SECURITIES AND EXCHANGE COMMISSION
(Mark One)
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended July 31, 2004 |
| 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: 1-12302
BARNES & NOBLE, INC.
| 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
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 Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
Number of shares of $.001 par value common stock outstanding as of August 31, 2004: 70,091,451.
BARNES & NOBLE, INC. AND SUBSIDIARIES
July 31, 2004
Index to Form 10-Q
| Page No. |
||||||||
| 3 | ||||||||
| 4 | ||||||||
| 6 | ||||||||
| 7 | ||||||||
| 8 | ||||||||
| 19 | ||||||||
| 20 | ||||||||
| 28 | ||||||||
| 29 | ||||||||
| 30 | ||||||||
| 30 | ||||||||
| 30 | ||||||||
| 32 | ||||||||
| 33 | ||||||||
| E-1 | ||||||||
| EX-31.1 CERTIFICATION | ||||||||
| EX-31.2 CERTIFICATION | ||||||||
| EX-32.1 CERTIFICATION | ||||||||
| EX-32.2 CERTIFICATION | ||||||||
PART I — FINANCIAL INFORMATION
Item 1: Financial Statements
BARNES & NOBLE, INC. AND SUBSIDIARIES
| 13 weeks ended |
26 weeks ended |
|||||||||||||||
| July 31, 2004 |
August 2, 2003 |
July 31, 2004 |
August 2, 2003 |
|||||||||||||
Sales |
$ | 1,445,942 | 1,283,243 | 2,875,875 | 2,468,848 | |||||||||||
Cost of sales and occupancy |
1,047,923 | 946,270 | 2,097,552 | 1,831,230 | ||||||||||||
Gross profit |
398,019 | 336,973 | 778,323 | 637,618 | ||||||||||||
Selling and administrative expenses |
312,868 | 259,184 | 619,000 | 509,857 | ||||||||||||
Depreciation and amortization |
45,983 | 39,246 | 90,718 | 78,286 | ||||||||||||
Pre-opening expenses |
2,622 | 2,458 | 5,253 | 3,960 | ||||||||||||
Operating profit |
36,546 | 36,085 | 63,352 | 45,515 | ||||||||||||
Interest (net of interest income of
$546, $452, $1,293 and $1,006,
respectively) and amortization of
deferred financing fees |
(3,512 | ) | (4,710 | ) | (7,856 | ) | (9,353 | ) | ||||||||
Debt redemption charge |
(14,582 | ) | — | (14,582 | ) | — | ||||||||||
Equity in net loss of Barnes &
Noble.com |
— | (5,404 | ) | — | (10,376 | ) | ||||||||||
Income before taxes and
minority interest |
18,452 | 25,971 | 40,914 | 25,786 | ||||||||||||
Income taxes |
7,246 | 10,454 | 16,342 | 10,379 | ||||||||||||
Income before minority interest |
11,206 | 15,517 | 24,572 | 15,407 | ||||||||||||
Minority interest |
(2,296 | ) | (1,854 | ) | (4,219 | ) | (3,770 | ) | ||||||||
Net income |
$ | 8,910 | 13,663 | 20,353 | 11,637 | |||||||||||
Income per common share |
||||||||||||||||
Basic |
$ | 0.13 | 0.21 | 0.30 | 0.18 | |||||||||||
Diluted |
$ | 0.12 | 0.20 | 0.28 | 0.17 | |||||||||||
Weighted average common shares
outstanding |
||||||||||||||||
Basic |
68,591,000 | 64,851,000 | 68,369,000 | 64,859,000 | ||||||||||||
Diluted |
71,052,000 | 66,703,000 | 70,884,000 | 66,260,000 | ||||||||||||
See accompanying notes to consolidated financial statements.
3
BARNES & NOBLE, INC. AND SUBSIDIARIES
| July 31, 2004 |
August 2, 2003 |
January 31, 2004 |
||||||||||
| (unaudited) | ||||||||||||
ASSETS |
||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 182,607 | 170,205 | 487,200 | ||||||||
Receivables, net |
71,022 | 71,611 | 60,529 | |||||||||
Barnes & Noble.com receivable |
— | 32,411 | — | |||||||||
Merchandise inventories |
1,512,242 | 1,434,719 | 1,526,156 | |||||||||
Prepaid expenses and other current assets |
129,445 | 107,735 | 119,604 | |||||||||
Total current assets |
1,895,316 | 1,816,681 | 2,193,489 | |||||||||
Property and equipment: |
||||||||||||
Land and land improvements |
5,247 | 3,247 | 3,247 | |||||||||
Buildings and leasehold improvements |
545,476 | 498,472 | 533,272 | |||||||||
Fixtures and equipment |
1,204,692 | 985,475 | 1,141,317 | |||||||||
| 1,755,415 | 1,487,194 | 1,677,836 | ||||||||||
Less accumulated depreciation and
amortization |
1,064,720 | 875,052 | 991,187 | |||||||||
Net property and equipment |
690,695 | 612,142 | 686,649 | |||||||||
Goodwill |
597,867 | 397,097 | 509,244 | |||||||||
Intangible assets, net |
100,663 | 47,276 | 94,574 | |||||||||
Investment in Barnes & Noble.com |
— | 14,378 | — | |||||||||
Other noncurrent assets |
69,529 | 23,766 | 23,338 | |||||||||
Total assets |
$ | 3,354,070 | 2,911,340 | 3,507,294 | ||||||||
(Continued)
4
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(thousands of dollars, except per share data)
| July 31, 2004 |
August 2, 2003 |
January 31, 2004 |
||||||||||
| (unaudited) | ||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||||||
Current liabilities: |
||||||||||||
Accounts payable |
$ | 790,931 | 704,774 | 858,068 | ||||||||
Accrued liabilities |
502,554 | 408,564 | 583,773 | |||||||||
Total current liabilities |
1,293,485 | 1,113,338 | 1,441,841 | |||||||||
Long-term debt |
257,400 | 319,000 | 300,000 | |||||||||
Deferred income taxes |
169,879 | 119,853 | 170,066 | |||||||||
Other long-term liabilities |
108,352 | 115,838 | 108,441 | |||||||||
Minority interest |
208,820 | 197,396 | 227,287 | |||||||||
Shareholders’ equity: |
||||||||||||
Common stock; $.001 par value; 300,000,000
shares authorized; 78,302,017,
73,873,637 and 76,854,856 shares
issued, respectively |
78 | 74 | 77 | |||||||||
Additional paid-in capital |
958,627 | 840,754 | 914,319 | |||||||||
Accumulated other comprehensive loss |
(8,872 | ) | (11,095 | ) | (8,579 | ) | ||||||
Retained earnings |
562,324 | 403,287 | 543,503 | |||||||||
Treasury stock, at cost, 9,007,700,
8,807,700 and 8,807,700 shares,
respectively |
(196,023 | ) | (187,105 | ) | (189,661 | ) | ||||||
Total shareholders’ equity |
1,316,134 | 1,045,915 | 1,259,659 | |||||||||
Commitments and contingencies |
— | — | — | |||||||||
Total liabilities and shareholders’ equity |
$ | 3,354,070 | 2,911,340 | 3,507,294 | ||||||||
See accompanying notes to consolidated financial statements.
5
BARNES & NOBLE, INC. AND SUBSIDIARIES
| Additional | Accumulated Other | Treasury | ||||||||||||||||||||||
| Common | Paid-In | Comprehensive | Retained | Stock at | ||||||||||||||||||||
| Stock |
Capital |
Losses |
Earnings |
Cost |
Total |
|||||||||||||||||||
Balance at January 31, 2004 |
$ | 77 | $ | 914,319 | $ | (8,579 | ) | $ | 543,503 | $ | (189,661 | ) | $ | 1,259,659 | ||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income |
— | — | — | 20,353 | — | |||||||||||||||||||
Other comprehensive loss: |
||||||||||||||||||||||||
Foreign currency translation |
— | — | (171 | ) | — | — | ||||||||||||||||||
Unrealized loss on
available-for-sale
securities (net of deferred
tax of $84) |
— | — | (122 | ) | — | — | ||||||||||||||||||
Total comprehensive income |
20,060 | |||||||||||||||||||||||
Exercise of 901,340 common stock
options (including tax benefit of
$5,198) |
1 | 22,896 | — | — | — | 22,897 | ||||||||||||||||||
Exercise of common stock options
of subsidiary (including tax
benefit of $1,652) |
— | 4,050 | — | — | — | 4,050 | ||||||||||||||||||
Conversion of subordinated notes
(See footnote 2) |
— | 17,362 | — | — | — | 17,362 | ||||||||||||||||||
Change in reporting period of
subsidiary (See footnote 1) |
— | — | — | (1,532 | ) | — | (1,532 | ) | ||||||||||||||||
Treasury stock acquired, 200,000
shares |
— | — | — | — | (6,362 | ) | (6,362 | ) | ||||||||||||||||
Balance at July 31, 2004 |
$ | 78 | $ | 958,627 | $ | (8,872 | ) | $ | 562,324 | $ | (196,023 | ) | $ | 1,316,134 | ||||||||||
See accompanying notes to consolidated financial statements.
6
BARNES & NOBLE, INC. AND SUBSIDIARIES
| 26 weeks ended |
||||||||
| July 31, 2004 |
August 2, 2003 |
|||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 20,353 | 11,637 | |||||
Adjustments to reconcile net income to net cash flows from operating
activities: |
||||||||
Depreciation and amortization (including amortization of deferred
financing fees) |
92,128 | 79,750 | ||||||
Non cash portion of debt redemption charge (deferred financing fees) |
6,112 | — | ||||||
Minority interest |
4,219 | 3,770 | ||||||
Loss on disposal of property and equipment |
68 | 2,898 | ||||||
Equity in net loss of Barnes & Noble.com |
— | 10,376 | ||||||
Deferred taxes |
(103 | ) | — | |||||
Increase in other long-term liabilities for scheduled rent increases
in long-term leases |
(108 | ) | 618 | |||||
Changes in operating assets and liabilities, net |
(137,673 | ) | (139,892 | ) | ||||
Net cash flows from operating activities |
(15,004 | ) | (30,843 | ) | ||||
Cash flows from investing activities: |
||||||||
Acquisition of consolidated subsidiaries, net of cash acquired |
(155,881 | ) | (3,144 | ) | ||||
Purchases of property and equipment |
(104,269 | ) | (70,997 | ) | ||||
Purchase of investments |
— | (1,474 | ) | |||||
Net increase in other noncurrent assets |
(1,394 | ) | (782 | ) | ||||
Net cash flows from investing activities |
(261,544 | ) | (76,397 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from exercise of common stock options |
22,408 | 8,029 | ||||||
Purchase of treasury stock through repurchase program |
(6,362 | ) | (5,714 | ) | ||||
Acquisition of minority interest |
(14,994 | ) | (11,512 | ) | ||||
Redemption of subordinated notes |
(286,497 | ) | — | |||||
Net increase in revolving credit facility |
257,400 | 19,000 | ||||||
Net cash flows from financing activities |
(28,045 | ) | 9,803 | |||||
Net decrease in cash and cash equivalents |
(304,593 | ) | (97,437 | ) | ||||
Cash and cash equivalents at beginning of period |
487,200 | 267,642 | ||||||
Cash and cash equivalents at end of period |
$ | 182,607 | 170,205 | |||||
Changes in operating assets and liabilities, net: |
||||||||
Receivables, net |
$ | (10,493 | ) | 19,145 | ||||
Merchandise inventories |
13,914 | (36,678 | ) | |||||
Prepaid expenses and other current assets |
(9,841 | ) | (6,148 | ) | ||||
Accounts payable and accrued liabilities |
(131,253 | ) | (116,211 | ) | ||||
Changes in operating assets and liabilities, net |
$ | (137,673 | ) | (139,892 | ) | |||
Supplemental cash flow information: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 13,200 | 9,040 | |||||
Income taxes |
$ | 47,649 | 95,869 | |||||
Supplemental disclosure of subsidiaries acquired: |
||||||||
Assets acquired |
$ | 155,881 | 7,668 | |||||
Liabilities assumed |
— | 4,524 | ||||||
Cash paid |
$ | 155,881 | 3,144 | |||||
See accompanying notes to consolidated financial statements.
7
BARNES & NOBLE, INC. AND SUBSIDIARIES
The unaudited consolidated financial statements include the accounts of Barnes & Noble, Inc. and its subsidiaries (collectively, the Company).
In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly its consolidated financial position as of July 31, 2004 and the results of its operations and its cash flows for the 26 weeks then ended. These consolidated financial statements are condensed and therefore do not include all of the information and footnotes required by generally accepted accounting principles. The consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the 52 weeks ended January 31, 2004 (fiscal 2003). The Company follows the same accounting policies in preparation of interim reports.
Due to the seasonal nature of the business, the results of operations for the 26 weeks ended July 31, 2004 are not indicative of the results to be expected for the 52 weeks ending January 29, 2005 (fiscal 2004).
| (1) | Barnes & Noble.com Acquisition |
On September 15, 2003, the Company completed its acquisition of all of Bertelsmann AG’s (Bertelsmann) interest in barnesandnoble.com inc. (bn.com) and barnesandnoble.com llc (Barnes & Noble.com). The purchase price paid by the Company was $165,406 (including acquisition related costs) in a combination of cash and a note, equivalent to $2.80 per share in bn.com or membership unit in Barnes & Noble.com. The note issued to Bertelsmann in the amount of $82,000 was paid in the fourth quarter of fiscal 2003. As a result of the acquisition, the Company increased its economic interest in Barnes & Noble.com to approximately 75 percent.
On May 27, 2004, the Company completed a merger (the Merger) of bn.com with a wholly owned subsidiary of the Company. The purchase price paid by the Company was $155,881 (including acquisition related costs). Under the terms of the Merger, the holders of bn.com’s outstanding common stock, other than the Company and its subsidiaries, received $3.05 in cash for each share that they owned. The Merger was approved by the shareholders of bn.com at a special meeting held on May 27, 2004. The allocation of the purchase price to the proportional amount of assets acquired and liabilities assumed was substantially completed during the second quarter of fiscal 2004, although minor adjustments may occur. As a result of the Merger, bn.com became a privately held company, wholly owned by the Company.
8
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 26 weeks ended July 31, 2004 and August 2, 2003
(thousands of dollars, except per share data)
(unaudited)
The acquisitions were accounted for by the purchase method of accounting and, accordingly, the results of operations since September 15, 2003 are included in the consolidated financial statements. Based upon the assessment of the fair values, the allocation of the purchase price to the proportionate amount of assets acquired and liabilities assumed in the above noted transactions was as follows, subject to being finalized:
Current assets |
$ | 58,835 | ||
Hardware and software |
24,625 | |||
Other assets |
15,543 | |||
Customer list and relationships |
7,700 | |||
Trade name |
48,400 | |||
Deferred tax assets |
52,913 | |||
Goodwill |
182,061 | |||
Total assets acquired |
390,077 | |||
Liabilities assumed |
68,790 | |||
Total purchase price |
$ | 321,287 | ||
Hardware and software have been assigned an estimated useful life of four years. The customer list and relationships intangible asset has been assigned an estimated useful life of four years to be amortized on an accelerated basis based on estimated usage where a substantial portion of the asset will be amortized in the first year. The goodwill and the trade name (which is considered to have an indefinite life and will not be amortized) will be tested at least annually for impairment in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”.
9
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 26 weeks ended July 31, 2004 and August 2, 2003
(thousands of dollars, except per share data)
(unaudited)
The following table summarizes pro forma results for the 13 weeks and 26 weeks ended August 2, 2003, as if the Company had acquired Barnes & Noble.com (resulting in a 100 percent economic interest) and recorded the above noted allocations of purchase price on the first day of fiscal 2003:
| 13 weeks ended | 26 weeks ended | |||||||
| August 2, 2003 |
August 2, 2003 |
|||||||
Sales |
$ | 1,373,125 | 2,644,739 | |||||
Net income |
$ | 8,600 | 882 | |||||
Income per common share |
||||||||
Basic |
$ | 0.13 | 0.01 | |||||
Diluted |
$ | 0.13 | 0.01 | |||||
The information has been prepared for comparative purposes only and does not purport to be indicative of the results of operations which actually would have occurred had the acquisition taken place on the date indicated, or which may result in the future. The Company’s management reviews these pro forma results internally to evaluate the Company’s performance and manage its operations. In addition, since the Company will consolidate bn.com in the future, the Company believes that pro forma results (as if the Company consolidated bn.com) provide investors a better understanding of the Company’s current operating results and provide a comparable measure to help investors understand the Company’s future operating results.
Prior to the quarter ended July 31, 2004, Barnes & Noble, Inc. reported the results of Barnes & Noble.com on a one month lag basis. Subsequent to the Merger, the results of Barnes & Noble.com have been included based on a reporting period which is consistent with that of the Company. As a result of this change, retained earnings has been charged directly for the $1,532 loss of Barnes & Noble.com for the month of January 2004, and all other reported results are presented as though the reporting period of Barnes & Noble.com was changed at the beginning of the current year. The following table summarizes operating results for the first quarter of fiscal 2004, as previously reported, compared to the results of the first quarter of fiscal 2004 which reflect Barnes & Noble.com on a common reporting period (As Revised):
| As Originally Reported |
As Revised |
|||||||
| Q1 2004 |
Q1 2004 |
|||||||
Sales |
$ | 1,452,845 | 1,429,933 | |||||
Net income |
$ | 12,454 | 11,443 | |||||
Income per common share |
||||||||
Basic |
$ | 0.18 | 0.17 | |||||
Diluted |
$ | 0.17 | 0.16 | |||||
10
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 26 weeks ended July 31, 2004 and August 2, 2003
(thousands of dollars, except per share data)
(unaudited)
| (2) | Redemption of Subordinated Notes |
In the second quarter of fiscal 2004, the Company completed the redemption of its $300,000 outstanding 5.25% convertible subordinated notes due 2009. Holders of the notes converted a total of $17,746 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 $282,254 principal amount of the notes at an aggregate redemption price, together with accrued interest and redemption premium, of $294,961. The write-off of the unamortized portion of the deferred financing fees from the issuance of the notes and the redemption premium resulted in a charge of $14,582.
| (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 79 percent, 83 percent and 77 percent of the Company’s merchandise inventories as of July 31, 2004, August 2, 2003 and January 31, 2004, respectively. Merchandise inventories of GameStop Corp. (GameStop) stores, Barnes & Noble.com and Calendar Club L.L.C. (Calendar Club) represent 17 percent, 12 percent and 19 percent of merchandise inventories as of July 31, 2004, August 2, 2003 and January 31, 2004, 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 July 31, 2004, August 2, 2003 and January 31, 2004.
| (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 31, 2004 and August 2, 2003 are based upon management’s estimate of the Company’s annualized effective tax rate.
11
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 26 weeks ended July 31, 2004 and August 2, 2003
(thousands of dollars, except per share data)
(unaudited)
| (6) | Stock Options |
The Company grants options to purchase Barnes & Noble, Inc. (BKS) and GameStop Corp. (GME) common stock, and prior to the Merger granted options to purchase barnesandnoble.com inc. (BNBN) common stock under stock-based incentive plans. The Company accounts for all transactions under which 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 (loss) and income (loss) per share as if the Company had applied the fair value-recognition provisions of 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 31, 2004 |
August 2, 2003 |
July 31, 2004 |
August 2, 2003 |
|||||||||||||
Net income– as reported |
$ | 8,910 | 13,663 | 20,353 | 11,637 | |||||||||||
Compensation expense, net of tax |
||||||||||||||||
BKS stock options |
12,735 | 4,022 | 14,676 | 6,977 | ||||||||||||
GME stock options, net of
minority interest |
1,562 | 1,275 | 2,878 | 2,566 | ||||||||||||
BNBN stock options (a) |
— | — | 13 | — | ||||||||||||
Pro forma net income (loss) – pro
forma for SFAS No. 123 |
$ | (5,387 | ) | 8,366 | 2,786 | 2,094 | ||||||||||
Basic earnings (loss) per share: |
||||||||||||||||
As reported |
$ | 0.13 | 0.21 | 0.30 | 0.18 | |||||||||||
Pro forma for SFAS No. 123 |
(0.08 | ) | 0.13 | 0.04 | 0.03 | |||||||||||
Diluted earnings (loss) per share: |
||||||||||||||||
As reported |
0.12 | 0.20 | 0.28 | 0.17 | ||||||||||||
Pro forma for SFAS No. 123 |
(0.08 | ) | 0.12 | 0.04 | 0.02 | |||||||||||
| (a) | Subsequent to the Company acquiring a controlling interest in Barnes & Noble.com (see footnote 1). |
12