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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 24, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 1-13740
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BORDERS GROUP, INC.
(Exact name of registrant as specified in its charter)
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MICHIGAN 38-3196915
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 PHOENIX DRIVE, ANN ARBOR, MICHIGAN 48108
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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(734) 477-1100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
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TITLE OF CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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COMMON STOCK NEW YORK STOCK EXCHANGE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT WAS APPROXIMATELY $1,143,052,444 BASED UPON THE CLOSING MARKET PRICE
OF $15.00 PER SHARE OF COMMON STOCK ON THE NEW YORK STOCK EXCHANGE AS OF MARCH
22, 1999.
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 22, 1999: 77,952,846
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE MAY 13, 1999 ANNUAL
MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III.
THE EXHIBIT INDEX IS LOCATED ON PAGE 40 HEREOF.
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BORDERS GROUP, INC.
INDEX
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PAGE
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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 7
Item 4. Submission of Matters to a Vote of Security Holders......... 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 8
Item 6. Selected Financial Data..................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 15
Item 8. Financial Statements and Supplementary Data................. 17
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 32
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 33
Item 11. Executive Compensation...................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 36
Item 13. Certain Relationships and Related Party Transactions........ 36
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 37
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PART I
ITEM 1. BUSINESS
GENERAL
Borders Group, Inc. (the Company), through its subsidiaries, Borders, Inc.
(Borders), Walden Book Company, Inc. (Walden) and Books etc. is the second
largest operator of book superstores and the largest operator of mall-based
bookstores in the world based upon both sales and number of stores. At March 21,
1999, the Company operated 256 superstores under the Borders name, including one
in Singapore, one in Australia, and three in the United Kingdom, 885 mall-based
and other bookstores primarily under the Waldenbooks name and 26 bookstores
under the Books etc. name in the United Kingdom. The Company also operates an
Internet commerce site under the name Borders.com. Borders is one of the
nation's largest specialty coffee retailers with cafe operations in nearly all
of its superstores. The Company had consolidated net sales of approximately $2.6
billion in 1998 and $2.3 billion in 1997. References herein to years are to
fiscal years of the Company which currently end in January of the following
calendar year.
STORES
Borders is a premier operator of book and music superstores, offering
customers selection and service that the Company believes to be superior to
other book superstore operators. A key element of the Company's strategy is to
continue its growth and increase its profitability through the ongoing expansion
of its Borders book and music superstore operations. In 1998, the Company opened
47 new Borders book and music superstores. Borders superstore operations
achieved annual growth in net sales for the year ended January 24, 1999 of 23.7%
and attained comparable store sales growth in 1998 of 3.5%. Borders superstores
achieved average sales per square foot of $256 and average sales per superstore
of $6.9 million in 1998, each of which the Company believes to be higher than
the comparable figures of any publicly reporting book superstore operator.
Borders superstores achieved compound annual growth in net sales for the three
years ended January 24, 1999 of 31.8%.
Each Borders superstore offers customers a vast assortment of books,
superior customer service, value pricing and an inviting and comfortable
environment designed to encourage browsing. A Borders superstore typically
carries the broadest selection of book titles in its market. Borders superstores
carry an average of 128,000 book titles, ranging from 85,000 titles to 170,000
titles, across numerous categories, including many hard-to-find titles. As of
March 21, 1999, 240 of the 256 Borders superstores were in a book and music
format, which also features an extensive selection of pre-recorded music, with
an emphasis on hard-to-find recordings and categories such as jazz, classical
and foreign music, and a broad assortment of pre-recorded videotapes and digital
video discs, focusing primarily on classic movies and hard-to-find titles. Each
book and music superstore carries approximately 50,000 titles of music, 5,500
titles of videotapes and 1,400 titles of digital video discs. As of March 21,
1999, 252 of the 256 Borders superstores featured a cafe.
Over the past two decades, Borders has developed what it believes is the
most sophisticated inventory management system in the retail book industry. The
inventory management system includes a centrally controlled "expert" system that
uses artificial intelligence principles to forecast sales and recommend
inventory levels for each book in each store. Management believes that Borders'
inventory management system, which reflects both overall sales trends and local
buying patterns, results in higher in-stock positions, a broader selection of
book titles, and increased sales per store and sales per square foot, while
effectively managing inventory investment to provide Borders stores with a more
productive inventory assortment. As a result, management believes this
proprietary system has been a principal reason for Borders' superior
performance. The Company is adapting certain aspects of the system for use in
its mall-based business where appropriate, and believes that over the long term
it will enable the Company to offer a more productive assortment of inventory
throughout its operations.
Borders superstores average 27,000 square feet in size, including
approximately 5,300 square feet devoted to music, approximately 700 square feet
devoted to videos and digital video discs and approximately 1,400 square feet
devoted to the cafe. Stores opened in fiscal 1998 averaged 25,000 square feet.
Each store is distinctive in appearance and architecture and is designed to
complement its local surroundings, although Borders utilizes certain
standardized specifications to increase the speed and lower the cost of new
store openings.
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Walden is the leading operator of mall-based bookstores in terms of sales
and number of stores, offering customers a convenient source for new releases,
hardcover and paperback bestsellers, selected children's books and a standard
selection of business, cooking, reference and general interest books. Walden has
a well established name and reputation and generates cash flow that the Company
plans to use toward financing the Company's growth initiatives. Walden stores
average approximately 3,300 square feet in size and typically carry between
15,000 and 25,000 titles.
In addition to its traditional mall format described above, Walden operates
alternative mall-based bookstores utilizing a large format. This addresses the
desires of some developers to include a larger format bookstore in malls,
including, in many cases, where developers plan to include only one bookstore in
a mall, and is designed to take advantage of what management believes is the
desire by mall customers in some markets for greater selection and service. The
larger format consists of approximately 5,000 to 8,000 square feet and carries
between 30,000 and 40,000 titles. As of March 21, 1999, Walden operated 106 of
the larger format stores.
Walden is the largest operator of seasonal kiosks under the Day by Day,
Animal House and Turn of the Century trade names.
In March 1999, Walden acquired for cash the stock of All Wound Up (AWU).
AWU operates seasonal kiosks which sell interactive toys and other novelty
merchandise. The acquisition complements Walden's kiosk operations and will
allow for continued growth by combining the core competencies of each
organization. The acquisition will be accounted for under the purchase method
and is not material to the results of the Company.
Books etc. operated 26 stores in the United Kingdom as of March 21, 1999,
all of which are small-format stores located primarily in central London or in
various airports in the United Kingdom. These stores generally range from 2,000
to 5,000 square feet in size, with the largest being 13,000 square feet, and the
smallest being 650 square feet. The Books etc. philosophy is to offer customers
the widest range of quality reading at the best prices, coupled with
knowledgeable guidance from experienced store employees.
The Company has acquired a 19.9% strategic investment in Paperchase
Products Limited (Paperchase), the leading design-oriented retailer of
stationery and art materials in the United Kingdom. Paperchase operates 18
stores and concessions in three Books etc. stores and two Borders superstores
located in the United Kingdom. The Company plans to test a similar concept in
Borders superstores in the United States in the spring of 1999. The investment
is not material to the results of the Company and will be accounted for under
the cost method.
BORDERS.COM
The Company, through its subsidiary, Borders Online, Inc., operates an
Internet commerce site, Borders.com. This site offers customers over 650,000
titles and 10 million book, music and video items in stock and ready for
immediate shipping from the Company's state-of-the-art fulfillment and
distribution center. Since its public debut in May, 1998, Borders.com has
garnered high rankings from Internet and industry experts in several recent
surveys of the Internet's best websites.
The Company plans to leverage the Internet capability of Borders.com to
customers in both Borders and Walden stores. Currently, customers can place
special orders through employees in Borders stores and have product shipped to
the store. The Company plans to extend that capability to allow shipments
directly to customers' homes.
DISTRIBUTION
Borders. Borders believes that its centralized distribution system,
combined with Borders' use of its proprietary "expert" system to manage
inventory, significantly enhances its ability to manage inventory on a
store-by-store basis. Inventory is shipped from vendors to one of Borders'
distribution centers, located in Harrisburg, Pennsylvania; Ann Arbor, Michigan;
Columbus, Ohio and Indianapolis, Indiana. Walden's distribution centers,
discussed below, are also utilized by Borders. Approximately 95% of the books
carried by Borders are processed through its distribution facilities. Employees
at the distribution facilities label books with proprietary bar code stickers
identifying the book title, price and subject area. During the non-holiday
selling season, approximately 85% to 90% of the trade inventory that arrives
from publishers is processed within 48 hours for shipment to the stores. Newly
released titles and rush orders are processed within 24 hours. Borders purchases
substantially all of its music merchandise directly
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from certain manufacturers and utilizes Borders' own distribution centers to
ship a majority of its music inventory to its stores.
Walden. Approximately 65% of the number of books carried by Walden's stores
are shipped to one of Walden's two distribution centers, located in Mira Loma,
California and Nashville, Tennessee. Walden continues to use Ingram, a major
book wholesaler, to supplement its distribution centers. Walden also receives
some product in stores directly from publishers.
United Kingdom. Books etc. and Borders superstores in the United Kingdom
are served by a distribution center in Cornwall, England. Books etc. stores in
central London also receive a large percentage of their merchandise directly
from publishers and wholesalers.
Borders.com. In 1998, the Company, through its subsidiary, Borders
Fulfillment, Inc., opened its new, state-of-the-art fulfillment center in
Nashville, Tennessee. This facility has over 650,000 titles of books, music and
videos in stock and available for immediate shipping, and gives the Company a
significant competitive advantage in terms of delivery capabilities. In addition
to serving Borders.com customers, the fulfillment center also provides delivery
services for store-originated special orders, institutional orders, and call
center orders.
In general, books can be returned to their publishers at cost. Borders and
Walden stores return books to the Company's centralized returns center in
Nashville, Tennessee to be processed for return to the publishers. Due to the
sophistication of its inventory management system, the Company is able to reduce
its handling, carrying and freight expenses. In general, Borders can return
music and videos to its vendors at cost plus an additional fee to cover handling
and processing costs.
COMPETITION
The retail book business is highly competitive. Competition within the
retail book industry is fragmented with Borders facing direct competition from
other superstores, such as Barnes & Noble, Books-A-Million, Crown Books and
Media Play. Approximately 85% of Borders superstores currently face direct
competition from other large format book superstores. Walden faces direct
competition from the B. Dalton division of Barnes & Noble, Inc., as well as
regional chains and superstores. In addition, Borders and Walden compete with
each other, as well as specialty retail stores that offer books in a particular
area of specialty, independent single store operators, variety discounters, drug
stores, warehouse clubs, mail order clubs and mass merchandisers (such as Best
Buy). In the future, Borders and Walden may face additional competition from
other categories of retailers entering the retail book market.
The music and video businesses are also highly competitive and Borders
faces competition from large established music chains, such as Tower Records and
the Musicland and Media Play divisions of Musicland Stores Corporation (which
also sell videos), established video chains, such as Blockbuster and Suncoast
Motion Picture Company (a division of Musicland Stores Corporation), as well as
specialty retail stores, video rental stores, variety discounters, warehouse
clubs and mass merchandisers (such as Best Buy), some of which may have greater
financial or other resources than the Company. In addition, consumers receive
television and mail order offers and have access to mail order clubs. The
largest mail order clubs are affiliated with major manufacturers of pre-recorded
music and may have advantageous marketing relationships with their affiliates.
The Internet has emerged as a significant avenue for retailing in all media
categories that the Company carries. In particular, the retailing of books and
music over the Internet is highly competitive. Competitors on the Internet
include Amazon.com, Inc., Barnes & Noble, Inc., CDnow, Inc. and others. The
Company believes that sales to date on the Internet have negatively affected the
Company's sales, but the impact cannot be quantified. Internet sales are
expected to continue to have a negative impact on the Company's sales. As
discussed above, the Company has its own vehicle for retailing over the Internet
and in 1999 will be working to integrate Borders.com with its stores.
EMPLOYEES
As of March 21, 1999, the Company had a total of approximately 15,600
full-time employees and approximately 11,600 part-time employees. When hiring
new employees, the Company considers a number of factors, including education
and experience, personality and orientation towards customer service. All new
store employees participate in a training program that provides up to two weeks
of in-store training in all aspects of customer
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service and selling, including title searches for in-stock and in-print
merchandise, merchandising, sorting, operation of point of sale terminals and
store policies and procedures. The Company believes that its relations with its
employees are generally good. The Company's employees are not represented by
unions except that the employees of two Borders stores have elected to be
represented by the United Food and Commercial Workers International Union
(UFCW). Agreements have been reached between the Company and the UFCW with
respect to these stores.
TRADEMARKS AND SERVICE MARKS
Borders(R), Borders Book Shop(R), and Borders Books & Music(R), among other
marks, are all registered trademarks and service marks used by Borders.
Brentano's(R), Coopersmith's(R), Longmeadow Press(R), Waldenbooks(R),
Waldenbooks Preferred Reader(R), Waldenkids(R) and Waldensoftware(R), among
other marks, are all registered trademarks and service marks used by Walden.
BOOKS etc(R) is a registered trademark and service mark used by Books etc.
Borders.com(R) is a registered trademark and service mark used by Borders
Online, Inc. The Borders, Walden, Books etc and Borders.com service marks are
used as trade names in connection with their business operations.
SEASONALITY
The Company's business is highly seasonal, with sales generally highest in
the fourth quarter and lowest in the first quarter. During 1998, 36.4% of the
Company's sales and 88.0% of the Company's operating income were generated in
the fourth quarter. The Company's results of operations depend significantly
upon the holiday selling season in the fourth quarter; less than satisfactory
net sales for such period could have a material adverse effect on the Company's
financial condition or results of operations for the year and may not be
sufficient to cover any losses which may be incurred in the first three quarters
of the year. The Company's expansion program generally is weighted with store
openings in the second half of the fiscal year. In the future, changes in the
number and timing of store openings, or other factors, may result in different
seasonality trends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Seasonality".
RELATIONSHIP WITH KMART
General. Prior to its initial public offering in May 1995, the Company was
a subsidiary of Kmart Corporation (Kmart); Kmart currently owns no shares of
Common Stock.
Kmart and the Company continue to have the following contractual
relationships.
Tax Allocation and Indemnification Agreement. Prior to the completion of
its initial public offering ("the IPO"), the Company was included in the
consolidated federal income tax returns of Kmart and filed on a combined basis
with Kmart in certain states. Pursuant to a tax allocation and indemnification
agreement between the Company and Kmart (the "Tax Allocation Agreement") the
Company will remain obligated to pay to Kmart any income taxes the Company would
have had to pay if it had filed separate tax returns for the tax period
beginning on January 26, 1995, and ending on June 1, 1995, the date of the
consummation of the IPO (to the extent that it has not previously paid such
amounts to Kmart). In addition, if the tax liability attributable to the Company
for any previous tax period during which the Company was included in a
consolidated federal income tax return filed by Kmart or a combined state return
is adjusted as a result of an action of a taxing authority or a court, then the
Company will pay to Kmart the amount of any increase in such liability and Kmart
will pay to the Company the amount of any decrease in such liability (in either
case together with interest and penalties). The Company's tax liability for
previous years will not be affected by any increase or decrease in Kmart's tax
liability if such increase or decrease is not directly attributable to the
Company. After completion of the IPO, the Company continued to be subject under
existing federal regulations to several liability for the consolidated federal
income taxes for any tax year in which it was a member of any consolidated group
of which Kmart was the common parent. Pursuant to the Tax Allocation Agreement,
however, Kmart agreed to indemnify the Company for any federal income tax
liability of Kmart or any of its subsidiaries (other than that which is
attributable to the Company) that the Company could be required to pay and the
Company agreed to indemnify Kmart for any of the Company's separate company
taxes.
Lease Guaranty Agreement. 32 of Borders' leases for its retail stores have
been guaranteed by Kmart, on either a full or limited basis. Limited guarantees
generally provide for the release of Kmart's guarantee upon satisfaction by
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Borders of certain financial requirements specified in the guarantee. Under the
terms of a lease guaranty, indemnification and reimbursement agreement entered
into upon completion of the IPO (the "Lease Guaranty Agreement"), until
termination of all of the lease guarantees, except during such time as the
Company achieves and maintains the investment grade status specified in the
Lease Guaranty Agreement, the Company will be subject to certain covenants and
restrictive covenants under the Lease Guaranty Agreement including restrictions
on indebtedness, dividends, mergers and certain liens.
Under the terms of the Lease Guaranty Agreement, the underlying leases will
be transferable by Borders, subject to a right of first refusal in favor of
Kmart with respect to sites within a three-mile radius of a Kmart store and,
with respect to all other sites, a right of first offer in favor of Kmart. The
Company and Borders are required to indemnify Kmart with respect to (i) any
liabilities Kmart may incur under the lease guarantees, except those liabilities
arising from the gross negligence or willful misconduct of Kmart, and (ii) any
losses incurred by Kmart after taking possession of any particular premises,
except to the extent such losses arise solely from the acts or omissions of
Kmart. Under the terms of the Lease Guaranty Agreement, in the event of (i) the
Company's or Borders' failure to provide any required indemnity, (ii) a knowing
and material violation of the limitations on transfers of guaranteed leases set
forth in the agreement, (iii) a breach of any of the financial covenants
described above or (iv) certain events of bankruptcy, Kmart will have the right
to assume any or all of the guaranteed leases and to take possession of all of
the premises underlying such guaranteed leases; provided, that in the event of a
failure or failures to provide required indemnities, the remedy of taking
possession of all of the premises underlying the guaranteed leases may be
exercised only if such failures relate to aggregate liability of $10.0 million
or more and only if Kmart has provided 100 days' prior written notice. In the
event of a failure to provide required indemnities resulting in losses of more
than the equivalent of two months rent under a particular lease but less than
$10.0 million, Kmart may exercise such remedy of possession as to the premises
underlying the guaranteed lease or leases to which the failure to provide the
indemnity relates and one additional premise for each such premises to which the
failure relates, up to a maximum, in any event, of five additional premises, and
thereafter, with respect to such additional premises, Kmart remedies and
indemnification rights shall terminate. In the event of a failure to provide
required indemnities resulting in liabilities of less than the equivalent of two
months rent under a particular lease, Kmart may exercise such remedy of
possession only as to the premises underlying the guaranteed lease or leases to
which the failure to provide the indemnity relates. The Lease Guaranty Agreement
will remain in effect until the expiration of all lease guarantees, which the
Company believes will be on or after November 2019.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. Forward-looking
statements reflect management's current expectations and are inherently
uncertain. The Company's actual results may differ significantly from
management's expectations. Exhibit 99.1, "Cautionary Statement Under the Private
Securities Litigation Reform Act of 1995", filed with this Annual Report on Form
10-K identifies the forward-looking statements and describes some, but not all,
of the factors that could cause these differences.
ITEM 2. PROPERTIES
Borders. Borders operated 251 stores in 40 states and the District of
Columbia, three stores in the United Kingdom, one store in Singapore and one
store in Australia at March 21, 1999. Borders leases all of its stores. Borders'
store leases have an average initial term of 15 to 20 years with several
five-year renewal options. At March 21, 1999, the average unexpired term under
Borders' existing store leases was 11.5 years prior to the exercise of any
options.
The Company has leased a portion of its corporate headquarters in Ann
Arbor, Michigan and owns the remaining building and improvements. In 1998, the
headquarters was significantly expanded and all corporate office personnel were
consolidated into the expanded facility. The Company leases all distribution
centers.
Walden. Walden operated 885 stores in all 50 states and the District of
Columbia as of March 21, 1999. Walden leases all of its stores. Walden's store
leases generally have an initial term of 10 years. At present, the
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average unexpired term under Walden's existing store leases is approximately 4.5
years. The terms of Walden's mall-based bookstores leases for its leased
bookstores open as of March 21, 1999 expire as follows:
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LEASE TERMS TO EXPIRE DURING 12 MONTHS NUMBER OF
ENDING ON OR ABOUT JANUARY 31 MALL STORES
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2000........................................................ 164
2001........................................................ 92
2002........................................................ 84
2003 and later.............................................. 545
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Walden leases both of its distribution facilities.
Books etc. Books etc. operated 26 stores in the United Kingdom as of March
21, 1999. Books etc. generally leases its stores under operating leases with
terms ranging from 5 to 25 years. The average remaining lease term for Books
etc. stores is 12.2 years.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in or affected by litigation
incidental to the conduct of its respective businesses. The Company believes
that no currently pending litigation to which it is a party will have a material
adverse effect on its liquidity, financial position or results of operations.
In March 1998, the American Booksellers Association ("ABA") and twenty-six
independent bookstores filed a lawsuit in the United States District Court for
the Northern District of California against the Company and Barnes & Noble Inc.
alleging violations of the Robinson-Patman Act, the California Unfair Trade
Practice Act and the California Unfair Competition Law. The Complaint seeks
injunctive and declaratory relief; unspecified treble damages on behalf of each
of the bookstore plaintiffs, and, with respect to the California bookstore
plaintiffs, any other damages permitted by California law; disgorgement of
money, property and gains wrongfully obtained in connection with the purchase of
books for resale, or offered for resale, in California from March 18, 1994 until
the action is completed and pre-judgment interest on any amounts awarded in the
action, as well as attorney fees and costs. The Company intends to vigorously
defend the action.
In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace Kuralt,
filed a lawsuit in the United States District Court for the Southern District of
New York against the Company, Barnes & Noble, Inc., Amazon.com, Inc., certain
publishers and others alleging violation of the Robinson-Patman Act and other
federal law, New York statutes governing trade practices and common law. An
Amended Complaint was subsequently filed eliminating the class action
allegations contained in the original Complaint. The Amended Complaint alleges
that the named plaintiffs have suffered damages of $11,250,000 or more and
requests treble damages on behalf of the named plaintiffs, as well as of
injunctive and declaratory relief (including an injunction requiring the closure
of all of the defendants' stores within 10 miles of any location where plaintiff
either has or had a retail bookstore during the four years preceding the filing
of the Complaint, and prohibiting the opening by defendants of any bookstore in
such areas for the next 10 years), disgorgement of alleged discriminatory
discounts, rebates, deductions and payments, punitive damages, interest, costs,
attorneys fees and other relief. Many of the allegations in the Amended
Complaint are similar to those contained in the action instituted by the ABA and
26 bookseller plaintiffs against the Company and Barnes & Noble in March of
1998. The Company intends to vigorously defend the action.
On November 20, 1998, six independent booksellers instituted an action
against the Company and Barnes & Noble in the United States District Court for
the Northern District of California asserting claims, and seeking relief,
similar to claims made and relief sought in the ABA litigation described above.
The Company intends to vigorously defend the action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth, for the fiscal quarters indicated, the high
and low closing market prices for the Common Stock on the New York Stock
Exchange (after the effect of the 2-for-1 stock split, effective, March 1,
1997).
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HIGH LOW
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FISCAL QUARTER 1997
First Quarter............................................. $22.82 $18.32
Second Quarter............................................ $26.94 $19.25
Third Quarter............................................. $29.00 $22.31
Fourth Quarter............................................ $31.94 $24.50
FISCAL QUARTER 1998
First Quarter............................................. $34.38 $31.50
Second Quarter............................................ $39.94 $30.69
Third Quarter............................................. $33.00 $18.94
Fourth Quarter............................................ $28.88 $18.31
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The Common Stock is traded on the New York Stock Exchange.
As of March 22, 1999, the Common Stock was held by 4,506 holders of record.
The Company currently intends to retain its earnings to finance future
growth and therefore does not anticipate paying any cash dividends in the
foreseeable future. The declaration and payment of dividends, if any, is subject
to the discretion of the Board and to certain limitations under the Michigan
Business Corporation Act. In addition, the Company's credit facility and the
lease facility agreements prohibit the Company from paying any dividends. The
Lease Guaranty Agreement between the Company, Borders and Kmart restricts the
Company's ability to pay dividends, unless no defaults exist under any
indebtedness of the Company and such payments do not exceed the sum of 50% of
cumulative consolidated net income since the Company's initial public offering
of common stock, which was completed on June 1, 1995, and certain proceeds
received from the sale of capital stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources".
On November 16, 1998 the Company sold 400,000 shares of Common Stock to
Philip M. Pfeffer, former Chief Executive Officer of the Company, for aggregate
consideration of $9,300,000, and Mr. Pfeffer received an option with an exercise
price of $23.25, the fair market value on the date of grant, for each share
purchased. On that date, the Company also issued to Mr. Pfeffer options to
purchase 15,610 shares with an exercise price of $23.25 in lieu of salary in the
amount of $134,246. These transactions involved an offer solely to Mr. Pfeffer
pursuant to the terms of his Employment Agreement with the Company. Reliance was
placed by the Company upon the exemption from registration under Section 4(2) of
the Securities Act of 1933, which exempts transactions by an issuer not
involving a public offering.
8
<PAGE> 10
ITEM 6. SELECTED FINANCIAL DATA
BORDERS GROUP, INC.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Company's consolidated financial statements and the notes
thereto.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------------------
JANUARY 24, JANUARY 25, JANUARY 26, JANUARY 28, JANUARY 22,
1999 1998 1997 1996(1) 1995
----------- ----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Borders Sales.............................. $1,563.5 $1,264.1 $ 958.1 $ 683.5 $ 404.0
Waldenbooks Sales.......................... 941.6 968.2 979.7 1,031.5 1,085.5
Other Sales................................ 85.3 33.7 21.0 34.0 21.5
-------- -------- -------- -------- --------
Total Store Sales.......................... 2,590.4 2,266.0 1,958.8 1,749.0 1,511.0
Borders.com Sales.......................... 4.6 -- -- -- --
-------- -------- -------- -------- --------
Total Sales.............................. $2,595.0 $2,266.0 $1,958.8 $1,749.0 $1,511.0
Operating Income Before Restructuring
Provision, Goodwill Writedowns and FAS
121...................................... $ 167.3 $ 138.0 $ 103.1 $ 64.5 $ 50.2
Restructuring Provision.................... -- -- -- -- 6.4
Goodwill Writedowns........................ -- -- -- 201.8 --
FAS 121 Impairment......................... -- -- -- 63.1 --
-------- -------- -------- -------- --------
Operating Income (Loss).................... $ 167.3 $ 138.0 $ 103.1 $ (200.4) $ 43.8
Net Income (Loss).......................... $ 92.1 $ 80.2 $ 57.9 $ (211.1) $ 20.9
Diluted Earnings (Loss) Per Common
Share(2)................................. $ 1.12 $ 0.98 $ 0.70 $ (2.94) $ 0.35
Pro Forma Diluted Earnings Per Common Share
Before Restructuring Provision, Goodwill
Writedowns and FAS 121(2)................ $ 1.12 $ 0.98 $ 0.70 $ 0.43 $ 0.32
BALANCE SHEET DATA
Working Capital............................ $ 144.5 $ 137.0 $ 225.1 $ 204.3 $ 258.0
Total Assets............................... $1,766.6 $1,534.9 $1,211.0 $1,052.3 $1,355.9
Short-Term Borrowings...................... $ 131.9 $ 122.5 $ 30.0 $ 60.0 $ --
Long-Term Debt and Capital Lease
Obligations, Including Current Portion,
and Redeemable Preferred Stock........... $ 8.5 $ 10.0 $ 6.7 $ 8.6 $ 21.1
Shares Subject to Repurchase............... $ -- $ -- $ 34.1 $ -- $ --
Stockholders' Equity....................... $ 715.1 $ 598.1 $ 511.4 $ 472.0 $ 726.3
</TABLE>
- -------------------------
(1) The Company's 1995 fiscal year consisted of 53 weeks.
(2) Earnings (loss) per common share for the fiscal years ended January 28, 1996
and January 22, 1995 are pro forma and are based on actual common shares
outstanding after the Company's initial public offering.
9
<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Borders Group, Inc. (the Company), through its subsidiaries, is the second
largest operator of book and music superstores and the largest operator of
mall-based bookstores in the world based upon both sales and number of stores.
At January 24, 1999, the Company operated 250 superstores primarily under the
Borders name, including 3 in the United Kingdom, 1 in Singapore, and 1 in
Australia. The Company also operated 900 mall-based and other bookstores
primarily under the Waldenbooks name, and 26 bookstores under the Books etc.
name in the United Kingdom. The Company, through its subsidiary Borders Online,
Inc., is also an online retailer of books, music, and video through the
operation of its Internet commerce site, Borders.com.
The Company's business strategy is to continue its growth and increase its
profitability through (i) the continued expansion and refinement of its Borders
superstore operation in the United States and internationally, (ii) the
continued focus on opportunistic store openings in its mall-based bookstore
operations and expansion of its kiosk operations, (iii) the development of
web-based commerce technologies which enhance the customer experience both
in-store and online, and (iv) realization of synergies and economies of scale
through a combination of certain of its books and music operations.
The Company's fiscal year ends on the Sunday immediately preceding the last
Wednesday in January. Fiscal 1998, 1997, and 1996 consisted of 52 weeks and
ended on January 24, 1999, January 25, 1998, and January 26, 1997, respectively.
References herein to years are to the Company's fiscal years.
RESULTS OF OPERATIONS
The following table presents the Company's statement of operations data, as
a percentage of sales, for the three most recent fiscal years.
<TABLE>
<CAPTION>
JANUARY 24, JANUARY 25, JANUARY 26,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
RESULTS OF OPERATIONS
Sales....................................................... 100.0% 100.0% 100.0%
Cost of merchandise sold (includes occupancy)............... 71.7 72.1 73.4
----- ----- -----
Gross margin................................................ 28.3 27.9 26.6
Selling, general and administrative expenses................ 21.5 21.4 20.9
Pre-opening expense......................................... 0.3 0.4 0.4
Goodwill amortization....................................... 0.1 -- --
----- ----- -----
Operating income............................................ 6.4 6.1 5.3
Interest expense............................................ 0.6 0.3 0.4
----- ----- -----
Income before income tax.................................... 5.8 5.8 4.9
Income tax provision........................................ 2.3 2.3 1.9
----- ----- -----
Net income.................................................. 3.5% 3.5% 3.0%
----- ----- -----
Store Activity
Borders Superstores
Beginning number of stores................................ 203 157 116
Openings.................................................. 47 46 41
----- ----- -----
Ending number of stores................................... 250 203 157
----- ----- -----
Walden Mall Bookstores
Beginning number of stores................................ 923 961 992
Openings.................................................. 16 8 9
Closings.................................................. (39) (46) (40)
----- ----- -----
Ending number of stores................................... 900 923 961
===== ===== =====
</TABLE>
10
<PAGE> 12
FISCAL YEARS ENDED JANUARY 24, 1999 AND JANUARY 25, 1998
Store sales for the year ended January 24, 1999 were $2,590.4 million,
reflecting a 14.3% increase over the $2,266.0 million in sales achieved in 1997.
Both the higher number of Borders superstores and Borders' 3.5% comparable store
sales increase contributed to the growth, which was partially offset by a lower
number of Waldenbooks stores and a 1.0% comparable store sales decrease.
Comparable store sales at Borders and Waldenbooks were impacted by increased
superstore and Internet competition. Sales for Borders.com were $4.6 million in
1998.
Gross margin as a percent of sales rose from 27.9% in 1997 to 28.3% in
1998. The increase in gross margin percentage primarily reflects improved
inventory shrinkage control and merchandise mix.
As a percentage of sales, SG&A for 1998 was 21.5%, or 0.1% higher than the
21.4% of sales in the corresponding period of 1997. The increase is due to
increased spending on strategic initiatives, including Borders.com and
international, which offset operating leverage in the Company's core business.
Pre-opening expense in 1998 was $7.8 million, an increase of $0.6 over the
1997 expense of $7.2 million. Pre-opening expense per store varies primarily as
a result of differing levels of grand opening advertising, depending on the
presence of the Company in the market, and differing levels of labor costs
associated with opening the store. The Company opened 47 Borders superstores and
16 Waldenbooks mall-based stores in 1998 as compared to 46 Borders superstores
and 8 Waldenbooks mall-based stores in 1997.
Goodwill amortization was $2.9 million in 1998, as compared to $1.6 million
in 1997. The increase in goodwill amortization of $1.3 million is a result of a
full year of amortization relating to the acquisition of Books etc. in October
1997.
Operating income improved to $167.3 million or 6.4% of sales in 1998, as
compared to $138.0 million or 6.1% of sales in 1997.
Interest expense was $16.2 million in 1998, as compared to $7.2 million in
1997. The increase represents interest on borrowings for the repurchase of
common stock and the acquisition of Books etc.
Income tax expense in 1998 was $59.0 million as compared to $50.6 million
in 1997. The effective tax rate for both periods differed from the federal
statutory rate primarily as a result of non-deductible goodwill amortization and
state income taxes. The Company's effective tax rate was 39.0% in 1998, as
compared to 38.7% in 1997. The increase in the effective rate is primarily due
to the mix of Borders store openings in higher taxed states.
As a result of the foregoing, store net income for the year ended January
24, 1999 was $102.6 million as compared to $86.2 million for the year ended
January 25, 1998. Borders.com had a net loss of $10.5 million in 1998, as
compared to a net loss of $6.0 million in 1997. On a consolidated basis, net
income in 1998 was $92.1 million, as compared to $80.2 million in 1997.
FISCAL YEARS ENDED JANUARY 25, 1998 AND JANUARY 26, 1997
Sales for the year ended January 25, 1998 were $2,266.0 million, reflecting
a 15.7% increase over the $1,958.8 million in sales achieved in 1996. Both the
higher number of Borders superstores and Borders' 8.0% comparable store sales
increase contributed to the growth, which was partially offset by store closings
at Waldenbooks. The Waldenbooks 0.0% comparable store sales reflects flat mall
traffic levels and the impact of increased superstore competition offset by the
benefit of new merchandising initiatives. Waldenbooks also experienced a benefit
from a larger number of seasonal calendar kiosks introduced in malls with
existing Waldenbooks stores.
Gross margin as a percent of sales rose from 26.6% in 1996 to 27.9% in
1997. The increase in gross margin percentage primarily reflects improved buying
and sales mix resulting in higher initial product margin and tighter control of
inventory shrinkage.
As a percentage of sales, SG&A for 1997 was 21.4%, or 0.5% higher than the
20.9% of sales in the corresponding period of 1996. The increase is due largely
to expenditures on strategic initiatives offset in part by the leveraging of
corporate overhead over the Company's expanding sales base.
11
<PAGE> 13
Pre-opening expense in 1997 was $7.2 million consistent with 1996 expense
of $7.2 million. Pre-opening expense per store varies primarily as a result of
differing levels of grand opening advertising, depending on the presence of the
Company in the market, and differing levels of labor costs associated with
opening the store. The Company opened 46 Borders superstores and 8 Waldenbooks
mall-based stores in 1997 as compared to 41 Borders superstores and 9
Waldenbooks mall-based stores in 1996.
Goodwill amortization was $1.6 million in 1997, as compared to $1.1 million
in 1996. The increase in goodwill amortization of $0.5 million is a result of
the higher goodwill balance due to the acquisition of Books etc. in October
1997.
Operating income was $138.0 million or 6.1% of sales in 1997, as compared
to $103.1 million or 5.3% of sales in 1996.
Interest expense was $7.2 million in 1997, as compared to $7.0 million in
1996. The increase represents interest on borrowings for the repurchase of
common stock, and the acquisition of Books etc.
Income tax expense in 1997 was $50.6 million as compared to $38.2 million
in 1996. The effective tax rate for both periods differed from the federal
statutory rate primarily as a result of non-deductible goodwill amortization.
The Company's effective tax rate was 38.7% in 1997, as compared to 39.8% in
1996. The decrease in effective rate is due primarily to the realization of
certain state tax benefits.
As a result of the foregoing, net income for the year ended January 25,
1998 was $80.2 million, as compared to $57.9 million for the year ended January
26, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund working capital
needs, the opening of new stores, the refurbishment and expansion of existing
stores, and continued development of Borders.com.
Net cash provided by operations in 1998 was $166.2 million, as compared to
$147.0 million in 1997. The current year activity primarily reflects income
before non-cash charges for depreciation and amortization offset by cash used
for inventories as a result of store expansion at Borders. Inventory net of
accounts payable increased primarily due to 47 new Borders stores.
Net cash used for investing was primarily for capital expenditures for new
stores, including the opening of three superstores in the United Kingdom and one
superstore in Australia, Borders.com and the fulfillment center, a new
distribution center in Mira Loma, California, and expansion of the home office
facility. Capital expenditures in 1998 reflect the opening of 47 new superstores
and 16 new Waldenbooks stores. Capital expenditures in 1997 and 1996 reflected
the opening of 46 and 41 new Borders superstores, respectively, and 8 and 9 new
Waldenbooks stores, respectively.
Net cash used for financing in 1998 was $8.7 million, resulting primarily
from the repurchase of common stock of $51.7 million offset by net borrowings
under the credit facility and the issuance of Company stock under the Company's
employee benefit plans. Net cash provided by financing in 1997 was $50.5
million, which resulted from net borrowings under the credit facility, cash
received from construction funding, and issuance of stock under employee benefit
plans offset by the repurchase of common stock.
The Company expects capital expenditures to be approximately $170.0 million
in 1999, resulting primarily from domestic and international store openings,
refurbishment of a number of existing stores, and continued investment in
web-based technology. The Company currently plans to open approximately 50
Borders superstores, including 5 international stores, and 15 new Waldenbooks
mall stores in 1999. Average cash requirements for the opening of a domestic
prototype Borders books and music superstore are $2.2 million, representing
capital expenditures of $1.2 million, inventory requirements, net of related
accounts payable, of $0.9 million and $0.1 million of pre-opening costs. Average
cash requirements to open a new or expanded Waldenbooks store range from $0.4
million to $0.7 million, depending on the size and format of the store. The
Company plans to lease new store locations predominantly under operating leases.
12
<PAGE> 14
The Company plans to execute its expansion plans for its Borders
superstores principally with funds generated from operations and financing
through the lease facility in 1999 and beyond. In the event that working capital
requirements are in excess of operating cash flows and lease financing, the
Company may fund such excess with borrowings under the credit facility. The
Company believes funds generated from operations, borrowings under the credit
facility and financing through the lease facility will be sufficient to fund its
anticipated capital requirements for at least the next two to three years.
The Company currently has a share repurchase program in place with
remaining authorization to repurchase approximately $64.5 million. During 1998
and 1997, $51.7 million and $61.8 million of common stock was repurchased,
respectively.
The Company has a $425.0 million multicurrency credit agreement (the Credit
Facility) which expires in October, 2002. Borrowings under the Credit Facility
bear interest at a base rate or an increment over LIBOR at the Company's option.
The Credit Facility contains operating covenants which limit the Company's
ability to incur indebtedness, make acquisitions, dispose of assets, issue or
repurchase its common stock in excess of $100.0 million (plus any proceeds and
tax benefits resulting from stock option exercises and tax benefits resulting
from restricted shares purchased by employees from the Company), pay dividends
on its common stock, and require the Company to meet certain financial measures
regarding fixed charge coverage, leverage and tangible net worth.
The Company has a $250.0 million lease financing facility (the Lease
Facility) to finance new stores and other property through operating leases
which expires in October, 2002. The Lease Facility provides financing to lessors
through loans from a third party lender for up to 95% of a project cost. It is
expected that lessors will make equity contributions approximating 5% of each
project. Independent of its obligations as lessee, the Company guarantees
payment when due of all amounts required to be paid to the third party lender.
The principal amount guaranteed will be limited to approximately 89% of the
original cost of a project, so long as the Company is not in default under the
lease relating to such project.
There were 31 properties financed through the Lease Facility, with a
financed value of $123.9 million at January 24, 1999. Management believes that
the rental payments for properties financed through the Lease Facility may be
lower than those which the Company could obtain elsewhere due to, among other
factors, (i) the lower borrowing rates available to the Company's landlords
under the facility, and (ii) the fact that rental payments for properties
financed through the facility do not include amortization of the principal
amounts of the landlords' indebtedness related to the properties. Rental
payments relating to such properties will be adjusted when permanent financing
is obtained to reflect the interest rates available at the time of the
refinancing and the amortization of principal. In December, 1998, 17 properties
previously financed through the Lease Facility with a total financed value of
$70.9 million were permanently financed through operating leases.
During 1994, the Company entered into agreements in which leases with
respect to four Borders' locations serve as collateral for certain mortgage
pass-through certificates. These mortgage pass-through certificates include a
provision requiring the Company to repurchase the underlying mortgage notes in
certain events, including the failure by the Company to make payments of rent
under the related leases, the failure by Kmart Corporation (the former parent of
the Company) to maintain required investment grade ratings or the termination of
the guarantee by Kmart of the Company's obligations under the related leases
(which would require mutual consent of Kmart and Borders). In the event the
Company is required to repurchase all of the underlying mortgage notes, the
Company would be obligated to pay approximately $36.6 million. The Company would
expect to fund this obligation through its line of credit. Since February 1995,
Kmart has failed to maintain investment grade ratings and, therefore, these
notes are now subject to put by the holder. To date, the holder has not
exercised its right to put the notes.
13
<PAGE> 15
SEASONALITY
The Company's business is highly seasonal, with sales significantly higher
and substantially all operating income realized during the fourth quarter, which
includes the Christmas selling season.
<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>
<TABLE>
<CAPTION>
FISCAL 1997 QUARTER ENDED
--------------------------------------------
APRIL JULY OCTOBER JANUARY
(DOLLARS IN MILLIONS) ----- ---- ------- -------
<S> <C> <C> <C> <C>
SALES.................................................... $463.6 $466.3 $477.3 $858.8
Operating income......................................... 1.8 2.3 2.2 131.7
% of full year:
Sales.................................................. 20.5% 20.6% 21.0% 37.9%
Operating income....................................... 1.3 1.7 1.6 95.4
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1996 QUARTER ENDED
--------------------------------------------
APRIL JULY OCTOBER JANUARY
(DOLLARS IN MILLIONS) ----- ---- ------- -------
<S> <C> <C> <C> <C>
SALES.................................................... $404.0 $414.3 $413.5 $727.0
Operating income (loss).................................. (3.7) (2.0) (2.9) 111.7
% of full year:
Sales.................................................. 20.6% 21.2% 21.1% 37.1%
Operating income (loss)................................ (3.6) (1.9) (2.8) 108.3
</TABLE>
OTHER MATTERS
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define a specific year. Absent corrective
actions, a computer program that has date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations causing disruptions to various activities and
operations.
The Company initiated assessments in prior years to identify the work
efforts required to assure that systems supporting the business successfully
operate beyond the turn of the century. The scope of this work effort
encompasses information technology systems, systems utilizing embedded
technology, such as microcontrollers, and the readiness of external third
parties, such as suppliers and service providers.
FINANCIAL AND NON-FINANCIAL INFORMATION TECHNOLOGY SYSTEMS
These systems encompass both application software and operating system
software. The Company has completed its assessment, renovation, and
validation of potential problem areas concerning application software.
Implementation (the final stage) of application software based in the
Company's distribution centers and headquarters is substantially complete
other than application programs required for operation of the sorter in the
Company's Nashville distribution center. These programs are expected to be
completed by the end of the second quarter unless significant unanticipated
remedial action is required, in which case completion is expected in the
fourth quarter. Implementation of application software based in the
Company's stores is currently more than 80% complete, with 100% completion
expected by the end of the second quarter of 1999.
14
<PAGE> 16
The assessment of operating system software has been completed. Necessary
upgrades of operating system software are expected to be completed by the
end of the second quarter of fiscal 1999.
EMBEDDED TECHNOLOGY SYSTEMS
The Company has completed its assessment of the potential risks associated
with embedded technology systems, such as HVAC, elevators and security
systems at the Company's stores, distribution centers, and headquarters.
This involved inventorying all equipment utilizing embedded technology by
vendor and model, and contacting the necessary vendors with regards to the
compliance status of each item. Services or equipment provided by
non-compliant vendors identified through the assessment process will be
upgraded to compliant versions to the extent that the Company cannot
correct identified problem areas internally. This step is expected to be
completed by the end of the second quarter of fiscal 1999.
SUPPLIERS AND SERVICE PROVIDERS
The Company relies on numerous third parties to provide merchandise and
services. As such, attention has been focused on compliance attainment
efforts of vendors. Key parties have been contacted for clarification of
their year 2000 plans and their compliance status. Merchandise or services
provided by non-compliant vendors identified through the assessment process
will be evaluated for potential alternative arrangements. Such arrangements
may include less reliance on electronic ordering or sourcing through
alternative distribution channels to the extent that merchandise is
available through such channels.
Notwithstanding the substantive work efforts described above, the Company
could potentially experience disruptions to some aspects of its various
activities and operations, including those resulting from non-compliant systems
utilized by unrelated third party business entities. The Company is in the
process of developing business contingency plans in order to attempt to mitigate
the extent of potential disruption to business operations. The Company
anticipates that development of such contingency plans will be completed by the
end of the second quarter of fiscal 1999. The Company will continuously monitor
the adequacy of its contingency plans throughout the remainder of fiscal 1999.
Costs of addressing the Year 2000 Issue have not been material to date and,
based on preliminary information gathered to date from the Company and its
vendors, are not currently expected to have a material adverse impact on the
Company's financial position, results of operations or cash flows in future
periods. However, if the Company or its vendors are unable to resolve such
processing issues in a timely manner, it could result in a material financial
risk, including loss of revenue, substantial unanticipated costs and service
interruptions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to risk resulting from interest rate fluctuations,
as interest on the Company's borrowings is principally based on variable rates.
The Company's objective in managing its exposure to interest rate fluctuations
is to limit the impact of interest rate changes on earnings and cash flows and
to lower its overall borrowing costs. The Company primarily utilizes interest
rate swaps and collars to achieve this objective, effectively converting a
portion of its variable-rate borrowings to fixed-rate borrowings.
LIBOR is the rate upon which the Company's variable rate debt is
principally based. If LIBOR were to increase 1% in 1999 as compared to the end
of 1998, the company's interest expense, after considering the effects of its
interest rate swap and collar agreements, would increase $0.1 million based on
the Company's outstanding debt as of January 24, 1999.
15
<PAGE> 17
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 24, 1999, January 25, 1998 and January 26,
1997...................................................... 17
Consolidated Balance Sheets as of January 24, 1999 and
January 25, 1998.......................................... 18
Consolidated Statements of Cash Flows for the fiscal years
ended January 24, 1999, January 25, 1998 and January 26,
1997...................................................... 19
Consolidated Statements of Stockholders' Equity for the
fiscal years ended January 24, 1999, January 25, 1998,
January 26, 1997 and January 28, 1996..................... 20
Notes to Consolidated Financial Statements.................. 21
Report of Independent Accountants........................... 31
</TABLE>
16
<PAGE> 18
BORDERS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 24, JANUARY 25, JANUARY 26,
1999 1998 1997
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) ----------- ----------- -----------
<S> <C> <C> <C>
Sales....................................................... $2,595.0 $2,266.0 $1,958.8
Cost of merchandise sold (includes occupancy)............... 1,859.4 1,634.3 1,437.8
-------- -------- --------
Gross margin................................................ 735.6 631.7 521.0
Selling, general and administrative expenses................ 557.6 484.9 409.6
Pre-opening expense......................................... 7.8 7.2 7.2
Goodwill amortization....................................... 2.9 1.6 1.1
Operating income............................................ 167.3 138.0 103.1
Interest expense............................................ 16.2 7.2 7.0
-------- -------- --------
Income before income tax.................................... 151.1 130.8 96.1
Income tax provision........................................ 59.0 50.6 38.2
-------- -------- --------
Net income.................................................. $ 92.1 $ 80.2 $ 57.9
======== ======== ========
Earnings per common share data (Note 2)
Diluted earnings per common share......................... $1.12 $.98 $.70
======== ======== ========
Diluted weighted average common shares outstanding (in
thousands)............................................. 82,503 82,241 82,554
======== ======== ========
Basic earnings per common share........................... $1.20 $1.06 $.77
======== ======== ========
Basic weighted average common shares outstanding (in
thousands)............................................. 76,631 75,825 75,575
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
17
<PAGE> 19
BORDERS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------
JANUARY 24, JANUARY 25,
1999 1998
(DOLLARS IN MILLIONS EXCEPT SHARE AMOUNTS) ----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 42.8 $ 65.1
Merchandise inventories................................... 1,019.6 879.1
Accounts receivable and other current assets.............. 62.9 60.8
Deferred income taxes..................................... 8.0 13.4
-------- --------
Total Current Assets................................... 1,133.3 1,018.4
Property and equipment, net................................. 493.8 373.7
Other assets................................................ 25.1 20.1
Deferred income taxes....................................... 8.4 13.2
Goodwill, net of accumulated amortization of $46.0 and
$43.1, respectively....................................... 106.0 109.5
-------- --------
$1,766.6 $1,534.9
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings and current portion of long-term
debt................................................... $ 134.1 $ 127.3
Trade accounts payable.................................... 607.2 480.7
Accrued payroll and other liabilities..................... 221.7 210.8
Taxes, including income taxes............................. 25.8 62.6
-------- --------
Total Current Liabilities.............................. 988.8 881.4
Long-term debt and capital lease obligations................ 6.3 5.2
Other long-term liabilities................................. 56.4 50.2
-------- --------
Total Liabilities...................................... 1,051.5 936.8
-------- --------
Stockholders' Equity:
Common stock, 200,000,000 shares authorized; 77,695,124
and 75,395,998 shares issued and outstanding at January
24, 1999 and January 25, 1998, respectively............ 687.3 661.0
Deferred compensation and officer receivables............... (7.7) (6.3)
Accumulated other comprehensive income...................... (0.9) (0.9)
Retained earnings (accumulated deficit)..................... 36.4 (55.7)
-------- --------
Total Stockholders' Equity........................... 715.1 598.1
-------- --------
$1,766.6 $1,534.9
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
18
<PAGE> 20
BORDERS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 24, JANUARY 25, JANUARY 26,
1999 1998 1997
(DOLLARS IN MILLIONS) ----------- ----------- -----------
<S> <C> <C> <C>
Cash Provided by (used for):
Operations
Net income................................................ $ 92.1 $ 80.2 $ 57.9
Adjustments to reconcile net income to operating cash
flows:
Depreciation and amortization.......................... 66.7 54.8 42.9
(Increase) decrease in deferred income taxes........... 10.2 3.9 (6.4)
Increase (decrease) in other long-term assets and
liabilities.......................................... 1.9 2.3 (2.8)
Cash provided by (used for) current assets and current
liabilities:
Increase in inventories................................ (140.5) (130.4) (100.0)
Increase in accounts payable........................... 126.5 121.9 45.3
Increase in taxes payable.............................. 2.9 12.0 44.2
Other -- net........................................... 6.4 2.3 19.9
------- ------- -------
Net cash provided by operations........................ 166.2 147.0 101.0
------- ------- -------
Investing
Capital expenditures...................................... (179.8) (113.6) (97.2)
Proceeds from sale of property and equipment.............. -- -- 4.7
Acquisitions.............................................. -- (61.4) --
Other..................................................... -- -- (0.4)
------- ------- -------
Net cash used for investing............................ (179.8) (175.0) (92.9)
------- ------- -------
Financing
Repayment of long-term debt and capital lease
obligations............................................ (4.6) (0.9) (2.0)
Increase in capital lease obligations..................... 3.0 -- --
Proceeds from sale of put options......................... -- -- 4.5
Repurchase of put option.................................. -- (0.8) --
Proceeds from construction funding........................ 1.3 6.8 19.8
Net funding from (to) credit facility..................... 9.4 85.8 (30.0)
Issuance of common stock.................................. 33.9 21.4 5.7
Repurchase of common stock................................ (51.7) (61.8) --
------- ------- -------
Net cash provided by (used for) financing.............. (8.7) 50.5 (2.0)
------- ------- -------
Net increase (decrease) in cash and equivalents............. (22.3) 22.5 6.1
Cash and equivalents at beginning of year................... 65.1 42.6 36.5
------- ------- -------
Cash and equivalents at end of year......................... $ 42.8 $ 65.1 $ 42.6
======= ======= =======
Supplemental Cash Flow Disclosures:
Interest paid............................................. $ 16.2 $ 9.8 $ 9.8
Income taxes paid......................................... $ 42.1 $ 40.0 $ 5.9
Common stock issued for business acquisition.............. -- $ 6.5 --
Debt and liabilities assumed in business acquisition...... -- $ 26.9 --
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
19
<PAGE> 21
BORDERS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFERRED ACCUMULATED RETAINED
COMMON STOCK COMPENSATION OTHER EARNINGS
-------------------- AND OFFICER COMPREHENSIVE (ACCUMULATED
SHARES AMOUNT RECEIVABLES INCOME DEFICIT) TOTAL
------ ------ ------------ ------------- ------------ -----
(DOLLARS IN MILLIONS EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 28, 1996....... 75,317,984 $ 669.2 $(3.4) $ -- $(193.8) $472.0
---------- ------- ----- ----- ------- ------
Net income........................ -- -- -- -- 57.9 57.9
Issuance of Common Stock.......... 540,032 5.8 -- -- -- 5.8
Tax benefit of equity
compensation.................... -- 2.7 -- -- -- 2.7
Issuance of put options:
Receipt of premium.............. -- 4.5 -- -- -- 4.5
Shares subject to repurchase.... -- (34.1) -- -- -- (34.1)
Change in receivables and deferred
Compensation.................... -- -- 2.6 -- -- 2.6
---------- ------- ----- ----- ------- ------
Balance at January 26, 1997....... 75,858,016 $ 648.1 $(0.8) $ -- $(135.9) $511.4
---------- ------- ----- ----- ------- ------
Net income........................ -- -- -- -- 80.2 80.2
Foreign currency translation
adjustments..................... -- -- -- (1.4) -- (1.4)
Related tax effect................ -- -- -- 0.5 -- 0.5
Comprehensive income 79.3
Issuance of common stock.......... 1,916,844 29.4 (5.5) -- -- 23.9
Repurchase and retirement of
Common Stock.................... (2,518,800) (61.8) -- -- -- (61.8)
Tax benefit of equity
compensation.................... -- 5.5 -- -- -- 5.5
Cancellation of put options:
Payment of premium.............. -- (0.8) -- -- -- (0.8)
Shares subject to repurchase.... -- 34.1 -- -- -- 34.1
Acquisition....................... 139,938 6.5 -- -- -- 6.5
---------- ------- ----- ----- ------- ------
Balance at January 25, 1998....... 75,395,998 $ 661.0 $(6.3) $(0.9) $ (55.7) $598.1
---------- ------- ----- ----- ------- ------
Net income........................ -- -- -- -- 92.1 92.1
Issuance of Common Stock.......... 4,171,059 38.3 (6.6) -- -- 31.7
Repurchase and retirement of
Common Stock.................... (1,871,933) (51.7) -- -- -- (51.7)
Tax benefit of equity
compensation.................... -- 39.7 -- -- -- 39.7
Change in receivables and deferred
Compensation.................... -- -- 5.2 -- -- 5.2
---------- ------- ----- ----- ------- ------
Balance at January 24, 1999....... 77,695,124 $ 687.3 $(7.7) $(0.9) $ 36.4 $715.1
========== ======= ===== ===== ======= ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
20
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: Borders Group, Inc. (the Company), through its
subsidiaries, operates book and music superstores, mall-based bookstores and
other bookstores in the United States, United Kingdom, Singapore and Australia.
The Company, through its subsidiary Borders Online, Inc., is also an online
retailer of books, music, and video through the operation of its Internet
commerce site, Borders.com. The Company owns all of the outstanding stock of
Borders, Inc. (Borders), Walden Book Company, Inc. (Walden), Books etc. and
Borders Online, Inc.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and all majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fiscal Year: The Company's fiscal year ends on the Sunday immediately
preceding the last Wednesday in January. Fiscal 1998, 1997, and 1996 consisted
of 52 weeks and ended on January 24, 1999, January 25, 1998, and January 26,
1997, respectively.
Cash and Equivalents: Cash and equivalents include short-term investments
with original maturities of 90 days or less.
Inventories: Merchandise inventories are valued on a first-in, first-out
(FIFO) basis at the lower of cost or market using the retail inventory method.
The Company includes certain distribution and other expenses in its inventory
costs.
Property and Equipment: Property and equipment are recorded at cost,
including capitalized interest, and depreciated over their estimated useful
lives on a straight-line basis for financial statement purposes and on
accelerated methods for income tax purposes. Most store properties are leased
and improvements are amortized over the term of the lease, generally over 5 to
20 years. Other annual rates used in computing depreciation for financial
statement purposes are 2% to 3% for buildings and 10% to 20% for other fixtures
and equipment. Amortization of assets under capital lease is included in
depreciation expense.
Goodwill: Goodwill is amortized over 40 years on a straight-line basis. The
Company evaluates the recoverability of goodwill using a fair value methodology
on a quarterly basis. This methodology is applied to Borders and Books etc.
separately (the businesses for which the Company has recorded goodwill). In
determining the fair value, the median price/earnings (P/E) multiple for similar
growth retail companies is calculated based upon actual quoted market prices per
share and analysts' consensus earnings estimates for these growth companies.
This P/E multiple is applied to the earnings for Borders and Books etc. to
arrive at an overall fair value of the respective companies. The Company
evaluates any indicated impairment as temporary or permanent, and records
appropriate charges (if any) to operations for permanent impairments in fair
value.
Financial Instruments: The recorded values of the Company's financial
instruments, which include accounts receivable and accounts payable, approximate
their fair values.
The Company has entered into interest rate swap and collar agreements to
reduce the impact of changes in interest rates on its variable-rate debt. The
net cash amounts paid or received by the Company resulting from these agreements
are recognized as an adjustment to interest expense in the period to which the
amounts paid or received relate.
Pre-Opening and Closing Costs: Costs associated with the opening of a new
store are expensed during the first full fiscal month of the store's operations.
When the decision to close a store is made, the Company provides for the future
net lease obligation, nonrecoverable investment in fixed assets and other
expenses directly related to discontinuance of operations.
21
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
Preferred Reader Program: Walden sells memberships in its Preferred Reader
Program, which offers members discounts on purchases and other benefits.
Membership fees are deferred and recognized over the 12-month membership period.
Equity-Based Compensation: The Company accounts for equity-based
compensation under the guidance of APB No. 25. See Note 10 for discussion of the
pro forma net income calculated under FAS 123.
New Accounting Guidance: In June 1998, the Financial Accounting Standards
Board issued Statement No. 133, "Accounting For Derivative Instruments and
Hedging Activities (FAS 133), which the Company is required to adopt effective
January 24, 2000. Changes in derivative fair values will either be recognized in
earnings as offsets to the changes in fair value of related hedged assets,
liabilities and firm commitments or, for forecasted transactions, deferred and
recorded as a component of other stockholders' equity until the hedged
transactions occur and are recognized in earnings. The ineffective portion of a
hedging derivative's change in fair value will be immediately recognized in
earnings. The Company does not believe the effect of adopting FAS 133 will be
material to its financial position.
Reclassifications: Certain prior year amounts have been reclassified to
conform to fiscal 1998 presentation.
NOTE 2 -- WEIGHTED AVERAGE SHARES OUTSTANDING
Weighted average shares outstanding are calculated as follows (thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted-average common shares outstanding -- basic
earnings per share................................. 76,631 75,825 75,575
Dilutive effect of employee stock options............ 5,872 6,416 6,979
------ ------ ------
Weighted-average common shares outstanding -- diluted
earnings per share................................. 82,503 82,241 82,554
====== ====== ======
</TABLE>
NOTE 3 -- ACQUISITION
Effective October 20, 1997, the Company purchased 100% of the outstanding
stock of Books etc., a London-based retailer of books and associated products
for a purchase price of $71.1, allocated primarily to fixed assets, inventory
and goodwill of $64.1. At the time of acquisition, Books etc. operated 23 stores
in the United Kingdom. The acquisition has been accounted for as a purchase.
This transaction did not have a material impact on earnings in 1997.
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Property and equipment:
Land...................................................... $ 10.2 $ 10.2
Buildings................................................. 5.7 5.7
Leasehold improvements.................................... 251.9 214.4
Furniture and fixtures.................................... 507.6 404.3
Construction in progress.................................. 50.0 20.6
------- -------
825.4 655.2
Less -- accumulated depreciation and amortization........... (331.6) (281.5)
------- -------
Property and equipment, net................................. $ 493.8 $ 373.7
======= =======
</TABLE>
22
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
NOTE 5 -- INCOME TAXES
The income tax provision consists of:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal................................................... $40.9 $42.7 $39.5
State and local........................................... 7.9 4.3 4.9
Foreign................................................... -- 0.4 --
Deferred:
Restructuring reserve..................................... 0.8 0.6 2.1
FAS 121 impairment........................................ 2.0 2.7 4.4
Deferred compensation..................................... 1.5 (2.5) (1.0)
Differences in book and tax depreciation.................. 7.1 5.1 1.9
Inventory valuation differences........................... (0.6) (2.3) (4.1)
Other..................................................... (0.6) (0.4) (9.5)
----- ----- -----
Total income tax provision................................ $59.0 $50.6 $38.2
===== ===== =====
</TABLE>
A reconciliation of the federal statutory rate to the Company's effective
tax rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate...................................... $52.9 $45.8 $33.3
State and local taxes, net of federal tax benefit........... 5.2 3.5 3.0
Goodwill amortization....................................... 0.4 0.4 0.4
Other....................................................... 0.5 0.9 1.5
----- ----- -----
Total income tax provision.................................. $59.0 $50.6 $38.2
===== ===== =====
</TABLE>
Deferred tax assets and liabilities resulted from the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Federal benefit for state deferred taxes.................. $ 1.6 $ 2.0
Accruals and other current liabilities.................... 11.2 13.9
Restructuring reserve..................................... 0.3 1.1
Deferred revenue.......................................... 7.0 7.0
Other long-term liabilities............................... 2.7 2.0
Deferred compensation..................................... 7.4 8.9
Deferred rent............................................. 16.8 14.2
FAS 121 impairment........................................ 7.9 9.9
----- -----
Total deferred tax assets................................. 54.9 59.0
----- -----
Deferred tax liabilities:
Inventory................................................. 8.6 9.2
Property and equipment.................................... 26.5 19.4
Other..................................................... 3.4 3.8
----- -----
Total deferred tax liabilities............................ 38.5 32.4
----- -----
Net deferred tax assets..................................... $16.4 $26.6
===== =====
</TABLE>
23
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
There are various claims, lawsuits and actions pending against the Company
and its subsidiaries that are incident to their operations. It is the opinion of
management that the ultimate resolution of these matters will not have a
material effect on the Company's liquidity, financial position or results of
operations.
During 1994, the Company entered into agreements in which leases with
respect to four Borders' locations serve as collateral for certain mortgage
pass-through certificates. These mortgage pass-through certificates include a
provision requiring the Company to repurchase the underlying mortgage notes in
certain events, including the failure by the Company to make payments of rent
under the related leases, the failure by Kmart Corporation to maintain required
investment grade ratings or the termination of the guarantee by Kmart
Corporation of the Company's obligations under the related leases (which would
require the mutual consent of Kmart Corporation and Borders). In the event the
Company is required to repurchase all of the underlying mortgage notes, the
Company would be obligated to pay approximately $36.6. Since February 1995,
Kmart Corporation has failed to maintain investment grade ratings and,
therefore, these notes are now subject to put by the holder. To date, the holder
has not exercised its rights to put the notes.
During December 1996, the Company sold two million put options on the
Company's common stock which had exercise prices of $16.75-$17.25 per share and
expired on various dates between March 16, 1998 and April 15, 1998. The Company
received proceeds of $4.5 upon sale of the puts. During 1997, all two million
put options were repurchased from the holders for $0.8.
In March 1998, the American Booksellers Association ("ABA") and twenty-six
independent bookstores filed a lawsuit in the United States District Court for
the Northern District of California against the Company and Barnes & Noble Inc.
alleging violations of the Robinson-Patman Act, the California Unfair Trade
Practice Act and the California Unfair Competition Law. The Complaint seeks
injunctive and declaratory relief; unspecified treble damages on behalf of each
of the bookstore plaintiffs, and with respect to the California bookstore
plaintiffs, any other damages permitted by California law; disgorgement of
money, property and gains wrongfully obtained in connection with the purchase of
books for resale, or offered for resale, in California from March 18, 1994 until
the action is completed and prejudgment interest on any amounts awarded in the
action, as well as attorney fees and costs. The Company intends to vigorously
defend the action.
In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace Kuralt,
filed a lawsuit in the United States District Court for the Southern District of
New York against the Company, Barnes & Noble, Inc., Amazon, Inc., certain
publishers and others alleging violation of the Robinson-Patman Act and other
federal law, New York statutes governing trade practices and common law. An
Amended Complaint was subsequently filed eliminating the class action
allegations contained in the original Complaint. The Amended Complaint alleges
that the named plaintiffs have suffered damages of $11.3 or more and requests
treble damages on behalf of the named plaintiffs, as well as of injunctive and
declaratory relief (including an injunction requiring the closure of all of
defendants' stores within 10 miles of any location where plaintiff either has or
had a retail bookstore during the four years preceding the filing of the
Complaint, and prohibiting the opening by defendants of any bookstore in such
areas for the next 10 years), disgorgement of alleged discriminatory discounts,
rebates, deductions and payments, punitive damages, interest, costs, attorneys
fees and other relief. Many of the allegations in the Amended Complaint are
similar to those contained in the action instituted by the ABA and 26 bookseller
plaintiffs against the Company and Barnes & Noble, Inc. in March of 1998. The
Company intends to vigorously defend the action.
On November 20, 1998, six independent booksellers instituted an action
against the Company and Barnes & Noble, Inc., in the United States District
Court for the Northern District of California asserting claims, and seeking
relief, similar to claims made and relief sought in the ABA litigation described
above. The Company intends to vigorously defend the action.
The Company has not included any liability in its financial statements in
connection with the lawsuits described above.
24
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
NOTE 7 -- DEBT
The Company has a $425.0 multicurrency credit agreement (the Credit
Facility) which expires in October, 2002. Borrowings under the Credit Facility
bear interest at a base rate or an increment over LIBOR at the Company's option.
The Credit Facility contains operating covenants which limit the Company's
ability to incur indebtedness, make acquisitions, dispose of assets, issue or
repurchase its common stock in excess of $100.0 (plus any proceeds and tax
benefits resulting from stock option exercises and tax benefits resulting from
restricted shares purchased by employees from the Company), pay dividends on its
common stock, and require the Company to meet certain financial measures
regarding fixed charge coverage, leverage and tangible net worth. The Company
had borrowings outstanding under the Credit Facility of $131.9 at January 24,
1999 and $122.5 at January 25, 1998. The weighted average interest rate in 1998
and 1997 was approximately 6.4% and 6.3%, respectively.
The Company's long-term debt obligations consist of capital lease
liabilities at January 24, 1999. Scheduled principal payments and capitalized
lease obligations as of January 24, 1999 are as follows: 1999 -- $1.9; 2000 --
$1.8; 2001 -- $0.3; 2002 -- $0.3; 2003 -- $0.3; 2004 and, thereafter, -- $4.1.
NOTE 8 -- LEASES
Operating Leases: The Company conducts operations primarily in leased
facilities. Store leases are generally for terms of 5 to 20 years. Borders'
leases generally contain multiple three to five-year renewal options which allow
Borders the option to extend the life of the leases up to 25 years beyond the
initial noncancellable term. Walden's leases generally do not contain renewal
options. Certain leases provide for additional rental payments based on a
percentage of sales in excess of a specified base. Also, certain leases provide
for the payment by the Company of executory costs (taxes, maintenance and
insurance).
Lease Commitments: Future minimum lease payments under operating leases at
January 24, 1999 total $222.5 in 1999, $218.8 in 2000, $213.1 in 2001, $203.1 in
2002, $184.4 in 2003, $1,616.2 in all later years and, in the aggregate, total
$2,658.1.
Rental Expenses: A summary of operating lease rental expense and short-term
rentals follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Rental Expenses:
Minimum rentals..................................... $222.3 $190.3 $163.8
Percentage rentals.................................. 2.3 2.7 3.3
------ ------ ------
Total............................................ $224.6 $193.0 $167.1
====== ====== ======
</TABLE>
Capitalized Leases: The Company accounts for one store and certain computer
equipment under capital leases. At January 24, 1999, the Company's commitments
under leases accounted for as capital leases aggregated $8.7.
Lease Financing Facility: The Company has a $250.0 lease financing facility
(the Lease Facility) to finance new stores and other property through operating
leases, which expires in October, 2002. The Lease Facility provides financing to
lessors through loans from a third party lender for up to 95% of a project cost.
It is expected that Lessors will make equity contributions approximating 5% of
each project. Independent of its obligations as lessee, the Company guarantees
payment when due of all amounts required to be paid to the third party lender.
The principal amount guaranteed is limited to approximately 89% of the original
cost of a project so long as the Company is not in default under the lease
relating to such project. There was $123.9 and $157.9 outstanding under the
Lease Facility at January 24, 1999 and January 25, 1998, respectively. In
December, 1998, 17 properties previously financed through the Lease Facility
with a total financed value of $70.9 were permanently financed through operating
leases.
25
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
NOTE 9 -- EMPLOYEE BENEFIT PLANS
Employee Savings Plan: Employees of Borders who meet certain requirements
as to age and service are eligible to participate in the Company's Savings Plan.
The Company's expense related to this plan was $2.5, $2.5 and $2.8 for 1998,
1997 and 1996, respectively.
NOTE 10 -- STOCK-BASED BENEFIT PLANS
Stock Option Plans: The Company has various stock option plans pursuant to
which the Company may grant options to purchase its common stock. The exercise
price of options granted under these plans will generally not be less than the
fair value per share of the Company's common stock at the date of grant with
vesting periods up to six years from grant date and maximum option terms up to
ten years from grant date. At January 24, 1999, the Company has 32.5 million
shares authorized for the grant of stock options under these plans.
The Company has established a compensation philosophy that is designed to
foster a performance-oriented ownership culture. The stock option plans are an
integral part of the Company's employee ownership culture and compensation
program. Options have been granted under the plans to all full-time employees of
the Company and its subsidiaries with 30 days or more of service, consisting of
approximately 16,000 employees. The Company's executive compensation is heavily
oriented toward equity incentives that includes a combination of stock and
options which require at least some annual out-of-pocket investment in the
business on the part of management. Restrictions on the equity incentives
promote a long-term focus on the part of management and maximize retention of
personnel. Management believes the equity incentives have been integral to its
success in meeting operating objectives and reducing employee turnover.
Stock Purchase Plans: The Company has a management stock purchase plan (the
Management Plan) and an employee stock purchase plan (the Employee Plan). Under
the Management Plan, the Company's senior management personnel are required to
use 20%, and may use up to 100%, of their annual incentive bonuses to purchase
restricted shares of the Company's common stock, at a 20% discount from the fair
value of the same number of unrestricted shares of common stock. Restricted
shares of common stock purchased under the Management Plan will generally be
restricted from sale or transfer for three years from date of purchase. The
Employee Plan allows the Company's associates not covered under the Management
Plan to purchase shares of the Company's common stock at a 15% discount from
their fair market value.
The Company recognizes compensation expense for the discount on restricted
shares of common stock purchased under the Management Plan. Such discounts are
recognized as expense on a straight-line basis over the three-year period during
which the shares are restricted from sale or transfer. The Company is not
required to record compensation expense with respect to shares purchased under
the Employee Plan.
26
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
A summary of the information relative to the Company's stock option plans
follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
(NUMBER OF SHARES
IN THOUSANDS)
<S> <C> <C>
STOCK OPTIONS
Outstanding at January 28, 1996............................. 14,704 $ 7.25
Granted................................................... 3,361 16.00
Exercised................................................. 297 5.44
Forfeited................................................. 1,581 9.19
Outstanding at January 26, 1997............................. 16,187 8.92
Granted................................................... 8,304 27.99
Exercised................................................. 1,800 3.43
Forfeited................................................. 1,394 12.63
Outstanding at January 25, 1998............................. 21,297 16.58
Granted................................................... 3,549 27.17
Exercised................................................. 3,759 9.57
Forfeited................................................. 1,901 22.51
Outstanding at January 24, 1999............................. 19,186 19.36
Balance exercisable at:
January 26, 1997.......................................... 2,278 2.70
January 25, 1998.......................................... 2,791 9.51
January 24, 1999.......................................... 5,365 11.87
</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 $11.52, $12.27 and
$7.33 in 1998, 1997 and 1996, respectively.
As permitted, the Company has adopted the disclosure-only option of
Financial Accounting Standards Board Statement No. 123, "Accounting for Stock
Based Compensation" (FAS 123). The pro forma net income had the Company adopted
the fair-value accounting provisions of FAS 123 would have been $72.6, $69.0 and
$50.8 in 1998, 1997, and 1996 respectively. Pro forma diluted and basic earnings
per share would have been $0.88, $0.84 and $0.62 and $0.95, $0.91, and $0.67 in
1998, 1997 and 1996 respectively.
The Black-Scholes option valuation model was used to calculate the fair
market value of the options at the grant date for the purpose of disclosures
required by FAS 123. The following assumptions were used in the calculation:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk-Free Interest Rate.................................. 4.2-6.8% 5.5-6.8% 5.5-6.5%
Expected Life............................................ 3-10 years 2-10 years 2-10 years
Expected Volatility...................................... 33.3-40.7% 33.3-39.0% 33.3-40.0%
Expected Dividends....................................... 0% 0% 0%
</TABLE>
27
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
The following table summarizes the information regarding stock options
outstanding at January 24, 1999 (number of shares in thousands):
<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>
$ 3.06-$ 4.64 461 1.3 $ 4.22 461 $ 4.22
$ 6.86-$11.57 7,049 5.2 8.42 3,483 8.03
$14.25-$17.81 1,492 6.0 16.54 555 17.00
$18.63-$27.50 3,253 8.2 23.29 268 23.81
$28.56-$34.06 6,931 8.4 30.22 598 29.98
</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
1996.......................................... 48 $ 9.33 $11.67
1997.......................................... 923 18.09 22.62
1998.......................................... 68 19.52 24.40
Employee Plan
1996.......................................... 196 14.00 16.48
1997.......................................... 157 20.06 23.60
1998.......................................... 115 24.78 29.15
</TABLE>
NOTE 11 -- FINANCIAL INSTRUMENTS
The Company enters into interest rate swap and collar agreements to reduce
the impact of changes in interest rates on its variable-rate debt. The swap
agreements are contracts to exchange variable-rate for fixed-interest payments
periodically over the life of the agreements without the exchange of the
underlying notional amounts. The collar agreements are contracts to effectively
limit the variability of interest on a portion of the Company's variable-rate
debt. The notional amounts of these agreements are used to measure interest paid
or received and do not represent the amount of exposure to credit loss.
As of January 24, 1999 and January 25, 1998, the Company had the following
interest rate instruments in effect:
<TABLE>
<CAPTION>
JANUARY 24, 1999
----------------------------------------------------
FAIR
NOTIONAL STRIKE MARKET
AMOUNT RATE PERIOD VALUE
-------- ------ ------ ------
<S> <C> <C> <C> <C>
Interest Rate Swaps............... $ 33.1(a) 6.6% 9/98-9/03 $(2.1)
$ 33.1(a) 6.9% 9/98-9/03 $(1.6)
Interest Rate Collar.............. $100.0 4.1%-5.5% 1/99-12/00 $ 0.1
</TABLE>
---------------------------------------
(a) Notional amount is the U.S. Dollar equivalent of 20.0 British
Pounds. Replaced swaps outstanding at January 25, 1998
28
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
<TABLE>
<CAPTION>
JANUARY 25, 1998
-------------------------------------------------
FAIR
NOTIONAL STRIKE MARKET
AMOUNT RATE PERIOD VALUE
-------- ------ ------ ------
<S> <C> <C> <C> <C>
Interest Rate Swaps.................... $33.5(a) 7.2% 11/97-11/00 $(0.6)
$33.5(a) 7.1% 11/97-11/02 $(0.4)
Treasury Lock.......................... $50.0 5.5% 1/98- 8/98 $ 0.7
</TABLE>
---------------------------------------
(a) Notional amount is the U.S. Dollar equivalent of 20.0 British
Pounds
In the first month of fiscal 1999, the Company entered into an interest
rate swap with a notional amount of $175.0, which effectively converted variable
rate U.S. dollar-denominated borrowings to a fixed rate of 4.6%. This swap
agreement expires in 1 or 3 years from the date the Company entered into the
agreement, at the option of the counterparty.
NOTE 12 -- SEGMENT INFORMATION
The Company is organized based upon the following operating segments:
domestic Borders stores, international Borders and Books etc. stores, Walden
stores and online retailing through Borders.com. These operating segments have
been aggregated into two reporting segments: stores and Borders.com. Although
stores and Borders.com share a number of characteristics, such as the nature of
the merchandise sold, the methods of merchandise procurement used, and the type
of customer for the merchandise sold, they differ in their method of
distributing merchandise to customers.
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies." Segment data includes charges
allocating all corporate headquarters costs to each segment. The Company
evaluates the performance of its segments and allocates resources to them based
on anticipated future contribution.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales:
Stores.................................................... $2,590.4 $2,266.0 $1,958.8
Borders.com............................................... 4.6 -- --
-------- -------- --------
Total sales............................................... 2,595.0 2,266.0 1,958.8
======== ======== ========
Interest expense:
Stores.................................................... 13.5 6.9 7.0
Borders.com............................................... 2.7 0.3 --
-------- -------- --------
Total interest expense.................................... 16.2 7.2 7.0
======== ======== ========
Income tax expense (benefit):
Stores.................................................... 65.2 54.3 38.2
Borders.com............................................... (6.2) (3.7) --
-------- -------- --------
Total income tax expense.................................. 59.0 50.6 38.2
======== ======== ========
Depreciation and amortization expense:
Stores.................................................... 64.8 54.8 42.9
Borders.com............................................... 1.9 -- --
-------- -------- --------
Total depreciation and amortization expense............... 66.7 54.8 42.9
======== ======== ========
Net income (loss):
Stores.................................................... 102.6 86.2 57.9
Borders.com............................................... (10.5) (6.0) --
-------- -------- --------
Total net income.......................................... 92.1 80.2 57.9
======== ======== ========
</TABLE>
29
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA) (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Total assets:
Stores.................................................... $1,718.4 $1,509.4
Borders.com............................................... 48.2 25.5
-------- --------
Total assets.............................................. 1,766.6 1,534.9
======== ========
Capital expenditures:
Stores.................................................... 168.2 98.7
Borders.com............................................... 11.6 14.9
-------- --------
Total capital expenditures................................ 179.8 113.6
======== ========
</TABLE>
NOTE 13 -- UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL 1998 QUARTER ENDED
--------------------------------------
APRIL JULY OCTOBER JANUARY
----- ---- ------- -------
(DOLLARS IN MILLIONS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
SALES....................................................... $545.3 $546.0 $558.3 $945.4
Cost of merchandise sold (includes occupancy)............... 405.5 406.1 412.9 634.9
Operating Income............................................ 9.0 7.9 3.2 147.2
Net Income (loss)........................................... 3.8 2.4 (0.8) 86.7
Diluted earnings (loss) per common share.................... 0.05 0.03 (0.01) 1.06
Basic earnings (loss) per common share...................... 0.05 0.03 (0.01) 1.13
FISCAL 1997 QUARTER ENDED
--------------------------------------
APRIL JULY OCTOBER JANUARY
------ ------ ------- -------
SALES....................................................... $463.6 $466.3 $477.3 $858.8
Cost of merchandise sold (includes occupancy)............... 350.8 351.1 355.1 577.3
Operating Income............................................ 1.8 2.3 2.2 131.7
Net Income.................................................. 0.4 0.5 0.4 78.9
Diluted earnings per common share 0.00 0.01 0.00 0.96
Basic earnings per common share............................. 0.01 0.01 0.01 1.05
</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.
30
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Borders Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of
stockholders' equity present fairly, in all material respects, the financial
position of Borders Group, Inc. and its subsidiaries at January 24, 1999 and
January 25, 1998, and the results of their operations and their cash flows for
each of the three years in the period ended January 24, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Bloomfield Hills, Michigan
March 8, 1999
31
<PAGE> 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
32
<PAGE> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information regarding the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert F. DiRomualdo........... 54 Chairman, Chief Executive Officer, President and Director
George R. Mrkonic.............. 46 Vice Chairman and Director
Bruce A. Quinnell.............. 50 Vice Chairman
Vincent E. Altruda............. 49 President, International
Thomas D. Carney............... 52 Vice President, General Counsel and Secretary
Richard L. Flanagan............ 46 President, Borders Stores
Timothy J. Hopkins............. 45 President, Merchandising and Distribution
Richard D. Joseph.............. 42 Chairman and Chief Executive Officer, Borders (UK) Ltd.
Kenneth E. Scheve.............. 52 Senior Vice President, Chief Financial Officer and Treasurer
Ronald S. Staffieri............ 49 President, Waldenbooks Stores
Cedric J. Vanzura.............. 35 President, Borders Online, Inc.
Kathryn L. Winkelhaus.......... 43 President, Borders Group Stores
Peter R. Formanek.............. 55 Director
Victor L. Lund................. 51 Director
Dr. Edna Greene Medford........ 47 Director
Larry Pollock.................. 51 Director
Leonard A. Schlesinger......... 46 Director
</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 the
Chief Executive Officer of the Company until November, 1998, and became
President and Chief Executive Officer in April 1999. Prior to the formation of
the Company, Mr. DiRomualdo was President and Chief Executive Officer of Borders
from January 1989 to February 1994. From February 1994 to August 1994, Mr.
DiRomualdo was responsible for overall operations at Borders and Walden.
George R. Mrkonic has served as the Vice Chairman of the Company since
December 1994, and a Director since its formation in August 1994. He has also
served as President of the Company from December 1994 until January 1997. Prior
to joining the Company, Mr. Mrkonic served as Executive Vice President,
Specialty Retailing Group of Kmart Corporation, where he had overall
responsibility for the specialty retailing operations of Kmart including, among
others, Borders and Walden, from November 1990 to November 1994. Mr. Mrkonic is
also a director of Champion Enterprises, Inc., a manufacturer and seller of
manufactured homes and mid-sized buses and Syntel, Inc., a computer software and
development company, and Cheap Tickets, Inc., a retail seller of discount
tickets for domestic leisure air travel.
Bruce A. Quinnell has served as Vice Chairman of the Company since April
1999. Mr. Quinnell served as President and Chief Operating Officer of the
Company from February 1997 to April 1999. Mr. Quinnell served as President and
Chief Operating Officer of Walden from November 1994 to February 1997. From
January 1994 to November 1994, Mr. Quinnell held the position of Executive Vice
President and Chief Operating Officer of Walden. Prior to joining Walden, Mr.
Quinnell was Executive Vice President, Finance and Administration for PACE
Membership Warehouse, Inc., a former subsidiary of Kmart, from October 1992 to
January 1994. From September 1987 until October 1992, Mr. Quinnell was Chief
Financial Officer of Dollar General Corp., a general merchandise retailer.
33
<PAGE> 35
Vincent E. Altruda has served as President of the Company's international
operations since December, 1997. From February 1997 through December 1997, Mr.
Altruda served as Senior Vice President of Borders Store Development. From
February 1995 through February 1997, Mr. Altruda served as Senior Vice President
of Borders Store Operations. From December 1992 through February 1995, Mr.
Altruda served as Vice President of Borders Store Operations.
Thomas D. Carney has been Vice President, General Counsel and Secretary of
the Company since December 1994. For more than five years prior to joining the
Company, Mr. Carney was a Partner at the law firm of Dickinson, Wright, Moon,
Van Dusen & Freeman in Detroit, Michigan.
Richard L. Flanagan has served as President of Borders Stores since
February 1997. From February 1994 until February 1997, Mr. Flanagan served as
President and Chief Operating Officer of Borders. Prior thereto, Mr. Flanagan
served as Chief Financial Officer of Borders from April 1991 to February 1994.
From 1987 until April 1991, Mr. Flanagan was Vice President and Chief Financial
Officer of Ellwood Group, Inc., a steel manufacturer.
Timothy J. Hopkins has served as President of Merchandising and
Distribution since February 1997. From 1995 to February 1997, Mr. Hopkins served
as Sr. Vice President, Merchandising and Marketing for Walden. Prior to joining
the company, Mr. Hopkins served as Vice President, International and also Vice
President, Merchandising with QVC Network from 1992 through 1995.
Richard D. Joseph is the Chairman and Chief Executive Officer of Borders
(UK) Ltd. and served in executive positions with Books etc. since he co-founded
the company in 1981.
Kenneth E. Scheve has served as Senior Vice President, Chief Financial
Officer and Treasurer of Borders Group Inc. since February 1997. From 1994
through February 1997, Mr. Scheve served as Vice President, Finance for Walden.
Prior to joining the company, Mr. Scheve served as Director -- Internal Audit,
Specialty Retailing Group of Kmart Corporation from 1991 through 1994.
Ronald S. Staffieri has served as President of Waldenbooks Stores since
April 1999. Mr. Staffieri served as Chief Administrative Officer of the Company
from January 1998 to April 1999. From July 1997 to January 1998, Mr. Staffieri
served as President of Borders Outlet. Prior to joining the Company Mr.
Staffieri was President and Chief Executive Officer of Lil' Things, a chain of
children's superstores, from 1994 until January of 1997. From 1990 until 1994,
Mr. Staffieri served as President and Chief Executive Officer of Kaybee Toy
Stores, a division of Melville Corporation, and as a Vice President of Melville
Corporation and a member of its Operating Committee.
In June of 1997, Lil' Things filed a voluntary petition for reorganization
under Chapter 11 of the United States Bankruptcy Code and the business was
liquidated in December of 1997.
Cedric J. Vanzura has served as President of Borders Online, Inc. since
April 1999. Mr. Vanzura served as Senior Vice President of Electronic Commerce
and Fulfillment Services from February 1998 to April 1999. From August 1996 to
February 1998, Mr. Vanzura served as Vice President, Planning and Finance, and
Treasurer. From November 1994 until August 1996. Mr. Vanzura served as Vice
President, Group Planning and Resource Management. From May 1994 to November
1994, Mr. Vanzura held the position of Director, Business Development, Specialty
Retail Group of Kmart. Prior to joining Kmart, from 1990 to 1994, Mr. Vanzura
was a Senior Consultant and then a Manager, Management Consulting, at Deloitte &
Touche Management Consulting.
Kathryn L. Winkelhaus has served as President of Borders Group Stores since
April 1999. Ms. Winkelhaus served as President of Waldenbooks Stores from
February 1997 to April 1999. From 1992 through 1997, Ms. Winkelhaus served as
Sr. Vice President, Store Operations for Walden. Ms. Winkelhaus has held several
positions of increasing levels of responsibility in store operations since
joining Walden in 1979.
Peter R. Formanek has served as a director of the Company since August,
1995. Mr. Formanek was co-founder of Autozone Inc., a retailer of aftermarket
automotive parts, and served as President and Chief Operating Officer of
Autozone, Inc. from 1986 until his retirement in May, 1994. He currently is a
director of The Perrigo Company, a manufacturer of store brand over-the-counter
drug and personal care products and vitamins, and Gart Sports, Inc., a retailer
of sporting goods.
34
<PAGE> 36
Victor L. Lund has served as a director of the Company since July, 1997.
Mr. Lund has served as Chairman of the Board of American Stores Company, a food
and drug retailer, since June 1995 and as its Chief Executive Officer since
August 1992. He was President of American Stores Company from August 1992 until
June 1995. Mr. Lund also serves as a director of American Stores Company.
Dr. Edna Greene Medford became a director of the Company in September,
1998. Dr. Medford is an Associate Professor of History and a former Director of
the Undergraduate Program in History at Howard University.
Larry Pollock has served as a director of the Company since August, 1995.
Since September, 1998, Mr. Pollock has served as President and Chief Executive
Officer of HomePlace, Inc., a chain of home furnishings and housewares
superstores, which he joined in January of 1997 as Executive Vice President and
Chief Operating Officer. From 1994 until 1996, he served as the President, Chief
Operating Officer and a director of Zale Corporation, a jewelry retailer. From
1990 through 1993, Mr. Pollock served as President and Chief Operating Officer
of Karten's Jewelers, Inc., a New England jewelry chain. Mr. Pollock is a
partner of Independent Group L.P., a privately-held radio broadcasting company
based in Cleveland, Ohio.
In January of 1998, HomePlace, Inc. filed a voluntary petition in the
United States Bankruptcy Court for the District of Delaware for reorganization
under Chapter 11 of the Bankruptcy Code.
Leonard A. Schlesinger has served as a director of the Company since
August, 1995. Mr. Schlesinger became Senior Vice President for Development of
Brown University and a professor of sociology and public policy in October 1998.
Prior to joining Brown University, he served as a faculty member at the Harvard
Business School for more than five years, most recently as the George Fisher
Baker, Jr. Professor of Business Administration. Mr. Schlesinger serves as a
director of The Limited, Inc., a specialty retailer, Pegasystems, Inc., a
customer relationship management software company, and GC Companies, Inc., a
motion picture exhibition company.
Officers of the Company are elected on an annual basis and serve at the
discretion of the Board of Directors.
COMMITTEES
The Audit Committee was established for the purpose of reviewing and making
recommendations regarding the Company's employment of independent accountants,
the annual audit of the Company's financial statements and the Company's
internal controls, accounting practices and policies. The current members of the
Audit Committee are Mr. Lund and Dr. Medford.
The Compensation Committee was established for the purpose of making
recommendations to the Board of Directors regarding the nature and amount of
compensation for executive officers of the Company. The Compensation Committee
also administers certain of the Company's employee benefit plans. The current
members of the Compensation Committee are Mr. Formanek, Mr. Pollock, and Mr.
Schlesinger.
COMPENSATION OF DIRECTORS
For service as a director during 1998, each director who is not an employee
of the Company received 2,000 restricted shares of Common Stock (the "Restricted
Shares") paid at the beginning of the relevant calendar year, subject to a
maximum value of $75,000. The restrictions on such Restricted Shares will
generally lapse one year from the date of grant.
On the date of each of the Company's Annual Meetings, each eligible
director receives an option to purchase 5,000 shares of common stock of the
Company. The exercise price of options granted under the Plan is the fair market
value on the date of grant. To be eligible to receive option grants at the
Annual Meetings to be held in 1999 and thereafter, a director generally must
have held at least 20,000 shares of common stock, for the one-year period prior
to the date of the meeting.
Each option vests and becomes exercisable on the third anniversary of the
date of grant except that (i) an option is forfeited in its entirety if the
director ceases, at any time prior to his or her exercise of the option, to hold
the minimum number of shares that he or she was required to hold for the one
year period prior to the grant to be eligible therefor; (ii) all outstanding
options vest and become immediately exercisable in the event of a change in
35
<PAGE> 37
control of the Company, and (iii) all options held by a director who has served
as a director for six years or more vest and become immediately exercisable as
of the date upon which he or she ceases to serve as a director.
An option may be exercised only during the period that the optionee serves
as a director of the Company or within three months after termination of such
service and only if it is vested and has not expired at the time of termination.
However, if the director ceases to serve as such as a result of death or if the
individual has served as a director of the Company for more than 10 years, such
three month period is extended to three years.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by
reference to the information under the caption "Executive Compensation" in the
Proxy Statement for the Company's May 13, 1999 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated herein by
reference to the information under the heading "Beneficial Ownership of Common
Stock" in the Proxy Statement for the Company's May 13, 1999 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The information required by this Item 13 is incorporated herein by
reference to the information under the headings "Settlement Agreement" and
"Certain Transactions and Indebtedness of Management" in the Proxy Statement for
the Company's May 13, 1999 Annual Meeting of Stockholders.
36
<PAGE> 38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith unless otherwise indicated:
<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 Restated Articles of Incorporation of Borders Group, Inc.
3.3(6) Bylaws of Borders Group, Inc.
3.4 First Amendment to Bylaws of Borders Group, Inc.
3.5 Second Amendment to Bylaws of Borders Group, Inc.
3.6 Third Amendment to Bylaws of Borders Group, Inc.
10.1(1) Stockholder Agreement dated as of February 17, 1995, between
Borders Group, Inc. and Kmart Corporation.
10.2(5) Form of Severance Agreement.
10.3(6) Borders Group, Inc. Stock Option Plan.
10.4(8) First Amendment to the Borders Group, Inc. Stock Option
Plan.
10.5 Second Amendment to the Borders Group, Inc. Stock Option
Plan.
10.6 Third Amendment to the Borders Group, Inc. Stock Option
Plan.
10.7(3) Tax Allocation Agreement dated May 24, 1995 between Borders
Group, Inc. and Kmart Corporation.
10.8(3) Lease Guaranty Agreement dated May 24, 1995 between Borders
Group, Inc. and Kmart Corporation.
10.9(2) Borders Group, Inc. Management Stock Purchase Plan.
10.10(8) First Amendment to the Borders Group, Inc. Management Stock
Purchase Plan.
10.11(9) Second Amendment to the Borders Group, Inc. Management Stock
Purchase Plan.
10.12 Third Amendment to the Borders Group, Inc. Management Stock
Purchase Plan.
10.13(2) Borders Group, Inc. Employee Stock Purchase Plan.
10.14(4) First Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan.
10.15 Second Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan.
10.16 Third Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan.
10.17(6) Borders Group, Inc. Annual Incentive Bonus Plan.
10.18 First Amendment to the Borders Group, Inc. Annual Incentive
Plan.
10.19(2) Borders Group, Inc. Director Stock Plan.
10.20(9) First Amendment to the Borders Group, Inc. Director Stock
Plan.
10.21(9) Second Amendment to the Borders Group, Inc. Director Stock
Plan.
10.22(7) Amended and Restated Multicurrency Credit Agreement among
Borders Group, Inc., its subsidiaries and Parties thereto.
10.23(7) Amended and Restated Participation Agreement among Borders
Group, Inc., its subsidiaries and Parties thereto.
10.24(7) Appendix A to Participation Agreement among Borders Group,
Inc., its subsidiaries and Parties thereto.
10.25(7) Amended and Restated Credit Agreement among Borders Group,
Inc., its subsidiaries and Parties thereto.
10.26(7) Amended and Restated Guarantee Credit Agreement among
Borders Group, Inc., its subsidiaries and Parties thereto.
10.27(5) Agreement dated April 19, 1996, between Borders Group, Inc.
and Richard L. Flanagan.
</TABLE>
37
<PAGE> 39
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.28(5) Agreement dated April 19, 1996, between Borders Group, Inc.
and Bruce A. Quinnell.
10.29(10) Borders Group, Inc. Stock Option Plan for International
Employees.
10.30 1998 Borders Group, Inc. Stock Option Plan.
10.31 Agreement dated November 16, 1998, between Borders Group,
Inc. and Robert F. DiRomualdo.
10.32 Agreement dated November 16, 1998, between Borders Group,
Inc. and George R. Mrkonic.
10.33 Agreement dated November 16, 1998, between Borders Group,
Inc. and Philip M. Pfeffer.
10.34 Participation Agreement dated as of December 1, 1998 by and
among Borders Group, Inc., Borders, Inc. and Parties
thereto.
10.35 Agreement dated April 20, 1999, between Borders Group, Inc.
and Philip M. Pfeffer.
18.1(3) Letter of PricewaterhouseCoopers LLP dated July 17, 1995.
21.1 Subsidiaries of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
99.1 Cautionary Statement under the Private Securities Litigation
Reform Act of 1995 -- "Safe Harbor" for Forward-Looking
Statements.
</TABLE>
- -------------------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-4 (File No. 33-90016).
(2) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-90918).
(3) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended April 23, 1995 (File No. 1-13740).
(4) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-80643).
(5) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 28, 1996 (File No. 1-13740).
(6) Incorporated by reference from the Company's Proxy Statement dated April 9,
1997 of Borders Group, Inc. (File No. 1-13740).
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended October 26, 1997 (File No. 1-13740).
(8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended October 22, 1995 (File No. 1-13740).
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 25, 1998 (File No. 1-13740).
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended July 26, 1998 (File No. 1-13740).
(b) Financial Statement Schedules:
All financial statement schedules are omitted as they are not applicable or
the required information is included in the consolidated financial statements of
the Registrant.
(c) Reports on Form 8-K:
One report was filed on Form 8-K under Item 5 -- Other Events which stated
the time and place of the Company's Annual Meeting of Stockholders. This report
was dated and filed on March 5, 1999 (File No. 1-13740).
38
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
BORDERS GROUP, INC.
(Registrant)
BY: /s/ ROBERT F. DIROMUALDO
------------------------------------
Robert F. DiRomualdo
Chairman, Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ ROBERT F. DIROMUALDO Chairman, Chief Executive Officer, April 26, 1999
- --------------------------------------------- President and Director
Robert F. DiRomualdo
/s/ GEORGE R. MRKONIC Vice Chairman and Director April 26, 1999
- ---------------------------------------------
George R. Mrkonic
/s/ KENNETH E. SCHEVE Senior Vice President, Chief April 26, 1999
- --------------------------------------------- Financial Officer and Treasurer
Kenneth E. Scheve (Principal Financial and Accounting
Officer)
/s/ PETER R. FORMANEK Director April 26, 1999
- ---------------------------------------------
Peter R. Formanek
/s/ VICTOR L. LUND Director April 26, 1999
- ---------------------------------------------
Victor L. Lund
/s/ DR. EDNA GREENE MEDFORD Director April 26, 1999
- ---------------------------------------------
Dr. Edna Greene Medford
/s/ LARRY POLLOCK Director April 26, 1999
- ---------------------------------------------
Larry Pollock
/s/ LEONARD A. SCHLESINGER Director April 26, 1999
- ---------------------------------------------
Leonard A. Schlesinger
</TABLE>
39
<PAGE> 41
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 Restated Articles of Incorporation of Borders Group, Inc.
3.3(6) Bylaws of Borders Group, Inc.
3.4 First Amendment to Bylaws of Borders Group, Inc.
3.5 Second Amendment to Bylaws of Borders Group, Inc.
3.6 Third Amendment to Bylaws of Borders Group, Inc.
10.1(1) Stockholder Agreement dated as of February 17, 1995, between
Borders Group, Inc. and Kmart Corporation.
10.2(5) Form of Severance Agreement.
10.3(6) Borders Group, Inc. Stock Option Plan.
10.4(8) First Amendment to the Borders Group, Inc. Stock Option
Plan.
10.5 Second Amendment to the Borders Group, Inc. Stock Option
Plan.
10.6 Third Amendment to the Borders Group, Inc. Stock Option
Plan.
10.7(3) Tax Allocation Agreement dated May 24, 1995 between Borders
Group, Inc. and Kmart Corporation.
10.8(3) Lease Guaranty Agreement dated May 24, 1995 between Borders
Group, Inc. and Kmart Corporation.
10.9(2) Borders Group, Inc. Management Stock Purchase Plan.
10.10(8) First Amendment to the Borders Group, Inc. Management Stock
Purchase Plan.
10.11(9) Second Amendment to the Borders Group, Inc. Management Stock
Purchase Plan.
10.12 Third Amendment to the Borders Group, Inc. Management Stock
Purchase Plan.
10.13(2) Borders Group, Inc. Employee Stock Purchase Plan.
10.14(4) First Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan.
10.15 Second Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan.
10.16 Third Amendment to the Borders Group, Inc. Employee Stock
Purchase Plan.
10.17(6) Borders Group, Inc. Annual Incentive Bonus Plan.
10.18 First Amendment to the Borders Group, Inc. Annual Incentive
Plan.
10.19(2) Borders Group, Inc. Director Stock Plan.
10.20(9) First Amendment to the Borders Group, Inc. Director Stock
Plan.
10.21(9) Second Amendment to the Borders Group, Inc. Director Stock
Plan.
10.22(7) Amended and Restated Multicurrency Credit Agreement among
Borders Group, Inc., its subsidiaries and Parties thereto.
10.23(7) Amended and Restated Participation Agreement among Borders
Group, Inc., its subsidiaries and Parties thereto.
10.24(7) Appendix A to Participation Agreement among Borders Group,
Inc., its subsidiaries and Parties thereto.
10.25(7) Amended and Restated Credit Agreement among Borders Group,
Inc., its subsidiaries and Parties thereto.
10.26(7) Amended and Restated Guarantee Credit Agreement among
Borders Group, Inc., its subsidiaries and Parties thereto.
10.27(5) Agreement dated April 19, 1996, between Borders Group, Inc.
and Richard L. Flanagan.
10.28(5) Agreement dated April 19, 1996, between Borders Group, Inc.
and Bruce A. Quinnell.
10.29(10) Borders Group, Inc. Stock Option Plan for International
Employees.
</TABLE>
40
<PAGE> 42
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.30 1998 Borders Group, Inc. Stock Option Plan.
10.31 Agreement dated November 16, 1998, between Borders Group,
Inc. and Robert F. DiRomualdo.
10.32 Agreement dated November 16, 1998, between Borders Group,
Inc. and George R. Mrkonic.
10.33 Agreement dated November 16, 1998, between Borders Group,
Inc. and Philip M. Pfeffer.
10.34 Participation Agreement dated as of December 1, 1998 by and
among Borders Group, Inc., Borders, Inc. and Parties
thereto.
10.35 Agreement dated April 20, 1999, between Borders Group, Inc.
and Philip M. Pfeffer.
18.1(3) Letter of PricewaterhouseCoopers LLP dated July 17, 1995.
21.1 Subsidiaries of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
99.1 Cautionary Statement under the Private Securities Litigation
Reform Act of 1995 -- "Safe Harbor" for Forward-Looking
Statements.
</TABLE>
- -------------------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-4 (File No. 33-90016).
(2) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-90918).
(3) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended April 23, 1995 (File No. 1-13740).
(4) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-80643).
(5) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 28, 1996 (File No. 1-13740).
(6) Incorporated by reference from the Company's Proxy Statement dated April 9,
1997 of Borders Group, Inc. (File No. 1-13740).
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended October 26, 1997 (File No. 1-13740).
(8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended October 22, 1995 (File No. 1-13740).
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 25, 1998 (File No. 1-13740).
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended July 26, 1998 (File No. 1-13740).
(b) Financial Statement Schedules:
All financial statement schedules are omitted as they are not applicable or
the required information is included in the consolidated financial statements of
the Registrant.
(c) Reports on Form 8-K:
One report was filed on Form 8-K under Item 5 -- Other Events which stated
the time and place of the Company's Annual Meeting of Stockholders. This report
was dated and filed on March 5, 1999 (File No. 1-13740).
41
<PAGE> 1
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
Pursuant to the provisions of Act 284, Public Acts of 1972, the
undersigned corporation executes the following Articles:
- --------------------------------------------------------------------------------
1. The present name of the corporation is: Michigan Borders Group, Inc.
2. The identification number assigned by the Bureau is: 462-982
3. All former names of the corporation are: None
4. The date of filing the original Article of Incorporation was: April 3, 1997
- --------------------------------------------------------------------------------
The following Restated Articles of Incorporation supersede the Articles
of Incorporation as amended and shall be the Articles of Incorporation for the
corporation:
ARTICLE I
The name of the corporation is: Borders Group, Inc.
ARTICLE II
The purpose or purposes for which the corporation is formed is to
engage in any activity within the purposes for which corporations may be formed
under the Business Corporation Act of Michigan ("MCBA").
ARTICLE III
The total authorized shares:
Common shares: 300,000.000 Preferred shares: 10,000,000
A statement of all or any of the relative rights, preferences and limitations of
the shares of each class is as follows:
A. Common Stock
1. Voting Rights. Except as otherwise required by law or by the Articles
of Incorporation, each holder of Common Stock shall have one vote for
each share of Common Stock held by a holder on all matters voted upon
by the holders of Common Stock.
2. Dividends. Subject to the preferential dividend rights, if any,
applicable to shares of Preferred Stock and subject to applicable
requirements, if any; with respect to the setting aside of sums for
purchase, retirement or sinking funds for Preferred Stock, the holders
of Common Stock shall be entitled to receive, to the extent permitted
by law, such dividends as may be declared from time to time by the
Board of Directors in its discretion.
3. Liquidation Rights. In the event of any liquidation, dissolution or
winding up of the Corporation, the holders of Common Stock shall be
entitled, after payment or provision for payment of the debts and other
liabilities of the Corporation and the amounts to which the holders of
any Preferred Stock shall be entitled, to share ratably in the
remaining net assets of the Corporation.
-1-
<PAGE> 2
B. Preferred Stock
The Board of Directors is expressly authorized at any time, and from time to
time, to provide for the issuance of shares of Preferred Stock in one or
more series, and for such consideration or considerations as the Board
of Directors may determine, with such voting powers, full or limited, or
without voting powers, and with such designations, preferences and
relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, as shall be stated
and expressed in the resolution or resolutions providing for the issue
thereof adopted by the Board of Directors, all except as otherwise
required by law or the Articles of Incorporation, and including, without
limiting the generality of the foregoing, the following:
1. The distinctive designation and number of shares comprising such
series.
2. The dividend rate or rates on the shares of such series and the
relation which such dividends shall bear to the dividends payable on
any other class of capital stock or on any other series of Preferred
Stock, the terms and conditions upon which and the periods in respect
of which dividends shall be payable, whether and upon what conditions
such dividends shall be cumulative, and, if cumulative, the date or
dates from which dividends shall accumulate.
3. Whether the shares of such series shall be redeemable, and, if
redeemable, whether redeemable for cash, property or rights, including
securities of any other corporation, at the option of either the holder
or the Corporation or upon the happening of a specified event, the
limitations and restrictions with respect to such redemption, the time
or times when, the price or prices or rate or rates at which, the
adjustments with which and the manner in which such shares shall be
redeemable, including the manner of selecting shares of such series for
redemption if less than all shares are to be redeemed.
4. The rights to which the holders of shares of such series shall be
entitled, and the preferences, if any, over any other series (or of any
other series over such series), upon the voluntary or involuntary
liquidation, dissolution, distribution or winding up of the
Corporation, which rights may vary depending on whether such
liquidation, dissolution, distribution or winding up is voluntary or
involuntary, and, if voluntary, may vary at different dates.
5. Whether the shares of such series shall be subject to the operation of
a purchase, retirement or sinking fund, and, if so, whether and upon
what conditions such purchase, retirement or sinking fund shall be
cumulative or, noncumulative, the extent to which and the manner in
which such fund shall be applied to the purchase or redemption of the
shares of such series for retirement or to other corporate purposes and
the terms and provisions relative to the operation thereof.
6. Whether the shares of such series shall be convertible into or
exchangeable for shares of any other class or of any other series of
any class of capital stock or other securities of the Corporation, or
the securities of any other corporation, or entity, and, if so,
convertible or exchangeable, the price or prices or the rate or rates
of conversion or exchange and the method, if any, of adjusting the
same, and any other terms and conditions of such conversion or
exchange.
7. The voting powers, full and/or limited, if any, of the shares of such
series, and whether and under what conditions, the shares of such
series (alone or together with the shares of one or more other series)
shall be entitled to vote separately as a single class upon any matter,
including, without limitation, the election of one or more additional
directors of the Corporation in case of dividend arrearages or other
specified events.
8. Whether the issuance of any additional shares such series, or of any
shares of any other series, shall be subject to restrictions as to
issuance, or as to the powers, preferences or rights of any such other
series.
9. Any other preferences, privileges and powers and relative,
participating, optional or other special rights, and qualifications,
limitations or restrictions of such series, as the Board of Directors
may deem advisable and as shall not be inconsistent with the provisions
of the Articles of Incorporation.
-2-
<PAGE> 3
10. All shares of Preferred Stock of any one series shall be of equal rank
and identical in all respects, except that shares of any one series
issued at different times may differ as to the dates from which
dividends thereon, if cumulative, shall be cumulative.
C. General Provisions
1. No stockholder shall have any preemptive right to subscribe for
additional issues of stock of the Corporation.
2. Shares of any class or series of capital stock redeemed, converted,
exchanged, purchased, retired or surrendered to the Corporation, or
which have been issued and reacquired in any manner shall, upon
compliance with any applicable provisions of the MBCA, be given the
status of authorized and unissued shares of the same class undesignated
as to series.
ARTICLE IV
1 The address of the current registered office is:
500 East Washington Street Ann Arbor MICHIGAN 48104
2 The mailing address of the registered office, if different than above:
Same
3 The name of the resident agent at the registered office is: Thomas D.
Carney
ARTICLE V
The following provisions are inserted for the management of the business and the
conduct of the affairs of the Corporation, and for further definition,
limitation and regulation of the powers of the Corporation and of its directors
and stockholders:
(1) The business and affairs of the Corporation shall be managed by or under
the direction of the Board of Directors. In addition to the powers and authority
expressly conferred upon them by statute or by these Articles of Incorporation
or the By-laws of the Corporation, the directors are empowered to exercise all
such powers and do all such acts and things as may be exercised or done by the
Corporation, subject to the provisions of the MBCA, these Articles of
Incorporation and any By-laws adopted by the stockholders; provided, however,
that no By-laws hereafter adopted by the stockholders shall invalidate any prior
act of the directors that would have been valid if such By-laws had not been
adopted.
(2) (2) The number of directors of the Corporation shall be as from time to
time fixed by, or in the manner provided in, the By-laws of the Corporation. The
directors of the Corporation need not be elected by written ballot unless the
By-laws so provide.
(3) Special meetings of stockholders of the Corporation may be called only
by the Chief Executive Officer or by the Board of Directors acting pursuant to a
resolution adopted by a majority of the Whole Board. For purposes of these
Articles of Incorporation, the term "Whole Board" shall mean the exact number of
directors determined from time to time by resolution adopted by the affirmative
vote of a majority of the directors then in office.
(4) Meetings of stockholders may be held within or without the State of
Michigan, as the By-laws may provide. The books of the Corporation may be kept
(subject to any provision contained in the MBCA) outside the State of Michigan
at such place or places as may be designated from time to time by the Board of
Directors or in the By-laws of the Corporation.
-3-
<PAGE> 4
ARTICLE VI
The Board of Directors is expressly empowered to adopt, amend or repeal By-laws
of the Corporation. Any adoption, amendment or repeal of the By-laws of the
Corporation by the Board of Directors shall require the approval of a majority
of the Whole Board. The stockholders shall also have power to adopt, amend or
repeal the By-laws of the Corporation.
ARTICLE VII
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability for (i) any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) a violation of Section 551 (1) of the MBCA or (iv) any
transaction from which the director derived an improper personal benefit. If the
MBCA is amended to authorize corporate action further eliminating or limiting
the personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the MBCA, as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification with respect to acts or omissions occurring prior to such repeal
or modification.
ARTICLE VIII
1. The Corporation shall indemnify its directors and officers to the
fullest extent authorized or permitted by the MBCA, as the same exists or may
hereafter be amended, and such right to indemnification shall continue as to a
person who has ceased to be a director or officer of the Corporation and shall
inure to the benefit of his or her heirs, personal representatives, executors
and administrators; provided, however, that, except for proceedings to enforce
rights to indemnification, the Corporation shall not be obligated to indemnity
any director or officer (or his or her heirs, personal representatives,
executors or administrators) in connection with a proceeding (or part thereof)
initiated by such person unless such proceeding (or part thereof) was authorized
at consented to by the Board of Directors of the Corporation.
2. The right to indemnification conferred in this Article VIII shall
include the right to be paid by the Corporation the expenses (including
attorneys' fees) incurred in defending any such proceeding in advance of its
final disposition (hereinafter an "advancement of expenses"); provided, however,
that, if the MBCA requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a director or officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including without
limitation, service to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that such indemnitee is not entitled to be indemnified or such expenses
under this Article VIII or otherwise. The rights to indemnification and to the
advancement of expenses conferred in this Article VIII shall be contract rights
and such rights shall continue as to an indemnitee who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, personal representatives, executors and administrators.
3. The Corporation may, to the extent authorized from time to time by
the Board of Directors, provide rights to indemnification and to the advancement
of expenses to employees and agents of the Corporation who are not directors or
officers similar to those conferred in this Article VIII to directors and
officers of the Corporation.
4. The rights to indemnification and to the advancement of expenses
conferred in this Article VIII shall extend to the directors and officers of any
predecessor corporation to the Corporation and shall not be exclusive of any
other right which any person may have or hereafter acquire under the Articles of
Incorporation, the By-laws, any statute, agreement, vote of stockholders or
disinterested directors, or otherwise.
-4-
<PAGE> 5
5. Any repeal or modification, of this Article VIII by the stockholders
of the Corporation shall not adversely affect any rights to indemnification and
advancement of expenses of a director or officer of the Corporation existing
pursuant to this Article VIII with respect to any acts or omissions occurring
prior to such repeal or modification.
ARTICLE IX
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in these Articles of Incorporation, in the manner now or
hereafter prescribed by the laws of the State of Michigan and all rights
conferred upon stockholders herein are granted subject to this reservation.
ARTICLE X
The Corporation expressly elects not to be governed by Section 780 of
the MBCA as to business combinations with interested stockholders.
-5-
<PAGE> 1
EXHIBIT 3.4
CERTIFIED
AMENDMENT
TO
THE BY-LAWS
OF
BORDERS GROUP, INC.
The undersigned, the duly elected Secretary of Borders Group, Inc. (the
"Company"), hereby certifies that the second sentence of Section 1 of Article V
of the By-Laws of the Company was hereby amended on November 11, 1998 to read as
follows:
"The Board of Directors, in its discretion, also may choose a Chairman
of the Board (who must be a director), a Chief Executive Officer, a Vice
Chairman of the Board, and one or more Vice Presidents, Assistant Secretaries,
Assistant Treasurers and other officers."
/s/ Thomas D. Carney
---------------------------
Thomas D. Carney
Secretary
<PAGE> 1
EXHIBIT 3.5
CERTIFIED
SECOND AMENDMENT
TO
THE BY-LAWS
OF
BORDERS GROUP, INC.
The undersigned, the duly elected Secretary of Borders Group, Inc. (the
"Company") hereby certifies that Section 8 of Article II of the By-Laws has been
amended to read as set forth below and Section 9 of the Article II of the
By-Laws has been deleted, effective for meetings of stockholders after the 1999
Annual Meeting of Stockholders:
SECTION 8. Notice of Stockholder Business and Nominations.
(A) Annual Meetings of Stockholders. (1) Nominations of persons for
election to the Board of Directors of the Corporation and the proposal of
business to be considered by the stockholders may be made at an annual meeting
of stockholders (a) pursuant to the Corporation's notice of meeting, (b) by or
at the direction of the Board of Directors or (c) by any stockholder of the
Corporation who was a stockholder of record at the time of giving of notice
provided for in this By-Law, who is entitled to vote at the meeting and who
complied with the notice procedures set forth in this By-Law.
(2) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (c) of paragraph
(A)(1) of this By-Law, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation and such other business must be a
proper matter for stockholder action. To be timely, a stockholder's notice shall
be delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the 90th day nor earlier
than the close of business on the 120th day prior to the first anniversary of
the preceding year's annual meeting; provided, however, that in the event that
the date of the annual meeting is more than 30 days before or more than 60 days
after such anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the close of business on the 120th day prior to such
annual meeting and not later than the close of business on the later of the 90th
day prior to such annual meeting or the 10th day following the day on which
public announcement of the date of such meeting is first made. In no event shall
the public announcement of an adjournment of an annual meeting commence a new
time period for giving of a stockholder's notice as described above. Such
stockholder's notice shall set forth (a) as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors in an election contest, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); (b) as to any other
business that the stockholder proposes to bring before the meeting, a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and the beneficial owner,
<PAGE> 2
if any, on whose behalf the proposal is made; and (c) as to the stockholder
giving the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made (i) the name and address of such stockholder, as
they appear on the Corporation's books, and of such beneficial owner and (ii)
the class and number of shares of the Corporation which are owned beneficially
and of record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of
paragraph (A)(2) of this By-Law to the contrary, in the event that the number of
directors to be elected to the Board of Directors of the Corporation is
increased and there is no public announcement naming all the nominees for
director or specifying the size of the increased Board of Directors made by the
Corporation at least 100 days prior to the first anniversary of the preceding
year's annual meeting, a stockholder's notice required by this By-Law shall also
be considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the 10th day following the day on which such public announcement is
first made by the Corporation.
(B) Special Meetings of Stockholders. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which directors are to be elected pursuant to the
Corporation's notice of meeting (a) by or at the direction of the Board of
Directors or (b) by any stockholders for the Corporation who is a stockholder of
record at the time of giving of notice provided for in this By-Law, who shall be
entitled to vote at the meeting and who complies with the notice procedures set
forth in this By-Law. In the event the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to the Board of
Directors, any such stockholder may nominate a person or persons (as the case
may be), for election to such position(s) as specified in the Corporation's
notice of meeting, if the stockholder's notice required by paragraph (A)(2) of
this By-Law shall be delivered to the Secretary at the principal executive
offices of the Corporation not earlier than the close of business on the 120th
day prior to such special meeting and not later than the close of business on
the later of the 90th day prior to such special meeting or the 10th day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting. In no event shall the public announcement of an
adjournment of a special meeting commence a new time period for the giving of a
stockholder's notice as described above.
(C) General. (1) Only such persons who are nominated in accordance
with the procedures set forth in this By-Law shall be eligible to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this By-Law. Except as otherwise provided by law, [the Certificate
of Incorporation or the By-Laws of the Corporation,] the Chairman of the meeting
shall have the power and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made, or proposed, as the case may
be, in accordance with the procedures set forth in
<PAGE> 3
this By-Law and, if any proposed nomination or business in not in compliance
with this By-Law, to declare that such defective proposal or nomination shall be
disregarded.
(2) For purposes of this Law "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to
Section 13, 14, or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this By-Law,
a stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this By-Law. Nothing in this By-Law shall be deemed to affect any
rights of (i) stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or
(ii) the holders of any series of Preferred Stock to elect directors under
specified circumstances.
/s/ Thomas D. Carney
-------------------------------
Thomas D. Carney
Secretary
<PAGE> 1
EXHIBIT 3.6
CERTIFIED
THIRD AMENDMENT
TO
THE BY-LAWS
OF
BORDERS GROUP, INC.
The undersigned, the duly elected Secretary of Borders Group, Inc. (the
"Company"), hereby certifies that the second sentence of Section 1 of the
Article V of the By-Laws of the Company has been amended to read as follows:
"The Board of Directors, in its discretion, may also choose a Chairman
of the Board (who must be a director), one or more Vice Chairmen of the Board
(who need not be directors), and one or more Vice Presidents, Assistant
Secretaries, Assistant Treasurers and other officers."
/s/ Thomas D. Carney
----------------------------
Thomas D. Carney
Secretary
<PAGE> 1
EXHIBIT 10.5
SECOND AMENDMENT TO THE
BORDERS GROUP, INC.
STOCK OPTION PLAN
Section 5 (d) of the Borders Group, Inc. Stock Option Plan (the "Plan") is
hereby amended to read as follows effective as of the date hereof:
(d) Nontransferability. Except as otherwise provided in Section 4(g)(3) hereof,
no option or any rights with respect thereto shall be subject to any debts or
liabilities of an optionee, nor be assignable or transferable except by will or
the laws of descent and distribution, nor be exercisable during the optionee's
lifetime other than by him or her, nor shall Shares be issued to or in the name
of one other than the optionee; provided, however, that (i) an option may after
the death or Disability of an optionee be exercised pursuant to paragraph (iv)
of Section 5(b); (ii)any Shares issued to an optionee hereunder may at the
request of the optionee be issued in the name of the optionee and one other
person, as joint tenants with right of survivorship and not as tenants in
common, or in the name of a trust for the benefit of the optionee or for the
benefit of the optionee and others; and (iii) if so provided in a Share Option
Agreement executed by the optionee and approved by the Committee, the option and
rights covered by such Agreement may be transferred without consideration to an
immediate family member(s) or to a trust for the benefit of such family
member(s), in which event the transferee(s) must agree in writing to accept the
terms and conditions of such option and such option shall not be covered under
Rule 16(b)-3 of the Exchange Act.
BORDERS GROUP, INC.
December 13, 1995 By: /s/ George R. Mrkonic
-------------------------
George R. Mrkonic
<PAGE> 1
EXHIBIT 10.6
THIRD AMENDMENT TO THE
BORDERS GROUP INC.
STOCK OPTION PLAN
The Borders Group, Inc. Stock Option (the "Plan") is hereby amended as
follows effective as of the date hereof, subject to shareholder approval to the
extent provided in the Amendment:
1. The first three sentences of Section 3 of the Plan are hereby
replaced with the following:
"The number of Shares which shall be reserved for grant under
the Plan shall not exceed the sum of: (i) 22,000,000 Shares,
(ii) 5,850,000 Shares if the proposal relating to an increase
in number of shares available under the Plan for broad based
grants is approved by the shareholders of the Company at the
1997 Annual Meeting of Shareholders; and/or (iii) 1,750,000
Shares if the proposal relating to an increase of the number
of shares available for compensation replacement options is
approved by the shareholders of the Company at the 1997 Annual
Meeting of Shareholders of the Company. Any Shares described
in (iii) above that are not used for compensation replacement
options shall be available for other grants under the Plan.
The maximum number of Shares on which options may be granted
to any one individual during the term is 1,000,000, not
including grants made pursuant to paragraphs (d), (e), (f),
(g) and (h) of Section 4 and compensation replacement options.
All of the numbers set forth above are subject to adjustment
in accordance with the provisions of Section 6 hereof.
2. Consistent with the interpretation of the Plan by the
Compensation Committee, the word "key" in the third line
Section 4(a) is hereby amended to read "full-time".
Except as here and amended, the Plan shall remain in full force and
effect.
BORDERS GROUP, INC.
March 19, 1997 By: /s/ George R. Mrkonic
-----------------------------
George R. Mrkonic
<PAGE> 1
EXHIBIT 10.12
THIRD AMENDMENT TO THE
BORDERS GROUP, INC.
MANAGEMENT STOCK PURCHASE PLAN
The Borders Group Management Stock Purchase Plan (as amended, the
"Plan") is hereby amended in the following particulars, effective as of the
dates indicated:
1. Paragraph (u) of Article 2 of the Plan hereby amended to read
as follows, effective as of September 16, 1998:
"(u) "Stock Option Plan" shall mean the Borders Group, Inc. Stock
Option Plan, the Borders Group International Stock Option Plan or the 1998
Borders Group, Inc. Stock Option Plan, as determined by the Committee or its
delegate at the time that a Tandem Option is granted."
1. Paragraph (a) is of Article 16 of the Plan is hereby amended
for clarification purposes to read as follows, effective as of June 1, 1995
(August 28, 1997 with respect to references to director level employee):
(a) UP TO $1 MILLION PURCHASE. The Committee, or, to the
extent permitted by Article 4 hereof, the Chairman of the
Board and/or President, may grant a Participant who (i) is not
a Section 16 Person, and (ii) did not receive Management Stock
Purchase Options under the Stock Option Plan, an opportunity
or opportunities to use up to $1 million ($250,000 in the case
of director level employees) to purchase Restricted Shares
under this Plan. The price of Restricted Shares acquired under
this Article 16(a) shall be discounted 20% from its Fair
Market Value on the date of purchase, provided, however, that,
unless otherwise determined by the Committee or its delegate,
(A) with respect to a Participant who was recently hired at
the time that he or she was granted rights under this Article
16, the price shall be discounted 20% from its Fair Market
Value on the date that the Participant commenced employment,
and (B) with respect to a Participant who was recently
promoted at the time that he or she was granted rights under
this Article 16, the price shall be discounted 20% from its
Fair Market Value on the date that the Participant's promotion
was effective. The rights granted under this Section 16 shall
be granted only on a one time basis except that, (i) in the
event of the promotion of a director level employee to the
officer level, the Participant may be given an additional
opportunity to use up to the difference between $1,000,000 and
the amount that he or she previously used to purchase
Restricted Shares, to acquire additional Restricted Shares,
and (ii) if a Participant elects to purchase Restricted Shares
utilizing the proceeds of a Share Loan, and his or he
application for the Share Loan is rejected on the terms
initially requested, all elections
<PAGE> 2
made by such Participant shall be null and void and such
Participant shall not be precluded from receiving additional
rights under the Plan.
2. The first sentence of Paragraph (a) of Article 16 of the Plan
is hereby amended to read as follows, effective as of September 16, 1998:
"The Committee, or, to the extent permitted by Article 4
hereof, the Chairman of the Board and/or President, may grant
a Participant who did not receive Management Stock Purchase
Options under the Stock Option Plan, an opportunity or
opportunities to use up to $1 million ($250,000 in the case of
director level employees) to purchase Restricted Shares under
this Plan.
3. Clause (1) of paragraph (b) is of Article 16 of the Plan is
hereby amended for clarification purposes to read as follows, effective as of
June 1, 1995:
" (1) up to 100 percent of his or her Annual Bonus (less
applicable payroll deductions) for the year in which the
purchase occurs (or, with respect to newly hired or promoted
employees, the bonus or portions of bonuses attributable to
the twelve months following his or her hire or promotion date,
regardless of the year(s) in which such bonus or bonuses is or
are earned);"
4. The following paragraph (f) is hereby added to Article 16 of
the Plan, effective as of September 16, 1998:
(f) LOANS BY THE COMPANY TO PARTICIPANTS. The Company, in its
discretion, may make loans to Participants (a "Company Loan")
in amounts that do not exceed the lesser of: (i) the amount of
interest payable by the Participant with respect to any Share
Loan of the Participant, or (ii) an amount such that,
immediately after the proceeds of the Company Loan are used to
pay interest on the Share Loan, the total amount outstanding
under all Share Loans and Company Loans of the Participant
(including accrued interest, if any) shall not exceed 100% of
the then Fair Market Value of such Participant's Restricted
Shares on the date that the Company Loan is made. A Company
Loan shall become due and payable not later than the date upon
which the restrictions on the Participant's Restricted Shares
lapse, shall bear interest at the same rate as Share Loan to
which it relates and shall have such other terms and
conditions as the Company shall determine. The proceeds of any
Company Loan may be used only to pay interest on a Share Loan,
and the Company may pay the proceeds directly to the lender of
the Share Loan for such purpose. Each Company Loan shall be
secured by a lien on the Restricted Shares of the Participant,
which lien shall become effective
<PAGE> 3
immediately upon lapse of the restrictions and shall be
subordinate to any lien relating to a Share Loan. In the event
of a default under any Company Loan, the Company may, subject
to the rights of any lender of the related Share Loan, offset
against any payment (whether in cash or Shares) that the
Participant would otherwise be entitled to receive, an amount
equal to the amount then owing under the Company Loan
(including accrued interest). In the event of a distribution
of Shares, the number of Restricted Shares to be canceled to
effectuate such offset shall be determined by dividing the
amount outstanding under the Company Loan by the Fair Market
Value per Restricted Share as of the date upon which the
payment to the Participant is being made (or otherwise would
be made if the amount to be offset exceeds the amount owing to
the Participant).
5. For clarification purposes, the following phrase is added at
the beginning of Section 5(c) of the Plan, effective as of June 1, 1995:
"Except in connection with any Share Loan or a Company Loan
provided for in Article 16 of the Plan, "
6. All references in the Plan to (i) the "Share Option Plan" are
hereby amended retroactively to refer to the "Stock Option
Plan" to correct a typographical error; (ii) "par value" of
the Shares are eliminated from the Plan; and (iii) "one-time
purchase right" or "one-time opportunity" are amended to read
"purchase right under Article 16" or "opportunity under
Article 16", as the case may be.
Except as herein amended the Plan remains in full force and effect.
BORDERS GROUP, INC.
By: /s/ George R. Mrkonic
-------------------------
<PAGE> 1
EXHIBIT 10.15
SECOND AMENDMENT TO THE
BORDERS GROUP, INC.
EMPLOYEE STOCK PURCHASE PLAN
Section 2(j) of the Borders Group Employee Stock Purchase Plan (the
"Plan") is hereby amended to read as follows, effective with respect to Offering
Periods beginning on or after October 1, 1997:
" (j) "Employee" shall mean any person, including an officer, who as of
an Offering Date is regularly employed by the Company, a wholly owned
Subsidiary of the Company or a Designated Subsidiary of the Company,
except any person who is both "highly compensated" within the meaning
of Section 414(g) of the Code and designated by the Committee as a
participant in the Company's Management Stock Purchase Plan (other than
director level employees who were given a one-time opportunity to
purchase shares under the Management Stock Purchase Plan); provided,
however, that such person's customary employment immediately prior to
the relevant Offering Date must be more than 20 hours per week.
Director level employees who are given a one-time opportunity to
purchase shares under the Company's Management Stock Purchase Plan
shall be eligible Employees"
This Amendment shall not affect, or in any manner inure to the benefit
of, any person who is subject to the reporting and short-swing liability
provisions of Section 16 of the Exchange Act.
Except as herein amended, the Plan shall remain in full force and
effect.
BORDERS GROUP, INC.
By: /s/ George R. Mrkonic
-------------------------
<PAGE> 1
EXHIBIT 10.16
THIRD AMENDMENT
TO THE BORDERS GROUP, INC.
EMPLOYEE STOCK PURCHASE PLAN
The Borders Group Employee Stock Purchase Plan (the "Plan") is hereby
amended in the following particulars:
1. Section 2(j) of the Plan is hereby amended as follows for
clarification purposes:
(j) "Employee" shall mean any person, including an officer, who as of
an Offering Date is regularly employed by the Company, a wholly owned Subsidiary
of the Company organized under the laws of any state of the United States or a
Designated Subsidiary of the Company, except any person who is both "highly
compensated" within the meaning of Section 414(q) of the Code and designated by
the Committee as a Participant in the Company's Management Stock Purchase Plan
(other than director level employee who are given an opportunity(ies) to
purchase shares under the Management Stock Purchase Plan)."
2. The following sentence is hereby added at the end of Section 2(v) of
the Plan for clarification purposes:
" For purposes of this Plan, references to a "corporation" or
"corporations" shall include corporations organized under the laws of any state
of the United States and any similar entity organized under the laws of a
country other than the United States that the Board designates as a Designated
Subsidiary.
3. Effective with respect to Employees hired on or after October 1,
1998, paragraph (a) of Section 3 of the Plan is amended to read as follows:
"(a) Subject to the requirements of Section 4(b) hereof, any person who
is an Employee shall be eligible to participate in the Plan on the first day of
the month following the earlier of satisfying the requirements of either (i),
(ii) or (iii) below:
(i) the Employee has: (A) attained the of age twenty-one (21),
(B) completed six months of service, and (C) completed at least five hundred
(500) hours of service within his/her initial 6 months of service;
(ii) the Employee has: (A) attained the of age twenty-one
(21), (B) completed one year of service, and (C) completed at least 1,000 hours
of service WITHIN ANY TWELVE-MONTH PERIOD ENDING ON ANY ANNIVERSARY OF OF
HIS/HER EMPLOYMENT COMMENCEMENT DATE, OR
(iii) the Employee has been employed for at least two years
and his or her customary employment is more than twenty (20) hours per week.
<PAGE> 2
4. Effective as of October 1, 1998, the following sentences are hereby
added to paragraph (a) of Section 3 of the Plan:
"An Employee who has become eligible to participate in the Plan
(whether hired on, before or after October 1, 1998) shall remain eligible to
participate in the Plan until he or she ceases for any reason to be an
Employee."
5. Effective as of December 1, 1998, the following sentences are hereby
added to paragraph (a) of Section 3 of the Plan:
"Any Employee who was hired prior to October 1, 1998 and who, on or
after December 1, 1998, is or becomes eligible to participate in the Borders
Group, Inc. Savings Plan, also shall be eligible to participate in this Plan.
6. The following sentence is hereby added to Section 11 of the Plan:
"With respect to any Designated Subsidiary which employs Employees who
reside outside of the United States, and notwithstanding anything herein to the
contrary, the Committee may, in its sole discretion, amend the terms of the
Plan, or an option granted under the Plan, in order to comply with the
requirements of local law, and may, where appropriate, establish one or more
sub-plans to reflect such amended provisions applicable to such Employees."
Except as set forth herein an amended, the Plan shall remain in full
force and effect.
BORDERS GROUP, INC.
By: /s/ George R. Mrkonic
-------------------------
<PAGE> 1
EXHIBIT 10.18
FIRST AMENDMENT TO THE
BORDER GROUP, INC.
ANNUAL INCENTIVE PLAN
The Border Group, Inc. Annual Incentive Bonus Plan (the "Plan") is
hereby amended as follows:
1. The following sentence is hereby added to the end of Section 6(a)
of the Plan:
"Notwithstanding any other provision of the Plan, the actual
Bonus paid to any Participant for any Plan year shall not exceed
$900,000."
Except as herein amended, the Plan shall remain in full force and
effort.
BORDERS GROUP, INC.
By: /s/ George R. Mrkonic
---------------------------
George R. Mrkonic
<PAGE> 1
EXHIBIT 10.30
1998 BORDERS GROUP, INC. STOCK OPTION PLAN
1. Purpose. The 1998 Borders Group, Inc. Stock Option Plan
(the "Plan") is intended (i) to attract and retain employees of Borders Group,
Inc. (the "Company") and its "Subsidiaries" (corporations of which a majority of
the shares of voting stock are owned directly or indirectly by the Company and
other business entities which have a majority of their shares of voting stock
owned directly or indirectly by the Company); (ii) to increase the proprietary
interest in the Company of such persons by providing further opportunity for
ownership of shares of the Company's common stock, (the "Shares"); and (iii) to
increase the incentives to such persons to contribute to the success of the
Company's business.
2. Administration. The Plan shall be administered by the
Compensation Committee (the "Committee" or "Administrator") of the Board of
Directors of the Company (the "Board").
The Administrator shall keep minutes of its meetings. A
majority of the members of the Administrator shall constitute a quorum thereof
and the acts of a majority of the members present at any meeting of the
Administrator at which a quorum is present, or acts unanimously approved in
writing by all of the members of the Administrator, shall be the acts of the
Administrator.
The Administrator may make such rules and regulations and
establish such procedures for the administration of the Plan as it deems
appropriate in its sole discretion. The interpretation and application of the
Plan or of any term or condition of an option granted under the Plan or of any
rule, regulation or procedure, and any other matter relating to or necessary to
the administration of the Plan, shall be determined by the Administrator, and
any such determination shall be final and binding upon all persons.
3. Shares. The number of Shares which shall be reserved
for issuance under the Plan shall not exceed 2,000,000, subject to adjustment in
accordance with the provisions of Section 6 hereof. Shares to be optioned or
issued under the Plan may be either authorized and unissued shares or issued
shares which shall have been reacquired by the Company. In the event that any
outstanding option or portion thereof expires or is canceled, surrendered or
terminated for any reason, the Shares allocable to the unexercised portion of
such option may again be subjected to an option or be issued under the Plan.
<PAGE> 2
4. Grant of Options.
(a) General Powers of Administrator. The Administrator may
grant options to purchase Shares to such employees of the Company or any of its
Subsidiaries as the Administrator or its delegate shall select; provided,
however, that executive officers of the Company shall not be eligible to receive
options under the Plan. Members of the Board who are not officers of the Company
shall not be eligible to participate in the Plan. Subject to the foregoing, the
Administrator shall have the discretion, in accordance with the provisions of
the Plan, to determine to whom an option is granted, the number of Shares
optioned, and the terms and conditions of the option, and, in the case of
replacement options, to determine the terms and conditions of such options. In
making such determinations, the Administrator shall consider the position and
responsibilities of the employee, the nature and value to the Company of his or
her services and accomplishments, his or her present and potential contribution
to the success of the Company, and such other factors as the Administrator may
deem relevant. The Administrator may delegate to the Chairman of the Board, the
Vice Chairman and/or President of the Company the authority to grant options to
any eligible employee of the Company or any of its Subsidiaries. If such
authority is delegated, the Administrator's delegation of authority shall
include the authority to determine (i) to whom the option is to be granted, (ii)
the number of shares optioned, (iii) the terms and conditions of the option, and
(iv) in the case of replacement options, the terms and conditions of such
options.
(b) Types of Options. Each option granted under the Plan shall
be a non-qualified stock option (a "Non-Qualified" option).
(c) General Provisions. Options granted under the Plan shall
be subject to and governed by the provisions of the Plan and by such other terms
and conditions, not inconsistent with the Plan, as shall be determined by the
Administrator or its delegate in its sole discretion. Except as otherwise
provided herein, the date on which an option shall be granted shall be the date
on which the optionee, the number of Shares optioned and the terms and
conditions of the option are determined by the Administrator or its delegate;
provided, however, that if an option or any term or condition of an option is
rejected or not accepted by an optionee or if an option is not granted in
accordance with the provisions of the Plan, such option shall be deemed to have
not been granted and shall be of no effect. Each option shall be evidenced by a
written agreement (the "Share Option Agreement") in such form as the
Administrator may from time to time approve.
2
<PAGE> 3
(d) Tandem Options. Tandem options granted under Article 16(e)
of the Borders Group, Inc. Management Stock Purchase Plan shall have the
exercise price set forth therein; shall be forfeited to the extent that an
equivalent number of shares are not purchased; shall become exercisable on the
later of (i) the date on which timely payment for the Restricted Share has been
made (and to the extent that the optionee shall fail to make such timely
payment, a proportionate number of shares underlying the Tandem Option shall be
forfeited) and (ii) the third anniversary of the date on which the exercise
price is determined; shall expire on the fifth anniversary of the date on which
the exercise price is determined; shall become exercisable only to the extent
that Restricted Shares are purchased; and shall contain such other terms as the
Administrator or its delegate shall determine.
5. Terms and Conditions of Options.
(a) Option Price. Except as otherwise provided in the
Management Stock Purchase Plan of the Company, in the case of each option
granted under the Plan, the price of each share that may be acquired upon the
exercise of an option (the "Option Price Per Share") shall not be less than the
Fair Market Value per Share on the date of grant of such option. "Fair Market
Value" per Share shall mean the closing price on the NYSE Composite Transactions
Tape (or its equivalent if the Shares are not traded on the New York Stock
Exchange) of such Share for the trading day immediately prior to the relevant
valuation date.
(b) Period of Option and When Exercisable.
(i) An option granted under the Plan may not be
exercised after the earlier of (A) the date specified by the Administrator,
which shall be a maximum of ten years and two days from date of grant, or (B)
the applicable time limit specified in paragraph (iii) of this Section 5 (b).
Any option not exercised within the aforementioned time periods shall
automatically terminate at the expiration of such period.
(ii) Except as specified in this Section 5(b)(ii), an
option granted with a maximum exercise period of more than three years may not
be exercised prior to three years from the date of grant (or such other period
as determined by the Administrator in its sole discretion), except that this
limitation shall be removed (A) if termination of employment of the optionee
results from death or Disability, or (B) if termination of employment of the
optionee occurs at or after age 65 and the optionee has ten or more years of
full-time service with Kmart, the Company and/or any of its Subsidiaries, or (C)
in the event of a Change in Control of the Company, or (D) if and to the extent
the Administrator may so determine in its
3
<PAGE> 4
sole discretion. "Disability" shall mean an optionee's total and permanent
inability to perform his or her duties with the Company or any of its affiliates
by reason of any medically determinable physical or mental impairment, as
determined by a physician acceptable to the Company. An option granted with a
maximum exercise period of three years or less shall not be subject to the
limitation contained in this paragraph (ii) unless otherwise specified by the
Administrator. A Change in Control shall be deemed to have occurred if:
(A) the "beneficial ownership" (as defined in Rule
l3d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) of securities representing more than 20% of the
combined voting power of the Company is acquired by any "person" as
defined in sections 13(d) and 14(d) of the Exchange Act (other; the
Company; any Subsidiary; any trustee or other fiduciary holding
securities under an employee benefit plan of the Company; or any
corporation owned, directly or indirectly, by the shareholders of the
Company in substantially the same proportions as their ownership of
shares of the Company, or
(B) the shareholders of the Company approve a
definitive agreement to merge or consolidate the Company with or into
another corporation, or to sell or otherwise dispose of all or
substantially all of its assets, or adopt a plan of liquidation, or
(C) during any period of three consecutive years,
individuals who at the beginning of such period were members of the
Board cease for any reason to constitute at least a majority thereof
(unless the election, or the nomination for election by the Company's
shareholders, of each new director was approved by a vote of at least a
majority of the directors then still in office who were directors at
the beginning of such period).
(iii) An option may be exercised by an optionee only while
such optionee is in the employ of the Company or a Subsidiary or within three
months thereafter, and only if any limitation upon the right to exercise such
option under paragraph (ii) of this Section 5 (b) has been removed or has
expired prior to termination of employment and exercise is not otherwise
precluded hereunder; provided, however, if at the date of termination of
employment the optionee has ten or more years of full-time service with Kmart,
the Company and/or any of its Subsidiaries or if termination of employment
results from death or Disability, such three-month period shall be extended to
three years. Employment with a Subsidiary shall be deemed terminated on the date
a former Subsidiary ceases to be a Subsidiary of the Company.
(iv) In the event of the Disability of an optionee, an option
which is otherwise exercisable may be exercised by the optionee's legal
representative or guardian. In the event of the death of an optionee, either
before or after termination of employment with the Company or any of its
subsidiaries, an option which is otherwise exercisable may be
4
<PAGE> 5
exercised by the person or persons whom the optionee shall have designated in
writing on forms prescribed by and filed with the Administrator("Beneficiary or
Beneficiaries"), or, if no such designation has been made, by the person or
persons to whom the optionee's rights shall have passed by will or by the laws
of descent and distribution ("Successor(s)"). The Administrator may require an
indemnity and/or such evidence or other assurances as it may deem necessary in
connection with an exercise by a legal representative, guardian, Beneficiary or
Successor.
(v) Notwithstanding anything contained herein to the contrary,
all rights with respect to all options of an optionee are subject to the
conditions that the optionee not engage or have engaged (a) in activity
constituting Cause, or (b) in activity directly or indirectly in competition
with any business of the Company or a Subsidiary, or in other conduct inimical
to the best interests of the Company or a Subsidiary, following the optionee's
termination of employment. If it is determined by the Administrator or the
Administrator's designee (which determination of such designee shall be subject
to ratification by the Administrator), either before or after termination of
employment of an optionee, that there has been a failure of any such condition,
all options and all rights with respect to all options granted to such optionee
shall immediately terminate and be null and void. "Cause shall mean an
optionee's fraud, embezzlement, defalcation, gross negligence in the performance
or nonperformance of the optionee's duties (other than as a result of
Disability) or material failure or refusal to perform the optionee's duties at
any time while in the employ of the Company or a Subsidiary.
(c) Exercise and Payment.
(i) Subject to the provisions of Section 5(b), an option may
be exercised by notice (in the form prescribed by the Administrator) to the
Company specifying the number of Shares to be purchased. Payment for the number
of Shares purchased upon the exercise of an option shall be made in full at the
price provided for in the applicable Share Option Agreement and such purchase
price shall be paid by the delivery to the Company of cash (including check or
similar draft) in United States dollars or previously owned whole Shares that
have been owned by the optionee for more than six (6) months or a combination
thereof. Shares used in payment of the purchase price shall be valued at their
Fair Market Value as of the date notice of exercise is received by the Company.
Any Shares delivered to the Company shall be in such form as is acceptable to
the Company.
(ii) The Company may defer making delivery of Shares under the
Plan until satisfactory arrangements have been made for the payment of any tax
attributable to exercise of an option. The Administrator may, in its sole
discretion, permit an optionee to elect, in such form and at such time as the
Administrator may prescribe, to pay all or a portion of all taxes arising in
connection with the exercise of an option by electing to (A) have the Company
withhold whole Shares, or (B) deliver other whole Shares previously owned by the
optionee having a Fair Market Value not greater than the amount to be withheld;
provid-
5
<PAGE> 6
ed, however, that the amount to be withheld shall not exceed the
optionee's estimated total tax obligations associated with the transaction.
(d) Nontransferability. No option or any rights with respect
thereto shall be subject to any debts or liabilities of an optionee, nor be
assignable or transferable except by will or the laws of descent and
distribution, nor be exercisable during the optionee's lifetime other than by
him or her, nor shall Shares be issued to or in the name of anyone other than
the optionee; provided, however, that (i) an option may after the death or
Disability of an optionee be exercised pursuant to paragraph (iv) of Section
5(b); (ii)any Shares issued to an optionee hereunder may at the request of the
optionee be issued in the name of the optionee and one other person, as joint
tenants with right of survivorship and not as tenants in common, or in the name
of a trust for the benefit of the optionee or for the benefit of the optionee
and others; and (iii) if so provided in the Share Option Agreement executed by
the optionee and approved by the Administrator, the option and rights covered by
such Agreement may be transferred without consideration to an immediate family
member(s) or to a trust for the benefit of such family member(s), in which event
the transferee(s) must agree in writing to accept the terms and conditions of
such option and such option shall not be covered under Rule 16(b)-3 of the
Exchange Act.
(e) Employment. No provision of the Plan, nor any term or
condition of any option, nor any action taken by the Administrator, the Company
or any Subsidiary pursuant to the Plan, shall give or be construed as giving an
optionee any right to be retained in the employ of the Company or of any
Subsidiary, or affect or limit in any way the right of the Company or any
Subsidiary to terminate the employment of any optionee.
(f) Termination of Option by Optionee. An optionee may at any
time elect, in a written notice filed with the Administrator, to terminate a
Non-Qualified option with respect to any number of shares as to which such
option shall not have been exercised.
6. Adjustments. If there is any change in the number or
class of Shares through the declaration of Share dividends, or recapitalization
resulting in Share splits, or combinations or exchanges of such Shares or
similar corporate transactions, or if the Administrator otherwise determines
that, as a result of a corporate transaction involving a change in the Company's
capitalization, it is appropriate to effect the adjustments described in this
Section 6, the aggregate number or class of Shares on which options may be
granted or which may be issued under the Plan, the number or class of Shares
covered by each outstanding option, and the exercise price per Share of each
option, shall all be proportionately adjusted by the Administrator; provided,
however, that any fractional Shares resulting from such adjustment shall be
eliminated. Subject to any required action by shareholders, if a new option is
substituted for the option granted hereunder, or an assumption of the option
granted hereunder is made, by reason of a corporate merger, consolidation,
acquisition of
6
<PAGE> 7
property or stock, separation, reorganization or liquidation, the
option granted hereunder shall pertain to and apply to the securities to which a
holder of the number of Shares subject to the option would have been entitled.
7. Term of Plan. No option shall be granted under the Plan
after December 31, 2003. Options granted prior thereto, however, may extend
beyond such date and the provisions of the Plan shall continue to apply thereto.
8. Application of Funds. The proceeds received by the
Company from the sale of Shares pursuant to options granted under the Plan will
be used for general corporate purposes.
9. No Obligation to Exercise Option. The granting or
acceptance of an option shall impose no obligation upon the optionee to exercise
such an option.
10. Rights as a Stockholder. An optionee shall have no
rights as a stockholder with respect to Shares covered by his or her option
until the date of issuance to him or her of a certificate evidencing such Shares
after the exercise of such option and payment in full of the purchase price. No
adjustment will be made for dividends or other rights for which the record date
is prior to the date such certificate is issued.
11. Amendments. The Board may from time to time alter,
amend, suspend or discontinue the Plan. Any such amendment may be effective in
respect of all past and future options granted hereunder in the sole discretion
of the Board.
The Plan, each option under the Plan and the grant and
exercise thereof, and the obligation of the Company to sell and issue shares
under the Plan shall be subject to all applicable laws, rules, regulations and
governmental and stockholder approvals, and the Administrator may make such
amendment or modification thereto as it shall deem necessary to comply with any
such laws, rules and regulations or to obtain any such approvals.
12. Severability. If any provision of the Plan, or any term
or condition of any option granted or Share Option Agreement or form executed or
to be executed thereunder, or any application thereof to any person or
circumstance is invalid, such provision, term, condition or application shall to
that extent be void (or, in the discretion of the Administrator, such provision,
term or condition may be amended so as to avoid such invalidity or failure), and
shall not affect other provisions, terms or conditions or applications thereof,
and to this extent such provision, term or condition is severable.
7
<PAGE> 1
EXHIBIT 10.31
November 16, 1998
ROBERT DiROMUALDO
Dear Bob:
This letter will confirm our agreement concerning your employment with Borders
Group, Inc. ("BGI").
1. During the term of this Agreement, you will be the Chairman of BGI and,
subject to your election by the shareholders, a director of BGI. You will report
to the Board of Directors of BGI (the "Board") and your place of employment
shall be in Ann Arbor, Michigan.
2. Your current compensation will remain in effect through January 24, 1999.
Subject to Section 6 and Section 12: (i) for fiscal 1999, your salary will be
$343,333 and you will have a bonus opportunity of $343,333 (the "Fiscal 1999
Bonus"); and (ii) you will receive the Fiscal 1999 Bonus if BGI meets "street"
earnings estimates for fiscal 1999 and you are employed by BGI on the last day
of fiscal 1999. "Street" earnings estimates shall be based upon consensus
analysts' estimates determined as of April 15, 1999 and shall be the same as the
earnings per share targets for other executives for fiscal 1999. Consistent with
current practice, all or any portion of your salary and bonus may be paid in
compensation replacement options subject to the mutual agreement of you and the
Compensation Committee of the Board.
3. You shall have authority consistent with your position and shall have such
duties consistent with your position as shall be assigned to you by the Board
from time to time. Such duties shall involve 100% of full-time employment
through January 23, 1999 and approximately 67% of full-time employment for the
remainder of the term of this Agreement.
4. You may participate in the savings and welfare programs of BGI in accordance
with their respective terms in the same manner as other senior executives of
BGI.
5. The term of this Agreement shall be from November 16, 1998 through January
23, 2000. Subsequent to the expiration of the term, it is anticipated that you
will continue to serve as a director of BGI, subject to your annual election by
the shareholders of BGI. Continuance of employment after the term of this
Agreement shall be subject to the mutual agreement of you and BGI.
6. Subject to Section 12, during the term of this Agreement, your position with
BGI may be terminated by BGI only for "Cause" by written notice given to you
after action by a majority of the members of the Board of Directors of BGI and
only within ninety days after the occurrence of BGI learning of one of the
following events:
<PAGE> 2
-2-
(a) Your conviction of a felony, or of a misdemeanor involving the
money or property of BGI or any subsidiary;
(b) You shall have willfully engaged in misconduct that materially
damages or injures the reputation of BGI or any subsidiary;
(c) You shall have breached the noncompetition provisions of this
Agreement and such breach is not cured within 7 days after notice
thereof from BGI; or
(d) Any material breach of the confidentiality provisions of this
Agreement.
For purposes of this Section 6, no act or failure to act, on your part shall be
deemed to be "willful" unless done, or omitted to be done, by you not in good
faith and without reasonable belief that such act or omission was in the best
interest of BGI.
In the event that BGI breaches this Agreement and either (i) your employment is
terminated by BGI without Cause prior to the expiration of the term, or (ii) you
voluntarily terminate your employment following any such breach which is not
cured by BGI within 30 days after BGI's receipt of written notice from you
describing the breach, you shall continue to receive (i) the salary and bonus
that you were receiving at the time of termination for the balance of the term
(including, without limitation the Fiscal 1999 Bonus), and (ii) the benefits
that you would have received had such breach not occurred, including, but not
limited to, the continued vesting of stock options and MSPP shares through the
balance of the term. In the event that any aspect of clause (ii) is inconsistent
with the terms of the relevant plan, BGI shall provide the same benefits outside
of such plan. You shall not be obligated to seek other employment to mitigate
damages and BGI's obligations hereunder shall not be reduced by any compensation
that you may earn from other employment or self employment.
7. You will be entitled to reimbursement for travel (at full coach rate) and
entertainment and other business expenses incurred on BGI's behalf in accordance
with BGI's policy upon submission of vouchers and documentation relating thereto
in accordance with BGI procedures.
8. You agree that during the Restricted Period neither you nor your Affiliates
will (i) Compete with BGI in the Restricted Area or (ii) directly or indirectly
(whether as owner, principal, employee, partner, lender or venturer with or
consultant to any person, firm, partnership, corporation or other entity): (A)
cause or seek to cause any of BGI's suppliers, purchasing agents or customers to
cease transacting business with BGI; or (B) cause or seek to cause any of BGI's
prospective suppliers, purchasing agents or customers not to transact business
with BGI.
For purposes of this Agreement:
(i) The term "Affiliate" means any corporation, person or
entity which, directly or indirectly, through one or more intermediaries, you
control or is under common control with you;
<PAGE> 3
-3-
(ii) The term "Company" means BGI and its subsidiaries.
(iii) The term "Compete" means to manage, operate, control or
participate in, or have any ownership interests in or make loans to, or aid or
advise as an employee, consultant or otherwise, whether directly or indirectly,
any business (whether an individual, sole proprietorship, partnership,
corporation, firm, joint venture, trust or other entity) which is engaged in,
directly or indirectly, the retail or wholesale book business or in a business
where principal business is the retail or wholesale sale of video cassettes,
videotapes, musical records, compact discs or audio cassettes; provided,
however, that you may (i) own equity securities in Kmart or any subsidiary of
Kmart and (ii) own up to 1% of a corporation where equity securities are listed
for trading on a national securities exchange;
(iv) The term "Restricted Period" means the period from the
date hereof through December 31, 2001, provided, that in the event that you
breach the covenant not to Compete set forth above, such breach shall suspend
and toll the running of the Restricted Period from the date of such breach until
such time as such violation ceases; and
(iv) The term "Restricted Area" means anywhere in North
America or any other country in which BGI is doing business at the time of your
termination of employment.
Nothing in this Section 8 shall be deemed to prohibit you or any of your
Affiliates from owning shares of BGI.
9. You agree that you and your Affiliates will maintain in strict confidence and
will not, directly or indirectly, divulge, transmit, publish, release or
otherwise use or cause to be used in any manner to Compete with or that is
contrary to the interests of BGI, any confidential information relating to BGI's
systems, operations, processes, computer programs and data bases, records,
development data and reports, store designs, quality control specifications,
cost analysis, flow charts, know-how, customer lists, supplier lists, marketing
data, personnel data, or any other information of like nature. You acknowledge
that all information regarding BGI compiled or obtained by, or furnished to, you
in connection with your employment or association with BGI is confidential
information and BGI's exclusive property. Upon demand by BGI, you will surrender
to BGI all original and facsimile records, documents and data in his possession
pertaining to BGI. The foregoing covenant of confidentiality has no temporal,
geographical or territorial limitation.
Notwithstanding the foregoing, this provision does not apply to the
extent, and only to the extent, such information: (a) is clearly obtainable in
the public domain; (b) becomes obtainable in the public domain, through no fault
of yours; (c) was not acquired by you in connection with your employment or
affiliation with BGI; (d) was not acquired by you from BGI or its
representatives; (e) is required to be disclosed by rule of law or by order of a
court or governmental body or agency; or (f) is reasonably necessary to be
<PAGE> 4
-4-
disclosed to defend yourself or assert your rights in connection with any
proceeding to which BGI or its affiliates is a party.
10. The restrictive covenants contained herein shall be construed as independent
of the other provisions of this Agreement, and the existence of any claim or
cause of action that you may have, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by BGI of any of
the restrictive covenants contained herein.
11. You acknowledge that if you breach any of the restrictive covenants
contained herein, the injuries that will be suffered by BGI will be irreparable,
and BGI will not have an adequate remedy at law. You therefore, agree that in
the event of such a breach, BGI shall be entitled to relief by way of injunction
from any court of proper jurisdiction, in addition to all other rights that BGI
may have at law, in equity, or otherwise.
12. In the event of your death, Disability or a Change in Control of BGI, all of
your outstanding options and restricted shares will vest as provided in the
applicable plan. In event of the occurrence of any such events: (i) your
employment shall thereupon terminate; (ii) no other payments will be due to you
except that, in the event of a Change in Control, the Fiscal 1999 Bonus shall be
paid to you, in whole or in part, in accordance with the terms of the Borders
Group, Inc. Annual Bonus Incentive Plan; and (iii) the noncompete provisions set
forth herein shall remain in effect until December 31, 2001. "Change in Control"
shall have the meaning set forth in the Borders Group, Inc. Stock Option Plan.
"Disability" shall mean that you are unable to perform your duties and
responsibilities by reason of a specific mental or physical illness or injury
and such inability shall have existed for an aggregate of at least 180 days in
the twelve-month period. Any question as to the existence of a Disability as to
which you and BGI cannot agree shall be determined in writing by a qualified
independent physician mutually acceptable to you and BGI. If you and BGI cannot
agree as to a qualified independent physician, each shall appoint such a
physician and those two physicians shall select a third who shall make such
determination in writing. Such determination of Disability shall be delivered to
BGI and to you and shall be final and conclusive for all purposes of this
agreement.
13. You shall not be entitled to any severance or other payment upon your
employment termination, either prior to or after the expiration of the term of
this Agreement, regardless of the reason for the termination, except that,
subject to Section 12, if, prior to the expiration of the term, either your
employment is terminated by BGI without Cause or you voluntarily resign
following a breach of this Agreement by BGI which is not cured within the time
specified in Section 6, you shall receive the payments/benefits described in
Section 6 as your sole and exclusive remedy.
14. The portions of your November, 1995 "Mega" option grant that would otherwise
vest in November of 1999, 2000 and 2001 shall vest on November 16, 1998. Your
remaining unvested MSPP shares shall vest on January 15, 1999.
15. All provisions of this Agreement are intended to be severable. In the event
any provision or restriction contained herein is held to be invalid or
unenforceable in any respect, in whole or in part, such finding shall in no way
affect the validity or
<PAGE> 5
-5-
enforceability of any other provisions of this Agreement. The parties hereto
further agree that any such invalid or unenforceable provision shall be deemed
modified so that it shall be enforced to the greatest extent permissible under
law, and to the extent that any court of competent jurisdiction determines any
restriction herein to be overly broad or unenforceable, such court is hereby
empowered and authorized to limit such restriction so that it is enforceable for
the longest duration of time and largest geographical area possible.
16. Any dispute that may exist respecting (i) the interpretation or application
of any provision of the agreement (including, without limitation, the provisions
of this Section) or (ii) your entitlement to payments or other benefits after
termination of your employment shall be resolved by arbitration in Detroit,
Michigan in accordance with the rules of the American Arbitration Association
and judgment on the award may be entered in any court having jurisdiction. If
your position in any such dispute is sustained in the arbitration, BGI will pay
or reimburse you for your expenses in connection with the resolution of such
dispute (including, without limitation, counsel fees and disbursements and other
charges).
17. This Agreement shall be effective as of November 16, 1997. You hereby
acknowledge and agree that this Agreement replaces the Amended and Restated
Employment Agreement dated February 1,1995 (the "Prior Agreement") between you
and BGI, and that neither you nor BGI shall have no further rights or
obligations of any nature whatsoever under the Prior Agreement or any other oral
or written agreement relating to your employment or the termination thereof.
Please confirm your agreement by signing below and retain one copy for your
records.
Sincerely,
BORDERS GROUP, INC.
Agreed:
By: /s/ George R. Mrkonic
--------------------------
ROBERT F. DiROMUALDO
/s/ Robert F. DiRomualdo
- -----------------------
<PAGE> 1
EXHIBIT 10.32
November 16, 1998
GEORGE R. MRKONIC
Dear George:
This letter will confirm our agreement concerning your employment with Borders
Group, Inc. ("BGI").
1. During the term of this Agreement, you will be the Vice Chairman of BGI and,
subject to your election by the shareholders, a member of the Board of Directors
of BGI (the "Board"). You will report to the Chairman of the Board and your
place of employment shall be in Ann Arbor, Michigan.
2. Your current compensation will remain in effect through January 24, 1999.
Subject to Section 6 and Section 12: (i) for fiscal 1999, your salary will be
$257,500 and you will have a bonus opportunity of $257,500 (the "Fiscal 1999
Bonus"); and (ii) you will receive the Fiscal 1999 Bonus if BGI meets "street"
earnings estimates for fiscal 1999 and you are employed by BGI on the last day
of fiscal 1999. "Street" earnings estimates shall be based upon consensus
analysts' estimates determined as of April 15, 1999 and shall be the same as the
earnings per share targets for other executives for fiscal 1999. Consistent with
current practice, all or any portion of your salary and bonus may be paid in
compensation replacement options subject to the mutual agreement of you and the
Compensation Committee of the Board.
3. You shall have authority consistent with your position and shall have such
duties consistent with your position as shall be assigned to you by the Board
from time to time. Such duties shall involve 70% of full-time employment through
January 23, 1999 and approximately 50% of full-time employment for the remainder
of the term of this Agreement.
4. You may participate in the savings and welfare programs of BGI in accordance
with their respective terms in the same manner as other senior executives of
BGI.
5. The term of this Agreement shall be from November 16, 1998 through January
23, 2000. Subsequent to the expiration of the term, it is anticipated that you
will continue to serve as a director of BGI, subject to your annual election by
the shareholders of BGI. Continuance of employment after the term of this
Agreement shall be subject to the mutual agreement of you and BGI.
6. Subject to Section 12, during the term of this Agreement, your position with
BGI may be terminated by BGI only for "Cause" by written notice given to you
after action by a majority of the members of the Board of Directors of BGI and
only within ninety days after the occurrence of BGI learning of one of the
following events:
<PAGE> 2
-2-
a) Your conviction of a felony, or of a misdemeanor involving the money or
property of BGI or any subsidiary;
b) You shall have willfully engaged in misconduct that materially damages
or injures the reputation of BGI or any subsidiary;
c) You shall have breached the noncompetition provisions of this Agreement
and such breach is not cured within 7 days after notice thereof from
BGI; or
d) Any material breach of the confidentiality provisions of this
Agreement.
For purposes of this Section 6, no act or failure to act, on your part shall be
deemed to be "willful" unless done, or omitted to be done, by you not in good
faith and without reasonable belief that such act or omission was in the best
interest of BGI.
In the event that BGI breaches this Agreement and either (i) your employment is
terminated by BGI without Cause prior to the expiration of the term, or (ii) you
voluntarily terminate your employment following any such breach which is not
cured by BGI within 30 days after BGI's receipt of written notice from you
describing the breach, you shall continue to receive (i) the salary and bonus
that you were receiving at the time of termination for the balance of the term
(including, without limitation the Fiscal 1999 Bonus), and (ii) the benefits
that you would have received had such breach not occurred, including, but not
limited to, the continued vesting of stock options and MSPP shares through the
balance of the term. In the event that any aspect of clause (ii) is inconsistent
with the terms of the relevant plan, BGI shall provide the same benefits outside
of such plan. You shall not be obligated to seek other employment to mitigate
damages and BGI's obligations hereunder shall not be reduced by any compensation
that you may earn from other employment or self employment.
7. You will be entitled to reimbursement for travel (at full coach rate) and
entertainment and other business expenses incurred on BGI's behalf in accordance
with BGI's policy upon submission of vouchers and documentation relating thereto
in accordance with BGI procedures.
8. You agree that during the Restricted Period neither you nor your Affiliates
will (i) Compete with BGI in the Restricted Area or (ii) directly or indirectly
(whether as owner, principal, employee, partner, lender or venturer with or
consultant to any person, firm, partnership, corporation or other entity): (A)
cause or seek to cause any of BGI's suppliers, purchasing agents or customers to
cease transacting business with BGI; or (B) cause or seek to cause any of BGI's
prospective suppliers, purchasing agents or customers not to transact business
with BGI.
For purposes of this Agreement:
(i) The term "Affiliate" means any corporation, person or entity
which, directly or indirectly, through one or more intermediaries, you control
or is under common control with you;
(ii) The term "Company" means BGI and its subsidiaries.
<PAGE> 3
-3-
(iii) The term "Compete" means to manage, operate, control or
participate in, or have any ownership interests in or make loans to, or aid or
advise as an employee, consultant or otherwise, whether directly or indirectly,
any business (whether an individual, sole proprietorship, partnership,
corporation, firm, joint venture, trust or other entity) which is engaged in,
directly or indirectly, the retail or wholesale book business or in a business
where principal business is the retail or wholesale sale of video cassettes,
videotapes, musical records, compact discs or audio cassettes; provided,
however, that you may (i) own equity securities in Kmart or any subsidiary of
Kmart and (ii) own up to 1% of a corporation where equity securities are listed
for trading on a national securities exchange;
(iv) The term "Restricted Period" means the period from the date
hereof through December 31, 2001, provided, that in the event that you breach
the covenant not to Compete set forth above, such breach shall suspend and toll
the running of the Restricted Period from the date of such breach until such
time as such violation ceases; and
(iv) The term "Restricted Area" means anywhere in North America or any
other country in which BGI is doing business at the time of your termination of
employment.
Nothing in this Section 8 shall be deemed to prohibit you or any of your
Affiliates from owning shares of BGI.
9. You agree that you and your Affiliates will maintain in strict confidence and
will not, directly or indirectly, divulge, transmit, publish, release or
otherwise use or cause to be used in any manner to Compete with or that is
contrary to the interests of BGI, any confidential information relating to BGI's
systems, operations, processes, computer programs and data bases, records,
development data and reports, store designs, quality control specifications,
cost analysis, flow charts, know-how, customer lists, supplier lists, marketing
data, personnel data, or any other information of like nature. You acknowledge
that all information regarding BGI compiled or obtained by, or furnished to, you
in connection with your employment or association with BGI is confidential
information and BGI's exclusive property. Upon demand by BGI, you will surrender
to BGI all original and facsimile records, documents and data in his possession
pertaining to BGI. The foregoing covenant of confidentiality has no temporal,
geographical or territorial limitation.
Notwithstanding the foregoing, this provision does not apply to the extent,
and only to the extent, such information: (a) is clearly obtainable in the
public domain; (b) becomes obtainable in the public domain, through no fault of
yours; (c) was not acquired by you in connection with your employment or
affiliation with BGI; (d) was not acquired by you from BGI or its
representatives; (e) is required to be disclosed by rule of law or by order of a
court or governmental body or agency; or (f) is reasonably necessary to be
disclosed to defend yourself or assert your rights in connection with any
proceeding to which BGI or its affiliates is a party.
<PAGE> 4
-4-
10. The restrictive covenants contained herein shall be construed as independent
of the other provisions of this Agreement, and the existence of any claim or
cause of action that you may have, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by BGI of any of
the restrictive covenants contained herein.
11. You acknowledge that if you breach any of the restrictive covenants
contained herein, the injuries that will be suffered by BGI will be irreparable,
and BGI will not have an adequate remedy at law. You therefore, agree that in
the event of such a breach, BGI shall be entitled to relief by way of injunction
from any court of proper jurisdiction, in addition to all other rights that BGI
may have at law, in equity, or otherwise.
12. In the event of your death, Disability or a Change in Control of BGI, all of
your outstanding options and restricted shares will vest as provided in the
applicable plan. In event of the occurrence of any such events: (i) your
employment shall thereupon terminate; (ii) no other payments will be due to you
except that, in the event of a Change in Control, the Fiscal 1999 Bonus shall be
paid to you, in whole or in part, in accordance with the terms of the Borders
Group, Inc. Annual Bonus Incentive Plan; and (iii) the noncompete provisions set
forth herein shall remain in effect until December 31, 2001. "Change in Control"
shall have the meaning set forth in the Borders Group, Inc. Stock Option Plan.
"Disability" shall mean that you are unable to perform your duties and
responsibilities by reason of a specific mental or physical illness or injury
and such inability shall have existed for an aggregate of at least 180 days in
the twelve-month period. Any question as to the existence of a Disability as to
which you and BGI cannot agree shall be determined in writing by a qualified
independent physician mutually acceptable to you and BGI. If you and BGI cannot
agree as to a qualified independent physician, each shall appoint such a
physician and those two physicians shall select a third who shall make such
determination in writing. Such determination of Disability shall be delivered to
BGI and to you and shall be final and conclusive for all purposes of this
agreement.
13. You shall not be entitled to any severance or other payment upon your
employment termination, either prior to or after the expiration of the term of
this Agreement, regardless of the reason for the termination, except that,
subject to Section 12, if, prior to the expiration of the term, either your
employment is terminated by BGI without Cause or you voluntarily resign
following a breach of this Agreement by BGI which is not cured within the time
specified in Section 6, you shall receive the payments/benefits described in
Section 6 as your sole and exclusive remedy.
14. The portions of your November, 1995 "Mega" option grant that would otherwise
vest in November of 1999, 2000 and 2001 shall vest on November 16, 1998. Your
remaining unvested MSPP shares shall vest on January 15, 1999.
15. All provisions of this Agreement are intended to be severable. In the event
any provision or restriction contained herein is held to be invalid or
unenforceable in any respect, in whole or in part, such finding shall in no way
affect the validity or enforceability of any other provisions of this Agreement.
The parties hereto further agree that any such invalid or unenforceable
provision shall be deemed modified so that it shall be enforced to the greatest
extent permissible under law, and to the extent that
<PAGE> 5
-5-
any court of competent jurisdiction determines any restriction herein to be
overly broad or unenforceable, such court is hereby empowered and authorized to
limit such restriction so that it is enforceable for the longest duration of
time and largest geographical area possible.
16. Any dispute that may exist respecting (i) the interpretation or application
of any provision of the agreement (including, without limitation, the provisions
of this Section) or (ii) your entitlement to payments or other benefits after
termination of your employment shall be resolved by arbitration in Detroit,
Michigan in accordance with the rules of the American Arbitration Association
and judgment on the award may be entered in any court having jurisdiction. If
your position in any such dispute is sustained in the arbitration, BGI will pay
or reimburse you for your expenses in connection with the resolution of such
dispute (including, without limitation, counsel fees and disbursements and other
charges).
17. This Agreement shall be effective as of November 16, 1998. You hereby
acknowledge and agree that this Agreement replaces the Employment Agreement
dated November 15,1994, as amended, (the "Prior Agreement") between you and BGI,
and that neither you nor BGI shall have no further rights or obligations of any
nature whatsoever under the Prior Agreement or any other oral or written
agreement relating to your employment or the termination thereof.
Please confirm your agreement by signing below and retain one copy for your
records.
Sincerely,
BORDERS GROUP, INC.
Agreed:
By:/s/ Robert DiRomualdo
---------------------
GEORGE R. MRKONIC
/s/ George R. Mrkonic
- ----------------------
<PAGE> 1
EXHIBIT 10.33
November 16, 1998
Dear Phil,
This letter will confirm our agreement concerning your employment with
Borders Group, Inc. (the "Company") and payments that may be due you in the
event of termination of your employment.
1. Effective November 16, 1998, you will serve as Chief Executive
Officer and a member of the Board of Directors of the Company. You will report
to the Chairman of the Board of Directors of the Company. Subject to your annual
election by the shareholders, you will continue to serve as a director during
the period of your employment with the Company.
2. Your offices will be at the Company's Corporate Office in Ann
Arbor, Michigan and at its facility in Nashville, Tennessee and you may maintain
your residence in Nashville. The Company will reimburse you for travel expenses
between Nashville and Ann Arbor until your son's graduation from high school.
You will be responsible for your housing arrangements in Ann Arbor and the
Company will reimburse you for reasonable relocation expenses on a "grossed-up"
basis.
3. Your base salary will be $700,000 per year. All of your 1998
salary and at least $250,000 of your 1999 salary will be in the form of
compensation replacement options. Commencing in 1999, your base salary and bonus
potential will be reviewed annually by the Compensation Committee in the same
manner as other senior executives of the Company, provided that in no event will
your base salary or bonus potential be less than that of any other officer or
employee of the Company.
4. You will receive an annual bonus of $500,000 per year if the
Company meets "street" earnings estimates for the applicable year. "Street"
earnings estimates shall be based upon consensus analysts' estimates for the
applicable fiscal year determined as of April 15th of such year and shall be the
same as the earnings per share targets for other executives for the applicable
fiscal year. No bonus will be payable for 1998 but your 1999 bonus opportunity
will be increased based upon the percentage of fiscal 1998 during which you were
employed.
5. You will be granted the following stock options on November 16,
1998:
a. an option for 250,000 shares with a term of ten years and
100% "cliff" vesting after four years from the grant date, except that if
performance standards described below are met, 50% of the options will vest on
the earliest date that the requirements of either (i) or (ii) below are
satisfied. To achieve early vesting of 50% of such options, either: (i) the
Company's per share earnings for the fiscal year ending in January of 2001 must
equal or exceed 1.5625 times the per share earnings of the Company for the
fiscal year ending in January of 1999, or (ii), the Company's percentage stock
price movement for the period from November 16, 1998 through the last day of the
Company's fiscal year ending in January 2001 must be higher than the average
percentage stock price movement of the specialty retail companies listed on
<PAGE> 2
Schedule A hereto for such period. For purposes of (ii), the calculation of the
percentage stock price movement of the shares of the Company and the specialty
retail companies listed on Schedule A shall be determined by comparing the
percentage changes based upon the average closing prices for the 20 trading days
beginning November 16, 1998 with the average closing prices for the last 20
trading days in the Company's fiscal year ending in January 2001. An example of
the calculation is attached hereto as Schedule B. This option will be in lieu of
any annual option grants for a three year period.
b. an option for each share that you purchase on November 16,
1998 pursuant to paragraph 6 below. The options relating to shares purchased
pursuant to paragraph 6a will have 100% "cliff" vesting after three years and a
term of five years. The options relating to shares purchased pursuant 6b will
have 100% "cliff" vesting on June 30, 2006, except that for each share purchased
pursuant to 6b that you continue to hold on the fourth anniversary of the
purchase date, the vesting period of the related option will be four years (i.e.
November 16, 2002).
All options will have an exercise price equal to the fair market value
on the date of grant; i.e. the closing price on the proceeding trading day.
6. You will have the opportunity to purchase shares of the Company's
common stock on November 16, 1998 in accordance with the following terms:
a. You may utilize up to $1,000,000 to purchase restricted
shares in accordance with the Company's Management Stock Purchase Plan. The
purchase price for these shares will be 80% of the fair market value on your
purchase date (i.e. the closing price on the preceding day) and the shares will
be restricted for three years. If your employment terminates prior to the
expiration of the restriction period, your pay out will be in accordance with
the terms of the Plan.
b. You may purchase up to 500,000 shares from the Company at
the closing price on November 13, 1998. The Company will provide a loan of $6,
300,000 with interest to be based upon the Company's borrowing rate. This will
be full recourse debt which will be fully collateralized, which collateral may
consist of the shares of the Company that you acquire under this paragraph 6b.
The term of the debt will be ten years, with principal being amortized over ten
years commencing on the third anniversary of your employment commencement date
and the balance to be paid at the end of the tenth year. Interest will be
payable annually beginning on the third anniversary of the date of the loan. In
addition, the Company will loan to you the amount of interest payable during the
first two years under other indebtedness that you incur to purchase such shares,
subject to the limitations under the Company's credit agreements. Such
additional indebtedness: (i) will be added to the principal amount of your loan
from the Company; (ii) will accrue interest at the rate provided for in such
loan, with such interest to be payable at the times specified for other interest
payments, and (iii) the principal amount attributable to such additional
indebtedness shall be paid as part of the balloon payment at the end of the
tenth year. The shares purchased under this paragraph will not be registered
under the Securities Act of 1933 and may be sold only in compliance with Rule
144, including the one year holding period; provided, however, that, subject to
the terms set forth on Schedule C hereto, the Company will register, at its
expense, the resale of shares as soon as reasonably practicable following
<PAGE> 3
your request for such registration. You acknowledge and represent that: (i)
these shares are being purchased for your own account and for investment and not
with a view to any distribution thereof; (ii) the certificates representing such
shares will bear a restrictive legend indicating that the shares may be sold
only pursuant to a registration statement or an exemption from such
registration, (iii) you have had access to a such information relating to the
Company, including the opportunity to ask questions of senior officers and the
receipt of satisfactory answers, as you have deemed necessary or appropriate in
connection with your purchase of such shares; and (iv) you will notify the
Secretary of the Company of any proposed sale or other transfer of the shares
and provide satisfactory evidence of compliance with applicable securities laws.
7. Until 2001, you will not serve as a director of, or in a similar
capacity with, any entity other than: (i) the Company, (ii) Ingram Micro, (iii)
Pameco, Inc. and (iv) the volunteer organizations with which you are currently
associated. Commencing in 2001, you may serve on the board of two additional
for-profit entities so long such positions do not conflict with your
responsibilities to the Company. Prior to your employment commencement date, you
will discontinue all association with Ingram Industries and its affiliates
(other than Ingram Micro), including service as an advisor to Ingram Industries
or any of its shareholders, except that your existing securities holdings in
Ingram Industries will be treated in the manner described in paragraph 13 below.
8. You may participate in the savings and welfare programs of the
Company in accordance with their respective terms in the same manner as other
senior executives of the Company. You will be reimbursed for expenses in
accordance with the Company's policies and also will be reimbursed for business
class travel on international flights. The Company also will reimburse your wife
for reasonable out-of-pocket expenses incurred as director of RIF.
9. If your position with the Company is terminated at any time by the
Company for a reason other than for Cause or Disability (as hereinafter set
forth in paragraph 10 or 11), or if you terminate your position with the Company
at any time for Good Reason (as set forth in paragraph 12), you will be entitled
to a severance payment equal to two times the sum of (i) your annual base salary
at the time of termination plus (ii) the on-plan bonus targeted for you for the
fiscal year in which termination occurred. This payment will be made in equal
monthly installments during the twenty-four month period (the "Severance
Period") commencing with the month following termination. You shall have no
obligation to seek other employment during the first 12 months of the Severance
Period (the "Initial Severance Period") and the obligation to make severance
payments to you during the Initial Severance Period will not be affected by any
compensation that you may receive during such period. You agree that you will
use reasonable efforts to seek other employment during the balance of the
Severance Period (the "Remaining Severance Period") and that, to the extent that
you earn cash compensation from other employment during the Remaining Severance
Period, the obligation to make payments to you during the Remaining Severance
Period shall be correspondingly reduced; provided, however, that the decision
whether to enter into other employment during either the Initial Severance
Period or the Remaining Severance Period shall be solely yours. Except for
benefits that may be due you under any of the Company's benefit plans providing
benefits after termination of employment in accordance with the terms of such
plan, the payments provided for herein during the Severance Period shall be the
<PAGE> 4
exclusive payments due to you for any reason in the event your employment with
the Company is terminated, and you shall not otherwise be entitled to any
payments or benefits.
10. Your position with the Company may be terminated by the Company for
"Cause" only by written notice given to you after action by a majority of the
members of the Board of Directors of the Company and only within ninety days
after the later of the occurrence of the Company learning of one of the
following events:
(a) Your conviction of a felony, or of a misdemeanor involving the
money or property of the Company or any subsidiary;
(b) Your willful and continued failure without proper cause to
substantially perform the duties and responsibilities of your
position or to comply in all material respects with the material
written policies or directives of the Company, which failure shall
not be remedied within seven days after written notice thereof
from the Company to you;
(c) You shall have willfully engaged in misconduct that materially
damages or injures the reputation of the Company or any
subsidiary; or
(d) You shall have been guilty of gross negligence in the performance
of your duties and responsibilities.
For purposes of this paragraph 10, no act or failure to act, on your part shall
be deemed to be "willful" unless done, or omitted to be done, by you not in good
faith and without reasonable belief that such act or omission was in the best
interest of the Company.
11. Your position with the Company shall be terminated by the Company for
"Disability" if you shall be unable to perform your duties and responsibilities
by reason of a specific mental or physical illness or injury and such inability
shall have existed for an aggregate of at least 180 days in the twelve month
period.
Any question as to the existence of a Disability as to which you and the Company
cannot agree shall be determined in writing by a qualified independent physician
mutually acceptable to you and the Company. If you and the Company cannot agree
as to a qualified independent physician, each shall appoint such a physician and
those two physicians shall select a third who shall make such determination in
writing. The determination of Disability made in writing to the Company and you
shall be final and conclusive for all purposes of this agreement.
12. Your position with the Company may be terminated by you for "Good
Reason" only if you give written notice of such termination to the Company
within 90 days after the occurrence of any one of the following events:
(a) At any time during the term of your employment with the Company
your base salary, or your bonus and incentive compensation
potential and benefits are in the aggregate, less favorable than
that provided to other senior executives of the Company or its
subsidiaries or your rate of base
<PAGE> 5
compensation, or the basis on which your incentive compensation is
awarded, is changed without your consent in a manner adverse to
you other than for Cause; provided, however, that there shall be
no obligation to increase your rate of base compensation or to pay
you minimum bonuses except those specifically agreed to by the
Company in writing (as long as the method of determining your
entitlement to bonuses is not changed in a manner adverse to you);
(b) Your authority or responsibilities are significantly diminished
without your consent or you are required to report to any person
other than the Chairman of the Board of Directors of the Company
or the Board, other than for Cause or unless you become Disabled;
(c) Your being required, without your consent, to perform your duties
at a location other than the Company's principal executive offices
in Ann Arbor, Michigan (other than as a result of normal business
travel requirements);
(d) A Change in Control of the Company, as defined in the Borders
Group, Inc. Stock Option Plan; or
(e) Any failure of the Board to nominate you, or of the shareholders
to elect you, to serve as a director of the Company.
13. The shares of Ingram Industries that you or your wife or your
minor children own or control, either directly or through partnerships or
trusts, as well as any additional shares of Ingram Industries that you or your
wife acquire in the future through the exercise of stock options or other
rights, will be placed in one or more blind trusts pursuant to which all voting,
disposition and other rights relating to such shares will be given to an
independent trustee until the earlier of: (i) the date upon which you cease to
be an employee of the Company; or (ii) the date upon which Ingram Industries
ceases to own any shares or other interest in Ingram Book Group or any successor
company. With respect to shares held for the benefit of your minor children, the
blind trust requirement may be satisfied by the appointment of, and the grant of
such rights to, an independent co-trustee of the existing trust(s) in which such
shares are held and such trustee shall not be required to have any rights with
respect to any assets of such trust(s) other than the Ingram Industries shares.
The Company will establish an independent committee of the Board to monitor all
transactions between the Company and Ingram Industries or its affiliates,
including both transactions in the normal course of business and any unusual
transactions, and all transactions outside the ordinary course of business will
be subject to the approval of the Board after receiving the report of the
independent committee. We may disclose your holdings in Ingram Industries and
the role of the independent committee in our annual proxy statement. Such
disclosure will be mutually acceptable to you and the Board except that the
Company shall have the right to make any disclosure that it reasonably believes
is required by law.
14. Any dispute that may exist respecting (i) the interpretation or
application of any provision of the agreement (including, without limitation,
the provisions of this paragraph) or (ii) your entitlement to payments or other
benefits after termination of your employment shall be resolved by arbitration
in Detroit, Michigan in accordance with the
<PAGE> 6
rules of the American Arbitration Association and judgment on the award may be
entered in any court having jurisdiction. If your position in any such
dispute is sustained in the arbitration, the Company will pay or reimburse you
for your expenses in connection with the resolution of such dispute (including,
without limitation, counsel fees and disbursements and other charges).
Please confirm your agreement by signing below and retain one copy for your
records.
Sincerely,
BORDERS GROUP, INC.
Agreed:
By:/s/ Robert DiRomualdo
---------------------
/s/ Phillip M. Pfeffer
- ----------------------
<PAGE> 7
Schedule A
BORDERS GROUP, INC.* BGP
Costco COST
Bed, Bath & Beyond BBBY
Staples SPLS
Starbucks SBUX
Home Depot HD
Best Buy BBY
Barnes & Noble BKS
Wal-Mart WMT
Circuit City CC
OfficeMax OMX
Office Depot ODP
AutoZone AZO
<PAGE> 8
Schedule C
The Company will prepare and file with the Securities and Exchange Commission
("SEC") as soon as reasonably practicable after your written request, a
Registration Statement on Form S-3, or other available form of Registration
Statement with respect to the shares of common stock of the Company ("Company
Shares") that you purchase under Section 6b (hereinafter referred to as the
"Registration Statement") and use its reasonable efforts to cause such
Registration Statement to become effective as soon as reasonably possible
thereafter, and, subject to the provisions below, use its reasonable efforts to
keep such Registration Statement effective for a period concluding on the
earlier of (i) one year after it becomes effective or (ii) until you have sold
all of such Company Shares. If at any time after a Registration Statement
becomes effective, the Company advises you in writing that due to the existence
of material information that has not been disclosed to the public and included
in the Registration Statement it is necessary to amend the Registration
Statement, you shall suspend any further sale of Company Shares pursuant to the
Registration Statement until the Company advises you that the Registration
Statement has been amended. In such event, the Company shall not be required to
amend the Registration Statement during any time when the Company's officers and
directors are prohibited from buying or selling Company Shares pursuant to
Company's insider trade policy. Notwithstanding the foregoing sentence, the
Company shall file any amendment necessary for you to recommence sales under the
Registration Statement concurrently with the commencement of any period in which
directors and officers of the Company are allowed to buy or sell Company Shares
pursuant to Company's insider trade policy.
In addition, the Company may suspend use of the Registration Statement to the
extent the Company is advised by its legal counsel that such action is
reasonably necessary to comply with federal securities law. In the event the
sales of your Company Shares pursuant to the Registration Statement are
suspended as provided above, the one year period during which a Registration
Statement must be kept effective shall be extended for the total number of days
during which sales are suspended. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to Section 6b and this
Schedule C that you furnish to the Company such information regarding you, the
Company Shares held by you, and the intended method of disposition of such
Company Shares, as shall be required to effect their registration.
<PAGE> 1
EXHIBIT 10.34
PARTICIPATION AGREEMENT
Among
BORDERS GROUP, INC.,
BORDERS, INC.,
WILMINGTON TRUST COMPANY,
not in its individual capacity
except as expressly stated herein,
but solely as Owner Trustee,
JESS PROJECT FUNDING CORP.,
as Owner Beneficiary,
FIRST SECURITY BANK, N.A.,
as Collateral Trustee,
And
THE PURCHASERS IDENTIFIED HEREIN
Dated as of December 1, 1998
<PAGE> 2
Participation Agreement
<TABLE>
<S> <C> <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 Documents..................................3
Section 2.6 Assignments of Mortgage, et al....................................................3
Section 2.7 Certification of Cost.............................................................3
Section 2.8 Surveys, Environmental Reports and Zoning.........................................3
Section 2.9 Mortgagee's Title Insurance; Endorsements.........................................4
Section 2.10 Estoppels.........................................................................4
Section 2.11 Letter of Credit..................................................................4
Section 2.12 Compliance Certificate............................................................4
Section 2.13 Opinions of Counsel...............................................................5
Section 2.14 Purchase Permitted By Applicable Law, etc.........................................6
Section 2.15 Payment of Special Counsel and other Fees.........................................6
Section 2.16 Payment of Recording Fees, Charges and Taxes......................................6
Section 2.17 Private Placement Number..........................................................6
Section 2.18 Offeree Letter....................................................................6
Section 2.19 Proceedings and Documents.........................................................6
ARTICLE III REPRESENTATIONS AND WARRANTIES....................................................7
Section 3.1 Representations of the Issuer.....................................................7
Section 3.2 Representations of the Collateral Trustee.........................................7
Section 3.3 Representations of the Guarantor..................................................7
Section 3.4 Representations of the Tenant.....................................................7
Section 3.5 Representations of the Owner Beneficiary..........................................7
Section 3.6 Representations of the Purchasers.................................................7
ARTICLE IV GUARANTOR COVENANTS...............................................................9
Section 4.1 Reporting Requirements............................................................9
Section 4.2 Inspection Rights................................................................10
Section 4.3 Transaction Expenses.............................................................10
Section 4.4 Payment of Certain Fees and Expenses.............................................11
ARTICLE V DIRECT PAYMENT...................................................................11
Section 5.1 Direct Payment...................................................................11
</TABLE>
-i-
<PAGE> 3
Participation Agreement
<TABLE>
<S> <C> <C>
ARTICLE VI DEFINITIONS......................................................................12
Section 6.1 General Definitions..............................................................12
Section 6.2 Indenture Definitions............................................................17
ARTICLE VII OTHER COVENANTS AND AGREEMENTS...................................................17
Section 7.1 Covenants of the Trust Company, the Issuer, the Collateral
Trustee and the Owner Beneficiary................................................17
Section 7.2 Guarantor's Operative Agreement Rights...........................................18
Section 7.3 Covenants of the Collateral Trustee..............................................18
Section 7.4 Collateral Trustee Project Loan Agreement Rights.................................19
ARTICLE VIII TRANSFER OF INTEREST.............................................................19
Section 8.1 Restrictions of Transfer.........................................................19
Section 8.2 Effect of Transfer...............................................................19
ARTICLE IX INDEMNIFICATION..................................................................19
Section 9.1 General Indemnity................................................................19
Section 9.2 General Tax Indemnity............................................................20
ARTICLE X MISCELLANEOUS....................................................................24
Section 10.1 Amendments, Etc..................................................................24
Section 10.2 Notices, Etc.....................................................................24
Section 10.3 No Waiver; Remedies..............................................................25
Section 10.4 Binding Effect; Term; Assignability..............................................26
Section 10.5 Governing Law....................................................................26
Section 10.6 Execution in Counterparts........................................................26
Section 10.7 Third Party Beneficiaries........................................................26
Section 10.8 Survival of Covenants and Representations........................................26
Section 10.9 Severability.....................................................................26
Section 10.10 Confidential Information.........................................................26
Section 10.11 Issuer Recourse..................................................................28
Section 10.12 Owner Beneficiary Exculpation....................................................28
</TABLE>
-ii-
<PAGE> 4
Participation Agreement
ATTACHMENTS TO PARTICIPATION AGREEMENT
<TABLE>
<S> <C>
SCHEDULE I -- Name and Address of Purchasers
EXHIBIT A -- Description of Closing Opinion of Special Counsel for Purchasers
EXHIBIT B -- Description of Closing Opinion of Counsel for Issuer
EXHIBIT C -- Description of Closing Opinion of Counsel for Collateral Trustee
EXHIBIT D -- Description of Closing Opinion of Counsel for Guarantor and Tenant
EXHIBIT E -- Description of Closing Opinion of Counsel for Project Borrowers
EXHIBIT F -- Representations and Warranties of Issuer
EXHIBIT G -- Representations and Warranties of Collateral Trustee
EXHIBIT H-1 -- Representations and Warranties of Guarantor
EXHIBIT H-2 -- Representations and Warranties of Tenant
EXHIBIT I -- Representations and Warranties of Owner Beneficiary
</TABLE>
-iii-
<PAGE> 5
Participation Agreement
PARTICIPATION AGREEMENT
INTRODUCTORY
THIS PARTICIPATION AGREEMENT (the "Participation Agreement") is dated
as of December 1, 1998, and is among Borders Group, Inc., a Michigan corporation
(the "Guarantor"), Borders, Inc., a Colorado corporation (the "Tenant"), Jess
Project Funding Corp., a Delaware corporation, as owner beneficiary under the
Trust Agreement (as hereinafter defined) (the "Owner Beneficiary"), Wilmington
Trust Company, not in its individual capacity except as expressly stated herein
(in such individual capacity, referred to herein as the "Trust Company"), but
solely as owner trustee under the Trust Agreement (in such capacity as owner
trustee, the "Issuer"), First Security Bank, N.A., as Collateral Trustee under
the Collateral Trust Indenture dated as of December 1, 1998 (the "Indenture")
between the Issuer and the Collateral Trustee (the "Collateral Trustee") and the
Purchasers listed on Schedule I hereto (the "Purchasers").
WHEREAS, Issuer wishes to issue its 6.91% Senior Secured Notes due 2019
(the "Notes") in accordance with the terms of the Indenture (as hereinafter
defined), which Notes shall have the tenor, and shall be secured in the manner,
set forth in the Indenture.
WHEREAS, subject to the terms and conditions set forth herein and on
the basis of the representations and warranties hereinafter set forth, the
Purchasers are willing to purchase from the Issuer all of the Notes.
WHEREAS, capitalized terms used in this Participation Agreement shall
have the respective meanings as specified in Article VI hereof.
NOW, THEREFORE, in consideration of and for the mutual benefit of the
parties hereto, each of the undersigned does hereby agree as follows:
ARTICLE I
TERMS OF ISSUANCE OF THE NOTES
Section 1.1 Issuance and Sale of Notes. The Issuer hereby agrees to
sell to the Purchasers, and each of the Purchasers agrees, severally and not
jointly, to purchase from the Issuer, the Notes on the Closing Date at a price
of 100% of the principal amount thereof and in the aggregate principal amount
set forth opposite its name on Schedule I hereto (the "Purchase Price"). The
Issuer hereby directs the Collateral Trustee to execute the certificate of
authentication appended to each Note.
Section 1.2 Closing. The closing of the transaction contemplated by the
Indenture and this Participation Agreement, including, without limitation, the
issuance and sale of the Notes, shall be held at the offices of Dickinson Wright
PLLC, 525 N. Woodward Avenue, Suite 2000, Bloomfield Hills, Michigan 48304, at
11:00 a.m., Bloomfield Hills, Michigan time, on
<PAGE> 6
Participation Agreement
December 17, 1998 or at such other date and time as may be mutually acceptable
to the parties hereto (the "Closing Date").
Section 1.3 Wire Transfer. On the Closing Date, the Purchase Price for
each Note shall be paid by the Purchaser thereof to the Issuer by wire transfer
of immediately available funds for the account of the Issuer at Wilmington Trust
Company, ABA no. 031100092, for credit to Account: Borders Trust 1998, Account
No. 46983-0 Attn: Joe Feil, Ref: Borders Trust 1998.
Section 1.4 Failure to Deliver. If on the Closing Date the Issuer fails
to tender to any Purchaser the Notes to be purchased by such Purchaser or if the
conditions to the obligation of such Purchaser specified in Article II have not
been fulfilled, such Purchaser may thereupon elect to be relieved of all further
obligations under this Participation Agreement. Nothing in this Section shall
operate to relieve the Issuer, the Owner Beneficiary, the Guarantor or the
Tenant from their respective obligations hereunder or to waive any of such
Purchaser's rights against the Issuer, the Owner Beneficiary, the Guarantor or
the Tenant.
In addition to execution and delivery of the Notes, the Issuer shall,
at the request of Purchaser, execute and deliver on the Closing Date such
receipts, endorsements, and other documents acknowledging receipt of the
Purchase Price as such Purchaser may reasonably request.
ARTICLE II
CONDITIONS TO THE CLOSING
The obligation of each Purchaser to purchase and pay for the Notes to
be sold to such Purchaser on the Closing Date is subject to the fulfillment to
its satisfaction, prior to or on the Closing Date, of the following conditions:
Section 2.1 Representations and Warranties.
(a) The representations and warranties of the Issuer contained in
Exhibit F to this Participation Agreement shall be true and correct on and with
respect to the Closing Date.
(b) The representations and warranties of the Collateral Trustee
contained in Exhibit G to this Participation Agreement shall be true and correct
on and with respect to the Closing Date.
(c) The representations and warranties of the Guarantor contained in
Exhibit H-1 to this Participation Agreement shall be true and correct on and
with respect to the Closing Date.
(d) The representations and warranties of the Tenant contained in
Exhibit H-2 to this Participation Agreement shall be true and correct on and
with respect to the Closing Date.
(e) The representations and warranties of the Owner Beneficiary
contained in Exhibit I to this Participation Agreement shall be true and correct
on and with respect to the Closing Date.
-2-
<PAGE> 7
Participation Agreement
Section 2.2 Performance; No Default.
(a) The Issuer and the Collateral Trustee shall have performed all of
their respective obligations and complied with all agreements and conditions
required to be performed and complied with on or prior to the Closing Date as
set forth in this Participation Agreement.
(b) No default or event of default shall have occurred and be
continuing with respect to any Project Loan Note, any Lease or any other Project
Loan Document and no event shall have occurred and be continuing under the
provisions of any such instrument or agreement which, with the lapse of time or
the giving of notice, or both, would constitute a default or an event of default
thereunder.
Section 2.3 Indenture. The Indenture shall have been duly executed and
delivered by the Issuer and the Collateral Trustee, and such parties shall have
performed, complied with or satisfied all agreements and conditions contained in
the Indenture required to be performed or complied with on or prior to the
Closing Date to the satisfaction of such Purchaser.
Section 2.4 Notes. The Issuer shall have issued, and the Collateral
Trustee shall have authenticated, the respective Note to such Purchaser.
Section 2.5 Collateral Assignments of Project Loan Documents. The
Issuer shall have executed and delivered in favor of the Collateral Trustee a
Collateral Assignment of Project Loan Document for each Project Loan, together
with, (i) with respect to each Project Loan, the related executed original
Project Loan Note, together with executed originals of the related Project Loan
Agreement, Mortgage, Assignment of Lease and Rents, Environmental Indemnity and
Property Owner Estoppel, if any, and a duly completed UCC financing statement
listing the related Project Borrower, as debtor, and the Issuer, as secured
party, and listing as collateral all fixtures located on the respective
Mortgaged Property, to be filed in such filing offices as such Purchaser may
reasonably determine, (ii) with respect to each Project Loan, a duly completed
UCC financing statement listing the related Project Borrower, as debtor, the
Issuer, as secured party, and the Collateral Trustee, as assignee, relating to
the UCC financing statement referred to in clause (i) above to be filed in each
filing office as such Purchaser may reasonably determine and (iii) duly
completed UCC financing statement listing the Issuer, as debtor, and the
Collateral Trustee, as secured party, and listing as collateral the security
interests created by each Collateral Assignment of Project Loan Documentation to
be filed in such filing office(s) as such Purchaser shall reasonably determine.
Section 2.6 Assignments of Mortgage, et al.. The Issuer shall have
executed and delivered in favor of the Collateral Trustee an Assignment of
Mortgage for each Mortgage and a Reassignment of Leases and Rents for each
Assignment of Lease and Rents, in recordable form for recording in the
appropriate filing office in which the respective Mortgaged Property is located.
Section 2.7 Certification of Cost. Certification of the actual cost for
each of the Mortgaged Properties certified by the Guarantor shall have been
delivered to such Purchaser or its special counsel and shall be satisfactory to
such Purchaser in scope and form.
Section 2.8 Surveys, Environmental Reports and Zoning. Surveys and
environmental
-3-
<PAGE> 8
Participation Agreement
reports for each of the Mortgaged Properties shall have been delivered to such
Purchaser or its special counsel and shall be satisfactory to such Purchaser in
scope and form. Such Purchaser shall have received sufficient evidence necessary
to determine that all zoning laws, regulations and ordinances have been complied
with for each Mortgaged Property.
Section 2.9 Mortgagee's Title Insurance; Endorsements. Loan title
insurance policies issued by a title insurance company naming the Collateral
Trustee as the insured mortgagee reasonably satisfactory to such Purchaser (or,
in the alternative, a commitment to issue a loan title insurance policy issued
by a title insurance company reasonably satisfactory to such Purchaser and
marked and initialed by an authorized agent of such title company to show all
changes to be made in connection with the actual issuance of such title
insurance policy) and dated the date of the recording of the Mortgages shall
have been issued for each Mortgaged Property and shall be satisfactory in scope
and form to such Purchaser.
Section 2.10 Estoppels. The Tenant shall have executed and delivered
the Tenant Estoppel and shall deliver estoppel certificates in respect of each
reciprocal easement and/or operating agreement affecting any Mortgaged Property
in form and scope, and executed by such parties, as may be reasonably
satisfactory to each Purchaser.
Section 2.11 Letter of Credit. The Guarantor or Tenant shall have
delivered to the Issuer the Letter of Credit duly issued by a financial
institution satisfactory to such Purchaser and the Issuer shall have delivered
to the Collateral Trustee the original Letter of Credit listing the Collateral
Trustee as a co-beneficiary.
Section 2.12 Compliance Certificate.
(a) Issuer Officer's Certificate. The Issuer shall have delivered to
the Purchasers an Officer's Certificate, dated the Closing Date, certifying that
the conditions specified in Sections 2.1(a), 2.2 and 2.3 (to the extent relating
to the obligations of the Issuer) have been fulfilled.
(b) Issuer Existence and Authority. On or prior to the Closing Date,
such Purchaser shall have received, in form and substance reasonably
satisfactory to such Purchaser and special counsel to the Purchasers, such
documents and evidence with respect to the Issuer as special counsel to the
Purchasers may reasonably request in order to establish the existence and good
standing of the Issuer and the authorization of the transactions contemplated by
this Participation Agreement and all other Operative Documents to which it is a
party.
(c) Collateral Trustee's Officer's Certificate. The Collateral Trustee
shall have delivered to the Purchasers an Officer's Certificate, dated the
Closing Date, certifying that the conditions specified in Sections 2.1(b),
2.2(a) and 2.3 (to the extent relating to the obligations of the Collateral
Trustee) have been fulfilled.
(d) Collateral Trustee's Existence and Authority. Such Purchaser shall
have received, in form and substance reasonably satisfactory to such Purchaser
and special counsel to the Purchasers, such documents and evidence with respect
to the Collateral Trustee as special counsel to the Purchasers may reasonably
request in order to establish the existence of the Collateral Trustee and the
authorization of the transactions contemplated by this Participation Agreement
and all other Operative Documents to which it is a party.
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Participation Agreement
(e) Guarantor's Officer's Certificate. The Guarantor shall have
delivered to the Purchasers an Officer's Certificate, dated the Closing Date,
certifying that, to such officer's knowledge, the representations and warranties
contained in Section 2.1(c) are true and correct on and with respect to the
Closing Date.
(f) Guarantor's Existence and Authority. Such Purchaser shall have
received, in form and substance reasonably satisfactory to such Purchaser and
special counsel to the Purchasers, such documents and evidence with respect to
the Guarantor as special counsel to the Purchasers may reasonably request in
order to establish the existence and good standing of the Guarantor and the
authorization of the transactions contemplated by this Participation Agreement
and all other Operative Documents to which it is a party.
(g) Tenant's Officer's Certificate. The Tenant shall have delivered to
the Purchasers an Officer's Certificate, dated the Closing Date, certifying
that, to such officer's knowledge, the representations and warranties contained
in Section 2.1(d) are true and correct on and with respect to the Closing Date.
(h) Tenant's Existence and Authority. Such Purchaser shall have
received, in form and substance reasonably satisfactory to such Purchaser and
special counsel to the Purchasers, such documents and evidence with respect to
the Tenant as special counsel to the Purchasers may reasonably request in order
to establish the existence and good standing of the Tenant and the authorization
of the transactions contemplated by this Participation Agreement and all other
Operative Documents to which it is a party.
Section 2.13 Opinions of Counsel. Each Purchaser shall have received
opinions in form and substance satisfactory to such Purchaser from:
(a) Morris, James, Hitchens & Williams, special counsel for the Issuer,
dated the Closing Date and covering the matters set forth in Exhibit B and
covering such other matters incident to the transactions contemplated hereby as
such Purchaser may reasonably request (and the Issuer hereby instructs its
counsel to deliver such opinions to the Purchasers),
(b) Ray, Quinney & Nebeker, counsel for the Collateral Trustee, dated
the Closing Date and covering the matters set forth in Exhibit C and covering
such other matters incident to the transactions contemplated hereby as such
Purchaser may reasonably request (and the Collateral Trustee hereby instructs
its counsel to deliver such opinion to the Purchasers),
(c) Dickinson Wright PLLC, special counsel for the Guarantor and the
Tenant, dated the Closing Date and covering the matters set forth in Exhibit D
and covering such other matters incident to the transactions contemplated hereby
as such Purchaser may reasonably request,
(d) various local counsel for the Project Borrowers dated on or prior
to the Closing Date and covering the matters set forth in Exhibit E and covering
such other matters incident to the transactions contemplated hereby as such
Purchaser may reasonably request, and
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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 J.P. Morgan Securities, Inc. to the Purchasers satisfactory to each Purchaser
in scope and form.
Section 2.19 Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated by this
Participation Agreement and all documents and instruments incident to such
transactions shall be reasonably satisfactory to such Purchaser and its special
counsel, and such Purchaser and its special counsel shall have received all such
counterpart originals or certified or other copies of such documents as such
Purchaser may reasonably request.
For purposes of this Article II, the payment of the Purchase Price by
such Purchaser for each Note to be purchased by it hereunder shall constitute
conclusive evidence that such Purchaser is satisfied that each and every
condition set forth in this Article II has been fulfilled or that such Purchaser
has waived compliance of any such condition; provided, however, that nothing
contained in this paragraph shall be construed as a waiver of the truth and
accuracy of
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Participation Agreement
any representation or warranty made by any party on or prior to the Closing Date
in connection with the transactions contemplated by the Participation Agreement
and the Indenture.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.1 Representations of the Issuer. In order to induce each
Purchaser to purchase the Notes from the Issuer, the Issuer represents and
warrants that all representations and warranties set forth in Exhibit F to this
Participation Agreement are true and correct as of the date hereof and are
incorporated herein by reference with the same force and effect as though herein
set forth in full.
Section 3.2 Representations of the Collateral Trustee. In order to
induce each Purchaser to purchase Notes from the Issuer, the Collateral Trustee
represents and warrants that all representations and warranties set forth in
Exhibit G to this Participation Agreement are true and correct as of the date
hereof and are incorporated herein by reference with the same force and effect
as though herein set forth in full.
Section 3.3 Representations of the Guarantor. In order to induce each
Purchaser to purchase the Notes from the Issuer, the Guarantor represents and
warrants that all representations and warranties set forth in Exhibit H-1 to
this Participation Agreement are true and correct as of the date hereof and are
incorporated herein by reference with the same force and effect as though herein
set forth in full.
Section 3.4 Representations of the Tenant. In order to induce each
Purchaser to purchase the Notes from the Issuer, the Tenant represents and
warrants that all representations and warranties set forth in Exhibit H-2 to
this Participation Agreement are true and correct as of the date hereof and are
incorporated herein by reference with the same force and effect as though herein
set forth in full.
Section 3.5 Representations of the Owner Beneficiary. In order to
induce each Purchaser to purchase the Notes from the Issuer, the Owner
Beneficiary represents and warrants that all representations and warranties set
forth in Exhibit I to this Participation Agreement are true and correct as of
the date hereof and are incorporated herein by reference with the same force and
effect as though herein set forth in full.
Section 3.6 Representations of the Purchasers.
(a) Each Purchaser represents and warrants that at least one of the
following statements concerning each source of funds to be used by it to pay the
Purchase Price is accurate as of the Closing Date:
(i) the source of funds to be used by it to pay the purchase
price of the Notes is an "insurance company general account" within the
meaning of Department of Labor Prohibited Transaction Exemption ("PTE")
95-60 (issued July 12, 1995) and there is no employee benefit plan,
treating as a single plan, all plans maintained by the same employer or
employee organization, with respect to which the amount of the general
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Participation Agreement
account reserves and liabilities for all contracts held by or on behalf
of such plan, exceed ten percent (10%) of the total reserves and
liabilities of such general account (exclusive of separate account
liabilities) plus surplus, as set forth in the NAIC Annual Statement
filed with its state of domicile;
(ii) all or a part of such funds constitute assets of one or
more separate accounts, trusts or a commingled pension trust maintained
by it, and it has disclosed to each of the Collateral Trustee, the
Issuer, the Owner Beneficiary and each Project Borrower, the names of
such employee benefit plans whose assets in such separate account or
accounts or pension trusts exceed 10% of the total assets or are
expected to exceed 10% of the total assets of such account or accounts
or trusts as of the date of such purchase (for the purpose of this
clause (ii), all employee benefit plans maintained by the same employer
or employee organization are deemed to be a single plan);
(iii) all or part of such funds constitute assets of a bank
collective investment fund maintained by it, and it has disclosed to
each of the Collateral Trustee, the Issuer, the Owner Beneficiary and
each Project Borrower, the names of such employee benefit plans whose
assets in such collective investment fund exceed 10% of the total
assets or are expected to exceed 10% of the total assets of such fund
as of the date of such purchase (for the purpose of this clause (iii),
all employee benefit plans maintained by the same employer or employee
organization are deemed to be a single plan);
(iv) all or part of such funds constitute assets of one or
more employee benefit plans, each of which has been identified to each
of the Collateral Trustee, the Issuer, the Owner Beneficiary and each
Project Borrower, in writing;
(v) it is acquiring the Notes for the account of one or more
pension funds, trust funds or agency accounts, each of which is a
"governmental plan" as defined in Section 3(32) of ERISA;
(vi) the source of funds is an "investment fund" managed by a
"qualified professional asset manager" or "QPAM" (as defined in Part V
of PTE 84-14, issued March 13, 1984), provided that no other party to
the transactions described in this Agreement and no "affiliate" of such
other party (as defined in Section V(c) of PTE 84-14) has at this time,
or during the immediately preceding one year exercised the authority to
appoint or terminate said QPAM as manager of the assets of any plan
identified in writing pursuant to this clause (vi) or to negotiate the
terms of said QPAM's management agreement on behalf of any such
identified plans; or
(vii) if it is other than an insurance company, all or a
portion of such funds consists of funds which do not constitute "plan
assets".
(b) Each Purchaser represents that it is an "accredited investor" (as
defined in Rule 501 (a)(1), (2), (3) or (7) of Regulation D under the Securities
Act of 1933, as amended) acting for its own account (and not for the account of
others) or as a fiduciary or agent for others (which others are also "accredited
investors"). Each Purchaser further represents that such Purchaser is acquiring
the Notes for the purpose of investment and not with a view to the distribution
thereof,
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Participation Agreement
and that such Purchaser has no present intention of selling, negotiating or
otherwise disposing of the Notes; it being understood, however, that the
disposition of such Purchaser's property shall at all times be and remain within
its control.
Each Purchaser understands that the Notes have not been registered
under the Securities Act of 1933, as amended (the "Securities Act"), or under
any state securities laws, and may not be resold in the absence of registration
unless such sale is exempt from registration under the Securities Act and any
applicable state securities laws.
ARTICLE IV
GUARANTOR COVENANTS
Section 4.1 Reporting Requirements. The Guarantor hereby covenants and
agrees that until payment in full of all principal, premium, if any, and
interest outstanding from time to time under the Notes, the Guarantor will
furnish or cause to be furnished to the Collateral Trustee and each Purchaser:
(a) As soon as available and in any event within forty-five (45)
calendar days after the end of each of its first three fiscal quarters in each
fiscal year, consolidating and consolidated financial statements of the
Guarantor and its Subsidiaries, consisting of a consolidating and consolidated
balance sheet as of the end of such fiscal quarter and related consolidating and
consolidated statements of income, stockholders' equity and cash flows for the
fiscal quarter then ended and the fiscal year through that date, all in
reasonable detail and certified (subject to normal year-end audit adjustments)
by an authorized officer of the Guarantor as having been prepared in accordance
with GAAP, consistently applied, and setting forth in comparative form the
respective financial statements for the corresponding date and period in the
previous fiscal year.
(b) As soon as available and in any event within ninety (90) days after
the end of each fiscal year of the Guarantor, consolidating and consolidated
financial statements of the Guarantor and its Subsidiaries consisting of a
consolidating and consolidated balance sheet as of the end of such fiscal year,
and related consolidating and consolidated statements of income, stockholders'
equity and cash flows for the fiscal year then ended, all in reasonable detail
and setting forth in comparative form the financial statements as of the end of
and for the preceding fiscal year, and certified by independent certified public
accountants of nationally recognized standing satisfactory to the Collateral
Trustee. The certificate or report of accountants shall be free of
qualifications (other than any consistency qualification that may result from a
change in the method used to prepare the financial statements as to which such
accountants concur) and shall not indicate the occurrence or existence of any
event, condition or contingency which would materially impair the prospect of
payment or performance of any covenant, agreement or duty of the Guarantor under
any of the Credit Documents, the Project Loan Documents or the Operative
Documents to which it is a party.
(c) Concurrently with the delivery of the financial statements
described in the foregoing paragraphs (a) and (b), a certificate executed by the
President or any Vice President of
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Participation Agreement
the Guarantor certifying that no Event of Default has occurred and is then
continuing as of the date of such financial statements and as of the date of
such certificate.
(d) Concurrently with the delivery of the financial statements
described in the foregoing paragraph (b), a report setting forth for the
corresponding fiscal year (i) with respect to each Mortgaged Property (A) the
return on net assets for such Mortgaged Property, (B) the net sales for such
Mortgaged Property and the corresponding percentage changes for the year earlier
period, and (C) the net sales per square foot for such Mortgaged Property and
(ii) with respect to each Mortgaged Property on an average basis for all other
"super stores" operated by the Tenant and open in the same fiscal year of the
Tenant as such Mortgaged Property has opened (A) the average return on net
assets for all such "super stores," (B) the average net sales for all such
"super stores," (C) the average net sales per square foot for all such "super
stores" and (D) the corresponding figures and corresponding percentage change
for the year earlier period.
(e) promptly, copies of all financial statements and reports and all
press releases that the Guarantor sends to its creditors or shareholders, and
copies of all financial statements and regular, periodical or special reports
(including Forms 10K, 10Q and 8K) that the Guarantor or the Tenant may make to,
or file with, the Securities and Exchange Commission, or any successor thereto.
(f) Such other information respecting the condition or operations,
financial or otherwise, of the Guarantor and the Tenant as the Collateral
Trustee or any Purchaser may from time to time reasonably request.
Section 4.2 Inspection Rights. The Guarantor shall permit the
representatives of the Purchaser:
(a) If no Default or Event of Default then exists, at the expense of
such Purchasers and upon reasonable prior notice to the Guarantor, to visit the
principal executive office of the Guarantor, to discuss the affairs, finances
and accounts of the Guarantor and its Subsidiaries with the Guarantor's
officers, and (with the consent of the Guarantor, which consent will not be
unreasonably withheld) its independent public accountants, and (with the consent
of the Guarantor, which consent will not be unreasonably withheld) to visit the
Mortgaged Properties, all at such reasonable times and as often as may be
reasonably requested in writing; and
(b) If a Default or Event of Default then exists, at the expense of the
Guarantor, to visit and inspect any of the offices or properties of the
Guarantor or any Subsidiary, to examine all their respective books of account,
records, reports and other papers, to make copies and extracts therefrom, and to
discuss their respective affairs, finances and accounts with their respective
officers and independent public accountants (and by this provision the Guarantor
authorizes said accountants to discuss the affairs, finances and accounts of the
Guarantor and its Subsidiaries), all at such times and as often as may be
requested.
Section 4.3 Transaction Expenses. Whether or not the transactions
contemplated hereby are consummated, the Guarantor will pay all costs and
expenses (including reasonable attorneys' fees of a special counsel and, if
reasonably required, local or other counsel) incurred by each Purchaser in
connection with such transactions and in connection with any amendments,
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Participation Agreement
waivers or consents under or in respect of this Agreement or the other Operative
Documents (whether or not such amendment, waiver or consent becomes effective),
including, without limitation: (a) the costs and expenses incurred in enforcing
or defending (or determining whether or how to enforce or defend) any rights
under this Agreement or the other Operative Documents or in responding to any
subpoena or other legal process or informal investigative demand issued in
connection with this Agreement or the other Operative Agreements, or by reason
of being a holder of the Notes, and (b) the costs and expenses, including
financial advisors' fees, incurred in connection with the insolvency or
bankruptcy of the Guarantor or the Tenant or in connection with any work-out or
restructuring of the transactions contemplated hereby and by the Notes. The
Guarantor will pay, and will save each Purchaser harmless from, all claims in
respect of any fees, costs or expenses if any, of brokers and finders.
The obligations of the Guarantor under this Section 4.3 will survive
the payment or transfer of any Note, the enforcement, amendment or waiver of any
provision of this Agreement or the other Operative Documents, and the
termination of the Leases.
Section 4.4 Payment of Certain Fees and Expenses. The Guarantor shall
pay or cause to be paid (a) the initial and annual fee of the Trust Company and
any necessary co-trustees (including reasonable counsel fees and expenses) or
any successor, for acting as owner trustee pursuant to the Trust Agreement, (b)
the initial and annual fee of the Owner Beneficiary and any successor beneficial
owner, for acting as beneficial owner pursuant to this Trust Agreement, (c) the
initial and annual fee of the Collateral Trustee and any necessary co-trustees
(including reasonable counsel fees and expenses) or any successor collateral
trustee, for acting as Collateral Trustee, (d) the initial and annual fee of
Lord Securities Corporation, a Delaware corporation, as manager of the Owner
Beneficiary pursuant to a management agreement between the Owner Beneficiary and
Lord Securities Corporation which has been delivered to Guarantor, and (e) all
costs and expenses incurred by the Trust Company, the Collateral Trustee and the
Owner Beneficiary in entering into any future amendments or supplements with
respect to any of the Operating Documents, whether or not such amendments or
supplements are ultimately entered into, or in giving or withholding of waivers
or consents hereto or thereto or, in the case of the Trust Company, in complying
with any further assurances with respect to the Collateral.
ARTICLE V
DIRECT PAYMENT
Section 5.1 Direct Payment. Notwithstanding anything to the contrary
contained in the Indenture or the Notes, in the case of any Note owned by any
Purchaser or any other Noteholder which has given written notice to the
Collateral Trustee requesting that the provisions of this Section 5.1 shall
apply, the Collateral Trustee will punctually pay when due all distributions
thereof with respect to said Notes pursuant to the terms of the Indenture,
without any presentment thereof, directly to such Noteholder at its address set
forth in Schedule I hereto or such other address as such Noteholder may from
time to time designate in writing to the Collateral Trustee or, if a bank
account with a United States bank is so designated for such Noteholder, the
Collateral Trustee will make such payments in immediately available funds to
such bank account, no later than 11:00 a.m., New York City time, on the date
due, marked for attention as indicated, or in such other manner or to such other
account in any United States bank
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Participation Agreement
as such Noteholder may from time to time direct in writing.
ARTICLE VI
DEFINITIONS
Section 6.1 General Definitions. As used herein, the following terms
have the respective meanings set forth below:
"After Tax Basis" shall mean with respect to any payment to be received
by an Impositions Indemnitee, the amount of such payment supplemented by a
further payment or payments so that, after deducting from such aggregate
payments the amount of all taxes (net of any actual current credits, deductions
or other tax benefits arising from the payment by the Impositions Indemnitee of
any amount, including taxes, for which the payment to be received is made)
actually imposed currently on the Impositions Indemnitee by any Governmental
Authority or taxing authority with respect to such payments, the balance of such
payment shall be equal to the original payment to be received; provided,
however, that for the purposes of this definition it shall be assumed that for
any Purchaser as an Indemnified Person (or any Affiliate thereof) Federal, state
and local income taxes are payable at the highest marginal Federal, state and
local statutory income tax rates applicable to corporations from time to time.
"Annual Statements" is defined on Exhibit H paragraph (6).
"Claims" shall mean any and all obligations, liabilities, losses,
actions, suits, penalties, claims, demands, costs and expenses (including,
without limitation, reasonable attorney's fees and expenses) of any nature
whatsoever.
"Collateral Trustee" is defined in the Introductory paragraphs of this
Participation Agreement.
"Closing Date" is defined in Section 1.2.
"Environmental Laws" shall have the meaning assigned thereto in the
Lease Appendix.
"Environmental Violation" shall have the meaning assigned thereto in
the Lease Appendix.
"GAAP" shall mean generally accepted accounting principles as are in
effect from time to time and applied on a basis consistent with the Historical
Statements both as to classification of items and amounts.
"Governmental Authority" shall have the meaning assigned thereto in the
Lease Appendix.
"Guarantor" is defined in the Introductory paragraphs of this
Participation Agreement.
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Participation Agreement
"Hazardous Substance" shall have the meaning assigned thereto in the
Lease Appendix.
"Historical Statements" is defined on Exhibit H paragraph (6).
"Impositions" shall mean, except to the extent described in the
following sentence, any and all liabilities, losses, expenses and costs of any
kind whatsoever for fees, taxes, levies, imposts, duties, charges, assessments
or withholdings ("Taxes") (including (i) real and personal property taxes,
including personal property taxes on any property covered by a Lease that is
classified by any governmental authority as personal property, and real estate
or ad valorem taxes in the nature of property taxes; (ii) sales taxes, use taxes
and other similar taxes (including rent taxes and intangibles taxes); (iii) any
excise taxes; (iv) real estate transfer taxes, conveyance taxes, stamp taxes and
documentary recording taxes and fees; (v) taxes that are or are in the nature of
franchise, income, value added, privilege and doing business taxes, license and
registration fees; and (vi) assessments on any Mortgaged Property, including all
assessments for public improvements or benefits, whether or not such
improvements are commenced or completed within the term of such Lease), and in
each case all interest, additions to tax and penalties thereon, which at any
time prior to, during or with respect to the term of such Lease or in respect of
any period for which the Tenant shall be obligated to pay Supplemental Rent (as
defined in the respective Leases), may be levied, assessed or imposed by any
Federal, state, city, county or local authority upon or with respect to (a) any
Mortgaged Property or any part thereof or interest therein; (b) the financing,
refinancing, demolition, construction, substitution, subleasing, assignment,
control, condition, occupancy, servicing, maintenance, repair, ownership,
possession, activity conducted on, delivery, insuring, use, operation,
improvement, transfer of title, return or other disposition of such Mortgaged
Property or any part thereof or interest therein; (c) the Notes or the Project
Loan Notes or other indebtedness with respect to any Mortgaged Property or any
part thereof or interest therein; (d) the rentals, receipts or earnings arising
from any Mortgaged Property or any part thereof or interest therein; (e) the
Operative Documents or any payment made or accrued pursuant thereto; (f) the
income or other proceeds received with respect to any Mortgaged Property, or any
part thereof or interest therein upon the sale or disposition thereof; (g) the
issuance of the Notes or the Project Loan Notes; or (h) otherwise in connection
with the transactions contemplated by the Operative Documents.
The term "Imposition" shall not mean or include:
(i) Taxes and impositions (other than Taxes that are, or are
in the nature of, sales, use, rental, value added, transfer or property
taxes) that are imposed on a Tax Indemnitee by the United States
federal government that are based on or measured by the net income
(including taxes based on capital gains and minimum taxes) of such
Person; provided that this clause (i) shall not be interpreted to
prevent a payment from being made on an After Tax Basis if such payment
is otherwise required to be so made;
(ii) Taxes and impositions (other than Taxes that are, or are
in the nature of, sales, use, rental, value added, transfer or property
taxes) that are imposed by any state or local jurisdiction and that are
based upon or measured by the gross or net income or gross or net
receipts (including any minimum taxes, withholding taxes or taxes on or
measured by capital stock, franchise or doing business taxes) except
that this clause (ii) shall not
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Participation Agreement
apply to (and thus shall not exclude) any such Taxes imposed on a Tax
Indemnitee by the state (or any local taxing authority thereof or
therein) where any Mortgaged Property is located, possessed or used
under each Lease; provided that this clause (ii) shall not be
interpreted to prevent a payment from being made on an After Tax Basis
if such payment is otherwise required to be so made;
(iii) any Tax or imposition to the extent, but only to such
extent, it relates to any act, event or omission that occurs after the
termination of a Lease with respect to a Mortgaged Property (but not
any Tax or imposition that relates to any period prior to the
termination of each Lease);
(iv) any Tax or imposition for so long as, but only for so
long as, it is being contested in accordance with the provisions of
Section 9.2(g);
(v) any interest or penalties imposed on a Tax Indemnitee as a
result of the failure of such Tax Indemnitee to file any return to
report timely and in the form prescribed by law or to pay any Tax or
imposition, except to the extent such failure is a result of a breach
by such Tax Indemnitee of its obligations under Section 9.2; provided,
that this clause (v) shall not apply (x) if such interest or penalties
arise as a result of a position taken (or requested to be taken) by the
Lessee in a contest controlled by the Lessee under Section 9.2(g) or
(y) to any such interest or penalties that result from such Tax
Indemnitee's complying with the reporting procedures set forth in
Section 9.2;
(vi) any Taxes or impositions imposed on the Tenant that are a
result of the Tenant not being considered a "United States person" as
defined in Section 7701(a)(30) of the Code;
(vii) any Taxes or impositions that are enacted or adopted by
their express terms as a substitute for any Tax that would not have
been indemnified against pursuant to the terms of Section 9.2;
(viii) any Taxes which are imposed on a Tax Indemnitee as a
result of a breach of a covenant or representation by such Tax
Indemnitee in any Operative Document (unless caused by the Lessee's
breach of its representations, warranties and covenants) or as a result
of the gross negligence or willful misconduct of such Tax Indemnitee
itself (as opposed to gross negligence or willful misconduct imputed to
such Tax Indemnitee), but not Taxes imposed as a result of ordinary
negligence of such Tax Indemnitee.
(ix) any Taxes or impositions imposed on the Tenant to the
extent that such Taxes are actually reimbursed to the Tenant by another
Person other than an Affiliate of the Tenant;
(x) any Taxes or impositions imposed upon the Tenant with
respect to any voluntary transfer, sale, financing or other voluntary
disposition by a Project Borrower (other than a transfer contemplated
and permitted by the Operative Documents, including
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Participation Agreement
any transfer in connection with (1) the exercise by the Tenant of any
purchase option under any Lease, (2) the occurrence of an Event of
Default, or (3) a Casualty Event or Condemnation Event affecting any
Mortgaged Property) of any interest in any Mortgaged Property or any
interest in, or created pursuant to, the Operative Documents or any
voluntary transfer of any interest in the Tenant (other than in
connection with the existence of a Lease Event of Default) or any
involuntary transfer of any of the foregoing interests resulting from
the bankruptcy or insolvency of the Tenant (other than in connection
with the existence of an Event of Default);
(xi) any gift or inheritance Taxes;
(xii) any Taxes or impositions imposed on a Tax Indemnitee, to
the extent such Tax Indemnitee actually receives a credit (or otherwise
has a reduction in a liability for Taxes) in respect thereof against
Taxes that are not indemnified hereunder (but only to the extent such
credit is not taken into account in calculating the indemnity payment
on an After Tax Basis);
(xiii) any Tax or imposition to the extent that such Tax or
imposition is imposed on a Tax Indemnitee in respect of a transaction
or business in the jurisdiction imposing such Tax other than the
transactions arising out of the Operative Documents; or
(xiv) any Tax or imposition imposed on a direct or indirect
transferee, successor or assign of the Tenant to the extent of the
excess of such Taxes over the amount of such Taxes that would have been
imposed had there not been a transfer by the Tenant of an interest
arising under the Operative Documents; provided that there shall not be
excluded under this clause (xiv) any such Tax or imposition if such
direct or indirect transferee, successor or assign of the Tenant
acquired its interest as a result of a transfer in connection with an
Event of Default; provided, further, that there shall not be excluded
under this clause (xiv) any amount necessary to make any payment on an
After Tax Basis.
Any tax or imposition excluded from the defined term "Imposition" in any one of
the foregoing clauses (i) through (xiv) shall not be construed as constituting
an Imposition by any provision of any other of the aforementioned clauses.
"Indemnified Person" shall mean the Trust Company, the Issuer, the
Collateral Trustee, in its individual capacity and its trust capacity, each
Purchaser, and the Owner Beneficiary and their respective successors, assigns,
directors, shareholders, partners, officers, employees, agents and Affiliates.
"Indenture" is defined in the Introductory paragraphs of this
Participation Agreement.
"Interim Statements" is defined on Exhibit H paragraph (6).
"Issuer" is defined in the Introductory paragraphs of this
Participation Agreement.
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Participation Agreement
"Lease Appendix" shall mean the appendix of defined terms attached to
each Lease.
"Material Adverse Effect" shall have the meaning assigned thereto in
the Lease Appendix.
"Noteholder" shall mean the Person in whose name a Note is registered
in accordance with the provisions of the Indenture.
"Notes" is defined in the Introductory paragraphs of this Participation
Agreement.
"Officer's Certificate" shall mean a certificate of the chief financial
officer, treasurer, or other officer of such Person whose responsibilities
extend to the subject matter of such certificate.
"Owner Beneficiary" is defined in the Introductory paragraph of this
Participation Agreement.
"Person" shall mean any individual, corporation, limited liability
company, partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Purchase Price" is defined in Section 1.1.
"Purchasers" is defined in the Introductory paragraphs of this
Participation Agreement.
"Subsidiary" of any Person shall mean any corporation, partnership,
joint venture, trust or estate of which (or in which) more than 50% of:
(i) the outstanding capital stock having voting power to elect
a majority of the board of directors of such corporation (irrespective
of whether at the time capital stock of any other class or classes of
such corporation shall or might having voting power upon the occurrence
of any contingency),
(ii) the interest in the capital or profits of such
partnership or joint venture, or
(iii) the beneficial interest of such trust or estate,
is at the time directly or indirectly owned by such Person, by such Person and
one or more of its Subsidiaries or by one or more of such Person's Subsidiaries.
"Tax Indemnitee" shall mean a Project Borrower, the Purchasers, the
Issuer, the Trust Company, the Collateral Trustee, in its individual capacity
and its trust capacity, the Owner Beneficiary and their respective successors,
assigns, participants, directors, shareholders, partners, officers, employees,
agents and Affiliates.
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Participation Agreement
"Taxes" is defined in the definition of "Imposition."
"Tenant" is defined in the Introductory paragraph of this Participation
Agreement.
"Trust Company" is defined in the Introductory paragraphs of this
Participation Agreement.
"Trust Estate" shall have the meaning assigned thereto in the Trust
Agreement.
Section 6.2 Indenture Definitions. Capitalized terms used herein and
not otherwise defined herein shall have the meanings assigned thereto in the
Indenture.
ARTICLE VII
OTHER COVENANTS AND AGREEMENTS
Section 7.1 Covenants of the Trust Company, the Issuer, the Collateral
Trustee and the Owner Beneficiary. The Trust Company, the Issuer, the Collateral
Trustee and the Owner Beneficiary hereby covenant and agree (as to itself only)
with the other parties hereto that, so long as this Agreement is in effect.
(a) Discharge of Lien. Each of the Owner Beneficiary, the Issuer and
the Trust Company will not create or permit to exist at any time, and will, at
its own cost and expense, promptly take such action as may be necessary duly to
discharge, or to cause to be discharged, all Liens on the Mortgaged Property or
the other Collateral (other than the Liens permitted or contemplated by the
Operative Documents) attributable to it or any of its Affiliates.
(b) Trust Agreement. Without prejudice to any right under the Trust
Agreement of the Trust Company to resign, or the Owner Beneficiary's right under
the Trust Agreement to remove the institution acting as owner trustee under the
Trust Agreement, the Owner Beneficiary hereby agrees with the Collateral Trustee
and the Tenant (i) not to terminate or revoke the trust created by the Trust
Agreement, (ii) not to amend, supplement, terminate or revoke or otherwise
modify any provision of the Trust Agreement in such a manner as to adversely
affect the rights of any such party without the prior written consent of such
party, (iii) to comply with all of the terms of the Trust Agreement, the
nonperformance of which would adversely affect such party and (iv) not to remove
the Trust Company as owner trustee under the Trust Agreement.
(c) Successor Trust Company. Subject to Section 8.1 of the Trust
Agreement, a successor owner trustee under the Trust Agreement may be appointed,
and a corporation may become the owner trustee under the Trust Agreement, only
with the consent of the Tenant and the Collateral Trustee, which consent shall
not be unreasonably withheld or delayed.
(d) Indebtedness; Other Business. Neither the Issuer nor the Owner
Beneficiary shall contract for, create, incur or assume any indebtedness, or
enter into any business or other activity, other than pursuant to or under the
Operative Documents.
(e) No Violation. Neither the Collateral Trustee nor the Owner
Beneficiary will
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Participation Agreement
instruct the Issuer to take any action in violation of the terms of any
Operative Document.
(f) No Voluntary Bankruptcy. The Owner Beneficiary shall not (i)
commence any case, proceedings or other action under any existing or future law
of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization, arrangement, winding-up, liquidation, dissolution, composition
or other relief with respect to it or its debts, or (ii) seek appointment of a
receiver, trustee, custodian or other similar official for it or for all or any
substantial benefit of its creditors; and neither the Owner Beneficiary nor the
Issuer shall take any action in furtherance of, or indicating its consent to,
approval of, or acquiescence in, any of the acts set forth in this paragraph.
(g) Change of Principal Place of Business. The Issuer and the Owner
Beneficiary shall give prompt notice to the Tenant and the Collateral Trustee if
the Trust Company's principal place of business or chief executive office, or
the office where the records concerning the accounts or contract rights relating
to the Mortgaged Properties are kept, shall cease to be located at the location
described in Exhibit F, paragraph 8 or if it shall change its name, identity or
corporate structure.
(h) Operative Agreements. Neither the Issuer nor the Owner Beneficiary
shall consent to or permit, and the Owner Beneficiary shall not take any action
for the purpose of permitting the Issuer to consent to or permit, any amendment,
supplement or other modification of the terms and provisions of the Operative
Documents, in each case without the prior written consent of the Tenant and the
Collateral Trustee.
Section 7.2 Guarantor's Operative Agreement Rights. Each of the parties
hereto agrees that, unless and until any Lease Event of Default shall have
occurred and be continuing, it will not enter into any amendments or
modifications of any Operative Document without the prior written consent of the
Guarantor.
Section 7.3 Covenants of the Collateral Trustee The Collateral Trustee
(in its individual capacity and in its trust capacity) hereby covenants and
agrees with the other parties hereto that, so long as this Agreement is in
effect:
(a) Discharge of Lien. The Collateral Trustee (in its individual
capacity and in its trust capacity) will not create or permit to exist at any
time, and will, at its own cost and expense, promptly take such action as may be
necessary duly to discharge, or to cause to be discharged, all Liens on any
Mortgaged Property or the Collateral attributable to it or any of its Affiliates
(other than Liens arising under or pursuant to any Operative Document);
provided, however, that the Collateral Trustee shall not be required to so
discharge any such Lien while the same is being contested in good faith by
appropriate proceedings diligently prosecuted so long as such proceedings shall
not involve any material danger or impairment of the Liens of the Operative
Documents or of the sale, forfeiture or loss of, and shall not interfere with
the use or disposition of, any Mortgaged Property or title thereto or any
interest therein or the payment of rent under any Lease or the Trust Estate (as
defined in the Trust Agreement).
(b) Successor Collateral Trustee. A successor Collateral Trustee may be
appointed, and a corporation may become the Collateral Trustee under the
Indenture, only with the consent
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Participation Agreement
of the Tenant and the Purchasers, which consent in the case of the Tenant shall
be limited to approval of such successor Collateral Trustee's fees.
Section 7.4 Collateral Trustee Project Loan Agreement Rights.
Notwithstanding anything to the contrary contained in any Project Loan Document,
the Collateral Trustee, the Guarantor, the Tenant, the Purchasers, the Issuer,
the Trust Company and the Owner Beneficiary hereby agree that the Collateral
Trustee, as agent on behalf of the Issuer in accordance with the Collateral
Trust Indenture, shall have the right to make all decisions, receive all
payments and take all actions on behalf of the Issuer under each Project Loan
Document.
ARTICLE VIII
TRANSFER OF INTEREST
Section 8.1 Restrictions of Transfer. The Owner Beneficiary may not,
directly or indirectly, assign, convey or otherwise transfer any of its right,
title or interest in or to the Trust Estate or the Trust Agreement. Any transfer
by the Owner Beneficiary as above provided, shall only be effected pursuant to
an agreement in form and substance reasonably satisfactory to the Collateral
Trustee, the Trust Company, the Tenant, and their respective counsel.
Section 8.2 Effect of Transfer. From and after any transfer effected in
accordance with this Section 8, the transferor shall be released, to the extent
of such transfer, from its liability hereunder and under the other documents to
which it is a party in respect of obligations to be performed on or after the
date of such transfer. Notwithstanding any transfer of all or a portion of the
Owner Beneficiary's interest as provided in this Section 8, the transferor shall
be entitled to all benefits accrued and all rights vested prior to such
transfer, including, without limitation, rights to indemnification under any
such document.
ARTICLE IX
INDEMNIFICATION
Section 9.1 General Indemnity. The Guarantor and the Tenant, jointly
and severally, hereby assume liability for and agree to defend, indemnify and
hold harmless each Indemnified Person on an After Tax Basis from and against any
and all Claims, which may be imposed on, incurred by or asserted against an
Indemnified Person (other than to the extent such Claims arise from the gross
negligence, willful misconduct or willful breach of such Indemnified Person) in
any way relating to or arising out of the execution, delivery, performance or
enforcement of this Agreement, or any other Operative Document or on or with
respect to any Mortgaged Property, including, without limitation, Claims in any
way relating to or arising out of (a) the financing or refinancing, purchase,
acceptance, rejection, ownership, design, leasing, subleasing, possession, use,
operation, repair, modification, condition, sale, return, repossession (whether
by summary proceedings or otherwise), or any other disposition of a Mortgaged
Property or any part thereof; (b) any latent or other defects in any Property
whether or not discoverable by any Indemnified Person or the Tenant; (c) the
Operative Documents, or any transaction contemplated thereby; (d) any breach by
the Guarantor or the Tenant of any of their representations or warranties under
the Operative Documents or failure by the Guarantor or the Tenant to perform or
observe any
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Participation Agreement
covenant or agreement to be performed by them under any of the Operative
Documents; and (e) personal injury, death or property damage, including Claims
based on strict liability in tort; but excluding (i) Claims (except Claims
against the Trust Company (including claims arising from Taxes or other
impositions set forth in clause (iii) of the exclusions to the definition of
"Impositions" set forth in Article VI)) to the extent such Claims arise solely
out of events occurring after the expiration of the terms of all Leases and
after the Tenant's discharge of all its obligations under the Operative
Documents or (ii) any Taxes (disregarding with respect to the Trust Company the
exclusions set forth in clauses (v), to the extent attributable to action taken
or not taken by the Issuer at the direction of the Owner Beneficiary or the
Collateral Trustee, and (ix) of the exclusions to the definition of Impositions
set forth in Article VI) including any Claim (or any portion of a Claim) made
upon an Indemnified Person by a third party that at its origin is based upon a
Tax (other than amounts necessary to make any payments hereunder on an After Tax
Basis, where the Tenant is otherwise specifically required to make such payments
on an After Tax Basis). The Guarantor and the Tenant shall be entitled to
control, and shall assume full responsibility for the defense of any Claim;
provided, however, that any Indemnified Person named in such Claim, may each
retain separate counsel at the expense of the Tenant and the Guarantor;
provided, further, that such parties shall use reasonable efforts to share
counsel to the extent practicable and minimize the fees of counsel being
reimbursed hereunder. The Tenant, the Guarantor and each Indemnified Person
agree to give each other prompt written notice of any Claim hereby indemnified
against but the giving of any such notice by an Indemnified Person shall not be
a condition to the Tenant's and Guarantor's obligation under this Section 9.1,
except to the extent failure to give such notice prejudices the Tenant's or
Guarantor's rights hereunder. After an Indemnified Person has been fully
indemnified for a Claim pursuant to this Section 9.1, and so long as no default
shall have occurred and be continuing under any Lease, the Tenant and the
Guarantor shall be subrogated to any right of such Indemnified Person (except
against another Indemnified Person) with respect to such Claim.
Section 9.2 General Tax Indemnity. (a) Indemnification. The Tenant
shall pay and assume liability for, and hereby agrees to indemnify, protect and
defend each Mortgaged Property and all Tax Indemnitees, and hold them harmless
against, all Impositions on an After Tax Basis. Each Tax Indemnitee agrees to
use good-faith efforts (but not including increasing liability for Taxes not
indemnifiable hereunder) to minimize the amount of Taxes indemnifiable by the
Tenant during any taxable year; provided that this sentence shall not be
construed to limit or impair any right of the Issuer set forth in the Operative
Documents. Each Tax Indemnitee further agrees to comply with recommendations
made by the Tenant regarding techniques to minimize Taxes indemnifiable
hereunder; provided that (i) the Tenant agrees to make payments to (or otherwise
indemnify) such Tax Indemnitee against any cost or expense arising from
instituting the Tenant's recommendations and (ii) such Tax Indemnitee determines
in its sole discretion that such recommendations will not have an adverse impact
on such Tax Indemnitee.
(b) Refunds. Provided that no Default or Event of Default has occurred
and is continuing, if any Tax Indemnitee obtains a refund or a reduction in a
liability (but only if such reduction relates to a Tax not otherwise
indemnifiable hereunder and has not been taken into account in determining the
amount of a payment on an After Tax Basis) as a result of any Imposition paid or
reimbursed by the Tenant (in whole or in part), such Tax Indemnitee shall
promptly pay to the Tenant the lesser of (x) the amount of such refund or
reduction in liability and (y) the amount previously so paid or advances by the
Tenant, in each case net of reasonable
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Participation Agreement
expenses not already paid or reimbursed by the Tenant.
(c) Payments. (i) Subject to the terms of Section 9.2(g), the Tenant
shall pay or cause to be paid all Impositions directly to the taxing authorities
where feasible and otherwise to the Tax Indemnitee, as appropriate, and the
Tenant shall at its own expense, upon such Tax Indemnitee's reasonable request,
furnish to such Tax Indemnitee copies of official receipts or other satisfactory
proof evidencing such payment.
(ii) In the case of Impositions for which no contest is
conducted pursuant to Section 9.2(g) and which the Tenant pays directly to the
taxing authorities, the Tenant shall pay such Impositions prior to the latest
time permitted by the relevant taxing authority for timely payment. In the case
of Impositions for which the Tenant reimburses a Tax Indemnitee, the Tenant
shall do so within twenty (20) days after receipt by the Tenant of demand by
such Tax Indemnitee describing in reasonable detail the nature of the Imposition
and the basis for the demand (including the computation of the amount payable),
but in no event shall the Tenant be required to pay such reimbursement prior to
thirty (30) days before the latest time permitted by the relevant taxing
authority for timely payment. In the case of Impositions for which a contest is
conducted pursuant to Section 9.2(g), the Tenant shall pay such Impositions or
reimburse such Tax Indemnitee for such Impositions, to the extent not previously
paid or reimbursed pursuant to Section 9.2(a), prior to the latest time
permitted by the relevant taxing authority for timely payment after conclusion
of all contests under Section 9.2(g).
(iii) Impositions imposed with respect to a Mortgaged Property
for a billing period during which a Lease expires or terminates with respect to
such Mortgaged Property (unless the Tenant has exercised the purchase option set
forth in the respective Lease with respect to such Mortgaged Property) shall be
adjusted and prorated on a daily basis between the Tenant and the applicable
Project Borrower, whether or not such Imposition is imposed before or after such
expiration or termination and each party shall pay or reimburse the other for
each party's pro rata share thereof.
(iv) At the Tenant's request, the amount of any
indemnification payment by the Tenant pursuant to Section 9.2(a) shall be
verified and certified by an independent public accounting firm mutually
acceptable to the Tenant and the Tax Indemnitee. The fees and expenses of such
independent public accounting firm shall be paid by the Tenant unless such
verification shall result in an adjustment in the Tenant's favor of 5 % or more
of the payment as computed by the Tax Indemnitee, in which case such fee shall
be paid by the Tax Indemnitee.
(d) Reports and Returns. (i) The Tenant shall be responsible for
preparing and filing any real and personal property or ad valorem tax returns in
respect of each Mortgaged Property. In case any other report or tax return shall
be required to be made with respect to any obligations of the Tenant under or
arising out of Section 9.2(a) and of which the Tenant has knowledge or should
have knowledge, the Tenant, at its sole cost and expense, shall notify the
relevant Tax Indemnitee of such requirement and (except if such Tax Indemnitee
notifies the Tenant that such Person intends to file such report or return) (A)
to the extent required or permitted by and consistent with applicable laws, make
and file in its own name such return, statement or report; and (B) in the case
of any other such return, statement or report required to be made in the name of
such Tax Indemnitee, advise such Tax Indemnitee of such fact and prepare such
return,
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Participation Agreement
statement or report for filing by such Tax Indemnitee or, where such return,
statement or report shall be required to reflect items in addition to any
obligations of the Tenant under or arising out of Section 9.2(a), provide such
Tax Indemnitee at the Tenant's expense with information sufficient to permit
such return, statement or report to be properly made with respect to any
obligations of the Tenant under or arising out of Section 9.2(a). Such Tax
Indemnitee shall, upon the Tenant's request and at the Tenant's expense, provide
any data maintained by such Tax Indemnitee (and not otherwise within the control
of the Tenant) with respect to each Mortgaged Property which the Tenant may
reasonably require to prepare any required tax returns or reports.
(e) Income Inclusions. If as a result of the payment or reimbursement
by the Tenant of any costs and expenses of the Issuer, the Owner Beneficiary or
any of their respective Affiliates incurred in connection with the transactions
contemplated by the Operative Documents, the Issuer, the Owner Beneficiary or
any of their respective Affiliates shall suffer a net increase in any federal,
state or local income tax liability, the Tenant shall indemnify the Issuer, the
Owner Beneficiary or any of their respective Affiliates (without duplication of
any indemnification required by Section 9.2(a)) on an After Tax Basis for the
amount of such increase. The calculation of any such net increase shall take
into account any current or future tax savings realized or reasonably expected
to be realized by the Issuer, the Owner Beneficiary or any of their respective
Affiliates, in respect thereof, as well as any interest, penalties and additions
to tax payable by the Issuer, the Owner Beneficiary or any of their respective
Affiliates.
(f) Withholding Taxes. As between the Tenant and the Issuer, the Tenant
shall be responsible for, and the Tenant shall indemnify and hold harmless the
Issuer (without duplication of any indemnification required by Section 9.2(a))
on an After Tax Basis against, any obligation for United States withholding
taxes imposed in respect of the interest payable on the Project Loan Notes to
the extent, but only to the extent, the Issuer has actually paid funds to a
taxing authority with respect to such withholding taxes (and, if the Issuer
receives a demand for such payment from any taxing authority, the Tenant shall
discharge such demand on behalf of the Issuer).
(g) Contests of Tax. (i) If a written claim is made against any Tax
Indemnitee or if any proceeding shall be commenced against such Tax Indemnitee
(including a written notice of such proceeding), for any Imposition, such Tax
Indemnitee shall promptly notify the Tenant in writing and shall not take action
with respect to such claim or proceeding without the consent of the Tenant for
thirty (30) days after the receipt of such notice by the Tenant; provided,
however, that, in the case of any such claim or proceeding, if action shall be
required by law or regulation to be taken prior to the end of such 30-day
period, such Tax Indemnitee shall, in such notice to the Tenant, inform the
Tenant, and no action shall be taken with respect to such claim or proceeding
without the consent of the Tenant before the termination of such shorter period;
provided, further, that the failure of such Tax Indemnitee to give the notices
referred to this sentence shall not diminish the Tenant's obligation hereunder
except to the extent such failure precludes the Tenant from contesting all or
part of such claim.
(ii) If, within thirty (30) days of receipt of such notice
from the Tax Indemnitee (or such shorter period as the Tax Indemnitee is
required by law or regulation for the Tax Indemnitee to commence such contest),
the Tenant shall request in writing that such Tax
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Participation Agreement
Indemnitee contest such Imposition, the Tax Indemnitee shall, at the expense of
the Tenant, in good faith conduct and control such contest (including, without
limitation, by pursuit of appeals) relating to the validity, applicability or
amount of such Tax (provided, however, that (A) if such contest can be pursued
independently from any other proceeding involving a tax liability of such Tax
Indemnitee, the Tax Indemnitee, at the Tenant's request, shall allow the Tenant
to conduct and control such contest and (B) in the case of any contest, the Tax
Indemnitee may request the Tenant to conduct and control such contest) by, in
the sole discretion of the Person conducting and controlling such contest, (1)
resisting payment thereof, (2) not paying the same except under protest, if
protest is necessary and proper, (3) if the payment be made, using reasonable
efforts to obtain a refund thereof in appropriate administrative and judicial
proceedings, or (4) taking such other action as is reasonably requested by the
Tenant from time to time.
(iii) The party controlling any contest shall consult in good
faith with the noncontrolling party and shall keep the non-controlling party
reasonably informed as to the conduct of such contest; provided that all
decisions ultimately shall be made in the sole discretion of the controlling
party. The parties agree that an Tax Indemnitee may at any time decline to take
further action with respect to the contest of any Imposition and may settle such
contest if such Tax Indemnitee shall waive its rights to any indemnity from the
Tenant that otherwise would be payable in respect of such claim (and any future
claim by any taxing authority with respect to other taxable periods that are
based, in whole or in part, upon the resolution of such claim) and shall pay to
the Tenant any amount previously paid or advanced by the Tenant pursuant to this
Section 9.2 by way of indemnification or advance for the payment of an
Imposition.
(iv) Notwithstanding the foregoing provisions of this Section
9.2, an Tax Indemnitee shall not be required to take any action and the Tenant
shall not be permitted to contest any Tax in its own name or that of the Tax
Indemnitee unless (A) the Tenant shall have agreed to pay and shall pay to such
Tax Indemnitee on demand and on an After Tax Basis all reasonable costs, losses
and expenses that such Tax Indemnitee actually incurs in connection with
contesting such Tax, including, without limitation, all reasonable legal,
accounting and investigatory fees and disbursements, (B) in the case of a claim
that must be pursued in the name of an Tax Indemnitee (or an Affiliate thereof),
the amount of the potential indemnity (taking into account all similar or
logically related claims that have been or could be raised in an audit involving
such Tax Indemnitee) for which the Tenant may be liable to pay an indemnity
under this Section 9.2 exceeds $1,000,000, (C) the Tax Indemnitee shall have
reasonably determined that the action to be taken will not result in any
material danger of sale, forfeiture or loss of any Mortgaged Property, or any
part thereof or interest therein, will not interfere with the payment of rent
under any Lease, and will not result in risk of criminal liability, (D) if such
contest shall involve the payment of the Imposition prior to the contest, the
Tenant shall provide to the Tax Indemnitee an interest-free advance in an amount
equal to the Imposition that the Tax Indemnitee is required to pay (with no
additional net after-tax cost to such Tax Indemnitee), (E) in the case of a
claim that must be pursued in the name of an Tax Indemnitee (or an Affiliate
thereof), the Tenant shall have provided to such Tax Indemnitee an opinion of
independent tax counsel selected by the Tax Indemnitee and reasonably
satisfactory to the Tenant stating that a reasonable basis exists to contest
such claim (or, in the case of an appeal of an adverse determination, an opinion
of such counsel to the effect that there is substantial authority for the
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Participation Agreement
position asserted in such appeal) and (F) no Event of Default shall have
occurred and be continuing. In no event shall an Tax Indemnitee be required to
appeal an adverse judicial determination to the United State Supreme Court. In
addition, an Tax Indemnitee shall not be required to contest any claim in its
name (or that of an Affiliate) if the subject matter thereof shall be of a
continuing nature and shall have previously been decided adversely by a court of
competent jurisdiction pursuant to the contest provisions of this Section 9.2,
unless there shall have been a change in law (or interpretation thereof) and the
Tax Indemnitee shall have received, at the Tenant's expense, an opinion of
independent tax counsel selected by the Tax Indemnitee and reasonably acceptable
to the Tenant stating that as a result of such change in law (or interpretation
thereof), it is more likely than not that the Tax Indemnitee will prevail in
such contest.
ARTICLE X
MISCELLANEOUS
Section 10.1 Amendments, Etc. No amendment or waiver of any provision
of this Participation Agreement, and no consent to any departure by any party
herefrom, shall in any event be effective unless the same shall be in writing
and signed by the parties hereto, and then such amendment, waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given.
Section 10.2 Notices, Etc. All notices and other communications
provided for hereunder shall be in writing (including telecopier) and
telecopied, if the sender on the same day sends a confirming copy of such notice
by a recognized overnight delivery service (charges prepaid), or sent by
courier, charges prepaid, for delivery at the following address (or at such
other address as shall be designated by such party in a written notice to the
other Persons listed below):
(a) if to the Issuer, to
Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
Attention: Corporate Trust Administration
Facsimile: (302) 651-8882
(b) if to Guarantor or Tenant, to:
Borders Group, Inc.
100 Phoenix Drive
Ann Arbor, MI 48108
Attention: Vice President and General Counsel
Facsimile: (734) 477-1285
With a copy to:
-24-
<PAGE> 29
Participation Agreement
Dickinson Wright PLLC
525 North Woodward Avenue
Suite 2000
Bloomfield Hills, MI 48304
Attention: Judith E. Gowing
(c) if to Owner Beneficiary, to:
Jess Project Funding Corp.
c/o Lord Securities Corporation
Two Wall Street
New York City, NY 10005
Attention: Rick L. Taiano, Vice President
Facsimile: (212) 346-9012
(d) if to the Collateral Trustee, to:
First Security Bank, N.A.
79 South Main Street, 3rd Floor
Salt Lake City, UT 84111
Attention: Corporate Trust Services
Facsimile: (801) 246-5053
(e) if to a Purchaser, to its address specified in
Schedule I hereto
Unless otherwise stated herein, all such notices and communications shall be
effective (i) if sent by courier, when delivered by hand on the day of delivery
or (ii) if telecopied, when received (provided such receipt is (x) verified by a
telephone call to the recipient or (y) confirmed by a transmission report
evidencing successful transmission). Copies of all notices and other
communications sent pursuant to the Indenture and the Trust Agreement shall be
sent to the Guarantor and Tenant.
Section 10.3 No Waiver; Remedies. No remedy conferred herein is
intended to be exclusive of any other remedy, but every such remedy shall be
cumulative and shall be in addition to every other remedy herein conferred or
now or hereafter existing in law or in equity. No failure to exercise, and no
delay in exercising, any right hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any right hereunder preclude any other
or further exercise thereof or the exercise of any other right.
Section 10.4 Binding Effect; Term; Assignability. This Participation
Agreement shall be binding upon the parties hereto and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
Section 10.5 Governing Law. This Agreement shall be construed and
enforced in accordance with, and the rights of the parties shall be governed by,
the law of the State of New
-25-
<PAGE> 30
Participation Agreement
York excluding choice-of-law principles of the law of such State that would
require the application of the laws of a jurisdiction other than such State.
Section 10.6 Execution in Counterparts. This Participation Agreement
may be executed in two or more counterparts and by each party hereto in a
separate counterpart, each of which when so executed shall be deemed to be an
original and all of which when taken together shall constitute one and the same
agreement.
Section 10.7 Third Party Beneficiaries. Nothing expressed or implied
herein is intended or shall be construed to confer upon or to give to any
Person, other than the parties hereto, any right, remedy or claim under or by
reason of this Participation Agreement, and any terms, covenants, conditions,
promises and agreements contained herein shall be for the sole and exclusive
benefit of the parties hereto and their respective successors and assigns.
Section 10.8 Survival of Covenants and Representations. All covenants,
representations and warranties made by any party to any other party herein or in
any Note delivered pursuant hereto, whether or not in connection with the
Closing Date, shall be considered to have been relied upon by such other party
and shall survive the issuance of the Notes and the delivery of this
Participation Agreement and shall survive until all of the Project Loans have
been paid in full.
Section 10.9 Severability. Should any part of this Participation
Agreement for any reason by declared invalid, such decision shall not affect the
validity of any remaining portion, which remaining portion shall remain in full
force and effect as if this Participation Agreement had been executed with the
invalid portion thereof eliminated and it is hereby declared the intention of
the parties hereto that they would have executed the remaining portion of this
Participation Agreement without including therein any such part, parts or
portion which may, for any reason, be hereafter declared invalid.
Section 10.10 Confidential Information. For the purposes of this
Section 10.10, "Confidential Information" means information delivered to the
Collateral Trustee or any Purchaser by or on behalf of the Guarantor or the
Tenant in connection with the transactions contemplated by or otherwise pursuant
to this Participation Agreement that is confidential or proprietary in nature
and that was clearly marked or labeled or otherwise adequately identified when
received by the Collateral Trustee or any Purchaser as being confidential
information of the Guarantor or the Tenant, provided that such term does not
include information that (a) was publicly known or otherwise known to the
Collateral Trustee or any Purchaser prior to the time of such disclosure, (b)
subsequently becomes publicly known through no act or omission by the Collateral
Trustee or any Purchaser or any Person acting on behalf of the Collateral
Trustee or any Purchaser, (c) otherwise becomes known to the Collateral Trustee
or any Purchaser other than through disclosure by the Guarantor or the Tenant or
(d) constitutes financial statements delivered to the Collateral Trustee or any
Purchaser under Section 4.1 that are otherwise publicly available.
The Collateral Trustee and each Purchaser will maintain the
confidentiality of such Confidential Information in accordance with procedures
adopted by the Collateral Trustee and each Purchaser in good faith to protect
confidential information of third parties delivered to the
-26-
<PAGE> 31
Participation Agreement
Collateral Trustee or such Purchaser, provided that the Collateral Trustee and
each Purchaser may deliver or disclose Confidential Information to: (i)
directors, trustees, officers, employees, attorneys and affiliates of the
Collateral Trustee or any Purchaser (to the extent such disclosure reasonably
relates to the administration of the investment represented by the Notes); (ii)
financial advisors and other professional advisors of the Collateral Trustee or
any Purchaser who agree to hold confidential the Confidential Information in
accordance with the terms of this Section 10.10; (iii) any other Holder; (iv)
with prior written notice to the Guarantor, any Institutional Holder to which
any Purchaser sells or offers to sell a Note or any part thereof or any
participation therein (if such Person has agreed in writing prior to its receipt
of such Confidential Information to be bound by the provisions of this Section
10.10); (v) with prior written notice to the Guarantor, any Person from which
any Purchaser offers to purchase any security of the Guarantor (if such Person
has agreed in writing prior to its receipt of such Confidential Information to
be bound by the provisions of this Section 10.10); (vi) any federal or state
regulatory authority having jurisdiction over the Collateral Trustee or any
Purchaser but only to the extent such information is expressly required to be
disclosed by such regulatory authority (with written notice of such disclosure
given to the Guarantor promptly following such disclosure); (vii) the National
Association of Insurance Commissioners or any similar organization, or any
nationally recognized rating agency that requires access to information about
the investment portfolio of any Purchaser (with written notice of such
disclosure given to the Guarantor promptly following such disclosure); or (viii)
with prior written notice to the Guarantor, any other Person to which such
delivery or disclosure may be necessary, but only (w) to effect compliance with
any law, rule, regulation or order applicable to the Collateral Trustee or any
Purchaser, (x) in response to any subpoena or other legal process, (y) in
connection with any litigation to which the Collateral Trustee or any Purchaser
is a party or (z) if an Event of Default has occurred and is continuing, to the
extent the Collateral Trustee or any Purchaser may reasonably determine such
delivery and disclosure to be necessary or appropriate in the enforcement or for
the protection of the rights and remedies under the Notes and this Participation
Agreement.
Each Holder, by its acceptance of a Note, will be deemed to have agreed
to be bound by and to be entitled to the benefits of this Section 10.10 as
though it were a party to this Agreement. On reasonable request by the Guarantor
or the Tenant in connection with the delivery to any Holder of information
required to be delivered to such Holder under this Agreement or requested by
such Holder (other than a Holder that is a party to this Agreement or its
nominee), such Holder will enter into an agreement with the Guarantor and the
Tenant embodying the provisions of this Section 10.10.
Section 10.11 Issuer Recourse. The parties hereto agree that all of the
statements, representations, warranties, covenants and agreements made by the
Issuer contained in this Participation Agreement are made and intended only for
the purpose of binding the Trust Estate (as defined in the Trust Agreement) and
establishing the existence of rights and remedies which can be exercised and
enforced against the Trust Estate. Therefore, anything contained in this
Agreement to the contrary notwithstanding, no recourse shall be had with respect
to this Participation Agreement against the Trust Company or against any
institution or person which becomes a successor trustee or co-trustee under the
Trust Agreement or any officer, director, trustee, servant or direct or indirect
parent or controlling person or persons of any of them; provided, however, that
this Section 10.11 shall not be construed to prohibit any action or
-27-
<PAGE> 32
Participation Agreement
proceeding against any party hereto for its own willful misconduct or grossly
negligent conduct; and provided, further, that nothing contained in this Section
10.11 shall be construed to limit the exercise and enforcement in accordance
with the terms of this Participation Agreement of rights and remedies against
the Trust Estate. The foregoing provisions of this Section 10.11 shall survive
the termination of this Participation Agreement.
Section 10.12 Owner Beneficiary Exculpation. Notwithstanding any other
provision herein, no recourse under any obligation, covenant, agreement or
instrument of the Owner Beneficiary contained in any Operative Document or with
respect hereto shall be had against any incorporator, member, manager, employee,
agent or partner of the Owner Beneficiary or its stockholders or their
affiliates (each a "Related Person") whether arising by breach of contract,
otherwise at law or in equity (including any claim or tort, whether express or
implied); it being expressly understood that the agreements and other
obligations of the Owner Beneficiary herein and with respect hereto are solely
its corporate obligations. Any and all personal liability of any Related Person
for breaches of any such obligation, covenant, agreement or instrument as
aforesaid are hereby expressly waived as a condition of and in consideration of
the Owner Beneficiary's execution of this Participation Agreement.
Notwithstanding any other provision herein, the provisions of this Section 10.12
shall survive the termination of this Participation Agreement.
-28-
<PAGE> 33
Participation Agreement
IN WITNESS WHEREOF, the parties hereto have caused this Participation
Agreement to be executed by their respective officers thereunto duly authorized
as of the day and year first above written.
WILMINGTON TRUST COMPANY, not in its
individual capacity except as expressly
stated herein, but solely as Issuer
By /s/ Norma P. Closs
-----------------------------------
Name: Norma P. Closs
Title: Vice President
<PAGE> 34
Participation Agreement
JESS PROJECT FUNDING CORP., as Owner
Beneficiary
By: /s/ Richard L. Taiano
----------------------------------
Name: Richard L. Taiano
Title: Vice President
<PAGE> 35
Participation Agreement
FIRST SECURITY BANK, N.A.
as Collateral Trustee
By /s/ Val T. Orton
-----------------------------------
Name: Val T. Orton
Title: Vice President
<PAGE> 36
Participation Agreement
BORDERS GROUP, INC.
By /s/ Kenneth E. Scheve
------------------------------------
Name: Kenneth E. Scheve
Title: Senior Vice President
<PAGE> 37
Participation Agreement
BORDERS, INC.
By /s/ Edward W. Wilhelm
------------------------------------
Name: Edward W. Wilhelm
Title: Vice President
<PAGE> 38
Participation Agreement
By
<PAGE> 39
Participation Agreement
<TABLE>
<CAPTION>
FRACTIONAL
UNDIVIDED
NAME AND ADDRESS OF PURCHASER INTEREST
<S> <C>
</TABLE>
<PAGE> 40
Participation Agreement
DESCRIPTION OF CLOSING OPINION
OF COUNSEL FOR PURCHASERS
The closing opinion of McDermott, Will & Emery, special counsel to the
Purchasers, called for by SECTION 2.10(e) of the Participation Agreement, shall
be dated the Closing Date and addressed to each Purchaser, shall be satisfactory
in form and substance to each Purchaser and shall cover such matters relating to
the sale of the Notes as each Purchaser may reasonably request. With respect to
matters of fact on which such opinion is based, such counsel shall be entitled
to rely on appropriate certificates of public officials and other officers of
the parties involved in the transaction.
EXHIBIT A
(to Participation Agreement)
<PAGE> 41
Participation Agreement
DESCRIPTION OF CLOSING OPINIONS
OF COUNSEL FOR ISSUER
The closing opinions of Morris, James, Hitchens & Williams, special
counsel to the Issuer, called for by SECTION 2.13(a) of the Participation
Agreement, shall be dated the Closing Date and addressed to each Purchaser,
shall be satisfactory in form and substance to each Purchaser and shall be to
the effect that:
1. The Trust Company is a Delaware banking corporation, duly
organized and validly existing in good standing under the laws of the
State of Delaware and has all necessary power and authority to enter
into and perform its obligations under the Indenture and act as the
Owner Trustee and to enter into and perform its obligations, as Trust
Company or Owner Trustee, as the case may be, under each of the other
Operative Agreements to which the Trust Company or the Owner Trustee,
as the case may be, is a party.
2. The execution, delivery and performance of each Operative
Agreement to which it is a party, either in its individual capacity or
as the Owner Trustee, as the case may be, has been duly authorized by
all necessary action on its part and neither the execution and delivery
thereof, nor the consummation of the transactions contemplated thereby,
nor compliance by it with any of the terms and provisions thereof (i)
does or will require, to our knowledge, any approval or consent of any
trustee or holder of any of its indebtedness or obligations, (ii) does
or will contravene any current State of Delaware or United States
federal law, governmental rule or regulations relating to its banking
or trust powers, (iii) does or will contravene or result in any breach
of or constitute any default under, or result in the creation of any
Lien upon any of its property under, its charter or by-laws, or, to our
knowledge, any indenture, mortgage, chattel mortgage, deed of trust,
conditional sales contract, bank loan or credit agreement or other
agreement or instrument to which it is a party or by which it or its
properties may be bound or affected or (iv) does or will require any
approval, consent, filing (other than the filing of the financing
statements in the Office of the Secretary of State of the State of
Delaware as described in paragraph 7 below), registration or
qualification with any governmental body of the State of Delaware or
any of the federal governmental body of the United States of America
governing the banking or trust powers of the Trust Company.
3. The Indenture and each other Operative Agreement to which
Trust Company is a party have been duly executed and delivered by Trust
Company, and the Indenture and each such other Operative Agreement to
the extent entered into by the Trust Company constitutes a legal, valid
and binding obligation enforceable against the Trust Company in
accordance with the terms thereof.
4. Each Operative Agreement to which the Owner Trustee is a
party have been duly executed and delivered by the Owner Trustee and
constitutes a legal, valid and
EXHIBIT B
(to Participation Agreement)
<PAGE> 42
Participation Agreement
binding obligation of the Owner Trustee, enforceable against the Owner
Trustee in accordance with the terms thereof.
5. To our knowledge, no limitation, investigation or
proceeding of or before any arbitrator or any governmental body,
federal, state or local, is pending or threatened by or against the
Trust Company or the Owner Trustee (a) with respect to any of the
Operative Agreements or any of the transactions contemplated thereby,
or (b) which could reasonably be expected to have a material adverse
effect on the assets, liabilities, operations, business or financial
condition of the Trust Company or the Owner Trustee.
6. To our knowledge, neither the Owner Trustee nor any
person authorized by the Owner Trustee to act on its behalf has offered
or sold any interest in the Trust Estate or the Notes, or created any
similar security or interest relating to any Property, or solicited any
offer to acquire any of the same from, any Person except as permitted
by the Operative Agreements.
7. Insofar as Article 9 of the Uniform Commercial Code as in
effect in the State of Delaware (the "UCC") is applicable (without
regard to conflicts of laws principles), and assuming that the security
interests of the Collateral Trustee in the Collateral have been duly
created and have attached (and are of the type that may be perfected by
the filing of a UCC financing statement), no action is required to
perfect such security interests in the State of Delaware, except for
the filing of a UCC financing statement in the Office of the Secretary
of State of the State of Delaware.
The opinion of Morris, James, Hitchens & Williams shall cover such
other matters of Delaware law relating to the collateral assignment of the
Project Loans and the issuance of the Notes and the transactions contemplated
thereby as each Purchaser may reasonably request. With respect to matters of
fact on which such opinions are based, such counsel shall be entitled to rely on
appropriate Certificates of public officials and other officers of the parties
involved in the transaction and the representations contained in the
Participation Agreement.
B-2
<PAGE> 43
Participation Agreement
DESCRIPTION OF CLOSING OPINIONS
OF COUNSEL FOR COLLATERAL TRUSTEE
The closing opinion of Ray, Quinney & Nebeker, counsel to the
Collateral Trustee called for by SECTION 2.13(b) of the Participation Agreement,
shall be dated the Closing Date and addressed to each Purchaser and shall be
satisfactory in form and substance to each Purchaser and shall be to the effect
that:
1. The Collateral Trustee is a national banking association
validly existing under the laws of the United States and is duly
qualified to act as Collateral Trustee.
2. The Collateral Trustee has the requisite power and
authority to execute, deliver and perform its respective obligations
under the Participation Agreement and the Indenture and the other
Operative Documents to which it is a party ( the "Collateral Trustee
Documents") and has taken all necessary action to authorize the
execution, delivery and performance by it of each of the Collateral
Trustee Documents.
3. Each of the Collateral Trustee Documents has been duly
authorized, executed and delivered by the Collateral Trustee and
constitutes the legal, valid and binding obligation or contract of the
Collateral Trustee enforceable against the Collateral Trustee in
accordance with its respective terms, subject to bankruptcy,
insolvency, fraudulent conveyance and similar laws affecting creditors'
rights generally, and general principles of equity (regardless of
whether the application of such principles is considered in a
proceeding in equity or at law).
4. The Notes delivered on the date hereof have been duly
authenticated by the Collateral Trustee in accordance with the terms of
the Indenture.
5. No authorization, consent, approval, license, exemption
of or filing or registration with any court or governmental department,
commission, board, bureau, agency or instrumentality by the Collateral
Trustee or any affiliate thereof is necessary to the valid execution,
delivery or performance of the Collateral Trustee Documents.
The opinion of Ray, Quinney & Nebeker shall cover such other matters
relating to the transactions contemplated by the Operative Documents as each
Purchaser may reasonably request. With respect to matters of fact on which such
opinion is based, such counsel shall be entitled to rely on appropriate
certificates of public officials and other officers of the parties involved in
the transaction.
EXHIBIT C
(to Participation Agreement)
<PAGE> 44
Participation Agreement
DESCRIPTION OF CLOSING OPINION
OF COUNSEL FOR GUARANTOR
AND TENANT
The closing opinion of Dickinson Wright PLLC, special counsel to the
Guarantor and the Tenants, called for by SECTION 2.13(c) of the Participation
Agreement, shall be dated on the Closing Date and shall be satisfactory in form
and substance to each Purchaser and shall be to the effect that:
1. The Guarantor is a corporation duly organized, validly
existing and in good standing under the laws of Michigan and has the
corporate power and authority to enter into and perform its obligations
under the Participation Agreement and each other Operative Document to
which the Guarantor is a party (the "Guarantor Documents").
2. Each of the Guarantor Documents has been duly authorized,
executed and delivered by the Guarantor and constitutes the legal,
valid and binding obligations of the Guarantor, enforceable against the
Guarantor in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent conveyance and similar laws affecting creditors'
rights generally, and general principles of equity (regardless of
whether the application of such principles is considered in a
proceeding in equity or at law).
3. The execution, delivery and compliance by the Guarantor
with all of the provisions of the Guarantor Documents will not conflict
with or result in any breach of any of the provisions or constitute a
default under or result in the creation or imposition of any lien or
encumbrance upon any of the property of the Guarantor pursuant to the
provisions of the charter or the by-laws of the Guarantor or any
material agreement or other instrument to which the Guarantor is a
party or by which the Guarantor may be bound or any existing law or
governmental regulation relating to or having jurisdiction over the
Guarantor or its activities.
4. No approval, consent or withholding of objection on the
part of, or filing, registration or qualification with, any
governmental body, federal or state, is necessary in connection with
the execution, delivery and performance by the Guarantor of the
Guarantor Documents.
5. The Tenant is a corporation duly organized, validly
existing and in good standing under the laws of Colorado and has the
corporate power and authority to enter into and perform the
Participation Agreement and each other Operative Document to which the
Tenant is a party (the "Tenant Documents").
6. The Tenant is duly licensed or qualified and is in good
standing as a foreign corporation in each jurisdiction in which any
Mortgaged Property is located.
EXHIBIT D
(to Participation Agreement)
<PAGE> 45
Participation Agreement
7. Each of the Tenant Documents has been duly authorized,
executed and delivered by the Tenant and constitutes the legal, valid
and binding obligations of the Tenant, enforceable against the Tenant
in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent conveyance and similar laws affecting creditors' rights
generally, and general principles of equity (regardless of whether the
application of such principles is considered in a proceeding in equity
or at law).
8. The execution, delivery and compliance by the Tenant with
all of the provisions of the Tenant Documents will not conflict with or
result in any breach of any of the provisions of or constitute a
default under or result in the creation or imposition of any lien or
encumbrance upon any of the property of the Tenant pursuant to the
provisions of the charter or the by-laws of the Tenant or any material
agreement or other instrument to which the Tenant is a party or by
which the Tenant may be bound or any existing law or governmental
regulation relating to or having jurisdiction over the Tenant or its
activities.
9. No approval, consent or withholding of objection on the
part of, or filing, registration or qualification with, any
governmental body, federal or state, is necessary in connection with
the execution, delivery and performance by the Tenant of the Tenant
Documents.
10. The issuance and sale of the Project Loan Notes under the
circumstances contemplated by the Project Loan Agreements do not, under
existing law, require the registration of the Project Loan Notes under
the Securities Act of 1933, as amended, or the qualification of an
indenture under the Trust Indenture Act of 1939, as amended.
11. To the best of our knowledge after due inquiry, there is
no action, proceeding or governmental investigation pending or
threatened that (i) questions the validity of or challenges any of the
Tenant Documents or any of the transactions contemplated thereby, (ii)
would have an adverse effect on the benefits intended to be realized by
the Issuer, the Collateral Trustee or the Purchasers under any of the
Tenant Documents, or (iii) could reasonably be expected to have, either
in any case or in the aggregate, a materially adverse effect on the
business, properties, assets, operations or financial condition of
Guarantor or the Tenant.
12. The issuance and delivery of the Notes under the
circumstances contemplated by the Participation Agreement and the
Indenture do not, under existing law, require the registration of the
Notes under the Securities Act of 1933, as amended, or the
qualification of an indenture under the Trust Indenture Act of 1939, as
amended.
13. [NON-CONSOLIDATION OPINION CONCERNING PROJECT BORROWERS].
The opinion of Dickinson Wright PLLC shall cover such other matters
relating to the transactions contemplated by the Operative Documents as each
Purchaser may reasonably
D-2
<PAGE> 46
Participation Agreement
request. With respect to matters of fact on which such opinion is based, such
counsel shall be entitled to rely on appropriate Certificates of public
officials and other officers of the parties involved in the transaction.
D-3
<PAGE> 47
Participation Agreement
DESCRIPTION OF CLOSING OPINION
OF EACH LOCAL COUNSEL FOR THE PROJECT BORROWERS
The closing opinion of various local counsel to the Project Borrowers,
called for by SECTION 2.13(d) of the Participation Agreement, shall be dated the
Closing Date and shall be satisfactory in form and substance to each Purchaser
and shall be to the effect that:
1. Each Lease Document to which the Tenant is a party
constitutes the legal, valid and binding contract of the Tenant,
enforceable against the Tenant in accordance with its respective terms,
subject to bankruptcy, insolvency, fraudulent conveyance and similar
laws affecting creditors' rights generally, and general principles of
equity (regardless of whether the application of such principles is
considered in a proceeding in equity or at law).
2. No authorization, consent, approval, license, exemption of or
filing or registration with any court or governmental department,
commission, board, bureau, agency or instrumentality in the State of
_________ is necessary for the valid execution, delivery or performance
of any Lease Document or any other Project Loan Document by the Tenant.
3. Each Lease Document to which each Project Borrower is a party
has been duly authorized, executed and delivered by such Project
Borrower and constitutes the legal, valid and binding contract of such
Project Borrower, enforceable against such Project Borrower in
accordance with its respective terms, subject to bankruptcy,
insolvency, fraudulent conveyance and similar laws affecting creditors'
rights generally, and general principles of equity (regardless of
whether the application of such principles is considered in a
proceeding in equity or at law).
4. Each Project Loan Document to which each Project Borrower is
a party has been duly authorized, executed and delivered by such
Project Borrower and constitutes the legal, valid and binding contract
of such Project Borrower, enforceable against such Project Borrower in
accordance with its respective terms, subject to bankruptcy,
insolvency, fraudulent conveyance and similar laws affecting creditors'
rights generally, and general principles of equity (regardless of
whether the application of such principles is considered in a
proceeding in equity or at law).
5. The execution, delivery and compliance by each Project
Borrower with all of the provisions of each Lease Document to which it
is a party and each Project Loan Document to which it is a party will
not conflict with or result in any breach of any of the provisions of
or constitute a default under or result in the creation or imposition
of any lien or encumbrance upon any of the property of the Project
Borrower pursuant to the provisions of the certificate of trust or
trust agreement, charter instrument or any agreement or other
instrument known to such counsel to which any Project Borrower is a
party or by which any Project Borrower may be bound.
EXHIBIT E
(to Participation Agreement)
<PAGE> 48
Participation Agreement
6. No authorization, consent, approval, license, exemption of
or filing or registration with any court or governmental department,
commission, board, bureau, agency or instrumentality in the State of is
necessary for the valid execution, delivery or performance of any Lease
Document or any other Project Loan Document by the Project Borrower.
7. The transactions contemplated by, and the payments to be
made and received pursuant to any Mortgage Note or any Project Loan
Document do not violate, or are exempt from, any applicable federal or
state usury laws.
8. There are no actions, suits or proceedings pending or, to
the knowledge of such counsel after due inquiry, threatened against or
affecting any Project Borrower in any court or before any governmental
authority or arbitration board or tribunal which could reasonably be
expected to materially and adversely affect the execution, delivery or
performance by any such Project Borrower of its obligations under any
Lease Document to which it is a party or any Project Loan Document to
which it is a party or the enforceability of any such Project
Borrower's obligations thereunder.
9. The execution, delivery and performance by each Project
Borrower of each Lease Document to which it is a party and each Project
Loan Document to which it is a party do not (i) violate (A) the
certificate of trust or trust agreement pursuant to which such Project
Borrower is organized, (B) any provision of any law, rule or regulation
in the State of __________, or (C) to the knowledge of such counsel,
any order, writ, judgment, injunction, decree, determination or award
applicable to such Project Borrower, (ii) result in a breach or
constitute a default under any indenture or loan or credit agreement or
any other agreement, lease or instrument (including, without
limitation, the Lease) to which it is a party or by which it or its
properties are bound, where such breach or default would have a
material adverse effect on the financial condition, properties or
operations of such Project Borrower, or (iii) result in, or require,
the creation or imposition of any mortgage, deed of trust, pledge,
lien, security interest or other charge or encumbrance (other than as
contemplated by the Project Loan Documents). To the knowledge of such
counsel, no Project Borrower is in violation of or in default under any
law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award or any indenture, agreement, lease or instrument
described in this opinion where such violation or default would have a
material adverse effect on the financial condition, properties or
operations of any such Project Borrower.
10. The Memorandum of Lease, Mortgage, Assignment of Lease and
Rents and the Assignment of Mortgage are each in form satisfactory for
recording in the appropriate public office for the recording of
instruments affecting title to real property in each county in which
any portion of the Mortgaged Property is located, and upon such
recordation shall constitute a valid first lien upon the real property
interest described therein, in each case in favor of the Indenture
Trustee. No other recordation or filing is required to create or
preserve the validity of such lien.
E-2
<PAGE> 49
Participation Agreement
11. The Mortgage creates a security interest in the portions
of the Mortgaged Property constituting fixtures, if any, and no
financing or other statements are required to be filed to perfect such
security interest under the Uniform Commercial Code of the state in
which the Mortgaged Property is located. Upon the recordation or filing
of the financing statement in the office of the Secretary of State of
the State of ________ and the offices of the county in which the
Mortgaged Property is located, the Collateral Trustee shall have a
perfected security interest upon the Collateral (as defined in the
Mortgage) pursuant to the uniform commercial code of such state. To
continue the effectiveness of such financing statement as to such
Collateral, continuation statements must be filed in the office in
which such financing statement has been filed within six months prior
to the expiration of each fifth anniversary of the date of filing of
such financing statement. Any such continuation statement must be
signed by the secured party, who should identify the original statement
by file number and state that the original statement is still
effective. No other recordation or filing is required to preserve such
interest in or lien upon the Collateral. Other than the filing fee
required to be paid at the time of recording the financing statement,
no other fees, taxes or other charges due in the state in which
Mortgaged Property is located in connection with the execution,
delivery, filing and recording of the financing statement.
12. No fees, taxes or other charges, or intangible documentary
stamp, mortgage, transfer or recording taxes or similar charges, are
payable to the government of the state in which the Mortgaged Property
is located or to any jurisdiction therein on account of the execution,
delivery or ownership of any Lease Document or any other Project Loan
Document, the creation of the indebtedness evidenced or secured
thereby, the creation of the liens and security interests thereunder,
or the filing, recording or registration of the Mortgage or any
financing statement except for nominal filing or recording fees.
13. Neither the Collateral Trustee nor the Purchasers are
required to pay any tax or to be qualified to do business, or to file
any designation for service of process or to file any reports in the
state in which the Mortgaged Property is located or to comply with any
statutory or regulatory rule or requirement applicable only to
financial institutions chartered or qualified to do business in the
state in which the Mortgaged Property is located solely by reason of
its execution and delivery or acceptance of the Mortgage or the other
Project Loan Documents or by reason of its participation in any of the
transactions under or contemplated by the Project Loan Documents,
including, without limitation, the Project Loan Note and the purchase
or holding of the Project Loan Note as contemplated thereby, and the
making and receipt of any payments pursuant thereto; and the validity
and enforceability of, and the exercise of any right or remedy under of
with respect to, the Mortgage and the other Project Loan Documents will
not be precluded by any failure to so qualify or file.
14. The Project Borrower has qualified to do business in the
State of ___________.
E-3
<PAGE> 50
Participation Agreement
15. The Mortgage and financing statement conform to all
requirements of the laws of the state in which the Property is located
and the Mortgage contains remedial, waiver and other provisions which
will allow the Collateral Trustee to realize the practical benefits
intended to be conferred thereby. The Project Loan Documents grant to
the Collateral Trustee the rights to (a) foreclose Project Borrower's
interests in the Mortgaged Property, (b) execute upon Project
Borrower's interests in the Collateral, (c) apply to a state court of
the state in which the Mortgaged Property is located for the
appointment of a receiver, (d) cite Project Borrower's failure to pay
taxes as evidence of waste and (e) collect the rents from the Mortgaged
Property, each of which is a remedy commonly sought by creditors whose
loans are secured by real and personal property in the state in which
the Mortgaged Property is located. Enforcement of the remedies provided
in the Mortgage with respect to the Project Borrower or its property
will not, except as expressly limited by the terms of the Mortgage,
deprive any secured party of its right to seek a deficiency judgment
nor will it limit the right of the Collateral Trustee to foreclose on
other security or collateral securing the Project Loan Note.
16. In connection with the remedies provided in the Mortgage:
(a) The exercise at any time and in any order of any remedies
available against the property covered by the uniform commercial code
as adopted by the state in which the Mortgaged Property is located or
any other Mortgaged Property will not be affected by, nor will the
exercise at any time of such remedies affect the remedies relating to
the Land and Improvements (as such terms are defined in the Mortgage),
unless the Project Loan Note and Mortgage have been paid and performed
in full.
(b) The exercise of any remedies with respect to any security
or collateral located outside of the state in which the Mortgaged
Property is located securing the obligations under any Project Loan
Documents will not affect or limit the Collateral Trustee's ability to
foreclose against, or exercise any other remedies with respect to, the
Mortgaged Property, except to the extent that the fair value of such
security or collateral so sold or disposed of has been appropriately
applied to the payment of the Project Loan Note or unless such Project
Loan Note has been paid and performed in full.
(c) There is no "one form of action" or similar law in the
state in which the Mortgaged Property is located which would limit the
Collateral Trustee or any other secured party to choosing only one
remedy to enforce its or their rights under any Project Loan Documents
or any other Project Loan Documents.
E-4
<PAGE> 51
Participation Agreement
REPRESENTATIONS AND WARRANTIES OF ISSUER
Capitalized terms used herein shall have the respective meanings as set
forth in the Participation Agreement.
Each of the Trust Company and the Issuer represents and warrants (as to
itself only) as follows (provided that the representations in the following
paragraphs 6 through 17 are made solely by the Issuer):
1. It is a corporation duly organized and validly existing and
in good standing under the laws of the State of Delaware and has the
power and authority to enter into and perform its obligations under the
Operative Agreements to which the Trust Company is a party (the "Issuer
Documents").
2. The execution, delivery and performance by the Issuer of
each of the Issuer Documents have been duly authorized by all necessary
action on its part and neither the execution and delivery thereof, nor
the consummation of the transactions contemplated thereby, nor
compliance by it with any of the terms and provisions thereof does or
will (i) require any approval or consent of any trustee or holders of
any of its indebtedness or obligations, (ii) contravene any current
law, governmental rule or regulation of the State of Delaware or any
United States federal law, rule or regulation, in each case relating to
it, (iii) contravene or result in any breach of or constitute any
default under, or result in the creation of any Lien upon any of its
property under, its organizational documents, or any indenture,
mortgage, chattel mortgage, deed of trust, conditional sales contract,
bank loan or credit agreement or other agreement or instrument to which
it is a party or by which it or its properties may be bound or affected
or (iv) require any authority, approval or other action by any
Governmental Authority or agency of the State of Delaware or any
federal authority governing the banking or trust powers of the Issuer.
3. Each of the Issuer Documents has been, or will be, duly
executed and delivered by the Trust Company or the Issuer, as the case
may be, and constitutes, or upon execution and delivery will
constitute, a legal, valid and binding obligation enforceable against
the Trust Company (to the extent expressly provided therein) or the
Issuer, as the case may be, in accordance with its respective terms.
4. No litigation, investigation or proceeding of or before any
arbitrator or Governmental Authority of the State of Delaware or of the
United States government governing the banking or trust powers of the
Issuer is pending or, to the knowledge of the Issuer, threatened by or
against the Issuer (a) with respect to any of the Issuer Documents or
any of the transactions contemplated thereby, or (b) which could have a
material adverse effect on the business or financial condition of the
Issuer or the validity or enforceability of any of the Issuer
Documents.
EXHIBIT F
(to Participation Agreement)
<PAGE> 52
Participation Agreement
5. It has not assigned or transferred, or granted any lien in
respect of, any of its rights, title or interest in or under any
Project Loan, except in accordance with the Issuer Documents.
6. The Issuer is not in default under or with respect to any
of its contractual obligations in any respect which could have a
material adverse effect on the business or financial condition of the
Issuer or the validity or enforceability of any of the Issuer
Documents. No Default or Event of Default has occurred and is
continuing.
7. The proceeds of the Loans shall be applied by the Issuer
solely to make Project Loans to the Project Borrowers.
8. The Issuer's principal place of business, chief executive
office and office where the documents, accounts and records relating to
the transaction contemplated by this Agreement and each other Operative
Agreement are located is in Wilmington, Delaware and the Issuer's
mailing address is: c/o Wilmington Trust Company, Rodney Square North,
1100 North Market Street, Wilmington, Delaware 19890.
9. No part of the proceeds of any Loans will be used for
"purchasing" or "carrying" any "margin stock" within the respective
meanings of each of the quoted terms under Regulation U of the Board of
Governors of the Federal Reserve System as now and from time to time
hereafter in effect. If requested by any Purchaser, the Issuer will
furnish to such Purchaser a statement to the foregoing effect in
conformity with the requirements of FR Form U-1 referred to in said
Regulation U.
10. The Issuer is not an "investment company" or a company
controlled by an "investment company" within the meaning of the
Investment Company Act.
11. The originally executed copy of each Project Loan Note and
an originally executed copy of each other Project Loan Document has
been delivered to the Collateral Trustee on or prior to the Closing
Date.
12. As of the Closing Date, no Project Loan Note or any
related Project Loan Document has been assigned or pledge to a third
party other than the Collateral Trustee. The Issuer has good and
marketable title to each Project Loan Note and related Project Loan
Documents purported to be collaterally assigned by the Issuer, and the
Issuer is the sole owner thereof and has full right and power to hold
and to create a Lien on such Project Loan Note and related Project Loan
Documents in favor of the Trustee.
13. The Issuer has collaterally assigned to the Collateral
Trustee the Project Loan Documents and the Collateral Trustee has a
first perfected Lien on all such Project Loan Documents.
F-2
<PAGE> 53
Participation Agreement
14. The Issuer represents and warrants that the Issuer has
not, directly or indirectly, nor has any agent on its behalf, offered
or will offer any Note or any similar security to or has solicited or
will solicit an offer to acquire any Note or any similar security from
any person in such manner as to bring the issuance and sale of the
Notes within the provisions of Section 5 of the Securities Act of 1933,
as amended.
15. The consummation of the transactions provided for in the
Issuer Documents and compliance by the Issuer with the provisions
thereof and the collateral assignment of the Project Loans thereunder
will not involve any prohibited transaction within the meaning of the
Employee Retirement Income Security Act of 1974, as amended, or Section
4975 of the Internal Revenue Code of 1986, as amended.
16. The Issuer has not waived or agreed to any waiver under,
or agreed to any amendment or other modification of, any Project Loan
Note, or any Project Loan Document.
17. The Issuer has not nor has anyone acting on its behalf
offered, transferred, pledged, sold or otherwise disposed of any Note,
any interest in any Note or any other similar security to, or solicited
any offer to buy or accept a transfer, pledge or other disposition of
any Note, any interest in the Notes or any other similar security, or
otherwise approached or negotiated with respect to the Notes, any
interest in the Notes or any other similar security with, any person in
any manner which would, or made any general solicitation by means of
general advertising or in any other manner or taken any other action
which would, constitute a distribution of the Notes under the
Securities Act of 1933, as amended, or which would render the
disposition of the Notes a violation of Section 5 of the Securities Act
of 1933, as amended, or require registration pursuant thereto.
F-3
<PAGE> 54
Participation Agreement
REPRESENTATIONS AND WARRANTIES OF COLLATERAL TRUSTEE
Capitalized terms used herein shall have the respective meanings as set
forth in the Participation Agreement.
The Collateral Trustee hereby represents and warrants that:
1. The Collateral Trustee is a national banking association
duly organized, validly existing, and in good standing under the laws
of the United States of America.
2. The Collateral Trustee has full power, authority and
legal right under the laws of the United States pertaining to its
banking and trust powers to execute, deliver, and perform each of the
Operative Documents to which it is a party (the "Trustee Documents")
and to authenticate and deliver the Notes and has taken all necessary
action to authorize the execution, delivery, and performance by it of
each of the Trustee Documents and to authenticate and deliver the
Notes.
3. The execution, delivery and performance by the Collateral
Trustee of each of the Trustee Documents will not contravene any law,
rule or regulation of the States of New York or Utah or any United
States governmental authority or agency regulating the Collateral
Trustee's banking or trust powers or any judgment or order applicable
to or binding on the Collateral Trustee and will not contravene or
result in any breach of, or constitute a default under, the Collateral
Trustee's articles of association or by-laws or the provision of any
indenture, mortgage, contract or other agreement to which it is a party
or by which it or any of its properties is bound.
4. The execution, delivery and performance by the Collateral
Trustee of each of the Trustee Documents and the authentication of the
Notes will not require the authorization, consent, or approval of, the
giving of notice to, the filing or registration with, or the taking of
any other action in respect of, any United States or State of Utah
governmental authority or agency regulating the banking and trust
activities of the Collateral Trustee.
5. Each of the Trustee Documents have been duly executed and
delivered by the Collateral Trustee and constitutes the legal, valid,
and binding agreements of the Collateral Trustee, enforceable in
accordance with their respective terms, subject to bankruptcy,
insolvency, fraudulent conveyance and similar laws affecting creditors'
rights generally, and general principles of equity (regardless of
whether the application of such principles is considered in a
proceeding in equity or at law).
6. The Collateral Trustee is not or will not, as a result of
the performance of its duties under the Indenture, be required to be
registered as an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
EXHIBIT G
(to Participation Agreement)
<PAGE> 55
Participation Agreement
REPRESENTATIONS AND WARRANTIES
OF GUARANTOR
1. The Guarantor is a corporation duly incorporated, validly existing
and in good standing under the laws of its jurisdictions of incorporation. The
Guarantor has the lawful power to own or lease its properties and to engage in
the business it presently conducts or proposes to conduct.
2. The Guarantor has full power to enter into, execute, deliver and
carry out the Operating Documents to which it is a party (the "Guarantor
Documents") and to perform obligations under each of the Guarantor Documents and
all such actions have been duly authorized by all necessary proceedings on its
part.
3. The Guarantor has duly and validly executed and delivered each of
the Guarantor Documents. Each such Guarantor Document constitutes the legal,
valid and binding obligation of the Guarantor enforceable against the Guarantor
in accordance with its terms, except to the extent that enforceability thereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the enforceability of creditors' rights generally or
limiting the right of specific performance.
4. Neither the execution and delivery of the Guarantor Documents nor
the consummation of the transactions therein contemplated nor the compliance
with the terms and provisions thereof will (i) violate any provision of any
existing law, statute, rule or regulation applicable to the Guarantor or (ii)
conflict with, constitute a default under or result in any breach of (a) the
terms and conditions of the certificate of incorporation, by-laws or other
organizational documents of the Guarantor or (b) any agreement or instrument or
order, writ, judgment, injunction or decree to which the Guarantor is a party or
by which the Guarantor or any of its properties may be subject or bound, or
(iii) result in the creation or enforcement of any Lien, charge or encumbrance
whatsoever upon any property (now or hereafter acquired) of the Guarantor.
5. There are no actions, suits, proceedings or investigations pending
or, to the knowledge of the Guarantor threatened against the Guarantor or any of
its Subsidiaries before any Governmental Authority which individually or in the
aggregate could reasonably be expected to have a Material Adverse Effect.
Neither the Guarantor nor any of its Subsidiaries is in violation of any order,
writ, injunction or any decree of any Governmental Authority which individually
or in the aggregate could reasonably be expected to have a Material Adverse
Effect.
6. The Guarantor has delivered to each of the Purchasers copies of its
audited consolidated financial statements dated January 25, 1998 (the "Annual
Statements"). In addition, the Guarantor has delivered to each of the Purchasers
copies of its unaudited consolidated interim financial statements dated October
25, 1998 (the "Interim Statements") (the Annual Statements and the Interim
Statements being collectively referred to as the "Historical Statements"). The
Historical Statements were compiled from the books and records maintained
EXHIBIT H-1
(to Participation Agreement)
<PAGE> 56
Participation Agreement
by the Guarantor's management, are correct and complete and fairly represent the
consolidated financial condition of the Guarantor and its Subsidiaries as of
their dates and the results of operations for the fiscal periods then ended and
have been prepared in accordance with GAAP consistently applied (except as
disclosed in such financial statements), subject (in the case of the Interim
Statements) to normal year end audit adjustments.
7. Neither the Guarantor nor any of its Subsidiaries (including the
Tenant) has any material liabilities, contingent or otherwise, or forward or
long-term commitments that are not disclosed in the Historical Statements
referenced in the foregoing paragraph (6) or in the notes thereto, other than as
incurred in the ordinary course of business after the date of such statements.
Except as disclosed therein or on the schedules thereto, there are no unrealized
or anticipated losses from any commitments of the Guarantor or any Subsidiary of
the Guarantor which individually or in the aggregate could reasonably be
expected to have a Material Adverse Effect. Since the date of the Interim
Statements, no circumstances or events have occurred which could reasonably be
expected to have a Material Adverse Effect.
8. On the Closing Date, no Guarantor Documents or any certificate,
statement, financial or otherwise, agreement or other documents furnished to the
Purchasers in connection therewith, contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements
contained therein, in light of the circumstances under which they were made, not
misleading. On the Closing Date, there is no fact known to the Guarantor which
could reasonably be expected to have a Material Adverse Effect and which has not
been set forth in this Certificate or in the certificates, Historical
Statements, agreements or other documents furnished in writing to the Purchasers
prior to or on the Closing Date in connection with the transactions contemplated
by the Guarantor Documents.
9. No consent, approval, exemption, order or authorization of, or
registration or filing with any Governmental Authority or any other Person is
required by law or any agreement in connection with the execution and delivery
by the Guarantor of the Guarantor Documents, the consummation of the
transactions therein contemplated and the compliance with the terms and
provisions thereof.
10. No Event of Default or Default has occurred and is continuing.
Neither the Guarantor nor any of its Subsidiaries (including the Tenant) is in
violation of (i) any term of its certificate of incorporation, by-laws, or other
organizational documents or (ii) any agreement or instrument or order, writ,
judgment, injunction or decree to which it is a party or by which it or any of
its properties may be subject or bound where such violation individually or in
the aggregate could reasonably be expected to have a Material Adverse Effect.
11. The Guarantor and its Subsidiaries (including the Tenant) are in
compliance in respects with all applicable laws in all jurisdictions in which
the Guarantor or any of its Subsidiaries is presently or will be doing business
except where the failure to do so individually or in the aggregate could not
reasonably be expected to have a Material Adverse Effect.
H-1-2
<PAGE> 57
Participation Agreement
12. All contracts which are material to the business operations of the
Guarantor and its Subsidiaries (including the Tenant) are valid, binding and
enforceable upon the Guarantor and each such Subsidiary, as applicable, and each
of the other parties thereto in accordance with their respective terms, and
there is no default thereunder, to the Guarantor's knowledge, with respect to
parties other than the Guarantor or its Subsidiaries which could be expected to
have a Material Adverse Effect.
13. (a) Except as otherwise disclosed in the December, 1998 Property
Solutions, Inc. Phase I Environmental Assessments prepared for each Mortgaged
Property (the "Reports"), there are no circumstances at, on or under any
Mortgaged Property that constitute a material breach of or material
noncompliance with any of the Environmental Laws, and there are no past or
present Environmental Violations at, on or under any Mortgaged Property or, to
the knowledge of the Guarantor at, on or under adjacent property, that prevent
compliance with the Environmental Laws at any Mortgaged Property or that
otherwise would require that any removal, remediation or other corrective action
or cleanup be taken with respect to any Mortgaged Property.
(b) No Mortgaged Property and no structures, improvements,
equipment, fixtures, activities or facilities thereon or thereunder
contain or use Hazardous Substances except in compliance with
Environmental Laws. Except as may otherwise be disclosed in the
Reports, there are no processes, facilities, operations, equipment or
any other activities at, on or under such property, or, to the
knowledge of the Guarantor at, on or under adjacent property, that have
resulted or are currently resulting in the release or threatened
release of Hazardous Substances onto any Mortgaged Property, except to
the extent that such releases or threatened releases are not a breach
of or otherwise not a violation of the Environmental Laws.
(c) There are no above ground storage tanks, underground
storage tanks or underground piping associated with such tanks, used
for the management of Hazardous Substances at, on or under any
Mortgaged Property that (a) do not have a full operational secondary
containment system in place, and (b) are not otherwise in compliance
with all Environmental Laws. Except as may otherwise be disclosed in
the Reports, there are no abandoned underground storage tanks or
underground piping associated with such tanks, previously used for the
management of Hazardous Substances at, on or under any Mortgaged
Property that have not either been closed in place in accordance with
Environmental Laws or removed in compliance with all applicable
Environmental Laws and no contamination associated with the use of such
tanks exists on such property.
(d) All material permits, licenses, authorizations, plans and
approvals necessary under the Environmental Laws for the conduct of
business by the Tenant on the Mortgaged Properties as presently
conducted have been obtained. All material notices, reports and other
filings required by the Environmental
H-1-3
<PAGE> 58
Participation Agreement
Laws to be submitted to a Governmental Authority which pertain to past
and current operations on the Mortgaged Properties have been submitted.
(e) All present, and, based upon the Reports, to the best of
Guarantor's knowledge, all past on-site generation, storage,
processing, treatment, recycling, reclamation, disposal or other use or
management of Hazardous Substances at, on, or under any Mortgaged
Property and all off-site transportation, storage, processing,
treatment, recycling, reclamation, disposal or other use or management
of Hazardous Substances has been done in material compliance with the
Environmental Laws.
14. The representations and warranties of the Guarantor set forth in
each Guarantor Document are true and correct in all material respects. The
Guarantor is in compliance with its obligations under the Guarantor Documents
and there exists no Default or Event of Default by the Guarantor under any of
the Guarantor Documents.
15. The aggregate amount of Project Loan Debt Service (as defined in
the Project Loan Agreements) and payable as Basic Rent due under all Leases for
each calendar month occurring while the Notes are scheduled to be outstanding
equals the Monthly Amortization for such calendar month.
H-1-4
<PAGE> 59
Participation Agreement
REPRESENTATIONS AND WARRANTIES
OF TENANT
1. Tenant is a corporation duly incorporated, validly existing and in
good standing under the laws of its jurisdictions of incorporation. Tenant has
the lawful power to own or lease its properties and to engage in the business it
presently conducts or proposes to conduct.
The Tenant is duly licensed or qualified and in good standing in each
jurisdiction in which any Property is located.
2. Tenant has full power to enter into, execute, deliver and carry out
the Operating Documents to which it is a party (the "Tenant Documents") and to
perform obligations under each of the Tenant Documents and all such actions have
been duly authorized by all necessary proceedings on its part.
3. Tenant has duly and validly executed and delivered each of the
Tenant Documents. Each such Tenant Document constitutes the legal, valid and
binding obligation of Tenant enforceable against Tenant in accordance with its
terms, except to the extent that enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforceability of creditors' rights generally or limiting the
right of specific performance.
4. Neither the execution and delivery of the Tenant Documents nor the
consummation of the transactions therein contemplated nor the compliance with
the terms and provisions thereof will (i) violate any provision of any existing
law, statute, rule or regulation applicable to Tenant or (ii) conflict with,
constitute a default under or result in any breach of (a) the terms and
conditions of the certificate of incorporation, by-laws or other organizational
documents of Tenant or (b) any agreement or instrument or order, writ, judgment,
injunction or decree to which Tenant is a party or by which Tenant or any of its
properties may be subject or bound, or (iii) result in the creation or
enforcement of any Lien, charge or encumbrance whatsoever upon any property (now
or hereafter acquired) of Tenant.
5. There are no actions, suits, proceedings or investigations pending
or, to the knowledge of Tenant threatened against Tenant or any of its
Subsidiaries before any Governmental Authority which individually or in the
aggregate could reasonably be expected to have a Material Adverse Effect.
Neither Tenant nor any of its Subsidiaries is in violation of any order, writ,
injunction or any decree of any Governmental Authority which individually or in
the aggregate could reasonably be expected to have a Material Adverse Effect.
6. On the Closing Date, no Tenant Documents or any certificate,
statement, financial or otherwise, agreement or other documents furnished to the
Purchasers in connection therewith, contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements
contained therein, in light of the circumstances under which they were made, not
misleading. On the Closing Date, there is no fact known to Tenant which could
reasonably be expected to have a Material Adverse Effect and which has not been
set forth in this Certificate or in the certificates, Historical Statements,
agreements or other documents
EXHIBIT H-2
(to Participation Agreement)
<PAGE> 60
Participation Agreement
furnished in writing to the Purchasers prior to or on the Closing Date in
connection with the transactions contemplated by the Tenant Documents.
7. No consent, approval, exemption, order or authorization of, or
registration or filing with any Governmental Authority or any other Person is
required by law or any agreement in connection with the execution and delivery
by Tenant of the Tenant Documents, the consummation of the transactions therein
contemplated and the compliance with the terms and provisions thereof.
8. (a) Except as otherwise disclosed in the December, 1998 Property
Solutions, Inc. Phase I Environmental Assessments prepared for each Mortgaged
Property (the "Reports"), there are no circumstances at, on or under any
Mortgaged Property that constitute a material breach of or material
noncompliance with any of the Environmental Laws, and there are no past or
present Environmental Violations at, on or under any Mortgaged Property or, to
the knowledge of Tenant at, on or under adjacent property, that prevent
compliance with the Environmental Laws at any Mortgaged Property or that
otherwise would require that any removal, remediation or other corrective action
or cleanup be taken with respect to any Mortgaged Property.
(b) No Mortgaged Property and no structures, improvements,
equipment, fixtures, activities or facilities thereon or thereunder
contain or use Hazardous Substances except in compliance with
Environmental Laws. Except as may otherwise be disclosed in the
Reports, there are no processes, facilities, operations, equipment or
any other activities at, on or under such property, or, to the
knowledge of Tenant at, on or under adjacent property, that have
resulted or are currently resulting in the release or threatened
release of Hazardous Substances onto any Mortgaged Property, except to
the extent that such releases or threatened releases are not a breach
of or otherwise not a violation of the Environmental Laws.
(c) There are no above ground storage tanks, underground
storage tanks or underground piping associated with such tanks, used
for the management of Hazardous Substances at, on or under any
Mortgaged Property that (a) do not have a full operational secondary
containment system in place, and (b) are not otherwise in compliance
with all Environmental Laws. Except as may otherwise be disclosed in
the Reports, there are no abandoned underground storage tanks or
underground piping associated with such tanks, previously used for the
management of Hazardous Substances at, on or under any Mortgaged
Property that have not either been closed in place in accordance with
Environmental Laws or removed in compliance with all applicable
Environmental Laws and no contamination associated with the use of such
tanks exists on such property.
(d) All material permits, licenses, authorizations, plans and
approvals necessary under the Environmental Laws for the conduct of
business by Tenant on the Mortgaged Properties as presently conducted
have been obtained. All
H-2-2
<PAGE> 61
Participation Agreement
material notices, reports and other filings required by the
Environmental Laws to be submitted to a Governmental Authority which
pertain to past and current operations on the Mortgaged Properties have
been submitted.
(e) All present, and, based upon the Reports, to the best of
Tenant's knowledge, all past on-site generation, storage, processing,
treatment, recycling, reclamation, disposal or other use or management
of Hazardous Substances at, on, or under the Mortgaged Property and all
off-site transportation, storage, processing, treatment, recycling,
reclamation, disposal or other use or management of Hazardous
Substances has been done in material compliance with the Environmental
Laws.
9. The representations and warranties of Tenant set forth in each
Tenant Document are true and correct in all material respects. Tenant is in
compliance with its obligations under the Tenant Documents and there exists no
Default or Event of Default by Tenant under any of the Tenant Documents.
10. Upon the execution and delivery of each Lease, (i) Tenant will have
unconditionally accepted the Mortgaged Property subject to such Lease, (ii) no
offset will exist with respect to any Basic Rent or other sums payable under
such Lease and (iii) no Basic Rent or Supplemental Rent under any Lease will
have been prepaid except as otherwise required by the Operative Agreements.
11. No portion of any Mortgaged Property is located in an area
identified as a special flood hazard area by the Federal Emergency Management
Agency or other applicable agency, or if any such Mortgaged Property is located
in an area identified as a special flood hazard area by the Federal Emergency
Management Agency or other applicable agency, then flood insurance has been
obtained for such Mortgaged Property in accordance with Article XV of each Lease
and in accordance with the National Flood Insurance Act of 1968, as amended.
12. Tenant has obtained insurance coverage for each Mortgaged Property
which meets the requirements of Article XV of each Lease and all of such
coverage is in full force and effect.
13. To the actual knowledge of Tenant, each Mortgaged Property (i)
complies in all material respects with all applicable laws, rules and
regulations of all governmental authorities (including, without limitation, all
zoning and land use laws and Environmental Laws); or (ii) does not comply with
certain state and local land use, zoning and related legal requirements (other
than Environmental Laws) which have been identified in writing to the Purchasers
and which the Purchasers have deemed immaterial.
14. To the actual knowledge of Tenant, all consents, licenses and
building permits required by all applicable laws, rules and regulations of all
governmental authorities, occupancy and operation of each Mortgaged Property (i)
have been obtained and are in full force and effect; or (ii) have not been
obtained (such consents, licenses and building permits having been identified in
writing to the Purchasers and which the Purchasers have deemed immaterial).
H-2-3
<PAGE> 62
Participation Agreement
REPRESENTATIONS AND WARRANTIES OF OWNER BENEFICIARY
Capitalized terms used herein shall have the respective meanings as set
forth in the Participation Agreement.
The Owner Beneficiary hereby represents and warrants that:
1. The Owner Beneficiary is a corporation duly organized,
validly existing and in good standing under the laws of Delaware.
2. The Owner Beneficiary has full power, authority and legal
right to execute, deliver, and perform each of the Operative Documents
to which it is a party (the "Owner Beneficiary Documents") and has
taken all necessary corporate action to authorize the execution,
delivery, and performance by it of each of the Owner Beneficiary
Documents.
3. The execution, delivery and performance by the Owner
Beneficiary of each of the Owner Beneficiary Documents will not
contravene any law, rule or regulation or any judgment or order
applicable to or binding on the Owner Beneficiary and will not
contravene or result in any breach of, or constitute a default under,
the Owner Beneficiary's certificate of incorporation or by-laws or the
provision of any indenture, mortgage, contract or other agreement to
which it is a party or by which it or any of its properties is bound.
4. The execution, delivery and performance by the Owner
Beneficiary of each of the Owner Beneficiary Documents will not require
the authorization, consent, or approval of, the giving of notice to,
the filing or registration with, or the taking of any other action in
respect of, any governmental authority.
5. Each of the Owner Beneficiary Documents have been duly
executed and delivered by the Owner Beneficiary and constitutes the
legal, valid, and binding agreements of the Owner Beneficiary,
enforceable in accordance with their respective terms, subject to
bankruptcy, insolvency, fraudulent conveyance and similar laws
affecting creditors' rights generally, and general principles of equity
(regardless of whether the application of such principles is considered
in a proceeding in equity or at law).
6. The Owner Beneficiary is not or will not, as a result of
the performance of its duties under the Indenture, be required to be
registered as an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
EXHIBIT I
(to Participation Agreement)
<PAGE> 1
EXHIBIT 10.35
RESIGNATION AND RELEASE AGREEMENT
AGREEMENT (the "Agreement"), dated as of April 20, 1999 (the
"Resignation Date"), by and between Borders Group, Inc. (the "Company"), and
Philip M. Pfeffer (the "Executive").
WHEREAS, the Executive has been employed as Chief Executive
Officer of the Company; and
WHEREAS, by mutual agreement between the parties hereto, the
Executive shall hereby resign, effective as of the Resignation Date, his
positions as Chief Executive Officer of the Company, as a member of the Board of
Directors of the Company and as an officer and director of any subsidiary or
affiliate of the Company for which he is serving in such positions.
NOW, THEREFORE, BE IT RESOLVED, that the Company and the
Executive, in consideration of the covenants herein set forth, hereby agree as
follows:
1. TERMINATION OF EMPLOYMENT
By mutual agreement with the Company, the Executive hereby
resigns, effective as of the Resignation Date, from his positions as Chief
Executive Officer of the Company and a member of the Board of Directors of the
Company, and from all other positions the Executive may currently hold as an
officer or member of the Board of Directors of any of the Company's subsidiaries
or affiliates. The Executive shall sign and deliver to the Company such other
documents as may be requested to reflect such resignations.
<PAGE> 2
2. SEVERANCE PAYMENTS, BENEFITS AND OBLIGATIONS
(a) The Company will pay to the Executive his base salary
through the Resignation Date, and the Executive will not be entitled to any
additional compensation or benefits from the Company, or its subsidiaries or
affiliates, except as provided in this Agreement.
(b) In consideration of the Executive's agreement to comply
with Sections 3, 4, 6 and 8 of this Agreement, and in lieu of and in
satisfaction of any severance or other payments due under any severance or other
benefit plans maintained by the Company or any of its subsidiaries or affiliates
(collectively, the "Company Entities"), or any individual agreement previously
entered into with the Executive by any of the Company Entities, including
without limitation the Employment Agreement, dated as of November 16, 1998, by
and between the Company and the Executive (the "Employment Agreement"), the
Company shall pay the Executive (i) with respect to severance under the
Employment Agreement, an aggregate payment of $2,400,000, half of which shall be
payable in equal monthly installments during the twelve-month period commencing
in May, 1999, and the other half of which shall be payable on April 20, 2000,
and (ii) with respect to the Executive's compliance with Sections 3, 4, 6 and 8
of this Agreement, a payment of $1,500,000, payable upon the end of the
Revocation Period (as defined in Section 8(c) hereof). The Company shall waive
any mitigation (or obligation to seek employment) provisions otherwise
applicable to the Executive under the Employment Agreement.
(c) The $6,300,000 promissory note from the Executive to the
Company, dated November 23, 1998 (the "Note") shall be extended to remain
outstanding until April 20, 2000, at which time the entire unpaid principal
balance of the Note, plus all unpaid accrued interest, shall be immediately due
and payable. The Pledge Agreement between the Executive
2
<PAGE> 3
and the Company, dated November 23, 1998, shall continue pursuant to its terms
and shall not be affected by any release set forth in Section 8 of this
Agreement. When any of the payments under Section 2(b) and Section 5(c) become
due, if the Executive has not repaid in full all outstanding principal and
accrued interest on the Note, the Company may, in its sole discretion, apply the
payment otherwise due to the Executive (net of applicable income, employment and
Medicare taxes required to be withheld on such payment by the Company) to reduce
the outstanding principal and accrued interest on the Note, instead of making
such payment directly to the Executive. Except as provided in this Section 2(c),
the terms and conditions of the Note (including without limitation as to
security therefor) shall remain in effect without amendment.
(d) The Executive shall be deemed, by virtue of the execution
of this Agreement, to have made a written request pursuant to Schedule C of the
Employment Agreement that the Company prepare and file with the Securities and
Exchange Commission, as soon as reasonably practicable following the date
hereof, a Registration Statement on Form S-3 (or other available Form) with
respect to the 400,000 shares of common stock of the Company purchased by the
Executive under the Employment Agreement, and the Company shall comply with the
requirements of said Schedule C (and Schedule C shall remain in effect until the
Company's obligations thereunder are satisfied in full).
(e) The Company shall continue to provide, and shall cause its
subsidiaries to continue to provide, the Executive with indemnification, expense
advancement, exculpation of liabilities and directors and officers liability
insurance, with respect to actions of the Executive as an officer or director of
the Company (or any of its subsidiaries) prior to the Resignation Date, in each
case on terms and conditions no less favorable than the terms and conditions
applicable
3
<PAGE> 4
from time to time to their respective senior executives and directors
or, if more favorable, to their respective former senior executives and
directors.
(f) The Company will reimburse the Executive for any
unreimbursed reasonable business expenses incurred by the Executive prior to the
Resignation Date, pursuant to the Company's reimbursement policies, following
the Executive's presentation of an expense report to the Company. In addition,
the Company shall reimburse the Executive for reasonable fees and expenses of
the Executive's legal and tax accounting advisors incurred in connection with
the negotiation and execution of this Agreement and for the expenses he incurs
in relocating his residence to Nashville, Tennessee, upon presentation by the
Executive of invoices therefor; provided, that the amounts reimbursed pursuant
to this sentence shall not exceed $30,000. Finally, the Company shall assume, as
of the date of this Agreement, all rights and responsibilities of the Executive
under the lease of the premises at 453 Waymarket Drive, Ann Arbor, MI and the
lease of the furniture contained therein, true and correct copies of which
leases have been provided to the Company.
(g) The Executive agrees that the payment of the amounts set
forth in this Section 2 is conditioned upon his satisfaction of the terms of
this Agreement and, that, without limiting any other remedies available to the
Company, the Company shall not be obligated to pay to the Executive any unpaid
portion of such payments or perform its obligations under this Section 2 if the
Executive fails to comply in any material respect with any of the material terms
of this Agreement.
(h) This Agreement shall supersede the Employment Agreement,
and the Employment Agreement shall be deemed terminated from and after the date
of this Agreement,
4
<PAGE> 5
without any remaining obligation of any party under such agreement, except to
the extent otherwise specifically provided in this Agreement.
3. DISPARAGING COMMENTS
From and after the Resignation Date, the Executive will
refrain from taking actions or making statements, written or oral, which
denigrate, disparage or defame the goodwill or reputation of the Company
Entities and their trustees, officers, security holders, partners, agents and
former and current employees and directors or which are intended to, or may be
reasonably expected to, adversely affect the morale of the employees of any of
the Company Entities. The Executive further agrees not to make any negative
statements to employees of the Company Entities or to third parties relating to
his employment or any aspect of the business of the Company Entities and not to
make any statements to employees of the Company Entities or to third parties
about the circumstances of the Executive's resignation, or about the Company
Entities and their former and current trustees, officers, security holders,
partners, agents, employees and directors. From and after the Resignation Date,
the Company will refrain, and will cause its executive officers and directors to
refrain, from taking actions or making statements, written or oral, which
denigrate, disparage or defame the reputation of the Executive. The Company
further agrees not to make, and cause its executive officers and directors not
to make, any negative statements to employees of the Company Entities or to
third parties relating to the Executive's employment or any statements to
employees of the Company Entities or to third parties about the circumstances of
the Executive's resignation. It is expressly acknowledged and agreed that none
of the following shall be considered a violation of the foregoing: (i) a
disposition by the Executive of stock of the Company that he owns; (ii)
5
<PAGE> 6
statements described in Section 9 of this Agreement; and (iii) statements that a
court or governmental body requires be made.
4. RESTRICTIVE COVENANTS
(a) The Executive has returned or will immediately return to
the Company all embodiments of Company Information (as defined below), including
client lists, files, software, records, computer access codes and instruction
manuals, which he has in his possession, and agrees not to keep any copies
thereof. The Executive affirms his obligation to keep all Company Information
confidential and not to use it or disclose it to any third party in the future.
The term "Company Information" means: (i) confidential information, including
information received from third parties under confidential conditions, and (ii)
other systems, technical, marketing, business or financial information, or
information relating to personnel or former personnel of the Company, the use or
disclosure of which might reasonably be construed to be contrary to the interest
of the Company; provided, however, that the term "Company Information" shall not
include any information that is or became known or available to the public other
than as a direct result of a breach of this paragraph by the Executive or any
action by the Executive prior to the Resignation Date which would have been a
breach of the Executive's obligations to the Company in effect at such time. The
Executive shall have the right to remove from the offices of the Company any of
his personal belongings which do not constitute Company Information.
(b) The Executive agrees that he will not without the prior
written consent of the Company engage in Competition during the thirty-six month
period following the Resignation Date. "Competition" for the purposes of this
Agreement shall mean:
(i) becoming directly or indirectly involved, as an owner,
principal, employee, officer, director, independent contractor, representative,
stockholder, agent, advisor, lender or in
6
<PAGE> 7
any other capacity, in any business or entity engaged (either directly or
indirectly, through any subsidiary or other affiliated entity) in the sale of
books, music or videos directly to the public (whether through traditional
retail sales or over the Internet or otherwise, but excluding sales that are
merely incidental to the sale of other goods or services) (such sales activity,
the "Covered Businesses"), anywhere in North America, the United Kingdom,
Singapore, Australia and New Zealand; provided, however, that in no event shall
ownership of less than 5% of the outstanding capital stock of any corporation,
in and of itself, be deemed Competition if such capital stock is listed on a
national securities exchange or regularly traded in an over-the-counter market;
and provided, further, that following the first anniversary of the Resignation
Date, in no event shall the ownership of less than 10% of the outstanding
capital stock of any corporation, in and of itself, be deemed Competition if
such capital stock is not listed on a national securities exchange or regularly
traded in an over-the-counter market; and provided, further, that in no event
shall the Executive's ownership of securities of Ingram Industries, Inc. or
Ingram Micro Inc. be deemed Competition; and provided, further, that in no event
shall Ingram Industries, Inc. or Ingram Micro Inc., as the case may be, be
deemed to be engaged in Competition if such entity and its consolidated
affiliates do not have consolidated net revenues from the Covered Businesses in
excess of the following percentages of their total consolidated net revenues: 5%
during the first twelve months following the Resignation Date; 10% during the
next twelve months following the Resignation Date; and 20% during the final
twelve months following the Resignation Date; or
(ii) directly soliciting, or causing another person to
solicit, any person who is a customer of the businesses conducted by the
Company, on behalf of a business engaged in
7
<PAGE> 8
Competition, or inducing or attempting to persuade any individual known by the
Executive to be an employee of the Company or any of its subsidiaries to
terminate his or her employment relationship with the Company or any of its
subsidiaries.
(c) The Executive acknowledges and agrees that the Company's
remedy at law for any breach of the Executive's obligations under this Section 4
would be inadequate and agrees and consents that temporary and permanent
injunctive relief may be granted in any proceeding which may be brought to
enforce any provision of this Section without the necessity of proof of actual
damage. With respect to any provision of this Section 4 finally determined by a
court of competent jurisdiction to be unenforceable, the Executive and the
Company hereby agree that such court shall have jurisdiction to reform this
Agreement or any provision hereof so that it is enforceable to the maximum
extent permitted by law, and the parties agree to abide by such court's
determination.
5. WAIVER OF OTHER PAYMENTS AND BENEFITS; STOCK OPTIONS;
RESTRICTED STOCK
(a) The compensation and benefits arrangements set forth in
this Agreement are in lieu of any rights or claims that the Executive may have
with respect to severance or other benefits, or any other form of remuneration
from the Company Entities, other than benefits under any tax-qualified employee
pension benefit plans subject to the Employee Retirement Income Security Act of
1974, as amended (including the Company's 401(k) plan), and without limiting the
generality of the foregoing, the Executive hereby expressly waives any right or
claim that he may have or could assert to payment for salary, bonuses, medical,
dental or hospitalization benefits, payments under supplemental retirement plans
and incentive plans, life insurance
8
<PAGE> 9
benefits, expenses and attorneys' fees, except as otherwise provided in this
Agreement or as mandated under applicable law.
(b) The Executive acknowledges that, except as provided in the
immediately following sentence, upon the Resignation Date all of his stock
options granted under the Borders Group, Inc. Stock Option Plan (the "Option
Plan") shall be immediately cancelled and forfeited pursuant to the terms of
such Plan. Notwithstanding the foregoing, the Company and the Executive
acknowledge that, pursuant to the terms of the Option Plan, the Executive's
stock options set forth on Exhibit A to this Agreement shall become vested and
exercisable upon the Resignation Date and shall remain exercisable until July
20, 1999, at which time they will be immediately cancelled and forfeited.
(c) Pursuant to the terms of the Company's Management Stock
Purchase Plan (the "Purchase Plan"), in settlement of the Executive's 53,763
shares of restricted stock purchased under the Purchase Plan, the Company shall
deliver to the Executive on the next business day immediately following the
Resignation Date a cash payment equal to $917,331.19, less all applicable
withholding, employment and Medicare taxes. If, at the time of payment under
this Section 5(c), the Executive has not repaid in full all outstanding
principal and accrued interest on the Note, the Company may in its sole
discretion, apply the above payment to reduce the outstanding principal and
accrued interest on the Note, and not make such payment directly to the
Executive.
6. INFORMATION REQUESTS/COOPERATION
The Executive agrees to make himself reasonably available to
the Company to respond to requests by the Company for information concerning
matters involving facts or events relating to the Company or any other Company
Entity that arose during the period of the
9
<PAGE> 10
Executive's employment with the Company and that may be within the Executive's
knowledge, and to assist the Company and the Company Entities as reasonably
requested with respect to pending and future litigations, arbitrations or other
dispute resolutions concerning matters involving facts or events relating to the
Company or any other Company Entity that arose during the period of the
Executive's employment with the Company. The Company will reimburse the
Executive for his reasonable travel expenses and costs incurred as a result of
his assistance under this Section 6. In addition, the Company shall pay the
Executive a fee of $500 per day for each day in excess of an aggregate of 10
days for which the Executive renders services pursuant to this Section 6.
7. NO ADMISSION OF WRONGDOING
Nothing contained in this Agreement shall be construed in any
way as an admission by any of the parties of any act, wrongdoing, practice or
policy of discrimination or breach of contract either in violation of applicable
law or otherwise.
8. WAIVER AND RELEASE.
(a) In consideration of the payments and benefits set forth in
this Agreement, the Executive, for himself, his heirs, administrators,
representatives, executors, successors and assigns (collectively "Releasors")
does hereby irrevocably and unconditionally release, acquit and forever
discharge the Company Entities and their former and current trustees, officers,
security holders, partners, agents, employees and directors, including without
limitation all persons acting by, through, under or in concert with any of them
(collectively, "Releasees"), from any and all charges, complaints, claims,
liabilities, obligations, promises, agreements, controversies, damages,
remedies, actions, causes of action, suits, rights, demands, costs, losses,
debts and expenses (including attorneys' fees and costs) of any nature
whatsoever, known or
10
<PAGE> 11
unknown, whether in law or equity and whether arising under federal, state or
local law and in particular including any claim for discrimination based upon
race, color, ethnicity, sex, age (including the Age Discrimination in Employment
Act of 1967) (the "ADEA Release"), national origin, religion, disability, or any
other unlawful criterion or circumstance, which the Releasors had, now have, or
may in the future have, against each or any of the Releasees from the beginning
of the world until the date of the execution of this Agreement; provided, that
the foregoing shall not include claims for the payments and benefits expressly
provided for in this Agreement. The Executive acknowledges and agrees that if he
or any other Releasor should hereafter make any claim or demand or commence or
threaten to commence any action, claim or proceeding against the Releasees with
respect to any cause, matter or thing which is the subject of this Section 8(a),
this Agreement may be raised as a complete bar to any such action, claim or
proceeding, and the applicable Releasee may recover from the Executive all costs
incurred in connection with such action, claim or proceeding, including
attorneys' fees.
(b) In consideration of the Executive's agreements and
covenants set forth in this Agreement, the Company and the Company Entities (the
"Company Releasors") hereby irrevocably and unconditionally release, acquit and
forever discharge the Executive, his heirs, administrators, representatives,
executors, successors and assigns (in each case in their capacity as such),
including without limitation all persons acting by, through, under or in concert
with any of them (collectively, the "Company Releasees"), from any and all
charges, complaints, claims, liabilities, obligations, promises, agreements,
controversies, damages, remedies, actions, causes of action, suits, rights,
demands, costs, losses, debts and expenses (including attorneys' fees and costs)
of any nature whatsoever, known or unknown, whether in law or equity and whether
arising under federal, state or local law, which the Company Releasors now have,
or may in the
11
<PAGE> 12
future have, against the Executive or any of the Company Releasees
with respect to the Executive from the beginning of the world until the date of
the execution of this Agreement, other than any claim based upon fraudulent or
illegal activity that was not discovered by the Company Releasors until
subsequent to the date of execution of this Agreement, or any claim that may be
brought derivatively. The Company acknowledges and agrees that if it or any
other Company Releasor should hereafter make any claim or demand or commence or
threaten to commence any action, claim or proceeding against the Executive or
the Company Releasees with respect to any cause, matter or thing which is the
subject of this Section 8(b), this Agreement may be raised as a complete bar to
any such action, claim or proceeding, and the Executive or the applicable
Company Releasee may recover from the Company Releasors all costs incurred in
connection with such action, claim or proceeding, including attorneys' fees.
(c) The Executive affirms that prior to the execution of this
Agreement and the waiver and release in Section 8(a), the Executive was advised
by the Company to consult with an attorney of the Executive's choice concerning
the terms and conditions set forth herein, and that the Executive was given up
to 21 days to consider executing this Agreement, including the ADEA Release in
Section 8(a). The Executive has 7 days following his execution of this Agreement
(the "Revocation Period") to revoke the ADEA Release. In the event the Executive
revokes the ADEA Release, the Company may cease making the payments set forth in
Section 2.
9. PUBLIC STATEMENTS
The parties agree that the Executive's termination of
employment will be announced by the statement attached hereto as Exhibit B, and
no subsequent comments shall be made to the media or through other public
statements by any party hereto or any Company Entity regarding the Executive's
termination of employment that are inconsistent with such statement,
12
<PAGE> 13
except as may be required by applicable law or regulation. The Company shall
retain the public relations firm of Abernathy MacGregor Frank to handle public
relations and press inquiries in connection with this Agreement and the
Executive's termination of employment.
10. NO RELIANCE
The Executive represents and acknowledges that, in executing
this Agreement, he has not relied upon any representation or statement made by
the Company or not set forth herein. The Company represents and acknowledges
that, in executing this Agreement, it has not relied upon any representation or
statement made by the Executive or not set forth herein.
11. GOVERNING LAW
This Agreement shall be governed by and construed in
accordance with the laws of the State of Michigan, without regard to the
principles of conflicts of law thereof, to the extent not superseded by
applicable federal law. 12. WARRANTY
The parties hereto represent and warrant that there exists no
impediment or restraint, contractual or otherwise on their power, right or
ability to enter into this Agreement and to perform their duties and obligations
hereunder or as contemplated hereby.
13. TAXES
All payments made to the Executive under this Agreement will
be reduced by, or the Executive will otherwise pay, all income, employment and
Medicare taxes required to be withheld on such payments.
14. NO COERCION
The parties hereto represent and acknowledge that they have
decided to enter into this Agreement voluntarily, knowingly and without coercion
of any kind.
13
<PAGE> 14
15. ENFORCEABILITY/SEVERABILITY
The parties hereto affirmatively acknowledge that this
Agreement, and each of its provisions, is enforceable, and expressly agree not
to challenge nor raise any defense against the enforceability of this Agreement
or any of its provisions in the future. The invalidity or unenforceability of
any provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement. In the event that any provision or
portion of this Agreement shall be determined to be invalid or unenforceable for
any reason, the remaining provisions or portions of this Agreement shall be
unaffected thereby and shall remain in full force and effect to the fullest
extent permitted by law.
16. NOTICES
All notices, requests, demands and other communication which
are required or may be given under this Agreement shall be in writing and shall
be deemed to have been duly given when received if personally delivered; when
transmitted by telecopy, electronic or digital transmission method upon receipt
of telephonic or electronic confirmation; the day after it is sent, if sent for
next day delivery to a domestic address by recognized overnight delivery service
(e.g., Federal Express) and upon receipt, if sent by certified or registered
mail, return receipt requested. In each case notice shall be sent to:
If to the Executive, addressed to:
Philip M. Pfeffer
836 Tremont Court
Nashville, TN 37220
14
<PAGE> 15
If to the Company, addressed to:
Borders Group, Inc.
100 Phoenix Drive
Ann Arbor, MI 48108-2202
Attention: General Counsel
or to such other place and with such other copies as any party may designate as
to itself or himself by written notice to the others.
17. AMENDMENTS; WAIVERS
This Agreement may not be amended, modified or terminated,
except by a written instrument signed by the parties hereto. Any provision of
this Agreement may be waived by a written instrument signed by the party to be
charged with such waiver.
18. SUCCESSORS
This Agreement shall be binding on the Executive, the Company,
and their respective heirs, successors and assigns, including without limitation
any corporation or other entity into which the Company may be merged,
reorganized or liquidated, or by which the Company may be acquired. As the
obligations to be performed by the Executive hereunder are unique based upon his
skills and qualifications, the Executive's obligations under this Agreement may
not be assigned. The obligations of the Company under this Agreement may not be
assigned except to a successor to all or substantially all of the business or
assets of the Company or by operation of law.
19. ENTIRE AGREEMENT
Except as specified herein, this Agreement contains the entire
agreement between the parties concerning the subject matter hereof and
supersedes all prior agreements,
15
<PAGE> 16
understandings, discussions, negotiations and undertakings, whether written or
oral, between the parties with respect thereto.
20. COUNTERPARTS
This Agreement may be executed in several counterparts, each
of which shall be deemed to be an original, but all of which together will
constitute one and the same Agreement.
16
<PAGE> 17
IN WITNESS WHEREOF, the parties have executed this Agreement,
as of the date and year first written above.
BORDERS GROUP, INC.
Robert D. Roumaldo
--------------------------
By:
/s/ Philip M. Pfeffer
---------------------------
Philip M. Pfeffer
<PAGE> 18
EXHIBIT A
Re: Outstanding Stock Options
1. Grant Date No. of Option Shares Option Price Per Share
11/16/98 15,610 $23.25
2. Grant Date No. of Option Shares Option Price Per Share
2/1/99 45,787 $17.125
The above-referenced options shall terminate on July 20, 1999.
18
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of Borders Group, Inc.
SUBSIDIARY STATE OF INCORPORATION
- ---------- ----------------------
Borders, Inc. Colorado
Borders Fulfillment, Inc. Delaware
Borders Online, Inc. Delaware
Borders Outlet, Inc. Colorado
Borders Properties, Inc. Delaware
Planet Music, Inc. North Carolina
Niche Marketing Limited, Inc. Ohio
Niche Marketing LLC
d/b/a All Wound Up! Ohio
The Library, Ltd. Missouri
Walden Book Company, Inc. Colorado
Waldenbooks Properties, Inc. Delaware
Books (UK) Limited
formerly Books etc. Limited U.K.
Borders New Zealand Limited New Zealand
Borders PTE. Limited Singapore
Borders Australia PTY, Limited Australia
BGI U.K. Limited U.K.
BGP U.K. Limited U.K.
Paperchase Products Limited U.K.
* BGI owns 19.9% with an option to acquire the remaining shares.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-92716) of Borders Group, Inc. of our report dated
March 8, 1999 appearing on page 31 of this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Bloomfield Hills, Michigan
April 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-24-1999
<PERIOD-START> JAN-25-1998
<PERIOD-END> JAN-24-1999
<CASH> 43
<SECURITIES> 0
<RECEIVABLES> 63
<ALLOWANCES> 0
<INVENTORY> 1,020
<CURRENT-ASSETS> 1,133
<PP&E> 825
<DEPRECIATION> 331
<TOTAL-ASSETS> 1,767
<CURRENT-LIABILITIES> 989
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 715
<TOTAL-LIABILITY-AND-EQUITY> 1,767
<SALES> 2,595
<TOTAL-REVENUES> 2,595
<CGS> 1,859
<TOTAL-COSTS> 1,859
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16
<INCOME-PRETAX> 151
<INCOME-TAX> 59
<INCOME-CONTINUING> 92
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 92
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.12
</TABLE>
<PAGE> 1
EXHIBIT 99.1
BORDERS GROUP, INC.
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 - "SAFE HARBOR" FOR FORWARD-LOOKING
STATEMENTS
This report and other written reports and oral statements made from time to time
by Borders Group, Inc. (the "Company") may contain so-called "forward-looking
statements, all of which are subject to risks and uncertainties. One can
identify these forward-looking statements by their use of words such as
"expects," "anticipates," "plans," "will," "estimates," "forecasts," "guidance"
"projects" and other words of similar meaning. One can also identify them by the
fact that they do not relate strictly to historical or current facts. These
statements are likely to address the Company's growth strategy, sales and,
earnings and other financial projections, Y2K compliance and similar matters.
One must carefully consider any such statement and should understand that many
factors could cause actual results to differ from the Company's forward-looking
statements. These factors include inaccurate assumptions and a broad variety of
risks and uncertainties, including some that are known and some that are not. No
forward-looking statement can be guaranteed and actual future results may vary
materially. Although it is not possible to predict or identify all such factors,
they may include the following:
- - consumer demand for the Company's products, which is believed to be related
to a number of factors, including overall consumer spending patterns,
weather conditions and with respect to the mall business, overall mall
traffic
- - an unexpected increase in competition, including internet competition and
competition resulting from electronic or other alternative methods of
delivery of books, music, and other products to consumers, or unanticipated
margin or other disadvantages relative to our competitors
- - higher than anticipated interest, occupancy, labor, distribution and
inventory shrinkage costs
- - unanticipated adverse litigation expenses or results
- - unanticipated work stoppages
- - higher than anticipated costs associated with the closing of
underperforming stores; unanticipated increases in the cost of the
merchandise sold by the Company
- - the performance of the Company's new strategic initiatives, including the
Internet and international expansion
- - the stability and capacity of the Company's information systems
- - unanticipated adverse litigation expenses or results
<PAGE> 2
- - unanticipated work stoppages
- - higher than anticipated costs associated with the closing of
underperforming stores
- - unanticipated increases in the cost of the merchandise sold by the Company
- - the performance of the Company's new strategic initiatives
- - including the Internet and international expansion the stability and
capacity of the Company's information systems
- - unanticipated costs or problems relating to the Company's Year 2000
compliance or systems enhancements required for the operations of the
Company
- - changes in foreign currency exchange rates
- - and the continued ability of the Company to locate and develop suitable
sites for its superstore expansion program and kiosk programs.
The Company does not undertake any obligation to update forward looking
statements.
