SECURITIES
AND EXCHANGE COMMISSION
 
 Washington,
D.C. 20549
 
 FORM 10 -
Q
 (Mark One)[X]
    QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the quarterly period ended April 23, 2005OR[
      ]
    TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES
      EXCHANGE ACT OF 1934
 
 For the
transition period from ______ to _______.
 
 Commission
file number 1-13740
 
 BORDERS
GROUP, INC.
 (Exact
name of registrant as specified in its charter)
 
 MICHIGAN
    
    38-3294588(State
      or other jurisdiction of
    
    (I.R.S.
      Employerincorporation
      or organization)
    
    Identification
      No.)
 
 100
Phoenix Drive, Ann Arbor, Michigan 48108
 (Address
of principal executive offices)
 (zip
code)
 
 (734)
477-1100
 (Registrant's
telephone number, including area code)
 
 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 _
 
 Shares
      Outstanding As ofTitle
      of Class
    
    May
      20, 2005Common
      Stock
    
    71,085,811
 
  
  **BORDERS
GROUP, INC.**
 
 **INDEX**
 ****
    
    
    **Page**Part
      I - Financial InformationItem
      1. Financial
      Statements
    
    
    1Item
      2. Management's
      Discussion and Analysis ofFinancial
      Condition and Results ofOperations
    
    
    10Item
      3. Quantitative and
      Qualitative Disclosures aboutMarket
      Risk
    
    
    19Item
      4. Controls and
      Procedures
    
    
    20Part
      II - Other informationItem
      1. Legal
      Proceedings
    
    
    20Item
      2. Unregistered
      Sales of Equity Securities and Use of Proceeds
    
    
    20Item
      3. Defaults Upon
      Senior Securities
    
    
    N/AItem
      4. Submission of
      Matters to a Vote of
    
    
    N/ASecurityholdersItem
      5.  Other
      Information
    
    
    N/AItem
      6.  Exhibits
    
    
    21Signatures
    
    
    22
 
   ii
   **BORDERS
GROUP, INC.**
 **CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(dollars
in millions except per share data)**
 **(UNAUDITED)**
 
 
 **13****Weeks
      Ended******
    
    
    
    **(Restated)******
      ****
    
    **April
      23,**
      **2005**
    
    **April
      25,**
      **2004**Sales
    
    $
    847.2
    
    $
    830.8Other
      revenue
    
    
    5.8
    
    
    7.3Total
      revenue
    
    
    853.0
    
    
    838.1Cost
      of merchandise sold (includes occupancy)
    
    
    639.2
    
    
    627.8Gross
      margin
    
    
    213.8
    
    
    210.3Selling,
      general and administrative expenses
    
    
    218.5
    
    
    203.6Pre-opening
      expense
    
    
    1.2
    
    
    0.7Asset
      impairments and other writedowns
    
    
    0.3
    
    
    0.4Operating
      income (loss)
    
    
    (6.2
    )
    
    5.6Interest
      expense
    
    
    2.2
    
    
    1.9Income
      (loss) before income tax
    
    
    (8.4
    )
    
    3.7Income
      tax provision (benefit)
    
    
    (3.1
    )
    
    1.4Net
      income (loss)
    
    $
    (5.3
    )
    $
    2.3Earnings
      (loss) per common share data*Diluted:*Income
      (loss) per common share
    
    $
    (0.07
    )
    $
    0.03Weighted
      average common shares outstanding (in millions)
    
    
    73.2
    
    
    79.8*Basic:*Income
      (loss) per common share
    
    $
    (0.07
    )
    $
    0.03Weighted
      average common shares outstanding (in millions)
    
    
    73.2
    
    
    78.2Dividends
      declared per common share
    
    $
    0.09
    
    $
    0.08
 
 
 See
accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
 
  1
  **BORDERS
GROUP, INC.**
 **CONDENSED
CONSOLIDATED BALANCE SHEETS**
 **(dollars
in millions except per share data)**
 **(UNAUDITED)**
 
 
 ****
    
    ****
    
    **(Restated)******
      ****
    
    **April
      23,**
      **2005**
    
    **April
      25,**
      **2004**
    
    **January
      23,**
      **2005****Assets**Current
      assets:Cash
      and cash equivalents
    
    $
    94.4
    
    $
    229.4
    
    $
    244.8Investments
    
    
    -
    
    
    5.0
    
    
    95.4Merchandise
      inventories
    
    
    1,335.7
    
    
    1,271.7
    
    
    1,306.9Accounts
      receivable and other current assets
    
    
    121.1
    
    
    95.6
    
    
    118.3Total
      current assets
    
    
    1,551.2
    
    
    1,601.7
    
    
    1,765.4Property
      and equipment, net of accumulated depreciation of$943.3,
      $831.7 and $912.2 at April 23, 2005, April 25,2004
      and January 23, 2005, respectively
    
    
    648.4
    
    
    619.1
    
    
    635.6Other
      assets
    
    
    86.8
    
    
    72.3
    
    
    84.8Deferred
      income taxes
    
    
    14.6
    
    
    29.0
    
    
    14.4Goodwill
    
    
    130.2
    
    
    102.5
    
    
    128.6Total
      assets
    
    $
    2,431.2
    
    $
    2,424.6
    
    $
    2,628.8**Liabilities,
      Minority Interest and Stockholders’ Equity**Current
      liabilities:Short-term
      borrowings and current portion of long-term debt
    
    $
    147.0
    
    $
    130.1
    
    $
    141.2Trade
      accounts payable
    
    
    562.7
    
    
    576.5
    
    
    615.1Accrued
      payroll and other liabilities
    
    
    261.6
    
    
    249.9
    
    
    306.4Taxes,
      including income taxes
    
    
    59.2
    
    
    56.8
    
    
    118.3Deferred
      income taxes
    
    
    15.0
    
    
    12.1
    
    
    15.0Total
      current liabilities
    
    
    1,045.5
    
    
    1,025.4
    
    
    1,196.0Long-term
      debt
    
    
    55.2
    
    
    56.2
    
    
    55.8Other
      long-term liabilities
    
    
    296.4
    
    
    273.3
    
    
    286.7Total
      liabilities
    
    
    1,397.1
    
    
    1,354.9
    
    
    1,538.5Minority
      interest
    
    
    1.4
    
    
    1.7
    
    
    1.4Total
      liabilities and minority interest
    
    
    1,398.5
    
    
    1,356.6
    
    
    1,539.9Stockholders'
      equity:Common
      stock; 200,000,000 shares authorized;72,241,887,
      77,762,697 and 73,875,627 shares issuedand
      outstanding at April 23, 2005, April 25, 2004 andJanuary
      23, 2005, respectively
    
    
    478.3
    
    
    623.3
    
    
    525.1Deferred
      compensation
    
    
    (0.7
    )
    
    (0.8
    )
    
    (0.5
    )Accumulated
      other comprehensive income
    
    
    27.9
    
    
    17.2
    
    
    25.3Retained
      earnings
    
    
    527.2
    
    
    428.3
    
    
    539.0Total
      stockholders' equity
    
    
    1,032.7
    
    
    1,068.0
    
    
    1,088.9Total
      liabilities, minority interest and stockholders' equity
    
    $
    2,431.2
    
    $
    2,424.6
    
    $
    2,628.8
 
 
 See
accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
 
  2
  **BORDERS
GROUP, INC.**
 **CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY**
 **FOR
THE 13 WEEKS ENDED APRIL 23, 2005**
 **(dollars
in millions except share amounts)**
 **(UNAUDITED)**
  ****
    
    **Common
      Stock**
    
    **Deferred**
    
    
    **Accumulated**
      **Other**
      **Comprehensive**
    
    
    **Retained******
    
    
    **Shares**
    
    
    **Amount**
    
    
    **Compensation**
    
    
    **Income**
    
    
    **Earnings**
    
    
    **Total**Balance
      at January 23, 2005
    
    
    73,875,627
    
    $
    525.1
    
    $
    (0.5
    )
    $
    25.3
    
    $
    539.0
    
    $
    1,088.9Net
      loss
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (5.3
    )
    
    (5.3
    )Currency
      translation adjustment
    
    
    -
    
    
    -
    
    
    -
    
    
    2.6
    
    
    -
    
    
    2.6Comprehensive
      loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.7
    )Cash
      dividends declared ($0.09 per
      common
      share)
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (6.5
    )
    
    (6.5
    )Issuance
      of common stock
    
    
    575,950
    
    
    9.1
    
    
    -
    
    
    -
    
    
    -
    
    
    9.1Repurchase
      and retirement ofcommon
      stock
    
    
    (2,209,690
    )
    
    (57.7
    )
    
    -
    
    
    -
    
    
    -
    
    
    (57.7
    )Change
      in deferredcompensation
    
    
    -
    
    
    -
    
    
    (0.2
    )
    
    -
    
    
    -
    
    
    (0.2
    )Tax
      benefit of equitycompensation
    
    
    -
    
    
    1.8
    
    
    -
    
    
    -
    
    
    -
    
    
    1.8Balance
      at April 23, 2005
    
    
    72,241,887
    
    $
    478.3
    
    $
    (0.7
    )
    $
    27.9
    
    $
    527.2
    
    $
    1,032.7
 See
accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
 
  3
  **BORDERS
GROUP, INC.**
 **CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(dollars
in millions)**
 **(UNAUDITED)**
 
 
 **13
      Weeks Ended******
    
    
    
    **(Restated)******
      ****
    
    **April
      23,**
      **2005**
    
    **April
      25,**
      **2004**Cash
      provided by (used for):OperationsNet
      income (loss)
    
    $
    (5.3
    )
    $
    2.3Adjustments
      to reconcile net income (loss) to operating cash flows:Depreciation
    
    
    29.6
    
    
    27.0Decrease
      in deferred income taxes
    
    
    -
    
    
    (3.9
    )Increase
      in other long-term assets
    
    
    (1.9
    )
    
    (2.3
    )Increase
      in other long-term liabilities
    
    
    8.8
    
    
    2.2Cash
      provided by (used for) current assets and current
    liabilities:Increase
      in inventories
    
    
    (26.5
    )
    
    (39.3
    )Decrease
      in accounts receivable
    
    
    14.7
    
    
    7.3Increase
      in prepaid expenses
    
    
    (16.6
    )
    
    (5.7
    )Decrease
      in accounts payable
    
    
    (53.5
    )
    
    (18.0
    )Decrease
      in taxes payable
    
    
    (57.6
    )
    
    (62.3
    )Decrease
      in expenses payable and accrued liabilities
    
    
    (45.7
    )
    
    (26.0
    )Net
      cash used for operations
    
    
    (154.0
    )
    
    (118.7
    )InvestingCapital
      expenditures
    
    
    (40.8
    )
    
    (12.3
    )Loss
      on disposal of assets
    
    
    0.6
    
    
    -Proceeds
      from sale of investments
    
    
    95.4
    
    
    118.0Purchase
      of investments
    
    
    -
    
    
    (5.0
    )Proceeds
      from sale-leaseback of assets
    
    
    -
    
    
    32.3Net
      cash provided by investing
    
    
    55.2
    
    
    133.0FinancingNet
      repayment of long-term capital lease obligations
    
    
    -
    
    
    (0.4
    )Net
      funding from (repayment of) credit facility
    
    
    3.0
    
    
    (7.2
    )Issuance
      of common stock
    
    
    9.1
    
    
    20.7Payment
      of cash dividends
    
    
    (6.5
    )
    
    (6.2
    )Repurchase
      of common stock
    
    
    (57.7
    )
    
    (50.1
    )Net
      cash used for financing
    
    
    (52.1
    )
    
    (43.2
    )Effect
      of exchange rates on cash and equivalents
    
    
    0.5
    
    
    (2.5
    )Net
      decrease in cash and equivalents
    
    
    (150.4
    )
    
    (31.4
    )Cash
      and equivalents at beginning of year
    
    
    244.8
    
    
    260.8Cash
      and equivalents at end of period
    
    $
    94.4
    
    $
    229.4
 
 
 See
accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
 
  4
  **BORDERS
GROUP, INC.**
 **NOTES
TO UNAUDITED CONDENSED**
 **CONSOLIDATED
FINANCIAL STATEMENTS**
 **(dollars
in millions except per share data)**
 
 **NOTE
1 - BASIS OF PRESENTATION**
 
 The
accompanying unaudited condensed consolidated financial statements of Borders
Group, Inc. (“the Company”) have been prepared in accordance with Rule 10-01 of
Regulation S-X and do not include all the information and notes required by
accounting principles generally accepted in the United States for complete
financial statements. All adjustments, consisting only of normal recurring
adjustments, have been made which, in the opinion of management, are necessary
for a fair presentation of the results of the interim periods. The results of
operations for such interim periods are not necessarily indicative of results of
operations for a full year. The unaudited condensed consolidated financial
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto, included in its Annual Report on Form
10-K for the fiscal year ended January 23, 2005.
 
 On
December 10, 2004, the Board of Directors of the Company approved a change in
the Company’s fiscal year-end. Effective with respect to fiscal 2005, the
Company elected to change its fiscal year to a 52/53-week fiscal year ending on
the Saturday closest to the last day of January. The Company implemented this
change in order to conform to industry standards and for certain administrative
purposes. As a result of the change, the Company’s 2005 fiscal year will consist
of 53 weeks, and will end on January 28, 2006. The Company’s first quarter of
fiscal 2005 ended April 23, 2005. The Company’s fiscal years had ended on the
Sunday immediately preceding the last Wednesday in January. Fiscal 2004
consisted of 52 weeks and ended January 23, 2005. References herein to years are
to the Company’s fiscal years.
 
 At April
23, 2005, the Company operated 507 superstores under the Borders name, including
461 in the United States, 29 in the United Kingdom, 11 in Australia, three in
Puerto Rico, two in New Zealand and one in Singapore. The Company also operated
702 mall-based and other bookstores, including stores operated under the
Waldenbooks, Borders Express and Borders Outlet names, as well as
Borders-branded airport stores, and 35 bookstores under the Books etc. name in
the United Kingdom. In addition, the Company owned and operated United
Kingdom-based Paperchase Products Limited (“Paperchase”), a designer and
retailer of stationery, cards and gifts, with 77 locations, including 31 located
inside Borders International superstores, at April 23, 2005.
 
 **NOTE
2 - RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS**
 
 In light
of announcements made by a number of public companies regarding lease accounting
and a SEC clarification on the subject, the Company reevaluated its lease
accounting practices near the end of 2004. As a result, the Company corrected
its computation of straight-line rent expense, depreciation of leasehold
improvements and the classification of landlord allowances related to leasehold
improvements (the “Restatement”), as further discussed in the Company’s most
recent Annual Report on Form 10-K. The restatement of first quarter 2004 results
reduced net income by $0.7, or $0.01 per share, increased total assets by $121.1
and increased cash used for operations by $1.4.
 
 **NOTE
3 - COMMITMENTS AND CONTINGENCIES**
 
 *Litigation:* On
October 29, 2002, Gary Gerlinger, individually and on behalf of all other
similarly situated consumers in the United States who, during the period from
August 1, 2001 to the present, purchased books online from either Amazon.com,
Inc. (“Amazon”) or the Company, instituted an action against the Company and
Amazon in the United States District Court for the Northern District of
California. The Complaint alleges that the agreement pursuant to which an
affiliate of Amazon operates Borders.com as a co-branded site (the “Mirror
Site”) violates federal anti-trust laws, California statutory law and the common
law of unjust enrichment. The Complaint seeks injunctive relief, damages,
including treble damages or statutory damages where applicable, attorneys fees,
costs and disbursements, disgorgement of all sums obtained by allegedly wrongful
acts, interest and declaratory relief. The Company has filed an answer denying
any liability and also has filed a motion for summary judgment. The Court has
issued an order granting the motion as to certain of plaintiff’s claims, denying
it as to others and requesting additional briefing on certain issues. The order
also denied certain cross-motions filed by the plaintiff. The Company intends to
vigorously defend the action. The Company has not included any liability in its
consolidated financial statements in connection with this matter and has
expensed as incurred all legal costs to date. Although an adverse resolution of
this matter could have a material adverse effect on the results of the
operations of the Company for the applicable period or periods, the Company does
not believe that this matter will have a material effect on its liquidity or
financial position.
 
 5
 **BORDERS
GROUP, INC.**
 **NOTES
TO UNAUDITED CONDENSED**
 **CONSOLIDATED
FINANCIAL STATEMENTS**
 **(dollars
in millions except per share data)**
 
 Certain
states and private litigants have sought to impose sales or other tax collection
efforts on out-of-jurisdiction companies that engage in e-commerce. The Company
currently is disputing a claim by the state of California relating to sales
taxes that the state claims should have been collected on certain Borders.com
sales in California prior to implementation of the Company’s Mirror Site
agreement with Amazon. Also, the Company and Amazon have been named as
defendants in actions filed by a private litigant on behalf of the states of
Nevada and Illinois under the applicable state’s False Claims Act relating to
the failure to collect use taxes on Internet sales in Nevada and Illinois for
periods both before and after the implementation of the Mirror Site Agreement.
The Complaints seek judgments, jointly and severally, against the defendants
for, among other things, injunctive relief, treble the amount of damages
suffered by the states of Nevada and Illinois as a result of the alleged
violations of the defendants, penalties, costs and expenses, including legal
fees. A similar action previously filed against the Company in Tennessee has
been dismissed and the appeal period has expired. Various motions to dismiss the
Nevada and Illinois actions have been made by the Company and other retailers
and by the respective attorney generals of those states. Certain of these
motions have been denied and others remain pending.
 
 The
Company is vigorously defending all claims against the Company relating to any
failure by it or Amazon to collect sales or other taxes relating to Internet
sales. Although an adverse resolution of claims relating to the failure to
collect sales or other taxes on online sales could have a material effect on the
results of the operations of the Company for the applicable period or periods,
the Company does not believe that any such claims will have a material adverse
effect on its liquidity or financial position.
 
 In
addition to the matters described above, the Company is, from time to time,
involved in or affected by other litigation incidental to the conduct of its
businesses. While some of such matters may involve claims for large sums
(including, from time to time, actions which are asserted to be maintainable as
class action suits), the Company does not believe that any other pending
litigation or claims will have a material adverse effect on its liquidity,
financial position, or results of operations.
 
 **NOTE
4 - FINANCING**
 
 *Credit
Facility:* The
Company has a Multicurrency Revolving Credit Agreement (the “Credit Agreement”),
which was amended in July 2004 and will expire in July 2009. The Credit
Agreement provides for borrowings of up to $500.0 (which may be increased to
$700.0 under certain circumstances) secured by eligible inventory and accounts
receivable and related assets. Borrowings under the Credit Agreement are limited
to a specified percentage of eligible inventories and accounts receivable and
bear interest at a variable base rate plus an increment or LIBOR plus an
increment at the Company’s option. The Credit Agreement (i) includes a fixed
charge coverage ratio requirement of 1.1 to 1 that is applicable only if
outstanding borrowings under the facility exceed 90% of permitted borrowings
thereunder, (ii) contains covenants that limit, among other things, the
Company’s ability to incur indebtedness, grant liens, make investments,
consolidate or merge or dispose of assets, (iii) prohibits dividend payments and
share repurchases that would result in borrowings under the facility exceeding
90% of permitted borrowings thereunder, and (iv) contains default provisions
that are typical for this type of financing, including a cross default provision
relating to other indebtedness of more than $25.0. The Company had borrowings
outstanding under the Credit Agreement (or a prior agreement) of $137.2 at April
23, 2005, $116.3 at April 25, 2004 and $131.7 at January 23, 2005.
 
 *Term
Loan:* On July
30, 2002, the Company issued $50.0 of senior guaranteed notes (the “Notes”) due
July 30, 2006 and bearing interest at 6.31% (payable semi-annually). The
proceeds of the sale of the Notes were used to refinance existing indebtedness
of the Company and its subsidiaries and for general corporate purposes. The note
purchase agreement relating to the Notes contains covenants which limit, among
other things, the Company’s ability to incur indebtedness, grant liens, make
investments, engage in any merger or consolidation, dispose of assets or change
the nature of its business, and requires the Company to meet certain financial
measures regarding net worth, total debt coverage and fixed charge coverage. In
July 2004, the note purchase agreement was amended to permit the amendment to
the Credit Agreement described above and to provide for a parity lien to secure
the Notes on the same collateral as secures borrowings under the Credit
Agreement.
 
 *Lease
Financing Facilities:* The
Company had two lease financing facilities (the “Original Lease Facility” and
the “New Lease Facility”, collectively, the “Lease Financing Facilities”) to
finance new stores and other property owned by unaffiliated entities and leased
to the Company or its subsidiaries. In July 2004, the Company repaid all amounts
outstanding under the Lease Financing Facilities (totaling $13.8) on behalf of
the two borrowing variable interest entities (“VIEs”), both of which had been
consolidated on
 6
 **BORDERS
GROUP, INC.**
 **NOTES
TO UNAUDITED CONDENSED**
 **CONSOLIDATED
FINANCIAL STATEMENTS**
 **(dollars
in millions except per share data)**
 
 April 25,
2004. The Company recorded this debt repayment as a prepayment of a portion of
the rent expense for occupancy through 2024, and has classified the current
portion as a component of “Accounts receivable and other current assets,” and
the non-current portion as a component of “Other assets” on the consolidated
balance sheets. As a result of the repayment of borrowings under the Lease
Financing Facilities, the Company deconsolidated the two borrowing VIEs in July
2004. Also, in conjunction with this transaction, the Lease Financing Facilities
were terminated.
 
 *Consolidated
VIEs:* At April
23, 2005, the Company is the primary beneficiary of two VIEs (unrelated to the
two VIEs previously discussed), due to the Company’s guarantee of the debt of
these entities. As a result, the Company consolidates these VIEs and has
recorded property and equipment, net of accumulated depreciation, of $5.4,
long-term debt (including current portion) of $5.7 and minority interest of $0.3
at April 23, 2005 .
 
 As of
April 23, 2005 the Company was in compliance with its debt
covenants.
 
 **NOTE
5 - STOCK-BASED BENEFIT PLANS**
 
 The
Company accounts for equity-based compensation under the guidance of APB No. 25,
“Accounting for Stock Issued to Employees” (“APB No. 25”). As permitted, the
Company has adopted the disclosure-only option of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" (“FAS
123”). The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of FAS
123 to stock-based employee compensation:
 
 **13
      Weeks Ended******
    
    
    
    **(Restated)******
    
    **April
      23,**
      **2005**
    
    **April
      25,**
      **2004**Net
      income (loss), as reported
    
    $
    (5.3
    )
    $
    2.3Add:
      Stock-based employee expense included in reported
      net
      income, net of related tax effects
    
    
    -
    
    
    0.1Deduct:
      Total stock-based employee compensation expense
      determined
      under fair value method for all awards, net
      of
      tax
    
    
    0.9
    
    
    1.3Pro
      forma net income (loss)
    
    $
    (6.2
    )
    $
    1.1Earnings
      (loss) per share:Basic
      -- as reported
    
    $
    (0.07
    )
    $
    0.03Basic
      -- pro forma
    
    $
    (0.08
    )
    $
    0.01Diluted
      -- as reported
    
    $
    (0.07
    )
    $
    0.03Diluted
      -- pro forma
    
    $
    (0.08
    )
    $
    0.01
 
 In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
Payment” (“FAS 123(R)”), which is a revision of FAS 123. FAS 123(R) supersedes
APB No. 25, amends FAS No. 95, “Statement of Cash Flows,” and requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. The Company
will adopt FAS 123 (R) in the first quarter of 2006 using the
modified-prospective method in which compensation cost is recognized beginning
with the adoption date based on (a) the requirements of FAS 123(R) for all
share-based payments granted after the effective date and (b) based on the
requirements of Statement 123 for all awards granted to employees prior to the
effective date of Statement 123(R) that remain unvested on the effective date.
As of April 23, 2005, there were approximately 3.0 million stock option awards
granted to employees that remain unvested. Based on the adoption of FAS 123(R)
in the first quarter of 2006, the Company estimates the impact to not exceed an
after-tax charge of approximately $0.6. FAS 123(R) also requires the benefits of
tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement will reduce net operating
cash flows and increase net financing cash flows in periods after adoption.
While the Company cannot estimate what those amounts will be in the future
(because they depend on, among other things, when employees
 7
 **BORDERS
GROUP, INC.**
 **NOTES
TO UNAUDITED CONDENSED**
 **CONSOLIDATED
FINANCIAL STATEMENTS**
 **(dollars
in millions except per share data)**
 
 exercise stock options), the amount of operating cash
flows recognized in prior periods for such excess tax deductions were $1.8 and
$6.4 in the first quarter of 2005 and 2004, respectively.
  **NOTE
6 - SEGMENT INFORMATION**
 
 The
Company is organized based upon the following operating segments: domestic
Borders stores, Waldenbooks Specialty Retail stores (“Waldenbooks”),
International stores (including Borders, Books etc. and Paperchase stores), and
Corporate (consisting of the unallocated portion of interest expense, certain
corporate governance costs, and corporate incentive costs).
 
 Segment
data includes charges allocating all corporate support costs to each segment.
Transactions between segments, consisting principally of inventory transfers,
are recorded primarily at cost. Interest income and expense are allocated to
segments based upon the cash flow generated or absorbed by those segments. The
Company utilizes fixed interest rates, approximating the Company's medium-term
borrowing and investing rates, in calculating segment interest income and
expense. The Company evaluates the performance of its segments and allocates
resources to them based on anticipated future contribution.
 
 Total
assets for the Corporate segment include certain corporate headquarters property
and equipment, net of accumulated depreciation, of $74.0 and $65.1 at April 23,
2005 and April 25, 2004, respectively, whose related depreciation expense has
been allocated to the Borders, Waldenbooks and International segments.
Depreciation expense allocated to the Borders segment totaled $2.5 and $2.5 for
the 13 weeks ended April 23, 2005 and April 25, 2004, respectively. Depreciation
expense allocated to the Waldenbooks segment totaled $1.1 and $1.2 for the 13
weeks ended April 23, 2005 and April 25, 2004, respectively. Depreciation
expense allocated to the International segment totaled $0.0 and $0.0 for the 13
weeks ended April 23, 2005 and April 25, 2004, respectively.
 
 **13
      Weeks Ended******
    
    
    
    ******(Restated)******
    
    ******April
      23,**
      **2005**
    
    ******April
      25,**
      **2004**SalesBorders
    
    $
    579.4
    
    $
    577.3Waldenbooks
    
    
    143.1
    
    
    150.8International
    
    
    124.7
    
    
    102.7Total
      sales
    
    $
    847.2
    
    $
    830.8Net
      income (loss)Borders
    
    $
    8.0
    
    $
    10.1Waldenbooks
    
    
    0.5
    
    
    2.9International
    
    
    (5.8
    )
    
    (3.5
    )Corporate
    
    
    (8.0
    )
    
    (7.2
    )Total
      net income (loss)
    
    $
    (5.3
    )
    $
    2.3Total
      assetsBorders
    
    $
    1,495.4
    
    $
    1,501.4Waldenbooks
    
    
    317.1
    
    
    305.2International
    
    
    465.9
    
    
    375.1Corporate
    
    
    152.8
    
    
    242.9Total
      assets
    
    $
    2,431.2
    
    $
    2,424.6
 
 
 
  8
  **BORDERS
GROUP, INC.**
 **NOTES
TO UNAUDITED CONDENSED**
 **CONSOLIDATED
FINANCIAL STATEMENTS**
 **(dollars
in millions except per share data)**
 
 **NOTE
7 - SALE-LEASEBACK TRANSACTION**
 
 In March
2004, the Company entered into an agreement with GE Pension Limited to sell and
subsequently leaseback a Company-owned property owned by its Books etc.
subsidiary. There were no future commitments, obligations, provisions, or
circumstances included in either the sale contract or the lease contract that
would result in the Company’s continuing involvement; therefore, the assets
associated with the property were removed from the Company’s consolidated
balance sheets.
 
 The
transaction was recorded in the International segment. The sale proceeds were
$32.3 and the net book value of the property upon the completion date of the
sale was $28.4, and direct costs associated with the transaction were $0.4. A
deferred gain of $3.5 was recorded on the consolidated balance sheets in “Other
long-term liabilities” and is being amortized over the 20-year term of the
operating lease.
 
 9
 **Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations**
 
 **General**
 
 Borders
Group, Inc., through its subsidiaries, Borders, Inc. (“Borders”), Walden Book
Company, Inc. (“Waldenbooks”), Borders (UK) Limited, Borders Australia Pty
Limited and others (individually and collectively, "the Company"), is the second
largest operator of book, music and movie superstores and the largest operator
of mall-based bookstores in the world based upon both sales and number of
stores. At April 23, 2005, the Company operated 507 superstores under the
Borders name, including 461 in the United States, 29 in the United Kingdom, 11
in Australia, three in Puerto Rico, two in New Zealand and one in Singapore. The
Company also operated 702 mall-based and other bookstores, including stores
operated under the Waldenbooks, Borders Express and Borders Outlet names, as
well as Borders-branded airport stores, and 35 bookstores under the Books etc.
name in the United Kingdom. In addition, the Company owned and operated United
Kingdom-based Paperchase Products Limited (“Paperchase”), a designer and
retailer of stationery, cards and gifts, with 77 locations, including 31 located
inside Borders International superstores, at April 23, 2005.
 
 The
Company’s business strategy is to continue its growth and increase its
profitability through (i) expanding and refining its core domestic superstore
business, (ii) driving International growth by expanding established markets and
leveraging infrastructure investments, (iii) leveraging strategic alliances and
in-store technologies which enhance the customer experience, and (iv) maximizing
cash flow and profitability at Waldenbooks through a combination of selective
growth and profit initiatives. Specifically, the Company has been engaged in an
aggressive expansion and remodel program, pursuant to which it opened 19
domestic Borders superstores and completed major remodels of 33 existing
domestic superstores in 2004. In 2005, the Company expects to open 18 to 20
domestic superstores and complete major remodels of approximately 100 existing
domestic superstores. New stores opened in 2005, and the majority of stores
remodeled in 2005, will feature cafe offerings by Seattle’s Best Coffee and
gifts and stationery merchandise by Paperchase. The Company also opened five
International superstores in 2004. International store growth over the next
several years will focus on existing markets, primarily in the United Kingdom
and Australia, with approximately 12 to 14 International store openings planned
in 2005, including the first Borders franchise store, which opened in Malaysia
in April 2005. The International segment achieved full year profitability in
2004, and continued profit growth is expected going forward. The Waldenbooks
segment has experienced negative comparable store sales percentages for the past
several years, primarily due to the overall decrease in mall traffic and the
impact of superstore openings. The Company is continuing to implement its plan
for the optimization of the Waldenbooks’ store base in order to improve sales,
net income and free cash flow. This plan could result in further store closing
costs or asset impairments over the next few years, but at a lesser anticipated
rate going forward. In addition, Waldenbooks manages the Company’s seasonal
businesses and small format stores, including those in airports and outlet
malls. The Company plans to open approximately 15 new stores in airports and
outlet malls in 2005. The Company also plans to selectively update and re-brand
75 to 100 Waldenbooks stores as Borders Express, an extension of a market test
that began in 2004 with similar conversions of 37 existing Waldenbooks stores.
The Company’s objectives with respect to these initiatives are to continue to
grow consolidated sales and earnings in 2005 and earn an acceptable return on
its investment.
 
 Subject
to Board approval, the Company plans to provide returns to stockholders through
quarterly cash dividends and share repurchases by utilizing free cash flow
generated by the business. In February 2005, the Board of Directors authorized
an increase in the amount of potential share repurchases to $250.0 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). In December 2004, the Board of Directors voted to increase the
quarterly cash dividend by 12.5% to $0.09 per share on the Company’s common
stock.
 
 The
Company, through its subsidiaries, has agreements with Amazon.com, Inc.
(“Amazon”) to operate Web sites utilizing the Borders.com, Waldenbooks.com,
Borders.co.uk and Booksetc.co.uk URLs (the “Mirror Sites”). Under these
agreements, Amazon is the merchant of record for all sales made through the
Mirror Sites, and determines all prices and other terms and conditions
applicable to such sales. Amazon is responsible for the fulfillment of all
products sold through the Mirror Sites and retains all payments from customers.
The Company receives referral fees for products purchased through the Mirror
Sites. The agreements contain mutual indemnification provisions, including
provisions that define between the parties the responsibilities with respect to
any liabilities for sales, use and similar taxes, including penalties and
interest, associated with products sold on the Mirror Sites. Currently, taxes
are not collected with respect to products sold on the Mirror Sites except in
certain states.
 
 In
addition, Borders has an agreement with Amazon to allow customers ordering
certain book, music and movie products through certain of Amazon’s Web sites to
purchase and pick up the merchandise at Borders stores in the United States
(“Express In-Store Pick Up”). Under this agreement, the Company is the merchant
of record for all sales made through this service, and determines all prices and
other terms and conditions applicable to such sales. The Company fulfills all
products sold through Express In-Store Pick Up. In addition, the Company assumes
all risk, cost and responsibility related to the sale and fulfillment of all
products sold. The Company
 
 10
 
 recognizes
revenue upon customers’ pick up of the merchandise at the store. The Company
also pays referral fees to Amazon pursuant to this agreement.
 
 On
December 10, 2004, the Board of Directors of the Company approved a change in
the Company’s fiscal year-end. Effective with respect to fiscal 2005, the
Company elected to change its fiscal year to a 52/53-week fiscal year ending on
the Saturday closest to the last day of January. The Company implemented this
change in order to conform to industry standards and for certain administrative
purposes. As a result of the change, the Company’s 2005 fiscal year will consist
of 53 weeks, and will end on January 28, 2006. The Company’s fiscal years had
ended on the Sunday immediately preceding the last Wednesday in January. Fiscal
2004 consisted of 52 weeks and ended January 23, 2005. The Company's first
quarters of 2005 and 2004 consisted of the 13 weeks ended April 23, 2005 and
April 25, 2004, respectively.
 
 **Restatement
of Prior Year Financial Statements**
 
 In light
of announcements made by a number of public companies regarding lease accounting
and a SEC clarification on the subject, the Company reevaluated its lease
accounting practices near the end of 2004. As a result, the Company corrected
its computation of straight-line rent expense, depreciation of leasehold
improvements and the classification of landlord allowances related to leasehold
improvements (the “Restatement”), as further discussed in the Company’s most
recent Annual Report on Form 10-K and in “Note 2 - Restatement of Prior Period
Financial Statements”. The Restatement of first quarter 2004 results reduced net
income by $0.7 million, or $0.01 per share, increased total assets by $121.1
million and increased cash used for operations by $1.4 million. During the
quarter ended April 23, 2005, the Company has implemented additional review
procedures over the selection and monitoring of appropriate assumptions and
factors affecting lease accounting practices.
  Throughout
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” all referenced amounts for prior periods and prior period
comparisons reflect the balances and amounts on a restated basis.
 
 **Results
of Operations**
 
 The
following table presents the Company's consolidated statements of operations
data, as a percentage of sales, for the periods indicated.
 
 ****
    
    **13
      Weeks Ended****April
      23, 2005**
    
    **April
      25, 2004**Sales
    
    
    100.0
    %
    
    100.0
    %Other
      revenue
    
    
    0.7
    
    
    0.9Total
      revenue
    
    
    100.7
    
    
    100.9Cost
      of merchandise sold (includes occupancy)
    
    
    75.5
    
    
    75.6Gross
      margin
    
    
    25.2
    
    
    25.3Selling,
      general and administrative expenses
    
    
    25.8
    
    
    24.5Pre-opening
      expense
    
    
    0.1
    
    
    0.1Asset
      impairments and other writedowns
    
    
    -
    
    
    -Operating
      income (loss)
    
    
    (0.7
    )
    
    0.7Interest
      expense
    
    
    0.3
    
    
    0.2Income
      (loss) before income tax
    
    
    (1.0
    )
    
    0.5Income
      tax provision (benefit)
    
    
    (0.4
    )
    
    0.2Net
      income (loss)
    
    
    (0.6
    )%
    
    0.3
    %
 
 **Consolidated
Results - Comparison of the 13 weeks ended April 23, 2005 to the 13 weeks ended
April 25, 2004**
 
 ***Sales***
 
 Consolidated
sales increased $16.4 million, or 2.0%, to $847.2 million in 2005 from $830.8
million in 2004. This resulted primarily from increased sales in the Borders and
International segments, partially offset by decreased sales in the Waldenbooks
segment.
 
 Comparable
store sales for all Borders superstores decreased 0.7% in 2005. Comparable store
sales measures for all Borders superstores, which are based upon a 52-week year,
include all stores open more than one year except those not offering music (of
which there are 13, representing approximately 2% of total sales). New stores
are included in the calculation of comparable store sales measures upon the 13th
month of operation. The comparable store sales decrease for 2005 was primarily
due to negative comparable
 
 11
 store
sales in the music category. Partially offsetting the decrease in comparable
store sales of music were comparable store sales increases of books, especially
in adult fiction, religion and business and money management titles, as well as
increased sales of movies on a comparable store basis, primarily as the result
of increased sales of digital videodiscs (DVDs). The impact of price changes on
comparable store sales was not significant.
 
 Waldenbooks’
comparable store sales decreased 3.1% in 2005. Waldenbooks’ comparable store
sales measures, which are based upon a 52-week year, include all stores open
more than one year. New stores are included in the calculation of comparable
store sales measures upon the 13th month of operation. The Company’s seasonal
mall-based kiosks are also included in Waldenbooks’ comparable store sales
measures. The comparable store sales decrease for 2005 was primarily due to the
sluggish mall environment. The impact of price changes on comparable store sales
was not significant.
 
 ***Other
revenue***
 
 Until
October 2004, Waldenbooks sold memberships in its Preferred Reader Program,
which offered members discounts on purchases and other benefits. Waldenbooks has
phased out its Preferred Reader Program and is replacing it with other
promotional programs in order to maximize long-term sales and earnings. The
Company recognizes membership income on a straight-line basis over the 12-month
term of the membership, and categorizes the income as "Other revenue" in the
Company's consolidated statements of operations. Discounts on purchases are
netted against "Sales" in the Company's consolidated statements of
operations.
 
 Due
primarily to the change in the Preferred Reader Program, other revenue has
decreased $1.5 million, or 20.5%, to $5.8 million in 2005 from $7.3 million in
2004.
 
 ***Gross
margin***
 
 Consolidated
gross margin increased $3.5 million, or 1.7%, to $213.8 million in 2005 from
$210.3 million in 2004. As a percentage of sales, consolidated gross margin
decreased 0.1%, to 25.2% in 2005 from 25.3% in 2004. This was due to a decrease
in the Waldenbooks segment’s gross margin as a percentage of sales, partially
offset by increases in the Borders and International segments’ gross margin as a
percentage of sales. The decrease in the Waldenbooks segment was primarily due
to decreased other revenue as a percentage of sales due to the change in the
Preferred Reader Program, as previously discussed, partially offset by decreased
markdowns. The increase in the Borders segment was primarily the result of
decreased markdowns. The increase in the International segment resulted from a
decrease in merchandise costs, primarily due to the higher product margins
generated by Paperchase, the weakness of the U.S. dollar and decreased product
markdowns, partially offset by increased occupancy and distribution costs as a
percentage of sales.
 
 The
Company classifies the following items as “Cost of merchandise sold (includes
occupancy)” on its consolidated statements of operations: product costs and
related discounts, markdowns, freight, shrinkage, capitalized inventory costs,
distribution center costs (including payroll, rent, supplies, depreciation, and
other operating expenses), and store occupancy costs (including rent, common
area maintenance, depreciation, repairs and maintenance, taxes, insurance, and
others). The Company’s gross margin may not be comparable to that of other
retailers, which may exclude the costs related to their distribution network
from cost of sales and include those costs in other financial statement
lines.
 
 ***Selling,
general and administrative expenses***
 
 Consolidated
selling, general and administrative expenses (“SG&A”) increased $14.9
million, or 7.3%, to $218.5 million in 2005 from $203.6 million in 2004. As a
percentage of sales, SG&A increased to 25.8% in 2005 from 24.5% in 2004.
This increase primarily resulted from increases in SG&A expenses as a
percentage of sales for the Borders, Waldenbooks and International segments.
Borders SG&A expenses as percentage of sales increased primarily due to
increased corporate and store payroll and operating expenses, all of which are
due to the de-leveraging of fixed costs resulting from comparable store sales
declines and cost increases to support strategic initiatives, partially offset
by decreased advertising expense. The Waldenbooks increase was primarily due to
increased corporate payroll and operating expenses as a percentage of sales, as
well as an increase in advertising expense. The International increase in
SG&A expenses as a percentage of sales was primarily the result of increased
corporate and store payroll and operating expenses, all of which are due to the
acquisition of Paperchase, partially offset by decreased advertising expense.
 
 The
Company classifies the following items as “Selling, general and administrative
expenses” on its consolidated statements of operations: store and administrative
payroll, utilities, supplies and equipment costs, credit card and bank
processing fees, bad debt, legal and consulting fees, certain advertising income
and expenses and others.
 
 12
 ***Interest
expense***
 
 Consolidated
interest expense increased $0.3 million, or 15.8%, to $2.2 million in 2005 from
$1.9 million in 2004. This was primarily a result of increased borrowings to
fund corporate stock repurchases in 2005.
 
 ***Taxes***
 
 The
effective tax rate differed for the quarters presented from the federal
statutory rate primarily as a result of state income taxes, partially offset by
international operations. The Company's effective tax rate used was 37.0% in
2005 compared to 37.7% in 2004. This decrease is primarily due to lower taxes
from international operations.
 
 ***Net
income (loss)***
 
 Due to
the factors mentioned above, net income as a percentage of sales decreased to a
net loss of 0.6% in 2005 from net income of 0.3% in 2004, and net income dollars
decreased to a net loss of $5.3 million in 2005 from net income of $2.3 million
in 2004.
 
 **Segment
Results**
 
 The
Company is organized based upon the following operating segments: domestic
Borders stores, Waldenbooks Specialty Retail stores (“Waldenbooks”),
International stores (including Borders, Books etc. and Paperchase stores), and
Corporate (consisting of the unallocated portion of interest expense, certain
corporate governance costs, and corporate incentive costs). See “Note 6 -
Segment Information” in the notes to consolidated financial statements for
further information relating to these segments.
 
 Segment
data includes charges allocating all corporate headquarters costs to each
segment. Interest income and expense are allocated to segments based upon the
cash flow generated or absorbed by those segments. The Company utilizes fixed
interest rates, approximating the Company’s medium-term borrowing and investing
rates, in calculating segment interest income and expense.
 
 **Borders**
 **13
      Weeks Ended**(dollar
      amounts in millions)
    
    **April
      23, 2005**
    
    **April
      25, 2004**Sales
    
    $
    579.4
    
    $
    577.3Net
      income
    
    $
    8.0
    
    $
    10.1Net
      income as % of sales
    
    
    1.4
    %
    
    1.7
    %Depreciation
      expense
    
    $
    21.7
    
    $
    19.7Interest
      income
    
    $
    2.9
    
    $
    1.8Store
      openings
    
    
    -
    
    
    4Store
      closings
    
    
    1
    
    
    1Store
      count
    
    
    461
    
    
    448
 
 **Borders
- Comparison of the 13 weeks ended April 23, 2005 to the 13 weeks ended April
25, 2004**
 
 ***Sales***
 
 Borders'
sales increased $2.1 million, or 0.4%, to $579.4 million in 2005 from $577.3
million in 2004. This increase was comprised of comparable store sales decreases
of $5.8 million, non-comparable store sales increases of $14.1 million,
primarily associated with 2005 and 2004 store openings, and a sales decrease of
$6.2 million due to the change in fiscal year, which resulted in one less day in
the first quarter of 2005 as compared to 2004.
 
 ***Gross
margin***
 
 Gross
margin as a percentage of sales increased 0.2%, to 26.7% in 2005 from 26.5% in
2004. This was due to decreased markdowns of 0.2% as a percentage of sales,
primarily as a result of lower sales of bestsellers in 2005.
 
 Gross
margin dollars increased $1.6 million, or 1.0%, to $154.5 million in 2005 from
$152.9 million in 2004, which was primarily due to new store openings and the
increase in gross margin percentage noted above.
 
 13
 ***Selling,
general and administrative expenses***
 
 SG&A
as a percentage of sales increased 1.0%, to 24.8% in 2005 from 23.8% in 2004.
This was primarily due to an increase of 0.7% in corporate payroll and operating
expenses as a percentage of sales and an increase of 0.5% in store payroll and
operating expenses as a percentage of sales, both of which are due to the
de-leveraging of fixed costs resulting from comparable store sales declines and
cost increases to support strategic initiatives. These increases were partially
offset by a 0.2% decrease in advertising expenses as a percentage of
sales.
 
 SG&A
dollars increased $6.4 million, or 4.7%, to $144.0 million in 2005 from $137.6
million in 2004 primarily due to new store openings and the increased store
payroll and operating expenses required, as well as increased corporate payroll
and operating expenses to support strategic initiatives.
 
 ***Effect
of terrorist attacks on September 11, 2001***
 
 As a
result of the terrorist attacks on September 11, 2001, a Borders store that
operated in the World Trade Center in New York City was destroyed. The loss of
that store’s sales and net income was not material to the Company’s consolidated
2005 or 2004 results as a whole. The Company was insured for the replacement
value of the assets destroyed at the store and up to 24 months of lost income
from business interruption coverage and has recognized a total recovery of $19.9
million. The Company does not expect to recover additional insurance amounts
related to this incident.
 
 In the
first quarter of 2004, Borders recognized as income an insurance reimbursement
of $1.2 million related to the September 11, 2001 loss. Of this, $0.9 million
was categorized as an offset to “Selling, general and administrative expenses”.
This amount primarily represented the excess of lost assets’ replacement value
over their net book value. It is the Company’s policy to record gains and losses
on asset disposals as a part of “Selling, general and administrative expenses”.
The remaining $0.3 million was related to pre-opening expenses incurred in the
opening of replacement stores in New York City. This was categorized as an
offset to “Pre-opening expense” on the consolidated statements of
operations.
 
 ***Depreciation
expense***
 
 Depreciation
expense increased $2.0 million, or 10.2%, to $21.7 million in 2005 from $19.7
million in 2004. This was primarily the result of increased depreciation expense
recognized on new and remodeled stores’ capital expenditures, as well as
accelerated depreciation related to store remodels.
 
 ***Interest
income***
 
 Interest
income increased $1.1 million, or 61.1%, to $2.9 million in 2005 from $1.8
million in 2004. This was the result of Borders’ continued positive cash flow at
fixed internal interest rates.
 
 ***Net
income***
 
 Due to
the factors mentioned above, net income as a percentage of sales decreased to
1.4% in 2005 from 1.7% in 2004, and net income dollars decreased $2.1 million,
or 20.8%, to $8.0 million in 2005 from $10.1 million in 2004.
 
 **Waldenbooks**
 **13
      Weeks Ended**(dollar
      amounts in millions)
    
    **April
      23, 2005**
    
    **April
      25, 2004**Sales
    
    $
    143.1
    
    $
    150.8Other
      revenue
    
    $
    1.0
    
    $
    5.4Net
      income
    
    $
    0.5
    
    $
    2.9Net
      income as % of sales
    
    
    0.3
    %
    
    1.9
    %Depreciation
      expense
    
    $
    3.4
    
    $
    3.5Interest
      income
    
    $
    10.9
    
    $
    10.5Store
      openings
    
    
    3
    
    
    1Store
      closings
    
    
    6
    
    
    8Store
      count
    
    
    702
    
    
    726
 
 14
 **Waldenbooks
- Comparison of the 13 weeks ended April 23, 2005 to the 13 weeks ended April
25, 2004**
 
 ***Sales***
 
 Waldenbooks'
sales decreased $7.7 million, or 5.1%, to $143.1 million in 2005 from $150.8
million in 2004. This decrease was comprised of decreased comparable store sales
of $4.7 million and decreased non-comparable sales associated with 2005 and 2004
store closings of $3.0 million.
 
 ***Other
revenue***
 
 Waldenbooks'
other revenue, which consists of membership income from the Preferred Reader
Program, decreased $4.4 million, or 81.5%, to $1.0 million in 2005 from $5.4
million in 2004. This was due to the change in the Preferred Reader Program as
previously discussed.
 
 ***Gross
margin***
 
 Gross
margin as a percentage of sales decreased 1.8%, to 22.8% in 2005 from 24.6% in
2004. This was primarily due to a 2.9% decrease in other revenue as a percentage
of sales, due to the change in the Preferred Reader Program, as previously
discussed, and increased distribution costs of 0.1% as a percentage of sales.
Partially offsetting these items were decreased product cost of sales of 0.6%,
primarily due to decreased markdowns as a result of lower sales of bestsellers
in 2005, and decreased store occupancy expenses of 0.2% as a percentage of
sales. In addition, shrink expense decreased 0.4% as a percentage of sales.
 
 Gross
margin dollars decreased $4.3 million, or 11.6%, to $32.7 million in 2005 from
$37.0 million in 2004, primarily due to store closings and the decrease in gross
margin percentage noted above.
 
 ***Selling,
general and administrative expenses***
 
 SG&A
as a percentage of sales increased 1.5%, to 29.6% in 2005 from 28.1% in 2004.
This was primarily due to an increase of 1.3% in corporate payroll and operating
expenses as a percentage of sales, due to the de-leveraging of fixed costs
resulting from comparable store sales declines and cost increases to support
strategic initiatives, and an increase of 0.2% in advertising expenses as a
percentage of sales.
 
 SG&A
dollars remained flat at $42.4 million in 2005 and 2004.
 
 ***Depreciation
expense***
 
 Depreciation
expense decreased $0.1 million, or 2.9%, to $3.4 million in 2005 from $3.5
million in 2004. This was primarily due to a lower fixed asset base resulting
from prior year asset impairments and store closings.
 
 ***Interest
income***
 
 Interest
income increased $0.4 million, or 3.8%, to $10.9 million in 2005 from $10.5
million in 2004. This was the result of Waldenbooks' continued positive cash
flow at fixed internal interest rates.
 
 ***Net
income***
 
 Due to
the factors mentioned above, net income as a percentage of sales decreased to
0.3% in 2005 from 1.9% in 2004, while net income dollars decreased $2.4 million,
or 82.8%, to $0.5 million in 2005 from $2.9 million in 2004.
 
 15
 **International**
 **13
      Weeks Ended**(dollar
      amounts in millions)
    
    
    **April
      23, 2005**
    
    
    **April
      25, 2004**Sales
    
    $
    124.7
    
    $
    102.7Net
      loss
    
    $
    5.8
    
    $
    3.5Net
      loss as % of sales
    
    
    4.7
    %
    
    3.4
    %Depreciation
      expense
    
    $
    4.5
    
    $
    3.8Interest
      expense
    
    $
    5.1
    
    $
    4.7Superstore
      store openings
    
    
    4
    
    
    -Superstore
      store count
    
    
    46
    
    
    37Books
      etc. store closings
    
    
    -
    
    
    -Books
      etc. store openings
    
    
    -
    
    
    -Books
      etc. store count
    
    
    35
    
    
    36
 
 **International
- Comparison of the 13 weeks ended April 23, 2005 to the 13 weeks ended April
25, 2004**
 
 ***Sales***
 
 International
sales increased $22.0 million, or 21.4%, to $124.7 million in 2005 from $102.7
million in 2004. Of this increase in sales, 3.6% was due to the translation of
foreign currencies to U.S. dollars. The remaining 17.8% was the result of new
superstore openings, the acquisition of Paperchase at the end of the second
quarter of 2004, and comparable store sales increases. The impact of price
changes on comparable store sales was not significant.
 
 ***Gross
margin***
 
 Gross
margin as a percentage of sales increased 1.6%, to 21.4% in 2005 from 19.8% in
2004, primarily the result of a decrease of 3.3% in merchandise costs as a
percentage of sales. This was primarily due to the acquisition of Paperchase,
which offers merchandise with higher margins than the International superstores’
core products. In addition, the Company negotiated improved vendor terms, which
further contributed to the reduction in merchandise costs. The weakness of the
U.S. dollar also contributed to the improvement in product costs, primarily
benefiting the Company’s operations in countries with a relatively high
percentage of U.S.-sourced merchandise. Also contributing to the increase in the
gross margin percentage are improvements of 0.5% in product markdowns as a
percentage of sales, resulting from improved vendor terms related to
returnability of merchandise, largely in the Company’s Asia Pacific stores, as
well as decreased shrink expense of 0.1% as a percentage of sales. Partially
offsetting these factors were increased occupancy costs of 1.7% as a percentage
of sales, due to rent expense recorded for the construction build-out period of
new stores opening in the first and second quarters of 2005, and increased
distribution costs of 0.6% as a percentage of sales, largely due to the higher
supply chain costs of Paperchase.
 
 Gross
margin dollars increased $6.2 million, or 30.4%, to $26.6 million in 2005 from
$20.4 million in 2004. Of this increase, $0.6 million is the result of
translation of foreign currencies to U.S. dollars. The remainder of the increase
is due to new superstore openings , the
acquisition of Paperchase and the
improved gross margin rate.
 
 ***Selling,
general and administrative expenses***
 
 SG&A
as a percentage of sales increased 3.3%, to 24.2% in 2005 from 20.9% in 2004.
This was primarily the result of increases as a percentage of sales in store
payroll of 1.5%, store operating expenses of 0.6%, administrative payroll of
0.6%, and administrative expenses of 0.7%, all of which are due to the
acquisition of Paperchase. These increases were partially offset by decreased
advertising costs of 0.1% as a percentage of sales.
 
 SG&A
dollars increased $8.8 million, or 41.1%, to $30.2 million in 2005 from $21.4
million in 2004. Of this increase, $0.6 million is the result of translation of
foreign currencies to U.S. dollars. The remainder of the increase is primarily
due to store openings, the acquisition of Paperchase and the increased store
payroll and operating expenses required.
 
 ***Depreciation
expense***
 
 Depreciation
expense increased $0.7 million, or 18.4%, to $4.5 million in 2005 from $3.8
million in 2004. This was primarily due to depreciation expense recognized on
new stores' capital expenditures.
 
 16
 ***Interest
expense***
 
 Interest
expense increased 0.4 million, or 8.5%, to $5.1 million in 2005 from $4.7
million in 2004.
 
 ***Net
loss***
 
 Due to
the factors mentioned above, net loss as a percentage of sales increased to 4.7%
in 2005 from 3.4% in 2004, and net loss dollars increased $2.3 million, or
65.7%, to $5.8 million in 2005 from $3.5 million in 2004.
 
 **Corporate**
 **13
      Weeks Ended**(dollar
      amounts in millions)
    
    **April
      23,****2005**
    
    **April
      25,****2004**Interest
      expense
    
    $
    10.9
    
    $
    9.5Net
      loss
    
    $
    8.0
    
    $
    7.2
 
 **Corporate
- Comparison of the 13 weeks ended April 23, 2005 to the 13 weeks ended April
25, 2004**
 
 The
Corporate segment includes the unallocated portion of interest expense, certain
corporate governance costs and corporate incentive costs.
 
 Net loss
dollars increased $0.8 million, or 11.1%, to $8.0 million in 2005 from $7.2
million in 2004. This was primarily due to increased interest expense for this
segment primarily resulting from increased borrowings to fund corporate stock
repurchases in 2005, partially offset by a decrease in various governance costs
as compared to the prior year. Interest expense represents corporate-level
interest costs not charged to the Company's other segments.
 
 **Liquidity
and Capital Resources**
 
 The
Company's principal capital requirements are to fund the opening of new stores,
the refurbishment of existing stores, continued investment in new corporate
information technology systems and maintenance spending on stores, distribution
centers and corporate information technology.
 
 Net cash
used for operations was $154.0 million and $118.7 million for the 13 weeks ended
April 23, 2005 and April 25, 2004, respectively. Operating cash outflows for the
period resulted from decreases in taxes payable, expenses payable and accrued
liabilities and accounts payable, as well as increases in inventories, prepaid
expenses and other long-term assets. The most significant of these was the
decrease in taxes payable, which resulted from payment of the Company’s
estimated 2004 taxes. The current year operating cash inflows primarily reflect
operating results net of non-cash charges for depreciation, as well as a
decrease in accounts receivable and an increase in other long-term liabilities.
 
 Net cash
provided by investing was $55.2 million in 2005, which primarily resulted from
the sale of auction rate securities of $95.4 million. Net cash provided by
investing was $133.0 million in 2004, which primarily resulted from the sale of
auction rate securities of $118.0 million, as well as proceeds received from the
sale-leaseback of a Company-owned store and office building in the United
Kingdom. The proceeds from the sale, totaling $32.3 million were offset against
assets with a net book value of $28.4 million. Direct costs associated with the
transaction were $0.4 million. A deferred gain of $3.5 million was recorded on
the consolidated balance sheets in “Other long-term liabilities” and will be
amortized over the 20 year term of the operating lease.
 
 In fiscal
2005, capital expenditures were $40.8 million, which primarily funded the
remodeling of nine domestic Borders superstores and the conversion of four
Waldenbooks stores to Borders Express. Additional capital spending in 2005
reflects the opening of four new Borders superstores, as well as one new airport
store and two new outlet stores operated by the Waldenbooks segment. In fiscal
2004, capital expenditures were $12.3 million, which primarily funded new stores
and the refurbishment of existing stores. Capital expenditures in 2004 reflect
the opening of three new superstores and one new airport store, operated by the
Waldenbooks segment.
 
 Net cash
used for financing in 2005 was $52.1 million, resulting from the repurchase of
common stock totaling $57.7 million and the payment of the Company’s
January cash dividend of $6.5 million, partially offset by $9.1 million of
proceeds from stock option exercises and funding from the Company’s credit
facility of $3.0 million. Net cash used for financing in 2004 was $43.2 million,
resulting from the repurchase of common stock totaling $50.1 million, the
repayment of the
 
 17
 credit
facility of $7.2 million, the payment of the Company’s January cash dividend of
$6.2 million and the repayment of long-term capital lease obligations of $0.4
million, partially offset by $20.7 million of proceeds from stock option
exercises.
 
 The
Company expects capital expenditures to approximate $175.0 million in 2005,
resulting primarily from new superstore openings and a store remodel program,
through which the Company plans to complete major remodels of approximately 100
domestic Borders superstore locations, most of which will include conversion to
Seattle’s Best cafes and Paperchase gifts and stationery shops, convert
approximately 75 to 100 Waldenbooks stores to Borders Express, and open
approximately 15 new airport and outlet mall stores. In addition, capital
expenditures will result from International store openings and continued
investment in new buying and merchandising systems. The Company currently plans
to open approximately 18 to 20 new domestic Borders superstores and 12 to 14 new
International stores in 2005. Average cash requirements for the opening of a
prototype Borders Books and Music superstore are $2.4 million, representing
capital expenditures of $1.2 million, inventory requirements (net of related
accounts payable) of $1.0 million, and $0.2 million of pre-opening costs.
Average cash requirements to open a new airport or outlet mall store range from
$0.2 million to $0.7 million, depending on the size and format of the store.
Average cash requirements for a major remodel of a Borders superstore are
between $0.1 million to $0.4 million, and average cash requirements for a
Borders Express conversion are less than $0.1 million. The Company plans to
lease new store locations predominantly under operating leases.
 
 The
Company plans to execute its expansion plans for Borders superstores and other
strategic initiatives principally with funds generated from operations and
financing if necessary through the Credit Agreement, discussed below. The
Company believes funds generated from operations and borrowings under the Credit
Agreement will be sufficient to fund its anticipated capital requirements for
the next several years.
 
 The
Company currently has a share repurchase program in place with remaining
authorization to repurchase approximately $172.1 million. During the 13 weeks
ended April 23, 2005 and April 25, 2004, $57.7 million and $50.1 million of
common stock were repurchased, respectively. The Company plans to continue the
repurchase of its common stock throughout fiscal 2005, subject to the Company's
share price, capital needs and regulatory requirements.
 
 In
November 2003, the Board of Directors declared the Company’s first-ever
quarterly cash dividend of $0.08 per share on the Company’s common stock. During
2004, the Company paid a regular quarterly dividend, and intends to pay regular
quarterly cash dividends, subject to Board approval, going forward. In December
2004, the Board of Directors increased the quarterly dividend by 12.5% to $0.09
per share. The declaration and payment of dividends, if any, is subject to the
discretion of the Board and to certain limitations under the Michigan Business
Corporation Act. In addition, the Company’s ability to pay dividends is
restricted by certain agreements to which the Company is a party.
 
 The
Company has a Multicurrency Revolving Credit Agreement (the “Credit Agreement”),
which was amended in July 2004 and will expire in July 2009. The Credit
Agreement provides for borrowings of up to $500.0 million (which may be
increased to $700.0 million under certain circumstances) secured by eligible
inventory and accounts receivable and related assets. Borrowings under the
Credit Agreement are limited to a specified percentage of eligible inventories
and accounts receivable and bear interest at a variable base rate plus an
increment or LIBOR plus an increment at the Company’s option. The Credit
Agreement (i) includes a fixed charge coverage ratio requirement of 1.1 to 1
that is applicable only if outstanding borrowings under the facility exceed 90%
of permitted borrowings thereunder, (ii) contains covenants that limit, among
other things, the Company’s ability to incur indebtedness, grant liens, make
investments, consolidate or merge or dispose of assets, (iii) prohibits dividend
payments and share repurchases that would result in borrowings under the
facility exceeding 90% of permitted borrowings thereunder, and (iv) contains
default provisions that are typical for this type of financing, including a
cross default provision relating to other indebtedness of more than $25.0
million. As of April 23, 2005 the Company was in compliance with all covenants
contained within this agreement.
 
 The
Company currently has in place two interest rate swaps which effectively convert
a portion of the Credit Agreement’s variable rate exposure to fixed interest
rates. In accordance with Statement of Financial Accounting Standards No. 133,
“Accounting For Derivative Instruments and Hedging Activities” (“FAS 133”), the
Company has designated these swap agreements as cash flow hedges. The notional
amounts of these agreements total $76.6 million and the agreements expire in
June 2005.
 
 On July
30, 2002, the Company issued $50.0 million of senior guaranteed notes (the
“Notes”) due July 30, 2006 and bearing interest at 6.31% (payable
semi-annually). The proceeds of the sale of the Notes were used to refinance
existing indebtedness of the Company and its subsidiaries and for general
corporate purposes. The note purchase agreement relating to the Notes contains
covenants which limit, among other things, the Company’s ability to incur
indebtedness, grant liens, make investments, engage in any merger or
consolidation, dispose of assets or change the nature of its business, and
requires the Company to meet certain financial measures regarding net worth,
total debt coverage and fixed charge coverage. In July 2004, the note purchase
agreement was amended to permit
 
 18
 the
amendment to the Credit Agreement described above and to provide for a parity
lien to secure the Notes on the same collateral as secures borrowings under the
Credit Agreement. As of April 23, 2005 the Company was in compliance with all
covenants contained within this agreement.
 
 In August
2003, the Company entered into an interest rate swap agreement which effectively
converted the fixed interest rate on the Company’s Notes to a variable rate
based on LIBOR. In accordance with the provisions of FAS 133, the Company
designated this swap agreement as a fair market value hedge. The notional amount
of the swap agreement is $50.0 million, and the agreement is set to expire
concurrently with the due date of the Notes.
 
 The
Company is the primary beneficiary of two variable interest entities (“VIEs”)
due to the Company’s guarantee of the debt of these entities. As a result, the
Company consolidates these VIEs and has recorded property and equipment, net of
accumulated depreciation, of $5.4 million, long-term debt (including current
portion) of $5.7 million and minority interest of $0.3 million at
April 23, 2005. These amounts have been treated as non-cash items on the
consolidated statements of cash flows.
 
 **Seasonality**
 
 The
Company’s business is highly seasonal, with significantly higher sales and
substantially all operating income realized during the fourth quarter.
 
 **Critical
Accounting Policies and Estimates**
 
 In the
ordinary course of business, the Company has made a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of its financial statements in conformity with
accounting principles generally accepted in the United States. Actual results
could differ from those estimates under different assumptions and conditions. Such
estimates have been disclosed in the Company's last
Annual Report on Form 10-K
for the fiscal year ended January 23, 2005. There
have been no significant changes in these estimates during the first quarter of
fiscal 2005.
 
 **New
Accounting Guidance**
 
 In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
Payment” (“FAS 123(R)”), which is a revision of FAS 123. FAS 123(R) supersedes
APB No. 25, and amends FAS No. 95, “Statement of Cash Flows.” Generally, the
approach in FAS 123(R) is similar to the approach described in FAS 123. FAS
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values.
 
 On
April 14, 2005 the U.S. Securities and Exchange Commission announced a
deferral of the effective date of FAS 123(R) until the beginning of 2006.
 
 **Related
Party Transactions**
 
 The
Company has not engaged in any related party transactions which would have had a
material effect on the Company's financial position, cash flows, or results of
operations.
 
 **Forward
Looking Statements**
 
 This
Quarterly Report on Form 10-Q contains forward-looking statements as defined in
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
reflect management's current expectations and are inherently uncertain. The
Company's actual results may differ significantly from management's
expectations. Exhibit 99.1 to this report, "Cautionary Statement under the
Private Securities Litigation Reform Act of 1995", identifies the
forward-looking statements and describes some, but not all, of the factors that
could cause these differences.
 
 **Item
3. Quantitative and Qualitative Disclosures About Market
Risk**
 
 The
Company is exposed to market risk during the normal course of business from
changes in interest rates and foreign currency exchange rates. The exposure to
these risks is managed though a combination of normal operating and financing
activities, which include the use of derivative financial instruments in the
form of interest rate swaps and forward foreign currency exchange
contracts.
 
 19
 There
have been no material changes in this Item since the Company’s last Annual
Report on Form 10-K for the fiscal year ended January 23, 2005.
 
 **Item
4. Controls and Procedures**
 
 *Controls
and Procedures:* The
Company’s Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the Company’s disclosure controls and procedures, as such term
is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the “Exchange Act”), as of April 23, 2005 (the “Evaluation
Date”). Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, the Company’s disclosure controls and procedures were effective
in alerting them on a timely basis to material information relating to the
Company (including its consolidated subsidiaries) required to be included in the
Company’s periodic filings under the Exchange Act.
 
 *Changes
in Internal Control:* During
the quarter ended April 23, 2005, the Company has implemented additional review
procedures over the selection and monitoring of appropriate assumptions and
factors affecting lease accounting practices.
 
 **Part
II - Other Information**
 
 **Item
1. Legal Proceedings**
 
 The
Company's Form 10-K Annual Report for the fiscal year ended January 23, 2005,
describes pending lawsuits and claims against the Company. The status of such
litigation and claims has not changed in any significant respect in the fiscal
quarter covered by this report.
 
 In
addition to the matters referred to above, the Company is, from time to time,
involved in or affected by other litigation incidental to the conduct of its
businesses. While some of such matters may involve claims for large sums
(including, from time to time, actions which are asserted to be maintainable as
class action suits), the Company does not believe that any other pending
litigation or claims will have a material adverse effect on its liquidity,
financial position, or results of operations.
 
 **Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds**
 
 (c)
    The
      table below presents the total number of shares repurchased during the
      first quarter of fiscal 2005.
 
 **Fiscal
      Period**
    
    
    **Total
      Number of Shares (1)**
    ****
    
    **Average
      Price Paid per Share**
      **(2)**
    ****
      ****
    
    **Total
      Number of Shares Purchased as Part of Publicly Announced Plans or Programs
      (3)**
    ****
    
    **Approximate
      Dollar Value of Shares that May Yet Be Purchased Under the Plans or
      Programs**January
      24, 2005
      through
      February
      19, 2005
    
    
    599,485
    
    $
    25.91
    
    
    580,000
    
    $
    238,774,688February
      20, 2005
      through
      March
      19, 2005
    
    
    678,000
    
    $
    26.28
    
    
    678,000
    
    $
    222,705,662March
      20, 2004
      through
      April
      23, 2005
    
    
    932,205
    
    $
    26.20
    
    
    929,700
    
    $
    200,609,936Total
    
    
    2,209,690
    
    $
    26.15
    
    
    2,187,700
    
    $
    200,609,936
 
 (1)
    During
      the first quarter of 2005, the company retired 21,990 shares which were
      acquired pursuant to the Company’s employee benefit
  plans.
 
 (2)
    Average
      price paid per share includes commissions and is rounded to the nearest
      two decimal places.
 
 20
 (3)
    On
      February 9, 2005, the Company announced that the Board of Directors
      authorized an increase in the amount of share repurchases to $250 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).
 
 **Item
6. Exhibits**
 
 Exhibits:
  3.1(1)
    Restated
      Articles of Incorporation of Borders Group, Inc.3.2(2)
    Restated
      bylaws of Borders Group, Inc.10.24(3)
    Restricted
      Share Grant Agreement31.1
    Statement
      of Gregory P. Josefowicz, Chairman, President and Chief Executive Officer
      of Borders Group, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act
      of 200231.2
    Statement
      of Edward W. Wilhelm, Senior Vice President and Chief Financial Officer of
      Borders Group,Inc.
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  200232.1
    Statement
      of Gregory P. Josefowicz, Chairman, President and Chief Executive Officer
      of Borders Group, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act
      of 200232.2
    Statement
      of Edward W. Wilhelm, Senior Vice President and Chief Financial Officer of
      Borders Group,Inc.
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  200299.1
    Cautionary
      Statement under the Private Securities Litigation Reform Act of 1995
      —“Safe Harbor” for Forward-Looking Statements(1)
    Incorporated
      by reference from the Company’s Annual Report on Form 10-K dated January
      24, 1999 (File No. 1-13740).(2)
    Incorporated
      by reference from the Company’s Annual Report on Form 10-K dated January
      27, 2002 (File No. 1-13740).(3)
    Incorporated
      by reference from the Company’s Current Report on Form 8-K dated April 21,
      2005 (File No. 1-13740).
  
  21
  **SIGNATURES**
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereto
duly authorized.
 
 BORDERS
GROUP, INC.
 (REGISTRANT)
 
 Date: May 26,
      2005
    By:/s/ Edward W. WilhelmEdward W. WilhelmSenior Vice President andChief Financial Officer(Principal Financial andAccounting
Officer)
 
  22
  **EXHIBIT
INDEX**
 **DESCRIPTION
OF EXHIBITS**
 
 Exhibits:
 3.1(1)
    Restated
      Articles of Incorporation of Borders Group, Inc.3.2(2)
    Restated
      bylaws of Borders Group, Inc.10.24(3)
    Restricted
      Share Grant Agreement31.1
    Statement
      of Gregory P. Josefowicz, Chairman, President and Chief Executive Officer
      of Borders Group, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act
      of 200231.2
    Statement
      of Edward W. Wilhelm, Senior Vice President and Chief Financial Officer of
      Borders Group,Inc.
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  200232.1
    Statement
      of Gregory P. Josefowicz, Chairman, President and Chief Executive Officer
      of Borders Group, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act
      of 200232.2
    Statement
      of Edward W. Wilhelm, Senior Vice President and Chief Financial Officer of
      Borders Group,Inc.
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  200299.1
    Cautionary
      Statement under the Private Securities Litigation Reform Act of 1995
      —“Safe Harbor” for Forward-Looking Statements(1)
    Incorporated
      by reference from the Company’s Annual Report on Form 10-K dated January
      24, 1999 (File No. 1-13740).(2)
    Incorporated
      by reference from the Company’s Annual Report on Form 10-K dated January
      27, 2002 (File No. 1-13740).(3)
    Incorporated
      by reference from the Company’s Current Report on Form 8-K dated April 21,
      2005 (File No. 1-13740).
 
 
 
 
 23