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 30,
1999 (fiscal 1998), the 52 weeks ended January 31, 1998 (fiscal 1997) and the 53
weeks ended February 1, 1997 (fiscal 1996) and the Balance Sheet Data as of
January 30, 1999 and January 31, 1998 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 27, 1996 (fiscal 1995) and January 28, 1995 (fiscal 1994) and the
Balance Sheet Data as of February 1, 1997, January 27, 1996 and January 28, 1995
are derived from audited consolidated financial statements not included in this
report. Certain prior-period amounts have been reclassified for comparative
purposes.
1
SELECTED CONSOLIDATED FINANCIAL DATA CONTINUED
Fiscal Year 1998 1997 1996 1995 1994
(In thousands of dollars, except per share data)
- --------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Sales
Barnes & Noble stores $ 2,515,352 2,245,531 1,861,177 1,349,830 952,697
B. Dalton stores 468,414 509,389 564,926 603,204 646,876
barnesandnoble.com -- 14,601 -- -- --
Other 21,842 27,331 22,021 23,866 23,158
------------ ------------ ------------ ------------ ------------
Total sales 3,005,608 2,796,852 2,448,124 1,976,900 1,622,731
Cost of sales and occupancy 2,142,717 2,019,291 1,785,392 1,444,555 1,192,123
------------ ------------ ------------ ------------ ------------
Gross profit 862,891 777,561 662,732 532,345 430,608
Selling and administrative expenses 577,195 540,423 465,687 383,692 316,457
Depreciation and amortization 88,345 76,951 59,806 47,881 36,617
Pre-opening expenses 8,795 12,918 17,571 12,160 9,021
Restructuring charge(1) -- -- -- 123,768 --
------------ ------------ ------------ ------------ ------------
Operating profit (loss) 188,556 147,269 119,668 (35,156) 68,513
Interest expense, net and amortization of
deferred financing fees(2) (24,412) (37,666) (38,286) (28,142) (22,955)
Equity in net loss of barnesandnoble.com llc(3) (71,334) -- -- -- --
Gain on formation of barnesandnoble.com llc(4) 63,759 -- -- -- --
------------ ------------ ------------ ------------ ------------
Earnings (loss) before provision (benefit)
for income taxes and extraordinary charge 156,569 109,603 81,382 (63,298) 45,558
Provision (benefit) for income taxes 64,193 44,935 30,157 (10,322) 20,085
------------ ------------ ------------ ------------ ------------
Earnings (loss) before extraordinary charge 92,376 64,668 51,225 (52,976) 25,473
Extraordinary charge(5) -- 11,499 -- -- --
------------ ------------ ------------ ------------ ------------
Net earnings (loss) $ 92,376 53,169 51,225 (52,976) 25,473
============ ============ ============ ============ ============
Earnings (loss) per common share
Basic
Earnings (loss) before extraordinary charge $ 1.35 0.96 0.77 (0.85) 0.42
Extraordinary charge $ -- 0.17 -- -- --
Net earnings (loss) $ 1.35 0.79 0.77 (0.85) 0.42
Diluted
Earnings (loss) before extraordinary charge $ 1.29 0.93 0.75 (0.85) 0.41
Extraordinary charge $ -- 0.17 -- -- --
Net earnings (loss) $ 1.29 0.76 0.75 (0.85) 0.41
Weighted average common
shares outstanding
Basic 68,435,000 67,237,000 66,103,000 62,434,000 59,970,000
Diluted 71,677,000 69,836,000 67,886,000 62,434,000 61,560,000
OTHER OPERATING DATA:
Number of Stores
Barnes & Noble stores(6) 520 483 431 358 268
B. Dalton stores(7) 489 528 577 639 698
------------ ------------ ------------ ------------ ------------
Total 1,009 1,011 1,008 997 966
============ ============ ============ ============ ============
Comparable store sales increase (decrease)(8)
Barnes & Noble stores 5.0% 9.4% 7.3% 6.9% 12.6%
B. Dalton stores (1.4) (1.1) (1.0) (4.3) (2.3)
Capital Expenditures $ 141,388 121,903 171,885 154,913 88,763
BALANCE SHEET DATA:
Working capital $ 315,989 264,719 212,692 226,500 155,976
Total assets $ 1,807,597 1,591,171 1,446,647 1,315,342 1,026,418
Long-term debt, less current portions $ 249,100 284,800 290,000 262,400 190,000
Shareholders' equity $ 678,789 531,755 455,989 400,235 358,173
- --------------------------------------------------------------------------------------------------------------------------------
2
SELECTED CONSOLIDATED FINANCIAL DATA CONTINUED
(In thousands of dollars)
(1) 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."
(2) Interest expense for fiscal 1998, 1997, 1996, 1995 and 1994 is net of
interest income of $976, $446, $2,288, $2,138 and $3,008, respectively.
(3) On November 12, 1998, the Company and Bertelsmann AG (Bertelsmann)
completed the formation of a limited liability company to operate the
online retail bookselling operations of the Company's wholly owned
subsidiary, barnesandnoble.com inc. barnesandnoble.com inc. began
operations in fiscal 1997. As a result of the formation of
barnesandnoble.com llc (barnesandnoble.com), the Company began accounting
for its interest in barnesandnoble.com under the equity method of
accounting as of the beginning of fiscal 1998. Fiscal 1998 reflects a
one-hundred percent equity interest in barnesandnoble.com for the first
three quarters ended October 31, 1998 (also the effective date of the
limited liability company agreement), and a fifty percent equity interest
beginning on November 1, 1998 through the end of the fiscal year. Had the
Company reported the results of barnesandnoble.com inc. under the equity
method of accounting during fiscal 1997, its fiscal 1997 equity in the net
loss of barnesandnoble.com inc. would have been $15,395.
(4) As a result of the formation of the limited liability company, the Company
has recognized a pre-tax gain during fiscal 1998 in the amount of $126,435,
of which $63,759 has been recognized in earnings based on the $75,000
received directly from Bertelsmann and $62,676 ($36,351 after taxes) has
been reflected in additional paid-in capital based on the Company's share
of the incremental equity of the joint venture resulting from the $150,000
Bertelsmann contribution.
(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) Also includes 15 Bookstop and 25 Bookstar stores as of January 30, 1999.
(7) Also includes 15 Doubleday Book Shops, eight Scribner's Bookstores and
seven smaller format bookstores operated under the Barnes & Noble trade
name representing the Company's original retail strategy as of January 30,
1999.
(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 1998, 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.
3
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
1998" represents the 52 weeks ended January 30, 1999, "fiscal 1997" represents
the 52 weeks ended January 31, 1998 and "fiscal 1996" represents the 53 weeks
ended February 1, 1997.
General
Barnes & Noble, Inc. (Barnes & Noble or the Company), the world's largest
bookseller*, as of January 30, 1999 operates 1,009 bookstores. Of these 1,009
stores, 520 operate under the Barnes & Noble Booksellers, Bookstop and Bookstar
trade names, (50 of which were opened in fiscal 1998), and 489 operate under the
B. Dalton Bookseller, Doubleday Book Shops and Scribner's Bookstore trade names.
Through its fifty percent interest in barnesandnoble.com llc
(barnesandnoble.com), the Company is also the world's largest bookseller on the
World Wide Web (http://www.barnesandnoble.com) and the exclusive bookseller on
America Online (keyword: bn). Barnes & Noble publishes books under its own
imprint for exclusive sale through its retail stores, mail-order catalogs and
barnesandnoble.com. The Company employed approximately 29,000 full- and
part-time booksellers and created nearly 2,000 new jobs nationwide during fiscal
1998 primarily due to its Barnes & Noble store expansion.
Barnes & Noble is the largest operator of book "super" stores in the United
States* with 520 Barnes & Noble stores located in 49 states and the District of
Columbia as of January 30, 1999. 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.
Barnes & Noble stores range in size from 10,000 to 60,000 square feet
depending upon market size, and each store features a comprehensive selection of
books, ranging from 60,000 to 175,000 titles. The title selection is diverse and
reflects local interests. In addition, Barnes & Noble emphasizes books published
by small and independent publishers and university presses. Bestsellers
represent only 3% of Barnes & Noble store sales. Complementing this extensive
on-site selection, all Barnes & Noble stores provide customers with access to
the millions of books available to online shoppers while offering an option to
have the book sent to the store or shipped directly to the customer. During
fiscal 1999 the Company expects to complete installation of BookMaster, the
Company's new in-store operating system, in all Barnes & Noble stores.
BookMaster enhances our existing merchandise replenishment systems, resulting in
higher in-stock positions and better productivity at the store level through
efficiencies in receiving, cashiering and returns processing.
Barnes & Noble stores opened during fiscal 1998 added 1.3 million square
feet to the Barnes & Noble base, bringing the total square footage to 11.9
million square feet, a 10% increase over the prior year. Barnes & Noble stores
contributed more than 84% of the Company's total sales in fiscal 1998. The
Company plans to open approximately 50 Barnes & Noble stores in 1999 which are
expected to average 26,000 square feet in size.
At the end of fiscal 1998, the Company operated 489 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. 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 to superstore
competition and 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, on average, between 40 and 60 B. Dalton stores per year since
1989.
barnesandnoble.com, a limited liability company created in November 1998
(as discussed more fully below) was formed by combining the online bookselling
operations of the Company with funds contributed by the international media
company Bertelsmann AG (Bertelsmann), one of the largest integrated media
companies in the world. barnesandnoble.com has the world's largest selection of
books* -- more than eight million in-print and out-of-print books. In less than
two years of operations, it has become the fourth most-trafficked e-commerce
site and among the top 25 largest overall sites on the Internet, as of December
1998, according to Media Metrix. barnesandnoble.com has access to the largest
standing inventory of any online bookseller with more than 750,000 titles ready
for immediate delivery. The site's database features more than six and one half
million out-of-print and rare books, as well as the largest online selection of
bargain books discounted up to 90 percent. During 1998, many major enhancements
were introduced, including one-click ordering, a powerful and user friendly
search engine, email book reviews and product-notification services, Software
and Magazine stores, a Gift Center and Bargain Book store and online gift
certificates. Also during 1998, the site began to add music and video to its
product offerings, as well as an out-of-print book service. barnesandnoble.com
is the exclusive bookseller to America Online (AOL)'s more than 16 million
subscribers. The Company's affiliate network pays the highest commissions with
the best linking and best reporting
- --------
(*) Based upon information reported in trade publications and public filings.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED
tools, including daily updated sales information, and is the leader in
business-to-business e-commerce with its unique Business Solutions program.
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 2,000
titles, Barnes & Noble Books offers customers high-quality books at exceptional
values, while generating attractive gross margins.
The Company also maintains an 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 327 bookstores, including 52 superstores, as of the end of fiscal
1998.
Results of Operations
The Company's sales, operating profit, comparable store sales, store
openings, store closings, number of stores open and square feet of selling space
at year end are set forth below:
Fiscal Year 1998 1997 1996
(In thousands of dollars)
- -------------------------------------------------------------------------------------------------------------
Sales(1) $ 3,005,608 2,796,852 2,448,124
Operating Profit(1) $ 188,556 147,269 119,668
Comparable Store Sales Increase (Decrease)(2)
Barnes & Noble stores 5.0% 9.4% 7.3%
B. Dalton stores (1.4) (1.1) (1.0)
=========== =========== ===========
Stores Opened
Barnes & Noble stores 50 65 91
B. Dalton stores 4 4 10
----------- ----------- -----------
Total 54 69 101
=========== =========== ===========
Stores Closed
Barnes & Noble stores 13 13 18
B. Dalton stores 43 53 72
----------- ----------- -----------
Total 56 66 90
=========== =========== ===========
Number of Stores Open at Year End
Barnes & Noble stores 520 483 431
B. Dalton stores 489 528 577
----------- ----------- -----------
Total 1,009 1,011 1,008
=========== =========== ===========
Square Feet of Selling Space at Year End (In millions)
Barnes & Noble stores 11.9 10.8 9.3
B. Dalton stores 1.9 2.0 2.2
----------- ----------- -----------
Total 13.8 12.8 11.5
=========== =========== ===========
- -------------------------------------------------------------------------------------------------------------
(1) Included in fiscal 1997 are sales and operating losses associated with
barnesandnoble.com of $14,601 and ($15,395), respectively. Beginning in
fiscal 1998 the Company's Consolidated Statement of Operations presents its
equity in the results of operations of barnesandnoble.com as a single line
item below operating profit in accordance with the equity method of
accounting. The Company's equity in the net loss of barnesandnoble.com for
fiscal 1998 was ($71,334).
(2) 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.
- --------------------------------------------------------------------------------
* Based upon information reported in trade publications and public filings.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED
The following table sets forth, for the periods indicated, the percentage
relationship that certain items bear to total sales of the Company:
Fiscal Year 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
Sales 100.0% 100.0% 100.0%
Cost of sales and occupancy 71.3 72.2 72.9
------- ------- -------
Gross margin 28.7 27.8 27.1
Selling and administrative expenses 19.2 19.3 19.0
Depreciation and amortization 2.9 2.8 2.5
Pre-opening expenses 0.3 0.4 0.7
------- ------- -------
Operating margin(1) 6.3 5.3 4.9
Interest expense, net and amortization of deferred financing fees (0.8) (1.4) (1.6)
Equity in net loss of barnesandnoble.com llc (2.4) -- --
Gain on formation of barnesandnoble.com llc 2.1 -- --
------- ------- -------
Earnings before provision for income taxes
and extraordinary charge(1) 5.2 3.9 3.3
Provision for income taxes(1) 2.1 1.6 1.2
------- ------- -------
Earnings before extraordinary charge(1) 3.1 2.3 2.1
Extraordinary charge, net -- 0.4 --
------- ------- -------
Net earnings 3.1% 1.9% 2.1%
======= ======= =======
- --------------------------------------------------------------------------------------------------------
(1) If operating margin, earnings before provision for income taxes and
extraordinary charge, provision for income taxes and earnings before
extraordinary charge were presented without barnesandnoble.com during
fiscal 1997, the percentage relationship that these items would bear to
total sales of the Company would be 5.8%, 4.5%, 1.8% and 2.7%
52 Weeks Ended January 30, 1999 Compared with
52 Weeks Ended January 31, 1998
Sales
The Company's sales increased 7.5% during fiscal 1998 to $3.006 billion
from $2.797 billion during fiscal 1997. Fiscal 1998 sales from Barnes & Noble
stores, which contributed 83.7% of total sales, increased 12.0% to $2.515
billion from $2.246 billion in fiscal 1997.
The increase in sales was primarily due to the 5.0% increase in Barnes &
Noble comparable store sales and the opening of an additional 50 Barnes & Noble
stores during 1998. This increase was slightly offset by declining sales of B.
Dalton, due to 43 store closings and a comparable store sales decline of 1.4%.
In addition, fiscal 1997 includes barnesandnoble.com sales of $14.6 million
whereas fiscal 1998 does not include sales for barnes-andnoble.com due to the
conversion to the equity method of accounting as of the beginning of the year.
Excluding barnesandnoble.com sales in fiscal 1997, retail sales increased 8.0%
during fiscal 1998.
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 to $2.143 billion in fiscal 1998 from
$2.019 billion in fiscal 1997. The Company's gross margin rate increased to
28.7% in fiscal 1998 from 27.8% in fiscal 1997. Excluding barnesandnoble.com in
fiscal 1997 the retail gross margin rate was 27.9%. The current year improvement
in gross margin reflects more direct buying, increased distribution center
efficiencies, better shrinkage control, and a more-favorable merchandise mix.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED
Selling and Administrative Expenses
Selling and administrative expenses increased $36.8 million, or 6.8% to
$577.2 million in fiscal 1998 from $540.4 million in fiscal 1997. Selling and
administrative expenses decreased slightly to 19.2% of sales during fiscal 1998
from 19.3% during fiscal 1997 primarily as a result of the start-up expenses
from barnesandnoble.com included in the fiscal 1997 results. Excluding
barnesandnoble.com, retail selling and administrative expenses would have been
18.9% of sales in fiscal 1997 and total retail selling and administrative
expenses would have increased 9.9% in fiscal 1998. The current year increase in
retail selling and administrative expenses reflects the opening of an additional
50 Barnes & Noble stores, the full year implementation of a new wage plan, and
expenses associated with new store system enhancements.
Depreciation and Amortization
Depreciation and amortization increased $11.3 million, or 14.8%, to $88.3
million in fiscal 1998 from $77.0 million in fiscal 1997. The increase was
primarily the result of the new Barnes & Noble stores opened during fiscal 1998
and fiscal 1997, as well as new store system enhancements made during fiscal
1998.
Pre-Opening Expenses
Pre-opening expenses declined in fiscal 1998 to $8.8 million from $12.9
million in fiscal 1997 reflecting fewer new stores compared with prior years.
Operating Profit
Operating profit increased to $188.6 million in fiscal 1998 from $147.3
million in fiscal 1997. Excluding the $15.4 million operating loss for
barnesandnoble.com included in fiscal 1997, retail operating margin improved to
6.3% of sales during fiscal 1998 from 5.8% of sales in fiscal 1997.
Interest Expense, Net and Amortization
of Deferred Financing Fees
Interest expense, net of interest income, and amortization of deferred
financing fees decreased 35.2% or $13.3 million in fiscal 1998 to $24.4 million
from $37.7 million in fiscal 1997. The decline was the result of the retirement
of $190 million in 11-7/8% senior subordinated notes on January 15, 1998 as well
as the more-favorable rate environment and lower spreads over the London
Interbank Offer Rate (LIBOR) in effect since the November 1997 refinancing.
Equity in Net Loss of barnesandnoble.com llc
As a result of the formation of the limited liability company with
Bertelsmann, the Company began accounting for its interest in barnesandnoble.com
under the equity method of accounting as of the beginning of fiscal 1998. The
Company's equity in the net loss of barnesandnoble.com for fiscal 1998 was $71.3
million. This reflects a one-hundred percent equity interest for the first three
quarters ended October 31, 1998 (also the effective date of the limited
liability company agreement), and a fifty percent equity interest beginning on
November 1, 1998 through the end of the fiscal year. Had the Company reported
the results of barnesandnoble.com under the equity method of accounting during
fiscal 1997, its fiscal 1997 equity in the net loss of barnesandnoble.com would
have been $15.4 million.
Gain on Formation of barnesandnoble.com llc
As a result of the formation of the limited liability company, resulting in
the receipt of $75 million by the Company from Bertelsmann, a gain was recorded
in fiscal 1998 in the amount of $63.8 million. The gain represents the excess of
the amount received over the portion of the net assets of barnesandnoble.com
sold by the Company to Bertelsmann.
Provision for Income Taxes
Barnes & Noble's effective tax rate was 41.0% during both fiscal 1998 and
fiscal 1997.
Earnings
Fiscal 1998 earnings before extraordinary charge increased $27.7 million,
or 42.8%, to $92.4 million (or $1.29 per diluted share) from $64.7 million (or
$0.93 per diluted share) during fiscal 1997. Before the effect of
barnesandnoble.com, retail earnings before extraordinary charge increased $23.0
million, or 31.3% to $96.8 million (or $1.35 per diluted share) from $73.8
million (or $1.06 per diluted share).
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED
52 Weeks Ended January 31, 1998 Compared
with 53 Weeks Ended February 1, 1997
Sales
The Company's sales 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, sales increased 16.0%. Fiscal 1997 sales from
Barnes & Noble stores, which contributed 80.3% of total sales, increased 20.7%
to $2.246 billion from $1.861 billion in fiscal 1996.
The increase in sales 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 sales of B.
Dalton stores which closed 53 stores and posted a comparable store sales decline
of 1.1%. The inclusion of barnesandnoble.com as a consolidated wholly owned
subsidiary also contributed to the increase in sales, posting $14.6 million of
sales during its first 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. The Company's gross margin rate
increased 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 sales 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 sales, reflecting operating leverage
improvement.
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 sales during fiscal
1997 from 4.9% of sales during fiscal 1996. Excluding barnesandnoble.com, retail
operating margin improved to 5.8% of sales.
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 fiscal 1997 and 1996 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.
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. The Company has now reported
operating profit for eleven consecutive quarters.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED
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 operating activities were $181.1
million, $169.2 million and $119.5 million during fiscal 1998, 1997 and 1996,
respectively. Fiscal 1997 cash flows from operating activities without
barnesandnoble.com were $181.9 million. The slight decrease in retail operating
cash flows in fiscal 1998 was due to a strategic increase in the distribution
center standing inventory, the implementation of a new wage plan in fiscal 1998
and increased operating expenses associated with implementing the Company's new
store system enhancements. In fiscal 1997, the improvement in cash flows was
primarily due to the improvement in net earnings.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased $52.7 million or 23.5% to $276.9 million in fiscal 1998 from $224.2
million in fiscal 1997. Without barnesandnoble.com fiscal 1997 EBITDA was $236.9
million resulting in a retail increase in EBITDA in fiscal 1998 of 16.9%. In
addition, total debt to retail EBITDA decreased from 1.20 times in fiscal 1997
to .90 times in fiscal 1998. This significant improvement in EBITDA is the
result of the continued maturation of the Barnes & Noble stores. The
weighted-average age per square foot of the Company's 520 Barnes & Noble stores
was 3.3 years as of January 30, 1999 and is expected to increase to
approximately 3.9 years by January 29, 2000. 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 as well as capital expenditures and other initiatives. Additionally,
due to the formation of the joint venture with Bertelsmann as discussed below,
retail cash flows are now fully available to support the Company's working
capital requirements.
Capital Structure Continued strong cash flows from operations and a
continued emphasis on working capital management, once again strengthened the
Company's balance sheet in fiscal 1998. Including the effect of the Bertelsmann
contribution to barnesandnoble.com (as discussed more fully below),
shareholders' equity increased 27.7% to $678.8 million as of January 30, 1999,
from $531.8 million as of January 31, 1998, and increased 20.8% as of January
30, 1999 before the Bertelsmann contribution. Return on average equity increased
to 15.3% in fiscal 1998 from 13.1% during fiscal 1997.
The Company has an $850 million senior credit facility (the Facility),
obtained in November 1997, with a syndicate led by The Chase Manhattan Bank. The
Facility is structured as a five-year revolving credit. The Facility permits
borrowings at various interest rate options based on the prime rate or 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 Facility contains covenants, limitations and events
of default typical of credit facilities of this size and nature.
The amount outstanding under the Facility has been classified as long-term
debt in the accompanying consolidated balance sheets due to both its terms and
the Company's intent and ability to maintain principal amounts outstanding
through November 2002.
Borrowings under the Company's senior credit facilities averaged $380.3
million, $184.5 million and $186.6 million and peaked at $535.0 million, $304.9
million and $292.8 million during fiscal 1998, 1997 and 1996, respectively. The
increase in average and peak borrowings in fiscal 1998 is primarily the result
of utilizing the Facility to retire $190 million in 11-7/8% senior subordinated
notes on January 15, 1998 as well as the Company's funding of the operations of
barnesandnoble.com. As a result of this retirement and the more favorable rates
contained in the current facility as compared with the facility existing until
November 1997, interest expense decreased 35% from $37.7 million to $24.4
million. The ratio of debt to equity improved significantly to 0.37:1.00 as of
January 30, 1999 from 0.54:1.00 as of January 31, 1998.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED
Capital Investment Capital expenditures totaled $141.4 million, $121.9
million and $171.9 million during fiscal 1998, 1997 and 1996, respectively.
Capital expenditures in fiscal 1999, primarily for the opening of approximately
50 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 $100 million and $120 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.
At the Company's Annual Meeting of Stockholders held on June 3, 1998, the
Company's shareholders approved an amendment to the Company's Restated
Certificate of Incorporation to increase the number of shares of Common Stock,
par value $.001 per share, that the Company is authorized to issue, from
100,000,000 to 300,000,000.
On July 10, 1998, the Board of Directors of the Company declared a dividend
of one Preferred Share Purchase Right (a Right) for each outstanding share of
the Company's common stock (Common Stock). The distribution of the Rights was
automatically made on July 21, 1998 to stockholders of record on that date. Each
Right entitles the holder to purchase from the Company one four-hundredth of a
share of a new series of preferred stock, designated as Series H Preferred
Stock, par value $.001 per share (the Preferred Stock), at a price of $225 per
one four-hundredth of a share. For a discussion of the terms of such preferred
stock see Note 8 of Notes to Consolidated Financial Statements. The Rights will
be exercisable only if a person or group acquires 15% or more of the Company's
outstanding Common Stock or announces a tender offer or exchange offer, the
consummation of which would result in such person or group owning 15% or more of
the Company's outstanding Common Stock. For a further discussion of the terms of
the Rights see Note 8 of Notes to Consolidated Financial Statements.
Formation of barnesandnoble.com llc
- --------------------------------------------------------------------------------
On November 12, 1998, the Company and Bertelsmann completed the formation
of a joint venture to operate the online retail bookselling operations of the
Company's wholly owned subsidiary, barnesandnoble.com inc. The new entity is
structured as a limited liability company under the name barnesandnoble.com llc.
Under the terms of the relevant agreements, effective as of October 31, 1998,
the Company and Bertelsmann (through their respective subsidiaries) each have a
50% membership interest in barnesandnoble.com. barnesandnoble.com inc.
contributed substantially all of its assets and liabilities to the joint venture
and Bertelsmann paid $75 million to the Company and made a $150 million cash
contribution to the joint venture. Bertelsmann also agreed to contribute an
additional $50 million to the joint venture for future working capital
requirements. In addition, if in an initial public offering of the business of
the joint venture prior to December 31, 2001, the value of Bertelsmann's
interest exceeds the value of Bertelsmann's investment, Bertelsmann will pay the
Company such excess amount, up to $25 million. As a consequence of the above
transactions the Company has recognized a pre-tax gain during fiscal 1998 in the
amount of $126.4 million of which $63.8 million has been recognized in earnings
based on the $75 million received directly and $62.6 million ($36.4 million
after taxes) has been reflected in additional paid-in capital based on the
Company's share of the incremental equity of the joint venture resulting from
the $150 million Bertelsmann contribution.
The accompanying consolidated financial statements, in accordance with the
equity method of accounting, reflect the Company's investment in
barnesandnoble.com as a single line item in the consolidated balance sheet as of
January 30, 1999 and reflect the Company's interest in the net loss of
barnesandnoble.com as a single line item in the consolidated statement of
operations for the fiscal year ended January 30, 1999, as if the formation of
the joint venture had occurred at the beginning of the fiscal year.
Consequently, the $71.3 million equity in net loss of barnesandnoble.com shown
in the accompanying consolidated statement of operations reflects the Company's
one-hundred percent interest throughout the period ending at the date of the
formation of the joint venture, October 31, 1998, and the Company's fifty
percent interest from that point through the end of the fiscal year ending
January 30, 1999. The accompanying consolidated financial statements reflect the
financial position and results of operations of barnesandnoble.com as a
consolidated wholly owned subsidiary for all other periods presented.
In March 1999, the Company announced the filing of a registration
statement with the Securities and Exchange Commission (SEC) for an initial
public offering of Class A common stock in barnesandnoble.com inc. Prior to the
offering the Company and Bertelsmann will each own a fifty percent interest in
barnesandnoble.com inc. via high voting Class B and high voting Class C common
shares, respectively. barnesandnoble.com inc. will use the proceeds of the
offering to purchase a fifteen to twenty percent interest in barnesandnoble.com
llc. In March 1999, the limited liability company agreement was amended to also
provide for the additional $50 million cash contribution by Bertelsmann to be
made to barnesandnoble.com in the event of the completion of the initial public
offering.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED
Acquisition of Ingram Book Group
- -------------------------------------------------------------------------------
On November 6, 1998, the Company announced an agreement to purchase the
Ingram Book Group, a group of subsidiaries of privately held Ingram Industries
Inc., for $600 million, consisting of approximately $200 million in cash and
approximately $400 million in common stock of the Company. The closing of the
transaction is subject to the satisfaction of certain conditions including the
expiration of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976.
Newly Issued Accounting Pronouncements
- --------------------------------------------------------------------------------
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP
98-5). SOP 98-5 requires an entity to expense all start-up activities, as
defined, when incurred. The Company has historically amortized costs associated
with the opening of new stores over the respective store's first 12 months of
operations. In accordance with SOP 98-5, the Company will adopt its provisions
effective for the fiscal year ending January 29, 2000, and will record a
one-time charge reflecting the cumulative effect of a change in accounting
principle in the first quarter of fiscal year 1999, in an amount estimated to be
$4,500 after taxes, representing such start-up costs capitalized as of the
beginning of that fiscal year. In addition, the Company will, on a prospective
basis, expense all such start-up costs as incurred. Without consideration to the
one-time charge, the Company's consolidated financial statements issued
subsequent to fiscal year 1998 are not expected to be materially affected by the
adoption of SOP 98-5.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 is effective for
the Company's fiscal year ending January 29, 2000. Adoption is not expected to
have a material effect on the Company's consolidated financial statements as the
Company's policies are substantially in compliance with SOP 98-1.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS
133 requires companies to recognize all derivatives contracts as either assets
or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company currently plans to adopt SFAS 133 on January
30, 2000. On that date, hedging relationships will be designated anew and
documented.
The Company from time to time enters into interest rate swap agreements for
the purpose of hedging risks attributable to changing interest rates associated
with the Company's revolving credit facility, and, in general, such hedges have
been fully effective. The Company may from time to time, enter into interest
rate swaps in the future and these transactions are expected to substantially
offset the effects of changes in the underlying variable interest rates. The
Company does not believe that adoption of SFAS 133 will have a material effect
on its consolidated financial statements.
Historically, the Company has not used derivative contracts for speculative
purposes.
Year 2000
- --------------------------------------------------------------------------------
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The Company's
computer equipment and software and devices with embedded technology that are
date-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in other normal business
activities.
In 1997, the Company began assessing how it may be impacted by the Year
2000 issue and has formulated and commenced implementation of a comprehensive
plan to address all known aspects of the issue.
The Company's plan encompasses the following areas: (1) information
systems that utilize date/time oriented software (IT systems), (2) computer
chips, processors and controllers (non-IT systems), and (3) vendors and
customers. The Company is in various stages of implementation which include
remediation, testing and implementation.
To date, approximately 80% of the Company's administrative support IT
systems have at least completed the remediation phase. Of this amount,
approximately 80% have completed the testing and remediation phase and 20% have
been replaced or upgraded. All remaining Year 2000 compliance efforts for
administrative IT functions are expected to be completed by the second quarter
of fiscal 1999.
Approximately 90% of non-IT systems have completed the remediation, testing
and implementation phases with no material replacements necessary.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED
The Company has been obtaining information from major vendors, suppliers,
and service providers to determine if their systems will be Year 2000 compliant.
There has been no indication from these sources that their systems will not be
sufficiently Year 2000 compliant or that their failure to be Year 2000 compliant
will cause a significant disruption in the operations of the Company. The
Company is developing contingency plans to identify alternative sources which
are Year 2000 compliant in the event the current parties suffer significant
disruption as a result of Year 2000 compliance failures.
The Company estimates that total costs to implement its Year 2000 plan will
be between $4.0 million and $6.0 million of which $2.6 million has already been
incurred, including $1.5 million relating to the purchase of new software and
hardware modifications, and $1.1 million relating to Year 2000 consultants. The
estimated total includes direct costs for systems enhancements which would have
been implemented in the ordinary course of business but whose acquisition has
been accelerated to ensure compliance by the Year 2000. The estimate excludes
costs for scheduled system upgrades which have not been accelerated due to Year
2000 issues.
The implementation of the Company's proprietary point-of-sale system
(Bookmaster), which began in 1996, is continuing and is expected to be
completed in the second quarter of fiscal 1999. Bookmaster, which is Year 2000
compliant, is an inventory management system with integrated point-of-sale
features that utilizes a proprietary data-warehouse-based just-in-time
replenishment system. It enhances communications and real-time access to the
Company's network of stores, distribution center, and wholesalers. The
Bookmaster system has been installed in approximately 25% of all Barnes & Noble
stores. By the end of the second quarter of fiscal 1999 all existing Barnes &
Noble and B. Dalton stores will either be utilizing the Bookmaster system or
will receive Year 2000 upgrades to their existing point-of-sale systems.
Should some of the Company's systems not be available due to Year 2000
problems, in a reasonably likely worst case scenario, the Company may experience
significant delays in its ability to perform certain functions. However, the
Company does not expect an impairment in its ability to execute critical
functions.
Disclosure Regarding Forward-Looking Statements
- -------------------------------------------------------------------------------
This report may contain certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) and information
relating to the Company that are based on the beliefs of the management of the
Company as well as assumptions made by and information currently available to
the management of the Company. When used in this report, the words "anticipate,"
"believe," "estimate," "expect," "intend," "plan" and similar expressions, as
they relate to the Company 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, unanticipated adverse litigation results or
effects, 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 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.
12
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year 1998 1997 1996
(In thousands of dollars, except per share data)
- ---------------------------------------------------------------------------------------------------------------------------
Sales $ 3,005,608 2,796,852 2,448,124
Cost of sales and occupancy 2,142,717 2,019,291 1,785,392
------------ --------- ---------
Gross profit 862,891 777,561 662,732
------------ --------- ---------
Selling and administrative expenses 577,195 540,423 465,687
Depreciation and amortization 88,345 76,951 59,806
Pre-opening expenses 8,795 12,918 17,571
------------ --------- ---------
Operating profit 188,556 147,269 119,668
Interest (net of interest income of $976, $446 and $2,288,
respectively) and amortization of deferred financing fees (24,412) (37,666) (38,286)
Equity in net loss of barnesandnoble.com llc (71,334) -- --
Gain on formation of barnesandnoble.com llc 63,759 -- --
------------ --------- ---------
Earnings before provision for income taxes and
extraordinary charge 156,569 109,603 81,382
Provision for income taxes 64,193 44,935 30,157
------------ --------- ---------
Earnings before extraordinary charge 92,376 64,668 51,225
Extraordinary charge due to early extinguishment of debt,
net of tax benefits of $7,991 -- 11,499 --
------------ --------- ---------
Net earnings $ 92,376 53,169 51,225
============ ========= =========
Earnings per common share
Basic
Earnings before extraordinary charge $ 1.35 0.96 0.77
Extraordinary charge due to early extinguishment
of debt, net of tax benefits $ -- 0.17 --
Net earnings $ 1.35 0.79 0.77
Diluted
Earnings before extraordinary charge $ 1.29 0.93 0.75
Extraordinary charge due to early extinguishment of debt,
net of tax benefits $ -- 0.17 --
Net earnings $ 1.29 0.76 0.75
Weighted average common shares outstanding
Basic 68,435,000 67,237,000 66,103,000
Diluted 71,677,000 69,836,000 67,886,000
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. Barnes & Noble, Inc. 1998
13
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share data) January 30, 1999 January 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 31,081 12,697
Receivables, net 57,523 43,858
Merchandise inventories 945,073 852,107
Prepaid expenses and other current assets 54,634 68,902
----------- ---------
Total current assets 1,088,311 977,564
----------- ---------
Property and equipment:
Land and land improvements 3,197 681
Buildings and leasehold improvements 383,292 347,598
Fixtures and equipment 440,488 378,058
----------- ---------
826,977 726,337
Less accumulated depreciation and amortization 316,631 244,207
----------- ---------
Net property and equipment 510,346 482,130
----------- ---------
Intangible assets, net 86,980 90,237
Investment in barnesandnoble.com llc 82,307 --
Other noncurrent assets 39,653 41,240
----------- ---------
Total assets $ 1,807,597 1,591,171
=========== =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 498,237 459,795
Accrued liabilities 274,085 253,050
----------- ---------
Total current liabilities 772,322 712,845
----------- ---------
Long-term debt 249,100 284,800
Deferred income taxes 32,449 --
Other long-term liabilities 74,937 61,771
Shareholders' equity:
Common stock; $.001 par value; 300,000,000 shares
authorized; 68,759,111 and 67,921,830 shares issued and
outstanding, respectively 69 68
Additional paid-in capital 523,517 468,860
Retained earnings 155,203 62,827
----------- ---------
Total shareholders' equity 678,789 531,755
----------- ---------
Commitments and contingencies -- --
----------- ---------
Total liabilities and shareholders' equity $ 1,807,597 1,591,171
=========== =========
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. Barnes & Noble, Inc. 1998
14
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Additional Retained
(In thousands of dollars) Stock paid-in capital earnings (deficit) Total
- ---------------------------------------------------------------------------------------------------------------------------
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
Exercise of 837,281 common stock options,
including tax benefits of $9,002 1 18,306 -- 18,307
barnesandnoble.com llc issuance of membership
units (net of deferred income taxes of $26,325) -- 36,351 -- 36,351
Net earnings -- -- 92,376 92,376
----- ------- ------- -------
Balance at January 30, 1999 $ 69 523,517 155,203 678,789
===== ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. Barnes & Noble, Inc. 1998
15
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year 1998 1997 1996
(In thousands of dollars)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 92,376 53,169 51,225
Adjustments to reconcile net earnings to net cash flows
from operating activities:
Depreciation and amortization 88,721 78,629 61,652
Loss (gain) on disposal of property and equipment 3,291 853 (130)
Deferred taxes 14,761 11,598 6,604
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 14,031 16,350 15,663
Gain on formation of barnesandnoble.com llc (63,759) -- --
Equity in net loss of barnesandnoble.com llc 71,334 -- --
Changes in operating assets and liabilities, net (39,673) (2,884) (15,477)
--------- --------- ---------
Net cash flows from operating activities 181,082 169,214 119,537
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment (141,388) (121,903) (171,885)
Investment in barnesandnoble.com llc (75,394) -- --
Proceeds from formation of barnesandnoble.com llc 75,000 -- --
Proceeds from sales of property and equipment 10 -- 177
Net increase in other noncurrent assets (3,533) (13,177) (16,787)
--------- --------- ---------
Net cash flows from investing activities (145,305) (135,080) (188,495)
--------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in revolving credit facility (35,700) 244,800 (32,400)
Proceeds from issuance of long-term debt -- -- 100,000
Repayment of long-term debt -- (290,000) --
Proceeds from exercise of common stock options
including related tax benefits 18,307 22,597 4,529
Payment of note premium -- (11,281) --
--------- --------- ---------
Net cash flows from financing activities (17,393) (33,884) 72,129
--------- --------- ---------
Net increase in cash and cash equivalents 18,384 250 3,171
Cash and cash equivalents at beginning of year 12,697 12,447 9,276
--------- --------- ---------
Cash and cash equivalents at end of year $ 31,081 12,697 12,447
========= ========= =========
Changes in operating assets and liabilities, net:
Receivables, net $(14,012) 1,700 3,461
Merchandise inventories (93,491) (119,904) 8,148
Prepaid expenses and other current assets (1,047) 9,721 (19,502)
Accounts payable and accrued liabilities 68,877 105,599 (7,584)
--------- --------- ---------
Changes in operating assets and liabilities, net $(39,673) (2,884) (15,477)
========= ========= =========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 25,243 37,845 38,103
Income taxes $ 18,225 20,282 24,574
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. Barnes & Noble, Inc. 1998
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 52 weeks ended January 30, 1999 (fiscal 1998), the 52 weeks ended
January 31, 1998 (fiscal 1997) and the 53 weeks ended February 1, 1997 (fiscal
1996).
(In 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 "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),
and its direct-mail strategy through its wholly owned subsidiary Marboro Books
Corp. The Company is also engaged in the online retailing of books and other
products through a 50% interest in barnesandnoble.com llc (barnesandnoble.com),
as more fully described in Note 5. The Company's interest in barnesandnoble.com
is through its wholly owned subsidiary B&N.com Holding Corp.
Consolidation
The consolidated financial statements include the accounts of Barnes &
Noble and its wholly owned subsidiaries. Investments in affiliates that are 20%
to 50% owned, principally barnesandnoble.com, are accounted for using the equity
method. The Company's investment in barnesandnoble.com has been presented in the
accompanying consolidated financial statements under the equity method as of the
beginning of fiscal 1998 and as a consolidated wholly owned subsidiary for all
of fiscal 1997. 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 86% and 83% of the Company's merchandise inventories as of
January 30, 1999 and January 31, 1998, 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 remain
unchanged as of January 30, 1999, and would have increased approximately $5,102
as of January 31, 1998.
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. In March 1998, the Accounting Standards Executive Committee
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1). This statement is
effective for the Company's fiscal year ending January 29, 2000. Adoption is not
expected to have a material effect on the Company's consolidated financial
statements as the Company's policies are substantially in compliance with SOP
98-1. 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 $59,365 and $27,615 as of January 30, 1999, and
$61,484 and $28,753 as of January 31, 1998, 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, $3,257 and $3,305 during fiscal 1998, 1997 and 1996, respectively.
Accumulated amortization at January 30, 1999 and January 31, 1998 was $44,551
and $41,294, respectively.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED BARNES & NOBLE, INC. 1998
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 30, 1999 and January 31, 1998 were $1,397 and $1,764,
respectively. Unamortized costs of $8,209 were included in the extraordinary
loss due to the early extinguishment of debt for fiscal 1997. Amortization
expense included in interest and amortization of deferred financing fees is
$376, $1,678 and $1,846 during fiscal 1998, 1997 and 1996 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
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP
98-5). SOP 98-5 requires an entity to expense all start-up activities, as
defined, when incurred. The Company has historically amortized costs associated
with the opening of new stores over the respective store's first 12 months of
operations. In accordance with SOP 98-5, the Company will adopt its provisions
effective for the fiscal year ending January 29, 2000, and will record a one
time non-cash charge reflecting the cumulative effect of a change in accounting
principle in the first quarter of fiscal year 1999, in an amount estimated to be
$4,500 after taxes, representing such start-up costs capitalized as of the
beginning of that fiscal year. In addition, the Company will, on a prospective
basis, expense all such start-up costs as incurred. Excluding the one time
charge, the Company's consolidated financial statements are not expected to be
materially affected by the adoption of SOP 98-5.
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 $1,208 during fiscal 1998 are included in selling and administrative
expenses in the accompanying consolidated statements of operations.
Net Earnings Per Common Share
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding.
Diluted earnings per share reflect, in periods in which they have a dilutive
effect, the impact of common shares issuable upon exercise of stock options.
Income Taxes
The provision 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." Generally, compensation expense is
not recognized for stock option grants.
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
30, 1999, January 31, 1998 and February 1, 1997 contained 52 weeks, 52 weeks and
53 weeks, respectively.
2. Receivables, Net
Receivables represent customer, bankcard, landlord and other receivables
due within one year as follows:
January 30, 1999 January 31, 1998
- -------------------------------------------------------------------------------
Trade accounts $ 6,743 6,628
Bankcard receivables 19,421 15,536
Receivables from landlords for
leasehold improvements 23,659 16,715
Other receivables 7,700 4,979
-------- ------
Total receivables, net $ 57,523 43,858
======== ======
- -------------------------------------------------------------------------------
3. Debt
On November 18, 1997, the Company obtained an $850,000 five-year senior
revolving credit facility (the Revolving Credit Facility) with a syndicate led
by The Chase Manhattan Bank. The Revolving Credit Facility refinanced an
existing
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED BARNES & NOBLE, INC. 1998
$450,000 revolving credit and $100,000 term loan facility (the Old Facility).
The Revolving Credit 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 Revolving Credit 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 Revolving Credit Facility is secured by the capital stock,
accounts receivable and general intangibles of the Company's subsidiaries.
Net proceeds from the Revolving Credit 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. As of January 30, 1999 and 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 $440 and $306
during fiscal years 1998 and 1997, respectively.
Selected information related to the Company's revolving credit facility is
as follows:
Fiscal Year 1998 1997 1996
- -------------------------------------------------------------------------------
Balance at end of year $ 249,100 284,800 40,000
Average balance
outstanding during
the year $ 380,315 105,127 101,671
Maximum borrowings
outstanding during
the year $535,000 304,900 192,800
Weighted average
interest rate during
the year 6.29% 7.12% 7.56%
Interest rate at end
of year 5.77% 6.60% 6.87%
- -------------------------------------------------------------------------------
Fees expensed with respect to the unused portion of the Company's
revolving credit commitment were $733, $1,204 and $911, during fiscal 1998,
1997 and 1996, respectively.
The amounts outstanding under the Company's Revolving Credit Facility of
$249,100 and $284,800 as of January 30, 1999 and January 31, 1998, respectively,
have 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.
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 approximates its
carrying amount, because of its recent and frequent repricing based upon market
conditions. Interest rate swap agreements are valued based on market quotes
obtained from dealers. The Company also maintains an investment in Chapters
Inc., a Canadian book retailer. The fair value of the investment in Chapters
Inc. is based on quoted market prices and conversion rates at January 30, 1999
and January 31, 1998.
The carrying amounts and fair values of the Company's financial
instruments as of January 30, 1999 and January 31, 1998 are as follows:
January 30, 1999 January 31, 1998
- -------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -------------------------------------------------------------------------------
Cash and cash
equivalents $ 31,081 31,081 12,697 12,697
Revolving credit
facility $249,100 249,100 284,800 284,800
Interest rate swaps
liability $ -- 2,189 -- 1,463
Investment in
Chapters Inc. $ 18,827 33,201 17,686 31,445
- -------------------------------------------------------------------------------
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED BARNES & NOBLE, INC.1998
5. Formation of barnesandnoble.com llc
On November 12, 1998, the Company and Bertelsmann AG (Bertelsmann)
completed the formation of a limited liability company to operate the online
retail bookselling operations of the Company's wholly owned subsidiary,
barnesandnoble.com inc. The new entity is structured as a limited liability
company under the name barnesandnoble.com llc. Under the terms of the relevant
agreements, effective as of October 31, 1998, the Company and Bertelsmann each
have a 50% membership interest in barnesandnoble.com. The Company contributed
substantially all of the assets and liabilities of its online operations to the
joint venture and Bertelsmann paid $75,000 to the Company and made a $150,000
cash contribution to the joint venture. Bertelsmann also agreed to contribute an
additional $50,000 to the joint venture for future working capital requirements.
In addition, if in an initial public offering (see below) of barnesandnoble.com
prior to December 31, 2001, the value of Bertelsmann's interest exceeds the
value of Bertelsmann's investment, Bertelsmann will pay the Company such excess
amount, up to $25,000. As a consequence of the above transactions the Company
has recognized a pre-tax gain during fiscal 1998 in the amount of $126,435, of
which $63,759 has been recognized in earnings based on the $75,000 received
directly from Bertelsmann and $62,676 ($36,351 after taxes) has been reflected
in additional paid-in capital based on the Company's share of the incremental
equity of the joint venture resulting from the $150,000 Bertelsmann
contribution.
Summarized financial information for barnesandnoble.com follows:
Fiscal Year 1998 1997(1)
- --------------------------------------------------------------------------------
Net sales $ 70,249 14,601
Gross profit $ 16,169 2,849
Loss before taxes $(85,590) (15,395)
Current assets $102,114 12,197
Noncurrent asset $ 89,324 24,879
Current liabilities $ 26,824 12,268
Net assets $164,614 24,808
Barnes & Noble's equity in loss
before taxes $(71,334) (15,395)
Barnes & Noble's equity in net
assets $ 82,307 24,808
- --------------------------------------------------------------------------------
(1) Fiscal 1997 represents amounts as consolidated in the accompanying
consolidated financial statements.
6. Employees' Retirement and Defined Contribution Plans
The Company maintains a noncontributory defined benefit pension plan (the
Pension Plan) and a defined contribution plan (the Savings Plan) for the benefit
of substantially all employees. In addition, the Company provides certain health
care and life insurance benefits (the Postretirement Plan) to retired employees,
limited to those receiving benefits or retired as of April 1, 1993.
A summary of the components of net periodic pension cost for the Pension
Plan and other postretirement benefit cost for the Postretirement Plan follows:
Pension Plan Postretirement Plan
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal Year 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Service cost $ 4,157 3,294 2,542 -- -- --
Interest cost 2,039 1,666 1,354 149 315 326
Expected return on plan assets (2,208) (1,803) (1,500) -- -- --
Net amortization and deferral 36 36 36 (135) -- --
-------- ------ ------ ---- ---- ----
Net periodic cost $ 4,024 3,193 2,432 14 315 326
======== ====== ====== ==== ==== ====
Total Company contributions charged to employee benefit expenses for the
Savings plan were $3,090, $2,545 and $2,115 during fiscal 1998, 1997 and 1996,
respectively.
Weighted-average actuarial assumptions used in determining the net periodic
pension and other post retirement benefit costs and the funded status of the
Pension Plan and the Postretirement Plan are as follows:
Pension Plan Postretirement Plan
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal Year 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Discount rate 7.3% 7.3% 7.5% 7.3% 7.3% 7.5%
Expected return on plan assets 9.5% 9.5% 9.5% -- -- --
Assumed rate of compensation increase 4.3% 4.3% 4.0% -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
As a result of the formation of barnesandnoble.com llc, as more fully
described in Note 5, assets of the Pension Plan and an equivalent benefit
obligation, were transferred to barnesandnoble.com's defined benefit pension
plan as of the date of the formation.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED BARNES & NOBLE, INC.1998
The following table provides a reconciliation of benefit obligations, plan
assets and funded status of the Pension Plan and the Postretirement Plan:
Pension Plan Postretirement Plan
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal Year 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $30,734 21,378 1,975 4,349
Service cost 4,157 3,294 -- --
Interest cost 2,039 1,666 149 315
Transfer to barnesandnoble.com (642) -- -- --
Actuarial (gain) loss (2,427) 5,752 136 (2,544)
Benefits paid (797) (1,356) (115) (145)
------- ------- ------ ------
Benefit obligation at end of year 33,064 30,734 2,145 1,975
------- ------- ------ ------
Change in plan assets:
Fair value of plan assets at beginning of year 22,909 18,565 -- --
Actual return on assets 2,255 4,165 -- --
Employer contributions 1,395 1,535 -- --
Benefits paid (797) (1,356) -- --
Transfer to barnesandnoble.com (431) -- -- --
------- ------- ------ ------
Fair value of plan assets at end of year 25,331 22,909 -- --
------- ------- ------ ------
Funded status (7,733) (7,825) (2,145) (1,975)
Unrecognized net actuarial loss (gain) 805 3,490 (2,136) (2,407)
Unrecognized prior service cost (183) (201) -- --
Unrecognized net obligation remaining 166 220 -- --
------- ------- ------ ------
Accrued Benefit Cost $(6,945) (4,316) (4,281) (4,382)
======= ======= ====== ======
The health care cost trend rate used to measure the expected cost of the
Postretirement Plan benefits is assumed to be 7.5% in 1999, 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 or decrease in the health care
cost trend rate would change the accumulated postretirement benefit obligation
by approximately $215 and $195, respectively, as of January 30, 1999, and would
change the net periodic cost by approximately $15 and $14, respectively, during
fiscal 1998.
7. Income Taxes
The Company files a consolidated federal return. Federal and state
income tax provisions for fiscal 1998, 1997 and 1996 are as follows:
Fiscal Year 1998 1997 1996
- --------------------------------------------------------------------------------
Current:
Federal $ 39,286 26,324 18,413
State 10,146 7,013 5,140
-------- ------ ------
49,432 33,337 23,553
-------- ------ ------
Deferred:
Federal 11,697 9,575 5,300
State 3,064 2,023 1,304
-------- ------ ------
14,761 11,598 6,604
-------- ------ ------
Total $ 64,193 44,935 30,157
======== ====== ======
A reconciliation between the provision for income taxes and the expected
provision for income taxes at the federal statutory rate of 35% during fiscal
1998, 1997 and 1996, is as follows:
Fiscal Year 1998 1997 1996
- --------------------------------------------------------------------------------
Expected provision for
income taxes at federal
statutory rate $ 54,799 38,361 28,484
Amortization of goodwill
and trade names 1,251 1,140 1,157
State income taxes, net of
federal income tax benefit 8,596 5,873 3,341
Rehabilitation tax credit -- -- (2,974)
Other, net (453) (439) 149
-------- ------ -------
Provision for income taxes $ 64,193 44,935 30,157
======== ====== =======
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED BARNES & NOBLE, INC.1998
The tax effects of temporary differences that give rise to significant
components of the Company's deferred tax assets and liabilities as of January
30, 1999 and January 31, 1998 are as follows:
January 30, 1999 January 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Operating expenses $(12,528) (10,103)
Depreciation (29,829) (16,359)
barnesandnoble.com (26,325) --
-------- --------
Total deferred tax liabilities (68,682) (26,462)
-------- --------
Deferred tax assets:
Inventory 4,043 6,604
Lease transactions 15,025 16,108
Reversal of estimated accruals 5,692 5,418
Restructuring charge 16,931 21,825
Insurance liability 2,502 2,265
Deferred income 11,411 7,058
Other 5,632 824
-------- --------
Total deferred tax assets 61,236 60,102
-------- --------
Net deferred tax assets (liabilities) $(7,446) 33,640
======== ========
8. Shareholders' Equity
At the Company's Annual Meeting of Stockholders held on June 3, 1998, the
Company's shareholders approved an amendment to the Company's Restated
Certificate of Incorporation to increase the number of shares of Common Stock,
par value $.001 per share, that the Company is authorized to issue from
100,000,000 to 300,000,000.
As discussed more fully in Note 5, shareholders' equity as of January 30,
1999 includes an increase in additional paid-in capital of $36,351 as a result
of the formation of barnesandnoble.com llc.
On July 10, 1998, the Board of Directors of the Company declared a dividend
of one Preferred Share Purchase Right (a Right) for each outstanding share of
the Company's common stock (Common Stock). The distribution of the Rights was
made on July 21, 1998 to stockholders of record on that date. Each Right
entitles the holder to purchase from the Company one four-hundredth of a share
of a new series of preferred stock, designated as Series H Preferred Stock, at a
price of $225 per one four-hundredth of a share. The Rights will be exercisable
only if a person or group acquires 15% or more of the Company's outstanding
Common Stock or announces a tender offer or exchange offer, the consummation of
which would result in such person or group owning 15% or more of the Company's
outstanding Common Stock.
If a person or group acquires 15% or more of the Company's outstanding
Common Stock, each Right will entitle a holder (other than such person or any
member of such group) to purchase, at the Right's then current exercise price, a
number of shares of Common Stock having a market value of twice the exercise
price of the Right. In addition, if the Company is acquired in a merger or other
business combination transaction or 50% or more of its consolidated assets or
earning power are sold at any time after the Rights have become exercisable,
each Right will entitle its holder to purchase, at the Right's then current
exercise price, a number of the acquiring company's common shares having a
market value at that time of twice the exercise price of the Right. Furthermore,
at any time after a person or group acquires 15% or more of the outstanding
Common Stock of the Company but prior to the acquisition of 50% of such stock,
the Board of Directors may, at its option, exchange part or all of the Rights
(other than Rights held by the acquiring person or group) at an exchange rate of
one four-hundredth of a share of Series H Preferred Stock or one share of the
Company's Common Stock for each Right.
The Company will be entitled to redeem the Rights at any time prior to the
acquisition by a person or group of 15% or more of the outstanding Common Stock
of the Company, at a price of $.01 per Right. The Rights will expire on July 20,
2008.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED BARNES & NOBLE, INC.1998
The Company has 5,000,000 shares of $.001 par value preferred stock
authorized for issuance, of which 250,000 shares have been designated by the
Board of Directors as Series H Preferred Stock and reserved for issuance upon
exercise of the Rights. Each such share of Series H Preferred Stock will be
nonredeemable and junior to any other series of preferred stock the Company may
issue (unless otherwise provided in the terms of such stock) and will be
entitled to a preferred dividend equal to the greater of $2.00 per share or 400
times any dividend declared on the Company's Common Stock. In the event of
liquidation, the holders of Series H Preferred Stock will receive a preferred
liquidation payment of $1,000 per share, plus an amount equal to accrued and
unpaid dividends and distributions thereon. Each share of Series H Preferred
Stock will have 400 votes, voting together with the Company's Common Stock.
However, in the event that dividends on the Series H Preferred Stock shall be in
arrears in an amount equal to six quarterly dividends thereon, holders of the
Series H Preferred Stock shall have the right, voting as a class, to elect two
of the Company's Directors, whose terms shall extend until such time when all
accrued and unpaid dividends for all previous quarterly dividend periods and for
the current quarterly dividend period on all shares of Series H Preferred Stock
then outstanding shall have been declared and paid or set apart for payment. In
the event of any merger, consolidation or other transaction in which the
Company's Common Stock is exchanged, each share of Series H Preferred Stock will
be entitled to receive 400 times the amount and type of consideration received
per share of the Company's Common Stock. As of January 30, 1999, there were no
shares of Series H Preferred Stock outstanding.
9. Restructuring Charge
From 1989 through 1995, the Company closed, on average, between 40 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 the fourth quarter of fiscal 1995, 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:
Lease
Provision for Termination
Store Closing Costs Other Total
- --------------------------------------------------------------------------------
Balance at
January 27, 1996 $5,974 32,833 6,099 44,906
Fiscal 1996
Activity 4,442 2,371 4,497 11,310
------ ------- ------ ------
Balance at
February 1, 1997 1,532 30,462 1,602 33,596
Fiscal 1997 Activity 1,532 9,026 1,602 12,160
------ ------- ------ ------
Balance at
January 31, 1998 -- 21,436 -- 21,436
Fiscal 1998 Activity -- 12,968 -- 12,968
------ ------- ------ ------
Balance at
January 30, 1999 $ -- 8,468 -- 8,468
====== ======= ====== ======
The remaining liability, representing outstanding lease liabilities, is
expected to be paid out over the next several years.
10. 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.
At the Company's Annual Meeting of Stockholders held on June 3, 1998, the
Company's shareholders approved an amendment to the 1996 Plan increasing the
number of shares available for issuance from 6,000,000 to 11,000,000. The 1991
Plan allows the Company to grant options to purchase up to 4,732,704 shares of
common stock.
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.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED BARNES & NOBLE, INC.1998
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 1998, 1997 and 1996, would have been reduced by approximately $6,188
or $0.09 per share, $3,863 or $0.06 per share, and $5,305 or $0.08 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 1998,
1997 and 1996 were estimated at $12.96, $8.05, and $4.66 respectively, using the
Black-Scholes option-pricing model with the following assumptions: volatility of
35% for fiscal 1998 grants, 28% for fiscal 1997 and 1996 grants, risk-free
interest rate of 5.33% in fiscal 1998, 6.54% in fiscal 1997, and 6.63% in fiscal
1996, and an expected life of 5.4 years for fiscal 1998 and 6.0 years for fiscal
1997 and 1996.
A summary of the status of the Company's stock options is presented below:
Weighted-Average
(In thousands of shares) Shares Exercise Price
- --------------------------------------------------------------------------------
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
Granted 1,841 31.12
Exercised (837) 11.11
Forfeited (390) 22.35
-------
Balance, January 30, 1999 10,278 $19.69
=======
Options exercisable as of January 30, 1999, January 31, 1998 and February
1, 1997 were 6,780,000, 6,558,000 and 7,070,000, respectively. Options available
for grant under the plans were 5,902,000, 2,354,000 and 4,422,000 at January 30,
1999, January 31, 1998 and February 1, 1997, respectively.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED BARNES & NOBLE, INC.1998
The following table summarizes information as of January 30, 1999
concerning outstanding and exercisable options:
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------------
Range of Number Weighted- Weighted- Number Weighted-
Exercise Outstanding Average Remaining Average Exercisable Average
Prices (000s) Contractural Life Exercise Price (000s) Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
$ 3.21- $ 3.77 818 4.38 $ 3.59 818 $ 3.59
$ 10.00- $15.00 5,384 4.98 $ 12.11 5,275 $ 12.08
$ 17.13- $24.25 2,870 8.42 $ 19.93 665 18.67
$ 26.50- $34.75 1,206 9.07 $ 34.30 22 28.92
------ -----
$ 3.21-$34.75 10,278 6.37 $ 16.22 6,780 $ 11.76
====== =====
11. 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 2028 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 1998 1997 1996
- --------------------------------------------------------------------------------
Minimum rentals $ 271,201 253,472 222,700
Percentage rentals 3,183 3,216 2,750
--------- ------- -------
$ 274,384 256,688 225,450
========= ======= =======
Future minimum annual rentals, excluding percentage rentals, required under
leases that had initial, noncancelable lease terms greater than one year, as of
January 30, 1999 are:
Fiscal Year
- --------------------------------------------------------------------------------
1999 $ 271,769
2000 264,027
2001 261,090
2002 247,781
2003 228,481
After 2003 1,577,713
----------
$2,850,861
==========
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.
12. Litigation
In March 1998, the American Booksellers Association (ABA) and 26
independent bookstores filed a lawsuit in the United States District Court for
the Northern District of California against the Company and Borders Group Inc.
(Borders) alleging violations of the Robinson-Patman Act, the California Unfair
Trade Practice Act and the California Unfair Competition Law. The Complaint
seeks injunctive and declaratory relief; treble damages on behalf of each of the
bookstore plaintiffs, and, with respect to the California bookstore plaintiffs,
any other damages permitted by California law; disgorgement of money, property
and gains wrongfully obtained in connection with the purchase of books for
resale, or offered for resale, in California from March 18, 1994 until the
action is completed and pre-judgment interest on any amounts awarded in the
action, as well as attorney fees and costs. In November 1998, six other
independent booksellers instituted an action in the same court against the same
defendants asserting similar claims and seeking similar relief. The Company
intends to vigorously defend both actions.
In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace Kuralt,
filed a lawsuit in the United States District Court for the Southern District of
New York against the Company, Borders, Amazon.com, Inc., certain publishers and
others alleging violation of the Robinson-Patman Act and other federal law, New
York statutes governing trade practices and common law. The Complaint seeks
certification of a class consisting of all retail booksellers in the United
States, whether or not currently in business, which were in business and were
members of the ABA at any time during the four year period preceding the filing
of the Complaint. The Complaint alleges that the named plaintiffs have suffered
damages of $11.25 million or more and requests treble damages on behalf of the
named plaintiffs and each of the purported class members, as well as of
injunctive and declaratory relief (including an injunction requiring the closure
of all of defendants' stores within 10 miles of any location where plaintiff
either has or had a retail bookstore during the four years preceding the filing
of the Complaint, and prohibiting the opening by defendants of any bookstore in
such areas for the next 10 years), disgorgement of alleged discriminatory
discounts, rebates, deductions and
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED BARNES & NOBLE, INC.1998
payments, punitive damages, interest, costs, attorneys fees and other relief.
Many of the allegations in the Complaint are similar to those contained in the
action instituted by the ABA and 26 bookseller plaintiffs against the Company in
March of 1998. The Company intends to vigorously defend the action.
In November 1998, a former bookstore chain in Texas which has filed for
bankruptcy protection, filed an amended complaint in an action in the Bankruptcy
Court for the Northern District of Texas against the Company alleging various
antitrust and related claims. Among other things, the plaintiff alleges that the
Company conspired with national book publishers to obtain lower prices and to
monopolize the Dallas/Fort Worth book retail market. The plaintiff is seeking
$11 million in actual damages, plus treble damages, punitive damages, and
attorneys' fees. The Company intends to vigorously defend this action.
In addition to the above actions, 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.
13. 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 $1,316, $1,309 and $1,307 in fiscal years 1998, 1997 and
1996, 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
$737, $743 and $665 in fiscal years 1998, 1997 and 1996, 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 $12,571, $11,528 and $9,100 for such
services during fiscal years 1998, 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 $725, $634 and $544 for the fiscal years ended January 30,
1999, 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 operating costs it incurred on behalf of
the Company. These charges are included in the accompanying consolidated
statements of operations and approximated $48, $75 and $115 for fiscal 1998,
1997 and 1996, respectively. The Company charged B&N College $972 and $473 for
fiscal years ended January 30, 1999 and January 31, 1998, respectively, 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
$1,760, $1,910 and $1,685 during fiscal 1998, fiscal 1997 and fiscal 1996,
respectively, and are included in the accompanying consolidated statements of
operations.
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 30, 1999 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, $1,396, $1,430 and $1,282 during fiscal 1998,
1997 and 1996, respectively, for such services, license fees, rent, operating
costs, insurance costs and benefits coverage. Babbages also purchases
merchandise from the Company at prices equal to the Company's cost to obtain and
ship the merchandise.
barnesandnoble.com purchased $33,444 and $4,997 of merchandise from the
Company during fiscal 1998 and 1997, respectively, and barnesandnoble.com
expects to source most of its purchases through the Company in the future. The
Company has entered into an agreement (the Supply Agreement) with
barnesandnoble.com whereby the Company charges barnesandnoble.com the costs
associated with such purchases plus incremental overhead incurred by the Company
in connection with providing such inventory. The Supply Agreement is subject to
certain termination provisions.
The Company has entered into agreements (the Service Agreements) whereby
barnesandnoble.com receives various services from the Company, including, among
others, services
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED BARNES & NOBLE, INC.1998
for payroll processing, benefits administration, insurance (property and
casualty, medical, dental and life), tax, traffic, fulfillment and
telecommunications. In accordance with the terms of such agreements the Company
has received, and expects to continue to receive, fees in an amount equal to the
direct costs plus incremental expenses associated with providing such services.
The Company received $856 and $250 for such services during fiscal 1998 and
1997, respectively.
14. Selected Quarterly Financial Information (Unaudited)
A summary of quarterly financial information for each of the last two
fiscal years is as follows:
Fiscal 1998 Quarter End April July October January Total Fiscal
On or About 1998 1998 1998 1999 Year 1998
- ---------------------------------------------------------------------------------------------------------------------------
Sales $656,976 662,507 656,837 1,029,288 3,005,608
Gross profit 172,387 179,844 182,967 327,693 862,891
Equity in net loss of
barnesandnoble.com llc(1) (13,603) (23,003) (20,472) (14,256) (71,334)
Net earnings (loss)(2) (3,335) (5,709) (4,596) 106,016 92,376
Basic earnings (loss) per common share (0.05) (0.08) (0.07) 1.54 1.35
Diluted earnings (loss) per common share (0.05) (0.08) (0.07) 1.47 1.29
Fiscal 1997 Quarter End April July October January Total Fiscal
On or About 1997 1997 1997 1998 Year 1997
- ---------------------------------------------------------------------------------------------------------------------------
Sales $595,731 617,748 614,831 968,542 2,796,852
Gross profit 147,514 158,813 164,514 306,720 777,561
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 (loss) 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 (loss) 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
- ---------------------------------------------------------------------------------------------------------------------------
(1) As a result of the formation of barnesandnoble.com llc on October 31, 1998,
each quarter of fiscal 1998 presents the Company's equity in net loss of
barnesandnoble.com llc as a separate line item in accordance with the
equity method of accounting. Accordingly, the first three quarters of
fiscal 1998 reflect the Company's one-hundred percent equity in net losses
of barnesandnoble.com and the fourth quarter reflects the Company's fifty
percent interest in the net losses of barnesandnoble.com. Fiscal 1997
reflects the operations of barnesandnoble.com as a consolidated wholly
owned subsidiary for each quarter presented.
(2) Included in net earnings for the fourth quarter of fiscal 1998 is a pre-tax
gain on the formation of barnesandnoble.com llc of $63,759 ($37,618 after
tax) or $0.55 and $0.52 per basic and diluted common share, respectively.
27
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 30, 1999 and January 31, 1998 and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the fiscal years ended January 30, 1999, January 31, 1998,
and February 1, 1997, 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 30, 1999 and January 31, 1998 and
the results of their operations and their cash flows for the fiscal years ended
January 30, 1999, January 31, 1998 and February 1, 1997, in conformity with
generally accepted accounting principles.
New York, New York
March 10, 1999
/s/ BDO Seidman, LLP
BDO Seidman, LLP
28