1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 5, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File Number: 1-12302
BARNES & NOBLE, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1196501
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
122 Fifth Avenue, New York, NY 10011
---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(212) 633-3300
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Number of shares of $.001 par value common stock outstanding as of May 31, 2001:
65,649,017.
2
BARNES & NOBLE, INC. AND SUBSIDIARIES
May 5, 2001
Index to Form 10-Q
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations - For the 13 weeks ended
May 5, 2001 and April 29, 2000........................................ 3
Consolidated Balance Sheets - May 5, 2001, April 29, 2000 and
February 3, 2001...................................................... 4
Consolidated Statement of Changes in Shareholders' Equity - May 5, 2001... 6
Consolidated Statements of Cash Flows - For the 13 weeks ended
May 5, 2001 and April 29, 2000........................................ 7
Notes to Consolidated Financial Statements................................ 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk................ N/A
PART II - OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 18
Item 2. Changes in Securities and Use of Proceeds................................. 18
Item 6. Exhibits and Reports on Form 8-K.......................................... 19
3
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(thousands of dollars, except per share data)
(unaudited)
- ------------------------------------------------------------------------------------
13 weeks ended
-----------------------------
May 5, 2001 April 29, 2000
----------- --------------
Sales $ 1,009,637 894,256
Cost of sales and occupancy 750,586 654,167
----------- ----------
Gross profit 259,051 240,089
----------- ----------
Selling and administrative expenses 210,170 182,779
Depreciation and amortization 36,723 33,005
Pre-opening expenses 825 1,483
----------- ----------
Operating profit 11,333 22,822
Interest (net of interest income of $468 and $131,
respectively) and amortization of deferred
financing fees (11,277) (9,773)
Equity in net loss of Barnes & Noble.com (14,315) (17,598)
Other expense, net (5,385) (2,534)
----------- ----------
Loss before benefit for income taxes (19,644) (7,083)
Benefit for income taxes (8,152) (2,939)
----------- ----------
Net loss $ (11,492) (4,144)
=========== ==========
Loss per common share
Basic $ (0.18) (0.06)
Diluted $ (0.18) (0.06)
Weighted average common shares outstanding
Basic 65,205,000 64,203,000
Diluted 65,205,000 64,203,000
See accompanying notes to consolidated financial statements.
3
4
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(thousands of dollars, except per share data)
May 5, April 29, February 3,
2001 2000 2001
---------- ---------- ----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 47,670 18,947 26,003
Receivables, net 78,011 58,421 84,505
Merchandise inventories 1,255,573 1,162,097 1,238,618
Prepaid expenses and other current assets 108,525 49,898 106,127
---------- ---------- ----------
Total current assets 1,489,779 1,289,363 1,455,253
---------- ---------- ----------
Property and equipment:
Land and land improvements 3,247 3,247 3,247
Buildings and leasehold improvements 402,760 415,144 436,289
Fixtures and equipment 657,142 582,274 682,444
---------- ---------- ----------
1,063,149 1,000,665 1,121,980
Less accumulated depreciation and amortization 518,238 447,335 555,760
---------- ---------- ----------
Net property and equipment 544,911 553,330 566,220
---------- ---------- ----------
Intangible assets, net 355,063 299,386 359,192
Investment in Barnes & Noble.com 122,280 222,933 136,595
Other noncurrent assets 46,044 62,354 40,216
---------- ---------- ----------
Total assets $2,558,077 2,427,366 2,557,476
========== ========== ==========
(Continued)
4
5
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(thousands of dollars, except per share data)
May 5, April 29, February 3,
2001 2000 2001
---------- ---------- ----------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 559,605 589,835 582,075
Accrued liabilities 259,856 221,132 353,000
---------- ---------- ----------
Total current liabilities 819,461 810,967 935,075
---------- ---------- ----------
Long-term debt 790,000 597,400 666,900
Deferred income taxes 72,432 121,249 74,289
Other long-term liabilities 102,907 90,484 103,535
Shareholders' equity:
Common stock; $.001 par value; 300,000,000
shares authorized; 70,995,594, 69,612,037
and 70,549,176 shares issued, respectively 71 70 71
Additional paid-in capital 682,831 655,510 673,122
Accumulated other comprehensive loss (8,491) (6,494) (5,874)
Retained earnings 216,243 275,557 227,735
Treasury stock, at cost, 5,504,700 shares (117,377) (117,377) (117,377)
---------- ---------- ----------
Total shareholders' equity 773,277 807,266 777,677
---------- ---------- ----------
Commitments and contingencies -- -- --
---------- ---------- ----------
Total liabilities and shareholders' equity $2,558,077 2,427,366 2,557,476
========== ========== ==========
See accompanying notes to consolidated financial statements.
5
6
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
(thousands of dollars, except per share data)
(unaudited)
Accumulated
Additional Other Treasury
Common Paid-In Comprehensive Retained Stock at
Stock Capital Losses Earnings Cost Total
-------- -------- ------- --------- --------- --------
Balance at February 3, 2001 $ 71 $673,122 $(5,874) $ 227,735 $(117,377) $777,677
-------- -------- ------- --------- --------- --------
Comprehensive loss:
Net loss -- -- -- (11,492) --
Other comprehensive loss:
Unrealized loss on
available-for-sale securities
(net of deferred tax benefit
of $1,396) -- -- (1,968) -- --
Unrealized loss on derivative
instrument (net of deferred
tax benefit of $462) -- -- (649) -- --
Total comprehensive loss (14,109)
Exercise of 446,418 common stock
options (net of deferred tax benefit
of $1,740) -- 9,709 -- -- -- 9,709
-------- -------- ------- --------- --------- --------
Balance at May 5, 2001 $ 71 $682,831 $(8,491) $ 216,243 $(117,377) $773,277
======== ======== ======= ========= ========= ========
See accompanying notes to consolidated financial statements.
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7
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(thousands of dollars)
(unaudited)
- ----------------------------------------------------------------------------------------------
13 weeks ended
----------------------------
May 5, 2001 April 29,2000
----------- -------------
Cash flows from operating activities:
Net loss $ (11,492) (4,144)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization (including amortization of
deferred financing fees) 37,144 33,313
Loss on disposal of property and equipment 671 108
Increase in other long-term liabilities for scheduled rent
increases in long-term leases 2,238 2,541
Other expense, net 5,385 2,534
Equity in net loss of Barnes & Noble.com 14,315 17,598
Changes in operating assets and liabilities, net (135,208) (164,874)
--------- ---------
Net cash flows from operating activities (86,947) (112,924)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (12,982) (15,823)
Proceeds from the partial sale of Chapters Inc. 6,072 --
Acquisition of consolidated subsidiary (3,555) --
Purchase of investments (2,500) (8,000)
Net increase in other noncurrent assets (9,490) (4,513)
--------- ---------
Net cash flows from investing activities (22,455) (28,336)
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in revolving credit facility (176,900) 165,800
Proceeds from issuance of long-term debt 300,000 --
Proceeds from exercise of common stock options 7,969 740
Purchase of treasury stock through repurchase program -- (30,580)
--------- ---------
Net cash flows from financing activities 131,069 135,960
--------- ---------
Net increase (decrease) in cash and cash equivalents 21,667 (5,300)
Cash and cash equivalents at beginning of period 26,003 24,247
--------- ---------
Cash and cash equivalents at end of period $ 47,670 18,947
========= =========
Changes in operating assets and liabilities, net:
Receivables, net $ 6,494 (181)
Merchandise inventories (16,955) (59,644)
Prepaid expenses and other current assets (2,398) 6,681
Accounts payable and accrued liabilities (122,349) (111,730)
--------- ---------
Changes in operating assets and liabilities, net $(135,208) (164,874)
========= =========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 9,304 4,590
Income taxes $ 27,540 36,632
Supplemental disclosure of subsidiaries acquired:
Assets acquired $ 3,555
Liabilities assumed --
---------
Cash $ 3,555
=========
See accompanying notes to consolidated financial statements.
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8
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements For the
13 weeks ended May 5, 2001 and April 29, 2000
(thousands of dollars, except per share data)
(unaudited)
The unaudited consolidated financial statements include the accounts of Barnes &
Noble, Inc. and its wholly and majority-owned subsidiaries (collectively, the
Company).
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly its consolidated
financial position as of May 5, 2001 and the results of its operations and its
cash flows for the 13 weeks then ended. These consolidated financial statements
are condensed and therefore do not include all of the information and footnotes
required by generally accepted accounting principles. The consolidated financial
statements should be read in conjunction with the Company's annual report on
Form 10-K for the 53 weeks ended February 3, 2001 (fiscal 2000). The Company
follows the same accounting policies in preparation of interim reports.
Due to the seasonal nature of the business, the results of operations for the 13
weeks ended May 5, 2001 are not indicative of the results to be expected for the
52 weeks ending February 2, 2002.
(1) Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market. Cost
is determined using the retail inventory method on the first-in, first-out
(FIFO) basis for 82 percent, 83 percent and 82 percent of the Company's
merchandise inventories as of May 5, 2001, April 29, 2000 and February 3, 2001,
respectively. Merchandise inventories of Babbage's Etc. LLC and GameStop, Inc.
(f/k/a Funco, Inc.) (Video Game & Entertainment Software) stores and Calendar
Club represent 9 percent, 7 percent and 9 percent of merchandise inventories as
of May 5, 2001, April 29, 2000 and February 3, 2001, respectively and are
recorded based on the average cost method. 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 May 5, 2001, April 29, 2000 and February 3, 2001.
(2) Convertible Subordinated Notes
In March of 2001, the Company announced the successful completion of
the sale of $300,000, 5.25 percent convertible subordinated notes due March 15,
2009. The notes are convertible into the Company's common stock at a conversion
price of $32.512 per share.
(3) Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period presentation.
(4) Income Taxes
The tax provisions for the 13 weeks ended May 5, 2001 and April 29,
2000 are based upon management's estimate of the Company's annualized effective
tax rate.
8
9
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements For the
13 weeks ended May 5, 2001 and April 29, 2000
(thousands of dollars, except per share data)
(unaudited)
(5) Derivative Financial Instruments
On February 4, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), as amended, which requires that all derivative
instruments be recorded on the balance sheet at their fair value. The impact of
adopting SFAS 133 on the Company's consolidated financial statements was not
material.
Under an agreement expiring February 2, 2003, the Company uses an
interest rate swap as a derivative to modify the interest characteristics of its
outstanding floating rate long-term debt, to reduce its exposure to fluctuations
in interest rates. The Company's accounting policy is based on its designation
of such instruments as cash flow hedges. The Company does not enter into such
contracts for speculative purposes. The swap has a notional amount of $55,000.
The effective portion of the gain or loss on the derivative instrument is
initially reported as a component of comprehensive loss in the Company's
Statement of Shareholders' Equity, and later reflected in earnings in the period
in which the related transactions occur. In the first quarter of 2001, the
Company recorded an unrealized loss of $(649), net of taxes. Ineffectiveness
results when gains and losses on the hedged item are not completely offset by
gains and losses in the derivative instrument. No ineffectiveness was recognized
in the first quarter of fiscal 2001 related to these instruments.
(6) Comprehensive loss
Comprehensive loss is net loss, plus certain other items that are
recorded directly to shareholders' equity. The only such items currently
applicable to the Company are the unrealized losses on available-for-sale
securities and derivative instruments, as follows:
13 weeks ended
----------------------------
May 5, 2001 April 29, 2000
----------- --------------
Net loss $(11,492) (4,144)
Other comprehensive loss:
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during the period (2,524) (5,296)
Less: reclassification adjustment 556 --
-------- --------
Net Unrealized losses, net of deferred income tax
benefit of $1,396 and $3,757 respectively (1,968) (5,296)
-------- --------
Unrealized loss on derivative instrument, net of
deferred income tax benefit of $462 and $0, respectively (649) --
-------- --------
Total comprehensive loss $(14,109) (9,440)
======== ========
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10
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements For the
13 weeks ended May 5, 2001 and April 29, 2000
(thousands of dollars, except per share data)
(unaudited)
(7) Other Expense
The following table sets forth the components of other expense, in
thousands of dollars:
13 weeks ended
----------------------------
May 5, 2001 April 29, 2000
----------- --------------
ABA legal and settlement costs(a) $ (4,500) --
Equity in net losses of iUniverse.com(b) (1,020) (2,534)
Equity in net losses of BOOK(R) magazine(c) (200) --
Gain on partial sale of Chapters Inc.(d) 335 --
-------- --------
Total other expense $ (5,385) (2,534)
======== ========
(a) In the first quarter of fiscal 2001, the Company recorded a pre-tax
charge of $4,500 in connection with a lawsuit brought by the American
Booksellers Association (ABA). The charges included a settlement of
$2,350 to be paid to the plaintiffs and approximately $2,150 in legal
expenses incurred by the Company during the quarter.
(b) In the first quarter of fiscal 2000, the Company held a 49 percent
ownership interest in iUniverse.com. During fiscal 2000, the Company
sold a portion of its investment in iUniverse.com decreasing its
percentage ownership interest to 29 percent. This investment is being
accounted for under the equity method and is reflected as a component
of other noncurrent assets.
(c) During fiscal 2000, the Company acquired an approximate 50 percent
interest in BOOK(R) magazine for $4,802. This investment is being
accounted for under the equity method and is reflected as a component
of other noncurrent assets.
(d) In the first quarter of fiscal 2001, the Company sold a portion of its
investment in Chapters Inc. (Chapters) resulting in a pre-tax gain of
$335.
(8) Segment Information
The Company's reportable segments are strategic groups that offer
different products. These groups have been aggregated into two segments:
bookstores and video game and entertainment software stores.
Bookstores
This segment includes 568 book "super" stores under the Barnes & Noble
Booksellers, Bookstop and Bookstar names which generally offer a comprehensive
title base, a cafe, a children's section, a music department, a magazine section
and a calendar of ongoing events, including author appearances and children's
activities. This segment also includes 335 small format mall-based stores under
the B. Dalton Bookseller, Doubleday Book Shops and Scribner's Bookstore trade
names. Additionally, this segment includes the operations of Calendar Club, the
Company's majority-owned subsidiary. Calendar Club is an operator of seasonal
calendar kiosks.
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11
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 13 weeks ended May 5, 2001 and April 29, 2000
(thousands of dollars, except per share data)
(unaudited)
Video Game and Entertainment Software Stores
This segment includes 479 video game and entertainment software stores
operated under the Babbage's and Software Etc. trade names, 501 stores under the
FuncoLand and GameStop trade names, a Web site (gamestop.com) and Game Informer
magazine. The principal products of these stores are comprised of video game
hardware and software and PC entertainment software.
The accounting policies of the segments are the same as those for the
Company as a whole. Segment operating profit includes corporate expenses in each
operating segment. Barnes & Noble evaluates the performance of its segments and
allocates resources to them based on operating profit.
Segment information for the 13 weeks ended May 5, 2001 and April 29,
2000 follows:
Sales May 5, 2001 April 29, 2000
- -------------------------------------------- ----------- --------------
Bookstores $ 808,267 774,253
Video game and entertainment software stores 201,370 120,003
---------- ---------
Total $1,009,637 894,256
========== =========
Operating profit May 5, 2001 April 29, 2000
- -------------------------------------------- ----------- --------------
Bookstores $ 16,673 22,125
Video game and entertainment software stores (5,340) 697
--------- --------
Total $ 11,333 22,822
========= ========
Bookstores operating profit includes Calendar Club operating losses of
approximately $2,014 and $1,500 for the 13 weeks ended May 5, 2001 and April 29,
2000, respectively.
A reconciliation of operating profit reported by reportable segments to
loss before income taxes in the consolidated financial statements for the 13
weeks ended May 5, 2001 and April 29, 2000 is as follows:
May 5, 2001 April 29, 2000
----------- --------------
Reportable segments operating profit $ 11,333 22,822
Interest, net (11,277) (9,773)
Equity in net loss of Barnes & Noble.com (14,315) (17,598)
Other expense (5,385) (2,534)
-------- --------
Consolidated loss before income taxes $(19,644) (7,083)
======== ========
11
12
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 13 weeks ended May 5, 2001 and April 29, 2000
(thousands of dollars, except per share data)
(unaudited)
(9) Acquisition
On March 19, 2001, Barnes & Noble, Inc. acquired SparkNotes, a
publisher of academic, educational and informational materials for students for
$3,555. The SparkNotes collection currently consists of over 600 study guides on
high school and college level academic topics, including literature, history,
economics, math and chemistry. The acquisition was accounted for by the purchase
method of accounting and, accordingly, the results of operations for the period
subsequent to the acquisition are included in the consolidated financial
statements.
(10) Video Game & Entertainment Software Stores Incentive Plan
To provide incentives to motivate, attract and retain key employees of
the Video Game & Entertainment Software stores, Gamestop, Inc. has adopted an
Incentive Plan (the Plan). The Plan is administered by the Compensation
Committee of the Company's Board of Directors, the same committee that
administers the Company's other Incentive Plans. The Plan reserves 20% of
Gamestop's outstanding (nonvoting) common stock for grants as stock options
(which, for tax purposes, may be either qualified "incentive stock options" or
"nonqualified stock options"), restricted shares and other forms of incentive
grants.
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Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
The primary sources of the Company's cash are net cash flows from operating
activities, funds available under its senior credit facility and short-term
vendor financing.
The Company's cash and cash equivalents were $47.7 million as of May 5, 2001
compared with $18.9 million as of April 29, 2000. During the 13 weeks ended May
5, 2001, retail earnings before interest, taxes, depreciation and amortization
(EBITDA) decreased $9.2 million to $48.1 million from $57.3 million during the
comparable prior year period.
Merchandise inventories increased to $1,255.6 million as of May 5, 2001,
compared with $1,162.1 million as of April 29, 2000. Approximately $30.4 million
of the increase is due to the increase of Babbage's Etc. and GameStop, Inc.
(f/k/a Funco, Inc.) (Video Game & Entertainment Software) inventory. The
increase in book inventory of approximately $60.1 million supported the
Company's 4.4% book sales growth, the opening of 31 Barnes & Noble stores over
the last twelve months and the strategic increase in the distribution center
standing inventory to over 750,000 in-stock titles available for shipping within
24 hours to both online customers and the retail store network.
The Company's investing activities consist principally of capital expenditures
for new store construction, system enhancements and store relocations/remodels.
Capital expenditures totaled $13.0 million and $15.8 million during the 13 weeks
ended May 5, 2001 and April 29, 2000, respectively.
In March of 2001, the Company announced the successful completion of the sale of
$300.0 million, 5.25 percent convertible subordinated notes due March 15, 2009,
further strengthening its balance sheet. The notes are convertible into the
Company's common stock at a conversion price of $32.512 per share.
Total debt increased 32.2% to $790.0 million as of May 5, 2001 from $597.4
million as of April 29, 2000. Average borrowings under the Company's senior
credit facility and subordinated notes were $752.7 million and $584.3 million
during the 13 weeks ended May 5, 2001 and April 29, 2000, respectively, and
peaked at $870.0 million and $627.6 million during the same periods. The
increase was primarily attributable to the funding of the acquisitions of
Babbage's Etc. in October 1999 and Funco in June 2000 (the Acquisitions). As a
result of the above transactions, the ratio of debt to equity increased to
1.02:1.00 as of May 5, 2001, compared with 0.74:1.00 as of April 29, 2000.
Based upon the Company's current operating levels, management believes net cash
flows from operating activities and the capacity under its $850.0 million senior
credit facility will be sufficient to meet the Company's normal working capital
and debt service requirements for at least the next twelve months.
The Company did not declare or pay any cash dividends during the 13-week periods
ended May 5, 2001 and April 29, 2000.
13
14
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.
Results of Operations
13 weeks ended May 5, 2001 compared with the 13 weeks ended April 29, 2000
Sales
During the 13 weeks ended May 5, 2001, the Company's sales increased $115.3
million or 12.9% to $1,009.6 million from $894.3 million during the 13 weeks
ended April 29, 2000. Contributing to this improvement was an increase of $81.4
million from Video Game & Entertainment Software stores. During the first
quarter, Barnes & Noble "super" store sales rose 6.7% to $738.6 million from
$692.5 million during the same period a year ago and accounted for 73.2% of
total Company sales or 91.4% of total bookstore sales.
During the first quarter, the 6.7% increase in Barnes & Noble bookstore sales
was primarily attributable to a same store sales gain of 2.3% coupled with 31
new stores opened since April 29, 2000 which contributed to a 5.3% increase in
square footage. Sales were strong across most book categories, particularly
children's books, hardcover, bargain books and educational books (teaching aids
and workbooks for the growing home school market), as well as music and cafes.
During the first quarter, B. Dalton sales declined 15.6% and represented 6.6% of
total Company sales. The decrease was primarily a result of 54 store closings
and a 13.8% reduction in its square footage since April 29, 2000. In addition,
B. Dalton's same store sales declined 1.8% during the first quarter.
During the first quarter, Video Game & Entertainment Software sales increased
67.8%. This increase was primarily attributable to the increase in the number of
stores resulting from the acquisition of Funco as well as a same store sales
gain of 13.2%.
During the first quarter, the Company opened two Barnes & Noble stores and
closed three, bringing its total number of Barnes & Noble bookstores to 568 with
13.4 million square feet. The Company closed four B. Dalton stores, ending the
period with 335 B. Dalton stores and 1.3 million square feet. The Company opened
seven GameStop stores, one smaller format store, closed two Babbage's stores and
closed four FuncoLand stores, bringing its total to 980 video game and
entertainment software stores with 1.5 million square feet. As of May 5, 2001,
the Company operated 1,883 stores in fifty states, the District of Columbia,
Puerto Rico and Guam.
Cost of Sales and Occupancy
During the 13 weeks ended May 5, 2001, cost of sales and occupancy increased
$96.4 million, or 14.7%, to $750.6 million from $654.2 million during the 13
weeks ended April 29, 2000 primarily due to growth in the Video Game &
Entertainment Software segment as a result of the Acquisitions.
As a percentage of sales, cost of sales and occupancy increased to 74.3% from
73.2% during the same period one year ago. This increase was primarily
attributable to lower gross margins in the Video Game & Entertainment Software
stores, partially offset by improved leverage on bookstore occupancy costs.
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Selling and Administrative Expenses
Selling and administrative expenses increased $28.9 million to $210.2 million
during the 13 weeks ended May 5, 2001 from $181.3 million during the 13 weeks
ended April 29, 2000 primarily due to growth in the Video Game & Entertainment
Software segment as a result of the Acquisitions. During the first quarter,
selling and administrative expenses increased as a percentage of sales to 20.8%
from 20.3% during the prior year period.
Depreciation and Amortization
During the first quarter, depreciation and amortization increased $3.7 million,
or 11.3%, to $36.7 million from $33.0 million during the same period last year.
The increase was primarily the result of the increase in depreciation and
amortization in the Video Game & Entertainment Software segment as a result of
the Acquisitions, as well as depreciation related to the 31 new Barnes & Noble
stores opened since April 29, 2000.
Pre-opening Expenses
Pre-opening expenses decreased $0.7 million, or 44.4%, to $0.8 million during
the 13 weeks ended May 5, 2001 from $1.5 million for the 13 weeks ended April
29, 2000.
Operating Profit
The Company's consolidated operating profit decreased to $11.3 million during
the 13 weeks ended May 5, 2001 from $24.3 million during the 13 weeks ended
April 29, 2000.
Interest Expense, Net and Amortization of Deferred Financing Fees
Net interest expense and amortization of deferred financing fees increased to
$11.3 million during the 13 weeks ended May 5, 2001 from $9.8 million during the
13 weeks ended April 29, 2000. This increase was primarily the result of the
increased borrowings used to support the Company's strategic growth initiatives
including the Acquisitions.
Other Expense
Other expense of $5.4 million in the first quarter of 2001 was primarily due to
$4.5 million in legal and settlement costs associated with the lawsuit brought
by the American Booksellers Association (ABA) and $1.0 million in equity losses
in iUniverse.com. Other expense of $2.5 million in the first quarter of 2000 was
due to equity losses in iUniverse.com.
Benefit for Income Taxes
The benefit for income taxes during the 13 weeks ended May 5, 2001 was $8.2
million compared with $2.9 million during the 13 weeks ended April 29, 2000. Tax
benefits were based upon management's estimate of the Company's annualized
effective tax rates. The Company's effective tax rate was 41.5% for the first
quarter of 2001 and 2000.
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Net Loss
As a result of the factors discussed above, the Company reported a consolidated
net loss of ($11.5) million (or ($0.18) per share) during the 13 weeks ended May
5, 2001, compared with a net loss of ($4.1) million (or ($0.06) per share)
during the 13 weeks ended April 29, 2000. Components of earnings per share are
as follows:
13 weeks ended
----------------------------
May 5, 2001 April 29, 2000
----------- --------------
Retail Earnings Per Share
Bookstores $ 0.12 0.16
Video Game & Entertainment Software stores (0.10) (0.02)
-------- --------
Retail EPS $ 0.02 0.14
EPS Impact of Investing Activities
Share of net losses of Barnes & Noble.com $ (0.13) (0.16)
Share of net losses from other investments (0.03) (0.04)
-------- --------
Total Investing Activities $ (0.16) (0.20)
Other Adjustments
ABA legal and settlement costs $ (0.04) --
-------- --------
Total Other Adjustments $ (0.04) --
-------- --------
Consolidated EPS $ (0.18) (0.06)
======== ========
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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, 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 Barnes & Noble.com, the performance and successful integration of acquired
businesses, the success of the Company's strategic investments, 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. In addition, the video game market has historically been cyclical in
nature and dependent upon the introduction of new generation systems and related
interactive software. 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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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.
alleging violations of the Robinson-Patman Act, the California Unfair Trade
Practice Act and the California Unfair Competition Law. On March 20, 2001, the
court granted the Company summary judgment dismissing all claims for damages
under federal and state law. On April 19, 2001, the parties settled the
litigation of all other remaining claims.
For a more descriptive summary of the litigation and terms of the
settlement, see Item 3 in the Company's Annual Report on Form 10-K for the
fiscal year ended February 3, 2001 which was filed with the Securities and
Exchange Commission (SEC) on May 4, 2001.
Item 2. Changes in Securities and Use of Proceeds
On March 14, 2001, the Company consummated the sale of its 5.25 percent
convertible subordinated notes due March 15, 2009 (the Notes) in the aggregate
principal amount of $275,000,000. Credit Suisse First Boston Corporation and
Merrill Lynch, Pierce, Fenner & Smith Incorporated acted as initial purchasers.
The initial purchasers were granted a 30-day option to purchase up to an
additional $25,000,000 principal amount of Notes, which option was exercised on
March 30, 2001, bringing the total amount of the sale to $300,000,000.
The Notes are convertible, in whole or in part, at any time prior to
maturity, at the option of the holders, unless previously redeemed or
repurchased, into shares of the Company's common stock, $0.001 par value per
share, at a conversion price per share of $32.512, subject to adjustments. The
Notes are redeemable, in whole or in part, at the option of the Company at any
time on or after March 20, 2004, at premiums declining to par on March 15, 2008.
The Notes are being issued under an Indenture, dated as of March 14,
2001, between the Company and United States Trust Company of New York, as
Trustee.
The Notes were offered to a limited number of purchasers pursuant to a
private placement in accordance with Rule 144A under the Securities Act of 1933,
as amended (the 1933 Act). The net proceeds to the Company of approximately
$291,000,000 were used to reduce borrowings under the Company's existing senior
credit facility.
The Notes were issued in a transaction exempt from registration under
the 1933 Act and may not be offered or sold in the United States absent
registration with the SEC or the availability of an applicable exemption from
such registration requirements.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed with this Form 10-Q:
10.1 Indenture, dated as of March 14, 2001, between Barnes
& Noble, Inc. and United States Trust Company of New
York, as Trustee.*
10.2 Registration Rights Agreement, dated as of March 8,
2001, between Barnes & Noble, Inc. and Credit Suisse
First Boston Corporation and Merrill Lynch, Pierce,
Fenner & Smith Incorporated.*
10.3 Gamestop, Inc. (f/k/a Funco, Inc.) 2000 Incentive
Plan.
(b) The following report on Form 8-K was filed during the
Company's quarter ended May 5, 2001:
On March 22, 2001, the Company filed a Form 8-K under Item 5
reporting the consummated sale of its 5.25% Convertible
Subordinated Notes due March 15, 2009.
* Previously filed as an exhibit to the Company's Form 8-K filed with the SEC on
March 22, 2001 and incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BARNES & NOBLE, INC.
- --------------------
(Registrant)
By: /s/ Maureen O'Connell
-----------------------
Maureen O'Connell
Chief Financial Officer
June 18, 2001