FORM 10-Q
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 May 1, 2004

OR

     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

     For the transition period from            to           

Commission File Number: 1-12302

BARNES & NOBLE, INC.


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

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

 
 
 
(Address of Principal Executive Offices)   (Zip Code)

(212) 633-3300


(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 May 31, 2004: 68,949,566.

 


BARNES & NOBLE, INC. AND SUBSIDIARIES

May 1, 2004

Index to Form 10-Q

             
        Page No.
  FINANCIAL INFORMATION        
  Financial Statements        
  Consolidated Statements of Operations - For the 13 weeks ended May 1, 2004 and May 3, 2003     3  
  Consolidated Balance Sheets – May 1, 2004, May 3, 2003 and January 31, 2004     4  
  Consolidated Statement of Changes in Shareholders’ Equity – For the 13 weeks ended May 1, 2004     6  
  Consolidated Statements of Cash Flows - For the 13 weeks ended May 1, 2004 and May 3, 2003     7  
  Notes to Consolidated Financial Statements     8  
  Report of Independent Certified Public Accountants     16  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     17  
  Quantitative and Qualitative Disclosures About Market Risk     22  
  Controls and Procedures     22  
  OTHER INFORMATION        
  Legal Proceedings     23  
  Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities     23  
  Exhibits and Reports on Form 8-K     24  
  SIGNATURES     25  
  Exhibit Index     E – 1  
 AMENDED AND RESTATED BYLAWS
 2004 INCENTIVE PLAN
 2004 EXECUTIVE PERFORMANCE PLAN
 CERTIFICATION
 CERTIFICATION
 CERTIFICATION
 CERTIFICATION

 


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
    May 1, 2004
  May 3, 2003
Sales
  $ 1,452,845       1,185,605  
Cost of sales and occupancy
    1,067,978       884,960  
 
   
 
     
 
 
Gross profit
    384,867       300,645  
 
   
 
     
 
 
Selling and administrative expenses
    309,274       250,673  
Depreciation and amortization
    44,717       39,040  
Pre-opening expenses
    2,631       1,502  
 
   
 
     
 
 
Operating profit
    28,245       9,430  
Interest (net of interest income of $764 and $554, respectively) and amortization of deferred financing fees
    (4,327 )     (4,643 )
Equity in net loss of Barnes & Noble.com
          (4,972 )
 
   
 
     
 
 
Income (loss) before income taxes and minority interest
    23,918       (185 )
Income taxes
    9,541       (75 )
 
   
 
     
 
 
Income (loss) before minority interest
    14,377       (110 )
Minority interest
    (1,923 )     (1,916 )
 
   
 
     
 
 
Net income (loss)
  $ 12,454       (2,026 )
 
   
 
     
 
 
Income (loss) per common share:
               
Basic
  $ 0.18       (0.03 )
Diluted
  $ 0.17       (0.03 )
Weighted average common shares outstanding
               
Basic
    68,146,000       64,867,000  
Diluted
    70,717,000       64,867,000  

See accompanying notes to consolidated financial statements.

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BARNES & NOBLE, INC. AND SUBSIDIARIES

Consolidated Balance Sheets
(thousands of dollars, except per share data)
                         
    May 1,   May 3,   January 31,
    2004
  2003
  2004
    (unaudited)        
ASSETS
                       
Current assets:
                       
Cash and cash equivalents
  $ 354,163       195,987       487,200  
Receivables, net
    52,151       64,014       60,529  
Barnes & Noble.com receivable
          35,920        
Merchandise inventories
    1,525,834       1,418,377       1,526,156  
Prepaid expenses and other current assets
    117,712       103,539       119,604  
 
   
 
     
 
     
 
 
Total current assets
    2,049,860       1,817,837       2,193,489  
 
   
 
     
 
     
 
 
Property and equipment:
                       
Land and land improvements
    15,276       3,247       3,247  
Buildings and leasehold improvements
    529,645       493,954       533,272  
Fixtures and equipment
    1,163,141       949,266       1,141,317  
 
   
 
     
 
     
 
 
 
    1,708,062       1,446,467       1,677,836  
Less accumulated depreciation and amortization
    1,022,677       842,580       991,187  
 
   
 
     
 
     
 
 
Net property and equipment
    685,385       603,887       686,649  
 
   
 
     
 
     
 
 
Goodwill
    509,244       391,704       509,244  
Intangible assets, net
    93,158       47,713       94,574  
Investment in Barnes & Noble.com
          19,782        
Other noncurrent assets
    22,663       23,009       23,338  
 
   
 
     
 
     
 
 
Total assets
  $ 3,360,310       2,903,932       3,507,294  
 
   
 
     
 
     
 
 

(Continued)

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

                         
    May 1,   May 3,   January 31,
    2004
  2003
  2004
    (unaudited)        
LIABILITIES AND SHAREHOLDERS’ EQUITY
                       
Current liabilities:
                       
Accounts payable
  $ 792,198       661,556       858,068  
Accrued liabilities
    480,558       423,537       583,773  
 
   
 
     
 
     
 
 
Total current liabilities
    1,272,756       1,085,093       1,441,841  
 
   
 
     
 
     
 
 
Long-term debt
    300,000       357,000       300,000  
Deferred income taxes
    169,947       119,845       170,066  
Other long-term liabilities
    108,493       115,142       108,441  
Minority interest
    230,934       202,979       227,287  
Shareholders’ equity:
                       
Common stock; $.001 par value; 300,000,000 shares authorized; 77,213,364, 73,470,067 and 76,854,856 shares issued, respectively
    77       73       77  
Additional paid-in capital
    926,944       832,313       914,319  
Accumulated other comprehensive loss
    (8,775 )     (11,032 )     (8,579 )
Retained earnings
    555,957       389,624       543,503  
Treasury stock, at cost, 9,007,700, 8,807,700 and 8,807,700 shares, respectively
    (196,023 )     (187,105 )     (189,661 )
 
   
 
     
 
     
 
 
Total shareholders’ equity
    1,278,180       1,023,873       1,259,659  
 
   
 
     
 
     
 
 
Commitments and contingencies
                 
 
   
 
     
 
     
 
 
Total liabilities and shareholders’ equity
  $ 3,360,310       2,903,932       3,507,294  
 
   
 
     
 
     
 
 

See accompanying notes to consolidated financial statements.

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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 January 31, 2004
  $ 77     $ 914,319     $ (8,579 )   $ 543,503     $ (189,661 )   $ 1,259,659  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Comprehensive income:
                                               
Net income
                      12,454                
Foreign currency translation
                (177)                      
Other comprehensive loss:
                                               
Unrealized loss on available-for-sale securities (net of deferred tax of $13)
                (19 )                    
Total comprehensive income
                                            12,258  
Exercise of 358,508 common stock options (including tax benefit of $2,075)
          8,689                         8,689  
Exercise of common stock options of subsidiary (including tax benefit of $1,603)
          3,936                         3,936  
Treasury stock acquired, 200,000 shares
                            (6,362 )     (6,362 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Balance at May 1, 2004
  $ 77     $ 926,944     $ (8,775 )   $ 555,957     $ (196,023 )   $ 1,278,180  
 
   
 
     
 
     
 
     
 
     
 
     
 
 

See accompanying notes to consolidated financial statements.

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BARNES & NOBLE, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
(thousands of dollars)
(unaudited)
                 
    13 weeks ended
    May 1, 2004
  May 3, 2003
Cash flows from operating activities:
               
Net income (loss)
  $ 12,454       (2,026 )
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
               
Depreciation and amortization (including amortization of deferred financing fees)
    45,475       39,739  
Minority interest
    1,923       1,916  
Loss on disposal of property and equipment
    56       799  
Increase in other long-term liabilities for scheduled rent increases in long-term leases
    52       326  
Equity in net loss of Barnes & Noble.com
          4,972  
Deferred taxes
    (106 )      
Changes in operating assets and liabilities, net
    (152,254 )     (146,354 )
 
   
 
     
 
 
Net cash flows from operating activities
    (92,400 )     (100,628 )
 
   
 
     
 
 
Cash flows from investing activities:
               
Purchases of property and equipment
    (45,380 )     (23,461 )
Purchase of investments
          (1,474 )
Net (increase) decrease in other noncurrent assets
    (115 )     745  
 
   
 
     
 
 
Net cash flows from investing activities
    (45,495 )     (24,190 )
 
   
 
     
 
 
Cash flows from financing activities:
               
Proceeds from exercise of common stock options
    11,220       1,877  
Purchase of treasury stock through repurchase program
    (6,362 )     (5,714 )
Net increase in revolving credit facility
          57,000  
 
   
 
     
 
 
Net cash flows from financing activities
    4,858       53,163  
 
   
 
     
 
 
Net decrease in cash and cash equivalents
    (133,037 )     (71,655 )
Cash and cash equivalents at beginning of period
    487,200       267,642  
 
   
 
     
 
 
Cash and cash equivalents at end of period
  $ 354,163       195,987  
 
   
 
     
 
 
Changes in operating assets and liabilities, net:
               
Receivables, net
  $ 8,378       22,188  
Merchandise inventories
    322       (22,505 )
Prepaid expenses and other current assets
    1,892       (2,041 )
Accounts payable and accrued liabilities
    (162,846 )     (143,996 )
 
   
 
     
 
 
Changes in operating assets and liabilities, net
  $ (152,254 )     (146,354 )
 
   
 
     
 
 
Supplemental cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 8,075       8,822  
Income taxes
  $ 37,888       54,688  

See accompanying notes to consolidated financial statements.

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BARNES & NOBLE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
For the 13 weeks ended May 1, 2004 and May 3, 2003
(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 May 1, 2004 and the results of its operations and its cash flows for the 13 weeks then ended. These consolidated financial statements are condensed and therefore do not include all of the information and footnotes required by generally accepted accounting principles. The consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the 52 weeks ended January 31, 2004 (fiscal 2003). The Company follows the same accounting policies in preparation of interim reports.

Due to the seasonal nature of the business, the results of operations for the 13 weeks ended May 1, 2004 are not indicative of the results to be expected for the 52 weeks ending January 29, 2005 (fiscal 2004).

(1) Barnes & Noble.com Acquisition

     On September 15, 2003, the Company completed its acquisition of all of Bertelsmann AG’s (Bertelsmann) interest in barnesandnoble.com inc. (bn.com) and barnesandnoble.com llc (Barnes & Noble.com). The purchase price paid by the Company was $165,406 (including acquisition related costs) in a combination of cash and a note, equivalent to $2.80 per share in bn.com or membership unit in Barnes & Noble.com. The note issued to Bertelsmann in the amount of $82,000 was paid in the fourth quarter of fiscal 2003. As a result of the acquisition, the Company increased its economic interest in Barnes & Noble.com to approximately 75 percent. 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.

     Based upon a preliminary assessment of the fair values, the allocation of the purchase price to the proportionate amount of assets acquired and liabilities assumed was as follows:

         
Current assets
  $ 35,370  
Hardware and software
    23,600  
Other tangible assets
    6,973  
Customer list and relationships
    4,800  
Trade name
    44,700  
Goodwill
    93,372  
 
   
 
 
Total assets acquired
    208,815  
Liabilities assumed
    43,409  
 
   
 
 
Total purchase price
  $ 165,406  
 
   
 
 

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BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 13 weeks ended May 1, 2004 and May 3, 2003
(thousands of dollars, except per share data)
(unaudited)

     Hardware and software have been assigned a preliminary estimated useful life of four years. The customer list and relationships intangible asset has been assigned a preliminary estimated useful life of four years to be amortized on an accelerated basis based on estimated usage where a substantial portion of the asset will be amortized in the first year. The above preliminary purchase price allocation is subject to revision as more detailed analysis is completed and additional information on the fair value of assets and liabilities of Barnes & Noble.com becomes available. The final allocation to goodwill and the trade name (which is considered to have an indefinite life and will not be amortized) will be tested at least annually for impairment in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”.

     The following table summarizes pro forma results for the 13 weeks ended May 3, 2003, as if the Company had acquired Bertelsmann’s interest in Barnes & Noble.com (resulting in a 75 percent economic interest) and recorded the above noted preliminary allocations of purchase price on the first day of fiscal 2003:

         
    13 weeks ended
    May 3, 2003
Sales
    1,291,569  
Net loss
    (6,839 )
Loss per common share
       
Basic
    (0.11 )
Diluted
    (0.11 )

     The information has been prepared for comparative purposes only and does not purport to be indicative of the results of operations which actually would have occurred had the acquisition taken place on the date indicated, or which may result in the future. The Company’s management reviews these pro forma results internally to evaluate the Company’s performance and manage its operations. In addition, since the Company will consolidate bn.com on a going forward basis, the Company believes that pro forma results (as if the Company consolidated bn.com) provide investors a better understanding of the Company’s current operating results and provide a comparable measure to help investors understand the Company’s future operating results.

     On May 27, 2004, subsequent to the first quarter of fiscal 2004, the Company completed its previously announced merger (the Merger) of bn.com with a wholly owned subsidiary of the Company. Under the terms of the Merger, the holders of bn.com’s outstanding common stock, other than the Company and its subsidiaries, received $3.05 in cash for each share that they owned. The Merger was approved by the shareholders of bn.com at a special meeting held on May 27, 2004. The allocation of the purchase price to the proportional amount of assets acquired and liabilities assumed is expected to be completed during the second quarter of fiscal 2004. As a result of the Merger, bn.com became a privately held company, wholly owned by the Company.

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BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 13 weeks ended May 1, 2004 and May 3, 2003
(thousands of dollars, except per share data)
(unaudited)

(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 80 percent, 83 percent and 77 percent of the Company’s merchandise inventories as of May 1, 2004, May 3, 2003 and January 31, 2004, respectively. Merchandise inventories of GameStop Corp. (GameStop) stores, Barnes & Noble.com and Calendar Club L.L.C. (Calendar Club) represent 16 percent, 11 percent and 19 percent of merchandise inventories as of May 1, 2004, May 3, 2003 and January 31, 2004, respectively and are recorded based on the average cost method. The remaining merchandise inventories are valued on the last-in, first-out (LIFO) method.

     If substantially all of the merchandise inventories currently valued at LIFO costs were valued at current costs, merchandise inventories would remain unchanged as of May 1, 2004, May 3, 2003 and January 31, 2004.

(3) Reclassifications

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

(4) Income Taxes

     The tax provisions for the 13 weeks ended May 1, 2004 and May 3, 2003 are based upon management’s estimate of the Company’s annualized effective tax rate.

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BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 13 weeks ended May 1, 2004 and May 3, 2003
(thousands of dollars, except per share data)
(unaudited)

(5) Stock Options

     The Company grants options to purchase Barnes & Noble, Inc. (BKS), GameStop Corp. (GME) and barnesandnoble.com inc. (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
    May 1, 2004
  May 3, 2003
Net income (loss) – as reported
  $ 12,454       (2,026 )
Compensation expense, net of tax
               
BKS stock options
    1,941       2,955  
GME stock options, net of minority interest
    1,316       1,291  
BNBN stock options (a)
    13        
 
   
 
     
 
 
Pro forma net income (loss) – pro forma for SFAS No. 123
  $ 9,184       (6,272 )
 
   
 
     
 
 
Basic earnings per share:
               
As reported
  $ 0.18       (0.03 )
Pro forma for SFAS No. 123
  $ 0.13       (0.10 )
Diluted earnings per share:
               
As reported
  $ 0.17       (0.03 )
Pro forma for SFAS No. 123
  $ 0.12       (0.10 )

(a) Subsequent to the Company acquiring a controlling interest in Barnes & Noble.com (see footnote 1).

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BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 13 weeks ended May 1, 2004 and May 3, 2003
(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:

                 
    For the 13 weeks ended
    May 1, 2004
  May 3, 2003
Net income (loss)
  $ 12,454       (2,026 )
Other comprehensive income:
               
Foreign currency translation adjustments
    (177 )      
Unrealized gains (losses) on available-for-sale securities, net of deferred income tax expense (benefit) of ($13) and $19, respectively
    (19 )     29  
Unrealized gain on derivative instrument, net of deferred income tax expense of $0 and $2, respectively
          3  
 
   
 
     
 
 
Total comprehensive income (loss)
  $ 12,258       (1,994 )
 
   
 
     
 
 

(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
            May 1, 2004
        May 3, 2003
            Income   Shares   Per Share           Income   Shares   Per Share
            (Numerator)
  (Denominator)
  Amount
          (Numerator)
  (Denominator)
  Amount
Basic EPS
                                                               
Net income (loss)
          $ 12,454       68,146     $ 0.18               (2,026 )     64,867       (0.03 )
 
                           
 
                             
 
 
Effect of dilutive securities
                                                               
Options
                  2,571                                      
Convertible debt
                                                       
 
           
 
     
 
                     
 
     
 
         
 
            12,454       70,717                       (2,026 )     64,867          
 
           
 
                             
 
                 
Effect of GameStop dilutive EPS
                                                               
GameStop net income less minority interest
            4,216                               4,170                  
 
           
 
                             
 
                 
 
            8,238                               (6,196 )                
GameStop diluted EPS
    $0.11                               0.11                          
GameStop shares owned by Barnes & Noble
    36,009       3,999                       36,009       3,952                  
 
   
 
     
 
     
 
             
 
     
 
     
 
         
 
          $ 12,237       70,717     $ 0.17               (2,244 )     64,867       (0.03 )
 
           
 
     
 
     
 
             
 
     
 
     
 
 

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BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 13 weeks ended May 1, 2004 and May 3, 2003
(thousands of dollars, except per share data)
(unaudited)

(8) Segment Information

     The Company operates under two strategic groups that offer different products. These groups have been aggregated into two reportable operating segments: book operating segment and video game operating segment.

     Book Operating Segment

     This segment includes bookstores primarily under the Barnes & Noble Booksellers and B. Dalton Bookseller trade names. The 653 Barnes & Noble stores 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. The 188 B. Dalton stores are typically small format mall-based stores. In addition, this segment includes Barnes & Noble.com (an online retailer of books, music and DVDs/videos), the Company’s publishing operation (which includes Sterling Publishing) and Calendar Club (a majority-owned subsidiary of the Company that operates seasonal kiosks and seasonal stores). The book operating segment employs a merchandising strategy that targets the mainstream consumer book market.

     Video Game Operating Segment

     This segment includes 1,603 video game and PC-entertainment stores primarily under the GameStop trade name, a Web site (www.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 weeks ended May 1, 2004 and May 3, 2003 follows:

                 
Sales
  May 1, 2004
  May 3, 2003
Book operating segment
  $ 1,081,109       863,864  
Video game operating segment
    371,736       321,741  
 
   
 
     
 
 
Total
  $ 1,452,845       1,185,605  
 
   
 
     
 
 
                 
Operating profit
  May 1, 2004
  May 3, 2003
Book operating segment
  $ 17,475       (1,259 )
Video game operating segment
    10,770       10,689  
 
   
 
     
 
 
Total
  $ 28,245       9,430  
 
   
 
     
 
 

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BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 13 weeks ended May 1, 2004 and May 3, 2003
(thousands of dollars, except per share data)
(unaudited)

     A reconciliation of operating profit reported by reportable segments to consolidated income (loss) before income taxes and minority interest in the consolidated financial statements for the 13 weeks ended May 1, 2004 and May 3, 2003 is as follows:

                 
    May 1, 2004
  May 3, 2003
Reportable segments operating profit
  $ 28,245       9,430  
Interest, net
    (4,327 )     (4,643 )
Equity in net loss of Barnes & Noble.com
          (4,972 )
 
   
 
     
 
 
Consolidated income (loss) before income taxes and minority interest
  $ 23,918       (185 )
 
   
 
     
 
 

(9) Changes in Intangible Assets and Goodwill

     The following intangible assets were acquired by the Company primarily in connection with the purchase of Sterling Publishing in fiscal 2002 and the purchase of Bertelsmann’s interest in Barnes & Noble.com in fiscal 2003:

                         
    As of May 1, 2004
    Gross Carrying   Accumulated    
    Amount
  Amortization
  Total
Amortizable intangible assets
  $ 23,288       (4,548 )   $ 18,740  
Unamortizable intangible assets
    74,418             74,418  
 
   
 
     
 
     
 
 
 
  $ 97,706       (4,548 )   $ 93,158  
 
   
 
     
 
     
 
 

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

         
Aggregate Amortization Expense:

For the 13 weeks ended May 1, 2004
  $ 1,416  
         
Estimated Amortization Expense:        

(12 months ending on or about January 31)
       
2005
  $ 4,684  
2006
  $ 2,322  
2007
  $ 1,991  
2008
  $ 1,899  
2009
  $ 1,849  

    There were no changes in the carrying amount of goodwill for the 13 weeks ended May 1, 2004.

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BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 13 weeks ended May 1, 2004 and May 3, 2003
(thousands of dollars, except per share data)
(unaudited)

(10) Subsequent Events

     On June 3, 2004, the Company announced the redemption of all of its $300,000 outstanding 5.25 percent convertible subordinated notes due 2009 (the Notes), effective June 28, 2004. The redemption price is equal to 103 percent of the principal amount of the Notes, together with accrued interest to, but excluding, the date fixed for redemption. At anytime prior to redemption, the Notes can be converted into common stock at a conversion price of $32.512 per share. There would have been no material effect on fully diluted earnings per share had the redemption of the Notes occurred at the beginning of fiscal 2004.

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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 May 1, 2004 and May 3, 2003, and the related consolidated statements of operations for the 13 week periods ended May 1, 2004 and May 3, 2003, changes in shareholders’ equity for the 13 week period ended May 1, 2004, and cash flows for the 13 week periods ended May 1, 2004 and May 3, 2003 included in the accompanying Securities and Exchange Commission Form 10-Q for the period ended May 1, 2004. 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 January 31, 2004, 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 January 31, 2004; and in our report dated March 17, 2004, 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 January 31, 2004 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
   

May 18, 2004

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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.

Other Long-Lived Assets. The Company’s other long-lived assets include property and equipment and amortizable intangibles. At May 1, 2004, the Company had $685.4 million of property and equipment, net of accumulated depreciation, and $18.7 million of amortizable intangible assets, net of amortization, accounting for approximately 21.0% 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”. Recoverability of 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.

Goodwill and Unamortizable Intangible Assets. At May 1, 2004, the Company had $509.2 million of goodwill and $74.4 million of unamortizable intangible assets (i.e. those with an indefinite useful life), accounting for approximately 17.4% of the Company’s total assets. SFAS No. 142, “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 SFAS No. 142. 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 impairment test on the goodwill in November 2003 and deemed that no impairment charge was necessary. The Company has noted no subsequent indicators of impairment. The Company tests unamortizable intangible assets by comparing the fair value and the carrying value of such assets. Changes in market conditions, among other factors, could have a material impact on these estimates.

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, a provision for future lease obligations, net of expected sublease recoveries. Costs associated with store closings of $0.7 million and $1.0 million during the first quarter of fiscal 2004 and fiscal 2003, respectively, are included in selling and administrative expenses in the accompanying consolidated statements of operations.

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Subsequent Events

On May 27, 2004, the Company announced the completion of the previously announced merger (the Merger) of barnesandnoble.com inc. (bn.com) with a wholly owned subsidiary of the Company. Under the terms of the Merger, the holders of bn.com’s outstanding common stock, other than the Company and its subsidiaries, received $3.05 in cash for each share that they owned. The Merger was approved by the shareholders of bn.com at a special meeting held on May 27, 2004. As a result of the Merger, bn.com became a privately held company, wholly owned by the Company.

On June 3, 2004, the Company announced the redemption of all of its $300.0 million outstanding 5.25% convertible subordinated notes due 2009 (the Notes), effective June 28, 2004. The redemption price is equal to 103% of the principal amount of the Notes, together with accrued interest to, but excluding, the date fixed for redemption. At anytime prior to redemption, the Notes can be converted into common stock at a conversion price of $32.512 per share.

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 $354.2 million as of May 1, 2004, compared with $196.0 million as of May 3, 2003.

Merchandise inventories increased $107.4 million, or 7.6%, to $1,525.8 million as of May 1, 2004, compared with $1,418.4 million as of May 3, 2003. The increase was attributable to a $69.1 million increase in the book operating segment inventory and a $38.4 million increase in GameStop Corp. (GameStop or video game operating segment) inventory. The increase in the book operating segment inventory includes $45.0 million due to the inclusion of barnesandnoble.com llc (Barnes & Noble.com) and supported the opening of 36 Barnes & Noble stores over the last twelve months. The increase in video game operating segment inventory supported the opening of 317 GameStop 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 $45.4 million and $23.5 million during the 13 weeks ended May 1, 2004 and May 3, 2003, respectively.

In the second quarter of fiscal 2003, the Company exercised its option to extend its $500.0 million senior credit facility (Credit Facility) (which was to expire in May 2005) for one additional year, through May 2006.

On June 3, 2004, the Company announced the redemption of all of the Notes. Cash flow from operations and borrowings under the Company’s Credit Facility will be available to fund the redemption.

Total debt decreased 16.0% to $300.0 million as of May 1, 2004 from $357.0 million as of May 3, 2003. Average combined borrowings under the Company’s senior credit facility and subordinated notes were $300.0 million and $319.7 million during the 13 weeks ended May 1, 2004 and May 3, 2003, respectively, and peaked at $300.0 million and $416.4 million during the same periods. The ratio of debt to equity decreased to 0.23:1.00 as of May 1, 2004, compared with 0.35:1.00 as of May 3, 2003.

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Based upon the Company’s current operating levels, management believes net cash flows from operating activities, the capacity under its Credit Facility and its ability to issue additional debt (if required) will be sufficient to meet the Company’s normal working capital and debt service requirements, including the redemption of the Notes, for at least the next twelve months.

The Company did not declare or pay any cash dividends during the 13-week periods ended May 1, 2004 and May 3, 2003.

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 May 1, 2004 compared with the 13 weeks ended May 3, 2003

Sales

During the 13 weeks ended May 1, 2004, the Company’s sales increased $267.2 million, or 22.5%, to $1,452.8 million from $1,185.6 million during the 13 weeks ended May 3, 2003. This increase was attributable to a $217.2 million increase in book operating segment sales and an increase of $50.0 million from the video game operating segment sales.

The increase in book operating segment sales was primarily attributable to a $106.7 million increase in Barnes & Noble store sales and the inclusion of $114.9 million in sales due to the consolidation of Barnes & Noble.com resulting from the Company’s acquisition of a controlling interest in Barnes & Noble.com on September 15, 2003. During the first quarter, Barnes & Noble store sales increased 13.3% to $910.2 million from $803.5 million during the same period a year ago and accounted for 62.7% of total Company sales or 84.2% of total book sales. The 13.3% increase in Barnes & Noble store sales was attributable to an increase in comparable store sales of 9.4%, coupled with the opening of 36 new stores since May 3, 2003, which contributed to a 4.6% increase in square footage.

During the 13 weeks ended May 1, 2004, B. Dalton sales declined 13.3% and represented 2.7% of total Company sales. The decrease was primarily a result of 57 store closings and a 19.7% reduction in its square footage since May 3, 2003, partially offset by an increase in comparable store sales of 6.0%.

GameStop sales during the first quarter increased 15.5%. This increase in sales was primarily attributable to the 317 new GameStop stores opened since May 3, 2003, partially offset by a comparable store sales decline of 1.8% during the first quarter of fiscal 2004.

During the 13 weeks ended May 1, 2004, the Company opened nine Barnes & Noble stores and closed three, bringing its total number of Barnes & Noble stores to 653 with 16.0 million square feet. The Company closed seven B. Dalton stores, ending the period with 188 B. Dalton stores and 0.8 million square feet. The Company opened 103 GameStop stores and closed 14, bringing its total to 1,603 stores with 2.5 million square feet. As of May 1, 2004, the Company operated 2,444 stores in the fifty states, the District of Columbia, Puerto Rico, Guam and Ireland.

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Cost of Sales and Occupancy

During the 13 weeks ended May 1, 2004, cost of sales and occupancy increased $183.0 million, or 20.7%, to $1,068.0 million from $885.0 million during the 13 weeks ended May 3, 2003, partially due to the inclusion of Barnes & Noble.com’s cost of sales and occupancy. As a percentage of sales, cost of sales and occupancy decreased to 73.5% from 74.6% during the same period one year ago. This decrease was primarily attributable to increased sales volume leveraging fixed occupancy costs in the Barnes & Noble stores.

Selling and Administrative Expenses

Selling and administrative expenses increased $58.6 million to $309.3 million during the 13 weeks ended May 1, 2004, from $250.7 million during the 13 weeks ended May 3, 2003, partially due to the inclusion of Barnes & Noble.com’s selling and administrative expenses. During the first quarter, selling and administrative expenses increased as a percentage of sales to 21.3% from 21.1% during the prior year period. This increase was primarily due to the de-leveraging of expenses in the video game operating segment and the inclusion of Barnes & Noble.com’s selling and administrative expenses, partially offset by increased sales volume leveraging the selling and administrative expenses in the Barnes & Noble stores.

Depreciation and Amortization

During the first quarter, depreciation and amortization increased $5.7 million, or 14.5%, to $44.7 million from $39.0 million during the same period last year. The increase was primarily due to the inclusion of Barnes & Noble.com’s depreciation and amortization.

Pre-opening Expenses

Pre-opening expenses increased to $2.6 million during the 13 weeks ended May 1, 2004, from $1.5 million for the 13 weeks ended May 3, 2003. The increase in pre-opening expenses was primarily the result of opening nine new Barnes & Noble stores during the first quarter of fiscal 2004, compared with four new Barnes & Noble stores opened during the same prior year period.

Operating Profit

The Company’s consolidated operating profit increased to $28.2 million during the 13 weeks ended May 1, 2004, from $9.4 million during the 13 weeks ended May 3, 2003.

Interest Expense, Net and Amortization of Deferred Financing Fees

Net interest expense and amortization of deferred financing fees decreased to $4.3 million during the 13 weeks ended May 1, 2004, from $4.6 million during the 13 weeks ended May 3, 2003. 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 May 1, 2004 were $9.5 million compared with a tax benefit of $75.0 thousand during the 13 weeks ended May 3, 2003. Taxes were based upon management’s estimate of the

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Company’s annualized effective tax rates. The Company’s effective tax rate was 39.89% for the first quarter of fiscal 2004 and 40.25% for the first quarter of fiscal 2003.

Minority Interest

Minority interest was $1.9 million during the first quarter of fiscal 2004 and fiscal 2003 and relates primarily to GameStop.

Net Income (Loss)

As a result of the factors discussed above, the Company reported consolidated net income of $12.5 million (or $0.17 per diluted share) during the 13 weeks ended May 1, 2004, compared with a net loss of ($2.0) million (or ($0.03) per share) during the 13 weeks ended May 3, 2003. Components of earnings per share were as follows:

                 
    13 weeks ended
    May 1, 2004
  May 3, 2003
Barnes & Noble Bookstores
  $ 0.21       (0.05 )
Barnes & Noble.com (1)
    (0.10 )     (0.04 )
 
   
 
     
 
 
Total book operating segment
  $ 0.11       (0.09 )
Video game operating segment
    0.06       0.06  
 
   
 
     
 
 
Consolidated EPS
  $ 0.17       (0.03 )
 
   
 
     
 
 

(1) The Company accounted for its approximate 38 percent equity interest in Barnes & Noble.com under the equity method through September 15, 2003 (the date the Company acquired Bertelsmann’s interest in Barnes & Noble.com) and consolidated the results of Barnes & Noble.com thereafter.

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Disclosure Regarding Forward-Looking Statements

     This report may contain certain forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934) 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 limits its interest rate risks by investing certain of its excess cash balances in short-term, highly-liquid instruments with an original maturity of one year or less. The Company does not expect any material losses from its invested cash balances and the Company believes that its interest rate exposure is modest. As of May 1, 2004, the Company’s cash and cash equivalents totaled approximately $354.2 million.

     Additionally, the Company may from time to time borrow money under its Credit Facility at various interest-rate options based on the prime rate or the London Interbank Offer Rate (LIBOR) depending upon certain financial tests. Accordingly, the Company may be exposed to interest rate risk on money that it borrows under its Credit Facility. The Company had $0 and $57.0 million outstanding under the Credit Facility at May 1, 2004 and May 3, 2003, respectively.

     The Company does not have any material foreign currency exposure as nearly all of its business is transacted in United States currency.

Item 4: Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

     As of the end of the period covered by this report, the Company’s management 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 Exchange Act). Based on this evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are

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effective. 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) Changes in Internal Controls

     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.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

     There have been no material developments with respect to previously reported legal proceedings.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Issuer Purchases of Equity Securities

                                 
                    Total Number    
                    of Shares   Maximum Dollar
                    Purchased as   Value of Shares
    Total Number   Average   Part of Publicly   That May Yet Be
    of Shares   Price Paid   Announced   Purchased Under
Period
  Purchased
  per Share
  Plans
  the Plans
February 1, 2004 - February 29, 2004
        $ N/A           $ 62,895,000  
March 1, 2004 - March 31, 2004
    200,000     $ 31.81       200,000     $ 56,533,000  
April 1, 2004 - May 1, 2004
        $ N/A           $ 56,533,000  
 
   
 
     
 
     
 
         
Total
    200,000     $ 31.81       200,000          
 
   
 
     
 
     
 
         

     In November 1999, the Board of Directors authorized a common stock repurchase program for the purchase of up to $250.0 million of the Company’s common shares. The Company may repurchase shares from time to time in the open market or through privately negotiated transactions, depending on prevailing market conditions and other factors. The repurchased shares will be held in treasury.

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Item 6. Exhibits and Reports on Form 8-K

     (a) Exhibits filed with this Form 10-Q:

  3.1   Amended and Restated Bylaws of the Company.
 
  10.1   Barnes & Noble, Inc. 2004 Incentive Plan.
 
  10.2   Barnes & Noble, Inc. 2004 Executive Performance Plan.
 
  31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
  31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
  32.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
  32.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     (b) Reports on Form 8-K:

      On February 20, 2004, the Company furnished a Report on Form 8-K pursuant to Items 7 and 12 of such Form announcing its sales results for the fiscal quarter and fiscal year ended January 31, 2004.
 
      On March 18, 2004, the Company furnished a Report on Form 8-K pursuant to Items 7 and 12 of such Form announcing its earnings results for the fiscal quarter and fiscal year ended January 31, 2004.
 
      Subsequent to the end of the quarter, on May 18, 2004, the Company furnished a Report on Form 8-K and Form 8-K/A pursuant to Items 7 and 12 of such Forms announcing first quarter 2004 financial results.
 
      Subsequent to the end of the quarter, on May 27, 2004, the Company filed a Report on Form 8-K pursuant to Items 5 and 7 of such Form announcing the completion of the previously announced merger of barnesandnoble.com inc. with a wholly owned subsidiary of the Company.
 
      Subsequent to the end of the quarter, on June 3, 2004, the Company filed a Report on Form 8-K pursuant to Items 5 and 7 of such Form announcing the redemption of all of its 5.25% Convertible Subordinated Notes.

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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)    

June 9, 2004

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EXHIBIT INDEX

3.1   Amended and Restated Bylaws of the Company.
 
10.1   Barnes & Noble, Inc. 2004 Incentive Plan.
 
10.2   Barnes & Noble, Inc. 2004 Executive Performance Plan.
 
31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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