BARNES & NOBLES, INC.
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
FORM 10-Q

(Mark One)

     
x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the quarterly period ended November 1, 2003

OR

     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the transition period from             to              

Commission File Number: 1-12302

BARNES & NOBLE, INC.


(Exact Name of Registrant as Specified in Its Charter)
     
Delaware   06-1196501

 
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)
         
122 Fifth Avenue, New York, NY       10011

     
(Address of Principal Executive Offices)       (Zip Code)

(212) 633-3300


(Registrant’s Telephone Number, Including Area Code)


(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x    No o

Number of shares of $.001 par value common stock outstanding as of November 28, 2003: 68,130,759.

 


TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statement of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Item 4: Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
SECTION 302 CERTIFICATION OF THE CEO
SECTION 302 CERTIFICATION OF THE CFO
SECTION 906 CERTIFICATION OF THE CEO
SECTION 906 CERTIFICATION OF THE CFO


Table of Contents

BARNES & NOBLE, INC. AND SUBSIDIARIES

November 1, 2003

Index to Form 10-Q

                 
            Page No.
           
PART I -
  FINANCIAL INFORMATION        
Item 1.
  Financial Statements        
 
 
Consolidated Statements of Operations - For the 13 weeks and 39 weeks ended November 1, 2003 and November 2, 2002
    3  
 
  Consolidated Balance Sheets - November 1, 2003, November 2, 2002 and February 1, 2003     4  
 
  Consolidated Statement of Changes in Shareholders’ Equity - For the 39 weeks ended November 1, 2003     6  
 
  Consolidated Statements of Cash Flows - For the 39 weeks ended November 1, 2003 and November 2, 2002     7  
 
  Notes to Consolidated Financial Statements     8  
 
  Report of Independent Certified Public Accountants     17  
Item 2.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     18  
Item 3.
  Quantitative and Qualitative Disclosures About Market Risk     26  
Item 4.
  Controls and Procedures     27  
PART II - OTHER INFORMATION
         
Item 1.
  Legal Proceedings     28  
Item 6.
  Exhibits and Reports on Form 8-K     29  
 
  SIGNATURES     30  
 
  Exhibit Index     E-1  

 


Table of Contents

PART I - FINANCIAL INFORMATION

Item 1: Financial Statements

BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(thousands of dollars, except per share data)
(unaudited)

                                       
          13 weeks ended   39 weeks ended
         
 
          November 1,   November 2,   November 1,   November 2,
          2003   2002   2003   2002
         
 
 
 
Sales
  $ 1,270,072       1,130,885       3,738,920       3,423,225  
Cost of sales and occupancy
    921,823       836,703       2,753,053       2,539,747  
 
   
     
     
     
 
     
Gross profit
    348,249       294,182       985,867       883,478  
 
   
     
     
     
 
Selling and administrative expenses
    273,062       227,774       782,919       692,005  
Depreciation and amortization
    40,492       37,982       118,778       110,352  
Pre-opening expenses
    3,186       4,077       7,146       8,077  
Impairment charge
                      25,328  
 
   
     
     
     
 
     
Operating profit
    31,509       24,349       77,024       47,716  
Interest (net of interest income of $421, $628, $1,427 and $2,587, respectively) and amortization of deferred financing fees
    (5,430 )     (5,604 )     (14,783 )     (15,970 )
Equity in net loss of Barnes & Noble.com
    (3,935 )     (6,323 )     (14,311 )     (21,227 )
Other expense, net
                      (16,498 )
 
   
     
     
     
 
 
Income (loss) before taxes and minority interest
    22,144       12,422       47,930       (5,979 )
Income taxes
    8,913       4,995       19,292       (2,411 )
 
   
     
     
     
 
 
Income (loss) before minority interest
    13,231       7,427       28,638       (3,568 )
Minority interest
    (3,058 )     (3,598 )     (6,828 )     (7,495 )
 
   
     
     
     
 
     
Net income (loss)
  $ 10,173       3,829       21,810       (11,063 )
 
   
     
     
     
 
Income (loss) per common share
                               
     
Basic
$ 0.15       0.06       0.33       (0.17 )
     
Diluted
$ 0.14       0.05       0.31       (0.18 )
Weighted average common shares outstanding
                               
     
Basic
  66,664,000       66,207,000       65,461,000       66,957,000  
     
Diluted
  68,704,000       67,927,000       67,075,000       66,957,000  

See accompanying notes to consolidated financial statements.

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Table of Contents

BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(thousands of dollars, except per share data)

                                 
            November 1,   November 2,   February 1,
            2003   2002   2003
           
 
 
            (unaudited)        
       
ASSETS
                       
Current assets:
                       
 
Cash and cash equivalents
  $ 136,671       142,571       267,642  
 
Receivables, net
    74,428       67,718       66,948  
 
Barnes & Noble.com receivable
          40,639       55,174  
 
Merchandise inventories
    1,920,266       1,827,897       1,395,872  
 
Prepaid expenses and other current assets
    111,777       113,453       101,232  
 
 
   
     
     
 
     
Total current assets
    2,243,142       2,192,278       1,886,868  
 
   
     
     
 
Property and equipment:
                       
 
Land and land improvements
    3,247       3,247       3,247  
 
Buildings and leasehold improvements
    517,541       484,307       495,499  
 
Fixtures and equipment
    1,176,290       916,224       936,136  
 
   
     
     
 
 
    1,697,078       1,403,778       1,434,882  
 
Less accumulated depreciation and amortization
    1,034,071       787,021       812,579  
 
 
   
     
     
 
     
Net property and equipment
    663,007       616,757       622,303  
 
   
     
     
 
Goodwill
    572,206       341,081       390,396  
Intangible assets, net
    46,856             48,176  
Investment in Barnes & Noble.com
          27,521       23,280  
Other noncurrent assets
    23,256       23,570       24,404  
 
   
     
     
 
 
Total assets
  $ 3,548,467       3,201,207       2,995,427  
 
   
     
     
 

(Continued)

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Table of Contents

BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(thousands of dollars, except per share data)

                               
          November 1,   November 2,   February 1,
          2003   2002   2003
         
 
 
          (unaudited)        
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                       
Current liabilities:
                       
 
Accounts payable
  $ 1,162,014       1,055,485       710,907  
 
Accrued liabilities
    457,951       367,665       520,541  
 
 
   
     
     
 
     
Total current liabilities
    1,619,965       1,423,150       1,231,448  
 
   
     
     
 
Long-term debt
    311,600       443,550       300,000  
Deferred income taxes
    119,893       115,204       119,823  
Other long-term liabilities
    198,085       106,064       115,415  
Minority interest
    201,365       188,491       200,951  
Shareholders’ equity:
                       
 
Common stock; $.001 par value; 300,000,000 shares authorized; 76,100,493 73,055,025 and 73,110,740 shares issued, respectively
    76       73       73  
 
Additional paid-in capital
    884,645       826,059       828,522  
 
Accumulated other comprehensive loss
    (10,961 )     (632 )     (11,064 )
 
Retained earnings
    413,460       280,639       391,650  
 
Treasury stock, at cost, 8,807,700, 8,502,700 and 8,502,700 shares, respectively
    (189,661 )     (181,391 )     (181,391 )
 
 
   
     
     
 
     
Total shareholders’ equity
    1,097,559       924,748       1,027,790  
 
   
     
     
 
Commitments and contingencies
                       
 
Total liabilities and shareholders’ equity
  $ 3,548,467       3,201,207       2,995,427  
 
   
     
     
 

See accompanying notes to consolidated financial statements.

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Table of Contents

BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders’ Equity
(thousands of dollars, except per share data)
(unaudited)

                                                     
                        Accumulated                        
                Additional   Other           Treasury        
        Common   Paid-In   Comprehensive   Retained   Stock at        
        Stock   Capital   Losses   Earnings   Cost   Total
       
 
 
 
 
 
Balance at February 1, 2003
  $ 73     $ 828,522     $ (11,064 )   $ 391,650     $ (181,391 )   $ 1,027,790  
 
   
     
     
     
     
     
 
Comprehensive income:
                                               
 
Net income
                      21,810                
 
Other comprehensive income (loss):
                                               
   
Foreign currency translation
                (24 )                    
   
Unrealized income on available-for-sale securities (net of deferred tax of $60)
                124                      
   
Unrealized gain on derivative instrument (net of deferred tax of $2)
                3                      
Total comprehensive income
                                            21,913  
Exercise of 2,989,753 common stock options (including tax benefit of $14,550)
    3       52,899                   (2,556 )     50,346  
Exercise of common stock options of subsidiary (including tax benefit of $1,792)
          3,224                         3,224  
Treasury stock acquired, 305,000 shares
                            (5,714 )     (5,714 )
 
   
     
     
     
     
     
 
Balance at November 1, 2003
  $ 76     $ 884,645     $ (10,961 )   $ 413,460     $ (189,661 )   $ 1,097,559  
 
   
     
     
     
     
     
 

See accompanying notes to consolidated financial statements.

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Table of Contents

BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(thousands of dollars)
(unaudited)

                       
          39 weeks ended
         
          November 1, 2003   November 2, 2002
         
 
Cash flows from operating activities:
               
 
Net income (loss)
  $ 21,810     (11,063 )
 
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
               
   
Depreciation and amortization (including amortization of deferred financing fees)
    120,969       112,618  
   
Loss on disposal of property and equipment
    2,664       4,096  
   
Increase in other long-term liabilities for scheduled rent increases in long-term leases
    765       2,091  
   
Equity in net loss of Barnes & Noble.com
    14,311       21,227  
   
Minority interest
    6,828       7,495  
   
Other expense, net
          16,498  
   
Deferred taxes
    (16 )     7,851  
   
Impairment charge
          25,328  
   
Changes in operating assets and liabilities, net of effect of acquired businesses
    (128,498 )     (293,114 )
 
 
   
     
 
   
Net cash flows from operating activities
    38,833       (106,973 )
 
   
     
 
Cash flows from investing activities:
               
 
Purchases of property and equipment
    (114,251 )     (135,436 )
 
Acquisition of consolidated subsidiaries, net of cash acquired
    (62,208 )      
 
Purchase of investments
    (1,474 )     (2,882 )
 
Net increase in other noncurrent assets
    (795 )     (3,829 )
 
 
   
     
 
   
Net cash flows from investing activities
    (178,728 )     (142,147 )
 
   
     
 
Cash flows from financing activities:
               
 
Net increase (decrease) in revolving credit facility
    11,600       (5,450 )
 
Proceeds from exercise of common stock options
    38,043       6,825  
 
Purchase of treasury stock through repurchase program
    (5,714 )     (64,014 )
 
Acquisition of minority interest
    (35,005 )      
 
Proceeds from GameStop initial public offering
          346,112  
 
 
   
     
 
   
Net cash flows from financing activities
    8,924       283,473  
 
   
     
 
Net increase (decrease) in cash and cash equivalents
    (130,971 )     34,353  
Cash and cash equivalents at beginning of period
    267,642       108,218  
 
   
     
 
Cash and cash equivalents at end of period
  $ 136,671     142,571  
 
   
     
 
Changes in operating assets and liabilities, net:
               
 
Receivables, net
  $ 16,030     (9,787 )
 
Merchandise inventories
    (474,232 )     (542,892 )
 
Prepaid expenses and other current assets
    (6,068 )     (18,056 )
 
Accounts payable and accrued liabilities
    335,772       277,621  
 
   
     
 
   
Changes in operating assets and liabilities, net of acquired businesses
  $ (128,498 )   (293,114 )
 
   
     
 
Supplemental cash flow information:
               
 
Cash paid during the period for:
               
   
Interest
  $ 17,628     19,574  
   
Income taxes
  $ 106,089     76,060  
Supplemental disclosure of subsidiaries acquired:
               
   
Assets acquired (net of cash acquired)
  $ 228,459        
   
Liabilities assumed (includes acquisition related notes payable)
    166,251        
 
 
   
     
 
   
Cash paid
  $ 62,208        
 
   
     
 

See accompanying notes to consolidated financial statements.

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Table of Contents

BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 39 weeks ended November 1, 2003 and November 2, 2002
(thousands of dollars, except per share data)
(unaudited)

The unaudited consolidated financial statements include the accounts of Barnes & Noble, Inc. and its subsidiaries (collectively, the Company).

In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly its consolidated financial position as of November 1, 2003 and the results of its operations and its cash flows for the 39 weeks then ended. These consolidated financial statements are condensed and therefore do not include all of the information and footnotes required by generally accepted accounting principles. The consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the 52 weeks ended February 1, 2003 (fiscal 2002). The Company follows the same accounting policies in preparation of interim reports.

Due to the seasonal nature of the business, the results of operations for the 39 weeks ended November 1, 2003 are not indicative of the results to be expected for the 52 weeks ending January 31, 2004 (fiscal 2003).

(1)   Acquisitions

     On September 15, 2003, the Company completed its acquisition of all of Bertelsmann AG’s (Bertelsmann) interest in barnesandnoble.com inc. (Barnes & Noble.com). The purchase price paid by the Company was $165,406 (including acquisition related costs) in a combination of cash and notes, equivalent to $2.80 per share or membership unit in barnesandnoble.com llc. The note issued to Bertelsmann in the amount of $82,000 is included in other long-term liabilities on the balance sheet. As a result of the acquisition, the Company increased its economic interest in Barnes & Noble.com to approximately 75 percent. The acquisition was accounted for by the purchase method of accounting and, accordingly, the results of operations for the period subsequent to the acquisition are included in the consolidated financial statements. The excess of purchase price over the tangible net assets acquired, in the amount of $165,037 has been initially recorded as goodwill. Any amounts remaining in goodwill or unamortizable intangible assets will be tested annually for impairment in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”. Prior to the acquisition, the Company had an approximate 38 percent economic interest in Barnes & Noble.com which it accounted for under the equity method of accounting. The Company will engage a firm to perform an independent allocation of the purchase price to any other acquired intangible assets.

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Table of Contents

BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 39 weeks ended November 1, 2003 and November 2, 2002
(thousands of dollars, except per share data)
(unaudited)

     The following table summarizes pro forma results as if the Company had entered into the agreement on the first day of fiscal 2002:

                                   
      13 weeks ended   39 weeks ended
     
 
      November 1,   November 2,   November 1,   November 2,
      2003   2002   2003   2002
     
 
 
 
Sales
  $ 1,351,216       1,233,460       4,012,504       3,718,172  
Net income (loss)
  $ 8,149       (225 )     13,739       (24,657 )
Income (loss) per common share
                               
 
Basic
  $ 0.12       (0.00 )     0.21       (0.37 )
 
Diluted
  $ 0.11       (0.01 )     0.20       (0.38 )

     The information has been prepared for comparative purposes only and does not purport to be indicative of the results of operations which actually would have resulted had the acquisition occurred on the date indicated, or which may result in the future.

     On June 24, 2003, the Company, through its 63 percent owned subsidiary GameStop Corp. (GameStop), acquired a controlling interest in Gamesworld Group Limited (Gamesworld), an Ireland-based electronic games retailer, for $3,279 in cash. The acquisition was accounted for by the purchase method of accounting and, accordingly, the results of operations for the period subsequent to the acquisition are included in the consolidated financial statements. The excess of purchase price over the net assets acquired, in the amount of $2,869, has been recorded as goodwill and will be tested annually for impairment in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”. The pro forma effect assuming the acquisition of Gamesworld at the beginning of fiscal 2002 is not material.

(2)   Merchandise Inventories

     Merchandise inventories are stated at the lower of cost or market. Cost is determined using the retail inventory method on the first-in, first-out (FIFO) basis for 75 percent, 77 percent and 82 percent of the Company’s merchandise inventories as of November 1, 2003, November 2, 2002 and February 1, 2003, respectively. Merchandise inventories of GameStop stores, Barnes & Noble.com and Calendar Club L.L.C. (Calendar Club) represent 21 percent, 17 percent and 12 percent of merchandise inventories as of November 1, 2003, November 2, 2002 and February 1, 2003, respectively and are recorded based on the average cost method. The remaining merchandise inventories are valued on the last-in, first-out (LIFO) method.

     If substantially all of the merchandise inventories currently valued at LIFO costs were valued at current costs, merchandise inventories would remain unchanged as of November 1, 2003, November 2, 2002 and February 1, 2003.

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BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 39 weeks ended November 1, 2003 and November 2, 2002
(thousands of dollars, except per share data)
(unaudited)

(3)   Reclassifications

     Certain prior period amounts have been reclassified to conform to the current period presentation.

(4)   Income Taxes

     The tax provisions for the 39 weeks ended November 1, 2003 and November 2, 2002 are based upon management’s estimate of the Company’s annualized effective tax rate.

(5)   Stock Options

     The Company grants options to purchase Barnes & Noble, Inc. (BKS), GameStop Corp. (GME) and Barnes & Noble.com (BNBN) common shares under stock-based incentive plans. The Company accounts for all transactions under which employees receive such options based on the price of the underlying stock in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”. The following table illustrates the effect on net income (loss) and income (loss) per share as if the Company had applied the fair value-recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure”, to stock-based incentive plans:

                                   
      For the 13 weeks ended   For the 39 weeks ended
     
 
      November 1,   November 2,   November 1,   November 2,
      2003   2002   2003   2002
     
 
 
 
Net income (loss) - as reported
  $ 10,173       3,829       21,810       (11,063 )
Compensation expense, net of tax
                               
 
BKS stock options
    2,928       7,152       9,905       10,855  
 
GME stock options, net of minority interest
    1,423       1,314       3,989       3,831  
 
BNBN stock options
                       
 
   
     
     
     
 
Pro forma net income (loss) - pro forma for SFAS No. 123
  $ 5,822       (4,637 )     7,916       (25,749 )
 
   
     
     
     
 
Basic earnings per share:
                               
As reported
  $ 0.15       0.06       0.33       (0.17 )
Pro forma for SFAS No. 123
    0.09       (0.07 )     0.12       (0.38 )
Diluted earnings per share:
                               
As reported
    0.14       0.05       0.31       (0.18 )
Pro forma for SFAS No. 123
    0.08       (0.07 )     0.11       (0.40 )

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BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 39 weeks ended November 1, 2003 and November 2, 2002
(thousands of dollars, except per share data)
(unaudited)

(6)   Comprehensive Income (Loss)

     Comprehensive income (loss) is net income (loss), plus certain other items that are recorded directly to shareholders’ equity, as follows:

                                     
        13 weeks ended   39 weeks ended
       
 
        November 1,   November 2,   November 1,   November 2,
        2003   2002   2003   2002
       
 
 
 
Net income (loss)
  $ 10,173       3,829       21,810       (11,063 )
Other comprehensive income (loss):
                               
 
Foreign currency translation adjustments
    51             (24 )      
 
Unrealized gains on available-for-sale securities:
                               
   
Unrealized holding gains arising during the period
    83             124       (1,823 )
   
Less: reclassification adjustment
                      14,806  
 
   
     
     
     
 
 
Unrealized gains, net of deferred income tax expense of $33, $0, $60 and $9,195, respectively
    83             124       12,983  
 
   
     
     
     
 
 
Unrealized gain on derivative instrument, net of deferred income tax expense of $0, ($3), $2 and $472, respectively
          (4 )     3       688  
 
   
     
     
     
 
Total comprehensive income
  $ 10,307       3,825       21,913       2,608  
 
   
     
     
     
 

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BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 39 weeks ended November 1, 2003 and November 2, 2002
(thousands of dollars, except per share data)
(unaudited)

(7)   Net Income (Loss) Per Share

     Following is a reconciliation of net income (loss) and weighted average common shares outstanding for purposes of calculating basic and diluted earnings per share:

                                                                   
              For the 13 weeks ended           For the 13 weeks ended
              November 1, 2003           November 2, 2002
             
         
              Income   Shares   Per Share           Income   Shares   Per Share
              (Numerator)   (Denominator)   Amount           (Numerator)   (Denominator)   Amount
             
 
 
         
 
 
Basic EPS
                                                               
Net income
          $ 10,173       66,664     $ 0.15             $ 3,829       66,207     $ 0.06  
 
                           
                             
 
Effect of dilutive securities
                                                               
Options
                  2,040                             1,720          
Convertible debt
                                                       
 
           
                             
                 
 
            10,173                               3,829                  
Effect of GameStop dilutive EPS
                                                               
GameStop net income less minority interest
            6,867                               6,195                  
 
           
                             
                 
 
            3,306                               (2,366 )                
GameStop diluted EPS
  $ 0.18                             $ 0.16                          
GameStop shares owned by Barnes & Noble
    36,009       6,479                       36,009       5,766                  
 
   
     
     
             
     
     
         
 
          $ 9,785       68,704     $ 0.14             $ 3,400       67,927     $ 0.05  
 
           
     
     
             
     
     
 
                                                                   
              For the 39 weeks ended           For the 39 weeks ended
              November 1, 2003           November 2, 2002
             
         
              Income   Shares   Per Share           Income   Shares   Per Share
              (Numerator)   (Denominator)   Amount           (Numerator)   (Denominator)   Amount
             
 
 
         
 
 
Basic EPS
                                                               
Net income (loss)
          $ 21,810       65,461     $ 0.33             $ (11,063 )     66,957     $ (0.17 )
 
                           
                             
 
Effect of dilutive securities
                                                               
Options
                  1,614                                      
Convertible debt
                                                       
 
           
                             
                 
 
            21,810                               (11,063 )                
Effect of GameStop dilutive EPS
                                                               
GameStop net income less minority interest
            15,228                               13,321                  
 
           
                             
                 
 
            6,582                               (24,384 )                
GameStop diluted EPS
  $ 0.40                             $ 0.34                          
GameStop shares owned by Barnes & Noble
    36,009       14,361                       36,009       12,243                  
 
   
     
     
             
     
     
         
 
          $ 20,943       67,075     $ 0.31             $ (12,141 )     66,957     $ (0.18 )
 
           
     
     
             
     
     
 

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BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 39 weeks ended November 1, 2003 and November 2, 2002
(thousands of dollars, except per share data)
(unaudited)

(8)   Segment Information

     The Company’s reportable segments are strategic groups that offer different products. These groups have been aggregated into two segments: bookstores and video-game and entertainment-software stores.

     Bookstores

     This segment includes 646 bookstores under the Barnes & Noble Booksellers, Bookstop and Bookstar trade names which generally offer a comprehensive title base, a café, a children’s section, a music department, a magazine section and a calendar of ongoing events, including author appearances and children’s activities. This segment also includes 231 small format mall-based stores under the B. Dalton Bookseller, Doubleday Book Shops and Scribner’s Bookstore trade names. In addition, this segment includes Barnes & Noble.com, an online retailer of books, music and DVDs/videos. The bookstore segment employs a merchandising strategy that targets the mainstream consumer book market. The Company’s publishing operation, which includes Sterling Publishing Co., Inc. (Sterling) is also included in this segment. Additionally, this segment includes the operations of Calendar Club, a majority-owned subsidiary of the Company. Calendar Club is an operator of seasonal kiosks and seasonal stores.

     Video Game & Entertainment Software Stores

     This segment includes 1,472 Video Game & Entertainment Software stores primarily under the GameStop trade name, a Web site (gamestop.com) and Game Informer magazine. The principal products of these stores are comprised of video-game hardware and software and PC-entertainment software.

     The accounting policies of the segments are the same as those for the Company as a whole. Segment operating profit includes corporate expenses in each operating segment. The Company evaluates the performance of its segments based on operating profit.

     Segment information for the 13 and 39 weeks ended November 1, 2003 and November 2, 2002 is as follows:

                                   
      13 weeks ended   39 weeks ended
     
 
      November 1,   November 2,   November 1,   November 2,
Sales   2003   2002   2003   2002

 
 
 
 
Bookstores (a)
  $ 944,029       844,157       2,785,462       2,590,830  
Video Game & Entertainment Software stores
    326,043       286,728       953,458       832,395  
 
   
     
     
     
 
 
Total
  $ 1,270,072       1,130,885       3,738,920       3,423,225  
 
   
     
     
     
 

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BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 39 weeks ended November 1, 2003 and November 2, 2002
(thousands of dollars, except per share data)
(unaudited)

                                   
      13 weeks ended   39 weeks ended
     
 
      November 1,   November 2,   November 1,   November 2,
Operating profit   2003   2002   2003   2002

 
 
 
 
Bookstores (a) (b)
  $ 13,595       8,367       37,595       13,158  
Video Game & Entertainment Software stores
    17,914       15,982       39,429       34,558  
 
   
     
     
     
 
 
Total
  $ 31,509       24,349       77,024       47,716  
 
   
     
     
     
 

(a)   Includes results of Barnes & Noble.com as of September 15, 2003.
 
(b)   Operating profit for the 39 weeks ended November 2, 2002 is net of a non-cash impairment charge of $25,328.

     A reconciliation of operating profit reported by reportable segments to income (loss) before taxes and minority interest in the consolidated financial statements for the 13 weeks and 39 weeks ended November 1, 2003 and November 2, 2002 is as follows:

                                 
    13 weeks ended   39 weeks ended
   
 
    November 1,   November 2,   November 1,   November 2,
    2003   2002   2003   2002
   
 
 
 
Reportable segments operating profit
  $ 31,509       24,349       77,024       47,716  
Interest, net
    (5,430 )     (5,604 )     (14,783 )     (15,970 )
Equity in net loss of Barnes & Noble.com
    (3,935 )     (6,323 )     (14,311 )     (21,227 )
Other expense
                      (16,498 )
 
   
     
     
     
 
     Consolidated income (loss) before taxes and minority interest
  $ 22,144       12,422       47,930       (5,979 )
 
   
     
     
     
 

(9)   Changes in Intangible Assets and Goodwill

     The following intangible assets were acquired by the Company primarily in connection with the purchase of Sterling in the fourth quarter of fiscal 2002:

                         
    As of November 1, 2003
   
    Gross Carrying   Accumulated        
    Amount   Amortization   Total
   
 
 
Amortized intangible assets
  $ 18,488       (1,350 )   $ 17,138  
Unamortized intangible assets
    29,718             29,718  
 
   
     
     
 
 
  $ 48,206       (1,350 )   $ 46,856  
 
   
     
     
 

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BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 39 weeks ended November 1, 2003 and November 2, 2002
(thousands of dollars, except per share data)
(unaudited)

     Amortized intangible assets consist primarily of author contracts which are being amortized on a straight-line basis over a period of 10 years.

         
Aggregate Amortization Expense:        

       
For the 39 weeks ended November 1, 2003
  $ 1,350  
         
Estimated Amortization Expense:        

       
(12 months ending on or about January 31)
       
2004
  $ 1,849  
2005
  $ 1,849  
2006
  $ 1,849  
2007
  $ 1,885  
2008
  $ 1,849  

       The changes in the carrying amount of goodwill for the 39 weeks ended November 1, 2003 are as follows:
                                 
    Video Game &                        
    Entertainment                        
    Software Stores   Bookstores           Total
   
 
         
Balance as of February 1, 2003
  $ 317,957       72,439             $ 390,396  
Goodwill acquired (See footnote 1)
    2,869       165,037   (a)           167,906  
Acquisition of minority interest
    12,642                     12,642  
Acquisition adjustment
          1,262               1,262  
 
   
     
             
 
Balance as of November 1, 2003
  $ 333,468       238,738             $ 572,206  
 
   
     
             
 

(a)   Relates to the acquisition of an approximate 37 percent economic interest in Barnes & Noble.com and is subject to a reallocation based on an independent valuation of identifiable intangible assets.

     During the first quarter of fiscal 2003, the purchase price related to the acquisition of Sterling was allocated based on the valuation performed by an independent firm. As a result, $48,176 was reallocated from goodwill to the intangible assets noted above. Goodwill as of February 1, 2003 has been adjusted to reflect this reallocation.

(10)   Recent Accounting Pronouncements

     In November 2002, the EITF reached a consensus on Issue 02-16 “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor”, addressing the accounting for cash consideration received by a customer from a vendor, including vendor rebates and refunds. The consensus reached states that consideration received should be presumed to be a reduction of the prices of the vendor’s products or services and should therefore be shown as a reduction of cost of sales in the income statement of the

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BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 39 weeks ended November 1, 2003 and November 2, 2002
(thousands of dollars, except per share data)
(unaudited)

customer. The presumption could be overcome if the vendor receives an identifiable benefit in exchange for the consideration or the consideration represents a reimbursement of a specific incremental identifiable cost incurred by the customer in selling the vendor’s product or service. If one of these conditions is met, the cash consideration should be characterized as revenues or a reduction of such costs, as applicable, in the income statement of the customer. The consensus reached also concludes that rebates or refunds based on the customer achieving a specified level of purchases should be recognized as a reduction of cost of sales based on a systematic and rational allocation of the consideration to be received relative to the transactions that mark the progress of the customer toward earning the rebate or refund provided the amounts are probable and reasonably estimable. EITF Issue 02-16 is effective for arrangements entered into after December 31, 2002. Implementation of this standard did not have a material effect on the Company’s financial condition or results of operations.

(11)   Subsequent Events

     On November 7, 2003, the Company announced that it proposed to take Barnes & Noble.com private through a merger. In the merger, all shareholders of Barnes & Noble.com (other than B&N.com Holding Corp., a wholly owned subsidiary of the Company) would receive $2.50 in cash for each share of Barnes & Noble.com that they own. At this price, the Company estimates that it would be paying in excess of the approximate net after-tax price per share that it paid to Bertelsmann in a combination of cash and notes on September 15, 2003 for an approximate 37 percent economic interest in Barnes & Noble.com. The aggregate consideration for the outstanding Barnes & Noble.com shares (including shares outstanding following exercise of “in-the-money” options) would be approximately $115,000. As a result of the merger, Barnes & Noble.com would become a wholly owned subsidiary of the Company.

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Report of Independent Certified Public Accountants

The Board of Directors
Barnes & Noble, Inc.

We have reviewed the condensed consolidated balance sheet of Barnes & Noble, Inc. and Subsidiaries as of November 1, 2003 and November 2, 2002, and the related consolidated statements of operations for the 13 week and 39 week periods ended November 1, 2003 and November 2, 2002, changes in shareholders’ equity for the 39 week period ended November 1, 2003, and cash flows for the 39 week periods ended November 1, 2003 and November 2, 2002 included in the accompanying Securities and Exchange Commission Form 10-Q for the period ended November 1, 2003. These financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Barnes & Noble, Inc. and Subsidiaries as of February 1, 2003, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for the year then ended included in the Company’s Form 10-K for the fiscal year ended February 1, 2003; and in our report dated March 14, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of February 1, 2003 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ BDO Seidman, LLP


BDO Seidman, LLP
New York, New York

November 20, 2003

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

Securities and Exchange Commission Financial Reporting Release No. 60 requests all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Barnes & Noble, Inc. and its subsidiaries (collectively, the Company) do 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.

Impairment of Long-Lived Assets and Amortized Intangible Assets. The Company’s long-lived assets include property and equipment and amortized intangibles. At November 1, 2003, the Company had $663.0 million of property and equipment, net of accumulated depreciation and $17.1 million of amortized intangible assets, net of amortization, accounting for approximately 19.2% 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 in accordance with Statement of Financial Accounting Standards (SFAS) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. In valuation, assets held and used are measured by a comparison of the carrying amount of an asset to undiscounted pre-tax future net cash flows. Future events could cause the Company to conclude that impairment indicators exist and that long-lived assets may be impaired. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations.

Impairment of Goodwill and Unamortized Intangible Assets. At November 1, 2003, the Company had $572.2 million of goodwill and $29.7 million of unamortized intangible assets, accounting for approximately 17.0% of the Company’s total assets. The Company performs a two-step process for impairment testing of goodwill and unamortized intangible assets as required by SFAS No. 142, “Goodwill and Other Intangible Assets”. 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. Unamortized intangible assets were acquired in January 2003 in connection with the acquisition of Sterling Publishing Co., Inc. (Sterling Publishing). The Company completed its annual impairment test on the goodwill in November 2002 and deemed that no impairment charge was necessary. The Company has noted no subsequent indicators of impairment. Changes in market conditions, among other factors, could have a material impact on these estimates.

Closed Store Expenses. Upon a formal decision to close or relocate a store, the Company charges unrecoverable costs to expense when incurred. Such costs include the net book value of abandoned fixtures and leasehold improvements and, when a store is closed, a provision for future lease obligations, net of sublease recoveries. Costs associated with store closings of $3.9 million and $4.9 million during the 39 weeks ended November 1, 2003 and November 2, 2002, respectively, are included in selling and administrative expenses in the accompanying consolidated statements of operations.

Recent Events

On September 15, 2003, the Company completed its acquisition of all of Bertlesmann AG’s (Bertelsmann) interest in barnesandnoble.com inc. (Barnes & Noble.com). The purchase price was $165.4 million (including acquisition related costs) in a combination of cash and notes, equivalent to $2.80 per share or membership unit in

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barnesandnoble.com llc. The note issued to Bertelsmann in the amount of $82.0 million is included in other long-term liabilities on the balance sheet. As a result of the acquisition, the Company increased its economic interest in Barnes & Noble.com to approximately 75%. The acquisition was accounted for by the purchase method of accounting and, accordingly, the results of operations for the period subsequent to the acquisition are included in the consolidated financial statements. The excess of purchase price over the tangible net assets acquired, in the amount of $165.0 million has been initially recorded as goodwill. Any amounts remaining in goodwill or unamortizable intangible assets will be tested annually for impairment in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”. Prior to the acquisition, the Company had an approximate 38% economic interest in Barnes & Noble.com which it accounted for under the equity method of accounting. The Company will engage a firm to perform an independent allocation of the purchase price to any other acquired intangible assets.

Subsequent Events

On November 7, 2003, the Company announced that it proposed to take Barnes & Noble.com private through a merger. In the merger, all shareholders of Barnes & Noble.com (other than B&N.com Holding Corp., a wholly owned subsidiary of the Company) would receive $2.50 in cash for each share of Barnes & Noble.com that they own. At this price, the Company estimates that it would be paying in excess of the approximate net after-tax price per share that it paid to Bertelsmann in a combination of cash and notes on September 15, 2003 for a 37% interest in Barnes & Noble.com. The aggregate consideration for the outstanding Barnes & Noble.com shares (including shares outstanding following exercise of “in-the-money” options) would be approximately $115.0 million. As a result of the merger, Barnes & Noble.com would become a wholly owned subsidiary of the Company.

Liquidity and Capital Resources

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

The Company’s cash and cash equivalents were $136.7 million as of November 1, 2003 compared with $142.6 million as of November 2, 2002.

Merchandise inventories increased $92.4 million, or 5.1%, to $1,920.3 million as of November 1, 2003, compared with $1,827.9 million as of November 2, 2002. The increase was primarily attributable to $48.0 million due to the inclusion of Barnes & Noble.com, $20.6 million due to the inclusion of Sterling Publishing and a $41.3 million increase in GameStop Corp. (GameStop or Video Game & Entertainment Software) inventory that supported the opening of 304 GameStop stores over the last twelve months. These increases were offset by reduced inventories in the bookstores due to improved inventory management that was achieved during a 7.0% increase in Barnes & Noble bookstore sales and the opening of 39 Barnes & Noble stores over the last twelve months.

The Company’s investing activities consist principally of capital expenditures for new store construction, system enhancements and store relocations/remodels. Capital expenditures totaled $114.3 million and $135.4 million during the 39 weeks ended November 1, 2003 and November 2, 2002, respectively.

In fiscal 2001, the Company issued $300.0 million, 5.25% convertible subordinated notes due March 15, 2009. The notes are convertible into the Company’s common stock at a conversion price of $32.512 per share.

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In the second quarter of fiscal 2003, the Company exercised its option to extend $490.0 million of its $500.0 million senior revolving credit facility for one additional year, through May 2006.

Total debt decreased 29.8% to $311.6 million as of November 1, 2003 from $443.6 million as of November 2, 2002. Average combined borrowings under the Company’s senior credit facility and subordinated notes were $316.1 million and $372.2 million during the 39 weeks ended November 1, 2003 and November 2, 2002, respectively. The ratio of debt to equity decreased to 0.28:1.00 as of November 1, 2003 compared with 0.48:1.00 as of November 2, 2002.

Based upon the Company’s current operating levels, management believes net cash flows from operating activities and the capacity under its $500.0 million senior credit facility will be sufficient to meet the Company’s working capital and debt service requirements for at least the next twelve months.

The Company did not declare or pay any cash dividends during the 39-week periods ended November 1, 2003 and November 2, 2002.

Seasonality

The Company’s business, like that of many retailers, is seasonal, with the major portion of sales and operating profit realized during the quarter which includes the Holiday selling season.

Results of Operations

13 weeks ended November 1, 2003 compared with the 13 weeks ended November 2, 2002

Sales

During the 13 weeks ended November 1, 2003, the Company’s sales increased $139.2 million, or 12.3%, to $1,270.1 million from $1,130.9 million during the 13 weeks ended November 2, 2002. This increase was primarily attributable to a $75.4 million increase in Barnes & Noble bookstore sales, an increase of $39.3 million from GameStop stores and the inclusion of $17.8 million in sales due to the consolidation of Barnes & Noble.com’s results from September 15, 2003.

During the third quarter, Barnes & Noble bookstore sales increased 9.6% to $859.4 million from $784.0 million during the same period a year ago and accounted for 67.7% of total Company sales or 91.0% of total bookstore sales. The 9.6% increase in Barnes & Noble bookstore sales was attributable to an increase in comparable store sales of 4.5% coupled with the opening of 39 new stores since November 2, 2002, which contributed to a 5.4% increase in square footage.

During the third quarter, B. Dalton sales declined 14.9% and represented 3.5% of total Company sales. The decrease was primarily a result of 50 store closings and a 17.4% reduction in its square footage since November 2, 2002. In addition, B. Dalton’s same store sales decreased 1.3% during the third quarter.

GameStop sales during the third quarter increased 13.7%. This increase in sales was primarily attributable to the 304 new GameStop stores opened since November 2, 2002, partially offset by a comparable store sales decline of 1.9% during the third quarter of fiscal 2003.

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During the third quarter, the Company opened 13 Barnes & Noble stores and closed one, bringing its total number of Barnes & Noble bookstores to 646 with 15.8 million square feet. The Company closed three B. Dalton stores, ending the period with 231 B. Dalton stores and 0.9 million square feet. The Company opened 83 GameStop stores and closed four, bringing its total to 1,472 stores with 2.2 million square feet. As of November 1, 2003, the Company operated 2,349 stores in the fifty states, the District of Columbia, Puerto Rico, Guam and Ireland.

Cost of Sales and Occupancy

During the 13 weeks ended November 1, 2003, cost of sales and occupancy increased $85.1 million, or 10.2%, to $921.8 million from $836.7 million during the 13 weeks ended November 2, 2002. As a percentage of sales, cost of sales and occupancy decreased to 72.6% from 74.0% during the same period one year ago. This decrease was primarily attributable to higher gross margins in the Video Game & Entertainment Software segment due to a favorable sales mix coupled with higher sales leveraging fixed occupancy costs in the bookstore segment.

Selling and Administrative Expenses

Selling and administrative expenses increased $45.3 million, or 19.9%, to $273.1 million during the 13 weeks ended November 1, 2003 from $227.8 million during the 13 weeks ended November 2, 2002. During the third quarter, selling and administrative expenses increased as a percentage of sales to 21.5% from 20.1% during the prior year period. This increase was primarily due to the deleveraging of expenses in the Video Game & Entertainment Software segment as well as increased costs in the bookstore segment in preparation for the holiday season.

Depreciation and Amortization

During the third quarter, depreciation and amortization increased $2.5 million, or 6.6%, to $40.5 million from $38.0 million during the same period last year. The increase was primarily the result of the increase in depreciation related to 304 new GameStop stores opened since November 2, 2002 and the inclusion of Barnes & Noble.com as of September 15, 2003.

Pre-opening Expenses

Pre-opening expenses decreased to $3.2 million during the 13 weeks ended November 1, 2003 from $4.1 million for the 13 weeks ended November 2, 2002. The decrease in pre-opening expenses was primarily the result of opening 13 new Barnes & Noble bookstores during the 13 weeks ended November 1, 2003, compared with 18 new Barnes & Noble bookstores during the 13 weeks ended November 2, 2002. This decrease was partially offset by the pre-opening expenses related to the opening of 83 new GameStop stores during the 13 weeks ended November 1, 2003 compared with 63 new GameStop stores during the 13 weeks ended November 2, 2002.

Operating Profit

The Company’s consolidated operating profit increased to $31.5 million during the 13 weeks ended November 1, 2003 from $24.3 million during the 13 weeks ended November 2, 2002.

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Interest Expense, Net and Amortization of Deferred Financing Fees

Net interest expense and amortization of deferred financing fees decreased to $5.4 million during the 13 weeks ended November 1, 2003 from $5.6 million during the 13 weeks ended November 2, 2002. The decrease was primarily the result of reduced average borrowings under the Company’s senior credit facility due to effective working capital management.

Income Taxes

Income taxes during the 13 weeks ended November 1, 2003 were $8.9 million compared with income taxes of $5.0 million during the 13 weeks ended November 2, 2002. Taxes were based upon management’s estimate of the Company’s annualized effective tax rates. The Company’s effective tax rate was 40.25% for the third quarter of fiscal 2003 and fiscal 2002.

Minority Interest

During the third quarter of fiscal 2003, minority interest was $3.1 million compared with $3.6 million during the third quarter of fiscal 2002.

Net Income

As a result of the factors discussed above, the Company reported consolidated net income of $10.2 million (or $0.14 per diluted share) during the 13 weeks ended November 1, 2003, compared with net income of $3.8 million (or $0.05 per diluted share) during the 13 weeks ended November 2, 2002. Components of earnings per share were as follows:

                   
      13 weeks ended
     
      November 1,   November 2,
      2003   2002
     
 
Retail Earnings Per Share
               
 
Retail EPS
  $ 0.19       0.11  
 
Share of net losses of Barnes & Noble.com
  $ (0.05 )     (0.06 )
 
   
     
 
Consolidated EPS
  $ 0.14       0.05  
 
   
     
 

Results of Operations

39 weeks ended November 1, 2003 compared with the 39 weeks ended November 2, 2002

Sales

During the 39 weeks ended November 1, 2003, the Company’s sales increased $315.7 million, or 9.2%, to $3,738.9 million from $3,423.2 million during the 39 weeks ended November 2, 2002. This increase was primarily attributable to a $169.0 million increase in Barnes & Noble bookstore sales and an increase of $121.1 million from Video Game & Entertainment Software stores.

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During the 39 weeks ended November 1, 2003, Barnes & Noble bookstores rose 7.0% to $2,575.5 from $2,406.5 million during the same period a year ago and accounted for 68.9% of total Company sales or 92.5% of total bookstore sales. The 7.0% increase in Barnes & Noble bookstore sales was primarily attributable to the opening of 39 new stores opened since November 2, 2002 which contributed to a 5.4% increase in square footage. Barnes & Noble bookstore comparable store sales were up 1.6% for the 39 weeks ended November 1, 2003 compared to the same period a year ago.

B. Dalton sales declined 17.5% and represented 3.8% of total Company sales for the 39 weeks ended November 1, 2003. The decrease was primarily a result of 50 store closings and a 17.4% reduction in its square footage since November 2, 2002. In addition, B. Dalton’s comparable store sales declined 5.2% during the 39 weeks ended November 1, 2003 compared to the same period a year ago.

GameStop sales during the 39 weeks ended November 1, 2003 increased 14.5%. This increase in sales was primarily attributable to the sales from the 304 new GameStop stores opened since November 2, 2002. GameStop’s comparable store sales declined 1.1% during the 39 weeks ended November 1, 2003 compared to the same period a year ago.

During the 39 weeks ended November 1, 2003, the Company opened 26 Barnes & Noble bookstores and closed eight, bringing its total number of Barnes & Noble bookstores to 646 with 15.8 million square feet. The Company closed 27 B. Dalton stores, ending the period with 231 B. Dalton stores and 0.9 million square feet. The Company opened 257 GameStop stores and closed 16, bringing its total to 1,472 stores with 2.2 million square feet. As of November 1, 2003, the Company operated 2,349 stores in the fifty states, the District of Columbia, Puerto Rico, Guam and Ireland.

Cost of Sales and Occupancy

During the 39 weeks ended November 1, 2003, cost of sales and occupancy increased $213.3 million, or 8.4%, to $2,753.1 million from $2,539.7 million during the 39 weeks ended November 2, 2002. As a percentage of sales, cost of sales and occupancy decreased to 73.6% from 74.2% during the same period one year ago. This decrease was primarily attributable to higher gross margins in the Video Game & Entertainment Software segment due to a favorable sales mix.

Selling and Administrative Expenses

Selling and administrative expenses increased $90.9 million, or 13.1%, to $782.9 million during the 39 weeks ended November 1, 2003 from $692.0 million during the 39 weeks ended November 2, 2002. As a percentage of sales, selling and administrative expenses increased to 20.9% from 20.2% during the prior year period. This increase was primarily due to the deleveraging of expenses in the Video Game & Entertainment Software segment as well as increased costs in the bookstore segment in preparation for the holiday season.

Depreciation and Amortization

During the 39 weeks ended November 1, 2003, depreciation and amortization increased $8.4 million, or 7.6%, to $118.8 million from $110.4 million during the same period last year. The increase was primarily the result of the increase in depreciation related to the 39 new Barnes & Noble bookstores and 304 new GameStop stores opened since November 2, 2002.

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Pre-opening Expenses

Pre-opening expenses decreased to $7.1 million during the 39 weeks ended November 1, 2003 from $8.1 million for the 39 weeks ended November 2, 2002. The decrease in pre-opening expenses was primarily the result of opening 26 new Barnes & Noble bookstores during the 39 weeks ended November 1, 2003, compared with 34 new Barnes & Noble bookstores during the 39 weeks ended November 2, 2002. This decrease was partially offset by the pre-opening expenses related to the opening of 257 new GameStop stores during the 39 weeks ended November 1, 2003 compared with 163 new GameStop stores during the 39 weeks ended November 2, 2002.

Impairment Charge

During the first quarter of fiscal 2002, the Company deemed the decline in value in its available-for-sale securities in Gemstar-TV Guide International, Inc. (Gemstar) and Indigo Books & Music Inc. (Indigo) to be other than temporary. The investments had been carried at fair market value with unrealized gains and losses included in shareholders’ equity. Events such as Gemstar’s largest shareholder taking an impairment charge for its investment, the precipitous decline in the stock price subsequent to the abrupt resignation of one of its senior executives, the questioning of aggressive revenue recognition policies and the filing of a class action lawsuit against Gemstar, were among the items which led to management’s decision to record an impairment for its investment in Gemstar of nearly $24.0 million (before taxes). The Company’s decision to record an impairment charge for its investment in Indigo was based on a review of Indigo’s financial condition and historical share trading data. As a result of these decisions, the Company recorded a non-cash impairment charge to operating earnings of $25.3 million ($14.9 million after taxes) to reclassify the accumulated unrealized losses and to write down the investments to their current fair market value at the close of business on May 4, 2002. The investment in Gemstar was sold in the second quarter of fiscal 2002.

Operating Profit

The Company’s consolidated operating profit increased to $77.0 million during the 39 weeks ended November 1, 2003 from $47.7 million during the 39 weeks ended November 2, 2002. Operating profit increased $4.0 million during the 39 weeks ended November 1, 2003 before the effect of the $25.3 million impairment charge during the first quarter of fiscal 2002.

Interest Expense, Net and Amortization of Deferred Financing Fees

Net interest expense and amortization of deferred financing fees decreased to $14.8 million during the 39 weeks ended November 1, 2003 from $16.0 million during the 39 weeks ended November 2, 2002. The decrease was primarily the result of reduced average borrowings under the Company’s senior credit facility due to effective working capital management.

Other Expense, Net

In the second quarter of fiscal 2002, the Company determined that a decrease in value in certain of its equity investments occurred which was other than temporary. As a result, other expense of $16.5 million for the 39 weeks ended November 2, 2002 included the recognition of losses of $11.5 million in excess of what would otherwise have been recognized by application of the equity method in accordance with Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” The $16.5

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million loss in other expense was primarily comprised of $8.5 million attributable to iUniverse.com, $5.1 million attributable to BOOK® magazine and $2.4 million attributable to enews, inc.

Income Taxes

Income tax expense (benefit) during the 39 weeks ended November 1, 2003 was $19.3 million compared with ($2.4) million during the 39 weeks ended November 2, 2002. Taxes were based upon management’s estimate of the Company’s annualized effective tax rates. The Company’s effective tax rate was 40.25% for the 39 weeks ended November 1, 2003 and November 2, 2002.

Minority Interest

During the 39 weeks ended November 1, 2003, minority interest was $6.8 million compared with $7.5 million during the 39 weeks ended November 2, 2002.

Net Income (Loss)

As a result of the factors discussed above, the Company reported consolidated net income of $21.8 million (or $0.31 per diluted share) during the 39 weeks ended November 1, 2003, compared with a net loss of ($11.1) million (or ($0.18) per share) during the 39 weeks ended November 2, 2002. Components of earnings per share were as follows:

                   
      39 weeks ended
     
      November 1,   November 2,
      2003   2002
     
 
Retail Earnings Per Share
               
Retail EPS
  $ 0.46       0.39  
EPS Impact of Investing Activities
               
 
Share of net losses of Barnes & Noble.com
  $ (0.15 )     (0.19 )
 
Share of net losses from other investments
          (0.15 )
 
   
     
 
Total Investing Activities
  $ (0.15 )     (0.34 )
Other Adjustments
               
 
Impairment charge
  $       (0.23 )
 
   
     
 
Consolidated EPS
  $ 0.31       (0.18 )
 
   
     
 

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Disclosure Regarding Forward-Looking Statements

     This report may contain certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to the Company that are based on the beliefs of the management of the Company as well as assumptions made by and information currently available to the management of the Company. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions, as they relate to the Company or the management of the Company, identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events, the outcome of which is subject to certain risks, including among others general economic and market conditions, decreased consumer demand for the Company’s products, possible disruptions in the Company’s computer or telephone systems, possible work stoppages or increases in labor costs, possible increases in shipping rates or interruptions in shipping service, effects of competition, possible disruptions or delays in the opening of new stores or the inability to obtain suitable sites for new stores, higher-than-anticipated store closing or relocation costs, higher interest rates, the performance of the Company’s online initiatives such as Barnes & Noble.com, the performance and successful integration of acquired businesses, the success of the Company’s strategic investments, unanticipated increases in merchandise or occupancy costs, unanticipated adverse litigation results or effects, and other factors which may be outside of the Company’s control. In addition, the video-game market has historically been cyclical in nature and dependent upon the introduction of new generation systems and related interactive software. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described as anticipated, believed, estimated, expected, intended or planned. Subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this paragraph.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

     The Company’s exposure to market risks results from fluctuations in interest rates. There have been no material changes in this Item since the Company’s last Annual Report on Form 10-K for the year ended February 1, 2003.

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Item 4: Controls and Procedures

(a) Disclosure Controls and Procedures.

     As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

(b) Internal Control Over Financial Reporting.

     There was no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

          There have been no material developments with respect to previously reported legal proceedings, except as follows:

          In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace Kuralt, filed a lawsuit in the United States District Court for the Southern District of New York against the Company, Borders Group, Inc. and others, alleging violation of the Robinson-Patman Act and other federal law, New York statutes governing trade practices and common law. In March 2000, a Second Amended Complaint was served on the Company and other defendants alleging a single cause of action for violations of the Robinson-Patman Act. The Second Amended Complaint claims that The Intimate Bookshop, Inc. has suffered damages of $11,250,000 or more and requests treble damages, costs, attorneys’ fees and interest, as well as declaratory and injunctive relief prohibiting the defendants from violating the Robinson-Patman Act. The Company served an Answer in April 2000 denying the material allegations of the Second Amended Complaint and asserting various affirmative defenses. On January 11, 2002, the Company and the other defendants filed a motion for summary judgment. A hearing on that motion was held on March 22, 2002. On September 30, 2003, the motion for summary judgment was granted and all claims against the Company were dismissed. On October 29, 2003, the plaintiff filed a Notice of Appeal. The Company intends to vigorously defend this action.

          On or about November 7, 2003, November 11, 2003 and November 12, 2003, twelve substantially similar putative class action lawsuits were filed against the Company and Barnes & Noble.com, and its directors in the Court of Chancery of the State of Delaware in and for New Castle County arising out of the Company’s proposal to acquire all of Barnes & Noble.com’s outstanding shares at a price of $2.50 per share in cash. These actions purport to be brought on behalf of all of Barnes & Noble.com’s stockholders excluding the defendants and their affiliates.

          The complaints in these actions generally allege that (a) the Company and the directors of Barnes & Noble.com breached their fiduciary duties to the class, (b) the consideration offered by the Company is inadequate and constitutes unfair dealing and (c) that the Company, as controlling stockholder of Barnes & Noble.com, breached its duty to the class by acting to further its own interests at the expense of the class. The complaints seek to enjoin the proposal or, in the alternative, damages in an unspecified amount and recission in the event a merger occurs pursuant to the proposal.

          The Company believes that these lawsuits are without merit and intends to vigorously defend the actions.

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Item 6. Exhibits and Reports on Form 8-K

       (a) Exhibits filed with this Form 10-Q:
                 
          31.1     Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
                 
          31.2     Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
                 
          32.1     Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
                 
          32.2     Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

       (b) Reports on Form 8-K:
         
        On August 25, 2003, the Company furnished a Report on Form 8-K pursuant to Items 7 and 12 of such Form announcing second quarter 2003 financial results.
         
        Subsequent to the end of the quarter, on November 7, 2003, the Company filed a Report on Form 8-K pursuant to Items 5 and 7 of such Form announcing the Company’s proposal to take Barnes & Noble.com private.
         
        Subsequent to the end of the quarter, on November 21, 2003, the Company furnished a Report on Form 8-K pursuant to Items 7 and 12 of such Form announcing third quarter 2003 financial results.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BARNES & NOBLE, INC.


(Registrant)
         
By:   /s/ Joseph J. Lombardi    
   
   
Joseph J. Lombardi    
Chief Financial Officer    
(principal financial and accounting officer)    

December 12, 2003

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EXHIBIT INDEX

     
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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