Selected Consolidated Financial Data
- --------------------------------------------------------------------------------
The selected consolidated financial data of Barnes & Noble, Inc. and its
wholly-owned subsidiaries (collectively, the Company) set forth on the following
pages should be read in conjunction with the consolidated financial statements
and notes included elsewhere in this report. The Company's fiscal year is
comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of
January. The Statement of Operations Data for the 53 weeks ended February 1,
1997 (fiscal 1996) and for the 52 weeks ended January 27, 1996 (fiscal 1995) and
January 28, 1995 (fiscal 1994) and the Balance Sheet Data as of February 1, 1997
and January 27, 1996 are derived from, and are qualified by reference to,
audited consolidated financial statements which are included elsewhere in this
report. The Statement of Operations Data for the 52 weeks ended January 29, 1994
(fiscal 1993) and January 30, 1993 (fiscal 1992) and the Balance Sheet Data as
of January 28, 1995, January 29, 1994 and January 30, 1993 are derived from
audited consolidated financial statements not included in this report.
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal Year 1996 1995 1994 1993 1992
(Thousands of dollars, except per share data)
- -----------------------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Revenues
Barnes & Noble stores(9) $ 1,861,177 1,349,830 952,697 614,646 328,766
B. Dalton Bookseller(10) 564,926 603,204 646,876 688,220 706,862
Other 22,021 23,866 23,158 34,520 51,075
----------- ---------- ---------- ---------- ----------
Total revenues 2,448,124 1,976,900 1,622,731 1,337,386 1,086,703
Cost of sales, buying and occupancy 1,569,448 1,269,001 1,050,011 874,038 711,845
----------- ---------- ---------- ---------- ----------
Gross profit 878,676 707,899 572,720 463,348 374,858
Selling and administrative expenses 456,181 376,773 311,344 262,861 221,266
Rental expense 225,450 182,473 147,225 120,326 91,792
Depreciation and amortization 59,806 47,881 36,617 29,077 25,082
Pre-opening expenses 17,571 12,160 9,021 8,940 6,004
Restructuring charge(8) -- 123,768 -- -- --
----------- ---------- ---------- ---------- ----------
Operating profit (loss) 119,668 (35,156) 68,513 42,144 30,714
Interest expense, net and amortization of
deferred financing fees(1) 38,286 28,142 22,955 25,807 26,858
----------- ---------- ---------- ---------- ----------
Earnings (loss) before provision (benefit) for income
taxes, extraordinary item and cumulative effect of
a change in accounting principle 81,382 (63,298) 45,558 16,337 3,856
Provision (benefit) for income taxes 30,157 (10,322) 20,085 8,584 3,646
----------- ---------- ---------- ---------- ----------
Earnings (loss) before extraordinary item and
cumulative effect of a change in accounting principle 51,225 (52,976) 25,473 7,753 210
Extraordinary loss(2) -- -- -- -- 6,663
Cumulative effect of a change in accounting principle(3) -- -- -- -- 2,052
----------- ---------- ---------- ---------- ----------
Net earnings (loss)(4) $ 51,225 (52,976) 25,473 7,753 (8,505)
=========== ======= ====== ===== ======
Net earnings (loss) per common share(7) $ 1.48 (1.70) 0.81 0.30 0.01
Weighted average common shares outstanding(5)(7) 34,576,000 31,217,000 31,344,000 26,194,000 20,528,000
Store Operating Data:
Stores open at end of period
Barnes & Noble stores(9) 431 358 268 203 135
B. Dalton Bookseller(10) 577 639 698 734 781
----------- ---------- ---------- ---------- ----------
Total 1,008 997 966 937 916
=========== ========== ========== ========== ==========
17
Barnes & Noble, Inc.
Selected Consolidated Financial Data (Continued)
- --------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal Year 1996 1995 1994 1993 1992
(Thousands of dollars, except per share data)
- -----------------------------------------------------------------------------------------------------------------------------------
Comparable store sales increase (decrease)(6)
Barnes & Noble stores(9) 7.3% 6.9% 12.6% 8.6% 5.2%
B. Dalton Bookseller(10) (1.0) (4.3) (2.3) (0.3) 2.5
Capital Expenditures $ 171,885 154,913 88,763 81,116 64,987
Balance Sheet Data (at end of period):
Working capital $ 212,692 226,500 155,976 182,403 114,677
Total assets $ 1,446,647 1,315,342 1,026,418 895,863 712,055
Long-term debt, less current portions $ 290,000 262,400 190,000 190,000 190,000
Preferred stock subject to redemption, including
cumulative dividends in arrears $ -- -- -- -- 66,248
Shareholders' equity $ 455,989 400,235 358,173 328,841 146,754
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Interest expense for fiscal 1996, 1995, 1994, 1993 and 1992 is net of
interest income of $2,288, $2,138, $3,008, $1,838 and $2,228, respectively.
(2) Reflects a net extraordinary charge during fiscal 1992 due to the early
extinguishment of debt, consisting of: (i) a pre-tax charge of $6,509
associated with the redemption premiums on the Company's senior
subordinated notes and debentures; (ii) the associated write-off of $5,179
of unamortized deferred finance costs related to the early extinguishment
of the Company's senior subordinated notes and debentures; and (iii) the
related tax benefits of $5,025 on the extraordinary charges.
(3) Reflects the cumulative effect of a change in accounting principle of
$2,052 (net of tax benefits of $1,548) during fiscal 1992 related to the
adoption of new accounting standards for post-retirement benefits.
(4) Net earnings (loss) does not give effect to preferred stock dividends.
Holders of the Company's Series C Preferred Stock were entitled to
dividends of $4,466 and $1,375 during fiscal 1993 and 1992, respectively.
Such accumulated dividends were paid from the proceeds of the Company's
initial public offering completed on October 4, 1993 (IPO). Accumulated
dividends on all other series of preferred stock outstanding for all
periods were converted into common stock or waived.
(5) The pro forma weighted average number of shares outstanding used in the
computation of pro forma earnings before extraordinary item and cumulative
effect of a change in accounting principle per common share gives effect to
an approximate 2.058-for-1 stock split completed by the Company prior to
the consummation of the IPO, the effect of certain employee stock options
using the treasury stock method, the number of shares issued upon the
conversions of preferred stock and the exercise of warrants in connection
with the IPO and the number of shares issued which is equal in value to the
redemption price of the Series C Preferred Stock, including accumulated and
unpaid dividends.
(6) Comparable store sales increase (decrease) is calculated using sales of
stores that have been open for 12 months for B. Dalton Bookseller and 15
months for Barnes & Noble stores (due to the high sales volume associated
with grand openings). The comparable store sales increase (decrease) for
fiscal 1996 has been adjusted to reflect the elimination of the fifty-third
week. Comparable store sales for fiscal 1996 include relocated Barnes &
Noble stores and exclude B. Dalton Bookseller stores which the Company
closed in fiscal 1996 or has a formal plan to close during fiscal 1997.
(7) Computed on a pro forma basis for fiscal 1993 and 1992. Earnings per common
share are before extraordinary item and cumulative effect of a change in
accounting principle for fiscal 1992.
(8) Restructuring charge includes restructuring and asset impairment losses
recognized upon adoption of Statement of Financial Accounting Standards
Board No. 121 "Impairment of Long-Lived Assets and Assets to be Disposed
Of."
(9) Also includes Bookstop and Bookstar stores.
(10) Also includes Doubleday Book Shops, Scribner's Bookstores and discount
bookstores operated under the Barnes & Noble tradename representing the
Company's original retail strategy.
18
Barnes & Noble, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
The Company's fiscal year is comprised of 52 or 53 weeks, ending on the
Saturday closest to the last day of January. As used in this section, "fiscal
1996" represents the 53 weeks ended February 1, 1997, "fiscal 1995" represents
the 52 weeks ended January 27, 1996 and "fiscal 1994" represents the 52 weeks
ended January 28, 1995.
GENERAL
Barnes & Noble, Inc. (Barnes & Noble or the Company), the world's largest
bookseller, operates 431 "super"stores, 91 of which were opened in fiscal 1996,
under the Barnes & Noble Booksellers, Bookstop and Bookstar tradenames, and 577
mall bookstores under the B. Dalton Bookseller, Doubleday Book Shops and
Scribner's Bookstore tradenames, as of February 1, 1997. Barnes & Noble
publishes books under its own imprint for exclusive sale through its retail
stores and mail-order catalogs. The Company is also the exclusive bookseller in
America Online's Marketplace and has plans to launch a World Wide Web site,
operating the "world's largest bookseller online," during 1997. The Company
employed approximately 24,000 full and part-time booksellers and created nearly
2,600 new jobs nationwide during fiscal 1996 primarily in relation to its Barnes
& Noble store expansion.
Barnes & Noble is the largest operator of book "super" stores in the United
States with 431 Barnes & Noble stores located in 47 states and the District of
Columbia as of February 1, 1997. With more than thirty years of bookselling
experience, management has a strong sense of customers' changing needs and the
Company leads book retailing with a "community store" concept. Barnes & Noble's
typical store offers a comprehensive title base, a cafe and a calendar of
ongoing events - author appearances and children's activities - that make each
Barnes & Noble store an active part of its community. Management estimates that
as much as 80% of the sales generated by a new Barnes & Noble store is
incremental to the community in which the store is located - representing a
combination of previously unfulfilled and newly created demand.
Barnes & Noble stores range in size from 10,000 to 60,000 square feet
depending upon market size, and each store features an authoritative selection
of books, ranging between 60,000 to 175,000 titles. The comprehensive title
selection is diverse and customized to the local community's interests and
demands. To further this diversity, Barnes & Noble funds the Discover Great New
Writers program supporting the work of newly published authors, and emphasizes
books published by small and independent publishers and university presses. In
addition to the extensive on-site selection, each store will special order any
book from the more than 1.2 million books in print.
The book "super" store concept originated in the mid-1970s when a
predecessor to the Company joined together the Barnes & Noble "Main Store" and
"Sale Annex" which became the "World's Largest Bookstore," with close to 100,000
square feet of total retail space. Based on the success of this retail format,
several Barnes & Noble stores were opened in midtown Manhattan and downtown
Boston. However, the Company did not begin to expand nationally until 1987 when
several Barnes & Noble store prototypes were tested in suburban locations. In
late 1989, with four Barnes & Noble stores already in operation, the Company
acquired 23 stores from Bookstop, Inc. thereby gaining market penetration in
Texas, Florida and Southern California. Subsequently, the Company accelerated
its expansion adding eight new stores in fiscal 1990; 28 in fiscal 1991; 78 in
fiscal 1992; 72 in fiscal 1993; 70 in fiscal 1994; 97 in fiscal 1995; and 91 in
fiscal 1996.
Although the early prototypes of the Barnes & Noble and Bookstop stores
were highly profitable, their smaller store size (roughly 10,000 square feet)
limited sales potential and created opportunity for competition. As a result, 12
of the Company's original Barnes & Noble or Bookstop stores were relocated or
expanded during fiscal 1996 to conform to the new prototype which has grown
steadily in size since 1990, reaching an average of 27,000 square feet by 1995.
The Company plans to complete its modernization program during fiscal 1997.
Barnes & Noble stores opened during fiscal 1996 added 2.54 million square feet
to the Barnes & Noble base, bringing the total square footage to 9.3 million
square feet, a 33% increase over the prior year. The Company plans to open
approximately 70 Barnes & Noble stores in 1997 which are expected to average
26,000 square feet in size.
19
Barnes & Noble, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
At the end of fiscal 1996, the Company operated 577 B. Dalton stores in 46
states, and the District of Columbia. These mall-based stores employ
merchandising strategies that target the "middle-American" consumer book market,
offering a wide range of bestsellers and general-interest titles. Doubleday and
Scribner's bookstores utilize a more upscale format aimed at the "carriage
trade" in higher-end shopping malls and place a greater emphasis on hardcover
and gift books. Most of the B. Dalton stores range in size from 2,800 to 6,000
square feet, and, while they are appropriate to the size of adjacent mall
tenants, the stores continue to be significantly impacted by the opening of
superstores in nearby locations.
During the past six years, the Company has pursued a two-pronged strategy
to maximize returns from its B. Dalton division in response to declining sales
attributable primarily to superstore competition and, to a lesser extent, weaker
overall consumer traffic in shopping malls. The first part of the Company's
strategy has been to rigorously identify and close underperforming stores. Since
1989, the Company has closed more than 50 B. Dalton stores per year. At the end
of fiscal 1995, the Company accelerated its store closing strategy, and provided
for these closing costs as part of the non-cash restructuring charge of $123.8
million ($87.3 million after tax or $2.65 per common share), with the aim of
forming a core of more-profitable B. Dalton stores for the future. During fiscal
1996 the Company closed 72 underperforming B. Dalton stores identified during
fiscal 1995 as part of the B. Dalton business restructuring. This two-pronged
business strategy is beginning to stabilize B. Dalton's store operations. During
fiscal 1996, same-store sales for the B. Dalton stores improved from a decline
of 4.3% during fiscal 1995 to a decline of 1.0%.
Concurrent with the implementation of the store closing strategy, the
Company has been expanding the size of some of its new B. Dalton stores and is
seeking better locations within malls for increased visibility and higher
traffic flow. A new B. Dalton prototype was developed for this purpose in 1993
and, since that time, more than 100 new or converted stores have been opened and
are performing, on average, better than the remaining store base.
Complementing its leadership position as the world's largest bookseller,
Barnes & Noble is the world's largest supplier of books through catalogs. The
Company mails over 20 million catalogues each year and enjoys a list of over one
million customers. Barnes & Noble's extensive catalog mailings over the past 13
years have created substantial name recognition in the U.S. and internationally,
and have facilitated the introduction of Barnes & Noble stores and the Company's
online business.
With publishing and distribution rights to over 1,500 book titles, the
Company further differentiates its product offerings from those of its
competitors by publishing books under its own Barnes & Noble Books imprint for
exclusive sale in its Barnes & Noble stores, B. Dalton stores and direct mail
catalogs. Through its proprietary publishing, Barnes & Noble offers customers
high quality books at excellent values while generating higher gross profit
margins.
During fiscal 1996, the Company selectively pursued opportunities to
leverage its "know-how" through strategic alliances with Chapters Inc.
(Chapters) and Calendar Club LLC (Calendar Club).
In 1996, the Company purchased 20% of Chapter's common stock. Chapters is
the largest book retailer in Canada with 360 mall bookstores and the leading
Canadian book superstore retailer with 12-15 book superstores. During December
1996, Chapters completed an initial public offering diluting the Company's
ownership to 13%. The Company, however, has a one-year maintenance right which
allows the Company to regain its 20% ownership position.
In 1996, the Company also acquired 50% of Calendar Club, an operator of
seasonal calendar kiosks in the U.S. and internationally.
20
Barnes & Noble, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The Company's revenues, comparable store sales, store openings, store
closings and number of stores open at fiscal year end are set forth below for
the Company's various retailing strategies for the periods indicated:
- --------------------------------------------------------------------------------
Fiscal Year 1996 1995 1994
(Thousands of dollars)
- --------------------------------------------------------------------------------
Revenues(1)
Barnes & Noble stores(3) $ 1,861,177 1,349,830 952,697
B. Dalton Bookseller(4) 564,926 603,204 646,876
Other 22,021 23,866 23,158
----------- --------- ---------
Total revenues $ 2,448,124 1,976,900 1,622,731
=========== ========= =========
Comparable Store Sales
Increase (Decrease)(2)
Barnes & Noble stores(3) 7.3% 6.9% 12.6%
B. Dalton Bookseller(4) (1.0) (4.3) (2.3)
=========== ========= =========
Stores Opened
Barnes & Noble stores(3) 91 97 70
B. Dalton Bookseller(4) 10 10 13
----------- --------- ---------
Total 101 107 83
=========== ========= =========
Stores Closed
Barnes & Noble stores(3) 18 7 5
B. Dalton Bookseller(4) 72 69 49
----------- --------- ---------
Total 90 76 54
=========== ========= =========
Number of Stores Open at Year End
Barnes & Noble stores(3) 431 358 268
B. Dalton Bookseller(4) 577 639 698
----------- --------- ---------
Total 1,008 997 966
=========== ========= =========
Square Feet of Selling Space
at Year End (in millions)
Barnes & Noble stores(3) 9.3 7.0 4.5
B. Dalton Bookseller(4) 2.2 2.4 2.5
----------- --------- ---------
Total 11.5 9.4 7.0
=========== ========= =========
(1) The Company's revenues include net sales from the Company's bookstores and
other operations, income from the sale of the Company's B. Dalton
Book$avers and Bookstop/Bookstar Reader's Choice discount cards, and other
miscellaneous revenue items.
(2) Comparable store sales for B. Dalton Bookseller are determined using stores
open at least twelve months. Comparable store sales for Barnes & Noble
stores are determined using stores open at least 15 months, due to the high
sales volume associated with grand openings. Comparable store sales
increase (decrease) is computed on a 52-week basis for fiscal 1996.
(3) Also includes Bookstop and Bookstar stores.
(4) Also includes Doubleday Book Shops, Scribner's Bookstores and discount
bookstores operated under the Barnes & Noble tradename representing the
Company's original retail strategy.
The following table sets forth, for the periods indicated, the percentage
relationship that certain items bear to total revenues of the Company:
- --------------------------------------------------------------------------------
Fiscal Year 1996 1995 1994
- --------------------------------------------------------------------------------
Revenues 100.0% 100.0% 100.0%
Cost of sales, buying
and occupancy 64.1 64.2 64.7
----- ----- -----
Gross profit 35.9 35.8 35.3
Selling and administrative
expenses 18.6 19.1 19.2
Rental expense 9.2 9.2 9.1
Depreciation and
amortization 2.5 2.4 2.2
Pre-opening expenses 0.7 0.6 0.6
Restructuring charge -- 6.3 --
----- ----- -----
Operating profit (loss)(1) 4.9 (1.8) 4.2
Interest expense, net
and amortization of
deferred financing fees 1.6 1.4 1.4
----- ----- -----
Earnings (loss) before
provision (benefit)
for income taxes(1) 3.3 (3.2) 2.8
Provision (benefit) for
income taxes(1) 1.2 (0.5) 1.2
----- ----- -----
Net earnings (loss)(1) 2.1% (2.7)% 1.6%
===== ===== =====
(1) If operating profit (loss), earnings (loss) before provision (benefit) for
income taxes, provision (benefit) for income taxes and net earnings (loss)
were presented before the effects of the restructuring charge of $123,768
during fiscal 1995, the percentage relationship that these items would bear
to total revenues of the Company would be 4.5%, 3.1%, 1.4% and 1.7%,
respectively.
21
Barnes & Noble, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
53 WEEKS ENDED FEBRUARY 1, 1997 COMPARED TO 52 WEEKS ENDED JANUARY 27, 1996
Revenues
The Company's revenues increased 23.8% during fiscal 1996 to $2.448 billion
from $1.977 billion during fiscal 1995. Fiscal 1996 includes 53 weeks; excluding
the impact of the fifty-third week, revenues increased 21.5%. During fiscal
1996, revenues from Barnes & Noble stores (which also includes Bookstop and
Bookstar stores) rose 37.9% to $1.861 billion from $1.350 billion during fiscal
1995 and contributed 76.0% of total revenues, up from 68.3% during fiscal 1995.
B. Dalton Bookseller (which also includes Doubleday Book Shops, Scribner's
Bookstores and discount bookstores operated under the Barnes & Noble tradename
representing the Company's original retail strategy) generated revenues of
$564.9 million (or 23.1% of total revenues) during fiscal 1996, down from $603.2
million (or 30.5% of total revenues) during fiscal 1995.
The increase in revenues was primarily attributable to an increase in sales
from Barnes & Noble stores. The Company opened 91 Barnes & Noble stores and
closed 18 during fiscal 1996 (12 of which were relocated), increasing square
footage by 33% in fiscal 1996. Comparable store sales for Barnes & Noble stores,
which excludes the impact of the fifty-third week of sales, increased 7.3%
during fiscal 1996, in comparison to 6.9% during fiscal 1995. During fiscal
1996, revenues of B. Dalton Bookseller declined, primarily due to the 72 store
closings and a comparable store sales decrease of 1.0%.
Cost of Sales, Buying and Occupancy
The Company's cost of sales, buying and occupancy includes occupancy costs
(such as common area maintenance, merchant association dues and lease-required
advertising, but excluding rental expense), certain overhead costs of the
Company's buying departments and adjustments for LIFO.
Cost of sales, buying and occupancy increased 23.7% during fiscal 1996 to
$1.569 billion from $1.269 billion during fiscal 1995, but decreased as a
percentage of revenues to 64.1% during fiscal 1996 from 64.2% during fiscal 1995
due to improvements in merchandise mix, as well as increases in merchandise
margins due to direct purchasing through the Company's new distribution center.
Excluding the impact of LIFO, cost of sales, buying and occupancy as a
percentage of revenues declined to 64.1% in fiscal 1996 from 64.5% in fiscal
1995.
Selling and Administrative Expenses
Selling and administrative expenses increased $79.4 million, or 21.1%, to
$456.2 million during fiscal 1996 from $376.8 million during fiscal 1995. The
Company's operating leverage continued to improve as selling and administrative
expenses decreased as a percentage of revenues to 18.6% during fiscal 1996 from
19.1% during fiscal 1995.
Rental Expense, Depreciation and Amortization
Rental expense increased $43.0 million, or 23.6%, to $225.5 million during
fiscal 1996 from $182.5 million during fiscal 1995. Depreciation and
amortization increased $11.9 million, or 24.9%, to $59.8 million during fiscal
1996 from $47.9 million during fiscal 1995. The increases were primarily a
result of the addition of 91 Barnes & Noble stores during fiscal 1996.
Pre-Opening Expenses
Pre-opening expenses increased $5.4 million, or 44.5%, to $17.6 million
during fiscal 1996 from $12.2 million during fiscal 1995. As the Company
amortizes pre-opening expenses over the respective store's first twelve months
of operation, the increase reflects the opening of 109 new Barnes & Noble stores
during the second half of fiscal 1995 and the first half of fiscal 1996 compared
with 68 stores in the corresponding period of the previous year.
Operating Profit (Loss)
Operating profit, before the effects of the $123.8 million restructuring
charge in fiscal 1995, increased $31.1 million, or 35.0%, to $119.7 million
during fiscal 1996 from $88.6 million during fiscal 1995. As a percentage of
revenues, operating profit increased to 4.9% during fiscal 1996 from 4.5% during
fiscal 1995 (before the effects of the restructuring charge), reflecting
improved operating leverage.
Interest Expense, Net and Amortization of
Deferred Financing Fees
Interest expense, net of interest income, and amortization of deferred
financing fees increased $10.2 million, or 36.0%, to $38.3 million during fiscal
1996 from $28.1 million during fiscal 1995. The increase resulted from a rise in
borrowings under the Company's credit facility to finance working capital and
capital expenditures. The impact of the increased borrowings was partially
offset by a reduction in the Company's weighted average interest rate on its
short-term borrowings.
22
Barnes & Noble, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
Provision (Benefit) for Income Taxes
The Company's income tax provision during fiscal 1996 was $30.2 million
compared with $26.1 million in fiscal 1995 (before the effects of the $123.8
million restructuring charge). Barnes & Noble's effective tax rate was 37.1%
during fiscal 1996 and 43.2% during fiscal 1995 (before the effects of the
restructuring charge). Such rates exceeded the Federal statutory rate primarily
due to the combined effects of goodwill amortization and state and local taxes.
The fiscal 1996 provision also reflects a non-recurring $3.0 million
rehabilitation tax credit.
Net Earnings (Loss)
As a result of the factors discussed above, the Company's net earnings in
fiscal 1996 increased to $51.2 million from $34.3 million in fiscal 1995 (before
the effects of the $123.8 million restructuring charge). Fiscal 1996 earnings
increased due to the continuing improvement in Barnes & Noble operating profits
combined with accelerating revenues over which to spread overhead costs.
Net earnings per common share were $1.48 during fiscal 1996 compared with
$1.05 during fiscal 1995 (before the effects of the restructuring charge). Net
earnings increased 49.3% while earnings per share increased 41.0% due to an
increase in the weighted average common shares outstanding to 34.6 million
shares during fiscal 1996 from 32.8 million shares during fiscal 1995,
reflecting the full-year impact of 2.5 million common shares issued in October
of 1995.
52 WEEKS ENDED JANUARY 27, 1996 COMPARED TO 52 WEEKS ENDED JANUARY 28, 1995
Revenues
The Company's revenues increased 21.8% during fiscal 1995 to $1.977 billion
from $1.623 billion during fiscal 1994. During fiscal 1995, revenues from Barnes
& Noble stores rose 41.7% to $1.350 billion from $952.7 million during fiscal
1994 and contributed 68.3% of total revenues, up from 58.7% of total revenues
during fiscal 1994. B. Dalton Bookseller generated revenues of $603.2 million
(or 30.5% of total revenues) during fiscal 1995, down 6.8% from revenues of
$646.9 million (or 39.9% of total revenues) during fiscal 1994.
The increase in revenues was primarily attributable to an increase in sales
of Barnes & Noble stores. The Company opened 97 Barnes & Noble stores and closed
seven during fiscal 1995. Comparable store sales for Barnes & Noble stores
increased 6.9% during fiscal 1995, in comparison to 12.6% during fiscal 1994.
During fiscal 1995, B. Dalton Bookseller revenues declined, primarily due to the
69 store closings and a comparable store sales decrease of 4.3% which reflected
accelerating superstore competition and a continuing decline in mall traffic.
Cost of Sales, Buying and Occupancy
The Company's cost of sales, buying and occupancy includes occupancy costs
(such as common area maintenance, merchant association dues and lease required
advertising, but excluding rental expense), certain overhead costs of the
Company's buying departments and adjustments for LIFO.
Cost of sales, buying and occupancy increased 20.9% during fiscal 1995 to
$1.269 billion from $1.050 billion during fiscal 1994, but decreased as a
percentage of revenues to 64.2% during fiscal 1995 from 64.7% during fiscal 1994
due to the effects of improvements in merchandise mix.
Selling and Administrative Expenses
Selling and administrative expenses increased $65.5 million, or 21.0%, to
$376.8 million during fiscal 1995 from $311.3 million during fiscal 1994 on a
revenue base which increased 21.8% during fiscal 1995. The Company's operating
leverage continued to improve as selling and administrative expenses decreased
as a percentage of revenues to 19.1% during fiscal 1995 from 19.2% during fiscal
1994.
Rental Expense, Depreciation and Amortization
Rental expense increased $35.3 million, or 23.9%, to $182.5 million during
fiscal 1995 from $147.2 million during fiscal 1994. Depreciation and
amortization increased $11.3 million, or 30.8%, to $47.9 million during fiscal
1995 from $36.6 million during fiscal 1994. The increases were primarily a
result of the net addition of 90 Barnes & Noble stores during fiscal 1995 which
were approximately 22% larger than the stores opened during fiscal 1994.
Pre-Opening Expenses
Pre-opening expenses increased $3.2 million, or 34.8%, to $12.2 million
during fiscal 1995 from $9.0 million during fiscal 1994 primarily as a result of
the increase in Barnes & Noble store openings to 97 stores during fiscal 1995
from 70 stores during fiscal 1994 and the 22% increase in average new store size
during fiscal 1995.
Restructuring Charge
Concurrent with the establishment of its restructuring plan, Barnes & Noble
evaluated its accounting policy for measuring the recoverability of its
long-lived assets and
23
Barnes & Noble, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
elected early adoption of Statement of Financial Accounting Standard No. 121,
"Accounting for Impairment of Long-Lived Assets and Assets to be Disposed Of"
(SFAS 121). During the fourth quarter of fiscal 1995, the Company recorded a
non-cash charge to operating earnings approximating $123,768 ($87,303 after-tax
or $2.65 per share) to reflect the aggregate impact of its restructuring plan
and change in accounting policy.
The change in the Company's method of valuing long-lived assets resulted in
a reduction in goodwill amortization expense of approximately $1,100 and $275 on
an annual and quarterly basis, respectively.
Operating Profit (Loss)
Operating profit (loss) was (35.2) million in fiscal 1995 and $68.5 in
fiscal 1994. Operating profit, before the effects of the $123.8 million
restructuring charge, increased $20.1 million, or 29.3%, to $88.6 million during
fiscal 1995 from $68.5 million during fiscal 1994 on a revenue base which
expanded 21.8% during fiscal 1995. As a percentage of revenues, operating
profit, before the effects of the restructuring charge, increased to 4.5% during
fiscal 1995 from 4.2% during fiscal 1994.
Interest Expense, Net and Amortization of Deferred Financing Fees
Interest expense, net of interest income, and amortization of deferred
financing fees increased $5.1 million, or 22.6%, to $28.1 million during fiscal
1995 from $23.0 million during fiscal 1994. The increase resulted from a rise in
borrowings under the Company's revolving credit facility to fund the working
capital requirements of the Company's new and existing stores. The impact of the
increased borrowings was partially offset by a reduction in the Company's
weighted average interest rate on its borrowings under the revolving credit
facility that resulted from the Company's increased profitability which improved
its interest coverage ratio on which the borrowing rates were based.
Provision for Income Taxes
During fiscal 1995, the provision for income taxes, before the effects of
the $123.8 million restructuring charge, was $26.1 million compared with $20.1
million during fiscal 1994. The increase resulted from the Company's improving
profitability. Barnes & Noble's effective tax rate of 43.2% and 44.1% during
fiscal 1995 and fiscal 1994, respectively, exceeded the Federal statutory rate
due primarily to the combined effects of goodwill amortization and state and
local taxes.
Net Earnings (Loss)
As a result of the factors discussed above, the Company's net loss in
fiscal 1995 was $53.0 million. The Company's net earnings, before the effects of
the $123.8 million restructuring charge, were $34.3 million during fiscal 1995
compared with $25.5 million during fiscal 1994 - a 34.8% increase on a revenue
base increase of 21.8%. Fiscal 1995 net earnings (before the effects of the
$123.8 million restructuring charge) increased due to the continuing improvement
in Barnes & Noble store operating profits combined with accelerating revenues
which created a larger revenue base over which to spread overhead costs.
Earnings per common share (before the effects of the $123.8 million
restructuring charge) were $1.05 during fiscal 1995 compared with $0.81 during
fiscal 1994.
SEASONALITY
The Company's business, like that of many retailers, is seasonal, with the
major portion of sales and operating profit realized during the quarter which
includes the Christmas selling season. The following table sets forth certain
information with respect to the Company's revenues and operating profit (loss)
for the last twelve fiscal quarters:
- --------------------------------------------------------------------------------
Revenues and Operating Profit (Loss) for the Fiscal Quarter Ended on or About
(Thousands of dollars)
April 30 July 31 October 31 January 31
- --------------------------------------------------------------------------------
1996 Revenues(1) $ 508,755 $ 524,321 $ 532,563 $ 882,485
Operating profit (loss)(1) (141) 5,622 4,578 109,609
1995 Revenues 401,971 420,080 432,315 722,534
Operating profit (loss)(2) (1,929) 3,478 2,537 84,526
1994 Revenues 320,301 350,584 359,009 592,837
Operating profit (loss) (5,347) 576 1,301 71,983
- --------------------------------------------------------------------------------
(1) The fourth quarter of fiscal 1996 includes 14 weeks. All other periods
presented include 13 weeks.
(2) Operating profit (loss) is presented before the effects of the
restructuring charge of $123,768 during the fourth quarter of fiscal 1995.
Working capital requirements are generally at their highest during the
Company's fiscal quarter ending on or about January 31 due to the higher
payments to vendors for holiday season merchandise purchases and the
replenishment of merchandise inventories following this period of increased
sales. In addition, the Company's sales and merchandise inventory levels will
fluctuate from quarter to quarter as a result of the number and timing of new
store openings, as well as the amount and timing of sales contributed by new
stores.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations, funds available under its revolving credit
facility and vendor financing continue to provide the Company with liquidity and
capital resources for
24
Barnes & Noble, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
store expansion, seasonal working capital requirements and capital investments.
Cash Flow. Cash flows provided from (used by) operations were $119.5
million, ($56.8) million and $17.9 million during fiscal 1996, 1995 and 1994,
respectively. In addition to improved net earnings, the improvement in cash
flows from operations in fiscal 1996 was the result of improved working capital
management; revenues increased 23.8% while inventory levels declined 1.1%
through faster inventory turns. The decline in cash flows from operations in
fiscal 1995 is attributable to the increase in working capital required by
Barnes & Noble's accelerated store expansion and declining B. Dalton Bookseller
operating profits, which were partially offset by increasing operating profits
of Barnes & Noble stores.
The weighted average age per square foot of the Company's 431 stores was
2.3 years as of February 1, 1997 and is expected to increase to approximately
2.8 years by January 31, 1998. As the relatively young Barnes & Noble stores
mature, and as the number of new stores opened during the fiscal year becomes
smaller as a percentage of the existing store base, the increasing operating
profits of Barnes & Noble stores are expected to generate a greater portion of
cash flows required for working capital, including new store inventories and
capital expenditures. Earnings before interest, taxes, depreciation and
amortization (EBITDA) increased $43.0 million or 31.5% to $179.5 million in
fiscal 1996 from $136.5 million in fiscal 1995 (pre-restructuring).
Capital Structure. Strong cash flows from operations, coupled with improved
working capital management, strengthened the Company's balance sheet during
fiscal 1996. The Company's shareholders' equity increased 13.9% to $456.0
million as of February 1, 1997 from $400.2 million as of January 27, 1996, and
return on equity increased to 12.8% in fiscal 1996 from 9.6% during fiscal 1995.
Although Barnes & Noble's growing business is somewhat mitigating the
seasonality of the Company's operations, the Company continues to experience
significant seasonal fluctuations in its financing needs, primarily during the
holiday season in which there is a concentration of store openings as well as
increases in inventory levels to support more than 35% of the Company's sales.
To meet the seasonal demands of its growing inventory and sales base, the
Company entered into a five-year senior credit facility in March 1996. The
facility includes a $325.0 million revolving credit facility and a $100.0
million term loan facility and provides for an additional $125.0 million which
will become available to the Company in fiscal 1997.
Borrowings under the Company's revolving credit facility averaged $101.7
million, $62.0 million and $3.1 million and peaked at $192.8 million, $152.2
million and $41.6 million during fiscal 1996, 1995 and 1994, respectively.
Capital Investment. Capital expenditures totaled $171.9 million, $154.9
million and $88.8 million during fiscal 1996, 1995 and 1994, respectively.
Capital expenditures in fiscal 1997, primarily for an estimated 70 new Barnes &
Noble stores as well as computer hardware and software associated with the
rollout of the Company's new store point-of-sale system, are expected to be
significantly less than fiscal 1996.
Based on current operating levels and the store expansion planned for the
next fiscal year, management believes cash flows generated from operations,
short-term vendor financing and its borrowing capacity under its revolving
credit facility will be sufficient to meet the Company's working capital and
debt service requirements, fund restructuring reserves and support the
development of its short and long-term strategies for at least the next twelve
months.
DISCLOSURE REGARDING
FORWARD-LOOKING STATEMENTS
This annual report contains certain forward-looking statements (as such
term is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to the Company 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 annual
report, the words "anticipate," "believe," "estimate," "expect," "intend,"
"plan" and similar expressions, as they relate to the Company 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, possible disruptions in the Company's computer or telephone systems,
possible increases in shipping rates or interruptions in shipping service,
effects of competition, possible disruptions or delays in the opening of new
stores, the level and volatility of interest rates, and other factors which 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 or
persons acting on its behalf are expressly qualified in their entirety by the
cautionary statements in this paragraph.
25
Barnes & Noble, Inc.
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal Year 1996 1995 1994
(Thousands of dollars, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $ 2,448,124 1,976,900 1,622,731
Cost of sales, buying and occupancy 1,569,448 1,269,001 1,050,011
----------- ---------- ----------
Gross profit 878,676 707,899 572,720
----------- ---------- ----------
Selling and administrative expenses 456,181 376,773 311,344
Rental expense 225,450 182,473 147,225
Depreciation and amortization 59,806 47,881 36,617
Pre-opening expenses 17,571 12,160 9,021
Restructuring charge -- 123,768 --
----------- ---------- ----------
Operating profit (loss) 119,668 (35,156) 68,513
Interest (net of interest income of $2,288, $2,138 and $3,008, respectively)
and amortization of deferred financing fees 38,286 28,142 22,955
----------- ---------- ----------
Earnings (loss) before provision (benefit) for income taxes 81,382 (63,298) 45,558
Provision (benefit) for income taxes 30,157 (10,322) 20,085
----------- ---------- ----------
Net earnings (loss) $ 51,225 (52,976) 25,473
=========== ========== ==========
Net earnings (loss) per common share $ 1.48 (1.70) 0.81
Weighted average common shares outstanding 34,576,000 31,217,000 31,344,000
See accompanying notes to consolidated financial statements.
26
Barnes & Noble, Inc.
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
(Thousands of dollars, except per share data) February 1, 1997 January 27, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 12,447 9,276
Receivables, net 45,558 49,019
Merchandise inventories 732,203 740,351
Prepaid expenses and other current assets 76,747 49,542
---------- ---------
Total current assets 866,955 848,188
---------- ---------
Property and equipment:
Land and land improvements 681 681
Buildings and leasehold improvements 326,392 249,603
Fixtures and equipment 289,684 204,528
---------- ---------
616,757 454,812
Less accumulated depreciation and amortization 181,983 134,932
---------- ---------
Net property and equipment 434,774 319,880
---------- ---------
Intangible assets, net 93,494 96,799
Other noncurrent assets 51,424 50,475
---------- ---------
Total assets $1,446,647 1,315,342
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit facility $ 40,000 --
Accounts payable 373,340 415,698
Accrued liabilities 240,923 205,990
---------- ---------
Total current liabilities 654,263 621,688
---------- ---------
Long-term debt 290,000 262,400
Other long-term liabilities 46,395 31,019
Shareholders' equity:
Common stock; $.001 par value; 100,000,000 shares authorized;
33,188,125 and 32,958,614 shares issued and outstanding, respectively 33 33
Additional paid-in capital 446,298 441,769
Retained earnings (deficit) 9,658 (41,567)
---------- ---------
Total shareholders' equity 455,989 400,235
---------- ---------
Commitments and contingencies
---------- ---------
Total liabilities and shareholders' equity $1,446,647 1,315,342
========== =========
See accompanying notes to consolidated financial statements.
27
Barnes & Noble, Inc.
Consolidated Statements of Changes in Shareholders' Equity
- --------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Additional Retained
Common paid-in earnings
(Thousands of dollars) Stock capital (deficit) Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 29, 1994 $ 30 342,875 (14,064) 328,841
Exercise of 219,082 common stock options,
including tax benefits of $2,221 -- 3,859 -- 3,859
Net earnings -- -- 25,473 25,473
-------- ------- ------- -------
Balance at January 28, 1995 30 346,734 11,409 358,173
Issuance of 2,500,000 shares of common stock 3 88,722 -- 88,725
Exercise of 375,447 common stock options,
including tax benefits of $3,470 -- 6,313 -- 6,313
Net loss -- -- (52,976) (52,976)
-------- ------- ------- -------
Balance at January 27, 1996 33 441,769 (41,567) 400,235
Exercise of 229,511 common stock options,
including tax benefits of $2,272 -- 4,529 -- 4,529
Net earnings -- -- 51,225 51,225
-------- ------- ------- -------
Balance at February 1, 1997 $ 33 446,298 9,658 455,989
======== ======= ======= =======
See accompanying notes to consolidated financial statements.
28
Barnes & Noble, Inc.
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal Year 1996 1995 1994
(Thousands of dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) $ 51,225 (52,976) 25,473
Adjustments to reconcile net earnings (loss) to
net cash flows from operating activities:
Depreciation and amortization 61,652 50,185 38,921
(Gain) loss on disposal of property and equipment (130) 4,657 2,959
Deferred taxes 6,604 (32,110) (5,394)
Restructuring charge -- 123,768 --
Increase in other long-term liabilities for
scheduled rent increases in long-term leases 15,663 10,670 7,266
Changes in operating assets and liabilities, net (15,477) (161,038) (51,342)
----------- -------- -------
Net cash flows from operating activities 119,537 (56,844) 17,883
----------- -------- -------
Cash flows from investing activities:
Purchases of property and equipment (171,885) (154,913) (88,763)
Proceeds from sales of property and equipment 177 551 3
Net increase in other noncurrent assets (16,787) (2,378) (15,876)
----------- -------- -------
Net cash flows from investing activities (188,495) (156,740) (104,636)
----------- -------- -------
Cash flows from financing activities:
Net (decrease) increase in revolving credit facility (32,400) 72,400 --
Proceeds from issuance of long-term debt 100,000 -- --
Proceeds from issuance of common stock, net -- 88,725 --
Proceeds from exercise of common stock options 4,529 6,313 3,859
----------- -------- -------
Net cash flows from financing activities 72,129 167,438 3,859
----------- -------- -------
Net increase (decrease) in cash and cash equivalents 3,171 (46,146) (82,894)
Cash and cash equivalents at beginning of year 9,276 55,422 138,316
----------- -------- -------
Cash and cash equivalents at end of year $ 12,447 9,276 55,422
continued =========== ======== =======
29
Barnes & Noble, Inc.
Consolidated Statements of Cash Flows (continued)
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal Year 1996 1995 1994
(Thousands of dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Changes in operating assets and liabilities, net:
Receivables, net $ 3,461 (19,191) (9,474)
Merchandise inventories 8,148 (241,432) (137,576)
Prepaid expenses and other current assets (19,502) (17,340) 1,751
Accounts payable and accrued liabilities (7,584) 116,925 93,957
----------- -------- -------
Changes in operating assets and liabilities, net $ (15,477) (161,038) (51,342)
=========== ======== =======
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 38,103 27,656 23,364
Income taxes $ 24,574 19,937 20,740
See accompanying notes to consolidated financial statements.
30
Barnes & Noble, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the 53 weeks ended February 1, 1997 (fiscal 1996) and the 52 weeks ended
January 27, 1996 (fiscal 1995) and January 28, 1995 (fiscal 1994).
(Thousands of dollars, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Barnes & Noble, Inc. (Barnes & Noble), through its wholly-owned subsidiaries
(collectively, the Company), is primarily engaged in the sale of books through
three principal bookselling strategies: its superstore strategy through its
wholly-owned subsidiary, Barnes & Noble Superstores, Inc. under its Barnes &
Noble Booksellers, Bookstop and Bookstar tradenames (hereafter collectively
referred to as Barnes & Noble stores), its mall strategy through its
wholly-owned subsidiaries, B. Dalton Bookseller, Inc. and Doubleday Book Shops,
Inc. under its B. Dalton Bookseller, Doubleday Book Shops and Scribner's
Bookstore tradenames (hereafter collectively referred to as B. Dalton
Bookseller), and its publishing and mail-order business.
Consolidation
The consolidated financial statements include the accounts of Barnes & Noble and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, the Company is required 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 reporting period. Actual results could differ
from those estimates.
Supplemental Cash Flow Information
The Company considers all short-term, highly liquid instruments purchased with
an original maturity of three months or less to be cash equivalents. The
Company's cash and cash equivalents are carried at cost, which approximates
market value, and consists primarily of Eurodollar and time deposits. Cash
equivalents as of January 28, 1995 were $49,600.
Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market. Cost is
determined primarily by the retail inventory method on the first-in, first-out
(FIFO) basis for 79% and 73% of the Company's merchandise inventories as of
February 1, 1997 and January 27, 1996, respectively. The remaining merchandise
inventories are valued on the last-in, first-out (LIFO) method.
If substantially all of the merchandise inventories currently valued at LIFO
costs were valued at current costs, merchandise inventories would increase
approximately $8,800 and $8,326 as of February 1, 1997 and January 27, 1996,
respectively.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and
amortization. For financial reporting purposes, depreciation is computed using
the straight-line method over estimated useful lives. For tax purposes,
different methods are used. Maintenance and repairs are expensed as incurred,
while betterments and major remodeling costs are capitalized. Leasehold
improvements are capitalized and amortized over the shorter of their estimated
useful lives or the terms of the respective leases. Capitalized lease
acquisition costs are being amortized over the average lease terms of the
underlying leases. Costs incurred in purchasing management information systems
are capitalized and included in property and equipment. These costs are
amortized over their estimated useful lives from the date the systems become
operational. Internal costs incurred in developing management information
systems to support existing lines of business are expensed as incurred.
Intangible Assets and Amortization
The costs in excess of net assets of businesses acquired are carried as
intangible assets, net of accumulated amortization, in the accompanying
consolidated balance sheets. The net intangible assets, consisting primarily of
goodwill and tradenames, of $63,604 and $29,890 as of February 1, 1997, and
$65,771 and $31,028 as of January 27, 1996, are being amortized over 40 years
using the straight-line method.
31
Barnes & Noble, Inc.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
Amortization of goodwill and tradenames included in depreciation and
amortization in the accompanying consolidated statements of operations is
$3,305, $4,272 and $4,264 during fiscal 1996, 1995 and 1994, respectively.
Accumulated amortization at February 1, 1997 and January 27, 1996 was $38,036
and $34,731, respectively.
Annually, the Company evaluates the recoverability of goodwill not allocable to
acquired business assets and considers whether this goodwill should be
completely or partially written off or the amortization periods accelerated. The
Company assesses the recoverability of this goodwill based upon several factors,
including management's intention with respect to the acquired operations and
those operations' projected undiscounted cash flows.
Deferred Charges
Net unamortized costs incurred to obtain long-term financing of $9,789 and
$5,964 as of February 1, 1997 and January 27, 1996, respectively, are being
amortized over the terms of the respective debt agreements using the
straight-line method, which approximates the interest method. Amortization
expense is $1,846, $2,304 and $2,304 for fiscal 1996, 1995 and 1994,
respectively. These amounts are included in interest and amortization of
deferred financing fees in the accompanying consolidated statements of
operations.
Revenue Recognition
Revenue from sales of the Company's products is recognized at the time of sale.
The Company sells memberships which entitle purchasers to additional discounts.
The membership revenue is deferred and recognized as income over the
twelve-month membership period.
Sales returns (which are not significant) are recognized at the time returns are
made.
Pre-opening Expenses
All costs associated with the opening of new stores are deferred and amortized
over the respective store's first twelve months of operations.
Closed Store Expenses
Upon a formal decision to close or relocate a store, the Company charges
unrecoverable costs to expense. Such costs include the net book value of
abandoned fixtures and leasehold improvements and a provision for future lease
obligations, net of expected sublease recoveries. Costs associated with store
closings of $5,113 and $2,006 during fiscal 1995 and 1994, respectively, are
included in selling and administrative expenses in the accompanying consolidated
statements of operations.
Net Earnings (Loss) Per Common Share
Net earnings (loss) per common share is computed using the weighted average
number of shares of common stock and common stock equivalents outstanding during
the period.
Income Taxes
The provision (benefit) for income taxes includes Federal, state and local
income taxes currently payable and those deferred because of temporary
differences between the financial statement and tax bases of assets and
liabilities. The deferred tax assets and liabilities are measured using the
enacted tax rates and laws that are expected to be in effect when the
differences reverse.
Stock Options
The Company accounts for all transactions under which employees receive shares
of stock or other equity instruments in the Company or the Company incurs
liabilities to employees in amounts 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." The Company has not adopted the fair
value method encouraged, but not required by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation."
Reporting Period
The Company's fiscal year is comprised of 52 or 53 weeks, ending on the Saturday
closest to the last day of January. The reporting period ended February 1, 1997
(fiscal 1996) includes 53 weeks. All other fiscal years presented include 52
weeks.
32
Barnes & Noble, Inc.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
2. RESTRUCTURING CHARGE
From 1989 through 1995, the Company closed, on average, between 50 and 60 mall
bookstores per year primarily due to increasing competition from superstores and
declining mall traffic. During the fourth quarter of fiscal 1995, the Company
accelerated its mall bookstore closing program with the aim of forming a core of
more-profitable B. Dalton Bookseller stores, and provided for these closing
costs and asset valuation adjustments through a non-cash restructuring charge,
and early adoption of Statement of Financial Accounting Standards No. 121
"Accounting for Impairment of Long-Lived Assets to be Disposed Of" (SFAS 121).
In January 1996, the Company recorded a non-cash charge to operating earnings of
$123,768 ($87,303 after tax or $2.65 per share) to reflect the aggregate impact
of its restructuring plan and change in accounting policy. The charge to
earnings included a $33,000 writedown of goodwill, and $45,862 related to the
writedown of fixed assets and other long-term assets. The Company has completed
a substantial portion of the planned store closings with the remainder to be
completed in 1997 and 1998.
The following table sets forth the restructuring liability activity during
fiscal 1996:
- --------------------------------------------------------------------------------
Fiscal 1996 Activity
- --------------------------------------------------------------------------------
Fiscal
Beginning 1996 Ending
Balance Activity Balance
------- ------ ------
Provision for store closings $ 5,974 4,442 1,532
Lease termination costs 32,833 2,371 30,462
Other 6,099 4,497 1,602
------- ------ ------
Total $44,906 11,310 33,596
======= ====== ======
The remaining balance of $33,596, which is classified as a current liability, is
expected to be adequate for all remaining obligations related to the
restructuring.
3. RECEIVABLES, NET
Receivables represent customer, bankcard, landlord and other receivables due
within one year as follows:
- --------------------------------------------------------------------------------
February 1, January 27,
1997 1996
- --------------------------------------------------------------------------------
Trade accounts $ 5,126 4,028
Bankcard receivables 12,800 10,968
Receivables for retail
display allowances 663 1,821
Receivables from landlords 19,374 22,345
Other receivables 7,931 10,262
Allowance for doubtful accounts (336) (405)
-------- ------
Total receivables, net $ 45,558 49,019
======== ======
4. DEBT
Revolving Credit Facility and Term Loan Agreement
The Company's five-year, senior credit facility includes a $325,000 revolving
credit facility and $100,000 term loan facility and provides for an additional
commitment of $125,000 which will be available to the Company in 1997. Fees of
up to 3/8 of 1% are assessed on the unused portion of the Company's commitment
under the facility. The senior credit facility, which permits borrowings at
various interest rate options based on the prime rate or London Interbank Offer
Rate (LIBOR), contains covenants, representations and events of default typical
of credit facility arrangements of this size and nature, including financial
covenants which require the Company to meet, among other things, cash flow and
interest coverage ratios and which limit capital expenditures. The revolving
credit and term loan facility are secured by the capital stock, accounts
receivable and general intangibles of the Company's subsidiaries.
During fiscal 1996, the Company entered into three-year and four-year interest
rate swap agreements for $70,000 and $30,000 respectively, involving the
exchange of fixed and floating interest payment obligations without the exchange
of underlying principal amounts. The Company enters into interest rate swap
agreements to manage interest costs and risk associated with changes in interest
rates. These agreements effectively convert underlying variable-rate debt based
on prime rate or LIBOR to fixed-rate debt. The Company recorded interest expense
of $365 during fiscal 1996 associated with these agreements.
33
Barnes & Noble, Inc.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
Selected information related to the Company's revolving credit facility is as
follows:
- --------------------------------------------------------------------------------
Fiscal Year 1996 1995 1994
- --------------------------------------------------------------------------------
Balance at end of year $40,000 72,400 --
Average balance outstanding
during the year 101,671 62,036 3,087
Maximum borrowings
outstanding during
the year 192,800 152,200 41,600
Weighted average interest
rate during the year 7.56% 8.13% 9.45%
Interest rate at end of year 6.87% 8.21% --
The average balance outstanding during the period was based on the number of
days outstanding. The weighted average interest rate during the period was
calculated as the result of dividing the related interest expense by average
borrowings outstanding.
Fees expensed with respect to the unused portion of the Company's revolving
credit commitment were $911, $454 and $760 during fiscal 1996, 1995 and 1994,
respectively.
Long-Term Debt
In November 1992, the Company issued $190,000 senior subordinated notes, bearing
interest at 11.875%, which are subject to redemption on or after January 15,
1998 at the option of the Company and are due on January 15, 2003. The indenture
covering the senior subordinated notes contains various covenants which limit
additional indebtedness, dividends and transactions with shareholders and
affiliates.
The $72,400 outstanding as of January 27, 1996 under the Company's previous
credit facility was refinanced pursuant to the consummation of Barnes & Noble's
senior credit facility and has been classified as long-term debt as of January
27, 1996 in the accompanying consolidated balance sheets.
The $100,000 term loan is due in twelve installments due each quarter beginning
on June 30, 1998. Each of the first eight installments are due in the amount of
$7,500 and each of the ninth through twelfth installments are due in the amount
of $10,000.
Long-term debt maturities are as follows:
- --------------------------------------------------------------------------------
Fiscal year
- --------------------------------------------------------------------------------
1997 $ --
1998 22,500
1999 30,000
2000 37,500
2001 10,000
Thereafter 190,000
The Company has no agreements to maintain compensating balances.
5. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents reported in the accompanying
consolidated balance sheets approximate fair value due to the short-term
maturities of these assets.
The aggregate fair value of the revolving credit facility approximates its
carrying amount, because of its recent and frequent repricing based upon market
conditions. The fair value of long-term debt is based upon quoted market prices.
The carrying amounts and fair values of the Company's financial instruments as
of February 1, 1997 and January 27, 1996 are as follows:
- --------------------------------------------------------------------------------
February 1, January 27,
1997 1996
- --------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- ------- -------
Cash and cash equivalents $ 12,447 12,447 9,276 9,276
Revolving credit facility $ 40,000 40,000 72,400 72,400
Long-term debt $290,000 307,575 190,000 208,810
34
Barnes & Noble, Inc.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
6. EMPLOYEES' RETIREMENT AND DEFINED CONTRIBUTION PLANS
The Company maintains a noncontributory defined benefit pension plan (the
Pension Plan) for the benefit of substantially all of its employees. Benefits
provided by the Pension Plan are based on years of credited service, the
employee's compensation for any of five consecutive years in the last ten years
of service and the primary Social Security benefit. The Company's contributions
to the Pension Plan are generally in amounts determined by independent
consulting actuaries.
The Company also sponsors a defined contribution plan (the Savings Plan) for the
benefit of substantially all of its employees who meet certain eligibility
requirements, primarily age and length of service. The Savings Plan allows
employees to invest up to 15% of their current gross cash compensation on a
pre-tax or post-tax basis, at their option. The Company's contributions to the
Savings Plan are generally in amounts based upon a certain percentage of the
employees' pre-tax contributions.
A summary of the components of net periodic pension cost for the Pension Plan
and the total contributions charged to employee benefit expenses for the Savings
Plan follows:
- --------------------------------------------------------------------------------
Fiscal Year 1996 1995 1994
- --------------------------------------------------------------------------------
Defined benefit plans:
Service cost $ 2,542 1,475 1,702
Interest cost 1,354 1,011 981
Actual return on
plan assets (2,378) (3,202) 184
Net amortization
and deferral 914 2,047 (1,175)
------- ----- -----
Net periodic
pension cost $ 2,432 1,331 1,692
======= ===== =====
Defined contribution plan $ 2,115 1,495 1,112
======= ===== =====
Actuarial assumptions used in determining the net periodic pension costs and the
funded status of the Pension Plan are as follows:
- --------------------------------------------------------------------------------
February 1, January 27, January 28,
1997 1996 1995
- --------------------------------------------------------------------------------
Discount rate
(beginning of year) 7.5% 8.8% 7.5%
Discount rate (end of year) 7.5% 7.5% 8.8%
Expected long-term rate of
return on Plan assets 9.5% 9.5% 9.8%
Assumed rate of
compensation increase 4.0% 4.0% 4.0%
The following table sets forth the funded status of the Pension Plan and the
pension liability recognized for the Pension Plan in the accompanying
consolidated balance sheets:
- --------------------------------------------------------------------------------
February 1, January 27,
1997 1996
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Vested benefits $(12,138) (10,784)
Nonvested benefits (2,114) (1,962)
-------- -------
Accumulated benefit obligation (14,252) (12,746)
Effect of projected future
compensation increases (7,126) (5,537)
-------- -------
Projected benefit obligation (21,378) (18,283)
Plan assets at market value 18,565 15,361
-------- -------
Projected benefit obligation in
excess of Plan assets (2,813) (2,922)
Unrecognized net loss 100 1,086
Unrecognized net obligation
remaining 274 328
Unrecognized prior service cost (219) (237)
-------- -------
Pension liability $ (2,658) (1,745)
======== =======
35
Barnes & Noble, Inc.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
In addition to providing pension benefits, the Company provides certain health
care and life insurance benefits to retired employees (the Plan). Only those
employees receiving benefits or retired as of April 1, 1993 are eligible to
participate in the Plan and receive these benefits. The Plan is unfunded. The
following table sets forth the status of the Plan and the post-retirement health
care liability of the Plan, which is attributable solely to retirees, recognized
in the accompanying consolidated balance sheets as of February 1, 1997 and
January 27, 1996 using a discount rate of 7.5% at both dates:
- --------------------------------------------------------------------------------
February 1, January 27,
1997 1996
- --------------------------------------------------------------------------------
Projected benefit obligation $ (4,349) (4,474)
Unrecognized loss 137 393
-------- ------
Post-retirement health care liability $ (4,212) (4,081)
======== ======
The net periodic cost for the post-retirement health care benefits under the
Plan is related to interest costs of $326, $375 and $416 during fiscal 1996,
1995 and 1994, respectively. The unrecognized loss resulting from the impact of
experience changes on current assumptions is recorded over the average remaining
life expectancy of Plan participants.
The health care cost trend rate used to measure the expected cost of Plan
benefits is assumed to be 8.5% in 1997, declining at one-half percent decrements
each year through 2004 to 5.0% in 2004 and each year thereafter. The health care
cost trend assumption has a significant effect on the amounts reported. For
example, a 1% increase in the health care cost trend rate would increase the
accumulated post-retirement benefit obligation by approximately $478 as of
February 1, 1997 and the net periodic cost by approximately $36 during fiscal
1996.
7. INCOME TAXES
The Company files a consolidated Federal return. Federal and state income tax
provisions (benefits) for fiscal 1996, 1995 and 1994 are as follows:
- --------------------------------------------------------------------------------
Fiscal Year 1996 1995 1994
- --------------------------------------------------------------------------------
Current:
Federal $18,413 17,317 18,106
State 5,140 4,471 7,373
------- ------- ------
23,553 21,788 25,479
------- ------- ------
Deferred:
Federal 5,300 (25,717) (4,119)
State 1,304 (6,393) (1,275)
------- ------- ------
6,604 (32,110) (5,394)
------- ------- ------
Total $30,157 (10,322) 20,085
======= ======= ======
A reconciliation between the provision (benefit) for income taxes and the
expected provision (benefit) for income taxes at the Federal statutory rate of
35% during fiscal 1996, 1995, and 1994 are as follows:
- --------------------------------------------------------------------------------
Fiscal Year 1996 1995 1994
- --------------------------------------------------------------------------------
Expected provision (benefit)
for income taxes at
Federal statutory rate $28,484 (22,154) 15,945
Amortization of goodwill
and tradenames and
writedown of goodwill 1,157 12,978 1,428
State income taxes, net of
Federal income tax benefit 3,341 2,906 4,792
Rehabilitation tax credit (2,974) -- --
Other, net 149 (4,052) (2,080)
------- ------- ------
Provision (benefit) for
income taxes $30,157 (10,322) 20,085
======= ======= ======
36
Barnes & Noble, Inc.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
components of the Company's deferred tax assets and liabilities as of February
1, 1997 and January 27, 1996 are as follows:
- --------------------------------------------------------------------------------
February 1, January 27,
1997 1996
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Operating expenses $ (6,910) (4,940)
Depreciation (7,979) (2,441)
-------- ------
Total deferred tax liabilities (14,889) (7,381)
-------- ------
Deferred tax assets:
Inventory 4,828 4,087
Lease transactions 13,007 7,339
Reversal of estimated accruals 5,701 3,581
Restructuring charge 26,599 36,465
Insurance liability 2,769 1,711
Deferred income 4,296 3,281
Other 2,927 2,759
-------- ------
Total deferred tax assets 60,127 59,223
-------- ------
Net deferred tax assets $ 45,238 51,842
======== ======
8. PUBLIC OFFERING OF COMMON STOCK
On October 2, 1995, the Company completed a public offering of 2,500,000 shares
of common stock which generated proceeds of $88,725 after deducting underwriting
discounts and commissions and expenses. The net proceeds were used for general
corporate purposes, including the financing of capital expenditures and
inventory purchases in connection with the accelerated expansion of the Barnes &
Noble store operations.
9. STOCK OPTION PLANS
The Company currently has two incentive plans under which stock options may be
granted to officers, directors and key employees of the Company - the 1991
Employee Incentive Plan (the 1991 Plan) and the 1996 Incentive Plan (the 1996
Plan). The options to purchase common shares generally are issued at fair market
value on the date of the grant, begin vesting after one year in 33 1/3% or 25%
increments per year, expire ten years from issuance and are conditioned upon
continual employment during the vesting period.
Under the 1996 Plan, approved by the shareholders on May 29, 1996, and the 1991
Plan, the Company may grant options to purchase up to 3,000,000 and 2,366,352
shares of common stock, respectively.
In addition to the two incentive plans, the Company has granted stock options to
certain key executives and directors. The vesting terms and contractual lives of
these grants are similar to that of the incentive plans.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations for its stock option
grants. Generally, compensation expense is not recognized for stock option
grants.
In accordance with the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), the Company discloses the
pro forma impact of recording compensation expense utilizing the Black-Scholes
model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the Black-Scholes model does not necessarily provide a
reliable measure of the fair value of its stock options.
Had compensation cost for the Company's stock option grants been determined
based on the fair value at the stock option grant dates consistent with the
method of SFAS 123, the Company's net earnings and earnings per share for fiscal
1996 and 1995, would have been reduced by approximately $5,305, or $0.15 per
share, and $1,448, or $0.05 per share, respectively.
37
Barnes & Noble, Inc.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
Because the application of the pro forma disclosure provisions of SFAS 123 are
required only to be applied to grants of options made by the Company during
fiscal 1995 and after, the above pro forma amounts may not be representative of
the effects of applying SFAS 123 to future years.
The weighted-average fair value of the options granted during fiscal 1996 and
1995 were estimated at $9.32 and $11.97 respectively, using the Black-Scholes
option-pricing model with the following assumptions: volatility of 28%,
risk-free interest rate of 6.63% in fiscal 1996, and 6.59% in fiscal 1995, and
an expected life of six years.
A summary of the status of the Company's stock options is presented below:
- --------------------------------------------------------------------------------
Weighted-Average
(Shares in thousands) Shares Exercise Price
- --------------------------------------------------------------------------------
Balance, January 29, 1994 3,753 $ 16.36
Granted 308 24.29
Exercised (219) 7.48
Forfeited (30) 22.65
-----
Balance, January 28, 1995 3,812 17.46
Granted 590 28.62
Exercised (375) 7.57
Forfeited (76) 26.22
-----
Balance, January 27, 1996 3,951 19.90
Granted 928 29.25
Exercised (230) 9.90
Forfeited (78) 29.94
-----
Balance, February 1, 1997 4,571 $ 22.13
=====
Options exercisable as of February 1, 1997, January 27, 1996 and January 28,
1995 were 3,535,000, 2,260,000 and 1,342,000, respectively.
The following table summarizes information as of February 1, 1997 concerning
outstanding and exercisable options:
- --------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------
Weighted
-Average Weighted Weighted
Range of Number Remaining -Average Number -Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices (000's) Life Price (000's) Price
- --------------------------------------------------------------------------------
$ 6.42-$ 7.53 859 6.07 $7.16 859 $7.16
$20.00-$24.38 1,882 7.36 21.96 1,394 21.13
$27.00-$34.88 1,830 7.50 29.33 1,136 27.31
----- -----
$ 6.42-$34.88 4,571 7.18 22.13 3,389 19.66
===== =====
10. LEASES
The Company leases retail stores, warehouse facilities, office space and
equipment. Substantially all of the retail stores are leased under noncancelable
agreements which expire at various dates through 2020 with various renewal
options for additional periods. The agreements, which have been classified as
operating leases, generally provide for both minimum and percentage rentals and
require the Company to pay all insurance, taxes and other maintenance costs.
Percentage rentals are based on sales performance in excess of specified
minimums at various stores.
Rental expense under operating leases are as follows:
- --------------------------------------------------------------------------------
Fiscal Year 1996 1995 1994
- --------------------------------------------------------------------------------
Minimum rentals $222,700 179,941 143,927
Percentage rentals 2,750 2,532 3,298
-------- ------- -------
$225,450 182,473 147,225
======== ======= =======
38
Barnes & Noble, Inc.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
Future minimum annual rentals, excluding percentage rentals, required under
leases that had initial, noncancelable lease terms greater than one year, as of
February 1, 1997 are:
- --------------------------------------------------------------------------------
Fiscal Year
- --------------------------------------------------------------------------------
1997 $ 235,086
1998 228,378
1999 220,565
2000 210,953
2001 206,345
After 2001 1,385,078
----------
$2,486,405
==========
Future minimum annual rentals for stores scheduled for closing pursuant to the
Company's restructuring plan are included in the preceding table. Future rental
payments representing the exit costs associated with these store closings were
included in the Company's non-cash restructuring charge of $123,768 recorded
during fiscal 1995 and, therefore, do not represent future operating expenses.
Minimum rental obligations may decline in the future, as the leases for these
stores subject to the restructuring plan are terminated or the restructuring
plan is otherwise completed.
11. LITIGATION
Various claims and lawsuits arising in the normal course of business are pending
against the Company. The subject matter of these proceedings primarily includes
commercial disputes and employment issues. The results of these proceedings are
not expected to have a material adverse effect on the Company's consolidated
financial position or results of operations.
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases space for its executive offices in properties in which a
principal shareholder/director/executive officer of the Company has a minority
interest. The space was rented at an aggregate annual rent including real estate
taxes of approximately $1,307 in fiscal year 1996 and $1,376 in fiscal year
1995. Such space is rented under leases expiring in 1997 and 1998, respectively.
Marboro Books Corp., the Company's mail-order subsidiary, leases a 76,000 square
foot office/warehouse from a partnership in which a principal
shareholder/director/executive officer of the Company has a 50% interest,
pursuant to a 15-year lease dated August 1987 requiring an annual rent of $700.
The Company is provided with certain package shipping services by the LTA Group,
Inc. ("LTA"), a company in which the brother of a principal
shareholder/director/executive officer of the Company acquired a 20% interest
during fiscal 1996. During fiscal 1996, the Company paid LTA $9,100 for such
services.
Barnes & Noble College Bookstores, Inc. (B&N College), a company owned by a
principal shareholder/director/executive officer of the Company, allocated
certain expenses it incurred on behalf of the Company for salaries, employee
benefit plan expenses and office support services. These charges are included in
selling and administrative expenses in the accompanying consolidated statements
of operations and approximated $115, $1,219 and $1,368 for fiscal 1996, fiscal
1995 and fiscal 1994, respectively.
39
Barnes & Noble, Inc.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
The Company uses a jet aircraft owned by B&N College and pays for the costs and
expenses of operating the aircraft based upon the Company's usage. Such costs
which include fuel, insurance, personnel and other costs approximate $1,685,
$1,298 and $1,384 during fiscal 1996, fiscal 1995 and fiscal 1994, respectively,
and are included in the accompanying consolidated statements of operations.
The Company leases retail space in a building in which B&N College subleases
space for its executive offices. Occupancy costs allocated by the Company to B&N
College for this space totaled $544 during fiscal 1996. In connection with the
space, during fiscal 1996 the Company reimbursed B&N College for leasehold
improvement costs totaling $2,200 which have been recorded as an addition to the
Company's buildings and leasehold improvements in the accompanying consolidated
balance sheets.
On February 1, 1988 the Company sold its retail software operations to Software
Etc. Stores, Inc. (Software), a company owned by a principal
shareholder/director/executive officer of the Company. Following the sale, the
Company provided Software certain management and administrative services and
continued benefits for Software's employees, subject to eligibility
requirements, through fiscal 1995. Software, a wholly-owned subsidiary of
NeoStar Retail Group, Inc. (NeoStar) since December 1994, operated retail
software departments within the Company's Barnes & Noble and B. Dalton stores
for which Software was required to pay the Company under license fee
arrangements 6.5% or 7.0% of the department's gross sales or 50% of the
department's operating earnings, subject to certain reimbursements. Software
also continued to operate retail software stores for which B. Dalton was
primarily liable for rent and other operating costs associated with leases for
Software stores devoted exclusively to the retail software business prior to
February 1, 1988. In addition, the Company subleased space to Software in a
building under terms which were substantially identical to the obligation of the
Company. On November 27, 1996, Babbage's Etc. LLC (Babbage's), a company owned
by a principal shareholder/director/executive officer of the Company, acquired
substantially all of Neostar's assets. Babbage's assumed the operations of 14
retail software departments located within Barnes & Noble stores and the
remaining 27 stores devoted exclusively to the retail software business for
which B. Dalton is primarily liable for rent and operating costs. As of November
27, 1996, the Company pays all rent related to these properties for which it
receives a license fee from Babbage's equal to 7.0% or 8.0% of the gross sales
of such departments and stores. The Company also provides real estate and
construction services to Babbage's and purchases business insurance on its
behalf for which the Company is reimbursed its incremental costs to provide such
services. The Company charged Software and Babbage's, on a combined basis,
$1,282, $4,992 and $4,924 during fiscal 1996, 1995 and 1994, respectively, for
such services, license fees, rent, operating costs, insurance costs and benefits
coverage.
40
Barnes & Noble, Inc.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
13. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
A summary of quarterly financial information for each of the last two fiscal
years is as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal 1996 Quarter End Total Fiscal
On or About April 1996 July 1996 October 1996 January 1997(1) 1996(2)
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 508,755 524,321 532,563 882,485 2,448,124
Operating profit (loss) (141) 5,622 4,578 109,609 119,668
Earnings (loss) before provision
(benefit) for income taxes (8,485) (4,547) (5,014) 99,428 81,382
Net earnings (loss) (5,393) (2,721) (2,622) 61,961 51,225
Net earnings (loss) per common share (0.16) (0.08) (0.08) 1.80 1.48
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal 1995 Quarter End Total Fiscal
On or About April 1995 July 1995 October 1995 January 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 401,971 420,080 432,315 722,534 1,976,900
Restructuring charge -- -- -- 123,768 123,768
Operating profit (loss) (1,929) 3,478 2,537 (39,242) (35,156)
Loss before benefit for income taxes (7,979) (3,597) (5,148) (46,574) (63,298)
Net loss (5,286) (2,579) (3,545) (41,566) (52,976)
Net loss per common share (0.17) (0.08) (0.11) (1.26) (1.70)
(1) The fourth quarter of 1996 includes 14 weeks.
(2) Fiscal 1996 includes 53 weeks.
Report of Independent Certified Public Accountants
- --------------------------------------------------------------------------------
The Board of Directors
Barnes & Noble, Inc.
We have audited the accompanying consolidated balance sheets of Barnes &
Noble, Inc. and subsidiaries as of February 1, 1997 and January 27, 1996 and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the fiscal years ended February 1, 1997, January 27, 1996 and
January 28, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Barnes &
Noble, Inc. and subsidiaries as of February 1, 1997 and January 27, 1996 and the
results of their operations and their cash flows for the fiscal years ended
February 1, 1997, January 27, 1996, and January 28, 1995 in conformity with
generally accepted accounting principles.
New York, New York
March 11, 1997
/s/BDO Seidman, LLP
BDO Seidman, LLP
41
Barnes & Noble, Inc.