UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 September 30, 2003 |
or
| o | 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: 0-26063
barnesandnoble.com inc.
| Delaware | 13-4048787 | |||
| (State or Other Jurisdiction of | (I.R.S. Employer | |||
| Incorporation or Organization) | Identification No.) | |||
| 76 Ninth Avenue, New York, NY | 10011 | |||
| (Address of Principal Executive Offices) | (Zip Code) |
(212) 414-6000
(Registrant’s Telephone Number, Including Area Code)
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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Number of shares of $.001 par value Class A Common Stock, Class B Common Stock and Class C Common Stock outstanding as of November 10, 2003 was 48,907,749, one and one, respectively.
barnesandnoble.com inc.
September 30, 2003
Index to Form 10-Q
| Page No. | ||||||||
| PART I - | FINANCIAL INFORMATION |
|||||||
| Item 1: | Financial Statements |
3 | ||||||
| Item 2: | Management’s Discussion and Analysis of Financial Condition and
Results of Operations |
12 | ||||||
| Item 3: | Quantitative and Qualitative Disclosures About Market Risk |
17 | ||||||
| Item 4: | Controls and Procedures |
17 | ||||||
| PART II - | OTHER INFORMATION |
|||||||
| Item 1: | Legal Proceedings |
18 | ||||||
| Item 2: | Changes in Securities and Use of Proceeds |
18 | ||||||
| Item 3: | Defaults upon Senior Securities |
18 | ||||||
| Item 4: | Submission of Matters to a Vote of Security Holders |
18 | ||||||
| Item 5: | Other Information |
18 | ||||||
| Item 6: | Exhibits and Reports on Form 8-K |
19 | ||||||
| Signatures | 22 | |||||||
2
PART I — FINANCIAL INFORMATION
Item 1: Financial Statements
barnesandnoble.com inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of dollars, except per share data)
(unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||
| September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||||
Net sales |
$ | 98,993 | $ | 102,575 | $ | 291,433 | $ | 294,947 | |||||||||||
Cost of sales |
74,688 | 77,997 | 219,915 | 227,034 | |||||||||||||||
Gross profit |
24,305 | 24,578 | 71,518 | 67,913 | |||||||||||||||
Operating expenses: |
|||||||||||||||||||
Fulfillment and customer service |
8,457 | 8,240 | 25,413 | 26,237 | |||||||||||||||
Marketing, sales and editorial |
7,187 | 8,682 | 22,945 | 26,731 | |||||||||||||||
Technology and web site
development |
8,056 | 8,190 | 23,168 | 27,022 | |||||||||||||||
General and administrative |
6,572 | 6,998 | 19,338 | 19,802 | |||||||||||||||
Depreciation and amortization |
6,210 | 8,428 | 20,322 | 24,953 | |||||||||||||||
Equity in net loss of equity
investments including related
amortization of intangibles |
— | 1,805 | — | 3,179 | |||||||||||||||
Total operating expenses |
36,482 | 42,343 | 111,186 | 127,924 | |||||||||||||||
Loss from operations |
(12,177 | ) | (17,765 | ) | (39,668 | ) | (60,011 | ) | |||||||||||
Interest income, net |
22 | 303 | 186 | 1,395 | |||||||||||||||
Loss before minority interest |
(12,155 | ) | (17,462 | ) | (39,482 | ) | (58,616 | ) | |||||||||||
Minority interest |
9,086 | 12,647 | 29,541 | 42,452 | |||||||||||||||
Net loss |
$ | (3,069 | ) | $ | (4,815 | ) | $ | (9,941 | ) | $ | (16,164 | ) | |||||||
Basic net loss per common share |
($ | 0.08 | ) | ($ | 0.11 | ) | ($ | 0.25 | ) | ($ | 0.37 | ) | |||||||
Basic weighted average common
shares outstanding (1) |
40,247 | 43,788 | 40,090 | 43,788 | |||||||||||||||
| (1) | Excludes assumed conversion of Membership Units and the elimination of minority interest, as it is not dilutive. |
See accompanying notes to consolidated financial statements.
3
barnesandnoble.com inc.
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except per share data)
| September 30, | December 31, | ||||||||||
| 2003 | 2002 | ||||||||||
| (unaudited) | |||||||||||
ASSETS |
|||||||||||
Current assets: |
|||||||||||
Cash and cash equivalents |
$ | 37,959 | $ | 70,144 | |||||||
Receivables, net of allowance $1,889 and $4,048, respectively |
5,524 | 14,631 | |||||||||
Merchandise inventories |
47,993 | 48,303 | |||||||||
Prepaid expenses and other current assets |
4,122 | 3,991 | |||||||||
Total current assets |
95,598 | 137,069 | |||||||||
Fixed assets, net |
46,395 | 58,871 | |||||||||
Goodwill, net |
13,777 | 13,777 | |||||||||
Other non-current assets |
20 | 17 | |||||||||
Total assets |
$ | 155,790 | $ | 209,734 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|||||||||||
Current liabilities: |
|||||||||||
Accounts payable |
$ | 12,536 | $ | 16,071 | |||||||
Accrued liabilities |
54,871 | 70,456 | |||||||||
Payable to affiliate |
51,715 | 48,261 | |||||||||
Total current liabilities |
119,122 | 134,788 | |||||||||
Minority interest |
22,706 | 52,305 | |||||||||
Commitments and contingencies |
|||||||||||
Stockholders’ equity: |
|||||||||||
Preferred Stock: $0.001 par value; 50,000,000 shares authorized; none
issued and outstanding |
— | — | |||||||||
Common Stock Series A: $0.001 par value; 750,000,000 shares authorized;
44,594,993 and 43,802,228 shares issued and outstanding |
44 | 44 | |||||||||
Common Stock Series B: $0.001 par value; 1,000 shares authorized; 1 share
issued and outstanding |
— | — | |||||||||
Common Stock Series C: $0.001 par value; 1,000 shares authorized; 1 share
issued and outstanding |
— | — | |||||||||
Paid-in capital |
190,555 | 189,294 | |||||||||
Accumulated deficit |
(176,637 | ) | (166,697 | ) | |||||||
Total stockholders’ equity |
13,962 | 22,641 | |||||||||
Total liabilities and stockholders’ equity |
$ | 155,790 | $ | 209,734 | |||||||
See accompanying notes to consolidated financial statements.
4
barnesandnoble.com inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars, except per share data)
(unaudited)
| Nine Months Ended | ||||||||||
| September 30, | September 30, | |||||||||
| 2003 | 2002 | |||||||||
Cash flows from operating activities: |
||||||||||
Net loss |
$ | (9,941 | ) | $ | (16,165 | ) | ||||
Adjustments to reconcile net loss to net cash flows from operating activities: |
||||||||||
Depreciation and amortization |
20,304 | 25,142 | ||||||||
Decrease in receivables, net |
9,107 | 3,684 | ||||||||
Decrease (increase) in merchandise inventories |
310 | (1,058 | ) | |||||||
Increase in prepaid expenses and other current assets |
(131 | ) | (820 | ) | ||||||
Increase (decrease) in accounts payable |
(3,535 | ) | 12,006 | |||||||
Increase (decrease) in payable to affiliate |
3,454 | (3,999 | ) | |||||||
Decrease in accrued liabilities |
(15,585 | ) | (16,764 | ) | ||||||
Minority interest in loss |
(29,541 | ) | (42,452 | ) | ||||||
Net cash flows used in operating activities |
(25,558 | ) | (40,426 | ) | ||||||
Cash flows from investing activities: |
||||||||||
Purchases of fixed assets |
(7,827 | ) | (5,254 | ) | ||||||
Sales of marketable securities |
— | 10,141 | ||||||||
Decrease (increase) in other non-current assets |
(3 | ) | 4,396 | |||||||
Net cash flows from (used in) investing activities |
(7,830 | ) | 9,283 | |||||||
Cash flows from financing activities: |
||||||||||
Proceeds from exercise of stock options |
1,203 | 1 | ||||||||
Net cash flows from financing activities |
1,203 | 1 | ||||||||
Net change in cash and cash equivalents |
(32,185 | ) | (31,142 | ) | ||||||
Cash and cash equivalents at beginning of period |
70,144 | 105,125 | ||||||||
Cash and cash equivalents at end of period |
$ | 37,959 | $ | 73,983 | ||||||
See accompanying notes to consolidated financial statements.
5
barnesandnoble.com inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2003 and September 30, 2002
(in thousands of dollars, except per share data)
(unaudited)
The unaudited consolidated financial statements include the accounts of barnesandnoble.com inc. (the “Company”), barnesandnoble.com llc (“B&N.com”) and BookQuest LLC (“BookQuest”), a wholly owned subsidiary of B&N.com.
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 September 30, 2003 and the results of its operations for the three months and nine months then ended and its cash flows for the nine months 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 year ended December 31, 2002. The Company followed the same accounting policies in preparation of this report as in such Annual Report. Operating results for the three months and nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.
| 1. | ORGANIZATION |
The Company is a holding company whose sole asset is a 29.8% equity interest in B&N.com, an online retailer of books, music and DVD/video, and whose sole business is currently acting as sole manager of B&N.com. As sole manager of B&N.com, the Company controls all of the affairs of B&N.com and as a result, B&N.com is consolidated with the Company. As of September 30, 2003, Barnes & Noble, Inc. (“Barnes & Noble”) beneficially owns an equity interest of 74.7%, (or 115,000 Membership Units and 4,139 shares of Class A Common Stock) in B&N.com. Barnes & Noble increased its interest to that level on September 15, 2003 by acquiring the entire 36.8% equity interest of Bertelsmann AG (“Bertelsmann”) in B&N.com for $2.80 per share or Membership Unit ($164,000 total), payable in a combination of cash and notes. Each Membership Unit held by Barnes & Noble is convertible into one share of the Company’s Class A Common Stock. As reflected in the consolidated statements of operations, the loss before minority interest represents the total loss for the period and the net loss represents the portion of the loss attributable to the Company subsequent to the commencement of its activities.
| 2. | RECLASSIFICATIONS |
Certain prior-period amounts have been reclassified for comparative purposes to conform to the 2003 presentation.
| 3. | STOCK OPTIONS |
The Company has one stock-based employee compensation plan in effect. The Company accounts for all transactions under which employees receive shares of stock or other equity instruments in the Company based on the price of its stock in accordance with the provisions of Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees”. Options which have been repriced have been treated as variable options. No stock-based employee compensation cost is reflected in net loss, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant and the market price of the stock subsequent to the repricing has not exceeded the exercise price. The following table illustrates the effect on net loss and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 “Stock-Based Compensation” (“SFAS No. 123”).
6
barnesandnoble.com inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2003 and September 30, 2002
(in thousands of dollars, except per share data)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
Net loss: |
||||||||||||||||||
As reported |
$ | (3,069 | ) | $ | (4,815 | ) | $ | (9,941 | ) | $ | (16,165 | ) | ||||||
Deduct: Total stock-based
employee
compensation expense
determined under fair
value based method for
all awards ($3,724 and
$2,129 for the three
months ended September
30, 2003 and 2002,
respectively and $5,060
and $9,145 for the nine
months ended September
30, 2003 and 2002,
respectively), net of
minority
interest |
(937 | ) | (587 | ) | (1,274 | ) | (2,524 | ) | ||||||||||
Proforma net loss |
$ | (4,006 | ) | $ | (5,402 | ) | $ | (11,215 | ) | $ | (18,689 | ) | ||||||
Basic net loss per share: |
||||||||||||||||||
As reported |
$ | (0.08 | ) | $ | (0.11 | ) | $ | (0.25 | ) | $ | (0.37 | ) | ||||||
Proforma SFAS No. 123 |
$ | (0.10 | ) | $ | (0.12 | ) | $ | (0.28 | ) | $ | (0.43 | ) | ||||||
The fair value for each option granted was estimated at the date of grant using the Black-Scholes option-pricing model, one of the allowable valuation methods under SFAS No. 123, with the following assumptions:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Average risk free interest rates |
4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | ||||||||
Average expected life (in years) |
3.73 | 5.00 | 3.17 | 5.00 | ||||||||||||
Volatility |
98.43 | % | 140.07 | % | 98.43 | % | 140.07 | % | ||||||||
The weighted-average fair value of the options granted during the three months ended September 30, 2003 and 2002 was estimated to be $1.59 and $0.83, respectively, and $0.66 and $1.09 for the nine months ended September 30, 2003 and 2002, respectively, for options granted at fair market value.
| 4. | ACCRUED SPECIAL CHARGES |
An impairment of fixed assets and other special charges of $88,213 ($0.56 per share assuming conversion of membership units) was recorded as a component of operating expenses during the fourth quarter of 2001. These charges were primarily related to the impairment of fixed and other assets, including equity investments, as well as the consolidation of fulfillment operations and administrative functions. At September 30, 2003, the accrued liability associated with the special charges was $4,374 and consisted of the following:
| Balance | 2003 | Balance | Due within | Due after | ||||||||||||||||
| 31-Dec-02 | Payments | 30-Sept-03 | 12 Months | 12 Months | ||||||||||||||||
Facility/lease termination costs |
$ | 4,569 | $ | 889 | $ | 3,680 | $ | 1,588 | $ | 2,092 | ||||||||||
Employee termination benefits |
80 | 30 | 50 | 50 | — | |||||||||||||||
Other impairment charges |
644 | — | 644 | 644 | — | |||||||||||||||
| $ | 5,293 | $ | 919 | $ | 4,374 | $ | 2,282 | $ | 2,092 | |||||||||||
7
barnesandnoble.com inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2003 and September 30, 2002
(in thousands of dollars, except per share data)
(unaudited)
| 5. | INVESTMENTS IN EQUITY METHOD INVESTEES |
The Company has made certain investments in business entities accounted for under the equity method of accounting. The Company accounts for an investment under the equity method if the investment gives the Company the ability to exercise significant influence over the operating and financial policies of such entity. An investment of 20% or more of the voting stock typically denotes such influence, in the absence of other evidence to the contrary.
The Company has periodically evaluated whether the declines in fair value of its equity investments are other-than-temporary. This evaluation consisted of reviewing qualitative and quantitative factors including operating results and trends, as well as market prices of public companies operating in the same sector. As of September 30, 2003, the investment in equity method investees had no carrying value as the business entity invested in has ceased all operations and is in the process of being dissolved.
| 6. | RELATED PARTY TRANSACTIONS |
B&N.com has entered into agreements with Barnes & Noble, Bertelsmann and their affiliates. The Company believes that the transactions and agreements discussed below (including renewals of any existing agreements) between B&N.com and its affiliates are at least as favorable to B&N.com as could be obtained from unaffiliated parties. The Board of Directors and its Audit Committee must approve in advance any proposed transaction or agreement with affiliates and will utilize procedures in evaluating the terms and provisions of such proposed transaction or agreement as are appropriate in light of the fiduciary duties of directors under Delaware law.
B&N.com entered into a Supply Agreement, dated October 31, 1998, as amended, with Barnes & Noble (the “Supply Agreement”), whereby Barnes & Noble has agreed to supply inventory to B&N.com through Barnes & Noble’s distribution facilities and purchasing departments. Pursuant to the Supply Agreement, Barnes & Noble charges B&N.com its actual cost to acquire the inventory plus any incremental overhead incurred by Barnes & Noble in connection with providing such merchandise supply services. The Company purchased $77,671 and $74,911 from Barnes & Noble representing 36.0% and 38.0% of the Company’s merchandise purchases for the nine months ended September 30, 2003 and 2002, respectively. The charges for incremental overhead for the nine months ended September 30, 2003 and 2002 were $2,535 and $1,750, respectively.
Under a Services Agreement, dated October 31, 1998, as amended, between B&N.com and Barnes & Noble (the “Services Agreement”), B&N.com receives various administrative services from Barnes & Noble, including, among other things, services for payroll processing, benefits administration, insurance (property and casualty, medical, dental and life) and tax administration. In accordance with the terms of the Services Agreement, B&N.com reimburses Barnes & Noble in an amount equal to the third-party expenses it incurs to fund and provide such services, plus any incremental internal costs. B&N.com was charged $1,349 and $1,256 for such services during the nine months ended September 30, 2003 and 2002, respectively.
B&N.com purchases merchandise directly from Calendar Club, L.L.C. (“Calendar Club”), a company engaged in the wholesaling and retailing of calendars, in which Barnes & Noble owns a 73.9% interest. B&N.com’s purchases from Calendar Club were $1,207 and $1,740 for the nine months ended September 30, 2003 and 2002, respectively.
B&N.com subleases from Barnes & Noble approximately one-third of a 300,000 square foot warehouse facility located in New Jersey. B&N.com was charged by Barnes & Noble $419 and $373 for such subleased space during the nine months ended September 30, 2003 and 2002, respectively. The amount paid to Barnes & Noble by B&N.com approximates the cost per square foot paid by Barnes & Noble as tenant pursuant to its lease of the space from an unaffiliated third party.
Since 1999, B&N.com has used AEC One Stop Group, Inc. (“AEC”) as its main music supplier, and as one of its suppliers of DVD/video. AEC is among the largest wholesale distributors of music, videos and DVDs in the United States. AEC also provides B&N.com with a music, DVD and video product database. Subsequent to the initial supply arrangement between AEC and B&N.com, AEC’s parent corporation was acquired by an investor group in which Leonard Riggio, Chairman of the Board of the Company and B&N.com, became a minority investor. B&N.com was charged by AEC $28,099 and $19,659, representing 13.0% and 10.0% of the Company’s merchandise purchases, during the nine months ended September 30, 2003 and 2002, respectively. In addition, B&N.com was charged by AEC $252 and $188 for database services during the nine months ended September 30, 2003 and 2002, respectively. At September 30, 2003 and 2002, $3,402 and $2,175, respectively, remained payable to AEC.
8
barnesandnoble.com inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2003 and September 30, 2002
(in thousands of dollars, except per share data)
(unaudited)
B&N.com licenses the “Barnes & Noble” name under a royalty-free license agreement, dated October 31, 1998, as amended, between B&N.com and Barnes & Noble College Bookstores, Inc. (the “License Agreement”), of which Leonard Riggio is the principal stockholder. Pursuant to the License Agreement, the Company has been granted an exclusive license to use the “Barnes & Noble” name and trademark for the purpose of selling books over the Internet (excluding sales of college textbooks). Under a separate agreement dated as of January 2001, between the Company and Textbooks.com, Inc. (“Textbooks.com”), a corporation owned by Leonard Riggio, B&N.com was granted the right to sell college textbooks over the Internet using the “Barnes & Noble” name. Pursuant to this agreement, B&N.com pays Textbooks.com a royalty on revenues (net of product returns, applicable sales tax and excluding shipping and handling) realized by the Company from the sale of books designated as textbooks. The term of the agreement is for five years and renews annually for additional one-year periods unless terminated 12 months prior to the end of any given term. For the nine months ended September 30, 2003 and 2002, the Company recorded royalty expense of $3,320 and $3,119, respectively, under the terms of this agreement.
B&N.com has various royalty-free non-exclusive licenses dated October 31, 1998, as amended, from Barnes & Noble and Bertelsmann’s Books Onl