EX-13.1 2 d361699dex131.htm SECTIONS OF THE COMPANY'S ANNUAL REPORT Sections of the Company's Annual Report

Exhibit 13.1

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data of Barnes & Noble, Inc. and its 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. On September 29, 2009, the Board of Directors of Barnes & Noble, Inc. authorized a change in the Company’s fiscal year end from the Saturday closest to the last day of January to the Saturday closest to the last day of April. The change in fiscal year, which became effective on September 30, 2009 upon the closing of the acquisition of Barnes & Noble College Booksellers, Inc. (B&N College) by Barnes & Noble, Inc. (the Acquisition), gives the Company and B&N College the same fiscal year. The change was intended to better align the Company’s fiscal year with the business cycles of both Barnes & Noble, Inc. and B&N College. As a result of the change in the Company’s fiscal year end, the Company is providing financial data for the transition period and comparable prior period as defined below.

The Statement of Operations Data for the 52 weeks ended April 28, 2012 (fiscal 2012), 52 weeks ended April 30, 2011 (fiscal 2011), 52 weeks ended May 1, 2010 (fiscal 2010), and the Balance Sheet Data as of April 28, 2012 and April 30, 2011 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 13 weeks ended May 2, 2009 (transition period), 52 weeks ended January 31, 2009 (fiscal 2008) and 52 weeks ended February 2, 2008 (fiscal 2007) and the Balance Sheet Data as of May 1, 2010, May 2, 2009, January 31, 2009 and February 2, 2008 are derived from audited consolidated financial statements not included in this report. The Statement of Operations Data for the 13 weeks ended May 3, 2008 are derived from unaudited consolidated financial statements not included elsewhere in this report.

 

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Fiscal Year

(In thousands of dollars, except per share data)

   Fiscal
2012
    Fiscal
2011
    Fiscal
2010
    13 weeks
ended
May 2,

2009
    13 weeks
ended
May 3,

2008
    Fiscal
2008
    Fiscal
2007
 

STATEMENT OF OPERATIONS DATA:

              

Sales

              

Barnes & Noble Retail

   $ 4,852,913      $ 4,926,834        4,947,469        1,105,152        1,155,882        5,121,804        5,286,674   

Barnes & Noble College (a)

     1,743,662        1,778,159        833,648        —          —          —          —     

NOOK

     933,471        695,182        105,435        —          —          —          —     

Elimination (b)

     (400,847     (401,610     (78,798     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total sales

     7,129,199        6,998,565        5,807,754        1,105,152        1,155,882        5,121,804        5,286,674   

Cost of sales and occupancy

     5,218,383        5,205,712        4,131,009        773,491        807,915        3,540,596        3,679,845   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,910,816        1,792,853        1,676,745        331,661        347,967        1,581,208        1,606,829   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling and administrative expenses (c)

     1,739,452        1,629,465        1,395,725        289,026        308,400        1,264,320        1,236,178   

Depreciation and amortization

     232,667        228,647        207,774        45,879        41,314        173,557        168,600   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

     (61,303     (65,259     73,246        (3,244     (1,747     143,331        202,051   

Interest income (expense), net and amortization of deferred financing fees (d)

     (35,304     (57,350     (28,237     (199     807        (2,344     7,483   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations before taxes

     (96,607     (122,609     45,009        (3,443     (940     140,987        209,534   

Income taxes

     (27,740     (48,652     8,365        (1,374     (374     55,591        74,623   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations (net of income tax)

     (68,867     (73,957     36,644        (2,069     (566     85,396        134,911   

Earnings (loss) from discontinued operations (net of income tax) (e)

     —          —          —          (654     (1,658     (9,506     888   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

     (68,867     (73,957     36,644        (2,723     (2,224     75,890        135,799   

Net loss attributable to noncontrolling interests (f)

     —          37        32        30        —          30        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to Barnes & Noble, Inc.

   $ (68,867   $ (73,920     36,676        (2,693     (2,224     75,920        135,799   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) attributable to Barnes & Noble, Inc.

              

Earnings (loss) from continuing operations

   $ (68,867   $ (73,957     36,644        (2,069     (566     85,396        134,911   

Less loss attributable to noncontrolling interests

     —          37        32        30        —          30        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) from continuing operations attributable to Barnes & Noble, Inc.

   $ (68,867   $ (73,920     36,676        (2,039     (566     85,426        134,911   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

              

Earnings (loss) from continuing operations attributable to Barnes & Noble, Inc.

   $ (1.41   $ (1.31     0.64        (0.04     (0.01     1.50        2.07   

Earnings (loss) from discontinued operations attributable to Barnes & Noble, Inc.

     —          —          —          (0.01     (0.03     (0.17     0.01   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to Barnes & Noble, Inc.

   $ (1.41   $ (1.31     0.64        (0.05     (0.04     1.33        2.08   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

              

Earnings (loss) from continuing operations attributable to Barnes & Noble, Inc.

   $ (1.41   $ (1.31     0.63        (0.04     (0.01     1.46        1.99   

Earnings (loss) from discontinued operations attributable to Barnes & Noble, Inc.

     —          —          —          (0.01     (0.03     (0.17     0.01   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to Barnes & Noble, Inc.

   $ (1.41   $ (1.31     0.63        (0.05     (0.04     1.29        2.00   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends paid per share

   $ —        $ 0.75        1.00        0.25        0.15        0.90        0.60   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

              

Basic

     57,337        56,588        55,344        54,759        57,614        55,207        63,662   

Diluted

     57,337        56,588        56,153        54,759        57,614        56,529        66,221   

 

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Fiscal Year

(In thousands of dollars, except per share data)

   Fiscal
2012
    Fiscal
2011
    Fiscal
2010
    13 weeks
ended
May 2,

2009
    13 weeks
ended
May 3,

2008
    Fiscal
2008
    Fiscal
2007
 

OTHER OPERATING DATA:

              

Number of stores

              

Barnes & Noble stores

     691        705        720        726        717        726        713   

Barnes & Noble College

     647        636        637        —          —          —          —     

B. Dalton stores

     —          —          —          51        83        52        85   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     1,338        1,341        1,357        777        800        778        798   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comparable sales increase (decrease)

              

Barnes & Noble Retail (g)

     1.4     0.7     (4.8 )%      (5.7 )%      (1.5 )%      (5.4 )%      1.8

Barnes & Noble College (h)

     (0.3 )%      (0.8 )%      (0.2 )%      —          —          —          —     

NOOK (i)

     45.0     589.1     n/m (l)      —          —          —          —     

Capital expenditures (j)

   $ 163,552      $ 110,502        127,779        22,822        38,278        192,153        193,958   

BALANCE SHEET DATA:

              

Total assets

   $ 3,765,249      $ 3,596,466        3,705,686        2,664,279        2,779,006        2,877,864        3,141,247   

Long-term debt

   $ 324,200      $ 313,100        260,400        —          86,700        —          —     

Long-term subordinated note (k)

   $ 150,000      $ 150,000        150,000        —          —          —          —     

 

(a) B&N College results are included since the Acquisition on September 30, 2009.

 

(b) Represents sales from NOOK to Barnes & Noble Retail and Barnes & Noble College that were sold through to the end user.

 

(c) Includes pre-opening expenses.

 

(d) Amounts for fiscal 2012, fiscal 2011, fiscal 2010, the transition period, the 13 weeks ended May 3, 2008, fiscal 2008 and fiscal 2007 are net of interest income of $0, $320, $452, $211, $1,369, $1,518 and $9,169, respectively.

 

(e) Represents the results of Calendar Club for all periods presented.

 

(f) Noncontrolling interest represents the 50% outside interest in Begin Smart LLC. During the second quarter of fiscal 2011, the Company purchased the remaining 50% outside interest in Begin Smart LLC.

 

(g) Comparable store sales increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and all eReader device revenue deferred in accordance with ASC 605-25 Revenue Recognition, Multiple Element Arrangements, and does not include sales from closed or relocated stores.

 

(h) Comparable store sales increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and all eReader device revenue deferred in accordance with ASC 605-25 Revenue Recognition, Multiple Element Arrangements, and does not include sales from closed or relocated stores. Additionally, for textbook rentals, comparable store sales reflects the retail selling price of a new or used textbook when rented, rather than solely the rental fee received and amortized over the rental period.

 

(i) Comparable sales increase (decrease) is calculated on a 52-week basis and includes sales of digital products, including sales through its eReader devices, and all eReader device revenue deferred in accordance with ASC 605-25 Revenue Recognition, Multiple Element Arrangements. Additionally, comparable sales reflects the actual retail selling price for eBooks sold under the agency model, rather than solely the commission received.

 

(j) Excludes Calendar Club capital expenditures of $308, $1,988 and $2,551 for the 13 weeks ended May 3, 2008, fiscal 2008 and fiscal 2007, respectively.

 

(k) See Notes 5 and 14 to the Notes to Consolidated Financial Statements.

 

(l) Not meaningful.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Barnes & Noble, Inc.’s (Barnes & Noble or the Company) fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. As used in this section, “fiscal 2012” represents the 52 weeks ended April 28, 2012, “fiscal 2011” represents the 52 weeks ended April 30, 2011 and “fiscal 2010” represents the 52 weeks ended May 1, 2010.

 

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General

Barnes & Noble, one of the nation’s largest booksellers,1 is a leading content, commerce and technology company providing customers easy and convenient access to books, magazines, newspapers and other content across its multi-channel distribution platform. As of April 28, 2012, the Company operated 1,338 bookstores in 50 states, including 647 bookstores on college campuses, and operates one of the Web’s largest eCommerce sites and develops digital content products and software. Given the dynamic nature of the book industry, the challenges faced by traditional booksellers, and the robust innovation pipeline fueling new opportunities in hardware, software and content creation and delivery, Barnes & Noble is utilizing the strength of its retail footprint to bolster its leadership and fuel sales growth across multiple channels.

Of the 1,338 bookstores, 691 operate primarily under the Barnes & Noble Booksellers trade name. Barnes & Noble College Booksellers, LLC (B&N College), a wholly-owned subsidiary of Barnes & Noble, operates 647 college bookstores at colleges and universities across the United States. Barnes & Noble Retail (B&N Retail) operates the 691 retail bookstores and includes the Company’s eCommerce site. B&N Retail also includes Sterling Publishing Co., Inc. (Sterling or Sterling Publishing), a leader in general trade book publishing. The NOOK segment represents the Company’s digital business, including the development and support of the Company’s NOOK product offerings. The digital business includes digital content such as eBooks, digital newsstand, apps, and sales of NOOK® devices and accessories to third party distribution partners, as well as B&N Retail and B&N College. The Company employed approximately 35,000 full and part-time employees as of April 28, 2012.

The Company’s principal business is the sale of trade books (generally hardcover and paperback consumer titles), mass market paperbacks (such as mystery, romance, science fiction and other popular fiction), children’s books, eBooks and other digital content, NOOK® (references to NOOK™ include the Company’s NOOK 1st Edition™, NOOK Wi-Fi 1st Edition™, NOOK Color™, NOOK Simple Touch™, NOOK Tablet™ and NOOK Simple Touch™ with GlowLightTM eBook Reader devices)2 and related accessories, bargain books, magazines, gifts, café products and services, educational toys & games, music and movies direct to customers through its bookstores or on barnesandnoble.com. On September 30, 2009 Barnes & Noble completed the acquisition of Barnes & Noble College Booksellers, Inc. from Leonard Riggio and Louise Riggio pursuant a Stock Purchase Agreement dated as of August 7, 2009 among the Company and the Sellers (the Acquisition). The Acquisition of B&N College has allowed the Company to expand into sales of textbooks and course-related materials, emblematic apparel and gifts, trade books, computer products, NOOK products and related accessories, school and dorm supplies, and convenience and café items on college and university campuses. In fiscal year ending April 30, 2011 (fiscal 2011), B&N College began offering a textbook rental option to its customers, and expanded its electronic textbooks and other course materials through a proprietary digital platform (NOOK Study™). B&N College offers its customers a full suite of textbook options—new, used, digital and rental. The Company previously licensed the “Barnes & Noble” trade name from B&N College under certain agreements. The Acquisition gave the Company exclusive ownership of its trade name.

To address dynamic changes in the book selling industry, Barnes & Noble has been transforming its business from a store-based model to a multi-channel model centered on its retail stores, Internet and digital commerce. Barnes & Noble is currently the only enterprise to offer readers the option of store visits, eCommerce, and digital delivery of books to Barnes & Noble-branded devices or other devices of their choosing.

 

 

1 

Based upon sales reported in trade publications and public filings.

2 

Any reference to NOOK®, NOOK 1st Edition™, NOOK Wi-Fi 1st Edition™, NOOK Color™, NOOK Simple Touch™, NOOK Tablet™ and NOOK Simple Touch with GlowLight™ includes the trademark symbol (® or ™, as applicable) even if a symbol is not included.

 

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Barnes & Noble’s strategy is to:

 

   

continue to invest in the digital business to fuel NOOK and content sales;

 

   

use its infrastructure to deliver digital content to customers wirelessly and online;

 

   

utilize the strong Barnes & Noble brand and retail footprint to attract customers to its multi-channel platform; and

 

   

expand its distribution channels through strategic partnerships with world-class hardware and software companies and retail partners.

The Company has a multi-channel marketing strategy that deploys various merchandising programs and promotional activities to drive traffic to both its stores and website. At the center of this program is the Company’s website, barnesandnoble.com.

On April 27, 2012, the Company entered into an investment agreement among the Company, Morrison Investment Holdings, Inc. (Morrison), and Microsoft Corporation (Microsoft) pursuant to which the Company will form a Delaware limited liability company (NewCo), and transfer to NewCo the Company’s digital device, digital content and college bookstore businesses and NewCo will sell to Morrison, and Morrison will purchase, 300 million convertible preferred membership interests in NewCo for an aggregate purchase price of $300.0 million. Concurrently with its entry into this agreement, the Company has also entered into a commercial agreement with Microsoft, pursuant to which, among other things, NewCo will develop and distribute a Windows 8 application for e-reading and digital content purchases, and an intellectual property license and settlement agreement with Microsoft and Microsoft Licensing GP.

As part of the partnership with Microsoft described above, the Company, through NewCo, plans to launch the NOOK digital bookstore in 10 countries within 12 months, putting NOOK.com websites onto the screens of tens of millions of Windows users. Once the NOOK digital bookstore is launched, customers in these countries will have access to one of the world’s largest marketplaces of digital copyright content and reading technologies, enabling them to buy and consume books, magazines and other forms of content on the world’s best mobile platforms, including WindowsTM, IOSTM, and AndroidTM. The Company is also exploring opportunities to give consumers outside of the U.S. access to its award-winning NOOK portfolio of reading products through potential distribution partnerships yet to be announced. While there can be no assurances, the Company intends to have one or more distribution agreements in place to sell NOOKTM devices in certain countries outside the U.S. prior to the 2012 holiday season.

On August 18, 2011, the Company entered into an investment agreement between the Company and Liberty GIC, Inc. (Liberty) pursuant to which the Company issued and sold to Liberty, and Liberty purchased, 204,000 shares of the Company’s Series J Preferred Stock, par value $0.001 per share (Preferred Stock), for an aggregate purchase price of $204.0 million in a private placement exempt from the registration requirements of the 1933 Act. The shares of Preferred Stock will be convertible, at the option of the holders, into shares of Common Stock representing 16.6% of the Common Stock outstanding as of August 29, 2011, (after giving pro forma effect to the issuance of the Preferred Stock), based on the initial conversion rate. The initial conversion rate reflects an initial conversion price of $17.00 and is subject to adjustment in certain circumstances. The initial dividend rate for the Preferred Stock is equal to 7.75% per annum of the initial liquidation preference of the Preferred Stock to be paid quarterly and subject to adjustment in certain circumstances.

Segments

Prior to year-end, the Company reported an operating segment titled B&N.com, which included

 

F-5


both the NOOK digital business and eCommerce operations. Due to the increased focus on the digital business and the Company’s recently developed ability to review the digital business separate from its eCommerce business, the Company performed an evaluation on the effect of its impact on the identification of operating segments. The assessment considered the way the business is managed (focusing on the financial information distributed) and the manner in which the chief operating decision maker interacts with other members of management. As a result of this assessment, during the fourth quarter of fiscal 2012 the Company has determined that the segment previously referred to B&N.com is no longer applicable and has created a new segment titled NOOK to report upon its digital business, moving the eCommerce business (i.e., sales of physical merchandise over the Internet) into the B&N Retail segment. Also as a result of this assessment, certain corporate office and other costs have been allocated to all three segments. The Company’s three operating segments are: B&N Retail, B&N College and NOOK.

B&N Retail

This segment includes 691 bookstores as of April 28, 2012, primarily under the Barnes & Noble Booksellers trade name. These stores generally offer a comprehensive title base, a NOOK® department/Boutique/Counter, a café, a Children’s department, an Educational Toys & Games department, a Music/DVDs/BluRay department, a gift department, a magazine department, a bargain department and a calendar of ongoing events, including author appearances and children’s activities. The B&N Retail segment also includes the Company’s eCommerce website, barnesandnoble.com and the publishing operation, Sterling Publishing.

Barnes & Noble stores range in size from 3,000 to 60,000 square feet depending upon market size, with an overall average store size of 26,000 square feet. In fiscal 2012, the Company reduced the Barnes & Noble store base by 0.4 million square feet, bringing the total square footage to 18.0 million square feet, a 1.9% decrease from fiscal 2011. Each Barnes & Noble store features an authoritative selection of books, ranging from 22,000 to 165,000 titles. The comprehensive title selection is diverse and reflects local interests. Bestsellers typically represent between 2% and 5% of Barnes & Noble store sales. BookMaster, the Company’s proprietary inventory management database, has more than 13 million titles. By enhancing the Company’s existing merchandise replenishment systems, BookMaster allows the Company to achieve high in-stock positions and productivity at the store level through efficiencies in receiving, cashiering and returns processing. Complementing this extensive on-site selection, all Barnes & Noble stores provide customers with access to the millions of books available to online shoppers at barnesandnoble.com while offering an option to have the book sent to the store or shipped directly to the customer. At the center of this eCommerce program is the Company’s website, barnesandnoble.com.

Sterling Publishing

Sterling Publishing is a leading publisher of non-fiction trade titles. Founded in 1949, Sterling publishes a wide range of non-fiction and illustrated books and kits across a variety of imprints, in categories such as health & wellness, music & popular culture, food & wine, crafts & photography, puzzles & games and history & current affairs, as well as a large and growing presence in children’s books. Sterling with its distinguished heritage, open mind to incubating new businesses and an all-consuming, entrepreneurial zest has a 12,000+ title base of eBooks and print books. In addition, Sterling also distributes 1,600+ titles on behalf of client publishers.

B&N College

B&N College is one of the largest contract operators of bookstores on college and university

 

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campuses across the United States. As of April 28, 2012, B&N College operated 647 stores nationwide. B&N College’s customer base, which is mainly comprised of students and faculty, can purchase various items from their campus stores, including textbooks and course-related materials, emblematic apparel and gifts, trade books, computer products, NOOK products and related accessories, school and dorm supplies, convenience and café items, and more recently, textbook rentals. In fiscal 2011, B&N College began offering a textbook rental option to its customers and expanded its electronic textbooks and other course materials through a proprietary digital platform (NOOK Study™). A significant number of textbook are now available in multiple formats: new, used, rental and digital (rental and ownership), resulting in improved choice and substantial student savings alternatives.

B&N College operates 613 traditional college bookstores and 34 academic superstores, which are generally larger in size, offer cafés and provide a sense of community that engages the surrounding campus and local communities in college activities and culture. The traditional bookstores range in size from 500 to 48,000 square feet. The academic superstores range in size from 8,000 to 75,000 square feet.

B&N College generally operates its stores pursuant to multi-year management service agreements under which a school designates B&N College to operate the official school bookstore on campus and B&N College provides the school with regular payments that represent a percentage of store sales and, in some cases, include a minimum fixed guarantee.

B&N College’s business strategy is to maintain long-term relationships with colleges and universities by providing high-quality service to college administrators, faculty and students.

NOOK

This segment represents the Company’s digital business, including the development and support of the Company’s NOOK product offerings. The digital business includes digital content such as eBooks, digital newsstand, apps, and sales of NOOK® devices and accessories to third party distribution partners, as well as B&N Retail and B&N College.

NOOK produces a number of different eReaders, including NOOK Tablet™, NOOK Color™, NOOK Simple Touch™ and NOOK Simple Touch with GlowLight™. These devices are designed in Palo Alto, California. Barnes & Noble’s NOOK eReading software provides customers the ability to purchase digital content and access to their Lifetime Library on a wide range of digital platforms, including iPad™, iPhone®, iPod touch®, Android™ smartphones and tablets, as well as most PC and Mac® laptops or full-sized desktop computers. Barnes & Noble has implemented innovative features on its digital platform to ensure that customers have a seamless experience across their devices.

In addition to selling NOOK® devices through its own bookstores, the Company also sells devices through other third-party retail channels. The Company’s third-party retail partners include Best Buy, Walmart, Staples, Target, Radio Shack, Books-A-Million, OfficeMax, Fred Meyer, P.C. Richard & Son, Office Depot, Fry’s Electroncis and Systemax Inc. retailers. These additional retailers expand the reach of the Company’s NOOK® devices.

The NOOK digital products group has knowledgeable product development and operational management teams for designing and delivering on its digital products business. NOOK’s development office in Palo Alto employs experienced engineers in its digital product area. NOOK digital products management team is focused on next generation strategic products that offer customers with a range of digital reading products to enhance the reading experience. The software, engineering and user interface teams provide for new or upgraded products. NOOK digital products remain competitive as a result of its investments in ongoing research and development efforts.

 

F-7


Results of Operations

 

Fiscal Year

   Fiscal 2012     Fiscal 2011     Fiscal 2010  

Sales (in thousands)

   $ 7,129,199      $ 6,998,565        5,807,754   

Earnings (Loss) From Continuing Operations Attributable to Barnes & Noble, Inc. (in thousands)

   $ (68,867   $ (73,920     36,676   

Diluted Earnings (Loss) Per Common Share From Continuing Operations

   $ (1.41   $ (1.31     0.63   

Comparable Sales Increase (Decrease)

      

Barnes & Noble stores (a)

     1.4     0.7     (4.8 )% 

Barnes & Noble College stores (b)

     (0.3 )%      (0.8 )%      (0.2 )% 

NOOK (c)

     45.0     589.1     n/m  (e) 

Stores Opened

      

Barnes & Noble stores

     —          1        8   

Barnes & Noble College

     32        15        11   
  

 

 

   

 

 

   

 

 

 

Total

     32        16        19   
  

 

 

   

 

 

   

 

 

 

Stores Closed

      

Barnes & Noble stores

     14        16        18   

Barnes & Noble College (d)

     21        16        6   

B. Dalton stores

     —          —          47   
  

 

 

   

 

 

   

 

 

 

Total

     35        32        71   
  

 

 

   

 

 

   

 

 

 

Number of Stores Open at Year End

      

Barnes & Noble stores

     691        705        720   

Barnes & Noble College (d)

     647        636        637   
  

 

 

   

 

 

   

 

 

 

Total

     1,338        1,341        1,357   
  

 

 

   

 

 

   

 

 

 

Square Feet of Selling Space at Year End (in millions)

      

Barnes & Noble stores

     18.0        18.4        18.7   

Total

     18.0        18.4        18.7   
  

 

 

   

 

 

   

 

 

 

 

(a) Comparable store sales increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and all eReader device revenue deferred in accordance with ASC 605-25 Revenue Recognition, Multiple Element Arrangements, and does not include sales from closed or relocated stores.

 

(b) Comparable store sales increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and all eReader device revenue deferred in accordance with ASC 605-25 Revenue Recognition, Multiple Element Arrangements, and does not include sales from closed or relocated stores. Additionally, for textbook rentals, comparable store sales reflects the retail selling price of a new or used textbook when rented, rather than solely the rental fee received and amortized over the rental period.

 

F-8


(c) Comparable sales increase (decrease) is calculated on a 52-week basis and includes sales of digital products, including sales through its eReader devices, and all eReader device revenue deferred in accordance with ASC 605-25 Revenue Recognition, Multiple Element Arrangements. Additionally, comparable sales reflects the actual retail selling price for eBooks sold under the agency model, rather than solely the commission received.

 

(d) Represents the number of B&N College stores opened and closed since the Acquisition date.

 

(e) Not meaningful.

The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to total sales of the Company:

 

Fiscal Year    Fiscal 2012     Fiscal 2011     Fiscal 2010  

Sales

     100.0     100.0     100.0

Cost of sales and occupancy

     73.2        74.4        71.1   
  

 

 

   

 

 

   

 

 

 

Gross margin

     26.8        25.6        28.9   

Selling and administrative expenses

     24.4        23.3        24.0   

Depreciation and amortization

     3.3        3.3        3.6   
  

 

 

   

 

 

   

 

 

 

Operating margin (loss)

     (0.9     (1.0     1.3   

Interest income, net and amortization of deferred financing fees

     0.5        0.8        0.5   
  

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations before taxes

     (1.4     (1.8     0.8   

Income taxes

     (0.4     (0.7     0.1   
  

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations (net of income tax)

     (1.0 )%      (1.1 )%      0.7

Business Overview

The Company’s financial performance has been significantly impacted in recent years by a number of factors, including the economic downturn, increased competition and the expanding digital market. However, recently the Company has benefited from reduced physical bookstore competition in the marketplace, as well as the successful execution of new marketing strategies.

The Company’s core business is the operation of B&N Retail and B&N College stores, from which it derives the majority of its sales and net income. B&N Retail comparable store sales trends have improved as one of B&N Retail’s largest competitors in the sale of physical books, Borders Group, Inc. (Borders), completed liquidating all of its stores under Chapter 11 of the Bankruptcy Code in early fiscal 2012. While the Company expects declining physical book trends to continue industry wide as consumer

 

F-9


spending shifts further online and toward digital products, it expects to be the beneficiary of further market consolidation as other non-book retailers reduce their presence in the book category. Additionally, the Company continues to experience positive trends in its juvenile, gift and toys & games businesses as a result of the successful execution of new marketing strategies. Other categories such as Café and Newsstand also improved as a result of increased store traffic.

The Company has leveraged its unique assets, iconic brands and reach to become a leader in the distribution of digital content. In 2009, the Company entered the eBook market with its acquisition of Fictionwise, Inc., a leader in the eBook marketplace, and the popularity of its eBook site continues to grow. Since then, the Company launched its NOOK™ brand of eReading products, which provide a fun, easy-to-use and immersive digital reading experience. With NOOK®, customers gain access to the Company’s expansive NOOK Bookstore™ of more than two million digital titles, and the ability to enjoy content access to a wide array of popular devices. The Company’s eBook market share has grown to over 27.0%.

In October 2010, Barnes & Noble introduced NOOK Color™, the first full-color touch Reader’s Tablet™, complementing its NOOK 1st Edition™ and NOOK Wi-Fi 1st Edition™ devices, which offer a paper-like reading experience with a color touch screen for navigation. In May 2011, the Company has introduced The All-New NOOK™, The Simple Touch Reader™, the easiest-to-use, most intuitive eReader available that is ultra light, features best-in-class battery performance, a 6-inch full touchscreen and the most advanced E Ink Pearl display at a desirable market price point. On November 7, 2011, Barnes & Noble launched NOOK Tablet™, the Company’s fastest and lightest tablet with the best in entertainment. On February 21, 2012, Barnes & Noble launched NOOK Tablet™ – 8GB, a new addition to the highly rated NOOK Tablet™ line. On April 12, 2012, the Company introduced NOOK Simple Touch with GlowLightTM, the world’s first E Ink device with patent-pending lighting technology that lets you read in the dark.

In addition to NOOK® devices, the Company makes it easy for customers to enjoy any book, anytime, anywhere with its free line of NOOK® software specific application, which has won the Webby People’s Voice Award. Customers can use Barnes & Noble’s eReading software to access and read books from their personal Barnes & Noble digital library on devices including iPad™, iPhone®, Android™ smartphones and tablets, PC and Mac®. The Lifetime Library™ helps ensure that Barnes & Noble customers will always be able to access their digital libraries on NOOK® products and software-enabled devices and B&N.com. The Company also offers NOOK Newsstand™, which provides an extensive selection of digital newspapers and magazines, available in both subscription and single copy format, NOOK Kids™, a collection of digital picture and chapter books for children and NOOK Study™, an innovative study platform and software solution for higher education.

As digital and electronic sales become a larger part of its business, the Company believes its footprint of more than 1,300 stores will continue to be a major competitive asset. The Company plans to integrate its traditional retail, trade book and college bookstores businesses with its electronic and Internet offerings, using retail stores in attractive geographic markets to promote and sell digital devices and content. Customers can see, feel and experiment with the NOOK® in the Company’s stores.

Although the stores will be just a part of the offering, they will remain a key driver of sales and cash flow as the Company expands its multi-channel relationships with its customers. The Company does not expect to open retail stores in new geographic markets or expand the total number of retail stores in the near future.

B&N College provides direct access to a large and well-educated demographic group, enabling the Company to build relationships with students throughout their college years and beyond. The Company also expects to be the beneficiary of market consolidation as more and more schools outsource their bookstore management. The Company is in a unique market position to benefit from this trend given its full suite of services: bookstore management, textbook rental and digital delivery.

 

F-10


Although the Company believes cash on hand, cash flows from operating activities, funds available from its senior credit facility and short-term vendor financing provide the Company with adequate liquidity and capital resources for seasonal working capital requirements, the Company may raise additional capital to support the growth of its digital businesses.

52 Weeks Ended April 28, 2012 Compared with 52 Weeks Ended April 30, 2011

Sales

The following table summarizes the Company’s sales for the 52 weeks ended April 28, 2012 and April 30, 2011:

 

     52 weeks ended  

Dollars in thousands

   April 28,
2012
    % Total     April 30,
2011
    % Total  

B&N Retail

   $ 4,852,913        68.1   $ 4,926,834        70.4

B&N College

     1,743,662        24.4     1,778,159        25.4

NOOK

     933,471        13.1     695,182        9.9

Elimination

     (400,847     (5.6 %)      (401,610     (5.7 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Sales

   $ 7,129,199        100.0   $ 6,998,565        100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s sales increased $130.6 million, or 1.9%, during fiscal 2012 to $7.13 billion from $7.00 billion during fiscal 2011. The increase or (decrease) by segment is as follows:

 

   

B&N Retail sales for fiscal 2012 decreased $73.9 million, or 1.5%, to $4.85 billion from $4.92 billion during fiscal 2011, and accounted for 68.1% of total Company sales. During fiscal 2012 comparable store sales increased 1.4%, which increased sales by $58.1 million, offset by closed stores that decreased sales by $59.2 million. Comparable physical book sales, including trade, juvenile and bargain, were essentially flat as the Company benefited from the Borders liquidation. The increase in comparable store sales was primarily attributable to the strategic expansion of non-book categories, such as NOOK® devices and accessories, Toys & Games and Gift products. B&N Retail also includes its eCommerce business and third-party sales of Sterling Publishing Co., Inc.

 

   

B&N College sales decreased $34.5 million, or 1.9%, to $1.74 billion during fiscal 2012 from $1.78 billion during fiscal 2011. The decrease in sales was primarily due to a higher mix of textbook rentals, which have a lower price than new or used textbooks. During fiscal 2012 comparable store sales decreased 0.3%, primarily due to lower textbook sales and partially offset by higher general merchandise sales. Closed stores decreased sales by $38.6 million offset by new B&N College stores contributing to an increase in sales of $49.9 million.

 

   

NOOK sales increased $238.3 million, or 34.3%, to $933.5 million during fiscal 2012 from $695.2 million during fiscal 2011. Comparable sales for NOOK increased 45.0% in fiscal 2012. This increase in sales was primarily due to higher sales of digital content and hardware.

 

   

The elimination represents sales from NOOK to B&N Retail and B&N College that were sold through to the end user. These amounts remained flat year over year despite NOOK’s top line increase due to higher sales to third party distribution channels.

In fiscal 2012, the Company closed 14 Barnes & Noble stores, bringing its total number of Barnes & Noble stores to 691 with 18.0 million square feet. In fiscal 2012, the Company added 32 B&N College stores and closed 21, ending the period with 647 B&N College stores. As of April 28, 2012, the Company operated 1,338 stores in the fifty states and the District of Columbia.

 

F-11


Cost of Sales and Occupancy

 

     52 weeks ended  

Dollars in thousands

   April 28,
2012
     % Sales     April 30,
2011
     % Sales  

B&N Retail

   $ 3,405,474         70.2   $ 3,499,825         71.1

B&N College

     1,348,350         77.3     1,394,690         78.4

NOOK

     464,559         87.2     311,197         106.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Cost of Sales and Occupancy

   $ 5,218,383         73.2   $ 5,205,712         74.4
  

 

 

    

 

 

   

 

 

    

 

 

 

The Company’s cost of sales and occupancy includes costs such as merchandise costs, distribution center costs (including payroll, freight, supplies, depreciation and other operating expenses), rental expense, management service agreement costs with schools, common area maintenance and real estate taxes, partially offset by landlord tenant allowances amortized over the life of the lease.

Cost of sales and occupancy increased $12.7 million, or 0.2%, to $5.22 billion, in fiscal 2012 from $5.21 billion in fiscal 2011. Cost of sales and occupancy decreased as a percentage of sales to 73.2% in fiscal 2012 from 74.4% in fiscal 2011. The decrease by segment is as follows:

 

   

B&N Retail cost of sales and occupancy decreased as a percentage of sales to 70.2% in fiscal 2012 from 71.1% in fiscal 2011. This decrease was primarily attributable to sales mix, higher product margins and lower occupancy costs.

 

   

B&N College cost of sales and occupancy decreased as a percentage of sales to 77.3% in fiscal 2012 from 78.4% in fiscal 2011. This decrease was primarily driven by a larger mix of higher margin textbook rentals.

 

   

NOOK cost of sales and occupancy decreased as a percentage of sales to 87.2% in fiscal 2012 from 106.0% in fiscal 2011. This decrease was primarily attributable to higher device margins and a heavier mix of higher margin digital content.

 

F-12


Gross Margin

 

     52 weeks ended  

Dollars in thousands

   April 28,
2012
     % of Sales     April 30,
2011
    % of Sales  

B&N Retail

   $ 1,447,440         29.8   $ 1,427,010        29.0

B&N College

     395,311         22.7     383,468        21.6

NOOK

     68,065         12.8     (17,625     (6.0 %) 
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Gross Margin

   $ 1,910,816         26.8   $ 1,792,853        25.6
  

 

 

    

 

 

   

 

 

   

 

 

 

The Company’s consolidated gross margin increased $118.0 million, or 6.6%, to $1.91 billion, in fiscal 2012 from $1.79 billion in fiscal 2011. This increase was due to the matters discussed above.

Selling and Administrative Expenses

 

     52 weeks ended  

Dollars in thousands

   April 28,
2012
     % Sales     April 30,
2011
     % Sales  

B&N Retail

   $ 1,130,311         23.3   $ 1,167,944         23.7

B&N College

     279,364         16.0     270,022         15.2

NOOK

     329,777         61.9     191,499         65.2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Selling and Administrative Expenses

   $ 1,739,452         24.4   $ 1,629,465         23.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Selling and administrative expenses increased $110.0 million, or 6.7%, to $1.74 billion in fiscal 2012 from $1.63 billion in fiscal 2011. Selling and administrative expenses increased as a percentage of sales to 24.4% in fiscal 2012 from 23.3% in fiscal 2011. The increase or (decrease) by segment is as follows:

 

   

B&N Retail selling and administrative expenses decreased slightly as a percentage of sales to 23.3% in fiscal 2012 from 23.7% in fiscal 2011. This decrease was primarily attributable to increased store productivity.

 

   

B&N College selling and administrative expenses increased as a percentage of sales to 16.0% in fiscal 2012 from 15.2% in fiscal 2011. This increase was primarily attributable to deleveraging against the increase in textbook rentals, which have a lower price than new or used textbooks.

 

   

NOOK selling and administrative expenses decreased as a percentage of sales to 61.9% in fiscal 2012 from 65.2% in fiscal 2011. This decrease was primarily attributable to the leveraging of expenses on the increased sales.

 

F-13


Depreciation and Amortization

 

     52 weeks ended  

Dollars in thousands

   April 28,
2012
     % Sales     April 30,
2011
     % Sales  

B&N Retail

   $ 162,693         3.4   $ 164,934         3.3

B&N College

     45,343         2.6     43,148         2.4

NOOK

     24,631         4.6     20,565         7.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Depreciation and Amortization

   $ 232,667         3.3   $ 228,647         3.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Depreciation and amortization increased $4.0 million, or 1.8%, to $232.7 million in fiscal 2012 from $228.6 million in fiscal 2011. This increase was primarily attributable due to amortization of intellectual property assets purchased from Borders and additional capital expenditures.

Operating Profit (Loss)

 

     52 weeks ended  

Dollars in thousands

   April 28,
2012
    % Sales     April 30,
2011
    % Sales  

B&N Retail

   $ 154,436        3.2   $ 94,131        1.9

B&N College

     70,604        4.0     70,299        4.0

NOOK

     (286,343     (53.8 %)      (229,689     (78.2 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Loss

   $ (61,303     (0.9 %)    $ (65,259     (0.9 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s consolidated operating loss decreased $3.9 million, or 6.1%, to an operating loss of $61.3 million in fiscal 2012 from an operating loss of $65.3 million in fiscal 2011. This decrease was due to the matters discussed above.

Interest Expense, Net and Amortization of Deferred Financing Fees

 

     52 weeks ended  

Dollars in thousands

   April 28,
2012
     April 30,
2011
     % of Change  

Interest Expense, Net and Amortization of Deferred Financing Fees

   $ 35,304       $ 57,350         (38.4 %) 
  

 

 

    

 

 

    

 

 

 

Net interest expense and amortization of deferred financing fees decreased $22.0 million, to $35.3 million in fiscal 2012 from $57.3 million in fiscal 2011. This decrease was primarily due to more favorable rates on the 2011 Amended Credit Facility under the Company’s credit facility, lower borrowings driven by the Liberty investment, payment of short-term note in December 2010 and a $6.6 million write-off of deferred financing fees in the prior fiscal year related to the amendment of the Company’s credit facility.

 

F-14


Income Taxes

 

     52 weeks ended  

Dollars in thousands

   April 28,
2012
    Effective
Rate
    April 30,
2011
    Effective
Rate
 

Income Taxes

   $ (27,740     28.7   $ (48,652     39.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefit in fiscal 2012 was $27.7 million compared with income tax benefit of $48.7 million in fiscal 2011. The Company’s effective tax rate decreased to 28.7% in fiscal 2012 compared with 39.7% in fiscal 2011. The lower effective tax rate in fiscal 2012 was due primarily to additions to the tax reserve and a permanent tax charge related to current and prior year compensation.

Net Loss Attributable to Noncontrolling Interests

Net loss attributable to noncontrolling interests was $0.04 million in fiscal 2011 and relates to the 50% outside interest in Begin Smart LLC (Begin Smart).

During fiscal 2011, the Company purchased the remaining 50% outside interest in Begin Smart LLC for $0.3 million. 100% of Begin Smart results of operations for the period subsequent to the Begin Smart acquisition date were included in the consolidated financial statements.

Net Earnings (Loss) Attributable to Barnes & Noble, Inc.

 

     52 weeks ended  

Dollars in thousands

   April 28,
2012
    Diluted
EPS
    April 30,
2011
    Diluted
EPS
 

Net Loss Attributable to Barnes & Noble, Inc.

   $ (68,867   $ (1.41   $ (73,920   $ (1.31
  

 

 

   

 

 

   

 

 

   

 

 

 

As a result of the factors discussed above, the Company reported a consolidated net loss of $68.9 million (or $1.41 per diluted share) during fiscal 2012, compared with consolidated net loss of $73.9 million (or $1.31 per diluted share) during fiscal 2011.

 

F-15


52 Weeks Ended April 30, 2011 Compared with 52 Weeks Ended May 1, 2010

Sales

The following table summarizes the Company’s sales for the 52 weeks ended April 30, 2011 and May 1, 2010:

 

     52 weeks ended  

Dollars in thousands

   April 30,
2011
    % Total     May 1,
2010
    % Total  

B&N Retail

   $ 4,926,834        70.4   $ 4,947,469        85.2

B&N College

     1,778,159        25.4     833,648        14.4

NOOK

     695,182        9.9     105,435        1.8

Elimination

     (401,610     (5.7 %)      (78,798     (1.4 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Sales

   $ 6,998,565        100.0   $ 5,807,754        100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s sales increased $1.19 billion, or 20.5%, during fiscal 2011 to $7.00 billion from $5.81 billion during fiscal 2010. The increase by segment is as follows:

 

   

B&N Retail sales for fiscal 2011 decreased $20.6 million, or 0.4%, to $4.93 billion from $4.95 billion during fiscal 2010, and accounted for 70.4% of total Company sales. This decrease was primarily attributable to closed stores that decreased sales by $93.3 million, offset by a 0.7% increase in comparable store sales, which increased sales by $29.1 million, and new Barnes & Noble stores that contributed to an increase in sales of $25.0 million. The 0.7% increase in comparable sales was primarily due to the strong sales of digital products and expansion into non-book areas such as Toys & Games, offset by a decline in trade books. B&N Retail also includes its eCommerce business and third-party sales of Sterling Publishing Co., Inc.

 

   

B&N College sales increased $944.5 million, or 113.3%, to $1.78 billion during fiscal 2011 from $833.6 million during fiscal 2010. This increase in sales was due to the Acquisition on September 30, 2009. Comparable sales for B&N College decreased 0.8% during fiscal 2011. This decrease in comparable sales was primarily due to lower textbook and trade book sales offset by higher general merchandise sales.

 

   

NOOK sales increased $589.7 million, or 559.3%, to $695.2 million during fiscal 2011 from $105.4 million during fiscal 2010. Comparable sales for NOOK increased 589.1% in fiscal 2011. This increase in sales was primarily due to higher device, accessories and digital content sales.

 

   

The elimination represents sales from NOOK to B&N Retail and B&N College that were sold through to the end user.

In fiscal 2011, the Company opened one Barnes & Noble store and closed 16, bringing its total number of Barnes & Noble stores to 705 with 18.4 million square feet. In fiscal 2011, the Company added 15 B&N College stores and closed 16, ending the period with 636 B&N College stores. As of April 30, 2011, the Company operated 1,341 stores in the fifty states and the District of Columbia.

 

F-16


Cost of Sales and Occupancy

 

     52 weeks ended  

Dollars in thousands

   April 30,
2011
     % Sales     May 1,
2010
     % Sales  

B&N Retail

   $ 3,499,825         71.1   $ 3,385,890         68.4

B&N College

     1,394,690         78.4     656,885         78.8

NOOK

     311,197         106.0     88,234         331.2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Cost of Sales and Occupancy

   $ 5,205,712         74.4   $ 4,131,009         71.1
  

 

 

    

 

 

   

 

 

    

 

 

 

The Company’s cost of sales and occupancy includes costs such as merchandise costs, distribution center costs (including payroll, freight, supplies, depreciation and other operating expenses), rental expense, management service agreement costs with schools, common area maintenance and real estate taxes, partially offset by landlord tenant allowances amortized over the life of the lease.

Cost of sales and occupancy increased $1.07 billion, or 26.0%, to $5.21 billion, in fiscal 2011 from $4.13 billion in fiscal 2010. Cost of sales and occupancy increased as a percentage of sales to 74.4% in fiscal 2011 from 71.1% in fiscal 2010. The increase or (decrease) by segment is as follows:

 

   

B&N Retail cost of sales and occupancy increased as a percentage of sales to 71.1% in fiscal 2011 from 68.4% in fiscal 2010. This increase was primarily attributable to greater NOOK® device sales at B&N stores, which have lower margins.

 

   

B&N College cost of sales and occupancy, included since the Acquisition on September 30, 2009, decreased slightly as a percentage of sales to 78.4% in fiscal 2011 from 78.8% in fiscal 2010. This decrease was primarily attributable to higher general merchandise sales that have higher margins.

 

   

NOOK cost of sales and occupancy decreased as a percentage of sales to 106.0% in fiscal 2011 from 331.2% in fiscal 2010. This decrease was due to a higher mix of higher margin digital content, as well as improved margins on device and eBooks.

Gross Margin

 

     52 weeks ended  

Dollars in thousands

   April 30,
2011
    % of Sales     May 1, 2010     % of Sales  

B&N Retail

   $ 1,427,010        29.0   $ 1,561,578        31.6

B&N College

     383,468        21.6     176,763        21.2

NOOK

     (17,625     (6.0 %)      (61,596     (231.2 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Gross Margin

   $ 1,792,853        25.6   $ 1,676,745        28.9
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s consolidated gross margin increased $116.1 million, or 6.9%, to $1.79 billion in fiscal 2011 from $1.68 billion in fiscal 2010. This increase was due to the matters discussed above.

 

F-17


Selling and Administrative Expenses

 

     52 weeks ended  

Dollars in thousands

   April 30,
2011
     % Sales     May 1,
2010
     % Sales  

B&N Retail

   $ 1,167,944         23.7   $ 1,187,337         24.0

B&N College

     270,022         15.2     155,613         18.7

NOOK

     191,499         65.2     52,775         198.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Selling and Administrative Expenses

   $ 1,629,465         23.3   $ 1,395,725         24.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Selling and administrative expenses increased $233.7 million, or 16.7%, to $1.63 billion in fiscal 2011 from $1.39 billion in fiscal 2010. Selling and administrative expenses decreased as a percentage of sales to 23.3% in fiscal 2011 from 24.0% in fiscal 2010. The decrease by segment is as follows:

 

   

B&N Retail selling and administrative expenses decreased as a percentage of sales to 23.7% in fiscal 2011 from 24.0% in fiscal 2010 due to improved store productivity.

 

   

B&N College selling and administrative expenses, included since the Acquisition on September 30, 2009, decreased as a percentage of sales to 15.2% in fiscal 2011 from 18.7% in fiscal 2010. This decrease was primarily attributable to the inclusion of the Fall back to school rush period in fiscal 2011, resulting in greater leverage on sales. The Acquisition occurred after the Fall rush in 2010.

 

   

NOOK selling and administrative expenses decreased as a percentage of sales to 65.2% in fiscal 2011 from 198.1% in fiscal 2010. This decrease was primarily attributable to leveraging on increased sales.

Depreciation and Amortization

 

     52 weeks ended  

Dollars in thousands

   April 30,
2011
     % Sales     May 1,
2010
     % Sales  

B&N Retail

   $ 164,934         3.3   $ 170,777         3.5

B&N College

     43,148         2.4     24,863         3.0

NOOK

     20,565         7.0     12,134         45.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Depreciation and Amortization

   $ 228,647         3.3   $ 207,774         3.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Depreciation and amortization increased $20.9 million, or 10.0%, to $228.6 million in fiscal 2011 from $207.8 million in fiscal 2010. This increase was primarily attributable to the inclusion of the B&N College depreciation and amortization since the Acquisition on September 30, 2009, which increased $18.3 million to $43.1 million in fiscal 2011 from $24.9 million during fiscal 2010.

 

F-18


Operating Profit (Loss)

 

     52 weeks ended  

Dollars in thousands

   April 30,
2011
    % Sales     May 1,
2010
    % Sales  

B&N Retail

   $ 94,132        1.9   $ 203,464        4.1

B&N College

     70,298        4.0     (3,713     (0.4 %) 

NOOK

     (229,689     (78.2 %)      (126,505     (474.9 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Profit (Loss)

   $ (65,259     (0.9 %)    $ 73,246        1.3
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s consolidated operating profit decreased $138.5 million, or 189.1%, to an operating loss of $65.3 million in fiscal 2011 from an operating profit of $73.2 million in fiscal 2010. This decrease was due to the matters discussed above.

Interest Expense, Net and Amortization of Deferred Financing Fees

 

     52 weeks ended  

Dollars in thousands

   April 30,
2011
     May 1,
2010
     % of Change  

Interest Expense, Net and Amortization of Deferred Financing Fees

   $ 57,350       $ 28,237         103.1
  

 

 

    

 

 

    

 

 

 

Net interest expense and amortization of deferred financing fees increased $29.1 million, to $57.4 million in fiscal 2011 from $28.2 million in fiscal 2010. This increase in interest expense was primarily due to interest expense related to debt from the Acquisition of B&N College, investments made in digital and a $6.6 million write-off of deferred financing fees related to the amendment of the Company’s credit facility.

Income Taxes

 

     52 weeks ended  

Dollars in thousands

   April 30,
2011
    Effective Rate     May 1,
2010
     Effective Rate  

Income Taxes

   $ (48,652     39.7   $ 8,365         18.6
  

 

 

   

 

 

   

 

 

    

 

 

 

Income tax benefit in fiscal 2011 was $48.7 million compared with income tax expense of $8.4 million in fiscal 2010. The Company’s effective tax rate increased to 39.7% in fiscal 2011 compared with 18.6% in fiscal 2010. The lower effective tax rate in fiscal 2010 was due primarily to the recognition of previously unrecognized tax benefits for years settled with the applicable tax authorities. The tax benefit in fiscal 2011 is a result of operating losses incurred during the fiscal year.

 

F-19


Net Loss Attributable to Noncontrolling Interests

Net loss attributable to noncontrolling interests was $0.04 million in fiscal 2011 compared with $0.03 million in fiscal 2010, and relates to the 50% outside interest in Begin Smart LLC (Begin Smart).

During fiscal 2011, the Company purchased the remaining 50% outside interest in Begin Smart LLC for $0.3 million. 100% of Begin Smart results of operations for the period subsequent to the Begin Smart acquisition date are included in the consolidated financial statements.

Net Earnings (Loss) Attributable to Barnes & Noble, Inc.

 

     52 weeks ended  

Dollars in thousands

   April 30,
2011
    Diluted EPS     May 1,
2010
     Diluted EPS  

Net Earnings (Loss) Attributable to Barnes & Noble, Inc.

   $ (73,920   $ (1.31   $ 36,676       $ 0.63   
  

 

 

   

 

 

   

 

 

    

 

 

 

As a result of the factors discussed above, the Company reported a consolidated net loss of $73.9 million (or $1.31 per diluted share) during fiscal 2011, compared with consolidated net earnings of $36.7 million (or $0.63 per diluted share) during fiscal 2010.

Seasonality

The B&N Retail business, like that of many retailers, is seasonal, with the major portion of sales and operating profit realized during the third fiscal quarter, which includes the holiday selling season. The B&N College business is also seasonal, with the major portion of sales and operating profit realized during the second and third fiscal quarters, when college students generally purchase textbooks for the upcoming semesters. The NOOK business, like that of many technology companies, is impacted by the launch of new products and the promotional efforts to support those new products, as well as the traditional retail holiday selling seasonality.

Liquidity and Capital Resources

The primary sources of Barnes & Noble, Inc.’s (Barnes & Noble or the Company) 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 $54.1 million as of April 28, 2012, compared with $59.4 million as of April 30, 2011.

Merchandise inventories increased $186.5 million, or 13.6%, to $1.562 billion as of April 28, 2012, compared with $1.375 billion as of April 30, 2011. This increase was primarily due to larger inventories of devices and accessories. Receivables, net increased $10.2 million or 6.8% to $160.5 million as of April 28, 2012, compared to $150.3 million as of April 30, 2011. This increase was primarily due to higher shipments of NOOK products to third party channel partners. Prepaid expenses and other current assets increased $59.4 million or 36.7% to $221.3 million as of April 28, 2012, compared to $161.9 million as of April 30, 2011. This increase was primarily due to an increase in textbook rental inventory and higher short-term deferred taxes. Accounts payable increased $10.4 million or 1.1% to $959.4 billion as of April 28, 2012, compared to $949.0 million as of April 30, 2011. Accounts payable was 61% and 69% of merchandise inventory as of April 28, 2012 and April 30, 2011, respectively. The decline in payable ratios was attributable to the increase in device and accessory inventory paid earlier in the year. Accrued liabilities

 

F-20


increased $82.2 million or 10.5% to $867.9 million as of April 28, 2012, compared to $785.7 million as of April 30, 2011. This increase was primarily due to several factors, including accrued taxes and deferred income (higher device and textbook rental sales).

Cash Flow

Cash flows provided by (used in) operating activities were $(24.1) million, $199.1 million and $128.4 million, during fiscal 2012, fiscal 2011 and fiscal 2010, respectively. The decrease in cash flows from operating activities in fiscal 2012 from fiscal 2011 was primarily attributable to increased device and accessory inventory levels and changes in deferred taxes. The increase in cash flows provided from operating activities in fiscal 2011 from fiscal 2010 was primarily attributable to a $59.6 million federal tax refund received in fiscal 2011.

Capital Structure

On April 27, 2012, the Company entered into an investment agreement among the Company, Morrison Investment Holdings, Inc. (Morrison), and Microsoft Corporation (Microsoft) pursuant to which the Company will form a Delaware limited liability company (NewCo), and transfer to NewCo the Company’s digital device, digital content and college bookstore businesses and NewCo will sell to Morrison, and Morrison will purchase, 300 million convertible preferred membership interests in NewCo for an aggregate purchase price of $300.0 million. Concurrently with its entry into this agreement, the Company has also entered into a commercial agreement with Microsoft, pursuant to which, among other things, NewCo will develop and distribute a Windows 8 application for e-reading and digital content purchases, and an intellectual property license and settlement agreement with Microsoft and Microsoft Licensing GP.

On August 18, 2011, the Company entered into an investment agreement between the Company and Liberty GIC, Inc. (Liberty) pursuant to which the Company issued and sold to Liberty, and Liberty purchased, 204,000 shares of the Company’s Series J Preferred Stock, par value $0.001 per share (Preferred Stock), for an aggregate purchase price of $204.0 million in a private placement exempt from the registration requirements of the 1933 Act. The shares of Preferred Stock will be convertible, at the option of the holders, into shares of Common Stock representing 16.6% of the Common Stock outstanding as of August 29, 2011, (after giving pro forma effect to the issuance of the Preferred Stock), based on the initial conversion rate. The initial conversion rate reflects an initial conversion price of $17.00 and is subject to adjustment in certain circumstances. The initial dividend rate for the Preferred Stock is equal to 7.75% per annum of the initial liquidation preference of the Preferred Stock to be paid quarterly and subject to adjustment in certain circumstances.

On September 30, 2009, in connection with the closing of the Acquisition described in Note 14 to the Consolidated Financial Statements contained herein, the Company issued the Sellers (i) a senior subordinated note (the Senior Seller Note) in the principal amount of $100.0 million, payable in full on December 15, 2010, with interest of 8% per annum payable on the unpaid principal amount, and (ii) a junior subordinated note (the Junior Seller Note) in the principal amount of $150.0 million, payable in full on the fifth anniversary of the closing of the Acquisition, with interest of 10% per annum payable on the unpaid principal amount. Pursuant to a settlement agreed to on June 13, 2012 and described in Note 18 to the Consolidated Financial Statements contained herein, the Sellers have agreed to waive their right to receive $22.75 million in principal amount (and interest on such principal amount) of the Junior Seller Note, subject to receipt of court approval. On December 22, 2009, the Company consented to the pledge and assignment of the Senior Seller Note by the Sellers as collateral security. The Senior Seller Note was paid on its scheduled due date, December 15, 2010.

On April 27, 2012, the Company entered into an amendment (the 2012 Amended Credit Facility)

 

F-21


to its existing agreement with Bank of America, N.A. entered into on April 29, 2011, as administrative agent, collateral agent and swing line lender, and other lenders in order to permit the transactions contemplated by the investment agreement among the Company, Morrison Investment Holdings, Inc., and Microsoft Corporation (See Note 11) and to make certain other changes to the Company’s 2011 Amended Credit Agreement in connection therewith.

On April 29, 2011, the Company entered into an amended and restated credit agreement (the 2011 Amended Credit Agreement) with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and other lenders, which amended and restated the credit agreement (the 2009 Credit Agreement) entered into on September 30, 2009 with Bank of America N.A., as administrative agent, collateral agent and swing line lender, and other lenders. Under the 2011 Amended Credit Agreement, Lenders provided up to $1.0 billion in aggregate commitments under a five-year asset-backed revolving credit facility (the 2011 Amended Credit Facility), which is secured by eligible inventory with the ability to include eligible real estate and accounts receivable and related assets. Borrowings under the 2011 Amended Credit Agreement were limited to a specified percentage of eligible inventories with the ability to include eligible real estate, accounts receivable and accrued interest, at the election of the Company, at Base Rate or LIBO Rate, plus, in each case, an Applicable Margin (each term as defined in the 2011 Amended Credit Agreement). In addition, the Company has the option to request an increase in commitments under the 2011 Amended Credit Agreement by up to $300.0 million, subject to certain restrictions.

The 2011 Amended Credit Agreement requires Availability (as defined in the 2011 Amended Credit Agreement) to be greater than the greater of (i) 10% of the Loan Cap (as defined in the 2011 Amended Credit Agreement) and (ii) $50.0 million. In addition, the 2011 Amended Credit Agreement contains covenants that limit, among other things, the Company’s ability to incur indebtedness, create liens, make investments, make restricted payments, merge or acquire assets, and contains default provisions that are typical for this type of financing, among other things. Proceeds from the 2011 Amended Credit Facility are used for general corporate purposes, including seasonal working capital needs.

As a result of the 2011 Amended Credit Agreement, $6.6 million of deferred financing fees related to the 2009 Credit Facility were written off in fiscal 2011, and included in net interest expenses. The remaining unamortized deferred costs of $16.3 million and new charges of $10.2 million relating to the Company’s 2011 Amended Credit Facility were deferred and are being amortized over the five-year term of the 2011 Amended Credit Facility.

On September 30, 2009, the Company had entered into the 2009 Credit Agreement under which the lenders committed to provide up to $1.0 billion in commitments under a four-year asset-backed revolving credit facility (the 2009 Credit Facility) and which was secured by eligible inventory and accounts receivable and related assets. Borrowings under the 2009 Credit Agreement were limited to a specified percentage of eligible inventories, accounts receivable and accrued interest, at the election of the Company, at Base Rate or LIBO Rate, plus, in each case, an Applicable Margin (each term as defined in the 2009 Credit Agreement). In addition, the Company had the option to request the increase in commitments under the 2009 Credit Agreement by up to $300.0 million subject to certain restrictions.

 

F-22


Selected information related to the Company’s 2012 Amended Credit Facility, 2011 Amended Credit Facility and 2009 Credit Facility (in thousands):

 

     Fiscal 2012     Fiscal
2011
    Fiscal 2010  

Credit facility at period end

   $ 324,200        313,100        260,400   

Average balance outstanding during the period

   $ 306,038        338,971        107,504   

Maximum borrowings outstanding during the period

   $ 582,000        622,800        512,500   

Weighted average interest rate during the period

     3.34     4.30     4.38

Interest rate at end of period

     3.32     5.13     4.13

Fees expensed with respect to the unused portion of the 2012 Amended Credit Facility, 2011 Amended Credit Facility and 2009 Credit Facility were $3.3 million, $5.5 million and $4.2 million during fiscal 2012, fiscal 2011, and fiscal 2010, respectively.

The Company has no agreements to maintain compensating balances.

Capital Investment

Capital expenditures were $163.6 million, $110.5 million and $127.8 million during fiscal 2012, fiscal 2011 and fiscal 2010, respectively. Capital expenditures planned for fiscal 2013 primarily relate to the Company’s digital initiatives, buildout of its Palo Alto facilities, new stores, maintenance of existing stores and system enhancements for the retail and college stores. The capital expenditures are expected to be approximately $175.0 million for fiscal 2013, although commitment to many of such expenditures has not yet been made.

Based on planned operating levels and capital expenditures for fiscal 2013, management believes cash and cash equivalents on hand, cash flows generated from operating activities, short-term vendor financing and borrowing capacity under the 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. However, the Company may determine to raise additional capital to support the growth of online and digital businesses.

On May 15, 2007, the Company announced that its Board of Directors authorized a stock repurchase program for the purchase of up to $400.0 million of the Company’s common stock. The maximum dollar value of common stock that may yet be purchased under the current program is approximately $2.5 million as of April 28, 2012.

Stock repurchases under this program may be made through open market and privately negotiated transactions from time to time and in such amounts as management deems appropriate. As of April 28, 2012, the Company has repurchased 33,722,264 shares at a cost of approximately $1.1 billion under its stock repurchase programs. The repurchased shares are held in treasury.

On December 29, 2011, the Company sold its distribution facility located in South Brunswick, New Jersey for $18.0 million, which resulted in a loss of $2.2 million.

 

F-23


Contractual Obligations

The following table sets forth the Company’s contractual obligations as of April 28, 2012 (in millions):

 

Contractual Obligations

   Payments Due by Period  
     Total      Less Than
1 Year
     1-3
Years
     3-5
Years
     More Than
5 Years
 

Long-term debt

   $ 324.2       $ —         $ —         $ 324.2       $ —     

Capital lease obligations

     3.0         1.0         1.7         0.3         —     

Operating lease obligations (a)

     1,944.7         404.5         643.8         432.0         464.4   

Purchase obligations

     48.8         30.3         11.7         3.6         3.2   

Interest obligations (b)

     57.1         20.2         31.9         5.0         —     

Other long-term liabilities reflected on the Company’s balance sheet under GAAP (c)

     150.0         —           150.0         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,527.8       $ 456.0       $ 839.1       $ 765.1       $ 467.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Excludes obligations under store leases for insurance, taxes and other maintenance costs, which obligations totaled approximately 16% of the minimum rent payments under those leases.

 

(b) Represents commitment fees related to the Company’s 2012 Amended Credit Facility and interest obligations on the Seller Notes issued in connection with the Acquisition.

 

(c) Excludes $17.0 million of unrecognized tax benefits for which the Company cannot make a reasonably reliable estimate of the amount and period of payment. See Note 9 to the Notes to Consolidated Financial Statements.

See also Note 8 to the Notes to Consolidated Financial Statements for information concerning the Company’s Pension and Postretirement Plans.

Off-Balance Sheet Arrangements

As of April 28, 2012, the Company had no off-balance sheet arrangements as defined in Item 303 of Regulation S-K.

Impact of Inflation

The Company does not believe that inflation has had a material effect on its net sales or results of operations.

 

F-24


Certain Relationships and Related Transactions

See Note 19 to the Notes to Consolidated Financial Statements.

Critical Accounting Policies

The “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this report discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. In preparing these financial statements, management has made its best estimates and judgments with respect to certain amounts included in the financial statements, giving due consideration to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

Revenue Recognition

Revenue from sales of the Company’s products is recognized at the time of sale, other than those with multiple elements and FOB destination point shipping terms. The Company’s products are considered delivered once they have been shipped and title and risk of loss have transferred. While the majority of the Company’s shipping terms are FOB shipping point, there are certain third party distribution partners with shipping terms of FOB destination point. Certain of the Company sales agreements with these distribution partners contain rights of inspection or acceptance provisions as is standard in the Company’s industry. The Company accrues for estimated sales returns in the period in which the related revenue is recognized based on historical experience and industry standards. Sales taxes collected from retail customers are excluded from reported revenues. All of the Company’s sales are recognized as revenue on a “net” basis, including sales in connection with any periodic promotions offered to customers. The Company does not treat any promotional offers as expenses.

In accordance with Accounting Standards Codification (ASC) 605-25, Revenue Recognition, Multiple Element Arrangements and Accounting Standards Updates (ASU) 2009-13 and 2009-14, for multiple-element arrangements that involve tangible products that contain software that is essential to the tangible product’s functionality, undelivered software elements that relate to the tangible product’s essential software and other separable elements, the Company allocates revenue to all deliverables using the relative selling-price method. Under this method, revenue is allocated at the time of sale to all deliverables based on their relative selling price using a specific hierarchy. The hierarchy is as follows: vendor-specific objective evidence, third-party evidence of selling price, or best estimate of selling price. NOOK® eBook Reader revenue (which includes revenue from the Company’s NOOK 1st Edition™, NOOK Wi-Fi 1st Edition™, NOOK Color™, NOOK Simple Touch™, NOOK Tablet™ and NOOK Simple Touch with GlowLight™ eBook Reader devices) is recognized at the segment point of sale.

The Company includes post-service customer support (PCS) in the form of software updates and potential increased functionality on a when-and-if-available basis, as well as wireless access and wireless connectivity with the purchase of NOOK® from the Company. Using the relative selling price described above, the Company allocates revenue based on the best estimate of selling price for the deliverables as no vendor-specific objective evidence or third-party evidence exists for any of the elements. Revenue allocated to NOOK® and the software essential to its functionality is recognized at the time of sale, provided all other conditions for revenue recognition are met. Revenue allocated to the PCS and the wireless access is deferred and recognized on a straight-line basis over the 2-year estimated life of NOOK®.

 

F-25


The average percentage of a NOOK’s sales price that is deferred for undelivered items and recognized over its 2-year estimated life ranges between 2% and 5%, depending on the type of device sold. The amount of NOOK®-related deferred revenue as of April 28, 2012 and April 30, 2011 was $19.8 million and $18.2 million, respectively. These amounts are classified on the Company’s balance sheet in accrued liabilities for the portion that is subject to deferral for one year or less and other long-term liabilities for the portion that is subject to deferral for more than one year.

The Company also pays certain vendors who distribute NOOK® a commission on the content sales sold through that device. The Company accounts for these transactions as a reduction in the sales price of the NOOK® based on historical trends of content sales and a liability is established for the estimated commission expected to be paid over the life of the product. The Company recognizes revenue of the content at the point of sale of the content. The Company records revenue from sales of digital content, sales of third-party extended warranties, service contracts and other products, for which the Company is not obligated to perform, and for which the Company does not meet the criteria for gross revenue recognition under ASC 605-45-45, Reporting Revenue Gross as a Principal versus Net as an Agent, on a net basis. All other revenue is recognized on a gross basis.

NOOK acquires the rights to distribute digital content from publishers and distributes the content on barnesandnoble.com, NOOK® devices and other eBookstore platforms. Certain digital content is distributed under an agency pricing model in which the publishers set fixed prices for eBooks and NOOK receives a fixed commission on content sold through the eBookstore. The majority of the Company’s eBook sales are sold under the agency model.

The Barnes & Noble Member Program offers members greater discounts and other benefits for products and services, as well as exclusive offers and promotions via e-mail or direct mail for an annual fee of $25.00, which is non-refundable after the first 30 days. Revenue is recognized over the twelve-month period based upon historical spending patterns for Barnes & Noble Members.

Merchandise Inventories

Merchandise inventories are stated at the lower of cost or market. Cost is determined primarily by the retail inventory method under both the first-in, first-out (FIFO) basis and the last-in, first-out (LIFO) basis. B&N College’s textbook and trade book inventories are valued using the LIFO method, where the related reserve was not material to the recorded amount of the Company’s inventories or results of operations.

Market is determined based on the estimated net realizable value, which is generally the selling price. Reserves for non-returnable inventory are based on the Company’s history of liquidating non-returnable inventory. The Company does not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to calculate the non-returnable inventory reserve. However, if assumptions based on the Company’s history of liquidating non-returnable inventory are incorrect, it may be exposed to losses or gains that could be material. A 10% change in actual non-returnable inventory would have affected net earnings by approximately $0.9 million in fiscal 2012.

The Company also estimates and accrues shortage for the period between the last physical count of inventory and the balance sheet date. Shortage rates are estimated and accrued based on historical rates and can be affected by changes in merchandise mix and changes in actual shortage trends. The Company does not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to calculate shortage rates. However, if the Company’s estimates

 

F-26


regarding shortage rates are incorrect, it may be exposed to losses or gains that could be material. A 10% change in actual shortage rates would have affected net earnings by approximately $0.9 million in fiscal 2012.

Research and Development Costs for Software Products

Software development costs for products to be sold, leased, or otherwise marketed are capitalized in accordance with ASC 985-20, Cost of Software to Be Sold, Leased or Marketed. Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale. A certain amount of judgment and estimation is required to assess when technological feasibility is established, as well as the ongoing assessment of the recoverability of capitalized costs. The Company’s products reach technological feasibility shortly before the products are released and therefore research and development costs are generally expensed as incurred.

Stock-Based Compensation

The calculation of stock-based employee compensation expense involves estimates that require management’s judgment. These estimates include the fair value of each of the stock option awards granted, which is estimated on the date of grant using a Black-Scholes option pricing model. There are two significant inputs into the Black-Scholes option pricing model: expected volatility and expected term. The Company estimates expected volatility based on traded option volatility of the Company’s stock over a term equal to the expected term of the option granted. The expected term of stock option awards granted is derived from historical exercise experience under the Company’s stock option plans and represents the period of time that stock option awards granted are expected to be outstanding. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate, and only recognize expense for those shares expected to vest. If the Company’s actual forfeiture rate is materially different from its estimate, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period. See Note 3 to the Consolidated Financial Statements for a further discussion on stock-based compensation.

The Company does not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions used to determine stock-based compensation expense. However, if actual results are not consistent with the Company’s estimates or assumptions, the Company may be exposed to changes in stock-based compensation expense that could be material. If actual results are not consistent with the assumptions used, the stock-based compensation expense reported in the Company’s financial statements may not be representative of the actual economic cost of the stock-based compensation. A 10% change in the Company’s stock-based compensation expense for the year ended April 28, 2012 would not have had a material impact on the Company’s results of operations in fiscal 2012.

Other Long-Lived Assets

The Company’s other long-lived assets include property and equipment and amortizable intangibles. At April 28, 2012, the Company had $622.7 million of property and equipment, net of accumulated depreciation, and $249.3 million of amortizable intangible assets, net of amortization, accounting for approximately 23.2% of the Company’s total assets. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets (ASC 360-10). The Company evaluates long-lived assets for impairment at

 

F-27


the individual Barnes & Noble store level, except for B&N College long-lived assets, which are evaluated for impairment at the university contract combined store level, which is the lowest level at which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, the Company will first compare the carrying amount of the assets to the individual store’s estimated future undiscounted cash flows. If the estimated future cash flows are less than the carrying amount of the assets, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the assets to the individual store’s fair value based on its estimated discounted future cash flows. If required, an impairment loss is recorded for that portion of the asset’s carrying value in excess of fair value. Impairment losses included in selling and administrative expenses totaled $11.7 million, $2.9 million and $12.1 million during fiscal 2012, fiscal 2011 and fiscal 2010, and are related to individual store locations. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to calculate long-lived asset impairment losses. However, if actual results are not consistent with estimates and assumptions used in estimating future cash flows and asset fair values, the Company may be exposed to losses that could be material. A 10% decrease in the Company’s estimated discounted cash flows would not have had a material impact on the Company’s results of operations in fiscal 2012.

Goodwill and Unamortizable Intangible Assets

At April 28, 2012, the Company had $519.7 million of goodwill and $314.7 million of unamortizable intangible assets (those with an indefinite useful life), accounting for approximately 22.2% of the Company’s total assets. ASC 350-30, Goodwill and Other Intangible Assets, requires that goodwill and other unamortizable intangible assets no longer be amortized, but instead be tested for impairment at least annually or earlier if there are impairment indicators. The Company performs a two-step process for impairment testing of goodwill as required by ASC 350-30. The first step of this test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount. The second step (if necessary) measures the amount of the impairment. The Company completed its annual goodwill impairment test as of the first day of the third quarter. In performing the valuations, the Company used cash flows that reflected management’s forecasts and discount rates that included risk adjustments consistent with the current market conditions. Based on the results of the Company’s step one testing, the fair values of the B&N Retail, B&N College and B&N.com reporting units exceeded their carrying values; therefore, the second step of the impairment test was not required to be performed and no goodwill impairment was recognized. During the fourth quarter of fiscal 2012 the Company has determined that the segment previously referred to as B&N.com is no longer applicable and created a new segment titled NOOK to report upon its digital business, moving the eCommerce business (i.e., sales of physical merchandise over the Internet) into the B&N Retail segment. The Company’s three operating segments are: B&N Retail, B&N College and NOOK. As a result of this evaluation, $20.3 million of goodwill was re-allocated between B&N Retail and NOOK segments. There were no subsequent indicators of impairment prior to or after the reallocation of goodwill. The Company tests unamortizable intangible assets by comparing the fair value and the carrying value of such assets. The Company also completed its annual impairment tests for its other unamortizable intangible assets by comparing the estimated fair value to the carrying value of such assets and determined that no impairment was necessary. Changes in market conditions, among other factors, could have a material impact on these estimates. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to calculate goodwill and unamortizable intangible asset impairment losses. However, if actual results are not consistent with estimates and assumptions used in estimating future cash flows and asset fair values, the Company may be exposed to losses that could be material. A 10% decrease in the Company’s estimated discounted cash flows would have no impact on the Company’s evaluation of goodwill and unamortizable intangible assets, except for the Company’s publishing contracts.

Publishing contracts include the value of long-standing relationships with authors, agents and

 

F-28


publishers established upon the Company’s acquisition of Sterling in 2003. Given Sterling’s strong history of maintaining such relationships, the Company believes they produce value indefinitely without an identifiable remaining useful life. However, given recent declines in the physical book business, these contracts were at risk of impairment as of its most recent impairment testing date and may be at risk in the future if declines in sales continue. A 10% decrease in Sterling sales trends would have resulted in a $5.4 million impairment charge on the Company’s results of operations in fiscal 2012.

Gift Cards

The Company sells gift cards which can be used in its stores or on Barnes & Noble.com. The Company does not charge administrative or dormancy fees on gift cards, and gift cards have no expiration dates. Upon the purchase of a gift card, a liability is established for its cash value. Revenue associated with gift cards is deferred until redemption of the gift card. Over time, some portion of the gift cards issued is not redeemed. The Company estimates the portion of the gift card liability for which the likelihood of redemption is remote based upon the Company’s historical redemption patterns. The Company records this amount in income on a straight-line basis over a 12-month period beginning in the 13th month after the month the gift card was originally sold. If actual redemption patterns vary from the Company’s estimates, actual gift card breakage may differ from the amounts recorded. The Company recognized gift card breakage of $29.3 million, $25.9 million and $21.3 million during fiscal 2012, fiscal 2011 and fiscal 2010, respectively. The Company had gift card liabilities of $321 million and $311 million as of April 28, 2012 and April 30, 2011, respectively, which amounts are included in accrued liabilities. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to recognize revenue associated with gift cards. However, if estimates regarding the Company’s history of gift card breakage are incorrect, it may be exposed to losses or gains that could be material. A 10% change in the Company’s gift card breakage rate at April 28, 2012 would have affected net earnings by approximately $1.7 million in fiscal 2012.

Income Taxes

Judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. In the ordinary course of business, tax issues may arise where the ultimate outcome is uncertain. Additionally, the Company’s tax returns are subject to audit by various tax authorities. Consequently, changes in the Company’s estimates for contingent tax liabilities may materially impact the Company’s results of operations or financial position. A 1% variance in the Company’s effective tax rate would not have had a material impact to the Company’s results of operations in fiscal 2012.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) issued ASU 2011-05, Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendment requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. In addition, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12). ASU 2011-12 effectively defers only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. All other requirements in ASU 2011-05 are not affected by this update. These ASUs are effective for the Company’s financial statements for annual and interim periods beginning on or after December 15, 2011 and must be applied retrospectively. The Company has early adopted both ASU 2011-05 and ASU 2011-12.

 

F-29


In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment (ASU 2011-08). ASU 2011-08 gives the Company the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. This ASU is effective for the Company’s financial statements for annual and interim periods beginning on or after December 15, 2011. The adoption is not expected to have an impact on the Company’s Fiscal 2013 Consolidated Financial Statements.

Disclosure Regarding Forward-Looking Statements

This report may contain certain forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act)) 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,” “will” 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, the general economic environment and consumer spending patterns, decreased consumer demand for the Company’s products, low growth or declining sales and net income due to various factors, risk that international expansion will not be successfully achieved or may be achieved later than expected, possible disruptions in the Company’s computer systems, telephone systems or supply chain, possible risks associated with data privacy, information security and intellectual property, possible work stoppages or increases in labor costs, possible increases in shipping rates or interruptions in shipping service, effects of competition, possible risks that inventory in channels of distribution may be larger than able to be sold, possible risk that returns from consumers or channels of distribution may be greater than estimated, the risk that the expected sales lift from Borders’ store closures is not achieved in whole or part, the risk that digital sales growth is less than expectations and the risk that it does not exceed the rate of investment spend, higher-than-anticipated store closing or relocation costs, higher interest rates, the performance of the Company’s online, digital and other initiatives, the performance and successful integration of acquired businesses, the success of the Company’s strategic investments, unanticipated increases in merchandise, component or occupancy costs, unanticipated adverse litigation results or effects, product and component shortages, the potential adverse impact on the business resulting from the review of a potential separation of the NOOK digital business, the risk that the transactions contemplated by the partnership with Microsoft Corporation (Microsoft) to form a new Company subsidiary (NewCo) to be comprised of NOOK and B&N College, including with respect to any spin-off, split-off or other disposition by the Company of its interest in NewCo, are not able to be implemented on the terms contemplated or at all, the risk that the transactions do not achieve the expected benefits for the parties including the risk that NewCo’s applications are not commercially successful or that the expected distribution of those applications is not achieved, the risk that the separation of the digital and college businesses or any subsequent spin-off, split-off or other disposition by the Company of its interest in NewCo results in adverse impacts on the Company or NewCo (including as a result of termination of agreements and other adverse impacts), the potential impact on the Company’s retail business of the separation, the potential tax consequences for the Company and its shareholders of a subsequent spin-off, split-off or other disposition by the Company of its interest in NewCo, the risk that the international expansion contemplated by the relationship is not successful, the risk that NewCo is not able to perform its obligations under the commercial agreement, including with respect to the development of applications and international expansion, and the consequences thereof, the costs and disruptions arising out of any

 

F-30


such separation of NOOK and the B&N College, the risk that the Company may not recoup its investments in NOOK as part of any separation transaction, the risks, difficulties, and uncertainties that may result from the separation of businesses that were previously co-mingled including necessary ongoing relationships, and potential for adverse customer impacts and other factors which may be outside of the Company’s control, including those factors discussed in detail in Item 1A, “Risk Factors,” in the Company’s Form 10-K for the fiscal year ended April 28, 2012, and in the Company’s other filings made hereafter from time to time with the SEC. The forward-looking statements relating to international expansion are also subject to the following risks, among others that may affect the introduction, success and timing of the NOOK® eReader and content in countries outside the United States: the Company may not be successful in reaching agreements with international companies, the terms of agreements that the Company reach may not be advantageous to it, the Company’s NOOK® device may require technological changes to comply with applicable laws, and marketplace acceptance and other companies have already entered the marketplace with products that have achieved some customer acceptance. 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. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Annual Report.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In thousands, except per share data)

   Fiscal 2012     Fiscal 2011     Fiscal 2010  

Sales

   $ 7,129,199        6,998,565        5,807,754   

Cost of sales and occupancy

     5,218,383        5,205,712        4,131,009   
  

 

 

   

 

 

   

 

 

 

Gross profit

     1,910,816        1,792,853        1,676,745   
  

 

 

   

 

 

   

 

 

 

Selling and administrative expenses

     1,739,452        1,629,465        1,395,725   

Depreciation and amortization

     232,667        228,647        207,774   
  

 

 

   

 

 

   

 

 

 

Operating profit (loss)

     (61,303     (65,259     73,246   

Interest income (expense), net and amortization of deferred financing fees

     (35,304     (57,350     (28,237
  

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes (benefit)

     (96,607     (122,609     45,009   

Income taxes (benefit)

     (27,740     (48,652     8,365   
  

 

 

   

 

 

   

 

 

 

Net earnings (loss)

     (68,867     (73,957     36,644   

Net loss attributable to noncontrolling interests

     —          37        32   
  

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to Barnes & Noble, Inc.

   $ (68,867     (73,920     36,676   
  

 

 

   

 

 

   

 

 

 

Earnings (loss) attributable to Barnes & Noble, Inc.

      

Earnings (loss)

   $ (68,867     (73,957     36,644   

Less loss attributable to noncontrolling interests

     —          37        32   
  

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to Barnes & Noble, Inc.

   $ (68,867     (73,920     36,676   
  

 

 

   

 

 

   

 

 

 

Basic earnings (loss) per common share

      
  

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to Barnes & Noble, Inc.

   $ (1.41     (1.31     0.64   
  

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per common share

      
  

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to Barnes & Noble, Inc.

   $ (1.41     (1.31     0.63   
  

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

      

Basic

     57,337        56,588        55,344   

Diluted

     57,337        56,588        56,153   

See accompanying notes to consolidated financial statements.

 

F-31


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

(In thousands)

   Fiscal 2012     Fiscal 2011     Fiscal 2010  

Net earnings (loss)

   $ (68,867     (73,957     36,644   

Other comprehensive earnings (loss), net of tax:

      

(Increase) decrease in minimum pension liability (net of deferred tax benefit (expense) of $3,336, ($1,055) and $798, respectively)

     (5,005     1,582        (1,197
  

 

 

   

 

 

   

 

 

 

Total comprehensive earnings (loss)

     (73,872     (72,375     35,447   

Comprehensive loss attributable to noncontrolling interest

     —          37        32   
  

 

 

   

 

 

   

 

 

 

Total comprehensive earnings (loss) attributable to Barnes & Noble, Inc.

   $ (73,872     (72,338     35,479   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-32


CONSOLIDATED BALANCE SHEETS

 

(In thousands, except per share data)

   April 28, 2012     April 30, 2011  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 54,131        59,429   

Receivables, net

     160,497        150,294   

Merchandise inventories, net

     1,561,841        1,375,362   

Prepaid expenses and other current assets

     221,324        161,936   
  

 

 

   

 

 

 

Total current assets

   $ 1,997,793        1,747,021   
  

 

 

   

 

 

 

Property and equipment:

    

Land and land improvements

     2,541        8,617   

Buildings and leasehold improvements

     1,196,764        1,204,108   

Fixtures and equipment

     1,784,492        1,670,488   
  

 

 

   

 

 

 
     2,983,797        2,883,213   

Less accumulated depreciation and amortization

     2,361,142        2,178,562   
  

 

 

   

 

 

 

Net property and equipment

     622,655        704,651   
  

 

 

   

 

 

 

Goodwill

     519,685        524,113   

Intangible assets, net

     564,054        566,578   

Other noncurrent assets

     61,062        54,103   
  

 

 

   

 

 

 

Total assets

   $ 3,765,249        3,596,466   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 959,423        949,010   

Accrued liabilities

     546,495        474,575   

Gift card liabilities

     321,362        311,092   
  

 

 

   

 

 

 

Total current liabilities

     1,827,280        1,734,677   
  

 

 

   

 

 

 

Long-term debt

     324,200        313,100   

Deferred taxes

     268,774        280,132   

Other long-term liabilities

     405,065        448,647   

Redeemable Preferred Shares; $.001 par value; 5,000 shares authorized; 204 and zero shares issued, respectively

     192,273        —     

Shareholders’ equity:

    

Common stock; $.001 par value; 300,000 shares authorized; 91,376 and 90,465 shares issued, respectively

     91        90   

Additional paid-in capital

     1,340,909        1,323,263   

Accumulated other comprehensive loss

     (16,635     (11,630

Retained earnings

     481,574        562,379   

Treasury stock, at cost, 33,722 and 33,410 shares, respectively

     (1,058,282     (1,054,192
  

 

 

   

 

 

 

Total Shareholders’ equity

     747,657        819,910   
  

 

 

   

 

 

 

Commitments and contingencies

     —          —     
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 3,765,249        3,596,466   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-33


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

(In thousands)

         Barnes & Noble, Inc. Shareholders’ Equity        
     Noncontrolling
Interest
    Common
Stock
     Additional
Paid-In
Capital
    Accumulated
Other
Comprehensive
Gains (Losses)
    Retained
Earnings
    Treasury
Stock at Cost
    Total  

Balance at May 2, 2009

   $ 1,582        88         1,274,454        (12,015     697,042        (1,049,328   $ 911,823   

Net earnings (loss)

     (32     —           —          —          36,676        —          36,644   

Minimum pension liability, net of tax

     —          —           —          (1,197     —          —          (1,197

Exercise of 313 common stock options

     —          1         4,362        —          —          —          4,363   

Stock options and restricted stock tax benefits

     —          —           (3,557     —          —          —          (3,557

Stock-based compensation expense

     —          —           15,723        —          —          —          15,723   

Sale of Calendar Club

     —          —           (4,767     —          4,767        —          —     

Cash dividend paid to stockholders

     —          —           —          —          (57,403     —          (57,403

Treasury stock acquired, 137 shares

     —          —           —          —          —          (3,028     (3,028
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at May 1, 2010

     1,550        89         1,286,215        (13,212     681,082        (1,052,356     903,368   

Net loss

     (37     —           —          —          (73,920     —          (73,957

Minimum pension liability, net of tax

     —          —           —          1,582        —          —          1,582   

Purchase of noncontrolling

interest

     (1,513     —           1,213        —          —          —          (300

Exercise of 1,024 common

stock options

     —          1         17,232        —          —          —          17,233   

Stock options and restricted stock tax benefits

     —          —           (2,375     —          —          —          (2,375

Stock-based compensation expense

     —          —           20,978        —          —          —          20,978   

Cash dividend paid to stockholders

     —          —           —          —          (44,783     —          (44,783

Treasury stock acquired, 125 shares

     —          —           —          —          —          (1,836     (1,836
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at April 30, 2011

   $ —          90         1,323,263        (11,630     562,379        (1,054,192   $ 819,910   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-34


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (CONTINUED)

 

(In thousands)

   Barnes & Noble, Inc. Shareholders’ Equity        
     Common
Stock
     Additional
Paid-In
Capital
    Accumulated
Other
Comprehensive
Gains (Losses)
    Retained
Earnings
    Treasury
Stock at Cost
    Total  

Balance at April 30, 2011

   $ 90         1,323,263        (11,630     562,379        (1,054,192   $ 819,910   

Net loss

     —           —          —          (68,867     —          (68,867

Minimum pension liability, net of tax

     —           —          (5,005     —          —          (5,005

Exercise of 92 common stock options

     1         1,096        —          —          —          1,097   

Stock options and restricted

stock tax benefits

     —           (4,225     —          —          —          (4,225

Stock-based compensation expense

     —           20,775        —          —          —          20,775   

Accretive dividend on

preferred stockholders

     —           —          —          (894     —          (894

Accrued/paid dividends for preferred stockholders

     —           —          —          (11,044     —          (11,044

Treasury stock acquired, 313 shares

     —           —          —          —          (4,090     (4,090
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at April 28, 2012

   $ 91         1,340,909        (16,635     481,574        (1,058,282   $ 747,657   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements.

F-35


CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Fiscal Year    Fiscal
2012
    Fiscal
2011
    Fiscal
2010
 

(In thousands)

      

Cash flows from operating activities:

      

Net earnings (loss)

   $ (68,867     (73,957     36,644   

Adjustments to reconcile net earnings (loss) to net cash flows provided by (used in) operating activities:

      

Depreciation and amortization (including amortization of deferred financing fees)

     238,048        244,734        214,464   

Stock-based compensation expense

     20,775        20,978        15,723   

Property and equipment impairment charge

     11,747        2,857        12,102   

Deferred taxes

     (37,570     1,614        (57,170

Loss on disposal of property and equipment

     2,590        893        2,388   

Decrease in other long-term liabilities

     (43,582     (57,256     (35,222

Changes in operating assets and liabilities, net

     (147,253     59,209        (60,528
  

 

 

   

 

 

   

 

 

 

Net cash flows provided by (used in) operating activities

     (24,112     199,072        128,401   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Proceeds from sale of distribution center

     18,000        —          —     

Purchases of property and equipment

     (163,552     (110,502     (127,779

Net increase in other noncurrent assets

     (13,326     (1,466     (3,568

Purchase of Borders Group, Inc. intellectual property

     (14,528     —          —     

Fictionwise earn-out payments

     —          (7,508     (2,612

Purchase of non-controlling interest

     —          (300     —     

Acquisition of Barnes & Noble College Booksellers, Inc. (net of cash acquired)

     —          —          (185,928

Acquisition of Tikatok Inc. (net of cash acquired)

     —          —          (2,261
  

 

 

   

 

 

   

 

 

 

Net cash flows used in investing activities

     (173,406     (119,776     (322,148
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Net proceeds from issuance of Redeemable Preferred Shares

     191,379        —          —     

Net increase in credit facility

     11,100        52,700        260,400   

Cash dividends paid to shareholders

     (7,081     (44,783     (57,403

Proceeds from exercise of common stock options

     1,097        17,233        4,363   

Purchase of treasury stock

     (4,090     (1,836     (3,028

Excess tax benefit from stock-based compensation

     193        34        855   

Financing fees paid

     (378     (10,180     (37,069

Payment of short term note payable

     —          (100,000     —     

Payment received for Calendar Club note receivable

     —          6,000        —     
  

 

 

   

 

 

   

 

 

 

Net cash flows provided by (used in) financing activities

     192,220        (80,832     168,118   
  

 

 

   

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (5,298     (1,536     (25,629

Cash and cash equivalents at beginning of year

     59,429        60,965        86,594   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 54,131        59,429        60,965   
  

 

 

   

 

 

   

 

 

 

Changes in operating assets and liabilities, net:

      

Receivables, net

   $ (10,203     (43,718     119,358   

Merchandise inventories

     (186,479     (5,251     228,822   

Prepaid expenses and other current assets

     (59,388     19,889        (56,675

Accounts payable and accrued liabilities

     108,817        88,289        (352,033
  

 

 

   

 

 

   

 

 

 

Changes in operating assets and liabilities, net

   $ (147,253     59,209        (60,528
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-36


CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

 

Fiscal Year    Fiscal
2012
     Fiscal
2011
    Fiscal
2010
 

(In thousands)

       

Supplemental cash flow information:

       

Cash paid (received) during the period for:

       

Interest paid

   $ 28,298         45,604        12,305   

Income taxes (net of refunds)

   $ 1,615         (41,681     31,461   

Supplemental disclosure of subsidiaries acquired:

       

Assets acquired (net of cash acquired)

   $ —           1,513        1,416,134   

Liabilities assumed

     —           1,213        1,227,945   
  

 

 

    

 

 

   

 

 

 

Cash paid

   $ —           300        188,189   
  

 

 

    

 

 

   

 

 

 

Noncash financing activity:

       

Notes payable on Acquisition of B&N College

     —           —          250,000   

Accrued dividend on redeemable preferred shares

   $ 3,963         —          —     

 

See accompanying notes to consolidated financial statements.

F-37


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Thousands of dollars, except per share data)

For the 52 weeks ended April 28, 2012 (fiscal 2012), April 30, 2011 (fiscal 2011), and May 1, 2010 (fiscal 2010).

 

  1. Summary of Significant Accounting Policies

Business

Barnes & Noble, one of the nation’s largest booksellers,3 is a leading content, commerce and technology company providing customers easy and convenient access to books, magazines, newspapers and other content across its multi-channel distribution platform. As of April 28, 2012, the Company operated 1,338 bookstores in 50 states, including 647 bookstores on college campuses, one of the Web’s largest eCommerce sites and develops digital content products and software. Given the dynamic nature of the book industry, the challenges faced by traditional booksellers, and the robust innovation pipeline fueling new opportunities in hardware, software and content creation and delivery, Barnes & Noble is utilizing the strength of its retail footprint to bolster its leadership and fuel sales growth across multiple channels.

Of the 1,338 bookstores, 691 operate primarily under the Barnes & Noble Booksellers® trade name. Barnes & Noble College Booksellers, LLC (B&N College), a wholly-owned subsidiary of Barnes & Noble, operates 647 college bookstores at colleges and universities across the United States. Barnes & Noble Retail (B&N Retail) operates the 691 retail bookstores. B&N Retail also includes the Company’s eCommerce site, and Sterling Publishing Co., Inc. (Sterling or Sterling Publishing), a leader in general trade book publishing. The NOOK segment includes the Company’s digital business, including the development and support of the Company’s NOOK product offerings. The digital business includes digital content such as eBooks, digital newsstand, apps, and sales of NOOK® devices and accessories to third party distribution partners, B&N Retail and B&N College.

The Company’s principal business is the sale of trade books (generally hardcover and paperback consumer titles), mass market paperbacks (such as mystery, romance, science fiction and other popular fiction), children’s books, eBooks and other digital content, NOOK® (references to NOOK™ include the Company’s NOOK 1st Edition™, NOOK Wi-Fi 1st Edition™, NOOK Color™, NOOK Simple Touch™, NOOK Tablet™ and NOOK Simple Touch with GlowLight™ eBook Reader devices),4 and related accessories, bargain books, magazines, gifts, café products and services, educational toys & games, music and movies direct to customers through its bookstores or on Barnes & Noble.com. The acquisition of B&N College (see Note 14) has allowed the Company to expand into sales of textbooks and course-related materials, emblematic apparel and gifts, trade books, computer products, school and dorm supplies, and convenience and café items on college and university campuses. In fiscal 2011, B&N College began offering a textbook rental option to its customers, and expanded its electronic textbooks and other course materials through a proprietary digital platform (NOOK Study™). B&N College offers its customers a full suite of textbook options – new, used, digital and rental.

Prior to year-end, the Company reported an operating segment titled B&N.com which included both its digital business and eCommerce operations. Due to the increased focus on the digital business

 

3 

Based upon sales reported in trade publications and public filings.

4 

Any reference to NOOK®, NOOK 1st Edition™, NOOK Wi-Fi 1st Edition™, NOOK Color™, NOOK Simple Touch™, NOOK Tablet™ and NOOK Simple Touch with GlowLight ™ includes the trademark symbol (® or ™, as applicable) even if a symbol is not included.

 

F-38


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

and the Company’s recently developed ability to review the digital business separate from its eCommerce business, the Company performed an evaluation on the effect of its impact on the identification of operating segments. The assessment considered the way the business is managed (focusing on the financial information distributed) and the manner in which the chief operating decision maker interacts with other members of management. As a result of this assessment, during the fourth quarter of fiscal 2012 the Company has determined that the segment previously referred to as B&N.com is no longer applicable and created a new segment titled NOOK to report upon its digital business, moving the eCommerce business (i.e., sales of physical non-NOOK merchandise over the Internet) into the B&N Retail segment. Also, as a result of this assessment, certain corporate office and other costs have been allocated to all three segments. The Company’s three operating segments are: B&N Retail, B&N College and NOOK.

Consolidation

The consolidated financial statements include the accounts of Barnes & Noble, Inc. and its wholly and majority-owned subsidiaries. Investments in affiliates in which ownership interests range from 20% to 50%, are accounted for under the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

In preparing financial statements in conformity with generally accepted accounting principles, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.

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 under both the first-in, first-out (FIFO) basis and the last-in, first-out (LIFO) basis. B&N College’s textbook and trade book inventories are valued using the LIFO method, where the related reserve was not material to the recorded amount of the Company’s inventories or results of operations.

Market is determined based on the estimated net realizable value, which is generally the selling price. Reserves for non-returnable inventory are based on the Company’s history of liquidating non-returnable inventory.

The Company also estimates and accrues shortage for the period between the last physical count of inventory and the balance sheet date. Shortage rates are estimated and accrued based on historical rates and can be affected by changes in merchandise mix and changes in actual shortage trends.

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

 

F-39


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

incurred, while major maintenance and 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 lease terms of the underlying leases. Costs incurred in purchasing management information systems are capitalized and included in property and equipment. These costs are amortized over their estimated useful lives from the date the systems become operational.

Other Long-Lived Assets

The Company’s other long-lived assets include property and equipment and amortizable intangibles. At April 28, 2012, the Company had $622,655 of property and equipment, net of accumulated depreciation, and $249,318 of amortizable intangible assets, net of amortization, accounting for approximately 23.2% of the Company’s total assets. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with Accounting Standards Codification (ASC) 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets (ASC 360-10). The Company evaluates long-lived assets for impairment at the individual Barnes & Noble store level, except for B&N College long-lived assets, which are evaluated for impairment at the school contract combined store level, which is the lowest level at which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, the Company will first compare the carrying amount of the assets to the individual store’s estimated future undiscounted cash flows. If the estimated future cash flows are less than the carrying amount of the assets, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the assets to the individual store’s fair value based on its estimated discounted future cash flows. If required, an impairment loss is recorded for that portion of the asset’s carrying value in excess of fair value. Impairment losses included in selling and administrative expenses totaled $11,747, $2,857, and $12,102 during fiscal 2012, fiscal 2011 and fiscal 2010, respectively, and are related to individual store locations.

Goodwill and Unamortizable Intangible Assets

The costs in excess of net assets of businesses acquired are carried as goodwill in the accompanying consolidated balance sheets.

At April 28, 2012, the Company had $519,685 of goodwill and $314,736 of unamortizable intangible assets (those with an indefinite useful life), accounting for approximately 22.2% of the Company’s total assets. ASC 350-30, Goodwill and Other Intangible Assets, requires that goodwill and other unamortizable intangible assets no longer be amortized, but instead be tested for impairment at least annually or earlier if there are impairment indicators. The Company performs a two-step process for impairment testing of goodwill as required by ASC 350-30. The first step of this test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount. The second step (if necessary) measures the amount of the impairment. The Company completed its annual goodwill impairment test as of the first day of the third quarter of fiscal 2012. In performing the valuations, the Company used cash flows that reflected management’s forecasts and discount rates that included risk adjustments consistent with the current market conditions. Based on the results of the Company’s step one testing, the fair values of the B&N Retail, B&N College and B&N.com reporting units as of that date exceeded their carrying values; therefore, the second step of the impairment test was not required to be performed and no goodwill impairment was recognized. During the fourth quarter of fiscal 2012 the Company has determined that the segment previously referred to as B&N.com is no longer applicable and created a new segment titled NOOK to report upon its digital business, moving the eCommerce business (i.e., sales of physical merchandise over the Internet) into the B&N Retail segment. The Company’s three operating segments are: B&N Retail, B&N College and NOOK. As a result of this evaluation, $20,279 of goodwill was re-allocated between B&N Retail and NOOK segments. There were no subsequent indicators of impairment prior to or after the reallocation of goodwill.

 

F-40


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

The Company tests unamortizable intangible assets by comparing the fair value and the carrying value of such assets. The Company also completed its annual impairment tests for its other unamortizable intangible assets by comparing the estimated fair value to the carrying value of such assets and determined that no impairment was necessary. Changes in market conditions, among other factors, could have a material impact on these estimates, except for the Company’s publishing contracts.

Publishing contracts include the value of long-standing relationships with authors, agents and publishers established upon the Company’s acquisition of Sterling in 2003. Given Sterling’s strong history of maintaining such relationships, the Company believes they produce value indefinitely without an identifiable remaining useful life. However, given recent declines in the physical book business, these contracts were at risk of impairment as of its most recent impairment testing date and may be at risk in the future if declines in sales continue.

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 April 28, 2012 and April 30, 2011 were $21,522 and $26,525, respectively. Amortization expense included in interest and amortization of deferred financing fees was $5,381, $16,087, and $5,925 during fiscal 2012, fiscal 2011 and fiscal 2010, respectively.

Revenue Recognition

Revenue from sales of the Company’s products is recognized at the time of sale, other than those with multiple elements and FOB destination point shipping terms. The Company’s products are considered delivered once they have been shipped and title and risk of loss have transferred. While the majority of the Company’s shipping terms are FOB shipping point, there are certain third party distribution partners with shipping terms of FOB destination point. Certain of the Company sales agreements with these distribution partners contain rights of inspection or acceptance provisions as is standard in the Company’s industry. The Company accrues for estimated sales returns in the period in which the related revenue is recognized based on historical experience and industry standards. Sales taxes collected from retail customers are excluded from reported revenues. All of the Company’s sales are recognized as revenue on a “net” basis, including sales in connection with any periodic promotions offered to customers. The Company does not treat any promotional offers as expenses.

In accordance with ASC 605-25, Revenue Recognition, Multiple Element Arrangements and Accounting Standards Updates (ASU) 2009-13 and 2009-14, for multiple-element arrangements that involve tangible products that contain software that is essential to the tangible product’s functionality, undelivered software elements that relate to the tangible product’s essential software and other separable elements, the Company allocates revenue to all deliverables using the relative selling-price method. Under this method, revenue is allocated at the time of sale to all deliverables based on their relative selling price using a specific hierarchy. The hierarchy is as follows: vendor-specific objective evidence, third-party evidence of selling price, or best estimate of selling price. NOOK™ eBook Reader revenue (which includes revenue from the Company’s NOOK® products) is recognized at the segment point of sale.

 

F-41


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

The Company includes post-service customer support (PCS) in the form of software updates and potential increased functionality on a when-and-if-available basis, as well as wireless access and wireless connectivity with the purchase of NOOK® from the Company. Using the relative selling price described above, the Company allocates revenue based on the best estimate of selling price for the deliverables as no vendor-specific objective evidence or third-party evidence exists for any of the elements. Revenue allocated to NOOK® and the software essential to its functionality is recognized at the time of sale, provided all other conditions for revenue recognition are met. Revenue allocated to the PCS and the wireless access is deferred and recognized on a straight-line basis over the 2-year estimated life of NOOK®.

The average percentage of a NOOK®’s sales price that is deferred for undelivered items and recognized over its 2-year estimated life ranges between 2% and 5%, depending on the type of device sold. The amount of NOOK®-related deferred revenue as of April 28, 2012 and April 30, 2011 was $19,785 and $18,184, respectively. These amounts are classified on the Company’s balance sheet in accrued liabilities for the portion that is subject to deferral for one year or less and other long-term liabilities for the portion that is subject to deferral for more than one year.

The Company also pays certain vendors who distribute NOOK® a commission on the content sales sold through that device. The Company accounts for these transactions as a reduction in the sales price of the NOOK® based on historical trends of content sales and a liability is established for the estimated commission expected to be paid over the life of the product. The Company recognizes revenue of the content at the point of sale of the content. The Company records revenue from sales of digital content, sales of third-party extended warranties, service contracts and other products, for which the Company is not obligated to perform, and for which the Company does not meet the criteria for gross revenue recognition under ASC 605-45-45, Reporting Revenue Gross as a Principal versus Net as an Agent, on a net basis. All other revenue is recognized on a gross basis.

NOOK acquires the rights to distribute digital content from publishers and distributes the content on barnesandnoble.com, NOOK® devices and other eBookstore platforms. Certain digital content is distributed under an agency pricing model in which the publishers set fixed prices for eBooks and NOOK receives a fixed commission on content sold through the eBookstore. The majority of the Company’s eBook sales are sold under the agency model.

The Barnes & Noble Member Program offers members greater discounts and other benefits for products and services, as well as exclusive offers and promotions via e-mail or direct mail for an annual fee of $25.00, which is non-refundable after the first 30 days. Revenue is recognized over the twelve-month period based upon historical spending patterns for Barnes & Noble Members.

Research and Development Costs for Software Products

The Company follows the guidance in ASC 985-20, Cost of Software to Be Sold, Leased or Marketed, regarding software development costs to be sold, leased, or otherwise marketed. Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale. A certain amount of judgment and estimation is required to assess when technological feasibility is established, as well as the ongoing assessment of the recoverability of capitalized costs. The Company’s products reach technological feasibility shortly before the products are released and therefore research and development costs are generally expensed as incurred.

 

F-42


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

Advertising Costs

The costs of advertising are expensed as incurred during the year pursuant to ASC 720-35, Advertising Costs. Advertising costs charged to selling and administrative expenses were $116,388, $73,417, and $37,600 during fiscal 2012, fiscal 2011, and fiscal 2010, respectively.

The Company receives payments and credits from vendors pursuant to co-operative advertising and other programs, including payments for product placement in stores, catalogs and online. In accordance with ASC 605-50-25-10, Customer’s Accounting for Certain Consideration Received from a Vendor, the Company classifies certain co-op advertising received as a reduction in costs of sales and occupancy. The gross advertising expenses noted above were completely offset by allowances received from vendors and the excess allowances received were recorded as a reduction of cost of goods sold or inventory, as appropriate.

Closed Store Expenses

When the Company closes or relocates a store, the Company charges unrecoverable costs to expense. Such costs include the net book value of abandoned fixtures and leasehold improvements and, when a store is closed prior to the expiration of the lease, a provision for future lease obligations, net of expected sublease recoveries. Costs associated with store closings of $551, $3,899, and $4,503 during fiscal 2012, fiscal 2011 and fiscal 2010, respectively, are included in selling and administrative expenses in the accompanying consolidated statements of operations.

Net Earnings (Loss) Per Common Share

Basic earnings per share represent net earnings (loss) attributable to common shareholders divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the impact of common shares issuable upon exercise of the Company’s outstanding stock options. The Company’s unvested restricted shares, unvested restricted stock units and common shares issuable under the Company’s deferred compensation plan are deemed participating securities and are excluded from the dilutive impact of common equivalent shares outstanding under the two-class method since these shares are entitled to participate in dividends declared on common shares. Under the two-class method, earnings (loss) attributable to unvested restricted shares, unvested restricted stock units and common shares issuable under the Company’s deferred compensation plan are excluded from net earnings (loss) attributable to common shareholders for purposes of calculating basic and diluted earnings (loss) per common share. See Note 7 for further information regarding the calculation of basic and diluted earnings (loss) per common share.

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. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance, if determined to be necessary.

Stock-Based Compensation

The calculation of stock-based employee compensation expense involves estimates that require management’s judgment. These estimates include the fair value of each of the stock option awards granted, which is estimated on the date of grant using a Black-Scholes option pricing model. There are two significant inputs into the Black-Scholes option pricing model: expected volatility and expected term.

 

F-43


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

The Company estimates expected volatility based on traded option volatility of the Company’s stock over a term equal to the expected term of the option granted. The expected term of stock option awards granted is derived from historical exercise experience under the Company’s stock option plans and represents the period of time that stock option awards granted are expected to be outstanding. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate, and only recognize expense for those shares expected to vest. If the Company’s actual forfeiture rate is materially different from its estimate, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period. See Note 3 to the Consolidated Financial Statements for a further discussion on stock-based compensation.

Gift Cards

The Company sells gift cards which can be used in its stores or on Barnes & Noble.com. The Company does not charge administrative or dormancy fees on gift cards and gift cards have no expiration dates. Upon the purchase of a gift card, a liability is established for its cash value. Revenue associated with gift cards is deferred until redemption of the gift card. Over time, some portion of the gift cards issued is not redeemed. The Company estimates the portion of the gift card liability for which the likelihood of redemption is remote based upon the Company’s historical redemption patterns. The Company records this amount in income on a straight-line basis over a 12-month period beginning in the 13th month after the month the gift card was originally sold. If actual redemption patterns vary from the Company’s estimates, actual gift card breakage may differ from the amounts recorded. The Company recognized gift card breakage of $29,284, $25,904 and $21,328 during fiscal 2012, fiscal 2011 and fiscal 2010, respectively. The Company had gift card liabilities of $321,362 and $311,092 as of April 28, 2012 and April 30, 2011, respectively.

Reclassifications

Certain prior-period amounts have been reclassified for comparative purposes to conform with the fiscal 2012 presentation.

Reporting Period

The Company’s fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. The reporting periods ended April 28, 2012, April 30, 2011 and May 1, 2010 all contained 52 weeks.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) issued ASU 2011-05, Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendment requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. In addition, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12). ASU 2011-12 effectively defers only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments out of

 

F-44


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

accumulated other comprehensive income. All other requirements in ASU 2011-05 are not affected by this update. These ASUs are effective for the Company’s financial statements for annual and interim periods beginning on or after December 15, 2011 and must be applied retrospectively. The Company has early adopted both ASU 2011-05 and ASU 2011-12.

In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment (ASU 2011-08). ASU 2011-08 gives the Company the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. This ASU is effective for the Company’s financial statements for annual and interim periods beginning on or after December 15, 2011. The adoption is not expected to have an impact on the Company’s Fiscal 2013 Consolidated Financial Statements.

 

  2. Credit Facility

On April 27, 2012, the Company entered into an amendment (the 2012 Amended Credit Facility) to its existing agreement with Bank of America, N.A. entered into on April 29, 2011, as administrative agent, collateral agent and swing line lender, and other lenders in order to permit the transactions contemplated by the investment agreement among the Company, Morrison Investment Holdings, Inc., and Microsoft Corporation (See Note 11) and to make certain other changes to the Company’s 2011 Amended Credit Agreement in connection therewith.

On April 29, 2011, the Company entered into an amended and restated credit agreement (the 2011 Amended Credit Agreement) with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and other lenders, which amended and restated the credit agreement (the 2009 Credit Agreement) entered into on September 30, 2009 with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and other lenders. Under the 2011 Amended Credit Agreement, Lenders provided up to $1,000,000 in aggregate commitments under a five-year asset-backed revolving credit facility, which is secured by eligible inventory with the ability to include eligible real estate and accounts receivable and related assets. Borrowings under the 2011 Amended Credit Agreement were limited to a specified percentage of eligible inventories and accounts receivable and accrued interest, at the election of the Company, at Base Rate or LIBO Rate, plus, in each case, an Applicable Margin (each term as defined in the 2011 Amended Credit Agreement). In addition, the Company has the option to request an increase in commitments under the 2011 Amended Credit Agreement by up to $300,000, subject to certain restrictions.

The 2011 Amended Credit Agreement requires Availability (as defined in the 2011 Amended Credit Agreement) to be greater than the greater of (i) 10% of the Loan Cap (as defined in the 2011 Amended Credit Agreement) and (ii) $50,000. In addition, the 2011 Amended Credit Agreement contains covenants that limit, among other things, the Company’s ability to incur indebtedness, create liens, make investments, make restricted payments, merge or acquire assets, and contains default provisions that are typical for this type of financing, among other things. Proceeds from the 2011 Amended Credit Facility are used for general corporate purposes, including seasonal working capital needs.

As a result of the 2011 Amended Credit Agreement, $6,580 of deferred financing fees related to the 2009 Credit Facility were written off in fiscal 2011, and included in net interest expenses. The remaining unamortized deferred costs of $16,341 and new charges of $10,180 relating to the Company’s 2011 Amended Credit Facility were deferred and are being amortized over the five-year term of the 2011 Amended Credit Facility.

 

F-45


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

On September 30, 2009, the Company had entered into the 2009 Credit Agreement, under which the lenders committed to provide up to $1,000,000 in commitments under a four-year asset-backed revolving credit facility (the 2009 Credit Facility), which was secured by eligible inventory and accounts receivable and related assets. Borrowings under the 2009 Credit Agreement were limited to a specified percentage of eligible inventories and accounts receivable and accrued interest, at the election of the Company, at Base Rate or LIBO Rate, plus, in each case, an Applicable Margin (each term as defined in the 2009 Credit Agreement). In addition, the Company had the option to request the increase in commitments under the 2009 Credit Agreement by up to $300,000, subject to certain restrictions.

Selected information related to the Company’s 2012 Amended Credit Facility, 2011 Amended Credit Facility and 2009 Credit Facility:

 

     Fiscal
2012
    Fiscal
2011
    Fiscal
2010
 

Credit facility at period end

   $ 324,200        313,100        260,400   

Average balance outstanding during the period

   $ 306,038        338,971        107,504   

Maximum borrowings outstanding during the period

   $ 582,000        622,800        512,500   

Weighted average interest rate during the period

     3.34     4.30     4.38

Interest rate at end of period

     3.32     5.13     4.13

Fees expensed with respect to the unused portion of the 2012 Amended Credit Facility, 2011 Amended Credit Facility and 2009 Credit Facility were $3,343, $5,466 and $4,198 during fiscal 2012, fiscal 2011 and fiscal 2010, respectively.

The Company has no agreements to maintain compensating balances.

 

  3. Stock-Based Compensation

The Company maintains three share-based incentive plans: the 1996 Incentive Plan, the 2004 Incentive Plan and the 2009 Incentive Plan. Prior to June 2, 2009, the Company issued restricted stock and stock options under the 1996 and 2004 Incentive Plans. On June 2, 2009, the Company’s shareholders approved the 2009 Incentive Plan. Under the 2009 Incentive Plan, the Company has issued restricted stock units, restricted stock and stock options. The maximum number of shares issuable under the 2009 Incentive Plan is 950,000, plus shares that remain available under the Company’s shareholder-approved 2004 Incentive Plan. At April 28, 2012, there were approximately 1,001,440 shares of common stock available for future grants under the 2009 Incentive Plan.

A restricted stock award is an award of common stock that is subject to certain restrictions during a specified period. Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the release of the restrictions. The grantee cannot transfer the shares before the restricted shares vest. Shares of unvested restricted stock have the same voting rights as common stock, are entitled to receive dividends and other distributions thereon and are considered to be currently issued and outstanding. The Company’s restricted stock awards vest over a period of one to five years. The Company expenses the cost of the restricted stock awards, which is determined to be the fair

 

F-46


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

market value of the shares at the date of grant, straight-line over the period during which the restrictions lapse. For these purposes, the fair market value of the restricted stock is determined based on the closing price of the Company’s common stock on the grant date.

A restricted stock unit is a grant valued in terms of the Company’s common stock, but no stock is issued at the time of grant. The restricted stock units may be redeemed for one share of common stock each once vested. Restricted stock units are generally subject to forfeiture if employment terminates prior to the release of the restrictions. The grantee cannot transfer the units except in very limited circumstances and with the consent of the compensation committee. Shares of unvested restricted stock units have no voting rights but are entitled to receive dividends and other distributions thereon. The Company’s restricted stock units vest over a period of one to five years. The Company expenses the cost of the restricted stock units, which is determined to be the fair market value of the shares at the date of grant, straight-line over the period during which the restrictions lapse. For these purposes, the fair market value of the restricted stock is determined based on the closing price of the Company’s common stock on the grant date.

The Company uses the Black-Scholes option-pricing model to value the Company’s stock options for each stock option award. Using this option-pricing model, the fair value of each stock option award is estimated on the date of grant. The fair value of the Company’s stock option awards, which are generally subject to pro-rata vesting annually over four years, is expensed on a straight-line basis over the vesting period of the stock options. The expected volatility assumption is based on traded options volatility of the Company’s stock over a term equal to the expected term of the option granted. The expected term of stock option awards granted is derived from historical exercise experience under the Company’s stock option plans and represents the period of time that stock option awards granted are expected to be outstanding. The expected term assumption incorporates the contractual term of an option grant, which is ten years, as well as the vesting period of an award, which is generally pro-rata vesting annually over four years. The risk-free interest rate is based on the implied yield on a U.S. Treasury constant maturity with a remaining term equal to the expected term of the option granted.

The Company recognizes stock-based compensation costs, net of estimated forfeitures, for only those shares expected to vest on a straight-line basis over the requisite service period of the award. The Company estimates the forfeiture rates based on its historical experience.

 

F-47


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

The weighted average assumptions relating to the valuation of the Company’s stock options for fiscal years 2012 and 2010 are shown below. No stock options were granted during fiscal 2011.

 

Fiscal Year

   2012     2010  

Weighted average fair value of grants

   $ 9.85      $ 5.72   

Volatility

     78.52     41.30

Risk-free interest rate

     0.92     2.59

Expected life

     5 years        5 years   

Expected dividend yield

     0.00     4.53

Stock-Based Compensation Activity

The following table presents a summary of the Company’s stock option activity:

 

     Number of Shares
(in thousands)
    Weighted
Average
Exercise

Price
     Weighted
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Value (in
thousands)
 

Balance, May 2, 2009

     5,561      $ 20.14         3.83 years       $ 33,633   

Granted

     500        22.07         

Exercised

     (313     13.96         

Forfeited

     (250     30.69         
  

 

 

         

Balance, May 1, 2010

     5,498        20.19         3.49 years       $ 13,782   

Exercised

     (1,024     16.83         

Forfeited

     (598     20.57         
  

 

 

         

Balance, April 30, 2011

     3,876        21.02         3.40 years         —     

Granted

     1,563        15.70         

Exercised

     (92     11.89         

Forfeited

     (1,487     21.86         
  

 

 

         

Balance, April 28, 2012

     3,860      $ 18.76         5.70 years       $ 574   
  

 

 

         

Vested and expected to vest in the future at April 28, 2012

     3,860      $ 18.76         5.70 years       $ 574   

Exercisable at April 28, 2012

     2,132      $ 20.74         2.68 years       $ 515   

Available for grant at April 28, 2012

     1,001           

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the related fiscal year and the exercise price, multiplied by the related in-the-money options) that would have been received by the option holders had they exercised their options at the end of the fiscal year. This amount changes based

 

F-48


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

on the market value of the Company’s common stock. Total intrinsic value of options exercised for fiscal 2012, fiscal 2011 and fiscal 2010 (based on the difference between the Company’s stock price on the exercise date and the respective exercise price, multiplied by the number of options exercised) was $521, $124 and $2,321, respectively.

As of April 28, 2012, there was $20,384 of total unrecognized compensation expense related to unvested stock options granted under the Company’s share-based compensation plans. That expense is expected to be recognized over a weighted average period of 3.4 years.

The Company’s Chief Executive Officer was granted 500,000 stock options, with an exercise price of $22.07 per share, on April 1, 2010 and a grant of 1,000,000 stock options, with an exercise price of $16.00 per share, was approved on December 9, 2011. However, the Company subsequently determined that 500,000 of the stock options approved on December 9, 2011 were not validly granted pursuant to the Company’s 2009 Incentive Plan because they exceeded the limit on the number of options that may be granted to any individual participant within any 36-month period. Accordingly, the attempted grant of these excess options was ineffective, and they were never granted to the Company’s Chief Executive Officer. The estimated liability recorded for the invalid grant in the quarter was not significant.

The following table presents a summary of the Company’s restricted stock activity:

 

     Number of
Shares (in
thousands)
    Weighted
Average Grant
Date Fair Value
 

Balance, May 2, 2009

     1,235      $ 30.86   

Granted

     1,647        21.93   

Vested

     (429     33.18   

Forfeited

     (123     30.41   
  

 

 

   

Balance, May 1, 2010

     2,330        24.15   

Granted

     684        16.65   

Vested

     (435     27.99   

Forfeited

     (154     24.76   
  

 

 

   

Balance, April 30, 2011

     2,425        21.31   

Granted

     83        13.23   

Vested

     (1,073     22.78   

Forfeited

     (51     21.52   
  

 

 

   

Balance, April 28, 2012

     1,384      $ 19.68   
  

 

 

   

Total fair value of shares of restricted stock that vested during fiscal 2012, fiscal 2011 and fiscal 2010 was $14,067, $6,163 and $9,408, respectively. As of April 28, 2012, there was $21,561 of unrecognized stock-based compensation expense related to nonvested restricted stock awards. That cost is expected to be recognized over a weighted average period of 1.4 years.

 

F-49


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

The following table presents a summary of the Company’s restricted stock unit activity:

 

     Number of
Shares (in
thousands)
    Weighted
Average Grant
Date Fair Value
 

Balance, April 30, 2011

     —        $ —     

Granted

     969        16.64   

Forfeited

     (5     18.59   
  

 

 

   

Balance, April 28, 2012

     964      $ 16.63   
  

 

 

   

No restricted stock units were granted prior to fiscal 2012 and there were no vestings during fiscal 2012. As of April 28, 2012, there was $14,200 of unrecognized stock-based compensation expense related to nonvested restricted stock units. That cost is expected to be recognized over a weighted average period of 3.1 years.

For fiscal 2012, fiscal 2011 and fiscal 2010, stock-based compensation expense of $20,775, $20,978 and $15,723, respectively, is included in selling and administrative expenses.

 

  4. Receivables, Net

Receivables represent customer, private and public institutional and government billings, credit/debit card, advertising, landlord and other receivables due within one year as follows:

 

     April 28,
2012
     April 30,
2011
 

Trade accounts

   $ 91,476         81,577   

Credit/debit card receivables

     36,042         42,982   

Advertising

     3,911         5,877   

Receivables from landlords for leasehold improvements

     374         867   

Other receivables

     28,694         18,991   
  

 

 

    

 

 

 

Total receivables, net

   $ 160,497         150,294   
  

 

 

    

 

 

 

 

F-50


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

  5. Other Long-Term Liabilities

Other long-term liabilities consist primarily of deferred rent and obligations under the Junior Seller Note (see Notes 14 and 19). The Company provides for minimum rent expense over the lease terms (including the build-out period) on a straight-line basis. The excess of such rent expense over actual lease payments (net of tenant allowances) is classified as deferred rent. Other long-term liabilities also include accrued pension liabilities, store closing expenses and long-term deferred revenues. The Company had the following long-term liabilities at April 28, 2012, April 30, 2011 and May 1, 2010:

 

     April 28,
2012
     April 30,
2011
 

Deferred Rent

   $ 220,875         271,451   

Junior Seller Note (see Note 14 and Note 19)

     150,000         150,000   

Other

     34,190         27,196   
  

 

 

    

 

 

 

Total long-term liabilities

   $ 405,065         448,647   
  

 

 

    

 

 

 

 

  6. Fair Values of Financial Instruments

In accordance with ASC 820, Fair Value Measurements and Disclosures, the fair value of an asset is considered to be the price at which the asset could be sold in an orderly transaction between unrelated knowledgeable and willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

 

Level 1 –    Observable inputs that reflect quoted prices in active markets
Level 2 –    Inputs other than quoted prices in active markets that are either directly or indirectly observable
Level 3 –    Unobservable inputs in which little or no market data exists, therefore requiring the Company to develop its own assumptions

The following table presents the changes in Level 3 contingent consideration liability:

 

     Acquisition
of
Fictionwise
 

Beginning balance, May 2, 2009

   $ 8,165   

Payments

     (2,612

Losses

     1,712   
  

 

 

 

Balance, May 1, 2010

   $ 7,265   

Payments

     (7,508

Losses

     243   
  

 

 

 

Balance, April 30, 2011 and April 28, 2012

   $ —     
  

 

 

 

Fair Value of Financial Instruments

The Company’s financial instruments, other than those presented in the disclosures above, include cash, receivables, other investments and accounts payable. The fair values of cash, receivables, and accounts payable approximated carrying values because of the short-term nature of these instruments. The Company believes that its 2012 Amended Credit Facility approximates fair value since interest rates are adjusted to reflect current rates. The Company believes that the terms and conditions of the remaining Seller Notes is consistent with comparable market debt issues.

 

F-51


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

  7. Net Earnings (Loss) Per Share

In accordance with ASC 260-10-45, Share-Based Payment Arrangements and Participating Securities and the Two-Class Method, the Company’s unvested restricted shares, unvested restricted stock units and shares issuable under the Company’s deferred compensation plan are considered participating securities. During periods of net income, the calculation of earnings per share for common stock are reclassified to exclude the income attributable to the unvested restricted shares, unvested restricted stock units and shares issuable under the Company’s deferred compensation plan from the numerator and exclude the dilutive impact of those shares from the denominator.

During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company. Due to the net loss during fiscal 2012 and 2011, participating securities in the amounts of 3,463 and 3,228, respectively, were excluded in the calculation of loss per share using the two-class method because the effect would be antidilutive. The Company’s outstanding stock options and accretion/payments of dividends on preferred shares were also excluded from the calculation of loss per share using the two-class method because the effect would be antidilutive.

The following is a reconciliation of the Company’s basic and diluted earnings per share calculation:

 

     Fiscal
2012
    Fiscal
2011
    Fiscal
2010
 

Numerator for basic earnings (loss) per share:

      

Income (loss) attributable to Barnes & Noble, Inc.

   $ (68,867     (73,920     36,676   

Preferred stock dividends

     (11,044     —          —     

Accretion of dividends on preferred stock

     (894     —          —     

Less allocation of earnings and dividends to participating securities

     —          —          (1,279
  

 

 

   

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ (80,805     (73,920     35,397   

Numerator for diluted earnings (loss) per share:

      

Net income (loss) available to common shareholders

   $ (80,805     (73,920     35,397   

Effect of dilutive options

     —          —          (10
  

 

 

   

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ (80,805     (73,920     35,387   

Denominator for basic and diluted earnings (loss) per share:

      

Basic weighted average common shares

     57,337        56,588        55,344   

Average dilutive options

     —          —          809   
  

 

 

   

 

 

   

 

 

 

Diluted weighted average common shares

     57,337        56,588        56,153   

Basic earnings (loss) per common share

      

Net income (loss) attributable to Barnes & Noble, Inc. available for common shareholders

   $ (1.41     (1.31     0.64   

Diluted earnings (loss) per common share

      

Net income (loss) attributable to Barnes & Noble, Inc. available for common shareholders

   $ (1.41     (1.31     0.63   

 

F-52


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

  8. Employees’ Retirement and Defined Contribution Plans

As of December 31, 1999, substantially all employees of the Company were covered under a noncontributory defined benefit pension plan (the Pension Plan). As of January 1, 2000, the Pension Plan was amended so that employees no longer earn benefits for subsequent service. Effective December 31, 2004, the Barnes & Noble.com Employees’ Retirement Plan (the B&N.com Retirement Plan) was merged with the Pension Plan. Substantially all employees of Barnes & Noble.com were covered under the B&N.com Retirement Plan. As of July 1, 2000, the B&N.com Retirement Plan was amended so that employees no longer earn benefits for subsequent service. Subsequent service continues to be the basis for vesting of benefits not yet vested at December 31, 1999 and June 30, 2000 for the Pension Plan and the B&N.com Retirement Plan, respectively, and the Pension Plan will continue to hold assets and pay benefits. The actuarial assumptions used to calculate pension costs are reviewed annually. Pension expense was $1,970, $2,558 and $1,951 for fiscal 2012, fiscal 2011 and fiscal 2010, respectively.

The Company maintains a defined contribution plan (the Savings Plan) for the benefit of substantially all employees. Total Company contributions charged to employee benefit expenses for the Savings Plan were $15,273, $14,212 and $12,954 during fiscal 2012, fiscal 2011 and fiscal 2010, respectively. 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. Total Company contributions charged to employee benefit expenses for the Postretirement Plan were $150, $150 and ($111) during fiscal 2012, fiscal 2011 and fiscal 2010, respectively.

 

  9. Income Taxes

The Company files a consolidated federal return with all subsidiaries owned 80% or more. Federal and state income tax provisions (benefits) for fiscal 2012, fiscal 2011 and fiscal 2010 are as follows:

 

     Fiscal 2012     Fiscal 2011     Fiscal 2010  

Current:

      

Federal

   $ 6,228        (47,825     51,343   

State

     3,602        (2,441     14,192   
  

 

 

   

 

 

   

 

 

 

Total current

     9,830        (50,266     65,535   
  

 

 

   

 

 

   

 

 

 

Deferred:

      

Federal

     (28,504     8,057        (45,903

State

     (9,066     (6,443     (11,267
  

 

 

   

 

 

   

 

 

 

Total deferred

     (37,570     1,614        (57,170
  

 

 

   

 

 

   

 

 

 

Total

   $ (27,740     (48,652     8,365   
  

 

 

   

 

 

   

 

 

 

 

F-53


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

Reconciliation between the effective income tax rate and the federal statutory income tax rate is as follows:

 

     Fiscal 2012     Fiscal 2011     Fiscal 2010  

Federal statutory income tax rate

     35.0     35.0     35.0

State income taxes, net of federal income tax benefit

     4.4        4.8        3.8   

Additions to unrecognized tax benefits

     (1.0     (2.5     11.2   

Reductions to unrecognized tax benefits

     0.7        1.3        (31.8

Excess 162(m) limitation (a)

     (9.3     —          —     

Other, net

     (1.1     1.1        0.4   
  

 

 

   

 

 

   

 

 

 

Effective income tax rate

     28.7     39.7     18.6
  

 

 

   

 

 

   

 

 

 

 

(a) Relates to 162(m) compensation in excess of limitation for the current year and prior year.

The tax effects of temporary differences that give rise to significant components of the Company’s deferred tax assets and liabilities as of April 28, 2012 and April 30, 2011 are as follows:

 

     April 28,
2012
    April 30,
2011
 

Deferred tax liabilities:

    

Investment in Barnes & Noble.com

   $ (95,051     (95,051

Property & equipment

     (63,216     (57,156

Goodwill and intangible asset amortization

     (233,322     (236,845

Prepaid expenses

     (7,827     (7,125

Other

     (6,226     (4,861
  

 

 

   

 

 

 

Total deferred tax liabilities

     (405,642     (401,038
  

 

 

   

 

 

 

Deferred tax assets:

    

Loss and credit carryovers

     75,817        57,751   

Lease transactions

     30,043        32,986   

Estimated accruals

     88,823        52,868   

Stock-based compensation

     9,946        11,508   

Insurance liability

     11,105        11,396   

Pension

     11,953        10,254   

Inventory

     19,674        18,996   

Investments in equity securities

     1,282        1,282   
  

 

 

   

 

 

 

Total deferred tax assets

     248,643        197,041   
  

 

 

   

 

 

 

Net deferred tax liabilities

   $ (156,999     (203,997
  

 

 

   

 

 

 

Balance Sheet caption reported in:

    

Prepaid expenses and other current assets

   $ 111,775        76,135   

Deferred tax liabilities

     (268,774     (280,132
  

 

 

   

 

 

 

Net deferred tax liabilities

   $ (156,999     (203,997
  

 

 

   

 

 

 

 

F-54


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

At April 28, 2012, the Company had federal and state net operating loss carryforwards (NOLs) of approximately $86,000 that expire beginning in 2018 through 2022, the utilization of which is limited to approximately $6,700 on an annual basis. Additionally, the Company had approximately $37,000 of federal NOLs and $134,000 of state NOLs that have no annual limitation and expire beginning in 2030 through 2031. These NOLs account for $57,773 of the $75,817 of loss and credit carryover deferred tax assets at April 28, 2012, with the remainder relating primarily to other state NOLs and federal credits.

As of April 28, 2012, the Company had $17,032 of unrecognized tax benefits, all of which, if recognized, would affect the Company’s effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits for fiscal 2012, fiscal 2011 and fiscal 2010 is as follows:

 

Balance at May 2, 2009

   $ 24,541   

Additions for tax positions of the current period

     2,457   

Additions for tax positions of prior periods

     2,563   

Other reductions for tax positions of prior periods

     (14,293
  

 

 

 

Balance at May 1, 2010

   $ 15,268   
  

 

 

 

Additions for tax positions of the current period

     1,809   

Additions for tax positions of prior periods

     1,199   

Reductions due to settlements

     (508

Other reductions for tax positions of prior periods

     (1,053
  

 

 

 

Balance at April 30, 2011

   $ 16,715   
  

 

 

 

Additions for tax positions of prior periods

     993   

Reductions due to settlements

     (228

Other reductions for tax positions of prior periods

     (448
  

 

 

 

Balance at April 28, 2012

   $ 17,032   
  

 

 

 

The Company’s continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. As of April 28, 2012 and April 30, 2011, the Company had accrued $3,897 and $3,236, respectively, for net interest and penalties, which is included in the $17,032 and $16,715 of unrecognized tax benefits noted above. The change in the amount accrued for net interest and penalties includes $974 in additions for net interest and penalties recognized in income tax expense in the Company’s fiscal 2012 statement of operations.

The Company is subject to U.S. federal income tax as well as income tax in jurisdictions of each state having an income tax. The tax years that remain subject to examination are primarily from fiscal 2007 and forward. Some earlier years remain open for a small minority of states.

 

F-55


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

  10. Intangible Assets and Goodwill

 

            As of April 30, 2011  

Amortizable intangible assets

   Useful
Life
     Gross Carrying
Amount
     Accumulated
Amortization
    Total  

Customer relationships

     5-25       $ 257,410       $ (17,962   $ 239,448   

Author contracts

     10         18,461         (15,204     3,257   

Technology

     5-10         5,850         (1,624     4,226   

Distribution contracts

     10         8,325         (4,304     4,021   

Other

     3-10         4,639         (3,924     715   
     

 

 

    

 

 

   

 

 

 
      $ 294,685       $ (43,018   $ 251,667   
     

 

 

    

 

 

   

 

 

 

Unamortizable intangible assets

                          

Trade name

           $ 293,400   

Copyrights

             175   

Publishing contracts

             21,336   
          

 

 

 
           $ 314,911   
          

 

 

 

 

            As of April 28, 2012  

Amortizable intangible assets

   Useful
Life
     Gross Carrying
Amount
     Accumulated
Amortization
    Total  

Customer relationships

     5-25       $ 271,938       $ (32,398   $ 239,540   

Author contracts

     10         18,461         (17,049     1,412   

Technology

     5-10         5,850         (2,427     3,423   

Distribution contracts

     10         8,325         (4,932     3,393   

Other

     3-10         6,178         (4,628     1,550   
     

 

 

    

 

 

   

 

 

 
      $ 310,751       $ (61,433   $ 249,318   
     

 

 

    

 

 

   

 

 

 

Unamortizable intangible assets

                          

Trade name

           $ 293,400   

Publishing contracts

             21,336