-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CwjfO6E16CArPcwjapkKxLF0i0wgXWjrbxjCk6vYRc1UdPZ7bkOzGIbzraocCSA6 93NLOJHds9Qql5vvXxkqpg== 0000889812-99-003607.txt : 19991208 0000889812-99-003607.hdr.sgml : 19991208 ACCESSION NUMBER: 0000889812-99-003607 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991030 FILED AS OF DATE: 19991207 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BARNES & NOBLE INC CENTRAL INDEX KEY: 0000890491 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS SHOPPING GOODS STORES [5940] IRS NUMBER: 061196501 STATE OF INCORPORATION: DE FISCAL YEAR END: 0130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12302 FILM NUMBER: 99769959 BUSINESS ADDRESS: STREET 1: 122 FIFTH AVE CITY: NEW YORK STATE: NY ZIP: 10011 BUSINESS PHONE: 2126333300 MAIL ADDRESS: STREET 1: 122 FIFTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10011 10-Q 1 QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 30, 1999 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ______________ Commission File Number: 1-12302 BARNES & NOBLE, INC. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 06-1196501 - -------------------------------------------------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 122 Fifth Avenue, New York, NY 10011 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (212) 633-3300 - -------------------------------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) - -------------------------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- Number of shares of $.001 par value common stock outstanding as of November 30, 1999: 69,455,186. BARNES & NOBLE, INC. AND SUBSIDIARIES October 30, 1999 Index to Form 10-Q
Page No. -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Operations - For the 13 weeks and the 39 weeks ended October 30, 1999 and October 31, 1998............ 3 Consolidated Balance Sheets - October 30, 1999, October 31, 1998 and January 30, 1999........................................... 4 Consolidated Statement of Shareholders' Equity - October 30, 1999................................................................ 6 Consolidated Statements of Cash Flows - For the 39 weeks ended October 30, 1999 and October 31, 1998............................... 7 Notes to Consolidated Financial Statements.......................... 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... N/A PART II - OTHER INFORMATION Item 1. Legal Proceedings................................................... 19 Item 5. Other Information................................................... 19 Item 6. Exhibits and Reports on Form 8-K.................................... 19
PART I - FINANCIAL INFORMATION Item 1: Financial Statements BARNES & NOBLE, INC. AND SUBSIDIARIES Consolidated Statements of Operations (thousands of dollars, except per share data) (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------ 13 weeks ended 39 weeks ended ---------------------------- --------------------------- October 30, October 31, October 30, October 31, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Sales $ 715,903 656,837 2,161,404 1,976,320 Cost of sales and occupancy 515,413 473,870 1,569,268 1,441,122 ------------ ------------ ------------ ------------ Gross profit 200,490 182,967 592,136 535,198 ------------ ------------ ------------ ------------ Selling and administrative expenses 150,520 138,537 458,143 410,873 Depreciation and amortization 27,751 22,784 80,144 64,487 Pre-opening expenses 2,137 2,013 4,463 6,897 ------------ ------------ ------------ ------------ Operating profit 20,082 19,633 49,386 52,941 Interest (net of interest income of $190, $95, $1,195 and $285, respectively) and amortization of deferred financing fees (5,605) (6,943) (15,352) (18,982) Equity in net loss of barnesandnoble.com llc (8,736) (20,472) (26,812) (57,078) Gain on formation of barnesandnoble.com llc - - 25,000 - Gain on the partial sale of Chapters Inc. - - 10,975 - ------------ ------------ ------------ ------------ Earnings (loss) before income taxes and cumulative effect of change in accounting principle 5,741 (7,782) 43,197 (23,119) Income tax provision (benefit) 2,354 (3,186) 17,711 (9,479) ------------ ------------ ------------ ------------ Earnings (loss) before cumulative effect of change in accounting principle 3,387 (4,596) 25,486 (13,640) Cumulative effect of change in accounting principle, net of tax benefits of $3,125 - - (4,500) - ------------ ------------ ------------ ------------ Net earnings (loss) $ 3,387 (4,596) 20,986 (13,640) ============ ============ ============ ============ Earnings (loss) per common share: Basic Earnings (loss) before cumulative effect of change in accounting principle $ 0.05 (0.07) 0.37 (0.20) Cumulative effect of change in accounting principle, net of tax benefits $ - - (0.07) - Net earnings (loss) $ 0.05 (0.07) 0.30 (0.20) Diluted Earnings (loss) before cumulative effect of change in accounting principle $ 0.05 (0.07) 0.35 (0.20) Cumulative effect of change in accounting principle, net of tax benefits $ - - (0.06) - Net earnings (loss) $ 0.05 (0.07) 0.29 (0.20) Weighted average common shares outstanding Basic 69,417,000 68,597,000 69,235,000 68,351,000 Diluted 71,461,000 68,597,000 71,772,000 68,351,000
See accompanying notes to consolidated financial statements. 3 BARNES & NOBLE, INC. AND SUBSIDIARIES Consolidated Balance Sheets (thousands of dollars, except per share data)
October 30, October 31, January 30, 1999 1998 1999 ----------- ----------- ----------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 19,234 10,614 31,081 Receivables, net 76,470 65,399 57,523 Merchandise inventories 1,275,167 1,055,676 945,073 Prepaid expenses and other current assets 59,118 56,534 54,634 ---------- --------- --------- Total current assets 1,429,989 1,188,223 1,088,311 ---------- --------- --------- Property and equipment: Land and land improvements 3,247 3,197 3,197 Buildings and leasehold improvements 402,581 371,323 383,292 Fixtures and equipment 549,403 413,214 440,488 ---------- --------- --------- 955,231 787,734 826,977 Less accumulated depreciation and amortization 398,029 298,374 316,631 ---------- --------- --------- Net property and equipment 557,202 489,360 510,346 ---------- --------- --------- Intangible assets, net 287,447 87,795 86,980 Investment in barnesandnoble.com llc 255,767 43,124 82,307 Other noncurrent assets 45,049 40,507 39,653 ---------- --------- --------- Total assets $2,575,454 1,849,009 1,807,597 ========== ========= =========
See accompanying notes to consolidated financial statements. 4 BARNES & NOBLE, INC. AND SUBSIDIARIES Consolidated Balance Sheets (thousands of dollars, except per share data)
October 30, October 31, January 30, 1999 1998 1999 ----------- ---------- ----------- (unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 756,928 621,626 498,237 Accrued liabilities 210,534 174,050 274,085 ------------- ------------- ------------- Total current liabilities 967,462 795,676 772,322 ------------- ------------- ------------- Long-term debt 575,000 447,900 249,100 Deferred income taxes 117,552 - 32,449 Other long-term liabilities 84,779 72,162 74,937 Shareholders' equity: Common stock; $.001 par value; 300,000,000 shares authorized; 69,442,074, 68,619,224 and 68,759,111 shares issued and outstand- ing, respectively 69 69 69 Additional paid-in capital 653,037 484,015 523,517 Accumulated other comprehensive earnings 1,366 - - Retained earnings 176,189 49,187 155,203 ------------- ------------- ------------- Total shareholders' equity 830,661 533,271 678,789 ------------- ------------- ------------- Commitments and contingencies - - - ------------- ------------- ------------- Total liabilities and shareholders' equity $ 2,575,454 1,849,009 1,807,597 ============= ============= =============
See accompanying notes to consolidated financial statements. 5 BARNES & NOBLE, INC. AND SUBSIDIARIES Consolidated Statement of Shareholders' Equity (thousands of dollars) (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------ Accumulated Additional Other Common Paid-In Comprehensive Retained Stock Capital Earnings Earnings Total ------ ---------- ------------- --------- ----- Balance at January 30, 1999 $ 69 $ 523,517 $ - $ 155,203 $ 678,789 ---------- ---------- ---------- ----------- ---------- Net earnings - - - 20,986 20,986 Other comprehensive earnings (net of deferred income taxes of $989) - - 1,366 - 1,366 barnesandnoble.com inc. IPO (net of deferred income taxes of $84,114) - 116,158 - - 116,158 Exercise of 682,963 common stock options - 13,362 - - 13,362 ---------- ---------- ---------- ----------- ---------- Balance at October 30, 1999 $ 69 $ 653,037 $ 1,366 $ 176,189 $ 830,661 ========== ========== ========== =========== ==========
See accompanying notes to consolidated financial statements. 6 BARNES & NOBLE, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (thousands of dollars) (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------ 39 weeks ended ------------------------- October 30, October 31, 1999 1998 ----------- ----------- Cash flows from operating activities: Net earnings (loss) $ 20,986 (13,640) Reconciliation of net earnings (loss) to net cash flows from operating activities: Depreciation and amortization 80,426 64,771 Loss on disposal of property and equipment 4,078 1,608 Increase in other long-term liabilities for scheduled rent increases in long-term leases 10,043 10,543 Cumulative effect of change in accounting principle, net of taxes 4,500 - Gain on the partial sale of Chapters Inc. (10,975) - Gain on the formation of barnesandnoble.com llc (25,000) - Equity in net loss of barnesandnoble.com llc 26,812 57,078 Changes in operating assets and liabilities, net (216,099) (129,993) --------- --------- Net cash flows from operating activities (105,229) (9,633) --------- --------- Cash flows from investing activities: Acquisition of consolidated subsidiaries (175,760) - Purchases of property and equipment (104,484) (95,676) Proceeds from sales of property and equipment - 10 Proceeds from the partial sale of Chapters Inc. 21,558 - Proceeds from the formation of barnesandnoble.com llc 25,000 - Investment in barnesandnoble.com llc - (75,392) Net (increase) decrease in other noncurrent assets (12,194) 352 --------- --------- Net cash flows from investing activities (245,880) (170,706) --------- --------- Cash flows from financing activities: Net increase in revolving credit facility 325,900 163,100 Proceeds from exercise of common stock options, including related tax benefits 13,362 15,156 --------- --------- Net cash flows from financing activities 339,262 178,256 --------- --------- Net decrease in cash and cash equivalents (11,847) (2,083) Cash and cash equivalents at beginning of period 31,081 12,697 --------- --------- Cash and cash equivalents at end of period $ 19,234 10,614 ========= ========= Changes in operating assets and liabilities, net: Receivables, net $ (14,435) (21,888) Merchandise inventories (241,773) (204,094) Prepaid expenses and other current assets (10,487) 1,043 Accounts payable and accrued liabilities 50,596 94,946 --------- --------- Changes in operating assets and liabilities, net $(216,099) (129,993) ========= ========= Supplemental cash flow information: Cash paid during the period for: Interest $ 15,127 16,627 Income taxes $ 69,645 16,219 Supplemental disclosure of subsidiaries acquired: Assets acquired $ 201,910 Liabilities assumed 26,150 --------- Cash paid $ 175,760 ---------
See accompanying notes to consolidated financial statements. 7 BARNES & NOBLE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements For the 39 weeks ended October 30, 1999 and October 31, 1998 (thousands of dollars, except per share data) (unaudited) The unaudited consolidated financial statements include the accounts of Barnes & Noble, Inc. and its wholly owned subsidiaries (collectively, the Company). In the opinion of the Company's management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly its consolidated financial position as of October 30, 1999 and the results of its operations and its cash flows for the 39 weeks then ended. These consolidated financial statements are condensed and therefore do not include all of the information and footnotes required by generally accepted accounting principles. The consolidated financial statements should be read in conjunction with the Company's annual report on Form 10-K for the 52 weeks ended January 30, 1999 (fiscal 1998). The Company follows the same accounting policies in preparation of interim reports. Due to the seasonal nature of the business, the results of operations for the 39 weeks ended October 30, 1999 are not indicative of the results to be expected for the 52 weeks ending January 29, 2000 (fiscal 1999). (1) Merchandise Inventories Merchandise inventories are stated at the lower of cost or market. Cost is determined using the retail inventory method on the first-in, first-out (FIFO) basis for 81%, 85% and 86% of the Company's merchandise inventories as of October 30, 1999, October 31, 1998, and January 30, 1999, respectively. Merchandise inventories of Babbage's Etc. LLC (Babbage's Etc.), which represent approximately 7% of merchandise inventories as of October 30, 1999, are recorded based on the average cost method. The remaining merchandise inventories are valued on the last-in, first-out (LIFO) method. If substantially all of the merchandise inventories currently valued at LIFO costs were valued at current costs, merchandise inventories would remain unchanged as of October 30, 1999 and January 30, 1999, and would have increased approximately $2,852 as of October 31, 1998. (2) Reclassifications Certain prior period amounts have been reclassified to conform to the current period presentation, including the Company's investment in barnesandnoble.com llc (barnesandnoble.com) which has been presented in the accompanying consolidated financial statements under the equity method as of the beginning of fiscal 1998. (3) Income Taxes The tax provisions (benefit) for the 39 weeks ended October 30, 1999 and October 31, 1998 are based upon management's estimate of the Company's annualized effective tax rate. 8 BARNES & NOBLE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements For the 39 weeks ended October 30, 1999 and October 31, 1998 (thousands of dollars, except per share data) (unaudited) (4) Recent Accounting Pronouncements In April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires an entity to expense all start-up activities (as defined) as incurred. The Company historically amortized costs associated with the opening of new stores over the respective store's first 12 months of operations. In accordance with SOP 98-5, the Company recorded a one-time non-cash charge in the first quarter of 1999 reflecting the cumulative effect of a change in accounting principle, in the amount of $4,500 after taxes, representing such start-up costs capitalized as of the beginning of fiscal year 1999. (5) Comprehensive Earnings In the second quarter of 1999, the Company sold a portion of its investment in Chapters Inc. (Chapters). The remaining investment is being recorded as an available-for-sale security. Accordingly, it will be carried at fair value with unrealized gains and losses (net of tax) reflected as a component of shareholders' equity classified as "accumulated other comprehensive earnings" in accordance with Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". This statement establishes standards for reporting and display of comprehensive earnings and its components in the financial statements. Comprehensive earnings are net earnings, plus certain other items that are recorded directly to shareholders' equity. The only such item currently applicable to the Company is the unrealized gain (loss) on available-for-sale securities, as follows:
13 weeks ended 39 weeks ended ------------------------------------- -------------------------------------- October 30, October 31, October 30, October 31, 1999 1998 1999 1998 ------------------------------------- -------------------------------------- Net earnings (loss) $ 3,387 $ (4,596) $ 20,986 $ (13,640) Other comprehensive earnings: Unrealized (loss) gain on available-for-sale securities, net of deferred income tax effect of ($2,346) and $989, respectively (3,239) - 1,366 - ------------- ------------- ------------- ------------- Comprehensive earnings (loss) $ 148 $ (4,596) $ 22,352 $ (13,640) ============= ============= ============= =============
9 BARNES & NOBLE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements For the 39 weeks ended October 30, 1999 and October 31, 1998 (thousands of dollars, except per share data) (unaudited) (6) Investment in barnesandnoble.com On May 28, 1999, barnesandnoble.com inc. (bn.com) completed an initial public offering (IPO) of 28.75 million shares of Class A Common Stock and used the proceeds to purchase a 20% interest in barnesandnoble.com. As a result, the Company and Bertelsmann AG (Bertelsmann) each retained a 40% interest in barnesandnoble.com. The Company recorded an increase in additional paid-in capital of $116.2 million after taxes representing the Company's incremental share in the equity of barnesandnoble.com. The Company will continue to account for its investment in barnesandnoble.com under the equity method. Under the terms of the November 12, 1998 joint venture agreement between the Company and Bertelsmann, the Company received a $25 million payment from Bertelsmann in connection with the IPO. The Company recognized the $25 million pretax gain in the second quarter of 1999. (7) Acquisition of Babbage's Etc. LLC On October 28, 1999, the Company acquired Babbage's Etc., one of the nation's largest operators of video game and entertainment software stores, for approximately $183 million in cash plus the assumption of $26 million in certain liabilities. If financial performance targets are met over the next two fiscal years, Barnes & Noble will make additional payments of approximately $10 million in 2001 and approximately $10 million in 2002. The acquisition was accounted for by the purchase method of accounting. The excess of purchase price over the net assets acquired, in the amount of approximately $202 million has been recorded as goodwill and is being amortized using the straight line method over an estimated useful life of 30 years. The results of operations for the third quarter do not reflect the acquisition. The acquisition will be included in the results of operations for the fourth quarter ending January 29, 2000. The pro forma effect assuming the acquisition of Babbages, Etc. at the beginning of fiscal 1998 and fiscal 1999 is not material. 10 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Recent Events Termination of Ingram Book Group Acquisition On June 2, 1999, the Company and the Ingram Book Group (Ingram) announced their agreement to terminate the Company's planned acquisition of Ingram. The Company's application before the Federal Trade Commission (FTC) for the purchase was formally withdrawn. As a result, the selling and administrative expenses for the 39 weeks ended October 30, 1999 reflect a one-time charge of $5 million ($3 million after taxes, or $0.04 per diluted share) for acquisition costs. These costs relate primarily to legal, accounting and other transaction related costs incurred in connection with the proposed acquisition of Ingram. Partial Divestiture of Chapters Investment During the second quarter of 1999, the Company sold 1,000,000 shares of its holdings in Chapters via a secondary offering. The Company retained a seven percent interest in Chapters. As a result of this transaction, the Company recorded a pretax gain of $11.0 million ($6.5 million after taxes or $0.09 per diluted share) in the second quarter. Prior to the above transaction, the investment in Chapters was accounted for under the equity method. The Company is now required to account for its remaining investment under the provisions of Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities". The investment is considered available-for-sale. Accordingly, the investment will be carried at fair value, with net unrealized holding gains and losses reflected as a component of comprehensive earnings within shareholders' equity until realized. barnesandnoble.com inc. Initial Public Offering On May 28, 1999, bn.com completed an initial public offering of 28.75 million shares of Class A Common Stock, raising a total of approximately $485 million after commissions and expenses and used the proceeds to purchase a 20% interest in barnesandnoble.com. As a result, the Company and Bertelsmann each retained a 40% interest in barnesandnoble.com. The Company recorded an increase of $116.2 million ($200.3 million, net of $84.1 million deferred tax) in additional paid-in capital representing the incremental share in the equity of barnesandnoble.com. Under the terms of the November 12, 1998 joint venture agreement (the Agreement) between the Company and Bertelsmann, on May 28, 1999 Bertelsmann contributed an additional $50 million to barnesandnoble.com. Also under the terms of the Agreement, the Company received a $25 million payment from Bertelsmann in connection with the IPO. The Company recognized the $25 million pretax gain ($14.8 million after taxes, or $0.20 per diluted share) in the second quarter. The Company will continue to account for its investment in barnesandnoble.com under the equity method. Acquisition of Babbage's Etc. LLC On October 28, 1999, the Company acquired Babbage's Etc., one of the nation's largest operators of video game and entertainment software stores, for approximately $183 million in cash plus the assumption of $26 million in certain liabilities. If financial performance targets are met over the next two fiscal years, Barnes & 11 Noble will make additional payments of approximately $10 million in 2001 and approximately $10 million in 2002. The acquisition was accounted for by the purchase method of accounting and accordingly, the Company's consolidated balance sheet reflects the acquisition. The excess of purchase price over the net assets acquired, in the amount of approximately $202 million has been recorded as goodwill and is being amortized using the straight line method over an estimated useful life of 30 years. The results of operations for the third quarter do not reflect the acquisition. The acquisition will be included in the results of operations for the fourth quarter ending January 29, 2000. Liquidity and Capital Resources The primary sources of the Company's cash are net cash flows from operating activities, funds available under its senior credit facility and short-term vendor financing. The Company's cash and cash equivalents as of October 30, 1999 were $19.2 million compared with $10.6 million as of October 31, 1998. During the 39 weeks ended October 30, 1999, excluding the $31.0 million of non-recurring items, consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) increased $47.4 million to $107.7 million from $60.3 million during the comparable prior year period. EBITDA in the retail business increased $17.1 million to $134.5 million during the 39 weeks ended October 30, 1999 from $117.4 million during the comparable prior year period, reflecting higher gross margins and improving expense leverage (primarily in Barnes & Noble store operating, rental and pre-opening costs). Merchandise inventories excluding Babbage's Etc. $84.1 million increased 12.8% to $1,191.1 million as of October 30, 1999 from $1,055.7 million as of October 31, 1998. The increased inventory levels supported the Company's 9.4% sales growth, the opening of 46 Barnes & Noble stores over the last twelve months and the strategic increase in the distribution center standing inventory to over 750,000 different titles available for shipping within 24 hours to both online customers and the retail store network. The Company's investing activities consisted principally of business acquisitions, capital expenditures for new store construction, system enhancements and store relocations/remodels, partially offset by the proceeds received from the partial sale of Chapters and from the formation of bn.com. Capital expenditures totaled $104.5 million and $95.7 million during the 39 weeks ended October 30, 1999 and October 31, 1998, respectively. The increase was due primarily to the timing of the new store rollout, home office facility expansion and the rollout of the Company's proprietary point-of-sale system (BookMaster). The ratio of debt to equity was 0.69:1.00 as of October 30, 1999, compared with 0.84:1.00 as of October 31, 1998. The significant improvement is primarily attributable to the $21 million in cash received from the partial sale of the investment in Chapters, $25 million in cash received from Bertelsmann as a result of the IPO of bn.com, as well as the Company's expanded gross margin and improved operating leverage. Total debt increased 28.4% to $575.0 million as of October 30, 1999 from $447.9 million as of October 31, 1998. Excluding businesses purchased for $175.8 million, the total debt decreased 10.9% as of October 30, 1999. Average borrowings decreased $39.4 million to $348.4 million during the 39 weeks ended October 30, 1999 from $387.8 million in the last-year period, and peaked at $575.0 million and $461.5 million during the same periods, respectively. The reduced average borrowings were accomplished during a period of 9.4% sales growth and 12.8% increase in merchandise inventories. 12 Based upon the Company's current operating levels and expansion plans, management believes net cash flows from operating activities and the capacity under its $850.0 million senior credit facility will be sufficient to meet the Company's working capital and debt service requirements and support the development of its short- and long-term strategies for at least the next twelve months. The Company did not declare or pay any cash dividends during the 39 week periods ended October 30, 1999 and October 31, 1998. Year 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The Company's computer equipment, software and devices with embedded technology that are date-sensitive may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in other normal business activities. In 1997 the Company began assessing how it may be impacted by the Year 2000 issue and has formulated and commenced implementation of a comprehensive plan to address all known aspects of the issue. The Company's plan encompasses the following areas: (1) information systems that utilize date/time oriented software (IT systems), (2) computer chips, processors, and controllers, (non-IT systems) and (3) vendors and customers. The Company is in various stages of implementation which include remediation, testing and implementation. To date, 100% of the Company's administrative support IT systems have at least completed the remediation phase. Of this amount, approximately 80% have completed the testing and reimplementation phase and 20% have been replaced or upgraded. Approximately 100% of non-IT systems have completed the remediation, testing and implementation phases with no material replacements necessary. The Company has been obtaining information from major vendors, suppliers, and service providers to determine if their systems will be Year 2000 compliant. There has been no indication from these sources that their systems will not be sufficiently Year 2000 compliant or that their failure to be Year 2000 compliant will cause a significant disruption in the operations of the Company. The Company is developing contingency plans to identify alternative sources which are Year 2000 compliant in the event the current parties suffer significant disruption as a result of Year 2000 compliance failures. The Company estimates that total costs to implement its Year 2000 plan will be between $4.0 and $6.0 million of which $3.8 million has already been incurred, including $1.4 million relating to the purchase of new software and hardware modifications, and $2.4 million relating to Year 2000 consultants. The estimated total includes direct costs for systems enhancements which would have been implemented in the ordinary course of business but whose acquisition has been accelerated to ensure compliance by the Year 2000. The estimate excludes costs for scheduled system upgrades which have not been accelerated due to Year 2000 issues. 13 The implementation of BookMaster, which began in 1996, was completed in the third quarter of fiscal 1999. BookMaster, which is Year 2000 compliant, is an inventory management system with integrated point-of-sale features that utilizes a proprietary data-warehouse-based just-in-time replenishment system. It enhances communications and real-time access to the Company's network of stores, distribution center, and wholesalers. The BookMaster system has been installed in 100% of all Barnes & Noble stores. All existing B. Dalton stores are presently utilizing the BookMaster system or have received Year 2000 upgrades to their existing point-of-sale systems. Should some of the Company's systems not be available due to Year 2000 problems, in a reasonably likely worst case scenario, the Company may experience significant delays in its ability to perform certain functions. However, the Company does not expect an impairment in its ability to execute critical functions. Results of Operations 13 weeks ended October 30, 1999 and October 31, 1998 Sales During the 13 weeks ended October 30, 1999, the Company's total sales increased 9.0% to $715.9 million from $656.8 million during the 13 weeks ended October 31, 1998. During the third quarter, Barnes & Noble store sales rose 12.3% to $622.3 million from $554.0 million during the same period a year ago. As a percentage of total sales during the third quarter, Barnes & Noble store sales represented 86.9%, up from 84.3% during the same period last year. During the third quarter, the 12.3% increase in Barnes & Noble store sales primarily resulted from a comparable store sales gain of 5.9% coupled with 46 new stores opened since October 31, 1998 which contributed a 10.8% increase in square footage. Sales were strong across all book categories, particularly children's books, fiction, non-fiction and educational books (teaching aids and workbooks for the growing home school market), as well as music and cafes. In addition, the number of stores included in the comparable store sales base increased to 91.7% as of October 30, 1999 compared with 89.3% as of October 31, 1998. During fiscal 1999's third quarter, B. Dalton sales, which represented 12.3% of total sales compared with 14.9% during fiscal 1998, declined (10.4%) primarily due to the closure of 65 B. Dalton stores since October 31, 1998. B. Dalton's comparable store sales decreased (0.8%) during fiscal 1999's third quarter. During the 13 weeks ended October 30, 1999, the Company opened 12 Barnes & Noble stores and five were closed, bringing its total number of Barnes & Noble stores to 528 while increasing the square footage to 12.4 million. During the same period, B. Dalton closed four stores ending with 444. As of October 30, 1999, the Company operated 972 stores in all fifty states and the District of Columbia. Cost of Sales and Occupancy During the 13 weeks ended October 30, 1999, cost of sales and occupancy increased $41.5 million, or 8.8%, to $515.4 million from $473.9 million during the 13 weeks ended October 31, 1998. As a percentage of sales, cost of sales and occupancy decreased to 72.0% during fiscal 1999's third quarter from 72.1% during the same period one year ago reflecting improved leverage on occupancy costs. 14 Selling and Administrative Expenses Selling and administrative expenses increased $12.0 million to $150.5 million during the 13 weeks ended October 30, 1999 from $138.5 million during the 13 weeks ended October 31, 1998. During the third quarter, selling and administrative expenses decreased as a percentage of sales to 21.0% from 21.1% during the prior year period. The $12.0 million increase was attributable to the increase in the Barnes & Noble store base and the associated increases in store, distribution, and headquarter operating expenses. The decrease in selling and administrative expenses as a percentage of total sales was primarily attributable to the continued leveraging of fixed store operating costs as store sales have increased. Depreciation and Amortization During the third quarter, depreciation and amortization increased $5.0 million, or 21.8%, to $27.8 million from $22.8 million during the same period last year, as a result of depreciation on the 46 new Barnes & Noble stores opened since October 31, 1998, as well as the depreciation on the Company's BookMaster system. Pre-opening Expenses Pre-opening expenses increased $0.1 million, or 6.2%, to $2.1 million during the 13 weeks ended October 30, 1999 from $2.0 million for the 13 weeks ended October 31, 1998, primarily as a result of the first quarter adoption of SOP 98-5. SOP 98-5 requires an entity to expense all start-up activities (as defined) as incurred. The Company historically amortized costs associated with the opening of new stores over the respective store's first 12 months of operations. Operating Profit The Company's consolidated operating profit increased to $20.1 million during the 13 weeks ended October 30, 1999 from $19.6 million during the 13 weeks ended October 31, 1998. Interest Expense, Net and Amortization of Deferred Financing Fees Net interest expense and amortization of deferred financing fees decreased to $5.6 million during the 13 weeks ended October 30, 1999 from $6.9 million during the 13 weeks ended October 31, 1998. Interest expense decreased due to a combination of both lower average borrowings and declining interest rates under the Company's senior credit facility. Provision for Income Taxes The provision for income taxes during the 13 weeks ended October 31, 1999 was $2.4 million compared with a benefit for income taxes of ($3.2) million during the 13 weeks ended October 31, 1998. Tax effects were based upon management's estimate of the Company's annualized effective tax rates. 15 Net Earnings (Loss) As a result of the factors discussed above, the Company reported consolidated net earnings of $3.4 million during the 13 weeks ended October 30, 1999, compared with a net loss of ($4.6) million during the 13 weeks ended October 31, 1998. For the third quarter of 1999, net earnings was $0.05 per diluted share (based on 71.5 million shares) compared with a net loss of ($0.07) per diluted share (based on 68.6 million shares) for the corresponding prior-year period. The consolidated third quarter net earnings reflect the Company's approximate 40% share in barnesandnoble.com's net losses of ($5.2) million after tax (or ($0.07) per diluted share), compared with 100% of barnesandnoble.com's net losses of ($12.1) million after tax (or ($0.18) per diluted share) in the third quarter of 1998. The retail business net earnings increased 14.1% to $8.6 million (or $0.12 per diluted share) for the 13 weeks ended October 30, 1999 compared to $7.5 million (or $0.11 per diluted share) during 13 weeks ended October 31, 1998. Results of Operations 39 weeks ended October 30, 1999 and October 31, 1998 Sales Consolidated sales totaled $2.161 billion during the 39 weeks ended October 30, 1999, a 9.4% increase over sales of $1.976 billion during the 39 weeks ended October 31, 1998. During the 39 weeks ended October 30, 1999, total Company sales rose primarily due to a 12.9% increase in Barnes & Noble store sales to $1.877 billion from $1.662 billion during the same period a year ago. For the same respective periods, Barnes & Noble store sales, as a percentage of total sales, increased to 86.8% up from 84.1%. The year-to-date increase in Barnes & Noble comparable store sales of 6.0%, coupled with a 10.8% increase in store square footage, produced the 12.9% increase in Barnes & Noble store sales. Sales were strong across all book categories, particularly children's books, fiction, non-fiction and educational books (teaching aids and workbooks for the growing home school market), as well as music and cafes. In addition, the number of stores included in the comparable store sales base increased to 91.7% as of October 30, 1999 compared with 89.3% as of October 31, 1998. B. Dalton stores contributed 12.6% of total sales year-to-date compared with 15.1% during the prior year period. Year-to-date B. Dalton sales declined (8.5%) as a result of 65 store closings since October 31, 1998 and a (0.4%) decrease in comparable store sales for the 39 weeks. During the 39 weeks ended October 30, 1999, the Company opened 24 and closed 16 Barnes & Noble stores and closed 45 B. Dalton stores. Cost of Sales and Occupancy During the 39 weeks ended October 30, 1999, cost of sales and occupancy increased $128.2 million, or 9.0%, to $1,569.3 million from $1,441.1 million during the 39 weeks ended October 31, 1998. As a percentage of sales, cost of sales and occupancy decreased to 72.6% during the 39 weeks ended October 30, 1999, from 72.9% during the same period last year reflecting improved leverage on occupancy costs. 16 Selling and Administrative Expenses Selling and administrative expenses increased $47.2 million, or 11.5%, to $458.1 million during the 39 weeks ended October 30, 1999 from $410.9 million during the 39 weeks ended October 31, 1998. As a percentage of sales, selling and administrative expenses increased to 21.2% during the 39 weeks ended October 30, 1999 from 20.8% during the same period last year. The increase was primarily attributable to the charge associated with the write-off of certain expenses in connection with the termination of the Ingram acquisition and Year 2000 consulting fees. Depreciation and Amortization Depreciation and amortization increased $15.6 million, or 24.2%, to $80.1 million during the 39 weeks ended October 30, 1999 from $64.5 million during the 39 weeks ended October 31, 1998 as a result of the 46 Barnes & Noble stores opened since October 31, 1998, as well as the depreciation on the Company's BookMaster system. Pre-opening Expenses Pre-opening expenses decreased $2.4 million, or 35.3%, to $4.5 million during the 39 weeks ended October 30, 1999 from $6.9 million during the 39 weeks ended October 31, 1998 primarily as a result of the first quarter adoption of SOP 98-5. SOP 98-5 requires an entity to expense all start-up activities (as defined) as incurred. The Company historically amortized costs associated with the opening of new stores over the respective store's first 12 months of operations. Operating Profit The Company's consolidated operating profit decreased to $49.4 million during the 39 weeks ended October 30, 1999 from $52.9 million during the 39 weeks ended October 31, 1998. Excluding the $5 million charge to selling and administrative expenses for costs relating to the termination of the acquisition of Ingram, the Company's consolidated operating profit would have increased to $54.4 million during the 39 weeks ended October 30, 1999. Interest Expense, Net and Amortization of Deferred Financing Fees Net interest expense and amortization of deferred financing fees decreased to $15.4 million during the 39 weeks ended October 30, 1999 from $19.0 million during the 39 weeks ended October 31, 1998. Interest expense decreased due to a combination of both lower average borrowings and declining interest rates under the Company's senior credit facility. Provision for Income Taxes Income taxes during the 39 weeks ended October 30, 1999 was $17.7 million compared with a benefit for income taxes of ($9.5) million during the 39 weeks ended October 31, 1998. Tax effects were based upon management's estimate of the Company's annualized effective tax rates. 17 Net Earnings (Loss) As a result of the factors discussed above, the Company reported consolidated net earnings of $21.0 million during the 39 weeks ended October 30, 1999, compared with a net loss of ($13.6) million during the 39 weeks ended October 31, 1998. For the 39 weeks ended October 30, 1999, net earnings was $0.29 per diluted share (based on 71.8 million shares) compared with a net loss of ($0.20) per diluted share (based on 68.4 million shares) for the corresponding prior-year period. For the 39 weeks ended October 30, 1999, the consolidated net earnings reflect the Company's approximate 40% share in barnesandnoble.com's net losses of ($15.8) million after tax (or ($0.22) per diluted share), compared with 100% of barnesandnoble.com's net losses of ($33.7) million after tax (or ($0.49) per diluted share), in the 39 weeks ended October 31, 1998. The 39 weeks ended October 30, 1999 includes a cumulative effect of a change in accounting principle of ($4.5) million after tax (or ($0.07) per diluted share). Also included in net earnings for the 39 weeks ended October 30, 1999 is a pretax gain of $31 million (or $0.25 per diluted share after tax), comprised of the following non-recurring items: a $25 million pretax gain (or $0.20 per diluted share after tax), as a result of the barnesandnoble.com IPO, an $11 million pretax gain (or $0.09 per diluted share after tax) resulting from the partial sale of the Company's investment in Chapters and a pretax charge of $5 million (or ($0.04) per diluted share after tax) associated with the write-off of certain expenses of the Company in connection with its termination of the Ingram acquisition. Excluding barnesandnoble.com, the change in accounting principle and the non-recurring items, the retail business net earnings increased 14.9% to $23.0 million (or $0.32 per diluted share) for the 39 weeks ended October 30, 1999 compared to $20.0 million (or $0.29 per diluted share) during 39 weeks ended October 31, 1998. Forward-Looking Statements This report may contain certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to the Company that are based on the beliefs of the management of the Company as well as assumptions made by and information currently available to the management of the Company. When used in this report, the words "anticipate," "believe," "estimate," "expect," "intend," "plan" and similar expressions, as they relate to the Company or the management of the Company, identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events, the outcome of which is subject to certain risks, including among others general economic and market conditions, decreased consumer demand for the Company's products, possible disruptions in the Company's computer or telephone systems, increased or unanticipated costs or effects associated with Year 2000 compliance by the Company or its service or supply providers, possible work stoppages, or increases in labor costs, possible increases in shipping rates or interruptions in shipping service, effects of competition, possible disruptions or delays in the opening of new stores or the inability to obtain suitable sites for new stores, higher than anticipated store closing or relocation costs, higher interest rates, the performance of the Company's online initiatives such as barnesandnoble.com, unanticipated increases in merchandise or occupancy costs, and other factors which may be outside of the Company's control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described as anticipated, believed, estimated, expected, intended or planned. Subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. The future events, which are the subject of such statements, are subject to certain risks, including those set forth in the company's annual, quarterly and other reports on file with the Securities and Exchange Commission. 18 PART II - OTHER INFORMATION Item 1: Legal Proceedings In the third quarter of 1999, following the acquisition of Babbage's Etc, five shareholder derivative lawsuits were filed in the Chancery Court of the State of Delaware by Harbor Finance Partners, Louis F. Mahler, Ralph Stone, Lawrence G. Metzger and Robert Waring against Barnes & Noble, Inc. and its directors. The lawsuits allege, among other things, a breach of fiduciary duties to Barnes & Noble for the benefit of Leonard Riggio and seek damages and to enjoin or rescind the transaction. The Company believes that the acquisition of Babbage's Etc. is in the best interests of shareholders and that the allegations are without merit. The Company intends to vigorously defend its position. Item 5: Other Information Shareholder Proposals Any shareholder proposal submitted outside the processes of Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the Exchange Act), for presentation at the Company's 2000 Annual Meeting will be considered untimely for purposes of Rules 14a-4 and 14a-5 under the Exchange Act if notice of such shareholder proposal is received by the Company after January 2, 2000. Share repurchase program On November 30, 1999, the Company announced that its board of directors has authorized the purchase of up to $250 million of its common shares. The Company may repurchase shares from time to time in the open market or through privately negotiated transactions, depending on prevailing market conditions, and other factors. Shares repurchased by the Company may be held as treasury shares or retired. Item 6: Exhibits and Reports on Form 8-K (a) Exhibit filed with this Form 10-Q: Exhibit 27 : Financial Data Schedule (b) The following reports on Form 8-K were filed during the Company's quarter ended October 30, 1999: On October 12, 1999, the Company filed a Form 8-K under Item 5 reporting the planned acquisition of Babbage's Etc. 19 On November 12, 1999, the Company filed a Form 8-K reporting under Items 2, 5 and 7. Item 2 provided information concerning the completed acquisition of Babbage's Etc. Item 5 reported information pertaining to lawsuits filed against the Company and its directors with respect to the Babbage's Etc. transaction and Item 7 filed as an exhibit the Purchase Agreement among the Company, Babbage's Etc. and its owners. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BARNES & NOBLE, INC. (Registrant) Date: December 7, 1999 By: /s/ Michael Archbold -------------------- Michael Archbold Vice President, Treasurer (Chief Accounting Officer) 21 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS JAN-29-2000 JAN-31-1999 OCT-30-1999 19,234 0 76,470 0 1,275,167 1,429,989 955,231 398,029 2,575,454 967,462 575,000 0 0 69 654,403 2,575,454 2,161,404 2,161,404 1,569,268 1,569,268 84,607 0 15,352 43,197 17,711 25,486 0 0 (4,500) 20,986 0.30 0.29
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