Agreement shall be from January 29, 2001 (the "Effective
Date") through January 27, 2002, unless this agreement terminates in accordance
with its terms prior to such date.
6. Subject to Section 12, during the term of this Agreement, your position with
BGI may be terminated by BGI only for "Cause" by written notice given to you
after action by a majority of the members of the Board of Directors of BGI and
only within ninety days after the occurrence of BGI learning of one of the
following events:
(a) Your conviction of a felony, or of a misdemeanor involving the
money or property of BGI or any subsidiary;
(b) You shall have willfully engaged in misconduct that materially
damages or injures the reputation of BGI or any subsidiary;
(c) You shall have breached the noncompetition provisions of this
Agreement and such breach is not cured within 7 days after notice
thereof from BGI; or
(d) Any willful and material breach of the confidentiality provisions
of this Agreement.
<PAGE> 2
-2-
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, the vesting of your stock options will continue through
the balance of the term. In the event that this clause is inconsistent with the
terms of the relevant plan, BGI shall provide the same benefits outside of such
plan. You shall not be obligated to seek other employment to mitigate damages
and BGI's obligations hereunder shall not be reduced by any compensation that
you may earn from other employment or self-employment.
7. You will be entitled to reimbursement for travel (at full coach rate) and
entertainment and other business expenses incurred on BGI's behalf in accordance
with BGI's policy upon submission of vouchers and documentation relating thereto
in accordance with BGI procedures.
8. You agree that during the Restricted Period neither you nor your Affiliates
will (i) Compete with BGI in the Restricted Area or (ii) directly or indirectly
(whether as owner, principal, employee, partner, lender or venturer with or
consultant to any person, firm, partnership, corporation or other entity): (A)
cause or seek to cause any of BGI's suppliers, purchasing agents or customers to
cease transacting business with BGI; or (B) cause or seek to cause any of BGI's
prospective suppliers, purchasing agents or customers not to transact business
with BGI.
For purposes of this Agreement:
(i) The term "Affiliate" means any corporation, person or entity which,
directly or indirectly, through one or more intermediaries, you control or is
under common control with you;
(ii) The term "Company" means BGI and its subsidiaries.
(iii) The term "Compete" means to manage, operate, control or
participate in, or have any ownership interests in or make loans to, or aid or
advise as an employee, consultant or otherwise, whether directly or indirectly,
any business (whether an individual, sole proprietorship, partnership,
corporation, firm, joint venture, trust or other entity) which is engaged in,
directly or indirectly, the retail (including internet) or wholesale book
business or in a business where principal business is the retail or wholesale
sale of video cassettes, videotapes, musical records, compact discs or audio
cassettes; provided, however, that you 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, 2003, 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
<PAGE> 3
-3-
(v) The term "Restricted Area" means anywhere in North America or any
other country in which BGI is doing business at the time of your termination of
employment.
Nothing in this Section 8 shall be deemed to prohibit you or any of your
Affiliates from owning shares of BGI.
9. You agree that you and your Affiliates will maintain in strict confidence and
will not, directly or indirectly, divulge, transmit, publish, release or
otherwise use or cause to be used in any manner to Compete with or that is
contrary to the interests of BGI, any confidential information relating to BGI's
systems, operations, processes, computer programs and data bases, records,
development data and reports, store designs, quality control specifications,
cost analysis, flow charts, know-how, customer lists, supplier lists, marketing
data, personnel data, or any other information of like nature. You acknowledge
that all information regarding BGI compiled or obtained by, or furnished to, you
in connection with your employment or association with BGI is confidential
information and BGI's exclusive property. Upon demand by BGI, you will surrender
to BGI all original and facsimile records, documents and data in your possession
pertaining to BGI. The foregoing covenant of confidentiality has no temporal,
geographical or territorial limitation.
Notwithstanding the foregoing, this provision does not apply to the
extent, and only to the extent, such information: (a) is clearly obtainable in
the public domain; (b) becomes obtainable in the public domain, through no fault
of yours; (c) was not acquired by you in connection with your employment or
affiliation with BGI; (d) was not acquired by you from BGI or its
representatives; (e) is required to be disclosed by rule of law or by order of a
court or governmental body or agency; or (f) is reasonably necessary to be
disclosed to defend yourself or assert your rights in connection with any
proceeding to which BGI or its affiliates is a party.
10. The restrictive covenants contained herein shall be construed as independent
of the other provisions of this Agreement, and the existence of any claim or
cause of action that you may have, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by BGI of any of
the restrictive covenants contained herein.
11. You acknowledge that if you breach any of the restrictive covenants
contained herein, the injuries that will be suffered by BGI will be irreparable,
and BGI will not have an adequate remedy at law. You therefore, agree that in
the event of such a breach, BGI shall be entitled to relief by way of injunction
from any court of proper jurisdiction, in addition to all other rights that BGI
may have at law, in equity, or otherwise.
12. In the event of your death, Disability or a Change in Control of BGI, all of
your outstanding options 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; and (iii) the noncompete
provisions set forth herein shall remain in effect until December 31, 2003.
"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.
<PAGE> 4
-4-
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 benefits described in Section 6 as
your sole and exclusive remedy.
14. All provisions of this Agreement are intended to be severable. In the event
any provision or restriction contained herein is held to be invalid or
unenforceable in any respect, in whole or in part, such finding shall in no way
affect the validity or enforceability of any other provisions of this Agreement.
The parties hereto further agree that any such invalid or unenforceable
provision shall be deemed modified so that it shall be enforced to the greatest
extent permissible under law, and to the extent that any court of competent
jurisdiction determines any restriction herein to be overly broad or
unenforceable, such court is hereby empowered and authorized to limit such
restriction so that it is enforceable for the longest duration of time and
largest geographical area possible.
15. Any dispute that may exist respecting (i) the interpretation or application
of any provision of the agreement (including, without limitation, the provisions
of this Section) or (ii) your entitlement to payments or other benefits after
termination of your employment shall be resolved by arbitration in Detroit,
Michigan in accordance with the rules of the American Arbitration Association
and judgment on the award may be entered in any court having jurisdiction. If
your position in any such dispute is sustained in the arbitration, BGI will pay
or reimburse you for your expenses in connection with the resolution of such
dispute (including, without limitation, counsel fees and disbursements and other
charges).
Please confirm your agreement by signing below and retain one copy for your
records.
Sincerely,
BORDERS GROUP, INC.
By:/s/
------------------------------------
Agreed:
/s/ ROBERT F. DIROMUALDO
- ----------------------------------
Robert F. DiRomualdo
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.33
<SEQUENCE>10
<FILENAME>k61366ex10-33.txt
<DESCRIPTION>AGREEMENT WITH GEORGE R. MRKONIC
<TEXT>
<PAGE> 1
EXHIBIT 10.33
January 29, 2001
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. In lieu of any cash compensation, you have received options for 53,191 shares
granted on the Effective Date under the Director Stock Plan. Such options have
an exercise price of $12.4375 per share (the closing price the New York Stock
Exchange on January 26, 2001), become exercisable on January 25, 2002 and expire
on April 28, 2003.
3. You shall have such duties relating to the international operations of the
Company as may be assigned to you by the Board from time to time. It is
understood that such duties shall include service as a director of international
subsidiaries and affiliates of the Company as requested by the Chief Executive
Officer of the Company. Your principal place of employment will be Ann Arbor,
Michigan unless you consent to another location.
4. You shall not be eligible to participate in the Company's medical, dental,
life insurance and other welfare plans, subject to your COBRA rights. The
Company will pay your COBRA cost during the term of this Agreement.
5. The term of this Agreement shall be from January 29, 2001 (the "Effective
Date") through January 27, 2002, unless this agreement terminates in accordance
with its terms prior to such date.
6. Subject to Section 12, during the term of this Agreement, your position with
BGI may be terminated by BGI only for "Cause" by written notice given to you
after action by a majority of the members of the Board of Directors of BGI and
only within ninety days after the occurrence of BGI learning of one of the
following events:
(a) Your conviction of a felony, or of a misdemeanor involving the
money or property of BGI or any subsidiary;
(b) You shall have willfully engaged in misconduct that materially
damages or injures the reputation of BGI or any subsidiary;
<PAGE> 2
-2-
(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 willful and material breach of the confidentiality
provisions of this Agreement.
For purposes of this Section 6, no act or failure to act, on your part shall be
deemed to be "willful" unless done, or omitted to be done, by you not in good
faith and without reasonable belief that such act or omission was in the best
interest of BGI.
In the event that BGI breaches this Agreement and either (i) your employment is
terminated by BGI without Cause prior to the expiration of the term, or (ii) you
voluntarily terminate your employment following any such breach which is not
cured by BGI within 30 days after BGI's receipt of written notice from you
describing the breach, the vesting of your stock options will continue through
the balance of the term. In the event that this clause is inconsistent with the
terms of the relevant plan, BGI shall provide the same benefits outside of such
plan. You shall not be obligated to seek other employment to mitigate damages
and BGI's obligations hereunder shall not be reduced by any compensation that
you may earn from other employment or self-employment.
7. You will be entitled to reimbursement for travel (at full coach rate) and
entertainment and other business expenses incurred on BGI's behalf in accordance
with BGI's policy upon submission of vouchers and documentation relating thereto
in accordance with BGI procedures.
8. You agree that during the Restricted Period neither you nor your Affiliates
will (i) Compete with BGI in the Restricted Area or (ii) directly or indirectly
(whether as owner, principal, employee, partner, lender or venturer with or
consultant to any person, firm, partnership, corporation or other entity): (A)
cause or seek to cause any of BGI's suppliers, purchasing agents or customers to
cease transacting business with BGI; or (B) cause or seek to cause any of BGI's
prospective suppliers, purchasing agents or customers not to transact business
with BGI.
For purposes of this Agreement:
(i) The term "Affiliate" means any corporation, person or entity
which, directly or indirectly, through one or more intermediaries, you control
or is under common control with you;
(ii) The term "Company" means BGI and its subsidiaries.
(iii) The term "Compete" means to manage, operate, control or
participate in, or have any ownership interests in or make loans to, or aid or
advise as an employee, consultant or otherwise, whether directly or indirectly,
any business (whether an individual, sole proprietorship, partnership,
corporation, firm, joint venture, trust or other entity) which is engaged in,
directly or indirectly, the retail (including internet) or wholesale book
business or in a business where principal business is the retail or wholesale
sale of video cassettes, videotapes, musical records, compact discs or audio
cassettes; provided, however, that you 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;
<PAGE> 3
-3-
(iv) The term "Restricted Period" means the period from the date
hereof through December 31, 2003, provided, that in the event that you breach
the covenant not to Compete set forth above, such breach shall suspend and toll
the running of the Restricted Period from the date of such breach until such
time as such violation ceases; and
(v) The term "Restricted Area" means anywhere in North America or
any other country in which BGI is doing business at the time of your termination
of employment.
Nothing in this Section 8 shall be deemed to prohibit you or any of your
Affiliates from owning shares of BGI.
9. You agree that you and your Affiliates will maintain in strict confidence and
will not, directly or indirectly, divulge, transmit, publish, release or
otherwise use or cause to be used in any manner to Compete with or that is
contrary to the interests of BGI, any confidential information relating to BGI's
systems, operations, processes, computer programs and data bases, records,
development data and reports, store designs, quality control specifications,
cost analysis, flow charts, know-how, customer lists, supplier lists, marketing
data, personnel data, or any other information of like nature. You acknowledge
that all information regarding BGI compiled or obtained by, or furnished to, you
in connection with your employment or association with BGI is confidential
information and BGI's exclusive property. Upon demand by BGI, you will surrender
to BGI all original and facsimile records, documents and data in your possession
pertaining to BGI. The foregoing covenant of confidentiality has no temporal,
geographical or territorial limitation.
Notwithstanding the foregoing, this provision does not apply to the
extent, and only to the extent, such information: (a) is clearly obtainable in
the public domain; (b) becomes obtainable in the public domain, through no fault
of yours; (c) was not acquired by you in connection with your employment or
affiliation with BGI; (d) was not acquired by you from BGI or its
representatives; (e) is required to be disclosed by rule of law or by order of a
court or governmental body or agency; or (f) is reasonably necessary to be
disclosed to defend yourself or assert your rights in connection with any
proceeding to which BGI or its affiliates is a party.
10. The restrictive covenants contained herein shall be construed as independent
of the other provisions of this Agreement, and the existence of any claim or
cause of action that you may have, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by BGI of any of
the restrictive covenants contained herein.
11. You acknowledge that if you breach any of the restrictive covenants
contained herein, the injuries that will be suffered by BGI will be irreparable,
and BGI will not have an adequate remedy at law. You therefore, agree that in
the event of such a breach, BGI shall be entitled to relief by way of injunction
from any court of proper jurisdiction, in addition to all other rights that BGI
may have at law, in equity, or otherwise.
12. In the event of your death, Disability or a Change in Control of BGI, all of
your outstanding options 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; and (iii) the noncompete
provisions set forth herein shall remain in effect until December 31, 2003.
"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
<PAGE> 4
-4-
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 benefits described in Section 6 as
your sole and exclusive remedy.
14. All provisions of this Agreement are intended to be severable. In the event
any provision or restriction contained herein is held to be invalid or
unenforceable in any respect, in whole or in part, such finding shall in no way
affect the validity or enforceability of any other provisions of this Agreement.
The parties hereto further agree that any such invalid or unenforceable
provision shall be deemed modified so that it shall be enforced to the greatest
extent permissible under law, and to the extent that any court of competent
jurisdiction determines any restriction herein to be overly broad or
unenforceable, such court is hereby empowered and authorized to limit such
restriction so that it is enforceable for the longest duration of time and
largest geographical area possible.
15. Any dispute that may exist respecting (i) the interpretation or application
of any provision of the agreement (including, without limitation, the provisions
of this Section) or (ii) your entitlement to payments or other benefits after
termination of your employment shall be resolved by arbitration in Detroit,
Michigan in accordance with the rules of the American Arbitration Association
and judgment on the award may be entered in any court having jurisdiction. If
your position in any such dispute is sustained in the arbitration, BGI will pay
or reimburse you for your expenses in connection with the resolution of such
dispute (including, without limitation, counsel fees and disbursements and other
charges).
Please confirm your agreement by signing below and retain one copy for your
records.
Sincerely,
BORDERS GROUP, INC.
By:/s/
--------------------------------
Agreed:
/s/ GEORGE R. MRKONIC
- ------------------------------------
George R. Mrkonic
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.41
<SEQUENCE>11
<FILENAME>k61366ex10-41.txt
<DESCRIPTION>PARTICIPATION AGREEMENT, DATED JANUARY 22, 2001
<TEXT>
<PAGE> 1
EXHIBIT 10.41
================================================================================
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,
DORIS PROJECT FUNDING CORP.,
as Owner Beneficiary,
FIRST SECURITY BANK, N.A.,
as Collateral Trustee,
And
THE PURCHASERS IDENTIFIED HEREIN
Dated as of January 22, 2001
================================================================================
<PAGE> 2
Participation Agreement
<TABLE>
<S> <C>
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 Documentation.........................3
Section 2.6 Assignments of Mortgage, et al...............................................3
Section 2.7 Certification of Cost........................................................3
Section 2.8 Surveys, Appraisals, Environmental Reports and Zoning........................4
Section 2.9 Mortgagee's Title Insurance; Endorsements....................................4
Section 2.10 Estoppels....................................................................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
</TABLE>
-i-
<PAGE> 3
Participation Agreement
<TABLE>
<S> <C>
ARTICLE IV GUARANTOR COVENANTS..........................................................9
Section 4.1 Reporting Requirements.......................................................9
Section 4.2 Inspection Rights...........................................................10
Section 4.3 Transaction Expenses........................................................11
Section 4.4 Payment of Certain Fees and Expenses........................................11
ARTICLE V DIRECT PAYMENT..............................................................11
Section 5.1 Direct Payment..............................................................11
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 Document 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.............................................................20
Section 9.1 General Indemnity...........................................................20
Section 9.2 General Tax Indemnity.......................................................21
ARTICLE X MISCELLANEOUS...............................................................24
Section 10.1 Amendments, Etc.............................................................24
Section 10.2 Notices, Etc................................................................24
Section 10.3 No Waiver; Remedies.........................................................26
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
</TABLE>
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Participation Agreement
<TABLE>
<S> <C>
Section 10.10 Confidential Information....................................................27
Section 10.11 Issuer Recourse.............................................................28
Section 10.12 Owner Beneficiary Exculpation...............................................28
</TABLE>
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<PAGE> 5
Participation Agreement
ATTACHMENTS TO PARTICIPATION AGREEMENT
<TABLE>
<S> <C>
SCHEDULE I -- Name and Address of Purchasers [SCHEDULE I HAS BEEN REDACTED]
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-1 -- Description of Closing Opinion of Counsel for Project Borrowers
EXHIBIT E-2 -- Description of Closing Opinion of Special 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
</TABLE>
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<PAGE> 6
Participation Agreement
PARTICIPATION AGREEMENT
INTRODUCTORY
THIS PARTICIPATION AGREEMENT (the "Participation Agreement") is dated
as of January 22, 2001, and is among Borders Group, Inc., a Michigan corporation
(the "Guarantor"), Borders, Inc., a Colorado corporation (the "Tenant"), Doris
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 January 22, 2001 (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 8.69% Senior Secured Notes due 2016
(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, 38525 Woodward Avenue, Suite 2000, Bloomfield Hills, Michigan 48304, at
11:00 a.m., Bloomfield Hills, Michigan time, on February 2, 2001 or at such
other date and time as may be mutually acceptable to the parties hereto (the
"Closing Date").
<PAGE> 7
Participation Agreement
Section 1.3 Wire Transfer. On the Closing Date, the Purchase Price for
each Note shall be paid by the Purchaser thereof directly to the Issuer by wire
transfer of immediately available funds for the account of the Issuer at
Comerica Bank, Detroit, Michigan, ABA #072 000 096, Account No. 1851004075, For
Credit of First American Title Insurance Company, Ref: Borders Trust 2001.
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.
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<PAGE> 8
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 and each
of the other Purchasers, and each of the other Purchasers shall have purchased
the Notes to be purchased by them at the Closing as specified in Schedule I
hereto.
Section 2.5 Collateral Assignments of Project Loan Documentation. The
Issuer shall have executed and delivered in favor of the Collateral Trustee a
Collateral Assignment of Project Loan Documentation 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 and
Environmental Indemnity, 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 Lease 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.
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<PAGE> 9
Participation Agreement
Section 2.8 Surveys, Appraisals, Environmental Reports and Zoning.
Surveys, real property appraisals and environmental 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 INTENTIONALLY OMITTED
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.
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<PAGE> 10
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 Exhibit H-1 to this Participation Agreement 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 Exhibit H-2 to this Participation Agreement 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) Richards, Layton & Finger, 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 and special local counsel for the Project
Borrowers dated on or prior to the Closing Date and covering the matters set
forth in Exhibit E-1 and Exhibit E-2 and covering such other matters incident to
the transactions contemplated hereby as such Purchaser may reasonably request,
and
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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 McDonald Investments, 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 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.
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Participation Agreement
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
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<PAGE> 13
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 Participation 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,
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<PAGE> 14
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 Noteholder:
(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 other 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
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<PAGE> 15
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 Noteholder may from time to time reasonably request.
Section 4.2 Inspection Rights. The Guarantor shall permit
representatives of the Noteholders:
(a) If no Default or Event of Default then exists, at the expense of
such Noteholders 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 an 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.
It is understood and agreed by each such Noteholder that the confidentiality of
"Confidential Information" disclosed to such Noteholder under this Section 4.2
shall be maintained in accordance with the provisions of Section 10.10 hereof.
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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. Guarantor will also pay all costs and
expenses (including reasonable attorneys' fees of a special counsel and, if
reasonably required, local or other counsel) incurred by any Noteholder in
connection with any amendments, waivers or consents under or in respect of this
Participation 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 Participation
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 Participation Agreement or the other Operative Documents, 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 Participation Agreement or the other Operative Documents, and
the termination of any Lease.
Section 4.4 Payment of Certain Fees and Expenses. The Guarantor shall
pay or cause to be paid (a) the initial and annual fee and reasonable
out-of-pocket expenses 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 the 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 the 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 Operative 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
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Participation Agreement
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 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 a Tax 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 Tax Indemnitee of any amount, including
taxes, for which the payment to be received is made) actually imposed currently
on the Tax 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 Noteholder 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-1 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.
"Confidential Information" is defined in Section 10.10 of this
Participation Agreement.
"Environmental Laws" shall have the meaning assigned thereto in the
Lease Appendix.
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Participation Agreement
"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.
"Hazardous Substance" shall have the meaning assigned thereto in the
Lease Appendix.
"Historical Statements" is defined on Exhibit H-1 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:
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Participation Agreement
(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 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 or
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
Tenant in a contest controlled by the Tenant 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
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Participation Agreement
(unless caused by the Tenant'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 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.
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Participation Agreement
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
Noteholder, 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-1 paragraph (6).
"Issuer" is defined in the Introductory paragraphs of this
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.
"Related Person" is defined in Section 10.12 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:
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Participation Agreement
(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 Noteholders, 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.
"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 Participation 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 arising under 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
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Participation Agreement
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 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 Documents. 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 Document 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.
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Participation Agreement
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 Participation
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 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.
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Participation Agreement
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 Participation 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 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 clause (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 clause (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.
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Participation Agreement
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 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
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<PAGE> 27
Participation Agreement
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, 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
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<PAGE> 28
Participation Agreement
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 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 a 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.
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<PAGE> 29
Participation Agreement
(iv) Notwithstanding the foregoing provisions of this Section
9.2, a 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 a 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 a 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
position asserted in such appeal) and (F) no Event of Default shall have
occurred and be continuing. In no event shall a Tax Indemnitee be required to
appeal an adverse judicial determination to the United State Supreme Court. In
addition, a 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
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<PAGE> 30
Participation Agreement
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:
Dickinson Wright PLLC
38525 Woodward Avenue
Suite 2000
Bloomfield Hills, MI 48304
Attention: Judith E. Gowing
(c) if to Owner Beneficiary, to:
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
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<PAGE> 31
Participation Agreement
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 Participation 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 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
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<PAGE> 32
Participation Agreement
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 Noteholder 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 Noteholder 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 Noteholder prior to the time of such disclosure, (b)
subsequently becomes publicly known through no act or omission by the Collateral
Trustee or any Noteholder or any Person acting on behalf of the Collateral
Trustee or any Noteholder, (c) otherwise becomes known to the Collateral Trustee
or any Noteholder other than through disclosure by the Guarantor or the Tenant
or (d) constitutes financial statements delivered to the Collateral Trustee or
any Noteholder under Section 4.1 that are otherwise publicly available.
The Collateral Trustee and each Noteholder will maintain the
confidentiality of such Confidential Information in accordance with procedures
adopted by the Collateral Trustee and each Noteholder in good faith to protect
confidential information of third parties delivered to the Collateral Trustee or
such Noteholder, provided that the Collateral Trustee and each Noteholder may
deliver or disclose Confidential Information to: (i) directors, trustees,
officers, employees, attorneys and affiliates of the Collateral Trustee or any
Noteholder (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
Noteholder who agree to hold confidential the Confidential Information in
accordance with the terms of this Section 10.10; (iii) with prior written notice
to the Guarantor, any Institutional Holder to which any Noteholder 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 and a copy of
such written agreement has been delivered to the Guarantor); (v) with prior
written notice to the Guarantor, any Person from which any Noteholder 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 and a copy of such written agreement has been
delivered to the Guarantor); (vi) any federal or state regulatory authority
having jurisdiction over the Collateral Trustee or any Noteholder 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 Noteholder (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
Noteholder, (x) in response to any subpoena or other legal process, (y) in
connection with any litigation to which the Collateral Trustee or any Noteholder
is a party or (z) if an Event of Default has occurred and is continuing, to the
extent the Collateral Trustee or any Noteholder may reasonably determine such
delivery and disclosure to be necessary or
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<PAGE> 33
Participation Agreement
appropriate in the enforcement or for the protection of the rights and remedies
under the Notes and this Participation Agreement.
Each Noteholder, by its acceptance of a Note or participation interest
therein, 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 Participation
Agreement. On reasonable request by the Guarantor or the Tenant in connection
with the delivery to any Noteholder of information required to be delivered to
such Noteholder under this Participation Agreement or requested by such
Noteholder (other than a Noteholder that is a party to this Participation
Agreement or its nominee), such Noteholder 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
Participation 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 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.
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<PAGE> 34
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/
-----------------------------------------
Name:
----------------------------------
Title:
---------------------------------
SCHEDULE I
(to Participation Agreement)
<PAGE> 35
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.
DORIS PROJECT FUNDING CORP.
as Owner Beneficiary
By:/s/ DWIGHT JENKINS
--------------------------
Name: Dwight Jenkins
Title: Vice President
I-2
<PAGE> 36
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.
FIRST SECURITY BANK, N.A.
as Collateral Trustee
By:/s/
-------------------------------
Name:
------------------------
Title:
-----------------------
I-3
<PAGE> 37
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.
BORDERS GROUP, INC.
By:/s/ BRUCE A. QUINNELL
-----------------------------------
Name: Bruce A. Quinnell
Title: Vice Chairman
I-4
<PAGE> 38
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.
BORDERS, INC.
By:/s/ EDWARD W. WILHELM
------------------------------
Name: Edward W. Wilhelm
Title: Vice President
I-5
<PAGE> 39
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.
STATE OF WISCONSIN
INVESTMENT BOARD
By:/s/
-----------------------------
Name:
----------------------
Title:
---------------------
I-6
<PAGE> 40
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.
MODERN WOODMEN OF AMERICA
By:/s/
-----------------------------
Name:
----------------------
Title:
---------------------
I-7
<PAGE> 41
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.
FEDERATED LIFE INSURANCE
COMPANY
By:/s/
-----------------------------
Name:
----------------------
Title:
---------------------
I-8
<PAGE> 42
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.
FEDERATED MUTUAL INSURANCE
COMPANY
By:/s/
-----------------------------
Name:
----------------------
Title:
---------------------
I-9
<PAGE> 43
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.
COUNTRY LIFE INSURANCE
COMPANY
By:/s/
-----------------------------
Name:
----------------------
Title:
---------------------
I-10
<PAGE> 44
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.
AUTO CLUB INSURANCE
ASSOCIATION
By:/s/
-----------------------------
Name:
----------------------
Title:
---------------------
I-11
<PAGE> 45
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.
BERKSHIRE LIFE INSURANCE
COMPANY
By:/s/
-----------------------------
Name:
----------------------
Title:
---------------------
I-12
<PAGE> 46
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.
HOMESTEADERS LIFE CO.
By:/s/
-----------------------------
Name:
----------------------
Title:
---------------------
I-13
<PAGE> 47
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 ss.2.13(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)
<PAGE> 48
Participation Agreement
DESCRIPTION OF CLOSING OPINIONS
OF COUNSEL FOR ISSUER
The closing opinions of Richards, Layton & Finger, 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 Documents 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
Document 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, without independent investigation, 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 Document to which
Trust Company is a party have been duly executed and delivered by Trust
Company, and the Indenture and each such other Operative Document 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 Document 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)
<PAGE> 49
Participation Agreement
binding obligation of the Owner Trustee, enforceable against the
Owner Trustee in accordance with the terms thereof.
5. To our knowledge, without independent investigation, no
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 Documents 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. 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 Richards, Layton & Finger 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
<PAGE> 50
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)
<PAGE> 51
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)
<PAGE> 52
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
<PAGE> 53
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
<PAGE> 54
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. The Project Borrower is duly formed, validly existing and in good
standing under the laws of its jurisdiction of formation, and is duly qualified
to transact business as a limited liability company in the State of
_______________ (the "STATE").
2. Each of the Lease Documents has been duly authorized, executed and
delivered by the Project Borrower.
3. Each of the Project Loan Documents has been duly authorized,
executed and delivered by the Project Borrower.
4. No authorization, consent, approval, license, exemption or filing
or registration with any court or governmental department, commission, board,
bureau, agency or instrumentality in the State by the Project Borrower or any
affiliate of the Project Borrower is necessary for the valid execution, delivery
or performance by the Project Borrower of any of the Lease Documents or any of
the Project Loan Documents.
5. The execution, delivery and performance by the Project Borrower of
each Lease Document and each Project Loan Document do not (i) violate (A) the
organizational documents pursuant to which the Project Borrower is organized, or
(B) to our knowledge, any order, writ, judgment, injunction, decree,
determination or award applicable to the 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 the 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 those arising
pursuant to the Project Loan Documents).
6. There are no actions, suits or proceedings pending or, to our
knowledge after due inquiry, threatened against or affecting the Project
Borrower in any court or before any governmental authority or arbitration board
or tribunal that could reasonably be expected to materially and adversely affect
the execution, delivery or performance by the Project Borrower of its
obligations under any of the Lease Documents or any of the Project Loan
Documents, or the enforceability of the Project Borrower's obligations
thereunder.
EXHIBIT E-1
(to Participation Agreement)
<PAGE> 55
Participation Agreement
DESCRIPTION OF CLOSING OPINION
OF EACH SPECIAL LOCAL COUNSEL FOR THE PROJECT BORROWERS
The closing opinion of various special 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. The Project Loan Documents constitute the legal, valid and binding
obligations of the Project Borrower, enforceable against the Project Borrower in
accordance with their respective terms.
2. The Lease Documents constitute the legal, valid and binding
obligations of the Project Borrower, the Tenant, and the Guarantor (where
applicable), enforceable against each in accordance with their respective terms.
3. The Mortgage is in proper 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 real property described
therein is located, and upon such recordation shall constitute a valid lien upon
the real property interest described therein, as security for the Project Loan
and the Project Borrower's obligations under the Project Loan Agreement in favor
of the Issuer. No other recordation or filing is required to create or preserve
the validity of such lien.
4. The Assignment of Lease and Rents is in proper 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 real
property described therein is located, and upon such recordation shall create a
valid collateral or assignment of, or a valid security interest in, the Project
Borrower's interests described therein in favor of the Issuer.
5. The Memorandum of Lease is in proper 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
leased property described in the Lease is located.
6. The Assignment of Mortgage is in proper 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 real
property described therein is located, and upon such recordation shall create a
valid collateral assignment of, or a valid security interest in, the Issuer's
interests described therein in favor of the Collateral Trustee.
7. The Reassignment of Lease and Rents is in proper 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 real
property described therein is located, and upon such recordation shall create a
valid collateral assignment of, or a valid security interest in, the Issuer's
interests described therein in favor of the Collateral Trustee.
EXHIBIT E-2
(to Participation Agreement)
<PAGE> 56
Participation Agreement
8. 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 as in effect in the State (the "UCC"), provided that the
Mortgage is properly recorded in each county in which any portion of such
fixtures are located.
9. To the extent that any property which secures the Project Loan or
which constitutes Collateral and in which a security interest can be granted
under the UCC (the "CODE COLLATERAL") is deemed located in the State for
purposes of the UCC, upon the recordation or filing of the Financing Statements
(as defined in the opinion) in the Filing Offices (as defined in the opinion),
the Issuer and the Collateral Trustee, as applicable, shall have a perfected
security interest in and perfected lien upon the Code Collateral to the extent
that perfection thereof is obtained by the filing of financing statements. To
continue the effectiveness of the Financing Statements, continuation statements
must be filed in the office in which the Financing Statements have been filed
within six months prior to the expiration of each fifth anniversary of the date
of filing of the Financing Statements. 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
Code Collateral. Other than the filing fee required to be paid at the time of
recording the Financing Statements, no other fees, taxes or other charges are
due in the State in connection with the execution, delivery, filing and
recording of the Financing Statements.
10. The execution, delivery and performance by the Project Borrower of
the Lease Documents and the Project Loan Documents do not violate any provision
of law, rule or regulation of the State.
11. Based solely on the interest specified in the Project Loan
Documents of 8.69% per annum on the outstanding but unpaid principal on the
Project Loan Note, the Project Loan Documents and the transactions contemplated
thereby do not violate the usury laws of the State.
12. The execution, delivery and performance by the Tenant of the Lease
Documents do not violate any provision of law, rule or regulation of the State.
13. The execution, delivery and performance by the parties thereto of
the Credit Documents do not violate any provision of law, rule or regulation of
the State.
14. No fees, taxes, or other charges, including, without limitation,
intangible documentary stamp, mortgage, transfer or recording taxes or similar
charges, are payable to the government of the State or to any jurisdiction
therein on account of the execution, delivery or ownership of the Project Loan
Documents, the Lease Documents and the Credit Documents, 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, the Assignment of
E-2-2
<PAGE> 57
Participation Agreement
Mortgage, the Assignment of Lease and Rents, the Reassignment of Lease and Rents
or the Financing Statement except for nominal filing or recording fees.
15. Neither the Issuer, the Collateral Trustee nor any of the
Noteholders is required to pay any tax, to be qualified to do business in the
State, to file any reports, 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 solely by reason of the execution, delivery or
acceptance of the Project Loan Documents, the Lease Documents or the Credit
Documents. The validity and enforceability of, and the exercise of any right or
remedy under or with respect to, the Project Loan Documents, the Lease Documents
and the Credit Documents will not be precluded by any failure to so qualify or
file.
16. The Mortgage and the Financing Statements conform to all
requirements of the laws of the State and the Mortgage contains remedial, waiver
and other provisions which will allow the Issuer and, upon recording of the
Assignment of Mortgage, the Collateral Trustee to realize the practical benefits
intended to be conferred thereby. The Project Loan Documents and the Lease
Documents grant to the Issuer and, upon recording of the Credit Documents, to
the Collateral Trustee, remedies including, but not limited to, the rights to
(a) foreclose the Project Borrower's interests in the property securing the
Project Loan, (b) execute upon the Project Borrower's interests in the property
securing the Project Loan, (c) apply to a state court of the State for the
appointment of a receiver, (d) cite the Project Borrower's failure to pay taxes
as evidence of waste, and (e) collect the rents from the property securing the
Project Loan. Each of the remedies listed in the preceding sentence is a remedy
commonly sought by lenders whose loans are secured by real and personal property
in the State. Enforcement of the remedies provided in the Project Documents and
the Lease Documents with respect to the Project Borrower or its property will
not, except as expressly limited by the terms of the Project Documents and the
Lease Documents, deprive the Issuer and, upon recording of the Credit Documents,
the Collateral Trustee of their rights to seek a deficiency judgment or limit
the rights of the Issuer and the Collateral Trustee to foreclose on other
security or collateral securing the Project Loan.
17. 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 Code Collateral or any other Mortgaged Property will not
affect nor be affected by the exercise of any remedies relating to the Mortgaged
Property, unless the Project Loan has been paid in full and all obligations
under the Project Loan Documents have been performed in full.
(b) The exercise of any remedies with respect to any security or
collateral located outside of the State securing the Project Loan will not
affect or limit the Issuer's or 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
E-2-3
<PAGE> 58
Participation Agreement
sold or disposed of has been appropriately applied to the repayment of the
Project Loan or unless the Project Loan has been paid in full and all
obligations under the Project Loan Documents have been performed in full.
(c) There is no "one form of action" or similar law in the State
that would limit the Issuer or the Collateral Trustee or any other secured party
from choosing only one remedy to enforce its or their rights under the Mortgage
or the other Project Loan Documents.
E-2-4
<PAGE> 59
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 Documents 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.
<PAGE> 60
Participation Agreement
EXHIBIT F
(to 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 Participation Agreement and each
other Operative Document 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
<PAGE> 61
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
<PAGE> 62
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)
<PAGE> 63
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 jurisdiction 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. Except as disclosed in the Form 10Q for the quarter ending July 23,
2000 (including Note 2 -- Commitments and Contingencies to the Financial
Statements) by Guarantor with the Securities and Exchange Commission, 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 23, 2000 (the "Annual
Statements"). In addition, the Guarantor has delivered to each of the Purchasers
copies of its unaudited
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consolidated interim financial statements dated July 23, 2000 (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 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
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Participation Agreement
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.
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 January 2001 Phase I
Environmental Site Assessments prepared by EMG 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
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Participation Agreement
Tenant on the Mortgaged Properties as presently conducted have been
obtained. All 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
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.
16. Neither the Guarantor nor any of its affiliates or partners,
members, directors or officers is or has been the subject of, or a defendant in:
(a) an enforcement action or prosecution (or settlement in lieu thereof) brought
by a governmental authority relating to a violation of securities, tax,
fiduciary or criminal laws, or (ii) a civil action (or settlement in lieu
thereof) brought by investors in a common investment vehicle for violation of
duties owed to the investors. Guarantor covenants that it will notify the
Collateral Trustee w