EXHIBIT 13.1
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 52 weeks ended January
31, 1998 (fiscal 1997), the 53 weeks ended February 1, 1997 (fiscal 1996) and
the 52 weeks ended January 27, 1996 (fiscal 1995) and the Balance Sheet Data as
of January 31, 1998 and February 1, 1997 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 28, 1995 (fiscal 1994) and January 29, 1994 (fiscal 1993) and the
Balance Sheet Data as of January 27, 1996, January 28, 1995 and January 29, 1994
are derived from audited consolidated financial statements not included in this
report. Certain prior-period amounts have been reclassified for comparative
purposes.
FISCAL YEAR
(Thousands of dollars, except per share data) 1997 1996 1995 1994 1993
- ---------------------------------------------- ---- ----- ----- ----- ----
STATEMENT OF OPERATIONS DATA:
Revenues
Barnes & Noble stores(1) $ 2,245,531 1,861,177 1,349,830 952,697 614,646
B. Dalton stores(2) 509,389 564,926 603,204 646,876 688,220
BarnesandNoble.com 14,601 -- -- -- --
Other 27,331 22,021 23,866 23,158 34,520
----------- ---------- ---------- ---------- ----------
Total revenues 2,796,852 2,448,124 1,976,900 1,622,731 1,337,386
Cost of sales and occupancy 2,019,291 1,785,392 1,444,555 1,192,123 989,526
----------- ---------- ---------- ---------- ----------
Gross profit 777,561 662,732 532,345 430,608 347,860
Selling and administrative expenses 540,423 465,687 383,692 316,457 267,699
Depreciation and amortization 76,951 59,806 47,881 36,617 29,077
Pre-opening expenses 12,918 17,571 12,160 9,021 8,940
Restructuring charge(3) -- -- 123,768 -- --
----------- ---------- ---------- ---------- ----------
Operating profit (loss) 147,269 119,668 (35,156) 68,513 42,144
Interest expense, net and amortization of
deferred financing fees(4) 37,666 38,286 28,142 22,955 25,807
----------- ---------- ---------- ---------- ----------
Earnings (loss) before provision (benefit) for
income taxes and extraordinary charge 109,603 81,382 (63,298) 45,558 16,337
Provision (benefit) for income taxes 44,935 30,157 (10,322) 20,085 8,584
----------- ---------- ---------- ---------- ----------
Earnings (loss) before extraordinary charge 64,668 51,225 (52,976) 25,473 7,753
Extraordinary charge(5) 11,499 -- -- -- --
----------- ---------- ---------- ---------- ----------
Net earnings (loss)(6) $ 53,169 51,225 (52,976) 25,473 7,753
=========== ========== =========== ========== ==========
Earnings (loss) per common share(7)
Basic
Earnings (loss) before extraordinary charge $ 0.96 0.77 (0.85) 0.42 0.15
Extraordinary charge $ 0.17 -- -- -- --
Net earnings (loss) $ 0.79 0.77 (0.85) 0.42 0.15
Diluted
Earnings (loss) before extraordinary charge $ 0.93 0.75 (0.85) 0.41 0.15
Extraordinary charge $ 0.17 -- -- -- --
Net earnings (loss) $ 0.76 0.75 (0.85) 0.41 0.15
Weighted average common shares outstanding(7)
Basic 67,237,000 66,103,000 62,434,000 59,970,000 52,039,000
Diluted 69,836,000 67,886,000 62,434,000 61,560,000 52,255,000
11
Selected Consolidated Financial Data Continued
FISCAL YEAR
(Thousands of dollars, except per share data) 1997 1996 1995 1994 1993
- ---------------------------------------------- ---- ----- ----- ----- ----
STORE OPERATING DATA:
Stores open at end of period
Barnes & Noble stores(1) 483 431 358 268 203
B. Dalton stores(2) 528 577 639 698 734
----------- ---------- ---------- ---------- ----------
Total 1,011 1,008 997 966 937
=========== ========== ========== ========== ==========
Comparable store sales increase (decrease)(8)
Barnes & Noble stores(1) 9.4% 7.3% 6.9% 12.6% 8.6%
B. Dalton stores(2) (1.1) (1.0) (4.3) (2.3) (0.3)
Capital Expenditures $ 121,903 171,885 154,913 88,763 81,116
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital $ 264,719 212,692 226,500 155,976 182,403
Total assets $ 1,591,171 1,446,647 1,315,342 1,026,418 895,863
Long-term debt, less current portions $ 284,800 290,000 262,400 190,000 190,000
Shareholders' equity $ 531,755 455,989 400,235 358,173 328,841
(1) Also includes 20 Bookstop and 25 Bookstar stores.
(2) Also includes 18 Doubleday Book Shops, nine Scribner's Bookstores and
seven smaller format bookstores operated under the Barnes & Noble trade
name representing the Company's original retail strategy.
(3) Restructuring charge includes restructuring and asset impairment losses
recognized upon adoption of Statement of Financial Accounting Standards
No. 121, "Impairment of Long-Lived Assets and Assets to be Disposed Of."
(4) Interest expense for fiscal 1997, 1996, 1995, 1994, and 1993 is net of
interest income of $446, $2,288, $2,138, $3,008 and $1,838, respectively.
(5) Reflects a net extraordinary charge during fiscal 1997 due to the early
extinguishment of debt, consisting of: (i) a pre-tax charge of $11,281
associated with the redemption premium on the Company's senior subordinated
notes; (ii) the associated write-off of $8,209 of unamortized deferred
finance costs; and (iii) the related tax benefits of $7,991 on the
extraordinary charge.
(6) 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 during fiscal 1993. 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 were converted into common stock or waived during fiscal 1993.
(7) All share and per-share amounts have been restated to give effect to a
two-for-one stock split completed by the Company during fiscal 1997, and to
reflect the adoption, in fiscal 1997, of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" for all periods presented. Fiscal
1993 earnings per share were computed on a pro forma basis and give effect
to 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 equal in value to the redemption price of the Series C Preferred
Stock, including accumulated and unpaid dividends.
(8) Comparable store sales increase (decrease) is calculated on a 52-week basis,
and includes sales of stores that have been open for 12 months for B. Dalton
stores and 15 months for Barnes & Noble stores (due to the high sales volume
associated with grand openings). Comparable store sales for fiscal years
1997 and 1996 include relocated Barnes & Noble stores and exclude B. Dalton
stores which the company has closed or has a formal plan to close.
12
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
1997" represents the 52 weeks ended January 31, 1998, "fiscal 1996" represents
the 53 weeks ended February 1, 1997 and "fiscal 1995" represents the 52 weeks
ended January 27, 1996.
GENERAL
Barnes & Noble, Inc. (Barnes & Noble or the Company), the world's
largest bookseller*, as of January 31, 1998 operates 483 "super" stores, 65 of
which were opened in fiscal 1997, under the Barnes & Noble Booksellers, Bookstop
and Bookstar trade names, and 528 mall bookstores under the B. Dalton
Booksellers, Doubleday Book Shops and Scribner's Bookstore trade names. 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 (keyword: BarnesandNoble) and
maintains its own Web site (BarnesandNoble.com), operating the "world's largest
bookseller online." The Company employed approximately 27,200 full- and
part-time booksellers and created nearly 3,200 new jobs nationwide during fiscal
1997 primarily due to its Barnes & Noble store expansion.
Barnes & Noble is the largest operator of book "super" stores in the
United States* with 483 Barnes & Noble stores located in 48 states and the
District of Columbia as of January 31, 1998. With more than 30 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, a
children's section, a music department and a calendar of ongoing events,
including 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 from 60,000 to 175,000 titles. The comprehensive title
selection is diverse and reflects local interests. To further this diversity,
Barnes & Noble emphasizes books published by small and independent publishers
and university presses. Bestsellers represent only 3% of Barnes & Noble store
sales. In addition to the extensive on-site selection, each store can fill
customers' special order requests from the more than one million books in print.
Barnes & Noble stores opened during fiscal 1997 added 1.6 million square
feet to the Barnes & Noble base, bringing the total square footage to 10.8
million square feet, a 16% increase over the prior year. Barnes & Noble stores
generated more than 80% of the Company's total revenues in fiscal 1997. The
Company plans to open approximately 60 Barnes & Noble stores in 1998 which are
expected to average 26,000 square feet in size.
At the end of fiscal 1997, the Company operated 528 B. Dalton stores in
45 states and the District of Columbia. B. Dalton 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 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 opening of
superstores in nearby locations continues to have a significant impact on B.
Dalton stores.
The Company is continuing to execute its 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. Part of the Company's strategy has been to
close underperforming stores, which has resulted in the closing of more than 50
B. Dalton stores per year since 1989.
The Company has also been expanding the size of some of its new B.
Dalton stores and is seeking better locations within malls. 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.
* based upon sales reported in trade publications and public filings
13
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 15 million catalogs each year and maintains a list of over
one million customers worldwide. Barnes & Noble's extensive catalog mailings
have created substantial global name recognition which has benefited both the
retail stores and the online business.
During 1997, the Company, through its wholly owned subsidiary
BarnesandNoble.com Inc., became the exclusive bookseller in America Online's
Marketplace, linking the world's largest bookseller with the world's most
popular Internet online service. The exclusive four-year agreement gives
BarnesandNoble.com an extensive presence throughout America Online. The Company
further extended its brand awareness by launching its own web site
(BarnesandNoble.com) through which it has entered into thousands of strategic
online alliances and affiliations, including Lycos, Web Crawler, ZDNet, The New
York Times and Disney. The Company believes that it brings significant
competitive advantages to the online bookselling market, including its
distribution expertise, proprietary title database, large customer base and
brand recognition.
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 retail stores, direct-mail catalogs and through
BarnesandNoble.com. With publishing and distribution rights to over 1,500
titles, Barnes & Noble Books offers customers high-quality books at excellent
values and generates attractive gross margins.
The Company also maintains an equity investment in Chapters Inc., an
Ontario company which is publicly traded on the Toronto Stock Exchange. Chapters
is the largest book retailer in Canada and the third largest in North America*,
operating 347 bookstores, including 29 superstores, as of the end of fiscal
1997.
RESULTS OF OPERATIONS
The Company's revenues, operating profit (loss), comparable store sales,
store openings, store closings and number of stores open at year end are
set forth below:
FISCAL YEAR
(Thousands of dollars) 1997 1996 1995
- ---------------------- ---- ---- ----
REVENUES
Retail business $ 2,782,251 2,448,124 1,976,900
BarnesandNoble.com 14,601 -- --
------------ ---------- ----------
Total $ 2,796,852 2,448,124 1,976,900
============ ========== ==========
Operating profit (loss)
Retail business $ 162,664 119,668 (35,156)
BarnesandNoble.com (15,395) -- --
------------ ---------- ----------
Total $ 147,269 119,668 (35,156)
============ ========== ==========
COMPARABLE STORE SALES
INCREASE (DECREASE)(1)
Barnes & Noble stores(2) 9.4% 7.3% 6.9%
B. Dalton stores(3) (1.1) (1.0) (4.3)
============ ========== ==========
STORES OPENED
Barnes & Noble stores(2) 65 91 97
B. Dalton stores(3) 4 10 10
------------ ---------- ----------
Total 69 101 107
============ ========== ==========
STORES CLOSED
Barnes & Noble stores(2) 13 18 7
B. Dalton stores(3) 53 72 69
------------ ---------- ----------
Total 66 90 76
============ ========== ==========
NUMBER OF STORES OPEN AT YEAR END
Barnes & Noble stores(2) 483 431 358
B. Dalton stores(3) 528 577 639
------------ ---------- ----------
Total 1,011 1,008 997
============ ========== ==========
SQUARE FEET OF SELLING SPACE
AT YEAR END (IN MILLIONS)
Barnes & Noble stores(2) 10.8 9.3 7.0
B. Dalton stores(3) 2.0 2.2 2.4
------------ ---------- ----------
Total 12.8 11.5 9.4
============ ========== ==========
(1) Comparable store sales for B. Dalton stores are determined using stores
open at least 12 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.
(2) Also includes 20 Bookstop and 25 Bookstar stores.
(3) Also includes 18 Doubleday Book Shops, nine Scribner's Bookstores and seven
smaller format bookstores operated under the Barnes & Noble trade name
representing the Company's original retail strategy.
* based upon sales reported in trade publications and public filings
14
The following table sets forth, for the periods indicated, the
percentage relationship that certain items bear to total revenues of the
Company:
FISCAL YEAR 1997 1996 1995
- ----------- ---- ---- ----
Revenues 100.0% 100.0% 100.0%
Cost of sales and occupancy 72.2 72.9 73.1
------ ------ ------
Gross margin 27.8 27.1 26.9
Selling and administrative expenses 19.3 19.0 19.4
Depreciation and amortization 2.8 2.5 2.4
Pre-opening expenses 0.4 0.7 0.6
Restructuring charge -- -- 6.3
------ ------ ------
Operating margin(1) 5.3 4.9 (1.8)
Interest expense, net and amortization
of deferred financing fees 1.4 1.6 1.4
------ ------ ------
Earnings (loss) before provision
(benefit) for income taxes and
extraordinary charge(1) 3.9 3.3 (3.2)
Provision (benefit) for income taxes(1) 1.6 1.2 (0.5)
------ ------ ------
Earnings (loss) before extraordinary
charge(1) 2.3 2.1 (2.7)
Extraordinary charge 0.4 -- --
------ ------ ------
Net earnings (loss) 1.9% 2.1% (2.7)%
====== ====== =======
(1) If operating margin, earnings (loss) before provision (benefit) for
income taxes and extraordinary charge, provision (benefit) for income
taxes and earnings (loss) before extraordinary charge 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.
52 WEEKS ENDED JANUARY 31, 1998 COMPARED WITH 53 WEEKS ENDED FEBRUARY 1, 1997
Revenues
The Company's revenues increased 14.2% during fiscal 1997 to $2.797
billion from $2.448 billion during fiscal 1996. Fiscal 1996 includes 53 weeks;
excluding the impact of the 53rd week, revenues increased 16.0%. Fiscal 1997
revenues from Barnes & Noble stores, which contributed 80.3% of total revenues,
increased 20.7% to $2.246 billion from $1.861 billion in fiscal 1996.
The increase in revenues was primarily due to the 9.4% increase in
Barnes & Noble comparable store sales and the opening of an additional 65 Barnes
& Noble stores during 1997. This increase was slightly offset by declining
revenues of B. Dalton stores which closed 53 stores and posted a comparable
store sales decline of 1.1%. BarnesandNoble.com, the Company's new online
subsidiary, also contributed to the increase in revenue, posting $14.6 million
of revenues during its first partial year of operations.
Cost of Sales and Occupancy
The Company's cost of sales and occupancy includes costs such as rental
expense, common area maintenance, merchant association dues, lease-required
advertising and adjustments for LIFO.
Cost of sales and occupancy increased 13.1% during fiscal 1997 to $2.019
billion from $1.785 billion in fiscal 1996 resulting in an increase in the
Company's gross margin rate to 27.8% in fiscal 1997 from 27.1% in fiscal 1996.
The gross margin expansion reflects more direct buying, reduced costs of
shipping and handling, and improvements in merchandise mix.
Selling and Administrative Expenses
Selling and administrative expenses increased $74.7 million, or 16.0% to
$540.4 million in fiscal 1997 from $465.7 million in fiscal 1996. Selling and
administrative expenses increased to 19.3% of revenues during fiscal 1997 from
19.0% during fiscal 1996 primarily as a result of the start-up expenses from
BarnesandNoble.com. Excluding BarnesandNoble.com, selling and administrative
expenses would have declined to 18.9% of revenues, reflecting operating leverage
improvement.
15
Depreciation and Amortization
Depreciation and amortization increased $17.2 million, or 28.8%, to
$77.0 million in fiscal 1997 from $59.8 million in fiscal 1996. The increase was
primarily the result of the new Barnes & Noble stores opened during fiscal 1997
and fiscal 1996.
Pre-Opening Expenses
Pre-opening expenses declined in fiscal 1997 to $12.9 million from $17.6
million in fiscal 1996 reflecting fewer new stores compared with prior years.
Operating Profit
Operating profit increased to $147.3 million in fiscal 1997 from $119.7
million in fiscal 1996. Despite the $15.4 million operating loss from
BarnesandNoble.com, operating margin improved to 5.3% of revenues during fiscal
1997 from 4.9% of revenues during fiscal 1996. Excluding BarnesandNoble.com,
operating margin for the retail business improved to 5.8% of revenues.
Interest Expense, Net and Amortization of Deferred Financing Fees
Interest expense, net of interest income, and amortization of deferred
financing fees decreased $0.6 million in fiscal 1997 to $37.7 million from $38.3
million in fiscal 1996. The decline was primarily due to lower borrowings under
the Company's senior credit facilities.
Provision for Income Taxes
Barnes & Noble's effective tax rate was 41.0% during fiscal 1997
compared with 37.1% during fiscal 1996. The fiscal 1996 provision reflected a
non-recurring $3.0 million rehabilitation tax credit.
Extraordinary Charge
As a result of obtaining a new senior credit facility during
fiscal 1997, the Company called its outstanding $190 million, 11 7/8% senior
subordinated notes on January 15, 1998, at a call premium of 5.9375%. The
extraordinary charge reflects (on an after-tax basis) such call premium along
with the write-off of related deferred financing fees.
Earnings
Fiscal 1997 earnings before extraordinary charge increased $13.4
million, or 26.2%, to $64.7 million (or $0.93 per diluted share) from $51.2
million (or $0.75 per diluted share) during fiscal 1996. The extraordinary
charge in fiscal 1997 of $11.5 million equated to $0.17 per diluted share
resulting in net earnings during fiscal 1997 of $53.2 million (or $0.76 per
diluted share).
All share and per-share amounts contained in this annual report have
been restated to reflect a two-for-one split of the Company's common stock in
September of 1997, and the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS 128). Implementation of SFAS 128
did not have a material effect on the Company's diluted earnings per share. SFAS
128 requires the disclosure of basic earnings per share in addition to diluted
earnings per share.
53 WEEKS ENDED FEBRUARY 1, 1997, COMPARED WITH 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 53rd week, revenues increased 21.5%. During fiscal
1996, revenues from Barnes & Noble 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 stores 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 53rd week of sales, increased 7.3% during
fiscal 1996, in comparison to 6.9% during fiscal 1995. During fiscal 1996,
revenues of B. Dalton stores declined, primarily due to the 72 store closings
and a comparable store sales decrease of 1.0%.
16
Cost of Sales and Occupancy
The Company's cost of sales and occupancy includes costs such as rental
expense, common area maintenance, merchant association dues, lease-required
advertising and adjustments for LIFO.
Cost of sales and occupancy increased 23.6% during fiscal 1996 to $1.785
billion from $1.445 billion during fiscal 1995, but decreased as a percentage of
revenues to 72.9% during fiscal 1996 from 73.1% during fiscal 1995 due to
improvements in merchandise mix, as well as increases in merchandise margins due
to more direct purchasing. Excluding the impact of LIFO, cost of sales and
occupancy as a percentage of revenues declined to 72.9% in fiscal 1996 from
73.4% in fiscal 1995.
Selling and Administrative Expenses
Selling and administrative expenses increased $82.0 million, or 21.4% to
$465.7 million during fiscal 1996 from $383.7 million during fiscal 1995. The
Company's operating leverage continued to improve as selling and administrative
expenses decreased as a percentage of revenues to 19.0% during fiscal 1996 from
19.4% during fiscal 1995.
Depreciation and Amortization
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
increase was 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 12 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.
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 diluted share were $0.75 during fiscal 1996 compared
with $0.53 during fiscal 1995 (before the effects of the restructuring charge).
Net earnings increased 49.3% while earnings per diluted share increased 41.5%
due to an increase in the diluted weighted-average shares outstanding to 67.9
million shares during fiscal 1996 from 64.3 million shares during fiscal 1995,
reflecting the full-year impact of 5.0 million common shares issued in October
of 1995.
17
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 growth in Barnes & Noble stores
continues to reduce such seasonal fluctuation. During fiscal 1997, the Company
reported operating profit in all four quarters for the first time since the
Company began its "super" store expansion.
LIQUIDITY AND CAPITAL RESOURCES
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.
Cash flows from operating activities, funds available under its
revolving credit facility and vendor financing continue to provide the Company
with liquidity and capital resources for store expansion, seasonal working
capital requirements and capital investments.
Cash Flow. Cash flows provided from (used by) operating activities were
$169.2 million, $119.5 million and ($56.8) million during fiscal 1997, 1996,
and 1995, respectively. The increased cash flow in fiscal 1997 was primarily due
to the improvement in net earnings. In fiscal 1996, improvement in cash flows
from operations was the result of increased net earnings and more efficient
working capital management; revenues increased 23.8% while inventory levels
declined 1.1% through faster inventory turns.
The weighted-average age per square foot of the Company's 483 Barnes &
Noble stores was 2.8 years as of January 31, 1998 and is expected to increase to
approximately 3.3 years by January 30, 1999. As the relatively young Barnes &
Noble stores mature, and as the number of new stores opened during the fiscal
year decreases 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 $44.7 million or 24.9% to
$224.2 million in fiscal 1997 from $179.5 million in fiscal 1996. This
improvement was achieved despite the start-up losses of BarnesandNoble.com.
Capital Structure. Strong cash flows from operations, coupled with
improved working capital management, strengthened the Company's balance sheet
during fiscal 1997. The Company's shareholders' equity increased 16.6% to $531.8
million (net of the $11.5 million extraordinary charge) as of January 31, 1998,
from $456.0 million as of February 1, 1997, and return on beginning equity
increased to 14.2% in fiscal 1997 (excluding the extraordinary charge) from
12.8% during fiscal 1996. The Company's market capitalization more than doubled
during fiscal 1997, reflecting the market's recognition of the Company's strong
performance.
On November 18, 1997, the Company obtained an $850 million senior credit
facility (the New Facility) with a syndicate led by The Chase Manhattan Bank.
The New Facility, structured as a five-year revolving credit, refinanced an
existing $450 million revolving credit and $100 million term loan facility (the
Old Facility). Net proceeds are available for general corporate purposes and
were used to redeem all of the Company's outstanding $190 million, 11 7/8%
senior subordinated notes on January 15, 1998.
The New Facility permits borrowings at various interest rate options
based on the prime rate or London Interbank Offer Rate (LIBOR) depending upon
certain financial tests and significantly reduces the interest rate margins over
LIBOR contained in the Old Facility. In addition, the agreement requires the
Company to pay a commitment fee up to 0.25% of the unused portion depending upon
certain financial tests. The New Facility contains covenants, limitations and
events of default typical of credit facilities of this size and nature.
The amount outstanding under the Company's New Facility has been
classified as long-term debt in the accompanying consolidated balance sheets due
to both the terms of the New Facility and the Company's intent and ability to
maintain principal amounts outstanding through November 2002.
Borrowings under the Company's senior credit facilities averaged $184.5
million, $186.6 million and $62.0 million and peaked at $304.9 million, $292.8
million and $152.2 million during fiscal 1997, 1996 and 1995, respectively.
Capital Investment. Capital expenditures totaled $121.9 million, $171.9
million and $154.9 million during fiscal 1997, 1996
18
and 1995, respectively. Capital expenditures in fiscal 1998,primarily for
approximately 60 new Barnes & Noble stores as well as computer hardware and
software associated with the Company's new store point-of-sale system, are
expected to be between $150 million and $175 million, although commitment to
such expenditures has not yet been made.
Based on current operating levels and the store expansion planned for
the next fiscal year, management believes cash flows generated from operating
activities, 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, and support the development of its short-
and long-term strategies for at least the next 12 months.
Year 2000. The Company is continuing its comprehensive evaluation of all
computer systems and microprocessors and is in the process of replacing,
modifying and/or converting those systems which are not year 2000 compliant. The
incremental cost over the next two years is being determined as part of the
continuing evaluation. Management does not expect such costs to have a material
adverse impact on the financial position or results of operations of the
Company.
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, decreased consumer demand for the Company's products, possible
disruptions in the Company's computer or telephone systems, increased or
unanticipated costs or effects associated with year 2000 compliance by the
Company or its service or supply providers, possible work stoppages, or
increases in labor costs, possible increases in shipping rates or interruptions
in shipping service, effects of competition, possible disruptions or delays in
the opening of new stores or the inability to obtain suitable sites for new
stores, higher than anticipated store closing or relocation costs, higher
interest rates, the performance of the Company's online initiatives such as
BarnesandNoble.com, unanticipated increases in merchandise or occupancy costs,
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 therein 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.
19
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year
(Thousands of dollars, except per share data) 1997 1996 1995
- --------------------------------------------- ---- ---- ----
Revenues $ 2,796,852 2,448,124 1,976,900
Cost of sales and occupancy 2,019,291 1,785,392 1,444,555
----------- ---------- ----------
Gross profit 777,561 662,732 532,345
----------- ---------- ----------
Selling and administrative expenses 540,423 465,687 383,692
Depreciation and amortization 76,951 59,806 47,881
Pre-opening expenses 12,918 17,571 12,160
Restructuring charge -- -- 123,768
----------- ---------- ----------
Operating profit (loss) 147,269 119,668 (35,156)
Interest (net of interest income of $446,
$2,288 and $2,138, respectively) and
amortization of deferred financing fees 37,666 38,286 28,142
----------- ---------- ----------
Earnings (loss) before provision
(benefit) for income taxes and
extraordinary charge 109,603 81,382 (63,298)
Provision (benefit) for income taxes 44,935 30,157 (10,322)
----------- ---------- ----------
Earnings (loss) before extraordinary
charge 64,668 51,225 (52,976)
Extraordinary charge due to early
extinguishment of debt, net of tax
benefits of $7,991 11,499 -- --
----------- ---------- ----------
Net earnings (loss) $ 53,169 51,225 (52,976)
=========== ========== ==========
Earnings (loss) per common share
Basic
Earnings (loss) before extraordinary
charge $ 0.96 0.77 (0.85)
Extraordinary charge due to early
extinguishment of debt, net of
tax benefits $ 0.17 -- --
Net earnings (loss) $ 0.79 0.77 (0.85)
Diluted
Earnings (loss) before extraordinary
charge $ 0.93 0.75 (0.85)
Extraordinary charge due to early
extinguishment of debt, net of
tax benefits $ 0.17 -- --
Net earnings (loss) $ 0.76 0.75 (0.85)
Weighted average common shares outstanding
Basic 67,237,000 66,103,000 62,434,000
Diluted 69,836,000 67,886,000 62,434,000
See accompanying notes to consolidated financial statements.
BARNES & NOBLE 1997
20
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except per share data) January 31, 1998 February 1, 1997
- --------------------------------------------- ---------------- ----------------
Assets
Current assets:
Cash and cash equivalents $ 12,697 12,447
Receivables, net 43,858 45,558
Merchandise inventories 852,107 732,203
Prepaid expenses and other current assets 68,902 76,747
------------ ----------
Total current assets 977,564 866,955
------------ ----------
Property and equipment:
Land and land improvements 681 681
Buildings and leasehold improvements 347,598 326,392
Fixtures and equipment 378,058 289,684
------------ ----------
726,337 616,757
Less accumulated depreciation and amortization 244,207 181,983
------------ ----------
Net property and equipment 482,130 434,774
------------ ----------
Intangible assets, net 90,237 93,494
Other noncurrent assets 41,240 51,424
------------ ----------
Total assets $ 1,591,171 1,446,647
============ ==========
Liabilities and Shareholders' Equity
Current liabilities:
Revolving credit facility $ -- 40,000
Accounts payable 459,795 373,340
Accrued liabilities 253,050 240,923
------------ ----------
Total current liabilities 712,845 654,263
------------ ----------
Long-term debt 284,800 290,000
Other long-term liabilities 61,771 46,395
Shareholders' equity:
Common stock; $.001 par value; 100,000,000
shares authorized; 67,921,830 and 66,376,250
shares issued and outstanding, respectively 68 66
Additional paid-in capital 468,860 446,265
Retained earnings 62,827 9,658
------------ ----------
Total shareholders' equity 531,755 455,989
------------ ----------
Commitments and contingencies -- --
------------ ----------
Total liabilities and shareholders' equity $ 1,591,171 1,446,647
============ ==========
See accompanying notes to consolidated financial statements.
BARNES & NOBLE 1997
21
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Additional Retained
Common paid-in earnings
(Thousands of dollars) Stock capital (deficit) Total
- ------------------------- ------- ----------- --------- -----
Balance at January 28, 1995 $ 60 346,704 11,409 358,173
Issuance of 5,000,000 shares of
common stock 5 88,720 -- 88,725
Exercise of 750,894 common stock
options, including tax benefits of
$3,470 1 6,312 -- 6,313
Net loss -- -- (52,976) (52,976)
----- ------- -------- --------
Balance at January 27, 1996 66 441,736 (41,567) 400,235
Exercise of 459,022 common stock
options, including tax benefits of
$2,272 -- 4,529 -- 4,529
Net earnings -- -- 51,225 51,225
----- ------- -------- --------
Balance at February 1, 1997 66 446,265 9,658 455,989
Exercise of 1,545,580 common stock
options, including tax benefits of
$8,253 2 22,595 -- 22,597
Net earnings -- -- 53,169 53,169
----- ------- -------- --------
Balance at January 31, 1998 $ 68 468,860 62,827 531,755
===== ======= ======== ========
See accompanying notes to consolidated financial statements.
BARNES & NOBLE 1997
22
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year
(Thousands of dollars) 1997 1996 1995
- ----------------------- ---- ---- ----
Cash flows from operating activities:
Net earnings (loss) $ 53,169 51,225 (52,976)
Adjustments to reconcile net earnings (loss) to net cash flows from
operating activities:
Depreciation and amortization 78,629 61,652 50,185
Loss (gain) on disposal of property and equipment 853 (130) 4,657
Deferred taxes 11,598 6,604 (32,110)
Restructuring charge -- -- 123,768
Extraordinary charge due to early extinguishment of debt, net of tax benefits 11,499 -- --
Increase in other long-term liabilities for scheduled rent increases in
long-term leases 16,350 15,663 10,670
Changes in operating assets and liabilities, net (2,884) (15,477) (161,038)
----------- --------- ----------
Net cash flows from operating activities 169,214 119,537 (56,844)
----------- --------- ----------
Cash flows from investing activities:
Purchases of property and equipment (121,903) (171,885) (154,913)
Proceeds from sales of property and equipment -- 177 551
Net increase in other noncurrent assets (13,177) (16,787) (2,378)
----------- --------- ----------
Net cash flows from investing activities (135,080) (188,495) (156,740)
----------- --------- ----------
Cash flows from financing activities:
Net increase (decrease) in revolving credit facility 244,800 (32,400) 72,400
Proceeds from issuance of long-term debt -- 100,000 --
Repayment of long-term debt (290,000) -- --
Proceeds from issuance of common stock, net -- -- 88,725
Proceeds from exercise of common stock options including related tax benefits 22,597 4,529 6,313
Payment of note premium (11,281) -- --
----------- --------- ----------
Net cash flows from financing activities (33,884) 72,129 167,438
----------- --------- ----------
Net increase (decrease) in cash and cash equivalents 250 3,171 (46,146)
Cash and cash equivalents at beginning of year 12,447 9,276 55,422
----------- --------- ----------
Cash and cash equivalents at end of year $ 12,697 12,447 9,276
=========== ========= ==========
Changes in operating assets and liabilities, net:
Receivables, net $ 1,700 3,461 (19,191)
Merchandise inventories (119,904) 8,148 (241,432)
Prepaid expenses and other current assets 9,721 (19,502) (17,340)
Accounts payable and accrued liabilities 105,599 (7,584) 116,925
----------- --------- ----------
Changes in operating assets and liabilities, net $ (2,884) (15,477) (161,038)
=========== ========= ==========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 37,845 38,103 27,656
Income taxes $ 20,282 24,574 19,937
See accompanying notes to consolidated financial statements.
BARNES & NOBLE 1997
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 52 weeks ended January 31, 1998 (fiscal 1997), the 53 weeks
ended February 1, 1997 (fiscal 1996) and the 52 weeks ended January 27, 1996
(fiscal 1995).
(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 four principal bookselling strategies: its "super" store strategy
through its wholly owned subsidiary Barnes & Noble Booksellers, Inc., under its
Barnes & Noble Booksellers, Bookstop and Bookstar trade names (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 stores, Doubleday Book Shops and Scribner's
Bookstore trade names (hereafter collectively referred to as B. Dalton stores),
its direct-mail strategy through its wholly owned subsidiary Marboro Books
Corp., and its e-commerce strategy through its wholly owned subsidiary
BarnesandNoble.com Inc.
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. Certain prior-period
amounts have been reclassified for comparative purposes.
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.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid instruments
purchased with an original maturity of three months or less to be cash
equivalents.
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 83% and 79% of the Company's merchandise inventories
as of January 31, 1998 and February 1, 1997, 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 $5,102 and $8,800 as of January 31, 1998 and February 1, 1997,
respectively.
Property and Equipment
Property andequipment 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.
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 trade names, of $61,484 and $28,753 as of January 31, 1998, $63,604
and $29,890
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
as of February 1, 1997, are amortized over 40 years using the straight-line
method.
Amortization of goodwill and trade names included in depreciation
and amortization in the accompanying consolidated statements of
operations is $3,257, $3,305 and $4,272 during fiscal 1997, 1996 and
1995, respectively. Accumulated amortization at January 31, 1998 and
February 1, 1997 was $41,293 and $38,036, respectively.
The Company periodically evaluates the recoverability of goodwill 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
store-level cash flows.
Deferred Charges
Costs incurred to obtain long-term financing are amortized over the
terms of the respective debt agreements using the straight-line method, which
approximates the interest method. Unamortized costs included in other noncurrent
assets as of January 31, 1998 and February 1, 1997 were $1,764 and $9,789,
respectively. Unamortized costs of $8,209 were included in the extraordinary
loss due to early extinguishment of debt for fiscal 1997. Amortization expense
included in interest and amortization of deferred financing fees is $1,678,
$1,846, and $2,304 during fiscal 1997, 1996 and 1995, respectively.
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
Costs directly associated with the opening of new stores, primarily
payroll and occupancy costs, are deferred and amortized over the respective
store's first 12 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 during fiscal 1995 are included in selling and administrative
expenses in the accompanying consolidated statements of operations.
Net Earnings (Loss) Per Common Share
In 1997 the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share" (SFAS 128). Under SFAS 128, the presentation of
primary and fully diluted earnings per share is replaced by basic and diluted
earnings per share. Basic earnings per share includes no dilutive effect of
common stock equivalents and is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding.
Diluted earnings per share reflects, in periods in which they have a dilutive
effect, the impact of common shares issuable upon exercise of stock options.
Also, as more fully described in Note 7, the Company effected a two-for-one
stock split during September 1997. Accordingly, all historical weighted average
share and per share amounts have been restated to reflect the stock split and
the adoption of SFAS 128.
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
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Generally, compensation expense is not recognized for
stock option grants. 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 periods ended January
31, 1998, February 1, 1997 and January 27, 1996 contained 52 weeks, 53 weeks and
52 weeks, respectively.
2. Receivables, Net
Receivables represent customer, bankcard, landlord and other receivables
due within one year as follows:
January 31, February 1,
1998 1997
----------- ------------
Trade accounts $ 6,628 4,790
Bankcard receivables 15,536 12,800
Receivables from landlords for
leasehold improvments 16,715 19,374
Other receivables 4,979 8,594
------- ------
Total receivables, net $43,858 45,558
======= =======
3. Debt
Revolving Credit Facility
On November 18, 1997, the Company obtained an $850,000 senior credit
facility (the New Facility) with a syndicate led by The Chase Manhattan Bank.
The New Facility, structured as a five-year revolving credit, refinanced an
existing $450,000 revolving credit and $100,000 term loan facility (the Old
Facility). The New Facility permits borrowings at various interest rate options
based on the prime rate or London Interbank Offer Rate (LIBOR) depending upon
certain financial tests. In addition, the agreement requires the Company to pay
a commitment fee up to 0.25% of the unused portion depending upon certain
financial tests. The New Facility contains covenants, limitations and events of
default typical of credit facilities 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 New
Facility is secured by the capital stock, accounts receivable and general
intangibles of the Company's subsidiaries.
Net proceeds from the New Facility are available for general corporate
purposes and were used to redeem all of the Company's outstanding $190,000,
11 7/8% senior subordinated notes on January 15, 1998. As a result of the
refinancings, the Company recorded an extraordinary charge of $11,499 (net of
applicable taxes) due to the early extinguishment of debt during fiscal 1997.
The extraordinary charge represents the payment of a call premium associated
with the redemption of the senior subordinated notes of $6,656 (net of
applicable taxes) and the write-off of unamortized fees of $4,843 (net of
applicable taxes).
The Company from time to time 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 through the exchange of fixed and
floating interest payment obligations without the exchange of underlying
principal amounts. During fiscal 1996, the Company entered into interest rate
swap agreements totaling $100,000 with maturities ranging from 1999 to 2000. As
of January 31, 1998 the Company had outstanding $125,000 of swaps with
maturities ranging from 1999 to 2003. The Company recorded interest expense
associated with these agreements of $306 and $365 during fiscal years 1997 and
1996, respectively.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Selected information related to the Company's revolving credit facility
is as follows:
Fiscal Year 1997 1996 1995
- ----------- ---- ---- ----
Balance at end of year $ 284,800 40,000 72,400
Average balance outstanding during the year $ 105,127 101,671 62,036
Maximum borrowings outstanding during the year $ 304,900 192,800 152,200
Weighted average interest rate during the year 7.12% 7.56% 8.13%
Interest rate at end of year 6.60% 6.87% 8.21%
The balance outstanding as of January 31, 1998 reflects the refinancing
of the senior subordinated notes and the term loan.
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 $1,204, $911 and $454, during fiscal 1997,1996
and 1995, respectively.
Long-Term Debt
As of January 31, 1998 the $284,800 balance outstanding under the
Company's New Facility has been classified as long-term debt based on the terms
of the credit agreement and the Company's intention to maintain principal
amounts outstanding through November 2002. As of February 1, 1997 classified as
long - term debt were both the $190,000, 11 7/8% senior subordinated notes based
on the January 15, 2003 maturity date, and the $100,000 term loan outstanding
under the Old Facility which had scheduled repayments starting in 1998. The
subordinated notes and the term loan were paid on January 15, 1998 and November
18, 1997, respectively.
The Company has no agreements to maintain compensating balances.
4. 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, classified as
long-term debt as of January 31, 1998, approximates its carrying amount, because
of its recent and frequent repricing based upon market conditions. The fair
value of long-term debt, consisting of the senior subordinated notes and term
loan as of February 1, 1997, is based upon quoted market prices. Interest rate
swap agreements are valued based on market quotes obtained from dealers. The
fair value of the investment in Chapters Inc. is based on quoted market prices
and conversion rates at January 31, 1998 and February 1, 1997.
The carrying amounts and fair values of the Company's financial
instruments as of January 31, 1998 and February 1, 1997 are as follows:
January 31, February 1,
1998 1997
----------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
Cash and cash equivalents $ 12,697 12,697 12,447 12,447
Revolving credit facility $ 284,800 284,800 40,000 40,000
Long-term debt $ -- -- 290,000 307,575
Interest rate swaps liability $ -- 1,463 -- 218
Investment in Chapters Inc. $ 17,686 31,445 8,541 11,843
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
5. 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 who
meet certain eligibility requirements, primarily age and length of service.
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 covered earnings for Social Security benefits. 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 1997 1996 1995
- ----------- ---- ---- ----
Defined benefit plans:
Service cost $ 3,294 2,542 1,475
Interest cost 1,666 1,354 1,011
Actual return on plan assets (4,165) (2,378) (3,202)
Net amortization and deferral 2,398 914 2,047
-------- ------- -------
Net periodic pension cost $ 3,193 2,432 1,331
======== ======= =======
Defined contribution plan $ 2,545 2,115 1,495
======== ======= =======
Actuarial assumptions used in determining the net periodic pension costs
and the funded status of the Pension Plan are as follows:
January 31, February 1, January 27,
1998 1997 1996
----------- ----------- -----------
Discount rate (beginning of year) 7.5% 8.8% 7.5%
Discount rate (end of year) 7.3% 7.5% 8.8%
Expected long-term rate of return on
plan assets 9.5% 9.5% 9.8%
Assumed rate of compensation increase 4.3% 4.3% 4.3%
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:
January 31, February 1,
1998 1997
----------- -----------
Actuarial present value of benefit
obligation:
Vested benefits $ (14,244) (12,138)
Nonvested benefits (3,484) (2,114)
---------- --------
Accumulated benefit obligation (17,728) (14,252)
Effect of projected future compensation increases (13,006) (7,126)
---------- --------
Projected benefit obligation (30,734) (21,378)
Plan assets at market value 22,909 18,565
---------- --------
Projected benefit obligation in excess of plan assets (7,825) (2,813)
Unrecognized net loss 3,490 100
Unrecognized net obligation remaining 220 274
Unrecognized prior service cost (201) (219)
---------- --------
Pension liability $ (4,316) (2,658)
========== ========
28
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 postretirement health
care liability of the Plan, which is attributable solely to retirees, recognized
in the accompanying consolidated balance sheets as of January 31, 1998 and
February 1, 1997 using a discount rate of 7.3% and 7.5%, respectively.
January 31, February 1,
1998 1997
------------ -----------
Accumulated post retirement benefit obligation $ (1,975) (4,349)
Unrecognized (gain) loss (2,407) 137
--------- --------
Postretirement health care liability $ (4,382) (4,212)
========= ========
The net periodic cost for the postretirement health care benefits under
the Plan is related to interest costs of $315, $326 and $375 during fiscal 1997,
1996 and 1995, respectively. The unrecognized (gain) loss resulting from the
impact of experience changes on current assumptions is recorded over the average
remaining life expectancy of the Plan participants.
The health care cost trend rate used to measure the expected cost of the
Plan benefits is assumed to be 8.0% in 1998, 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 postretirement benefit obligation by approximately $198
as of January 31, 1998 and the net periodic cost by approximately $32 during
fiscal 1997.
6. Income Taxes
The Company files a consolidated federal return. Federal and state
income tax provisions (benefits) for fiscal 1997, 1996 and 1995 are as follows:
Fiscal Year 1997 1996 1995
- ----------- ---- ---- ----
Current:
Federal $ 26,324 18,413 17,317
State 7,013 5,140 4,471
--------- ------ -------
33,337 23,553 21,788
-------- ------ --------
Deferred:
Federal 9,575 5,300 (25,717)
State 2,023 1,304 (6,393)
-------- ------ --------
11,598 6,604 (32,110)
-------- ------ --------
Total $ 44,935 30,157 (10,322)
======== ====== ========
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 1997, 1996, and 1995,is as follows:
Fiscal Year 1997 1996 1995
- ----------- ---- ---- ----
Expected provision (benefit)
for income taxes at
federal statutory rate $ 38,361 28,484 (22,154)
Amortization of goodwill
and trade names and
write-down of goodwill 1,140 1,157 12,978
State income taxes, net of
federal income tax benefit 5,873 3,341 2,906
Rehabilitation tax credit -- (2,974) --
Other, net (439) 149 (4,052)
-------- ------ --------
Provision (benefit) for
income taxes $ 44,935 30,157 (10,322)
======== ====== ========
29
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
January 31, 1998 and February 1, 1997 are as follows:
January 31, February 1,
1998 1997
------------ ------------
Deferred tax liabilities:
Operating expenses $ (10,103) (6,910)
Depreciation (16,359) (7,979)
---------- ---------
Total deferred tax liabilities (26,462) (14,889)
---------- ---------
Deferred tax assets:
Inventory 6,604 4,828
Lease transactions 16,108 13,007
Reversal of estimated accruals 5,418 5,701
Restructuring charge 21,825 26,599
Insurance liability 2,265 2,769
Deferred income 7,058 4,296
Other 824 2,927
---------- ---------
Total deferred tax assets 60,102 60,127
---------- ---------
Net deferred tax assets $ 33,640 45,238
========== =========
7. Shareholders' Equity
On September 22, 1997, the Company effected a two-for-one stock split in
the form of a stock dividend. One additional share was issued for each share of
common stock held by shareholders of record as of September 2, 1997. Share and
per share amounts for all periods presented have been adjusted to reflect this
split.
On October 2, 1995, the Company completed a public offering of 5,000,000
shares of common stock (restated for the September 1997 two - for-one stock
split) 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.
8. 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 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 and 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 $1.32 per share) to reflect
the aggregate impact of its restructuring plan and change in accounting policy.
The charge to earnings included a $33,000 write-down of goodwill, and $45,862
related to the write-down of fixed assets and other long-term assets. The
Company has substantially completed the store closing program.
The following table sets forth the restructuring liability activity:
Balance Fiscal Balance Fiscal Balance
at Jan 27, 1996 at Feb 1, 1997 at Jan 31,
1996 Activity 1997 Activity 1998
---------- --------- --------- -------- ----------
Provision for
store closings $ 5,974 4,442 1,532 1,532 --
Lease termination costs 32,833 2,371 30,462 9,026 21,436
Other 6,099 4,497 1,602 1,602 --
-------- ------ ------ ------- --------
Total $ 44,906 11,310 33,596 12,160 21,436
======== ======= ======= ======= =======
The remaining liability, which primarily represents outstanding lease
liabilities, is expected to be paid out over the next several years.
9. Stock Option Plans
The Company currently has two incentive plans under which stock options
have been or 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.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The 1996 Plan and the 1991 Plan allow the Company to grant options to
purchase up to 6,000,000 and 4,732,704 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.
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 diluted earnings per
share for fiscal 1997, 1996 and 1995, would have been reduced by approximately
$3,863 or $0.06 per share, $5,305 or $0.08 per share, and $1,448 or $0.02 per
share, respectively.
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
1997, 1996 and 1995 were estimated at $8.05, $4.66 and $5.99 respectively, using
the Black-Scholes option-pricing model with the following assumptions:
volatility of 28%, risk-free interest rate of 6.54% in fiscal 1997, 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
(Thousands of shares) Shares Exercise Price
- --------------------- ------ ----------------
Balance, January 28, 1995 7,624 $ 8.73
Granted 1,180 14.31
Exercised (750) 3.79
Forfeited (152) 13.11
Balance, January 27, 1996 7,902 9.95
Granted 1,856 14.63
Exercised (460) 4.95
Forfeited (156) 14.97
Balance, February 1, 1997 9,142 11.07
Granted 2,254 19.31
Exercised (1,546) 9.28
Forfeited (186) 16.25
-------
Balance, January 31, 1998 9,664 $13.17
=======
Options exercisable as of January 31, 1998, February 1, 1997 and January
27, 1996 were 6,558,000, 7,070,000 and 4,520,000, respectively. Options
available for grant under the plans were 2,354,000, 4,422,000 and 121,000
at January 31, 1998, February 1, 1997 and January 27, 1996, respectively.
The following table summarizes information as of January 31, 1998
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 (000Os) Life Price (000Os) Price
--------- ------------ ------------ ---------- ------------ ----------
$ 3.21 - $ 3.77 1,117 4.90 $ 3.57 1,117 $ 3.57
$10.00 - $15.00 5,735 6.04 $12.19 5,257 $12.03
$17.13 - $23.00 2,700 9.06 $18.53 184 $17.44
$27.00 - $32.06 112 9.86 $30.10 -- $ --
------- ------ -------
$ 3.21 - $32.06 9,664 6.80 $13.17 6,558 $10.74
======= ======
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
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
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 1997 1996 1995
- ------------ ---- ---- ----
Minimum rentals $ 253,472 222,700 179,941
Percentage rentals 3,216 2,750 2,532
--------- -------- --------
$ 256,688 225,450 182,473
========= ======== =========
Future minimum annual rentals, excluding percentage rentals, required
under leases that had initial, noncancelable lease terms greater than one year,
as of January 31, 1998 are:
Fiscal Year
-----------
1998 $ 256,588
1999 250,230
2000 240,798
2001 235,819
2002 222,158
After 2002 1,471,425
-----------
$ 2,677,018
===========
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 $1,309, $1,307 and $1,376 in fiscal years
1997, 1996 and 1995, 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 lease expiring in 2023. Pursuant to such lease, the Company paid
$743, $665 and $664 in fiscal years 1997, 1996 and 1995, respectively.
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. The Company paid LTA $11,528 and $9,100 for such services
during fiscal years 1997 and 1996, respectively.
The Company leases retail space in a building in which Barnes & Noble
College Bookstores, Inc. (B&N College), a company owned by a principal
shareholder/director/executive officer of the Company, subleases space for its
executive offices. Occupancy costs allocated by the Company to B&N College for
this space totaled $634 and $544 for the fiscal years ended January 31, 1998 and
February 1, 1997, respectively. In connection with the space, the Company
reimbursed B&N College during fiscal 1997, for a landmark tax credit totaling
$726.
B&N College also 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 $75,
$115, and $1,219 for fiscal 1997, 1996 and 1995, respectively. The Company
charged B&N College $473 during fiscal 1997 for capital expenditures, business
insurance and other operating costs incurred on their behalf.
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 $1,910, $1,685 and $1,298 during fiscal 1997, 1996 and 1995,
respectively, and are included in the accompanying consolidated statements of
operations.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
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 the assets of Software Etc. Stores, Inc. (Software), a
company (formerly a division of the Company) in which two principal
shareholder-directors had an ownership interest, and assumed the operations of
14 retail software departments located within Barnes & Noble stores. As of
January 31, 1998, there are 13 of these departments remaining. The Company pays
all rent related to these properties for which it receives a license fee from
Babbage's equal to 7.0% of the gross sales of such departments. 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 for its
incremental costs to provide such services. The Company charged Software and
Babbage's, on a combined basis, $1,430, $1,282 and $4,992 during fiscal 1997,
1996, and 1995, respectively, for such services, license fees, rent, operating
costs, insurance costs and benefit coverage. Babbage's also purchases
merchandise from the Company at prices equal to the Company's cost to obtain and
ship the merchandise.
13. Selected Quarterly Financial Information (Unaudited)
A summary of quarterly financial information for each of the last two
fiscal years is as follows:
Fiscal 1997 Quarter End Total Fiscal
On or About April 1997 July 1997 October 1997 January 1998 year 1997
----------------------- ---------- --------- ------------ ------------ ------------
Revenues $ 595,731 617,748 614,831 968,542 2,796,852
Operating profit 3,102 7,441 10,001 126,725 147,269
Earnings (loss) before extraordinary charge (3,861) (1,366) 65 69,830 64,668
Net earnings (loss) (3,861) (1,366) 65 58,331 53,169
Basic earnings per common share
Earnings (loss) before extraordinary charge (0.06) (0.02) 0.00 1.03 0.96
Net earnings (loss) (0.06) (0.02) 0.00 0.86 0.79
Diluted earnings per common share
Earnings (loss) before extraordinary charge (0.06) (0.02) 0.00 0.98 0.93
Net earnings (loss) (0.06) (0.02) 0.00 0.81 0.76
Fiscal 1996 Quarter End Total Fiscal
On or About April 1996 July 1996 October 1996 January 1997(1) year 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
Net earnings (loss) (5,393) (2,721) (2,622) 61,961 51,225
Basic earnings (loss) per common share (0.08) (0.04) (0.04) 0.93 0.77
Diluted earnings (loss) per common share (0.08) (0.04) (0.04) 1.91 0.75
(1) The fourth quarter of 1996 includes 14 weeks.
(2) Fiscal 1996 includes 53 weeks.
33
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 January 31, 1998 and February 1, 1997
and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the fiscal years ended January
31, 1998, February 1, 1997, and January 27, 1996, respectively. 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 its subsidiaries as of January 31, 1998 and February 1, 1997 and
the results of their operations and their cash flows for the fiscal years ended
January 31, 1998, February 1, 1997 and January 27, 1996, in conformity with
generally accepted accounting principles.
New York, New York
March 10, 1998
Sd/-
BDO Seidman, LLP