SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 30, 2005
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 þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
Number of shares of $.001 par value common stock outstanding as of April 30, 2005: 70,236,613.
BARNES & NOBLE, INC. AND SUBSIDIARIES
April 30, 2005
Index to Form 10-Q
PART I — FINANCIAL INFORMATION
Item 1: Financial Statements
BARNES & NOBLE, INC. AND SUBSIDIARIES
| 13 weeks ended | ||||||||
| May 1, 2004 | ||||||||
| April 30, 2005 | Restated | |||||||
Sales |
$ | 1,097,170 | 1,058,197 | |||||
Cost of sales and occupancy |
769,819 | 750,414 | ||||||
Gross profit |
327,351 | 307,783 | ||||||
Selling and administrative expenses |
266,059 | 244,434 | ||||||
Depreciation and amortization |
43,311 | 44,925 | ||||||
Pre-opening expenses |
2,447 | 2,648 | ||||||
Operating profit |
15,534 | 15,776 | ||||||
Interest (net of interest income of $2,835 and $420,
respectively) and amortization of deferred financing
fees |
(329 | ) | (4,497 | ) | ||||
Income before income taxes and minority interest |
15,205 | 11,279 | ||||||
Income taxes |
6,196 | 4,587 | ||||||
Income before minority interest |
9,009 | 6,692 | ||||||
Minority interest |
897 | 538 | ||||||
Income from continuing operations |
9,906 | 7,230 | ||||||
Income from discontinued operations (net of income tax) |
— | 4,215 | ||||||
Net income |
$ | 9,906 | 11,445 | |||||
Basic income per common share: |
||||||||
Income from continuing operations |
$ | 0.14 | 0.11 | |||||
Income from discontinued operations |
— | 0.06 | ||||||
Net income |
$ | 0.14 | 0.17 | |||||
Diluted income per common share: |
||||||||
Income from continuing operations |
$ | 0.13 | 0.10 | |||||
Income from discontinued operations |
— | 0.06 | ||||||
Net income |
$ | 0.13 | 0.16 | |||||
Weighted average common shares outstanding |
||||||||
Basic |
69,722 | 68,146 | ||||||
Diluted |
74,400 | 70,717 | ||||||
See accompanying notes to consolidated financial statements.
3
BARNES & NOBLE, INC. AND SUBSIDIARIES
| April 30, | May 1, 2004 | January 29, | ||||||||||
| 2005 | Restated | 2005 | ||||||||||
| (unaudited) | ||||||||||||
ASSETS |
||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 322,095 | 177,701 | 535,652 | ||||||||
Receivables, net |
94,292 | 45,225 | 74,640 | |||||||||
Merchandise inventories |
1,307,421 | 1,314,306 | 1,274,578 | |||||||||
Prepaid expenses and other current assets |
125,733 | 101,744 | 85,140 | |||||||||
Current assets of discontinued operations |
— | 388,818 | — | |||||||||
Total current assets |
1,849,541 | 2,027,794 | 1,970,010 | |||||||||
Property and equipment: |
||||||||||||
Land and land improvements |
3,247 | 3,247 | 3,247 | |||||||||
Buildings and leasehold improvements |
958,827 | 875,238 | 940,616 | |||||||||
Fixtures and equipment |
1,083,330 | 1,017,296 | 1,081,966 | |||||||||
| 2,045,404 | 1,895,781 | 2,025,829 | ||||||||||
Less accumulated depreciation and
amortization |
1,250,446 | 1,105,747 | 1,221,169 | |||||||||
Net property and equipment |
794,958 | 790,034 | 804,660 | |||||||||
Goodwill |
267,311 | 175,775 | 268,379 | |||||||||
Intangible assets, net |
96,196 | 93,158 | 97,538 | |||||||||
Deferred taxes |
123,682 | 83,248 | 123,231 | |||||||||
Other noncurrent assets |
36,881 | 21,386 | 37,710 | |||||||||
Noncurrent assets of discontinued operations |
— | 458,842 | — | |||||||||
Total assets |
$ | 3,168,569 | 3,650,237 | 3,301,528 | ||||||||
(Continued)
4
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share data)
| April 30, | May 1, 2004 | January 29, | ||||||||||
| 2005 | Restated | 2005 | ||||||||||
| (unaudited) | ||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||||||
Current liabilities: |
||||||||||||
Accounts payable |
$ | 729,779 | 640,706 | 745,073 | ||||||||
Accrued liabilities |
496,852 | 398,207 | 580,509 | |||||||||
Current liabilities of discontinued operations |
— | 211,375 | — | |||||||||
Total current liabilities |
1,226,631 | 1,250,288 | 1,325,582 | |||||||||
Long-term debt |
245,000 | 300,000 | 245,000 | |||||||||
Deferred income taxes |
193,743 | 162,737 | 193,743 | |||||||||
Other long-term liabilities |
370,812 | 362,605 | 362,319 | |||||||||
Noncurrent liabilities of discontinued operations |
— | 298,680 | — | |||||||||
Minority interest |
8,044 | 18,873 | 8,942 | |||||||||
Shareholders’ equity: |
||||||||||||
Common stock; $.001 par value; 300,000
shares authorized; 80,270, 77,213 and
79,276 shares issued, respectively |
80 | 77 | 79 | |||||||||
Additional paid-in capital |
1,007,922 | 926,944 | 985,609 | |||||||||
Accumulated other comprehensive loss |
(9,781 | ) | (8,775 | ) | (9,857 | ) | ||||||
Retained earnings |
396,040 | 534,831 | 386,134 | |||||||||
Treasury stock, at cost, 11,162, 9,008 and
9,008 shares, respectively |
(269,922 | ) | (196,023 | ) | (196,023 | ) | ||||||
Total shareholders’ equity |
1,124,339 | 1,257,054 | 1,165,942 | |||||||||
Commitments and contingencies |
— | — | — | |||||||||
Total liabilities and shareholders’ equity |
$ | 3,168,569 | 3,650,237 | 3,301,528 | ||||||||
See accompanying notes to consolidated financial statements.
5
BARNES & NOBLE, INC. AND SUBSIDIARIES
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Treasury | ||||||||||||||||||||||
| Common | Paid-In | Comprehensive | Retained | Stock at | ||||||||||||||||||||
| Stock | Capital | Loss | Earnings | Cost | Total | |||||||||||||||||||
Balance at January 29, 2005 |
$ | 79 | $ | 985,609 | $ | (9,857 | ) | $ | 386,134 | $ | (196,023 | ) | $ | 1,165,942 | ||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income |
— | — | — | 9,906 | — | |||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||
Foreign currency translation |
— | — | 76 | — | — | |||||||||||||||||||
Total comprehensive income |
9,982 | |||||||||||||||||||||||
Exercise of 994 common stock
options (including tax benefit of
$8,330) |
1 | 21,859 | — | — | — | 21,860 | ||||||||||||||||||
Restricted stock |
— | 454 | — | — | — | 454 | ||||||||||||||||||
Treasury stock acquired, 2,154
shares |
— | — | — | — | (73,899 | ) | (73,899 | ) | ||||||||||||||||
Balance at April 30, 2005 |
$ | 80 | $ | 1,007,922 | $ | (9,781 | ) | $ | 396,040 | $ | (269,922 | ) | $ | 1,124,339 | ||||||||||
See accompanying notes to consolidated financial statements.
6
BARNES & NOBLE, INC. AND SUBSIDIARIES
| 13 weeks ended | ||||||||
| April 30, 2005 | May 1, 2004 | |||||||
| Restated | ||||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 9,906 | 11,445 | |||||
Net income
from discontinued operations |
— | 4,215 | ||||||
Net income from continuing operations |
9,906 | 7,230 | ||||||
Adjustments to reconcile net income to net cash
flows from operating activities: |
||||||||
Depreciation and amortization (including
amortization of deferred financing fees) |
43,681 | 45,683 | ||||||
Increase (decrease) in other long-term
liabilities for scheduled rent increases in
long-term leases |
(3,024 | ) | 313 | |||||
Minority interest |
(897 | ) | (538 | ) | ||||
Gain on disposal of property and equipment |
(171 | ) | (207 | ) | ||||
Restricted stock compensation expense |
454 | — | ||||||
Deferred taxes |
— | (111 | ) | |||||
Changes in operating assets and liabilities, net |
(165,086 | ) | (135,985 | ) | ||||
Net cash flows from operating activities |
(115,137 | ) | (83,615 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(38,511 | ) | (21,173 | ) | ||||
Net (increase) decrease in other noncurrent assets |
459 | (153 | ) | |||||
Net cash flows from investing activities |
(38,052 | ) | (21,326 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from exercise of common stock options |
13,531 | 6,709 | ||||||
Purchase of treasury stock through repurchase program |
(73,899 | ) | (6,362 | ) | ||||
Net cash flows from financing activities |
(60,368 | ) | 347 | |||||
Net decrease in cash and cash equivalents |
(213,557 | ) | (104,594 | ) | ||||
Cash and cash equivalents at beginning of period |
535,652 | 282,295 | ||||||
Cash and cash equivalents at end of period |
$ | 322,095 | 177,701 | |||||
Changes in operating assets and liabilities, net: |
||||||||
Receivables, net |
$ | (8,135 | ) | 5,741 | ||||
Merchandise inventories |
(32,843 | ) | (24,499 | ) | ||||
Prepaid expenses and other current assets |
(40,593 | ) | 1,077 | |||||
Accounts payable and accrued liabilities |
(83,515 | ) | (118,304 | ) | ||||
Changes in operating assets and liabilities, net |
$ | (165,086 | ) | (135,985 | ) | |||
Supplemental cash flow information: |
||||||||
Cash paid (received) during the period for: |
||||||||
Interest |
$ | (1,809 | ) | 8,005 | ||||
Income taxes |
$ | 51,687 | 37,888 | |||||
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 April 30, 2005 and the results of its operations and its cash flows for the 13 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 29, 2005 (fiscal 2004). The Company follows the same accounting policies in preparation of interim reports.
Due to the seasonal nature of the Company’s business, the results of operations for the 13 weeks ended April 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 recent 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 $8,335 during the first quarter of fiscal 2004.
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 $635, decreased operating profit and earnings before taxes and minority interest by $261, and decreased net earnings by $149 ($0.00 per share).
8
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 13 weeks ended April 30, 2005 and May 1, 2004
(Thousands of dollars, except per share data)
(unaudited)
The Company’s May 1, 2004 balance sheet has been adjusted to reflect the combined impact of the above restatements by increasing net property and equipment by $225,374, increasing deferred rent (other long-term liabilities) by $257,381, increasing deferred tax assets by $13,276 and decreasing retained earnings and shareholders’ equity by $18,731.
(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 Company’s Class B common stock in GameStop Corp. (GameStop), the Company’s video game operating segment. The plan was consummated in November 2004 with the distribution to the Company’s 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 $371,736 and net income of $4,215 (net of $2,899 in tax) during the first quarter of fiscal 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 93 percent of the Company’s merchandise inventories as of April 30, 2005, and 92 percent as of May 1, 2004 and January 29, 2005. Merchandise inventories of Barnes & Noble.com and Calendar Club L.L.C. (Calendar Club) represent four percent of merchandise inventories as of April 30, 2005, May 1, 2004 and 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 April 30, 2005, May 1, 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 13 weeks ended April 30, 2005 and May 1, 2004 are based upon management’s estimate of the Company’s annualized effective tax rate.
9
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 13 weeks ended April 30, 2005 and May 1, 2004
(Thousands of dollars, except per share data)
(unaudited)
(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 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 | ||||||||
| April 30, 2005 | May 1, 2004(a) | |||||||
Net income – as reported |
$ | 9,906 | 11,445 | |||||
Compensation
expense, net of tax BKS stock options |
2,057 | 1,941 | ||||||
GME stock options, net of minority interest |
— | 1,316 | ||||||
BNBN stock options (b) |
— | 13 | ||||||
Pro forma net income (loss) – pro forma for SFAS No. 123 |
$ | 7,849 | 8,175 | |||||
Basic earnings per share: |
||||||||
As reported |
$ | 0.14 | 0.17 | |||||
Pro forma for SFAS No. 123 |
$ | 0.11 | 0.12 | |||||
Diluted earnings per share: |
||||||||
As reported |
$ | 0.13 | 0.16 | |||||
Pro forma for SFAS No. 123 |
$ | 0.10 | 0.11 | |||||
| (a) | Restated to reflect certain adjustments as discussed in Note 1 to the Notes to Consolidated Financial Statements. Also adjusted to reflect the change in the reporting period used to consolidate Barnes & Noble.com to be consistent with that of the Company. | |||
| (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 Company’s restricted stock which is already
10
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 13 weeks ended April 30, 2005 and May 1, 2004
(Thousands of dollars, except per share data)
(unaudited)
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.
(7) Comprehensive Income
Comprehensive income is net income, plus certain other items that are recorded directly to shareholders’ equity, as follows:
| For the 13 weeks ended | ||||||||
| April 30, 2005 | May 1, 2004(a) | |||||||
Net income |
$ | 9,906 | 11,445 | |||||
Other comprehensive income: |
||||||||
Foreign currency translation adjustments |
76 | (177 | ) | |||||
Unrealized losses on available-for-sale
securities, net of deferred income tax
benefit of $0 and ($13), respectively |
— | (19 | ) | |||||
Total comprehensive income |
$ | 9,982 | 11,249 | |||||
| (a) | Restated to reflect certain adjustments as discussed in Note 1 to the Notes to Consolidated Financial Statements. Also adjusted to reflect the change in the reporting period used to consolidate Barnes & Noble.com to be consistent with that of the Company. |
11
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 13 weeks ended April 30, 2005 and May 1, 2004
(Thousands of dollars, except per share data)
(unaudited)
(8) Net Income Per Share
Following is a reconciliation of income from continuing operations and weighted average common shares outstanding for purposes of calculating basic and diluted earnings per share:
| For the 13 weeks ended | ||||||||
| April 30, 2005 | May 1, 2004(a) | |||||||
Numerator: |
||||||||
Income from continuing
operations |
$ | 9,906 | 7,230 | |||||