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 30, 2005
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-12302
BARNES & NOBLE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 06-1196501 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) | |
122 Fifth Avenue, New York, NY | 10011 | |
(Address of Principal Executive Offices) | (Zip Code) |
(212) 633-3300
(Registrants 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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x
Number of shares of $.001 par value common stock outstanding as of August 30, 2005: 68,555,550.
BARNES & NOBLE, INC. AND SUBSIDIARIES
July 30, 2005
Index to Form 10-Q
PART I - FINANCIAL INFORMATION
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
13 weeks ended |
26 weeks ended |
||||||||||||
July 30, 2005 |
July 31, 2004 Restated |
July 30, 2005 |
July 31, 2004 Restated |
||||||||||
Sales |
$ | 1,170,800 | 1,100,349 | 2,267,970 | 2,158,546 | ||||||||
Cost of sales and occupancy |
826,401 | 775,719 | 1,596,220 | 1,526,133 | |||||||||
Gross profit |
344,399 | 324,630 | 671,750 | 632,413 | |||||||||
Selling and administrative expenses |
276,471 | 252,620 | 542,530 | 497,054 | |||||||||
Depreciation and amortization |
43,198 | 45,812 | 86,509 | 90,737 | |||||||||
Pre-opening expenses |
2,662 | 2,247 | 5,109 | 4,895 | |||||||||
Operating profit |
22,068 | 23,951 | 37,602 | 39,727 | |||||||||
Interest (net of interest income of $1,564, $154, $4,390 and $574, respectively) and amortization of deferred financing fees |
(665 | ) | (3,706 | ) | (994 | ) | (8,203 | ) | |||||
Debt redemption charge |
| (14,582 | ) | | (14,582 | ) | |||||||
Income before taxes and minority interest |
21,403 | 5,663 | 36,608 | 16,942 | |||||||||
Income taxes |
8,722 | 2,308 | 14,918 | 6,895 | |||||||||
Income before minority interest |
12,681 | 3,355 | 21,690 | 10,047 | |||||||||
Minority interest |
(786 | ) | (496 | ) | (1,683 | ) | (1,034 | ) | |||||
Income from continuing operations |
13,467 | 3,851 | 23,373 | 11,081 | |||||||||
Income from discontinued operations (net of income tax) |
| 4,883 | | 9,098 | |||||||||
Net income |
$ | 13,467 | 8,734 | 23,373 | 20,179 | ||||||||
Basic income per common share |
|||||||||||||
Income from continuing operations |
$ | 0.20 | 0.06 | 0.34 | 0.17 | ||||||||
Income from discontinued operations |
| 0.07 | | 0.13 | |||||||||
Net income |
$ | 0.20 | 0.13 | 0.34 | 0.30 | ||||||||
Diluted income per common share |
|||||||||||||
Income from continuing operations |
$ | 0.18 | 0.05 | 0.32 | 0.16 | ||||||||
Income from discontinued operations |
| 0.07 | | 0.12 | |||||||||
Net income |
$ | 0.18 | 0.12 | 0.32 | 0.28 | ||||||||
Weighted average common shares outstanding |
|||||||||||||
Basic |
68,323 | 68,591 | 69,023 | 68,369 | |||||||||
Diluted |
73,087 | 71,052 | 73,743 | 70,884 |
See accompanying notes to consolidated financial statements.
3
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share data)
July 30, 2005 |
July 31, 2004 Restated |
January 29, 2005 | |||||
(unaudited) | |||||||
ASSETS |
|||||||
Current assets: |
|||||||
Cash and cash equivalents |
$ | 21,315 | 22,860 | 535,652 | |||
Receivables, net |
112,114 | 84,530 | 91,501 | ||||
Merchandise inventories |
1,336,174 | 1,311,745 | 1,274,578 | ||||
Prepaid expenses and other current assets |
102,443 | 112,059 | 85,140 | ||||
Current assets of discontinued operations |
| 372,616 | | ||||
Total current assets |
1,572,046 | 1,903,810 | 1,986,871 | ||||
Property and equipment: |
|||||||
Land and land improvements |
3,247 | 3,247 | 3,247 | ||||
Buildings and leasehold improvements |
976,579 | 883,650 | 940,616 | ||||
Fixtures and equipment |
1,121,202 | 1,041,931 | 1,081,966 | ||||
2,101,028 | 1,928,828 | 2,025,829 | |||||
Less accumulated depreciation and amortization |
1,293,732 | 1,146,274 | 1,221,169 | ||||
Net property and equipment |
807,296 | 782,554 | 804,660 | ||||
Goodwill |
265,901 | 262,067 | 268,379 | ||||
Intangible assets, net |
95,351 | 100,663 | 97,538 | ||||
Deferred taxes |
124,152 | 138,917 | 123,231 | ||||
Other noncurrent assets |
36,861 | 14,839 | 37,710 | ||||
Noncurrent assets of discontinued operations |
| 478,320 | | ||||
Total assets |
$ | 2,901,607 | 3,681,170 | 3,318,389 | |||
(Continued)
4
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share data)
July 30, 2005 |
July 31, 2004 Restated |
January 29, 2005 |
||||||||
(unaudited) | ||||||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||
Current liabilities: |
||||||||||
Accounts payable |
$ | 760,806 | 647,909 | 745,073 | ||||||
Accrued liabilities |
475,987 | 413,571 | 580,509 | |||||||
Current liabilities of discontinued operations |
| 216,435 | | |||||||
Total current liabilities |
1,236,793 | 1,277,915 | 1,325,582 | |||||||
Long-term debt |
9,000 | 257,400 | 245,000 | |||||||
Deferred taxes |
193,743 | 170,458 | 193,743 | |||||||
Other long-term liabilities |
379,134 | 382,529 | 379,180 | |||||||
Noncurrent liabilities of discontinued operations |
| 291,899 | | |||||||
Minority interest |
6,442 | 3,594 | 8,942 | |||||||
Shareholders equity: |
||||||||||
Common stock; $.001 par value; 300,000 shares authorized; 81,337, 78,302 and 79,276 shares issued, respectively |
81 | 78 | 79 | |||||||
Additional paid-in capital |
1,037,321 | 958,627 | 985,609 | |||||||
Accumulated other comprehensive loss |
(10,347 | ) | (8,872 | ) | (9,857 | ) | ||||
Retained earnings |
409,507 | 543,565 | 386,134 | |||||||
Treasury stock, at cost, 13,503, 9,008 and 9,008 shares, respectively |
(360,067 | ) | (196,023 | ) | (196,023 | ) | ||||
Total shareholders equity |
1,076,495 | 1,297,375 | 1,165,942 | |||||||
Commitments and contingencies |
| | | |||||||
Total liabilities and shareholders equity |
$ | 2,901,607 | 3,681,170 | 3,318,389 | ||||||
See accompanying notes to consolidated financial statements.
5
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders Equity
(In thousands)
(unaudited)
Common Stock |
Additional Paid-In Capital |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Treasury Stock at Cost |
Total |
||||||||||||||||
Balance at January 29, 2005 |
$ | 79 | $ | 985,609 | $ | (9,857 | ) | $ | 386,134 | $ | (196,023 | ) | $ | 1,165,942 | |||||||
Comprehensive income: |
|||||||||||||||||||||
Net income |
| | | 23,373 | | ||||||||||||||||
Other comprehensive loss: |
|||||||||||||||||||||
Foreign currency translation |
| | (490 | ) | | | |||||||||||||||
Total comprehensive income |
22,883 | ||||||||||||||||||||
Exercise of 2,061 common stock options (including tax benefit of $18,020) |
2 | 50,159 | | | | 50,161 | |||||||||||||||
Restricted stock compensation expense |
| 1,553 | | | | 1,553 | |||||||||||||||
Treasury stock acquired, 4,495 shares |
| | | | (164,044 | ) | (164,044 | ) | |||||||||||||
Balance at July 30, 2005 |
$ | 81 | $ | 1,037,321 | $ | (10,347 | ) | $ | 409,507 | $ | (360,067 | ) | $ | 1,076,495 | |||||||
See accompanying notes to consolidated financial statements.
6
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
26 weeks ended |
|||||||
July 30, 2005 |
July 31, 2004 Restated |
||||||
Cash flows from operating activities: |
|||||||
Net income |
$ | 23,373 | 20,179 | ||||
Net income from discontined operations |
| 9,098 | |||||
Net income from continuing operations |
23,373 | 11,081 | |||||
Adjustments to reconcile net income to net cash flows from operating activities: |
|||||||
Depreciation and amortization (including amortization of deferred financing fees) |
87,111 | 92,147 | |||||
Increase (decrease) in other long-term liabilities for scheduled rent increases in long-term leases |
(4,484 | ) | 1,152 | ||||
Minority interest |
(1,683 | ) | (1,034 | ) | |||
Loss on disposal of property and equipment |
1,127 | 46 | |||||
Restricted stock compensation expense |
1,553 | | |||||
Deferred taxes |
1,293 | (132 | ) | ||||
Non cash portion of debt redemption charge (deferred financing fees) |
| 6,112 | |||||
Changes in operating assets and liabilities, net |
(161,868 | ) | (116,253 | ) | |||
Net cash flows from operating activities |
(53,578 | ) | (6,881 | ) | |||
Cash flows from investing activities: |
|||||||
Purchases of property and equipment |
(92,287 | ) | (74,792 | ) | |||
Acquisition of consolidated subsidiary, net of cash acquired |
| (159,172 | ) | ||||
Net (increase) decrease in other noncurrent assets |
247 | (925 | ) | ||||
Net cash flows from investing activities |
(92,040 | ) | (234,889 | ) | |||
Cash flows from financing activities: |
|||||||
Proceeds from issuance of long term debt |
| 245,000 | |||||
Repayment of debt |
(245,000 | ) | (286,497 | ) | |||
Dividend to minority interest |
(816 | ) | | ||||
Net increase in revolving credit debt |
9,000 | 12,400 | |||||
Proceeds from exercise of common stock options |
32,141 | 17,794 | |||||
Purchase of treasury stock through repurchase program |
(164,044 | ) | (6,362 | ) | |||
Net cash flows from financing activities |
(368,719 | ) | (17,665 | ) | |||
Net decrease in cash and cash equivalents |
(514,337 | ) | (259,435 | ) | |||
Cash and cash equivalents at beginning of period |
535,652 | 282,295 | |||||
Cash and cash equivalents at end of period |
$ | 21,315 | 22,860 | ||||
Changes in operating assets and liabilities, net: |
|||||||
Receivables, net |
$ | (16,175 | ) | (14,118 | ) | ||
Merchandise inventories |
(61,596 | ) | (21,938 | ) | |||
Prepaid expenses and other current assets |
(17,303 | ) | (9,238 | ) | |||
Accounts payable and accrued liabilities |
(66,794 | ) | (70,959 | ) | |||
Changes in operating assets and liabilities, net |
$ | (161,868 | ) | (116,253 | ) | ||
Supplemental cash flow information: |
|||||||
Cash paid during the period for: |
|||||||
Interest |
$ | 1,231 | 13,089 | ||||
Income taxes |
$ | 61,328 | 39,614 | ||||
Supplemental disclosure of subsidiary acquired: |
|||||||
Assets acquired |
$ | | 159,172 | ||||
Liabilities assumed |
| | |||||
Cash paid |
$ | | 159,172 | ||||
See accompanying notes to consolidated financial statements.
7
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 26 weeks ended July 30, 2005 and July 31, 2004
(Thousands of dollars, except per share data)
(unaudited)
The unaudited consolidated financial statements include the accounts of Barnes & Noble, Inc. and its subsidiaries (collectively, the Company).
In the opinion of the Companys management, the accompanying unaudited consolidated financial statements of the Company contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly its consolidated financial position as of July 30, 2005, 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 Companys Annual Report on Form 10-K for the 52 weeks ended January 29, 2005 (fiscal 2004). 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 30, 2005 are not indicative of the results to be expected for the 52 weeks ending January 28, 2006 (fiscal 2005).
(1) Restatement of Previously Issued Consolidated Financial Statements
As a result of a clarification from the Securities and Exchange Commission, the Company re-evaluated its lease accounting policies. Like many other companies within the retail industry that corrected commonly accepted lease accounting practices, the Company has changed the way it accounts for its leases, including the accounting for tenant allowances and rent holidays during the store build-out period. As a result of its review, the Company has corrected its lease accounting policies in fiscal 2004, and while it does not consider such corrections to be material to any one year, has restated certain historical financial information for prior periods. The restatement adjustments are non-cash and had no impact on revenues or total cash flows.
Consistent with common retail industry practice, the Company had previously classified tenant allowances received as a result of store openings as a reduction in capital expenditures. The Company has reclassified tenant allowances received from a reduction of fixed assets to an increase in other long-term liabilities. The related amortization of such amounts has been reclassified from a reduction of depreciation expense to a reduction of cost of sales and occupancy. Such amortization reclassifications amounted to $8,526 and $16,861 during the 13 weeks and 26 weeks ended July 31, 2004, respectively.
In addition, consistent with industry practice, the Company had recognized the straight-line expense for leases beginning on the earlier of the store opening date or the commencement date of the lease, which had the effect of excluding the construction period of its stores from the calculation of the period over which it expenses rent. In order to correct the straight-line rent expense to include the store build-out period, the Company has decreased cost of sales and occupancy and increased gross profit by $423 and $1,058, decreased operating profit and earnings before taxes and minority interest by $47 and $308, and decreased net earnings by $27 ($0.00 per share) and $176 ($0.00 per share) during the 13 weeks and 26 weeks ended July 31, 2004, respectively.
The Companys July 31, 2004 balance sheet has been adjusted to reflect the combined impact of the above restatements by increasing net property and equipment by $225,369, increasing deferred rent (other long-term liabilities) by $277,500, increasing receivables by $20,072, increasing deferred tax assets by $13,297 and decreasing retained earnings and shareholders equity by $18,758.
8
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 26 weeks ended July 30, 2005 and July 31, 2004
(Thousands of dollars, except per share data)
(unaudited)
(2) GameStop Spin-Off
On October 1, 2004, the Board of Directors of the Company approved an overall plan for the complete disposition of all of the Companys Class B common stock in GameStop Corp. (GameStop), the Companys video game operating segment. The plan was completed in November 2004 with the distribution to the Companys stockholders of the GameStop Class B common stock. As a result, GameStop is no longer a subsidiary of the Company and, accordingly, the Company will present all historical results of operations of GameStop as discontinued operations. The discontinued operations generated sales of $345,593 and $717,329 and net income of $4,883 (net of $3,358 in tax) and $9,098 (net of $6,257 in tax) during the 13 weeks and 26 weeks ended July 31, 2004.
(3) 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 91 percent of the Companys merchandise inventories as of July 30, 2005, 90 percent as of July 31, 2004 and 92 percent as of January 29, 2005. Merchandise inventories of Barnes & Noble.com and Calendar Club L.L.C. (Calendar Club) represent five percent of merchandise inventories as of July 30, 2005, six percent as of July 31, 2004 and four percent as of January 29, 2005 and are recorded based on the average cost method. The remaining merchandise inventories are valued on the last-in, first-out (LIFO) method.
If substantially all of the merchandise inventories currently valued at LIFO costs were valued at current costs, merchandise inventories would remain unchanged as of July 30, 2005, July 31, 2004 and January 29, 2005.
(4) Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
(5) Income Taxes
The tax provisions for the 26 weeks ended July 30, 2005 and July 31, 2004 are based upon managements estimate of the Companys annualized effective tax rate.
(6) Stock Options
The Company grants options to purchase Barnes & Noble, Inc. (BKS) common stock and, prior to the May 27, 2004 merger of barnesandnoble.com inc. into a wholly-owned subsidiary of the Company, barnesandnoble.com inc. (BNBN) common stock under stock-based incentive plans. In addition, prior to the November 12, 2004 spin-off of GameStop, the Company granted options to purchase GameStop (GME) common stock under a stock-based incentive plan. The Company accounts for all transactions under which
9
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 26 weeks ended July 30, 2005 and July 31, 2004
(Thousands of dollars, except per share data)
(unaudited)
employees receive such options based on the price of the underlying stock in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The following table illustrates the effect on net income and income per share as if the Company had applied the fair value-recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, to stock-based incentive plans:
For the 13 weeks ended |
For the 26 weeks ended | |||||||||
July 30, 2005 |
July 31, 2004(a) |
July 30, 2005 |
July 31, 2004(a) | |||||||
Net income as reported |
$ | 13,467 | 8,734 | 23,373 | 20,179 | |||||
Compensation expense, net of tax |
||||||||||
BKS stock options |
1,472 | 12,735 | 3,529 | 14,676 | ||||||
GME stock options, net of minority interest |
| 1,562 | | 2,878 | ||||||
BNBN stock options (b) |
| | | 13 | ||||||
Pro forma net income (loss) pro forma for SFAS No. 123 |
$ | 11,995 | (5,563 | ) | 19,844 | 2,612 | ||||
Basic earnings (loss) per share: |
||||||||||
As reported |
$ | 0.20 | 0.13 | 0.34 | 0.30 | |||||
Pro forma for SFAS No. 123 |
$ | 0.18 | (0.08 | ) | 0.29 | 0.04 | ||||
Diluted earnings (loss) per share: |
||||||||||
As reported |
$ | 0.18 | 0.12 | 0.32 | 0.28 | |||||
Pro forma for SFAS No. 123 |
$ | 0.17 | (0.08 | ) | 0.27 | 0.04 |
(a) | Restated to reflect certain adjustments as discussed in Note 1 to the Notes to Consolidated Financial Statements. |
(b) | Subsequent to the Company acquiring a controlling interest in Barnes & Noble.com. |
In December 2004, the FASB issued SFAS No. 123 (Revised), Share-Based Payment, a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123R requires the fair value measurement of all stock-based payments to employees, including grants of employee stock options, and recognition of those expenses in the statement of operations. SFAS No. 123R is effective at the beginning of the next fiscal year after June 15, 2005. The Company will continue to account for stock-based compensation using the intrinsic value method until adoption of SFAS No. 123R on January 29, 2006. The adoption of this standard will not affect the stock-based compensation associated with the Companys restricted stock which is already recorded at fair value on the date of grant and recognized over the vesting period, but will result in the recognition of stock-based compensation in future periods for remaining unvested stock options as of the effective date.
10
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 26 weeks ended July 30, 2005 and July 31, 2004
(Thousands of dollars, except per share data)
(unaudited)
(7) Comprehensive Income
Comprehensive income is net income, plus certain other items that are recorded directly to shareholders equity, as follows:
13 weeks ended |
26 weeks ended |
||||||||||||
July 30, 2005 |
July 31, 2004(a) |
July 30, 2005 |
July 31, 2004(a) |
||||||||||
Net income |
$ | 13,467 | 8,734 | 23,373 | 20,179 | ||||||||
Other comprehensive income (loss): |
|||||||||||||
Foreign currency translation adjustments |
(566 | ) | 6 | (490 | ) | (171 | ) | ||||||
Unrealized losses, net of deferred income tax benefit of $0, ($71), $0 and ($84), respectively |
| (103 | ) | | (122 | ) | |||||||
Total comprehensive income |
$ | 12,901 | 8,637 | 22,883 | 19,886 | ||||||||
(a) | Restated to reflect certain adjustments as discussed in Note 1 to the Notes to Consolidated Financial Statements. |
(8) Net Income Per Share
Following is a reconciliation of net income and weighted average common shares outstanding for purposes of calculating basic and diluted earnings per share:
For the 13 weeks ended |
For the 26 weeks ended | ||||||||
July 30, 2005 |
July 31, 2004(a) |
July 30, 2005 |
July 31, 2004(a) | ||||||
Numerator: |
|||||||||
Income from continuing operations |
$ | 13,467 | 3,851 | 23,373 | 11,081 | ||||
Denominator: |
|||||||||
Basic weighted average common shares outstanding |
68,323 | 68,591 | 69,023 | 68,369 | |||||
Dilutive effect of stock awards |
4,764 | 2,461 | 4,720 | 2,515 | |||||
Diluted outstanding shares |
73,087 | 71,052 | 73,743 | 70,884 | |||||
Income from continuing operations |
|||||||||
Basic |
$ | 0.20 | 0.06 | 0.34 | 0.17 | ||||
Diluted |
$ | 0.18 | 0.05 | 0.32 | 0.16 |
(a) | Restated to reflect certain adjustments as discussed in Note 1 to the Notes to Consolidated Financial Statements. |
11
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 26 weeks ended July 30, 2005 and July 31, 2004
(Thousands of dollars, except per share data)
(unaudited)
(9) Intangible Assets and Goodwill
The following intangible assets were acquired by the Company primarily in connection with the purchase of Sterling Publishing in fiscal 2002, the purchase of Bertelsmanns interest in Barnes & Noble.com in fiscal 2003 and the purchase of the public interest in Barnes & Noble.com in fiscal 2004:
As of July 30, 2005 | |||||||||
Gross Carrying Amount |
Accumulated Amortization |
Total | |||||||
Amortizable intangible assets |
$ | 29,390 | (12,157 | ) | $ | 17,233 | |||
Unamortizable intangible assets |
78,118 | | 78,118 | ||||||
$ | 107,508 | (12,157 | ) | $ | 95,351 | ||||
Amortized intangible assets consist primarily of author contracts and customer lists and relationships, which are being amortized over periods of 10 years and four years (on an accelerated basis), respectively.
Aggregate Amortization Expense: |
|||
For the 26 weeks ended July 30, 2005 |
$ | 2,187 | |
Estimated Amortization Expense: |
|||
(12 months ending on or about January 31) |
|||
2006 |
$ | 3,720 | |
2007 |
$ | 2,684 | |
2008 |
$ | 2,531 | |
2009 |
$ | 2,395 | |
2010 |
$ | 2,382 |
The changes in the carrying amount of goodwill for the 26 weeks ended July 30, 2005 are as follows:
Balance as of January 29, 2005 |
$ | 268,379 | ||
Foreign currency translation |
(264 | ) | ||
Benefit of excess tax amortization |
(2,214 | ) | ||
Balance as of July 30, 2005 |
$ | 265,901 | ||
12
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 26 weeks ended July 30, 2005 and July 31, 2004
(Thousands of dollars, except per share data)
(unaudited)
(10) Pension and Other Postretirement Benefit Plans
As of December 31, 1999, substantially all employees of the Company were covered under a noncontributory defined benefit pension plan (the Pension Plan). As of January 1, 2000, the Pension Plan was amended so that employees no longer earn benefits for subsequent service. Effective December 31, 2004, the Barnes & Noble.com Employees Retirement Plan (the B&N.com Retirement Plan) was merged with the Pension Plan. Substantially all employees of Barnes & Noble.com were covered under the B&N.com Retirement Plan. As of July 1, 2000, the B&N.com Retirement Plan was amended so that employees no longer earn benefits for subsequent service. Subsequent service continues to be the basis for vesting of benefits not yet vested at December 31, 1999 and June 30, 2000 for the Pension Plan and the B&N.com Retirement Plan, respectively, and the Pension Plan will continue to hold assets and pay benefits. In addition, the Company provides certain health care and life insurance benefits (the Postretirement Plan) to retired employees, limited to those receiving benefits or retired as of April 1, 1993.
Net periodic benefit cost for the Pension Plan and the Postretirement Plan for the 13 weeks and 26 weeks ended July 30, 2005 and July 31, 2004 is as follows:
Pension Plan |
||||||||||||||
13 weeks ended |
26 weeks ended |
|||||||||||||
July 30, 2005 |
July 31, 2004 |
July 30, 2005 |
July 31, 2004 |
|||||||||||
Service cost |
$ | | | $ | | | ||||||||
Interest cost |
571 | 561 | 1,142 | 1,122 | ||||||||||
Expected return on plan assets |
(692 | ) | (670 | ) | (1,384 | ) | (1,340 | ) | ||||||
Net amortization and deferral |
390 | 399 | 780 | 798 | ||||||||||
Net periodic expense |
$ | 269 | 290 | $ | 538 | 580 | ||||||||
Postretirement Plan |
||||||||||||||
13 weeks ended |
26 weeks ended |
|||||||||||||
July 30, 2005 |
July 31, 2004 |
July 30, 2005 |
July 31, 2004 |
|||||||||||
Service cost |
$ | | | $ | | | ||||||||
Interest cost |
72 | 71 | 144 | 142 | ||||||||||
Expected return on plan assets |
| | | | ||||||||||
Net amortization and deferral |
32 | 21 | 64 | 42 | ||||||||||
Net periodic expense |
$ | 104 | 92 | $ | 208 | 184 | ||||||||
13
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 26 weeks ended July 30, 2005 and July 31, 2004
(Thousands of dollars, except per share data)
(unaudited)
(11) New Revolving Credit Facility
On June 17, 2005, the Company, together with certain of its subsidiaries, entered into a Credit Agreement (the Agreement) with a syndicate led by Bank of America, N.A. and JPMorgan Chase Bank, N.A. The Agreement replaces the Amended and Restated Credit and Term Loan Agreement, dated as of August 10, 2004 (the Prior Facility), which consisted of a revolving credit facility and a term loan. The revolving credit facility portion was due to expire in May 2006 and the term loan had a maturity date of August 10, 2009. The Prior Facility was terminated on June 17, 2005, at which time the prior outstanding term loan of $245,000 was repaid. Letters of credit issued under the Prior Facility, which totaled approximately $30,000 as of June 17, 2005, were transferred to become letters of credit under the Agreement.
The Agreement provides for a maximum borrowing of $850,000 (which under certain circumstances may be increased to $1,000,000 at the option of the Company) and terminates on June 16, 2010. The maximum borrowing amount may be reduced from time to time according to the terms of the Agreement. Borrowings made pursuant to the Agreement may be committed loans or swing line loans, the combined sum (including any outstanding letters of credit) of which may not exceed the maximum borrowing amount. Amounts borrowed under the Agreement may be borrowed, repaid and reborrowed from time to time until June 16, 2010. The Agreement also provides for the issuance of letters of credit.
Borrowings made pursuant to the Agreement as committed loans will bear interest, payable quarterly or, if earlier, at the end of any interest period, at either (a) the base rate, described in the Agreement as the higher of Bank of America N.A.s prime rate or the federal funds rate plus 0.50%, or (b) the Eurodollar rate (a publicly published rate) plus a percentage spread (ranging from 0.750% to 1.375%) based on the Companys consolidated fixed charge coverage ratio. Swing line loans bear interest at the base rate. Under the Agreement, the Company agrees to pay a commitment fee, payable quarterly, at rates that range from 0.150% to 0.300% depending on the Companys consolidated fixed charge coverage ratio. The payments under the Agreement are guaranteed by material subsidiaries of the Company.
The Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations on the Company and its subsidiaries with respect to indebtedness, liens, investments, distributions, mergers and acquisitions, disposition of assets, sale-leaseback transactions, and transactions with affiliates. The Agreement permits the Company to use proceeds of the credit loans and letters of credit for the repayment of all amounts under the Prior Facility and for other existing indebtedness, as permitted under the Agreement, for working capital and capital expenditures and for all other lawful corporate purposes, including payment of dividends, acquisitions of assets, capital stock of other companies and share repurchases, in each case to the extent permitted in the Agreement. The Agreement also contains financial covenants that require the Company to maintain a minimum consolidated fixed charge coverage ratio of 1.75 and a maximum consolidated funded debt to earnings ratio of 2.00.
The Agreement provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, failure to comply with covenants, any material representation or warranty made by the Company proving to be false in any material respect, certain bankruptcy, insolvency or receivership events affecting the Company or its subsidiaries, defaults relating to certain other indebtedness, imposition of certain judgments and a change in control of the Company (as defined in the Agreement).
14
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 26 weeks ended July 30, 2005 and July 31, 2004
(Thousands of dollars, except per share data)
(unaudited)
(12) Subsequent Events
On August 18, 2005, the Company announced it had authorized the initiation of a quarterly cash dividend of $0.15 per share for stockholders of record at the close of business on September 9, 2005, payable on September 30, 2005.
15
Report of Independent Registered Public Accounting Firm
The Board of Directors
Barnes & Noble, Inc.
We have reviewed the condensed consolidated balance sheet of Barnes & Noble, Inc. and Subsidiaries as of July 30, 2005 and July 31, 2004, and the related consolidated statements of operations for the 13 week and 26 week periods ended July 30, 2005 and July 31, 2004, changes in shareholders equity for the 26 week period ended July 30, 2005, and cash flows for the 26 week periods ended July 30, 2005 and July 31, 2004 included in the accompanying Securities and Exchange Commission Form 10-Q for the period ended July 30, 2005. These financial statements are the responsibility of the Companys management.
We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the consolidated balance sheet of Barnes & Noble, Inc. and Subsidiaries as of January 29, 2005, and the related consolidated statements of operations, changes in shareholders equity, and cash flows for the year then ended included in the Companys Form 10-K for the fiscal year ended January 29, 2005; and in our report dated April 8, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 29, 2005 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
As discussed in Note 1 to the Notes to Consolidated Financial Statements, the accompanying consolidated financial statements as of July 31, 2004 and for the 13 week and 26 week periods then ended have been restated.
/s/ BDO Seidman, LLP |
BDO Seidman, LLP |
New York, New York |
August 18, 2005
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Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
Restatement of Financial Statements
As a result of a recent clarification from the Securities and Exchange Commission (SEC), Barnes & Noble, Inc. and its subsidiaries(collectively, the Company) re-evaluated its lease accounting policies. Like many other companies within the retail industry that corrected commonly accepted lease accounting practices, the Company has changed the way it accounts for its leases, including the accounting for tenant allowances and rent holidays during the store build-out period. As a result of its review, the Company has corrected its lease accounting policies in fiscal 2004, and while it does not consider such corrections to be material to any one year, has restated certain historical financial information for prior periods. The restatement adjustments are non-cash and had no impact on revenues or total cash flows.
Consistent with common retail industry practice, the Company had previously classified tenant allowances received as a result of store openings as a reduction in capital expenditures. The Company has reclassified tenant allowances received from a reduction of fixed assets to an increase in other long-term liabilities. The related amortization of such amounts has been reclassified from a reduction of depreciation expense to a reduction of cost of sales and occupancy. Such amortization reclassifications amounted to $8.5 million and $16.9 million during the 13 weeks and 26 weeks ended July 31, 2004, respectively.
In addition, consistent with industry practice, the Company had recognized the straight-line expense for leases beginning on the earlier of the store opening date or the commencement date of the lease, which had the effect of excluding the construction period of its stores from the calculation of the period over which it expenses rent. In order to correct the straight-line rent expense to include the store build-out period, in the first quarter of fiscal 2004 the Company has decreased cost of sales and occupancy and increased gross profit by $0.4 million and $1.1 million, decreased operating profit and earnings before taxes and minority interest by $0.0 million and $0.3 million, and decreased net earnings by $0.0 million ($0.00 per share) and $0.2 million ($0.00 per share) during the 13 weeks and 26 weeks ended July 31, 2004.
The Companys July 31, 2004 balance sheet has been adjusted to reflect the combined impact of the above restatements by increasing net property and equipment by $225.4 million, increasing deferred rent (other long-term liabilities) by $277.5 million, increasing receivables by $20.1 million, increasing deferred tax assets by $13.3 million and decreasing retained earnings and shareholders equity by $18.8 million.
Critical Accounting Policies
SEC Financial Reporting Release No. 60 requests all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Management of the Company does not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
Other Long-Lived Assets. The Companys other long-lived assets include property and equipment and amortizable intangibles. At July 30, 2005, the Company had $807.3 million of property and equipment, net of accumulated depreciation, and $17.2 million of amortizable intangible assets, net of amortization, accounting
17
for approximately 28.4% of the Companys total assets. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, the Company will first compare the carrying amount of the assets to the individual stores estimated future undiscounted cash flows. If the estimated future cash flows are less than the carrying amount of the assets, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the assets to the individual stores fair value based on its estimated discounted future cash flows. If required, an impairment loss is recorded for that portion of the assets carrying value in excess of fair value.
Goodwill and Unamortizable Intangible Assets. At July 30, 2005, the Company had $265.9 million of goodwill and $78.1 million of unamortizable intangible assets (i.e. those with an indefinite useful life), accounting for approximately 11.9% of the Companys total assets. SFAS No. 142, Goodwill and Other Intangible Assets, requires that goodwill and other unamortizable intangible assets no longer be amortized, but instead be tested for impairment at least annually or earlier if there are impairment indicators. The Company performs a two-step process for impairment testing of goodwill as required by SFAS No. 142. The first step of this test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount. The second step (if necessary) measures the amount of the impairment. The Company completed its annual impairment test on the goodwill in November 2004 and deemed that no impairment charge was necessary. The Company has noted no subsequent indicators of impairment. The Company tests unamortizable intangible assets by comparing the fair value and the carrying value of such assets. Changes in market conditions, among other factors, could have a material impact on these estimates.
Closed Store Expenses. When the Company closes or relocates a store, the Company charges unrecoverable costs to expense. Such costs include the net book value of abandoned fixtures and leasehold improvements and, when a store is closed, a provision for future lease obligations, net of expected sublease recoveries. Costs associated with store closings of $5.0 million and $2.9 million during the first half of fiscal 2005 and fiscal 2004, respectively, are included in selling and administrative expenses in the accompanying consolidated statements of operations.
Liquidity and Capital Resources
The primary sources of the Companys cash are net cash flows from operating activities, funds available under its senior credit facility and short-term vendor financing.
The Companys cash and cash equivalents were $21.3 million as of July 30, 2005, compared with $22.9 million as of July 31, 2004.
Merchandise inventories increased $24.5 million, or 1.9%, to $1,336.2 million as of July 30, 2005, compared with $1,311.7 million as of July 31, 2004. The increase was primarily due to the opening of 26 Barnes & Noble stores over the last twelve months.
The Companys investing activities consist principally of capital expenditures for new store construction, the Companys new distribution center, system enhancements and store relocations/remodels. Capital expenditures totaled $92.3 million and $74.8 million during the 26 weeks ended July 30, 2005 and July 31, 2004, respectively.
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On June 17, 2005, the Company entered into an $850.0 million five-year revolving credit facility (the New Facility), which under certain circumstances may be increased to $1.0 billion at the option of the Company. The New Facility replaces the Companys existing $400.0 million revolving credit facility, which was scheduled to expire in May 2006. In addition, the Company pre-paid in full and cancelled its $245.0 million term loan, which had been scheduled to mature in August 2009. Proceeds from the New Facility will be used for general corporate purposes, including seasonal working capital needs. The New Facility, which is unsecured, contains terms that are substantially more favorable to the Company, including lower interest rates and fees, and more flexible covenants.
In fiscal 1999, the Board of Directors authorized a common stock repurchase program for the purchase of up to $250.0 million of the Companys common shares. The Company completed its $250.0 million repurchase program during the first quarter of fiscal 2005. On March 24, 2005, the Companys Board of Directors authorized a new share repurchase program of up to $200.0 million of its common shares. Share repurchases under this program may be made through open market and privately negotiated transactions from time to time and in such amounts as management deems appropriate. As of July 30, 2005, the Company has repurchased 13,503,200 shares at a cost of approximately $360.1 million under these programs. The repurchased shares are held in treasury.
Total debt decreased to $9.0 million as of July 30, 2005 from $257.4 million as of July 31, 2004. Average combined borrowings under the Companys senior credit facility and term loan were $196.0 million and $303.3 million during the 26 weeks ended July 30, 2005 and July 31, 2004, respectively, and peaked at $245.0 million and $392.7 million during the same periods. The ratio of debt to equity decreased to 0.01:1.00 as of July 30, 2005, compared with 0.20:1.00 as of July 31, 2004.
Based upon the Companys current operating levels, management believes net cash flows from operating activities and the capacity under its New Facility will be sufficient to meet the Companys normal working capital and debt service requirements for at least the next twelve months.
On August 18, 2005, the Company announced it had authorized the initiation of a quarterly cash dividend of $0.15 per share for stockholders of record at the close of business on September 9, 2005, payable on September 30, 2005.
Seasonality
The Companys business, like that of many retailers, is seasonal, with the major portion of sales and operating profit realized during the quarter which includes the Holiday selling season.
Results of Operations
13 weeks ended July 30, 2005 compared with the 13 weeks ended July 31, 2004
Sales
During the 13 weeks ended July 30, 2005, the Companys sales increased $70.5 million, or 6.4%, to $1,170.8 million from $1,100.3 million during the 13 weeks ended July 31, 2004. This increase was attributable to a $67.6 million increase in sales at Barnes & Noble stores and an $11.7 million increase in sales at Barnes & Noble.com, offset by an $8.3 million decrease in sales at B. Dalton stores.
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Barnes & Noble store sales increased 7.0% to $1,028.9 million from $961.3 million during the same period a year ago and accounted for 87.9% of total Company sales. The 7.0% increase in Barnes & Noble store sales was attributable to an increase in comparable store sales of 4.3% (which includes a 3.0% increase in comparable store sales due to the release of the J. K. Rowlings Harry Potter and the Half-Blood Prince book), coupled with the opening of 26 new stores since July 31, 2004, which contributed to a 3.1% increase in square footage.
During the second quarter, B. Dalton sales declined 20.8% and represented 2.7% of total Company sales. The decrease was primarily a result of 37 store closings and a 21.0% reduction in its square footage since July 31, 2004, offset by an increase in comparable store sales of 0.2%.
During the 13 weeks ended July 30, 2005, the Company opened five Barnes & Noble stores and closed three, bringing its total number of Barnes & Noble stores to 673 with 16.6 million square feet. The Company closed four B. Dalton stores, ending the period with 146 B. Dalton stores and 0.6 million square feet. As of July 30, 2005, the Company operated 819 stores in the fifty states and the District of Columbia.
Cost of Sales and Occupancy
During the 13 weeks ended July 30, 2005, cost of sales and occupancy increased $50.7 million, or 6.5%, to $826.4 million from $775.7 million during the 13 weeks ended July 31, 2004. As a percentage of sales, cost of sales and occupancy increased slightly to 70.6% from 70.5% during the same period one year ago. This slight decrease in gross margin was due to the deep discount on J. K. Rowlings Harry Potter and the Half-Blood Prince book, offset by increased sales volume leveraging fixed occupancy costs in the Barnes & Noble stores and a reduction in bestseller markdowns excluding J. K. Rowlings Harry Potter and the Half-Blood Prince book.
Selling and Administrative Expenses
Selling and administrative expenses increased $23.9 million to $276.5 million during the 13 weeks ended July 30, 2005, from $252.6 million during the 13 weeks ended July 31, 2004. During the second quarter, selling and administrative expenses increased as a percentage of sales to 23.6% from 23.0% during the prior year period. This increase was primarily due to the write-off of deferred financing fees of $1.9 million and charges associated with legal costs of approximately $6.9 million.
Depreciation and Amortization
During the second quarter, depreciation and amortization decreased $2.6 million, or 5.7%, to $43.2 million from $45.8 million during the same period last year. The decrease was primarily due to certain Barnes & Noble store assets becoming fully depreciated.
Pre-opening Expenses
Pre-opening expenses increased $0.4 million, or 18.5%, to $2.7 million during the 13 weeks ended July 30, 2005, from $2.2 million for the 13 weeks ended July 31, 2004. The increase in pre-opening expenses was primarily due to the timing of opening new Barnes & Noble stores for the remainder of the year compared with the new Barnes & Noble stores opened during the same prior year period.
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Operating Profit
The Companys consolidated operating profit decreased $1.9 million, or 7.9%, to $22.1 million during the 13 weeks ended July 30, 2005, from $24.0 million during the 13 weeks ended July 31, 2004. This decrease was primarily due to the matters discussed above.
Interest Expense, Net and Amortization of Deferred Financing Fees
Net interest expense and amortization of deferred financing fees decreased $3.0 million, or 82.1%, to $0.7 million during the 13 weeks ended July 30, 2005, from $3.7 million during the 13 weeks ended July 31, 2004. The decrease was primarily the result of interest income increasing $1.4 million, to $1.6 million during the 13 weeks ended July 30, 2005, from $0.2 million during the 13 weeks ended July 31, 2004 and the result of reduced borrowings under the Companys credit facility.
Debt Redemption Charge
On June 28, 2004, the Company completed the redemption of its $300.0 million outstanding 5.25% convertible subordinated notes due 2009. Holders of the notes converted a total of $17.7 million principal amount of the notes into 545,821 shares of common stock of the Company, plus cash in lieu of fractional shares, at a price of $32.512 per share. The Company redeemed the balance of $282.3 million principal amount of the notes at an aggregate redemption price, together with accrued interest and redemption premium, of $295.0 million. The unamortized portion of the deferred financing fees from the issuance of the notes and the redemption premium resulted in a charge of $14.6 million. The debt redemption charge of $14.6 million during the 13 weeks ended July 31, 2004 was comprised of an $8.5 million redemption premium and the write-off of $6.1 million of unamortized deferred financing fees from the issuance of the notes.
Income Taxes
Income taxes during the 13 weeks ended July 30, 2005 were $8.7 million compared with $2.3 million during the 13 weeks ended July 31, 2004. Taxes were based upon managements estimate of the Companys annualized effective tax rates. The Companys estimated effective tax rate was 40.75% for the second quarter of fiscal 2005 and fiscal 2004.
Minority Interest
Minority interest was $0.8 million during the second quarter of fiscal 2005 compared with $0.5 million during the same prior year period and relates to Calendar Club L.L.C.
Income From Discontinued Operations
On October 1, 2004, the Board of Directors of the Company approved an overall plan for the complete disposition of all of the Companys Class B common stock in GameStop Corp., the Companys video game operating segment. The plan was completed in November 2004 with the distribution to the Companys stockholders of the GameStop Class B common stock. As a result, GameStop is no longer a subsidiary of the Company and, accordingly, the Company is presenting all historical results of operations of GameStop as discontinued operations.
21
Net Income
As a result of the factors discussed above, the Company reported consolidated net earnings of $13.5 million (or $0.18 per diluted share) during the 13 weeks ended July 30, 2005, compared with net earnings of $8.7 million (or $0.12 per diluted share) during the 13 weeks ended July 31, 2004.
Results of Operations
26 weeks ended July 30, 2005 compared with the 26 weeks ended July 31, 2004
Sales
During the 26 weeks ended July 30, 2005, the Companys sales increased $109.4 million, or 5.1%, to $2,268.0 million from $2,158.5 million during the 26 weeks ended July 31, 2004. This increase was attributable to a $116.5 million increase in sales at Barnes & Noble stores and an $11.2 million increase in sales at Barnes & Noble.com, offset by a $16.5 million decrease in sales at B. Dalton stores.
Barnes & Noble store sales increased $116.5 million, or 6.2%, to $1,988.0 million from $1,871.5 million during the same period a year ago and accounted for 87.7% of total Company sales. The 6.2% increase in Barnes & Noble store sales was attributable to an increase in comparable store sales of 3.3% (which includes a 1.5% increase in comparable store sales due to the release of the J. K. Rowlings Harry Potter and the Half-Blood Prince book), coupled with the opening of 26 new stores since July 31, 2004, which contributed to a 3.1% increase in square footage.
During the 26 weeks ended July 30, 2005, B. Dalton sales declined 20.7% and represented 2.8% of total Company sales. The decrease was primarily a result of 37 store closings and a 21.0% reduction in its square footage since July 31, 2004, and a decrease in comparable store sales of 0.1%.
During the first half of fiscal 2005, the Company opened 12 Barnes & Noble stores and closed five, bringing its total number of Barnes & Noble stores to 673 with 16.6 million square feet. The Company closed eight B. Dalton stores, ending the period with 146 B. Dalton stores and 0.6 million square feet. As of July 30, 2005, the Company operated 819 stores in the fifty states and the District of Columbia.
Cost of Sales and Occupancy
During the 26 weeks ended July 30, 2005, cost of sales and occupancy increased $70.1 million, or 4.6%, to $1,596.2 million from $1,526.1 million during the 26 weeks ended July 31, 2004. As a percentage of sales, cost of sales and occupancy decreased to 70.4% from 70.7% during the same period one year ago. This decrease was due to increased sales volume leveraging fixed occupancy costs in the Barnes & Noble stores and a reduction in bestseller markdowns, offset by the deep discount on J. K. Rowlings Harry Potter and the Half-Blood Prince book.
Selling and Administrative Expenses
Selling and administrative expenses increased $45.5 million to $542.5 million during the 26 weeks ended July 30, 2005, from $497.1 million during the 26 weeks ended July 31, 2004. During the first half of fiscal 2005, selling and administrative expenses increased as a percentage of sales to 23.9% from 23.0% during the prior year period. This increase was primarily due to the write-off of deferred financing fee of $1.9 million and charges associated with legal costs of approximately $6.9 million.
22
Depreciation and Amortization
During the first half of fiscal 2005, depreciation and amortization decreased $4.2 million, or 4.7%, to $86.5 million from $90.7 million during the same period last year. The decrease was primarily due to certain Barnes & Noble store assets becoming fully depreciated.
Pre-opening Expenses
Pre-opening expenses increased $0.2 million, or 4.4%, to $5.1 million during the 26 weeks ended July 30, 2005, from $4.9 million for the 26 weeks ended July 31, 2004. The increase in pre-opening expenses was primarily due to the timing of new Barnes & Noble stores to be opened during for the remainder of the year compared with the new Barnes & Noble stores opened during the same prior year period.
Operating Profit
The Companys consolidated operating profit decreased $2.1 million, or 5.3%, to $37.6 million during the 26 weeks ended July 30, 2005, from $39.7 million during the 26 weeks ended July 31, 2004. This decrease was primarily due to the matters discussed above.
Interest Expense, Net and Amortization of Deferred Financing Fees
Net interest expense and amortization of deferred financing fees decreased $7.2 million, or 87.9%, to $1.0 million during the 26 weeks ended July 30, 2005, from $8.2 million during the 26 weeks ended July 31, 2004. The decrease was primarily the result of interest income increasing $3.8 million, to $4.4 million during the 26 weeks ended July 30, 2005, from $0.6 million during the 26 weeks ended July 31, 2004 and the result of reduced borrowings under the Companys credit facility.
Debt Redemption Charge
On June 28, 2004, the Company completed the redemption of its $300.0 million outstanding 5.25% convertible subordinated notes due 2009. Holders of the notes converted a total of $17.7 million principal amount of the notes into 545,821 shares of common stock of the Company, plus cash in lieu of fractional shares, at a price of $32.512 per share. The Company redeemed the balance of $282.3 million principal amount of the notes at an aggregate redemption price, together with accrued interest and redemption premium, of $295.0 million. The unamortized portion of the deferred financing fees from the issuance of the notes and the redemption premium resulted in a charge of $14.6 million. The debt redemption charge of $14.6 million during the 26 weeks ended July 31, 2004 was comprised of an $8.5 million redemption premium and the write-off of $6.1 million of unamortized deferred financing fees from the issuance of the notes.
Income Taxes
Income taxes during the 26 weeks ended July 30, 2005 were $14.9 million compared with $6.9 million during the 26 weeks ended July 31, 2004. Taxes were based upon managements estimate of the Companys annualized effective tax rates. The Companys estimated effective tax rate was 40.75% for the first half of fiscal 2005 and 40.70% for the first half of fiscal 2004.
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Minority Interest
Minority interest was $1.7 million during the first half of fiscal 2005 compared with $1.0 million during the same prior year period and relates to Calendar Club L.L.C.
Income From Discontinued Operations
On October 1, 2004, the Board of Directors of the Company approved an overall plan for the complete disposition of all of the Companys Class B common stock in GameStop Corp., the Companys video game operating segment. The plan was completed in November 2004 with the distribution to the Companys stockholders of the GameStop Class B common stock. As a result, GameStop is no longer a subsidiary of the Company and, accordingly, the Company is presenting all historical results of operations of GameStop as discontinued operations.
Net Income
As a result of the factors discussed above, the Company reported consolidated net earnings of $23.4 million (or $0.32 per diluted share) during the 26 weeks ended July 30, 2005, compared with net earnings of $20.2 million (or $0.28 per diluted share) during the 26 weeks ended July 31, 2004.
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Disclosure Regarding Forward-Looking Statements
This report may contain certain forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934) 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 Companys products, possible disruptions in the Companys computer or telephone systems, 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 Companys online initiatives such as Barnes & Noble.com, the performance and successful integration of acquired businesses, the successful and timely completion and integration of the Companys new New Jersey distribution center, the success of the Companys strategic investments, unanticipated increases in merchandise or occupancy costs, unanticipated adverse litigation results or effects, and other factors which may be outside of the Companys 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.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company limits its interest rate risks by investing certain of its excess cash balances in short-term, highly-liquid instruments with an original maturity of one year or less. The Company does not expect any material losses from its invested cash balances and the Company believes that its interest rate exposure is modest. As of July 30, 2005, the Companys cash and cash equivalents totaled approximately $21.3 million.
Additionally, the Company may from time to time borrow money under its New Facility at various interest-rate options based on the prime rate or the Eurodollar rate (a publicly published rate) depending upon certain financial tests. Accordingly, the Company may be exposed to interest rate risk on money that it borrows under its New Facility. The Company had $9.0 million and $257.4 million outstanding at July 30, 2005 and July 31, 2004, respectively.
The Company does not have any material foreign currency exposure as nearly all of its business is transacted in United States currency.
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Item 4: Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Companys management conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Companys disclosure controls and procedures are effective. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Companys periodic reports.
(b) Changes in Internal Controls
There was no change in the Companys internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Companys most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
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There have been no material developments with respect to previously reported legal proceedings, except as follows:
On March 14, 2003, a Company employee filed a class action lawsuit in the Superior Court of California, Orange County against the Company. The complaint alleges that the Company improperly classified the assistant store managers, department managers and receiving managers working in its California stores as salaried exempt employees. The complaint alleges that these employees spent more than 50 percent of their time performing non-exempt work and should have been classified as non-exempt employees. The complaint alleges violations of the California Labor Code and California Business and Professions Code and seeks relief, including overtime compensation, prejudgment interest, penalties, attorneys fees and costs. On November 18, 2004, an amended complaint was filed alleging that the Company improperly classified the music managers and café managers working in its California stores as salaried exempt employees. The parties are in the process of negotiating the terms of a settlement that will lead to a full and final resolution of this action if approved by the Court.
On August 16, 2002, Barnes & Noble.com, along with 17 other defendants, was sued in the United States District Court for the Eastern District of Texas by Charles E. Hill & Associates for patent infringement of United States Patent Nos. 5,528,490, 5,761,649 and 6,029,142. On November 7, 2002, Barnes & Noble.com and the other defendants answered and filed counterclaims for a declaratory judgment of non-infringement, invalidity and unenforceability of all three patents. On March 22, 2005, Barnes & Noble.com filed a motion for summary judgment of noninfringement. On August 19, 2005, the Court held a Markman hearing to define the scope of the plaintiffs patents. The Court has not yet issued its Markman Order. Trial is scheduled for February 6, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans |
Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans | ||||||
May 1, 2005 May 28, 2005 |
400,000 | $ | 36.27 | 400,000 | $ | 14,507,000 | ||||
May 29, 2005 July 2, 2005 |
1,460,700 | $ | 38.56 | 1,460,700 | $ | 56,324,000 | ||||
July 3, 2005 July 30, 2005 |
480,600 | $ | 40.19 | 480,600 | $ | 19,314,000 | ||||
Total |
2,341,300 | $ | 38.50 | 2,341,300 | ||||||
In fiscal 1999, the Board of Directors of the Company authorized a common stock repurchase program for the purchase of up to $250.0 million of the Companys common stock. The Company completed its $250.0 million repurchase program during the 13 weeks ended April 30, 2005. On March 24, 2005, the Companys Board of Directors authorized a new share repurchase program of up to $200.0 million of its common stock. Share repurchases under this program may be made through open market and privately negotiated transactions from time to time and in such amounts as management deems appropriate. As of July 30, 2005, the Company has repurchased 13,503,200 shares at a cost of approximately $360.1 million under these programs. The repurchased shares are held in treasury.
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Item 4. Submission of Matters to a Vote of Security Holders
The Companys Annual Meeting of Shareholders was held on June 1, 2005 (the Annual Meeting). At the close of business on the record date for the meeting (which was April 8, 2005), there were 70,124,725 shares of Common Stock outstanding and entitled to vote at the meeting. Holders of 58,792,111 shares of Common Stock (representing a like number of votes) were present at the meeting, either in person or by proxy.
At the Annual Meeting, the following individuals were elected to the Companys Board of Directors to hold office for a term of three years and until their respective successors are duly elected and qualified, by the following vote:
Nominee |
In Favor |
Withheld | ||
Stephen Riggio |
56,348,967 | 2,443,144 | ||
Matthew A. Berdon |
54,509,554 | 4,282,557 | ||
Margaret T. Monaco |
54,528,492 | 4,263,619 |
The following individuals continue to serve on the Companys Board of Directors until the expiration of their terms: Leonard Riggio, Michael J. Del Giudice, William Dillard II, Irene Miller, William Sheluck, Jr., and Michael N. Rosen.
At the Annual Meeting, the Shareholders also ratified the appointment of BDO Seidman, LLP as the Companys independent certified public accountants for the fiscal year ending January 28, 2006, by the following vote:
In Favor |
Against |
Abstained | ||
57,410,226 | 1,339,640 | 42,245 |
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(a) Exhibits filed with this Form 10-Q:
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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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) | ||
By: | /s/ Joseph J. Lombardi | |
Joseph J. Lombardi | ||
Chief Financial Officer (principal financial and accounting officer) | ||
September 8, 2005 |
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31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
E-1