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Article by DailyStocks_admin    (01-26-09 06:22 AM)

Filed with the SEC from Jan 15 to Jan 21:

Borders Group (BGP)
Borders has amended a deal to potentially sell certain U.K.-based businesses to Pershing Square Capital Management to clarify that its 17% stake in Bookshop Acquisitions isn't included in the transaction. Pershing Square, run by activist William Ackman, will allow Borders to "put" its stake in U.K.-based Paperchase Products to Pershing Square for $65 million, subject to certain conditions. The Borders put expires on Feb. 16. Pershing Square holds 25,297,880 shares (33.6% of the total outstanding).

BUSINESS OVERVIEW

Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. One can identify these forward-looking statements by the use of words such as “projects,” “expect,” “estimated,” “look toward,” “going forward,” “continuing,” “planning,” “returning,” “guidance,” “goal,” “will,” “may,” “intend,” “anticipates,” and other words of similar meaning. One can also identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address matters such as the Company’s future financial performance (including earnings per share growth, EBIT margins and inventory turns, liquidity, same-store sales growth, and anticipated capital expenditures and depreciation and amortization amounts), its exploration of strategic alternatives, its financing agreement with Pershing Square and the benefits thereof, strategic plans and expected financing and benefits relating to such plans (including steps to be taken to improve the performance of domestic superstores, the downsizing of the Waldenbooks Specialty Retail segment and the development of a proprietary Web site).

These statements are subject to risks and uncertainties that could cause actual results and plans to differ materially from those included in the Company’s forward-looking statements. These risks and uncertainties include, but are not limited to, consumer demand for the Company’s products, particularly during the holiday season, which is believed to be related to general economic and geopolitical conditions, competition and other factors; the availability of adequate capital to fund the Company’s operations and to carry out its strategic plans; the performance of the Company’s information technology systems and the development of improvements to the systems necessary to implement the Company’s strategic plan, and, with respect to the exploration of strategic alternatives including the sale of certain parts of the Company or the sale of the entire Company, the ability to attract interested third parties.

Although it is not possible to predict or identify all such factors, they may include the risks discussed in “Item 1A. — Risk Factors.” The Company does not undertake any obligation to update forward-looking statements.

General

Borders Group, Inc., through its subsidiaries, Borders, Inc. (“Borders”), Walden Book Company, Inc. (“Waldenbooks”), 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 February 2, 2008, the Company operated 541 superstores under the Borders name, including 509 in the United States, 22 in Australia, five in New Zealand, three in Puerto Rico, and two in Singapore. The Company also operated 490 mall-based and other bookstores, including stores operated under the Waldenbooks, Borders Express and Borders Outlet names, as well as Borders-branded airport stores. In addition, the Company owned and operated United Kingdom-based Paperchase Products Limited (“Paperchase”), a designer and retailer of stationery, cards and gifts. As of February 2, 2008, Paperchase operated 112 stores, primarily in the United Kingdom, and Paperchase shops have been added to 319 domestic Borders superstores.

Business Strategy

Throughout fiscal 2007, the Company continued to implement its strategic plan, the principal components of which are as follows: grow comparable store sales and profitability in the domestic Borders superstores, right-size the Waldenbooks Specialty Retail business, explore strategic alternatives in the International segment, and leverage innovation, technology and strategic alliances to differentiate the Company’s business, primarily through its Borders Rewards loyalty program and through the planned launch of a proprietary e-commerce Web site during the spring of fiscal 2008. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of the Company’s business strategy.

On March 20, 2008, the Company announced that it would undergo a strategic alternative review process. J.P. Morgan Securities Inc. and Merrill Lynch & Co. have been retained as the Company’s financial advisors to assist in this process. The review will include the investigation of a wide range of alternatives including the sale of the Company and/or certain divisions for the purpose of maximizing shareholder value.

Segment Information

The Company is organized based upon the following operating segments: domestic Borders superstores, Waldenbooks Specialty Retail stores and International stores (including Borders and Paperchase stores). Corporate consists of the unallocated portion of certain corporate governance and corporate incentive costs. See “Note 13 — Segment Information” in the notes to consolidated financial statements for further information relating to these segments.

Domestic Borders Superstores

Borders is a premier operator of book, music and movie superstores in the United States, offering customers selection and service that the Company believes to be superior to other such superstore operators. In 2007, the Company opened 18 new Borders superstores, achieved average sales per square foot of $228 and average sales per superstore of $5.6 million. Borders superstores offer customers a vast assortment of books, music and movies, superior customer service, value pricing and an inviting and comfortable environment designed to encourage browsing. The largest superstores carry up to 200,000 book, bargain book, music, movie and periodical titles. On average, Borders superstores carry 87,000 book titles, with individual store selections ranging from 39,000 titles to 141,000 titles, across numerous categories, including many hard-to-find titles. As of February 2, 2008, the majority of the domestic Borders superstores were in a book, music and movie format, which also features an extensive selection of pre-recorded music, with a broad assortment in categories such as jazz, classical and world music, and a broad assortment of DVDs, focusing on new release and catalog movies. A typical Borders superstore carries approximately 11,500 titles of music and over 7,000 titles of movies.

Borders superstores average 24,700 square feet in size, including approximately 13,000 square feet devoted to books, 2,700 square feet devoted to music, 800 square feet devoted to newsstand and 900 square feet devoted to movies. Through its remodeling efforts, Borders is realigning space devoted to specific categories which, in general, results in an increase in space for categories such as books, movies and gifts and stationery and a reduction in music space. As part of those efforts, the Company remodeled 93 Borders superstores during 2007.

Stores opened in 2007 averaged 22,900 square feet. Each store is distinctive in appearance and architecture and is designed to complement its local surroundings, although Borders utilizes certain standardized specifications to increase the speed and lower the cost of new store openings.

The typical Borders superstore also dedicates approximately 800 square feet to gifts and stationery. In 2005, the Company began to install Paperchase shops in all new and most remodeled domestic superstores as part of a long-term plan to enhance the variety and distinctiveness of the Company’s gifts and stationery offering. The Company will continue to convert gifts and stationery departments to Paperchase shops through its store remodeling efforts.

In addition, the Company devotes approximately 1,400 square feet to a cafe within virtually all Borders superstores. In August 2004, the Company entered into a licensing agreement with Seattle’s Best Coffee, a wholly-owned subsidiary of Starbucks Corporation, through which the Company operates Seattle’s Best Coffee-branded cafes within substantially all of the Company’s existing Borders superstores in the continental U.S. and Alaska and new stores as they are opened. Cafes located within existing Borders superstores began conversion to Seattle’s Best Coffee cafes in early 2005, and the conversions were completed during 2007. There was no change in the size of the cafes as a result of the conversion to Seattle’s Best Coffee.

The Company is currently exploring changes to its superstore format, and has developed a concept store that incorporates these changes. The first of these new concept stores opened during the first quarter of 2008, and the Company expects to open 14 additional concept stores during the year. The concept store design represents a significant enhancement over existing Borders stores inside and out and fulfills the Company’s mission to be a headquarters for knowledge and entertainment. The concept store includes a deep and intelligent selection, knowledgeable staff and a comfortable, welcoming atmosphere. The concept store brings a fresh new look and an exciting interactive dimension to the store with a Digital Center where customers can do everything from mix and make their own custom CDs, download books and music, publish their own books, explore their family history, and create photo books. The concept store also puts a strong focus on popular categories, including travel, cooking, wellness, graphic novels and children’s, by incorporating digital options and the online world, making these sections of the store interactive destinations where customers can not only shop a vast selection of books, but also take advantage of computer kiosks featuring recommendations, related video content including interviews with experts and authors, and much more. In addition, in select destinations within the store, there are large in-section LCD screens broadcasting a depth of content featuring some highly recognizable names in these subject areas, as well as Borders’ own exclusive programs.

The Company believes this new concept store is a key part of its long-term strategic plan, and that its concept store differentiates Borders and gives customers a reason to choose its stores over other competitors (both brick and mortar and online). The Company also believes that the concept store, along with the launch of the new Borders.com, will deliver on its cross-channel retail strategy including the option for customers to access the Web site in stores to view wish lists and conveniently order from millions of titles for delivery to their homes or their Borders store within two days.

The Company plans to analyze results of these concept stores to ascertain if acceptable financial returns can be achieved. Based on this financial analysis, the Company will make decisions to retrofit the particularly successful elements of the concept store into existing stores.

Waldenbooks Specialty Retail Stores

Waldenbooks Specialty Retail operates small format stores in malls, airports and outlet malls, offering customers a convenient source for new releases, hardcover and paperback bestsellers, periodicals and a standard selection of other titles. Waldenbooks Specialty Retail operates stores under the Waldenbooks, Borders Express and Borders Outlet names, as well as Borders-branded airport stores. Average sales per square foot were $277 and average sales per store were $1.1 million for 2007. Waldenbooks Specialty Retail stores average approximately 3,800 square feet in size, and carry an average of 15,500 titles, ranging from 7,700 in an airport store to 24,500 in a large format store.

International Stores

The Company has a presence on four continents. During fiscal 2007, the Company opened six International superstores.

The Company sold all of its bookstores in the United Kingdom and Ireland during the third quarter of 2007. See “Note 14 — Discontinued Operations” in the notes to consolidated financial statements for further information relating to the sale of these bookstores.
International superstores, which operate under the Borders name, achieved average sales per square foot of $381 and average sales per superstore of $8.3 million in 2007. International superstores range between 13,500 and 38,400 square feet in size, and are located in both city center as well as suburban locations. All International superstores offer book, music, movie and gifts and stationery merchandise and feature cafes. Cafes located in Australia and New Zealand are licensed to and operated by Gloria Jean’s Coffees. The gifts and stationery departments in select Asia Pacific superstores are branded Paperchase. The Company owns substantially all of Paperchase, as discussed below.

In July 2004, the Company increased its 15% equity stake in Paperchase to 96.5%, and purchased an additional 0.5% interest in November of 2007, bringing its equity interest in Paperchase to 97% as of February 2, 2008. Paperchase is a brand leader in design-led and innovative stationery retailing in the United Kingdom. As of February 2, 2008, the Company operated 112 Paperchase locations, including 33 stand-alone stores, 25 concessions in selected House of Fraser and Selfridges stores, and seven stores located in railway stations. In addition, the Company operates concessions in 42 International Borders superstores, primarily located in the U.K, as well as in five Books etc. stores, also located in the U.K. The vast majority of Paperchase’s merchandise is developed specifically by and for Paperchase and, as such, can only be found in Paperchase stores.

Internet

The Company, through its subsidiaries, has agreements with Amazon.com, Inc. (“Amazon”) to operate Web sites utilizing the Borders.com and Waldenbooks.com URLs (the “Web Sites”). These agreements are currently being renewed on a month-to-month basis. Under these agreements, Amazon is the merchant of record for all sales made through the Web 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 Web Sites and retains all payments from customers. The Company receives referral fees for products purchased through the Web Sites. The agreements contain mutual indemnification provisions, including provisions that define between the parties the responsibilities with respect to any liabilities for sales, use and similar taxes, including penalties and interest, associated with products sold on the Web Sites. Currently, taxes are not collected with respect to products sold on the Web Sites except in certain states. As previously discussed, the Company plans to launch its proprietary e-commerce Web site during the spring of fiscal 2008. At that time the Amazon agreements will be terminated subject to the survival of certain provisions.

Distribution

The Company’s centralized distribution system, consisting of 10 distribution facilities worldwide, enhances its ability to manage inventory on a store-by-store basis. Inventory is shipped from vendors primarily to the Company’s distribution centers. Approximately 90% of the books carried by the Company’s stores are processed through the Company’s distribution facilities. Borders purchases substantially all of its music and movie merchandise directly from manufacturers and utilizes the Company’s own distribution center to ship approximately 95% of its music and movie inventory to its stores.

In general, unsold books and magazines can be returned to their vendors at cost. Domestic Borders superstores and Waldenbooks Specialty Retail stores return books to the Company’s centralized returns center near Nashville, Tennessee to be processed for return to the publishers. In general, Borders can return music and movie merchandise to its vendors at cost plus an additional fee to cover handling and processing costs.

The Company completed its second year of a multi-year initiative to enhance the efficiency of its distribution and logistics network. In 2007, the Company closed its Indiana facility and consolidated certain operations within the Tennessee campus. In 2008, the Company will reduce its three Tennessee facilities to two for a total of 633,000 square feet, and will transfer the operations of the Ohio facility, which services the Company’s multimedia categories, to its three primary distribution facilities. These changes will further optimize inventory and supply chain cost management.

CEO BACKGROUND

Michael G. Archbold, age 48. Mr. Archbold is the Executive Vice President, Chief Operating Officer and Chief Financial Officer of The Vitamin Shoppe, a specialty retailer and direct marketer of nutritional products. He joined the Vitamin Shoppe in his current position in 2007. He previously served as Executive Vice President, Chief Financial and Administrative Officer of Saks Fifth Avenue from 2005 through 2007. Mr. Archbold was with AutoZone from 2002 to 2005, where he served as Executive Vice President and Chief Financial Officer. From 1996 to 2002, he was Vice President and Chief Financial Officer of the Booksellers Division of Barnes & Noble, Inc., and prior to that was with Woolworth Corporation (now Foot Locker, Inc.), where he served in a series of financial management positions. Mr. Archbold has served as a director of the Company since December 2007.

Donald G. Campbell, age 56. Mr. Campbell is Vice Chairman of The TJX Companies, Inc., a global off-price retailer of apparel and home fashions, and is responsible for TJX’s corporate/administrative functions and business development efforts. He joined TJX in 1973 and has held a series of increasingly responsible management positions prior to assuming his current position in September 2006. His prior positions included Chief Financial Officer, Senior Vice President and Executive Vice President, as well as, from 2004 until September 2006, Senior Executive Vice President, Chief Administrative and Business Development Officer with responsibility for TJX’s worldwide systems, new business development and human resource activities. He has served as a director of the Company since July 2005.

Joel J. Cohen, age 70. Mr. Cohen has served as Chairman and co-Chief Executive Officer of Sagent Advisors, Inc., a financial advisory firm, since September 2003. Mr. Cohen served as the non-executive Chairman of the Board of The Chubb Corporation, a major property and casualty insurance holding company, from December 2002 until December 2003 and currently serves as lead director of that company. Mr. Cohen was Managing Director and co-head of Global Mergers and Acquisitions at Donaldson, Lufkin & Jenrette Securities Corporation (“DLJ”), a leading investment and merchant bank that was acquired by Credit Suisse, until November 2000. He had been associated with DLJ since October 1989. He had previously served as General Counsel to the Presidential Task Force on Market Mechanisms and as a partner of Davis Polk and Wardwell, attorneys. Mr. Cohen became a director of the Company in March 2001, and also serves as a director of Maersk, Inc., which engages in shipping and related businesses in the United States and Canada.

George L. Jones, age 57. Mr. Jones has served as President, Chief Executive Officer and a Director of the Company since July 2006. Prior to joining the Company, Mr. Jones had extensive retail experience, including serving as President and Chief Executive Officer of the Saks Department Store Group, a division of Saks Incorporated, from March 2001 through September 2005. Prior to joining Saks, Mr. Jones was President, Worldwide Licensing and Retail, for Warner Bros., where in addition to his core responsibilities, he oversaw Warner Bros. Worldwide Publishing, Kids WB Music, Warner Bros. Interactive Entertainment, WB Sports and Warner Bros. Studio Stores. His background also includes key merchandising and operations positions at Target Corporation, including Executive Vice President-Store Operations and Senior Vice President, Merchandising.

Amy B. Lane, age 55. Ms. Lane was Managing Director, Investment Banking Group, of Merrill Lynch from 1997 until her retirement in February 2002. From 1989 through 1996, Ms. Lane served as a Managing Director, Corporate Finance, of Salomon Brothers in New York. Ms. Lane served as a director of the Company from August 1995 until March 1999, and was again appointed a director in October 2001. Ms. Lane is also a director of The TJX Companies, Inc., a global off-price retailer of apparel and home fashions.

Brian T. Light, age 44. Mr. Light is Executive Vice President and Chief Information Officer for Staples, Inc., an office products company. In his current position, which he has served in since November 2005, he leads the Information Systems function supporting Staples corporate, U.S. retail and North American delivery operations. He also served as Executive Vice President/Senior Vice President and CIO for Staples from 1998 to 2002. From 2002 to 2005, Mr. Light served as Executive Vice President, Business Delivery for Staples. In this position, he led the public catalog and e-commerce business for Staples in the U.S. and Canada. He also led Staples’ New Business Development organization, identifying growth vehicles and partnership opportunities. Before joining Staples, Mr. Light was employed from 1986 through 1998 by Accenture, most recently as an Associate Partner with specialization in the consumer packaged goods industry. He has served as a director of the Company since July 2005.

Victor L. Lund, age 60. Mr. Lund has served as the non-executive Chairman of the Board of DemandTec, a provider of merchandising, sales and marketing software for retailers and consumer demand management solutions, since December 2006. Mr. Lund also served as the non-executive Chairman of the Board of Mariner Health Care, Inc., a nursing home operator, from May 2002 until December 2004. Mr. Lund was Vice Chairman of Albertson’s, Inc., a food and drug retailer, from June 1999 until June 2002. Mr. Lund served as Chairman of the Board of American Stores Company from June 1995 until its acquisition by Albertson’s in June 1999, and as Chief Executive Officer of American Stores Company from August 1992 until June 1999. He was President of American Stores Company from August 1992 until June 1995. Mr. Lund has served as a director of the Company since July 1997, and also serves as a director of the following publicly-held companies: DemandTec; Service Corporation International, a provider of funeral, cremation and cemetery services; Teradata, a leading provider of enterprise analytic technologies; Delta Airlines; and Del Monte Foods Company, a food producer, distributor and marketer.

Richard “Mick” McGuire, age 31. Mr. McGuire is a partner of Pershing Square Capital Management, L.P. He is one of five senior professionals responsible for managing approximately $6 billion in investor capital, a role that includes evaluating, initiating and monitoring investments across a wide range of industries including, among others, retail, consumer, business services and financial services. Prior to joining Pershing Square in 2005, Mr. McGuire held positions at private equity funds J.H. Whitney & Co., and Stonington Partners, Inc. Mr. McGuire holds a masters degree in business administration (MBA) from Harvard Business School and a bachelors degree from Princeton University. He has served as a director of the Company since January 2008.

Dr. Edna Medford, age 56. Dr. Medford is an Associate Professor of History and former Director of the Graduate Program in History at Howard University. She has served as a director of the Company since September 1998.

Lawrence I. Pollock, age 60. Mr. Pollock has served as the non-executive Chairman of the Board of Directors of the Company since July 2006 and as Managing Partner of Lucky Stars Partners LLC, an investment firm, since October 2004. Mr. Pollock served as President of Cole National Corporation, which operates retail vision and gift stores, from January 2000 and as Chief Executive Officer from June 2003 until the company was sold to Luxottica Group SpA in October 2004. From September 1998 until June 1999, Mr. Pollock served as President and Chief Executive Officer of HomePlace, Inc., a chain of home furnishings and housewares superstores, which he joined in January 1997 as Executive Vice President and Chief Operating Officer. From 1994 until 1996, he served as the President, Chief Operating Officer and a director of Zale Corporation, a jewelry retailer. Mr. Pollock has served as a director of the Company since August 1995.

Michael Weiss, age 66. Mr. Weiss is the Chief Executive Officer of Express, a fashion apparel retailer. He was President and Chief Executive Officer of Express from 1997 to 2004, during which it was a subsidiary of Limited Brands, Inc., and rejoined Express in 2007 upon the sale by Limited Brands, Inc. of a majority stake in Express. Mr. Weiss joined Limited in 1981 as merchandise manager for Express and rose to the position of President of Express, serving in that capacity from 1982 to 1993. He was named Vice Chairman of Limited in 1993, and served in that post until 1997. Mr. Weiss returned to Express in January 1997, serving as President and Chief Executive Officer until his retirement in 2004. He has served as a director of the Company since July 2005. Mr. Weiss also serves as a director of Payless ShoeSource, Inc., a specialty family footwear retailer, and Pacific Sunware of California, Inc., a specialty retailer of casual apparel, accessories and footwear for active teens and young adults, as well as a director and Non-Executive Chairman of Chico’s FAS, Inc., a retailer of women’s clothing, complimentary accessories and other non-clothing gift items.


MANAGEMENT DISCUSSION FROM LATEST 10K

General

Borders Group, Inc., through its subsidiaries, Borders, Inc. (“Borders”), Walden Book Company, Inc. (“Waldenbooks”), 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 February 2, 2008, the Company operated 541 superstores under the Borders name, including 509 in the United States, 22 in Australia, five in New Zealand, three in Puerto Rico, and two in Singapore. The Company also operated 490 mall-based and other bookstores, including stores operated under the Waldenbooks, Borders Express and Borders Outlet names, as well as Borders-branded airport stores. In addition, the Company owned and operated United Kingdom-based Paperchase Products Limited (“Paperchase”), a designer and retailer of stationery, cards and gifts. As of February 2, 2008, Paperchase operated 112 stores, primarily in the United Kingdom, and Paperchase shops have been added to 319 domestic Borders superstores.

Business Strategy

Strategic alternatives review process. On March 20, 2008, the Company announced that it would undergo a strategic alternative review process. J.P. Morgan Securities Inc. and Merrill Lynch & Co. have been retained as the Company’s financial advisors to assist in this process. The review will include the investigation of a wide range of alternatives including the sale of the Company and/or certain divisions for the purpose of maximizing shareholder value.

Throughout fiscal 2007, the Company continued to implement its strategic plan, the principal components of which are as follows:

Grow comparable store sales and profitability in the domestic Borders superstores. The Company continues to focus on improving key retailing practices at its domestic superstores, including increasing effectiveness of merchandise presentation, improving assortment planning, replenishment and supply chain effectiveness, and ensuring consistency of execution across the chain. A key component in this strategy is the development of a concept store, the first of which opened during the first quarter of 2008. The concept store includes the implementation of “destination businesses” within certain of the Company’s most popular categories, which will help to distinguish the Company’s domestic superstores from competitors. The concept store also includes a Seattle’s Best Coffee cafe and a Paperchase shop, which continue to be drivers of both sales and increased profitability for their categories. The Company plans to open additional concept stores in 2008, and will implement select features of the concept store in its existing superstores based on financial analysis of costs and benefits. To address declining sales in the music category, as well as increasing space available for improved merchandising presentation and expansion of higher margin categories, the Company has begun reducing inventories and reallocating floor space in its stores. Also, the Company made changes in 2007 to its loyalty program, Borders Rewards, which has grown to over 25 million members. The changes were intended to increase profitability, to drive revenue through partnerships with other organizations, and to drive sales by employing customer data to tailor promotions that meet specific customer needs and interests.

Right-size the Waldenbooks Specialty Retail business. The Waldenbooks Specialty Retail segment has generally experienced negative comparable store sales percentages for the past several years, primarily due to the overall decrease in mall traffic, sluggish bestsellers and increased competition from all channels. The Company is working to aggressively right-size the Waldenbooks mall store base, which could result in additional asset impairments and store closure costs in the next few years, but will position the Company to improve sales, profitability and free cash flow in the long term. The Company will retain stable locations that meet acceptable profit and return on investment objectives and in those stores, change product assortment and formats to drive sales and profitability.

Explore strategic alternatives in the International segment. As previously announced, the Company has suspended growth and investment in its International businesses, while focusing on improving the profitability of the investments the Company has already made. A key component in this strategy was the sale of the Company’s U.K. and Ireland bookstores during the third quarter of 2007, as discussed below. The Company is continuing to explore strategic alternatives for portions of its remaining International businesses, including the Australia, New Zealand and Singapore superstores, as well as Paperchase. The Company believes the Borders brand has global potential, however, and believes that future International growth will most profitably utilize a franchise business model, which the Company has applied successfully in Malaysia and the United Arab Emirates.

Leverage innovation, technology and strategic alliances to differentiate our business. In order to achieve the goals of the strategic plan detailed above, the Company plans to enhance its current systems environment. This includes a focus on the systems supporting the domestic Borders superstore business, including merchandise buying, replenishment and supply chain, as well as in-store technology enhancements. In addition, this effort includes development of a proprietary e-commerce platform, which will include both in-store and online e-commerce components. The proprietary e-commerce Web site will also allow the Company to engage in key partnerships that are expected to build incremental revenues and margins and connect e-commerce sales to the Company’s Borders Rewards loyalty program. The Company expects to launch its e-commerce Web site during the spring of fiscal 2008.

The Company plans to continue to execute this strategy throughout fiscal 2008, factoring in its belief that 2008 will be a challenging year for retailers due to continued uncertainty in the economic environment, and will focus on maximizing cash flow and profitability. The Company plans to reduce capital spending by investing in projects with short paybacks and high returns, will review all cost structures with the goal of reducing expenses to improve profitability, and will continue to reduce working capital needs of the business and drive inventory productivity, thus improving cash flow and lowering supply chain costs.

Other Information

The Company, through its subsidiaries, has agreements with Amazon.com, Inc. (“Amazon”) to operate Web sites utilizing the Borders.com and Waldenbooks.com, (the “Web Sites”). These agreements are currently being renewed on a month-to-month basis. Under these agreements, Amazon is the merchant of record for all sales made through the Web 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 Web Sites and retains all payments from customers. The Company receives referral fees for products purchased through the Web Sites. The agreements contain mutual indemnification provisions, including provisions that define between the parties the responsibilities with respect to any liabilities for sales, use and similar taxes, including penalties and interest, associated with products sold on the Web Sites. Currently, taxes are not collected with respect to products sold on the Web Sites except in certain states. As previously discussed, the Company plans to launch its proprietary e-commerce site during the spring of fiscal 2008. At that time the Amazon agreements will be terminated subject to the survival of certain provisions.

The Company has signed an agreement with Berjaya Corporation Berhad (“Berjaya”), a publicly-listed diversified corporation headquartered in Malaysia, establishing a franchise arrangement under which Berjaya will operate Borders stores in Malaysia. The Company has also signed an agreement with Al Maya Group (“Al Maya”), a diversified corporation headquartered in the United Arab Emirates, establishing a franchise agreement under which Al Maya or its affiliates will operate Borders stores in the United Arab Emirates and other Gulf Cooperation Council (“GCC”) countries.

Effective with respect to fiscal 2005, the Company’s fiscal year ends on the Saturday closest to the last day of January. Fiscal 2007 consisted of 52 weeks, and ended on February 2, 2008. Fiscal 2006 consisted of 53 weeks and ended February 3, 2007. Fiscal 2005 consisted of 53 weeks and ended January 28, 2006. References herein to years are to the Company’s fiscal years.

Discontinued Operations

On September 21, 2007, the Company sold its U.K. and Ireland bookstore operations to Bookshop Acquisitions Ltd., a corporation formed by Risk Capital Partners, a private equity firm in the United Kingdom. The consideration for the sale was: (i) cash of $20.4 million; (ii) the potential for up to an additional $20.4 million of contingent deferred consideration, which will be payable in whole or in part only if specified sales levels are achieved by the U.K. and Ireland bookstore operations in future years; (iii) a 19.9% equity interest in Bookshop Acquisitions Ltd., which is expected to be diluted to approximately seventeen percent (17%); and (iv) 7% loan notes of approximately $3.4 million which mature in 2017 or sooner upon the occurrence of certain events.

The sale agreement included all 41 Borders superstores located in the U.K. and the Borders superstore in Ireland, as well as all 28 Books etc. stores. All assets and liabilities, with the exception of outstanding lease guarantees relating to four stores, remained with the entities sold, which are now owned by Risk Capital Partners. The maximum potential liability under these lease guarantees is approximately $193.2 million. The leases provide for periodic rent reviews, which could increase the Company’s potential liability. One of the applicable lease guaranty agreements provides that the guaranty will automatically terminate if Borders U.K. Limited achieves a specified level of net assets. This potential limitation has not been considered in calculating the maximum exposures set forth above. In addition, in the event of a default under the primary leases and the landlord does not require the Company to take a new (replacement) lease, the landlord would have an obligation to attempt to re-lease the premises, which could further reduce the Company’s potential liability. The Company has recorded a contingent liability of approximately $5.8 million based upon the likelihood that the Company will be required to perform under the guarantees.

Also under the terms of the sale agreement, the Company indemnified the U.K. and Ireland operations from the tax liability, if any, imposed upon it as a result of the forgiveness of the portions of intercompany indebtedness owing from the Company. The maximum potential liability is approximately $10.7 million, and the Company has recorded a liability of approximately $4.4 million based upon the likelihood that the Company will be required to perform under the indemnification.

The Company did not record any amount related to the contingent deferred consideration of $20.4 million. The Company will record this amount once the realization of such amount is resolved beyond a reasonable doubt. The Company has attributed only a nominal value to its equity interest in Bookshop Acquisitions Ltd. and to its 7% loan notes.

The disposal resulted in a loss of $125.7 million for year ended February 2, 2008. The operation of the disposed businesses resulted in losses of $13.2 million and $138.3 million for the years ended February 2, 2008 and February 3, 2007, respectively, and income of $4.5 million for the year ended January 28, 2006.

Consolidated Results — Comparison of 2007 to 2006

Sales

Consolidated sales increased $91.0 million, or 2.5%, to $3,774.8 million in 2007 from $3,683.8 million in 2006. This resulted primarily from increased sales in the Borders segment, due to increased comparable store sales and the opening of new superstores. Also contributing to the increase in sales was the International segment, due to increased comparable store sales, the opening of new superstores and favorable foreign currency exchange rates. Partially offsetting these increases was a decrease in sales of the Waldenbooks Specialty Retail segment, due primarily to store closures, partially offset by increased comparable store sales. Excluding the impact of the extra week in fiscal 2006, sales would have increased 4.2%.

Comparable store sales measures include stores open more than one year, with new stores included in the calculation upon their 13th month of operation. Comparable store sales measures for Waldenbooks Specialty Retail include the Company’s mall-based seasonal businesses, and comparable store sales measures for International Borders superstores include sales from licensed departments operating within the superstores. International comparable store sales are calculated in local currency. The calculation of 2007 comparable store sales increases or decreases assume that 2007 and 2006 consisted of 52 weeks.

Comparable store sales for domestic Borders superstores increased 1.5% in 2007. The comparable store sales increase for 2007 was due primarily to positive comparable store sales in the book category of 3.2%, including strong sales of the final Harry Potter title, as well as increased comparable store sales in Seattle’s Best Coffee cafes and Paperchase gifts and stationery shops of 13.3% and 10.0%, respectively. Also, on a comparable store basis, transactions increased by 1.0% for the year. Comparable store sales in the music category continued to decline with negative comparable store sales of 14.2% for the year. The impact of price changes on comparable store sales was not significant.

Waldenbooks Specialty Retail’s comparable store sales increased 2.2% in 2007. The comparable store sales increase was driven by increased transaction size of 2.4% while transaction count declined by 0.2%. The impact of price changes on comparable store sales was not significant.

Comparable store sales for International Borders superstores increased 7.9% in 2007, driven by positive comparable store sales in Australia, Singapore and Puerto Rico, partially offset by a decline in comparable stores sales in New Zealand. The impact of price changes on comparable store sales was not significant.

Other Revenue

Other revenue for the Borders and International segments primarily consists of income recognized from unredeemed gift cards, as well as revenue from franchisees. Other revenue for the Borders segment also includes wholesale revenue earned through sales of merchandise to other retailers, as well as referral fees received from Amazon as part of the Web Site agreement. Other revenue in the International segment also includes revenue earned through a transitional services agreement with the new owners of Borders U.K. Other revenue in the Waldenbooks Specialty Retail segment primarily consists of income recognized from unredeemed gift cards.

Other revenue increased $6.3 million, or 15.8%, to $46.1 million in 2007 from $39.8 million in 2006. The increase is due to increases in the domestic Borders Superstores and International segments, partially offset by a decrease in the Waldenbooks Specialty Retail segment. The increase in domestic Borders Superstores was primarily due to increased income recognized from unredeemed gift cards in 2007. The International increase was the result of increased revenue from franchisees and transitional services revenue in 2007.

Gross Margin

Consolidated gross margin decreased $8.0 million, or 0.8%, to $982.6 million in 2007 from $990.6 million in 2006. As a percentage of sales, it decreased by 0.9%, to 26.0% in 2007 from 26.9% in 2006. This was due to a decrease in the domestic Borders Superstores segment, partially offset by an increase in the Waldenbooks Specialty Retail segment’s gross margin as a percentage of sales. Gross margin as a percentage of sales remained flat in the International segment. The decrease in the domestic Borders Superstores segment was primarily due to increased promotional discounts as a percentage of sales related to Borders Rewards and the Harry Potter book. In addition, shrinkage in the DVD category and cafe waste increased as a percentage of sales, and occupancy costs increased as a percentage of sales. Partially offsetting these increases were decreased distribution costs as a percentage of sales, driven by the increase in comparable store sales, and 2006 accruals for Borders Rewards member benefits as a percentage of sales. These benefits were substantially modified in 2007 and reduced the required accrual in the current year. The increase in the Waldenbooks Specialty Retail segment was primarily due to decreased occupancy costs as a percentage of sales, resulting from the increase in comparable store sales. Partially offsetting the decrease in occupancy were increased promotional discounts and other costs as a percentage of sales, mainly related to sales of the seventh and final book in the Harry Potter series and Borders Rewards, and increased distribution costs, primarily due to increased product returns and the associated handling costs. The International segment’s gross margin as a percentage of sales was flat, primarily the result of decreased occupancy costs as a percentage of sales, driven by the increase in comparable store sales, offset by increased product markdowns as a percentage of sales and increased distribution costs as a percentage of sales.

The Company classifies the following items as “Cost of merchandise sold (includes occupancy)” on its consolidated statements of operations: product costs and related discounts, markdowns, freight, shrinkage, capitalized inventory costs, distribution center costs (including payroll, rent, supplies, depreciation, and other operating expenses), and store occupancy costs (including rent, common area maintenance, depreciation, repairs and maintenance, taxes, insurance, and others). The Company’s gross margin may not be comparable to that of other retailers, which may exclude the costs related to their distribution network and store occupancy from cost of sales and include those costs in other financial statement lines.

Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses (“SG&A”) increased $44.0 million, or 4.8%, to $956.1 million in 2007 from $912.1 million in 2006. As a percentage of sales, it increased by 0.6%, to 25.3% in 2007 from 24.7% in 2006. This increase primarily resulted from increased SG&A expenses as a percentage of sales for the domestic Borders Superstores segment and the International segment, partially offset by decreased SG&A expense in the Waldenbooks Specialty Retail segment. The domestic Borders Superstores segment increase was primarily driven by increased corporate payroll and corporate operating expenses as a percentage of sales, mainly the result of the settlement of the California overtime litigation in 2007, a gain on the sale of investments in 2006, income received in 2006 from the Visa Check/MasterMoney Antitrust Litigation settlement, and 2007 investment in strategic initiatives. In addition, store payroll and operating expenses increased as a percentage of sales. These increases were partially offset by decreased advertising costs as a percentage of sales. The increase in the International segment was primarily the result of increased corporate payroll and operating expenses as a percentage of sales, due to professional fees incurred pursuant to the strategic alternatives process relating to the Company’s Asia Pacific operations, as well as increased advertising costs as a percentage of sales. Partially offsetting these items were decreased store payroll and operating expenses as a percentage of sales, driven by the increase in comparable store sales. The Waldenbooks Specialty Retail decrease was primarily due to decreased store payroll and operating expenses as a percentage of sales, driven by the increase in comparable store sales. Partially offsetting these decreases were increased corporate payroll and corporate operating expenses as a percentage of sales and increased advertising expense as a percentage of sales. Also impacting the comparison of 2007 to 2006 was income received in 2006 from the Visa Check/MasterMoney Antitrust Litigation settlement.

The Company classifies the following items as “Selling, general and administrative expenses” on its consolidated statements of operations: store and administrative payroll, rent, depreciation, utilities, supplies and equipment costs, credit card and bank processing fees, bad debt, legal and consulting fees, certain advertising income and expenses and others.

Asset Impairments and Other Writedowns

In 2007, the Company recorded a $6.7 million writedown related to the impairment of assets (primarily leasehold improvements, furniture, and fixtures) of certain underperforming stores. Of this, $5.5 million related to domestic Borders superstores, $0.7 million related to Waldenbooks Specialty Retail stores and $0.5 million related to one Borders store in Puerto Rico. In addition, the Company recorded a charge of $6.4 million in 2007 related to the closure costs of certain stores. Of this, $5.6 million related to domestic Borders superstores, $0.7 million related to Waldenbooks Specialty Retail stores and $0.1 related to one Borders store in Australia.

In 2006, the Company recorded a $19.1 million writedown related to the impairment of assets (primarily leasehold improvements, furniture, and fixtures) of certain underperforming stores. Of this, $9.0 million related to domestic Borders superstores and $10.1 million related to Waldenbooks Specialty Retail stores. In addition, the Company recorded a charge of $7.2 million in 2006 related to the closure costs of certain stores. Of this, $4.1 million related to domestic Borders superstores and $3.1 million related to Waldenbooks Specialty Retail stores. The Company also recorded a charge of $34.3 million related to Waldenbooks Specialty Retail’s merchandising system.

Interest Expense

Consolidated interest expense increased $13.2 million, or 44.4%, to $42.9 million in 2007 from $29.7 million in 2006. This was primarily a result of increased borrowings to fund capital expenditures, seasonal inventory growth and dividend payments.

Taxes

The effective tax rate differed for the years presented from the federal statutory rate primarily due to the realization of the benefits of prior year net operating loss carryforwards, partially offset by the impact of non-deductible losses. The effective tax rate was 49.0% in 2007 and 38.7% in 2006.

Loss from Continuing Operations

Due to the factors mentioned above, loss from continuing operations as a percentage of sales increased to 0.5% in 2007 from 0.4% in 2006, and loss from continuing operations dollars increased to $18.5 million in 2007 from $13.0 million in 2006.

Consolidated Results — Comparison of 2006 to 2005

Sales

Consolidated sales remained relatively flat, increasing $8.1 million, to $3,683.8 million in 2006 from $3,675.7 million in 2005. This resulted primarily from increased sales in the Borders segment, due to the opening of new superstores, partially offset by negative comparable store sales. Also contributing to the increase in sales was the International segment, due to the opening of new superstores, favorable foreign currency exchange rates and positive comparable store sales. A decrease in sales of the Waldenbooks Specialty Retail segment partially offset the increase in consolidated sales, due primarily to store closures and negative comparable store sales.

Comparable store sales measures include stores open more than one year, with new stores included in the calculation upon their 13th month of operation. Comparable store sales measures for Waldenbooks Specialty Retail include the Company’s mall-based seasonal businesses, and comparable store sales measures for International Borders superstores include sales from licensed departments operating within the superstores. International comparable store sales are calculated in local currency. The calculation of 2006 comparable store sales increases or decreases assume that 2006 and 2005 consisted of 53 weeks.

Comparable store sales for domestic Borders superstores decreased 2.2% in 2006. This was due primarily to negative comparable store sales in the music category of 15.1%, as well as a decline in comparable store sales of books. The decrease in books was driven by a challenging comparison to 2005 when the sixth book in the Harry Potter series was released, as well as weakness in other bestsellers. The cafe and gift and stationery categories positively impacted comparable store sales in remodeled stores, resulting primarily from the conversions of cafes to the Seattle’s Best Coffee brand and gift and stationery departments to the Paperchase brand. The impact of price changes on comparable store sales was not significant.

Waldenbooks Specialty Retail’s comparable store sales decreased 7.5% in 2006. This was primarily due to the sluggish mall environment, the 2005 release of the Harry Potter title, and weakness in other bestsellers, which impacted Waldenbooks Specialty Retail to a greater degree than Borders superstores. The impact of price changes on comparable store sales was not significant.

Comparable store sales for International Borders superstores increased 0.1% in 2006 driven by positive comparable store sales in Australia and New Zealand, partially offset by a decline in comparable stores sales in Singapore and Puerto Rico. The impact of price changes on comparable store sales was not significant.

Other Revenue

Other revenue for the Borders and International segments primarily consists of income recognized from unredeemed gift cards, as well as revenue from franchisees. Other revenue for the Borders segment also includes wholesale revenue earned through sales of merchandise to other retailers, as well as referral fees received from Amazon as part of the Web Site agreement. Other revenue in the Waldenbooks Specialty Retail segment primarily consists of income recognized from unredeemed gift cards.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

General

Borders Group, Inc., through its subsidiaries, Borders, Inc. (“Borders”), Walden Book Company, Inc. (“Waldenbooks”), Paperchase Products, Ltd., 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 United States based upon both sales and number of stores. At November 1, 2008, the Company operated 522 superstores under the Borders name, including 519 in the United States and three in Puerto Rico. The Company also operated 467 mall-based and other bookstores, including stores operated under the Waldenbooks, Borders Express and Borders Outlet names, as well as Borders-branded airport stores. In addition, the Company owned and operated United Kingdom-based Paperchase Products Limited (“Paperchase”), a designer and retailer of stationery, cards and gifts. As of November 1, 2008, Paperchase operated 117 stores, primarily in the United Kingdom, and Paperchase shops exist in 333 domestic Borders Superstores.

In addition, the Company operated a proprietary e-commerce Web site, Borders.com, which was launched in May of 2008.

On June 10, 2008, the Company sold bookstores that it had owned and operated in Australia, New Zealand and Singapore. On September 21, 2007, the Company sold bookstores that it had owned and operated in the U.K. and Ireland. The sale of these businesses is discussed below under the caption “Discontinued Operations” within Management’s Discussion and Analysis.

Business Strategy

Strategic alternatives review process. On March 20, 2008, the Company announced that it would undergo a strategic alternative review process, which included the exploration of a wide range of options, among them the sale of the Company and or certain divisions, including Paperchase Products, Ltd. With respect to the sale of the Company, the Company is no longer contemplating a transaction, but continues to explore financing options to support its long-term goals. Borders Group, however, retains its right to exercise its "put" option to sell its Paperchase business to Pershing Square Capital Management for $65 million and is also in discussions with Pershing Square regarding an alternative financing transaction. No assurance can be given as to whether an alternative financing transaction will be entered into or consummated.

Throughout fiscal 2008, the Company continued to implement its strategic plan, the principal components of which are as follows:

Grow comparable store sales and profitability in the domestic Borders Superstores. The Company continues to focus on improving key retailing practices at its domestic superstores, including increasing effectiveness of merchandise presentation, improving assortment planning, replenishment and supply chain effectiveness, and ensuring consistency of execution across the chain. A key component in this strategy is the development of a concept store, 14 of which opened during fiscal 2008, which included 12 new stores and two relocations. The concept store includes the implementation of “destination businesses” within certain of the Company’s most popular categories, which will help to distinguish the Company’s domestic superstores from competitors. The concept store also includes a Seattle’s Best Coffee cafe and a Paperchase shop, which continue to be drivers of both sales and increased profitability for their categories. The Company plans to implement select features of the concept store in its existing superstores based on financial analysis of costs and benefits. To address declining sales in the music category, as well as increasing space available for improved merchandising presentation and expansion of higher margin categories, the Company has reduced inventories and reallocated floor space in its stores and will continue to do so as appropriate. Also, the Company made changes in 2007 to its loyalty program, Borders Rewards, which has grown to over 30 million members. The changes were intended to increase profitability, to drive revenue through partnerships with other organizations, and to drive sales by employing customer data to tailor promotions that meet specific customer needs and interests.

Right-size the Waldenbooks Specialty Retail business. The Waldenbooks Specialty Retail segment has generally experienced negative comparable store sales percentages for the past several years, primarily due to the overall decrease in mall traffic, sluggish bestsellers and increased competition from all channels. The Company is working to aggressively right-size the Waldenbooks mall store base, which could result in additional asset impairments and store closure costs in the next few years, but will position the Company to improve sales, profitability and free cash flow in the long term. The Company will retain stable locations that meet acceptable profit and return on investment objectives and in those stores, change product assortment and formats to drive sales and profitability.

Explore strategic alternatives in the International segment. As previously announced, the Company has suspended growth and investment in its International businesses, while focusing on improving the profitability of the investments the Company has already made. Key components in this strategy were the sale of the Company’s Australia, New Zealand and Singapore bookstores during the second quarter of 2008 and the sale of the Company’s U.K. and Ireland bookstores during the third quarter of 2007, as discussed below. The Company will continue to opportunistically explore strategic alternatives for its Paperchase business, based in the U.K.; however, the financing markets are making this process challenging. The Company believes the Borders brand has global potential, and believes that future International growth will most profitably utilize a franchise business model, which the Company has applied successfully in Malaysia and the United Arab Emirates.

Leverage innovation, technology and strategic alliances to differentiate our business. In order to achieve the goals of the strategic plan detailed above, the Company plans to enhance its current systems environment. This includes a focus on the systems supporting the domestic Borders superstore business, including merchandise buying, replenishment and supply chain, as well as in-store technology enhancements. In addition, this effort includes development of a proprietary e-commerce platform, which includes both in-store and online e-commerce components. The proprietary e-commerce Web site launched in May of 2008, and the in-store e-commerce kiosks were introduced into Borders stores during the fourth quarter of 2008. This strategy allows the Company to engage in key partnerships that are expected to build incremental revenues and margins, connect e-commerce sales to the Company’s Borders Rewards loyalty program and integrate Borders.com and its domestic Borders Superstores, creating a cross-channel experience for customers.

The Company plans to continue to execute this strategy throughout the remainder of fiscal 2008, factoring in its belief that the remainder of the year will be challenging for retailers due to continued uncertainty in the economic environment, and will focus on maximizing cash flow and profitability. The Company plans to reduce capital spending by investing in projects with short paybacks and high returns, and expects capital expenditures in fiscal 2008 to be approximately $80 million. In addition, the Company will continue to review all cost structures with the goal of reducing expenses to improve profitability, will continue to reduce working capital needs, and drive inventory productivity, thus improving cash flow and lowering supply chain costs. In addition, the Company is launching an initiative to improve its gross margin rate and total gross margin dollars. Driven by all these factors, the Company expects to reduce expenses, including corporate, stores and distribution expenses, by $70 million in 2008 and by an additional $70 million in fiscal 2009.

Other Information

The Company operates a loyalty program, Borders Rewards. Membership in Borders Rewards is free, with no enrollment costs or annual fees. Members can earn Borders Bucks in increments of $5 for each cumulative $150 they spend on qualifying purchases in a calendar year at Borders and Waldenbooks stores nationwide. Borders Bucks expire 30 days after receipt by the member if not redeemed. In addition, the Company will be offering Bonus Rewards Events, whereby members get special deals periodically throughout the year.

The Company has an agreement with Berjaya Corporation Berhad (“Berjaya”), a publicly-listed diversified corporation headquartered in Malaysia, establishing a franchise arrangement under which Berjaya will operate Borders stores in Malaysia. The Company also has an agreement with Al Maya Group (“Al Maya”), a diversified corporation headquartered in the United Arab Emirates, establishing a franchise agreement under which Al Maya or its affiliates operates Borders stores in the United Arab Emirates and other Gulf Cooperation Council (“GCC”) countries.

The Company, through its subsidiaries, had agreements with Amazon.com, Inc. (“Amazon”) to operate Web sites utilizing the Borders.com and Waldenbooks.com URLs (the “Web Sites”). Under these agreements, Amazon was the merchant of record for all sales made through the Web Sites, and determined all prices and other terms and conditions applicable to such sales. Amazon was responsible for the fulfillment of all products sold through the Web Sites and retained all payments from customers. The Company received referral fees for products purchased through the Web Sites. The agreements contained mutual indemnification provisions, including provisions that define between the parties the responsibilities with respect to any liabilities for sales, use and similar taxes, including penalties and interest, associated with products sold on the Web Sites. Taxes were not collected with respect to products sold on the Web Sites except in certain states. As previously discussed, the Company launched its proprietary e-commerce site during May of 2008, and the Amazon agreements have been terminated subject to the survival of indemnification and certain other provisions.

Discontinued Operations

On June 10, 2008, the Company sold all of the outstanding shares of Borders Australia Pty Limited, Borders New Zealand Limited and Borders Pte. Ltd. to companies affiliated with A&R Whitcoulls Group Holdings Pty Limited (“the Purchasers”). Funds managed by Pacific Equity Partners Pty Limited are the principal shareholders of A&R Whitcoulls Group Holdings Pty Limited, a leading bookseller in Australia and New Zealand. The following is a summary of the principal terms of the Agreement:

The Purchasers’ consideration to the Company was (a) a cash payment of $97.3 million, (b) a deferred payment of $3.4 million, payable on or about January 1, 2009 if certain actual operating results for fiscal 2008 exceed a specified level, approximating 2007 results; and (c) a deferred payment of up to $6.8 million payable on or about March 31, 2009 if certain actual operating results for fiscal 2008 exceed a specified level.

The sale agreement included all 30 Borders superstores located in Australia, New Zealand and Singapore. All assets and liabilities, with the exception of outstanding lease guarantees relating to four stores, remained with the entities sold, which are now owned by the Purchasers. With respect to the contingent lease obligations, based upon current rents, taxes, common area maintenance charges and exchange rates, the maximum amount of potential future payments (undiscounted) is approximately $13.7 million. The Company has recorded a contingent liability of approximately $0.7 million based upon the likelihood that the Company will be required to perform under the guarantees. Also under the terms of the sale agreement, the Company provided certain tax indemnifications to the Purchasers, with the maximum amount of potential future payments (undiscounted) totaling approximately $5.1 million. The Company previously reserved for this item.

The Company did not record any amount related to the contingent deferred consideration of $10.2 million. The Company will record this amount once the realization of such amount is resolved beyond a reasonable doubt. As a result of the sale of the Australia, New Zealand and Singapore bookstores, a portion of the intangible asset attributable to these businesses, resulting from the Pershing Square Financing Agreement and which totaled $17.5 million, was added to the carrying value of the related businesses and expensed upon disposal, and is included in the loss on disposal.

On September 21, 2007, the Company sold its U.K. and Ireland bookstore operations to Bookshop Acquisitions Ltd., a corporation formed by Risk Capital Partners, a private equity firm in the United Kingdom. The consideration for the sale was: (i) cash of $20.4 million; (ii) the potential for up to an additional $16.5 million of contingent deferred consideration, which will be payable in whole or in part only if specified sales levels are achieved by the U.K. and Ireland bookstore operations in future years; (iii) a 19.9% equity interest in Bookshop Acquisitions Ltd.; and (iv) 7% loan notes of approximately $2.8 million which mature in 2017 or sooner upon the occurrence of certain events.

The sale agreement included all 41 Borders superstores located in the U.K. and the Borders superstore in Ireland, as well as all 28 Books etc. stores. All assets and liabilities, with the exception of outstanding lease guarantees relating to four stores, remained with the entities sold, which are now owned by Risk Capital Partners. The maximum potential liability under these lease guarantees is approximately $137.5 million. The leases provide for periodic rent reviews, which could increase the Company’s potential liability. One of the applicable lease guaranty agreements provides that the guaranty will automatically terminate if Borders U.K. Limited achieves a specified level of net assets. This potential limitation has not been considered in calculating the maximum exposures set forth above. In addition, in the event of a default under the primary leases and the landlord does not require the Company to take a new (replacement) lease, the landlord would have an obligation to attempt to re-lease the premises, which could further reduce the Company’s potential liability. As of the end of the third quarter of 2008, the Company has re-evaluated the likelihood that it will have to perform under the guarantees and as a result, recorded an additional reserve of $5.5 million, bringing the total recorded liability to approximately $10.3 million as of November 1, 2008.

Also under the terms of the sale agreement, the Company indemnified the U.K. and Ireland operations from the tax liability, if any, imposed upon it as a result of the forgiveness of the portions of intercompany indebtedness owing from the Company. The maximum potential liability is approximately $8.9 million, and the Company has recorded a liability of approximately $3.6 million based upon the likelihood that the Company will be required to perform under the indemnification.

The Company did not record any amount related to the contingent deferred consideration of $16.5 million. The Company will record this amount once the realization of such amount is resolved beyond a reasonable doubt. The Company has attributed only a nominal value to its equity interest in Bookshop Acquisitions Ltd. and to its 7% loan notes.

These disposals resulted in losses of $3.2 million and $117.5 million for the 13 weeks ended November 1, 2008 and November 3, 2007, respectively, while the operation of the disposed businesses resulted in a loss of $3.6 million for the 13 weeks ended November 3, 2007. These disposals resulted in losses of $1.0 million and $120.8 million for the 39 weeks ended November 1, 2008 and November 3, 2007, respectively, while the operation of the disposed businesses resulted in losses of $1.7 million and $13.3 million for the 39 weeks ended November 1, 2008 and November 3, 2007, respectively.

Subsequent Event

During the fourth quarter of 2008, the Company agreed to purchase the remaining 3% of shares in Paperchase Products, Ltd. (“Paperchase”) that it had not previously owned. As a result, the Company increased its ownership of Paperchase to 100%. The purchase price approximates $3.6 million.

Consolidated Results - Comparison of the 13 weeks ended November 1, 2008 to the 13 weeks ended November 3, 2007

Sales

Consolidated sales decreased $75.7 million, or 10%, to $682.1 million in 2008 from $757.8 million in 2007. This resulted from decreased sales in all operating segments.

Comparable store sales measures include stores open more than one year, with new stores included in the calculation upon their 13th month of operation. Comparable store sales measures for Waldenbooks Specialty Retail include the Company’s mall-based seasonal businesses.

Comparable store sales for domestic Borders Superstores decreased 12.8% in the third quarter of 2008. This was primarily a result of a significant decline in customer traffic, mainly during the months of September and October, which contributed to negative comparable store sales in trade books. Also contributing to the decline in comparable store sales were decreased comparable store sales in the music category of 39.7%, primarily due to continuing negative sales trends of the CD format and the Company’s planned reduction in inventory and floor space devoted to the category. Partially offsetting these declines were positive comparable store sales in the children’s and the gifts and stationery categories. Excluding the music category, comparable same store sales would have declined by 10.6% during the third quarter of 2008. The impact of price changes on comparable store sales was not significant.

Waldenbooks Specialty Retail’s comparable store sales decreased 7.7% in the third quarter of 2008, also due to a significant decline in customer traffic during the months of September and October. The impact of price changes on comparable store sales was not significant.

Other revenue

Other revenue for the domestic Borders Superstores segment primarily consists of income recognized from unredeemed gift cards, as well as revenue from franchises, marketing revenue earned through partnerships with third parties, wholesale revenue earned through sales of merchandise to other retailers, as well as referral fees received from Amazon as part of the Web Site agreement. Other revenue in the Waldenbooks Specialty Retail segment primarily consists of income recognized from unredeemed gift cards.

Other revenue increased $3.9 million, or 52.7%, to $11.3 million in 2008 from $7.4 million in 2007, due to an increase in the domestic Borders Superstores segment, primarily due to increased revenue earned through sales of merchandise to other retailers. Other revenue in the Waldenbooks Specialty Retail remained flat during the third quarter of 2008 compared to the third quarter of 2007.

Gross margin

Consolidated gross margin decreased $19.9 million, or 11.9%, to $146.8 million in 2008 from $166.7 million in 2007. As a percentage of sales, consolidated gross margin decreased 0.6%, to 21.5% in 2008 from 22.1% in 2007. This was due to a decrease as a percentage of sales in the domestic Borders Superstores segment, primarily due to increased occupancy costs as a percentage of sales, a result of the de-leveraging of costs driven by negative comparable store sales. This was partially offset by decreased shrink expense, distribution expense, and promotional discounts as a percentage of sales. The decrease as a percentage of sales in the domestic Borders Superstores was partially offset by an increase in the Waldenbooks Specialty Retail segment as a percentage of sales, due to decreased distribution and occupancy costs as a percentage of sales. Partially offsetting these items were increased promotional discounts as a percentage of sales.

The Company classifies the following items as “Cost of merchandise sold (includes occupancy)” on its consolidated statements of operations: product costs and related discounts, markdowns, freight, shrinkage, capitalized inventory costs, distribution center costs (including payroll, rent, supplies, depreciation, and other operating expenses), and store occupancy costs (including rent, common area maintenance, depreciation, repairs and maintenance, taxes, insurance, and others). The Company’s gross margin may not be comparable to that of other retailers, which may exclude the costs related to their distribution network from cost of sales and include those costs in other financial statement lines.

Selling, general and administrative expenses

Consolidated selling, general and administrative expenses (“SG&A”) decreased $12.7 million, or 5.8%, to $204.6 million in 2008 from $217.3 million in 2007. As a percentage of sales, SG&A increased 1.3%, to 30.0% in 2008 from 28.7% in 2007, due to an increase in the domestic Borders Superstores segment, partially offset by a decrease in the Waldenbooks Specialty Retail segment as a percentage of sales. SG&A in the domestic Borders Superstores segment increased as a percentage of sales due to increased corporate payroll and operating expenses, as well as an increase in store operating expense and advertising expense as a percentage of sales, all primarily due to the decrease in comparable store sales. Partially offsetting these increases was a decrease as a percentage of sales in store payroll expenses. SG&A as a percentage of sales in the Waldenbooks Specialty Retail segment decreased due to decreased corporate payroll expenses and advertising costs as a percentage of sales, primarily a result of the Company’s expense reduction initiative. Partially offsetting these costs were increased corporate operating expenses and store payroll expenses as a percentage of sales, primarily due to the decline in comparable store sales.

The Company classifies the following items as “Selling, general and administrative expenses” on its consolidated statements of operations: store and administrative payroll, rent, depreciation, utilities, supplies and equipment costs, credit card and bank processing fees, bad debt, legal and consulting fees, certain advertising income and expenses and others.

Asset Impairments and Other Writedowns

During the third quarter of 2008, based on a combination of factors, including the current economic environment and the Company’s operating results, the Company concluded that there were sufficient indicators to require the performance of long-lived asset impairment tests as of the end of the quarter. As a result of these third quarter tests, the Company recorded a pre-tax charge of $48.4 million, comprised of the following: $45.0 million related to domestic Borders Superstores, $3.3 million related to Waldenbooks Specialty Retail stores and $0.1 million related to one Borders store in Puerto Rico.

Also during the third quarter of 2008, based on a combination of factors, including the current economic environment, the Company’s operating results, and a sustained decline in the Company’s market capitalization, the Company concluded that there were sufficient indicators to require the performance of an interim goodwill impairment test as of the end of the quarter. As a result of this third quarter test, no impairment of the Company’s $40.5 million of goodwill existed as of November 1, 2008.

Interest expense

Consolidated interest expense decreased $11.1 million, or 91.0%, to $1.1 million in 2008 from $12.2 million in 2007. This was primarily a result of income recognized on the fair market value adjustment of the warrant liability of $12.7 million. Also impacting interest expense were lower debt levels during the third quarter of 2008 as compared to the third quarter of 2007, partially offset by the amortization of the term loan discount of $3.0 million.

Taxes

During the third quarter of 2008, the Company recorded a non-cash charge of $107.0 million related to establishing a full valuation allowance against its domestic net deferred tax assets. The Company determined during the quarter that, based on operating results, it was more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not be realized.

The Company’s effective tax rate was -57.5% in the third quarter of 2008 compared to 38.9% in the third quarter in 2007. This unfavorable decrease, which results in tax expense as the Company is in a pre-tax loss position, is primarily due to the impact of recording in the third quarter of 2008 a valuation allowance against domestic net deferred tax assets of $107.0 million, partially offset by the impact of the re-measurement of stock warrants to fair market value.

Loss from continuing operations

Due to the factors mentioned above, loss from continuing operations as a percentage of sales increased to 25.2% in 2008 from 5.2% in 2007, and loss from continuing operations dollars increased to $172.2 million in 2008 from $40.0 million in 2007.

Consolidated Results - Comparison of the 39 weeks ended November 1, 2008 to the 39 weeks ended November 3, 2007

Sales

Consolidated sales decreased $153.0 million, or 6.6%, to $2,160.8 million in 2008 from $2,313.8 million in 2007. This resulted primarily from decreased sales in the Borders and Waldenbooks Specialty Retail segments, partially offset by increased sales in the International segment.

Comparable store sales measures include stores open more than one year, with new stores included in the calculation upon their 13th month of operation. Comparable store sales measures for Waldenbooks Specialty Retail include the Company’s mall-based seasonal businesses.

Comparable store sales for domestic Borders Superstores decreased 8.6% in 2008. This was primarily due to the 2007 release of the final book in the Harry Potter series, as well as a significant decline in customer traffic that occurred during the months of September and October 2008 which contributed to negative comparable store sales in trade books. Also contributing to the decline in comparable store sales were decreased comparable store sales in the music category of 30.5%, primarily due to continuing negative sales trends of the CD format and the Company’s planned reduction in inventory and floor space devoted to the category. Partially offsetting these declines were positive comparable store sales in the bargain books and gifts and stationery categories. Excluding the music category, comparable same store sales would have declined by 7.3% in 2008. The impact of price changes on comparable store sales was not significant.

Waldenbooks Specialty Retail’s comparable store sales decreased 5.2% in 2008, also primarily due to the 2007 release of the final book in the Harry Potter series, as well as a significant decline in customer traffic that occurred during the months of September and October 2008. The impact of price changes on comparable store sales was not significant.

Other revenue

Other revenue for the Borders segment primarily consists of income recognized from unredeemed gift cards, as well as revenue from franchises, marketing revenue earned through partnerships with third parties, wholesale revenue earned through sales of merchandise to other retailers, as well as referral fees received from Amazon as part of the Web Site agreement. Other revenue in the Waldenbooks Specialty Retail segment primarily consists of income recognized from unredeemed gift cards.

Other revenue increased $6.4 million, or 31.2%, to $26.9 million in 2008 from $20.5 million in 2007, due to an increase in the Domestic Borders Superstores segment, primarily due to increased revenue earned through sales of merchandise to other retailers. Other revenue in the Waldenbooks Specialty Retail Segment remained flat during 2008 compared to 2007.

CONF CALL

Edward Wilhelm

Good morning, everyone. This is Edward Wilhelm, CFO of Borders Group and I am here this morning with our CEO, George Jones. Thanks for being with us on the call today.

Before we begin, I need to point out that this conference call includes forward-looking statements. These statements, among others, include sales and earnings expectations and information related to corporate initiatives.

Please refer to the news release issued last evening and our most recently filed 10-K for information relating to forward-looking statements, including factors that could cause actual results and plans to differ.

I will now turn it over to George who will get started with today’s call.

George Jones

Good morning everyone. As all of you know the focus at Borders Group since the beginning of this year has been on strengthening our balance sheet. With that as our top priority we detailed several months ago our efforts to significantly reduce debt, improve cash flow, reduce expenses, and improve the productivity of our inventory.

We have attacked each of these objectives with specific and highly focused effort designed to drive substantial results quickly. I am pleased to report again this quarter that we’ve made great strides even in the midst of this most challenging economic environment.

In the third quarter we reduced debt year-over-year by over $273 million, that’s a 34.2% reduction in debt compared to the same period last year.

Operating cash flow from continuing operations improved by $110 million as we moved from a fiscal year-to-date cash use of $100.6 million a year ago to positive cash flow of $9.4 million year-to-date this year.

We significantly improved inventory productivity due in large part to the work we are doing in conjunction with our vendors. We reduced inventory at cost by $304.2 million or 19.5% of reductions at the end of the third quarter compared to the end of the third quarter a year ago.

Our intense focus on inventory management called for us to collaborate more closely with vendors on opportunities such as [sage] product flow, accelerated returns, assortment management, and other efforts, some of which are standard practice in many industries that have been long overdue in the book-selling business.

I’ve been outspoken about the need for these types of industry-wide changes since I joined Borders as CEO almost two-and-a-half years ago. While our need to improve cash flow and reduce debt as well as the difficult overall economic environment really accelerated these efforts, make no mistake that this is a much more intelligent way to run our business overall.

And when the dust settles we will emerge as the better run and more profitable company because of these efforts. I am extremely pleased with the strong partnership and support we are now getting on this from our key vendors.

At the same time we realize that these inventory initiatives have had at least some degree of negative impact on our sales. With a program as aggressive and multifaceted as the one we have implemented the cuts were not always as surgical as we would have liked. But we are now in the process of doing a store-by-store deep dive into our inventory, returning what is not selling and adding back in where we may have cut too deeply at specific store locations. We are fine-tuning.

Expense reduction has also been a special focus this year. About six months ago we announced that we would reduce annual operating expenses by $120 million beginning in 2009 and would achieve half of that target or $60 million in savings this year.

We have successfully implemented a comprehensive expense reduction effort that has touched every part of our business and I’m pleased to tell you that we are now on track to exceed the original target. We now plan to reduce annual operating expenses by $140 million in 2009, with at least $70 million in savings this year.

I am very proud of the tremendous progress our team has made at reducing expenses and enhancing the inventory productivity this year and now, we are beginning to embark with the same intensity on another high focus special project, that’s gross margin improvement.

We have brought in an external consultant as we did with the previous successful special projects to help with this initiative and we feel there is a major opportunity for us to make improvements that will increase both gross margin rates and total gross margin dollars, with an emphasis on that, total gross margin dollars. We are focusing on improving our gross margin dollars.

As we stated in our release our third quarter earnings on an operating basis were essentially flat versus the same period last year. We certainly had originally planned for much stronger earnings but that was before we encountered the current retail climate, which is by far the most [pervasively] difficult I’ve ever seen during my 36-year retail career.

We got in front of this storm however as early this year we revised our planned sales to very conservative levels and took the necessary steps to reduce inventory and expenses. So even though customer traffic has declined during this period, sales have been tough, we have still managed our business well and the result is that we have still been able to make major progress on improving our balance sheet.

I also want to point out that Borders actually turned out to be one of the very few retailers that did not report significantly decreased operating earnings for the quarter. As I said, our operating loss from continued operations was essentially flat versus last year.

On the sales line, same store sales at Borders superstores decreased for the quarter by 12.8%. Factoring out the music category superstore comps declined by 10.6% and Waldenbooks had a 7.7% same store sales decline.

We experienced the same problems as almost every other retailer as our negative comps were primarily a traffic issue and the traffic drop was especially pronounced in September and October. Also, as I previously mentioned our inventory efforts are likely responsible for at least some of the same store sales decline and as I noted we are taking aggressive measures to identify where we may have reduced inventory too deeply in certain stores and are carefully adding back inventory on a store-by-store basis.

We did see positive performance in some categories including children’s where the Stephanie Meyer Twilight Saga [inaudible] drove really strong results and in addition we continue to see good results out of our Paperchase gifts and stationary category which also had positive comps this quarter.

With regard to borders.com as our news release stated, we had sales in the third quarter of $11.9 million, a lower then expected result that was driven by overall economic conditions which slowed online traffic as well.

In addition we delayed the public grand opening of the site until the last two weeks of July this year before we got it open, so the ramp up of borders.com got a late start. Due to the sales shortfall we do not expect, as originally predicted, to break-even with the site this year.

However we continue to be very pleased with the site itself and the overall customer response to it. We have just completed the rollout of borders.com to select kiosks in each of our Borders stores giving customers the ability to order using borders.com while in our stores.

We look forward to the cross-channel opportunities this can drive going forward.

We continue to market directly to our now nearly 30 million Borders Rewards loyalty program efforts. Membership continues to grow by over 127,000 new members weekly who receive our weekly shortlist emails.

As [inaudible] our stores are stocked and ready for the holidays. We expect to see strength in titles such as Malcolm Gladwell’s Outliers, James Patterson’s Cross Country, and Ina Garten’s newest, Barefoot Contessa Back to Basics.

Building on the success of the Stephanie Meyer books and the recently released Twilight film we have taken an industry-leading position in our stores with dedicated tables featuring the Twilight Saga books as well as a tremendous assortment of other items related to the film, some of those which are exclusive to Borders that are popular with tweens and teens.

In addition we are thrilled to have a retail exclusive on Aretha Franklin’s first ever Christmas CD titled This Christmas. She was just named the greatest singer of all time by Rolling Stone Magazine and this CD is getting an incredible amount of attention in the major media. We truly believe that our stores are the place where shoppers can get something for virtually everyone on their shopping list and at a price point that are attractive, especially this year.

Before I turn it over to Edward, I want to address the update we provided regarding the strategic alternatives process. As reported in our press release with respect to the sale of the company we are no longer contemplating a transaction.

Regarding Paperchase we retained the right to exercise the put option to sell Paperchase to Pershing Square Capital Management for $65 million and we are also in discussions with Pershing Square regarding an alternative financing transaction.

Of course no assurance can be given as to whether an alternative financing transaction will be entered into or contemplated. The process we undertook was very comprehensive however it has also been a notable distraction. We are pleased to have it behind us. We are now moving forward and I’m very pleased with and quite encouraged by the important progress we continue to make on our balance sheet.

With that, I’ll turn it over to Edward.

Edward Wilhelm

Thanks George, I want to provide a little more color primarily on the key initiatives that are driving cash flow, debt reduction, profitability improvement, as well as the non-cash, non-operating charges we took in the quarter.

We continue to have a clear focus on maximizing our cash flow and are exploring any and all alternatives to do so. Primary drivers of maximizing cash flow and profitability include reducing our working capital needs and improving inventory productivity, reducing our capital spending, and reducing expenses and improving our gross margins.

Our results so far in 2008 show the significant progress we have made. As it relates to the inventory reduction, one of the drivers has been the reduction in music inventory which was decreased by 30% compared to last year.

We have reduced floor space dedicated to music in all of our stores by about a third on average. Music now occupies about 7% of our total floor space. The space previously occupied by music was reallocated to growth categories such as children’s books and bargain books.

In addition we’ve reduced weeks of supply and book inventory and DVD inventory as well. As Georges said we are working closely with our vendors to execute this inventory productivity initiative. Together with our vendors we are analyzing sales potential but being prudent in our assessment.

We are also leveraging our distribution network to a greater degree and creating a more just-in-time inventory model. Borders.com has been rolled out to all of our stores for this holiday season and will not only help drive special order sales but will also help drive inventory productivity.

There continues to be a lot of opportunity in this area and it will remain a key driver of cash flow for us going forward.

Related to capital spending we remain on track to spend approximately $80 million in capital expenditures this year including approximately $10 million to support Paperchase overseas. That compares to a total capital spend of $143 million in 2007.

The CapEx reduction will be another key driver of cash flow improvement for us in 2008 and going forward.

We continue to diligently review all discretionary capital projects and are spending capital only where significant financial returns are assured. We are spending capital where necessary to maintain stores, distribution centers, and critical IT systems.

Next, I want to update you on the status of improving the profitability of our business. The key drivers of profit improvement include operating expense reductions, gross margin improvement including lower DVD and shrink and café waste, and lower interest expense driven by positive cash flow and lower overall debt levels.

Regarding our operating expense reduction initiative we continue to critically review the cost structure of or entire business. Earlier this year we began taking significant steps to reduce expenses. As George noted we are on track to now realize approximately $70 million of expense savings in 2008 and expect to be operating at a level to realize $140 million in annualized expense savings at the beginning of fiscal 2009.

The incremental expense savings are across the board with store expense and facilities maintenance being the largest individual areas.

We are very confident in our ability to deliver these expense savings and have made good progress as demonstrated by the reduction in absolute SG&A dollars of over $22 million realized in the third quarter of this year compared to the prior year.

Next related to gross margin improvement we made progress again in the third quarter. Absent the negative impact of deleveraging occupancy costs, our gross margins improved by 30 basis points compared to last year.

The major items contributing to this improvement include a favorable sales mix and lower shrink. Sales mix was favorable as the higher margin categories such as gifts and stationary and bargain books continued to show a comp sales performance that outpaced the total store while music, a low margin category continued to show a significant decline in comp sales.

Related to DVD shrink and café waste, given the control actions implemented late last year our cycle inventory results continue to show improvement over the prior year. In the third quarter shrink improved in the Borders superstore segment by about $4 million or 70 basis points over last year bringing our year-to-date shrink improvement to $6.5 million over last year.

We continue to work diligently to reduce our shrink costs. In the third quarter we incurred significant non-operating charges related to asset impairments and other items. These charges totaled $133 million after-tax and were non-cash.

The most significant charge related to write-downs of deferred tax assets which totaled $107 million. In addition we were required by accounting rules to test store assets for impairment and as a result recorded an after-tax charge totaling $31 million.

This test had typically been done in the fourth quarter in previous years, however certain impairment indicators required that the test be done in the third quarter this year.

There were other miscellaneous items as detailed in our press release which on a combined basis totaled about $5 million in after-tax income, again, these non-operating charges while significant and required by GAAP were non-cash.

To conclude, we as a management team remain keenly focused on maximizing cash flow and improving the profitability of our business even in the face of a weak consumer environment.

That’s it today for our prepared comments, we’ll now open it up for questions.

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