EX-13.1 3 d389058dex131.htm EX-13.1 EX-13.1

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. The Company’s fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. The Statement of Operations Data for the 52 weeks ended April 29, 2017 (fiscal 2017), 52 weeks ended April 30, 2016 (fiscal 2016) and 52 weeks ended May 2, 2015 (fiscal 2015), and the Balance Sheet Data as of April 29, 2017 and April 30, 2016 are derived from, and are incorporated by reference to, audited consolidated financial statements which are included elsewhere in this report. The Statement of Operations Data for the 53 weeks ended May 3, 2014 (fiscal 2014), 52 weeks ended April 27, 2013 (fiscal 2013), the Balance Sheet Data as of May 2, 2015, May 3, 2014 and April 27, 2013 are derived from audited consolidated financial statements not included elsewhere in this report.

 

Fiscal Year

(In thousands, except per share data)

   Fiscal
2017
    Fiscal
2016
    Fiscal
2015
    Fiscal
2014
    Fiscal
2013
 

STATEMENT OF OPERATIONS DATA:

          

Sales

          

Barnes & Noble Retail

   $ 3,784,655       4,028,614       4,108,243       4,295,140       4,568,247  

NOOK

     146,514       191,520       263,833       505,862       780,433  

Elimination (a)

     (36,611     (56,290     (74,968     (167,657     (272,919
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total sales

     3,894,558       4,163,844       4,297,108       4,633,345       5,075,761  

Cost of sales and occupancy

     2,682,356       2,836,547       2,871,184       3,214,396       3,800,064  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,212,202       1,327,297       1,425,924       1,418,949       1,275,697  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling and administrative expenses

     1,040,007       1,176,778       1,192,065       1,287,163       1,380,747  

Depreciation and amortization

     117,887       135,863       143,665       168,793       180,285  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     54,308       14,656       90,194       (37,007     (285,335

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

     7,509       8,770       17,678       29,122       30,474  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

     46,799       5,886       72,516       (66,129     (315,809

Income taxes

     24,776       (8,814     39,644       13,011       (122,407
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     22,023       14,700       32,872       (79,140     (193,402

Net income (loss) from discontinued operations

     —         (39,146     3,724       31,872       35,596  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 22,023       (24,446     36,596       (47,268     (157,806
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic income (loss) per common share:

          

Income (loss) from continuing operations

   $ 0.30       0.05       0.15       (1.67     (3.63

Income (loss) from discontinued operations

     —         (0.54     0.06       0.54       0.61  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic income (loss) per common share

   $ 0.30       (0.49     0.21       (1.12     (3.02
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted income (loss) per common share:

          

Income (loss) from continuing operations

   $ 0.30       0.05       0.15       (1.67     (3.63

Income (loss) from discontinued operations

     —         (0.54     0.06       0.54       0.61  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted income (loss) per common share

   $ 0.30       (0.49     0.21       (1.12     (3.02
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

          

Basic

     72,188       72,410       60,842       58,971       58,247  

Diluted

     72,328       72,542       60,928       58,971       58,247  

Dividends declared per common share

   $ 0.60       0.60       —         —         —    

 

F-1


(In thousands of dollars, except per share data)

   Fiscal
2017
    Fiscal
2016
    Fiscal
2015
    Fiscal
2014
    Fiscal
2013
 

OTHER OPERATING DATA:

          

Number of Barnes & Noble Retail stores

     633       640       648       661       675  

Comparable sales increase (decrease):

          

Barnes & Noble Retail store sales (c)

     (6.3 )%      0.0     (1.9 )%      (5.8 )%      (3.4 )% 

Barnes & Noble Retail core sales (d)

     (5.7 )%      0.4     0.5     (3.1 )%      0.1

Capital expenditures

   $ 96,258       94,274       94,805       96,728       127,075  

BALANCE SHEET DATA:

          

Total assets – continuing operations

   $ 1,932,921       2,012,782       2,045,104       2,270,649       2,542,108  

Total assets – discontinued operations

   $ —         —         1,067,327       1,122,071       980,535  

Total liabilities – continuing operations

   $ 1,358,610       1,409,272       1,347,384       1,798,649       1,880,729  

Total liabilities – discontinued operations

   $ —         —         379,630       357,180       353,009  

Long-term debt

   $ 64,900       47,200       —         —         77,000  

Long-term subordinated note

   $ —         —         —         —         127,250  

Shareholders’ equity

   $ 574,311       603,510       1,189,358       658,696       713,743  

 

(a) Represents sales from NOOK to B&N Retail on a sell-through basis.

 

(b) Amounts for fiscal 2017, fiscal 2016, fiscal 2015, fiscal 2014 and fiscal 2013 are net of interest income of $0, $0, $58, $190 and $71, respectively.

 

(c) 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 Accounting Standards Codification 605-25, Revenue Recognition, Multiple-Element Arrangements, and does not include sales from closed or relocated stores.

 

(d)

Core comparable store sales, which exclude sales of NOOK® products, increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and does not include sales from closed or relocated stores.

 

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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 2017” represents the 52 weeks ended April 29, 2017, “fiscal 2016” represents the 52 weeks ended April 30, 2016 and “fiscal 2015” represents the 52 weeks ended May 2, 2015.

General

Barnes & Noble, Inc., one of the nation’s largest booksellers,1 provides customers a unique experience across its multi-channel distribution platform. As of April 29, 2017, the Company operates 633 bookstores in 50 states, maintains an eCommerce site, develops digital reading products and operates NOOK, one of the largest digital bookstores. Barnes & Noble is utilizing the strength of its retail footprint in combination with its online and digital businesses to provide an omni-channel experience for its customers, fulfilling its commitment to offer customers any book, anytime, anywhere and in any format.

Barnes & Noble Retail (B&N Retail) operates 633 retail bookstores, primarily under the Barnes & Noble Booksellers® trade name, 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, offering digital books and magazines for sale and consumption online, NOOK®2 reading devices, co-branded NOOK® tablets and reading software for iOS, Android and Windows. The Company employed approximately 26,000 employees (11,000 full-time and 15,000 part-time employees) as of April 29, 2017.

The Company’s principal business is the sale of trade books (generally, hardcover and paperback titles), mass market paperbacks (such as mystery, romance, science fiction and other popular fiction), children’s books, eBooks and other digital content, NOOK® 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 www.barnesandnoble.com. The Company offers its customers a full suite of textbook options (new, used, digital and rental).

Separation of Barnes & Noble Education, Inc.

On February 26, 2015, Barnes & Noble announced plans for the legal and structural separation of Barnes & Noble Education, Inc. (Barnes & Noble Education or B&N Education) (formerly known as NOOK Media Inc.) from Barnes & Noble into an independent public company (the Spin-Off).

On July 14, 2015, the Barnes & Noble board of directors (the Board) approved the final distribution ratio and declared a pro rata dividend of the outstanding shares of B&N Education common stock, which resulted in the complete legal and structural separation of the two companies. The distribution was subject to the satisfaction or waiver of certain conditions as set forth in B&N Education’s Registration Statement on Form S-1, which was filed with the Securities and Exchange Commission (SEC) on February 26, 2015 and was amended on April 29, 2015, June 4, 2015, June 29, 2015, July 13, 2015, July 14, 2015 and July 15, 2015.

 

 

1  Based upon sales reported in trade publications and public filings.
2 

Any references to NOOK® include the Company’s NOOK® Tablet, Samsung Galaxy Tab® A NOOK®, Samsung Galaxy Tab® S2 NOOK®, Samsung Galaxy Tab® E NOOK® and NOOK GlowLightTM Plus devices, each of which includes the trademark symbol (® or ™, as applicable) even if a trademark symbol is not included.

 

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On August 2, 2015, Barnes & Noble completed the Spin-Off of Barnes & Noble Education and distributed, on a pro rata basis, all of the shares of B&N Education common stock to the Company’s stockholders of record as of July 27, 2015. These Barnes & Noble stockholders of record as of July 27, 2015 received a distribution of 0.632 shares of B&N Education common stock for each share of Barnes & Noble common stock held as of the record date. Immediately following the completion of the Spin-Off, the Company’s stockholders owned 100% of the outstanding shares of common stock of B&N Education. Following the Spin-Off, B&N Education operates as an independent public company and as the parent of Barnes & Noble College, trading on New York Stock Exchange under the ticker symbol “BNED”.

In connection with the separation of B&N Education, the Company and B&N Education entered into a Separation and Distribution Agreement on July 14, 2015 and several other ancillary agreements on August 2, 2015. These agreements govern the relationship between the Company and B&N Education after the separation and allocate between the Company and B&N Education various assets, liabilities, rights and obligations following the separation, including employee benefits, intellectual property, information technology, insurance and tax-related assets and liabilities. The agreements also describe the Company’s future commitments to provide B&N Education with certain transition services.

This Spin-Off is expected to be a non-taxable event for Barnes & Noble and its shareholders, and Barnes & Noble’s U.S. shareholders (other than those subject to special rules) generally will not recognize gain or loss as a result of the distribution of B&N Education shares.

History of Barnes & Noble Education, Inc.

On September 30, 2009, Barnes & Noble acquired Barnes & Noble College Booksellers, LLC (B&N College) from Leonard and Louise Riggio. From that date until October 4, 2012, B&N College was wholly owned by Barnes & Noble Booksellers, Inc. B&N Education was initially incorporated under the name NOOK Media Inc. in July 2012 to hold Barnes & Noble’s B&N College and NOOK digital businesses. On October 4, 2012, Microsoft Corporation (Microsoft) acquired a 17.6% non-controlling preferred membership interest in B&N Education’s subsidiary B&N Education, LLC (formerly NOOK Media LLC) (the LLC), and through B&N Education, Barnes & Noble maintained an 82.4% controlling interest of the B&N College and NOOK digital businesses.

On January 22, 2013, Pearson Education, Inc. (Pearson) acquired a 5% non-controlling preferred membership interest in the LLC, entered into a commercial agreement with the LLC relating to the B&N College business and received warrants to purchase an additional preferred membership interest in the LLC.

On December 4, 2014, B&N Education re-acquired Microsoft’s interest in the LLC in exchange for cash and common stock of Barnes & Noble and the Microsoft commercial agreement was terminated effective as of such date. On December 22, 2014, B&N Education also re-acquired Pearson’s interest in the LLC and certain related warrants previously issued to Pearson. In connection with these transactions, Barnes & Noble entered into contingent payment agreements with Microsoft and Pearson providing for additional payments upon the occurrence of certain events, including upon a sale of the NOOK digital business. As a result of these transactions, Barnes & Noble owned, prior to the Spin-Off, 100% of B&N Education.

On May 1, 2015, B&N Education distributed to Barnes & Noble all of the membership interests in B&N Education’s NOOK digital business. As a result, B&N Education ceased to own any interest in the NOOK digital business, which remains a wholly owned subsidiary of Barnes & Noble.

 

F-4


Discontinued Operations of Barnes & Noble Education, Inc.

The Company has recognized the separation of B&N Education in accordance with Accounting Standards Codification (ASC) 205-20, Discontinued Operations. As such, the historical results of Barnes & Noble Education for fiscal 2015 and fiscal 2014 have been adjusted to include pre-spin B&N Education results and separation-related costs and exclude corporate allocations with B&N Retail, and have been classified as discontinued operations. Additionally, discontinued operations for fiscal 2016 primarily consisted of pre-spin B&N Education results, investment banking fees (as they directly related to the Spin-Off) and separation-related costs, and excluded corporate allocation adjustments with B&N Retail.

Resignation Charge

On August 2, 2015, Michael P. Huseby resigned from the Company’s Board of Directors and as Chief Executive Officer of the Company, which was contingent upon the successful separation of B&N Education. In connection with his termination of employment, he received severance payments based on the terms of his employment agreement with the Company, effective as of January 7, 2014. Under the terms of his employment agreement, upon a resignation for “Good Reason”, Mr. Huseby was entitled to receive lump-sum severance equal to two times the sum of (a) annual base salary, (b) the average annual incentive compensation paid to the named executive officer with respect to the preceding two completed years and (c) the cost of benefits. In addition, Mr. Huseby was entitled to accelerated vesting of the equity-based awards granted pursuant to his employment agreement. As a result, Mr. Huseby received a severance payment equal to $7.7 million and additionally was entitled to 300,000 shares of the Company’s common stock pursuant to the accelerated vesting of the equity-based awards, which were settled for cash based on the closing price of the Company’s common stock on the record date of the Spin-Off in an amount equal to $8.0 million. The net cash payments related to Mr. Huseby’s resignation totaled $15.7 million during the second quarter of fiscal 2016. Mr. Huseby’s 300,000 shares have been ratably expensed from the initial grant date, thereby reducing the total resignation charge to $10.5 million, which was recorded within selling and administrative expenses during the second quarter of fiscal 2016.

CEO Departure

On October 26, 2016, the Company entered into a release agreement (the Release Agreement) with its former Chief Executive Officer, Ronald D. Boire. Under the Release Agreement, Mr. Boire and the Company agreed to release claims against each other in connection with Mr. Boire’s termination of employment in exchange for a cash payment contemplated by his employment agreement. In connection with the execution of the Release Agreement, Mr. Boire also agreed to forfeit all equity awards that were granted to him by the Company.

The cash payment in connection with the Release Agreement totaled $4.8 million. The Company has previously recognized $1.9 million in expense relating to the equity awards granted to Mr. Boire during his employment. Taking into account the reversal of those expenses, the Company recorded a net charge related to the cash payment to Mr. Boire in connection with the Release Agreement of $2.9 million within selling and administrative expenses during the second quarter of fiscal 2017.

 

F-5


Series J Preferred Stock

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 were 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 reflected an initial conversion price of $17.00 and was subject to adjustment in certain circumstances. The initial dividend rate for the Preferred Stock was equal to 7.75% per annum of the initial liquidation preference of the Preferred Stock paid quarterly and subject to adjustment in certain circumstances.

On April 8, 2014, Liberty sold the majority of its shares to qualified institutional buyers in reliance on Rule 144A under the Securities Act and had retained an approximate 10% stake of its initial investment. As a result, Liberty no longer had the right to elect two preferred stock directors to the Company’s Board. Additionally, the consent rights and pre-emptive rights, to which Liberty was previously entitled, ceased to apply.

On June 5, 2015, the Company entered into conversion agreements with five beneficial owners (Series J Holders) of its Preferred Stock, pursuant to which each of the Series J Holders had agreed to convert (Conversion) shares of Preferred Stock it beneficially owned into shares of the Company’s common stock, par value $0.001 per share (Company Common Stock), and additionally received a cash payment from the Company in connection with the Conversion.

On July 9, 2015, the Company completed the Conversion. Pursuant to the terms of the Conversion Agreements, the Series J Holders converted an aggregate of 103,995 shares of Preferred Stock into 6,117,342 shares of Company Common Stock, and made an aggregate cash payment to the Series J Holders of $3.7 million plus cash in lieu of fractional shares in connection with the Conversion.

On July 10, 2015, the Company gave notice of its exercise of the right to force conversion of all outstanding shares of its Senior Convertible Redeemable Series J Preferred Stock into Company Common Stock pursuant to Section 9 of the Certificate of Designations, Preferences and Relative Participating, Optional and Other Special Rights and Qualifications, Limitations and Restrictions of Series J Preferred Stock, dated as of August 18, 2011 (the Forced Conversion). The effective date of the Forced Conversion was July 24, 2015. On the date of the Forced Conversion, each share of Series J Preferred Stock was automatically converted into 59.8727 shares of Company Common Stock, which included shares of Company Common Stock reflecting accrued and unpaid dividends on Series J Preferred Stock. Each holder of Series J Preferred Stock received whole shares of Company Common Stock and a cash amount in lieu of fractional shares of Company Common Stock.

As a result of the transactions described above, all shares of Series J Preferred Stock were retired by the Company and are no longer outstanding.

 

F-6


Segments

The Company identifies its operating segments based on 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 and makes decisions on the allocation of resources. The Company’s two operating segments are B&N Retail and NOOK.

B&N Retail

This segment includes 633 bookstores as of April 29, 2017, primarily under the Barnes & Noble Booksellers trade name. These Barnes & Noble stores generally offer a comprehensive trade book title base, a café, and departments dedicated to Juvenile, Toys & Games, DVDs, Music & Vinyl, Gift, Magazine, Bargain products and a dedicated NOOK® area. The stores also offer a calendar of ongoing events, including author appearances and children’s activities. The B&N Retail segment also includes the Company’s eCommerce website, www.barnesandnoble.com, and its 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 2017, the Company reduced the Barnes & Noble store base by approximately 199,000 square feet, bringing the total square footage to 16.7 million square feet, a net reduction of 1.2% from fiscal 2016.

Each Barnes & Noble store features an authoritative selection of books, ranging from 22,000 to 163,000 titles. The comprehensive title selection is diverse and reflects local interests and regional titles and authors’ works. Bestsellers typically represent between approximately 4% and 6% of Barnes & Noble store sales. Product Master, the Company’s proprietary inventory management database, has approximately 19.0 million titles. It includes approximately 7.3 million active titles and provides each store with comprehensive title selections. By enhancing the Company’s existing merchandise replenishment systems, Product Master allows the Company to achieve higher in-stock positions and better productivity at the bookstore 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 www.barnesandnoble.com by offering an option to have the book sent to the store or shipped directly to the customer.

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, puzzles & games, coloring books and history & current affairs, as well as a large children’s line. Sterling, with a solid backlist and robust value publishing program, has a title base of approximately 15,000 eBooks and print books. In addition, Sterling also distributes approximately 1,100 titles on behalf of client publishers.

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 and sales of NOOK® devices and accessories to B&N Retail. The underlying

 

F-7


strategy of the NOOK business is to offer customers any digital book, newspaper or magazine, anytime, on any device. The Company remains committed to delivering to customers the best digital bookstore experience, providing easy access to Barnes & Noble’s expansive digital collection of over four million eBooks, digital magazines and newspapers, while rationalizing its existing cost structure. As part of this commitment, the Company partners with Samsung to develop co-branded NOOK® tablets that feature the award-winning Barnes & Noble digital reading experience, while continuing to develop and offer its own black-and-white NOOK® eReaders.

On April 7, 2016, the Company entered into an agreement with Bahwan CyberTek (BCT), a global software products and services company, in which the Company outsourced certain NOOK functions, including cloud management and development support for NOOK® software.

Results of Operations

 

Fiscal Year

   Fiscal 2017     Fiscal 2016     Fiscal 2015  

Sales (in thousands)

   $ 3,894,558     $ 4,163,844     $ 4,297,108  

Net Income From Continuing Operations (in thousands)

   $ 22,023     $ 14,700     $ 32,872  

Net Income (Loss) From Discontinued Operations (in thousands)

   $ —       $ (39,146   $ 3,724  

Net Income (Loss) (in thousands)

   $ 22,023     $ (24,446   $ 36,596  

Diluted Income Per Common Share From Continuing Operations

   $ 0.30     $ 0.05     $ 0.15  

Diluted Income (Loss) Per Common Share From Discontinued Operations

   $ —       $ (0.54   $ 0.06  
  

 

 

   

 

 

   

 

 

 

Diluted Income (Loss) Per Common Share

   $ 0.30     $ (0.49   $ 0.21  

Comparable Sales Increase (Decrease)

      

Barnes & Noble Retail store sales (a)

     (6.3 )%      0.0     (1.9 )% 

Barnes & Noble Retail core sales (b)

     (5.7 )%      0.4     0.5

Stores Opened

      

Barnes & Noble Retail stores

     3       0       0  

Stores Closed

      

Barnes & Noble Retail stores

     10       8       13  

Number of Stores Open at Year End

      

Barnes & Noble Retail stores

     633       640       648  

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

      

Barnes & Noble Retail stores

     16.7       16.9       17.1  

 

(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 Accounting Standards Codification (ASC) 605-25, Revenue Recognition, Multiple-Element Arrangements, and does not include sales from closed or relocated stores.

 

(b)

Core comparable store sales, which exclude sales of NOOK® products, increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and does not include sales from closed or relocated stores.

 

F-8


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 2017     Fiscal 2016     Fiscal 2015  

Sales

     100.0     100.0     100.0

Cost of sales and occupancy

     68.9       68.1       66.8  
  

 

 

   

 

 

   

 

 

 

Gross profit

     31.1       31.9       33.2  

Selling and administrative expenses

     26.7       28.3       27.7  

Depreciation and amortization

     3.0       3.3       3.3  
  

 

 

   

 

 

   

 

 

 

Operating income

     1.4       0.4       2.1  

Interest expense, net and amortization of deferred financing fees

     0.2       0.2       0.4  
  

 

 

   

 

 

   

 

 

 

Income before taxes

     1.2       0.1       1.7  

Income taxes

     0.6       (0.2     0.9  
  

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     0.6       0.4       0.8  

Net income (loss) from discontinued operations

     —         (0.9     0.1  
  

 

 

   

 

 

   

 

 

 

Net income (loss)

     0.6     (0.6 )%      0.9

Business Overview

Recently, Barnes & Noble has experienced declining sales trends due primarily to lower store traffic and the challenging retail environment. Despite sales declines, the Company has been able to sustain profit levels on cost reductions. While the Company believes it has lost share on its recent sales performance, it also sees opportunities in an industry that has become more stable.

To grow sales, the Company will leverage the strength of its Barnes & Noble brand, knowledgeable booksellers, vast selection and retail footprint to attract customers to its omni-channel offerings. Merchandising initiatives are focused on increasing the number of value offers, improving SKU productivity, improving inventory management processes, testing changes to existing store layouts and remerchandising select business units in stores. The Company believes there is opportunity to increase conversion, by improving navigation and discovery throughout the store, including a customer friendly and more intuitive organization of books and improved signage for easier browsing within and across sections.

In-store events also drive traffic, reinforcing Barnes & Noble as a community center where customers can meet, browse and discover. The Company is also utilizing social media, where booksellers communicate events, promotions and new product offerings with customers at the local level.

In addition to initiatives focused on growing sales through its existing store base, the Company is also testing new bookstore formats, which it believes could foster sales growth in the future.

BN.com and NOOK are important components of the Company’s omni-channel strategy. The Company believes that in the long term, enhancements to its BN.com platform will enable it to be more competitive in the marketplace. The Company continues to improve its overall eCommerce user experience across channels, including desktop, tablet, mobile and app based, with the goal of providing a great device agnostic user experience. For customers interested in eBooks, the Company continues to judiciously bring new NOOK devices and apps to market.

 

F-9


The Company’s Membership program provides the Company with valuable data and insights into its customer base, enabling the Company to better understand and market to its customers. Members are more productive than Non-Members, as they spend more and visit more often. The Company continues to test programs to grow sales to both Members and Non-Members, increase Membership, improve price perception and enhance its overall customer value proposition.

In light of the declining sales trends, the Company remains committed to right sizing its cost structure. The Company is focused on simplification throughout its organization to create efficiencies and reinvest resources to support sales growth. At B&N Retail, the Company is focused on increasing store and supply chain productivity, streamlining operations and eliminating non-productive spend. At NOOK, the Company exited non-core businesses and outsourced certain functions, which enabled it to close its Santa Clara, CA and Taipei offices. NOOK expects to continue to re-calibrate its cost structure commensurate with sales, further reducing its losses.

52 Weeks Ended April 29, 2017 Compared with 52 Weeks Ended April 30, 2016

The following tables summarize the Company’s results of operations for the 52 weeks ended April 29, 2017 and 52 weeks ended April 30, 2016.

Sales

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 29,
2017
    % Total     April 30,
2016
    % Total  

B&N Retail

   $ 3,784,655       97.2   $ 4,028,614       96.8

NOOK

     146,514       3.8     191,520       4.6

Elimination

     (36,611     (0.9 )%      (56,290     (1.4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Sales

   $ 3,894,558       100.0   $ 4,163,844       100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s sales decreased $269.3 million, or 6.5%, during fiscal 2017 to $3.895 billion from $4.164 billion during fiscal 2016. The changes by segment are as follows:

 

   

B&N Retail sales decreased $244.0 million, or 6.1%, to $3.785 billion from $4.029 billion during the same period one year ago, and accounted for 97.2% of total Company sales. Comparable store sales decreased $216.5 million, or 6.3%, as compared to the prior year. Closed stores decreased sales by $46.7 million. B&N Retail also includes third-party sales of Sterling Publishing Co., Inc., which decreased by $13.4 million, or 27.3%, versus the prior year on lower coloring book sales. Online sales increased $10.8 million, or 3.7%, versus the prior year period on benefits from an eBook settlement (as discussed below), site improvements and increased promotional activity. New stores increased sales by $7.7 million. Gift card breakage increased $6.5 million as redemptions continue to run lower than historical patterns.

Of the $216.5 million decrease in comparable store sales, core comparable store sales, which exclude sales of NOOK® products, decreased $194.2 million, or 5.7%, as compared to the prior year due in large part to lower traffic, comparisons to last year’s coloring book and artist supplies phenomenon and the challenging retail environment. Book categories decreased sales by $134.5 million, or 6.0%, on lower sales of Trade, Bargain (primarily coloring books) and Juvenile titles,

 

F-10


while non-book core categories decreased sales by $59.7 million, or 5.1% on declines in the DVD, Café, Newsstand and Gift businesses. Comparable sales of NOOK® products at B&N Retail stores decreased $22.3 million, or 37.5%, primarily on lower device unit volume and lower average selling prices.

 

   

NOOK sales decreased $45.0 million, or 23.5%, to $146.5 million from $191.5 million during the same period one year ago, and accounted for 3.8% of total Company sales. Digital content sales decreased $23.6 million, or 18.1%, compared to prior year on lower unit sales, partially offset by higher average selling prices. Current year content volume benefited from an eBook settlement. Device and accessories sales decreased $21.4 million, or 34.9%, primarily on lower unit sales and lower average selling prices.

 

   

Elimination sales, which represent sales from NOOK to B&N Retail on a sell-through basis, decreased $19.7 million, or 35.0%, versus the prior year. NOOK sales, net of elimination, accounted for 2.8% of total Company sales.

In fiscal 2017, the Company opened three and closed ten Barnes & Noble stores, bringing its total number of B&N Retail stores to 633, with 16.7 million square feet, in the 50 states.

Cost of Sales and Occupancy

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 29,
2017
    % Sales     April 30,
2016
    % Sales  

B&N Retail

   $ 2,636,113       69.7   $ 2,770,209       68.8

NOOK

     82,854       56.6     122,628       64.0

Elimination

     (36,611     (25.0 )%      (56,290     (29.4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Cost of Sales and Occupancy

   $ 2,682,356       68.9   $ 2,836,547       68.1
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s cost of sales and occupancy includes costs such as merchandise costs, distribution center costs (including payroll, freight, supplies and other operating expenses), rental expense, 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 decreased $154.2 million, or 5.4%, to $2.682 billion in fiscal 2017 from $2.837 billion in fiscal 2016. Cost of sales and occupancy increased as a percentage of sales to 68.9% in fiscal 2017 from 68.1% in fiscal 2016. The changes by segment are as follows:

 

   

B&N Retail cost of sales and occupancy increased as a percentage of sales to 69.7% from 68.8%, or 90 basis points, during the same period one year ago primarily on occupancy deleverage (60 basis points), higher markdowns (50 basis points) from promotional activity, including Harry Potter and the Cursed Child, as well as markdowns to clear non-returnable merchandise resulting from the holiday sales shortfall. The remaining variance included product mix, sales deleverage and general timing differences.

 

   

NOOK cost of sales and occupancy decreased as a percentage of sales to 56.6% from 64.0% during the same period one year ago. This decrease was primarily due to sales mix, improved device margins and a favorable channel partner settlement.

 

F-11


Gross Profit

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 29,
2017
     % Sales     April 30,
2016
     % Sales  

B&N Retail

   $ 1,148,542        30.3   $ 1,258,405        31.2

NOOK

     63,660        57.9     68,892        50.9
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Gross Profit

   $ 1,212,202        31.1   $ 1,327,297        31.9
  

 

 

    

 

 

   

 

 

    

 

 

 

The Company’s consolidated gross profit decreased $115.1 million, or 8.7%, to $1.212 billion in fiscal 2017 from $1.327 billion in fiscal 2016. This decrease was due to the matters discussed above.

Selling and Administrative Expenses

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 29,
2017
     % Sales     April 30,
2016
     % Sales  

B&N Retail

   $ 959,002        25.3   $ 1,043,221        25.9

NOOK

     81,005        73.7     133,557        98.8
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Selling and Administrative Expenses

   $ 1,040,007        26.7   $ 1,176,778        28.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Selling and administrative expenses decreased $136.8 million, or 11.6%, to $1.040 billion in fiscal 2017 from $1.177 billion in fiscal 2016. Selling and administrative expenses decreased as a percentage of sales to 26.7% in fiscal 2017 from 28.3% in fiscal 2016. The changes by segment are as follows:

 

   

B&N Retail selling and administrative expenses decreased $84.2 million as compared to prior year, decreasing 60 basis points as a percentage of sales to 25.3% from 25.9% for the year. Favorable variances to the prior year include lower pension expense (60 basis points) on the prior year pension settlement charge, lower holiday advertising (45 basis points) and lower website expenses (25 basis points) as the prior year included investments to stabilize the site and improve traffic and customer experience. The prior year also included a net CEO separation-related severance charge of $10.5 million (25 basis points). Unfavorable variances to the prior year include higher store payroll (65 basis points on store sales) as sales deleverage and wage increases offset productivity gains, higher non-CEO severance costs (25 basis points) primarily resulting from a cost reduction program and a severance charge (net of reversal of expense relating to equity awards) of $3.0 million resulting from the current year CEO departure (10 basis points). The remaining variance included the general timing of expenses.

 

   

NOOK selling and administrative expenses decreased $52.6 million as compared to the prior year, decreasing as a percentage of sales to 73.7% from 98.8% during the same period a year ago. Current year expenses include severance and transitional costs of $10.7 million related to the outsourcing of certain services and the closure of its California and Taiwan offices. Excluding these costs, the decrease in dollars was primarily attributable to continued cost rationalization efforts, including lower compensation, as well as lower variable costs on the sales decline.

 

F-12


Depreciation and Amortization

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 29,
2017
     % Sales     April 30,
2016
     % Sales  

B&N Retail

   $ 98,877        2.6   $ 101,888        2.5

NOOK

     19,010        17.3     33,975        25.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Depreciation and Amortization

   $ 117,887        3.0   $ 135,863        3.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Depreciation and amortization decreased $18.0 million, or 13.2%, to $117.9 million in fiscal 2017 from $135.9 million in fiscal 2016. This decrease was primarily attributable to fully depreciated assets, partially offset by additional capital expenditures.

Operating Income (Loss)

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 29,
2017
    % Sales     April 30,
2016
    % Sales  

B&N Retail

   $ 90,663       2.4   $ 113,296       2.8

NOOK

     (36,355     (33.1 )%      (98,640     (72.9 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Income

   $ 54,308       1.4   $ 14,656       0.4
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s consolidated operating income increased $39.7 million, or 270.6%, to an operating income of $54.3 million in fiscal 2017 from an operating income of $14.7 million in fiscal 2016. This increase was due to the matters discussed above.

Interest Expense, Net and Amortization of Deferred Financing Fees

 

     52 Weeks Ended      52 Weeks Ended         

Dollars in thousands

   April 29,
2017
     April 30,
2016
     % of Change  

Interest Expense, Net and Amortization of Deferred Financing Fees

   $ 7,509      $ 8,770        (14.4 )% 
  

 

 

    

 

 

    

 

 

 

Net interest expense and amortization of deferred financing fees decreased $1.3 million, or 14.4%, to $7.5 million in fiscal 2017 from $8.8 million in fiscal 2016. This decrease was primarily due to lower deferred financing fees in conjunction with the refinancing of the credit facility in August 2015.

 

F-13


Income Taxes

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 29,
2017
     Effective
Rate
    April 30,
2016
    Effective
Rate
 

Income Taxes

   $ 24,776        52.9   $ (8,814     (149.7 )% 
  

 

 

    

 

 

   

 

 

   

 

 

 

The Company recorded an income tax provision of $24.8 million in fiscal 2017 compared with an income tax benefit of $8.8 million in fiscal 2016. The Company’s effective tax rate was 52.9% and (149.7)% in fiscal 2017 and fiscal 2016, respectively. The Company’s effective tax rate differs from the statutory rate due to the impact of permanent items such as meals and entertainment, non-deductible executive compensation, tax credits, changes in uncertain tax positions and the impact of return to provision adjustments and state tax provision, net of federal benefit. The Company continues to maintain a valuation allowance against certain state items. The prior year rate was impacted by uncertain tax positions, finalization of the federal income tax audit covering the 2008 through 2012 tax years, the closure of many state taxing jurisdiction statutes, the impact of new legislation enacted by Congress permanently reinstating the research and development credit and the impact of filing the income tax returns.

In accordance with accounting principles generally accepted in the United States (GAAP) rules on accounting for income taxes, the Company evaluates the realizability of its deferred tax assets at each reporting date. The Company records a valuation allowance when it determines that it is more likely than not that all or a portion of a particular deferred tax asset will not be realized. As part of this evaluation, the Company reviews all evidence, both positive and negative, to determine if a valuation allowance is needed. The Company’s review of positive evidence included the review of historic profitability, projected profitability, feasible tax planning strategies that may be implemented and the reversal of temporary items. The Company determined that there was sufficient negative evidence to establish valuation allowances against certain deferred tax assets, totaling $7.6 million. The Company will monitor the need for additional valuation allowances at each quarter in the future and adjust the valuation allowance as necessary.

Net Income from Continuing Operations

 

     52 Weeks Ended      52 Weeks Ended  

Dollars in thousands

   April 29,
2017
     Diluted
EPS
     April 30,
2016
     Diluted
EPS
 

Net Income from Continuing Operations

   $ 22,023      $ 0.30      $ 14,700      $ 0.05  
  

 

 

    

 

 

    

 

 

    

 

 

 

As a result of the factors discussed above, the Company reported a consolidated net income from continuing operations of $22.0 million (or $0.30 per diluted share) during fiscal 2017, compared with consolidated net income from continuing operations of $14.7 million (or $0.05 per diluted share) during fiscal 2016.

 

F-14


Net Loss from Discontinued Operations

 

     52 Weeks Ended      52 Weeks Ended  

Dollars in thousands

   April 29,
2017
     Diluted
EPS
     April 30,
2016
    Diluted
EPS
 

Net Loss from Discontinued Operations

   $ —        $ —        $ (39,146   $ (0.54
  

 

 

    

 

 

    

 

 

   

 

 

 

The Company has recognized the separation of B&N Education in accordance with ASC 205-20, Discontinued Operations. As such, the historical results of Barnes & Noble Education have been classified as discontinued operations.

Discontinued operations for fiscal 2016 primarily consisted of pre-spin B&N Education results, investment banking fees (as they directly related to the Spin-Off) and separation-related costs, and excluded corporate allocation adjustments with B&N Retail.

Net Income (Loss)

 

     52 Weeks Ended      52 Weeks Ended  

Dollars in thousands

   April 29,
2017
     Diluted
EPS
     April 30,
2016
    Diluted
EPS
 

Net Income (Loss)

   $ 22,023      $ 0.30      $ (24,446   $ (0.49
  

 

 

    

 

 

    

 

 

   

 

 

 

As a result of the factors discussed above, the Company reported a consolidated net income of $22.0 million (or $0.30 per diluted share) during fiscal 2017, compared with consolidated net loss of $24.4 million (or $0.49 per diluted share) during fiscal 2016.

52 Weeks Ended April 30, 2016 Compared with 52 Weeks Ended May 2, 2015

The following tables summarize the Company’s results of operations for the 52 weeks ended April 30, 2016 and 52 weeks ended May 2, 2015.

Sales

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 30,
2016
    % Total     May 2,
2015
    % Total  

B&N Retail

   $ 4,028,614       96.8   $ 4,108,243       95.6

NOOK

     191,520       4.6     263,833       6.1

Elimination

     (56,290     (1.4 )%      (74,968     (1.7 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Sales

   $ 4,163,844       100.0   $ 4,297,108       100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s sales decreased $133.3 million, or 3.1%, during fiscal 2016 to $4.164 billion from $4.297 billion during fiscal 2015. The changes by segment are as follows:

 

   

B&N Retail sales decreased $79.6 million, or 1.9%, to $4.029 billion from $4.108 billion during the same period one year ago, and accounted for 96.8% of total Company sales. Online sales were impacted by challenges following the launch of the new BN.com website, decreasing $49.0

 

F-15


 

million, or 14.4%, versus the prior year. Closed stores decreased sales by $40.5 million. Device warranty reimbursements, resulting from favorable claims experience with a warranty service provider, decreased $4.8 million on a year-to-date basis as compared to the prior year due to a smaller claim period and lower volume. These unfavorable variances were partially offset by a $3.0 million increase in gift card breakage as redemptions continue to run lower than historical patterns. B&N Retail also includes third-party sales of Sterling Publishing Co., Inc., which increased by $8.7 million, or 21.7%, on increased adult coloring book business.

Comparable store sales decreased $1.3 million, or essentially flat, as compared to the prior year. Of the $1.3 million decrease in comparable store sales, core comparable store sales, which exclude sales of NOOK® products, increased $13.0 million, or 0.4%, as compared to the prior year. Non-book core categories increased sales by $48.3 million, or 4.2%, on growth of the Toys & Games and Gift businesses. Book categories decreased sales by $35.3 million, or 1.5%, primarily on lower sales of Trade and Juvenile titles, partially offset by strong sales of coloring books. Sales of NOOK® products at B&N Retail stores decreased $14.3 million, or 19.2%, versus the prior year on lower device unit sales and lower average selling prices.

 

   

NOOK sales decreased $72.3 million, or 27.4%, to $191.5 million from $263.8 million during the same period one year ago, and accounted for 4.6% of total Company sales. Digital content sales decreased $47.3 million, or 26.7%, to $130.0 million primarily on lower unit sales and to a lesser extent, agency vs. non-agency mix. Device and accessories sales decreased $25.0 million, or 28.9%, to $61.5 million primarily on lower unit sales.

 

   

Elimination sales, which represent sales from NOOK to B&N Retail on a sell-through basis, decreased $18.7 million, or 24.9%, versus the prior year. NOOK sales, net of elimination, accounted for 3.2% of total Company sales.

In fiscal 2016, the Company closed eight Barnes & Noble stores, bringing its total number of B&N Retail stores to 640, with 16.9 million square feet, in the 50 states.

Cost of Sales and Occupancy

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 30,
2016
    % Sales     May 2,
2015
    % Sales  

B&N Retail

   $ 2,770,209       68.8   $ 2,798,846       68.1

NOOK

     122,628       64.0     147,306       55.8

Elimination

     (56,290     (29.4 )%      (74,968     (28.4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Cost of Sales and Occupancy

   $ 2,836,547       68.1   $ 2,871,184       66.8
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s cost of sales and occupancy includes costs such as merchandise costs, distribution center costs (including payroll, freight, supplies and other operating expenses), rental expense, 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 decreased $34.6 million, or 1.2%, to $2.837 billion in fiscal 2016 from $2.871 billion in fiscal 2015. Cost of sales and occupancy increased as a percentage of sales to 68.1% in fiscal 2016 from 66.8% in fiscal 2015. The percentage of sales changes by segment are as follows:

 

F-16


   

B&N Retail cost of sales and occupancy increased as a percentage of sales to 68.8% from 68.1%, or 70 basis points, during the same period one year ago. This increase was due to the following factors. Ecommerce margin decreased 35 basis points on the Company’s promotional activity, reserves on non-returnable products increased 30 basis points on inventory mix, distribution costs increased 15 basis points on the transition to a new third-party service provider during the year, as well as expense deleverage, higher occupancy costs of 20 basis points on expense deleverage and the lower warranty reimbursement of 10 basis points, partially offset by a favorable product mix (45 basis points).

 

   

NOOK cost of sales and occupancy increased as a percentage of sales to 64.0% from 55.8% during the same period one year ago. The prior year included a favorable benefit from the adjustment of lease accounting items to reflect the impact of the Palo Alto relocations. This benefit, net of closing costs, was primarily driven by the reversal of previously deferred rent liabilities upon exiting the facility. In addition, the prior year included a favorable reduction in costs of goods sold on renegotiated parts and components liabilities. Cost of sales and occupancy was also impacted by product mix and sales deleverage.

Gross Profit

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 30,
2016
     % Sales     May 2,
2015
     % Sales  

B&N Retail

   $ 1,258,405        31.2   $ 1,309,397        31.9

NOOK

     68,892        50.9     116,527        61.7
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Gross Profit

   $ 1,327,297        31.9   $ 1,425,924        33.2
  

 

 

    

 

 

   

 

 

    

 

 

 

The Company’s consolidated gross profit decreased $98.6 million, or 6.9%, to $1.327 billion in fiscal 2016 from $1.426 billion in fiscal 2015. This decrease was due to the matters discussed above.

Selling and Administrative Expenses

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 30,
2016
     % Sales     May 2,
2015
     % Sales  

B&N Retail

   $ 1,043,221        25.9   $ 991,669        24.1

NOOK

     133,557        98.8     200,396        106.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Selling and Administrative Expenses

   $ 1,176,778        28.3   $ 1,192,065        27.7
  

 

 

    

 

 

   

 

 

    

 

 

 

Selling and administrative expenses decreased $15.3 million, or 1.3%, to $1.177 billion in fiscal 2016 from $1.192 billion in fiscal 2015. Selling and administrative expenses increased as a percentage of sales to 28.3% in fiscal 2016 from 27.7% in fiscal 2015. The percentage of sales changes by segment are as follows:

 

   

B&N Retail selling and administrative expenses increased as a percentage of sales to 25.9% from 24.1% during the same period one year ago. The current year included executive severance costs of $10.5 million, an impairment charge on a publishing contract of $3.8 million and a net

 

F-17


 

increase in pension settlement charges of $13.6 million ($20.9 million in the current year and $7.3 million in the prior year). Excluding these charges, selling and administrative expenses increased 100 basis points as a percentage of sales to 25.0% from 24.0% during the same period one year ago. Advertising costs increased 30 basis points as the Company invested in the bookstore-focused “You never know who you’ll meet at Barnes & Noble” holiday television campaign. Store payroll increased 30 basis points (on store sales) as wage increases outpaced productivity gains. The new website increased expenses by 20 basis points primarily due to a significant amount of website fixes to stabilize the site, increase traffic and improve the overall user experience. Other increases include increased employee benefit costs (20 basis points).

 

   

NOOK selling and administrative expenses decreased as a percentage of sales to 98.8% from 106.1% during the same period one year ago. On a dollar basis, selling and administrative expenses decreased $66.8 million on cost rationalization efforts, including lower compensation-related costs, advertising, consulting and legal costs, as well as lower variable costs on the sales decline, partially offset by higher severance, bad debt and exit costs related to the Video, Apps and UK businesses.

Depreciation and Amortization

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 30,
2016
     % Sales     May 2,
2015
     % Sales  

B&N Retail

   $ 101,888        2.5   $ 104,373        2.5

NOOK

     33,975        25.1     39,292        20.8
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Depreciation and Amortization

   $ 135,863        3.3   $ 143,665        3.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Depreciation and amortization decreased $7.8 million, or 5.4%, to $135.9 million in fiscal 2016 from $143.7 million in fiscal 2015. This decrease was primarily attributable to fully depreciated assets and store closings, partially offset by additional capital expenditures.

Operating Income (Loss)

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 30,
2016
    % Sales     May 2,
2015
    % Sales  

B&N Retail

   $ 113,296       2.8   $ 213,355       5.2

NOOK

     (98,640     (72.9 )%      (123,161     (65.2 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Income

   $ 14,656       0.4   $ 90,194       2.1
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s consolidated operating income decreased $75.5 million, or 83.8%, to an operating income of $14.7 million in fiscal 2016 from an operating income of $90.2 million in fiscal 2015. This decrease was due to the matters discussed above.

 

F-18


Interest Expense, Net and Amortization of Deferred Financing Fees

 

     52 Weeks Ended      52 Weeks Ended         

Dollars in thousands

   April 30,
2016
     May 2,
2015
     % of Change  

Interest Expense, Net and Amortization of Deferred Financing Fees

   $ 8,770      $ 17,678        (50.4 )% 
  

 

 

    

 

 

    

 

 

 

Net interest expense and amortization of deferred financing fees decreased $8.9 million, or 50.4%, to $8.8 million in fiscal 2016 from $17.7 million in fiscal 2015. This decrease was primarily due to lower interest related to the repayment of the Junior Seller Note in September 2014 and lower deferred financing fees in conjunction with the refinancing of the credit facility.

Income Taxes

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 30,
2016
    Effective
Rate
    May 2,
2015
     Effective
Rate
 

Income Taxes

   $ (8,814     (149.7 )%    $ 39,644        54.7
  

 

 

   

 

 

   

 

 

    

 

 

 

The Company recorded an income tax benefit of $8.8 million in fiscal 2016 compared with an income tax provision of $39.6 million in fiscal 2015. The Company’s effective tax rate was (149.7)% and 54.7% in fiscal 2016 and fiscal 2015, respectively. The income tax (benefit)/provision in fiscal 2016 and fiscal 2015, respectively, include the impact of permanent items such as meals and entertainment, non-deductible executive compensation and changes in uncertain tax positions. Fiscal 2016 also includes the impact of the finalization of the federal income tax audit covering the 2008 through 2012 tax years, the closure of many state taxing jurisdiction statutes and the impact of new legislation enacted by Congress permanently reinstating the research and development credit. The Company continues to maintain a valuation allowance against certain state items. In fiscal 2015, the Company recorded the tax implications of the Microsoft agreement, which do not impact the current year, as a result of the termination of the Microsoft agreement in December 2014.

In accordance with GAAP rules on accounting for income taxes, the Company evaluates the realizability of its deferred tax assets at each reporting date. The Company records a valuation allowance when it determines that it is more likely than not that all or a portion of a particular deferred tax asset will not be realized. As part of this evaluation, the Company reviews all evidence, both positive and negative, to determine if a valuation allowance is needed. The Company’s review of positive evidence included the review of historic profitability, projected profitability, feasible tax planning strategies that may be implemented and the reversal of temporary items. The Company determined that there was sufficient negative evidence to establish valuation allowances against certain deferred tax assets, totaling $6.7 million during fiscal 2016. The Company will monitor the need for additional valuation allowances at each quarter in the future and adjust the valuation allowance as necessary.

 

F-19


Net Income from Continuing Operations

 

     52 Weeks Ended      52 Weeks Ended  

Dollars in thousands

   April 30,
2016
     Diluted EPS      May 2,
2015
     Diluted EPS  

Net Income from Continuing Operations

   $ 14,700      $ 0.05      $ 32,872      $ 0.15  
  

 

 

    

 

 

    

 

 

    

 

 

 

As a result of the factors discussed above, the Company reported a consolidated net income from continuing operations of $14.7 million (or $0.05 per diluted share) during fiscal 2016, compared with consolidated net income from continuing operations of $32.9 million (or $0.15 per diluted share) during fiscal 2015.

Net Income (Loss) from Discontinued Operations

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 30,
2016
    Diluted EPS     May 2,
2015
     Diluted EPS  

Net Income (Loss) from Discontinued Operations

   $ (39,146   $ (0.54   $ 3,724      $ 0.06  
  

 

 

   

 

 

   

 

 

    

 

 

 

The Company has recognized the separation of B&N Education in accordance with ASC 205-20, Discontinued Operations. As such, the historical results of Barnes & Noble Education for fiscal 2015 have been adjusted to include pre-spin B&N Education results and separation-related costs and exclude corporate allocations with B&N Retail, and have been classified as discontinued operations. Additionally, discontinued operations for fiscal 2016 included investment banking fees (as they directly related to the Spin-Off), as well as pre-spin B&N Education results and separation-related costs, and excluded corporate allocation adjustments with B&N Retail.

Net Income (Loss)

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 30,
2016
    Diluted EPS     May 2,
2015
     Diluted EPS  

Net Income (Loss)

   $ (24,446   $ (0.49   $ 36,596      $ 0.21  
  

 

 

   

 

 

   

 

 

    

 

 

 

As a result of the factors discussed above, the Company reported a consolidated net loss of $24.4 million (or $0.49 per diluted share) during fiscal 2016, compared with consolidated net income of $36.6 million (or $0.21 per diluted share) during fiscal 2015.

Seasonality

The B&N Retail business, like that of many retailers, is seasonal, with the major portion of sales and operating income realized during its third fiscal quarter, which includes the holiday selling season.

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.

 

F-20


Liquidity and Capital Resources

The primary sources of the Company’s cash are net cash flows from operating activities, funds available under its credit facility and short-term vendor financing.

Cash Flows

The Company’s cash and cash equivalents were $12.0 million as of April 29, 2017, compared with $13.8 million as of April 30, 2016. The decrease in cash and cash equivalents of $1.8 million versus the prior year period was due to changes in working capital and cash flows as outlined below.

Net cash flows provided by operating activities for fiscal 2017 were $145.2 million, as compared to net cash flows provided by operating activities of $195.7 million for fiscal 2016. The unfavorable year-over-year comparison was primarily attributable to changes in working capital.

Net cash flows used in investing activities for fiscal 2017 were $96.3 million, as compared to net cash flows used in investing activities of $94.3 million for fiscal 2016. The Company’s investing activities primarily consisted of capital expenditures for the maintenance of existing stores, merchandising initiatives, new store construction and enhancements to systems and the website.

Net cash flows used in financing activities for fiscal 2017 were $50.8 million, as compared to net cash flows used in financing activities of $47.8 million for fiscal 2016. The Company’s financing activities during fiscal 2017 consisted primarily of common dividends and share repurchases, partially offset by net proceeds on its credit facility. Financing activities during fiscal 2016 consisted primarily of common and preferred dividends, share repurchases, fees incurred to enter into the New Credit Facility (as defined below) and other financing activities, partially offset by net proceeds on the Company’s credit facility.

Over the past 12 months, the Company has returned $67.2 million in cash to its shareholders through share repurchases and dividends. Since July 2015, the Company has returned $139.9 million in cash to its shareholders through share repurchases and dividends.

Additional year-over-year balance sheet changes include the following:

 

   

Receivables, net decreased $57.6 million, or 46.1%, to $67.3 million as of April 29, 2017, compared to $124.9 million as of April 30, 2016, primarily due to collections on the eBook settlement receivable.

 

   

Merchandise inventories, net increased $13.2 million, or 1.4%, to $946.9 million as of April 29, 2017, compared to $933.7 million as of April 30, 2016. Retail inventories increased $16.2 million, or 1.8% as the prior year included heavier fourth quarter return volume. NOOK inventories decreased $3.0 million, or 24.3%, versus the prior year on lower planned sales volume.

 

   

Prepaid expenses and other current assets decreased $4.1 million, or 3.9%, to $101.8 million as of April 29, 2017, compared to $105.9 million as of April 30, 2016, primarily on income tax differences.

 

   

Property and equipment, net decreased $22.5 million, or 7.5%, to $276.1 million as of April 29, 2017, compared to $298.6 million as of April 30, 2016, as depreciation outpaced capital expenditures.

 

F-21


   

Intangible assets, net decreased $0.7 million, or 0.2%, to $310.2 million as of April 29, 2017, compared to $310.9 million as of April 30, 2016, on additional amortization.

 

   

Other non-current assets decreased $2.4 million, or 17.8%, to $11.2 million as of April 29, 2017, compared to $13.6 million as of April 30, 2016.

 

   

Accounts payable decreased $6.9 million, or 1.4%, to $473.7 million as of April 29, 2017, compared to $480.6 million as of April 30, 2016. Accounts payable represented 50.0% and 51.5% of merchandise inventories as of April 29, 2017 and April 30, 2016, respectively. This ratio is subject to changes in product mix and the timing of purchases, payments and returns.

 

   

Accrued liabilities decreased $77.0 million, or 21.4%, to $283.2 million as of April 29, 2017, compared to $360.2 million as of April 30, 2016. Accrued liabilities include the eBook settlement, deferred income, compensation, occupancy related, legal and other selling and administrative miscellaneous accruals.

 

   

Gift card liabilities decreased $1.7 million, or 0.5%, to $351.4 million as of April 29, 2017, compared to $353.1 million as of April 30, 2016. 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 recognized gift card breakage of $35.5 million and $29.1 million during the 52 weeks ended April 29, 2017 and April 30, 2016, respectively. Gift card breakage increased over last year as redemptions continue to run lower than historical patterns. Additional breakage may be required if gift card redemptions continue to run lower than historical patterns.

 

   

Deferred taxes increased $32.1 million, or 59.5%, to $86.1 million as of April 29, 2017, compared to $54.0 million as of April 30, 2016. This increase is primarily due to true-up activity upon filing of federal and state returns, as well as recurring movement in temporary differences and the impact of accounting method changes.

 

   

Other long-term liabilities decreased $14.9 million, or 13.0%, to $99.3 million as of April 29, 2017, compared to $114.2 million as of April 30, 2016, due to lower deferred rent and lower tax reserves.

The Company has arrangements with third-party manufacturers to produce certain NOOK® products. These manufacturers procure and assemble unfinished parts and components from third-party suppliers based on forecasts provided by the Company. Given production lead times, commitments are generally made far in advance of finished product delivery. Based on current purchase commitments and product development plans, the Company did not record any provision for purchase commitments. Future charges may be required based on changes in forecasted sales or strategic direction.

EBook Settlement

The Company provided credits to eligible customers resulting from the settlement reached with Apple Inc. (Apple) in an antitrust lawsuit filed by various State Attorneys General and private class plaintiffs regarding the price of digital books. The Company’s customers were entitled to $95.7 million in total credits as a result of the settlement, which is funded by Apple. If a customer’s credit is not used to make a purchase within one year, the entire credit will expire. The Company estimated total activations of $60.8 million through June 2017, which are recorded as a liability to its customers to the extent they have not yet been activated and as a receivable from Apple settlement fund to the extent they have not yet been reimbursed. As of April 29, 2017, the Company’s customers had activated $59.2 million in credits, of which $52.7 million were redeemed. Total receivables from the Apple settlement fund were $2.5 million as of April 29, 2017.

 

F-22


Capital Structure

Microsoft Investment

On April 27, 2012, Barnes & Noble entered into an investment agreement, pursuant to which Barnes & Noble transferred to the LLC its digital device, digital content and college bookstore businesses, and Morrison Investment Holdings, Inc. (Morrison) purchased from the LLC 300,000 convertible preferred membership interests in the LLC (Series A Preferred) for an aggregate purchase price of $300.0 million. Concurrently with its entry into this agreement, Barnes & Noble also entered into a commercial agreement with Microsoft, pursuant to which, among other things, the LLC would develop and distribute a Windows 8 application for eReading and digital content purchases, and an intellectual property license and settlement agreement with Microsoft and Microsoft Licensing GP. The parties closed Morrison’s investment in the LLC and the commercial agreement became effective on October 4, 2012.

On December 3, 2014, Morrison, Microsoft, Barnes & Noble and Barnes & Noble Education entered into agreements, pursuant to which Morrison’s interest in the LLC was purchased by Barnes & Noble Education and the Microsoft commercial agreement was terminated effective as of such date. Pursuant to the Purchase Agreement (the Purchase Agreement) among Barnes & Noble, Barnes & Noble Education, Morrison and Microsoft, Barnes & Noble Education purchased from Morrison, and Morrison sold, all of its $300.0 million convertible Series A preferred limited liability company interest in the LLC in exchange for an aggregate purchase price of $124.9 million consisting of (i) $62.4 million in cash and (ii) 2,737,290 shares of common stock, par value $0.001 per share, of Barnes & Noble. The Purchase Agreement closed on December 4, 2014. The Company accounted for this transaction in accordance with ASC 810-10, Non-Controlling Interest (ASC 810-10) and it accordingly was reflected as an equity transaction. In connection with the closing, the parties entered into a Digital Business Contingent Payment Agreement, pursuant to which Microsoft is entitled to receive 22.7% of the proceeds from, among other events or transactions, (1) any future dividends or other distributions received from Barnes & Noble’s NOOK digital business at any time until the date that is three years from the closing, subject to a one-year extension under certain circumstances, and (2) the sale of Barnes & Noble’s NOOK digital business at any time until the date that is three years from the closing, subject to a one-year extension under certain circumstances.

Pearson Investment

On December 21, 2012, the LLC entered into an agreement with a subsidiary of Pearson plc (Pearson) to make a strategic investment in the LLC. That transaction closed on January 22, 2013, and Pearson invested approximately $89.5 million of cash in the LLC in exchange for preferred membership interests representing a 5% equity stake in the LLC. Following the closing of the transaction, Barnes & Noble owned approximately 78.2% of the LLC and Microsoft owned approximately 16.8%. The preferred membership interests had a liquidation preference equal to the original investment. In addition, the LLC granted warrants to Pearson to purchase up to an additional 5% of the LLC under certain conditions. Upon the completion of the acquisition of Pearson’s interest in the LLC, as stated below, the temporary equity was converted to permanent equity.

On December 22, 2014, Barnes & Noble entered into a Purchase Agreement (the Pearson Purchase Agreement) among Barnes & Noble, Barnes & Noble Education, NOOK Media Member Two LLC, a Delaware limited liability company (NOOK Member Two), Pearson Education, Inc. (Pearson

 

F-23


Education) and Pearson Inc., pursuant to which Barnes & Noble Education and NOOK Member Two purchased from Pearson Education all of its convertible Series B preferred limited liability company interest in the LLC and all of its warrants to purchase additional Series B preferred limited liability company interests, in exchange for an aggregate purchase price equal to (i) $13.8 million in cash and (ii) 602,927 shares of common stock, par value $0.001 per share, of Barnes & Noble. The transactions under the Pearson Purchase Agreement closed on December 22, 2014. The Company accounted for this transaction in accordance with ASC 810-10 and it accordingly was reflected as an equity transaction. As a condition to closing, the parties entered into an amended and restated Digital Business Contingent Payment Agreement, pursuant to which a Digital Business Contingent Payment Agreement dated as of December 3, 2014, by and between Barnes & Noble, the LLC and Pearson, was amended and restated to include provisions consistent with the Digital Business Contingent Payment Agreement entered into with Morrison on December 3, 2014.

Series J Preferred Stock

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 were 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 reflected an initial conversion price of $17.00 and was subject to adjustment in certain circumstances. The initial dividend rate for the Preferred Stock was equal to 7.75% per annum of the initial liquidation preference of the Preferred Stock paid quarterly and subject to adjustment in certain circumstances.

On April 8, 2014, Liberty sold the majority of its shares to qualified institutional buyers in reliance on Rule 144A under the Securities Act and had retained an approximate 10% stake of its initial investment. As a result, Liberty no longer had the right to elect two preferred stock directors to the Company’s Board. Additionally, the consent rights and pre-emptive rights, to which Liberty was previously entitled, ceased to apply.

On June 5, 2015, the Company entered into conversion agreements with five beneficial owners (Series J Holders) of its Preferred Stock, pursuant to which each of the Series J Holders had agreed to convert (Conversion) shares of Preferred Stock it beneficially owned into shares of the Company’s common stock, par value $0.001 per share (Company Common Stock), and additionally received a cash payment from the Company in connection with the Conversion.

On July 9, 2015, the Company completed the Conversion. Pursuant to the terms of the Conversion Agreements, the Series J Holders converted an aggregate of 103,995 shares of Preferred Stock into 6,117,342 shares of Company Common Stock, and made an aggregate cash payment to the Series J Holders of $3.7 million plus cash in lieu of fractional shares in connection with the Conversion.

On July 10, 2015, the Company gave notice of its exercise of the right to force conversion of all outstanding shares of its Senior Convertible Redeemable Series J Preferred Stock into Company Common Stock pursuant to Section 9 of the Certificate of Designations, Preferences and Relative Participating, Optional and Other Special Rights and Qualifications, Limitations and Restrictions of Series J Preferred Stock, dated as of August 18, 2011 (the Forced Conversion). The effective date of the Forced Conversion was July 24, 2015. On the date of the Forced Conversion, each share of Series J

 

F-24


Preferred Stock was automatically converted into 59.8727 shares of Company Common Stock, which included shares of Company Common Stock reflecting accrued and unpaid dividends on Series J Preferred Stock. Each holder of Series J Preferred Stock received whole shares of Company Common Stock and a cash amount in lieu of fractional shares of Company Common Stock.

As a result of the transactions described above, all shares of Series J Preferred Stock were retired by the Company and are no longer outstanding.

Credit Facility

Prior to August 3, 2015, the Company was party to an amended and restated credit facility with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and other lenders, dated as of April 29, 2011 (as amended and modified through August 3, 2015, the Prior Credit Facility), consisting of up to $1.0 billion in aggregate commitments under a five-year asset-backed revolving credit facility, which was scheduled to expire on April 29, 2016.

On August 3, 2015, the Company and certain of its subsidiaries entered into a credit agreement (New Credit Agreement) with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and the other lenders from time to time party thereto, under which the lenders committed to provide a five-year asset-backed revolving credit facility in an aggregate committed principal amount of up to $700.0 million (Revolving Credit Facility). On September 30, 2016, the Company amended the New Credit Agreement to provide for a new “first-in, last-out” revolving credit facility (the FILO Credit Facility and, together with the Revolving Credit Facility, the New Credit Facility) in an aggregate principal amount of up to $50.0 million, which supplements availability under the Revolving Credit Facility. The Company generally must draw down the FILO Credit Facility before making any borrowings under the Revolving Credit Facility.

Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC, Wells Fargo Bank, N.A. and SunTrust Robinson Humphrey, Inc. are the joint lead arrangers for the New Credit Facility. The New Credit Facility replaced the Prior Credit Facility. Proceeds from the New Credit Facility are used for general corporate purposes, including seasonal working capital needs.

The Company and certain of its subsidiaries are permitted to borrow under the New Credit Facility. The New Credit Facility is secured by substantially all of the inventory, accounts receivable and related assets of the borrowers under the New Credit Facility (collectively, the Loan Parties), but excluding the equity interests in the Company and its subsidiaries, intellectual property, equipment and certain other property. Borrowings under the New Credit Facility are limited to a specified percentage of eligible collateral. The Company has the option to request an increase in commitments under the New Credit Facility of up to $250.0 million, subject to certain restrictions.

The New Credit Facility allows the Company to declare and pay up to $70.0 million in dividends annually to its stockholders without compliance with any availability or ratio-based limitations.

Interest under the Revolving Credit Facility accrues, at the election of the Company, at a LIBOR or alternate base rate, plus, in each case, an applicable interest rate margin, which is determined by reference to the level of excess availability under the Revolving Credit Facility. Through the end of the fiscal quarter during which the closing of the Revolving Credit Facility occurred, loans under the Revolving Credit Facility bore interest at LIBOR plus 1.750% per annum, in the case of LIBOR borrowings, or at the alternate base rate plus 0.750% per annum, in the alternative, and thereafter the interest rate began to fluctuate between LIBOR plus 2.000% per annum and LIBOR plus 1.500% per annum (or between the alternate base rate plus 1.000% per annum and the alternate base rate plus 0.500% per annum), based upon the average daily availability under the Revolving Credit Facility for the

 

F-25


immediately preceding fiscal quarter. Interest under the FILO Credit Facility accrues, at the election of the Company, at a LIBOR or alternate base rate, plus, in each case, an applicable interest rate margin, which is also determined by reference to the level of excess availability under the Revolving Credit Facility. Loans under the FILO Credit Facility bear interest at 1.000% per annum more than loans under the Revolving Credit Facility.

The New Credit Agreement contains customary negative covenants, which limit the Company’s ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets, among other things. In addition, if excess availability under the New Credit Facility were to fall below certain specified levels, certain additional covenants (including fixed charge coverage ratio requirements) would be triggered, and the lenders would assume dominion and control over the Loan Parties’ cash.

The New Credit Agreement contains customary events of default, including payment defaults, material breaches of representations and warranties, covenant defaults, default on other material indebtedness, customary ERISA events of default, bankruptcy and insolvency, material judgments, invalidity of liens on collateral, change of control or cessation of business. The New Credit Agreement also contains customary affirmative covenants and representations and warranties.

The following table presents selected information related to the Company’s credit facilities (in thousands):

 

     Fiscal
2017
    Fiscal
2016
    Fiscal
2015
 

Credit facility at period end

   $ 64,900       47,200       —    

Average balance outstanding during the period

   $ 96,297       66,948       18,227  

Maximum borrowings outstanding during the period

   $ 285,278       293,200       202,800  

Weighted average interest rate during the period (a)

     5.77     8.21     38.18

Interest rate at end of period

     3.73     2.69     0.00

 

(a) Includes commitment fees.

The Company wrote off $0.5 million of deferred financing fees related to the Prior Credit Facility during the 52 weeks ended April 30, 2016 and the remaining unamortized deferred financing fees of $3.5 million were deferred and are being amortized over the five-year term of the New Credit Facility. The Company also incurred $5.7 million of fees to secure the New Credit Facility, which are being amortized over the five-year term accordingly. During the 52 weeks ended April 29, 2017, the Company incurred $0.5 million of fees to secure the FILO Credit Facility, which are being amortized over the same term as the New Credit Facility.

Fees expensed with respect to the unused portion of the credit facilities were $2.2 million, $2.8 million and $4.7 million during fiscal 2017, fiscal 2016 and fiscal 2015, respectively.

The Company had $64.9 million and $47.2 million of outstanding debt under the New Credit Facility as of April 29, 2017 and April 30, 2016, respectively. The Company had $38.8 million and $47.9 million of outstanding letters of credit under its New Credit Facility as of April 29, 2017 and April 30, 2016, respectively.

 

F-26


The Company has no agreements to maintain compensating balances.

Capital Investment

The Company’s investing activities consist principally of capital expenditures for the maintenance of existing stores, merchandising initiatives, new store construction and enhancements to systems and the website. Capital expenditures totaled $96.3 million, $94.3 million and $94.8 million during fiscal 2017, fiscal 2016 and fiscal 2015, respectively. Fiscal 2018 capital expenditure levels are expected to be approximately $100.0 million, although commitment to many such expenditures has not yet been made. Capital expenditures planned for fiscal 2018 primarily include new store development, merchandising initiatives, maintenance of existing stores, enhancements to systems and the website.

Based upon the Company’s current operating levels and capital expenditures for fiscal 2018, management believes cash and cash equivalents on hand, funds available under its credit facility and short-term vendor financing will be sufficient to meet the Company’s normal working capital and debt service requirements for at least the next 12 months. The Company regularly evaluates its capital structure and conditions in the financing markets to ensure it maintains adequate flexibility to successfully execute its business plan.

On October 20, 2015, the Company’s Board of Directors authorized a stock repurchase program (prior repurchase plan) of up to $50.0 million of its common shares. During fiscal 2016, the Company repurchased 2,763,142 shares at a cost of $26.7 million under the prior repurchase plan. During fiscal 2017, the Company repurchased 2,019,798 shares at a cost of $23.3 million under the prior repurchase plan. On March 15, 2017, subsequent to completing the prior repurchase plan, the Company’s Board of Directors authorized a new stock repurchase program of up to $50.0 million of its common shares. 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. The new stock repurchase program has no expiration date and may be suspended or discontinued at any time. The Company’s repurchase plan is intended to comply with the requirements of Rule 10b-18 under the Securities Exchange Act of 1934. The Company has not repurchased shares under this plan in fiscal 2017. The Company has remaining capacity of $50.0 million under the new repurchase program as of April 29, 2017.

As of April 29, 2017, the Company has repurchased 39,496,765 shares at a cost of approximately $1.1 billion since the inception of the Company’s stock repurchase programs. The repurchased shares are held in treasury.

 

F-27


Contractual Obligations

The following table sets forth the Company’s contractual obligations as of April 29, 2017 (in millions):

 

Contractual Obligations

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

Operating lease obligations (a)

   $ 1,125.0      $ 314.3      $ 465.8      $ 238.3      $ 106.6  

Purchase obligations (b)

     55.4        34.1        21.2        0.1        —    

Interest obligations (c)

     9.3        2.9        5.7        0.7        —    

Other long-term liabilities reflected on the Company’s balance sheet under U.S. GAAP (d)

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,189.7      $ 351.3      $ 492.7      $ 239.1      $ 106.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Excludes obligations under store leases for insurance, taxes and other maintenance costs, which totaled approximately 19.7% of the minimum rent payments under those leases.

 

(b) Includes hardware and software maintenance contracts and inventory purchase commitments.

 

(c) Represents commitment fees related to the Company’s New Credit Facility.

 

(d) Excludes $9.4 million of unrecognized tax benefits for which the Company cannot make a reasonably reliable estimate of the amount and period of payment. See Note 13 to the Notes to Consolidated Financial Statements.

See also Note 12 to the Notes to Consolidated Financial Statements for information concerning the Company’s pension and postretirement plans.

Off-Balance Sheet Arrangements

As of April 29, 2017, 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.

Certain Relationships and Related Transactions

See Note 23 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

 

F-28


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 or shipment, other than those with multiple elements and Free On Board (FOB) destination point shipping terms. The Company accrues for estimated sales returns in the period in which the related revenue is recognized based on historical experience. ECommerce revenue from sales of products ordered through the Company’s websites is recognized upon estimated delivery and receipt of the shipment by its customers. Freight costs are included within the Company’s cost of sales and occupancy. 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® device revenue 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 with the purchase of a NOOK® from the Company. Using the relative selling-price method 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 is deferred and recognized on a straight-line basis over the 2-year estimated life of a NOOK® device.

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 0% and 5%, depending on the type of device sold. The amount of NOOK®-related deferred revenue as of April 29, 2017 and April 30, 2016 was $0.2 million and $0.2 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 distributed 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 was established for the

 

F-29


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.

The Company rents physical textbooks. Revenue from the rental of physical textbooks is deferred and recognized over the rental period commencing at point of sale. The Company offers a buyout option to allow the purchase of a rented book at the end of the semester. The Company records the buyout purchase when the customer exercises and pays the buyout option price. In these instances, the Company would accelerate any remaining deferred rental revenue at the point of sale.

NOOK acquires the rights to distribute digital content from publishers and distributes the content on www.barnesandnoble.com, NOOK® devices and other eBookstore platforms. Certain digital content is distributed under an agency pricing model, in which the publishers set prices for eBooks and NOOK receives a commission on content sold through the eBookstore. The majority of the Company’s eBooks 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 12-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 the first-in, first-out (FIFO) basis. NOOK merchandise inventories are recorded based on the average cost method.

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 reserve would have affected pre-tax earnings by approximately $5.2 million in fiscal 2017.

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 regarding shortage rates are incorrect, it may be exposed to losses or gains that could be material. A 10 basis point change in actual shortage rates would have affected pre-tax earnings by approximately $0.7 million in fiscal 2017.

 

F-30


Internal-Use Software and Website Development Costs

Direct costs incurred to develop software for internal use and website development costs are capitalized and amortized over an estimated useful life of three to seven years. During fiscal 2017 and fiscal 2016, the Company capitalized costs, primarily related to labor, consulting, hardware and software, of $18.5 million and $31.5 million, respectively. Amortization of previously capitalized amounts was $23.6 million, $30.5 million and $27.6 million for fiscal 2017, fiscal 2016 and fiscal 2015, respectively. Costs related to the design or maintenance of internal-use software and website development are expensed as incurred.

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 research and development costs for software products 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.

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 7 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 29, 2017 would have affected pre-tax earnings by approximately $0.6 million in fiscal 2017.

 

F-31


Property and Equipment and Other Long-Lived Assets

The Company’s long-lived assets include property and equipment and amortizable intangibles. At April 29, 2017, the Company had $276.1 million of property and equipment, net of accumulated depreciation, and $0.9 million of amortizable intangible assets, net of amortization, accounting for approximately 14.3% 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 and considers market participants in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company evaluates long-lived assets for impairment at the individual Barnes & Noble 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 related to amortizable assets totaled $0.3 million, $0.2 million and $0.4 million during fiscal 2017, fiscal 2016 and fiscal 2015, respectively. 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 resulted in a material impairment charge on the Company’s results of operations in fiscal 2017.

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 29, 2017, the Company had $207.4 million of goodwill (on its Retail reporting unit) and $309.3 million of unamortizable intangible assets (those with an indefinite useful life), accounting for approximately 26.7% of the Company’s total assets. ASC 350-30, Goodwill and Other Intangible Assets (ASC 350-30), 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 2017. 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 value of the B&N Retail reporting unit, as of that date, exceeded its carrying values; therefore, the second step of the impairment test was not required to be performed and no goodwill impairment was recognized. Goodwill is subject to further risk of impairment if B&N Retail comparable store sales continue to decline, the Company’s cost reduction plans do not materialize or store closings accelerate. There were no impairment losses included in selling and administrative expenses related to goodwill during fiscal 2017, fiscal 2016 and fiscal 2015.

 

F-32


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. Impairment losses included in selling and administrative expenses related to unamortizable intangible assets totaled $0 million, $3.8 and $0 million during fiscal 2017, fiscal 2016 and fiscal 2015, respectively. Changes in market conditions, among other factors, could have a material impact on these estimates.

During fiscal 2016, the Company impaired one of its publishing contracts due to a significant drop in business with that publisher, driven by lower title offerings, product quality and the loss of a distribution partner. As a result, the Company recorded an impairment charge of $3.8 million in selling and administrative expenses. The 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 the continued declines in the physical book business, certain of these contracts were impaired.

A 10% decrease in the Company’s estimated discounted cash flows would have no impact on the Company’s evaluation of publishing contracts in fiscal 2017.

Gift Cards

The Company sells gift cards, which can be used in its stores, on www.barnesandnoble.com, on NOOK® devices and at B&N Education stores. 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. Gift cards redeemed at B&N Education are funded by the gift card liability at the Company. Over time, a portion of the gift cards issued is typically 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 revenue on a straight-line basis over a 12-month period beginning in the 13th month after the month the gift card was originally sold. Additional breakage may be required if gift card redemptions continue to run lower than historical patterns.

The Company recognized gift card breakage of $35.5 million, $29.1 million and $26.1 million during fiscal 2017, fiscal 2016 and fiscal 2015, respectively. The Company had gift card liabilities of $351.4 million and $353.1 million as of April 29, 2017 and April 30, 2016, respectively. Gift card breakage increased over last year as redemptions continue to run lower than historical patterns. 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 25 basis point change in the Company’s gift card breakage rate at April 29, 2017 would have affected pre-tax earnings by approximately $15.8 million in fiscal 2017.

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 have affected the Company’s results of operations in fiscal 2017 by $0.5 million.

 

F-33


Disclosure Regarding Forward-Looking Statements

This report contains certain forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) and information relating to Barnes & Noble that are based on the beliefs of the management of Barnes & Noble as well as assumptions made by and information currently available to the management of Barnes & Noble. When used in this communication, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “will,” “forecasts,” “projections,” and similar expressions, as they relate to Barnes & Noble or the management of Barnes & Noble, identify forward-looking statements.

Such statements reflect the current views of Barnes & Noble 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 Barnes & Noble’s products, low growth or declining sales and net income due to various factors, including store closings, higher-than-anticipated or increasing costs, including with respect to store closings, relocation, occupancy (including in connection with lease renewals) and labor costs, the effects of competition, the risk of insufficient access to financing to implement future business initiatives, risks associated with data privacy and information security, risks associated with Barnes & Noble’s supply chain, including possible delays and disruptions and increases in shipping rates, various risks associated with the digital business, including the possible loss of customers, declines in digital content sales, risks and costs associated with ongoing efforts to rationalize the digital business and the digital business not being able to perform its obligations under the Samsung commercial agreement and the consequences thereof, the risk that financial and operational forecasts and projections are not achieved, the performance of Barnes & Noble’s initiatives including but not limited to its new store concept and eCommerce initiatives, unanticipated adverse litigation results or effects, potential infringement of Barnes & Noble’s intellectual property by third parties or by Barnes & Noble of the intellectual property of third parties, and other factors, including those factors discussed in detail in Item 1A, “Risk Factors,” and in Barnes & Noble’s other filings made hereafter from time to time with the SEC.

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 Barnes & Noble or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. Barnes & Noble 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.

 

F-34


CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In thousands, except per share data)

   Fiscal 2017      Fiscal 2016     Fiscal 2015  

Sales

   $ 3,894,558      $ 4,163,844     $ 4,297,108  

Cost of sales and occupancy

     2,682,356        2,836,547       2,871,184  
  

 

 

    

 

 

   

 

 

 

Gross profit

     1,212,202        1,327,297       1,425,924  

Selling and administrative expenses

     1,040,007        1,176,778       1,192,065  

Depreciation and amortization

     117,887        135,863       143,665  
  

 

 

    

 

 

   

 

 

 

Operating income

     54,308        14,656       90,194  

Interest expense, net and amortization of deferred financing fees

     7,509        8,770       17,678  
  

 

 

    

 

 

   

 

 

 

Income before income taxes

     46,799        5,886       72,516  

Income taxes provision (benefit)

     24,776        (8,814     39,644  
  

 

 

    

 

 

   

 

 

 

Net income from continuing operations

   $ 22,023      $ 14,700     $ 32,872  

Net income (loss) from discontinued operations

     —          (39,146     3,724  
  

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 22,023      $ (24,446   $ 36,596  
  

 

 

    

 

 

   

 

 

 

Basic income (loss) per common share:

       

Income from continuing operations

   $ 0.30      $ 0.05     $ 0.15  

Income (loss) from discontinued operations

     —          (0.54     0.06  
  

 

 

    

 

 

   

 

 

 

Basic income (loss) per common share

   $ 0.30      $ (0.49   $ 0.21  
  

 

 

    

 

 

   

 

 

 

Diluted income (loss) per common share:

       

Income from continuing operations

   $ 0.30      $ 0.05     $ 0.15  

Income (loss) from discontinued operations

     —          (0.54     0.06  
  

 

 

    

 

 

   

 

 

 

Diluted income (loss) per common share

   $ 0.30      $ (0.49   $ 0.21  
  

 

 

    

 

 

   

 

 

 

Weighted average common shares outstanding:

       

Basic

     72,188        72,410       60,842  

Diluted

     72,328        72,542       60,928  

Dividends declared per common share

   $ 0.60      $ 0.60     $ —    

See accompanying notes to consolidated financial statements.

 

F-35


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

(In thousands)

   Fiscal 2017      Fiscal 2016     Fiscal 2015  

Net income (loss)

   $ 22,023      $ (24,446   $ 36,596  

Other comprehensive income (loss), net of tax:

       

(Increase) decrease in minimum pension liability (net of deferred tax benefit (expense) of $(107), $(2,188) and $4,603, respectively)

     164        3,662       (9,370

Pension reclassification (net of deferred tax expense of $0, $(7,780) and $(2,707), respectively) (see Note 12)

     —          13,022       4,610  
  

 

 

    

 

 

   

 

 

 

Total comprehensive income (loss)

   $ 22,187      $ (7,762   $ 31,836  
  

 

 

    

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-36


CONSOLIDATED BALANCE SHEETS

 

(In thousands, except per share data)

   April 29, 2017     April 30, 2016  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 11,993     $ 13,838  

Receivables, net

     67,294       124,917  

Merchandise inventories, net

     946,909       933,723  

Prepaid expenses and other current assets

     101,816       105,912  
  

 

 

   

 

 

 

Total current assets

     1,128,012       1,178,390  
  

 

 

   

 

 

 

Property and equipment:

    

Land and land improvements

     2,541       2,541  

Buildings and leasehold improvements

     1,072,007       1,058,452  

Fixtures and equipment

     1,608,433       1,560,005  
  

 

 

   

 

 

 
     2,682,981       2,620,998  

Less accumulated depreciation and amortization

     2,406,859       2,322,418  
  

 

 

   

 

 

 

Net property and equipment

     276,122       298,580  
  

 

 

   

 

 

 

Goodwill

     207,381       211,276  

Intangible assets, net

     310,205       310,904  

Other non-current assets

     11,201       13,632  
  

 

 

   

 

 

 

Total assets

   $ 1,932,921     $ 2,012,782  
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 473,686     $ 480,574  

Accrued liabilities

     283,157       360,194  

Gift card liabilities

     351,424       353,103  
  

 

 

   

 

 

 

Total current liabilities

     1,108,267       1,193,871  
  

 

 

   

 

 

 

Long-term debt

     64,900       47,200  

Deferred taxes

     86,132       54,017  

Other long-term liabilities

     99,311       114,184  

Shareholders’ equity:

    

Common stock; $0.001 par value; 300,000 shares authorized; 111,933 and 111,228 shares issued, respectively

     112       112  

Additional paid-in capital

     1,741,380       1,738,034  

Accumulated other comprehensive income

     315       151  

Retained earnings

     (46,425     (24,349

Treasury stock, at cost, 39,497 and 37,941 shares, respectively

     (1,121,071     (1,110,438
  

 

 

   

 

 

 

Total shareholders’ equity

     574,311       603,510  
  

 

 

   

 

 

 

Commitments and contingencies

     —         —    
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,932,921     $ 2,012,782  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-37


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

(In thousands)

                                      
      Common
Stock
     Additional
Paid-In
Capital
     Accumlated
Other
Comprehensive
Gains (Losses)
    Retained
Earnings
    Stock at Cost     Total  

Balance at May 3, 2014

   $ 94        1,395,463        (11,773     344,021       (1,069,109   $ 658,696  

Net income

     —          —          —         36,596       —         36,596  

Minimum pension liability, net of tax

     —          —          (9,370     —         —         (9,370

Pension reclassification (see Note 12)

     —          —          4,610       —         —         4,610  

Exercise of 83 common stock options

     1        1,282        —         —         —         1,283  

Stock options and restricted stock tax benefits

     —          652        —         —         —         652  

Stock-based compensation expense

     —          19,989        —         —         —         19,989  

Accretive dividend on preferred stockholders

     —          —          —         (7,340     —         (7,340

Accrued/paid dividends for preferred stockholders

     —          —          —         (15,765     —         (15,765

Treasury stock acquired, 477 shares

     —          —          —         —         (10,607     (10,607

Acquisition of preferred membership interest

     3        313,295        —         —         —         313,298  

Settlement of Microsoft commercial liability

     —          197,316        —         —         —         197,316  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at May 2, 2015

   $ 98        1,927,997        (16,533     357,512       (1,079,716   $ 1,189,358  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-38


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (CONTINUED)

 

(In thousands)

            
      Common
Stock
     Additional
Paid-In
Capital
    Accumlated
Other
Comprehensive
Gains (Losses)
    Retained
Earnings
    Treasury
Stock at Cost
    Total  

Balance at May 2, 2015

   $ 98        1,927,997       (16,533     357,512       (1,079,716   $ 1,189,358  

Net loss

     —          —         —         (24,446     —         (24,446

Minimum pension liability, net of tax

     —          —         3,662       —         —         3,662  

Pension reclassification (see Note 12)

     —          —         13,022       —         —         13,022  

Exercise of 111 common stock options

     2        1,301       —         —         —         1,303  

Stock options and restricted stock tax benefits

     —          1,094       —         —         —         1,094  

Stock-based compensation expense

     —          14,889       —         —         —         14,889  

Accretive dividend on preferred stockholders and membership interests

     —          —         —         (4,204     —         (4,204

Inducement fee paid upon conversion of Series J preferred stock

     —          —         —         (3,657     —         (3,657

Cash dividends declared

     —          —         —         (46,056     —         (46,056

Accrued dividends for long-term incentive awards

     —          —         —         (451     —         (451

Purchase of treasury stock related to stock-based compensation, 337 shares

     —          —         —         —         (4,004     (4,004

Treasury stock repurchase plan, 2,763 shares

     —          —         —         —         (26,718     (26,718

Dividend to preferred shareholders paid in shares

     —          1,783       —         (1,783     —         —    

Common shares issued upon conversion of Series J preferred stock

     12        200,250       —         —         —         200,262  

Cash settlement of equity award

     —          (8,022     —         —         —         (8,022

Separation of B&N Education, Inc.

     —          (401,258     —         (301,264     —         (702,522
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at April 30, 2016

   $ 112        1,738,034       151       (24,349     (1,110,438   $ 603,510  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-39


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (CONTINUED)

 

(In thousands)

            
      Common
Stock
     Additional
Paid-In
Capital
    Accumlated
Other
Comprehensive
Gains
     Retained
Earnings
    Treasury
Stock at Cost
    Total  

Balance at April 30, 2016

   $ 112        1,738,034       151        (24,349     (1,110,438   $ 603,510  

Net income

     —          —         —          22,023       —         22,023  

Postretirement plan liability, net of tax

     —          —         164        —         —         164  

Exercise of 31 common stock options

     —          312       —          —         —         312  

Stock options and restricted stock tax benefit

     —          1,110       —          —         —         1,110  

Stock-based compensation expense

     —          6,299       —          —         —         6,299  

Cash dividends declared

     —          —         —          (43,887     —         (43,887

Accrued dividends for long-term incentive awards

     —          —         —          (212     —         (212

Purchase of treasury stock related to stock-based compensation, 248 shares

     —          —         —          —         (2,694     (2,694

Treasury stock repurchase plan, 2,020 shares

     —          —         —          —         (23,281     (23,281

Distribution of Rabbi Trust shares (see Note 7)

     —          (15,342     —          —         15,342       —    

Tax benefit from distribution of Rabbi Trust

     —          10,967       —          —         —         10,967  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at April 29, 2017

   $ 112        1,741,380       315        (46,425     (1,121,071   $ 574,311  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-40


CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Fiscal Year    Fiscal
2017
    Fiscal
2016
    Fiscal
2015
 

(In thousands)

                  

Cash flows from operating activities:

      

Net income (loss)

   $ 22,023     $ (24,446   $ 36,596  

Net income (loss) from discontinued operations

     —         (39,146     3,724  
  

 

 

   

 

 

   

 

 

 

Net income from continuing operations

   $ 22,023     $ 14,700     $ 32,872  

Adjustments to reconcile net income (loss) to net cash flows from operating activities:

      

Depreciation and amortization (including amortization of deferred financing fees)

     119,837       139,138       149,143  

Stock-based compensation expense

     6,299       14,201       16,875  

Impairment charges

     349       3,991       366  

Deferred taxes

     28,534       34,604       (3,858

Loss on disposal of property and equipment

     1,262       2,428       4,605  

Net decrease in other long-term liabilities

     (14,602     (48,025     (4,201

Pension contributions

     —         (12,707     (13,667

Pension reclassification

     —         20,802       7,317  

Net (increase) decrease in other non-current assets

     872       (3,405     1,019  

Changes in operating assets and liabilities, net

     (19,331     29,960       (191,201
  

 

 

   

 

 

   

 

 

 

Net cash flows provided by (used in) operating activities

   $ 145,243     $ 195,687     $ (730
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Purchases of property and equipment

     (96,258     (94,274     (94,805
  

 

 

   

 

 

   

 

 

 

Net cash flows used in investing activities

   $ (96,258   $ (94,274   $ (94,805
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Proceeds from credit facility

     1,140,178       929,500       349,400  

Payments on credit facility

     (1,122,478     (882,300     (349,400

Cash dividends paid

     (43,887     (46,056     —    

Treasury stock repurchase plan

     (23,281     (26,718     —    

Purchase of treasury stock related to stock-based compensation

     (2,694     (4,004     (10,607

Payment of new credit facility related fees

     (474     (5,701     —    

Proceeds from exercise of common stock options

     312       1,303       1,282  

Excess tax benefit from stock-based compensation

     1,579       1,838       1,865  

Cash dividends paid for long-term incentive awards

     (85     —         —    

Cash settlement of equity award

     —         (8,022     —    

Cash dividends paid to preferred shareholders

     —         (3,941     (16,026

Inducement fee paid upon conversion of Series J preferred stock

     —         (3,657     —    

Payment of Junior Seller Note

     —         —         (127,250

Acquisition of preferred membership interests

     —         —         (76,175

Net proceeds from Microsoft commercial agreement financing arrangement

     —         —         57,161  
  

 

 

   

 

 

   

 

 

 

Net cash flows used in financing activities

   $ (50,830   $ (47,758   $ (169,750
  

 

 

   

 

 

   

 

 

 

Cash flows from discontinued operations:

      

Operating cash flows

     —         (86,384     50,926  

Investing cash flows

     —         (11,764     (51,452

Financing cash flows (including cash at date of Spin-Off)

     —         (16,029     —    
  

 

 

   

 

 

   

 

 

 

Net cash flows used in discontinued operations

     —         (114,177     (526
  

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (1,845     (60,522     (265,811

Cash and cash equivalents at beginning of period

     13,838       74,360       340,171  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

     11,993       13,838       74,360  

Cash and cash equivalents of discontinued operations

     —         —         (59,714
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 11,993     $ 13,838     $ 14,646  
  

 

 

   

 

 

   

 

 

 

Changes in operating assets and liabilities, net:

      

Receivables, net

   $ 57,623     $ (64,652   $ 44,715  

Merchandise inventories, net

     (13,186     62,015       (36,448

Prepaid expenses and other current assets

     4,096       (11,947     (28,228

Accounts payable, accrued liabilities and gift card liabilities

     (67,864     44,544       (171,240
  

 

 

   

 

 

   

 

 

 

Changes in operating assets and liabilities, net

   $ (19,331   $ 29,960     $ (191,201
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-41


CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

 

Fiscal Year    Fiscal
2017
    Fiscal
2016
     Fiscal
2015
 

(In thousands)

                   

Supplemental cash flow information

       

Cash paid during the period for:

       

Interest

   $ 5,487     $ 12,217      $ 16,548  

Income taxes (net of refunds)

   $ (16,859   $ 16,107      $ 95,584  

Non-cash financing activity:

       

Accrued dividends for long-term incentive awards

   $ 577     $ 451      $ —    

Dividends to preferred stockholders paid in shares

   $ —       $ 1,783      $ —    

Issuance of common stock upon conversion of Series J preferred stock

   $ —       $ 200,262      $ —    

Accrued dividends on redeemable preferred stock

   $ —       $ —        $ 3,941  

Acquisition of preferred membership interests for 2,737 shares of common stock of Barnes & Noble, Inc.

   $ —       $ —        $ 76,175  

See accompanying notes to consolidated financial statements.

 

F-42


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Thousands of dollars, except per share data)

For the 52 weeks ended April 29, 2017 (fiscal 2017), 52 weeks ended April 30, 2016 (fiscal 2016) and 52 weeks ended May 2, 2015 (fiscal 2015).

 

  1. Summary of Significant Accounting Policies

Business

Barnes & Noble, Inc. (Barnes & Noble or the Company), one of the nation’s largest booksellers,3 provides customers a unique experience across its multi-channel distribution platform. As of April 29, 2017, the Company operates 633 bookstores in 50 states, maintains an eCommerce site, develops digital reading products and operates NOOK, one of the largest digital bookstores. Barnes & Noble is utilizing the strength of its retail footprint in combination with its online and digital businesses to provide an omni-channel experience for its customers, fulfilling its commitment to offer customers any book, anytime, anywhere and in any format.

Barnes & Noble Retail (B&N Retail) operates 633 retail bookstores, primarily under the Barnes & Noble Booksellers® trade name, 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, offering digital books and magazines for sale and consumption online, NOOK®4 reading devices, co-branded NOOK® tablets and reading software for iOS, Android and Windows.

The Company’s principal business is the sale of trade books (generally, hardcover and paperback titles), mass market paperbacks (such as mystery, romance, science fiction and other popular fiction), children’s books, eBooks and other digital content, NOOK® 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 www.barnesandnoble.com. The Company offers its customers a full suite of textbook options (new, used, digital and rental).

The Company identifies its operating segments based on 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, and makes decisions on the allocation of resources. The Company’s two operating segments are B&N Retail and NOOK.

Separation of Barnes & Noble Education, Inc.

On February 26, 2015, Barnes & Noble announced plans for the legal and structural separation of Barnes & Noble Education, Inc. (Barnes & Noble Education or B&N Education) (formerly known as NOOK Media Inc.) from Barnes & Noble into an independent public company (the Spin-Off).

On July 14, 2015, the Barnes & Noble board of directors (the Board) approved the final distribution ratio and declared a pro rata dividend of the outstanding shares of B&N Education common stock, which resulted in the complete legal and structural separation of the two companies. The distribution was subject to the satisfaction or waiver of certain conditions as set forth in B&N Education’s Registration Statement on Form S-1, which was filed with the Securities and Exchange Commission (SEC) on February 26, 2015 and was amended on April 29, 2015, June 4, 2015, June 29, 2015, July 13, 2015, July 14, 2015 and July 15, 2015.

 

3  Based upon sales reported in trade publications and public filings.
4 

Any references to NOOK® include the Company’s NOOK® Tablet, Samsung Galaxy Tab® A NOOK®, Samsung Galaxy Tab® S2 NOOK®, Samsung Galaxy Tab® E NOOK® and NOOK GlowLightTM Plus devices, each of which includes the trademark symbol (® or ™, as applicable) even if a trademark symbol is not included.

 

F-43


On August 2, 2015, Barnes & Noble completed the Spin-Off of Barnes & Noble Education and distributed, on a pro rata basis, all of the shares of B&N Education common stock to the Company’s stockholders of record as of July 27, 2015. These Barnes & Noble stockholders of record as of July 27, 2015 received a distribution of 0.632 shares of B&N Education common stock for each share of Barnes & Noble common stock held as of the record date. Immediately following the completion of the Spin-Off, the Company’s stockholders owned 100% of the outstanding shares of common stock of B&N Education. Following the Spin-Off, B&N Education operates as an independent public company and as the parent of Barnes & Noble College, trading on New York Stock Exchange under the ticker symbol “BNED”.

In connection with the separation of B&N Education, the Company and B&N Education entered into a Separation and Distribution Agreement on July 14, 2015 and several other ancillary agreements on August 2, 2015. These agreements govern the relationship between the Company and B&N Education after the separation and allocate between the Company and B&N Education various assets, liabilities, rights and obligations following the separation, including employee benefits, intellectual property, information technology, insurance and tax-related assets and liabilities. The agreements also describe the Company’s future commitments to provide B&N Education with certain transition services.

This Spin-Off is expected to be a non-taxable event for Barnes & Noble and its shareholders, and Barnes & Noble’s U.S. shareholders (other than those subject to special rules) generally will not recognize gain or loss as a result of the distribution of B&N Education shares.    

Discontinued Operations of Barnes & Noble Education, Inc.

The Company has recognized the separation of B&N Education in accordance with Accounting Standards Codification (ASC) 205-20, Discontinued Operations. As such, the historical results of Barnes & Noble Education have been adjusted to include pre-spin B&N Education results and separation-related costs and exclude corporate allocations with B&N Retail, and have been classified as discontinued operations. Additionally, discontinued operations for fiscal 2016 included investment banking fees (as they directly related to the Spin-Off).

History of Barnes & Noble Education, Inc.

On September 30, 2009, Barnes & Noble acquired Barnes & Noble College Booksellers, LLC (B&N College) from Leonard and Louise Riggio. From that date until October 4, 2012, B&N College was wholly owned by Barnes & Noble Booksellers, Inc. B&N Education was initially incorporated under the name NOOK Media Inc. in July 2012 to hold Barnes & Noble’s B&N College and NOOK digital businesses. On October 4, 2012, Microsoft Corporation (Microsoft) acquired a 17.6% non-controlling preferred membership interest in B&N Education’s subsidiary B&N Education, LLC (formerly NOOK Media LLC) (the LLC), and through B&N Education, Barnes & Noble maintained an 82.4% controlling interest of the B&N College and NOOK digital businesses.

On January 22, 2013, Pearson Education, Inc. (Pearson) acquired a 5% non-controlling preferred membership interest in the LLC, entered into a commercial agreement with the LLC relating to the B&N College business and received warrants to purchase an additional preferred membership interest in the LLC.

 

F-44


On December 4, 2014, B&N Education re-acquired Microsoft’s interest in the LLC in exchange for cash and common stock of Barnes & Noble and the Microsoft commercial agreement was terminated effective as of such date. On December 22, 2014, B&N Education also re-acquired Pearson’s interest in the LLC and certain related warrants previously issued to Pearson. In connection with these transactions, Barnes & Noble entered into contingent payment agreements with Microsoft and Pearson providing for additional payments upon the occurrence of certain events, including upon a sale of the NOOK digital business. As a result of these transactions, Barnes & Noble owned, prior to the Spin-Off, 100% of B&N Education.

On May 1, 2015, B&N Education distributed to Barnes & Noble all of the membership interests in B&N Education’s NOOK digital business. As a result, B&N Education ceased to own any interest in the NOOK digital business, which remains a wholly owned subsidiary of Barnes & Noble.

Consolidation

The consolidated financial statements include the accounts of Barnes & Noble, Inc. and its wholly and majority-owned subsidiaries. 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 the first-in, first-out (FIFO) basis. NOOK merchandise inventories are recorded based on the average cost method.

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.

 

F-45


Property and Equipment and Other Long-Lived Assets

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. Maintenance and repairs are expensed as incurred, while major maintenance and remodeling costs are capitalized if they extend the useful life of the asset. Leasehold improvements are capitalized and amortized over the shorter of their estimated useful lives or the terms of the respective leases. Fixtures and equipment are capitalized and amortized over the shorter of their estimated useful lives or 10 years. Capitalized lease acquisition costs are being amortized over the lease terms of the underlying leases. System costs are capitalized and included in property and equipment. These costs are depreciated over their estimated useful lives from the date the systems become operational. The Company had $276,122 and $298,580 of property and equipment, net of accumulated depreciation, at April 29, 2017 and April 30, 2016, respectively, and $117,105, $134,850 and $139,204 of depreciation expense for fiscal 2017, fiscal 2016 and fiscal 2015, respectively. Capitalized software costs of $75,893 and $79,890 for fiscal 2017 and fiscal 2016, respectively, are included in property and equipment.

The Company had $911 and $1,610 of amortizable intangible assets, net of amortization, at April 29, 2017 and April 30, 2016, respectively. 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 and considers market participants 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, 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 related to amortizable assets totaled $349, $150 and $366 during fiscal 2017, fiscal 2016 and fiscal 2015, respectively.

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 29, 2017, the Company had $207,381 of goodwill (on its Retail reporting unit) and $309,294 of unamortizable intangible assets (those with an indefinite useful life), accounting for approximately 26.7% 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. Fair value was determined using the combination of a discounted cash flow method (income approach) and the guideline public company method (market comparable approach), weighted equally in determining the fair value of the Company. The market comparable approach estimates fair value using market multiples of various financial measures compared to a set of comparable public companies in the retail industry. 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 2017. 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 value of the B&N Retail reporting unit as of that date exceeded its carrying values; therefore, the second step of the impairment test was not required to be performed and no goodwill impairment was recognized.

 

F-46


Goodwill is subject to further risk of impairment if B&N Retail comparable store sales continue to decline, the Company’s cost reduction plans do not materialize or store closings accelerate. There were no impairment losses included in selling and administrative expenses related to goodwill during fiscal 2017, fiscal 2016 and fiscal 2015.

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. Impairment losses included in selling and administrative expenses related to unamortizable intangible assets totaled $0, $3,840 and $0 during fiscal 2017, fiscal 2016 and fiscal 2015, respectively. Changes in market conditions, among other factors, could have a material impact on these estimates.

During fiscal 2016, the Company impaired one of its publishing contracts due to a significant drop in business with that publisher, driven by lower title offerings, product quality and the loss of a distribution partner. As a result, the Company recorded an impairment charge of $3,840 in selling and administrative expenses. The 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.

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 effective interest method. Unamortized costs included in other non-current assets as of April 29, 2017 and April 30, 2016 were $6,346 and $7,796, respectively. Amortization expense included in interest and amortization of deferred financing fees was $1,950, $3,276 and $5,477 during fiscal 2017, fiscal 2016 and fiscal 2015, respectively.

Revenue Recognition

Revenue from sales of the Company’s products is recognized at the time of sale or shipment, other than those with multiple elements and Free On Board (FOB) destination point shipping terms. The Company accrues for estimated sales returns in the period in which the related revenue is recognized based on historical experience. ECommerce revenue from sales of products ordered through the Company’s websites is recognized upon estimated delivery and receipt of the shipment by its customers. Freight costs are included within the Company’s cost of sales and occupancy. 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® device revenue is recognized at the segment point of sale.

 

F-47


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 with the purchase of a NOOK® from the Company. Using the relative selling-price method 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 is deferred and recognized on a straight-line basis over the 2-year estimated life of a NOOK® device.

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 0% and 5%, depending on the type of device sold. The amount of NOOK®-related deferred revenue as of April 29, 2017 and April 30, 2016 was $226 and $160, 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 distributed NOOK® a commission on the content sales sold through that device. The Company accounted for these transactions as a reduction in the sales price of the NOOK® based on historical trends of content sales and a liability was 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.

The Company rents physical textbooks. Revenue from the rental of physical textbooks is deferred and recognized over the rental period commencing at point of sale. The Company offers a buyout option to allow the purchase of a rented book at the end of the semester. The Company records the buyout purchase when the customer exercises and pays the buyout option price. In these instances, the Company would accelerate any remaining deferred rental revenue at the point of sale.

NOOK acquires the rights to distribute digital content from publishers and distributes the content on www.barnesandnoble.com, NOOK® devices and other eBookstore platforms. Certain digital content is distributed under an agency pricing model, in which the publishers set prices for eBooks and NOOK receives a commission on content sold through the eBookstore. The majority of the Company’s eBooks 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 12-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 research and development costs for software products 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-48


Internal-Use Software and Website Development Costs

Direct costs incurred to develop software for internal use and website development costs are capitalized and amortized over an estimated useful life of three to seven years. During fiscal 2017 and fiscal 2016, the Company capitalized costs, primarily related to labor, consulting, hardware and software, of $18,450 and $31,531, respectively. Amortization of previously capitalized amounts was $23,584, $30,461 and $27,618 for fiscal 2017, fiscal 2016 and fiscal 2015, respectively. Costs related to the design or maintenance of internal-use software and website development are expensed as incurred.

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 $36,420, $53,569 and $50,210 during fiscal 2017, fiscal 2016 and fiscal 2015, 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. Allowances received from vendors exceeded gross advertising costs in each of the fiscal years noted above.

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 $1,434, $744 and $1,301 during fiscal 2017, fiscal 2016 and fiscal 2015, respectively, are included in selling and administrative expenses in the accompanying consolidated statements of operations.

Net Earnings (Loss) per Share

In accordance with ASC 260-10-45, Share-Based Payment Arrangements and Participating Securities and the Two-Class Method, unvested share-based payment awards that contain rights to receive non-forfeitable dividends are considered participating securities. The Company’s unvested restricted shares and unvested restricted stock units granted prior to July 15, 2015 and shares issuable under the Company’s deferred compensation plan are considered participating securities. Cash dividends to restricted stock units and performance-based stock units granted on or after July 15, 2015 are not distributed until and except to the extent that the restricted stock units vest, and in the case of performance-based stock units, until and except to the extent that the performance metrics are achieved or are otherwise deemed satisfied. Stock options do not receive cash dividends. As such, these awards are not considered participating securities.

Basic earnings per common share is calculated by dividing the net income, adjusted for preferred dividends and income allocated to participating securities, by the weighted average number of common shares outstanding during the period. Diluted net income per common share reflects the dilution that would occur if any potentially dilutive instruments were exercised or converted into common shares. The dilutive effect of participating securities is calculated using the more dilutive of the treasury stock method or two-class method. Other potentially dilutive securities include preferred stock, stock options, restricted stock units granted after July 15, 2015, and performance-based stock

 

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units and are included in diluted shares to the extent they are dilutive under the treasury stock method for the applicable periods. See Note 11 to the Consolidated Financial Statements 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. The Company establishes a reserve for uncertain tax positions. If the Company considers that a tax position is more likely than not of being sustained upon audit, based solely on the technical merits of the position, it recognizes the tax benefit. The Company measures the tax benefit by determining the largest amount that is greater than 50% likely of being realized upon settlement, presuming that the tax position is examined by the appropriate taxing authority that has full knowledge of all relevant information. A reserve for an uncertain income tax position will be recognized if it has less than a 50% likelihood of being sustained. The tax positions are analyzed periodically (at least quarterly) and adjustments are made as events occur that warrant adjustments for those positions. The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense.

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 7 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, on www.barnesandnoble.com, on NOOK® devices and at B&N Education stores. 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. Gift cards redeemed at B&N Education are funded by the gift card liability at the Company. Over time, a portion of the gift cards issued is typically 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 revenue on a straight-line basis over a 12-month period beginning in the 13th month after the month the gift card was originally sold. Additional breakage may be required if gift card redemptions continue to run lower than historical patterns.

 

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The Company recognized gift card breakage of $35,524, $29,074 and $26,080 during fiscal 2017, fiscal 2016 and fiscal 2015, respectively. The Company had gift card liabilities of $351,424 and $353,103 as of April 29, 2017 and April 30, 2016, respectively.

Accounts Receivable

Accounts receivable, as presented on the Company’s Consolidated Balance Sheets, is net of allowances. An allowance for doubtful accounts is determined through an analysis of the aging of accounts receivable and assessments of collectability based on historic trends, the financial condition of the Company’s customers and an evaluation of economic conditions. The Company writes off uncollectible trade receivables once collection efforts have been exhausted. Costs associated with allowable customer markdowns and operational chargebacks, net of the expected recoveries, are part of the provision for allowances included in accounts receivable. These provisions result from seasonal negotiations, as well as historic deduction trends net of expected recoveries, and the evaluation of current market conditions.

Reclassifications

Certain prior period amounts have been reclassified for comparative purposes to conform with the fiscal 2017 presentation.

Recent Accounting Pronouncements

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) – Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16). This standard requires that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this standard eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments in this standard do not include new disclosure requirements; however, existing disclosure requirements might be applicable. ASU 2016-16 is effective for public companies for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). This update clarifies the classification of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination, insurance settlement proceeds, and distributions from certain equity method investees. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. ASU 2016-15 is effective for the Company beginning May 1, 2018 under a retrospective approach. Since the standard only impacts classification in the statements of cash flows, adoption will not affect the Company’s cash and cash equivalents.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). The new guidance changes certain aspects of accounting for share-based payments including accounting for income taxes, forfeitures and classifications in the statement of cash flows. The Company plans to adopt this standard in the first quarter of fiscal 2018, which aligns with the required adoption date. As allowed by ASU 2016-09, the Company plans to change its accounting for forfeitures from its current method of estimating the number of awards that are expected to vest to recording forfeitures as they occur. This will require a cumulative-effect adjustment to equity as of the beginning of fiscal 2018. The Company does not expect this adjustment to be material to its consolidated financial statements. In addition, the Company does not expect the remaining changes caused by ASU 2016-09 to have a material impact to its consolidated financial statements.

 

 

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In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02), in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous Generally Accepted Accounting Principles. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 requires expanded disclosures about the nature and terms of lease agreements and is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company currently anticipate early adoption of ASU 2016-02 effective April 29, 2018 in conjunction with the adoption of ASU 2014-09. While the Company’s ability to early adopt depends on system readiness and completing the Company’s analysis of information necessary to restate prior period consolidated financial statements, the Company remains on schedule and have implemented key system functionality to enable the preparation of restated financial information. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements, but expects that it will result in a significant increase to its long-term assets and liabilities on its consolidated balance sheet. However, the Company does not expect adoption will have a material impact on its consolidated income statement.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (ASU 2015-11), modifying the accounting for inventory. Under ASU 2015-11, the measurement principle for inventory will change from lower of cost or market value to lower of cost and net realizable value. ASU 2015-11 defines net realizable value as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is applicable to inventory that is accounted for under the first-in, first-out method and is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2015-11 effective May 1, 2017. The Company will apply the amendments in this update prospectively to the measurement of inventory after the date of adoption. The majority of the Company’s merchandise inventories are valued using the retail inventory method, which is outside the scope of ASU 2015-11. The remaining inventory of the Company’s merchandise inventories are valued at the lower of cost or market using the average cost method, and the Company is evaluating the effect of this update on these inventory values. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). ASU 2015-03 simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03. In August 2015, FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (ASU 2015-15). ASU 2015-15 clarifies the presentation and measuring of debt issuance costs incurred in connection with line-of-credit arrangements given the lack of guidance on this topic in ASU 2015-03. For line-of-credit arrangements, an entity can continue to present debt issuance costs as an asset and amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. ASU 2015-03, as amended, is effective for annual reporting periods beginning after December 15, 2015, including interim periods within such annual reporting periods with early adoption permitted. ASU 2015-03 is

 

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to be retrospectively adopted to each prior reporting period presented. The Company adopted ASU 2015-03 in the first quarter ended July 30, 2016. The Company made a policy election to continue recording the debt issuance costs as an asset, as allowed for revolving credit agreements. As the Company only has a line-of-credit arrangement, the adoption of this ASU did not result in a change in the Company’s accounting for debt issuance costs related to such line of credit and had no impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09. The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. ASU 2014-09, as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted for annual reporting periods beginning after December 15, 2016. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company plans to adopt ASU 2014-09 effective April 29, 2018. The Company currently anticipates adopting the standard using the modified retrospective method. The Company has begun the process of implementing this standard, including performing a review of its revenue streams to identify any differences in the timing, measurement, or presentation of revenue recognition. The Company currently believes that the primary impact will be changes to the timing of recognition of revenues related to gift card breakage. The Company will continue to assess the impact on all areas of its revenue recognition, disclosure requirements and changes that may be necessary to its internal controls over financial reporting. The Company is continuing to evaluate the impact of adopting this ASU on its consolidated financial statements. The Company remains on schedule to adopt this ASU effective April 29, 2018.

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 29, 2017, April 30, 2016 and May 2, 2015 each contained 52 weeks.

 

  2. Discontinued Operations of Barnes & Noble Education, Inc.

The Company has recognized the separation of B&N Education in accordance with Accounting Standards Codification (ASC) 205-20, Discontinued Operations. As such, the historical results of Barnes & Noble Education have been adjusted to include pre-spin B&N Education results and separation-related costs and exclude corporate allocations with B&N Retail, and have been classified as discontinued operations. Additionally, discontinued operations for fiscal 2016 included investment banking fees (as they directly related to the Spin-Off).

 

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The following financial information presents the discontinued operations for fiscal 2016 and fiscal 2015:

 

     Fiscal
2016
    Fiscal
2015
 

Sales

   $ 238,983     $ 1,772,389  

Cost of sales and occupancy

     186,697       1,325,814  
  

 

 

   

 

 

 

Gross profit

     52,286       446,575  

Selling and administrative expenses

     94,933       353,087  

Depreciation and amortization

     13,100       50,509  
  

 

 

   

 

 

 

Operating income (loss) from discontinued operations

     (55,747     42,979  

Interest expense, net and amortization of deferred financing fees

     3       210  
  

 

 

   

 

 

 

Income (loss) before income taxes from discontinued operations

     (55,750     42,769  

Income taxes

     (16,604     39,045  
  

 

 

   

 

 

 

Net income (loss) from discontinued operations

   $ (39,146   $ 3,724  
  

 

 

   

 

 

 

The following table presents the aggregate carrying amounts of the classes of assets and liabilities of discontinued operations:

 

     May 2,
2015
 

Carrying amounts of assets included as part of discontinued operations:

  

Cash and cash equivalents

   $ 59,714  

Receivables, net

     38,311  

Merchandise inventories, net

     297,425  

Prepaid expenses and other current assets

     52,176  
  

 

 

 

Total current assets

     447,626  
  

 

 

 

Property and equipment:

  

Buildings and leasehold improvements

     149,065  

Fixtures and equipment

     335,404  
  

 

 

 
     484,469  

Less accumulated depreciation and amortization

     376,911  
  

 

 

 

Net property and equipment

     107,558  
  

 

 

 

Goodwill

     274,070  

Intangible assets, net

     198,190  

Other non-current assets

     39,883  
  

 

 

 

Total assets classified as discontinued operations in the consolidated balance sheet

   $ 1,067,327  
  

 

 

 

Carrying amounts of liabilities included as part of discontinued operations:

  

Accounts payable

   $ 170,490  

Accrued liabilities

     133,123  
  

 

 

 

Total current liabilities

     303,613  

Long-term deferred taxes

     41,924  

Other long-term liabilities

     34,093  
  

 

 

 

Total liabilities classified as discontinued operations in the consolidated balance sheet

   $ 379,630  
  

 

 

 

 

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  3. Resignation Charge

On August 2, 2015, Michael P. Huseby resigned from the Company’s Board of Directors and as Chief Executive Officer of the Company, which was contingent upon the successful separation of B&N Education. In connection with his termination of employment, he received severance payments based on the terms of his employment agreement with the Company, effective as of January 7, 2014. Under the terms of his employment agreement, upon a resignation for “Good Reason”, Mr. Huseby was entitled to receive lump-sum severance equal to two times the sum of (a) annual base salary, (b) the average annual incentive compensation paid to the named executive officer with respect to the preceding two completed years and (c) the cost of benefits. In addition, Mr. Huseby was entitled to accelerated vesting of the equity-based awards granted pursuant to his employment agreement. As a result, Mr. Huseby received a severance payment equal to $7,742 and additionally was entitled to 300,000 shares of the Company’s common stock pursuant to the accelerated vesting of the equity-based awards, which were settled for cash based on the closing price of the Company’s common stock on the record date of the Spin-Off in an amount equal to $8,022. The net cash payments related to Mr. Huseby’s resignation totaled $15,764 during the second quarter of fiscal 2016. Mr. Huseby’s 300,000 shares have been ratably expensed from the initial grant date, thereby reducing the total resignation charge to $10,510, which was recorded within selling and administrative expenses during the second quarter of fiscal 2016.

 

  4. CEO Departure

On October 26, 2016, the Company entered into a release agreement (the Release Agreement) with its former Chief Executive Officer, Ronald D. Boire. Under the Release Agreement, Mr. Boire and the Company agreed to release claims against each other in connection with Mr. Boire’s termination of employment in exchange for a cash payment contemplated by his employment agreement. In connection with the execution of the Release Agreement, Mr. Boire also agreed to forfeit all equity awards that were granted to him by the Company.

The cash payment in connection with the Release Agreement totaled $4,826. The Company has previously recognized $1,933 in expense relating to the equity awards granted to Mr. Boire during his employment. Taking into account the reversal of those expenses, the Company recorded a net charge related to the cash payment to Mr. Boire in connection with the Release Agreement of $2,892 within selling and administrative expenses during the second quarter of fiscal 2017.

 

  5. EBook Settlement

The Company provided credits to eligible customers resulting from the settlement reached with Apple Inc. (Apple) in an antitrust lawsuit filed by various State Attorneys General and private class plaintiffs regarding the price of digital books. The Company’s customers were entitled to $95,707 in total credits as a result of the settlement, which is funded by Apple. If a customer’s credit is not used to make a purchase within one year, the entire credit will expire. The Company estimated total activations of $60,844 through June 2017, which are recorded as a liability to customers to the extent they have not yet been activated and as a receivable from the Apple settlement fund to the extent they have not yet been reimbursed. As of April 29, 2017, the Company’s customers had activated $59,232 in credits, of which $52,687 were redeemed. Total receivables from the Apple settlement fund were $2,478 as of April 29, 2017.

 

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  6. Credit Facility

Prior to August 3, 2015, the Company was party to an amended and restated credit facility with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and other lenders, dated as of April 29, 2011 (as amended and modified through August 3, 2015, the Prior Credit Facility), consisting of up to $1,000,000 in aggregate commitments under a five-year asset-backed revolving credit facility, which was scheduled to expire on April 29, 2016.

On August 3, 2015, the Company and certain of its subsidiaries entered into a credit agreement (New Credit Agreement) with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and the other lenders from time to time party thereto, under which the lenders committed to provide a five-year asset-backed revolving credit facility in an aggregate committed principal amount of up to $700,000 (Revolving Credit Facility). On September 30, 2016, the Company amended the New Credit Agreement to provide for a new “first-in, last-out” revolving credit facility (the FILO Credit Facility and, together with the Revolving Credit Facility, the New Credit Facility) in an aggregate principal amount of up to $50,000, which supplements availability under the Revolving Credit Facility. The Company generally must draw down the FILO Credit Facility before making any borrowings under the Revolving Credit Facility.

Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC, Wells Fargo Bank, N.A. and SunTrust Robinson Humphrey, Inc. are the joint lead arrangers for the New Credit Facility. The New Credit Facility replaced the Prior Credit Facility. Proceeds from the New Credit Facility are used for general corporate purposes, including seasonal working capital needs.

The Company and certain of its subsidiaries are permitted to borrow under the New Credit Facility. The New Credit Facility is secured by substantially all of the inventory, accounts receivable and related assets of the borrowers under the New Credit Facility (collectively, the Loan Parties), but excluding the equity interests in the Company and its subsidiaries, intellectual property, equipment and certain other property. Borrowings under the New Credit Facility are limited to a specified percentage of eligible collateral. The Company has the option to request an increase in commitments under the New Credit Facility of up to $250,000, subject to certain restrictions.

The New Credit Facility allows the Company to declare and pay up to $70,000 in dividends annually to its stockholders without compliance with any availability or ratio-based limitations.

Interest under the Revolving Credit Facility accrues, at the election of the Company, at a LIBOR or alternate base rate, plus, in each case, an applicable interest rate margin, which is determined by reference to the level of excess availability under the Revolving Credit Facility. Through the end of the fiscal quarter during which the closing of the Revolving Credit Facility occurred, loans under the Revolving Credit Facility bore interest at LIBOR plus 1.750% per annum, in the case of LIBOR borrowings, or at the alternate base rate plus 0.750% per annum, in the alternative, and thereafter the interest rate began to fluctuate between LIBOR plus 2.000% per annum and LIBOR plus 1.500% per annum (or between the alternate base rate plus 1.000% per annum and the alternate base rate plus 0.500% per annum), based upon the average daily availability under the Revolving Credit Facility for the immediately preceding fiscal quarter. Interest under the FILO Credit Facility accrues, at the election of the Company, at a LIBOR or alternate base rate, plus, in each case, an applicable interest rate margin, which is also determined by reference to the level of excess availability under the Revolving Credit Facility. Loans under the FILO Credit Facility bear interest at 1.000% per annum more than loans under the Revolving Credit Facility.

The New Credit Agreement contains customary negative covenants, which limit the Company’s ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets, among other things. In addition, if

 

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excess availability under the New Credit Facility were to fall below certain specified levels, certain additional covenants (including fixed charge coverage ratio requirements) would be triggered, and the lenders would assume dominion and control over the Loan Parties’ cash.

The New Credit Agreement contains customary events of default, including payment defaults, material breaches of representations and warranties, covenant defaults, default on other material indebtedness, customary ERISA events of default, bankruptcy and insolvency, material judgments, invalidity of liens on collateral, change of control or cessation of business. The New Credit Agreement also contains customary affirmative covenants and representations and warranties.

The Company wrote off $460 of deferred financing fees related to the Prior Credit Facility during fiscal 2016 and the remaining unamortized deferred financing fees of $3,542 were deferred and are being amortized over the five-year term of the New Credit Facility. The Company also incurred $5,701 of fees to secure the New Credit Facility, which are being amortized over the five-year term accordingly. During fiscal 2017, the Company incurred $474 of fees to secure the FILO Credit Facility, which are being amortized over the same term as the New Credit Facility.

The Company had $64,900 and $47,200 of outstanding debt under the New Credit Facility as of April 29, 2017 and April 30, 2016, respectively. The Company had $38,833 and $47,895 of outstanding letters of credit under its New Credit Facility as of April 29, 2017 and April 30, 2016, respectively.

The following table presents selected information related to the Company’s credit facilities:

 

     Fiscal
2017
    Fiscal
2016
    Fiscal
2015
 

Credit facility at period end

   $ 64,900       47,200       —    

Average balance outstanding during the period

   $ 96,297       66,948       18,227  

Maximum borrowings outstanding during the period

   $ 285,278       293,200       202,800  

Weighted average interest rate during the period (a)

     5.77     8.21     38.18

Interest rate at end of period

     3.73     2.69     0.00

 

(a) Includes commitment fees.

Fees expensed with respect to the unused portion of the credit facilities were $2,235, $2,781 and $4,658 during fiscal 2017, fiscal 2016 and fiscal 2015, respectively.

The Company has no agreements to maintain compensating balances.

 

  7. Stock-Based Compensation

The Company maintains two active share-based incentive plans: the 2009 Incentive Plan and the Amended and Restated 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. On September 11, 2012, the Company’s shareholders approved the Amended and Restated 2009 Incentive Plan. Under the Amended and Restated 2009 Incentive Plan, the Company has issued performance-based stock units, restricted stock units, restricted stock and stock options. At April 29, 2017, there were approximately 7,261,401 shares of common stock available for future grants under the Amended and Restated 2009 Incentive Plan.

 

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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 four years. The Company expenses the cost of the restricted stock awards, 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.

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. Cash dividends to restricted stock units granted on or after July 15, 2015 are not distributed until the restricted stock units vest. The Company’s restricted stock units vest over a period of one to four 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 unit is determined based on the closing price of the Company’s common stock on the grant date.

A performance-based stock unit is a grant valued in terms of the Company’s common stock, but no stock is issued at the time of grant. Each performance-based stock unit may be redeemed for one share of common stock once vested. In general, upon the achievement of a minimum threshold, 50% to 150% of these awards vest at the end of a three year performance period from the date of grant based upon achievement of the performance goal specified in the performance-based stock unit agreement. Performance-based stock units are generally subject to forfeiture if employment terminates prior to the settlement of the award. The grantee cannot transfer the units except in very limited circumstances and with the consent of the compensation committee. Shares of unvested performance-based stock units have no voting rights but are entitled to receive dividends and other distributions thereon. Cash dividends to performance-based stock units are not distributed until the award is settled. The Company expenses the cost of the performance-based stock units, which is determined to be the fair market value of the shares at the date of grant, ratably over the requisite service period, based on the probability of achieving the performance goal, with changes in expectations recognized as an adjustment to earnings in the period of the change. If the performance goal is not met, no compensation cost is recognized and any previously recognized compensation cost is reversed.

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.

 

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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.

No stock options were granted during fiscal 2017, fiscal 2016 or fiscal 2015.

In September 2003, Leonard Riggio, the Company’s Executive Chairman, exercised 1,318,750 stock options by tendering in payment of the exercise price of the stock options 606,277 shares that he held in the Company’s stock. Mr. Riggio elected to defer receipt of the balance of the shares (712,473) due from the exercise pursuant to the Company’s Executive Deferred Compensation Plan (Plan). In accordance therewith, the Company established a rabbi trust (Rabbi Trust) under the Plan for the benefit of Mr. Riggio, which holds 712,473 shares of the Company’s common stock. The shares held by the Rabbi Trust were treated as treasury stock. Due to the deferred compensation arrangement, these shares were included in the denominator of the earnings per share calculation in accordance with ASC 260, Earnings per share when the impact was not antidilutive.

On March 15, 2017, the Board of Directors of the Company approved the termination of the Plan and the Rabbi Trust. As part of the termination of the Plan, all amounts deferred under the Plan and held in the Rabbi Trust were distributed in March 2017 to Mr. Riggio, who was the sole participant in the Plan.

 

F-59


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 3, 2014

     1,039     $ 20.14       4.53 years      $ 725  

Granted

     —         0.00       

Exercised

     (83     15.47       

Forfeited

     (501     24.12       
  

 

 

        

Balance, May 2, 2015

     455     $ 16.62       6.27 years      $ 3,114  

Granted

     —         0.00 (a)      

Exercised

     (111     11.71 (a)      

Forfeited

     (239     10.89 (a)      

Adjustment due to the Spin-Off of B&N Education

     219         
  

 

 

        

Balance, April 30, 2016

     324     $ 11.29       5.09 years      $ 516  

Granted

     —         0.00       

Exercised

     (31     9.91       

Forfeited

     (38     21.14       
  

 

 

        

Balance, April 29, 2017

     255     $ 9.99       4.62 years      $ 11  
  

 

 

        

Vested and expected to vest in the future at April 29, 2017

     255     $ 9.99       4.62 years      $ 11  

Exercisable at April 29, 2017

     255     $ 9.99       4.62 years      $ 11  

Available for grant at April 29, 2017

     7,261         

 

(a) Weighted average exercise price is calculated using exercise price prior to the Spin-Off and after the Spin-Off.

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 on the market value of the Company’s common stock. Total intrinsic value of options exercised for fiscal 2017, fiscal 2016 and fiscal 2015 (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 $99, $546 and $596, respectively.

As of April 29, 2017, there was no unrecognized compensation expense related to unvested stock options granted under the Company’s share-based compensation plans.

 

F-60


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 3, 2014

     99      $ 14.09  

Granted

     43        22.24  

Vested

     (96      14.10  

Forfeited

     (3      13.46  
  

 

 

    

Balance, May 2, 2015

     43      $ 22.24  

Granted

     64        13.04  

Vested

     (43      22.24  

Forfeited

     —          0.00  
  

 

 

    

Balance, April 30, 2016

     64      $ 13.04  

Granted

     77        10.95  

Vested

     (64      13.04  

Forfeited

     —          0.00  
  

 

 

    

Balance, April 29, 2017

     77      $ 10.95  
  

 

 

    

Total fair value of shares of restricted stock that vested during fiscal 2017, fiscal 2016 and fiscal 2015 was $680, $637 and $2,188, respectively. As of April 29, 2017, there was $280 of unrecognized stock-based compensation expense related to non-vested restricted stock awards. That cost is expected to be recognized over a weighted average period of 0.38 years.

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, May 3, 2014

     3,127      $ 15.15  

Granted

     291        19.40  

Vested

     (1,054      15.19  

Forfeited

     (309      15.94  
  

 

 

    

Balance, May 2, 2015

     2,055      $ 15.62  

Granted

     692        18.82 (a) 

Vested

     (1,312      10.68 (a) 

Forfeited

     (1,054      10.74 (a) 

Adjustment due to the Spin-Off of B&N Education

     1,057     
  

 

 

    

Balance, April 30, 2016

     1,438      $ 13.76  

Granted

     547        12.42  

Vested

     (609      11.75  

Forfeited

     (826      14.22  
  

 

 

    

Balance, April 29, 2017

     550      $ 13.96  
  

 

 

    

 

(a) Weighted average grant date fair value is calculated using the grant price prior to the Spin-Off and after the Spin-Off.

 

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Total fair value of shares of restricted stock units that vested during fiscal 2017, fiscal 2016 and fiscal 2015 were $6,612, $18,047 and $23,578, respectively. As of April 29, 2017, there was $5,084 of unrecognized stock-based compensation expense related to non-vested restricted stock units. That cost is expected to be recognized over a weighted average period of 1.79 years.

The following table presents a summary of the Company’s performance-based stock unit activity:

 

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

Balance, May 3, 2014

     —        $ 0.00  

Granted

     —          0.00  

Vested

     —          0.00  

Forfeited

     —          0.00  
  

 

 

    

Balance, May 2, 2015

     —        $ 0.00  

Granted

     110        28.08 (a) 

Vested

     —          0.00 (a) 

Forfeited

     (17      18.46 (a) 

Adjustment due to the Spin- Off of B&N Education

     58     
  

 

 

    

Balance, April 30, 2016

     151      $ 18.41  

Granted

     507        12.48  

Vested

     —          0.00  

Forfeited

     (238      13.55  
  

 

 

    

Balance, April 29, 2017

     420      $ 14.00  
  

 

 

    

 

(a) Weighted average grant date fair value is calculated using the grant price prior to the Spin-Off and after the Spin-Off.

There were no vesting of performance-based stock units during fiscal 2017, fiscal 2016 and fiscal 2015. As of April 29, 2017, there was $2,940 of unrecognized stock-based compensation expense related to non-vested performance-based stock units. That cost is expected to be recognized over a weighted average period of 1.97 years.

For fiscal 2017, fiscal 2016 and fiscal 2015, stock-based compensation expense of $6,299, $14,201 and $16,875, respectively, is included in selling and administrative expenses.

 

  8. 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 29,
2017
     April 30,
2016
 

Trade accounts

   $ 16,189      $ 21,000  

Credit/debit card receivables

     25,136        28,232  

eBook settlement receivable (see Note 5)

     2,478        53,809  

Other receivables

     23,491        21,876  
  

 

 

    

 

 

 

Total receivables, net

   $ 67,294      $ 124,917  
  

 

 

    

 

 

 

 

F-62


  9. Other Long-Term Liabilities

Other long-term liabilities consist primarily of deferred rent, tax liabilities and reserves, long-term insurance liabilities and asset retirement obligations. 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 store closing expenses, long-term deferred revenues and a health care and life insurance plan for certain retired employees. The Company had the following other long-term liabilities at April 29, 2017 and April 30, 2016:

 

     April 29,
2017
     April 30,
2016
 

Deferred rent

   $ 59,142      $ 70,006  

Tax liabilities and reserves

     8,711        13,758  

Insurance liabilities

     14,225        15,219  

Asset retirement obligations

     11,482        11,268  

Other

     5,751        3,933  
  

 

 

    

 

 

 

Total other long-term liabilities

   $ 99,311      $ 114,184  
  

 

 

    

 

 

 

 

  10. Fair Values of Financial Instruments

In accordance with ASC 820, Fair Value Measurements and Disclosures (ASC 820), 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 Company’s financial instruments include cash, receivables, gift cards, accrued liabilities, accounts payable and its credit facility. The fair values of cash, receivables, gift cards accrued liabilities and accounts payable approximate carrying values because of the short-term nature of these instruments. The Company believes that its credit facility approximates fair value since interest rates are adjusted to reflect current rates.

During fiscal 2016, the Company impaired one of its publishing contracts due to a significant drop in business with that publisher, driven by lower title offerings, product quality and the loss of a distribution partner. As a result, the Company recorded an impairment charge of $3,840 in selling and administrative expenses. In determining whether the carrying value of unamortizable intangible assets is less than its estimated fair value, a discounted cash flow approach to value was used, which was based on Level 3 inputs as defined by ASC 820.

 

F-63


  11. Net Earnings (Loss) per Share

In accordance with ASC 260-10-45, Share-Based Payment Arrangements and Participating Securities and the Two-Class Method, unvested share-based payment awards that contain rights to receive non-forfeitable dividends are considered participating securities. The Company’s unvested restricted shares and unvested restricted stock units granted prior to July 15, 2015 and shares issuable under the Company’s deferred compensation plan were considered participating securities. Cash dividends to restricted stock units and performance-based stock units granted on or after July 15, 2015 are not distributed until and except to the extent that the restricted stock units vest, and in the case of performance-based stock units, until and except to the extent that the performance metrics are achieved or are otherwise deemed satisfied. Stock options do not receive cash dividends. As such, these awards are not considered participating securities.

Basic earnings per common share are calculated by dividing the net income, adjusted for preferred dividends and income allocated to participating securities, by the weighted average number of common shares outstanding during the period. Diluted net income per common share reflects the dilution that would occur if any potentially dilutive instruments were exercised or converted into common shares. The dilutive effect of participating securities is calculated using the more dilutive of the treasury stock method or two-class method. Other potentially dilutive securities include preferred stock, stock options, restricted stock units granted after July 15, 2015, and performance-based stock units and are included in diluted shares to the extent they are dilutive under the treasury stock method for the applicable periods.

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 2016, participating securities in the amount of 2,163,190 were excluded from the calculation of loss per share using the two-class method because the effect would be antidilutive. The Company’s outstanding non-participating securities consisting of dilutive stock options and restricted stock units of 140,341, 129,450 and 86,491 for fiscal 2017, fiscal 2016 and fiscal 2015, respectively, 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 income (loss) per share calculation:

 

     Fiscal
2017
    Fiscal
2016
    Fiscal
2015
 

Numerator for basic income (loss) per share:

      

Net income from continuing operations

   $ 22,023       14,700       32,872  

Inducement fee paid upon conversion of Series J preferred stock

     —         (3,657     —    

Preferred stock dividends

     —         —         (15,767

Preferred stock dividends paid in shares

     —         (1,783     —    

Accretion of dividends on preferred stock

     —         (4,204     (7,339

Less allocation of dividends to participating securities

     (576     (1,219     —    

Less allocation of undistributed earnings to participating securities

     —         —         (535
  

 

 

   

 

 

   

 

 

 

Net income from continuing operations available to common shareholders

     21,447       3,837       9,231  

Net income (loss) from discontinued operations available to common shareholders

     —         (39,146     3,724  

Less allocation of undistributed earnings to participating securities

     —         —         (204
  

 

 

   

 

 

   

 

 

 

Net income (loss) from discontinued operations available to common shareholders

     —         (39,146     3,520