1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 4, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File Number: 1-12302
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BARNES & NOBLE, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1196501
----------------------------------------- ---------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
122 Fifth Avenue, New York, NY 10011
----------------------------------------------------- ---------------------
(Address of Principal Executive Offices) (Zip Code)
(212) 633-3300
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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,
2001: 67,058,855.
2
BARNES & NOBLE, INC. AND SUBSIDIARIES
August 4, 2001
Index to Form 10-Q
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations - For the 13 weeks and
26 weeks ended August 4, 2001 and July 29, 2000....................... 3
Consolidated Balance Sheets - August 4, 2001, July 29, 2000
and February 3, 2001.................................................. 4
Consolidated Statement of Changes in Shareholders' Equity -
August 4, 2001........................................................ 6
Consolidated Statements of Cash Flows - For the 26 weeks
ended August 4, 2001 and July 29, 2000................................ 7
Notes to Consolidated Financial Statements............................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk............... N/A
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 21
Item 4. Submission of Matters to a Vote of Security Holders...................... 21
Item 6. Exhibits and Reports on Form 8-K......................................... 21
3
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)
13 weeks ended 26 weeks ended
--------------------------------- ---------------------------------
August 4, 2001 July 29, 2000 August 4, 2001 July 29, 2000
-------------- ------------- -------------- -------------
Sales $ 1,050,018 924,330 2,059,655 1,818,586
Cost of sales and occupancy 774,696 676,263 1,525,282 1,330,430
------------ ------------ ------------ ------------
Gross profit 275,322 248,067 534,373 488,156
------------ ------------ ------------ ------------
Selling and administrative expenses 214,691 192,214 424,861 374,993
Depreciation and amortization 36,560 34,562 73,283 67,567
Pre-opening expenses 896 1,848 1,721 3,331
------------ ------------ ------------ ------------
Operating profit 23,175 19,443 34,508 42,265
Interest (net of interest income of $31, $245, $499
and $376, respectively) and amortization of
deferred financing fees (9,830) (13,283) (21,107) (23,056)
Equity in net loss of Barnes & Noble.com (13,906) (17,940) (28,221) (35,538)
Other expense, net (2,328) (3,000) (7,713) (5,534)
------------ ------------ ------------ ------------
Loss before benefit for income taxes (2,889) (14,780) (22,533) (21,863)
Benefit for income taxes (1,199) (6,134) (9,351) (9,073)
------------ ------------ ------------ ------------
Net loss $ (1,690) (8,646) (13,182) (12,790)
============ ============ ============ ============
Loss per common share
Basic $ (0.03) (0.13) (0.20) (0.20)
Diluted $ (0.03) (0.13) (0.20) (0.20)
Weighted average common shares outstanding
Basic 66,172,000 64,126,000 65,689,000 64,165,000
Diluted 66,172,000 64,126,000 65,689,000 64,165,000
See accompanying notes to consolidated financial statements.
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4
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(thousands of dollars, except per share data)
August 4, July 29, February 3,
2001 2000 2001
---------- ---------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 26,107 33,294 26,003
Receivables, net 83,466 68,950 84,505
Merchandise inventories 1,267,082 1,121,094 1,238,618
Prepaid expenses and other current assets 103,686 70,046 106,127
---------- ---------- ----------
Total current assets 1,480,341 1,293,384 1,455,253
---------- ---------- ----------
Property and equipment:
Land and land improvements 3,247 3,247 3,247
Buildings and leasehold improvements 446,545 434,381 436,289
Fixtures and equipment 725,998 625,523 682,444
---------- ---------- ----------
1,175,790 1,063,151 1,121,980
Less accumulated depreciation and amortization 626,937 492,632 555,760
---------- ---------- ----------
Net property and equipment 548,853 570,519 566,220
---------- ---------- ----------
Intangible assets, net 351,606 423,794 359,192
Investment in Barnes & Noble.com 108,374 204,993 136,595
Other noncurrent assets 46,688 61,117 40,216
---------- ---------- ----------
Total assets $2,535,862 2,553,807 2,557,476
========== ========== ==========
(Continued)
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5
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(thousands of dollars, except per share data)
August 4, July 29, February 3,
2001 2000 2001
----------- ----------- -----------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 626,409 578,193 582,075
Accrued liabilities 255,563 214,431 353,000
----------- ----------- -----------
Total current liabilities 881,972 792,624 935,075
----------- ----------- -----------
Long-term debt 676,300 745,000 666,900
Deferred income taxes 72,622 122,220 74,289
Other long-term liabilities 100,485 92,522 103,535
Shareholders' equity:
Common stock; $.001 par value; 300,000,000
shares authorized; 72,326,161, 69,696,902
and 70,549,176 shares issued, respectively 72 70 71
Additional paid-in capital 715,459 656,963 673,122
Accumulated other comprehensive loss (8,224) (5,126) (5,874)
Retained earnings 214,553 266,911 227,735
Treasury stock, at cost, 5,504,700 shares (117,377) (117,377) (117,377)
----------- ----------- -----------
Total shareholders' equity 804,483 801,441 777,677
----------- ----------- -----------
Commitments and contingencies -- -- --
----------- ----------- -----------
Total liabilities and shareholders' equity $ 2,535,862 2,553,807 2,557,476
=========== =========== ===========
See accompanying notes to consolidated financial statements.
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6
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
(thousands of dollars, except per share data)
(unaudited)
Accumulated
Additional Other Treasury
Common Paid-In Comprehensive Retained Stock at
Stock Capital Losses Earnings Cost Total
-------- ---------- ------------- --------- --------- --------
Balance at February 3, 2001 $ 71 $673,122 $ (5,874) $ 227,735 $(117,377) $777,677
-------- -------- -------- --------- --------- --------
Comprehensive loss:
Net loss -- -- -- (13,182) --
Other comprehensive loss:
Unrealized loss on
available-for-sale securities
(net of deferred tax benefit of $1,122) -- -- (1,583) -- --
Unrealized loss on derivative
instrument (net of deferred tax
benefit of $543) -- -- (767) -- --
Total comprehensive loss (15,532)
Exercise of 1,776,985 common stock
options (including deferred tax
benefit of $12,071) 1 42,337 -- -- -- 42,338
-------- -------- -------- --------- --------- --------
Balance at August 4, 2001 $ 72 $715,459 $ (8,224) $ 214,553 $(117,377) $804,483
======== ======== ======== ========= ========= ========
See accompanying notes to consolidated financial statements.
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BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(thousands of dollars)
(unaudited)
26 weeks ended
--------------------------------
August 4, 2001 July 29, 2000
-------------- -------------
Cash flows from operating activities:
Net loss $ (13,182) (12,790)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization (including amortization of deferred
financing fees) 74,251 68,067
Loss on disposal of property and equipment 826 874
Increase in other long-term liabilities for scheduled rent increases in
long-term leases 3,326 5,092
Other expense, net 7,713 5,534
Equity in net loss of Barnes & Noble.com 28,221 35,538
Changes in operating assets and liabilities, net (78,200) (167,427)
--------- ---------
Net cash flows from operating activities 22,955 (65,112)
--------- ---------
Cash flows from investing activities:
Acquisition of consolidated subsidiaries, net of cash received (3,747) (148,492)
Purchases of property and equipment (50,468) (52,754)
Proceeds from the partial sale of Chapters Inc. 6,072 --
Purchase of investments (4,047) (8,000)
Net increase in other noncurrent assets (10,328) (1,370)
--------- ---------
Net cash flows from investing activities (62,518) (210,616)
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in revolving credit facility (290,600) 313,400
Proceeds from issuance of long-term debt 300,000 --
Proceeds from exercise of common stock options
30,267 1,955
Purchase of treasury stock through repurchase program -- (30,580)
--------- ---------
Net cash flows from financing activities 39,667 284,775
--------- ---------
Net increase in cash and cash equivalents 104 9,047
Cash and cash equivalents at beginning of period 26,003 24,247
--------- ---------
Cash and cash equivalents at end of period $ 26,107 33,294
========= =========
Changes in operating assets and liabilities, net:
Receivables, net $ 1,039 (14,444)
Merchandise inventories (28,464) 10,021
Prepaid expenses and other current assets 2,441 (1,009)
Accounts payable and accrued liabilities (53,216) (161,995)
--------- ---------
Changes in operating assets and liabilities, net $ (78,200) (167,427)
========= =========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 15,889 14,970
Income taxes $ 38,257 58,118
Supplemental disclosure of subsidiaries acquired:
Assets acquired $ 3,747 180,140
Liabilities assumed -- (31,648)
--------- ---------
Cash $ 3,747 148,492
========= =========
See accompanying notes to consolidated financial statements.
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8
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 26 weeks ended August 4, 2001 and July 29, 2000
(thousands of dollars, except per share data)
(unaudited)
The unaudited consolidated financial statements include the accounts of Barnes &
Noble, Inc. and its wholly and majority-owned subsidiaries (collectively, the
Company).
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly its consolidated
financial position as of August 4, 2001 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 53 weeks ended February 3, 2001 (fiscal 2000). The
Company follows the same accounting policies in preparation of interim reports.
Due to the seasonal nature of the business, the results of operations for the 26
weeks ended August 4, 2001 are not indicative of the results to be expected for
the 52 weeks ending February 2, 2002 (fiscal 2001).
(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 80 percent, 84 percent and 82 percent of the Company's
merchandise inventories as of August 4, 2001, July 29, 2000 and February 3,
2001, respectively. Merchandise inventories of Babbage's Etc. LLC and GameStop,
Inc. (f/k/a Funco, Inc.) (Video Game & Entertainment Software) stores and
Calendar Club L.L.C. (Calendar Club) represent 12 percent, 7 percent and 9
percent of merchandise inventories as of August 4, 2001, July 29, 2000 and
February 3, 2001, respectively, 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 August 4, 2001, July 29, 2000 and February 3, 2001.
(2) Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period presentation.
(3) Income Taxes
The tax provisions for the 26 weeks ended August 4, 2001 and July 29,
2000 are based upon management's estimate of the Company's annualized effective
tax rate.
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9
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 26 weeks ended August 4, 2001 and July 29, 2000
(thousands of dollars, except per share data)
(unaudited)
(4) Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets" effective for fiscal years
beginning after December 15, 2001. Under the new standards, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests. Other intangible assets will
continue to be amortized over their useful lives.
The Company will apply the new standards on accounting for goodwill and
other intangible assets beginning in the first quarter of the Company's fiscal
year ending February 1, 2003. The Company has not yet determined what the effect
of implementing these standards will be on its financial position and results of
operations.
(5) Derivative Financial Instruments
On February 4, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended, which requires that
all derivative instruments be recorded on the balance sheet at their fair value.
The impact of adopting SFAS No. 133 on the Company's consolidated financial
statements was not material.
Under an agreement expiring February 2, 2003, the Company uses an
interest rate swap as a derivative to modify the interest characteristics of its
outstanding floating rate long-term debt, to reduce its exposure to fluctuations
in interest rates. The Company's accounting policy is based on its designation
of such instruments as cash flow hedges. The Company does not enter into such
contracts for speculative purposes. The swap has a notional amount of $55,000.
The effective portion of the gain or loss on the derivative instrument is
initially reported as a component of comprehensive loss in the Company's
Statement of Shareholders' Equity, and later reflected in earnings in the period
in which the related transactions occur. During the 26 weeks ended August 4,
2001, the Company recorded an unrealized loss of $(767), net of taxes.
Ineffectiveness results when gains and losses on the hedged item are not
completely offset by gains and losses in the derivative instrument. No
ineffectiveness was recognized in the first half of fiscal 2001 related to these
instruments.
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10
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 26 weeks ended August 4, 2001 and July 29, 2000
(thousands of dollars, except per share data)
(unaudited)
(6) Comprehensive Loss
Comprehensive loss is net loss, plus certain other items that are
recorded directly to shareholders' equity. The only such items currently
applicable to the Company are the unrealized gains (losses) on
available-for-sale securities and derivative instruments, as follows:
13 weeks ended 26 weeks ended
----------------------------- -----------------------------
August 4, 2001 July 29, 2000 August 4, 2001 July 29, 2000
-------------- ------------- -------------- -------------
Net loss $(1,690) (8,646) (13,182) (12,790)
Other comprehensive earnings (loss):
Unrealized gains (losses) on available-
for-sale securities:
Unrealized holding gains (losses)
arising during the period, net of
deferred income tax expense
(benefit) of $273, $971, ($1,517)
and ($2,786), respectively 385 1,368 (2,139) (3,928)
Less: reclassification adjustment,
net of deferred income tax
expense of $0, $0, $395 and $0,
respectively -- -- 556 --
------- ------- ------- -------
385 1,368 (1,583) (3,928)
------- ------- ------- -------
Unrealized loss on derivative
instrument, net of deferred income
tax (benefit) of ($83), $0, ($544)
and $0, respectively (118) -- (767) --
------- ------- ------- -------
Total comprehensive loss $(1,423) (7,278) (15,532) (16,718)
======= ======= ======= =======
(7) Other Expense
The following table sets forth the components of other expense, in
thousands of dollars:
13 weeks ended 26 weeks ended
----------------------------- -----------------------------
August 4, 2001 July 29, 2000 August 4, 2001 July 29, 2000
-------------- ------------- -------------- -------------
Equity in net losses of iUniverse.com(a) $ (873) (3,000) (1,893) (5,534)
Equity in net losses of BOOK(R) magazine(b) (750) -- (950) --
Equity in net losses of enews(c) (705) -- (705) --
ABA legal and settlement costs(d) -- -- (4,500) --
Gain on partial sale of Chapters Inc.(e) -- -- 335 --
------- ------- ------- -------
Total other expense $(2,328) (3,000) (7,713) (5,534)
======= ======= ======= =======
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BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 26 weeks ended August 4, 2001 and July 29, 2000
(thousands of dollars, except per share data)
(unaudited)
(a) In the first half of fiscal 2000, the Company held a 49
percent ownership interest in iUniverse.com. During fiscal
2000, the Company sold a portion of its investment in
iUniverse.com decreasing its percentage ownership interest to
29 percent. This investment is being accounted for under the
equity method and is reflected as a component of other
noncurrent assets.
(b) During fiscal 2000, the Company acquired an approximate 50
percent interest in BOOK(R) magazine for $4,802. This
investment is being accounted for under the equity method and
is reflected as a component of other noncurrent assets.
(c) In the first half of fiscal 2001, the Company acquired an
approximate 49 percent interest in enews for $4,047. This
investment is being accounted for under the equity method and
is reflected as a component of other noncurrent assets.
(d) In the first quarter of fiscal 2001, the Company recorded a
pre-tax charge of $4,500 in connection with a lawsuit brought
by the American Booksellers Association (ABA). The charges
included a settlement of $2,350 to be paid to the plaintiffs
and approximately $2,150 in legal expenses incurred by the
Company during the first quarter. (e) In the first quarter of
fiscal 2001, the Company sold a portion of its investment in
Chapters Inc. (Chapters) resulting in a pre-tax gain of $335.
(8) Segment Information
The Company's reportable segments are strategic groups that offer
different products. These groups have been aggregated into two segments:
bookstores and video game and entertainment software stores.
Bookstores
This segment includes 569 book "super" stores under the Barnes & Noble
Booksellers, Bookstop and Bookstar trade names which generally offer a
comprehensive title base, a cafe, a children's section, a music department, a
magazine section and a calendar of ongoing events, including author appearances
and children's activities. This segment also includes 331 small format
mall-based stores under the B. Dalton Bookseller, Doubleday Book Shops and
Scribner's Bookstore trade names. Additionally, this segment includes the
operations of Calendar Club, a majority-owned subsidiary of the Company.
Calendar Club is an operator of seasonal calendar kiosks.
Video Game & Entertainment Software Stores
This segment includes 457 Video Game & Entertainment Software stores
operated under the Babbage's and Software Etc. trade names, 533 stores under the
FuncoLand and GameStop trade names, a Web site (gamestop.com) and Game Informer
magazine. The principal products of these stores are comprised of video game
hardware and software and PC entertainment software.
The accounting policies of the segments are the same as those for the
Company as a whole. Segment operating profit includes corporate expenses in each
operating segment. Barnes & Noble evaluates the performance of its segments and
allocates resources to them based on operating profit.
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BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 26 weeks ended August 4, 2001 and July 29, 2000
(thousands of dollars, except per share data)
(unaudited)
Segment information for the 13 weeks and 26 weeks ended August 4, 2001
and July 29, 2000 follows:
13 weeks ended 26 weeks ended
------------------------------ ------------------------------
Sales August 4, 2001 July 29, 2000 August 4, 2001 July 29, 2000
-------------- ------------- -------------- -------------
Bookstores $ 843,212 797,008 1,651,479 1,571,261
Video Game & Entertainment
Software stores 206,806 127,322 408,176 247,325
---------- -------- ---------- ---------
Total $1,050,018 924,330 2,059,655 1,818,586
========== ======== ========== =========
13 weeks ended 26 weeks ended
------------------------------ -----------------------------
Operating profit August 4, 2001 July 29, 2000 August 4, 2001 July 29, 2000
-------------- ------------- -------------- -------------
Bookstores $ 25,337 26,923 42,011 49,048
Video Game & Entertainment
Software stores (2,162) (7,480) (7,503) (6,783)
-------- -------- -------- --------
Total $ 23,175 19,443 34,508 42,265
======== ======== ======== ========
Bookstores operating profit includes Calendar Club operating losses.
These losses were approximately $2,725 and $1,502 for the 13 weeks ended August
4, 2001 and July 29, 2000, respectively, and $4,739 and $3,002 for the 26 weeks
ended August 4, 2001 and July 29, 2000, respectively.
A reconciliation of operating profit reported by reportable segments to
loss before income taxes in the consolidated financial statements for the 13
weeks and 26 weeks ended August 4, 2001 and July 29, 2000 is as follows:
13 weeks ended 26 weeks ended
------------------------------ ------------------------------
August 4, 2001 July 29, 2000 August 4, 2001 July 29, 2000
-------------- ------------- -------------- -------------
Reportable segments
operating profit $ 23,175 19,443 34,508 42,265
Interest, net (9,830) (13,283) (21,107) (23,056)
Equity in net loss of Barnes &
Noble.com (13,906) (17,940) (28,221) (35,538)
Other expense (2,328) (3,000) (7,713) (5,534)
-------- -------- -------- --------
Consolidated loss before
income taxes $ (2,889) (14,780) (22,533) (21,863)
======== ======== ======== ========
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13
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 26 weeks ended August 4, 2001 and July 29, 2000
(thousands of dollars, except per share data)
(unaudited)
(9) Acquisition
On March 19, 2001, Barnes & Noble, Inc. acquired SparkNotes, a
publisher of academic, educational and informational materials for students for
$3,747. The SparkNotes collection currently consists of over 600 study guides on
high school and college level academic topics, including literature, history,
economics, math and chemistry. The acquisition was accounted for by the purchase
method of accounting and, accordingly, the results of operations for the period
subsequent to the acquisition are included in the consolidated financial
statements.
(10) Subsequent Events
On August 24, 2001, the Company filed a registration statement for the
Video Game & Entertainment Software segment (GameStop Corp.) to raise up to $325
million in an initial public offering. The Company anticipates using a portion
of the proceeds to reduce inter-company debt and the remainder to capitalize
GameStop Corp. for future growth.
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Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
The primary sources of the Company's cash are net cash flows from operating
activities, funds available under its senior credit facility and short-term
vendor financing.
The Company's cash and cash equivalents were $26.1 million as of August 4, 2001
compared with $33.3 million as of July 29, 2000. During the 26 weeks ended
August 4, 2001, retail earnings before interest, taxes, depreciation and
amortization (EBITDA) decreased $2.0 million to $107.8 million from $109.8
million during the comparable prior year period.
Merchandise inventories increased $146.0 million, or 13.0%, to $1.267 billion as
of August 4, 2001, compared with $1.121 billion as of July 29, 2000. The
increase supported the Company's 13.3% sales growth, the opening of 27 Barnes &
Noble stores and 46 Babbage's Etc. LLC and GameStop, Inc. (f/k/a Funco, Inc.)
(Video Game & Entertainment Software) stores over the last twelve months.
The Company's investing activities consist principally of capital expenditures
for new store construction, system enhancements and store relocations/remodels.
Capital expenditures totaled $50.5 million and $52.8 million during the 26 weeks
ended August 4, 2001 and July 29, 2000, respectively.
In March 2001, the Company issued $300.0 million, 5.25 percent convertible
subordinated notes due March 15, 2009, further strengthening its balance sheet.
The notes are convertible into the Company's common stock at a conversion price
of $32.512 per share.
Total debt decreased 9.2% to $676.3 million as of August 4, 2001 from $745.0
million as of July 29, 2000. Average combined borrowings under the Company's
senior credit facility and subordinated notes were $737.7 million and $642.6
million during the 26 weeks ended August 4, 2001 and July 29, 2000,
respectively, and peaked at $870.0 million and $785.0 million during the same
periods. The ratio of debt to equity decreased to 0.84:1.00 as of August 4, 2001
compared with 0.93:1.00 as of July 29, 2000. The reduced debt, which was
accomplished during a period of 13.3% sales growth and a 13.0% increase in
merchandise inventories, reflects strong cash flows from operations and the
Company's commitment to working capital management and expense controls.
Based upon the Company's current operating levels, 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 normal working capital
and debt service requirements for at least the next twelve months.
The Company did not declare or pay any cash dividends during the 26-week periods
ended August 4, 2001 and July 29, 2000.
14
15
Seasonality
The Company's business, like that of many retailers, is seasonal, with the major
portion of sales and operating profit realized during the fourth quarter, which
includes the Holiday selling season.
Results of Operations
13 weeks ended August 4, 2001 and July 29, 2000
Sales
During the 13 weeks ended August 4, 2001, the Company's sales increased $125.7
million, or 13.6%, to $1.050 billion from $924.3 million during the 13 weeks
ended July 29, 2000. Contributing to this improvement was an increase of $79.5
million from Video Game & Entertainment Software stores. During the second
quarter, Barnes & Noble "super" store sales rose 8.3% to $772.5 million from
$713.5 million during the same period a year ago and accounted for 73.6% of
total Company sales or 91.6% of total bookstore sales.
During the second quarter, the 8.3% increase in Barnes & Noble "super" store
sales was primarily attributable to a same store sales gain of 3.0% coupled with
27 new stores opened since July 29, 2000 which contributed to a 4.2% increase in
square footage. Sales were strong across most book categories, particularly
bargain books, hardcover, mass market and educational books (teaching aids and
workbooks for the growing home school market), as well as music and cafes.
During the second quarter, B. Dalton sales declined 16.3% and represented 6.5%
of total Company sales. The decrease was primarily a result of 48 store closings
and a 12.8% reduction in its square footage since July 29, 2000. In addition, B.
Dalton's same store sales declined 4.9% during the second quarter.
During the second quarter, Video Game & Entertainment Software sales increased
62.4%. This increase was primarily attributable to the same store sales gain of
33.1%, as well as the increase in the number of stores resulting from the
acquisition of Funco in June 2000 and the 46 new stores opened since July 29,
2000.
During the second quarter, the Company opened four Barnes & Noble stores and
closed three, bringing its total number of Barnes & Noble bookstores to 569 with
13.5 million square feet. The Company closed four B. Dalton stores, ending the
period with 331 B. Dalton stores and 1.3 million square feet. The Company opened
13 and closed three Video Game & Entertainment Software stores, bringing its
total to 990 stores with 1.5 million square feet. As of August 4, 2001, the
Company operated 1,890 stores in fifty states, the District of Columbia, Puerto
Rico and Guam.
Cost of Sales and Occupancy
During the 13 weeks ended August 4, 2001, cost of sales and occupancy increased
$98.4 million, or 14.6%, to $774.7 million from $676.3 million during the 13
weeks ended July 29, 2000, primarily due to growth in the Video Game &
Entertainment Software segment. As a percentage of sales, cost of sales and
occupancy increased to 73.8% from 73.2% during the same period one year ago.
This increase was primarily attributable to lower gross margins in the Video
Game & Entertainment Software stores, partially offset by improved leverage on
bookstore occupancy costs.
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Selling and Administrative Expenses
Selling and administrative expenses increased $22.5 million to $214.7 million
during the 13 weeks ended August 4, 2001 from $192.2 million during the 13 weeks
ended July 29, 2000, primarily due to growth in the Video Game & Entertainment
Software segment. During the second quarter, selling and administrative expenses
decreased as a percentage of sales to 20.4% from 20.8% during the prior year
period.
Depreciation and Amortization
During the second quarter, depreciation and amortization increased $2.0 million,
or 5.8%, to $36.6 million from $34.6 million during the same period last year.
The increase was primarily the result of the increase in depreciation and
amortization in the Video Game & Entertainment Software segment.
Pre-opening Expenses
Pre-opening expenses decreased $0.9 million, or 51.5%, to $0.9 million during
the 13 weeks ended August 4, 2001 from $1.8 million for the 13 weeks ended July
29, 2000.
Operating Profit
The Company's consolidated operating profit increased to $23.2 million during
the 13 weeks ended August 4, 2001 from $19.4 million during the 13 weeks ended
July 29, 2000.
Interest Expense, Net and Amortization of Deferred Financing Fees
Net interest expense and amortization of deferred financing fees decreased to
$9.8 million during the 13 weeks ended August 4, 2001 from $13.3 million during
the 13 weeks ended July 29, 2000. The decrease was primarily the result of lower
interest rates on the Company's outstanding debt, partially through the issuance
of the convertible subordinated notes sold in March 2001.
Other Expense
Other expense of $2.3 million in the second quarter of 2001 was due to $0.9
million in equity losses in iUniverse.com, $0.7 million in equity losses in
BOOK(R) magazine and $0.7 million in equity losses in enews. Other expense of
$3.0 million in the second quarter of 2000 was due to equity losses in
iUniverse.com.
Benefit for Income Taxes
The benefit for income taxes during the 13 weeks ended August 4, 2001 was $1.2
million compared with $6.1 million during the 13 weeks ended July 29, 2000. Tax
benefits were based upon management's estimate of the Company's annualized
effective tax rates. The Company's effective tax rate was 41.5% for the second
quarter of 2001 and 2000.
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Net Loss
As a result of the factors discussed above, the Company reported a consolidated
net loss of ($1.7) million (or ($0.03) per share) during the 13 weeks ended
August 4, 2001, compared with a net loss of ($8.6) million (or ($0.13) per
share) during the 13 weeks ended July 29, 2000. Components of earnings per share
are as follows:
13 weeks ended
------------------------------
August 4, 2001 July 29, 2000
-------------- -------------
Retail Earnings Per Share
Bookstores $ 0.21 0.19
Video Game & Entertainment Software stores (0.06) (0.12)
------ ------
Retail EPS $ 0.15 0.07
EPS Impact of Investing Activities
Share of net losses of Barnes & Noble.com $(0.12) (0.16)
Share of net losses from other investments (including
Calendar Club) (0.06) (0.04)
------ ------
Total Investing Activities $(0.18) (0.20)
------ ------
Consolidated EPS $(0.03) (0.13)
====== ======
Results of Operations
26 weeks ended August 4, 2001 and July 29, 2000
Sales
Sales totaled $2.060 billion during the 26 weeks ended August 4, 2001, a 13.3%
increase over sales of $1.819 billion during the 26 weeks ended July 29, 2000.
Contributing to this improvement was an increase of $160.9 million from Video
Game & Entertainment Software stores. During the 26 weeks ended August 4, 2001,
Barnes & Noble "super" store sales rose 7.5% to $1.511 billion from $1.406
billion during the same period a year ago and accounted for 73.4% of total
Company sales or 91.5% of total bookstore sales.
During the 26 weeks ended August 4, 2001, the 7.5% increase in Barnes & Noble
"super" store sales was primarily attributable to a same store sales gain of
2.6% coupled with 27 new stores opened since July 29, 2000 which contributed a
4.2% increase in square footage. Sales were strong across most book categories,
particularly bargain and educational books (teaching aids and workbooks for the
growing home school market), as well as music and cafes.
During the 26 weeks ended August 4, 2001, B. Dalton sales declined 16.0% and
represented 6.6% of total Company sales. The decrease was primarily a result of
48 store closings and a 12.8% reduction in its square footage since July 29,
2000. In addition, B. Dalton's same store sales decreased 3.4% during the first
half of fiscal 2001.
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During the first half of fiscal 2001, the Company opened six Barnes & Noble
stores and closed six, bringing its total number of Barnes & Noble bookstores to
569 with 13.5 million square feet. The Company closed eight B. Dalton stores,
ending the period with 331 B. Dalton stores and 1.3 million square feet. The
Company opened 21 and closed nine Video Game & Entertainment Software stores,
bringing its total to 990 stores with 1.5 million square feet. As of August 4,
2001, the Company operated 1,890 stores in fifty states, the District of
Columbia, Puerto Rico and Guam.
Cost of Sales and Occupancy
During the 26 weeks ended August 4, 2001, cost of sales and occupancy increased
$194.9 million, or 14.6%, to $1,525.3 million from $1,330.4 million during the
26 weeks ended July 29, 2000. As a percentage of sales, cost of sales and
occupancy increased to 74.1% during fiscal 2001's first half from 73.2% during
the same period last year. This increase was primarily attributable to lower
gross margins in the Video Game & Entertainment Software segment, partially
offset by improved leverage on bookstore occupancy costs.
Selling and Administrative Expenses
Selling and administrative expenses increased $49.9 million, or 13.3%, to $424.9
million during the 26 weeks ended August 4, 2001 from $375.0 million during the
26 weeks ended July 29, 2000, primarily due to growth in the Video Game &
Entertainment Software segment. As a percentage of sales, selling and
administrative expenses were 20.6% during the first half of fiscal 2001 and
fiscal 2000.
Depreciation and Amortization
During the first half of fiscal 2001, depreciation and amortization increased
$5.7 million, or 8.5%, to $73.3 million from $67.6 million during the same
period last year. The increase was primarily the result of the increase in
depreciation and amortization in the Video Game & Entertainment Software
segment.
Pre-opening Expenses
Pre-opening expenses decreased $1.6 million, or 48.3%, to $1.7 million during
the 26 weeks ended August 4, 2001 from $3.3 million for the 26 weeks ended July
29, 2000.
Operating Profit
The Company's consolidated operating profit decreased to $34.5 million during
the 26 weeks ended August 4, 2001 from $42.3 million during the 26 weeks ended
July 29, 2000.
Interest Expense, Net and Amortization of Deferred Financing Fees
Net interest expense and amortization of deferred financing fees decreased to
$21.1 million during the 26 weeks ended August 4, 2001 from $23.1 million during
the 26 weeks ended July 29, 2000. The decrease was primarily the result of lower
interest rates on the Company's outstanding debt, partially through the issuance
of the convertible subordinated notes sold in March 2001.
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Other Expense
Other expense of $7.7 million in the first half of 2001 was primarily due to
$4.5 million in legal and settlement costs associated with the lawsuit brought
by the American Booksellers Association (ABA), $1.9 million in equity losses in
iUniverse.com and $1.3 million in net losses in other investments. Other expense
of $5.5 million in the first half of 2000 was due to equity losses in
iUniverse.com.
Income Taxes
The benefit for income taxes during the 26 weeks ended August 4, 2001 was $9.4
million compared with $9.1 million during the 26 weeks ended July 29, 2000. Tax
benefits were based upon management's estimate of the Company's annualized
effective tax rates. The Company's effective tax rate was 41.5% for the first
half of 2001 and 2000.
Net Loss
As a result of the factors discussed above, the Company reported a consolidated
net loss of ($13.2) million (or ($0.20) per share) during the 26 weeks ended
August 4, 2001, compared with a net loss of ($12.8) million (or ($0.20) per
share) during the 26 weeks ended July 29, 2000. Components of earnings per share
are as follows:
26 weeks ended
------------------------------
August 4, 2001 July 29, 2000
-------------- -------------
Retail Earnings Per Share
Bookstores $ 0.33 0.35
Video Game & Entertainment Software stores (0.16) (0.14)
------ ------
Retail EPS $ 0.17 0.21
EPS Impact of Investing Activities
Share of net losses of Barnes & Noble.com $(0.25) (0.32)
Share of net losses from other investments (including
Calendar Club) (0.08) (0.09)
------ ------
Total Investing Activities $(0.33) (0.41)
Other Adjustments
ABA legal and settlement costs $(0.04) --
------ ------
Total Other Adjustments $(0.04) --
------ ------
Consolidated EPS $(0.20) (0.20)
====== ======
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DISCLOSURE REGARDING 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, 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 Barnes & Noble.com, the performance and successful integration of acquired
businesses, the success of the Company's strategic investments, unanticipated
increases in merchandise or occupancy costs, unanticipated adverse litigation
results or effects, and other factors which may be outside of the Company's
control. In addition, the video game market has historically been cyclical in
nature and dependent upon the introduction of new generation systems and related
interactive software. 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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In March 1998, the American Booksellers Association (ABA) and 26
independent bookstores filed a lawsuit in the United States District Court for
the Northern District of California against the Company and Borders Group, Inc.
alleging violations of the Robinson-Patman Act, the California Unfair Trade
Practice Act and the California Unfair Competition Law. On March 20, 2001, the
court granted the Company summary judgment dismissing all claims for damages
under federal and state law. On April 19, 2001, the parties settled the
litigation of all other remaining claims.
For a more descriptive summary of the litigation and terms of the
settlement, see Item 3 in the Company's Annual Report on Form 10-K for the
fiscal year ended February 3, 2001 which was filed with the Securities and
Exchange Commission (SEC) on May 4, 2001.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on June 11, 2001.
At the close of business on the record date for the meeting (which was April 23,
2001), there were 65,401,406 shares of Common Stock outstanding and entitled to
vote at the meeting. Holders of 59,271,520 shares of Common Stock (representing
a like number of votes) were present at the meeting, either in person or by
proxy.
The following individuals were elected to the Company's Board of
Directors to hold office for a term of three years and until their respective
successors are duly elected and qualified.
Nominee In Favor Withheld
------- -------- --------
Leonard Riggio 58,777,221 494,299
Michael J. Del Giudice 58,790,868 480,652
William Sheluck, Jr. 58,796,928 474,592
The Shareholders ratified the appointment of BDO Seidman, LLP as
independent certified public accountants for the fiscal year ending February 2,
2002 by a vote of:
In Favor Against Abstained
-------- ------- ---------
59,014,865 215,357 41,298
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed with this Form 10-Q:
None.
(b) No report on Form 8-K was filed during the Company's
quarter ended August 4, 2001.
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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)
By: /s/Maureen O'Connell
-------------------------------
Maureen O'Connell
Chief Financial Officer
September 18, 2001
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