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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-Q/A
AMENDMENT NO. 1
(Mark One) | ||
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 30, 2003 | ||
or | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission File Number: 0-26063
barnesandnoble.com inc.
Delaware | 13-4048787 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
76 Ninth Avenue, New York, NY | 10011 | |
(Address of Principal Executive Offices) | (Zip Code) |
(212) 414-6000
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesþ Noo
Number of shares of $.001 par value Class A Common Stock, Class B Common Stock and Class C Common Stock outstanding as of November 10, 2003 was 48,907,749, one and one, respectively.
barnesandnoble.com inc.
Index to Form 10-Q/A
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11 | ||||||||
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17 | ||||||||
EX-31.1:CERTIFICATION OF CEO | ||||||||
EX-31.2: CERTIFICATION OF CFO | ||||||||
EX-32.1: 906 CERTIFICATION OF CEO | ||||||||
EX-32.2: 906 CERTIFICATION OF CFO |
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EXPLANATORY NOTE
This Form 10-Q/A is being filed for the purpose of amending (i) Part I, Item 1 “Financial Statements” and (ii) Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003, which was filed by barnesandnoble.com inc. on November 14, 2003. The purpose of this amendment is to reflect the push down accounting treatment of Barnes & Noble, Inc.’s acquisition of Bertelsmann AG’s entire interest in barnesandnoble.com llc and barnesandnoble.com inc., which resulted in Barnes & Noble, Inc. increasing its voting interest in barnesandnoble.com inc. from approximately 48.4% to approximately 96.6%.
PART I
FINANCIAL INFORMATION
Item 1:Financial Statements
barnesandnoble.com inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of dollars, except per share data)
(unaudited)
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Net sales | $ | 98,993 | $ | 102,575 | $ | 291,433 | $ | 294,947 | ||||||||
Cost of sales | 74,688 | 77,997 | 219,915 | 227,034 | ||||||||||||
Gross profit | 24,305 | 24,578 | 71,518 | 67,913 | ||||||||||||
Operating expenses: | ||||||||||||||||
Fulfillment and customer service | 8,457 | 8,240 | 25,413 | 26,237 | ||||||||||||
Marketing, sales and editorial | 7,187 | 8,682 | 22,945 | 26,731 | ||||||||||||
Technology and web site development | 8,056 | 8,190 | 23,168 | 27,022 | ||||||||||||
General and administrative | 6,572 | 6,998 | 19,338 | 19,802 | ||||||||||||
Depreciation and amortization | 6,210 | 8,428 | 20,322 | 24,953 | ||||||||||||
Equity in net loss of equity investments including related amortization of intangibles | — | 1,805 | — | 3,179 | ||||||||||||
Total operating expenses | 36,482 | 42,343 | 111,186 | 127,924 | ||||||||||||
Loss from operations | (12,177 | ) | (17,765 | ) | (39,668 | ) | (60,011 | ) | ||||||||
Interest income, net | 22 | 303 | 186 | 1,395 | ||||||||||||
Loss before minority interest | (12,155 | ) | (17,462 | ) | (39,482 | ) | (58,616 | ) | ||||||||
Minority interest | 9,086 | 12,647 | 29,541 | 42,452 | ||||||||||||
Net loss | $ | (3,069 | ) | $ | (4,815 | ) | $ | (9,941 | ) | $ | (16,165 | ) | ||||
Basic net loss per common share | ($0.08 | ) | ($0.11 | ) | ($0.25 | ) | ($0.37 | ) | ||||||||
Basic weighted average common shares outstanding (1) | 40,247 | 43,788 | 40,090 | 43,788 |
(1) | Excludes assumed conversion of Membership Units and the elimination of minority interest, as it is not dilutive. |
See accompanying notes to consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except per share data)
Restated post- | Pre- | |||||||
acquisition, | acquisition, | |||||||
September 30, | December 31, | |||||||
2003 | 2002 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 37,959 | $ | 70,144 | ||||
Receivables, net of allowance $1,889 and $4,048, respectively | 5,524 | 14,631 | ||||||
Merchandise inventories | 47,993 | 48,303 | ||||||
Prepaid expenses and other current assets | 4,122 | 3,991 | ||||||
Total current assets | 95,598 | 137,069 | ||||||
Fixed assets, net | 59,795 | 58,871 | ||||||
Goodwill | 102,137 | 13,777 | ||||||
Trade name | 44,700 | — | ||||||
Intangible assets, net | 4,800 | — | ||||||
Other non-current assets | 20 | 17 | ||||||
Total assets | $ | 307,050 | $ | 209,734 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 12,536 | $ | 16,071 | ||||
Accrued liabilities | 54,871 | 70,456 | ||||||
Payable to affiliate | 51,715 | 48,261 | ||||||
Total current liabilities | 119,122 | 134,788 | ||||||
Minority interest | 173,966 | 52,305 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred Stock: $0.001 par value; 50,000,000 shares authorized; none issued and outstanding | — | — | ||||||
Common Stock Series A: $0.001 par value; 750,000,000 shares authorized; 44,594,993 and 43,802,228 shares issued and outstanding | 44 | 44 | ||||||
Common Stock Series B: $0.001 par value; 1,000 shares authorized; 1 share issued and outstanding | — | — | ||||||
Common Stock Series C: $0.001 par value; 1,000 shares authorized; 1 share issued and outstanding | — | — | ||||||
Paid-in capital | 190,555 | 189,294 | ||||||
Accumulated deficit | (176,637 | ) | (166,697 | ) | ||||
Total stockholders’ equity | 13,962 | 22,641 | ||||||
Total liabilities and stockholders’ equity | $ | 307,050 | $ | 209,734 | ||||
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars, except per share data)
(unaudited)
Nine Months Ended | ||||||||
September 30, | September 30, | |||||||
2003 | 2002 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (9,941 | ) | $ | (16,165 | ) | ||
Adjustments to reconcile net loss to net cash flows from operating activities: | ||||||||
Depreciation and amortization | 20,303 | 25,142 | ||||||
Decrease in receivables, net | 9,107 | 3,684 | ||||||
Decrease (increase) in merchandise inventories | 310 | (1,058 | ) | |||||
Increase in prepaid expenses and other current assets | (131 | ) | (820 | ) | ||||
Increase (decrease) in accounts payable | (3,535 | ) | 12,006 | |||||
Increase (decrease) in payable to affiliate | 3,454 | (3,999 | ) | |||||
Decrease in accrued liabilities | (15,585 | ) | (16,764 | ) | ||||
Minority interest in loss | (29,541 | ) | (42,452 | ) | ||||
Net cash flows used in operating activities | (25,559 | ) | (40,426 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchases of fixed assets | (7,827 | ) | (5,254 | ) | ||||
Sales of marketable securities | — | 10,141 | ||||||
Decrease (increase) in other non-current assets | (2 | ) | 4,396 | |||||
Net cash flows from (used in) investing activities | (7,829 | ) | 9,283 | |||||
Cash flows from financing activities: | ||||||||
Proceeds from exercise of stock options | 1,203 | 1 | ||||||
Net cash flows from financing activities | 1,203 | 1 | ||||||
Net change in cash and cash equivalents | (32,185 | ) | (31,142 | ) | ||||
Cash and cash equivalents at beginning of period | 70,144 | 105,125 | ||||||
Cash and cash equivalents at end of period | $ | 37,959 | $ | 73,983 | ||||
See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2003 and September 30, 2002
(in thousands of dollars, except per share data)
(unaudited)
The unaudited consolidated financial statements include the accounts of barnesandnoble.com inc. (the “Company”), barnesandnoble.com llc (“B&N.com”) and BookQuest LLC (“BookQuest”), a wholly owned subsidiary of B&N.com.
In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly its consolidated financial position as of September 30, 2003 and the results of its operations for the three months and nine months then ended and its cash flows for the nine months then ended. These consolidated financial statements are condensed and therefore do not include all of the information and footnotes required by generally accepted accounting principles. The consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. The Company followed the same accounting policies in preparation of this report as in such Annual Report. Operating results for the three months and nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.
1. ORGANIZATION
The Company is a holding company whose sole asset is a 29.8% equity interest in B&N.com, an online retailer of books, music and DVD/video, and whose sole business is currently acting as sole manager of B&N.com. As sole manager of B&N.com, the Company controls all of the affairs of B&N.com and as a result, B&N.com is consolidated with the Company. As of September 30, 2003, Barnes & Noble, Inc. (“Barnes & Noble”) beneficially owns an equity interest of 74.7%, (or 115,000 Membership Units and 4,139 shares of Class A Common Stock) in B&N.com. Barnes & Noble increased its interest to that level on September 15, 2003 by acquiring the entire 36.8% equity interest of Bertelsmann AG (“Bertelsmann”) in B&N.com for $2.80 per share or Membership Unit ($165,406 total), payable in a combination of cash and notes. Each Membership Unit held by Barnes & Noble is convertible into one share of the Company’s Class A Common Stock. As reflected in the consolidated statements of operations, the loss before minority interest represents the total loss for the period and the net loss represents the portion of the loss attributable to the Company subsequent to the commencement of its activities.
On September 15, 2003 Barnes & Noble completed its acquisition of all of Bertelsmann’s interest in the Company and B&N.com resulting in Barnes & Noble increasing its beneficial equity interest in the Company from approximately 38.0% to approximately 74.7% and its voting interest from approximately 48.4% to approximately 96.6%. The purchase price paid by Barnes & Noble was $165,406 (including acquisition costs of $1,253), equivalent to $2.80 per share or Membership Unit. As a result of the substantial change in ownership from this transaction, push down accounting has been applied to the Company’s financial statements. Accordingly, the proportionate share of the Company’s assets acquired and liabilities assumed have been adjusted to reflect Barnes & Noble’s basis. The $151,260 step-up resulting from the purchase price allocation was credited to the minority interest attributable to Barnes & Noble.
Based upon a preliminary assessment of the fair values, the allocation of the purchase price to the approximately 36.8% proportionate amount of assets acquired and the liabilities assumed by Barnes & Noble was as follows:
Current assets | $ | 35,370 | ||
Hardware and software | 23,600 | |||
Other tangible assets | 6,973 | |||
Customer list and relationships | 4,800 | |||
Trade name | 44,700 | |||
Goodwill | 93,372 | |||
Total assets acquired | 208,815 | |||
Liabilities assumed | 43,409 | |||
Total purchase price | $ | 165,406 | ||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2003 and September 30, 2002
(in thousands of dollars, except per share data)
(unaudited)
Hardware and software have been assigned preliminary estimated useful lives of four years. The customer list and relationships intangible asset has been assigned a preliminary useful life of four years to be amortized on an accelerated basis based on estimated usage, whereby a substantial portion of the asset will be amortized in the first year. The above preliminary purchase price allocation is subject to revision as more detailed analysis is completed and additional information on the fair value of assets and liabilities of the Company becomes available. Barnes & Noble has engaged an independent third party to perform a valuation analysis. The final purchase price allocation is expected to be completed by the second quarter of 2004. It is possible that some or all of the preliminary amounts may change. The final allocation to goodwill and the trade name (which is considered to have an indefinite life and will not be amortized) will be tested at least annually for impairment in accordance with SFAS Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”).
As a result of the above noted preliminary purchase price allocation, the accompanying balance sheet as of September 30, 2003 has been labeled Restated post-acquisition to indicate the new basis of accounting reflected as of that date. A similar distinction has not been reflected in the accompanying statement of operations, since the amounts reported for sales, net loss and net loss per share would not differ from those previously reported because the additional amortization resulting from the purchase price adjustments would have all been attributable to the minority interest in the statement of operations. Similarly, the pro forma results of the Company assuming the acquisition of Bertelsmann’s interest by Barnes & Noble had occurred on January 1, 2003 would not differ from previously reported sales, net loss and net loss per share, and therefore have not been provided.
2. RECLASSIFICATIONS
Certain prior-period amounts have been reclassified for comparative purposes to conform to the 2003 presentation.
3. STOCK OPTIONS
The Company has one stock-based employee compensation plan in effect. The Company accounts for all transactions under which employees receive shares of stock or other equity instruments in the Company based on the price of its stock in accordance with the provisions of Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees”. Options which have been repriced have been treated as variable options. No stock-based employee compensation cost is reflected in net loss, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant and the market price of the stock subsequent to the repricing has not exceeded the exercise price. The following table illustrates the effect on net loss and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 “Stock-Based Compensation” (“SFAS No. 123”).
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Net loss: | ||||||||||||||||
As reported | $ | (3,069 | ) | $ | (4,815 | ) | $ | (9,941 | ) | $ | (16,165 | ) | ||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards ($3,724 and $2,129 for the three months ended September 30, 2003 and 2002, respectively and $5,060 and $9,145 for the nine months ended September 30, 2003 and 2002, respectively), net of minority interest | (937 | ) | (587 | ) | (1,274 | ) | (2,524 | ) | ||||||||
Proforma net loss | $ | (4,006 | ) | $ | (5,402 | ) | $ | (11,215 | ) | $ | (18,689 | ) | ||||
Basic net loss per share: | ||||||||||||||||
As reported | $ | (0.08 | ) | $ | (0.11 | ) | $ | (0.25 | ) | $ | (0.37 | ) | ||||
Proforma SFAS No. 123 | $ | (0.10 | ) | $ | (0.12 | ) | $ | (0.28 | ) | $ | (0.43 | ) |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2003 and September 30, 2002
(in thousands of dollars, except per share data)
(unaudited)
The fair value for each option granted was estimated at the date of grant using the Black-Scholes option-pricing model, one of the allowable valuation methods under SFAS No. 123, with the following assumptions:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Average risk free interest rates | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | ||||||||
Average expected life (in years) | 3.73 | 5.00 | 3.17 | 5.00 | ||||||||||||
Volatility | 98.43 | % | 140.07 | % | 98.43 | % | 140.07 | % |
The weighted-average fair value of the options granted during the three months ended September 30, 2003 and 2002 was estimated to be $1.59 and $0.83, respectively, and $0.66 and $1.09 for the nine months ended September 30, 2003 and 2002, respectively, for options granted at fair market value.
4. ACCRUED SPECIAL CHARGES
An impairment of fixed assets and other special charges of $88,213 ($0.56 per share assuming conversion of Membership Units) was recorded as a component of operating expenses during the fourth quarter of 2001. These charges were primarily related to the impairment of fixed and other assets, including equity investments, as well as the consolidation of fulfillment operations and administrative functions. At September 30, 2003, the accrued liability associated with the special charges was $4,374 and consisted of the following:
Balance | 2003 | Balance | Due within | Due after | ||||||||||||||||
31-Dec-02 | Payments | 30-Sept-03 | 12 Months | 12 Months | ||||||||||||||||
Facility/lease termination costs | $ | 4,569 | $ | 889 | $ | 3,680 | $ | 1,588 | $ | 2,092 | ||||||||||
Employee termination benefits | 80 | 30 | 50 | 50 | — | |||||||||||||||
Other impairment charges | 644 | — | 644 | 644 | — | |||||||||||||||
$ | 5,293 | $ | 919 | $ | 4,374 | $ | 2,282 | $ | 2,092 | |||||||||||
5. INVESTMENTS IN EQUITY METHOD INVESTEES
The Company has made certain investments in business entities accounted for under the equity method of accounting. The Company accounts for an investment under the equity method if the investment gives the Company the ability to exercise significant influence over the operating and financial policies of such entity. An investment of 20% or more of the voting stock typically denotes such influence, in the absence of other evidence to the contrary.
The Company has periodically evaluated whether the declines in fair value of its equity investments are other-than-temporary. This evaluation consisted of reviewing qualitative and quantitative factors including operating results and trends, as well as market prices of public companies operating in the same sector. As of September 30, 2003, the investment in equity method investees had no carrying value as the business entity invested in has ceased all operations and is in the process of being dissolved.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2003 and September 30, 2002
(in thousands of dollars, except per share data)
(unaudited)
6. RELATED PARTY TRANSACTIONS
B&N.com has entered into agreements with Barnes & Noble, Bertelsmann and their affiliates. The Company believes that the transactions and agreements discussed below (including renewals of any existing agreements) between B&N.com and its affiliates are at least as favorable to B&N.com as could be obtained from unaffiliated parties. The Board of Directors and its Audit Committee must approve in advance any proposed transaction or agreement with affiliates and will utilize procedures in evaluating the terms and provisions of such proposed transaction or agreement as are appropriate in light of the fiduciary duties of directors under Delaware law.
B&N.com entered into a Supply Agreement, dated October 31, 1998, as amended, with Barnes & Noble (the “Supply Agreement”), whereby Barnes & Noble has agreed to supply inventory to B&N.com through Barnes & Noble’s distribution facilities and purchasing departments. Pursuant to the Supply Agreement, Barnes & Noble charges B&N.com its actual cost to acquire the inventory plus any incremental overhead incurred by Barnes & Noble in connection with providing such merchandise supply services. The Company purchased $77,671 and $74,911 from Barnes & Noble representing 36.0% and 38.0% of the Company’s merchandise purchases for the nine months ended September 30, 2003 and 2002, respectively. The charges for incremental overhead for the nine months ended September 30, 2003 and 2002 were $2,535 and $1,750, respectively.
Under a Services Agreement, dated October 31, 1998, as amended, between B&N.com and Barnes & Noble (the “Services Agreement”), B&N.com receives various administrative services from Barnes & Noble, including, among other things, services for payroll processing, benefits administration, insurance (property and casualty, medical, dental and life) and tax administration. In accordance with the terms of the Services Agreement, B&N.com reimburses Barnes & Noble in an amount equal to the third-party expenses it incurs to fund and provide such services, plus any incremental internal costs. B&N.com was charged $1,349 and $1,256 for such services during the nine months ended September 30, 2003 and 2002, respectively.
B&N.com purchases merchandise directly from Calendar Club, L.L.C. (“Calendar Club”), a company engaged in the wholesaling and retailing of calendars, in which Barnes & Noble owns a 73.9% interest. B&N.com’s purchases from Calendar Club were $1,207 and $1,740 for the nine months ended September 30, 2003 and 2002, respectively.
B&N.com subleases from Barnes & Noble approximately one-third of a 300,000 square foot warehouse facility located in New Jersey. B&N.com was charged by Barnes & Noble $419 and $373 for such subleased space during the nine months ended September 30, 2003 and 2002, respectively. The amount paid to Barnes & Noble by B&N.com approximates the cost per square foot paid by Barnes & Noble as tenant pursuant to its lease of the space from an unaffiliated third party.
Since 1999, B&N.com has used AEC One Stop Group, Inc. (“AEC”) as its main music supplier, and as one of its suppliers of DVD/video. AEC is among the largest wholesale distributors of music, videos and DVDs in the United States. AEC also provides B&N.com with a music, DVD and video product database. Subsequent to the initial supply arrangement between AEC and B&N.com, AEC’s parent corporation was acquired by an investor group in which Leonard Riggio, Chairman of the Board of the Company and B&N.com, became a minority investor. B&N.com was charged by AEC $28,099 and $19,659, representing 13.0% and 10.0% of the Company’s merchandise purchases, during the nine months ended September 30, 2003 and 2002, respectively. In addition, B&N.com was charged by AEC $252 and $188 for database services during the nine months ended September 30, 2003 and 2002, respectively. At September 30, 2003 and 2002, $3,402 and $2,175, respectively, remained payable to AEC.
B&N.com licenses the “Barnes & Noble” name under a royalty-free license agreement, dated October 31, 1998, as amended, between B&N.com and Barnes & Noble College Bookstores, Inc. (the “License Agreement”), of which Leonard Riggio is the principal stockholder. Pursuant to the License Agreement, the Company has been granted an exclusive license to use the “Barnes & Noble” name and trademark for the purpose of selling books over the Internet (excluding sales of college textbooks). Under a separate agreement dated as of January 2001, between the Company and Textbooks.com, Inc. (“Textbooks.com”), a corporation owned by Leonard Riggio, B&N.com was granted the right to sell college textbooks over the Internet using the “Barnes & Noble” name. Pursuant to this agreement, B&N.com pays Textbooks.com a royalty on revenues (net of product returns, applicable sales tax and excluding shipping and handling) realized by the Company from the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2003 and September 30, 2002
(in thousands of dollars, except per share data)
(unaudited)
sale of books designated as textbooks. The term of the agreement is for five years and renews annually for additional one-year periods unless terminated 12 months prior to the end of any given term. For the nine months ended September 30, 2003 and 2002, the Company recorded royalty expense of $3,320 and $3,119, respectively, under the terms of this agreement.
B&N.com has various royalty-free non-exclusive licenses dated October 31, 1998, as amended, from Barnes & Noble and Bertelsmann’s Books Online (“BOL”). B&N.com licenses from Barnes & Noble the right to use Barnes & Noble’s database of book bibliographic data as well as certain software applications. B&N.com licenses from BOL, the subsidiary through which Bertelsmann conducts its Internet business, its name and trademark for use in B&N.com’s operations. Under Technology Sharing License Agreements, B&N.com was granted a royalty-free license to view, access and use BOL’s computer technology and systems, and B&N.com granted BOL a license to view, access and use B&N.com’s computer technology and systems. All of the agreements described in this paragraph were terminated as of September 16, 2003.
B&N.com and Barnes & Noble commenced a marketing program in November 2000, whereby a customer purchases a subscription to the Barnes & Noble Membership Program (formerly the “Readers’ Advantage™ card”) for an annual membership fee of $25.00, which is non-refundable after the first 30 days of the membership term. With this card, customers can receive discounts of 10 percent on certain Barnes & Noble purchases and 5 percent on all B&N.com purchases. B&N.com and Barnes & Noble have agreed to share the expenses, net of revenue from the sale of the cards, related to this program in proportion to the discounts customers receive on purchases with each company. B&N.com’s share of the card revenue generated from this program for the nine months ended September 30, 2003 and 2002 were $1,850 and $837, respectively.
In the fourth quarter of 2002, B&N.com entered into an agreement with Marketing Services (Minnesota) Corp. (“MSC”), a wholly owned subsidiary of Barnes & Noble, for marketing services, which includes the issuance of gift cards. Under this agreement B&N.com has received $10,991 for the nine months ended September 30, 2003 from MSC, which represents reimbursement for purchases made with gift cards purchased in a Barnes & Noble store and redeemed on the B&N.com Web site.
B&N.com ships, through its fulfillment centers, customer orders on behalf of Barnes & Noble to Barnes & Noble retail stores as well as to Barnes & Noble customers’ homes. B&N.com charges Barnes & Noble the costs associated with such shipments plus any incremental overhead incurred by B&N.com to process these orders. For the nine months ended September 30, 2003 and 2002, B&N.com recorded $1,458 and $330, respectively, as a reimbursement for shipping and handling from Barnes & Noble. In addition, during the year 2001, B&N.com and Barnes & Noble entered into an agreement whereby B&N.com receives a commission on all items ordered by customers at Barnes & Noble stores and shipped directly to customers’ homes by B&N.com. Commissions for these sales were recorded as revenue and amounted to $878 and $902 for the nine months ended September 30, 2003 and 2002, respectively.
Barnes & Noble subleased warehouse space from the Company in Reno, Nevada. The Company charged Barnes & Noble $0 and $500 for such subleased space for the nine months ended September 30, 2003 and 2002, respectively. Additionally, Barnes & Noble reimbursed B&N.com $6,186 during the three months ended March 31, 2002, for fixed assets purchased on behalf of Barnes & Noble for the Reno warehouse. The equipment was sold to Barnes & Noble at its original cost. In January 2002, B&N.com determined it could not effectively utilize the full capacity of its Reno, Nevada distribution center. Accordingly B&N.com agreed to transfer the Reno warehouse lease and sell B&N.com’s inventory located in Reno to Barnes & Noble. Barnes & Noble purchased the inventory from B&N.com during the three months ended March 31, 2002, at cost for approximately $9,877. The Reno lease assignment and the transfer of the operations of the Reno facility to Barnes & Noble was completed in April 2002. In connection with the transfer, B&N.com agreed to pay one-half of the rent charged for the facility through December 31, 2002.
In 2000, B&N.com began purchasing new and used textbooks directly from MBS Textbook Exchange, Inc. (“MBS”), a corporation majority-owned by Leonard Riggio and one of the nation’s largest wholesalers of college textbooks. B&N.com’s total purchases for the nine months ended September 30, 2003 and 2002 were $12,064 and $15,486, respectively. In addition, B&N.com maintains a link on its Web site called “Sell Your Textbooks” which is hosted by MBS and through which B&N.com customers are able to sell back used books purchased at B&N.com directly to MBS. B&N.com is paid a
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2003 and September 30, 2002
(in thousands of dollars, except per share data)
(unaudited)
commission based on the price paid by MBS to the consumer. Total commissions received and recorded as revenue for the nine months ended September 30, 2003 and 2002 were $64 and $45, respectively.
Under a Strategic Relationship Agreement, dated as of May 1, 2001 (the “Strategic Relationship Agreement”), between B&N.com and GameStop Corp. (“GameStop”), a majority-owned subsidiary of Barnes & Noble, B&N.com’s Web site refers customers to the GameStop Web site for purchases of video game hardware, software and accessories and PC entertainment software. GameStop pays B&N.com a referral fee based on its net sales revenue from certain eligible purchases made by customers as a result of the redirection from the B&N.com Web site. Either party may terminate the Strategic Relationship Agreement on 60 days’ notice. Commissions of $7 and $63 were recorded as revenue for the nine months ended September 30, 2003 and 2002, respectively, under this agreement.
B&N.com has an approximate 46.8% equity stake in enews, inc. (“enews”), a company previously engaged in selling magazine subscriptions on the Internet, and accounted for this investment under the equity method. Substantially all of the balance of the shares are owned by Barnes & Noble. In July 2002, the Board of Directors and stockholders of enews approved a Plan of Complete Liquidation (the “Liquidation Plan”). As of September 30, 2003, the implementation of the Liquidation Plan had been substantially completed and is expected to be concluded by February 29, 2004. Prior to the implementation of the Liquidation Plan, B&N.com fulfilled a majority of orders for magazine subscriptions through enews and recorded a commission on these sales. B&N.com recorded commissions of $0 and $909 for the nine months ended September 30, 2003 and 2002, respectively, and was reimbursed $432 and $269, respectively, for expenses incurred on behalf of enews for the nine months ended September 30, 2003 and 2002.
At September 30, 2003 and 2002, $51,715 and $39,532, respectively, remained payable to Barnes & Noble in connection with the transactions described above.
Michael N. Rosen, a director of the Company, is also a member of Bryan Cave LLP, outside counsel to the Company and B&N.com.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor”, addressing the accounting of cash consideration received by a customer from a vendor, including vendor rebates and refunds. The consensus reached states that consideration received should be presumed to be a reduction of the prices of the vendor’s products or services and should therefore be shown as a reduction of cost of sales in the income statement of the customer. The presumption could be overcome if the vendor receives an identifiable benefit in exchange for the consideration or the consideration represents a reimbursement of a specific incremental identifiable cost incurred by the customer in selling the vendor’s product or service. If one of these conditions is met, the cash consideration should be characterized as revenues or a reduction of such costs, as applicable, in the income statement of the customer. The consensus reached also concludes that rebates or refunds based on the customer achieving a specified level of purchases should be recognized as a reduction of cost of sales based on a systematic and rational allocation of the consideration to be received relative to the transactions that mark the progress of the customer toward earning the rebate or refund, provided the amounts are probable and reasonably estimable. This standard is effective for arrangements entered into after December 31, 2002. Implementation of this standard did not have a material effect on the Company.
In November 2002, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“Interpretation No. 45”). Interpretation No. 45 requires a guarantor to include disclosure of certain obligations, and if applicable, at the inception of the guarantee, recognize a liability for the fair value of other certain obligations undertaken in issuing a guarantee. The recognition requirement is effective for guarantees issued or modified after December 31, 2002. The Company has no obligations regarding Interpretation No. 45.
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barnesandnoble.com inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2003 and September 30, 2002
(in thousands of dollars, except per share data)
(unaudited)
In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation — Transition and Disclosure” (“SFAS No. 148”). SFAS No. 148 amends SFAS No. 123, to provide alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure provisions of this standard are effective for fiscal years ending after December 15, 2002. The Company has elected to continue using the intrinsic value method and has incorporated these expanded disclosures into the footnotes to the Company’s consolidated financial statements included herein.
In January 2003, the FASB issued Interpretation No. 46 “Consolidation of Variable Interest Entities” (“Interpretation No. 46”). Interpretation No. 46 clarifies the application of Accounting Research Bulletin No. 51 “Consolidated Financial Statements”, and applies immediately to any variable interest entities created after January 31, 2003 and to variable interest entities in which an interest is obtained after that date. The Company holds no interest in variable interest entities.
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Item 2:Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company is a holding company whose sole asset is its 29.8% equity interest in B&N.com and whose sole business is acting as sole manager of B&N.com. B&N.com launched its initial online store in March 1997 and is currently ranked the ninth most-trafficked online shopping site, based on the ComScore Media Metrix June 2003 report.
B&N.com has pursued a strategy of focusing on the sale of books, music, DVD/video and online courses. Since opening its online store (www.bn.com) in March 1997, B&N.com has sold products to more than 15.8 million customers in 230 countries. B&N.com’s online bookstore includes the largest in-stock selection of in-print book titles, supplemented by more than 30 million listings from its nationwide network of out-of-print, rare and used book dealers. B&N.com offers its customers fast delivery, easy and secure ordering and rich editorial content.
The results of operations discussed hereafter include the consolidated results of the Company and B&N.com. In view of the changing nature of B&N.com’s business and its limited operating history, the Company believes that period-to-period comparisons of the operating results of B&N.com, including gross profit margin and operating expenses as a percentage of net sales, are not necessarily meaningful and should not be relied upon as an indication of future performance.
Critical Accounting Policies
Securities and Exchange Commission Financial Reporting Release No. 60 requests all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. The Company believes that the following critical accounting policies affect the significant judgments and estimates used in the preparation of the Company’s financial statements.
Revenue Recognition.The Company’s product sales, including outbound shipping and handling charges, are recognized, net of estimated returns and discounts, at the time the products are shipped to customers. Commissions received on sales of magazine subscriptions are recorded at the net amount earned as the Company is acting as an agent in such transactions. The Company continuously monitors and tracks product returns and records a provision for the estimated amount of future returns, based on historical experience. While returns have historically been within the Company’s expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same return rates that it has in the past. Any significant increase in product return rates could have a material adverse impact on the Company’s operating results for the period or periods in which such returns materialize.
As of April 2003, the Company now receives commissions on sales of used and out of print books, through BookQuest, a service that allows independent book dealers to sell their used books on the B&N.com Web site. In accordance with EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal Versus Net as an Agent,” revenues are recorded at the net amount earned as the Company is acting as an agent in such transactions.
Impairment of Goodwill and Other Long-Lived Assets.The Company’s long-lived assets include fixed assets and goodwill. At September 30, 2003, the Company had $59.8 million of fixed assets, net of accumulated depreciation, and $102.1 million of net goodwill, accounting for approximately 52.7% of the Company’s total assets. B&N.com reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. In valuation, assets held and used are measured by a comparison of the carrying amount of an asset to undiscounted pre-tax future net cash flows. Future events could cause B&N.com to conclude that impairment indicators exist and that long-lived assets may be impaired. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations. As required by SFAS Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), which the Company implemented in 2002, the Company completed its annual impairment test on the goodwill as of November 30, 2002 and deemed that no impairment charge was necessary. The Company has noted no subsequent indicators of impairment. Changes in market conditions, among other factors, could have a material impact on these estimates.
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Results of Operations
Net sales
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
(in thousands of dollars) | (in thousands of dollars) | |||||||||||||||||||||||
2003 | 2002 | % Change | 2003 | 2002 | % Change | |||||||||||||||||||
Net sales | $ | 98,993 | $ | 102,575 | (3 | %) | $ | 291,433 | $ | 294,947 | (1 | %) |
Net sales are comprised of sales of books, music, DVD/video and online courses including outbound shipping and handling charges, net of returns and discounts. In April 2003, the Company began recording in net sales the net commission received on any used and out-of-print product sold by dealers listing their books on the Web site and shipping directly to the Company’s customers as the Company is acting as an agent on these sales. Prior to April 2003, the Company recorded the gross amount of sales of used and out-of-print product in its net sales as the Company had acted as the principal in the transaction. Net sales for the three months ended September 30, 2003 decreased 3 percent to $99.0 million. Had the Company continued to record the gross amount of the used and out-of-print book sales, its total sales for the third quarter would have been $103.7 million as compared with $102.6 million for the comparable prior year period. The Company expects full year 2003 net sales to range between $415 million and $435 million.
Gross profit
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
(in thousands of dollars) | (in thousands of dollars) | |||||||||||||||||||||||
2003 | 2002 | % Change | 2003 | 2002 | % Change | |||||||||||||||||||
Gross profit | $ | 24,305 | $ | 24,578 | (1 | %) | $ | 71,518 | $ | 67,913 | 5 | % | ||||||||||||
Gross margin | 24.6 | % | 24.0 | % | 24.5 | % | 23.0 | % |
Gross profit is net sales less the cost of sales, which consists of the cost of merchandise sold to customers and the cost of online courses as well as inbound and outbound shipping costs. Gross profit decreased 1 percent in the third quarter ended September 30, 2003 as a result of the 3 percent decrease in net sales for the quarter. The gross margin in the third quarter improved to 24.6 percent due to an increase in the Company’s internal fulfillment rate resulting in less reliance on more expensive wholesalers and to the change in the model for selling and distributing used and out-of-print books, which results in higher gross margins and lower reported sales. The Company expects the gross margin for full year 2003 to exceed 2002 results. Quarterly gross margin results will fluctuate due to the timing of promotional activities.
Fulfillment and customer service
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
(in thousands of dollars) | (in thousands of dollars) | |||||||||||||||||||||||
2003 | 2002 | % Change | 2003 | 2002 | % Change | |||||||||||||||||||
Fulfillment and customer service | $ | 8,457 | $ | 8,240 | 3 | % | $ | 25,413 | $ | 26,237 | (3 | %) | ||||||||||||
Percentage of net sales | 8.5 | % | 8.0 | % | 8.7 | % | 8.9 | % |
Fulfillment and customer service expenses consist primarily of the cost of operating and staffing distribution and customer service centers, including costs attributable to picking, packing and preparing customer orders for shipment and responding to inquiries from customers. Fulfillment and customer service expenses increased slightly during the third quarter, as compared to last year, however, remained lower for the nine-month period than prior year levels. The Company expects fulfillment and customer service expenses to be lower in absolute dollars and as a percentage of sales for full year 2003 as compared with 2002 results.
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Marketing, sales and editorial
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
(in thousands of dollars) | (in thousands of dollars) | |||||||||||||||||||||||
2003 | 2002 | % Change | 2003 | 2002 | % Change | |||||||||||||||||||
Marketing, sales and editorial | $ | 7,187 | $ | 8,682 | (17 | %) | $ | 22,945 | $ | 26,731 | (14 | %) | ||||||||||||
Percentage of net sales | 7.3 | % | 8.5 | % | 7.9 | % | 9.1 | % |
Marketing, sales and editorial expenses consist primarily of advertising and promotional expenditures, as well as payroll and related expenses for personnel engaged in marketing and selling activities. Marketing, sales and editorial expenses decreased primarily due to the Company’s increased focus on more targeted and measurable marketing programs as well as the renegotiation of many of the Company’s online marketing deals for 2003 at more advantageous terms. The Company expects marketing, sales and editorial expenses to be lower as a percentage of net sales for full year 2003.
Technology and web site development
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
(in thousands of dollars) | (in thousands of dollars) | |||||||||||||||||||||||
2003 | 2002 | % Change | 2003 | 2002 | % Change | |||||||||||||||||||
Technology and web site development | $ | 8,056 | $ | 8,190 | (2 | %) | $ | 23,168 | $ | 27,022 | (14 | %) | ||||||||||||
Percentage of net sales | 8.1 | % | 8.0 | % | 7.9 | % | 9.2 | % |
Technology and web site development expenses consist of payroll and related expenses for Web page production and computer network operations personnel and consultants, and costs of infrastructure related to systems and telecommunications. Certain costs relating to the development of internal-use software are capitalized and depreciated over three years. The decrease in technology and web site development expenses on an absolute basis was primarily attributable to increased infrastructure efficiency and negotiated price reductions in many expense categories. Technology and web site development expenses increased as a percentage of net sales from 8.0 percent to 8.1 percent in the third quarter of 2003 due to the 3 percent decrease in net sales for the quarter. The Company expects technology and web site development expenses to be lower as a percentage of net sales for full year 2003.
General and administrative
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
(in thousands of dollars) | (in thousands of dollars) | |||||||||||||||||||||||
2003 | 2002 | % Change | 2003 | 2002 | % Change | |||||||||||||||||||
General and administrative | $ | 6,572 | $ | 6,998 | (6 | %) | $ | 19,338 | $ | 19,802 | (2 | %) | ||||||||||||
Percentage of net sales | 6.6 | % | 6.8 | % | 6.6 | % | 6.7 | % |
General and administrative expenses primarily consist of payroll and related expenses for executive, finance and administrative personnel, recruiting, professional fees and other general corporate expenses, including costs to process credit card transactions. General and administrative expenses decreased in absolute dollars and as a percentage of net sales in the third quarter primarily due to lower costs associated with processing credit card transactions.
Depreciation and amortization
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
(in thousands of dollars) | (in thousands of dollars) | |||||||||||||||||||||||
2003 | 2002 | % Change | 2003 | 2002 | % Change | |||||||||||||||||||
Depreciation and amortization | $ | 6,210 | $ | 8,428 | (26 | %) | $ | 20,322 | $ | 24,953 | (19 | %) | ||||||||||||
Percentage of net sales | 6.3 | % | 8.2 | % | 7.0 | % | 8.5 | % |
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The decrease in depreciation and amortization expenses was the result of lower capital expenditures in fiscal 2003, 2002 and 2001. The carrying balance of goodwill is assessed for recoverability on a periodic basis. In 2002, the Company no longer amortized goodwill due to the adoption of SFAS No. 142.
Equity in net loss of equity investments including related amortization of intangibles
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
(in thousands of dollars) | (in thousands of dollars) | |||||||||||||||||||||||
2003 | 2002 | % Change | 2003 | 2002 | % Change | |||||||||||||||||||
Equity in net loss of equity investments including related amortization of intangibles | $ | — | $ | 1,805 | (100 | %) | $ | — | $ | 3,179 | (100 | %) | ||||||||||||
Percentage of net sales | — | % | 1.8 | % | — | % | 1.1 | % |
Equity in net loss of equity investments (including related amortization of intangibles) consisted of losses from the Company’s equity investment in enews for the third quarter ended September 30, 2002. As of December 31, 2002, the Company had written off its entire investment in enews of $3.3 million. As of March 31, 2002, there was no remaining goodwill related to equity investments. In July 2002, the Board of Directors and stockholders of enews approved the Liquidation Plan. As of September 30, 2003, the implementation of the Liquidation Plan had been substantially completed and is expected to be concluded by February 29, 2004.
Interest income, net
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
(in thousands of dollars) | (in thousands of dollars) | |||||||||||||||||||||||
2003 | 2002 | % Change | 2003 | 2002 | % Change | |||||||||||||||||||
Interest income, net | $ | 22 | $ | 303 | (93 | %) | $ | 186 | $ | 1,395 | (87 | %) | ||||||||||||
Percentage of net sales | — | % | 0.3 | % | 0.1 | % | 0.5 | % |
Interest income was lower as compared with last year, as cash balances decreased due to their use as a source of funding the Company’s operations. All available cash is invested in various marketable securities consisting primarily of money market funds containing highly liquid U.S. Treasury Securities, U.S. government agency securities and investments in high quality corporate issuers.
Income Taxes
The Company has not generated any taxable income to date and therefore has not paid any federal income taxes since inception. The Company has provided a full valuation allowance on the deferred tax asset, consisting primarily of net operating loss carryforwards, due to the uncertainty of its realizability.
Inflation
The Company currently believes that inflation has not had a material impact on operations.
Liquidity and Capital Resources
As of September 30, 2003, the Company’s cash and cash equivalents were $38.0 million, compared to $70.1 million on December 31, 2002. The Company continues to have a debt-free balance sheet.
Net cash flows used in operating activities were $25.6 million for the nine months ended September 30, 2003 and $40.4 million for the nine months ended September 30, 2002. Cash used for the nine months ended September 30, 2003 was attributable to a net loss of $9.9 million, minority interest in loss of $29.5 million, a decrease in accrued liabilities of $15.6 million, a decrease of $3.5 million in accounts payable and an increase in prepaid expenses and other current assets of $0.1 million. This was offset by a decrease in receivables of $9.1 million, depreciation and amortization of $20.3 million, a $0.3 million decrease in merchandise inventories and an increase in payable to affiliate of $3.5 million. Cash used for the nine months ended September 30, 2002 was attributable to a net loss of $16.2 million, minority interest in loss of $42.5 million, a
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$1.1 million increase in merchandise inventories, a decrease in accrued liabilities of $16.8 million, a decrease in payable to affiliate of $4.0 million and an increase in prepaid expenses and other current assets of $0.8 million. This was offset by a decrease in receivables of $3.7 million, depreciation and amortization of $25.1 million and an increase of $12.0 million in accounts payable.
Net cash flows used in investing activities of $7.8 million for the nine months ended September 30, 2003 was attributable to purchases of fixed assets totaling $7.8 million. Net cash flows from investing activities of $9.3 million for the nine months ended September 30, 2002 was attributable to a decrease of $4.4 million in other non-current assets and sales of marketable securities of $10.1 million, offset by purchases of fixed assets totaling $5.3 million.
Net cash flows from financing activities for the nine months ended September 30, 2003 were $1.2 million due to proceeds from the exercise of stock options.
At September 30, 2003, the Company’s principal sources of liquidity consisted of $38.0 million in cash and cash equivalents. As of September 30, 2003, the Company’s remaining principal commitments consisted of obligations outstanding under operating leases. The Company has pledged a portion of its cash and cash equivalents as collateral for stand-by letters of credit that guarantee certain of the Company’s real property lease obligations. At September 30, 2003 and 2002, the total amount of collateral pledged under these agreements was $4.2 million. The Company has no unconsolidated majority-owned subsidiaries and no interests in special purpose entities.
The Company believes that current cash and cash equivalents will be sufficient to meet its anticipated cash needs for at least twelve months. However, any projection of future cash needs and cash flows is subject to substantial uncertainty. If current cash and cash equivalents in addition to cash generated from operations are insufficient to satisfy the Company’s liquidity requirements, the Company may seek to sell additional equity or debt securities or to obtain a credit facility. The sale of additional equity or convertible debt securities could result in additional dilution to the Company’s stockholders. There can be no assurance that financing will be available in amounts or on terms acceptable to the Company, if at all. In addition, the Company will, from time to time, consider the acquisition of or investment in complementary businesses, products and technologies, which might increase the Company’s liquidity requirements or cause the Company to issue additional equity or debt securities.
Forward-Looking Statements
This report may contain certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to the Company and B&N.com that are based on the beliefs of the management of the Company as well as assumptions made by and information currently available to the management of the Company. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions, as they relate to the Company, B&N.com or the management of the Company, identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events, the outcome of which is subject to certain risks, including among others general economic and market conditions, changes in product demand, the growth rate of Internet usage and e-commerce, possible disruptions in the Company’s or B&N.com’s computer or telephone systems, possible increases in shipping rates or interruptions in shipping service, effects of competition, possible work stoppages or increases in labor costs or labor shortages, unanticipated adverse litigation results or effects, the performance of B&N.com’s current and future investments and new product initiatives, unanticipated costs associated with B&N.com’s warehouse or the failure to successfully integrate that warehouse into B&N.com’s distribution network, the level and volatility of interest rates, the successful integration of acquired businesses, changes in tax and other governmental rules and regulations applicable to the Company or B&N.com and other factors that may be outside of the Company’s control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein as anticipated, believed, estimated, expected, intended or planned. Subsequent written and oral forward-looking statements attributable to the Company, B&N.com or persons acting on their behalf are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere described in this report and other reports filed by the Company with the Securities and Exchange Commission.
Item 4:Controls and Procedures
Disclosure Controls and Procedures. The Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. The financial statements filed for the quarter ended September 30, 2003 were restated to reflect the application of push down accounting resulting from the acquisition by Barnes & Noble of Bertelsmann’s interest in the Company and B&N.com in September 2003. The Form 10-Q filed November 14, 2003 did not include the effects of push down accounting on the Company’s financial statements due to the significant 25.3% equity interest in B&N.com still owned by the Company which the Company believed was significant enough to not require the application of push down accounting. Upon review, it has been determined that based on Barnes & Noble’s 96.6% voting interest in the Company, push down accounting is appropriate. In management’s opinion, given the interpretive nature of the restatement, such restatement did not change its conclusion that the Company’s controls and procedures are effective.
Internal Control Over Financial Reporting. There was no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 6:Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit | ||
No. | Description | |
31.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
(b) Reports on Form 8-K
On July 25, 2003, the Company furnished a Report on Form 8-K pursuant to Items 5 and 9 of such form announcing second quarter 2003 financial results.
On July 30, 2003, the Company filed a Report on Form 8-K pursuant to Items 5 and 7 of such form announcing an agreement between Barnes & Noble and Bertelsmann for Barnes & Noble to acquire Bertelsmann’s entire equity interest in the Company and B&N.com.
Subsequent to the end of the quarter, on October 29, 2003, the Company furnished a Report on Form 8-K pursuant to Items 7 and 12 of such form announcing third quarter 2003 financial results.
Subsequent to the end of the quarter, on November 12, 2003, the Company filed a Report on Form 8-K pursuant to Items 5 and 7 of such form relating to Barnes & Noble’s proposal to purchase in a merger transaction for $2.50 in cash each share of the Company’s common stock that Barnes & Noble does not currently own.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
barnesandnoble.com inc. (Registrant) | ||||
By: | /s/ Marie J. Toulantis | |||
Marie J. Toulantis Chief Executive Officer (Principal Executive Officer) | ||||
Date: April 27, 2004 |
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