<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 August 1, 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
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BARNES & NOBLE, INC.
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(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 August 28,
1998: 68,585,134.
================================================================================
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BARNES & NOBLE, INC. AND SUBSIDIARIES
August 1, 1998
Index to Form 10-Q
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Statements of Operations - For the 13 weeks and the 26 weeks
ended August 1, 1998 and August 2, 1997.................................. 3
Consolidated Balance Sheets - August 1, 1998, August 2, 1997 and January 31,
1998..................................................................... 4
Consolidated Statements of Cash Flows - For the 26 weeks ended August 1,
1998 and August 2, 1997.................................................. 6
Notes to Consolidated Financial Statements................................... 7
Item 2: Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 17
Item 2. Changes in Securities........................................................ 17
Item 4. Submission of Matters to a Vote of Security Holders.......................... 18
Item 5. Other Information............................................................ 19
Item 6. Exhibits and Reports on Form 8-K............................................. 19
</TABLE>
<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 26 weeks ended
------------------------------- --------------------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 675,009 617,748 1,341,353 1,213,479
Cost of sales and occupancy 492,726 458,935 984,840 907,152
------------ ------------ ------------ ------------
Gross profit 182,283 158,813 356,513 306,327
------------ ------------ ------------ ------------
Selling and administrative
expenses 160,558 129,079 310,166 251,890
Depreciation and amortization 22,838 18,926 44,761 36,673
Pre-opening expenses 2,280 3,367 4,884 7,221
------------ ------------ ------------ ------------
Operating profit (loss) (3,393) 7,441 (3,298) 10,543
Interest (net of interest income of $85, $107,
$190 and $219, respectively) and
amortization of deferred financing fees
6,289 9,756 12,039 19,404
------------ ------------ ------------ ------------
Loss before benefit for income taxes (9,682) (2,315) (15,337) (8,861)
Benefit for income taxes (3,973) (949) (6,293) (3,634)
------------ ------------ ------------ ------------
Net loss $ (5,709) (1,366) (9,044) (5,227)
============ ============ ============ ============
Net loss per common share
Basic $ (0.08) (0.02) (0.13) (0.08)
Diluted $ (0.08) (0.02) (0.13) (0.08)
Weighted average common shares outstanding
Basic 68,354,000 66,820,000 68,227,000 66,630,000
Diluted 68,354,000 66,820,000 68,227,000 66,630,000
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(thousands of dollars)
<TABLE>
<CAPTION>
August 1, August 2, January 31,
1998 1997 1998
----------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,615 8,768 12,697
Receivables, net 39,399 46,970 43,858
Merchandise inventories 821,342 733,283 852,107
Prepaid expenses and other current assets 92,732 86,930 68,902
---------- ---------- ----------
Total current assets 963,088 875,951 977,564
---------- ---------- ----------
Property and equipment:
Land and land improvements 3,247 681 681
Buildings and leasehold improvements 359,653 341,099 347,598
Fixtures and equipment 423,047 321,289 378,058
---------- ---------- ----------
785,947 663,069 726,337
Less accumulated depreciation and amortization 285,719 212,294 244,207
---------- ---------- ----------
Net property and equipment 500,228 450,775 482,130
---------- ---------- ----------
Intangible assets, net 88,609 91,885 90,237
Other noncurrent assets 42,538 59,180 41,240
---------- ---------- ----------
Total assets $1,594,463 1,477,791 1,591,171
========== ========== ==========
</TABLE>
(Continued)
4
<PAGE>
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(thousands of dollars, except per share data)
<TABLE>
<CAPTION>
August 1, August 2, January 31,
1998 1997 1998
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit facility $ -- 80,500 --
Current portion of long-term debt -- 7,500 --
Accounts payable 392,326 394,043 459,795
Accrued liabilities 201,226 191,250 253,050
---------- ---------- ----------
Total current liabilities 593,552 673,293 712,845
---------- ---------- ----------
Long-term debt 395,200 282,500 284,800
Other long-term liabilities 68,666 53,932 61,771
Shareholders' equity:
Common stock; $.001 par value; 300,000,000 shares authorized; 68,578,373,
67,579,454 and 67,921,830 shares issued and outstanding respectively 69 68 68
Additional paid-in capital 483,193 463,567 468,860
Retained earnings 53,783 4,431 62,827
---------- ---------- ----------
Total shareholders' equity 537,045 468,066 531,755
---------- ---------- ----------
Commitments and contingencies
---------- ---------- ----------
Total liabilities and shareholders' equity $1,594,463 1,477,791 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>
26 weeks ended
-------------------------------
August 2, August 1,
1998 1997
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,044) (5,227)
Adjustments to reconcile net loss to net cash flows from operating
activities:
Depreciation and amortization 44,952 37,667
Loss on disposal of property and equipment 726 54
Increase in other long-term liabilities for scheduled rent
increases in long-term leases 7,034 8,212
Changes in operating assets and liabilities, net (108,038) (42,321)
--------- ---------
Net cash flows from operating activities (64,370) (1,615)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (62,167) (51,119)
Proceeds from sales of property and equipment 210 --
Net increase in other noncurrent assets (1,489) (8,749)
--------- ---------
Net cash flows from investing activities (63,446) (59,868)
--------- ---------
Cash flows from financing activities:
Net increase in revolving credit facility 110,400 40,500
Proceeds from exercise of common stock options, including related
tax benefits 14,334 17,304
--------- ---------
Net cash flows from financing activities 124,734 57,804
--------- ---------
Net decrease in cash and cash equivalents (3,082) (3,679)
Cash and cash equivalents at beginning of period 12,697 12,447
--------- ---------
Cash and cash equivalents at end of period $ 9,615 8,768
========= =========
Changes in operating assets and liabilities, net:
Receivables, net $ 4,459 (1,412)
Merchandise inventories 30,765 (1,080)
Prepaid expenses and other current assets (23,830) (10,183)
Accounts payable and accrued liabilities (119,432) (29,646)
--------- ---------
Changes in operating assets and liabilities, net $(108,038) (42,321)
========= =========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 11,366 18,700
Income taxes $ 15,508 17,839
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 26 weeks ended August 1, 1998 and August 2, 1997
(thousands of dollars)
(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 August 1, 1998 and the results of its operations and
its cash flows for the 26 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 26 weeks ended August 1, 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
(FIFO) basis for 85%, 81% and 83% of the Company's merchandise inventories as of
August 1, 1998, August 2, 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 $3,602, $8,300 and $5,102 as of August 1, 1998, August 2, 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 26 weeks ended August 1, 1998 and August 2,
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 26 weeks ended August 1, 1998 and August 2, 1997
(thousands of dollars)
(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, representing such start-up costs
capitalized at that time, and in addition 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.
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 the second fiscal quarter and the first fiscal half of 1998 and
1997 incremental shares attributed to outstanding stock options were not
included because the result would be anti-dilutive. All historical data weighted
average share and per share amounts have been restated to reflect the adoption
of SFAS 128.
(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.
8
<PAGE>
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 26 weeks ended August 1, 1998 and August 2, 1997
(thousands of dollars)
(unaudited)
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 stock) and will be
entitled to a preferred dividend equal to the greater of $2.00 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 August 1, 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 26 weeks ended August 1, 1998, options to purchase
approximately 1,194,862 shares of the Company's Common Stock were granted, at
market value on date of grant, to employees under the 1996 Incentive Plan.
9
<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 August 1, 1998 were $9.6
million compared with $8.8 million as of August 2, 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 1998's first half,
consolidated earnings before interest, taxes, depreciation and amortization
(EBITDA) decreased $5.7 million to $41.5 million from $47.2 million. The
decrease was primarily a result of the Company's continued strategic investment
in barnesandnoble.com. For the first half of 1998, EBITDA in the retail business
increased $25.9 million or 52.9% to $75.0 million from $49.1 million during the
prior period, reflecting higher gross margins and improving expense leverage
(primarily in Barnes & Noble store operating, rental and pre-opening costs).
EBITDA for barnesandnoble.com decreased $31.7 million to ($33.5) million from
($1.8) million reflecting continuing strategic investment spending and increased
operating costs.
Merchandise inventories increased 12.0% to $821.3 million as of August
1, 1998 from $733.3 million as of August 2, 1997. The increased inventory levels
supported the Company's 9.3% revenue growth and the increase in the distribution
center standing inventory to over 650,000 different titles available for
shipping within 24 hours to both online customers and the retail store network.
The Company's investing activities consist principally of capital
expenditures for new store construction, computer system enhancements, store
relocation/remodels and capital expenditures incurred by barnesandnoble.com.
Consolidated capital expenditures totaled $62.2 million and $51.1 million during
the 26 weeks ended August 1, 1998 and August 2, 1997, respectively. Capital
expenditures incurred solely by barnesandnoble.com were $10.1 million for the
26 weeks ended August 1, 1998 and $8.3 million for the 26 weeks ended
August 2, 1997.
The ratio of debt to equity was 0.74:1.00 as of August 1, 1998,
compared with 0.79:1.00 as of August 2, 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 6.7% to $395.2 million as of August 1, 1998 from
$370.5 million as of August 2, 1997. Average borrowings increased $7.9 million
to $366.9 million during the first half of 1998 from $359.0 million in the
last-year period, and peaked at $418.9 million and $384.7 million during the
same periods, respectively. Strong cash flows from operations from the retail
business combined with the minimal 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.
10
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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,
par value $.001 per share, 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 26
week periods ended August 1, 1998 and August 2, 1997.
Year 2000: Many currently installed computer systems and software
products are coded to accept only two-digit entries in the date code field.
Beginning in the year 2000, these date code fields will need to accept
11
<PAGE>
four-digit entries to distinguish 21st century dates from 20th century dates.
This "Year 2000" issue potentially affects all individuals and companies
(including the Company, its customers, business partners, vendors, suppliers,
service providers and banks). The Company is continuing its comprehensive
evaluation of all computer systems and microprocessors to ensure that they are
all Year 2000 compliant.
Management does not anticipate that the Company will incur significant
operating expenses or be required to invest heavily in computer systems
improvements to be Year 2000 compliant. In addition, communications are ongoing
with other companies that have systems which interface with those of the
Company, to determine the extent to which those companies are addressing their
Year 2000 compliance.
The Company is developing contingency plans which identify alternative
vendors, suppliers and service providers in the event current vendors, suppliers
or service providers suffer significant disruption as a result of Year 2000
compliance failures.
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, but does not
expect an inability to perform critical functions or to otherwise conduct its
business.
Results of Operations
13 weeks ended August 1, 1998 and August 2, 1997
Revenues
During the 13 weeks ended August 1, 1998, the Company's total revenues
increased 9.3% to $675.0 million from $617.7 million during the 13 weeks ended
August 2, 1997. During the second quarter, Barnes & Noble store revenues rose
11.1% to $557.1 million from $501.4 million during the same period a year ago.
As a percentage of total revenues during the second quarter, Barnes & Noble
store revenues represented 82.5%, up from 81.2% during the same period last
year.
The second quarter Barnes & Noble same store sales gain of 5.0%,
coupled with a 9.9% year over year increase in store square footage, produced
the 11.1% increase in Barnes & Noble store revenues. Management attributes the
same store sales performance to an increase in the number of stores eligible for
inclusion in the same store sales base. The number of comparable Barnes & Noble
stores, as a percentage of total Barnes & Noble stores, increased to 85.7% as of
August 1, 1998 compared with 75.8% as of August 2, 1997. Second quarter revenues
generated by barnesandnoble.com rose to $12.5 million, an increase of 470.1%
over revenues of $2.2 million reported for the second quarter of 1997 and a
33.5% increase from $9.4 million for the first quarter of 1998, continuing
successive double digit quarterly increases since inception.
During fiscal 1998's second quarter, B. Dalton revenues, which
represented 14.8% of total revenues compared with 17.6% during fiscal 1997,
declined (7.9%) primarily due to the closure of 53 B. Dalton stores since August
2, 1997. B. Dalton's same store sales decreased (1.2%) during fiscal 1998's
second quarter.
During the 13 weeks ended August 1, 1998, the Company opened nine
Barnes & Noble stores and closed one, bringing its total number of Barnes &
Noble stores to 489 with 11.0 million square feet. During the same period, B.
Dalton closed ten stores ending the period with 510 stores. As of August 1, 1998
the Company operated 999 stores in 49 states and the District of Columbia.
12
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Cost of Sales and Occupancy
During the 13 weeks ended August 1, 1998, cost of sales and occupancy
increased $33.8 million, or 7.4%, to $492.7 million from $458.9 million during
the 13 weeks ended August 2, 1997. As a percentage of revenues, cost of sales
and occupancy decreased to 73.0% during fiscal 1998's second quarter from 74.3%
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 $31.5 million to $160.6
million during the 13 weeks ended August 1, 1998 from $129.1 million during the
13 weeks ended August 2, 1997. During the second quarter, selling and
administrative expenses increased as a percentage of revenues to 23.8% from
20.9% during the prior year period. The increase was attributable to increased
operating costs associated with the Company's investment in barnesandnoble.com.
Depreciation and Amortization
During the second quarter, depreciation and amortization increased $3.9
million, or 20.7%, to $22.8 million from $18.9 million during the same period
last year, as a result of depreciation on the 46 new Barnes & Noble stores
opened since August 2, 1997 and depreciation attributable to
barnesandnoble.com's capital expenditures.
Pre-opening Expenses
Pre-opening expenses decreased $1.1 million, or 32.3%, to $2.3 million
during the 13 weeks ended August 1, 1998 from $3.4 million during the 13 weeks
ended August 2, 1997, as a result of the 39 fewer Barnes & Noble store openings
during the 52 weeks ended August 1, 1998 in comparison to the corresponding
prior-year period.
Operating Profit (Loss)
The Company's consolidated operating loss during the 13 weeks ended
August 1, 1998 was ($3.4) million compared with a consolidated operating profit
of $7.4 million during the 13 weeks ended August 2, 1997. Operating profit of
$19.6 million generated by the retail business was offset by
barnesandnoble.com's second quarter operating loss of ($23.0) million. The $19.6
million operating profit for the retail business improved 102.6% from $9.7
million in the prior year, reflecting strong Barnes & Noble store revenue gains,
expanding gross margins and increasing operating leverage.
Interest Expense, Net and Amortization of Deferred Financing Fees
Net interest expense and amortization of deferred financing fees
decreased to $6.3 million during the 13 weeks ended August 1, 1998 from $9.8
million during the 13 weeks ended August 2, 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 13 weeks ended August 1, 1998
was $4.0 million compared with $0.9 million during the 13 weeks ended August
2,1997. Tax benefits were based upon management's estimate of the Company's
annualized effective tax rates.
13
<PAGE>
Net Loss
As a result of the factors discussed above, the Company reported a
consolidated net loss of ($5.7) million during the 13 weeks ended August 1, 1998
compared with a net loss of ($1.4) million during the 13 weeks ended August 2,
1997. During the second quarter, the net loss per common share was ($0.08) per
share (based on 68.4 million shares) compared with a net loss of ($0.02) per
share (based on 66.8 million shares) during the same period a year ago. The
consolidated second quarter net loss reflects barnesandnoble.com's net loss of
($13.6) million or ($0.20) per share. Excluding barnesandnoble.com, net earnings
for the Company's retail operations increased to $7.9 million or $0.12 per share
during the 13 weeks ending August 1, 1998 from a net loss of ($0.0) million or
($0.00) per share during the 13 weeks ending August 2, 1997.
Results of Operations
26 weeks ended August 1, 1998 and August 2, 1997
Revenues
Revenues totaled $1.341 billion during the 26 weeks ended August 1,
1998, a 10.5% increase over revenues of $1.213 billion during the 26 weeks ended
August 2, 1997. During the first half of 1998, total Company revenues rose
primarily due to a 12.7% increase in Barnes & Noble store revenues to $1.108
billion from $983.1 million during the same period a year ago. For the same
respective periods, Barnes & Noble store revenues, as a percentage of total
revenues, rose to 82.6%, up from 81.0%.
The year-to-date increase in Barnes & Noble same store sales of 5.6%,
coupled with a 9.9% year over year increase in store square footage, produced
the 12.7% increase in Barnes & Noble store revenues. Management attributes the
same store sales performance to an increase in the number of stores eligible for
inclusion in the same store sales base. Year-to-date revenues generated by
barnesandnoble.com rose to $21.9 million, an increase of 817.9% over revenues of
$2.4 million reported for same period one year ago.
B. Dalton stores generated 14.8% of total revenues year-to-date
compared with 17.6% during the prior period. Year-to-date B. Dalton revenues
declined (7.8%) as a result of 53 store closings since August 2, 1997, and a
(0.6%) decrease in same store sales for the 26 weeks.
During the 26 weeks ended August 1, 1998, the Company opened eleven and
closed five Barnes & Noble stores and closed 18 B. Dalton stores.
Cost of Sales and Occupancy
During the 26 weeks ended August 1, 1998, cost of sales and occupancy
increased $77.6 million, or 8.6%, to $984.8 million from $907.2 million during
the 26 weeks ended August 2, 1997. As a percentage of revenues, cost of sales
and occupancy decreased to 73.4% during fiscal 1998's first half from 74.8%
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.
14
<PAGE>
Selling and Administrative Expenses
Selling and administrative expenses increased $58.3 million, or 23.1%,
to $310.2 million during the 26 weeks ended August 1, 1998 from $251.9 million
during the 26 weeks ended August 2, 1997. As a percentage of revenues, selling
and administrative expenses increased to 23.1% during fiscal 1998's first half
from 20.8% during the same period last year. The increase was attributable to
increased operating costs associated with the Company's investment in
barnesandnoble.com.
Depreciation and Amortization
Depreciation and amortization increased $8.1 million, or 22.1%, to
$44.8 million during the 26 weeks ended August 1, 1998 from $36.7 million during
the 26 weeks ended August 2, 1997. Depreciation on the 46 Barnes & Noble stores
opened since August 2, 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 $2.3 million, or 32.4%, to $4.9 million
during the 26 weeks ended August 1, 1998 from $7.2 million during the 26 weeks
ended August 2, 1997 primarily as a result of 39 fewer Barnes & Noble store
openings during the 52 weeks ended August 1, 1998 compared to the corresponding
prior-year period.
Operating Profit (Loss)
The Company's consolidated operating loss during the 26 weeks ended
August 1, 1998 was ($3.3) million compared with a consolidated operating profit
of $10.5 million during the 26 weeks ended August 2, 1997. Operating profit
generated by the retail business was $33.3 million offset by
barnesandnoble.com's first half operating loss of ($36.6) million. The $33.3
million operating profit for the retail business was a 155.5% increase over
$13.0 million in the prior year, reflecting strong Barnes & Noble store revenue
gains, expanding gross margins and increasing operating leverage.
Interest Expense, Net and Amortization of Deferred Financing Fees
Interest expense, net of interest income, and amortization of deferred
financing fees decreased to $12.0 million during the 26 weeks ended August 1,
1998 from $19.4 million during the 26 weeks ended August 2, 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 26 weeks ended August 1, 1998,
was $6.3 million compared with $3.6 million during the 26 weeks ended August 2,
1997. Tax benefits during these periods were based upon management's estimate of
the Company's annualized effective tax rates.
Net Loss
As a result of the factors discussed above, the Company reported a net
loss of ($9.0) million during the 26 weeks ended August 1, 1998 compared with a
net loss of ($5.2) million during the 26 weeks ended August 2, 1997. For the
first half of 1998, the net loss per common share was ($0.13) per share (based
on 68.2 million shares) compared with ($0.08) per share (based on 66.6 million
shares) for the corresponding prior-year period. The consolidated first half net
15
<PAGE>
loss reflects barnesandnoble.com's net loss of ($21.6) million or ($0.32) per
share. Excluding barnesandnoble.com, net earnings for the Company's retail
operations increased to $12.6 million or $0.19 per share during the 26 weeks
ending August 1, 1998 compared with a net loss of ($3.8) million or ($0.06) per
share during the 26 weeks ending August 2, 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,
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.
16
<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. 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. The Company intends to vigorously
defend this action.
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 Group, Inc., 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 addition to the above action, 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.
Item 2: Changes in Securities
Increase in Authorized Shares: 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. 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.
Adoption of Rights Plan: On July 10, 1998, the Company's Board of
Directors adopted a Preferred Share Purchase Rights Plan. The terms of such
plan, the Preferred Share Purchase Rights that will be issued in connection with
the implementation of such plan and the new series of preferred stock that was
created in connection therewith are described in the Company's Current Report on
Form 8-K, dated July 15, 1998 and filed with the Securities and Exchange
Commission on July 16, 1998, which description is incorporated herein by
reference.
17
<PAGE>
Item 4: Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on June 3, 1998.
At the close of business on the record date for the meeting (which was April 15,
1998), there were 68,228,566 shares of Common Stock issued and outstanding and
entitled to vote at the meeting. Holders of 59,760,733 shares of Common Stock
(representing a like number of votes) were present at the meeting, either in
person or by proxy. The following individuals were elected to the Company's
Board of Directors to hold office for a term of three years and until their
respective successors are duly elected and qualified.
Nominee In Favor Withheld
------- -------- --------
Leonard Riggio 59,304,670 456,063
Jan Michiel Hessels 59,109,518 651,215
William Sheluck, Jr. 59,309,483 451,250
The results of the voting on the following items were as follows:
Approval of an amendment to the Company's Restated Certificate of
Incorporation increasing the number of authorized shares of Common Stock from
100,000,000 to 300,000,000.
In Favor Against Abstained
-------- ------- ---------
47,668,169 12,021,750 70,814
Approval of an amendment to the Barnes & Noble, Inc. 1996 Incentive
Plan increasing the number of shares available for issuance from 6,000,000 to
11,000,000.
Broker
In Favor Against Abstained Non-Vote
-------- ------- --------- --------
31,345,591 15,082,644 111,762 13,220,736
Ratification of the selection of BDO Seidman, LLP as independent
certified public accountants for the fiscal year ending January 30, 1999.
In Favor Against Abstained
-------- ------- ---------
59,662,892 40,236 57,605
18
<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 a part of this Report:
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------------------------------------------------------------------------------------
<S> <C>
3.1 Certificate of Designation of Preferences and Rights of Preferred Stock, Series H of Barnes & Noble,
Inc. (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, dated
July 15, 1998 and filed with the Securities and Exchange Commission on July 16, 1998, Commission
File No. 1-12302)
3.2 Certificate of Amendment of The Amended and Restated Certificate of Incorporation of Barnes & Noble,
Inc., dated July 17, 1998 and filed July 17, 1998
4.1 Rights Agreement, dated as of July 10, 1998, between Barnes & Noble, Inc. and The Bank of New York,
as Rights Agent (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form
8-K, dated July 15, 1998 and filed with the Securities and Exchange Commission on July 16, 1998,
Commission File No. 1-12302)
27 Financial Data Schedule
</TABLE>
(b) On July 16, 1998, the Company filed a Current Report on Form 8-K reporting
under Item 5 the adoption by the Board of Directors of the Preferred Share
Purchase Rights Plan referred to in Item 2 of this Report.
19
<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: September 14, 1998 By: /s/ Marie J. Toulantis
----------------------
Marie J. Toulantis
Executive Vice President, Finance
20
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------------------------------------------------------------------------------------
<S> <C>
3.1 Certificate of Designation of Preferences and Rights of Preferred Stock, Series H of Barnes & Noble,
Inc. (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, dated
July 15, 1998 and filed with the Securities and Exchange Commission on July 16, 1998, Commission
File No. 1-12302)
3.2 Certificate of Amendment of The Amended and Restated Certificate of Incorporation of Barnes & Noble,
Inc., dated July 17, 1998 and filed July 17, 1998
4.1 Rights Agreement, dated as of July 10, 1998, between Barnes & Noble, Inc. and The Bank of New York,
as Rights Agent (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form
8-K, dated July 15, 1998 and filed with the Securities and Exchange Commission on July 16, 1998,
Commission File No. 1-12302)
27 Financial Data Schedule
</TABLE>
<PAGE>
Exhibit 3.2
CERTIFICATE OF AMENDMENT
OF THE AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
BARNES & NOBLE, INC.
(Under Section 242 of the General Corporation Law of Delaware)
The undersigned hereby certifies that:
FIRST: The name of the corporation is Barnes & Noble, Inc. (hereinafter
the "Corporation").
SECOND: The Certificate of Incorporation of the Corporation is hereby
amended by striking out section (a) of Article Fourth thereof and by
substituting in lieu of said section (a) of Article Fourth the following:
FOURTH: (a) The total number of shares of all classes of stock which
the Corporation shall have the authority to issue is (i) 300,000,000
shares with a par value of $.001 per share which are to be of a class
designated "Common Stock" and (ii) 5,000,000 shares with a par value of
$.001 per share which are to be of a class designated "Preferred
Stock."
THIRD: The amendment of the Certificate of Incorporation herein
certified has been duly adopted in accordance with the provisions of Section 242
of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, this certificate has been signed this 17th day of
June, 1998 and it is affirmed that the statements made herein are true under the
penalties of perjury.
BARNES & NOBLE, INC.
By: /s/Jay M. Dorman
--------------------
Jay M. Dorman
Assistant Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> AUG-01-1998
<EXCHANGE-RATE> 1.000
<CASH> 9,615
<SECURITIES> 0
<RECEIVABLES> 39,399
<ALLOWANCES> 0
<INVENTORY> 821,342
<CURRENT-ASSETS> 963,088
<PP&E> 785,947
<DEPRECIATION> 285,719
<TOTAL-ASSETS> 1,594,463
<CURRENT-LIABILITIES> 593,552
<BONDS> 395,200
0
0
<COMMON> 69
<OTHER-SE> 483,193
<TOTAL-LIABILITY-AND-EQUITY> 1,594,463
<SALES> 1,341,353
<TOTAL-REVENUES> 1,341,353
<CGS> 984,840
<TOTAL-COSTS> 984,840
<OTHER-EXPENSES> 49,645
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,039
<INCOME-PRETAX> (15,337)
<INCOME-TAX> (6,293)
<INCOME-CONTINUING> (9,044)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,044)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
