<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File Number: 1-12302
BARNES & NOBLE, INC.
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1196501
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
122 Fifth Avenue, New York, NY 10011
- ---------------------------------------- -------------------
(Address of Principal Executive Offices) (Zip Code)
(212) 633-3300
- -------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- -------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Number of shares of $.001 par value common stock outstanding
as of November 30, 1998: 68,625,723.
-----------
<PAGE>
BARNES & NOBLE, INC. AND SUBSIDIARIES
October 31, 1998
Index to Form 10-Q
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Statements of Operations - For the 13 weeks
and the 39 weeks ended October 31, 1998 and
November 1, 1997......................................... 3
Consolidated Balance Sheets - October 31, 1998,
November 1, 1997 and January 31, 1998.................... 4
Consolidated Statements of Cash Flows - For the 39 weeks
ended October 31, 1998 and November 1, 1997............. 6
Notes to Consolidated Financial Statements.................. 7
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 11
Item 3: Quantitative and Qualitative Disclosures About
Market Risk.............................................. N/A
PART II - OTHER INFORMATION
Item 1: Legal Proceedings........................................... 20
Item 5: Other Information........................................... 21
Item 6: Exhibits and Reports on Form 8-K............................ 21
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(thousands of dollars, except per share data)
(unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
13 weeks ended 39 weeks ended
------------------------------ ------------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Sales $ 674,073 614,831 2,015,426 1,828,310
Cost of sales and occupancy 487,712 450,317 1,472,552 1,357,469
------------- ------------- ------------- -------------
Gross profit 186,361 164,514 542,874 470,841
------------- ------------- ------------- -------------
Selling and administrative
expenses 160,525 131,691 470,691 383,581
Depreciation and amortization 24,662 19,746 69,423 56,419
Pre-opening expenses 2,013 3,076 6,897 10,297
------------- ------------- ------------- -------------
Operating profit (loss) (839) 10,001 (4,137) 20,544
Interest (net of interest income of
$95, $93, $285 and $312, respectively)
and amortization of deferred
financing fees 6,943 9,889 18,982 29,293
------------- ------------- ------------- -------------
Earnings (loss) before income taxes (7,782) 112 (23,119) (8,749)
Provision (benefit) for income taxes (3,186) 47 (9,479) (3,587)
------------- ------------- ------------- -------------
Net earnings (loss) $ (4,596) 65 (13,640) (5,162)
============= ============= ============= =============
Net earnings (loss) per
common share
Basic $ (0.07) 0.00 (0.20) (0.08)
Diluted $ (0.07) 0.00 (0.20) (0.08)
Weighted average common
shares outstanding
Basic 68,597,000 67,789,000 68,351,000 67,017,000
Diluted 68,597,000 70,517,000 68,351,000 67,017,000
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(thousands of dollars)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
October 31, November 1, January 31,
1998 1997 1998
---------------- --------------- --------------
<S> <C> <C> <C>
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 10,614 11,753 12,697
Receivables, net 66,168 63,501 43,858
Merchandise inventories 1,056,443 936,923 852,107
Prepaid expenses and other current assets 72,906 88,908 68,902
---------------- --------------- --------------
Total current assets 1,206,131 1,101,085 977,564
---------------- --------------- --------------
Property and equipment:
Land and land improvements 3,197 681 681
Buildings and leasehold improvements 371,323 341,562 347,598
Fixtures and equipment 454,769 345,927 378,058
---------------- --------------- --------------
829,289 688,170 726,337
Less accumulated depreciation and amortization 304,782 230,067 244,207
---------------- --------------- --------------
Net property and equipment 524,507 458,103 482,130
---------------- --------------- --------------
Intangible assets, net 87,795 91,052 90,237
Other noncurrent assets 40,824 59,391 41,240
---------------- --------------- --------------
Total assets $ 1,859,257 1,709,631 1,591,171
================ =============== ==============
</TABLE>
(Continued)
4
<PAGE>
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(thousands of dollars, except per share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
October 31, November 1, January 31,
1998 1997 1998
------------- ------------ --------------
<S> <C> <C> <C>
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 623,913 555,614 459,795
Accrued liabilities 182,011 218,160 253,050
------------- ------------ -------------
Total current liabilities 805,924 773,774 712,845
------------- ------------ -------------
Long-term debt 447,900 405,200 284,800
Other long-term liabilities 72,162 57,866 61,771
Shareholders' equity:
Common stock; $.001 par value;
300,000,000 shares authorized;
68,619,224, 67,875,339 and 67,921,830
shares issued and outstanding,
respectively 69 68 68
Additional paid-in capital 484,015 468,227 468,860
Retained earnings 49,187 4,496 62,827
------------- ------------- -------------
Total shareholders' equity 533,271 472,791 531,755
------------- ------------- -------------
Commitments and contingencies
------------- ------------- -------------
Total liabilities and shareholders' equity $ 1,859,257 1,709,631 1,591,171
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(thousands of dollars)
(unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
39 weeks ended
------------------------------------
October 31, November 1,
1998 1997
-------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (13,640) (5,162)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization 69,707 57,913
Loss on disposal of property and equipment 1,811 388
Increase in other long-term liabilities for scheduled rent
increases in long-term leases 10,543 12,125
Changes in operating assets and liabilities, net (137,723) (75,967)
-------------- ---------------
Net cash flows from operating activities (69,302) (10,703)
-------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment (111,379) (77,694)
Proceeds from sales of property and equipment 210 -
Net decrease (increase) in other noncurrent assets 132 (9,461)
-------------- ---------------
Net cash flows from investing activities (111,037) (87,155)
-------------- ---------------
Cash flows from financing activities:
Net increase in revolving credit facility 163,100 75,200
Proceeds from exercise of common stock options, including related tax benefits 15,156 21,964
-------------- ---------------
Net cash flows from financing activities 178,256 97,164
-------------- ---------------
Net decrease in cash and cash equivalents (2,083) (694)
Cash and cash equivalents at beginning of period 12,697 12,447
-------------- ---------------
Cash and cash equivalents at end of period $ 10,614 11,753
============== ===============
Changes in operating assets and liabilities, net:
Receivables, net $ (22,310) (17,943)
Merchandise inventories (204,336) (204,720)
Prepaid expenses and other current assets (4,004) (12,161)
Accounts payable and accrued liabilities 92,927 158,857
-------------- ---------------
Changes in operating assets and liabilities, net $ (137,723) (75,967)
============== ===============
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 16,627 22,204
Income taxes $ 16,219 18,234
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 39 weeks ended October 31, 1998 and November 1, 1997
(thousands of dollars, except per share data)
(unaudited)
The unaudited consolidated financial statements include the accounts
of Barnes & Noble, Inc. and its wholly owned subsidiaries (collectively, the
Company).
In the opinion of the Company's management, the accompanying
unaudited consolidated financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
its consolidated financial position as of October 31, 1998 and the results of
its operations and its cash flows for the 39 weeks then ended. These
consolidated financial statements are condensed and therefore do not include
all of the information and footnotes required by generally accepted accounting
principles. The consolidated financial statements should be read in
conjunction with the Company's annual report on Form 10-K for the 52 weeks
ended January 31, 1998. The Company follows the same accounting policies in
preparation of interim reports.
Due to the seasonal nature of the business, the results of operations
for the 39 weeks ended October 31, 1998 are not indicative of the results to
be expected for the 52 weeks ending January 30, 1999.
(1) Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market.
Cost is determined using the retail inventory method on the first-in,
first-out basis for 85%, 81% and 83% of the Company's merchandise inventories
as of October 31, 1998, November 1, 1997, and January 31, 1998, respectively.
The remaining merchandise inventories are valued on the last-in, first-out
(LIFO) method.
If substantially all of the merchandise inventories currently valued
at LIFO costs were valued at current costs, merchandise inventories would
increase approximately $2,852, $7,300 and $5,102 as of October 31, 1998,
November 1, 1997, and January 31, 1998, respectively.
(2) Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period presentation.
(3) Income Taxes
The tax provisions for the 39 weeks ended October 31, 1998 and
November 1, 1997 are based upon management's estimate of the Company's
annualized effective tax rate.
(4) Recent Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). The pronouncement requires
all costs related to the development of internal use software other than those
incurred during the application development stage to be expensed as incurred.
Costs incurred during the application development stage are required to be
capitalized and amortized over the estimated useful life of the software. SOP
98-1 is effective for the Company's fiscal year ending January 29, 2000.
Adoption is not expected to have a material effect on the Company's
consolidated financial statements as the Company's policies are substantially
in compliance with SOP 98-1.
7
<PAGE>
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 39 weeks ended October 31, 1998 and November 1, 1997
(thousands of dollars, except per share data)
(unaudited)
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
(SOP 98-5). SOP 98-5 requires an entity to expense all start-up activities (as
defined) as incurred. The Company has historically amortized costs associated
with the opening of new stores over the respective store's first 12 months of
operations. In accordance with SOP 98-5, the Company will adopt its provisions
effective for the fiscal year ending January 29, 2000, and will record a one
time charge reflecting the cumulative effect of a change in accounting
principle in the first quarter of fiscal year 1999, in an amount estimated to
be approximately $4,200 after taxes, representing such start-up costs
capitalized at that time. In addition, the Company will, on a prospective
basis, expense all such start-up costs as incurred. The Company's consolidated
financial statements issued subsequent to the first quarter of fiscal year
1999 are not expected to be materially affected by the adoption of SOP 98-5.
(5) Shareholders' Equity
On July 10, 1998, the Board of Directors of the Company declared a
dividend of one Preferred Share Purchase Right (a Right) for each outstanding
share of the Company's common stock (Common Stock). The distribution of the
Rights was made on July 21, 1998 to stockholders of record on that date. Each
Right entitles the holder to purchase from the Company one four-hundredth of a
share of a new series of preferred stock, designated as Series H Preferred
Stock, at a price of $225 per one four-hundredth of a share. The Rights will
be exercisable only if a person or group acquires 15% or more of the Company's
outstanding Common Stock or announces a tender offer or exchange offer, the
consummation of which would result in such person or group owning 15% or more
of the Company's outstanding Common Stock.
If a person or group acquires 15% or more of the Company's
outstanding Common Stock, each Right will entitle a holder (other than such
person or any member of such group) to purchase, at the Right's then current
exercise price, a number of shares of Common Stock having a market value of
twice the exercise price of the Right. In addition, if the Company is acquired
in a merger or other business combination transaction or 50% or more of its
consolidated assets or earning power are sold at any time after the Rights
have become exercisable, each Right will entitle its holder to purchase, at
the Right's then current exercise price, a number of the acquiring company's
common shares having a market value at that time of twice the exercise price
of the Right. Furthermore, at any time after a person or group acquires 15% or
more of the outstanding Common Stock of the Company but prior to the
acquisition of 50% of such stock, the Board of Directors may, at its option,
exchange part or all of the Rights (other than Rights held by the acquiring
person or group) at an exchange rate of one four-hundredth of a share of
Series H Preferred Stock or one share of the Company's Common Stock for each
Right.
The Company will be entitled to redeem the Rights at any time prior to
the acquisition by a person or group of 15% or more of the outstanding Common
Stock of the Company, at a price of $.01 per Right. The Rights will expire on
July 20, 2008.
The Company has 5,000,000 shares of $.001 par value preferred stock
authorized for issuance, of which 250,000 shares have been designated by the
Board of Directors as Series H Preferred Stock and reserved for issuance upon
exercise of the Rights. Each such share of Series H Preferred Stock will be
nonredeemable and junior to any other series of preferred stock the Company
may issue (unless otherwise provided in the terms of such
8
<PAGE>
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 39 weeks ended October 31, 1998 and November 1, 1997
(thousands of dollars, except per share data)
(unaudited)
stock) and will be entitled to a preferred dividend equal to the greater of
$2.00 per share or 400 times any dividend declared on the Company's Common
Stock. In the event of liquidation, the holders of Series H Preferred Stock
will receive a preferred liquidation payment of $1,000 per share, plus an
amount equal to accrued and unpaid dividends and distributions thereon. Each
share of Series H Preferred Stock will have 400 votes, voting together with
the Company's Common Stock. However, in the event that dividends on the Series
H Preferred Stock shall be in arrears in an amount equal to six quarterly
dividends thereon, holders of the Series H Preferred Stock shall have the
right, voting as a class, to elect two of the Company's Directors, whose terms
shall extend until such time when all accrued and unpaid dividends for all
previous quarterly dividend periods and for the current quarterly dividend
period on all shares of Series H Preferred Stock then outstanding shall have
been declared and paid or set apart for payment. In the event of any merger,
consolidation or other transaction in which the Company's Common Stock is
exchanged, each share of Series H Preferred Stock will be entitled to receive
400 times the amount and type of consideration received per share of the
Company's Common Stock. At October 31, 1998, there were no shares of Series H
Preferred Stock outstanding.
At the Company's Annual Meeting of Stockholders held on June 3, 1998,
the Company's shareholders approved an amendment to the Company's Restated
Certificate of Incorporation to increase the number of shares of Common Stock,
par value $.001 per share, that the Company is authorized to issue from
100,000,000 to 300,000,000.
(6) Stock Option Plans
At the Company's Annual Meeting of Stockholders held on June 3, 1998,
the Company's shareholders approved an amendment to the Company's 1996
Incentive Plan increasing the number of shares available for issuance from
6,000,000 to 11,000,000. The Company filed a Form S-8 with the Securities and
Exchange Commission (SEC) on July 15, 1998 registering the additional
5,000,000 shares approved for issuance under the 1996 Incentive Plan.
During the 39 weeks ended October 31, 1998, options to purchase
approximately 1,820,314 shares of the Company's Common Stock were granted, at
market value on date of grant, to employees under the 1996 Incentive Plan.
(7) Net Earnings (Loss) Per Common Share
In 1997 the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS 128). Under SFAS 128, the
presentation of primary and fully diluted earnings per share is replaced by
basic and diluted earnings per share. Basic earnings per common share includes
no dilutive effect of common stock equivalents and is computed by dividing
income available to common shareholders by the weighted average number of
common shares outstanding. Diluted earnings per common share reflects, in
periods in which they have a dilutive effect, the impact of common shares
issuable upon exercise of stock options. For all periods presented in the
accompanying Consolidated Statements of Operations, other than the 13 weeks
ended November 1, 1997, incremental shares attributed to outstanding stock
options were not included because the result would be anti-dilutive. For the
13 weeks ended November 1, 1997, diluted earnings per common share reflects
the effect, of assumed conversions of employee stock options. All historical
weighted average share and per share amounts have been restated to reflect the
adoption of SFAS 128.
9
<PAGE>
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 39 weeks ended October 31, 1998 and November 1, 1997
(thousands of dollars, except per share data)
(unaudited)
(8) Subsequent Events
Formation of barnesandnoble.com Joint Venture
On November 12, 1998, the Company and Bertelsmann AG (Bertelsmann)
completed the formation of a joint venture to operate the online retail
bookselling operations of the Company's wholly owned subsidiary,
barnesandnoble.com inc. (barnesandnoble.com). The new entity is structured as a
limited liability company under the name barnesandnoble.com llc (the LLC). Under
the terms of the relevant agreements, effective as of October 31, 1998, the
Company and Bertelsmann (through their respective subsidiaries) each have a 50%
membership interest in the LLC. barnesandnoble.com contributed substantially all
of its assets and liabilities to the LLC, and Bertelsmann paid $75,000 to the
Company and made a $150,000 cash contribution to the LLC. Bertelsmann also
agreed to contribute an additional $50,000 to the LLC for future working capital
requirements. In addition, if in an initial public offering of the business of
the LLC prior to December 31, 2001, the value of Bertelsmann's interest exceeds
the value of Bertelsmann's investment, Bertelsmann will pay the Company such
excess amount, up to $25,000. As a result of the above transactions the Company
will recognize a gain during the fourth quarter of fiscal 1998 in the amount of
$64,000 before taxes representing the portion of barnesandnoble.com's net assets
sold by the Company, and an increase in additional paid-in capital in the amount
of $36,000 after taxes representing the Company's incremental share in the
equity of the LLC over the previous interest in the net assets of
barnesandnoble.com.
The accompanying consolidated financial statements reflect the
financial position and results of operations of barnesandnoble.com as a
consolidated wholly owned subsidiary for all periods presented. Beginning in the
fourth quarter of fiscal 1998 the Company will account for its interest in the
LLC using the equity method.
Acquisition of Ingram Book Group
On November 6, 1998, the Company announced an agreement to purchase the
Ingram Book Group, a group of privately held subsidiaries of Ingram Industries
Inc., for $600,000, consisting of approximately $200,000 in cash and
approximately $400,000 in common stock of the Company. The closing of the
transaction is subject to the satisfaction of certain conditions including the
expiration of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976.
10
<PAGE>
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 39 weeks ended October 31, 1998 and November 1, 1997
(thousands of dollars, except per share data)
(unaudited)
(9) Selected Segment Information
The following table summarizes statements of operation information:
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
-------------------------------- ------------------------------
October 31 November 1, October 31, November 1,
1998 1997 1998 1997
-------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Barnes & Noble Retail Business
Sales $ 656,837 610,826 1,976,320 1,821,922
Operating profit $ 19,633 15,601 52,941 28,635
Earnings (loss) per share $ 0.11 0.05 0.29 (0.01)
barnesandnoble.com
Sales $ 17,236 4,005 39,106 6,388
Operating loss $ (20,472) (5,600) (57,078) (8,091)
Loss per share $ (0.18) (0.05) (0.49) (0.07)
Consolidated Barnes & Noble, Inc.
and Subsidiaries
Sales $ 674,073 614,831 2,015,426 1,828,310
Operating profit (loss) $ (839) 10,001 (4,137) 20,544
Earnings (loss) per share $ (0.07) 0.00 (0.20) (0.08)
</TABLE>
11
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The primary sources of the Company's cash are net cash flows from
operating activities, funds available under its senior credit facility and
short-term vendor financing.
The Company's cash and cash equivalents as of October 31, 1998 were
$10.6 million compared with $11.8 million as of November 1, 1997. The Company
used cash primarily for investments in new Barnes & Noble stores, computer
system enhancements and its wholly owned Internet retailing subsidiary
barnesandnoble.com inc. (barnesandnoble.com). During the 39 weeks ended
October 31, 1998, consolidated earnings before interest, taxes, depreciation
and amortization (EBITDA) decreased $11.7 million to $65.3 million from $77.0
million. The decrease was primarily a result of the Company's continued
strategic investment in barnesandnoble.com.
Merchandise inventories increased 12.7% to $1,056.4 million as of
October 31, 1998 from $936.9 million as of November 1, 1997. The increased
inventory levels supported the Company's 10.2% sales growth, the opening of
47 Barnes & Noble stores over the last twelve months and the strategic
increase in the distribution center standing inventory to over 750,000
different titles. The inventory expansion allowed the Company to increase its
offering of titles for online and in-store customer orders to over one million
titles which are available for rapid delivery.
The Company's investing activities consist principally of capital
expenditures for new store construction, computer system enhancements, store
relocation/remodels and capital expenditures incurred by barnesandnoble.com.
Consolidated capital expenditures totaled $111.4 million and $77.7 million
during the 39 weeks ended October 31, 1998 and November 1, 1997, respectively.
The ratio of debt to equity was 0.84:1.00 as of October 31, 1998,
compared with 0.86:1.00 as of November 1, 1997. This improvement is the result
of the Company's continued positive cash flows from the retail business,
expanded gross margin, improved operating leverage and strong emphasis on
working capital management partially offset by the Company's continued
investment in barnesandnoble.com.
Total debt increased 10.5% to $447.9 million as of October 31, 1998
from $405.2 million as of November 1, 1997. Average borrowings increased $19.7
million to $387.8 million during the 39 weeks ended October 31, 1998, from
$368.1 million in the last-year period, and peaked at $461.5 million and
$412.9 million during the same periods, respectively. Strong cash flows from
operations from the retail business combined with the increase in borrowings
supported the strategic increase in merchandise inventories and continued
investment in barnesandnoble.com
Based upon the Company's current operating levels and expansion
plans, management believes net cash flows from operating activities and the
capacity under its $850.0 million senior credit facility will be sufficient to
meet the Company's working capital and debt service requirements and support
the development of its short- and long-term strategies for at least the next
twelve months.
12
<PAGE>
On July 10, 1998, the Board of Directors of the Company declared a
dividend of one Preferred Share Purchase Right (a Right) for each outstanding
share of the Company's common stock (Common Stock). The distribution of the
Rights was automatically made on July 21, 1998 to stockholders of record on
that date. No action is necessary on the part of holders of the Company's
Common Stock. Each Right entitles the holder to purchase from the Company one
four-hundredth of a share of a new series of preferred stock, designated as
Series H Preferred Stock, par value $.001 per share (the Preferred Stock), at
a price of $225 per one four-hundredth of a share.
The Rights will be exercisable only if a person or group acquires 15%
or more of the Company's outstanding Common Stock or announces a tender offer
or exchange offer, the consummation of which would result in such person or
group owning 15% or more of the Company's outstanding Common Stock. Once
exercisable, each Right will entitle a holder to purchase a number of shares
of the Company's Common Stock having a market value of twice the exercise
price of the Right. In addition, if the Company is acquired at any time after
the Rights have become exercisable, each Right will entitle its holder to
purchase a number of the acquiring company's common shares having a market
value at that time of twice the exercise price of the Right. Furthermore, at
any time after a person or group acquires 15% or more of the outstanding
Common Stock of the Company but prior to the acquisition of 50% of such stock,
the Board of Directors may, at its option, exchange part or all of the Rights
at an exchange rate of one four-hundredth of a share of Preferred Stock or one
share of the Company's Common Stock for each Right.
The Company will be entitled to redeem the Rights at any time prior to
the acquisition by a person or group of 15% or more of the outstanding Common
Stock of the Company, at a price of $.01 per Right. The Rights will expire on
July 20, 2008.
The Company has authorized 250,000 shares of the Preferred Stock,
designated by the Board of Directors as reserved for issuance upon exercise of
the Rights. Each share of Preferred Stock will be entitled to certain dividend
and liquidation preferences and will be entitled to 400 votes, voting together
with the Company's Common Stock. In addition, in the event that dividends on
the Preferred Stock shall be in arrears in an amount equal to six quarterly
dividends thereon, holders of the Preferred Stock shall have the right to
elect two of the Company's Directors, whose terms shall continue until all
accrued and unpaid dividends shall have been declared and paid. Further, in
the event of any merger, consolidation or other transaction in which the
Company's Common Stock is exchanged, each share of Preferred Stock will be
entitled to receive 400 times the amount and type of consideration received
per share of the Company's Common Stock.
At the Company's Annual Meeting of Stockholders held on June 3, 1998,
the Company's shareholders approved an amendment to the Company's Restated
Certificate of Incorporation to increase the number of shares of Common Stock
that the Company is authorized to issue from 100,000,000 to 300,000,000. The
additional authorized shares will provide the Company with flexibility in
connection with possible future stock splits, equity financings, joint
ventures and acquisitions, in raising additional capital, for grants and as
incentives to employees, officers, directors and consultants of the Company,
and other general corporate purposes.
The Company did not declare or pay any cash dividends during the 39
week periods ended October 31, 1998 and November 1, 1997.
Year 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. The Company's
computer equipment and software and devices with embedded technology that are
date-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of
13
<PAGE>
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in other normal business activities.
In 1997 the Company began assessing how it may be impacted by the
Year 2000 issue and has formulated and commenced implementation of a
comprehensive plan to address all known aspects of the issue.
The Company's plan encompasses the following areas: (1) information
systems that utilize date/time oriented software (IT systems), (2) computer
chips, processors , and controllers, (non-IT systems) and (3) vendors and
customers. The Company is in various stages of implementation which include
remediation, testing and implementation.
To date, approximately 80% of the Company's administrative support IT
systems have at least completed the remediation phase. Of this amount,
approximately 80% have completed the testing and remediation phase and 20%
have been replaced or upgraded. All remaining Year 2000 compliance efforts for
administrative IT functions are expected to be completed by the second quarter
of fiscal 1999.
Approximately 90% of non-IT systems have completed the remediation,
testing and implementation phases with no material replacements necessary.
The Company has been obtaining information from major vendors,
suppliers, and service providers to determine if their systems will be Year
2000 compliant. There has been no indication from these sources that their
systems will not be sufficiently Year 2000 compliant or that their failure to
be Year 2000 compliant will cause a significant disruption in the operations
of the Company. The Company is developing contingency plans to identify
alternative sources which are Year 2000 compliant in the event the current
parties suffer significant disruption as a result of Year 2000 compliance
failures.
The Company estimates that total costs to implement its Year 2000 plan
will be between $4.0 and $6.0 million of which $2.0 million has already been
incurred, including $1.2 million relating to the purchase of new software and
hardware modifications, and $0.8 million relating to Year 2000 consultants. The
estimated total includes direct costs for systems enhancements which would have
been implemented in the ordinary course of business but whose acquisition has
been accelerated to ensure compliance by the Year 2000. The estimate excludes
costs for scheduled system upgrades which have not been accelerated due to Year
2000 issues.
The implementation of the Company's proprietary point-of-sale system
(Bookmaster), which began in 1996, is continuing and is expected to be completed
in the second quarter of fiscal 1999. Bookmaster, which is Year 2000 compliant,
is an inventory management system with integrated point-of-sale features that
utilizes a proprietary data-warehouse-based just-in-time replenishment system.
It enhances communications and real-time access to the Company's network of
stores, distribution center, and wholesalers. The Bookmaster system has been
installed in approximately 26% of all Barnes & Noble stores. By the end of the
second quarter of fiscal 1999 all existing Barnes & Noble and B. Dalton stores
will either be utilizing the Bookmaster system or will receive Year 2000
upgrades to their existing point-of-sale systems.
Should some of the Company's systems not be available due to Year
2000 problems, in a reasonably likely worst case scenario, the Company may
experience significant delays in its ability to perform certain functions.
However, the Company does not expect an impairment in its ability to execute
critical functions.
Results of Operations
14
<PAGE>
13 weeks ended October 31, 1998 and November 1, 1997
Sales
During the 13 weeks ended October 31, 1998, the Company's
consolidated sales increased 9.6% to $674.1 million from $614.8 million during
the 13 weeks ended November 1, 1997. During the third quarter, Barnes & Noble
store sales rose 10.9% to $554.0 million from $499.7 million during the same
period a year ago. As a percentage of total sales during the third quarter,
Barnes & Noble store sales represented 82.2%, up from 81.3% during the same
period last year.
The third quarter Barnes & Noble same store sales gain of 4.5%,
coupled with a 10.1% year over year increase in store square footage, produced
the 10.9% increase in Barnes & Noble store sales. The number of comparable
Barnes & Noble stores, as a percentage of total Barnes & Noble stores,
increased to 89.3% as of October 31, 1998 compared with 76.5% as of November
1, 1997. Third quarter sales generated by barnesandnoble.com rose to $17.2
million, an increase of 330.4% over sales of $4.0 million reported for the
third quarter of 1997 and a 37.9% increase from $12.5 million for the second
quarter of 1998, continuing the trend of successive double digit quarterly
increases since inception.
During fiscal 1998's third quarter, B. Dalton sales, which
represented 14.5% of total sales compared with 17.1% during the same period
last year, declined (7.1%) primarily due to the closure of 52 B. Dalton stores
since November 1, 1997. B. Dalton's same store sales decreased (1.1%) during
fiscal 1998's third quarter.
During the 13 weeks ended October 31, 1998, the Company opened 17
Barnes & Noble stores and closed two, bringing its total number of Barnes &
Noble stores to 504 totaling 11.4 million square feet. During the same period,
the Company opened two and closed five B. Dalton stores ending the period with
507 stores. As of October 31, 1998, the Company operated 1,011 stores in 49
states and the District of Columbia.
Cost of Sales and Occupancy
During the 13 weeks ended October 31, 1998, cost of sales and
occupancy increased $37.4 million, or 8.3%, to $487.7 million from $450.3
million during the 13 weeks ended November 1, 1997. As a percentage of sales,
cost of sales and occupancy decreased to 72.4% during fiscal 1998's third
quarter from 73.2% during the same period one year ago reflecting increased
fulfillment through the distribution center, improved leverage on occupancy
costs, more favorable sales mix and better shrinkage control.
Selling and Administrative Expenses
Selling and administrative expenses increased $28.8 million to $160.5
million during the 13 weeks ended October 31, 1998 from $131.7 million during
the 13 weeks ended November 1, 1997. During the third quarter, selling and
administrative expenses increased as a percentage of sales to 23.8% from 21.4%
during the prior year period. The increase was primarily attributable to
increased operating costs associated with the Company's investment in
barnesandnoble.com.
15
<PAGE>
Depreciation and Amortization
During the third quarter, depreciation and amortization increased
$5.0 million, or 24.9%, to $24.7 million from $19.7 million during the same
period last year, as a result of depreciation on the 47 new Barnes & Noble
stores opened since November 1, 1997 and depreciation attributable to
barnesandnoble.com's capital expenditures.
Pre-opening Expenses
Pre-opening expenses decreased $1.1 million, or 34.6%, to $2.0
million during the 13 weeks ended October 31, 1998 from $3.1 million during
the 13 weeks ended November 1, 1997, as a result of the 31 fewer Barnes &
Noble store openings during the 52 weeks ended October 31, 1998 in comparison
to the corresponding prior year period.
Operating Profit (Loss)
The Company's consolidated operating loss during the 13 weeks ended
October 31, 1998 was ($0.8) million compared with a consolidated operating
profit of $10.0 million during the 13 weeks ended November 1, 1997. Operating
profit of $19.6 million generated by the retail business was offset by
barnesandnoble.com's third quarter operating loss of ($20.5) million. The
$19.6 million operating profit for the retail business improved 25.6% from
$15.6 million in the prior year, reflecting strong Barnes & Noble store sales
growth, expanding gross margins and increasing leverage on occupancy expenses.
Interest Expense, Net and Amortization of Deferred Financing Fees
Net interest expense and amortization of deferred financing fees
decreased to $6.9 million during the 13 weeks ended October 31, 1998 from $9.9
million during the 13 weeks ended November 1, 1997. Interest expense decreased
due to a reduction in the average interest rate on borrowings as a result of
the Company's refinancing of its senior credit facility in November 1997.
16
<PAGE>
Benefit For Income Taxes
The benefit for income taxes during the 13 weeks ended October 31,
1998 was $3.2 million compared with $0.0 million during the 13 weeks ended
November 1, 1997. Tax benefits were based upon management's estimate of the
Company's annualized effective tax rates.
Net Earnings (Loss)
As a result of the factors discussed above, the Company reported a
consolidated net loss of ($4.6) million during the 13 weeks ended October 31,
1998 compared with net earnings of $0.1 million during the 13 weeks ended
November 1, 1997. During the third quarter, the net loss per common share was
($0.07) per share (based on 68.6 million basic shares) compared to $0.00 per
share (based on 70.5 million diluted shares) during the same period a year
ago. The consolidated third quarter net loss reflects barnesandnoble.com's net
loss of ($12.1) million or ($0.18) per share. Net earnings for the Company's
retail operations increased to $7.5 million or $0.11 per share during the 13
weeks ending October 31, 1998 from net earnings of $3.4 million or $0.05 per
share during the 13 weeks ending November 1, 1997.
Results of Operations
39 weeks ended October 31, 1998 and November 1, 1997
Sales
Consolidated sales totaled $2.015 billion during the 39 weeks ended
October 31, 1998, a 10.2% increase over sales of $1.828 billion during the 39
weeks ended November 1, 1997. During the 39 weeks ended October 31, 1998,
total Company sales rose primarily due to a 12.1% increase in Barnes & Noble
store sales to $1.662 billion from $1.483 billion during the same period a
year ago. For the same respective periods, Barnes & Noble store sales, as a
percentage of total sales, rose to 82.5%, up from 81.1%.
The year-to-date increase in Barnes & Noble same store sales of 5.2%,
coupled with a 10.6% year over year increase in store square footage, produced
the 12.1% increase in Barnes & Noble store sales. Year-to-date sales generated
by barnesandnoble.com rose to $39.1 million, an increase of 512.2% over sales
of $6.4 million reported for the same period one year ago.
B. Dalton stores generated 14.8% of total sales year-to-date compared
with 17.7% during the prior period. Year-to-date B. Dalton sales declined
(7.6%) as a result of 52 store closings since November 1, 1997, and a (0.8%)
decrease in same store sales for the 39 weeks.
During the 39 weeks ended October 31, 1998, the Company opened 28 and
closed seven Barnes & Noble stores and opened two and closed 23 B. Dalton
stores.
Cost of Sales and Occupancy
During the 39 weeks ended October 31, 1998, cost of sales and
occupancy increased $116.0 million, or 8.5%, to $1.473 billion from $1.357
billion during the 39 weeks ended November 1, 1997. As a percentage of sales,
cost of sales and occupancy decreased to 73.1% during the 39 weeks ended
October 31, 1998, from 74.2% during the same period last year reflecting
increased fulfillment through the distribution center, improved leverage on
occupancy costs, more favorable sales mix and better shrinkage control.
17
<PAGE>
Selling and Administrative Expenses
Selling and administrative expenses increased $87.1 million, or
22.7%, to $470.7 million during the 39 weeks ended October 31, 1998 from
$383.6 million during the 39 weeks ended November 1, 1997. As a percentage of
sales, selling and administrative expenses increased to 23.4% during the 39
weeks ended October 31, 1998, from 21.0% during the same period last year. The
increase was primarily attributable to increased operating costs associated
with the Company's investment in barnesandnoble.com.
Depreciation and Amortization
Depreciation and amortization increased $13.0 million, or 23.0%, to
$69.4 million during the 39 weeks ended October 31, 1998 from $56.4 million
during the 39 weeks ended November 1, 1997. Depreciation on the 47 Barnes &
Noble stores opened since November 1, 1997 and depreciation attributable to
barnesandnoble.com's capital expenditures were the primary factors
contributing to the increase.
Pre-opening Expenses
Pre-opening expenses decreased ($3.4) million, or (33.0%), to $6.9
million during the 39 weeks ended October 31, 1998 from $10.3 million during
the 39 weeks ended November 1, 1997 primarily as a result of 31 fewer Barnes &
Noble store openings during the 52 weeks ended October 31, 1998 compared to
the corresponding prior year period.
Operating Profit (Loss)
The Company's consolidated operating loss during the 39 weeks ended
October 31, 1998 was ($4.1) million compared with a consolidated operating
profit of $20.5 million during the 39 weeks ended November 1, 1997. Operating
profit generated by the retail business was $52.9 million offset by
barnesandnoble.com's operating loss of ($57.1) million. The $52.9 million
operating profit for the retail business was a 84.9% increase over $28.6
million in the prior year, reflecting strong Barnes & Noble store sales
growth, expanding gross margins and increasing leverage on occupancy expenses.
Interest Expense, Net and Amortization of Deferred Financing Fees
Interest expense, net of interest income, and amortization of
deferred financing fees decreased to $19.0 million during the 39 weeks ended
October 31, 1998 from $29.3 million during the 39 weeks ended November 1,
1997. Interest expense decreased due to a reduction in the average interest
rate on borrowings as a result of the Company's refinancing of its senior
credit facility in November 1997.
Benefit For Income Taxes
The benefit for income taxes during the 39 weeks ended October 31,
1998, was $9.5 million compared with $3.6 million during the 39 weeks ended
November 1, 1997. Tax benefits during these periods were based upon
management's estimate of the Company's annualized effective tax rates.
18
<PAGE>
Net Loss
As a result of the factors discussed above, the Company reported a
net loss of ($13.6) million during the 39 weeks ended October 31, 1998
compared with a net loss of ($5.2) million during the 39 weeks ended November
1, 1997. For the 39 weeks ended October 31, 1998, the net loss per common
share was ($0.20) per share (based on 68.4 million basic shares) compared with
($0.08) per share (based on 67.0 million basic shares) for the corresponding
prior-year period. The consolidated net loss reflects barnesandnoble.com's net
loss of ($20.0) million or ($0.29) per share. Excluding barnesandnoble.com,
net earnings for the Company's retail operations increased to $20.0 million or
$0.29 per share during the 39 weeks ending October 31, 1998 compared to a net
loss of ($0.4) million or ($0.01) per share during the 39 weeks ending
November 1, 1997.
Forward-Looking Statements
This report may contain certain forward-looking statements (as such
term is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to the Company that are based on the beliefs of the
management of the Company as well as assumptions made by and information
currently available to the management of the Company. When used in this
report, the words "anticipate," "believe," "estimate," "expect," "intend,"
"plan" and similar expressions, as they relate to the Company or the
management of the Company, identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events, the outcome of which is subject to certain risks, including among
others general economic and market conditions, decreased consumer demand for
the Company's products, possible disruptions in the Company's computer or
telephone systems, increased or unanticipated costs or effects associated with
Year 2000 compliance by the Company or its service or supply providers,
possible work stoppages or increases in labor costs, possible increases in
shipping rates or interruptions in shipping service, effects of competition,
possible disruptions or delays in the opening of new stores or the inability
to obtain suitable sites for new stores, higher than anticipated store closing
or relocation costs, higher interest rates, the performance of the Company's
online initiatives such as barnesandnoble.com, unanticipated increases in
merchandise or occupancy costs, unanticipated adverse litigation results or
effects, and other factors which may be outside of the Company's control.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results or outcomes may vary
materially from those described as anticipated, believed, estimated, expected,
intended or planned. Subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements in this paragraph.
19
<PAGE>
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
In March 1998, the American Booksellers Association (ABA) and
twenty-six independent bookstores filed a lawsuit in the United States
District Court for the Northern District of California against the Company and
Borders Group Inc. ("Borders") alleging violations of the Robinson-Patman Act,
the California Unfair Trade Practice Act and the California Unfair Competition
Law. The Complaint seeks injunctive and declaratory relief; treble damages on
behalf of each of the bookstore plaintiffs, and, with respect to the
California bookstore plaintiffs, any other damages permitted by California
law; disgorgement of money, property and gains wrongfully obtained in
connection with the purchase of books for resale, or offered for resale, in
California from March 18, 1994 until the action is completed and pre-judgment
interest on any amounts awarded in the action, as well as attorney fees and
costs. In November 1998, six other independent booksellers instituted an
action in the same court against the same defendants asserting similar claims
and seeking similar relief. The Company intends to vigorously defend both
actions.
In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace
Kuralt, filed a lawsuit in the United States District Court for the Southern
District of New York against the Company, Borders , Amazon, Inc., certain
publishers and others alleging violation of the Robinson-Patman Act and other
federal law, New York statutes governing trade practices and common law. The
Complaint seeks certification of a class consisting of all retail booksellers
in the United States, whether or not currently in business, which were in
business and were members of the ABA at any time during the four year period
preceding the filing of the Complaint. The Complaint alleges that the named
plaintiffs have suffered damages of $11,250,000 or more and requests treble
damages on behalf of the named plaintiffs and each of the purported class
members, as well as of injunctive and declaratory relief (including an
injunction requiring the closure of all of defendants' stores within 10 miles
of any location where plaintiff either has or had a retail bookstore during
the four years preceding the filing of the Complaint, and prohibiting the
opening by defendants of any bookstore in such areas for the next 10 years),
disgorgement of alleged discriminatory discounts, rebates, deductions and
payments, punitive damages, interest, costs, attorneys fees and other relief.
Many of the allegations in the Complaint are similar to those contained in an
action instituted by the ABA and 26 bookseller plaintiffs against the Company
in March of 1998. The Company intends to vigorously defend the action.
In November 1998, a former bookstore chain in Texas which has filed
for bankruptcy protection, filed an amended complaint in an action in the
Bankruptcy Court for the Northern District of Texas against the Company
alleging various antitrust and related claims. Among other things, the
plaintiff alleges that the Company conspired with national book publishers to
obtain lower prices and to monopolize the Dallas/Fort Worth book retail market.
The plaintiff is seeking $11,000,000 in actual damages, plus treble damages,
punitive damages, and attorneys' fees. The Company intends to vigorously
defend this action.
In addition to the above actions, various claims and lawsuits arising
in the normal course of business are pending against the Company. The subject
matter of these proceedings primarily includes commercial disputes and
employment issues. The results of these proceedings are not expected to have a
material adverse effect on the Company's consolidated financial position or
results of operations.
20
<PAGE>
Item 5: Other Information
Shareholder Proposals
Any shareholder proposal submitted outside the processes of Rule
14a-8 under the Securities Exchange Act of 1934, as amended (the Exchange
Act), for presentation at the Company's 1999 Annual Meeting will be considered
untimely for purposes of Rules 14a-4 and 14a-5 under the Exchange Act if
notice of such shareholder proposal is received by the Company after March 17,
1999.
Item 6: Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this Report:
Exhibit No. Description of Exhibit
- ------------------ -------------------------------------------------
2.1 Formation Agreement dated November 12, 1998
among Barnes & Noble, Inc., B&N.com Holding
Corp., barnesandnoble.com inc., B&N.com Member
Corp., Bertelsmann AG and BOL.US Online, Inc.
(incorporated herein by reference to Exhibit
10.1 to the Company's Current Report on Form
8-K, dated November 24, 1998, Commission File
No. 1-12302)
2.2 Amended and Restated Limited Liability Company
Agreement of barnesandnoble.com llc among
Barnes & Noble, Inc., B&N.com Holding Corp.,
Bertelsmann AG and BOL.US Online, Inc.
(incorporated herein by reference to Exhibit
10.2 to the Company's Current Report on Form
8-K, dated November 24, 1998, Commission File
No. 1-12302)
27 Financial Data Schedule
(b) On November 24, 1998, the Company filed a Current Report on Form 8-K
reporting under Item 2 the establishment of its previously announced
50%/50% joint venture with Bertelsmann AG, an Akteingesellschaft
organized and existing under the laws of Germany, to operate the
Company's online retail business, barnesandnoble.com, and under Item 5
the agreement to purchase the Ingram Book Group.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BARNES & NOBLE, INC.
(Registrant)
Date: December 15, 1998 By: /s/ Marie J. Toulantis
----------------------
Marie J. Toulantis
Executive Vice President, Finance
22
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
- ------------------ -------------------------------------------------
2.1 Formation Agreement dated November 12, 1998
among Barnes & Noble, Inc., B&N.com Holding
Corp., barnesandnoble.com inc., B&N.com Member
Corp., Bertelsmann AG and BOL.US Online, Inc.
(incorporated herein by reference to Exhibit
10.1 to the Company's Current Report on Form
8-K, dated November 24, 1998, Commission File
No. 1-12302)
2.2 Amended and Restated Limited Liability Company
Agreement of barnesandnoble.com llc among
Barnes & Noble, Inc., B&N.com Holding Corp.,
Bertelsmann AG and BOL.US Online, Inc.
(incorporated herein by reference to Exhibit
10.2 to the Company's Current Report on Form
8-K, dated November 24, 1998, Commission File
No. 1-12302)
27 Financial Data Schedule
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