<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 July 31, 1999
OR
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File Number: 1-12302
BARNES & NOBLE, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1196501
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
122 Fifth Avenue, New York, NY 10011
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(Address of Principal Executive Offices) (Zip Code)
(212) 633-3300
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(Registrant's Telephone Number, Including Area Code)
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(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 31, 1999: 69,403,345.
<PAGE>
BARNES & NOBLE, INC. AND SUBSIDIARIES
July 31, 1999
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 July 31, 1999 and August 1, 1998 ................................. 3
Consolidated Balance Sheets - July 31, 1999, August 1, 1998 and
January 30, 1999 ............................................................. 4
Consolidated Statement of Shareholders' Equity - July 31, 1999 ............... 6
Consolidated Statements of Cash Flows - For the 26 weeks ended July
31, 1999 and August 1, 1998 .................................................. 7
Notes to Consolidated Financial Statements ................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................................ 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................... N/A
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders........................... 18
Item 5. Other Information............................................................. 18
Item 6. Exhibits and Reports on Form 8-K.............................................. 18
</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
--------------------------- ---------------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 727,165 662,507 1,445,501 1,319,483
Cost of sales and occupancy 527,890 482,663 1,053,855 967,252
------------ ----------- ----------- -----------
Gross profit 199,275 179,844 391,646 352,231
------------ ----------- ----------- -----------
Selling and administrative expenses 155,691 136,779 307,623 272,336
Depreciation and amortization 26,594 21,175 52,393 41,703
Pre-opening expenses 1,525 2,280 2,326 4,884
------------ ----------- ----------- -----------
Operating profit 15,465 19,610 29,304 33,308
Interest (net of interest income of $293, $85,
$1,005 and $190, respectively) and amortization
of deferred financing fees (5,005) (6,289) (9,747) (12,039)
Equity in net loss of barnesandnoble.com llc (6,532) (23,003) (18,076) (36,606)
Gain on formation of barnesandnoble.com llc 25,000 -- 25,000 --
Gain on the partial sale of Chapters Inc. 10,975 -- 10,975 --
------------ ----------- ----------- -----------
Earnings (loss) before income taxes and cumulative
effect of change in accounting principle 39,903 (9,682) 37,456 (15,337)
Income tax provision (benefit) 16,360 (3,973) 15,357 (6,293)
------------ ----------- ----------- -----------
Earnings (loss) before cumulative effect of change
in accounting principle 23,543 (5,709) 22,099 (9,044)
Cumulative effect of change in accounting principle,
net of tax benefits of $3,125 -- -- (4,500) --
------------ ----------- ----------- -----------
Net earnings (loss) $ 23,543 (5,709) 17,599 (9,044)
============ =========== =========== ===========
Earnings (loss) per common share
Basic
Earnings (loss) before cumulative effect of
change in accounting principle $ 0.34 (0.08) 0.32 (0.13)
Cumulative effect of change in accounting
principle, net of tax benefits $ -- -- (0.07) --
Net earnings (loss) $ 0.34 (0.08) 0.25 (0.13)
Diluted
Earnings (loss) before cumulative effect of
change in accounting principle $ 0.33 (0.08) 0.31 (0.13)
Cumulative effect of change in accounting
principle, net of tax benefits $ -- -- (0.06) --
Net earnings (loss) $ 0.33 (0.08) 0.25 (0.13)
Weighted average common shares outstanding
Basic 69,356,000 68,354,000 69,143,000 68,227,000
Diluted 71,826,000 68,354,000 71,928,000 68,227,000
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(thousands of dollars, except per share data)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
July 31, August 1, January 30,
1999 1998 1999
-------------- ------------- ---------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,558 9,615 31,081
Receivables, net 54,069 38,738 57,523
Merchandise inventories 913,617 820,707 945,073
Prepaid expenses and other current assets 76,543 81,609 54,634
-------------- ------------- ---------------
Total current assets 1,053,787 950,669 1,088,311
-------------- ------------- ---------------
Property and equipment:
Land and land improvements 3,247 3,197 3,197
Buildings and leasehold improvements 394,192 359,703 383,292
Fixtures and equipment 489,763 387,063 440,488
-------------- ------------- ---------------
887,202 749,963 826,977
Less accumulated depreciation and amortization 357,513 281,188 316,631
-------------- ------------- ---------------
Net property and equipment 529,689 468,775 510,346
-------------- ------------- ---------------
Intangible assets, net 85,364 88,609 86,980
Investment in barnesandnoble.com llc 264,502 35,213 82,307
Other noncurrent assets 48,791 42,235 39,653
-------------- ------------- ---------------
Total assets $ 1,982,133 1,585,501 1,807,597
============== ============= ===============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(thousands of dollars, except per share data)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
July 31, August 1, January 30,
1999 1998 1999
------------- -------------- ---------------
(unaudited)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 394,403 390,370 498,237
Accrued liabilities 210,376 194,220 274,085
------------- -------------- ---------------
Total current liabilities 604,779 584,590 772,322
------------- -------------- ---------------
Long-term debt 347,400 395,200 249,100
Deferred income taxes 119,898 -- 32,449
Other long-term liabilities 80,662 68,666 74,937
Shareholders' equity:
Common stock; $.001 par value; 300,000,000
shares authorized; 69,390,807, 68,578,373 and
68,759,111 shares issued and outstanding, respectively 69 69 69
Additional paid-in capital 651,918 483,193 523,517
Accumulated other comprehensive earnings 4,605 -- --
Retained earnings 172,802 53,783 155,203
------------- -------------- ---------------
Total shareholders' equity 829,394 537,045 678,789
------------- -------------- ---------------
Commitments and contingencies -- -- --
------------- -------------- ---------------
Total liabilities and shareholders' equity $ 1,982,133 1,585,501 1,807,597
============= ============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
(thousands of dollars, except per share data)
(unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-In Comprehensive Retained
Stock Capital Earnings Earnings Total
------------- ------------- ------------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at January 30, 1999 $ 69 $ 523,517 $ -- $ 155,203 $ 678,789
------------- ------------- ------------------- ------------- --------------
Net earnings -- -- -- 17,599 17,599
Other comprehensive earnings (net of
deferred income taxes of $3,335) -- -- 4,605 -- 4,605
barnesandnoble.com inc. IPO (net of
deferred income taxes of $84,114) -- 116,158 -- -- 116,158
Exercise of 631,696 common stock
options -- 12,243 -- -- 12,243
------------- ------------- ------------------- ------------- --------------
Balance at July 31, 1999 $ 69 $ 651,918 $ 4,605 $ 172,802 $ 829,394
============= ============= =================== ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(thousands of dollars, except per share data)
(unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
26 weeks ended
---------------------------
July 31, August 1,
1999 1998
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 17,599 (9,044)
Adjustments to reconcile net earnings (loss) to net cash flows from operating activities:
Depreciation and amortization 52,580 41,803
Loss on disposal of property and equipment 3,334 508
Increase in other long-term liabilities for scheduled rent increases in long-term
leases 6,843 6,849
Cumulative effect of change in accounting principle, net of taxes 4,500 --
Gain on the partial sale of Chapters Inc. (10,975) --
Gain on the formation of barnesandnoble.com llc (25,000) --
Equity in net loss of barnesandnoble.com llc 18,076 36,606
Changes in operating assets and liabilities, net (160,159) (104,326)
--------- --------
Net cash flows from operating activities (93,202) (27,604)
--------- --------
Cash flows from investing activities:
Purchases of property and equipment (73,455) (52,034)
Proceeds from sales of property and equipment -- 10
Proceeds from the partial sale of Chapters Inc. 21,558 --
Proceeds from the formation of barnesandnoble.com llc 25,000 --
Investment in barnesandnoble.com llc -- (47,009)
Net increase in other noncurrent assets (11,967) (1,179)
--------- --------
Net cash flows from investing activities (38,864) (100,212)
--------- --------
Cash flows from financing activities:
Net increase in revolving credit facility 98,300 110,400
Proceeds from exercise of common stock options, including related tax benefits 12,243 14,334
--------- --------
Net cash flows from financing activities 110,543 124,734
--------- --------
Net decrease in cash and cash equivalents (21,523) (3,082)
Cash and cash equivalents at beginning of period 31,081 12,697
--------- --------
Cash and cash equivalents at end of period $ 9,558 9,615
========= ========
Changes in operating assets and liabilities, net:
Receivables, net $ 3,454 4,773
Merchandise inventories 31,456 30,875
Prepaid expenses and other current assets (29,534) (24,032)
Accounts payable and accrued liabilities (165,535) (115,942)
--------- --------
Changes in operating assets and liabilities, net $(160,159) (104,326)
========= ========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 9,758 11,366
Income taxes $ 43,079 15,508
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 26 weeks ended July 31, 1999 and August 1, 1998
(thousands of dollars, except per share data)
(unaudited)
The unaudited consolidated financial statements include the accounts
of Barnes & Noble, Inc. and its wholly owned subsidiaries (collectively, the
Company).
In the opinion of the Company's management, the accompanying
unaudited consolidated financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
its consolidated financial position as of July 31, 1999 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 30, 1999 (fiscal 1998). The Company follows the same accounting
policies in preparation of interim reports.
Due to the seasonal nature of the business, the results of operations
for the 26 weeks ended July 31, 1999 are not indicative of the results to be
expected for the 52 weeks ending January 29, 2000 (fiscal 1999).
(1) Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market.
Cost is determined using the retail inventory method on the first-in,
first-out (FIFO) basis for 86%, 85% and 86% of the Company's merchandise
inventories as of July 31, 1999, August 1, 1998, and January 30, 1999,
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
remain unchanged as of July 31, 1999 and January 30, 1999, and would have
increased approximately $3,602 as of August 1, 1998.
(2) Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period presentation, including the Company's investment in
barnesandnoble.com llc (barnesandnoble.com) which has been presented in the
accompanying consolidated financial statements under the equity method as of
the beginning of fiscal 1998.
(3) Income Taxes
The tax provisions for the 26 weeks ended July 31, 1999 and August 1,
1998 are based upon management's estimate of the Company's annualized effective
tax rate.
(4) Recent Accounting Pronouncements
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
(SOP 98-5). SOP 98-5 requires an entity to expense all start-up activities (as
defined) as incurred. The Company historically amortized costs associated with
the opening of
8
<PAGE>
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 26 weeks ended July 31, 1999 and August 1, 1998
(thousands of dollars, except per share data)
(unaudited)
new stores over the respective store's first 12 months of operations. In
accordance with SOP 98-5, the Company recorded a one-time non-cash charge in the
first quarter of 1999 reflecting the cumulative effect of a change in accounting
principle, in the amount of $4,500 after taxes, representing such start-up costs
capitalized as of the beginning of fiscal year 1999. The effect of the change on
operating results for the 26 weeks ended July 31, 1999 was an increase in
operating profit of $1.5 million and a decrease in net income of $3.6 million or
$0.5 per diluted share.
(5) Comprehensive Earnings
In the second quarter of 1999, the Company sold a portion of its
investment in Chapters Inc. (Chapters). The remaining investment is being
recorded as an available-for-sale security. Accordingly, it will be carried at
fair value with unrealized gains and losses (net of tax) reflected as a
component of shareholders' equity classified as "accumulated other
comprehensive earnings" in accordance with Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income". This statement
establishes standards for reporting and display of comprehensive earnings and
its components in the financial statements. Comprehensive earnings are net
earnings, plus certain other items that are recorded directly to shareholders'
equity. The only such item currently applicable to the Company is the
unrealized gain on available-for-sale securities, as follows:
<TABLE>
<CAPTION>
13 weeks ended 26 weeks ended
-------------------------------------- -------------------------------------
July 31, 1999 August 1, 1998 July 31, 1999 August 1, 1998
-------------------------------------- -------------------------------------
<S> <C> <C> <C> <C>
Net earnings (loss) $ 23,543 $ (5,709) $ 17,599 $ (9,044)
Other comprehensive earnings:
Unrealized gain on available-for-sale
securities, net of deferred income
taxes of $3,335 4,605 -- 4,605 --
-------------- --------------- ------------- -----------
Comprehensive earnings (loss) $ 28,148 $ (5,709) $ 22,204 $ (9,044)
============== =============== ============= ===========
</TABLE>
(6) Investment in barnesandnoble.com
On May 28, 1999, barnesandnoble.com inc. (bn.com) completed an
initial public offering (IPO) of 28.75 million shares of Class A Common Stock
and used the proceeds to purchase a 20% interest in barnesandnoble.com. As a
result, the Company and Bertelsmann AG (Bertelsmann) each retained a 40%
interest in barnesandnoble.com. The Company recorded an increase in additional
paid-in capital of $116.2 million after taxes representing the Company's
incremental share in the equity of barnesandnoble.com. The Company will
continue to account for its investment in barnesandnoble.com under the equity
method.
Under the terms of the November 12, 1998 joint venture agreement
between the Company and Bertelsmann, the Company received a $25 million
payment from Bertelsmann in connection with the IPO. The Company recognized
the $25 million pretax gain in the second quarter of 1999.
9
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
Recent Events
Termination of Ingram Book Group Acquisition
On June 2, 1999, the Company and the Ingram Book Group (Ingram) announced
their agreement to terminate the Company's planned acquisition of Ingram. The
Company's application before the Federal Trade Commission (FTC) for the
purchase was formally withdrawn. As a result, the selling and administrative
expenses for the 13 and 26 weeks ended July 31, 1999 reflect a one-time charge
of $5 million ($3 million after taxes, or $0.04 per diluted share) for
acquisition costs. These costs relate primarily to legal, accounting and other
transaction related costs incurred in connection with the proposed acquisition
of Ingram.
Partial Divestiture of Chapters Investment
During the second quarter of 1999, the Company sold 1,000,000 shares of its
holdings in Chapters via a secondary offering. The Company retained a seven
percent interest in Chapters. As a result of this transaction, the Company
recorded a pretax gain of $11.0 million ($6.5 million after taxes or $0.09 per
diluted share) in the second quarter. Prior to the above transaction, the
investment in Chapters was accounted for under the equity method. The Company
is now required to account for its remaining investment under the provisions
of Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities". The investment is considered
available-for-sale. Accordingly, the investment will be carried at fair value,
with net unrealized holding gains and losses reflected as a component of
comprehensive earnings within shareholders' equity until realized.
barnesandnoble.com inc. Initial Public Offering
On May 28, 1999, bn.com completed an initial public offering of 28.75 million
shares of Class A Common Stock, raising a total of approximately $485 million
after commissions and expenses and used the proceeds to purchase a 20%
interest in barnesandnoble.com. As a result, the Company and Bertelsmann each
retained a 40% interest in barnesandnoble.com. The Company recorded an
increase of $116.2 million ($200.3 million, net of $84.1 million deferred tax)
in additional paid-in capital representing the incremental share in the equity
of barnesandnoble.com. Under the terms of the November 12, 1998 joint venture
agreement (the "Agreement") between the Company and Bertelsmann, on May 28,
1999 Bertelsmann contributed an additional $50 million to barnesandnoble.com.
Also under the terms of the Agreement, the Company received a $25 million
payment from Bertelsmann in connection with the IPO. The Company recognized
the $25 million pretax gain ($14.8 million after taxes, or $0.20 per diluted
share) in the second quarter. The Company will continue to account for its
investment in barnesandnoble.com under the equity method. For the 13 weeks
ended July 31, 1999, the Company reported its share of the results of bn.com's
most recent fiscal quarter ended June 30, 1999.
10
<PAGE>
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 July 31, 1999 were $9.6 million
compared with $9.6 million as of August 1, 1998. During 1999's first half,
excluding the $31.0 million of non-recurring items, consolidated earnings
before interest, taxes, depreciation and amortization (EBITDA) increased $30.2
million to $68.6 million from $38.4 million during the comparable prior year
period. EBITDA in the retail business increased $11.7 million to $86.7 million
during the first half of 1999 from $75.0 million during the comparable prior
year period, reflecting higher gross margins and improving expense leverage
(primarily in Barnes & Noble store operating, rental and pre-opening costs).
Merchandise inventories increased 11.3% to $913.6 million as of July 31, 1999
from $820.7 million as of August 1, 1998. The increased inventory levels
supported the Company's 9.6% sales growth, the opening of 54 Barnes & Noble
stores over the last twelve months and the strategic increase in the
distribution center standing inventory to over 750,000 different titles
available for shipping within 24 hours to both online customers and the retail
store network.
The Company's investing activities consist principally of capital expenditures
for new store construction, system enhancements and store
relocations/remodels, partially offset by the proceeds received from the
partial sale of Chapters and from the formation of bn.com. Capital
expenditures totaled $73.5 million and $52.0 million during the 26 weeks ended
July 31, 1999 and August 1, 1998, respectively. The increase was due primarily
to the timing of the new store rollout, home office facility expansion and the
rollout of the Company's proprietary point-of-sale system (BookMaster).
The ratio of debt to equity was 0.42:1.00 as of July 31, 1999, compared with
0.74:1.00 as of August 1, 1998. The significant improvement is primarily
attributable to the $21 million in cash received from the partial sale of the
investment in Chapters, $25 million in cash received from Bertelsmann as a
result of the IPO of bn.com, as well as the Company's expanded gross margin
and improved operating leverage.
Total debt decreased 12.1% to $347.4 million as of July 31, 1999 from $395.2
million as of August 1, 1998. Average borrowings decreased $28.5 million to
$338.4 million during the first half of 1999 from $366.9 million in the
last-year period, and peaked at $410.6 million and $418.9 million during the
same periods, respectively. The reduced average borrowings were accomplished
during a period of 9.6% sales growth and 11.3% increase in merchandise
inventories.
Based upon the Company's current operating levels and expansion plans,
management believes net cash flows from operating activities and the capacity
under its $850.0 million senior credit facility will be sufficient to meet the
Company's working capital and debt service requirements and support the
development of its short- and long-term strategies for at least the next
twelve months.
The Company did not declare or pay any cash dividends during the 26 week periods
ended July 31, 1999 and August 1, 1998.
11
<PAGE>
Year 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company's computer
equipment, software and devices with embedded technology that are
date-sensitive may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in other normal
business activities.
In 1997 the Company began assessing how it may be impacted by the Year 2000
issue and has formulated and commenced implementation of a comprehensive plan
to address all known aspects of the issue.
The Company's plan encompasses the following areas: (1) information systems
that utilize date/time oriented software (IT systems), (2) computer chips,
processors, and controllers, (non-IT systems) and (3) vendors and customers.
The Company is in various stages of implementation which include remediation,
testing and implementation.
To date, approximately 95% of the Company's administrative support IT systems
have at least completed the remediation phase. Of this amount, approximately
80% have completed the testing and reimplementation phase and 20% have been
replaced or upgraded. All remaining Year 2000 compliance efforts for
administrative IT functions are expected to be completed by the third quarter
of fiscal 1999.
Approximately 95% 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 $2.8 million has already been incurred,
including $1.4 million relating to the purchase of new software and hardware
modifications, and $1.4 million relating to Year 2000 consultants. The
estimated total includes direct costs for systems enhancements which would
have been implemented in the ordinary course of business but whose acquisition
has been accelerated to ensure compliance by the Year 2000. The estimate
excludes costs for scheduled system upgrades which have not been accelerated
due to Year 2000 issues.
The implementation of BookMaster, which began in 1996, is continuing and is
expected to be completed in the third quarter of fiscal 1999. BookMaster,
which is Year 2000 compliant, is an inventory management system with
integrated point-of-sale features that utilizes a proprietary
data-warehouse-based just-in-time replenishment system. It enhances
communications and real-time access to the Company's network of stores,
distribution center, and wholesalers. The BookMaster system has been installed
in 100% of all Barnes & Noble stores. By the end of the third quarter of
fiscal 1999, all existing B. Dalton stores will either be utilizing the
BookMaster system or will receive Year 2000 upgrades to their existing
point-of-sale systems.
12
<PAGE>
Should some of the Company's systems not be available due to Year 2000
problems, in a reasonably likely worst case scenario, the Company may
experience significant delays in its ability to perform certain functions.
However, the Company does not expect an impairment in its ability to execute
critical functions.
Results of Operations
13 weeks ended July 31, 1999 and August 1, 1998
Sales
During the 13 weeks ended July 31, 1999, the Company's total sales increased
9.8% to $727.2 million from $662.5 million during the 13 weeks ended August 1,
1998. During the second quarter, Barnes & Noble store sales rose 13.7% to
$633.5 million from $557.1 million during the same period a year ago. As a
percentage of total sales during the second quarter, Barnes & Noble store
sales represented 87.1%, from 84.1% during the same period last year.
During the second quarter, the 13.7% increase in Barnes & Noble store sales
primarily resulted from a comparable store sales gain of 6.6% coupled with 54
new stores opened since August 1, 1998 which contributed a 12.6% increase in
square footage. Management attributed the comparable store sales performance
to, among other things, strong sales across many categories including fiction,
political science, religion, children's books, gift books, music and cafes. In
addition, the number of stores eligible for inclusion in the comparable store
sales base increased to 90.0% as of July 31, 1999 compared with 85.7% as of
August 1, 1998.
During fiscal 1999's second quarter, B. Dalton sales, which represented 12.5%
of total sales compared with 15.1% during fiscal 1998, declined (9.2%)
primarily due to the closure of 66 B. Dalton stores since August 1, 1998. B.
Dalton's comparable store sales decreased (0.5%) during fiscal 1999's second
quarter.
During the 13 weeks ended July 31, 1999, the Company opened nine Barnes &
Noble stores and nine were closed, keeping its total number of Barnes & Noble
stores at 521 while increasing the square footage to 12.1 million. During the
same period, B. Dalton closed 18 stores ending with 448. As of July 31, 1999,
the Company operated 969 stores in all fifty states and the District of
Columbia.
Cost of Sales and Occupancy
During the 13 weeks ended July 31, 1999, cost of sales and occupancy increased
$45.2 million, or 9.4%, to $527.9 million from $482.7 million during the 13
weeks ended August 1, 1998. As a percentage of sales, cost of sales and
occupancy decreased to 72.6% during fiscal 1999's second quarter from 72.9%
during the same period one year ago reflecting improved leverage on occupancy
costs, more favorable sales mix and better shrinkage control.
Selling and Administrative Expenses
Selling and administrative expenses increased $18.9 million to $155.7 million
during the 13 weeks ended July 31, 1999 from $136.8 million during the 13
weeks ended August 1, 1998. During the second quarter, selling and
administrative expenses increased as a percentage of sales to 21.4% from 20.6%
during the prior year period. The increase was primarily attributable to the
charge associated with the write-off of certain expenses in connection with
the termination of the Ingram acquisition and Year 2000 consulting fees.
13
<PAGE>
Depreciation and Amortization
During the second quarter, depreciation and amortization increased $5.4
million, or 25.6%, to $26.6 million from $21.2 million during the same period
last year, as a result of depreciation on the 54 new Barnes & Noble stores
opened since August 1, 1998, as well as the depreciation on the Company's
BookMaster system.
Pre-opening Expenses
Pre-opening expenses decreased $0.8 million, or 33.1%, to $1.5 million during
the 13 weeks ended July 31, 1999 from $2.3 million for the 13 weeks ended
August 1, 1998, primarily as a result of the first quarter adoption of SOP
98-5. SOP 98-5 requires an entity to expense all start-up activities (as
defined) as incurred. The Company historically amortized costs associated with
the opening of new stores over the respective store's first 12 months of
operations.
Operating Profit
The Company's consolidated operating profit decreased to $15.5 million during
the 13 weeks ended July 31, 1999 from $19.6 million during the 13 weeks ended
August 1, 1998. Excluding the $5 million charge to selling and administrative
expenses for costs relating to the termination of the acquisition of Ingram,
the Company's consolidated operating profit would have increased to $20.5
million during the 13 weeks ended July 31, 1999.
Interest Expense, Net and Amortization of Deferred Financing Fees
Net interest expense and amortization of deferred financing fees decreased to
$5.0 million during the 13 weeks ended July 31, 1999 from $6.3 million during
the 13 weeks ended August 1, 1998. Interest expense decreased due to a
combination of both lower average borrowings and declining interest rates
under the Company's senior credit facility.
Income Taxes
The provision for income taxes during the 13 weeks ended July 31, 1999 was
$16.4 million compared with a benefit for income taxes of ($4.0) million
during the 13 weeks ended August 1, 1998. Tax effects 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 consolidated
net earnings of $23.5 million during the 13 weeks ended July 31, 1999,
compared with a net loss of ($5.7) million during the 13 weeks ended August 1,
1998. For the second quarter of 1999, net earnings was $0.33 per diluted share
(based on 71.8 million shares) compared with a net loss of ($0.08) per diluted
share (based on 68.4 million shares) for the corresponding prior-year period.
The consolidated second quarter net earnings reflect the Company's 40% share
in barnesandnoble.com's net losses of ($3.9) million (or ($0.05) per diluted
share), compared with 100% of barnesandnoble.com's net losses of ($13.6)
million (or ($0.20) per diluted share), in the second quarter of 1998. Also
included in net earnings for the second quarter of 1999 is a pretax gain of
$31 million (or $0.25 per diluted share after tax) comprised of the following
non-recurring items: a $25 million pretax gain (or $0.20 per diluted share
after tax), as a result of the barnesandnoble.com IPO, an $11 million pretax
gain (or $0.09 per diluted share after tax) resulting from the partial sale of
the Company's investment in Chapters and a pretax charge of
14
<PAGE>
$5 million (or ($0.04) per diluted share after tax) associated with the write-
off of certain expenses of the Company in connection with its termination of the
Ingram acquisition. Excluding barnesandnoble.com and the non-recurring items,
the retail business net earnings increased 16.1% to $9.1 million (or $0.13 per
diluted share) for the 13 weeks ended July 31, 1999 compared to $7.9 million (or
$0.12 per diluted share) during 13 weeks ended August 1, 1998.
Results of Operations
26 weeks ended July 31, 1999 and August 1, 1998
Sales
Sales totaled $1.446 billion during the 26 weeks ended July 31, 1999, a 9.6%
increase over sales of $1.319 billion during the 26 weeks ended August 1,
1998. During the first half of 1999, total Company sales rose primarily due to
a 13.2% increase in Barnes & Noble store sales to $1.254 billion from $1.108
billion during the same period a year ago. For the same respective periods,
Barnes & Noble store sales, as a percentage of total sales, increased to 86.8%
from 84.0%.
The year-to-date increase in Barnes & Noble comparable store sales of 6.0%,
coupled with a 12.6% increase in store square footage, produced the 13.2%
increase in Barnes & Noble store sales. Management attributed the comparable
store sales performance to, among other things, strong sales across many
categories including fiction, political science, religion, children's books,
gift books, music and cafes. In addition, the number of stores eligible for
inclusion in the comparable store sales base increased to 90.0% as of July 31,
1999 compared with 85.7% as of August 1, 1998.
B. Dalton stores contributed 12.8% of total sales year-to-date compared with
15.2% during the prior year period. Year-to-date B. Dalton sales declined
(7.6%) as a result of 66 store closings since August 1, 1998 and a (0.2%)
decrease in comparable store sales for the 26 weeks.
During the 26 weeks ended July 31, 1999, the Company opened twelve and closed
eleven Barnes & Noble stores and closed 41 B. Dalton stores.
Cost of Sales and Occupancy
During the 26 weeks ended July 31, 1999, cost of sales and occupancy increased
$86.6 million, or 9.0%, to $1,053.9 million from $967.3 million during the 26
weeks ended August 1, 1998. As a percentage of sales, cost of sales and
occupancy decreased to 72.9% during fiscal 1999's first half from 73.3% during
the same period last year reflecting improved leverage on occupancy costs,
more favorable sales mix and better shrinkage control.
Selling and Administrative Expenses
Selling and administrative expenses increased $35.3 million, or 13.0%, to
$307.6 million during the 26 weeks ended July 31, 1999 from $272.3 million
during the 26 weeks ended August 1, 1998. As a percentage of sales, selling
and administrative expenses increased to 21.3% during fiscal 1999's first half
from 20.6% during the same period last year. The increase was primarily
attributable to the charge associated with the write-off of certain expenses
in connection with the termination of the Ingram acquisition and Year 2000
consulting fees.
15
<PAGE>
Depreciation and Amortization
Depreciation and amortization increased $10.7 million, or 25.6%, to $52.4
million during the 26 weeks ended July 31, 1999 from $41.7 million during the
26 weeks ended August 1, 1998 as a result of the 54 Barnes & Noble stores
opened since August 1, 1998, as well as the depreciation on the Company's
BookMaster system.
Pre-opening Expenses
Pre-opening expenses decreased $2.6 million, or 52.4%, to $2.3 million during
the 26 weeks ended July 31, 1999 from $4.9 million during the 26 weeks ended
August 1, 1998 primarily as a result of the first quarter adoption of SOP
98-5. SOP 98-5 requires an entity to expense all start-up activities (as
defined) as incurred. The Company historically amortized costs associated with
the opening of new stores over the respective store's first 12 months of
operations.
Operating Profit
The Company's consolidated operating profit decreased to $29.3 million during
the 26 weeks ended July 31, 1999 from $33.3 million during the 26 weeks ended
August 1, 1998. Excluding the $5 million charge to selling and administrative
expenses for costs relating to the termination of the acquisition of Ingram,
the Company's consolidated operating profit would have increased to $34.3
million during the 26 weeks ended July 31, 1999.
Interest Expense, Net and Amortization of Deferred Financing Fees
Net interest expense and amortization of deferred financing fees decreased to
$9.7 million during the 26 weeks ended July 31, 1999 from $12.0 million during
the 26 weeks ended August 1, 1998. Interest expense decreased due to a
combination of both lower average borrowings and declining interest rates
under the Company's senior credit facility.
Income Taxes
Income taxes during the 26 weeks ended July 31, 1999 was $15.4 million
compared with a benefit for income taxes of ($6.3) million during the 26 weeks
ended August 1, 1998. Tax effects 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 consolidated
net earnings of $17.6 million during the 26 weeks ended July 31, 1999,
compared with a net loss of ($9.0) million during the 26 weeks ended August 1,
1998. For the first half of 1999, net earnings was $0.25 per diluted share
(based on 71.9 million shares) compared with a net loss of ($0.13) per diluted
share (based on 68.2 million shares) for the corresponding prior-year period.
The consolidated first half net earnings reflect the Company's 40% share in
barnesandnoble.com's net losses of ($10.7) million (or ($0.15) per diluted
share), compared with 100% of barnesandnoble.com's net losses of ($21.6)
million (or ($0.32) per diluted share), in the first half of 1998. The first
half of 1999 also includes the cumulative effect of a change in accounting
principle of ($4.5) million after tax (or ($0.07) per diluted share). Also
included in net earnings for the first half of 1999 is a pretax gain of $31
million (or $0.25 per diluted share after tax), comprised of the following
non-recurring items: a $25 million
16
<PAGE>
pretax gain (or $0.20 per diluted share after tax), as a result of the
barnesandnoble.com IPO, an $11 million pretax gain (or $0.09 per diluted share
after tax) resulting from the partial sale of the Company's investment in
Chapters and a pretax charge of $5 million (or ($0.04) per diluted share after
tax) associated with the write-off of certain expenses of the Company in
connection with its termination of the Ingram acquisition. Excluding
barnesandnoble.com, the change in accounting principle and the non-recurring
items, the retail business net earnings increased 15.1% to $14.5 million (or
$0.20 per diluted share) for the 26 weeks ended July 31, 1999 compared to $12.6
million (or $0.19 per diluted share) during 26 weeks ended August 1, 1998.
Forward-Looking Statements
This report may contain certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) and
information relating to the Company that are based on the beliefs of the
management of the Company as well as assumptions made by and information
currently available to the management of the Company. When used in this
report, the words "anticipate," "believe," "estimate," "expect," "intend,"
"plan" and similar expressions, as they relate to the Company or the
management of the Company, identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events, the outcome of which is subject to certain risks, including among
others general economic and market conditions, decreased consumer demand for
the Company's products, possible disruptions in the Company's computer or
telephone systems, increased or unanticipated costs or effects associated with
year 2000 compliance by the Company or its service or supply providers,
possible work stoppages, or increases in labor costs, possible increases in
shipping rates or interruptions in shipping service, effects of competition,
possible disruptions or delays in the opening of new stores or the inability
to obtain suitable sites for new stores, higher than anticipated store closing
or relocation costs, higher interest rates, the performance of the Company's
online initiatives such as barnesandnoble.com, unanticipated increases in
merchandise or occupancy costs, and other factors which may be outside of the
Company's control. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
or outcomes may vary materially from those described as anticipated, believed,
estimated, expected, intended or planned. Subsequent written and oral
forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by the cautionary
statements in this paragraph.
17
<PAGE>
PART II - OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on June 9,
1999. At the close of business on the record date for the meeting (which was
April 21, 1999), there were 69,092,730 shares of Common Stock issued and
outstanding and entitled to vote at the meeting. Holders of 48,808,576 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
------------------- ------------- -----------
Stephen Riggio 48,270,050 538,526
Matthew A. Berdon 48,234,803 573,773
Margaret T. Monaco 48,278,893 529,683
The Shareholders ratified the appointment of BDO Seidman, LLP as
independent certified public accountants for the fiscal year ending January
29, 2000 by a vote of:
In Favor Against Abstained
------------------- ------------- -----------
48,610,714 114,690 83,172
Item 5: Other Information
Shareholder Proposals
Any shareholder proposal submitted outside the processes of Rule
14a-8 under the Securities Exchange Act of 1934, as amended (the Exchange
Act), for presentation at the Company's 2000 Annual Meeting will be considered
untimely for purposes of Rules 14a-4 and 14a-5 under the Exchange Act if
notice of such shareholder proposal is received by the Company after January
2, 2000.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibit filed with this Form 10-Q:
Exhibit 27 : Financial Data Schedule
(b) No report on Form 8-K was filed by the registrant during
the fiscal quarter for which this report is filed.
18
<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 10, 1999 By: /s/ Michael Archbold
--------------------
Michael Archbold
Vice President, Treasurer
(Chief Accounting Officer)
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