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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 July 25, 2004OR[  ]
    
    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. 
  MICHIGAN
    
    38-3294588(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 100 Phoenix Drive, Ann Arbor, Michigan 48108 
   (734) 477-1100 
  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 [  ] Title of Class
    
    Shares Outstanding As of
August 22, 2004Common Stock
    
    76,342,585




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BORDERS GROUP, INC. INDEX PagePart I  Financial InformationItem 1.
    
    Financial Statements
    
    
    1Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    25Item 4.
    
    Controls and Procedures
    
    
    26Part II  Other informationItem 1.
    
    Legal Proceedings
    
    
    26Item 2.
    
    Changes in Securities and Use of Proceeds
    
    
    27Item 3.
    
    Defaults Upon Senior Securities
    
    
    N/AItem 4.
    
    Submission of Matters to a vote of Securityholders
    
    
    28Item 5.
    
    Other Information
    
    
    N/AItem 6.
    
    Exhibits and Reports on Form 8-K
    
    
    29Signatures
    
    
    30Exhibits
    
    
    31Amendment to Annual Incentive PlanAmendment to 2004 Long-Term Incentive PlanAmended & Restated Multicurrency Revolving Credit AgreementSecurity AgreementAmendment to Note Purchase Agreements1995 Termination Agreement2002 Termination AgreementCertificationCertificationCertificationCertificationCautionary Statement
 ii




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BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in millions except per share data)
(UNAUDITED) 13 Weeks EndedJuly 25,
    
    July 27,2004
    
    2003Sales
    
    $
    847.1
    
    
    $
    826.9Other revenue
    
    
    6.3
    
    
    
    7.5Total revenue
    
    
    853.4
    
    
    
    834.4Cost of merchandise sold, including occupancy costs
    
    
    629.8
    
    
    
    621.3Inventory writedowns
    
    
    
    
    
    
    0.5Gross margin
    
    
    223.6
    
    
    
    212.6Selling, general and administrative expenses
    
    
    206.5
    
    
    
    200.5Pre-opening expense
    
    
    1.0
    
    
    
    1.7Asset impairments and other writedowns
    
    
    0.2
    
    
    
    0.6Operating income
    
    
    15.9
    
    
    
    9.8Interest expense
    
    
    2.4
    
    
    
    2.6Income before income tax
    
    
    13.5
    
    
    
    7.2Income tax provision
    
    
    5.0
    
    
    
    2.7Net income
    
    $
    8.5
    
    
    $
    4.5Earnings per common share dataDiluted:Income per common share
    
    $
    0.11
    
    
    $
    0.06Weighted average common shares outstanding (in millions)
    
    
    78.4
    
    
    
    78.5Basic:Income per common share
    
    $
    0.11
    
    
    $
    0.06Weighted average common shares outstanding (in millions)
    
    
    77.1
    
    
    
    77.4Dividends declared per common share
    
    $
    0.08
    
    
    $
    
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 1




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BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in millions except per share data)
(UNAUDITED) 26 Weeks EndedJuly 25,
    
    July 27,2004
    
    2003Sales
    
    $
    1,677.9
    
    
    $
    1,578.3Other revenue
    
    
    13.6
    
    
    
    14.7Total revenue
    
    
    1,691.5
    
    
    
    1,593.0Cost of merchandise sold, including occupancy costs
    
    
    1,257.0
    
    
    
    1,190.9Inventory writedowns
    
    
    0.1
    
    
    
    0.5Gross margin
    
    
    434.4
    
    
    
    401.6Selling, general and administrative expenses
    
    
    409.5
    
    
    
    393.5Pre-opening expense
    
    
    1.7
    
    
    
    3.2Asset impairments and other writedowns
    
    
    0.6
    
    
    
    0.6Operating income
    
    
    22.6
    
    
    
    4.3Interest expense
    
    
    4.3
    
    
    
    4.8Income (loss) before income tax
    
    
    18.3
    
    
    
    (0.5
    )Income tax provision (benefit)
    
    
    6.8
    
    
    
    (0.2
    )Net income (loss)
    
    $
    11.5
    
    
    $
    (0.3
    )Earnings (loss) per common share dataDiluted:Income (loss) per common share
    
    $
    0.15
    
    
    $
    Weighted average common shares outstanding (in millions)
    
    
    79.1
    
    
    
    77.9Basic:Income (loss) per common share
    
    $
    0.15
    
    
    $
    Weighted average common shares outstanding (in millions)
    
    
    77.6
    
    
    
    77.9Dividends declared per common share
    
    $
    0.16
    
    
    $
    
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 2




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BORDERS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in millions except per share data)
(UNAUDITED) July 25,
    
    July 27,
    
    January 25,2004
    
    2003
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    180.8
    
    
    $
    177.3
    
    
    $
    378.8Merchandise inventories
    
    
    1,229.7
    
    
    
    1,214.4
    
    
    
    1,235.6Accounts receivable and other current assets
    
    
    110.5
    
    
    
    98.6
    
    
    
    98.3Total current assets
    
    
    1,521.0
    
    
    
    1,490.3
    
    
    
    1,712.7Property and equipment, net of accumulated depreciation of
$796.5, $700.0 and $763.5 at July 25, 2004, July 27,
2003 and January 25, 2004, respectively
    
    
    530.3
    
    
    
    552.7
    
    
    
    577.7Other assets
    
    
    79.4
    
    
    
    89.8
    
    
    
    70.2Deferred income taxes
    
    
    1.1
    
    
    
    2.4
    
    
    
    1.3Goodwill
    
    
    132.6
    
    
    
    96.1
    
    
    
    104.3Total assets
    
    $
    2,264.4
    
    
    $
    2,231.3
    
    
    $
    2,466.2Liabilities, Minority Interest and Stockholders EquityCurrent liabilities:Short-term borrowings and current portion of long-term debt
    
    $
    129.8
    
    
    $
    124.5
    
    
    $
    141.2Trade accounts payable
    
    
    547.2
    
    
    
    604.3
    
    
    
    595.9Accrued payroll and other liabilities
    
    
    270.6
    
    
    
    270.3
    
    
    
    281.8Taxes, including income taxes
    
    
    61.2
    
    
    
    60.8
    
    
    
    133.1Deferred income taxes
    
    
    12.1
    
    
    
    8.7
    
    
    
    12.1Total current liabilities
    
    
    1,020.9
    
    
    
    1,068.6
    
    
    
    1,164.1Long-term debt
    
    
    56.1
    
    
    
    50.0
    
    
    
    57.2Long-term capital lease obligations
    
    
    
    
    
    
    19.0
    
    
    
    Other long-term liabilities
    
    
    97.2
    
    
    
    85.4
    
    
    
    90.2Total liabilities
    
    
    1,174.2
    
    
    
    1,223.0
    
    
    
    1,311.5Minority interest
    
    
    1.4
    
    
    
    
    
    
    
    1.7Total liabilities and minority interest
    
    
    1,175.6
    
    
    
    1,223.0
    
    
    
    1,313.2Stockholders equity:Common stock; 200,000,000 shares authorized;
76,195,396, 77,273,070 and 78,273,341 shares issued
and outstanding at July 25, 2004, July 27, 2003 and
January 25, 2004, respectively
    
    
    586.0
    
    
    
    632.9
    
    
    
    646.3Deferred compensation
    
    
    (0.7
    )
    
    
    (0.5
    )
    
    
    (0.6
    )Accumulated other comprehensive income
    
    
    21.1
    
    
    
    6.8
    
    
    
    24.1Retained earnings
    
    
    482.4
    
    
    
    369.1
    
    
    
    483.2Total stockholders equity
    
    
    1,088.8
    
    
    
    1,008.3
    
    
    
    1,153.0Total liabilities, minority interest and stockholders equity
    
    $
    2,264.4
    
    
    $
    2,231.3
    
    
    $
    2,466.2
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 3




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BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE 26 WEEKS ENDED JULY 25, 2004
(dollars in millions except share amounts)
(UNAUDITED) AccumulatedOtherCommon Stock
    
    Deferred
    
    Comprehensive
    
    RetainedShares
    
    Amount
    
    Compensation
    
    Income
    
    Earnings
    
    TotalBalance at January 25, 2004
    
    
    78,273,341
    
    
    $
    646.3
    
    
    $
    (0.6
    )
    
    $
    24.1
    
    
    $
    483.2
    
    
    $
    1,153.0Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11.5
    
    
    
    11.5Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3.2
    )
    
    
    
    
    
    
    (3.2
    )Change in fair value of
derivatives, net of tax of $0.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    0.2Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.5Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12.3
    )
    
    
    (12.3
    )Issuance of common stock pursuant to
stock-based compensation plans
    
    
    1,868,967
    
    
    
    24.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24.3Repurchase and retirement of
common stock
    
    
    (3,946,912
    )
    
    
    (91.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (91.7
    )Change in deferred
compensation
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Tax benefit of equity
compensation
    
    
    
    
    
    
    7.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.1Balance at July 25, 2004
    
    
    76,195,396
    
    
    $
    586.0
    
    
    $
    (0.7
    )
    
    $
    21.1
    
    
    $
    482.4
    
    
    $
    1,088.8
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 4




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BORDERS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
(UNAUDITED) 26 Weeks EndedJuly 25,
    
    July 27,2004
    
    2003Cash provided by (used for):OperationsNet income (loss)
    
    $
    11.5
    
    
    $
    (0.3
    )Adjustments to reconcile net income (loss) to operating cash flows:Depreciation
    
    
    47.6
    
    
    
    48.6Gain on deconsolidation of variable interest entities
    
    
    (2.9
    )
    
    
    Increase in other long-term assets
    
    
    (9.2
    )
    
    
    (15.3
    )Increase in other long-term liabilities
    
    
    3.1
    
    
    
    4.4Cash provided by (used for) current assets and current liabilities:(Increase) / decrease in inventories
    
    
    10.3
    
    
    
    (29.6
    )Decrease in accounts receivable
    
    
    15.6
    
    
    
    23.6Increase in prepaid expenses
    
    
    (25.6
    )
    
    
    (33.3
    )Increase / (decrease) in accounts payable
    
    
    (51.9
    )
    
    
    38.4Decrease in taxes payable
    
    
    (64.8
    )
    
    
    (59.2
    )Decrease in expenses payable and accrued liabilities
    
    
    (14.7
    )
    
    
    (10.6
    )Net cash used for operations
    
    
    (81.0
    )
    
    
    (33.3
    )InvestingCapital expenditures
    
    
    (36.1
    )
    
    
    (46.7
    )Proceeds from sale-leaseback of assets
    
    
    32.3
    
    
    
    Acquisition
    
    
    (31.4
    )
    
    
    Net cash used for investing
    
    
    (35.2
    )
    
    
    (46.7
    )FinancingNet repayment of long-term capital lease obligations
    
    
    (0.4
    )
    
    
    (0.3
    )Net funding from (repayment of) credit facility and other financing obligations
    
    
    (0.7
    )
    
    
    12.6Issuance of common stock pursuant to stock-based compensation plans
    
    
    24.3
    
    
    
    6.7Payment of cash dividends
    
    
    (12.3
    )
    
    
    Repurchase of common stock
    
    
    (91.7
    )
    
    
    (31.5
    )Net cash used for financing
    
    
    (80.8
    )
    
    
    (12.5
    )Effect of exchange rates on cash and equivalents
    
    
    (1.0
    )
    
    
    0.7Net decrease in cash and equivalents
    
    
    (198.0
    )
    
    
    (91.8
    )Cash and equivalents at beginning of year
    
    
    378.8
    
    
    
    269.1Cash and equivalents at end of period
    
    $
    180.8
    
    
    $
    177.3
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 5




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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 for the fiscal year ended
January 25, 2004. The Companys fiscal year ends on the Sunday immediately preceding the last
Wednesday in January. At July 25, 2004, the Company operated 487 superstores
primarily under the Borders name, including 24 in the United Kingdom, nine in
Australia, two in Puerto Rico, and one each in Singapore and New Zealand. The
Company also operated 711 mall-based and other bookstores primarily under the
Waldenbooks name, and 36 bookstores under the Books etc. name in the United
Kingdom. NOTE 2  COMMITMENTS AND CONTINGENCIES Litigation:Two former employees, individually and on behalf of a purported
class consisting of all current and former employees who worked as assistant
managers in Borders stores in the state of California at any time between April
10, 1996, and the present, have filed an action against the Company in the
Superior Court of California for the County of San Francisco. The action
alleges that the individual plaintiffs and the purported class members worked
hours for which they were entitled to receive, but did not receive, overtime
compensation under California law, and that they were classified as exempt
store management employees but were forced to work more than 50% of their time
in non-exempt tasks. The Amended Complaint, which names two additional
plaintiffs, alleges violations of the California Labor Code and the California
Business and Professions Code. The relief sought includes compensatory and
punitive damages, penalties, preliminary and permanent injunctions requiring
Borders to pay overtime compensation as required under California and Federal
law, prejudgment interest, costs, and attorneys fees and such other relief as
the court deems proper. On July 29, 2002, the Superior Court of California
granted the plaintiffs motion for class certification in the action. The class
certified consists of all individuals who worked as Assistant Managers in a
Borders superstore in California at any time between April 10, 1996 and March
18, 2001. The class was further certified by the Court into the following
subclasses: Assistant Manager-Merchandising; Assistant Manager-Inventory;
Assistant Manager-Human Resources; Assistant Manager-Music; Assistant
Manager-Training; Assistant Manager-Café. On January 28, 2004, a tentative
settlement, subject to court approval, was reached pursuant to which the
Company has agreed to pay $3.5 to resolve all claims asserted in the
litigation. On July 29, 2004, the court granted preliminary approval of the
tentative settlement, and scheduled the hearing on the final approval of the
tentative settlement for December 2, 2004. The Company classified this charge
as Legal settlement expense in the consolidated statements of operations in
2003. 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 recently
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
lawsuit and has expensed as incurred all legal costs to date. Although an
adverse resolution of the matter could have a material adverse effect on the
result of the operations of the Company for the applicable period or periods,
the Company does not believe that this litigation will have a material effect
on its liquidity or financial position. 6




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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. A motion of the Attorney
General of Nevada to dismiss the Nevada action was denied, and the Company has
been advised that the Attorney General will seek an appeal of that ruling. On
July 29, 2004, the Illinois Attorney General filed a motion to dismiss the
Illinois matter. 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, and intends to file, with other retailers, motions to dismiss
the Illinois and Nevada actions on grounds not included in the respective
Attorney Generals motions. 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. Relationship with Kmart  General:Prior to its initial public offering in May
1995, the Company was a subsidiary of Kmart Corporation (Kmart); Kmart
currently owns no shares of common stock of the Company. On January 22, 2002,
Kmart filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code,
and emerged from Chapter 11 on May 6, 2003. Such filings have not affected the
operations of the Company. Kmart and the Company continue to have the following contractual relationships. Tax Allocation and Indemnification Agreement:Prior to the completion of its
initial public offering (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 (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 has agreed to
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. 7




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BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions except per share data). Lease Guaranty Agreement:Borders leases for 13 of its retail stores and its
distribution center in Harrisburg, Pennsylvania have been guaranteed by Kmart.
Under the terms of a lease guaranty, indemnification and reimbursement
agreement entered into upon completion of the IPO, as amended, (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, or
(iii) 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 an aggregate liability of $10.0 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, 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 in January 2020. NOTE 3  FINANCING Credit Agreement.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 of $122.0 at July 25, 2004, $124.2 at July 27, 2003
and $126.9 at January 25, 2004. 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). The Company has recorded this debt repayment as a 8




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BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per share data) 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 at July 25, 2004. In conjunction with this
transaction, the Lease Financing Facilities were terminated. Consolidated VIEs. As a result of the repayment and termination of the Lease
Financing Facilities, the Company deconsolidated the two VIEs which had
participated in the Lease Financing Facilities as of July 25, 2004, pursuant to
the provisions of Financial Accounting Standards Board (FASB) Interpretation
No. 46, Consolidation of Variable Interest Entities (FIN 46). The
deconsolidation of the two VIEs resulted in a reduction of land, property and
equipment, net of accumulated depreciation, of $12.5, short-term borrowings of
$13.8, and minority interest of $1.3 at July 25, 2004. The Company also
recorded an after-tax gain of $1.7 as a result of the deconsolidation of these
VIEs. These amounts have been treated as non-cash items on the consolidated
statements of cash flows. Separately, the Company is the primary beneficiary of two 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 $5.5, long-term debt of $5.8, and minority
interest of $0.4 at July 25, 2004. These amounts have been treated as non-cash
items on the consolidated statements of cash flows. Mortgage Notes: During 1994, the Company entered into agreements in which
leases with respect to four Borders locations served as collateral for certain
mortgage pass-through certificates. These mortgage pass-through certificates
included a provision requiring the Company to repurchase the underlying
mortgage notes in certain events. In the fourth quarter of 2001, the Company
was obligated to purchase the notes for $33.5, due to Kmart Corporations (the
former guarantor of the leases) failure to maintain investment grade credit
ratings. As a result, the Company has categorized this prepaid rent amount as
part of Other assets in the consolidated balance sheets and is amortizing the
balance over each propertys remaining lease term. The remaining balance at
July 25, 2004 was approximately $27.8. NOTE 4  STOCK-BASED BENEFIT PLANS The Company accounts for equity-based compensation under the guidance of APB
No. 25. As permitted, the Company has adopted the disclosure-only option of
Statement of Financial Accounting Standards No. 123, Accounting for Stock
Base 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
    
    26 Weeks EndedJuly 25,
    
    July 27,
    
    July 25,
    
    July 27,2004
    
    2003
    
    2004
    
    2003Net income (loss), as reported
    
    $
    8.5
    
    
    $
    4.5
    
    
    $
    11.5
    
    
    $
    (0.3
    )Add: Stock-based employee expense included in reported
net income, net of related tax effects
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards, net
of tax
    
    
    1.2
    
    
    
    1.0
    
    
    
    2.5
    
    
    
    3.0Pro forma net income (loss)
    
    $
    7.3
    
    
    $
    3.5
    
    
    $
    9.1
    
    
    $
    (3.3
    )Earnings (loss) per share:Basic  as reported
    
    $
    0.11
    
    
    $
    0.06
    
    
    $
    0.15
    
    
    $
    Basic  pro forma
    
    $
    0.09
    
    
    $
    0.04
    
    
    $
    0.12
    
    
    $
    (0.04
    )Diluted  as reported
    
    $
    0.11
    
    
    $
    0.06
    
    
    $
    0.15
    
    
    $
    Diluted  pro forma
    
    $
    0.09
    
    
    $
    0.04
    
    
    $
    0.12
    
    
    $
    (0.04
    )
 9




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##### Table of Contents



BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per share data) NOTE 5  SEGMENT INFORMATION The Company is organized based upon the following operating segments: domestic
Borders stores, Waldenbooks stores, International Borders and Books etc.
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 $71.2 and $57.5 at
July 25, 2004 and July 27, 2003, respectively, whose related depreciation
expense has been allocated to the Borders, Waldenbooks and International
segments. Depreciation expense allocated to the Borders segment totaled $2.4
and $2.9 for the 13 weeks ended July 25, 2004 and July 27, 2003, respectively,
and $4.8 and $5.7 for the 26 weeks ended July 25, 2004 and July 27, 2003,
respectively. Depreciation expense allocated to the Waldenbooks segment totaled
$1.2 and $1.5 for the 13 weeks ended July 25, 2004 and July 27, 2003,
respectively, and $2.3 and $3.0 for the 26 weeks ended July 25, 2004 and July
27, 2003, respectively. Depreciation expense allocated to the International
segment totaled $0.0 and $0.0 for the 13 weeks ended July 25, 2004 and July 27,
2003, respectively, and $0.1 and $0.0 for the 26 weeks ended July 25, 2004 and
July 27, 2003, respectively. 13 Weeks Ended
    
    26 Weeks EndedJuly 25,
    
    July 27,
    
    July 25,
    
    July 27,2004
    
    2003
    
    2004
    
    2003SalesBorders
    
    $
    592.8
    
    
    $
    570.0
    
    
    $
    1,170.1
    
    
    $
    1,091.5Walden
    
    
    150.0
    
    
    
    168.7
    
    
    
    300.8
    
    
    
    319.0International
    
    
    104.3
    
    
    
    88.2
    
    
    
    207.0
    
    
    
    167.8Total sales
    
    $
    847.1
    
    
    $
    826.9
    
    
    $
    1,677.9
    
    
    $
    1,578.3Net income (loss)Borders
    
    $
    16.1
    
    
    $
    10.6
    
    
    $
    26.6
    
    
    $
    15.4Walden
    
    
    1.6
    
    
    
    2.6
    
    
    
    4.5
    
    
    
    3.1International
    
    
    (2.6
    )
    
    
    (3.6
    )
    
    
    (5.8
    )
    
    
    (7.8
    )Corporate
    
    
    (6.6
    )
    
    
    (5.1
    )
    
    
    (13.8
    )
    
    
    (11.0
    )Total net income (loss)
    
    $
    8.5
    
    
    $
    4.5
    
    
    $
    11.5
    
    
    $
    (0.3
    )Total assetsBorders
    
    
    
    
    
    
    
    
    
    $
    1,360.8
    
    
    $
    1,343.2Walden
    
    
    
    
    
    
    
    
    
    
    313.5
    
    
    
    332.8International
    
    
    
    
    
    
    
    
    
    
    383.3
    
    
    
    339.1Corporate
    
    
    
    
    
    
    
    
    
    
    206.8
    
    
    
    216.2Total assets
    
    
    
    
    
    
    
    
    
    $
    2,264.4
    
    
    $
    2,231.3
 10




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BORDERS GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per share data) NOTE 6  SALE-LEASEBACK TRANSACTION In March 2004, the Company entered into an agreement with GE Pension Limited to
sell and subsequently leaseback the Company-owned property at 120 Charing Cross
Road, London U.K. WC2J 0JR, 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 condensed 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. 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. NOTE 7  ACQUISITION OF PAPERCHASE PRODUCTS, LTD. In July 2004, the Company invested cash of $24.1, including debt repayment of
$4.1, in connection with an increase in its 15% equity stake in Paperchase
Products, Ltd. (Paperchase), a leading stationery retailer in the United
Kingdom, to 97%, which was allocated primarily to fixed assets, inventory and
goodwill of $28.0. The Company also recorded minority interest of $1.1. At the
time of the acquisition, Paperchase operated 61 locations, including more than
a third of which are located inside Borders International superstores. The
acquisition has been accounted for as a purchase in the Companys International
Segment. The acquisition was not material to the consolidated statements of
operations, the consolidated balance sheets, or the consolidated statements of
cash flows of the Company. NOTE 8  NEW ACCOUNTING GUIDANCE On March 31, 2004, the Financial Accounting Standards Board (FASB) issued an
exposure draft, Share-Based Payment, an Amendment of FASB Statements No. 123
and 95. The proposed change in accounting would replace existing requirements
under SFAS 123, Accounting for Stock-Based Compensation, and APB Opinion No.
25, Accounting for Stock Issued to Employees. The exposure draft covers a
wide range of equity-based compensation arrangements. Under the FASBs
proposal, all forms of share-based payments to employees, including employee
stock options, would be treated the same as other forms of compensation by
recognizing the related cost in the income statement. The expense of the award
would generally be measured at fair value at the grant date. The comment
period for the exposure draft ended on June 30, 2004 and final rules are
expected to be issued in late 2004. The standard would be applicable for
fiscal years beginning after December 15, 2004. The Company will evaluate the
impact of any change in the accounting standards on the Companys financial
position and results of operations when the final rules are issued. NOTE 9  SUBSEQUENT EVENT In August 2004, the Company entered into a licensing agreement with Seattles
Best Coffee LLC (SBC), a wholly-owned subsidiary of Starbucks Corporation, in
which the Company will operate SBC-branded cafés within substantially all of
the Companys existing Borders superstores in the continental U.S. and Alaska
and new stores in that territory as they are opened. Cafés located within
existing Borders superstores will be converted to SBC cafés beginning in early
2005, and continue over the next few years. The SBC cafés will continue to be
managed and staffed by Company employees, who will be trained on SBC brand
standards and procedures. SBC will also provide brand direction and oversight,
as well as in-store promotional support, and will receive royalty payments from
the Company. The agreement is not material to the consolidated statements of
operations, the consolidated balance sheets, or the consolidated statements of
cash flows of the Company. 11




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##### Table of Contents



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 U.K. 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 July 25, 2004, the Company operated 487 superstores primarily
under the Borders name, including 24 in the United Kingdom, nine in Australia,
two in Puerto Rico, and one each in Singapore and New Zealand. The Company also
operated 711 mall-based and other bookstores primarily under the Waldenbooks
name, and 36 bookstores under the Books etc. name in the United Kingdom. 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 Web-based commerce 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 expects to open 18 to 20 domestic Borders stores and will undertake
an expanded remodel program, through which the Company expects to complete
major remodels of 40 to 50 existing stores in 2004. International store growth
over the next several years will primarily focus on existing markets with
approximately six to eight International store openings annually. The
International segment achieved full year profitability for the first time in
2003 and full year 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; however, as a result of the successful plan
to optimize the Waldenbooks store base, the comparable store sales percentages
are generally improving. The Company is continuing to implement this plan in
order to continue improving 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 rate going forward. In addition, Waldenbooks manages
the Companys kiosks and small format stores, including those in airports and
outlet malls and selective growth in these small format stores is expected in
2004. The Companys objectives with respect to these initiatives are to
continue to grow consolidated sales and earnings in 2004. In addition, 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 March 2004, the Board of Directors declared a
quarterly cash dividend of $0.08 per share on the Companys common stock,
payable April 28, 2004 to stockholders of record at the close of business April
7, 2004, and in May 2004, the Board of Directors declared a quarterly cash
dividend of $0.08 per share on the Companys common stock, payable July 28,
2004 to stockholders of record at the close of business July 7, 2004. In May
2003, the Board of Directors authorized an increase in the amount of share
repurchases to $150 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). From May 1998 to August 2001, the Company operated an Internet commerce site,
Borders.com. In 2001, the Company entered into an agreement with an affiliate
of Amazon.com, Inc. (Amazon) for Amazon to develop and operate a Web site
utilizing the Borders.com URL (the Mirror Site). Operation of the Mirror Site
began August 1, 2001. As of that date, the Company stopped selling merchandise
via its Company-owned and -operated Borders.com Web site (and the Internet). In
2002, the Company entered into an additional agreement with Amazon for Amazon
to develop and operate a Web site utilizing the Waldenbooks.com URL (the
Second Mirror Site). Operation of the Second Mirror Site began November 11,
2002. In 2004, the Company entered into an additional agreement with a UK
affiliate of Amazon for Amazon to develop and operate a Web site utilizing the
borders.co.uk and booksetc.co.uk URLs (the Third Mirror Site). Operation of
the Third Mirror Site is expected to launch later this fiscal year. 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 essentially allocate between the parties
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. Also in 2002, Borders entered into 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 their 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 12




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##### Table of Contents



Pick Up. In addition, the Company assumes all risk, cost and responsibility
related to the sale and fulfillment of all products sold. The Company
recognizes revenue upon customers pick up of the merchandise at the store, and
classifies this revenue as a component of Sales in the Companys consolidated
statements of operations. The Company also pays referral fees to Amazon
pursuant to this agreement. This service was offered to customers beginning
November 27, 2002. In August 2004, the Company entered into a licensing agreement with Seattles
Best Coffee LLC (SBC), a wholly-owned subsidiary of Starbucks Corporation, in
which the Company will operate SBC-branded cafés within substantially all of
the Companys existing Borders superstores in the continental U.S. and Alaska
and new stores in that territory as they are opened. Cafés located within
existing Borders superstores will be converted to SBC cafés beginning in early
2005, and continue over the next few years. The SBC cafés will continue to be
managed and staffed by Company employees, who will be trained on SBC brand
standards and procedures. SBC will also provide brand direction and oversight,
as well as in-store promotional support, and will receive royalty payments from
the Company. The agreement is not material to the consolidated statements of
operations, the consolidated balance sheets, or the consolidated statements of
cash flows of the Company. The Companys second quarters of 2004 and 2003 consisted of the 13 weeks ended
July 25, 2004 and July 27, 2003, respectively. 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
    
    26 Weeks EndedJuly 25, 2004
    
    July 27, 2003
    
    July 25, 2004
    
    July 27, 2003Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Other revenue
    
    
    0.7
    
    
    
    0.9
    
    
    
    0.8
    
    
    
    0.9Total revenue
    
    
    100.7
    
    
    
    100.9
    
    
    
    100.8
    
    
    
    100.9Cost of merchandise sold (includes
occupancy)
    
    
    74.3
    
    
    
    75.2
    
    
    
    74.9
    
    
    
    75.5Inventory writedowns
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    Gross margin
    
    
    26.4
    
    
    
    25.6
    
    
    
    25.9
    
    
    
    25.4Selling, general and administrative
expenses
    
    
    24.4
    
    
    
    24.3
    
    
    
    24.4
    
    
    
    24.9Pre-opening expense
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.2Asset impairments and other
writedowns
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    Operating income
    
    
    1.9
    
    
    
    1.0
    
    
    
    1.4
    
    
    
    0.3Interest expense
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.3Income (loss) before income tax
    
    
    1.6
    
    
    
    0.7
    
    
    
    1.1
    
    
    
    Income tax
    
    
    0.6
    
    
    
    0.2
    
    
    
    0.4
    
    
    
    Net income (loss)
    
    
    1.0
    %
    
    
    0.5
    %
    
    
    0.7
    %
    
    
    
    %
 Consolidated Results  Comparison of the 13 weeks ended July 25, 2004 to the
13 weeks ended July 27, 2003 Sales Consolidated sales increased $20.2 million, or 2.4%, to $847.1 million in 2004
from $826.9 million in 2003. This resulted primarily from increased sales in
the Borders and International segments, partially offset by a decrease in the
Waldenbooks segment. Comparable store sales for all Borders superstores decreased 0.8% in the 13
weeks ended July 25, 2004. 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 10,
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 2004 was due primarily to
the book category, driven by a challenging comparison to a year ago when the
fifth book in the Harry Potter series was released, and continued negative
comparable store sales in the music category. Partially offsetting this was
strong positive comparable store sales in the movie category and positive
comparable store sales in the gifts and stationery category. Sales of movies
improved on a comparable store basis primarily as the result of increased sales
of digital videodiscs (DVDs). Sales of the gifts and stationery category also
increased, principally the result of category management initiatives resulting
in product enhancements, improved placements, and a slight increase in space
allocation. The impact of price changes on comparable store sales was not
significant. 13




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Waldenbooks comparable store sales decreased 7.3% in the 13 weeks ended July
25, 2004. 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 2004 was primarily due to a challenging comparison to a year ago
when the fifth book in the Harry Potter series was released. The impact of
price changes on comparable store sales was not significant. Other revenue Other revenue consists primarily of membership income from Waldenbooks
Preferred Reader Program. Waldenbooks sells memberships in its Preferred Reader Program, which offers
members discounts on purchases and other benefits. 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. Gross margin Consolidated gross margin increased $11.0 million, or 5.2%, to $223.6 million
in 2004 from $212.6 million in 2003. As a percentage of sales, consolidated
gross margin increased to 26.4% in 2004 from 25.6% in 2003. The increase is
mainly due to the Borders and International segments gross margin as a
percentage of sales increasing, partially offset by a decrease in the
Waldenbooks segment. In the Borders and International segments, this was
primarily due to higher bestseller discounts in 2003 related to the release of
the fifth book in the Harry Potter series. The decrease in the Waldenbooks
segment was due to decreased other revenue as a percentage of sales due to
decreased in-store promotion of the Preferred Reader Program, as well as
increased occupancy expense as a percentage of sales, as a result of occupancy
costs for stores open more than one year remaining essentially flat while
comparable store sales declined. 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 them in other
financial statement lines. Selling, general and administrative expenses Consolidated selling, general and administrative expenses (SG&A) increased $6.0
million, or 3.0%, to $206.5 million in 2004 from $200.5 million in 2003. As a
percentage of sales, SG&A increased to 24.4% in 2004 from 24.3% in 2003. This
increase primarily resulted from an increase in SG&A expenses as a percentage
of sales for the Waldenbooks segment, offset by a decrease in the International
segment, while the Borders segment remained flat. This resulted from increased
payroll costs in the Waldenbooks segment as a percentage of sales, partially
offset by decreased payroll costs as a percentage of sales in the International
segment. 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. Interest expense Consolidated interest expense decreased $0.2 million, or 7.7%, to $2.4 million
in 2004 from $2.6 million in 2003. This was primarily due to lower average debt
levels in 2004 as compared to 2003, which primarily resulted from increased
cash flow generated by the Borders segment. 14




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##### Table of Contents



Taxes The effective tax rate for the years presented differed from the federal
statutory rate primarily as a result of state income taxes. The Companys
effective tax rate used was 37.0% in 2004 compared to 38.0% in 2003. Net income Due to the factors mentioned above, net income as a percentage of sales
increased to 1.0% in 2004 from 0.5% in 2003, and net income dollars increased
to $8.5 million in 2004 from $4.5 million in 2003. Consolidated Results  Comparison of the 26 weeks ended July 25, 2004 to the
26 weeks ended July 27, 2003 Sales Consolidated sales increased $99.6 million, or 6.3%, to $1,677.9 million in
2004 from $1,578.3 million in 2003. This resulted primarily from increased
sales in the Borders and International segments, partially offset by a decrease
in the Waldenbooks segment. Comparable store sales for all Borders superstores increased 1.7% in the 26
weeks ended July 25, 2004. 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 10,
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 increase for 2004 was due primarily to
the book, movie and gifts and stationery categories, which experienced strong
positive comparable store sales, partially offset by negative comparable store
sales in the music category. Comparable store sales of books remained positive
due to continued strength in bestsellers, despite the challenging comparison to
a year ago when the fifth book in the Harry Potter series was released. Sales
of movies improved on a comparable store basis primarily as the result of
increased sales of digital videodiscs (DVDs). Sales of the gifts and stationery
category also increased, principally the result of category management
initiatives resulting in product enhancements, improved placements, and a
slight increase in space allocation. The impact of price changes on comparable
store sales was not significant. Waldenbooks comparable store sales decreased 1.3% in the 26 weeks ended July
25, 2004. 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 2004 was primarily due to a challenging comparison to a year ago
when the fifth book in the Harry Potter series was released. The impact of
price changes on comparable store sales was not significant. Other revenue Other revenue consists primarily of membership income from Waldenbooks
Preferred Reader Program. Waldenbooks sells memberships in its Preferred Reader Program, which offers
members discounts on purchases and other benefits. 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. Gross margin Consolidated gross margin increased $32.8 million, or 8.2%, to $434.4 million
in 2004 from $401.6 million in 2003. As a percentage of sales, consolidated
gross margin increased to 25.9% in 2004 from 25.4% in 2003. This was primarily
due to the Borders, Waldenbooks and International segments gross margin as a
percentage of sales increasing. In the Borders, Waldenbooks and International
segments, the increase was primarily due to higher bestseller discounts in 2003
related to the release of the fifth book in the Harry Potter series. In the
Waldenbooks segment, however, the improvement was partially offset by decreased
other revenue as a percentage of sales due to decreased in-store promotion of
the Preferred Reader Program. 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 them in other
financial statement lines. 15




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##### Table of Contents



Selling, general and administrative expenses Consolidated selling, general and administrative expenses (SG&A) increased
$16.0 million, or 4.1%, to $409.5 million in 2004 from $393.5 million in 2003.
As a percentage of sales, SG&A decreased to 24.4% in 2004 from 24.9% in 2003.
This decrease primarily resulted from a decrease in SG&A expenses as a
percentage of sales for the Borders and International segments, partially
offset by an increase in SG&A expenses as a percentage of sales for the
Waldenbooks segment. The improvement in the Borders and International segments
resulted from reduced corporate non-payroll costs as a percentage of sales.
The increase in the Waldenbooks segment was primarily due to increased store
and administrative payroll costs and store operating expenses as a percentage
of sales. 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. Interest expense Consolidated interest expense decreased $0.5 million, or 10.4%, to $4.3 million
in 2004 from $4.8 million in 2003. This was primarily due to lower average debt
levels in 2004 as compared to 2003, which primarily resulted from increased
cash flow generated by the Borders segment. Taxes The effective tax rate for the years presented differed from the federal
statutory rate primarily as a result of state income taxes. The Companys
effective tax rate used was 37.0% in 2004 compared to 38.0% in 2003. Net income (loss) Due to the factors mentioned above, net income as a percentage of sales
increased to 0.7% in 2004 from 0.0% in 2003, and net income dollars increased
to net income of $11.5 million in 2004 from net loss of $(0.3) million in 2003. Segment Results The Company is organized based upon the following operating segments: domestic
Borders stores, Waldenbooks stores, International Borders and Books etc.
stores, and Corporate (consisting of the unallocated portion of interest
expense, certain corporate governance costs and corporate incentive costs). See
Note 5  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
    
    26 Weeks Ended(dollar amounts in millions)
    
    July 25, 2004
    
    July 27, 2003
    
    July 25, 2004
    
    July 27, 2003Sales
    
    $
    592.8
    
    
    $
    570.0
    
    
    $
    1,170.1
    
    
    $
    1,091.5Net income
    
    $
    16.1
    
    
    $
    10.6
    
    
    $
    26.6
    
    
    $
    15.4Net income as % of sales
    
    
    2.7
    %
    
    
    1.8
    %
    
    
    2.3
    %
    
    
    1.4
    %Depreciation expense
    
    $
    16.8
    
    
    $
    17.4
    
    
    $
    34.1
    
    
    $
    34.7Interest income
    
    $
    1.1
    
    
    $
    0.4
    
    
    $
    2.9
    
    
    $
    1.3Store openings
    
    
    2
    
    
    
    8
    
    
    
    6
    
    
    
    16Store closings
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Store count
    
    
    450
    
    
    
    420
    
    
    
    450
    
    
    
    420
 16




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##### Table of Contents



Borders  Comparison of the 13 weeks ended July 25, 2004 to the 13 weeks ended
July 27, 2003 Sales Borders sales increased $22.8 million, or 4.0%, to $592.8 million in 2004 from
$570.0 million in 2003. This increase was comprised of non-comparable sales
primarily associated with 2004 and 2003 store openings of $32.1 million and
comparable store sales decreases of $9.3 million. Gross margin Gross margin as a percentage of sales increased to 28.5% in 2004 from 27.3% in
2003, primarily due to decreases in markdowns, freight and product costs of
1.5%, resulting from greater sales discounts on popular new-release titles in
2003. Partially offsetting the decrease in these costs were higher store
occupancy and other costs of 0.3% as a percentage of sales. Gross margin dollars increased $13.1 million, or 8.4%, to $168.6 million in
2004 from $155.5 million in 2003, which was primarily due to increased sales
and the increase in gross margin as a percentage of sales. Selling, general and administrative expenses SG&A as a percentage of sales remained flat at 24.1% in 2004 as compared to
2003. SG&A dollars increased $5.2 million, or 3.8%, to $142.7 million in 2004 from
$137.5 million in 2003 primarily due to increased store payroll expenses
resulting from new store openings. Depreciation expense Depreciation expense decreased $0.6 million, or 3.4%, to $16.8 million in 2004
from $17.4 million in 2003. This was primarily due to the maturation of the
store base. Interest income Borders interest income increased $0.7 million, or 175.0%, to $1.1 million in
2004 from $0.4 million in 2003. This was primarily due to the increased
generation of positive cash flow. Net income Due to the factors mentioned above, net income as a percentage of sales
increased to 2.7% in 2004 from 1.8% in 2003, and net income dollars increased
to $16.1 million in 2004 from $10.6 million in 2003. Borders  Comparison of the 26 weeks ended July 25, 2004 to the 26 weeks ended
July 27, 2003 Sales Borders sales increased $78.6 million, or 7.2%, to $1,170.1 million in 2004
from $1,091.5 million in 2003. This increase was comprised of non-comparable
sales primarily associated with 2004 and 2003 store openings of $68.1 million
and comparable store sales increases of $10.5 million. Gross margin Gross margin as a percentage of sales increased to 27.5% in 2004 from 26.9% in
2003, primarily due to decreases in markdowns, freight and product costs of
0.7%, resulting from greater sales discounts on popular new-release titles in
2003. Partially offsetting the decrease in these costs were higher store
occupancy costs as a percentage of sales. Gross margin dollars increased $27.7 million, or 9.4%, to $321.6 million in
2004 from $293.9 million in 2003, which was primarily due
to increased sales and the increase in gross margin as a percentage of sales. 17




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##### Table of Contents



Selling, general and administrative expenses SG&A as a percentage of sales decreased to 23.9% in 2004 from 24.5% in 2003.
This was primarily due to a decrease of 0.7% in corporate non-payroll costs as
a percentage of sales, due to disciplined cost controls at the corporate level,
offset by an increase of 0.1% in store payroll as a percentage of sales. SG&A dollars increased $11.9 million, or 4.4%, to $279.7 million in 2004 from
$267.8 million in 2003 primarily due to increased store payroll and non-payroll
expenses resulting from new store openings, partially offset by a decrease in
corporate non-payroll costs due to disciplined cost controls at the corporate
level. Depreciation expense Depreciation expense decreased $0.6 million, or 1.7%, to $34.1 million in 2004
from $34.7 million in 2003. This was primarily due to the maturation of the
store base. Interest income Borders interest income increased $1.6 million, or 123.1%, to $2.9 million in
2004 from $1.3 million in 2003. This was primarily due to the increased
generation of positive cash flow. Net income Due to the factors mentioned above, net income as a percentage of sales
increased to 2.3% in 2004 from 1.4% in 2003, and net income dollars increased
to $26.6 million in 2004 from $15.4 million in 2003. Waldenbooks 13 Weeks Ended
    
    26 Weeks Ended(dollar amounts in millions)
    
    July 25, 2004
    
    July 27, 2003
    
    July 25, 2004
    
    July 27, 2003Sales
    
    $
    150.0
    
    
    $
    168.7
    
    
    $
    300.8
    
    
    $
    319.0Other revenue
    
    $
    4.5
    
    
    $
    6.0
    
    
    $
    9.9
    
    
    $
    12.0Net income
    
    $
    1.6
    
    
    $
    2.6
    
    
    $
    4.5
    
    
    $
    3.1Net income as % of sales
    
    
    1.1
    %
    
    
    1.5
    %
    
    
    1.5
    %
    
    
    1.0
    %Depreciation expense
    
    $
    3.4
    
    
    $
    4.0
    
    
    $
    6.9
    
    
    $
    8.1Interest income
    
    $
    10.3
    
    
    $
    9.3
    
    
    $
    20.8
    
    
    $
    18.6Store Openings
    
    
    1
    
    
    
    2
    
    
    
    2
    
    
    
    4Store Closings
    
    
    2
    
    
    
    17
    
    
    
    7
    
    
    
    23Store Count
    
    
    711
    
    
    
    759
    
    
    
    711
    
    
    
    759
 Waldenbooks  Comparison of the 13 weeks ended July 25, 2004 to the 13 weeks
ended July 27, 2003 Sales Waldenbooks sales decreased $18.7 million, or 11.1%, to $150.0 million in 2004
from $168.7 million in 2003. This decrease was comprised of decreased
comparable store sales
of $11.5 million and decreased non-comparable sales associated with 2004 and
2003 store closings of $7.2 million. Other revenue Waldenbooks other revenue, which consists of membership income from the
Preferred Reader Program, decreased $1.5 million, or 25.0%, to $4.5 million in
2004 from $6.0 million in 2003. This was due to decreased in-store promotion
of the Preferred Reader Program. Gross margin Gross margin as a percentage of sales decreased to 22.5% in 2004 from 23.3% in
2003. This was primarily due to a 0.8% increase in occupancy as a percentage of
sales, as a result of occupancy costs for stores open more than one year
remaining essentially flat while 18




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##### Table of Contents



comparable store sales declined, as well as a
0.6% decrease in other revenue as a percentage of sales. These factors were
partially offset by a decrease in markdowns, product and other costs of 0.6%,
as a result of greater sales discounts on popular new-release titles in 2003. Gross margin dollars decreased $5.6 million, or 14.2%, to $33.7 million in 2004
from $39.3 million in 2003, primarily due to store closures and the decrease in
comparable store sales. Selling, general and administrative expenses SG&A as a percentage of sales increased to 27.3% in 2004 from 26.0% in 2003.
This was primarily due to increased store payroll expense of 0.4% and increased
store operating expenses of 0.9% as a percentage of sales, resulting from the
decrease in comparable store sales. SG&A dollars decreased $2.8 million, or 6.4%, to $41.0 million in 2004 from
$43.8 million in 2003 primarily due to store closings. Depreciation expense Depreciation expense decreased $0.6 million, or 15.0%, to $3.4 million in 2004
from $4.0 million in 2003. This was primarily due to a lower fixed asset base
resulting from prior year asset impairments and store closings. Interest income Interest income increased $1.0 million, or 10.8%, to $10.3 million in 2004 from
$9.3 million in 2003. This was the result of Waldenbooks continued positive
cash flow at fixed internal interest rates. Net income (loss) Due to the factors mentioned above, net income as a percentage of sales
increased to 1.1% in 2004 from 1.5% in 2003, while net income dollars decreased
$1.0 million to $1.6 million in 2004 from $2.6 million in 2003. Waldenbooks  Comparison of the 26 weeks ended July 25, 2004 to the 26 weeks
ended July 27, 2003 Sales Waldenbooks sales decreased $18.2 million, or 5.7%, to $300.8 million in 2004
from $319.0 million in 2003. This decrease was comprised of decreased
comparable store sales of $3.5 million and decreased non-comparable sales
associated with 2004 and 2003 store closings of $14.7 million. Other revenue Waldenbooks other revenue, which consists of membership income from the
Preferred Reader Program, decreased $2.1 million, or 17.5%, to $9.9 million in
2004 from $12.0 million in 2003. This was due to decreased in-store promotion
of the Preferred Reader Program. Gross margin Gross margin as a percentage of sales increased to 23.5% in 2004 from 23.2% in
2003, primarily due to a decrease in markdowns, product and other costs of
0.7%, as a result of greater sales discounts on popular new-release titles in
2003, partially offset by a 0.5% decrease in other revenue as a percentage of
sales. Gross margin dollars decreased $3.2 million, or 4.3%, to $70.8 million in 2004
from $74.0 million in 2003, primarily due to store closings and the decrease in
comparable store sales. 19




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##### Table of Contents



Selling, general and administrative expenses SG&A as a percentage of sales increased to 27.7% in 2004 from 27.3% in 2003.
This was primarily due to increased store payroll expense of 0.5% and increased
store operating expenses of 0.2% as a percentage of sales, offset by a decrease
in corporate non-payroll costs of 0.3% due to disciplined cost controls at the
corporate level. SG&A dollars decreased $3.6 million, or 4.1%, to $83.4 million in 2004 from
$87.0 million in 2003 primarily due to store closings. Depreciation expense Depreciation expense decreased $1.2 million, or 14.8%, to $6.9 million in 2004
from $8.1 million in 2003. This was primarily due to a lower fixed asset base
resulting from prior year asset impairments and store closings. Interest income Interest income increased $2.2 million, or 11.8%, to $20.8 million in 2004 from
$18.6 million in 2003. 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
increased to 1.5% in 2004 from 1.0% in 2003, while net income dollars increased
$1.4 million, or 45.2%, to $4.5 million in 2004 from $3.1 million in 2003. International 13 Weeks Ended
    
    26 Weeks Ended(dollar amounts in millions)
    
    July 25, 2004
    
    July 27, 2003
    
    July 25, 2004
    
    July 27, 2003Sales
    
    $
    104.3
    
    
    $
    88.2
    
    
    $
    207.0
    
    
    $
    167.8Net loss
    
    $
    2.6
    
    
    $
    3.6
    
    
    $
    5.8
    
    
    $
    7.8Net loss as % of sales
    
    
    2.5
    %
    
    
    4.1
    %
    
    
    2.8
    %
    
    
    4.7
    %Depreciation expense
    
    $
    3.2
    
    
    $
    3.0
    
    
    $
    6.6
    
    
    $
    5.8Interest expense
    
    $
    4.3
    
    
    $
    4.7
    
    
    $
    9.0
    
    
    $
    9.3Superstore Store Openings
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    5Superstore Store Count
    
    
    37
    
    
    
    35
    
    
    
    37
    
    
    
    35Books etc. Store Openings
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    Books etc. Store Closings
    
    
    1
    
    
    
    2
    
    
    
    1
    
    
    
    2Books etc. Store Count
    
    
    36
    
    
    
    35
    
    
    
    36
    
    
    
    35
 International  Comparison of the 13 weeks ended July 25, 2004 to the 13 weeks
ended July 27, 2003 Sales International sales increased $16.1 million, or 18.3%, to $104.3 million in
2004 from $88.2 million in 2003. Of this increase in sales, 10.4% was due to
the translation of foreign currencies to U.S. dollars. The remaining 7.9% was
the result of new superstore openings 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 to 20.4% in 2004 from 20.1% in
2003. Gross margin as a percentage of sales was impacted by a decrease in
markdowns, freight and product costs of 1.2%, resulting from greater sales
discounts on popular new-release titles in 2003. Offsetting the decrease in
these costs were higher store occupancy costs as a percentage of sales. Gross margin dollars increased $3.5 million, or 19.7%, to $21.3 million in 2004
from $17.8 million in 2003. Of this increase, $1.6 million is the result of
translation of foreign currencies to U.S. dollars. The remainder of
the increase is due to new
superstore openings and the improved gross margin rate. Selling, general and administrative expenses SG&A as a percentage of sales decreased to 20.4% in 2004 from 21.0% in 2003.
This improvement was primarily the result of decreases in store payroll costs
of 0.4% and corporate administrative expenses of 0.6% as a percentage of sales,
offset by an increase 20




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##### Table of Contents



in advertising costs of 0.4% as a percentage of sales.
Although these expenses increased in dollars, they increased at rates less than
sales growth. SG&A dollars increased $2.7 million, or 14.5%, to $21.3 million in 2004 from
$18.6 million in 2003. Of this increase, $1.7 million is the result of
translation of foreign currencies to U.S. dollars. The remainder of
the increase is primarily due to store openings and the increased store payroll
and operating expenses required. Depreciation expense Depreciation expense increased $0.2 million, or 6.7%, to $3.2 million in 2004
from $3.0 million in 2003. This was primarily due to depreciation expense
recognized on new stores capital expenditures. Interest expense Interest expense decreased $0.4 million, or 8.5%, to $4.3 million in 2004 from
$4.7 million in 2003. This was a result of interest earned on holdings from the
sale of the Charing Cross property in the first quarter of 2004. Net loss Due to the factors mentioned above, net loss as a percentage of sales decreased
to 2.5% in 2004 as compared to 4.1% in 2003, and net loss dollars decreased
$1.0 million, or 27.8%, to 2.6 million in 2004 from $3.6 million in 2003. International  Comparison of the 26 weeks ended July 25, 2004 to the 26 weeks
ended July 27, 2003 Sales International sales increased $39.2 million, or 23.4%, to $207.0 million in
2004 from $167.8 million in 2003. Of this increase in sales, 12.5% was due to
the translation of foreign currencies to U.S. dollars. The remaining 10.9% was
the result of new superstore openings 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 to 20.3% in 2004 from 20.1% in
2003. Gross margin as a percentage of sales was impacted by a decrease in
markdowns, freight and product costs of 0.9%, resulting from greater sales
discounts on popular new-release titles in 2003. Offsetting the decrease in
these costs were higher store occupancy costs as
a percentage of sales. Gross margin dollars increased $8.3 million, or 24.6%, to $42.0 million in 2004
from $33.7 million in 2003. Of this increase, $3.7 million is the result of
translation of foreign currencies to U.S. dollars. The remainder of
the increase is due to new superstore openings and the improved gross margin
rate. Selling, general and administrative expenses SG&A as a percentage of sales decreased to 20.6% in 2004 from 21.7% in 2003.
This improvement was primarily the result of decreases in store payroll costs
of 0.9% as a percentage of sales, corporate administrative expenses of 0.4% as
a percentage of sales and store operating expenses of 0.3% as a percentage of
sales, partially offset by an increase in advertising costs as a percentage of
sales. Although these expenses increased in dollars, they increased at rates
less than sales growth. SG&A dollars increased $6.2 million, or 17.0%, to $42.7 million in 2004 from
$36.5 million in 2003. Of this increase, $4.0 million is the result of
translation of foreign currencies to U.S. dollars. The remainder of
the increase is primarily due to store openings and the increased store payroll
and operating expenses required. Depreciation expense Depreciation expense increased $0.8 million, or 13.8%, to $6.6 million in 2004
from $5.8 million in 2003. This was primarily due to depreciation expense
recognized on new stores capital expenditures. 21




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##### Table of Contents



Interest expense Interest expense decreased $0.3 million, or 3.2%, to $9.0 million in 2004 from
$9.3 million in 2003. This was a result of interest earned on holdings from the
sale of the Charing Cross property in the first quarter of 2004. Net loss Due to the factors mentioned above, net loss as a percentage of sales decreased
to 2.8% in 2004 as compared to 4.7% in 2003, and net loss dollars decreased
$2.0 million, or 25.6%, to $5.8 million in 2004 from $7.8 million in 2003. Corporate 13 Weeks Ended
    
    26 Weeks Ended(dollar amounts in millions)
    
    July 25, 2004
    
    July 27, 2003
    
    July 25, 2004
    
    July 27, 2003Net loss
    
    $
    6.6
    
    
    $
    5.1
    
    
    $
    13.8
    
    
    $
    11.0Interest expense
    
    $
    9.5
    
    
    $
    7.6
    
    
    $
    19.0
    
    
    $
    15.4
 Corporate  Comparison of the 13 weeks ended July 25, 2004 to the 13 weeks
ended July 27, 2003 The Corporate segment includes the unallocated portion of interest expense,
certain corporate governance costs and corporate incentive costs. Net loss dollars increased $1.5 million, or 29.4%, to $6.6 million in 2004 from
$5.1 million in 2003. This was primarily due to increased interest expense for
this segment resulting from increased borrowings to fund corporate stock
repurchases in 2004. Interest expense represents corporate-level interest costs
not charged to the Companys other segments. Corporate  Comparison of the 26 weeks ended July 25, 2004 to the 26 weeks
ended July 27, 2003 Net loss dollars increased $2.8 million, or 25.4%, to $13.8 million in 2004
from $11.0 million in 2003. This was primarily due to increased interest
expense for this segment resulting from increased borrowings to fund corporate
stock repurchases in 2004. 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 and expansion of existing stores, continued
investment in new buying and merchandising systems, and maintenance spending on
stores, distribution centers and corporate information technology. Net cash used for operations was $81.0 million and $33.3 million for the 26
weeks ended July 25, 2004 and July 27, 2003, respectively. Operating cash
outflows for the period resulted from decreases in accounts payable, taxes
payable and expenses payable and accrued liabilities, as well as increases in
prepaid expenses, and other long-term assets. The most
significant of these was the decrease in taxes payable, which resulted from
Companys final estimated fiscal 2003 tax payment. The current year operating
cash inflows primarily reflect operating results net of non-cash charges for
depreciation, as well as decreases in accounts receivable and inventories. Net cash used for investing was $35.2 million, which primarily funded the
acquisition of Paperchase Products, Ltd. (Paperchase), capital expenditures for
new stores, the refurbishment of existing stores and new corporate information
technology systems. In July 2004, the Company invested cash of $24.1 million,
including debt repayment of $4.1 million, in connection with an increase in its
15% equity stake in Paperchase Products, Ltd. (Paperchase), a leading
stationery retailer in the United Kingdom, to 97%, which was allocated
primarily to fixed assets, inventory and goodwill of $28.0 million. The Company
also recorded minority interest of $1.1 million.  At the time of the acquisition,
Paperchase operated 61 locations, including more than a third of which are
located inside Borders International superstores. The acquisition has been
accounted for as a purchase in the Companys International Segment. The
acquisition was not material to the consolidated statements of operations, the
consolidated balance sheets, or the consolidated statements of cash flows of
the Company. 22




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##### Table of Contents



Capital expenditures were $36.1 million in 2004, which primarily reflects the
opening of six new superstores and one new airport store, operated by the
Waldenbooks segment, as well as the remodel of 18 existing domestic
superstores. In fiscal 2003, capital expenditures were $46.7 million, which
primarily funded capital expenditures for new stores and the refurbishment of
existing stores. Capital expenditures in 2003 reflect the opening of 21 new
superstores and three new airport stores, operated by the Waldenbooks segment.
Additional capital spending in 2003 reflected the development and installation
of in-store web-based technology and spending on corporate information
technology streamlining. The Company expects capital expenditures to be approximately $110.0 million for
the full year of 2004, resulting primarily from new domestic superstore
openings and a major remodel program related to 40 to 50 domestic Borders
superstore locations. In addition, capital expenditures will result from
International store openings and investment in information technology. The
Company currently plans to open approximately 18 to 20 domestic Borders
superstores and six to eight international stores in 2004. 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. The Company also expects to open two to six new
airport stores in 2004. 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 also plans to perform major remodels
of 40 to 50 domestic Borders superstore locations. Average cash requirements
for a major remodel of a Borders superstore are between $0.3 million to $0.4
million. The Company plans to lease new store locations predominantly under
operating leases. Net cash used for investing was partially offset by the 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 is being amortized over the 20 year term of the operating lease. Net cash used for financing was $80.8 million, resulting primarily from the
repurchase of common stock and the payment of dividends, offset by the issuance
of common stock pursuant to stock-based compensation plans. Net cash used for
financing in 2003 was $12.5 million, resulting primarily from the repurchase of
common stock, offset by funding from the credit agreement and the issuance of
common stock. The Company currently has a share repurchase program in place with remaining
authorization to repurchase approximately $88.6 million. During the 26 weeks
ended July 25, 2004 and July 27, 2003, $91.7 million and $31.5 million of
common stock was repurchased, respectively. The Company plans to continue the
repurchase of its common stock throughout fiscal 2004, subject to the Companys
share price and capital needs. In April 2004, the Board of Directors declared a quarterly cash dividend of
$0.08 per share, which equaled $6.2 million in total, on the Companys common
stock, payable April 28, 2004 to stockholders of record at the close of
business April 7, 2004, and in May 2004, the Board of Directors declared a
quarterly cash dividend of $0.08 per share, which equaled $6.1 million in
total, on the Companys common stock, payable July 28, 2004 to stockholders of
record at the close of business July 7, 2004. The Company intends to pay
regular quarterly cash dividends, subject to Board approval, going forward. At the Annual Stockholders Meeting in May of 2004, the shareholders approved
the Borders Group, Inc. 2004 Long-Term Incentive Plan as detailed in the
Companys Proxy Statement dated April 14, 2004. This plan will replace the
existing stock option and restricted stock plans on a going-forward basis,
which will allow the Company to reduce its annual stock grants as a percentage
of outstanding shares by implementing a greater use of restricted stock while
reducing the number of stock options issued. 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, borrowings under the Credit
Agreement will be sufficient to fund its anticipated capital requirements for
the next several years. 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 23




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##### Table of Contents



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 of
$122.0 million at July 25, 2004, $124.2 million at July 27, 2003 and $126.9
million at January 25, 2004. As of July 25, 2004 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 $73.3 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 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. 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 has designated this swap agreement as a fair market value hedge. The
notional amount of the swap agreement is $50.0 million, and it expires
concurrently with the due date of the Notes. In March 2004, the Company entered
into an agreement to terminate this swap if a termination value of $1.6 million
is reached. 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
million) on behalf of the two borrowing variable interest entities (VIEs). The
Company has 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 at July 25, 2004. In conjunction with this transaction, the
Lease Financing Facilities were terminated. As a result of the repayment and termination of the Lease Financing Facilities,
the Company deconsolidated the two VIEs which had participated in the Lease
Financing Facilities as of July 25, 2004, pursuant to the provisions of
Financial Accounting Standards Board (FASB) Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). The deconsolidation of
the two VIEs resulted in a reduction of land, property and equipment, net of
accumulated depreciation, of $12.5 million, short-term borrowings of $13.8
million, and minority interest of $1.3 million at July 25, 2004. The Company
also recorded an after-tax gain of $1.7 million as a result of the
deconsolidation of these VIEs. These amounts have been treated as non-cash
items on the consolidated statements of cash flows. Separately, the Company is the primary beneficiary of two 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 $5.5 million, long-term debt of $5.8 million, and
minority interest of $0.4 million at July 25, 2004. These amounts have been
treated as non-cash items on the consolidated statements of cash flows. During 1994, the Company entered into agreements in which leases with respect
to four Borders locations served as collateral for certain mortgage
pass-through certificates. These mortgage pass-through certificates included a
provision requiring the Company to repurchase the underlying mortgage notes in
certain events. In the fourth quarter of 2001, the Company was obligated to
purchase the notes for $33.5 million, due to Kmart Corporations (the former
guarantor of the leases) failure to maintain investment grade credit ratings.
As a result, the Company has categorized this prepaid rent amount as part of
Other assets in the consolidated balance sheets and is amortizing the balance
over each propertys remaining lease term. 24




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##### Table of Contents



The following table summarizes the Companys significant financing and lease
obligations at July 25, 2004: Fiscal Years(dollars in millions)
    
    2004
    
    2005-2006
    
    2007-2008
    
    2009 and thereafter
    
    TotalCredit Agreement borrowings
    
    $
    122.0
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    122.0Capital lease obligations
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Operating lease obligations
    
    
    170.3
    
    
    
    647.4
    
    
    
    612.1
    
    
    
    2,420.0
    
    
    
    3,849.8Senior guaranteed notes
    
    
    
    
    
    
    50.0
    
    
    
    
    
    
    
    
    
    
    
    50.0Debt of consolidated VIEs
    
    
    
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    5.0
    
    
    
    5.8Other borrowings
    
    
    7.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.7Total
    
    $
    300.1
    
    
    $
    697.8
    
    
    $
    612.5
    
    
    $
    2,425.0
    
    
    $
    4,035.4
 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 25, 2004. There have
been no significant changes in these estimates during the second quarter of
fiscal 2004. New Accounting Guidance On March 31, 2004, the Financial Accounting Standards Board (FASB) issued an
exposure draft, Share-Based Payment, an Amendment of FASB Statements No. 123
and 95. The proposed change in accounting would replace existing requirements
under SFAS 123, Accounting for Stock-Based Compensation, and APB Opinion No.
25, Accounting for Stock Issued to Employees. The exposure draft covers a
wide range of equity-based compensation arrangements. Under the FASBs
proposal, all forms of share-based payments to employees, including employee
stock options, would be treated the same as other forms of compensation by
recognizing the related cost in the income statement. The expense of the award
would generally be measured at fair value at the grant date. The comment
period for the exposure draft ended on June 30, 2004 and final rules are
expected to be issued in late 2004. The standard would be applicable for
fiscal years beginning after December 15, 2004. The Company will evaluate the
impact of any change in the accounting standards on the Companys financial
position and results of operations when the final rules are issued. 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. 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 25, 2004. 25




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##### Table of Contents



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-14(c) and
15d-14(c) under the Securities Exchange Act of 1934, as amended (the Exchange
Act)) as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date). Based on such evaluation, such officers have
concluded that, as of the Evaluation Date, the Companys disclosure controls
and procedures are 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 Controls:Since the Evaluation Date, there have not been
any significant changes in the Companys internal controls or in other factors
that could significantly affect such controls. 
 Part II  Other Information 
 Item 1. Legal Proceedings The Companys Form 10-K Annual Report for the fiscal year ended January 25,
2004, describes pending lawsuits and claims against the Company. The status of
such litigation and claims has not changed in any significant respect except as
follows. On July 29, 2004, the court granted preliminary approval of the tentative
settlement of the California overtime litigation, and scheduled the hearing on
the final approval of the tentative settlement for December 2, 2004. The motion of the Attorney General of Nevada to dismiss the action against the
Company and other s under the Nevada False Claims Act relating to the failure
to collect use taxes on Internet sales in Nevada was denied. The Company has
been advised that the Attorney General intends to seek an appeal of that
ruling. On July 29, 2004, the Illinois Attorney General filed a motion to
dismiss the action against the Company and others under the Illinois False
Claims Act relating to the failure to collect use taxes on Internet sales
Illinois. In addition to the matters described or 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 such
other litigation or claims will have a material adverse effect on its
liquidity, financial position, or results of operations. 26




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##### Table of Contents



Item 2. Changes in Securities and Use of Proceeds  (e)
    
    The table below presents the total number of shares repurchased during
the second quarter of fiscal 2004. Average
    
    Total Number of Shares
    
    Approximate Dollar ValuePrice Paid
    
    Purchased as Part of
    
    of Shares that May Yet BeTotal Number
    
    per Share
    
    Publicly Announced Plans or
    
    Purchased Under theFiscal Period
    
    of Shares
    
    (1)
    
    Programs (2)
    
    Plans or ProgramsApril 26, 2004
through
May 23, 2004
    
    
    243,042
    
    
    $
    22.43
    
    
    
    243,042
    
    
    $
    121,724,932May 24, 2004
through
June 20, 2004
    
    
    861,944
    
    
    $
    23.16
    
    
    
    861,944
    
    
    $
    103,127,787June 21, 2004
through
July 25, 2004
    
    
    705,600
    
    
    $
    23.09
    
    
    
    705,600
    
    
    $
    88,613,266Total
    
    
    1,810,586
    
    
    $
    23.04
    
    
    
    1,810,586
    
    
    $
    88,613,266
  (1)
    
    Average price paid per share includes commissions and is
rounded to the nearest two decimal places.(2)
    
    On May 20, 2003, the Company announced that the Board of
Directors authorized an increase in the amount of share repurchases
to $150 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). 27




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Securityholders The following actions were taken at the Annual Meeting of the Company held on
May 20, 2004 with the votes on such matters being indicated as below:  1.
    
    The following individuals were elected to serve as directors for one year
terms expiring in 2005: AuthorityName
    
    For
    
    WithheldJoel J. Cohen
    
    74,072,641 Shares
    
    830,691 SharesRobert F. DiRomualdo
    
    74,064,292 Shares
    
    839,040 SharesGregory P. Josefowicz
    
    72,695,346 Shares
    
    2,207,986 SharesAmy B. Lane
    
    73,113,103 Shares
    
    1,790,229 SharesVictor L. Lund
    
    73,110,444 Shares
    
    1,792,888 SharesEdna Greene Medford
    
    74,053,016 Shares
    
    850,316 SharesGeorge R. Mrkonic
    
    73,705,058 Shares
    
    1,198,274 SharesLawrence I. Pollock
    
    73,379,701 Shares
    
    1,523,631 SharesBeth M. Pritchard
    
    74,079,307 Shares
    
    824,025 Shares
  2.
    
    The Borders Group, Inc. 2004 Long-Term Incentive Plan was adopted: For
    
    47,399,180 SharesAgainst
    
    17,298,904 SharesAbstain
    
    1,383,407 Shares
  3.
    
    The selection of Ernst & Young LLP as the Companys independent auditors for
fiscal 2004 was ratified: For
    
    72,695,564 SharesAgainst
    
    2,171,326 SharesAbstain
    
    36,442 Shares
 28




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##### Table of Contents



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits:  (a)
    
    Exhibits: 10.57
    
    Amendment to the Borders Group, Inc. Annual Incentive Plan dated as of May 20, 200410.58
    
    First Amendment to the Borders Group, Inc. 2004 Long Term Incentive Plan dated as of May 20, 200410.59
    
    Amended and Restated Multicurrency Revolving Credit Agreement dated as of July 30, 2004 among
Borders Group, Inc., its subsidiaries and Parties thereto10.60
    
    Security Agreement dated as of July 30, 2004 among Borders Group, Inc., its subsidiaries and
Parties thereto10.61
    
    Amendment No. 1 to the Note Purchase Agreement dated as of July 30, 2004 among Borders Group,
Inc., its subsidiaries and Parties thereto10.62
    
    1995 Synthetic Lease Financing Termination Agreement dated as of July 22, 2004 among Borders
Group, Inc. and Parties thereto10.63
    
    2002 Synthetic Lease Financing Termination Agreement dated as of July 22, 2004 among Borders
Group, Inc. and Parties thereto31.1
    
    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
  (b)
    
    Reports on Form 8-K:Subsequent to the 13 weeks ended July 25, 2004 and prior to the filing of
this Form 10-Q, one report was filed on Form 8-K under Item 9. Regulation
FD Disclosure. This report, filed on August 17, 2004, furnished a press
release with earnings information for the quarter ended July 25, 2004. 29




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##### Table of Contents



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.   Date: September 2, 2004
    By:
    /s/ Edward W. WilhelmEdward W. WilhelmSenior Vice President and
     Chief Financial Officer
     (Principal Financial and
     Accounting Officer) 30




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##### Table of Contents



EXHIBIT INDEX   (a)
    
    Exhibits: 10.57
    
    Amendment to the Borders Group, Inc. Annual Incentive Plan dated as of May 20, 200410.58
    
    First Amendment to the Borders Group, Inc. 2004 Long Term Incentive Plan dated as
of May 20, 200410.59
    
    Amended and Restated Multicurrency Revolving Credit Agreement dated as of July 30,
2004 among Borders Group, Inc., its subsidiaries and Parties thereto10.60
    
    Security Agreement dated as of July 30, 2004 among Borders Group, Inc., its
subsidiaries and Parties thereto10.61
    
    Amendment No. 1 to the Note Purchase Agreement dated as of July 30, 2004 among
Borders Group, Inc., its subsidiaries and Parties thereto10.62
    
    1995 Synthetic Lease Financing Termination Agreement dated as of July 22, 2004
among Borders Group, Inc. and Parties thereto10.63
    
    2002 Synthetic Lease Financing Termination Agreement dated as of July 22, 2004
among Borders Group, Inc. and Parties thereto31.1
    
    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
  (b)
    
    Reports on Form 8-K:  Subsequent to the 13 weeks ended July 25, 2004 and prior to
the filing of this Form 10-Q, one report was filed on Form
8-K under Item 9. Regulation FD Disclosure. This report,
filed on August 17, 2004, furnished a press release with
earnings information for the quarter ended July 25, 2004. 31