SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
/ / 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.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-4048787
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) 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. Yes /x/ No / /
Number of shares of $.001 par value Class A Common Stock, Class B Common Stock
and Class C Common Stock outstanding as of August 10, 2000 was 31,145,268, one
and one, respectively.
barnesandnoble.com inc.
June 30, 2000
Index to Form 10-Q
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements.......................................... 3
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 9
Item 3: Quantitative and Qualitative Disclosure About Market Risk.... 16
PART II - OTHER INFORMATION.............................................
Item 1: Legal Proceedings............................................. 17
Item 2: Changes in Securities and Use of Proceeds .................... 17
Item 3: Defaults upon Senior Securities............................... 17
Item 4: Submission of Matters to a Vote of Security Holders........... 17
Item 5: Other Information............................................. 17
Item 6: Exhibits and Reports on Form 8-K.............................. 17
Signatures.................................................... 18
2
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 Six months ended
------------------------ ------------------------
June 30, June 30, June 30, June 30,
2000 1999 (1) 2000 1999 (1)
--------- --------- --------- ---------
Net sales (2) $ 67,428 $ 38,178 $ 141,403 $ 70,495
Cost of sales 56,966 30,482 120,052 55,499
--------- --------- --------- ---------
Gross profit 10,462 7,696 21,351 14,996
--------- --------- --------- ---------
Operating expenses:
Marketing and sales (2) 31,574 21,638 59,507 39,983
Technology and web site
development 9,593 4,049 15,942 7,568
General and administrative 7,125 3,985 12,401 7,497
Depreciation and amortization 8,425 3,308 14,744 6,466
Stock based compensation (175) -- 11,740 --
Equity in net loss of equity investments
including related amortization of
intangibles 5,575 -- 10,782 --
--------- --------- --------- ---------
Total operating expenses 62,117 32,980 125,116 61,514
Loss from operations (51,655) (25,284) (103,765) (46,518)
Interest income, net 6,289 3,330 14,196 4,346
--------- --------- --------- ---------
Loss before minority interest (45,366) (21,954) (89,569) (42,172)
Minority interest 35,794 17,563 70,858 33,738
--------- --------- --------- ---------
Net loss $ (9,572) $ (4,391) $ (18,711) $ (8,434)
========= ========= ========= =========
Basic and diluted loss before minority
interest per share ($ 0.31) ($0.15) ($0.62) ($0.29)
Basic and diluted weighted average shares
outstanding if converted (1) 145,783 143,769 145,405 143,760
Basic and diluted net loss per common share ($0.31) ($0.15) ($0.62) ($0.29)
Basic and diluted weighted average common
shares outstanding 30,783 28,763 30,405 28,757
(1) Represents pro forma results as if the shares issued in the initial
public offering of barnesandnoble.com inc. and the acquisition of
the interest in barnesandnoble.com llc were completed as of the
beginning of the earliest period presented.
(2) In accordance with the Emerging Issues Task Force Issue No. 00-14,
"Accounting for Certain Sales Incentives" ("EITF 00-14"), expenses
related to coupon redemptions, formerly classified as marketing and
sales expense, are now recorded as a reduction to sales. EITF 00-14
requires the implementation of this change effective within all
reporting periods beginning in the fourth quarter of the fiscal year
beginning after December 15, 1999, and also requires all prior
periods to be reclassified to reflect this modification.
See accompanying notes to financial statements.
3
barnesandnoble.com inc.
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except per share data)
June 30, December 31,
2000 1999
---------- ------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 28,933 $ 247,403
Marketable securities 255,313 230,644
Receivables, net 15,975 15,520
Merchandise inventories 17,367 3,886
Prepaid expenses and other current assets 10,448 8,161
--------- ---------
Total current assets 328,036 505,614
--------- ---------
Fixed assets, net 132,887 97,854
Long term marketable securities 71,852 71,852
Other non-current assets 59,308 4,198
--------- ---------
Total assets $ 592,083 $ 679,518
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,884 $ 19,204
Accrued liabilities 38,255 39,627
Due to affiliate 20,637 17,109
--------- ---------
Total current liabilities 60,776 75,940
--------- ---------
Minority interest 422,252 482,896
Stockholders' equity:
Preferred Stock: $0.001 par value; 50,000,000 shares authorized; none
issued and outstanding -- --
Common Stock Class A; $0.001 par value;
750,000,000 shares authorized; 30,998,411 and 29,347,067 shares issued
and outstanding 31 29
Common Stock Class B; $0.001 par value; 1,000 shares authorized; 1
share issued and outstanding -- --
Common Stock Class C; $0.001 par value; 1,000 shares authorized; 1
share issued and outstanding -- --
Paid-in capital 141,505 134,452
Accumulated deficit (32,481) (13,799)(1)
--------- ---------
Total stockholders' equity 109,055 120,682
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' equity $ 592,083 $ 679,518
========= =========
(1) Represents accumulated deficit of barnesandnoble.com inc. since the
Company's initial public offering on May 25, 1999.
See accompanying notes to financial statements.
4
barnesandnoble.com inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
Six months ended
------------------------
June 30, June 30,
2000 1999 (1)
--------- ---------
Cash flows from operating activities:
Net loss $ (18,711) $ (8,434)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization 14,097 5,548
Non-cash acquisition, disposition and investment
related costs 12,857 --
Increase in receivables, net (455) (5,211)
Increase in merchandise inventories (13,481) (443)
Decrease (increase) in prepaid expenses and other
current assets (2,287) 1,863
Increase (decrease) in accounts payable (17,320) 3,451
Increase (decrease) in due to affiliate 3,528 (4,960)
Decrease in accrued liabilities (1,372) (4,067)
Minority interest in loss (70,858) (33,738)
--------- ---------
Net cash flows used in operating activities (94,002) (45,991)
--------- ---------
Cash flows from investing activities:
Purchases of fixed assets (49,027) (13,404)
Purchases of marketable securities (24,669) (262,509)
Decrease in restricted cash -- 50,393
Decrease (increase) in other non-current assets (55,215) 168
--------- ---------
Net cash flows used in investing activities (128,911) (225,352)
--------- ---------
Cash flows from financing activities:
Proceeds from initial public offering -- 484,382
Capital contributions from members -- 50,000
Proceeds from exercise of stock options 4,443 252
--------- ---------
Net cash flows from financing activities 4,443 534,634
--------- ---------
Net change in cash and cash equivalents (218,470) 263,291
Cash and cash equivalents at beginning of period 247,403 96,940
--------- ---------
Cash and cash equivalents at end of period $ 28,933 $ 360,231
========= =========
(1) Represents pro forma results as if the shares issued in the initial public
offering of barnesandnoble.com inc. and the acquisition of the interest in
barnesandnoble.com llc were completed as of the beginning of the earliest
date presented.
See accompanying notes to financial statements.
5
barnesandnoble.com inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2000 and June 30, 1999
(in thousands of dollars, except per share data)
(unaudited)
The unaudited consolidated financial statements include the accounts of
barnesandnoble.com inc. (the "Company") and barnesandnoble.com llc ("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 June 30, 2000 and the results of its operations and its
cash flows for the six 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, 1999. Operating results for
the six months ended June 30, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000.
1. Organization
The Company is a holding company whose sole asset is a 21.2% equity
interest in B&N.com, an online retailer of knowledge, information, education and
entertainment related products, 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. Barnes & Noble, Inc. ("Barnes & Noble") and Bertelsmann A.G.
("Bertelsmann") each beneficially own a 39.4% equity interest (equivalent to an
aggregate sum of 115 million Membership Units) in B&N.com. Each Membership Unit
held by these companies is convertible into one share of the Company's Class A
Common Stock. As reflected in the 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.
2. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the period reported. Actual results
could differ from these estimates.
3. Investments
The Company invests certain of its excess cash in debt instruments of the
U.S. Government and its agencies, and of high quality corporate issuers. All
highly liquid instruments with an original maturity of three months or less are
considered cash equivalents; those with original maturities greater than three
months are considered marketable securities. The Company classified investments
in accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
6
barnesandnoble.com inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2000 and June 30, 1999
(in thousands of dollars, except per share data)
(unaudited)
At June 30, 2000, investments in marketable securities consist primarily
of U.S. Treasury Securities, U.S. government agency securities and investments
in high quality corporate issuers and were classified as held-to-maturity.
Unrealized holding gains and losses at June 30, 2000 were not material.
4. Stockholders' Equity
There are three classes of common stock authorized, issued and
outstanding: Class A Common Stock ("Class A Common"), Class B Common Stock
("Class B Common") and Class C Common Stock ("Class C Common"). The holders of
Class A Common generally have rights identical to holders of Class B Common and
Class C Common (collectively, "High Vote Stock"), except that each holder of
Class A Common is entitled to one vote per share and each holder of High Vote
Stock is entitled to the number of votes per share equal to: (i) ten, multiplied
by the sum of (a) the aggregate number of High Vote Stock owned by such holder
and (b) the aggregate number of Membership Units in B&N.com owned by such
holder; divided by (ii) the number of shares of High Vote Stock owned by such
holder. Pursuant to the Company's Amended and Restated Certificate of
Incorporation (the "Amended Charter"), the holders of the Class B Common Stock
and the holders of the Class C Common Stock have the right to each elect three
of the Company's directors. Otherwise, holders of Class A Common and High Vote
Stock (collectively "Common Stock") generally will vote together as a single
class on all matters (including the election of the directors who are not
elected directly by the holders of the High Vote Stock) presented to the
stockholders for their vote or approval, except as otherwise required by
applicable Delaware law.
The Board of Directors is authorized to issue up to an aggregate of 50
million shares of Preferred Stock. The rights and characteristics of the
Preferred Stock are at the discretion of the Board of Directors. As of June 30,
2000 there is no Preferred Stock issued or outstanding.
5. Recent Accounting Pronouncements
In March 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") reached a consensus on EITF Issue No. 00-2,
"Accounting for Web Site Development Costs." This consensus provides guidance on
which types of Web development costs should be capitalized or expensed. The
consensus is effective for Web site development costs incurred for the fiscal
quarters beginning after June 30, 2000. The Company does not expect the adoption
of this consensus to have a material impact on its financial position or results
of operations.
In March 2000, FASB issued FASB Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Based Compensation ("FIN 44")." FIN 44
clarifies the application of Accounting Principles Board Opinion No. 25 for
certain issues relating to stock compensation. FIN 44 is effective July 1, 2000,
but certain conclusions in it cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that FIN 44 covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying FIN 44 are
recognized on a prospective basis from July 1, 2000. On March 1, 2000 the
Company repriced approximately 5 million stock options and elected early
adoption of FIN 44.
7
barnesandnoble.com inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2000 and June 30, 1999
(in thousands of dollars, except per share data)
(unaudited)
In March 2000, the EITF reached a consensus on EITF Issue No. 00-14,
"Accounting for Certain Sales Incentives." This consensus provides guidance on
the recognition, measurement, and income statement classification of sales
incentives which are offered voluntarily by a vendor without charge to customers
that can be used in, or that are exercisable by a customer as a result of, a
single exchange transaction. The Company has adopted this requirement and now
expenses related to coupon redemptions, formerly classified as marketing and
sales expense are recorded as a net reduction to sales. The EITF pronouncement
requires the implementation of this change effective within all reporting
periods beginning in the fourth quarter of the fiscal year beginning after
December 15, 1999, and also requires all prior periods to be reclassified to
reflect this modification.
In July 2000, the EITF reached a consensus on EITF Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs." The new consensus
requires that all or any amounts billed to a customer in a sales transaction
related to shipping and handling, represent revenue and should be classified as
such in the income statement. The EITF did not reach a consensus with respect to
the classification of costs related to shipping and handling incurred by the
seller. Net sales reported by the Company include revenue generated from
outbound shipping and handling charges.
6. Investments in Equity Method Investees
The Company has made certain investments in business entities accounted
for under the equity method. The Company accounts for an investment under the
equity method if the investment gives the Company the ability to exercise
significant influence on such entity regarding operating and financial policies.
An investment of 20% or more of the voting stock typically denotes such
influence, in the absence of other evidence to the contrary.
In January 2000, B&N.com acquired a 32% common stock interest in Enews.com
("Enews"), the largest retailer of magazine subscriptions on the Internet, and
warrants to acquire an additional 8% of common stock to expand its presence in
the growing on-line magazine subscription market. The purchase price was $26,428
in cash and stock valued at $12,857. The Company has accounted for this
acquisition using the equity method of accounting. Pro forma results of
operations of Enews for the second quarter 1999 and the six months ending June
30, 1999 have not been included as they would not have had a material effect on
the overall results of operations of the Company.
In June 2000, B&N.com invested $20,000 in cash for a 25% equity stake in
MightyWords Inc. ("MightyWords"), a leading provider of digital content. The
Company has accounted for this acquisition using the equity method of
accounting. Pro forma results of operations of MightyWords for the second
quarter 1999 have not been included as they would not have had a material effect
on the overall results of operations of the Company.
8
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 21.2 % equity
interest in B&N.com and whose sole business is currently acting as sole manager
of B&N.com. Since launching its online business in May 1997, B&N.com has become
one of the world's largest Web sites. Focused largely on the sale of books,
music, video, software, magazines, prints, posters and related products, B&N.com
has capitalized on the recognized brand value of the Barnes & Noble name to
become one of the largest, and fastest growing, online distributors of
books. B&N.com's Web site has been rated No.1 by Forbes.com as the best
bookselling site on the Internet two years running. B&N.com's Music Store was
named Forbes.com's favorite online music site. The Forbes Favorite award is in
recognition of the Music Store's substantial content, smart organization and
search capabilities.
Customers can choose from millions of new and out-of-print book titles and
enjoy a variety of related content such as author chats, book synopses and
reader reviews. B&N.com's Web site also offers for sale thousands of bargain
books discounted up to 91 percent, the most popular software and magazine
titles, gift items for every occasion, a Prints & Posters Gallery and a free
eCard service. In July 2000, the Company launched its Video Store, featuring
tens of thousands of movie titles available in both DVD and VHS formats. Other
new initiatives include the launch of Barnes & Noble University, a free online
education resource offering learning courses to B&N.com's millions of customers
through its Web site. The introduction of Barnes & Noble Television ("BNTV"), a
unique programming concept for books on the Web also occurred during the second
quarter of 2000. BNTV is broadcast over the Internet, combining video and
contextual content with e-commerce capability. The Company considers BNTV to be
an opportunity to use rich media for promoting books on the Web. B&N.com also
recently launched a "publish your book" service designed to appeal to
established authors and aspiring writers. This service is consistent with
B&N.com's strategy of being the leading portal for the sale, marketing and
distribution of content.
With the opening of B&N.com's distribution center in Memphis, Tennessee
and access to Barnes & Noble's distribution facility containing more than
800,000 in-stock titles, B&N.com has the largest standing inventory of any
online bookseller ready for immediate delivery. More than 50,000 publishers,
including thousands of small and independent presses, university publishers and
privately placed books are represented.
The results of operations discussed hereafter include the consolidated
results of the Company and B&N.com. In view of the rapidly 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 sales, are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
9
Results of Operations
Net Sales
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------------- --------------------------------------------
2000 1999 % Change 2000 1999 % Change
-------- -------- -------- -------- -------- --------
(in thousands) (in thousands)
Net sales $ 67,428 $ 38,178 77% $141,403 $ 70,495 101%
Net sales include the sale of books, music, software, prints & posters and
related products, net of returns and promotional discounts, as well as outbound
shipping and handling charges. Growth in net sales reflects a significant
increase in items sold due to growth in traffic to the Web site as well as the
number of new products and services introduced over the preceding twelve months
supported by enhancements made to the Web site. These factors contributed to the
growth of the Company's customer base and repeat purchases from B&N.com's
existing customers. B&N.com added more than 700,000 customers during the second
quarter of 2000, raising the cumulative customer count to more than 5.5 million
as of June 30, 2000, an increase of over 39 percent from the year end 1999
total. Cumulative repeat customer orders reached 70 percent as of the end of the
second quarter, a significant increase from 61 percent as of the end of June
1999, reflecting increased customer loyalty.
Gross Profit
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------ -------------------------------------------
2000 1999 % Change 2000 1999 % Change
-------- -------- -------- -------- -------- --------
(in thousands) (in thousands)
Gross profit $ 10,462 $ 7,696 36% $ 21,351 $ 14,996 42%
Gross margin 15.5% 20.2% 15.1% 21.3%
Gross profit is net sales less the cost of sales, which consists of the
cost of merchandise sold to customers, and outbound and inbound shipping costs.
Gross profit increased due to the Company's increased sales volume. Gross margin
decreased in the second quarter of 2000 to 15.5% from 20.2% in the second
quarter of 1999 and to 15.1% from 21.3% for the six months ended June 30, 2000
and June 30, 1999, respectively. The decrease in gross margin is due primarily
to the increase in coupon promotions in the first six months of 2000 compared
with the first six months of 1999. The Company views coupon offerings as an
important customer acquisition tool and expects to continue to utilize these
types of offerings in the future. The Company expects to be able to improve
gross margin over the next twelve months by utilizing its distribution facility
in Memphis and by decreasing over time, its reliance on more costly third party
suppliers.
The Company intends to expand its operations by promoting new or
complementary products or sales formats and by expanding the breadth and depth
of its product and service offerings. Gross margins attributable to new business
areas may be lower than those associated with the Company's existing business
activities. Therefore, to the extent lower margin products become a larger
portion of the Company's product mix, a proportionate impact on overall product
gross margin is expected.
10
Marketing and Sales
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- ---------------------------------------
2000 1999 % Change 2000 1999 % Change
------- ------- -------- ------- ------- --------
(in thousands) (in thousands)
Marketing and sales $31,574 $21,638 46% $59,507 $39,983 49%
Percentage of net sales 46.8% 56.7% 42.1% 56.7%
Marketing and sales expenses consist primarily of advertising and
promotional expenditures, as well as payroll and related expenses for personnel
engaged in marketing, selling, fulfillment and editorial activities. All
fulfillment costs, including the cost of operating and staffing distribution and
customer service centers, are included in marketing and sales. Marketing and
sales expenses increased primarily due to the increases in the Company's
advertising and promotional expenditures and increased payroll and related costs
associated with fulfilling customer demand. Marketing and sales expenses
decreased as a percentage of net sales compared with 1999 due to the higher net
sales and the Company's focus on improving the productivity of its marketing and
advertising expenditures.
B&N.com intends to continue pursuing its aggressive brand and marketing
campaigns. B&N.com also anticipates its variable costs of fulfillment to
increase based on anticipated sales growth but as a percentage of sales will
decline. Fixed fulfillment costs were higher in the second quarter 2000 and are
expected to continue to increase over the next six months as a result of the
opening of two new distribution facilities in Memphis, Tennessee and Reno,
Nevada. The Memphis facility began operation on May 1 with 380,000 square feet
featuring the latest in direct-to-consumer automated fulfillment systems
providing the Company with expanded capacity and improved efficiency. The Reno
facility is expected to open later this year.
Accounting standard setters are currently reviewing financial statements
of internet companies in order to achieve a consensus with respect to the
financial statement presentation of certain items. Included in this review is
the current practice of including certain warehouse and fulfillment costs in
marketing and sales expense instead of in cost of sales. No decisions have been
reached and further discussion is expected.
Technology and Web Site Development
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- ---------------------------------------
2000 1999 % Change 2000 1999 % Change
------- ------- -------- ------- ------- --------
(in thousands) (in thousands)
Technology and web site
development $9,593 $4,049 137% $15,942 $7,568 111%
Percentage of net sales 14.2% 10.6% 11.3% 10.7%
Technology and Web site development expenses consist principally of
payroll and related expenses for web page production and network operations
personnel and consultants, and infrastructure related to systems and
telecommunications. The increase in technology and Web site development expenses
was primarily attributable
11
to increased staffing and associated costs related to the increased number of
new initiatives executed over the first six months of 2000. During the second
quarter of 2000, B&N.com introduced a new site design, and navigational and
ordering improvements to further enhance the user experience. The introduction
of Barnes & Noble University and BNTV also contributed to the increase in costs
for the quarter.
Technology and Web site development expenses are also a result of
increased investments in systems and telecommunications infrastructure,
including investments associated with the introduction of new product lines and
the enhancement of existing product lines. Examples include the launching of the
Video Store and the costs associated with the future launch of the eBook
Superstore in the third quarter. Additional technology and Web site expenses
were also required to support the higher sales volume. B&N.com believes that
continued investment in technology and Web site development is critical to
attaining its strategic objectives, but the pace with which new initiatives are
implemented is not expected to equal that of the current quarter.
General and Administrative
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- ---------------------------------------
2000 1999 % Change 2000 1999 % Change
------- ------- -------- ------- ------- --------
(in thousands) (in thousands)
General and
administrative $7,125 $3,985 79% $12,401 $7,497 65%
Percentage of
net sales 10.6% 10.4% 8.8% 10.6%
General and administrative expenses consist of payroll and related
expenses for executive, finance and administrative personnel, recruiting,
professional fees and other general corporate expenses such as costs to process
credit card transactions. The increase in general and administrative expenses
was primarily a result of increased salaries and related expenses associated
with the hiring of additional personnel and professional fees related to
B&N.com's growth and to support expanded online activities. Such expenses
increased slightly as a percentage of net sales for the three months ended June
30, 2000 but have decreased as a percentage of net sales for the six months
ended June 30, 2000 due to the significant increase in net sales and the effects
of leveraging these expenses over a larger sales base. B&N.com expects general
and administrative expenses to increase as B&N.com expands its staff and incurs
additional costs related to the growth of its business; however, B&N.com expects
general and administrative expenses as a percentage of sales to decrease for the
balance of this fiscal year.
Depreciation and Amortization
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- ---------------------------------------
2000 1999 % Change 2000 1999 % Change
------- ------- -------- ------- ------- --------
(in thousands) (in thousands)
Depreciation and
amortization $8,425 $ 3,308 155% $14,744 $ 6,466 128%
Percentage of
net sales 12.5% 8.7% 10.4% 9.2%
12
The increase in depreciation and amortization expenses was primarily
attributable to fixed asset purchases of $49.0 million for the six months ended
June 30, 2000 compared with fixed asset purchases of $13.4 million for the six
months ended June 30, 1999. Depreciation expense will increase over the next
twelve months due to fixed assets which will be placed in service to support the
operations of the two new distribution centers and additional technology
infrastructure.
Stock Based Compensation
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- ---------------------------------------
2000 1999 % Change 2000 1999 % Change
------- ------- -------- ------- ------- --------
(in thousands) (in thousands)
Stock based compensation $(175) $ -- -- $11,740 $ --
Percentage of net sales (0.3)% $ -- 8.3% --
Stock based compensation for the six months ended June 30, 2000 is
primarily attributable to expenses incurred from a payment of $10,940,000 to
Jonathan Bulkeley, former Chief Executive Officer, in March 2000 for the
surrender and cancellation of exercisable stock options. In addition, the
Company repriced a portion of its options in February 2000. On March 1, 2000 the
Company repriced approximately 5 million (net of cancellations) of 16 million
then outstanding options which were originally granted at an average exercise
price of $16.15 to a new exercise price of $8.00, the closing market price of
the Company's stock as of March 1, 2000. Based on current accounting
pronouncements, the Company is accounting for the repriced options as if they
were variable options and as a result, recorded a credit of $175,000 in the
second quarter of 2000, representing the reversal of charges in the first
quarter of 2000 due to the decrease in the Company's stock price below the new
exercise price.
Equity in Net Loss of Equity Investments Including Related Amortization of
Intangibles
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- ---------------------------------------
2000 1999 % Change 2000 1999 % Change
------- ------- -------- ------- ------- --------
(in thousands) (in thousands)
Equity in net
loss of equity
investments including
related amortization
of intangibles $5,575 $ -- -- $10,782 $ -- --
Percentage of
net sales 8.3% $ -- 7.6% --
13
Equity in net loss of equity investments including related amortization of
intangibles consists of expenses from the Company's equity investments in
Enews.com, the largest retailer of magazine subscriptions on the Internet and
MightyWords, a leading provider of digital content. MightyWords content will be
distributed through the Company's web site. This investment exemplifies the
Company's commitment to the distribution of digital content.
Interest Income, Net
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- ---------------------------------------
2000 1999 % Change 2000 1999 % Change
------- ------- -------- ------- ------- --------
(in thousands) (in thousands)
Interest income, net $6,289 $ 3,330 89% $14,196 $ 4,346 227%
Percentage of
net sales 9.3% 8.7% 10.0% 6.2%
An increase in net interest income reflects funds received from the
Company's initial public offering in the second quarter of 1999 which are
currently invested in various fixed income and money market investments.
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, because of uncertainty regarding its
realizability.
Liquidity and Capital Resources
As of June 30, 2000, the Company's cash, cash equivalents and short-term
marketable securities were $284.2 million, compared to $478.0 million on
December 31, 1999. At June 30, 2000, the Company had $71.9 million in long-term
marketable securities, compared to $71.9 million of long-term marketable
securities at December 31, 1999. The Company completed the second quarter 2000
with a debt-free balance sheet and cash and liquid investments totaled $356.1
million. On May 25, 1999, the Company completed an initial public offering of
28,750,000 shares of Class A Common Stock at a price of $18 per share. The net
proceeds to the Company from the initial public offering were approximately
$484.4 million net of commissions. At the completion of the initial public
offering, the Company received additional capital contributions of $50.0
million.
Net cash flows used in operating activities were $94.0 million for the six
months ended June 30, 2000 and $46.0 million for the six months ended June 30,
1999. Cash used in the six months ended June 30, 2000, was primarily
attributable to a net loss of $18.7 million and a corresponding decrease in
minority interest of $70.9 million, a $17.3 million decrease in accounts payable
and a decrease in accrued liabilities of $1.4 million. In addition, receivables
increased $0.5 million, merchandise inventories increased $13.5 million and
prepaid expenses and other current assets increased $2.3 million. This was
partially offset by depreciation and amortization of $14.1 million, an increase
in payables to affiliates of $3.5 million and non-cash acquisition, disposition
and investment related costs of $12.9 million. Cash used for the six months
ended June 30, 1999, was primarily attributable to a net loss of $8.4 million
and a corresponding decrease in minority interest of $33.7 million, a decrease
in payables
14
to affiliates of $5.0 million and a decrease in accrued liabilities of $4.1
million. In addition, receivables increased $5.2 million and merchandise
inventories increased $0.4 million. This was partially offset by depreciation
and amortization of $5.5 million and an increase in accounts payable of $3.5
million. In addition, prepaid expenses and other current assets decreased $1.9
million.
Net cash used in investing activities of $128.9 million for the six months
ended June 30, 2000 was attributable to a $24.7 million increase in marketable
securities, a $55.2 million increase in other non-current assets and purchases
of fixed assets totaling $49.0 million. Net cash used in investing activities of
$225.4 million for the six months ended June 30, 1999 was primarily attributable
to a $262.5 million increase in marketable securities and purchases of fixed
assets totaling $13.4 million. This was partially offset by a decrease in
restricted cash of $50.4 million.
Net cash flows from financing activities were $4.4 million for the six
months ended June 30, 2000, attributable to proceeds from the exercise of stock
options. Net cash flows from financing activities were $534.6 million for the
six months ended June 30, 1999, primarily due to proceeds of $484.4 million from
the Company's initial public offering and capital contributions of $50.0
million.
At June 30, 2000, the Company's principal sources of liquidity consisted
of $28.9 million of cash and cash equivalents and $255.3 million of short-term
marketable securities. Long term marketable securities totaled $71.9 million.
Preparing two distribution centers for operation this year and continued
technology infrastructure are expected to require continued capital
expenditures. The Memphis distribution facility was operational effective May 1,
2000. The distribution centers are being established to enhance service and
availability to customers and improve purchasing efficiencies by increasing
percentage of orders filled internally. In addition, expenditures to stock
inventories at both facilities will continue over the next six months. As of
June 30, 2000, the Company's remaining principal commitments consisted of
obligations outstanding under operating leases and commitments for advertising,
marketing and promotion arrangements. The Company anticipates a continued
increase in its capital expenditures consistent with anticipated growth in
operations, infrastructure and personnel.
The Company believes that current cash and investments will be sufficient
to meet its anticipated cash needs for at least 24 months. However, any
projection of future cash needs and cash flows is subject to substantial
uncertainty. If current cash and short term investments in addition to cash
generated from operations is 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 forward-looking statements regarding expectations
of the Company and B&N.com. These statements 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 or B&N.com. 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, the level and
volatility of interest rates, changes in tax and other governmental rules and
regulations applicable to the
15
Company or B&N.com and other factors, risks and uncertainties more specifically
set forth in the Company's public filings with the Securities and Exchange
Commission. The forward-looking statements herein speak only as of the date of
this report. The Company and B&N.com expressly disclaim any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statement included in this report to reflect any changes in the Company's or
B&N.com's expectations or any changes in events, conditions, or circumstances on
which any such statement is based. 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.
Item 3: Quantitative and Qualitative Disclosure about Market Risk
The Company invested in Enews and MightyWords primarily for strategic
purposes. Such investments are accounted for under the equity method if they
give the Company the ability to exercise significant influence, but not control,
over an investee. This is generally defined as an ownership interest of the
voting stock of the investee of between 20% and 50%, although other factors,
such as representation on the investee's Board of Directors and the impact of
commercial arrangements, are considered in determining whether the equity method
is appropriate. The Company regularly reviews the carrying value of its
investments and identifies and records impairment losses when events and
circumstances indicate that such assets are permanently impaired. To date, the
Company has not recorded any such impairment losses. As of June 30, 2000 the
Company had equity-method investments of $48.5 million. These investments are in
companies involved in the Internet and e-commerce industries and their fair
values are subject to significant fluctuations due to volatile market
conditions.
16
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
No material developments have occurred with respect to previously reported
legal proceedings.
Item 2: Changes in Securities and Use of Proceeds
The effective date of the Company's registration statement, filed on Form
S-1 under the Securities Act of 1933 (File No. 333-64211) relating to the
initial public offering of its Class A Common Stock, was May 25, 1999. Pursuant
to the initial public offering, a total of 28,750,000 shares of the Company's
Class A Common Stock were sold to an underwriting syndicate. The managing
underwriters of the initial public offering were Goldman, Sachs & Co., Merrill
Lynch & Co., Salomon Smith Barney and Wit Capital Corporation. The initial
public offering was completed on May 28, 1999, at an initial public offering
price of $18.00 per share. The initial public offering resulted in gross
proceeds to the Company of $517.5 million, $31.1 million of which were applied
to the underwriting discount and approximately $2.0 million of which were
applied to initial public offering expenses. As a result, net proceeds of the
initial public offering to the Company were approximately $484.4 million. Such
net proceeds were used by the Company to acquire 28,750,000 Membership Units of
B&N.com. Since May 28, 1999, B&N.com has invested approximately $255.3 million
of such net proceeds in short-term marketable securities and $71.9 million in
long-term marketable securities. The remainder of the funds have been used to
purchase fixed assets and support the ongoing operations of B&N.com. Except as
indicated in the Company's prospectus, none of the net proceeds of the initial
public offering were paid by the Company or B&N.com, directly or indirectly, to
any director, officer or general partner of the Company or B&N.com or any of
their associates, or to any persons owning ten percent or more of any class of
the Company's equity securities, or any affiliates of the Company or B&N.com.
Item 3: Defaults upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Securities Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data Schedule
(b) No report on 8-K was filed by registrant during the fiscal quarter
for which this report is filed.
17
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)
Date: August 14, 2000 By: /s/ Marie J. Toulantis
--------------------------------
Marie J. Toulantis
Chief Financial Officer
18