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Exhibit 13.1

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data of Barnes & Noble, Inc. and its subsidiaries (collectively, the Company) set forth on the following pages should be read in conjunction with the consolidated financial statements and notes included elsewhere in this report. The Company’s fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. The Statement of Operations Data for the 52 weeks ended May 2, 2015 (fiscal 2015), 53 weeks ended May 3, 2014 (fiscal 2014) and 52 weeks ended April 27, 2013 (fiscal 2013), and the Balance Sheet Data as of May 2, 2015 and May 3, 2014 are derived from, and are incorporated by reference to, audited consolidated financial statements which are included elsewhere in this report. The Statement of Operations Data for the 52 weeks ended April 28, 2012 (fiscal 2012), April 30, 2011 (fiscal 2011), the Balance Sheet Data as of April 27, 2013, April 28, 2012 and April 30, 2011 are derived from audited consolidated financial statements not included elsewhere in this report.

 

Fiscal Year

(In thousands of dollars, except per share data)

   Fiscal
2015
    Fiscal
2014
    Fiscal
2013
    Fiscal
2012
    Fiscal
2011
 

STATEMENT OF OPERATIONS DATA:

          

Sales

          

Barnes & Noble Retail

   $ 4,108,243        4,295,110        4,568,243        4,852,913        4,926,834   

Barnes & Noble College

     1,772,389        1,748,042        1,763,248        1,743,662        1,778,159   

NOOK

     263,833        505,862        780,433        933,471        695,182   

Elimination (a)

     (74,968     (167,657     (272,919     (400,847     (401,610
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total sales

     6,069,497        6,381,357        6,839,005        7,129,199        6,998,565   

Cost of sales and occupancy

     4,196,998        4,523,422        5,156,499        5,211,683        5,197,252   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,872,499        1,857,935        1,682,506        1,917,516        1,801,313   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling and administrative expenses

     1,545,152        1,606,936        1,675,376        1,739,452        1,629,465   

Depreciation and amortization

     194,174        216,807        227,134        232,667        228,647   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

     133,173        34,192        (220,004     (54,603     (56,799

Interest expense, net and amortization of deferred financing fees (b)

     (17,890     (29,507     (35,345     (35,304     (57,350
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before taxes

     115,283        4,685        (255,349     (89,907     (114,149

Income taxes

     78,687        51,953        (97,543     (25,067     (45,276
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) (net of income tax)

     36,596        (47,268     (157,806     (64,840     (68,873

Net earnings (loss) attributable to noncontrolling interests (c)

     —          —          —          —          37   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to Barnes & Noble, Inc.

   $ 36,596        (47,268     (157,806     (64,840     (68,836
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) attributable to Barnes & Noble, Inc.

          

Earnings (loss)

   $ 36,596        (47,268     (157,806     (64,840     (68,873

Less loss attributable to noncontrolling interests

     —          —          —          —          37   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to Barnes & Noble, Inc.

   $ 36,596        (47,268     (157,806     (64,840     (68,836
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

          

Net earnings (loss) attributable to Barnes & Noble, Inc.

   $ 0.21        (1.12     (3.02     (1.34     (1.22
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

          

Net earnings (loss) attributable to Barnes & Noble, Inc.

   $ 0.21        (1.12     (3.02     (1.34     (1.22
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends paid per share

   $ —          —          —          —          0.75   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

          

Basic

     60,842        58,971        58,247        57,337        56,588   

Diluted

     60,928        58,971        58,247        57,337        56,588   

 

F-1


Fiscal Year

(In thousands of dollars, except per share data)

   Fiscal
2015
    Fiscal
2014
    Fiscal
2013
    Fiscal
2012
    Fiscal
2011
 

OTHER OPERATING DATA:

          

Number of stores

          

Barnes & Noble Retail

     648        661        675        691        705   

Barnes & Noble College

     724        700        686        647        636   

Total

     1,372        1,361        1,361        1,338        1,341   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comparable sales increase (decrease)

          

Barnes & Noble Retail (d)

     (1.9 )%      (5.8 )%      (3.4 )%      1.4     0.7

Barnes & Noble Retail Core comparable sales (e)

     0.5     (3.1 )%      0.1     0.7     (8.3 )% 

Barnes & Noble College (f)

     0.1     (2.7 )%      (1.2 )%      (0.3 )%      (0.8 )% 

Capital expenditures

   $ 143,257        134,981        165,835        163,552        110,502   

BALANCE SHEET DATA:

          

Total assets

   $ 3,229,505        3,537,449        3,732,536        3,774,699        3,596,466   

Total liabilities

   $ 1,844,088        2,300,559        2,443,631        2,730,155        2,675,969   

Long-term debt

   $ —          —          77,000        324,200        313,100   

Long-term subordinated note (g)

   $ —          —          127,250        150,000        150,000   

Shareholders’ Equity

   $ 1,189,358        658,696        713,743        852,271        920,497   

 

(a) Represents sales from NOOK to B&N Retail and B&N College on a sell-through basis.

 

(b) Amounts for fiscal 2015, fiscal 2014, fiscal 2013, fiscal 2012 and fiscal 2011 are net of interest income of $58, $190, $71, $0 and $320, respectively.

 

(c) Noncontrolling interest represents the 50% outside interest in Begin Smart LLC. During the second quarter of fiscal 2011, the Company purchased the remaining 50% outside interest in Begin Smart LLC.

 

(d) Comparable store sales increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and all eReader device revenue deferred in accordance with Accounting Standards Codification 605-25 Revenue Recognition, Multiple Element Arrangements, and does not include sales from closed or relocated stores.

 

(e)

Core comparable store sales, which excludes sales of NOOK® products, increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and does not include sales from closed or relocated stores.

 

(f) Comparable store sales increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and does not include sales from closed stores for all periods presented. In fiscal 2012 through fiscal 2014, as the Company developed its textbook rental business, comparable store sales reflected the retail selling price of a new or used textbook when rented, rather than solely the rental fees received, to provide a more representative comparable store sales figure. Beginning with the 26 weeks ended November 1, 2014, as a result of the significant expansion of the textbook rental business as compared to prior periods, the comparable store sales are determined based upon the actual revenue received from textbook rentals and are no longer adjusted to reflect the equivalent textbook retail selling price.

 

(g) See Note 21 to the Notes to Consolidated Financial Statements.

 

F-2


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Barnes & Noble, Inc.’s (Barnes & Noble or the Company) fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. As used in this section, “fiscal 2015” represents the 52 weeks ended May 2, 2015, “fiscal 2014” represents the 53 weeks ended May 3, 2014 and “fiscal 2013” represents the 52 weeks ended April 27, 2013.

General

Barnes & Noble, one of the nation’s largest booksellers,1 is a leading content, commerce and technology company providing customers easy and convenient access to trade books, textbooks, magazines, newspapers and other content across its multi-channel distribution platform. As of May 2, 2015, the Company operates 1,372 bookstores in 50 states, including 724 bookstores on college campuses, operates one of the Web’s largest eCommerce sites, develops digital reading products and operates one of the largest digital bookstores. Given the dynamic nature of the book industry, the challenges faced by traditional booksellers, and the robust innovation pipeline fueling new opportunities in hardware, software and content creation and delivery, Barnes & Noble is utilizing the strength of its retail footprint to bolster its leadership in selling content to drive sales across its multiple channels.

Of the 1,372 bookstores, Barnes & Noble Retail (B&N Retail) operates 648 retail bookstores, primarily under the Barnes & Noble Booksellers trade name, and includes the Company’s eCommerce site. Barnes & Noble College Booksellers, LLC (B&N College) operates 724 college bookstores at colleges and universities across the United States, of which 154 stores are co-branded with the universities’ names and Barnes & Noble name. B&N Retail also includes Sterling Publishing Co., Inc. (Sterling or Sterling Publishing), a leader in general trade book publishing. The NOOK segment represents the Company’s digital business, offering digital books and magazines for sale and consumption online, NOOK®2 reading devices, co-branded NOOK® devices and reading software for iOS, Android and Windows 8. The Company employed approximately 33,000 full and part-time employees as of May 2, 2015. Including seasonal and temporary employees, the Company employed approximately 41,000 employees as of May 2, 2015.

The Company’s principal business is the sale of trade books (generally hardcover and paperback consumer titles), mass market paperbacks (such as mystery, romance, science fiction and other popular fiction), children’s books, eBooks and other digital content, textbooks and course-related materials, NOOK® and related accessories, bargain books, magazines, gifts, emblematic apparel and gifts, school and dorm supplies, café products and services, educational toys & games, music and movies direct to customers through its bookstores or on barnesandnoble.com. The Company also offers a textbook rental option to its customers, digital textbooks and other course materials through a proprietary digital platform (YuzuTM). The Company offers its customers a full suite of textbook options—new, used, digital and rental.

 

 

1  Based upon sales reported in trade publications and public filings.
2 

Any reference to NOOK® include the Company’s Samsung Galaxy Tab® 4 NOOK® 7.0 and 10.1 devices and NOOK GlowLightTM, and each of which includes the trademark symbol (® or ™, as applicable) even if a trademark symbol is not included.

 

F-3


To address dynamic changes in the book selling industry, Barnes & Noble has transformed its business from a store-based model to a multi-channel model centered on its retail stores, Internet and digital commerce. The Company offers readers the option of store visits, eCommerce, and digital delivery of books to devices of their choosing, including the NOOK® branded and co-branded tablets.

Barnes & Noble’s strategy is to:

 

   

utilize the strong Barnes & Noble brand and retail footprint to attract customers to its multi-channel platform;

 

   

drive content sales through the web, NOOK® eReaders and 3rd party devices;

 

   

use its infrastructure to deliver digital content to customers; and

 

   

continue to grow campus partnerships including store locations and students served while continuing its investment in the digital higher education business.

The Company has a multi-channel marketing strategy that deploys various merchandising programs and promotional activities to drive traffic to both its stores and website. At the center of this program is the Company’s website, barnesandnoble.com.

Separation of B&N Education, Inc.

On February 26, 2015, Barnes & Noble announced plans for the legal and structural separation of Barnes & Noble Education, Inc. (Barnes & Noble Education or B&N Education) (formerly known as NOOK Media Inc.) from Barnes & Noble into an independent public company (the Spin-Off).

This Spin-Off is expected to be executed by means of a pro-rata distribution of B&N Education’s common stock to Barnes & Noble’s existing shareholders and is expected to be a non-taxable event for Barnes & Noble and its shareholders.

The distribution of B&N Education’s common stock to Barnes & Noble shareholders is conditioned on, among other things, final approval of the Spin-Off plan by the Barnes & Noble Board of Directors; the receipt of opinions from external legal counsel and KPMG LLP to Barnes & Noble, confirming the tax-free status of the Spin-Off for U.S. federal income tax purposes; and the United States Securities and Exchange Commission (SEC) declaring effective the Registration Statement, which was filed on a Registration Statement on Form S-1 with the SEC on February 26, 2015, which has been amended on April 29, 2015 and June 4, 2015.

History of B&N Education, Inc.

On September 30, 2009, Barnes & Noble acquired Barnes & Noble College Booksellers, LLC (B&N College) from Leonard and Louise Riggio. From that date until October 4, 2012, B&N College was wholly owned by Barnes & Noble Booksellers, Inc. B&N Education was initially incorporated under the name NOOK Media Inc. in July 2012 to hold Barnes & Noble’s B&N College and NOOK digital businesses. On October 4, 2012, Microsoft Corporation (Microsoft) acquired a 17.6% non-controlling preferred membership interest in B&N Education’s subsidiary B&N Education, LLC (formerly NOOK Media LLC) (the LLC), and through B&N Education, Barnes & Noble maintained an 82.4% controlling interest of the B&N College and NOOK digital businesses.

On January 22, 2013, Pearson Education, Inc. (Pearson) acquired a 5% non-controlling preferred membership interest in the LLC, entered into a commercial agreement with the LLC relating to the B&N College business and received warrants to purchase an additional preferred membership interest in the LLC.

 

F-4


On December 4, 2014, B&N Education re-acquired Microsoft’s interest in the LLC in exchange for cash and common stock of Barnes & Noble and the Microsoft commercial agreement was terminated effective as of such date. On December 22, 2014, B&N Education also re-acquired Pearson’s interest in the LLC and certain related warrants previously issued to Pearson. In connection with these transactions, Barnes & Noble entered into contingent payment agreements with Microsoft and Pearson providing for additional payments upon the occurrence of certain events, including upon a sale of the NOOK digital business. As a result of these transactions, Barnes & Noble owns, and will own prior to the Spin-Off, 100% of B&N Education.

On May 1, 2015, B&N Education distributed to Barnes & Noble all of the membership interests in B&N Education’s NOOK digital business. As a result, B&N Education ceased to own any interest in the NOOK digital business, which will remain a wholly owned subsidiary of Barnes & Noble.

The Company expects that the completion of the potential separation of the Company’s businesses could occur by the end of August 2015, although there can be no assurances regarding the timing of such potential separation or that such separation will be completed.

In connection with the closing of the acquisition of B&N College, the Company issued the sellers (i) a senior subordinated note in the principal amount of $100.0 million, with interest of 8% per annum payable on the unpaid principal amount, which was paid on December 15, 2010 in accordance with its scheduled date, and (ii) a junior subordinated note (the Junior Seller Note) in the principal amount of $150.0 million, payable in full on the fifth anniversary of the closing of the acquisition, with interest of 10% per annum payable on the unpaid principal amount. Pursuant to a settlement agreed to on June 13, 2012, the sellers have agreed to waive their right to receive $22.8 million in principal amount (and interest on such principal amount) of the Junior Seller Note. The net short-term payable of $127.3 million was paid in September 2014, in accordance with its terms.

Samsung Commercial Agreement

On June 4, 2014, NOOK Digital, LLC (NOOK Digital) (formerly barnesandnoble.com llc), a wholly owned subsidiary of B&N Education as of such date and a subsidiary of Barnes & Noble, entered into a commercial agreement (Agreement) with Samsung Electronics America, Inc. (Samsung) relating to tablets.

Pursuant to the Agreement, NOOK Digital, after good faith consultations with Samsung and subject to Samsung’s agreement, selected Samsung tablet devices under development to be customized and co-branded by NOOK Digital. Such devices are produced by Samsung. The co-branded NOOK® tablet devices are sold by NOOK Digital through Barnes & Noble retail stores, www.barnesandnoble.com, www.nook.com and other Barnes & Noble websites. NOOK Digital and Samsung agreed to develop co-branded Samsung Galaxy Tab® 4 NOOK® tablets as the initial co-branded devices pursuant to the Agreement.

Under the Agreement, NOOK Digital committed to purchase a minimum of 1,000,000 NOOK-Samsung co-branded devices from Samsung within 12 months after the launch of the initial co-branded device, which launch occurred on August 20, 2014. The 12-month period was automatically extended by three months due to the quantity of sales of such co-branded devices through December 31, 2014, and the period was further extended until June 30, 2016 by an amendment executed by the parties on March 7, 2015.

 

F-5


NOOK Digital and Samsung have agreed to coordinate customer service for the co-branded NOOK® devices and have both agreed to a license of intellectual property to promote and market the devices. Additionally, Samsung has agreed to fund a marketing fund for the co-branded NOOK® devices at the initial launch and for the duration of the Agreement.

The Agreement has a two-year term, with certain termination rights, including termination (i) by NOOK Digital for a Samsung material default; (ii) by Samsung for a NOOK Digital material default; (iii) by NOOK Digital if Samsung fails to meet its shipping and delivery obligations in any material respect on a timely basis; and (iv) by either party upon insolvency or bankruptcy of the other party.

The companies introduced the Samsung Galaxy Tab® 4 NOOK® in a 7-inch version in the U.S. in August 2014 and a 10-inch version in October 2014. The co-branded device combines the popular Samsung Galaxy Tab® 4 hardware with customized NOOK® software to give customers powerful, full-featured tablets that are designed for reading, with easy access to Barnes & Noble’s expansive digital collection of approximately four million eBooks, digital magazines and newspapers.

Series J Preferred Shares

On August 18, 2011, the Company entered into an investment agreement between the Company and Liberty GIC, Inc. (Liberty) pursuant to which the Company issued and sold to Liberty, and Liberty purchased, 204,000 shares of the Company’s Series J Preferred Stock, par value $0.001 per share (Preferred Stock), for an aggregate purchase price of $204.0 million in a private placement exempt from the registration requirements of the 1933 Act. The shares of Preferred Stock will be convertible, at the option of the holders, into shares of Common Stock, representing 16.6% of the Common Stock outstanding as of August 29, 2011, (after giving pro forma effect to the issuance of the Preferred Stock), based on the initial conversion rate. The initial conversion rate reflects an initial conversion price of $17.00 and is subject to adjustment in certain circumstances. The initial dividend rate for the Preferred Stock is equal to 7.75% per annum of the initial liquidation preference of the Preferred Stock to be paid quarterly and subject to adjustment in certain circumstances.

On April 8, 2014, Liberty sold the majority of its shares to qualified institutional buyers in reliance on Rule 144A under the Securities Act and has retained an approximate 10 percent stake of its initial investment. As a result, Liberty will no longer have the right to elect two preferred stock directors to the Company’s Board. Additionally, the consent rights and pre-emptive rights to which Liberty was previously entitled ceased to apply.

On June 5, 2015, the Company entered into conversion agreements with five existing beneficial owners (Series J Holders) of its Preferred Stock, pursuant to which each of the Series J Holders has agreed to convert (Conversion) shares of Preferred Stock it beneficially owns into shares of the Company’s common stock, par value $0.001 per share (Company Common Stock), and will in addition receive a cash payment from the Company in connection with the Conversion. The Series J Holders have agreed to convert an aggregate of 103,995 shares of Preferred Stock into 6,117,347 shares of Company Common Stock in the Conversion, and the Company has agreed to make an aggregate cash payment to the Series J Holders of $8.1 million plus cash in lieu of fractional shares in connection with the Conversion, in each case, subject to adjustment under certain circumstances. The Company expects to issue the shares of Company Common Stock to be issued in the Conversion on or about July 9, 2015.

The number of shares of Company Common Stock to be issued was determined based on a conversion ratio of 58.8235 shares of Company Common Stock per share of Preferred Stock converted, which is the conversion rate in the Certificate of the Designations with respect to the Preferred Stock dated as of August 18, 2011.

 

F-6


Segments

The Company identifies its operating segments based on the way the business is managed (focusing on the financial information distributed) and the manner in which the chief operating decision maker interacts with other members of management. The Company’s three operating segments are B&N Retail, B&N College and NOOK.

B&N Retail

This segment includes 648 bookstores as of May 2, 2015, primarily under the Barnes & Noble Booksellers trade name. These stores generally offer a dedicated NOOK® area, a comprehensive trade book title base, a café, and departments dedicated to Juvenile, Toys & Games, DVDs, Music, Gift, Magazine and Bargain products. The stores also offer a calendar of ongoing events, including author appearances and children’s activities. The B&N Retail segment also includes the Company’s eCommerce website, barnesandnoble.com, and its publishing operation, Sterling Publishing.

Barnes & Noble stores range in size from 3,000 to 60,000 square feet depending upon market size, with an overall average store size of 26,000 square feet. In fiscal 2015, the Company reduced the Barnes & Noble store base by approximately 271,000 square feet, bringing the total square footage to 17.1 million square feet, a net reduction of 1.6% from fiscal 2014. The Company did not open any new Barnes & Noble stores in fiscal 2015. Each Barnes & Noble store features an authoritative selection of books, ranging from 22,000 to 164,000 titles. The comprehensive title selection is diverse and reflects local interests. Bestsellers typically represent between approximately 4% and 6% of Barnes & Noble store sales. Product Master, the Company’s proprietary inventory management database, has approximately 16.0 million titles. By enhancing the Company’s existing merchandise replenishment systems, Product Master allows the Company to achieve high in-stock positions and productivity at the store level through efficiencies in receiving, cashiering and returns processing. Complementing this extensive on-site selection, all Barnes & Noble stores provide customers with access to the millions of books available to online shoppers at barnesandnoble.com while offering an option to have the book sent to the store or shipped directly to the customer. At the center of this eCommerce program is the Company’s website, barnesandnoble.com.

Sterling Publishing

Sterling Publishing is a leading publisher of non-fiction trade titles. Founded in 1949, Sterling publishes a wide range of non-fiction and illustrated books and kits across a variety of imprints, in categories such as health & wellness, music & popular culture, food & wine, crafts & photography, puzzles & games and history & current affairs, as well as a large children’s line. Sterling, with a solid backlist and robust value publishing program, has a title base of approximately 16,000 eBooks and print books. In addition, Sterling also distributes approximately 800 titles on behalf of client publishers.

 

F-7


B&N College

B&N College is one of the largest contract operators of bookstores on college and university campuses across the United States. As of May 2, 2015, B&N College operated 724 stores nationwide. These stores are operated under 453 contracts, which can cover multiple stores and include over 5 million students and faculty. B&N College’s customer base, which is mainly comprised of students and faculty, can purchase various items from their campus stores, including textbooks, textbook rentals and course-related materials, emblematic apparel and gifts, trade books, computer products, NOOK® products and related accessories, school and dorm supplies, convenience and café items. B&N College provides extensive textbook rental options to its customers and has expanded its digital textbooks and other course materials through a proprietary digital platform (Yuzu™). A significant number of textbooks are now available in multiple formats: new, used, rental and digital (rental and ownership), resulting in improved choice and substantial student savings.

B&N College operates 688 traditional college bookstores and 36 academic superstores, which are generally larger in size, offer cafés and provide a sense of community that engages the surrounding campus and local communities in college activities and culture. The traditional bookstores range in size up to 48,000 square feet. The academic superstores range in size from 8,000 to 111,000 square feet.

B&N College generally operates its stores pursuant to multi-year management service agreements under which a school designates B&N College to operate the official school bookstore on campus and B&N College provides the school with regular payments that represent a percentage of store sales and, in some cases, include a minimum fixed guarantee.

B&N College’s business strategy is to maintain long-term relationships with colleges and universities by providing high-quality service to college administrators, faculty and students. B&N College is poised for continued growth with approximately 52% of college and university affiliated bookstores in the United States being operated by their respective educational institutions. B&N College believes it will achieve this by increasing market share through new account acquisition and through strategic planning and outreach with its existing accounts to exploit opportunities and grow market share.

NOOK

This segment includes the Company’s digital business, which includes the Company’s eBookstore, digital newsstand and sales of NOOK® devices and accessories through B&N Retail, B&N College and third party distribution partners. The underlying strategy of the NOOK business is to offer customers any digital book, newspaper or magazine, anytime, on any device. The Company remains committed to delivering to customers the best digital bookstore experience, while rationalizing its existing cost structure. As part of this commitment, the Company entered into a partnership on June 4, 2014, to develop co-branded Samsung Galaxy Tab® 4 NOOK® tablets that feature the award-winning Barnes & Noble digital reading experience. The co-branded devices combined the popular Samsung Galaxy Tab® 4 hardware with customized NOOK software to give customers powerful, full-featured tablets that are designed for reading, with easy access to Barnes & Noble’s expansive digital collection of approximately four million eBooks, digital magazines and newspapers. The companies introduced the Samsung Galaxy Tab® 4 NOOK® in a 7-inch version in the U.S. in August 2014 and the 10-inch version in October 2014. The Company also intends to continue to offer the best black-and-white eReaders on the market, backed by quality customer service and technology support for those devices. The Company will continue to sell its existing device inventory as it segues into new products. At the same time, it will

 

F-8


leverage all Barnes & Noble retail, digital and partnership assets, as well as existing NOOK customer relationships. The Company intends to continue to provide the resources necessary for quality customer service and support sales of new devices and those in use by NOOK’s existing customer base.

On June 5, 2014, the Company entered into an Assignment of Lease for its 208,000 square foot Palo Alto, California campus. Employees were relocated to new state-of-the-art facilities totaling 88,000 square feet. NOOK employees were moved to a new facility in Santa Clara, California, while Barnes & Noble College’s digital education employees were relocated to a facility in Mountain View, California. The relocations occurred during the first quarter of fiscal 2015. This action resulted in a net reduction of annual occupancy expenses of approximately $9.6 million, reducing the Company’s future lease commitments by approximately $102.1 million. In the fourth quarter of fiscal 2014, the Company recorded an asset impairment charge of $28.4 million related to this relocation. In the first quarter of fiscal 2015, the Company recorded a benefit, net of closing related costs, of $5.5 million primarily driven by the reversal of previously deferred rent liabilities upon exiting the facility.

The digital products group has knowledgeable product development and operational management teams in the areas of reading software, digital content retailing and mobile device development. NOOK’s development office employs experienced engineers in its digital product area. The NOOK digital products management team is currently focused on next generation digital reading products to enhance the reading experience and help consumers discover content in new and interesting ways. The Digital Services team, which includes the Cloud and Commerce groups, is responsible for maintaining and developing the NOOK digital bookstore service.

Results of Operations

 

Fiscal Year

   Fiscal 2015     Fiscal 2014     Fiscal 2013  

Sales (in thousands)

   $ 6,069,497      $ 6,381,357      $ 6,839,005   

Net Income (Loss) Attributable to Barnes & Noble, Inc. (in thousands)

   $ 36,596      $ (47,268   $ (157,806

Diluted Earnings (Loss) Per Common Share

   $ 0.21      $ (1.12   $ (3.02

Comparable Sales Increase (Decrease)

      

Barnes & Noble Retail stores (a)

     (1.9 )%      (5.8 )%      (3.4 )% 

Barnes & Noble Retail core sales (b)

     0.5     (3.1 )%      0.1

Barnes & Noble College stores (c)

     0.1     (2.7 )%      (1.2 )% 

Stores Opened

      

Barnes & Noble Retail stores

     0        3        2   

Barnes & Noble College stores

     48        30        49   
  

 

 

   

 

 

   

 

 

 

Total

     48        33        51   
  

 

 

   

 

 

   

 

 

 

Stores Closed

      

Barnes & Noble Retail stores

     13        17        18   

Barnes & Noble College stores

     24        16        10   
  

 

 

   

 

 

   

 

 

 

Total

     37        33        28   
  

 

 

   

 

 

   

 

 

 

Number of Stores Open at Year End

      

Barnes & Noble Retail stores

     648        661        675   

Barnes & Noble College stores

     724        700        686   
  

 

 

   

 

 

   

 

 

 

Total

     1,372        1,361        1,361   
  

 

 

   

 

 

   

 

 

 

Square Feet of Selling Space at Year End (in millions)

      

Barnes & Noble Retail stores

     17.1        17.4        17.7   

 

(a) Comparable store sales increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and all eReader device revenue deferred in accordance with Accounting Standards Codification (ASC) 605-25, Revenue Recognition, Multiple Element Arrangements, and does not include sales from closed or relocated stores.

 

F-9


(b)

Core comparable store sales, which excludes sales of NOOK® products, increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and does not include sales from closed or relocated stores.

 

(c) Comparable store sales increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and does not include sales from closed stores for all periods presented. In fiscal 2012 through fiscal 2014, as the Company developed its textbook rental business, comparable store sales reflected the retail selling price of a new or used textbook when rented, rather than solely the rental fees received, to provide a more representative comparable store sales figure. Beginning with the 26 weeks ended November 1, 2014, as a result of the significant expansion of the textbook rental business as compared to prior periods, the comparable store sales are determined based upon the actual revenue received from textbook rentals and are no longer adjusted to reflect the equivalent textbook retail selling price.

The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to total sales of the Company:

 

Fiscal Year

   Fiscal 2015     Fiscal 2014     Fiscal 2013  

Sales

     100.0     100.0     100.0

Cost of sales and occupancy

     69.1        70.9        75.4   
  

 

 

   

 

 

   

 

 

 

Gross margin

     30.9        29.1        24.6   

Selling and administrative expenses

     25.5        25.2        24.5   

Depreciation and amortization

     3.2        3.4        3.3   
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

     2.2        0.5        (3.2

Interest expense, net and amortization of deferred financing fees

     0.3        0.5        0.5   
  

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

     1.9        0.1        (3.7

Income taxes

     1.3        0.8        (1.4
  

 

 

   

 

 

   

 

 

 

Income (loss), net of income tax

     0.6     (0.7 )%      (2.3 )% 

Business Overview

The Company’s financial performance has been significantly impacted in recent years by a number of factors, including the expanding digital market, increased online competition and the economic downturn. However, the Company has benefited from reduced physical bookstore competition in the marketplace, the successful execution of new merchandising strategies, its ability to acquire new college contracts and by expanding its offerings to college students. Additionally, the Company has leveraged its unique assets, iconic brands and reach to become a significant aggregator and distributor of digital content, although competition from much larger companies with greater resources has challenged the Company’s ability to maintain its share of the U.S. eBook market.

 

F-10


The Company derives the majority of its sales and net income from its B&N Retail and B&N College stores.

In recent years, B&N Retail has experienced declining sales trends due to secular industry challenges, including the growth of the digital book market and online shopping, declining sales of NOOK® devices and fewer stores. More recently, the Company has benefitted from improving book industry trends, including a moderation of the growth of the digital book market, as well as successful merchandising initiatives that increased store traffic and sales and drove positive trends in its Toys & Games and Gift businesses. Additionally, the Company continues to expect to benefit from further market consolidation as non-book retailers reduce their presence in the book category. The Company is making further investments in its retail business this fiscal year and is scheduled to launch a new eCommerce platform in June 2015, which it believes will allow it to be more competitive in the marketplace.

B&N College provides direct access to a large and well-educated demographic group, enabling the Company to build relationships with students throughout their college years and beyond. The Company also expects to be the beneficiary of market consolidation as more and more schools outsource their bookstore management. The Company is in a unique market position to benefit from this trend given its full suite of services: bookstore management, textbook rental and digital delivery. The Company is making further investments in its college business, including the launch of YuzuTM in March 2014, its developing digital education platform that provides access to a wide range of rich, engaging content, including digital textbooks and select consumer titles applicable to the higher education market. The Company believes higher education provides a long-term growth opportunity, both organically by adding additional bookstores to its outsourcing model, and also, through strategic acquisition and merger activity.

NOOK represents the Company’s digital business, which includes the Company’s eBookstore, digital newsstand and sales of NOOK® devices and accessories. The underlying strategy of the NOOK business is to offer customers any digital book, newspaper or magazine, anytime, on any device. The Company remains committed to delivering to customers the best digital bookstore experience, while rationalizing its existing cost structure. As part of this commitment, the Company entered into a partnership on June 4, 2014, to develop co-branded Samsung Galaxy Tab® 4 NOOK® tablets that feature the award-winning Barnes & Noble digital reading experience. The co-branded devices combined popular Samsung Galaxy Tab® 4 hardware with customized NOOK software to give customers powerful, full-featured tablets that are designed for reading, with easy access to Barnes & Noble’s expansive digital collection of approximately four million eBooks, digital magazines and newspapers. The companies introduced the Samsung Galaxy Tab® 4 NOOK® in a 7-inch version in the U.S. in August 2014 and a 10-inch version in October 2014. The Company also intends to continue to develop and offer the best black-and-white eReaders on the market, backed by quality customer service and technology support for those devices. At the same time, it will leverage all Barnes & Noble retail, digital and partnership assets, as well as existing NOOK customer relationships. The Company intends to continue to provide the resources necessary for quality customer service and support sales of new devices and those in use by NOOK’s existing customer base, while continuing to rationalize the business.

The Company believes that its commercial partnership with Pearson will accelerate customer access to digital content by pairing Pearson’s leading expertise in online learning with B&N College’s expertise in digital reading technology, online commerce and customer service.

The Company believes its footprint of more than 1,300 stores will continue to be a major competitive asset in capturing digital content share. The Company will continue to complement its

 

F-11


traditional retail, trade book and college bookstores businesses with its electronic and Internet offerings, using retail stores in attractive geographic markets to promote and sell digital devices and content. Customers can see, feel and experiment with NOOK® products in the Company’s stores.

Although the Company believes cash on hand, cash flows from operating activities, funds available from its credit facility and short-term vendor financing provide the Company with adequate liquidity and capital resources for seasonal working capital requirements, the Company may raise additional capital to support key strategic initiatives.

52 Weeks Ended May 2, 2015 Compared with 53 Weeks Ended May 3, 2014

Sales

The following table summarizes the Company’s sales for the 52 weeks ended May 2, 2015 and 53 weeks ended May 3, 2014:

 

      52 Weeks Ended     53 Weeks Ended  

Dollars in thousands

   May 2,
2015
    % Total     May 3,
2014
    % Total  

B&N Retail

   $ 4,108,243        67.7   $ 4,295,110        67.3

B&N College

     1,772,389        29.2     1,748,042        27.4

NOOK

     263,833        4.3     505,862        7.9

Elimination

     (74,968     (1.2 )%      (167,657     (2.6 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Sales

   $ 6,069,497        100.0   $ 6,381,357        100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s sales decreased $311.9 million, or 4.9%, during fiscal 2015 to $6.07 billion from $6.38 billion during fiscal 2014. The changes by segment are as follows:

 

   

B&N Retail sales for the 52 weeks ended May 2, 2015, decreased $186.9 million, or 4.4%, to $4.108 billion from $4.295 billion during the 53 weeks ended May 3, 2014, and accounted for 67.7% of total Company sales. The inclusion of the 53rd week contributed $56.6 million of additional sales in fiscal 2014. Excluding the 53rd week, sales decreased $130.3 million, or 3.1%, for the year. The decrease was attributable to a 1.9% decrease in comparable store sales, which decreased sales by $68.7 million, closed stores, which decreased sales by $57.9 million and lower online sales, which declined by $16.3 million, or 4.6%. These unfavorable variances were partially offset by new stores, which increased sales by $5.8 million and a $7.3 million reimbursement resulting from favorable claims experience with a warranty service provider. B&N Retail also includes third-party sales of Sterling Publishing Co., Inc, which decreased by $1.6 million, or 3.9%, versus the prior year.

Of the $68.7 million decrease in comparable store sales, sales of NOOK® products at B&N Retail stores declined $85.1 million, or 53.2%, primarily on lower device unit volume, slightly offset by higher average selling prices, while core comparable store sales, which exclude sales of NOOK® products, increased $16.4 million, or 0.5%, as compared to the prior year. Non-book core categories increased sales by $21.9 million primarily due to the continued growth of the Toys & Games and Gift businesses, as the Company increasingly becomes a differentiated destination for shoppers during the holiday season and throughout the year. Book categories decreased sales by $5.5 million primarily due to lower Trade and Juvenile sales, which is attributable to stronger titles in the prior year.

 

F-12


   

B&N College sales increased $24.3 million, or 1.4%, to $1.772 billion during the 52 weeks ended May 2, 2015 from $1.748 billion during the 53 weeks ended May 3, 2014, and accounted for 29.2% of total Company sales. The inclusion of the 53rd week in the prior year contributed $14.6 million of additional sales in fiscal 2014. Excluding the 53rd week, sales increased $38.9 million, or 2.2% for the year. New store openings over the past year increased sales by $71.0 million, partially offset by closed stores, which decreased sales by $22.9 million. Comparable store sales increased 0.1% or $1.4 million for the comparable sales period. General merchandise sales increased $22.2 million, or 4.7%, primarily due to strong emblematic apparel sales, partially offset by $17.9 million in decreased textbook sales as students continued to shift to lower priced rentals. General merchandise sales have continued to increase as B&N College’s product assortments continue to emphasize and reflect the changing consumer trends and B&N College evolves its presentation concepts and merchandising of product in stores and online.

 

   

NOOK sales decreased $242.0 million, or 47.8%, to $263.8 million during the 52 weeks ended May 2, 2015 from $505.9 million during the 53 weeks ended May 3, 2014, and accounted for 4.3% of total Company sales. The inclusion of the 53rd week contributed $9.2 million of additional sales in fiscal 2014. Device and accessories sales decreased $173.7 million, or 66.7%, to $86.5 million on lower unit sales, partially offset by higher average selling prices. Digital content sales decreased $68.3 million, or 27.8%, to $177.3 million during the 52 weeks ended May 2, 2015 on lower unit sales, partially offset by higher average selling prices.

 

   

The elimination represents sales from NOOK to B&N Retail and B&N College on a sell-through basis. The $92.7 million, or 55.3%, decrease versus the prior year was due to the lower device sales at B&N Retail. NOOK sales, net of elimination, accounted for 3.1% of total Company sales.

In fiscal 2015, the Company closed 13 Barnes & Noble stores, bringing its total number of B&N Retail stores to 648 with 17.1 million square feet. In fiscal 2015, the Company added 48 B&N College stores and closed 24, ending the period with 724 B&N College stores. As of May 2, 2015, the Company operated 1,372 stores in the 50 states and the District of Columbia.

Cost of Sales and Occupancy

 

     52 Weeks Ended     53 Weeks Ended  

Dollars in thousands

   May 2,
2015
    % Sales     May 3,
2014
    % Sales  

B&N Retail

   $ 2,796,521        68.1   $ 2,956,821        68.8

B&N College

     1,328,139        74.9     1,310,673        75.0

NOOK

     147,306        55.8     423,585        83.7

Elimination

     (74,968     (28.4 )%      (167,657     (33.1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Cost of Sales and Occupancy

   $ 4,196,998        69.1   $ 4,523,422        70.9
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s cost of sales and occupancy includes costs such as merchandise costs, distribution center costs (including payroll, freight, supplies, depreciation and other operating expenses), rental expense, management service agreement costs with schools, common area maintenance and real estate taxes, partially offset by landlord tenant allowances amortized over the life of the lease.

 

F-13


Cost of sales and occupancy decreased $326.4 million, or 7.2%, to $4.20 billion in fiscal 2015 from $4.52 billion in fiscal 2014. Cost of sales and occupancy decreased as a percentage of sales to 69.1% in fiscal 2015 from 70.9% in fiscal 2014. The change as a percentage of sales by segment is as follows:

 

   

B&N Retail cost of sales and occupancy decreased as a percentage of sales to 68.1% in fiscal 2015 from 68.8% in fiscal 2014. This decrease was attributable to a higher sales mix of higher margin core products (which exclude NOOK® products), which decreased cost of goods sold and occupancy as a percentage of sales by 60 basis points, lower core product markdowns, which decreased cost of goods sold and occupancy as a percentage of sales by 30 basis points on a lower mix of bestselling titles, increased vendor allowances on additional showroom partnerships, which decreased cost of sales and occupancy as a percentage of sales by 60 basis points and a $7.3 million reimbursement resulting from favorable claims experience with a warranty service provider (included in sales), which decreased cost of goods sold and occupancy as a percentage of sales by 20 basis points. These favorable variances were partially offset by higher occupancy costs, which increased cost of goods sold and occupancy as a percentage of sales by 40 basis points, expense deleverage of 35 basis points against the sales decline and lower vendor settlements of 20 basis points.

 

   

B&N College cost of sales and occupancy decreased as a percentage of sales to 74.9% in fiscal 2015 from 75.0% in fiscal 2014 on a favorable sales mix of higher margin textbook rentals and general merchandise, which decreased cost of goods sold and occupancy as a percentage of sales by 70 basis points and margin improvements, primarily on textbook rentals, which decreased cost of goods sold and occupancy as a percentage of sales by 40 basis points. These variances were partially offset by higher occupancy costs resulting from contract renewals, which increased cost of sales and occupancy as a percentage of sales by 55 basis points and comparisons to a prior year favorable LIFO adjustment of $7.7 million, which resulted in an increase to cost of sales and occupancy as a percentage of sales by 45 basis points.

 

   

NOOK cost of sales and occupancy decreased as a percentage of sales to 55.8% in fiscal 2015 from 83.7% in fiscal 2014. This decrease is due to a higher mix of higher margin content sales, lower occupancy, freight and returns in the current year, as well as improved margin on devices.

The current year includes a benefit from the adjustment of lease accounting items to reflect the impact of the Palo Alto relocations. This benefit, net of closing related costs, of $5.5 million was primarily driven by the reversal of previously deferred rent liabilities upon exiting the facility. In addition, cost of goods sold and occupancy included the recognition of a $6.9 million benefit on the settlement of previously estimated and accrued parts and components liabilities.

The current year also includes higher device recoverability rates resulting from a new relationship with a third-party purchaser of returned product.

The prior year included a reduction in cost of sales of $25.7 million as the Company sold through devices at higher average selling prices than originally anticipated, and also was able to use parts and components, which were previously written down, to build more devices to meet higher than expected demand. The prior year also included $21.8 million of inventory charges to write down device development and other costs reflective of the Company’s revised device strategy.

 

F-14


Gross Margin

 

      52 Weeks Ended     53 Weeks Ended  

Dollars in thousands

   May 2,
2015
     % Sales     May 3,
2014
     % Sales  

B&N Retail

   $ 1,311,722         31.9   $ 1,338,289         31.2

B&N College

     444,250         25.1     437,369         25.0

NOOK

     116,527         61.7     82,277         24.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Gross Margin

   $ 1,872,499         30.9   $ 1,857,935         29.1
  

 

 

    

 

 

   

 

 

    

 

 

 

The Company’s consolidated gross margin increased $14.6 million, or 0.8%, to $1.87 billion in fiscal 2015 from $1.86 billion in fiscal 2014. This increase was due to the matters discussed above.

Selling and Administrative Expenses

 

     52 Weeks Ended     53 Weeks Ended  

Dollars in thousands

   May 2,
2015
     % Sales     May 3,
2014
     % Sales  

B&N Retail

   $ 989,223         24.1   $ 984,236         22.9

B&N College

     353,130         19.9     322,819         18.5

NOOK

     202,799         107.4     299,881         88.7
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Selling and Administrative Expenses

   $ 1,545,152         25.5   $ 1,606,936         25.2
  

 

 

    

 

 

   

 

 

    

 

 

 

Selling and administrative expenses decreased $61.8 million, or 3.8%, to $1.55 billion in fiscal 2015 from $1.61 billion in fiscal 2014. The current year includes $11.5 million of separation related costs. Selling and administrative expenses increased as a percentage of sales to 25.5% in fiscal 2015 from 25.2% in fiscal 2014. The change as a percentage of sales by segment is as follows:

 

   

B&N Retail selling and administrative expenses increased as a percentage of sales to 24.1% in fiscal 2015 from 22.9% in fiscal 2014. This increase was primarily due to deleveraging against the sales decline of 30 basis points, primarily due to store payroll given the comparable store sales decline. The increase also included higher professional fees which increased selling and administrative expenses as a percentage of sales by 30 basis points (including separation-related costs and legal fees), a pension settlement charge, which increased selling and administrative expenses as a percentage of sales by 20 basis points and higher advertising costs, which increased selling and administrative expenses as a percentage of sales by 10 basis points.

 

   

B&N College selling and administrative expenses increased as a percentage of sales to 19.9% in fiscal 2015 from 18.5% in fiscal 2014. This increase included continued investments in Yuzu™, which increased $3.0 million, or 15 basis points, to $24.3 million in fiscal 2015, as compared to $21.3 million in fiscal 2014. Excluding Yuzu™, B&N College’s selling and administrative expenses increased as a percentage of sales by 130 basis points, due primarily to higher store payroll and operating expenses, including benefits and marketing, which increased selling and

 

F-15


 

administrative expenses as a percentage of sales by 60 basis points, planned infrastructure costs to support business growth increased selling and administrative expenses as a percentage of sales by 40 basis points and separation-related costs increased selling and administrative expenses as a percentage of sales by 15 basis points.

 

   

NOOK selling and administrative expenses increased as a percentage of sales to 107.4% in fiscal 2015 from 88.7% in fiscal 2014. The prior year included a $28.4 million asset impairment resulting from the relocation of the Palo Alto, CA facility. Excluding the impairment charge, SG&A expenses as a percentage of sales increased on sales deleverage. On a dollar basis excluding this charge, expenses declined $69.0 million primarily on cost rationalization, including compensation, legal and consulting costs of approximately $46.6 million, lower advertising costs of $12.0 million and lower variable expenses commensurate with the sales decline.

Depreciation and Amortization

 

      52 Weeks Ended     53 Weeks Ended  

Dollars in thousands

   May 2,
2015
     % Sales     May 3,
2014
     % Sales  

B&N Retail

   $ 104,373         2.5   $ 125,991         2.9

B&N College

     50,509         2.8     48,014         2.7

NOOK

     39,292         20.8     42,802         12.7
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Depreciation and Amortization

   $ 194,174         3.2   $ 216,807         3.4
  

 

 

    

 

 

   

 

 

    

 

 

 

Depreciation and amortization decreased $22.6 million, or 10.4%, to $194.2 million in fiscal 2015 from $216.8 million in fiscal 2014. This decrease was primarily attributable to fully depreciated assets and store closings at B&N Retail, partially offset by additional capital expenditures.

Operating Profit (Loss)

 

     52 Weeks Ended     53 Weeks Ended  

Dollars in thousands

   May 2,
2015
    % Sales     May 3,
2014
    % Sales  

B&N Retail

   $ 218,126        5.3   $ 228,062        5.3

B&N College

     40,611        2.3     66,536        3.8

NOOK

     (125,564     (66.5 )%      (260,406     (77.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Profit

   $ 133,173        2.2   $ 34,192        0.5
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s consolidated operating profit increased $99.0 million, or 289.5%, to an operating profit of $133.2 million in fiscal 2015 from an operating profit of $34.2 million in fiscal 2014. This increase was due to the matters discussed above.

 

F-16


Interest Expense, Net and Amortization of Deferred Financing Fees

 

      52 Weeks Ended      53 Weeks Ended         

Dollars in thousands

   May 2,
2015
     May 3,
2014
     % of Change  

Interest Expense, Net and Amortization of Deferred Financing Fees

   $ 17,890       $ 29,507         (39.4 )% 
  

 

 

    

 

 

    

 

 

 

Net interest expense and amortization of deferred financing fees decreased $11.6 million, or 39.4%, to $17.9 million in fiscal 2015 from $29.5 million in fiscal 2014. This decrease was due to lower interest related to the repayment of the Junior Seller Note in September 2014, lower average borrowings and the terminated Microsoft commercial agreement.

Income Taxes

 

      52 Weeks Ended     53 Weeks Ended  

Dollars in thousands

   May 2,
2015
     Effective
Rate
    May 3,
2014
     Effective
Rate
 

Income Taxes

   $ 78,687         68.3   $ 51,953         1,108.9
  

 

 

    

 

 

   

 

 

    

 

 

 

The Company recorded an income tax provision in fiscal 2015 of $78.7 million compared with income tax provision of $52.0 million in fiscal 2014. The Company’s effective tax rate decreased to 68.3% in fiscal 2015 compared with 1,108.9% in fiscal 2014. The lower effective tax rate in fiscal 2015 was due primarily to the impacts of loss allocations within the Company’s NOOK Media joint venture and non-deductible expenses, partly offset by valuation allowances, R&D tax credits and changes to unrecognized tax benefits.

In accordance with accounting principles generally accepted in the United States (GAAP) rules on accounting for income taxes, the Company evaluates the realizability of its deferred tax assets at each reporting date. The Company records a valuation allowance when it determines that it is more likely than not that all or a portion of a particular deferred tax asset will not be realized. As part of this evaluation, the Company reviews all evidence, both positive and negative, to determine if a valuation allowance is needed. The Company’s review of positive evidence included the review of feasible tax planning strategies that may be implemented and the reversal of temporary items. The Company determined that there was sufficient negative evidence to establish valuation allowances against certain deferred tax assets generated during this fiscal year, totaling $1.2 million. The Company will monitor the need for additional valuation allowances at each quarter in the future and, if the negative evidence outweighs the positive evidence, an allowance will be recorded.

 

F-17


Net Earnings (Loss)

 

      52 Weeks Ended      53 Weeks Ended  

Dollars in thousands

   May 2,
2015
     Diluted
EPS
     May 3,
2014
    Diluted
EPS
 

Net Income (Loss)

   $ 36,596       $ 0.21       $ (47,268   $ (1.12
  

 

 

    

 

 

    

 

 

   

 

 

 

As a result of the factors discussed above, the Company reported a consolidated net income of $36.6 million (or $0.21 per diluted share) during fiscal 2015, compared with consolidated net loss of $(47.3) million (or $1.12 per diluted share) during fiscal 2014.

53 Weeks Ended May 3, 2014 Compared with 52 Weeks Ended April 27, 2013

Sales

The following table summarizes the Company’s sales for the 53 weeks ended May 3, 2014 and 52 weeks ended April 27, 2013:

 

      53 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   May 3,
2014
    % Total     April 27,
2013
    % Total  

B&N Retail

   $ 4,295,110        67.3   $ 4,568,243        66.8

B&N College

     1,748,042        27.4     1,763,248        25.8

NOOK

     505,862        7.9     780,433        11.4

Elimination

     (167,657     (2.6 )%      (272,919     (4.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Sales

   $ 6,381,357        100.0   $ 6,839,005        100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s sales decreased $457.7 million, or 6.7%, during fiscal 2014 to $6.38 billion from $6.84 billion during fiscal 2013. The decrease by segment is as follows:

 

   

B&N Retail sales decreased $273.1 million, or 6.0%, to $4.30 billion during the 53 weeks ended May 3, 2014 from $4.57 billion during the 52 weeks ended April 27, 2013, and accounted for 67.3% of total Company sales. The inclusion of the 53rd week contributed $56.6 million in additional sales in fiscal 2014. Excluding the 53rd week, sales decreased $329.7 million, or 7.2%, for the year. The decrease was attributable to a 5.8% decrease in comparable store sales, which decreased sales by $224.6 million and lower online sales, which declined by $32.3 million. Closed stores decreased sales by $81.8 million, partially offset by new stores, which increased sales by $19.0 million. B&N Retail also includes third-party sales of Sterling Publishing, which declined $6.6 million, or 5.7%, versus the prior year.

Of the $224.6 million decrease in comparable store sales, core comparable store sales, which exclude sales of NOOK® products, decreased $112.7 million, or 3.1%, as compared to the prior year, while sales of NOOK® products at B&N Retail stores declined $111.8 million on lower device unit volume and lower average selling prices. Core comparable sales were impacted by comparisons to the strong sales of the Fifty Shades and Hunger Games trilogies in the prior year. Excluding these trilogies, core comparable store sales decreased $60.4 million or 1.7%. Core

 

F-18


comparable store sales were impacted by lower physical book sales, which decreased sales by $45.0 million and a decrease in non-book core categories of $15.4 million. Non-book core categories include Toys & Games, Gift, Café and other items. Core sales trends benefitted from a strong line-up of bestselling book titles, merchandising initiatives and a holiday advertising campaign. The Company’s management believes this campaign created greater awareness of the in-store shopping experience and expanded depth and breadth of product offerings.

 

   

B&N College sales decreased $15.2 million, or 0.9%, to $1.75 billion during the 53 weeks ended May 3, 2014 from $1.76 billion during the 52 weeks ended April 27, 2013, and accounted for 27.4% of total Company sales. The inclusion of the 53rd week contributed $14.6 million in additional sales in fiscal 2014. Excluding the 53rd week, sales decreased $29.8 million, or 2.2%, for the year. Comparable sales dollars decreased sales by $73.5 million, or 2.7%, for the year. Recognition of previously deferred rental revenues increased sales by $2.0 million for the year. Closed stores decreased sales by $21.2 million, offset by new store openings, which increased sales by $63.2 million.

The comparable store sales decline of 2.7% was attributable to lower textbook sales, which decreased sales by $150.3 million, partially offset by higher textbook rentals, which increased sales by $70.1 million and higher general merchandise sales, which increased sales by $14.3 million. While comparable store sales percentages were adjusted for the impact of textbook rentals, sales dollars were negatively impacted by the continued growth of textbook rentals, which have a lower price than new or used textbooks, and a portion of rental sales are deferred over the rental period. As B&N College expanded its textbook rental offerings, its consumers have been shifting away from higher priced textbook purchases to lower priced rental options. General merchandise sales have continued to increase as B&N College continues to expand its product offerings in its stores.

 

   

NOOK sales decreased $274.6 million, or 35.2 %, to $505.9 million during the 53 weeks ended May 3, 2014 from $780.4 million during the 52 weeks ended April 27, 2013. The inclusion of the 53rd week contributed $9.2 million in additional sales in fiscal 2014. Device and accessories sales decreased $211.0 million, or 44.8%, to $260.3 million during the 53 weeks ended May 3, 2014 on lower device unit volume and lower average selling prices. Two new tablet products were launched in fiscal 2013 versus one new e-Ink product in fiscal 2014, as the Company sold through most of its existing device inventories at reduced prices. Digital content sales decreased $63.6 million, or 20.6%, to $245.6 million during the 53 weeks ended May 3, 2014. The digital content decrease was primarily due to lower device unit volume throughout the year, lower average selling prices and comparisons to the Fifty Shades and Hunger Games trilogies in the prior year. Excluding the impact of these two trilogies, digital content sales decreased 17.5% during the 53 weeks ended May 3, 2014.

 

   

The elimination represents sales from NOOK to B&N Retail and B&N College on a sell-through basis. The decrease versus prior year was due to the lower device sales at B&N Retail. NOOK sales, net of this elimination, accounted for 5.3% of total Company sales.

In fiscal 2014, the Company opened three and closed 17 Barnes & Noble stores, bringing its total number of B&N Retail stores to 661 with 17.4 million square feet. In fiscal 2014, the Company added 30 B&N College stores and closed 16, ending the period with 700 B&N College stores. As of May 3, 2014, the Company operated 1,361 stores in the 50 states and the District of Columbia.

 

F-19


Cost of Sales and Occupancy

 

      53 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   May 3,
2014
    % Sales     April 27,
2013
    % Sales  

B&N Retail

   $ 2,956,821        68.8   $ 3,168,520        69.4

B&N College

     1,310,673        75.0     1,358,172        77.0

NOOK

     423,585        83.7     902,726        115.7

Elimination

     (167,657     (33.1 )%      (272,919     (35.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Cost of Sales and Occupancy

   $ 4,523,422        70.9   $ 5,156,499        75.4
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s cost of sales and occupancy includes costs such as merchandise costs, distribution center costs (including payroll, freight, supplies, depreciation and other operating expenses), rental expense, management service agreement costs with schools, common area maintenance and real estate taxes, partially offset by landlord tenant allowances amortized over the life of the lease.

Cost of sales and occupancy decreased $633.1 million, or 12.3%, to $4.52 billion in fiscal 2014 from $5.16 billion in fiscal 2013. Cost of sales and occupancy decreased as a percentage of sales to 70.9% in fiscal 2014 from 75.4% in fiscal 2013. The decrease by segment is as follows:

 

   

B&N Retail cost of sales and occupancy decreased as a percentage of sales to 68.8% in fiscal 2014 from 69.4% in fiscal 2013. This decrease was attributable to a higher sales mix of higher margin core products (which excludes NOOK® products), which decreased costs of goods sold and occupancy as a percentage of sales by 70 basis points, increased vendor allowances on additional showroom partnerships, which decreased costs of sales and occupancy as a percentage of sales by 30 basis points, and favorable settlements, which decreased costs of sales and occupancy as a percentage of sales by 35 basis points on improvements to the distribution center accrual reconciliation process. These favorable variances were partially offset by higher occupancy costs, which increased cost of goods sold and occupancy as a percentage of sales by 60 basis points and expense deleverage of 10 basis points against the sales decline, as described above.

 

   

B&N College cost of sales and occupancy decreased as a percentage of sales to 75.0% in fiscal 2014 from 77.0% in fiscal 2013 due to a favorable sales mix of higher margin textbook rentals and general merchandise, which decreased costs of goods sold and occupancy as a percentage of sales by 160 basis points and a $7.7 million favorable LIFO adjustment this year compared to a $2.2 million unfavorable LIFO adjustment last year, which decreased costs of goods sold and occupancy as a percentage of sales by 55 basis points. These were partially offset by higher occupancy costs as a percentage of sales of 15 basis points as a result of contract renewals. As B&N College expanded its textbook rental offerings, its consumers have been shifting away from higher priced textbook purchases to lower priced rental options. General merchandise sales have continued to increase as B&N College continues to expand its general merchandise product offerings in its stores.

 

F-20


   

NOOK cost of sales and occupancy decreased as a percentage of sales to 83.7% in fiscal 2014 from 115.7% in fiscal 2013. During fiscal 2013, the Company recorded $222.2 million of additional inventory related charges, of which $189.7 million was recorded to cost of sales and the remainder related to sales allowances, as the holiday sales shortfall resulted in higher than anticipated levels of finished and unfinished goods. The current year includes a reduction in cost of sales of $25.7 million as the Company sold through devices at higher average selling prices than originally anticipated, and also was able to use parts and components, which were previously written down, to build more devices to meet higher than expected demand. The current year also includes $21.8 million of inventory charges to write down device development and other costs reflective of changes to the Company’s device strategy.

Gross Margin

 

      53 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   May 3,
2014
     % Sales     April 27,
2013
    % Sales  

B&N Retail

   $ 1,338,289         31.2   $ 1,399,723        30.6

B&N College

     437,369         25.0     405,076        23.0

NOOK

     82,277         24.3     (122,293     (24.1 )% 
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Gross Margin

   $ 1,857,935         29.1   $ 1,682,506        24.6
  

 

 

    

 

 

   

 

 

   

 

 

 

The Company’s consolidated gross margin increased $175.4 million, or 10.4%, to $1.86 billion in fiscal 2014 from $1.68 billion in fiscal 2013. This increase was due to the matters discussed above.

Selling and Administrative Expenses

 

      53 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   May 3,
2014
     % Sales     April 27,
2013
     % Sales  

B&N Retail

   $ 984,236         22.9   $ 1,023,633         22.4

B&N College

     322,819         18.5     293,618         16.7

NOOK

     299,881         88.7     358,125         70.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Selling and Administrative Expenses

   $ 1,606,936         25.2   $ 1,675,376         24.5
  

 

 

    

 

 

   

 

 

    

 

 

 

Selling and administrative expenses decreased $68.4 million, or 4.1%, to $1.61 billion in fiscal 2014 from $1.68 billion in fiscal 2013. Selling and administrative expenses increased as a percentage of sales to 25.2% in fiscal 2014 from 24.5% in fiscal 2013. The change as a percentage of sales by segment is as follows:

 

   

B&N Retail selling and administrative expenses increased as a percentage of sales to 22.9% in fiscal 2014 from 22.4% in fiscal 2013. This increase was primarily due to deleveraging against the sales decline of 55 basis points, primarily store payroll and corporate overhead costs, given the comparable store sales decline.

 

F-21


   

B&N College selling and administrative expenses increased as a percentage of sales to 18.5% in fiscal 2014 from 16.7% in fiscal 2013. This increase was primarily due to deleveraging against the sales decline as well as continued investments in YuzuTM, B&N College’s digital education platform. The investment in Yuzu™ increased $13.9 million, or 80 basis points, to $21.3 million in fiscal 2014, as compared to $7.4 million in fiscal 2013. Excluding Yuzu™, B&N College’s selling and administrative expenses increased by 100 basis points as a percentage of sales, as store payroll and corporate overhead costs delevered against the comparable store sales decline.

 

   

NOOK selling and administrative expenses increased as a percentage of sales to 88.7% in fiscal 2014 from 70.6% in fiscal 2013. The current year includes a $28.4 million asset impairment resulting from the relocation of the Palo Alto, CA facility. The prior year included $20.3 million of impairment charges, primarily including goodwill. Excluding these impairment charges, selling and administrative expenses increased to 80.3% from 66.6% primarily due to sales deleverage. On a dollar basis, excluding these impairment charges, expenses declined $66.4 million primarily on lower advertising costs of $48.5 million, and a reduction in consulting expenses of $14.4 million.

Depreciation and Amortization

 

      53 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   May 3,
2014
     % Sales     April 27,
2013
     % Sales  

B&N Retail

   $ 125,991         2.9   $ 148,855         3.3

B&N College

     48,014         2.7     46,849         2.7

NOOK

     42,802         12.7     31,430         6.2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Depreciation and Amortization

   $ 216,807         3.4   $ 227,134         3.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Depreciation and amortization decreased $10.3 million, or 4.5%, to $216.8 million in fiscal 2014 from $227.1 million in fiscal 2013. This decrease was primarily attributable to store closings and fully depreciated assets, partially offset by additional capital expenditures.

Operating Profit (Loss)

 

      53 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   May 3,
2014
    % Sales     April 27,
2013
    % Sales  

B&N Retail

   $ 228,062        5.3   $ 227,235        5.0

B&N College

     66,536        3.8     64,609        3.7

NOOK

     (260,406     (77.0 )%      (511,848     (100.9 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Profit (Loss)

   $ 34,192        0.5   $ (220,004     (3.2 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s consolidated operating profit increased $254.2 million, or 115.5%, to an operating profit of $34.2 million in fiscal 2014 from an operating loss of $(220.0) million in fiscal 2013. This increase was due to the matters discussed above.

 

F-22


Interest Expense, Net and Amortization of Deferred Financing Fees

 

      53 Weeks Ended      52 Weeks Ended         

Dollars in thousands

   May 3,
2014
     April 27,
2013
     % of Change  

Interest Expense, Net and Amortization of Deferred Financing Fees

   $ 29,507       $ 35,345         (16.5 )% 
  

 

 

    

 

 

    

 

 

 

Net interest expense and amortization of deferred financing fees decreased $5.8 million, or 16.5%, to $29.5 million in fiscal 2014 from $35.3 million in fiscal 2013. This decrease was due to lower average borrowings in the current year.

Income Taxes

 

      53 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   May 3,
2014
     Effective
Rate
    April 27,
2013
    Effective
Rate
 

Income Taxes

   $ 51,953         1,108.9   $ (97,543     38.2
  

 

 

    

 

 

   

 

 

   

 

 

 

The Company recorded an income tax provision in fiscal 2014 of $52.0 million compared with income tax benefit of $(97.5) million in fiscal 2013. The Company’s effective tax rate increased to 1,108.9% in fiscal 2014 compared with 38.2% in fiscal 2013. The higher effective tax rate in fiscal 2014 was due primarily to the impacts of valuation allowances, loss allocations within the Company’s NOOK Media joint venture and non-deductible expenses, partly offset by R&D tax credits, state loss carryforwards and changes to unrecognized tax benefits.

In accordance with U.S. GAAP rules on accounting for income taxes, the Company evaluates the realizability of its deferred tax assets at each reporting date. The Company records a valuation allowance when it determines that it is more likely than not that all or a portion of a particular deferred tax asset will not be realized. As part of this evaluation, the Company reviewed all evidence, both positive and negative, to determine if a valuation allowance was needed. The Company’s review of positive evidence included the review of feasible tax planning strategies that may be implemented and the reversal of temporary items. The Company determined that there was sufficient negative evidence to establish valuation allowances against certain deferred tax assets generated during fiscal 2014, totaling $19.2 million. The Company will monitor the need for additional valuation allowances at each quarter in the future and, if the negative evidence outweighs the positive evidence, an allowance will be recorded.

 

F-23


Net Earnings (Loss)

 

      53 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   May 3,
2014
    Diluted EPS     April 27,
2013
    Diluted EPS  

Net Loss

   $ (47,268   $ (1.12   $ (157,806   $ (3.02
  

 

 

   

 

 

   

 

 

   

 

 

 

As a result of the factors discussed above, the Company reported a consolidated net loss of $(47.3) million (or $1.12 per diluted share) during fiscal 2014, compared with consolidated net loss of $(157.8) million (or $3.02 per diluted share) during fiscal 2013.

Seasonality

The B&N Retail business, like that of many retailers, is seasonal, with the major portion of sales and operating profit realized during its third fiscal quarter, which includes the holiday selling season.

The B&N College business is highly seasonal, with the major portion of sales and operating profit realized during the second and third fiscal quarters, when college students generally purchase and rent textbooks for the upcoming semesters. Revenues from textbook rentals, which primarily occur at the beginning of the semester, are recognized over the rental period.

The NOOK business, like that of many technology companies, is impacted by the launch of new products and the promotional efforts to support those new products, as well as the traditional retail holiday selling seasonality.

Liquidity and Capital Resources

The primary sources of the Company’s cash are net cash flows from operating activities, funds available under its credit facility and short-term vendor financing.

The Company’s cash and cash equivalents were $74.4 million as of May 2, 2015, compared with $340.2 million as of May 3, 2014. The decrease in cash and cash equivalents of $265.8 million versus the prior year period includes payment of $76.2 million in cash to re-acquire the Company’s preferred membership interests in NOOK Media Inc., repayment of the Junior Seller Note of $127.3 million on September 30, 2014, and changes in working capital as outlined below.

The Company had no borrowings under its $1.0 billion credit facility at May 2, 2015 and May 3, 2014.

Additional year-over-year balance sheet changes include the following:

 

   

Receivables, net decreased $45.4 million, or 31.5%, to $98.6 million as of May 2, 2015, compared to $144.0 million as of May 3, 2014. This decrease was attributable to lower channel partner business and the collection of eBook settlement receivables.

 

   

Merchandise inventories increased $58.5 million, or 4.7%, to $1.293 billion as of May 2, 2015, compared to $1.235 billion as of May 3, 2014. Retail inventories increased $31.6 million, or 3.3%,

 

F-24


 

on higher Toys & Games and Juvenile positions to support sales increases in these categories. B&N College inventories increased $22.1 million, or 8.0%, primarily due to new store growth. NOOK inventories increased $4.8 million, or 39.5%, versus the prior year on lower than expected device sales volume.

 

   

Textbook rental inventories increased $4.7 million, or 9.4%, to $55.1 million as of May 2, 2015, compared to $50.3 million as of May 3, 2014.

 

   

Prepaid expenses and other current assets decreased $1.2 million, or 1.9%, to $65.3 million as of May 2, 2015 compared to $66.6 million as of May 3, 2014.

 

   

Short-term deferred taxes decreased $1.9 million, or 1.3%, to $142.8 million as of May 2, 2015, compared to $144.7 million as of May 3, 2014. This decrease is primarily due to a reversal of timing differences and a change in valuation allowances.

 

   

Property and equipment, net decreased $41.4 million, or 8.4%, to $449.3 million as of May 2, 2015, compared to $490.7 million as of May 3, 2014 as depreciation outpaced capital expenditures.

 

   

Intangible assets, net decreased $14.7 million, or 2.8%, to $513.8 million as of May 2, 2015, compared to $528.6 million as of May 3, 2014 on additional amortization.

 

   

Other noncurrent assets increased $3.3 million, or 7.3%, to $47.8 million as of May 2, 2015, compared to $44.5 million as of May 3, 2014.

 

   

Accounts payable decreased $80.0 million, or 10.9%, to $655.1 million as of May 2, 2015, compared to $735.1 million as of May 3, 2014. Accounts payable were 50.7% and 59.5% of merchandise inventory as of May 2, 2015 and May 3, 2014, respectively. The decline is primarily due to product mix and the timing of purchases and returns.

 

   

Accrued liabilities decreased $68.5 million, or 13.6%, to $434.0 million as of May 2, 2015, compared to $502.6 million as of May 3, 2014. Accrued liabilities include deferred income, accrued taxes, compensation, occupancy related, legal and other selling and administrative miscellaneous accruals. This decrease was primarily due to reductions in income tax liabilities, device related liabilities and the eBook settlement liability.

 

   

Gift card liabilities increased $1.4 million, or 0.4%, to $358.1 million as of May 2, 2015, compared to $356.7 million as of May 3, 2014. The Company estimates the portion of the gift card liability for which the likelihood of redemption is remote based upon the Company’s historical redemption patterns. The Company recognized $26.1 million in gift card breakage during the 52 weeks ended May 2, 2015 compared to $23.2 million in gift card breakage during the 53 weeks ended May 3, 2014. Additional breakage may be required if gift card redemptions continue to run lower than historical patterns.

 

   

The Junior Seller Note of $127.3 million related to the acquisition of B&N College and was paid in September 2014, in accordance with its terms.

 

   

Long-term deferred taxes decreased $11.4 million, or 5.4%, to $200.5 million as of May 2, 2015, compared to $211.9 million as of May 3, 2014. This decrease was primarily due to a reversal of timing differences and a change in valuation allowances.

 

   

Other long-term liabilities decreased $170.7 million, or 46.5%, to $196.3 million as of May 2, 2015, compared to $367.0 million as of May 3, 2014 due to lower deferred rent and the settlement of the Microsoft commercial liability as a result of the purchase of Microsoft’s preferred membership interests, partially offset by higher tax reserves.

 

   

In December 2014, the Company re-acquired Microsoft and Pearson’s interest in NOOK Media, Inc. in exchange for $76.2 million cash and $76.2 million in common stock of Barnes & Noble.

The Company has arrangements with third-party manufacturers to produce certain NOOK® products. These manufacturers procure and assemble unfinished parts and components from third-party suppliers based on forecasts provided by the Company. Given production lead times, commitments are

 

F-25


generally made far in advance of finished product delivery. Based on current purchase commitments and product development plans, the Company records a provision for purchase commitments. Future charges may be required based on changes in forecasted sales or strategic direction.

The Company provided credits to eligible customers resulting from the settlements reached with certain publishers in antitrust lawsuits filed by various State Attorney Generals and private class plaintiffs regarding the price of digital books. The Company’s customers were entitled to $44.2 million in total credits as a result of the settlement, which is funded by these publishers. If a customer’s credit is not used to make a purchase within one year, the entire credit will expire. The Company recorded estimated redemptions of $33.6 million as a receivable from these publishers and a liability to its customers in March 2014, all of which were activated by customers as of March 2015.

Cash Flow

Cash flows provided by operating activities were $55.9 million, $320.0 million and $117.4 million during fiscal 2015, fiscal 2014 and fiscal 2013, respectively. Cash flows from operating activities increased $202.6 million in fiscal 2014 as compared to fiscal 2013 primarily due to the sell-through of excess NOOK inventories in fiscal 2014. Cash flows from operating activities decreased $264.0 million in fiscal 2015 compared to fiscal 2014 primarily due to the sell-through of excess NOOK inventories in fiscal 2014, higher B&N Retail core merchandise payments in fiscal 2015 (driven by product mix, increased sales and timing of purchases and returns), B&N College new store growth and higher income tax payments.

Capital Structure

On April 27, 2012, Barnes & Noble entered into an investment agreement pursuant to which Barnes & Noble transferred to the LLC its digital device, digital content and college bookstore businesses, and Morrison Investment Holdings, Inc. (Morrison) purchased from the LLC, 300,000 convertible preferred membership interests in the LLC (Series A Preferred) for an aggregate purchase price of $300.0 million. Concurrently with its entry into this agreement, Barnes & Noble also entered into a commercial agreement with Microsoft, pursuant to which, among other things, the LLC would develop and distribute a Windows 8 application for eReading and digital content purchases, and an intellectual property license and settlement agreement with Microsoft and Microsoft Licensing GP. The parties closed Morrison’s investment in the LLC and the commercial agreement became effective on October 4, 2012.

On December 3, 2014, Morrison, Microsoft, Barnes & Noble and Barnes & Noble Education entered into agreements pursuant to which Morrison’s interest in the LLC was purchased by Barnes & Noble Education and the Microsoft commercial agreement was terminated effective as of such date. Pursuant to the Purchase Agreement (the Purchase Agreement) among Barnes & Noble, Barnes & Noble Education, Morrison, and Microsoft, Barnes & Noble Education purchased from Morrison, and Morrison sold, all of its $300.0 million convertible Series A preferred limited liability company interest in the LLC in exchange for an aggregate purchase price of $124.9 million consisting of (i) $62.4 million in cash and (ii) 2,737,290 shares of common stock, par value $0.001 per share, of Barnes & Noble. The Purchase Agreement closed on December 4, 2014. The Company accounted for this transaction in accordance with ASC 810-10, Non Controlling Interest (ASC 810-10) and accordingly, the transaction was reflected as an equity transaction. In connection with the closing, the parties entered into a Digital Business Contingent Payment Agreement pursuant to which Microsoft is entitled to receive 22.7% of the proceeds from, among other events or transactions, (1) any future

 

F-26


dividends or other distributions received from Barnes & Noble’s NOOK digital business at any time until the date that is three years from the closing, subject to a one-year extension under certain circumstances, and (2) the sale of Barnes & Noble’s NOOK digital business at any time until the date that is three years from the closing, subject to a one-year extension under certain circumstances.

On December 21, 2012, the LLC entered into an agreement with a subsidiary of Pearson plc (Pearson) to make a strategic investment in the LLC. That transaction closed on January 22, 2013, and Pearson invested approximately $89.5 million of cash in the LLC in exchange for preferred membership interests representing a 5% equity stake in the LLC. Following the closing of the transaction, Barnes & Noble owned approximately 78.2% of the LLC and Microsoft owned approximately 16.8%. The preferred membership interests had a liquidation preference equal to the original investment. In addition, the LLC granted warrants to Pearson to purchase up to an additional 5% of the LLC under certain conditions. Upon the completion of the acquisition of Pearson’s interest in the LLC, as stated below, the temporary equity was converted to permanent equity.

At closing, the LLC and Pearson entered into a commercial agreement with respect to distributing Pearson content in connection with this strategic investment. On December 27, 2013, the LLC entered into an amendment to the commercial agreement that extends the term of the agreement and the timing of the measurement period to meet certain revenue share milestones.

On December 22, 2014, Barnes & Noble entered into a Purchase Agreement (the Pearson Purchase Agreement) among Barnes & Noble, Barnes & Noble Education, NOOK Media Member Two LLC, a Delaware limited liability company (NOOK Member Two), Pearson Education, Inc. (Pearson Education) and Pearson Inc., pursuant to which Barnes & Noble Education and NOOK Member Two purchased from Pearson Education all of its convertible Series B preferred limited liability company interest in the LLC and all of its warrants to purchase additional Series B preferred limited liability company interests, in exchange for an aggregate purchase price equal to (i) $13.8 million in cash and (ii) 602,927 shares of common stock, par value $0.001 per share, of Barnes & Noble. The transactions under the Pearson Purchase Agreement closed on December 22, 2014. The Company accounted for this transaction in accordance with ASC 810-10 and it accordingly was reflected as an equity transaction. As a condition to closing, the parties entered into an amended and restated Digital Business Contingent Payment Agreement, pursuant to which a Digital Business Contingent Payment Agreement dated as of December 3, 2014, by and between Barnes & Noble, the LLC and Pearson, was amended and restated to include provisions consistent with the Digital Business Contingent Payment Agreement entered into with Morrison on December 3, 2014.

On June 4, 2014, NOOK Digital, a wholly owned subsidiary of B&N Education as of such date and a subsidiary of Barnes & Noble, entered into the Agreement with Samsung relating to tablets.

Pursuant to the Agreement, NOOK Digital, after good faith consultations with Samsung and subject to Samsung’s agreement, selected Samsung tablet devices under development to be customized and co-branded by NOOK Digital. Such devices are produced by Samsung. The co-branded NOOK® tablet devices may be sold by NOOK Digital through Barnes & Noble retail stores, www.barnesandnoble.com, www.nook.com and other Barnes & Noble websites. NOOK Digital and Samsung agreed to develop co-branded Samsung Galaxy Tab® 4 NOOK® tablets as the initial co-branded devices pursuant to the Agreement.

Under the Agreement, NOOK Digital committed to purchase a minimum of 1,000,000 NOOK®-Samsung co-branded devices from Samsung within 12 months after the launch of the initial co-branded

 

F-27


device, which launch occurred on August 20, 2014. The 12-month period was automatically extended by three months due to the quantity of sales of such co-branded devices through December 31, 2014, and the period was further extended until June 30, 2016 by an amendment executed by the parties on March 7, 2015.

NOOK Digital and Samsung have agreed to coordinate customer service for the co-branded NOOK® devices and have both agreed to a license of intellectual property to promote and market the devices. Additionally, Samsung has agreed to fund a marketing fund for the co-branded NOOK® devices at the initial launch and for the duration of the Agreement.

The Agreement has a two year term, with certain termination rights, including termination (i) by NOOK Digital for a Samsung material default; (ii) by Samsung for a NOOK Digital material default; (iii) by NOOK Digital if Samsung fails to meet its shipping and delivery obligations in any material respect on a timely basis; and (iv) by either party upon insolvency or bankruptcy of the other party.

The companies introduced the Samsung Galaxy Tab® 4 NOOK® in a 7-inch version in the U.S. in August 2014 and a 10-inch version in October 2014. The co-branded device combines the popular Samsung Galaxy Tab® 4 hardware with customized NOOK® software to give customers powerful, full-featured tablets that are designed for reading, with easy access to Barnes & Noble’s expansive digital collection of approximately four million eBooks, digital magazines and newspapers.

On August 18, 2011, the Company entered into an investment agreement between the Company and Liberty GIC, Inc. (Liberty) pursuant to which the Company issued and sold to Liberty, and Liberty purchased, 204,000 shares of the Company’s Series J Preferred Stock, par value $0.001 per share (Preferred Stock), for an aggregate purchase price of $204.0 million in a private placement exempt from the registration requirements of the 1933 Act. The shares of Preferred Stock will be convertible, at the option of the holders, into shares of Common Stock representing 16.6% of the Common Stock outstanding as of August 29, 2011 (after giving pro forma effect to the issuance of the Preferred Stock) based on the initial conversion rate. The initial conversion rate reflects an initial conversion price of $17.00 and is subject to adjustment in certain circumstances. The initial dividend rate for the Preferred Stock is equal to 7.75% per annum of the initial liquidation preference of the Preferred Stock to be paid quarterly and subject to adjustment in certain circumstances.

On April 8, 2014, Liberty sold the majority of its shares to qualified institutional buyers in reliance on Rule 144A under the Securities Act and initially retained an approximate 10 percent stake of its initial investment. As a result, Liberty no longer has the right to elect two preferred stock directors to the Company’s Board. Additionally, the consent rights and pre-emptive rights to which Liberty was previously entitled ceased to apply.

On June 5, 2015, the Company entered into Conversion Agreements with five existing beneficial owners (Series J Holders) of its Preferred Stock, pursuant to which each of the Series J Holders has agreed to convert (Conversion) shares of Preferred Stock it beneficially owns into shares of the Company’s common stock, par value $0.001 per share (Company Common Stock), and will in addition receive a cash payment from the Company in connection with the Conversion. The Series J Holders have agreed to convert an aggregate of 103,995 shares of Preferred Stock into 6,117,347 shares of Company Common Stock in the Conversion, and the Company has agreed to make an aggregate cash payment to the Series J Holders of $8.1 million plus cash in lieu of fractional shares in connection with the Conversion, in each case, subject to adjustment under certain circumstances. The Company expects to issue the shares of Company Common Stock to be issued in the Conversion on or about July 9, 2015.

 

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The number of shares of Company Common Stock to be issued was determined based on a conversion ratio of 58.8235 shares of Company Common Stock per share of Preferred Stock converted, which is the conversion rate in the Certificate of the Designations with respect to the Preferred Stock dated as of August 18, 2011.

On September 30, 2009, in connection with the closing of the acquisition of B&N College, the Company issued the sellers (i) a senior subordinated note in the principal amount of $100.0 million, with interest of 8% per annum payable on the unpaid principal amount, which was paid on December 15, 2010 in accordance to its scheduled date, and (ii) a junior subordinated note (the Junior Seller Note) in the principal amount of $150.0 million, payable in full on the fifth anniversary of the closing of the acquisition, with interest of 10% per annum payable on the unpaid principal amount. Pursuant to a settlement agreed to on June 13, 2012, the sellers waived their right to receive $22.8 million in principal amount (and interest on such principal amount) of the Junior Seller Note. The net short-term payable of $127.3 million was paid in September 2014, in accordance with its terms.

The Company is party to an amended and restated credit facility with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and other lenders, dated as of April 29, 2011 (as amended and modified to date, the Credit Facility), consisting of up to $1.0 billion in aggregate commitments under a five-year asset-backed revolving credit facility expiring on April 29, 2016, which is secured by eligible inventory and accounts receivable with the ability to include eligible real estate and related assets. Borrowings under the Credit Facility are limited to a specified percentage of eligible inventories and accounts receivable and accrued interest, at the election of the Company, at Base Rate or LIBO Rate, plus, in each case, an Applicable Margin (each term as defined in the Credit Facility). In addition, the Company has the option to request an increase in commitments under the Credit Facility by up to $300.0 million, subject to certain restrictions.

The Credit Facility requires Availability (as defined in the Credit Facility) to be greater than the greater of (i) 10% of the Loan Cap (as defined in the Credit Facility) and (ii) $50.0 million. In addition, the Credit Facility contains covenants that limit, among other things, the Company’s ability to incur indebtedness, create liens, make investments, make restricted payments, merge or acquire assets, and contains default provisions that are typical for this type of financing, among other things. Proceeds from the Credit Facility are used for general corporate purposes, including seasonal working capital needs.

 

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Selected information related to the Company’s credit facilities (in thousands):

 

     Fiscal
2015
    Fiscal
2014
    Fiscal
2013
 

Credit facility at period end

   $ —          —          77,000   

Average balance outstanding during the period

   $ 18,227        48,254        214,702   

Maximum borrowings outstanding during the period

   $ 202,800        180,300        462,900   

Weighted average interest rate during the period (a)

     38.18     15.65     5.56

Interest rate at end of period

     0.00     0.00     4.93

 

(a) Includes commitment fees.

Fees expensed with respect to the unused portion of the credit facilities were $4.7 million, $4.4 million and $3.8 million during fiscal 2015, fiscal 2014 and fiscal 2013, respectively.

The Company had $66.9 million of outstanding letters of credit under the 2013 Amended Credit Facility as of May 2, 2015 compared with $36.8 million as of May 3, 2014.

The Company has no agreements to maintain compensating balances.

Capital Investment

The Company’s investing activities consist principally of capital expenditures for the maintenance of existing stores, new store construction, digital initiatives and enhancements to systems and the website. The Company is scheduled to launch its new eCommerce website in June 2015. The new website is expected to have better search capabilities, improved user experience and yield cost savings to the Company. The Company believes that the new website will allow it to be more competitive in the marketplace and continue to be a valuable resource for its customers, whether they would like their purchased products shipped to their homes or made available for pick up in the stores. Capital expenditures totaled $143.3 million, $135.0 million and $165.8 million during fiscal 2015, fiscal 2014 and fiscal 2013, respectively. Fiscal 2016 capital expenditure levels are expected to be comparable to fiscal 2015, although commitment to many such expenditures has not yet been made. Capital expenditures planned for fiscal 2016 primarily include maintenance of existing stores, enhancements to systems and the website, new college stores and digital initiatives.

Based upon the Company’s current operating levels and capital expenditures for fiscal 2015, management believes cash and cash equivalents on hand, funds available under its credit facility and short-term vendor financing will be sufficient to meet the Company’s normal working capital and debt service requirements for at least the next twelve months. The Company regularly evaluates its capital structure and conditions in the financing markets to ensure it maintains adequate flexibility to successfully execute its business plan.

On May 15, 2007, the Company announced that its Board of Directors authorized a stock repurchase program for the purchase of up to $400.0 million of the Company’s common stock. The maximum dollar value of common stock that may yet be purchased under the current program is approximately $2.5 million as of May 2, 2015.

 

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Stock repurchases under this program may be made through open market and privately negotiated transactions from time to time and in such amounts as management deems appropriate. As of May 2, 2015, the Company has repurchased 34,840,750 shares at a cost of approximately $1.1 billion under its stock repurchase programs. The repurchased shares are held in treasury.

Contractual Obligations

The following table sets forth the Company’s contractual obligations as of May 2, 2015 (in millions):

 

Contractual Obligations

   Payments Due by Period  
     Total      Less Than
1 Year
     1-3
Years
     3-5
Years
     More Than
5 Years
 

Operating lease obligations (a)

   $ 1,941.4       $ 438.3       $ 721.6       $ 445.7       $ 335.8   

Capital lease obligations

     0.3         0.2         0.1         —           —     

Purchase obligations (b)

     146.7         135.1         11.3         0.3         —     

Interest obligations (c)

     5.0         5.0         —           —           —     

Other long-term liabilities reflected on the Company’s balance sheet under U.S. GAAP (d)

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,093.4       $ 578.6       $ 733.0       $ 446.0       $ 335.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Excludes obligations under store leases for insurance, taxes and other maintenance costs, which obligations totaled approximately 14% of the minimum rent payments under those leases.

 

(b) Includes hardware and software maintenance contracts and inventory purchase commitments.

 

(c) Represents commitment fees related to the Company’s Credit Facility.

 

(d) Excludes $18.4 million of unrecognized tax benefits for which the Company cannot make a reasonably reliable estimate of the amount and period of payment. See Note 9 to the Notes to Consolidated Financial Statements.

See also Note 8 to the Notes to Consolidated Financial Statements for information concerning the Company’s pension and postretirement plans.

Off-Balance Sheet Arrangements

As of May 2, 2015, the Company had no off-balance sheet arrangements as defined in Item 303 of Regulation S-K.

Impact of Inflation

The Company does not believe that inflation has had a material effect on its net sales or results of operations.

 

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Certain Relationships and Related Transactions

See Note 21 to the Notes to Consolidated Financial Statements.

Critical Accounting Policies

The “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this report discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. In preparing these financial statements, management has made its best estimates and judgments with respect to certain amounts included in the financial statements, giving due consideration to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

Revenue Recognition

Revenue from sales of the Company’s products is recognized at the time of sale or shipment, other than those with multiple elements and Free On Board (FOB) destination point shipping terms. Certain of the Company sales agreements with its distribution partners contain rights of inspection or acceptance provisions as is standard in the Company’s industry. The Company accrues for estimated sales returns in the period in which the related revenue is recognized based on historical experience and industry standards. ECommerce revenue from sales of products ordered through the Company’s websites is recognized upon delivery and receipt of the shipment by its customers. Sales taxes collected from retail customers are excluded from reported revenues. All of the Company’s sales are recognized as revenue on a “net” basis, including sales in connection with any periodic promotions offered to customers. The Company does not treat any promotional offers as expenses.

In accordance with ASC 605-25, Revenue Recognition, Multiple Element Arrangements and Accounting Standards Updates (ASU) 2009-13 and 2009-14, for multiple-element arrangements that involve tangible products that contain software that is essential to the tangible product’s functionality, undelivered software elements that relate to the tangible product’s essential software and other separable elements, the Company allocates revenue to all deliverables using the relative selling-price method. Under this method, revenue is allocated at the time of sale to all deliverables based on their relative selling price using a specific hierarchy. The hierarchy is as follows: vendor-specific objective evidence, third-party evidence of selling price, or best estimate of selling price. NOOK® device revenue is recognized at the segment point of sale.

The Company includes post-service customer support (PCS) in the form of software updates and potential increased functionality on a when-and-if-available basis, as well as wireless access and wireless connectivity with the purchase of a NOOK® from the Company. Using the relative selling price described above, the Company allocates revenue based on the best estimate of selling price for the deliverables as no vendor-specific objective evidence or third-party evidence exists for any of the elements. Revenue allocated to NOOK® and the software essential to its functionality is recognized at the time of sale, provided all other conditions for revenue recognition are met. Revenue allocated to the PCS and the wireless access is deferred and recognized on a straight-line basis over the 2-year estimated life of a NOOK®.

 

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The average percentage of a NOOK®’s sales price that is deferred for undelivered items and recognized over its 2-year estimated life ranges between 0% and 6%, depending on the type of device sold. The amount of NOOK®-related deferred revenue as of May 2, 2015 and May 3, 2014 was $2.4 million and $9.9 million, respectively. These amounts are classified on the Company’s balance sheet in accrued liabilities for the portion that is subject to deferral for one year or less and other long-term liabilities for the portion that is subject to deferral for more than one year.

The Company also pays certain vendors who distribute NOOK® a commission on the content sales sold through that device. The Company accounts for these transactions as a reduction in the sales price of the NOOK® based on historical trends of content sales and a liability is established for the estimated commission expected to be paid over the life of the product. The Company recognizes revenue of the content at the point of sale of the content. The Company records revenue from sales of digital content, sales of third-party extended warranties, service contracts and other products, for which the Company is not obligated to perform, and for which the Company does not meet the criteria for gross revenue recognition under ASC 605-45-45, Reporting Revenue Gross as a Principal versus Net as an Agent, on a net basis. All other revenue is recognized on a gross basis.

The Company rents both physical and digital textbooks. Revenue from the rental of physical textbooks is deferred and recognized over the rental period commencing at point of sale. Revenue from the rental of digital textbooks is recognized at time of sale. A software feature is imbedded within the content of our digital textbooks, such that upon expiration of the rental term the customer is no longer able to access the content. While the digital rental allows the customer to access digital content for a fixed period of time, once the digital content is delivered to the customer the Company’s obligation is complete. The Company offers a buyout option to allow the purchase of a rented book at the end of the semester. The Company records the buyout purchase when the customer exercises and pays the buyout option price. In these instances, the Company would accelerate any remaining deferred rental revenue at the point of sale.

NOOK acquires the rights to distribute digital content from publishers and distributes the content on barnesandnoble.com, NOOK® devices and other eBookstore platforms. Certain digital content is distributed under an agency pricing model in which the publishers set prices for eBooks and NOOK receives a commission on content sold through the eBookstore. The majority of the Company’s eBook sales are sold under the agency model.

The Barnes & Noble Member Program offers members greater discounts and other benefits for products and services, as well as exclusive offers and promotions via e-mail or direct mail generally for an annual fee of $25.00, which is non-refundable after the first 30 days. Revenue is recognized over the twelve-month period based upon historical spending patterns for Barnes & Noble Members.

In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue

 

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guidance. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company has not yet selected a transition method nor has it determined the impact of adoption on its consolidated financial statements.

Merchandise Inventories

Merchandise inventories, which primarily consist of finished goods, are stated at the lower of cost or market, where cost is determined primarily by the retail inventory method under both the first-in, first-out (FIFO) basis and the last-in, first-out (LIFO) basis. B&N College’s textbook and trade book inventories are valued using the LIFO method, where the related reserve was not material to the recorded amount of the Company’s inventories or results of operations at May 2, 2015. There were no LIFO adjustments in fiscal 2015 compared to a favorable LIFO adjustment of $7.7 million in fiscal 2014. NOOK merchandise inventories are recorded based on the average cost method.

Market is determined based on the estimated net realizable value, which is generally the selling price. Reserves for non-returnable inventory are based on the Company’s history of liquidating non-returnable inventory. The Company does not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to calculate the non-returnable inventory reserve. However, if assumptions based on the Company’s history of liquidating non-returnable inventory are incorrect, it may be exposed to losses or gains that could be material. A 10% change in actual non-returnable inventory reserve would have affected pre-tax earnings by approximately $10.1 million in fiscal 2015.

The Company also estimates and accrues shortage for the period between the last physical count of inventory and the balance sheet date. Shortage rates are estimated and accrued based on historical rates and can be affected by changes in merchandise mix and changes in actual shortage trends. The Company does not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to calculate shortage rates. However, if the Company’s estimates regarding shortage rates are incorrect, it may be exposed to losses or gains that could be material. A 10 basis point change in actual shortage rates would have affected pre-tax earnings by approximately $1.0 million in fiscal 2015.

Internal-use Software and Website Development Costs

Direct costs incurred to develop software for internal use and website development costs are capitalized and amortized over an estimated useful life of three to seven years. During fiscal 2015 and 2014, the Company capitalized costs, primarily related to labor, consulting, hardware and software of $42.7 million and $50.6 million, respectively. Amortization of previously capitalized amounts was $27.6 million, $24.1 million and $19.1 million for fiscal 2015, 2014 and 2013, respectively. Costs related to the design or maintenance of internal use software and website development are expensed as incurred.

Research and Development Costs for Software Products

The Company follows the guidance in ASC 985-20, Cost of Software to be Sold, Leased or Marketed, regarding software development costs to be sold, leased, or otherwise marketed. Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale. A certain amount of judgment and estimation is required to assess when technological feasibility is established, as well as the ongoing assessment of the recoverability of capitalized costs. The Company’s products reach technological feasibility shortly before the products are released and therefore research and development costs are generally expensed as incurred.

 

F-34


Stock-Based Compensation

The calculation of stock-based employee compensation expense involves estimates that require management’s judgment. These estimates include the fair value of each of the stock option awards granted, which is estimated on the date of grant using a Black-Scholes option pricing model. There are two significant inputs into the Black-Scholes option pricing model: expected volatility and expected term. The Company estimates expected volatility based on traded option volatility of the Company’s stock over a term equal to the expected term of the option granted. The expected term of stock option awards granted is derived from historical exercise experience under the Company’s stock option plans and represents the period of time that stock option awards granted are expected to be outstanding. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate, and only recognize expense for those shares expected to vest. If the Company’s actual forfeiture rate is materially different from its estimate, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period. See Note 3 to the Consolidated Financial Statements for a further discussion on stock-based compensation.

The Company does not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions used to determine stock-based compensation expense. However, if actual results are not consistent with the Company’s estimates or assumptions, the Company may be exposed to changes in stock-based compensation expense that could be material. If actual results are not consistent with the assumptions used, the stock-based compensation expense reported in the Company’s financial statements may not be representative of the actual economic cost of the stock-based compensation. A 10% change in the Company’s stock-based compensation expense for the year ended May 2, 2015 would have affected pre-tax earnings by approximately $2.0 million in fiscal 2015.

Other Long-Lived Assets

The Company’s other long-lived assets include property and equipment and amortizable intangibles. At May 2, 2015, the Company had $449.3 million of property and equipment, net of accumulated depreciation, and $200.7 million of amortizable intangible assets, net of amortization, accounting for approximately 20.1% of the Company’s total assets. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and considers market participants in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company evaluates long-lived assets for impairment at the individual Barnes & Noble store level, except for B&N College long-lived assets, which are evaluated for impairment at the school contract combined store level, which is the lowest level at which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, the Company will first compare the carrying amount of the assets to the individual store’s estimated future undiscounted cash flows. If the estimated future cash flows are less than the carrying amount of the assets, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the assets to the individual store’s fair value based on its estimated discounted future cash flows. If required, an impairment loss is recorded for that portion of the

 

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asset’s carrying value in excess of fair value. Impairment losses included in selling and administrative expenses totaled $0.4 million, $32.4 million and $4.2 million during fiscal 2015, fiscal 2014 and fiscal 2013, respectively. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to calculate long-lived asset impairment losses. However, if actual results are not consistent with estimates and assumptions used in estimating future cash flows and asset fair values, the Company may be exposed to losses that could be material. A 10% decrease in the Company’s estimated discounted cash flows would have resulted in an additional $0.7 million impairment charge on the Company’s results of operations in fiscal 2015.

Goodwill and Unamortizable Intangible Assets

The costs in excess of net assets of businesses acquired are carried as goodwill in the accompanying consolidated balance sheets.

At May 2, 2015, the Company had $489.3 million of goodwill and $313.1 million of unamortizable intangible assets (those with an indefinite useful life), accounting for approximately 24.8% of the Company’s total assets. ASC 350-30, Goodwill and Other Intangible Assets (ASC 350-30), requires that goodwill and other unamortizable intangible assets no longer be amortized, but instead be tested for impairment at least annually or earlier if there are impairment indicators. The Company performs a two-step process for impairment testing of goodwill as required by ASC 350-30. The first step of this test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount. The second step (if necessary) measures the amount of the impairment. The Company completed its annual goodwill impairment test as of the first day of the third quarter of fiscal 2015. In performing the valuations, the Company used cash flows that reflected management’s forecasts and discount rates that included risk adjustments consistent with the current market conditions. Based on the results of the Company’s step one testing, the fair values of the B&N Retail, B&N College and NOOK reporting units, as of that date, exceeded their carrying values; therefore, the second step of the impairment test was not required to be performed and no goodwill impairment was recognized. Goodwill is subject to further risk of impairment if B&N Retail comparable store sales decline, store closings accelerate or B&N College digital projections fall short of expectations. In addition, goodwill testing did not incorporate the impact of the proposed separation of B&N Education. Impairment losses included in selling and administrative expenses related to unamortizable intangible assets totaled $0, $0 and $20.3 million during fiscal 2015, fiscal 2014 and fiscal 2013, respectively.

The Company tests unamortizable intangible assets by comparing the fair value and the carrying value of such assets. The Company also completed its annual impairment tests for its other unamortizable intangible assets by comparing the estimated fair value to the carrying value of such assets. Impairment losses included in selling and administrative expenses totaled $0, $1.6 million and $0 during fiscal 2015, fiscal 2014 and fiscal 2013, respectively. Changes in market conditions, among other factors, could have a material impact on these estimates.

The $1.6 million of impairments in fiscal 2014 related to a certain publishing contract. The publishing contracts include the value of long-standing relationships with authors, agents and publishers established upon the Company’s acquisition of Sterling in 2003. Given Sterling’s strong history of maintaining such relationships, the Company believes they produce value indefinitely without an identifiable remaining useful life. However, given the continued declines in the physical book business, certain of these contracts were impaired.

 

F-36


A 10% decrease in the Company’s estimated discounted cash flows in the evaluation of goodwill and unamortizable intangible assets would result in the failure of the first step in the B&N College goodwill impairment test and would have resulted in a $0.2 million impairment charge related to the Company’s publishing contracts on the Company’s results of operations in fiscal 2015. The second step related to the B&N College goodwill testing would then need to be performed to determine the potential impact, if any, on results of operations. The 10% decrease in the Company’s estimated discounted cash flows would have no impact on the Company’s remaining goodwill and unamortizable intangible assets.

Gift Cards

The Company sells gift cards, which can be used in its stores, on barnesandnoble.com and NOOK® devices. The Company does not charge administrative or dormancy fees on gift cards and gift cards have no expiration dates. Upon the purchase of a gift card, a liability is established for its cash value. Revenue associated with gift cards is deferred until redemption of the gift card. Over time, a portion of the gift cards issued is typically not redeemed. The Company estimates the portion of the gift card liability for which the likelihood of redemption is remote based upon the Company’s historical redemption patterns. The Company records this amount in income on a straight-line basis over a 12-month period beginning in the 13th month after the month the gift card was originally sold. If actual redemption patterns vary from the Company’s estimates, actual gift card breakage may differ from the amounts recorded. The Company recognized gift card breakage of $26.1 million, $23.2 million and $23.9 million during fiscal 2015, fiscal 2014 and fiscal 2013, respectively. The Company had gift card liabilities of $358.1 million and $356.7 million as of May 2, 2015 and May 3, 2014, respectively. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to recognize revenue associated with gift cards. However, additional breakage may be required if gift card redemptions continue to run lower than historical patterns. If estimates regarding the Company’s history of gift card breakage are incorrect, it may be exposed to losses or gains that could be material. A 25 basis point change in the Company’s gift card breakage rate at May 2, 2015 would have affected pre-tax earnings by approximately $5.6 million in fiscal 2015.

Income Taxes

Judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. In the ordinary course of business, tax issues may arise where the ultimate outcome is uncertain. Additionally, the Company’s tax returns are subject to audit by various tax authorities. Consequently, changes in the Company’s estimates for contingent tax liabilities may materially impact the Company’s results of operations or financial position. A 1% variance in the Company’s effective tax rate would have affected the Company’s results of operations in fiscal 2015 by $1.2 million.

Disclosure Regarding Forward-Looking Statements

This report contains certain forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) and information relating to Barnes & Noble that are based on the beliefs of the management of Barnes & Noble as well as assumptions made by and information currently available to the management of Barnes & Noble. When used in this communication, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “will,” “forecasts,” “projections,” and similar expressions, as they relate to Barnes & Noble or the management of Barnes & Noble, identify forward-looking statements.

Such statements reflect the current views of Barnes & Noble with respect to future events, the outcome of which is subject to certain risks, including, among others, the general economic environment and consumer spending patterns, decreased consumer demand for Barnes & Noble’s products, low

 

F-37


growth or declining sales and net income due to various factors, possible disruptions in Barnes & Noble’s computer systems, telephone systems or supply chain, possible risks associated with data privacy, information security and intellectual property, possible work stoppages or increases in labor costs, possible increases in shipping rates or interruptions in shipping service, effects of competition, possible risks that inventory in channels of distribution may be larger than able to be sold, possible risks associated with changes in the strategic direction of the device business, including possible reduction in sales of content, accessories and other merchandise and other adverse financial impacts, possible risk that component parts will be rendered obsolete or otherwise not be able to be effectively utilized in devices to be sold, possible risk that financial and operational forecasts and projections are not achieved, possible risk that returns from consumers or channels of distribution may be greater than estimated, the risk that digital sales growth is less than expectations and the risk that it does not exceed the rate of investment spend, higher-than-anticipated store closing or relocation costs, higher interest rates, the performance of Barnes & Noble’s online, digital and other initiatives, the success of Barnes & Noble’s strategic investments, unanticipated increases in merchandise, component or occupancy costs, unanticipated adverse litigation results or effects, product and component shortages, risks associated with NOOK Digital, LLC’s (NOOK Digital) commercial agreement with Samsung Electronics America, Inc. (Samsung), the effect of the proposed separation of Barnes & Noble Education, Inc. (including with respect to the timing of the completion thereof), the potential adverse impact on the Company’s businesses resulting from the Company’s prior reviews of strategic alternatives, the risk that the transactions with Pearson plc (Pearson) and Samsung do not achieve the expected benefits for the parties or impose costs on the Company in excess of what the Company anticipates, including the risk that NOOK Digital’s applications are not commercially successful or that the expected distribution of those applications is not achieved, the risks associated with the international expansion previously undertaken, including any risks associated with a reduction of international operations following termination of the Microsoft Corporation (Microsoft) commercial agreement, the risk that NOOK Digital is not able to perform its obligations under the Pearson and Samsung commercial agreements and the consequences thereof, the risks associated with the termination of the Microsoft commercial agreement, including potential customer losses, the risk that Barnes & Noble Education, Inc. and its subsidiaries do not continue to grow, including the risk that its growth rate declines, the risk of possible delays in the launch of our higher education digital products, the risks associated with the Securities and Exchange Commission (SEC) investigation and associated risks and other factors which may be outside of Barnes & Noble’s control, including those factors discussed in detail in Item 1A, “Risk Factors,” and in Barnes & Noble’s other filings made hereafter from time to time with the SEC.

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 Barnes & Noble or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. Barnes & Noble undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Annual Report.

 

F-38


CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In thousands, except per share data)

   Fiscal 2015     Fiscal 2014     Fiscal 2013  

Sales

   $ 6,069,497        6,381,357        6,839,005   

Cost of sales and occupancy

     4,196,998        4,523,422        5,156,499   
  

 

 

   

 

 

   

 

 

 

Gross profit

     1,872,499        1,857,935        1,682,506   

Selling and administrative expenses

     1,545,152        1,606,936        1,675,376   

Depreciation and amortization

     194,174        216,807        227,134   
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

     133,173        34,192        (220,004

Interest expense, net and amortization of deferred financing fees

     (17,890     (29,507     (35,345
  

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     115,283        4,685        (255,349

Income taxes (benefit)

     78,687        51,953        (97,543
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 36,596        (47,268     (157,806
  

 

 

   

 

 

   

 

 

 

Income (loss) per common share

      
  

 

 

   

 

 

   

 

 

 

Basic

   $ 0.21        (1.12     (3.02
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.21        (1.12     (3.02
  

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

      

Basic

     60,842        58,971        58,247   

Diluted

     60,928        58,971        58,247   

See accompanying notes to consolidated financial statements.

 

F-39


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

(In thousands)

   Fiscal 2015     Fiscal 2014     Fiscal 2013  

Net income (loss)

   $ 36,596        (47,268     (157,806

Other comprehensive earnings (loss), net of tax:

      

(Increase) decrease in minimum pension liability (net of deferred tax benefit (expense) of $1,896, $(3,001) and $38, respectively)

     (12,077     4,919        (57

Pension reclassification (see Note 8)

     7,317        —          —     
  

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ 31,836        (42,349     (157,863
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-40


CONSOLIDATED BALANCE SHEETS

 

(In thousands, except per share data)

   May 2, 2015     May 3, 2014  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 74,360      $ 340,171   

Receivables, net

     98,576        143,981   

Merchandise inventories, net

     1,293,164        1,234,635   

Textbook rental inventories

     55,075        50,341   

Prepaid expenses and other current assets

     65,331        66,580   

Short-term deferred tax assets

     142,809        144,730   
  

 

 

   

 

 

 

Total current assets

   $ 1,729,315      $ 1,980,438   
  

 

 

   

 

 

 

Property and equipment:

    

Land and land improvements

     2,541        2,541   

Buildings and leasehold improvements

     1,207,039        1,224,083   

Fixtures and equipment

     1,866,719        1,938,555   
  

 

 

   

 

 

 
     3,076,299        3,165,179   

Less accumulated depreciation and amortization

     2,627,007        2,674,466   
  

 

 

   

 

 

 

Net property and equipment

     449,292        490,713   
  

 

 

   

 

 

 

Goodwill

     489,267        493,189   

Intangible assets, net

     513,842        528,576   

Other noncurrent assets

     47,789        44,533   
  

 

 

   

 

 

 

Total assets

   $ 3,229,505      $ 3,537,449   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 655,064      $ 735,112   

Accrued liabilities

     434,049        502,583   

Gift card liabilities

     358,146        356,700   

Short-term note payable

     —          127,250   
  

 

 

   

 

 

 

Total current liabilities

     1,447,259        1,721,645   
  

 

 

   

 

 

 

Long-term deferred taxes

     200,527        211,925   

Other long-term liabilities

     196,302        366,989   

Redeemable Preferred Shares; $0.001 par value; 5,000 shares authorized; 204 and 204 shares issued, respectively

     196,059        194,797   

Preferred Membership Interests in NOOK Media, LLC

     —          383,397   

Shareholders’ equity:

    

Common stock; $0.001 par value; 300,000 shares authorized; 98,115 and 93,540 shares issued, respectively

     98        94   

Additional paid-in capital

     1,927,997        1,395,463   

Accumulated other comprehensive loss

     (16,533     (11,773

Retained earnings

     357,512        344,021   

Treasury stock, at cost, 34,841 and 34,364 shares, respectively

     (1,079,716     (1,069,109
  

 

 

   

 

 

 

Total shareholders’ equity

     1,189,358        658,696   
  

 

 

   

 

 

 

Commitments and contingencies

     —          —     
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 3,229,505      $ 3,537,449   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-41


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

(In thousands)

   Barnes & Noble, Inc. Shareholders’ Equity  
     Common
Stock
     Additional
Paid-In
Capital
    Accumulated
Other
Comprehensive
Gains (Losses)
    Retained
Earnings
    Treasury
Stock at Cost
    Total  

Balance at April 28, 2012

   $ 91         1,340,909        (16,635     586,188        (1,058,282   $ 852,271   

Net loss

     —           —          —          (157,806     —          (157,806

Minimum pension liability, net of tax

     —           —          (57     —          —          (57

Reduction of junior note

     —           24,292        —          —          —          24,292   

Deferred tax adjustment

     —           1,270        —          —          —          1,270   

Exercise of 279 common stock options

     2         3,398        —          —          —          3,400   

Stock options and restricted stock tax benefits

     —           (6,208     —          —          —          (6,208

Stock-based compensation expense

     —           20,187        —          —          —          20,187   

Accretive dividend on preferred stockholders

     —           —          —          (2,266     —          (2,266

Accrued/paid dividends for preferred stockholders

     —           —          —          (15,767     —          (15,767

Treasury stock acquired, 356 shares

     —           —          —          —          (5,573     (5,573
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at April 27, 2013

   $ 93         1,383,848        (16,692     410,349        (1,063,855   $ 713,743   

Net loss

     —           —          —          (47,268     —          (47,268

Minimum pension liability, net of tax

     —           —          4,919        —          —          4,919   

Exercise of 66 common stock options

     1         1,031        —          —          —          1,032   

Stock options and restricted stock tax benefits

     —           (1,587     —          —          —          (1,587

Stock-based compensation expense

     —           12,171        —          —          —          12,171   

Accretive dividend on preferred stockholders

     —           —          —          (3,032     —          (3,032

Accrued/paid dividends for preferred stockholders

     —           —          —          (16,028     —          (16,028

Treasury stock acquired, 286 shares

     —           —          —          —          (5,254     (5,254
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at May 3, 2014

   $ 94         1,395,463        (11,773     344,021        (1,069,109   $ 658,696   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements.

 

F-42


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (CONTINUED)

 

(In thousands)

   Barnes & Noble, Inc. Shareholders’ Equity  
     Common
Stock
     Additional
Paid-In
Capital
     Accumulated
Other
Comprehensive
Gains (Losses)
    Retained
Earnings
    Treasury
Stock at Cost
    Total  

Balance at May 3, 2014

   $ 94         1,395,463         (11,773     344,021        (1,069,109   $ 658,696   

Net income

     —           —           —          36,596        —          36,596   

Minimum pension liability, net of tax

     —           —           (12,077     —          —          (12,077

Pension reclassification (see Note 8)

     —           —           7,317        —          —          7,317   

Exercise of 83 common stock options

     1         1,282         —          —          —          1,283   

Stock options and restricted stock tax benefits

     —           652         —          —          —          652   

Stock-based compensation expense

     —           19,989         —          —          —          19,989   

Accretive dividend on preferred stockholders

     —           —           —          (7,340     —          (7,340

Accrued/paid dividends for preferred stockholders

     —           —           —          (15,765     —          (15,765

Treasury stock acquired, 477 shares

     —           —           —          —          (10,607     (10,607

Acquisition of preferred membership interest

     3         313,295         —          —          —          313,298   

Settlement of Microsoft commercial liability

     —           197,316         —          —          —          197,316   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at May 2, 2015

   $ 98         1,927,997         (16,533     357,512        (1,079,716   $ 1,189,358   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-43


CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Fiscal Year    Fiscal
2015
    Fiscal
2014
    Fiscal
2013
 

(In thousands)

                  

Cash flows from operating activities:

      

Net income (loss)

   $ 36,596        (47,268     (157,806

Adjustments to reconcile net income (loss) to net cash flows from operating activities:

      

Depreciation and amortization (including amortization of deferred financing fees)

     199,652        222,764        232,604   

Stock-based compensation expense

     19,989        12,171        20,187   

Non-cash impairment charges

     373        32,390        24,473   

Deferred taxes

     (12,578     43,225        (118,893

(Gain) loss on disposal of property and equipment

     4,843        (572     (750

Increase (decrease) in other long-term liabilities

     (30,532     (10,382     24,985   

Pension reclassification (see Note 8)

     7,317        —          —     

Changes in operating assets and liabilities, net

     (169,752     67,628        92,591   
  

 

 

   

 

 

   

 

 

 

Net cash flows provided by operating activities

     55,908        319,956        117,391   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Purchases of property and equipment

     (143,257     (134,981     (165,835

Net (increase) decrease in other noncurrent assets

     (5,712     6,482        (5,745

Other investing activities, net

     (3,000     —          (4,100
  

 

 

   

 

 

   

 

 

 

Net cash flows used in investing activities

     (151,969     (128,499     (175,680
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Net proceeds from issuance of Preferred Membership interests

     —          —          380,623   

Net proceeds from Microsoft Commercial Agreement financing arrangement

     57,161        84,675        48,706   

Proceeds from credit facility

     349,400        734,000        1,639,600   

Payments on credit facility

     (349,400     (811,000     (1,886,800

Proceeds from exercise of common stock options

     1,282        1,031        3,400   

Purchase of treasury stock

     (10,607     (5,254     (5,573

Excess tax benefit from stock-based compensation

     1,865        560        439   

Cash dividends paid to shareholders

     (16,026     (15,768     (15,767

Payment of Junior Seller Note

     (127,250     —          —     

Acquisition of Preferred Membership Interests

     (76,175     —          —     
  

 

 

   

 

 

   

 

 

 

Net cash flows provided by (used in) financing activities

     (169,750     (11,756     164,628   
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (265,811     179,701        106,339   

Cash and cash equivalents at beginning of year

     340,171        160,470        54,131   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 74,360        340,171        160,470   
  

 

 

   

 

 

   

 

 

 

Changes in operating assets and liabilities, net:

      

Receivables, net

   $ 45,405        5,388        20,578   

Merchandise inventories

     (58,529     176,134        151,072   

Textbook rental inventories

     (4,734     3,410        (19,956

Prepaid expenses and other current assets

     1,249        (3,697     12,871   

Accounts payable and accrued liabilities

     (153,143     (113,607     (71,974
  

 

 

   

 

 

   

 

 

 

Changes in operating assets and liabilities, net

   $ (169,752     67,628        92,591   
  

 

 

   

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements.

 

F-44


CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

 

Fiscal Year    Fiscal
2015
     Fiscal
2014
     Fiscal
2013
 

(In thousands)

                    

Supplemental cash flow information:

        

Cash paid during the period for:

        

Interest paid

   $ 16,548         20,115         24,925   

Income taxes (net of refunds)

   $ 95,584         3,471         3,822   

Non-cash financing activity:

        

Accrued dividend on redeemable preferred shares

   $ 3,941         4,202         3,942   

Acquisition of Preferred Membership Interests for 2,737,290 shares of common stock of Barnes & Noble

   $ 76,175         —           —     

See accompanying notes to consolidated financial statements.

 

F-45


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Thousands of dollars, except per share data)

For the 52 weeks ended May 2, 2015 (fiscal 2015), 53 weeks ended May 3, 2014 (fiscal 2014) and 52 weeks ended April 27, 2013 (fiscal 2013).

 

  1. Summary of Significant Accounting Policies

Business

Barnes & Noble, one of the nation’s largest booksellers3, is a leading content, commerce and technology company providing customers easy and convenient access to trade books, textbooks, magazines, newspapers and other content across its multi-channel distribution platform. As of May 2, 2015, the Company operated 1,372 bookstores in 50 states, including 724 bookstores on college campuses, operates one of the Web’s largest eCommerce sites, develops digital reading products and operates one of the largest digital bookstores. Given the dynamic nature of the book industry, the challenges faced by traditional booksellers, and the robust innovation pipeline fueling new opportunities in hardware, software and content creation and delivery, Barnes & Noble is utilizing the strength of its retail footprint to bolster its leadership in selling content to drive sales across its multiple channels.

Of the 1,372 bookstores, Barnes & Noble Retail (B&N Retail) operates 648 retail bookstores, primarily under the Barnes & Noble Booksellers® trade name, and includes the Company’s eCommerce site. Barnes & Noble College Booksellers, LLC (B&N College) operates 724 college bookstores at colleges and universities across the United States, of which 154 stores are co-branded with the universities’ names and Barnes & Noble name. B&N Retail also includes Sterling Publishing Co., Inc. (Sterling or Sterling Publishing), a leader in general trade book publishing. The NOOK segment represents the Company’s digital business, offering digital books and magazines for sale and consumption online, NOOK®4 reading devices, co-branded NOOK® tablets and reading software for iOS, Android and Windows 8.

The Company’s principal business is the sale of trade books (generally hardcover and paperback consumer titles), mass market paperbacks (such as mystery, romance, science fiction and other popular fiction), children’s books, eBooks and other digital content, textbooks and course-related materials, NOOK® and related accessories, bargain books, magazines, gifts, emblematic apparel and gifts, school and dorm supplies, café products and services, educational toys & games, music and movies direct to customers through its bookstores or on barnesandnoble.com. The Company also offers a textbook rental option to its customers, as well as digital textbooks and other course materials through a proprietary digital platform (Yuzu™). The Company offers its customers a full suite of textbook options — new, used, digital and rental.

The Company identifies its operating segments based on the way the business is managed (focusing on the financial information distributed) and the manner in which the chief operating decision maker interacts with other members of management. The Company has three operating segments: B&N Retail, B&N College and NOOK.

 

3  Based upon sales reported in trade publications and public filings.
4 

Any reference to NOOK® include the Company’s Samsung Galaxy Tab® 4 NOOK® 7.0 and 10.1 devices and NOOK GlowLightTM, and each of which includes the trademark symbol (® or ™, as applicable) even if a trademark symbol is not included.

 

F-46


Separation of B&N Education, Inc.

On February 26, 2015, Barnes & Noble announced plans for the legal and structural separation of Barnes & Noble Education, Inc. (Barnes & Noble Education or B&N Education) (formerly known as NOOK Media Inc.) from Barnes & Noble into an independent public company (the Spin-Off).

This Spin-Off is expected to be executed by means of a pro-rata distribution of B&N Education’s common stock to Barnes & Noble’s existing shareholders and is expected to be a non-taxable event for Barnes & Noble and its shareholders.

The distribution of B&N Education’s common stock to Barnes & Noble shareholders is conditioned on, among other things, final approval of the Spin-Off plan by the Barnes & Noble Board of Directors; the receipt of opinions from external legal counsel and KPMG LLP to Barnes & Noble, confirming the tax-free status of the Spin-Off for U.S. federal income tax purposes; and the United States Securities and Exchange Commission (SEC) declaring effective the Registration Statement, which was filed on a Registration Statement on Form S-1 with the SEC on February 26, 2015, which has been amended on April 29, 2015 and June 4, 2015.

History of B&N Education, Inc.

On September 30, 2009, Barnes & Noble acquired Barnes & Noble College Booksellers, LLC (B&N College) from Leonard and Louise Riggio. From that date until October 4, 2012, B&N College was wholly owned by Barnes & Noble Booksellers, Inc. B&N Education was initially incorporated under the name NOOK Media Inc. in July 2012 to hold Barnes & Noble’s B&N College and NOOK digital businesses. On October 4, 2012, Microsoft Corporation (Microsoft) acquired a 17.6% non-controlling preferred membership interest in B&N Education’s subsidiary B&N Education, LLC (formerly NOOK Media LLC) (the LLC), and through B&N Education, Barnes & Noble maintained an 82.4% controlling interest of the B&N College and NOOK digital businesses.

On January 22, 2013, Pearson Education, Inc. (Pearson) acquired a 5% non-controlling preferred membership interest in the LLC, entered into a commercial agreement with the LLC relating to the B&N College business and received warrants to purchase an additional preferred membership interest in the LLC.

On December 4, 2014, B&N Education re-acquired Microsoft’s interest in the LLC in exchange for cash and common stock of Barnes & Noble and the Microsoft commercial agreement was terminated effective as of such date. On December 22, 2014, B&N Education also re-acquired Pearson’s interest in the LLC and certain related warrants previously issued to Pearson. In connection with these transactions, Barnes & Noble entered into contingent payment agreements with Microsoft and Pearson providing for additional payments upon the occurrence of certain events, including upon a sale of the NOOK digital business. As a result of these transactions, Barnes & Noble owns, and will own prior to the Spin-Off, 100% of B&N Education.

On May 1, 2015, B&N Education distributed to Barnes & Noble all of the membership interests in B&N Education’s NOOK digital business. As a result, B&N Education ceased to own any interest in the NOOK digital business, which will remain a wholly owned subsidiary of Barnes & Noble.

The Company expects that the completion of the potential separation of the Company’s businesses could occur by the end of August 2015, although there can be no assurances regarding the timing of such potential separation or that such separation will be completed.

Consolidation

The consolidated financial statements include the accounts of Barnes & Noble, Inc. and its wholly and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

F-47


Use of Estimates

In preparing financial statements in conformity with generally accepted accounting principles, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all short-term, highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.

Merchandise Inventories

Merchandise inventories, which primarily consist of finished goods, are stated at the lower of cost or market. Cost is determined primarily by the retail inventory method under both the first-in, first-out (FIFO) basis and the last-in, first-out (LIFO) basis. B&N College’s textbook and trade book inventories are valued using the LIFO method, where the related reserve was not material to the recorded amount of the Company’s inventories at May 2, 2015. There were no LIFO adjustments in fiscal 2015 compared to a favorable adjustment of $7,692 in fiscal 2014, respectively. NOOK merchandise inventories are recorded based on the average cost method.

Market is determined based on the estimated net realizable value, which is generally the selling price. Reserves for non-returnable inventory are based on the Company’s history of liquidating non-returnable inventory.

The Company also estimates and accrues shortage for the period between the last physical count of inventory and the balance sheet date. Shortage rates are estimated and accrued based on historical rates and can be affected by changes in merchandise mix and changes in actual shortage trends.

Property and Equipment, and Other Long-Lived Assets

Property and equipment are carried at cost, less accumulated depreciation and amortization. For financial reporting purposes, depreciation is computed using the straight-line method over estimated useful lives. For tax purposes, different methods are used. Maintenance and repairs are expensed as incurred, while major maintenance and remodeling costs are capitalized if they extend the useful life of the asset. Leasehold improvements are capitalized and amortized over the shorter of their estimated useful lives or the terms of the respective leases. Fixtures and equipment are capitalized and amortized over the shorter of their estimated useful lives or 10 years. Capitalized lease acquisition costs are being amortized over the lease terms of the underlying leases. System costs are capitalized and included in property and equipment. These costs are depreciated over their estimated useful lives from the date the systems become operational. The Company had $449,292 and $490,713 of property and equipment, net of accumulated depreciation, at May 2, 2015 and May 3, 2014, respectively, and $179,462, $198,972 and $205,708 of depreciation expense for fiscal 2015, fiscal 2014 and fiscal 2013, respectively. Capitalized software costs of $54,205 and $68,107 for fiscal 2015 and fiscal 2014, respectively, are included in property and equipment.

 

F-48


Other Long-Lived Assets

The Company’s other long-lived assets include property and equipment and amortizable intangibles. The Company had $200,708 and $215,442 of amortizable intangible assets, net of amortization, at May 2, 2015 and May 3, 2014, respectively. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and considers market participants in accordance with Accounting Standards Codification (ASC) 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets (ASC 360-10). The Company evaluates long-lived assets for impairment at the individual Barnes & Noble store level, except for B&N College long-lived assets, which are evaluated for impairment at the school contract combined store level, which is the lowest level at which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, the Company will first compare the carrying amount of the assets to the individual store’s estimated future undiscounted cash flows. If the estimated future cash flows are less than the carrying amount of the assets, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the assets to the individual store’s fair value based on its estimated discounted future cash flows. If required, an impairment loss is recorded for that portion of the asset’s carrying value in excess of fair value. Impairment losses included in selling and administrative expenses totaled $373, $32,390 and $4,168 during fiscal 2015, fiscal 2014 and fiscal 2013, respectively.

Goodwill and Unamortizable Intangible Assets

The costs in excess of net assets of businesses acquired are carried as goodwill in the accompanying consolidated balance sheets.

At May 2, 2015, the Company had $489,267 of goodwill and $313,134 of unamortizable intangible assets (those with an indefinite useful life), accounting for approximately 24.8% of the Company’s total assets. ASC 350-30, Goodwill and Other Intangible Assets, requires that goodwill and other unamortizable intangible assets no longer be amortized, but instead be tested for impairment at least annually or earlier if there are impairment indicators. The Company performs a two-step process for impairment testing of goodwill as required by ASC 350-30. The first step of this test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount. The second step (if necessary) measures the amount of the impairment. The Company completed its annual goodwill impairment test as of the first day of the third quarter of fiscal 2015. In performing the valuations, the Company used cash flows that reflected management’s forecasts and discount rates that included risk adjustments consistent with the current market conditions. Based on the results of the Company’s step one testing, the fair values of the B&N Retail, B&N College and NOOK reporting units as of that date exceeded their carrying values; therefore, the second step of the impairment test was not required to be performed and no goodwill impairment was recognized. Impairment losses included in selling and administrative expenses related to goodwill totaled $0, $0 and $20,278 during fiscal 2015, fiscal 2014 and fiscal 2013, respectively.

The Company tests unamortizable intangible assets by comparing the fair value and the carrying value of such assets. The Company also completed its annual impairment tests for its other unamortizable intangible assets by comparing the estimated fair value to the carrying value of such assets. Impairment losses included in selling and administrative expenses related to unamortizable intangible assets totaled $0, $1,602 and $0 during fiscal 2015, fiscal 2014 and fiscal 2013, respectively. Changes in market conditions, among other factors, could have a material impact on these estimates.

 

F-49


The impairments in fiscal 2014 related to certain publishing contracts. The publishing contracts include the value of long-standing relationships with authors, agents and publishers established upon the Company’s acquisition of Sterling in 2003. Given Sterling’s strong history of maintaining such relationships, the Company believes they produce value indefinitely without an identifiable remaining useful life. However, given the continued declines in the physical book business, certain of these contracts were impaired.

During the fourth quarter of 2013, the Company determined that goodwill impairment indicators arose in its NOOK reporting unit as recurring losses have led to revisions in its strategic plans. As a result, during the fourth quarter of fiscal 2013, the Company recorded a non-cash goodwill impairment charge of $18,332 in selling and administrative expenses, which represented all the goodwill in the NOOK reporting unit.

In fiscal 2013, the Company decided to shut down the operations of Tikatok. Tikatok was an online platform where parents and their children and others can write, illustrate and publish stories into hardcover and paperback books. This decision resulted in an impairment charge of $1,973, including the write-off of goodwill of $1,947 and intangible assets of $26 during the second quarter of fiscal 2013. The effect of Tikatok operations is not material to the overall results of the Company.

Deferred Charges

Costs incurred to obtain long-term financing are amortized over the terms of the respective debt agreements using the straight-line method, which approximates the interest method. Unamortized costs included in other noncurrent assets as of May 2, 2015 and May 3, 2014 were $5,371 and $10,897, respectively. Amortization expense included in interest and amortization of deferred financing fees was $5,477, $5,957 and $5,470 during fiscal 2015, fiscal 2014 and fiscal 2013, respectively.

Revenue Recognition

Revenue from sales of the Company’s products is recognized at the time of sale or shipment, other than those with multiple elements and Free On Board (FOB) destination point shipping terms. Certain of the Company sales agreements with its distribution partners contain rights of inspection or acceptance provisions as is standard in the Company’s industry. The Company accrues for estimated sales returns in the period in which the related revenue is recognized based on historical experience and industry standards. ECommerce revenue from sales of products ordered through the Company’s websites is recognized upon delivery and receipt of the shipment by its customers. Sales taxes collected from retail customers are excluded from reported revenues. All of the Company’s sales are recognized as revenue on a “net” basis, including sales in connection with any periodic promotions offered to customers. The Company does not treat any promotional offers as expenses.

In accordance with ASC No. 605-25, Revenue Recognition, Multiple Element Arrangements and Accounting Standards Updates (ASU) 2009-13 and 2009-14, for multiple-element arrangements that involve tangible products that contain software that is essential to the tangible product’s

 

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functionality, undelivered software elements that relate to the tangible product’s essential software and other separable elements, the Company allocates revenue to all deliverables using the relative selling-price method. Under this method, revenue is allocated at the time of sale to all deliverables based on their relative selling price using a specific hierarchy. The hierarchy is as follows: vendor-specific objective evidence, third-party evidence of selling price, or best estimate of selling price. NOOK® device revenue is recognized at the segment point of sale.

The Company includes post-service customer support (PCS) in the form of software updates and potential increased functionality on a when-and-if-available basis, as well as wireless access and wireless connectivity with the purchase of a NOOK® from the Company. Using the relative selling price described above, the Company allocates revenue based on the best estimate of selling price for the deliverables as no vendor-specific objective evidence or third-party evidence exists for any of the elements. Revenue allocated to NOOK® and the software essential to its functionality is recognized at the time of sale, provided all other conditions for revenue recognition are met. Revenue allocated to the PCS and the wireless access is deferred and recognized on a straight-line basis over the 2-year estimated life of a NOOK®.

The average percentage of a NOOK®’s sales price that is deferred for undelivered items and recognized over its 2-year estimated life ranges between 0% and 6%, depending on the type of device sold. The amount of NOOK®-related deferred revenue as of May 2, 2015 and May 3, 2014 was $2,406 and $9,934, respectively. These amounts are classified on the Company’s balance sheet in accrued liabilities for the portion that is subject to deferral for one year or less and other long-term liabilities for the portion that is subject to deferral for more than one year.

The Company also pays certain vendors who distribute NOOK® a commission on the content sales sold through that device. The Company accounts for these transactions as a reduction in the sales price of the NOOK® based on historical trends of content sales and a liability is established for the estimated commission expected to be paid over the life of the product. The Company recognizes revenue of the content at the point of sale of the content. The Company records revenue from sales of digital content, sales of third-party extended warranties, service contracts and other products, for which the Company is not obligated to perform, and for which the Company does not meet the criteria for gross revenue recognition under ASC 605-45-45, Reporting Revenue Gross as a Principal versus Net as an Agent, on a net basis. All other revenue is recognized on a gross basis.

The Company rents both physical and digital textbooks. Revenue from the rental of physical textbooks is deferred and recognized over the rental period commencing at point of sale. Revenue from the rental of digital textbooks is recognized at time of sale. A software feature is imbedded within the content of our digital textbooks, such that upon expiration of the rental term the customer is no longer able to access the content. While the digital rental allows the customer to access digital content for a fixed period of time, once the digital content is delivered to the customer our obligation is complete. The Company offers a buyout option to allow the purchase of a rented book at the end of the semester. The Company records the buyout purchase when the customer exercises and pays the buyout option price. In these instances, the Company would accelerate any remaining deferred rental revenue at the point of sale.

NOOK acquires the rights to distribute digital content from publishers and distributes the content on barnesandnoble.com, NOOK® devices and other eBookstore platforms. Certain digital content is distributed under an agency pricing model in which the publishers set prices for eBooks and NOOK receives a commission on content sold through the eBookstore. The majority of the Company’s eBook sales are sold under the agency model.

 

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The Barnes & Noble Member Program offers members greater discounts and other benefits for products and services, as well as exclusive offers and promotions via e-mail or direct mail generally for an annual fee of $25.00, which is non-refundable after the first 30 days. Revenue is recognized over the twelve-month period based upon historical spending patterns for Barnes & Noble Members.

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company has not yet selected a transition method nor has it determined the impact of adoption on its consolidated financial statements.

Research and Development Costs for Software Products

The Company follows the guidance in ASC 985-20, Cost of Software to Be Sold, Leased or Marketed, regarding software development costs to be sold, leased, or otherwise marketed. Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale. A certain amount of judgment and estimation is required to assess when technological feasibility is established, as well as the ongoing assessment of the recoverability of capitalized costs. The Company’s products reach technological feasibility shortly before the products are released and therefore research and development costs are generally expensed as incurred.

Internal-use Software and Website Development Costs

Direct costs incurred to develop software for internal-use and website development costs are capitalized and amortized over an estimated useful life of three to seven years. During fiscal 2015 and 2014, the Company capitalized costs, primarily related to labor, consulting, hardware and software of $42,699 and $50,565, respectively. Amortization of previously capitalized amounts was $27,568, $24,145 and $19,044 for fiscal 2015, 2014 and 2013, respectively. Costs related to the design or maintenance of internal-use software and website development are expensed as incurred.

Advertising Costs

The costs of advertising are expensed as incurred during the year pursuant to ASC 720-35, Advertising Costs. Advertising costs charged to selling and administrative expenses were $58,823, $61,527 and $110,878 during fiscal 2015, fiscal 2014 and fiscal 2013, respectively.

The Company receives payments and credits from vendors pursuant to co-operative advertising and other programs, including payments for product placement in stores, catalogs and online. In accordance with ASC 605-50-25-10, Customer’s Accounting for Certain Consideration Received from a Vendor, the Company classifies certain co-op advertising received as a reduction in costs of sales and occupancy. Allowances received from vendors exceeded gross advertising costs in each of the fiscal years noted above.

 

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Closed Store Expenses

When the Company closes or relocates a store, the Company charges unrecoverable costs to expense. Such costs include the net book value of abandoned fixtures and leasehold improvements and, when a store is closed prior to the expiration of the lease, a provision for future lease obligations, net of expected sublease recoveries. Costs associated with store closings of $1,201, $929 and $5,006 during fiscal 2015, fiscal 2014 and fiscal 2013, respectively, are included in selling and administrative expenses in the accompanying consolidated statements of operations.

Net Earnings (Loss) Per Common Share

Basic earnings per share represent net earnings (loss) attributable to common shareholders divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the impact of common shares issuable upon exercise of the Company’s outstanding stock options. The Company’s unvested restricted shares, unvested restricted stock units and common shares issuable under the Company’s deferred compensation plan are deemed participating securities and are excluded from the dilutive impact of common equivalent shares outstanding under the two-class method since these shares are entitled to participate in dividends declared on common shares. Under the two-class method, earnings (loss) attributable to unvested restricted shares, unvested restricted stock units and common shares issuable under the Company’s deferred compensation plan are excluded from net earnings (loss) attributable to common shareholders for purposes of calculating basic and diluted earnings (loss) per common share. See Note 7 for further information regarding the calculation of basic and diluted earnings (loss) per common share.

Income Taxes

The provision for income taxes includes federal, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. The deferred tax assets and liabilities are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance, if determined to be necessary.

Stock-Based Compensation

The calculation of stock-based employee compensation expense involves estimates that require management’s judgment. These estimates include the fair value of each of the stock option awards granted, which is estimated on the date of grant using a Black-Scholes option pricing model. There are two significant inputs into the Black-Scholes option pricing model: expected volatility and expected term. The Company estimates expected volatility based on traded option volatility of the Company’s stock over a term equal to the expected term of the option granted. The expected term of stock option awards granted is derived from historical exercise experience under the Company’s stock option plans and represents the period of time that stock option awards granted are expected to be outstanding. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate, and only recognize expense for those shares expected to vest. If the Company’s actual forfeiture rate is materially different from its estimate, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period. See Note 3 to the Consolidated Financial Statements for a further discussion on stock-based compensation.

 

F-53


Gift Cards

The Company sells gift cards, which can be used in its stores, on barnesandnoble.com and NOOK® devices. The Company does not charge administrative or dormancy fees on gift cards and gift cards have no expiration dates. Upon the purchase of a gift card, a liability is established for its cash value. Revenue associated with gift cards is deferred until redemption of the gift card. Over time, some portion of the gift cards issued is not redeemed. The Company estimates the portion of the gift card liability for which the likelihood of redemption is remote based upon the Company’s historical redemption patterns. The Company records this amount in income on a straight-line basis over a 12-month period beginning in the 13th month after the month the gift card was originally sold. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to recognize revenue associated with gift cards. However, additional breakage may be required if gift card redemptions continue to run lower than historical patterns. The Company recognized gift card breakage of $26,080, $23,221 and $23,929 during fiscal 2015, fiscal 2014 and fiscal 2013, respectively. The Company had gift card liabilities of $358,146 and $356,700 as of May 2, 2015 and May 3, 2014, respectively.

Accounts Receivable

Accounts receivable, as presented on the Company’s Consolidated Balance Sheets, is net of allowances. An allowance for doubtful accounts is determined through an analysis of the aging of accounts receivable and assessments of collectibility based on historic trends, the financial condition of the Company’s customers and an evaluation of economic conditions. The Company writes off uncollectible trade receivables once collection efforts have been exhausted. Costs associated with allowable customer markdowns and operational chargebacks, net of the expected recoveries, are part of the provision for allowances included in accounts receivable. These provisions result from seasonal negotiations, as well as historic deduction trends net of expected recoveries, and the evaluation of current market conditions.

Reclassifications

Certain prior-period amounts have been reclassified for comparative purposes to conform with the fiscal 2015 presentation.

Recent Accounting Pronouncements

In April 2015, the FASB issued ASU No. 2015-04, Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets (ASU 2015-04). For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in this ASU provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently to all plans if an entity has more than one plan. ASU 2015-04 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Earlier application is permitted. The amendments in this ASU should be applied prospectively. The Company has not yet selected a transition method nor has it determined the impact of adoption on its consolidated financial statements.

Reporting Period

The Company’s fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. The reporting periods ended May 2, 2015 contained 52 weeks, May 3, 2014 contained 53 weeks, and April 27, 2013 contained 52 weeks.

 

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  2. Credit Facility

The Company is party to an amended and restated credit facility with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and other lenders, dated as of April 29, 2011 (as amended and modified to date, the Credit Facility), consisting of up to $1,000,000 in aggregate commitments under a five-year asset-backed revolving credit facility expiring on April 29, 2016, which is secured by eligible inventory and accounts receivable with the ability to include eligible real estate and related assets. Borrowings under the Credit Facility are limited to a specified percentage of eligible inventories and accounts receivable and accrued interest, at the election of the Company, at Base Rate or LIBO Rate, plus, in each case, an Applicable Margin (each term as defined in the Credit Facility). In addition, the Company has the option to request an increase in commitments under the Credit Facility by up to $300,000, subject to certain restrictions.

The Credit Facility requires Availability (as defined in the Credit Facility) to be greater than the greater of (i) 10% of the Loan Cap (as defined in the Credit Facility) and (ii) $50,000. In addition, the Credit Facility contains covenants that limit, among other things, the Company’s ability to incur indebtedness, create liens, make investments, make restricted payments, merge or acquire assets, and contains default provisions that are typical for this type of financing, among other things. Proceeds from the Credit Facility are used for general corporate purposes, including seasonal working capital needs.

The Company had no outstanding debt under the Credit Facility as of May 2, 2015 and May 3, 2014.

Selected information related to the Company’s credit facilities:

 

     Fiscal
2015
    Fiscal
2014
    Fiscal
2013
 

Credit facility at period end

   $ —          —          77,000   

Average balance outstanding during the period

   $ 18,227        48,254        214,702   

Maximum borrowings outstanding during the period

   $ 202,800        180,300        462,900   

Weighted average interest rate during the period (a)

     38.18     15.65     5.56

Interest rate at end of period

     0.00     0.00     4.93

 

(a) Includes commitment fees.

Fees expensed with respect to the unused portion of the credit facilities were $4,658, $4,375 and $3,794 during fiscal 2015, fiscal 2014 and fiscal 2013, respectively. The Company had $66,946 of outstanding letters of credit under the 2013 Amended Credit Facility as of May 2, 2015 compared with $36,782 as of May 3, 2014.

The Company has no agreements to maintain compensating balances.

 

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  3. Stock-Based Compensation

The Company maintains four share-based incentive plans: the 1996 Incentive Plan, the 2004 Incentive Plan, the 2009 Incentive Plan and the Amended and Restated 2009 Incentive Plan. Prior to June 2, 2009, the Company issued restricted stock and stock options under the 1996 and 2004 Incentive Plans. On June 2, 2009, the Company’s shareholders approved the 2009 Incentive Plan. Under the 2009 Incentive Plan, the Company has issued restricted stock units, restricted stock and stock options. On September 11, 2012, the Company’s shareholders approved the Amended and Restated 2009 Incentive Plan. Under the Amended and Restated 2009 Incentive Plan, the Company has issued restricted stock units, restricted stock and stock options. The maximum number of shares issuable under the Amended and Restated 2009 Incentive Plan is 1,700,000, plus shares that remain available under the Company’s shareholder-approved 2009 and 2004 Incentive Plan. At May 2, 2015, there were approximately 4,326,902 shares of common stock available for future grants under the Amended and Restated 2009 Incentive Plan.

A restricted stock award is an award of common stock that is subject to certain restrictions during a specified period. Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the release of the restrictions. The grantee cannot transfer the shares before the restricted shares vest. Shares of unvested restricted stock have the same voting rights as common stock, are entitled to receive dividends and other distributions thereon and are considered to be currently issued and outstanding. The Company’s restricted stock awards vest over a period of one to four years. The Company expenses the cost of the restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, straight-line over the period during which the restrictions lapse. For these purposes, the fair market value of the restricted stock is determined based on the closing price of the Company’s common stock on the grant date.

A restricted stock unit is a grant valued in terms of the Company’s common stock, but no stock is issued at the time of grant. The restricted stock units may be redeemed for one share of common stock each once vested. Restricted stock units are generally subject to forfeiture if employment terminates prior to the release of the restrictions. The grantee cannot transfer the units except in very limited circumstances and with the consent of the compensation committee. Shares of unvested restricted stock units have no voting rights but are entitled to receive dividends and other distributions thereon. The Company’s restricted stock units vest over a period of one to four years. The Company expenses the cost of the restricted stock units, which is determined to be the fair market value of the shares at the date of grant, straight-line over the period during which the restrictions lapse. For these purposes, the fair market value of the restricted stock unit is determined based on the closing price of the Company’s common stock on the grant date.

The Company uses the Black-Scholes option-pricing model to value the Company’s stock options for each stock option award. Using this option-pricing model, the fair value of each stock option award is estimated on the date of grant. The fair value of the Company’s stock option awards, which are generally subject to pro-rata vesting annually over four years, is expensed on a straight-line basis over the vesting period of the stock options. The expected volatility assumption is based on traded options volatility of the Company’s stock over a term equal to the expected term of the option granted. The expected term of stock option awards granted is derived from historical exercise experience under the Company’s stock option plans and represents the period of time that stock option awards granted are expected to be outstanding. The expected term assumption incorporates the contractual term of an option grant, which is ten years, as well as the vesting period of an award, which is generally pro-rata vesting annually over four years. The risk-free interest rate is based on the implied yield on a U.S. Treasury constant maturity with a remaining term equal to the expected term of the option granted.

 

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The Company recognizes stock-based compensation costs, net of estimated forfeitures, for only those shares expected to vest on a straight-line basis over the requisite service period of the award. The Company estimates the forfeiture rates based on its historical experience.

The weighted average assumptions relating to the valuation of the Company’s stock options for fiscal year 2013 are shown below. No stock options were granted during fiscal 2015 or fiscal 2014.

 

Fiscal Year

   2013  

Weighted average fair value of grants

   $ 7.80   

Volatility

     86.13

Risk-free interest rate

     0.67

Expected life

     5 years   

Expected dividend yield

     0.00

Stock-Based Compensation Activity

The following table presents a summary of the Company’s stock option activity:

 

     Number of Shares
(in thousands)
    Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Value (in
thousands)
 

Balance, April 28, 2012

     3,860      $ 18.76         5.70 years       $ 574   

Granted

     515        11.64         

Exercised

     (279     12.20         

Forfeited

     (720     20.19         
  

 

 

         

Balance, April 27, 2013

     3,376      $ 17.91         6.24 years       $ 7,331   

Granted

     0        0.00         

Exercised

     (66     15.71         

Forfeited

     (2,272     16.95         
  

 

 

         

Balance, May 3, 2014

     1,039      $ 20.14         4.53 years       $ 725   

Granted

     0        0.00         

Exercised

     (83     15.47         

Forfeited

     (501     24.12         
  

 

 

         

Balance, May 2, 2015

     455      $ 16.62         6.27 years       $ 3,114   
  

 

 

         

Vested and expected to vest in the future at May 2, 2015

     438      $ 16.69         6.25 years       $ 2,984   

Exercisable at May 2, 2015

     196      $ 18.14         5.86 years       $ 1,245   

Available for grant at May 2, 2015

     4,327           

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the related

 

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fiscal year and the exercise price, multiplied by the related in-the-money options) that would have been received by the option holders had they exercised their options at the end of the fiscal year. This amount changes based on the market value of the Company’s common stock. Total intrinsic value of options exercised for fiscal 2015, fiscal 2014 and fiscal 2013 (based on the difference between the Company’s stock price on the exercise date and the respective exercise price, multiplied by the number of options exercised) was $596, $227 and $1,206, respectively.

As of May 2, 2015, there was $671 of total unrecognized compensation expense related to unvested stock options granted under the Company’s share-based compensation plans. That expense is expected to be recognized over a weighted average period of 0.59 years.

The following table presents a summary of the Company’s restricted stock activity:

 

     Number of Shares
(in thousands)
     Weighted
Average Grant
Date Fair Value
 

Balance, April 28, 2012

     1,384       $ 19.68   

Granted

     60         11.52   

Vested

     (866      20.49   

Forfeited

     (293      19.24   
  

 

 

    

Balance, April 27, 2013

     285       $ 15.91   

Granted

     61         13.81   

Vested

     (194      16.15   

Forfeited

     (53      16.02   
  

 

 

    

Balance, May 3, 2014

     99       $ 14.09   

Granted

     43         22.24   

Vested

     (96      14.10   

Forfeited

     (3      13.46   
  

 

 

    

Balance, May 2, 2015

     43       $ 22.24   
  

 

 

    

Total fair value of shares of restricted stock that vested during fiscal 2015, fiscal 2014 and fiscal 2013 was $2,188, $2,955 and $13,447, respectively. As of May 2, 2015, there was $320 of unrecognized stock-based compensation expense related to nonvested restricted stock awards. That cost is expected to be recognized over a weighted average period of 0.38 years.

 

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The following table presents a summary of the Company’s restricted stock unit activity:

 

     Number of
Shares
(in thousands)
     Weighted
Average Grant
Date Fair  Value
 

Balance, April 28, 2012

     964       $ 16.63   

Granted

     1,029         16.29   

Vested

     (13      15.31   

Forfeited

     (102      18.01   
  

 

 

    

Balance, April 27, 2013

     1,878       $ 16.38   

Granted

     2,469         15.12   

Vested

     (497      16.76   

Forfeited

     (723      17.13   
  

 

 

    

Balance, May 3, 2014

     3,127       $ 15.15   

Granted

     291         19.40   

Vested

     (1,054      15.19   

Forfeited

     (309      15.94   
  

 

 

    

Balance, May 2, 2015

     2,055       $ 15.62   
  

 

 

    

Total fair value of shares of restricted stock units that vested during fiscal 2015, fiscal 2014 and fiscal 2013 were $23,578, $9,475 and $205, respectively. As of May 2, 2015, there was $23,101 of unrecognized stock-based compensation expense related to nonvested restricted stock units. That cost is expected to be recognized over a weighted average period of 1.77 years.

For fiscal 2015, fiscal 2014 and fiscal 2013, stock-based compensation expense of $19,989, $12,171 and $20,187, respectively, is included in selling and administrative expenses.

 

  4. Receivables, Net

Receivables represent customer, private and public institutional and government billings, credit/debit card, advertising, landlord and other receivables due within one year as follows:

 

      May 2,
2015
     May 3,
2014
 

Trade accounts

   $ 43,880       $ 54,375   

Credit/debit card receivables

     29,993         32,331   

EBook settlement receivable (a)

     —           28,117   

Other receivables

     24,703         29,158   
  

 

 

    

 

 

 

Total receivables, net

   $ 98,576       $ 143,981   
  

 

 

    

 

 

 

 

(a) The Company provided credits to eligible customers resulting from the settlements reached with certain publishers in antitrust lawsuits filed by various State Attorney Generals and private class plaintiffs regarding the price of digital books. The Company’s customers were entitled to $44,203 in total credits as a result of the settlement, which is funded by these publishers. If a customer’s credit is not used to make a purchase within one year, the entire credit will expire. The Company recorded estimated redemptions of $33,646 as a receivable from these publishers and a liability to its customers in March 2014, all of which were activated by customers as of March 2015.

 

F-59


  5. Other Long-Term Liabilities

Other long-term liabilities consist primarily of deferred rent, the Microsoft Commercial Agreement financing transaction (see Note 11) and tax liabilities and reserves. The Company provides for minimum rent expense over the lease terms (including the build-out period) on a straight-line basis. The excess of such rent expense over actual lease payments (net of tenant allowances) is classified as deferred rent. Other long-term liabilities include store closing expenses and long-term deferred revenues. The Company had the following long-term liabilities at May 2, 2015 and May 3, 2014:

 

     May 2,
2015
     May 3,
2014
 

Deferred rent

   $ 94,952       $ 128,280   

Microsoft Commercial Agreement financing transaction (see Note 11)

     —           140,714   

Tax liabilities and reserves

     71,369         51,399   

Pension Liability (a) (see Note 8)

     —           11,154   

Other

     29,981         35,442   
  

 

 

    

 

 

 

Total long-term liabilities

   $ 196,302       $ 366,989   
  

 

 

    

 

 

 
(a) Pension liabilities of $14,216 as of May 2, 2015 were reclassed to short-term as the plan termination is expected to be settled within twelve months.

 

  6. Fair Values of Financial Instruments

In accordance with ASC 820, Fair Value Measurements and Disclosures, the fair value of an asset is considered to be the price at which the asset could be sold in an orderly transaction between unrelated knowledgeable and willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

 

Level 1 –    Observable inputs that reflect quoted prices in active markets
Level 2 –    Inputs other than quoted prices in active markets that are either directly or indirectly observable
Level 3 –    Unobservable inputs in which little or no market data exists, therefore requiring the Company to develop its own assumptions

The Company’s financial instruments include cash, receivables, gift cards, accrued liabilities and accounts payable. The fair values of cash, receivables, accrued liabilities and accounts payable approximate carrying values because of the short-term nature of these instruments. The Company believes that its credit facility approximates fair value since interest rates are adjusted to reflect current rates.

 

  7. Net Earnings (Loss) Per Share

In accordance with ASC 260-10-45, Share-Based Payment Arrangements and Participating Securities and the Two-Class Method, the Company’s unvested restricted shares, unvested restricted stock units and shares issuable under the Company’s deferred compensation plan are considered participating securities. During periods of net income, the calculation of earnings per share for common stock are reclassified to exclude the income attributable to the unvested restricted shares,

 

F-60


unvested restricted stock units and shares issuable under the Company’s deferred compensation plan from the numerator and exclude the dilutive impact of those shares from the denominator. Diluted earnings per share for fiscal year 2015 were calculated using the two-class method for stock options, restricted stock and restricted stock units and the if-converted method for the preferred stock.

During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company. Due to the net loss during fiscal 2014 and 2013, participating securities in the amounts of 3,048,040 and 2,859,084, respectively, were excluded from the calculation of loss per share using the two-class method because the effect would be antidilutive. The Company’s outstanding dilutive stock options of 31,778 and 55,977, for fiscal 2014 and 2013, respectively, and accretion/payments of dividends on preferred shares were also excluded from the calculation of loss per share using the two-class method because the effect would be antidilutive.

The following is a reconciliation of the Company’s basic and diluted earnings per share calculation:

 

     Fiscal
2015
    Fiscal
2014
    Fiscal
2013
 

Numerator for basic income (loss) per share:

      

Net income (loss) attributable to Barnes & Noble, Inc.

   $ 36,596        (47,268     (157,806

Preferred stock dividends

     (15,767     (16,028     (15,767

Accretion of dividends on preferred stock

     (7,339     (3,032     (2,266

Less allocation of earnings and dividends to participating securities

     (739     —          —     
  

 

 

   

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ 12,751        (66,328     (175,839

Numerator for diluted income (loss) per share:

      

Net income (loss) available to common shareholders

   $ 12,751        (66,328     (175,839

Preferred stock dividends (a)

     —          —          —     

Accretion of dividends on preferred stock (a)

     —          —          —     

Allocation of earnings and dividends to participating securities

     739        —          —     

Less diluted allocation of earnings and dividends to participating securities

     (738     —          —     
  

 

 

   

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ 12,752        (66,328     (175,839

Denominator for basic income (loss) per share:

      

Basic weighted average common shares

     60,842        58,971        58,247   

Denominator for diluted income (loss) per share:

      

Basic weighted average shares

     60,842        58,971        58,247   

Preferred shares (a)

     —          —          —     

Average dilutive options

     86        —          —     
  

 

 

   

 

 

   

 

 

 

Diluted weighted average shares

     60,928        58,971        58,247   

Income (loss) per common share:

      

Basic

   $ 0.21        (1.12     (3.02

Diluted

   $ 0.21        (1.12     (3.02

 

(a) Although the Company was in a net income position during the 52 weeks ended May 2, 2015, the dilutive effect of the Company’s convertible preferred shares were excluded from the calculation of income per share using the two-class method because the effect would be antidilutive.

 

F-61


  8. Employees’ Retirement and Defined Contribution Plans

As of December 31, 1999, substantially all employees of the Company were covered under a noncontributory defined benefit pension plan (the Pension Plan). As of January 1, 2000, the Pension Plan was amended so that employees no longer earn benefits for subsequent service. Effective December 31, 2004, the Barnes & Noble.com Employees’ Retirement Plan (the B&N.com Retirement Plan) was merged with the Pension Plan. Substantially all employees of Barnes & Noble.com were covered under the B&N.com Retirement Plan. As of July 1, 2000, the B&N.com Retirement Plan was amended so that employees no longer earn benefits for subsequent service. Subsequent service continues to be the basis for vesting of benefits not yet vested at December 31, 1999 and June 30, 2000 for the Pension Plan and the B&N.com Retirement Plan, respectively. The actuarial assumptions used to calculate pension costs are reviewed annually. Pension expense was $10,434, $2,465 and $2,836 for fiscal 2015, fiscal 2014 and fiscal 2013, respectively.

On June 18, 2014, the Company’s Board of Directors approved a resolution to terminate the Pension Plan. The Pension Plan termination was effective November 1, 2014. As a result of the Pension Plan termination, pension liability and other comprehensive loss increased by $15,747, before tax, during the 13 weeks ended August 2, 2014. It is expected to take 18 to 24 months to complete the termination from the date of the approved resolution to terminate the Pension Plan. The pension liability will be settled in either a lump sum payment or a purchased annuity. A special lump sum opportunity was offered to terminated vested participants in the Pension Plan during the 13 weeks ended November 1, 2014, which triggered settlement accounting in the period ending January 31, 2015. The settlement represents 735 participants who elected to receive a lump sum of their benefit, totaling $15,190. The distributions primarily took place in December 2014 and resulted in a settlement charge of $7,317, which was reclassified from other comprehensive income to selling and administrative expenses during fiscal 2015. The net impact of the Pension Plan termination, special lump sum opportunity, settlement accounting and remeasurement and regular plan experience, was an increase in pension liability of $3,062 and a decrease in other comprehensive income of $6,503, before tax, in fiscal 2015. There will be another lump sum opportunity available to the remaining 2,300 active and terminated vested participants at the final Pension Plan termination distribution date. Currently, there is not enough information available to determine the ultimate charge of the termination. The actuarial assumptions used to calculate pension costs are typically reviewed annually. In light of the resolution to terminate the Pension Plan, the assumptions used to calculate the pension costs were reviewed during the 13 weeks ended August 2, 2014. In addition, due to the required settlement, the assumptions were again reviewed during the 13 weeks ended January 31, 2015.

The Company maintains a defined contribution plan (the Savings Plan) for the benefit of substantially all employees. Total Company contributions charged to employee benefit expenses for the Savings Plan were $16,270, $16,744 and $15,902 during fiscal 2015, fiscal 2014 and fiscal 2013, respectively. In addition, the Company provides certain health care and life insurance benefits (the Postretirement Plan) to certain retired employees, limited to those receiving benefits or retired as of April 1, 1993. Total Company contributions charged to employee benefit expenses for the Postretirement Plan were $52, $44 and $0 during fiscal 2015, fiscal 2014 and fiscal 2013, respectively.

 

F-62


  9. Income Taxes

Income (loss) before income taxes for fiscal 2015, fiscal 2014 and fiscal 2013 are as follows:

 

     Fiscal 2015      Fiscal 2014      Fiscal 2013  

Domestic operations

   $ 111,302         3,952         (257,173

Foreign operations

     3,981         733         1,824   
  

 

 

    

 

 

    

 

 

 

Total income (loss) before taxes

   $ 115,283         4,685         (255,349
  

 

 

    

 

 

    

 

 

 

Income tax provisions (benefits) for fiscal 2015, fiscal 2014 and fiscal 2013 are as follows:

 

     Fiscal 2015      Fiscal 2014      Fiscal 2013  

Current:

        

Federal

   $ 81,107         5,753         18,270   

State

     8,844         2,819         2,594   

Foreign

     1,314         156         486   
  

 

 

    

 

 

    

 

 

 

Total current

     91,265         8,728         21,350   
  

 

 

    

 

 

    

 

 

 

Deferred:

        

Federal

     (41      30,792         (93,684

State

     (12,581      12,433         (25,209

Foreign

     44         —           —     
  

 

 

    

 

 

    

 

 

 

Total deferred

     (12,578      43,225         (118,893
  

 

 

    

 

 

    

 

 

 

Total

   $ 78,687         51,953         (97,543
  

 

 

    

 

 

    

 

 

 

Reconciliation between the effective income tax rate and the federal statutory income tax rate is as follows:

 

     Fiscal 2015     Fiscal 2014     Fiscal 2013  

Federal statutory income tax rate

     35.0     35.0     35.0

State income taxes, net of federal income tax benefit

     9.5        156.8        3.9   

Changes to unrecognized tax benefits

     0.1        42.5        (5.7

Excess executive compensation

     2.4        14.0        (1.8

Meals and entertainment disallowance

     0.7        16.0        (0.2

Research Tax Credits

     (2.4     (63.4     7.4   

Joint venture net loss allocation

     32.0        657.8        —     

Change in valuation allowance

     (11.3     248.5        —     

Other, net

     2.3        1.7        (0.4
  

 

 

   

 

 

   

 

 

 

Effective income tax rate

     68.3     1,108.9     38.2
  

 

 

   

 

 

   

 

 

 

The joint venture net loss allocation identified in the table above refers to our obligation under the joint venture with Microsoft and Pearson that was terminated earlier in the fiscal year to allocate items of loss and expense to Microsoft for income tax purposes. In the current fiscal year, this commitment resulted in an additional allocation for tax purposes of $105,542 of joint venture losses to Microsoft.

 

F-63


The Company accounts for income taxes using the asset and liability method. Deferred taxes are recorded based on differences between the financial statement basis and tax basis of assets and liabilities and available tax loss and credit carryforwards. At May 2, 2015 and May 3, 2014, the significant components of the Company’s deferred taxes consisted of the following:

 

     May 2, 2015      May 3, 2014  

Deferred tax assets:

     

Estimated accrued liabilities

   $ 131,347       $ 124,875   

Inventory

     28,437         42,671   

Insurance liability

     9,149         8,804   

Loss and credit carryovers

     28,735         47,308   

Lease transactions

     25,292         24,499   

Pension

     6,175         4,885   

Stock-based compensation

     4,565         6,364   

Investments in equity securities

     39         1,564   

Depreciation

     4,501         —     

Other

     809         1,263   
  

 

 

    

 

 

 

Gross deferred tax assets

     239,049         262,233   
  

 

 

    

 

 

 

Valuation allowance

     (1,215      (19,176
  

 

 

    

 

 

 

Net deferred tax assets

     237,834         243,057   
  

 

 

    

 

 

 

Deferred tax liabilities:

     

Prepaid expenses

     (6,777      (6,900

Goodwill and intangible asset amortization

     (210,249      (209,541

Investment in Barnes & Noble.com

     (78,526      (78,554

Depreciation

     —           (15,257