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FORM 10-K

For the fiscal year ended January 27, 2002

OR

For the transition period from                to                .

Commission File Number 1-13740

BORDERS GROUP, INC.

(734) 477-1100

Securities registered pursuant to section 12(g) of the act:

Securities registered pursuant to Section 12(b) of the act:

None

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x       No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $1,903,653,086 based upon the closing market price of $23.91 per share of Common Stock on the New York Stock Exchange as of March 28, 2002.

Number of shares of Common Stock outstanding as of March 28, 2002: 81,635,509

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant’s Proxy Statement for the May 23, 2002 Annual Meeting of Stockholders are incorporated by reference into Part III.

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BORDERS GROUP, INC.

INDEX

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General

      Borders Group, Inc. (the Company), through its subsidiaries, Borders, Inc. (Borders), Walden Book Company, Inc. (Waldenbooks), Borders U.K. Limited, Borders Australia PTY Limited and others, is the second largest operator of book superstores and the largest operator of mall-based bookstores in the world based upon both sales and number of stores. At January 27, 2002, the Company operated 385 superstores primarily under the Borders name, including 12 in the United Kingdom, six in Australia, two in Puerto Rico, and one each in Singapore and New Zealand. The Company also operated 827 mall-based and other bookstores primarily under the Waldenbooks name and 36 bookstores under the Books etc. name in the United Kingdom.

Borders

      Borders is a premier operator of book and music superstores, offering customers selection and service that the Company believes to be superior to other book superstore operators. A key element of the Company’s strategy is to continue its growth and increase its profitability through the ongoing expansion and refinement of its Borders book and music superstore operations. In 2001, the Company opened 29 new Borders book and music superstores. Borders superstore operations achieved annual growth in net sales and net income for the year ended January 27, 2002 of 6.0% and 27.6% respectively. Borders superstores also achieved average sales per square foot of $245 and average sales per superstore of $6.4 million in 2001. The Company believes its average sales per superstore to be higher than the comparable figure of any publicly reporting book superstore operator. Borders superstores achieved compound annual growth in net sales for the three years ended January 27, 2002 and January 28, 2001 of 13.6% and 18.5%, respectively.

      Each Borders superstore offers customers a vast assortment of books, superior customer service, value pricing and an inviting and comfortable environment designed to encourage browsing. Borders superstores carry an average of 116,000 book titles, ranging from 73,000 titles to 204,000 titles, across numerous categories, including many hard-to-find titles. As of January 27, 2002, 349 of the 363 domestic Borders superstores were in a book and music format, which also feature an extensive selection of pre-recorded music, with an emphasis on hard-to-find recordings and categories such as jazz, classical and foreign music, and a broad assortment of pre-recorded videotapes and digital video discs, focusing primarily on classic movies and hard-to-find titles. Each book and music superstore carries approximately 34,000 titles of music and over 6,000 titles of videotapes and digital video discs.

      Borders superstores average 26,200 square feet in size, including approximately 5,000 square feet devoted to music, approximately 600 square feet devoted to videos and digital video discs and approximately 1,400 square feet devoted to a café. Stores opened in fiscal 2001 averaged 24,600 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.

      Borders has entered into an agreement with an affiliate of Amazon.com under which customers will be able to order certain book, music and video products on Borders.com or Amazon.com for pick up in Borders stores. This service is expected to be available for the 2002 holiday season.

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      The number of Borders domestic stores located in each state and the District of Columbia as of January 27, 2002 are listed below:

Waldenbooks

      Waldenbooks is the leading operator of mall-based bookstores in terms of sales and number of stores, offering customers a convenient source for new releases, hardcover and paperback bestsellers, periodicals, and a standard selection of other titles. Waldenbooks generates cash flow that the Company uses to finance the Company’s growth initiatives. Waldenbooks achieved average sales per square foot of $266 and average sales per store of $1.1 million for 2001, both of which the company believes are higher than its closest competitor. Waldenbooks stores average approximately 3,500 square feet in size and typically carry between 15,000 and 40,000 titles.

      Waldenbooks operates one of the longest-running customer loyalty programs in the nation, the Preferred Reader Program. The lessons learned via this program are helping the Company in considering the development of customer loyalty programs across its other business channels.

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      The number of Waldenbooks stores located in each state and the District of Columbia as of January 27, 2002 are listed below:

International

      The Company’s international initiative began in 1997 with the acquisition of Books etc. in the United Kingdom and the opening of a superstore in Singapore. Since then, Borders has expanded its international operations to establish a presence on four continents. The Company opened eight international superstores in 2001, and as of January 27, 2002, operated 12 superstores in the United Kingdom, six in Australia, two in Puerto Rico, and one each in Singapore and New Zealand.

      International superstores range between 16,000 and 43,000 square feet in size, and tend to be multi-level facilities located in older buildings in urban locations. The Company believes it has a competitive advantage due to the depth of Borders’ system-driven assortment and level of service. In 2001, international sales increased 14.8% to $251.7 million. Currently, four of the ten highest volume Borders superstores are international stores.

      Borders U.K. Limited also operated 36 stores under the Books etc. name in the United Kingdom as of January 27, 2002, all of which are small-format stores located primarily in central London or in various airports in the United Kingdom. These stores generally range from 2,000 to 5,000 square feet in size, with the largest being 8,000 square feet, and the smallest being 650 square feet.

Borders.com and Waldenbooks.com

      From May 1998 to August 2001, the Company operated an Internet commerce site, Borders.com. In August 2001, the Company re-launched Borders.com as a co-branded Web site powered by Amazon.com’s e-commerce platform. Amazon.com became the seller of record, providing inventory, fulfillment, site content and

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      In the consolidated financial statements, amounts relating to Borders.com, other than intercompany interest expense (net of related taxes), have been reclassified from prior years into the Borders segment. Intercompany interest charges (net of related taxes) relating to Borders.com have been included in the Other segment.

Discontinued Operations

      In January 2001, the Company adopted a plan to discontinue operations of All Wound Up, a seasonal retailer of interactive toys and novelty merchandise the Company had acquired in March 1999. Accordingly, the operating results of AWU have been segregated from continuing operations.

Segment Information

      The Company is organized based upon the following operating segments: domestic Borders stores, Waldenbooks stores, international Borders and Books etc. stores, and other. For financial information about segments, see “Note 15 — Segment Information” in the notes to consolidated financial statements.

Distribution

      The Company believes that its centralized distribution system, consisting of 13 distribution facilities worldwide, combined with Borders’ use of its proprietary “expert” system to manage inventory, significantly enhances its ability to manage inventory on a store-by-store basis. Inventory is shipped from vendors to one of the Company’s distribution centers. Approximately 95% and 70% of the books carried by Borders and Waldenbooks, respectively, are processed through the Company’s distribution facilities. Approximately 85% of the inventory that arrives from publishers is processed within 48 hours for shipment to the stores. Newly released titles and rush orders are processed within 24 hours. Borders purchases substantially all of its music merchandise directly from manufacturers and utilizes the Company’s own distribution center to ship approximately 99% of its music inventory to its stores.

      The Company utilizes distribution centers located in Harrisburg, Pennsylvania; Indianapolis, Indiana; Columbus, Ohio; Mira Loma, California and Nashville, Tennessee that provide exclusive service to Borders’ stores. The Company also utilized a distribution center in Columbus that serviced the All Wound Up seasonal kiosk operations in fiscal 2000. The distribution center in Columbus closed in 2001 due to the discontinuance of operations of All Wound Up. In addition, the Company has distribution facilities in Mira Loma, California and Nashville, Tennessee that service Waldenbooks and provide central overstock for Borders’ stores. Distribution centers located in the United Kingdom, Australia, Puerto Rico and Singapore support the Company’s growing international business.

      The Company has a 200,000 square-foot fulfillment center in La Vergne, Tennessee that supported Borders.com prior to August 2001. Pursuant to the agreement with Amazon.com as discussed above, Amazon.com assumed the fulfillment of online orders upon the transition to a co-branded site in August 2001. This fulfillment center also distributed the Company’s special order merchandise to Borders and Waldenbooks stores. Pursuant to the March 15, 2001 agreement, Ingram Book Group became the primary provider of book fulfillment services for Borders Group’s special order sales. The transaction included the sale to Ingram of a large percentage of the book inventory housed in this fulfillment center. The Company has converted the La Vergne facility to support other products and retail store growth.

      In general, books can be returned to their publishers at cost. Borders and Waldenbooks stores return books to the Company’s centralized returns center in Nashville, Tennessee to be processed for return to the publishers. In general, Borders can return music and videos to its vendors at cost plus an additional fee to cover handling and processing costs.

Competition

      The retail book business is highly competitive. Competition within the retail book industry is fragmented with Borders facing direct competition from other superstores, such as Barnes & Noble, Inc., as well as regional chains

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      The music and video businesses are also highly competitive and Borders faces competition from large established music chains, such as Tower Records and the Musicland and Media Play divisions of Musicland Stores Corporation (which also sell videos), established video chains, such as Blockbuster and Suncoast Motion Picture Company (a division of Musicland Stores Corporation), as well as specialty retail stores, video rental stores, discount stores, warehouse clubs and mass merchandisers. In addition, consumers receive television and mail order offers and have access to mail order clubs. The largest mail order clubs are affiliated with major manufacturers of pre-recorded music and may have advantageous marketing relationships with their affiliates.

      The Internet has emerged as a significant channel for retailing in all media categories that the Company carries. In particular, the retailing of books and music over the Internet is highly competitive. Competitors on the Internet include Amazon.com, barnesandnoble.com, and others. In addition, the Company faces competition from companies engaged in the business of selling books and music products via electronic means.

Employees

      As of January 27, 2002, the Company had a total of approximately 15,000 full-time employees and approximately 17,000 part-time employees. When hiring new employees, the Company considers a number of factors, including education and experience, personality and orientation towards customer service. All new store employees participate in a training program that provides up to two weeks of in-store training in all aspects of customer service and selling, including title searches for in-stock and in-print merchandise, merchandising, sorting, operation of point of sale terminals and store policies and procedures. The Company believes that its relations with its employees are generally excellent. None of the employees of the Company are represented by unions.

Trademarks and Service Marks

      Borders®, Borders Book Shop®, and Borders Books & Music®, among other marks, are all registered trademarks and service marks used by Borders. Brentano’s®, Coopersmith’s®, Longmeadow Press®, Waldenbooks®, Waldenbooks Preferred Reader®, Waldenkids® and Waldensoftware®, among other marks, are all registered trademarks and service marks used by Waldenbooks. Books etc.® is a registered trademark and service mark used by Borders U.K. Limited, Borders.com® is a registered trademark and service mark used by Borders Online, Inc. The Borders, Walden, Books etc. and Borders.com service marks are used as trade names in connection with their business operations.

Seasonality

      The Company’s business is highly seasonal, with sales generally highest in the fourth quarter and lowest in the first quarter. During 2001, 35.6% of the Company’s sales and 96.1% of the Company’s operating income were generated in the fourth quarter. The Company’s results of operations depend significantly upon the holiday selling season in the fourth quarter; less than satisfactory net sales for such period could have a material adverse effect on the Company’s financial condition or results of operations for the year and may not be sufficient to cover any losses which may be incurred in the first three quarters of the year. The Company’s expansion program generally is weighted with store openings in the second half of the fiscal year. In the future, changes in the number and timing of store openings, or other factors, may result in different seasonality trends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Seasonality”.

Relationship with Kmart

      General. Prior to its initial public offering in May 1995, the Company was a subsidiary of Kmart Corporation (Kmart); Kmart currently owns no shares of common stock of the Company. In January 2002, Kmart Corporation filed for reorganization under Chapter 11 of the US Bankruptcy Code. Such filing has not affected the operations of the Company.

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      Kmart and the Company continue to have the following contractual relationships.

      Tax Allocation and Indemnification Agreement. Prior to the completion of its initial public offering (IPO), the Company was included in the consolidated federal income tax returns of Kmart and filed on a combined basis with Kmart in certain states. Pursuant to a tax allocation and indemnification agreement between the Company and Kmart (Tax Allocation Agreement) the Company will remain obligated to pay to Kmart any income taxes the Company would have had to pay if it had filed separate tax returns for the tax period beginning on January 26, 1995, and ending on June 1, 1995, the date of the consummation of the IPO (to the extent that it has not previously paid such amounts to Kmart). In addition, if the tax liability attributable to the Company for any previous tax period during which the Company was included in a consolidated federal income tax return filed by Kmart or a combined state return is adjusted as a result of an action of a taxing authority or a court, then the Company will pay to Kmart the amount of any increase in such liability and Kmart will pay to the Company the amount of any decrease in such liability (in either case together with interest and penalties). The Company’s tax liability for previous years will not be affected by any increase or decrease in Kmart’s tax liability if such increase or decrease is not directly attributable to the Company. After completion of the IPO, the Company continued to be subject under existing federal regulations to several liability for the consolidated federal income taxes for any tax year in which it was a member of any consolidated group of which Kmart was the common parent. Pursuant to the Tax Allocation Agreement, however, Kmart agreed to indemnify the Company for any federal income tax liability of Kmart or any of its subsidiaries (other than that which is attributable to the Company) that the Company could be required to pay and the Company agreed to indemnify Kmart for any of the Company’s separate company taxes.

      Lease Guaranty Agreement. Borders’ leases for 13 of its retail stores and its distribution center in Harrisburg, Pennsylvania have been guaranteed by Kmart. Under the terms of a lease guaranty, indemnification and reimbursement agreement entered into upon completion of the IPO, as amended, (Lease Guaranty Agreement), the underlying leases will be transferable by Borders, subject to a right of first refusal in favor of Kmart with respect to sites within a three-mile radius of a Kmart store and, with respect to all other sites, a right of first offer in favor of Kmart. The Company and Borders are required to indemnify Kmart with respect to (i) any liabilities Kmart may incur under the lease guarantees, except those liabilities arising from the gross negligence or willful misconduct of Kmart, and (ii) any losses incurred by Kmart after taking possession of any particular premises, except to the extent such losses arise solely from the acts or omissions of Kmart. Under the terms of the Lease Guaranty Agreement, in the event of (i) the Company’s or Borders’ failure to provide any required indemnity, (ii) a knowing and material violation of the limitations on transfers of guaranteed leases set forth in the agreement, or (iii) certain events of bankruptcy, Kmart will have the right to assume any or all of the guaranteed leases and to take possession of all of the premises underlying such guaranteed leases; provided, that in the event of a failure or failures to provide required indemnities, the remedy of taking possession of all of the premises underlying the guaranteed leases may be exercised only if such failures relate to aggregate liability of $10.0 million or more and only if Kmart has provided 100 days’ prior written notice. In the event of a failure to provide required indemnities resulting in losses of more than the equivalent of two months rent under a particular lease but less than $10.0 million, Kmart may exercise such remedy of possession as to the premises underlying the guaranteed lease or leases to which the failure to provide the indemnity relates and one additional premise for each such premises to which the failure relates, up to a maximum, in any event, of five additional premises, and thereafter, with respect to such additional premises, Kmart remedies and indemnification rights shall terminate. In the event of a failure to provide required indemnities resulting in liabilities of less than the equivalent of two months rent under a particular lease, Kmart may exercise such remedy of possession only as to the premises underlying the guaranteed lease or leases to which the failure to provide the indemnity relates. The Lease Guaranty Agreement will remain in effect until the expiration of all lease guarantees, which the Company believes will be in January 2020.

Forward-Looking Statements

      This Annual Report on Form 10-K contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect management’s current expectations and are inherently uncertain. The Company’s actual results may differ significantly from management’s expectations. Exhibit 99.1, “Cautionary Statement Under the Private Securities Litigation Reform Act of 1995”, filed with this

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      Borders leases all of its stores. Borders’ store leases have an average initial term of 15 to 20 years with multiple three- to five-year renewal options. At January 27, 2002, the average unexpired term under Borders’ existing store leases was 13 years prior to the exercise of any options.

      Waldenbooks leases all of its stores. Waldenbooks’ store leases generally have an initial term of ten years. At present, the average unexpired term under Waldenbooks’ existing store leases is approximately 3.5 years. The expiration of Waldenbooks’ mall-based bookstore leases for its bookstores open as of January 27, 2002 expire as follows:

      Books etc. operated 36 stores in the United Kingdom as of January 27, 2002. Books etc. generally leases its stores under operating leases with terms ranging from 5 to 25 years. The average remaining lease term for Books etc. stores is 11.8 years.

      The Company has leased a portion of its corporate headquarters in Ann Arbor, Michigan and owns the remaining building and improvements. The Company leases all distribution centers.

      In August 1998, The Intimate Bookshop, Inc. (Intimate) and its owner, Wallace Kuralt, filed a lawsuit in the United States District Court for the Southern District of New York against the Company, Barnes & Noble, Inc., and others alleging violation of the Robinson-Patman Act and other federal laws, New York statutes governing trade practices and common law. In response to Defendants’ Motion to Dismiss the Complaint, plaintiff Kuralt withdrew his claims and plaintiff Intimate voluntarily dismissed all but its Robinson-Patman claims. Intimate has filed a Second Amended Complaint limited to allegations of violations of the Robinson-Patman Act. The Second Amended Complaint alleges that Intimate has suffered $11.3 million or more in damages and requests treble damages, injunctive and declaratory relief, interest, costs, attorneys’ fees and other unspecified relief. The Company intends to vigorously defend the action.

      Two former employees, individually and on behalf of a purported class consisting of all current and former employees who worked as assistant managers in Borders stores in the state of California at any time between April 10, 1996, and the present, have filed an action against the Company in the Superior Court of California for the County of San Francisco. The action alleges that the individual plaintiffs and the purported class members worked hours for which they were entitled to receive, but did not receive, overtime compensation under California law, and

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      In addition to the matters described above, the Company is from time to time involved in or affected by other litigation incidental to the conduct of its businesses. The Company does not believe that any such other litigation will have a material adverse effect on its liquidity, financial position or results of operations.

      Not applicable.

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      The following table sets forth, for the fiscal quarters indicated, the high and low closing market prices for the Common Stock on the New York Stock Exchange.

      The Common Stock is traded on the New York Stock Exchange.

      As of March 28, 2002, the Common Stock was held by 3,845 holders of record.

      The Company has not declared any cash dividends and intends to retain its earnings to finance future growth. Therefore, the Company does not anticipate paying any cash dividends in the foreseeable future. The declaration and payment of dividends, if any, is subject to the discretion of the Board and to certain limitations under the Michigan Business Corporation Act. In addition, the Company’s ability to pay dividends is restricted by certain agreements to which the Company is a party. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources”.

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

      The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s consolidated financial statements and the notes thereto.