Exhibit 10.21
-------------
AMENDMENT NO. 1 TO
SECOND AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF XXXXXXXXXXXXXX.XXX LLC
THIS AMENDMENT NO. 1 (this "Amendment") amends the Second
Amended and Restated Limited Liability Company Agreement (the "Restated
Agreement") of xxxxxxxxxxxxxx.xxx llc, a Delaware limited liability company (the
"Company"), made and entered into, effective as of May 28, 1999, by and among
Xxxxxx & Xxxxx, Inc., a corporation organized and existing under the laws of
Delaware, with its principal place of business at 000 Xxxxx Xxxxxx, Xxx Xxxx,
Xxx Xxxx 00000 ("BN"), B&X.xxx Holding Corp., a corporation organized and
existing under the laws of Delaware, with its principal place of business at 000
Xxxxx Xxxxxx, Xxx Xxxx, Xxx Xxxx 00000 ("BN Holding"), xxxxxxxxxxxxxx.xxx inc.,
a corporation organized and existing under the laws of Delaware, with its
principal place of business at 00 Xxxxx Xxxxxx, Xxx Xxxx, Xxx Xxxx 00000 (the
"Public Corp."), Bertelsmann AG, an Aktiengesellschaft organized and existing
under the laws of Germany, with its principal place of business at
Xxxx-Xxxxxxxxxxx-Xxxxxxx 000, 00000 Xxxxxxxxx, Xxxxxxx ("BAG"), and XXX.XX
Online, Inc., a corporation organized and existing under the laws of Delaware,
with its principal place of business at 0000 Xxxxxxxx, Xxx Xxxx, Xxx Xxxx 00000
("USO").
WHEREAS, the Company was formed as a limited liability company
pursuant to the Delaware Limited Liability Company Law (6 Del. C. Sections
18-101, et seq.) by the filing of a Certificate of Formation with the Office of
the Secretary of State of the State of Delaware on October 27, 1998;
WHEREAS, the parties entered into the Restated Agreement to
reflect the addition of the Public Corp. as a Member and the sole Manager of the
LLC pursuant to the terms and conditions of the Restated Agreement; and
WHEREAS, the parties hereto desire to amend the Restated
Agreement, effective as of May 28, 1999, to accurately reflect their
understanding with respect to Section 5.4(c) and Schedule I of the Restated
Agreement;
NOW, THEREFORE, the parties hereto hereby agree as follows:
Amendment to Section 5.4(c). Section 5.4(c) of the Restated Agreement
is hereby amended and restated in its entirety to read as follows:
"When the Gross Asset Value of a Company asset differs from its basis
for federal or other income tax purposes, solely for purposes of the relevant
tax and not for purposes of computing Capital Account balances, income, gain,
loss, deduction and credit with respect to such asset shall be allocated among
the Members (i) with respect to any contributions of assets to the Company on or
after May 28, 1999, under the traditional method allowed pursuant to Treasury
Regulations Section 1.704-3(b), unless otherwise determined by BN Holding and
USO, and (ii) with respect to all contributions of assets to the Company before
May 28, 1999, under the remedial allocation method under Treasury Regulation
Section 1.704-3(d). The members agree
that, as of October 31, 1998, all such differences related to goodwill, and the
corresponding remedial allocations shall be made ratably over a fifteen (15)
year period."
Amendment to Schedule I. Schedule I of the Restated Agreement is hereby
amended and replaced in its entirety by Schedule I attached hereto.
References. Any references in the Restated Agreement to "the
Agreement", "this Agreement", "hereof", "herein", "hereunder" or terms of
similar import shall mean the Restated Agreement as amended by this Amendment.
No Other Changes. Except as amended hereby, all other terms and
provisions of the Restated Agreement remain unchanged and in full force and
effect.
Counterparts. This Amendment may be executed in counterparts which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
this 14th day of January, 2000, effective and effectuating their agreement as of
May 28, 1999.
Bertelsmann AG
By: /s/ Xxxxxx Xxxxxxxxxx
---------------------
Name: Xxxxxx Xxxxxxxxxx
Title: Chief Executive Officer
XXX.XX Online, Inc.
By: /s/ Xxxxxx Xxxxxxxxxx
---------------------
Name: Xxxxxx Xxxxxxxxxx
Title: President
Xxxxxx & Xxxxx, Inc.
By: /s/ Xxxxxxx Xxxxxx
------------------
Name: Xxxxxxx Xxxxxx
Title: Chairman
B&X.xxx Holding Corp.
By: /s/ Xxxxxxx Xxxxxx
------------------
Name: Xxxxxxx Xxxxxx
Title: Chairman
xxxxxxxxxxxxxx.xxx inc.
By: /s/ Xxxxxxx Xxxxxx
------------------
Name: Xxxxxxx Xxxxxx
Title: Chairman
SCHEDULE I
----------
MEMBERS; MEMBERSHIP UNITS; CAPITAL ACCOUNTS
Member Membership Units Capital
------ ---------------- Account
--------
xxxxxxxxxxxxxx.xxx inc. 28,750,002 $ 517,500,000
Membership Units
B&X.xxx Holding Corp. 57,500,000 $1,035,000,000
Membership Units
XXX.XX Online, Inc. 57,500,000 $1,035,000,000
Membership Units
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of Xxxxxx & Noble, Inc. and its
wholly owned subsidiaries (collectively, the Company) set forth on the following
pages should be read in conjunction with the consolidated financial statements
and notes included elsewhere in this report. The Company's fiscal year is
comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of
January. The Statement of Operations Data for the 52 weeks ended January 29,
2000 (fiscal 1999), the 52 weeks ended January 30, 1999 (fiscal 1998) and the 52
weeks ended January 31, 1998 (fiscal 1997) and the Balance Sheet Data as of
January 29, 2000 and January 30, 1999 are derived from, and are qualified by
reference to, audited consolidated financial statements which are included
elsewhere in this report. The Statement of Operations Data for the 53 weeks
ended February 1, 1997 (fiscal 1996) and 52 weeks ended January 27, 1996 (fiscal
1995) and the Balance Sheet Data as of January 31, 1998, February 1, 1997 and
January 27, 1996 are derived from audited consolidated financial statements not
included in this report. Certain prior-period amounts have been reclassified for
comparative purposes.
Fiscal Year 1999(1) 1998 1997 1996 1995
------- ---- ---- ---- ----
(Thousands of dollars, except per share data)
---------------------------------------------
STATEMENT OF OPERATIONS DATA:
Sales
Xxxxxx & Xxxxx stores $2,821,549 2,515,352 2,245,531 1,861,177 1,349,830
X. Xxxxxx stores 426,018 468,414 509,389 564,926 603,204
Xxxxxx & Xxxxx.xxx -- -- 14,601 -- --
Other 14,728 21,842 27,331 22,021 23,866
--------- ---------- ---------- ---------- -----------
Total bookstore sales 3,262,295 3,005,608 2,796,852 2,448,124 1,976,900
Babbage's Etc. stores 223,748 -- -- -- --
--------- ---------- ---------- ---------- -----------
Total sales 3,486,043 3,005,608 2,796,852 2,448,124 1,976,900
Cost of sales and occupancy 2,483,729 2,142,717 2,019,291 1,785,392 1,444,555
--------- ---------- ---------- ---------- -----------
Gross profit 1,002,314 862,891 777,561 662,732 532,345
Selling and administrative expenses 651,099 580,609 542,336 467,777 383,692
Depreciation and amortization 112,304 88,345 76,951 59,806 47,881
Pre-opening expenses 6,801 8,795 12,918 17,571 12,160
Restructuring charge(2) -- -- -- -- 123,768
--------- ---------- ---------- ---------- -----------
Operating profit (loss) 232,110 185,142 145,356 117,578 (35,156)
Interest expense, net and amortization of
deferred financing fees(3) (23,765) (24,412) (37,666) (38,286) (28,142)
Equity in net loss of Xxxxxx & Xxxxx.xxx(4) (42,047) (71,334) -- -- --
Gain on formation of Xxxxxx & Xxxxx.xxx(5) 25,000 63,759 -- -- --
Other income(6) 27,337 3,414 1,913 2,090 --
--------- ---------- ---------- ---------- -----------
Earnings (loss) before provision
(benefit) for income taxes,
extraordinary charge and cumulative
effect of a change in accounting
principle 218,635 156,569 109,603 81,382 (63,298)
Provision (benefit) for income taxes 89,637 64,193 44,935 30,157 (10,322)
--------- ---------- ---------- ---------- -----------
Earnings (loss) before extraordinary
charge and cumulative effect of a
change in accounting principle 128,998 92,376 64,668 51,225 (52,976)
Extraordinary charge(7) -- -- (11,499) -- --
Cumulative effect of a change in
accounting principle (4,500) -- -- -- --
--------- ---------- ---------- ---------- -----------
Net earnings (loss) $ 124,498 92,376 53,169 51,225 (52,976)
========= ========== ========== ========== ===========
Earnings (loss) per common share
Basic
Earnings (loss) before extraordinary
charge and cumulative effect of a
change in accounting principle $ 1.87 1.35 0.96 0.77 (0.85)
Extraordinary charge $ -- -- (0.17) -- --
Cumulative effect of a change in
accounting principle $ (0.07) -- -- -- --
1
Fiscal Year 1999(1) 1998 1997 1996 1995
------- ---- ---- ---- ----
(Thousands of dollars, except per share data)
---------------------------------------------
Net earnings (loss) $ 1.80 1.35 0.79 0.77 (0.85)
Diluted
Earnings (loss) before extraordinary
charge and cumulative effect of a
change in accounting $ 1.81 1.29 0.93 0.75 (0.85)
principle
Extraordinary charge $ -- -- (0.17) -- --
Cumulative effect of a change in
accounting principle $ (0.06) -- -- -- --
Net earnings (loss) $ 1.75 1.29 0.76 0.75 (0.85)
Weighted average common shares outstanding
Basic 69,005,000 68,435,000 67,237,000 66,103,000 62,434,000
Diluted 71,354,000 71,677,000 69,836,000 67,886,000 62,434,000
OTHER OPERATING DATA:
Number of stores
Xxxxxx & Xxxxx stores(8) 542 520 483 431 358
X. Xxxxxx stores(9) 400 489 528 577 639
Babbage's Etc. stores(10) 526 -- -- -- --
---------- ---------- ---------- ---------- ------------
Total 1,468 1,009 1,011 1,008 997
========== ========== ========== ========== ============
Comparable store sales increase
(decrease)(11)
Xxxxxx & Xxxxx stores 6.1% 5.0% 9.4% 7.3% 6.9%
X. Xxxxxx stores 0.1 (1.4) (1.1) (1.0) (4.3)
Babbage's Etc. stores 12.5 -- -- -- --
Capital expenditures $ 146,294 141,388 121,903 171,885 154,913
BALANCE SHEET DATA:
Working capital $ 318,668 315,989 264,719 212,692 226,500
Total assets $2,413,791 1,807,597 1,591,171 1,446,647 1,315,342
Long-term debt, less current portions $ 431,600 249,100 284,800 290,000 262,400
Shareholders' equity $ 846,360 678,789 531,755 455,989 400,235
(1) Fiscal 1999 includes the results of operations of Babbage's Etc. from
October 28, 1999, the date of acquisition.
(2) Restructuring charge includes restructuring and asset impairment losses
recognized upon adoption of Statement of Financial Accounting Standards
No. 121, "Impairment of Long-Lived Assets and Assets to be Disposed
Of."
(3) Interest expense for fiscal 1999, 1998, 1997, 1996 and 1995 is net of
interest income of $1,449, $976, $446, $2,288 and $2,138, respectively.
(4) On November 12, 1998, the Company and Bertelsmann AG (Bertelsmann)
completed the formation of a limited liability company to operate the
online retail bookselling operations of the Company's wholly owned
subsidiary, xxxxxxxxxxxxxx.xxx inc. (Xxxxxx & Xxxxx.xxx Inc.). Xxxxxx &
Xxxxx.xxx Inc. began operations in fiscal 1997. As a result of the
formation of xxxxxxxxxxxxxx.xxx llc (Xxxxxx & Xxxxx.xxx), the Company
began accounting for its interest in Xxxxxx & Xxxxx.xxx under the
2
equity method of accounting as of the beginning of fiscal 1998. Fiscal
1998 reflects a 100 percent equity interest in Xxxxxx & Xxxxx.xxx for
the first three quarters ended October 31, 1998 (also the effective
date of the limited liability company agreement), and a 50 percent
equity interest beginning on November 1, 1998 through the end of the
fiscal year. As a result of the Xxxxxx & Xxxxx.xxx Inc. initial public
offering (IPO) on May 25, 1999, the Company retained a 40 percent
interest in Xxxxxx & Xxxxx.xxx. Accordingly, fiscal 1999 reflects the
Company's 50 percent interest in the net losses of Xxxxxx & Xxxxx.xxx
through the date of the IPO and 40 percent thereafter.
(5) As a result of the formation of the limited liability company, the
Company recognized a pre-tax gain during fiscal 1998 in the amount of
$126,435, of which $63,759 has been recognized in earnings based on the
$75,000 received directly from Bertelsmann and $62,676 ($36,351 after
taxes) has been reflected in additional paid-in capital based on the
Company's share of the incremental equity of the joint venture
resulting from the $150,000 Bertelsmann contribution. As a result of
the Xxxxxx & Xxxxx.xxx Inc. IPO, the Company and Bertelsmann each
retained a 40 percent interest in Xxxxxx & Xxxxx.xxx. The Company
recorded an increase in additional paid-in capital of $200,272
($116,158 after taxes) representing the Company's incremental share in
the equity in Xxxxxx & Xxxxx.xxx. In addition, the Company recognized a
pre-tax gain of $25,000 in fiscal 1999 as a result of cash received in
connection with the joint venture agreement with Bertelsmann.
(6) Included in other income in fiscal 1999 are pre-tax gains of $22,356
and $10,975 recognized in connection with the Company's investments in
NuvoMedia Inc. and Chapters Inc., respectively, as well as a one-time
charge of $5,000 attributable to the termination of the Xxxxxx
acquisition and losses from equity investments of $994.
(7) Reflects a net extraordinary charge during fiscal 1997 due to the early
extinguishment of debt, consisting of: (i) a pre-tax charge of $11,281
associated with the redemption premium on the Company's senior
subordinated notes; (ii) the associated write-off of $8,209 of
unamortized deferred finance costs; and (iii) the related tax benefits
of $7,991 on the extraordinary charge.
(8) Also includes 10 Bookstop and 23 Bookstar stores as of January 29,
2000.
(9) Also includes 10 Doubleday Book Shops, five Xxxxxxxx'x Bookstores and
five smaller format bookstores operated under the
3
Xxxxxx & Noble trade name representing the Company's original retail
strategy as of January 29, 2000.
(10) Includes 265 Software Etc., 216 Babbage's, 40 GameStop and five smaller
format stores as of January 29, 2000.
(11) Comparable store sales increase (decrease) is calculated on a 52-week
basis, and includes sales of stores that have been open for 12 months
for X. Xxxxxx stores and 15 months for Xxxxxx & Noble stores (due to
the high sales volume associated with grand openings). Comparable store
sales for fiscal years 1999, 1998 and 1997 include relocated Xxxxxx &
Noble stores and exclude X. Xxxxxx stores which the Company has closed
or has a formal plan to close. Comparable store sales increase for
Babbage's Etc. is calculated on a 52-week basis, and includes sales of
stores that have been open for 12 months.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's fiscal year is comprised of 52 or 53 weeks, ending on the
Saturday closest to the last day of January. As used in this section, "fiscal
1999" represents the 52 weeks ended January 29, 2000, "fiscal 1998" represents
the 52 weeks ended January 30, 1999 and "fiscal 1997" represents the 52 weeks
ended January 31, 1998.
General
Xxxxxx & Xxxxx, Inc. (Xxxxxx & Noble or the Company), the nation's
largest bookseller(1), as of January 29, 2000 operates 942 bookstores and 526
video game and entertainment software stores. Of the 942 bookstores, 542 operate
under the Xxxxxx & Xxxxx Booksellers, Bookstop and Bookstar trade names (38 of
which were opened in fiscal 1999) and 400 operate under the X. Xxxxxx
Bookseller, Doubleday Book Shops and Xxxxxxxx'x Bookstore trade names. Through
its 40 percent interest in xxxxxxxxxxxxxx.xxx llc (Xxxxxx & Xxxxx.xxx), the
Company is the second largest seller of books on the Internet and is the
exclusive bookseller on America Online (AOL). The Company, through its recent
acquisition of Babbage's Etc. LLC (Babbage's Etc.), operates 526 video game and
entertainment software stores under the Babbage's, Software Etc. and GameStop
trade names, and a Web site, xxxxxxxx.xxx. The Company employed approximately
37,400 full- and part-time employees and created nearly 3,000 new jobs
nationwide during fiscal 1999.
Xxxxxx & Xxxxx is the largest operator of book "super" stores in the
United States(1) with 542 Xxxxxx & Noble bookstores located in 49 states and the
District of Columbia as of January 29, 2000. With more than 30 years of
bookselling experience, management has a strong sense of customers' changing
needs and the Company leads book retailing with a "community store" concept.
Xxxxxx & Xxxxx'x typical bookstore offers a comprehensive title base, a cafe, a
children's section, a music department, a magazine section and a calendar of
ongoing events, including author appearances and children's activities, that
make each Xxxxxx & Noble bookstore an active part of its community.
Xxxxxx & Xxxxx bookstores range in size from 10,000 to 60,000 square
feet depending upon market size, and each store features an authoritative
selection of books, ranging from 60,000 to 175,000 titles. The comprehensive
title selection is diverse and reflects local interests. In addition, Xxxxxx &
Noble emphasizes books published by small and independent publishers and
university presses. Bestsellers represent only 3% of Xxxxxx & Xxxxx bookstore
sales. Complementing this extensive on-site selection, all Xxxxxx & Noble
bookstores provide customers with access to the millions of books available to
online shoppers while offering an option to have the book sent to the store or
shipped directly to the customer. During fiscal 1999 the Company completed its
rollout of BookMaster, the Company's new in-store operating system, in all
Xxxxxx & Xxxxx bookstores. BookMaster enhances the Company's existing
merchandise replenishment systems, resulting in higher in-stock positions and
better productivity at the store level through efficiencies in receiving,
cashiering and returns processing.
During fiscal 1999, the Company added 1.0 million square feet to the
Xxxxxx & Noble bookstore base, bringing the total square footage to 12.7 million
square feet, a 7% increase over the prior year. Xxxxxx & Xxxxx bookstores
contributed more than 86% of the Company's total bookstore sales in fiscal 1999.
The Company plans to open between 40 and 45 Xxxxxx & Noble bookstores in fiscal
2000 which are expected to average 26,000 square feet in size.
--------
(1) Based upon sales reported in trade publications and public filings.
5
At the end of fiscal 1999, the Company operated 400 X. Xxxxxx bookstores
in 45 states and the District of Columbia. X. Xxxxxx bookstores employ
merchandising strategies that target the "Middle-American" consumer book market,
offering a wide range of bestsellers and general-interest titles. Most X. Xxxxxx
bookstores range in size from 2,800 to 6,000 square feet, and while they are
appropriate to the size of adjacent mall tenants, the opening of superstores in
nearby locations continues to have a significant impact on X. Xxxxxx bookstores.
The Company is continuing to execute a strategy to maximize returns from
its X. Xxxxxx bookstores in response to declining sales attributable primarily
to superstore competition. Part of the Company's strategy has been to close
underperforming stores, which has resulted in the closing of between 40 to 90 X.
Xxxxxx bookstores per year since 1989.
In 1998, the Company and Bertelsmann AG (Bertelsmann) completed the
formation of a limited liability company to operate the online retail
bookselling operations of the Company's wholly owned subsidiary,
xxxxxxxxxxxxxx.xxx inc. (Xxxxxx & Xxxxx.xxx Inc.). The new entity, Xxxxxx &
Xxxxx.xxx, was formed by combining the online bookselling operations of the
Company with funds contributed by the international media company Bertelsmann,
one of the largest integrated media companies in the world. In 0000, Xxxxxx &
Xxxxx.xxx Inc. completed an initial public offering (IPO) of 28.75 million
shares of Class A Common Stock and used the proceeds to purchase a 20 percent
interest in Xxxxxx & Xxxxx.xxx. As a result, the Company and Bertelsmann each
retained a 40 percent interest in Xxxxxx & Xxxxx.xxx.
Xxxxxx & Xxxxx.xxx has become one of the world's largest Web sites and
the fourth largest e-commerce site, according to Media Metrix. Focused largely
on the sale of books, music, software, magazines, prints, posters and related
products, Xxxxxx & Xxxxx.xxx has capitalized on the recognized brand value of
the Xxxxxx & Noble name to become the second largest, and one of the fastest
growing, online distributors of books. Customers can choose from millions of new
and out-of-print titles and enjoy a variety of related content such as author
chats, book synopses and reader reviews. The site also offers thousands of
bargain books discounted up to 91 percent, the most popular software and
magazine titles, as well as gift items for every occasion. Xxxxxx & Xxxxx.xxx
recently launched its Prints & Posters Gallery, a unique collection of images
that can be produced on demand on museum-quality canvas or high-quality paper,
and its eCards service, an exclusive selection of greeting card images that can
be personalized and enhanced with animation and music. With access to Xxxxxx &
Noble's more than 750,000 in-stock titles, Xxxxxx & Xxxxx.xxx has the largest
standing inventory of any online bookseller ready for immediate delivery. The
URL xxxx://xxx.xx.xxx makes the site easy to find. The Xxxxxx & Xxxxx.xxx
affiliate network has more than 300,000 members and maintains strategic
alliances with major Web portals and content sites, such as AOL, Lycos and MSN.
Xxxxxx & Xxxxx.xxx is also a leader in business-to-business e-commerce with its
unique Business Solutions program.
Xxxxxx & Noble further differentiates its product offerings from those
of its competitors by publishing books under its own imprints for sale in its
retail stores and through Xxxxxx & Xxxxx.xxx's online and direct-mail book
sales. With publishing and distribution rights to over 2,000 titles, Xxxxxx &
Noble Books offers customers high-quality books at exceptional values, while
generating attractive gross margins.
On October 28, 1999, the Company acquired Babbage's Etc., one of the
nation's largest operators of video game and entertainment software stores. As a
result of the acquisition, the Company currently
6
operates 526 video game and entertainment software stores located in 47 states
and Puerto Rico. The Company's video game and entertainment software stores
range in size from 500 to 5,000 square feet (averaging 1,500 square feet)
depending upon market demographics. Stores feature video game hardware and
software, PC entertainment software and a multitude of accessories.
Results of Operations
The Company's sales, operating profit, comparable store sales, store
openings, store closings, number of stores open and square feet of selling space
at year end are set forth below:
Fiscal Year 1999 1998 1997
---------- --------- ---------
(Thousands of dollars)
Sales
Bookstores (1) $3,262,295 3,005,608 2,796,852
Video game and entertainment software stores 223,748 -- --
---------- --------- ---------
Total $3,486,043 3,005,608 2,796,852
========== ========= =========
Operating Profit
Bookstores (1) $216,678 185,142 145,356
Video game and entertainment software stores 15,432 -- --
---------- --------- ---------
Total $232,110 185,142 145,356
========== ========= =========
Comparable Store Sales Increase (Decrease)(2)
Xxxxxx & Xxxxx stores 6.1% 5.0% 9.4%
X. Xxxxxx stores 0.1 (1.4) (1.1)
Babbage's Etc. stores 12.5 -- --
========== ========= =========
Stores Opened
Xxxxxx & Xxxxx stores 38 50 65
X. Xxxxxx stores -- 4 4
---------- --------- ---------
Total 38 54 69
========== ========= =========
Stores Closed
Xxxxxx & Xxxxx stores 16 13 13
X. Xxxxxx stores 89 43 53
---------- --------- ---------
Total 105 56 66
========== ========= =========
Number of Stores Open at Year End
Xxxxxx & Xxxxx stores 542 520 483
X. Xxxxxx stores 400 489 528
Babbage's Etc. stores 526 -- --
---------- --------- ---------
Total 1,468 1,009 1,011
========== ========= =========
Square Feet of Selling Space at Year End (in millions)
Xxxxxx & Xxxxx stores 12.7 11.9 10.8
X. Xxxxxx stores 1.6 1.9 2.0
Babbage's Etc. stores 0.8 -- --
---------- --------- ---------
Total 15.1 13.8 12.8
========== ========= =========
7
(1) Included in fiscal 1997 are sales and operating losses associated with
Xxxxxx & Xxxxx.xxx of $14,601 and ($15,395), respectively. Beginning in
fiscal 1998 the Company's consolidated statement of operations presents its
equity in the results of operations of Xxxxxx & Xxxxx.xxx as a single line
item below operating profit in accordance with the equity method of
accounting. The Company's equity in the net loss of Xxxxxx & Xxxxx.xxx for
fiscal 1999 and fiscal 1998 was ($42,047) and ($71,334), respectively.
(2) Comparable store sales for X. Xxxxxx stores are determined using stores
open at least 12 months. Comparable store sales for Xxxxxx & Xxxxx stores
are determined using stores open at least 15 months, due to the high sales
volume associated with grand openings. Comparable store sales for Babbage's
Etc. are calculated on a 52-week basis, and include sales of stores that
have been open for 12 months.
The following table sets forth, for the periods indicated, the percentage
relationship that certain items bear to total sales of the Company:
Fiscal Year 1999 1998 1997
------------ ------------ ------------
Sales 100.0% 100.0% 100.0%
Cost of sales and occupancy 71.2 71.3 72.2
------------ ------------ ------------
Gross margin 28.8 28.7 27.8
Selling and administrative expenses 18.7 19.3 19.4
Depreciation and amortization 3.2 2.9 2.8
Pre-opening expenses 0.2 0.3 0.4
------------ ------------ ------------
Operating margin* 6.7 6.2 5.2
Interest expense, net and amortization of deferred
financing fees (0.7) (0.8) (1.4)
Equity in net loss of Xxxxxx & Xxxxx.xxx (1.2) (2.4) --
Gain on formation of Xxxxxx & Xxxxx.xxx 0.7 2.1 --
Other income 0.8 0.1 0.1
------------ ------------ ------------
Earnings before provision for income taxes,
extraordinary charge and cumulative effect of
a change in accounting principle* 6.3 5.2 3.9
Provision for income taxes* 2.6 2.1 1.6
------------ ------------ ------------
Earnings before extraordinary charge and
cumulative effect of a change in accounting
principle* 3.7 3.1 2.3
Extraordinary charge, net -- -- 0.4
------------ ------------ ------------
Earnings before cumulative effect of a change
in accounting principle 3.7 3.1 1.9
Cumulative effect of a change in accounting
principle (0.1) -- --
------------ ------------ ------------
Net earnings 3.6% 3.1% 1.9%
============ ============ ============
8
*If operating margin, earnings before provision for income taxes, extraordinary
charge and cumulative effect of a change in accounting principle, provision for
income taxes and earnings before extraordinary charge and cumulative effect of a
change in accounting principle were presented without Xxxxxx & Xxxxx.xxx during
fiscal 1997, the percentage relationship that these items would bear to total
sales of the Company would be 5.8%, 4.5%, 1.8% and 2.7%.
9
52 Weeks Ended January 29, 2000 Compared with 52 Weeks Ended January 30, 1999
Sales
The Company's sales increased 16.0% during fiscal 1999 to $3.486 billion
from $3.006 billion during fiscal 1998. Contributing to this improvement was a
7.4% increase attributable to the inclusion of Babbage's Etc.'s sales for the
fourth quarter of 1999. Babbage's Etc., one of the nation's largest operators of
video game and entertainment software stores, was acquired by the Company on
October 28, 1999. Fiscal 1999 sales from Xxxxxx & Xxxxx "super" stores, which
contributed 80.9% of total sales or 86.5% of total bookstore sales, increased
12.2% to $2.822 billion from $2.515 billion in fiscal 1998.
The increase in bookstore sales was primarily attributable to the 6.1%
growth in Xxxxxx & Noble comparable store sales, full year sales from the 50 new
stores opened during fiscal 1998 and the opening of an additional 38 Xxxxxx &
Xxxxx stores during 1999. This increase was partially offset by declining sales
of X. Xxxxxx, due to 89 store closings.
Cost of Sales and Occupancy
The Company's cost of sales and occupancy includes costs such as rental
expense, common area maintenance, merchant association dues, lease-required
advertising and adjustments for LIFO.
Cost of sales and occupancy increased to $2.484 billion in fiscal 1999
from $2.143 billion in fiscal 1998 primarily due to the inclusion of Babbage's
Etc.'s cost of sales and occupancy in the fourth quarter of 1999. The Company's
gross margin rate increased to 28.8% in fiscal 1999 from 28.7% in fiscal 1998.
This increase was attributable to improved leverage on occupancy costs as well
as a favorable merchandise mix in the bookstores, partially offset by lower
gross margins in the video game and entertainment software stores.
Selling and Administrative Expenses
Selling and administrative expenses increased $70.5 million, or 12.1% to
$651.1 million in fiscal 1999 from $580.6 million in fiscal 1998 partially due
to the inclusion of Babbage's Etc.'s selling and administrative expenses in the
fourth quarter of 1999. Selling and administrative expenses decreased to 18.7%
of sales during fiscal 1999 from 19.3% during fiscal 1998.
Depreciation and Amortization
Depreciation and amortization increased $24.0 million, or 27.1%, to
$112.3 million in fiscal 1999 from $88.3 million in fiscal 1998. The increase
was primarily the result of the depreciation related to Xxxxxx & Xxxxx stores
opened during fiscal 1999 and fiscal 1998, as well as the depreciation on the
Company's BookMaster system and the inclusion of Babbage's Etc.'s fourth quarter
depreciation and amortization of $3.6 million.
Pre-Opening Expenses
Pre-opening expenses declined in fiscal 1999 to $6.8 million from $8.8
million in fiscal 1998 reflecting the opening of fewer new stores compared with
prior years and the first quarter adoption of
10
Statement of Position 98-5, "Reporting on Costs of Start-up Activities" (SOP
98-5). SOP 98-5 requires an entity to expense all start-up activities (as
defined) as incurred. Prior to 1999, the Company amortized costs associated with
the opening of new stores over the respective store's first 12 months of
operations. The Company recorded a one-time non-cash charge reflecting the
cumulative effect of a change in accounting principle in the amount of $4,500
after taxes, representing such start-up costs capitalized as of the beginning of
fiscal year 1999. Since adoption, the Company has expensed all such start-up
costs as incurred. The effect of the change in accounting principle on earnings
in 1999 was immaterial.
Operating Profit
Operating profit increased to $232.1 million in fiscal 1999 from $185.1
million in fiscal 1998. Fiscal 1999 operating profit includes Babbage's Etc.'s
fourth quarter 1999 operating profit of $15.4 million. Bookstore operating
profit increased 17.1% to $216.7 million. Bookstore operating margin improved to
6.6% of sales during fiscal 1999 from 6.2% of sales in fiscal 1998 reflecting
better occupancy leverage and a more favorable product mix.
Interest Expense, Net and Amortization of Deferred Financing Fees
Interest expense, net of interest income, and amortization of deferred
financing fees decreased 2.5% to $23.8 million in fiscal 1999 from $24.4 million
in fiscal 1998 despite the inclusion of $3.1 million of additional interest
expense attributable to the Babbage's Etc. acquisition in fiscal 1999. The
decline was the result of strong cash flows and more favorable interest rates
under the Company's senior credit facility.
Equity in Net Loss of Xxxxxx & Xxxxx.xxx
As a result of the formation of the limited liability company with
Bertelsmann, the Company began accounting for its interest in Xxxxxx & Xxxxx.xxx
under the equity method of accounting as of the beginning of fiscal 1998. The
Company's equity in the net loss of Xxxxxx & Xxxxx.xxx for fiscal 1998 was $71.3
million. The Company's share in the net loss of Xxxxxx & Xxxxx.xxx for fiscal
1998 was based on a 100 percent equity interest for the first three quarters
ended October 31, 1998 (the effective date of the limited liability company
agreement), and a 50 percent equity interest beginning on November 1, 1998
through the end of the fiscal year.
As a result of the Xxxxxx & Xxxxx.xxx Inc. IPO on May 25, 1999, the
Company and Bertelsmann each retained a 40 percent interest in Xxxxxx &
Xxxxx.xxx. Accordingly, the Company's share in the net loss of Xxxxxx &
Xxxxx.xxx for fiscal 1999 was based on a 50 percent equity interest from the
beginning of fiscal 1999 through May 25, 1999 and 40 percent thereafter. The
Company's equity in the net loss of Xxxxxx & Xxxxx.xxx for fiscal 1999 was $42.0
million.
Gain on Formation of Xxxxxx & Xxxxx.xxx
As a result of the formation of the limited liability company, resulting
in the receipt of $75 million by the Company from Bertelsmann, a gain was
recorded in fiscal 1998 in the amount of $63.8 million. The gain represents the
excess of the amount received over the portion of the net assets of Xxxxxx &
Xxxxx.xxx sold by the Company to Bertelsmann.
Under the terms of the November 12, 1998 joint venture agreement between
the Company and
11
Bertelsmann, the Company received a $25 million payment from Bertelsmann in
fiscal 1999 in connection with the Xxxxxx & Xxxxx.xxx IPO.
Other Income
Other income increased to $27.3 million in fiscal 1999 from $3.4 million
in fiscal 1998. This increase was primarily attributable to the following
transactions which occurred in fiscal 1999:
The Company and the Xxxxxx Book Group (Xxxxxx) announced their agreement
to terminate the Company's planned acquisition of Xxxxxx. The Company's
application before the Federal Trade Commission for the purchase was formally
withdrawn. As a result, other income reflects a one-time charge of $5.0 million
for acquisition costs. These costs relate primarily to legal, accounting and
other transaction related costs incurred in connection with the proposed
acquisition of Xxxxxx.
The Company sold a portion of its investment in Chapters Inc. (Chapters)
resulting in a pre-tax gain of $11.0 million.
The Company recognized a pre-tax gain of $22.4 million in connection
with the sale of its investment in NuvoMedia Inc. (NuvoMedia) to Gemstar
International Ltd., a publicly traded company.
Provision for Income Taxes
Xxxxxx & Noble's effective tax rate was 41 percent during both fiscal
1999 and fiscal 1998.
12
Earnings
Fiscal 1999 earnings increased $32.1 million, or 34.8%, to $124.5
million (or $1.75 per diluted share) from $92.4 million (or $1.29 per diluted
share) during fiscal 1998. Components of earnings per share are as follows:
Fiscal Year 1999 1998
------------ ------------
Retail Earnings Per Share
Bookstores $1.62 1.32
Babbage's Etc. 0.10 --
------------ ------------
Retail EPS $1.72 1.32
EPS Impact of Investing Activities
Cash:
Gain on Xxxxxx & Xxxxx.xxx $0.21 0.53
Gain on partial sale of Chapters 0.09 --
Non-cash:
Share in net losses of Xxxxxx & Xxxxx.xxx (0.35) (0.59)
Share of net earnings (losses) from other equity investments (0.01) 0.03
Gain on sale of investment in NuvoMedia 0.19 --
------------ ------------
Total Investing Activities $0.13 (0.03)
Other Adjustments
Xxxxxx write-off $(0.04) --
Change in accounting for pre-opening costs (0.06) --
------------ ------------
Total Other Adjustments $(0.10) --
------------ ------------
Consolidated EPS $1.75 1.29
============ ============
13
52 Weeks Ended January 30, 1999 Compared with 52 Weeks Ended January 31, 1998
Sales
The Company's sales increased 7.5% during fiscal 1998 to $3.006 billion
from $2.797 billion during fiscal 1997. Fiscal 1998 sales from Xxxxxx & Noble
stores, which contributed 83.7% of total sales, increased 12.0% to $2.515
billion from $2.246 billion in fiscal 1997.
The increase in sales was primarily due to the 5.0% increase in Xxxxxx &
Xxxxx comparable store sales and the opening of an additional 50 Xxxxxx & Noble
stores during 1998. This increase was slightly offset by declining sales of X.
Xxxxxx, due to 43 store closings and a comparable store sales decline of 1.4%.
In addition, fiscal 1997 includes Xxxxxx & Xxxxx.xxx sales of $14.6 million
whereas fiscal 1998 does not include sales for Xxxxxx & Xxxxx.xxx due to the
conversion to the equity method of accounting as of the beginning of the year.
Excluding Xxxxxx & Xxxxx.xxx sales in fiscal 1997, retail sales increased 8.0%
during fiscal 1998.
Cost of Sales and Occupancy
The Company's cost of sales and occupancy includes costs such as rental
expense, common area maintenance, merchant association dues, lease-required
advertising and adjustments for LIFO.
Cost of sales and occupancy increased to $2.143 billion in fiscal 1998
from $2.019 billion in fiscal 1997. The Company's gross margin rate increased to
28.7% in fiscal 1998 from 27.8% in fiscal 1997. Excluding Xxxxxx & Xxxxx.xxx in
fiscal 1997 the retail gross margin rate was 27.9%. The fiscal 1998 improvement
in gross margin reflects more direct buying, increased distribution center
efficiencies, better shrinkage control and a more-favorable merchandise mix.
Selling and Administrative Expenses
Selling and administrative expenses increased $38.3 million, or 7.1% to
$580.6 million in fiscal 1998 from $542.3 million in fiscal 1997. Selling and
administrative expenses decreased slightly to 19.3% of sales during fiscal 1998
from 19.4% during fiscal 1997 primarily as a result of the start-up expenses
from Xxxxxx & Xxxxx.xxx included in the fiscal 1997 results. Excluding Xxxxxx &
Xxxxx.xxx, retail selling and administrative expenses would have been 18.9% of
sales in fiscal 1997 and total retail selling and administrative expenses would
have increased 10.1% in fiscal 1998. The fiscal 1998 increase in retail selling
and administrative expenses reflects the opening of an additional 50 Xxxxxx &
Xxxxx stores, the full year implementation of a new wage plan and expenses
associated with new store system enhancements.
Depreciation and Amortization
Depreciation and amortization increased $11.3 million, or 14.8%, to
$88.3 million in fiscal 1998 from $77.0 million in fiscal 1997. The increase was
primarily the result of the new Xxxxxx & Noble stores opened during fiscal 1998
and fiscal 1997, as well as new store system enhancements made during fiscal
1998.
14
Pre-Opening Expenses
Pre-opening expenses declined in fiscal 1998 to $8.8 million from $12.9
million in fiscal 1997 reflecting fewer new stores compared with prior years.
Operating Profit
Operating profit increased to $185.1 million in fiscal 1998 from $145.4
million in fiscal 1997. Excluding the $15.4 million operating loss for Xxxxxx &
Xxxxx.xxx included in fiscal 1997, retail operating margin improved to 6.2% of
sales during fiscal 1998 from 5.8% of sales in fiscal 1997.
Interest Expense, Net and Amortization of Deferred Financing Fees
Interest expense, net of interest income, and amortization of deferred
financing fees decreased 35.2% or $13.3 million in fiscal 1998 to $24.4 million
from $37.7 million in fiscal 1997. The decline was the result of the retirement
of $190 million in 11 7/8% senior subordinated notes on January 15, 1998 as well
as the more-favorable rate environment and lower spreads over the London
Interbank Offer Rate (LIBOR) in effect since the November 1997 refinancing.
Equity in Net Loss of Xxxxxx & Xxxxx.xxx
As a result of the formation of the limited liability company with
Bertelsmann, the Company began accounting for its interest in Xxxxxx & Xxxxx.xxx
under the equity method of accounting as of the beginning of fiscal 1998. The
Company's equity in the net loss of Xxxxxx & Xxxxx.xxx for fiscal 1998 was $71.3
million. This reflects a 100 percent equity interest for the first three
quarters ended October 31, 1998 (also the effective date of the limited
liability company agreement), and a 50 percent equity interest beginning on
November 1, 1998 through the end of the fiscal year. Had the Company reported
the results of Xxxxxx & Xxxxx.xxx under the equity method of accounting during
fiscal 1997, its fiscal 1997 equity in the net loss of Xxxxxx & Xxxxx.xxx would
have been $15.4 million.
Gain on Formation of Xxxxxx & Xxxxx.xxx
As a result of the formation of the limited liability company,
resulting in the receipt of $75 million by the Company from Bertelsmann, a gain
was recorded in fiscal 1998 in the amount of $63.8 million. The gain represents
the excess of the amount received over the portion of the net assets of Xxxxxx &
Xxxxx.xxx sold by the Company to Bertelsmann.
Other Income
Other income increased to $3.4 million in fiscal 1998 from $1.9 million
in fiscal 1997 as a result of increased equity earnings from minority
investments in Chapters and Calendar Club LLC.
Provision for Income Taxes
Xxxxxx & Xxxxx'x effective tax rate was 41 percent during both fiscal
1998 and fiscal 1997.
15
Earnings
Fiscal 1998 earnings before extraordinary charge increased $27.7
million, or 42.8%, to $92.4 million (or $1.29 per diluted share) from $64.7
million (or $0.93 per diluted share) during fiscal 1997. Before the effect of
Xxxxxx & Xxxxx.xxx, retail earnings before extraordinary charge increased $23.0
million, or 31.3% to $96.8 million (or $1.35 per diluted share) from $73.8
million (or $1.06 per diluted share).
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 Christmas selling season. The Company has now reported
operating profit for 15 consecutive quarters.
Liquidity and Capital Resources
Working capital requirements are generally at their highest during the
Company's fiscal quarter ending on or about January 31 due to the higher
payments to vendors for holiday season merchandise purchases and the
replenishment of merchandise inventories following this period of increased
sales. In addition, the Company's sales and merchandise inventory levels will
fluctuate from quarter-to-quarter as a result of the number and timing of new
store openings, as well as the amount and timing of sales contributed by new
stores.
Cash flows from operating activities, funds available under its
revolving credit facility and vendor financing continue to provide the Company
with liquidity and capital resources for store expansion, seasonal working
capital requirements and capital investments.
Cash Flow
Cash flows provided from operating activities were $187.3 million,
$177.7 million and $167.3 million during fiscal 1999, 1998 and 1997,
respectively. In fiscal 1999, the improvement in cash flows was primarily due to
the improvement in net earnings. Fiscal 1997 cash flows from operating
activities without Xxxxxx & Xxxxx.xxx were $180.0 million. The slight decrease
in retail operating cash flows in fiscal 1998 was due to a strategic increase in
the distribution center standing inventory, the implementation of a new wage
plan in fiscal 1998 and increased operating expenses associated with
implementing the Company's new store system enhancements.
Retail earnings before interest, taxes, depreciation and amortization
(EBITDA) increased $70.9 million or 25.9% to $344.4 million in fiscal 1999 from
$273.5 million in fiscal 1998. This significant improvement in EBITDA is a
combination of the inclusion of Babbage's Etc. and the continuing maturation of
the Xxxxxx & Xxxxx stores. Total debt to retail EBITDA (excluding the effect of
the Babbage's Etc. acquisition) decreased to .68 times in fiscal 1999 from .91
times in fiscal 1998. Including the effect of the acquisition of Babbage's Etc.,
total debt to retail EBITDA increased to 1.25 times in fiscal 1999, primarily
attributable to the debt incurred to fund the acquisition of Babbage's Etc. The
weighted-average age per square foot of the Company's 000 Xxxxxx & Xxxxx stores
was 3.9 years as of January 29, 2000 and is expected to increase to
approximately 4.5 years by February 3, 2001. As the relatively young Xxxxxx &
Xxxxx stores mature, and as the number of new stores opened during the fiscal
year decreases as a percentage of the existing store base, the increasing
operating profits of Xxxxxx &
16
Noble stores are expected to generate a greater portion of cash flows required
for working capital, including new store inventories as well as capital
expenditures and other initiatives. Additionally, due to the Xxxxxx & Xxxxx.xxx
IPO in fiscal 1999, retail cash flows are now fully available to support the
Company's working capital requirements.
Capital Structure
Continued strong cash flows from operations and a continued emphasis on
working capital management, once again strengthened the Company's balance sheet
in fiscal 1999. Shareholders' equity increased 24.7% to $846.4 million as of
January 29, 2000, from $678.8 million as of January 30, 1999. Return on average
equity increased to 16.3% in fiscal 1999 from 15.3% during fiscal 1998.
The Company has an $850 million senior credit facility (the Facility),
obtained in November 1997, with a syndicate led by The Chase Manhattan Bank. The
Facility is structured as a five-year revolving credit. The Facility permits
borrowings at various interest rate options based on the prime rate or LIBOR
depending upon certain financial tests. In addition, the agreement requires the
Company to pay a commitment fee up to 0.25% of the unused portion depending upon
certain financial tests. The Facility contains covenants, limitations and events
of default typical of credit facilities of this size and nature.
The amount outstanding under the Facility has been classified as
long-term debt in the accompanying consolidated balance sheets due to both its
terms and the Company's intent and ability to maintain principal amounts
outstanding through November 2002.
Borrowings under the Company's senior credit facilities averaged $397.1
million, $380.3 million and $105.1 million and peaked at $693.5 million, $535.0
million and $304.9 million during fiscal 1999, 1998 and 1997, respectively.
Despite the increase in average and peak borrowings in fiscal 1999 primarily
attributable to the Babbage's Etc. acquisition, interest expense decreased 2.5%
to $23.8 million in fiscal 1999 from $24.4 million in fiscal 1998 as a result of
more favorable interest rates under the Company's senior credit facility. The
ratio of debt to equity increased to 0.51:1.00 as of January 29, 2000 from
0.37:1.00 as of January 30, 1999, primarily attributable to the increased
borrowings to fund the Babbage's Etc. acquisition.
Capital Investment
Capital expenditures totaled $146.3 million, $141.4 million and $121.9
million during fiscal 1999, 1998 and 1997, respectively. Capital expenditures in
fiscal 2000, primarily for the opening of between 40 and 45 new Xxxxxx & Xxxxx
stores and 90 new Babbage's Etc. stores, are expected to be between $120 million
and $130 million, although commitment to such expenditures has not yet been
made.
Based on current operating levels and the store expansion planned for
the next fiscal year, management believes cash flows generated from operating
activities, short-term vendor financing and its borrowing capacity under its
revolving credit facility will be sufficient to meet the Company's working
capital and debt service requirements, and support the development of its short-
and long-term strategies for at least the next 12 months.
In fiscal 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. As of January 29, 2000, the Company has repurchased 4,025,900
shares at a cost of approximately $86.8 million under this program. The
17
repurchased shares are held in treasury.
On July 10, 1998, the Board of Directors of the Company declared a
dividend of one Preferred Share Purchase Right (a Right) for each outstanding
share of the Company's common stock (Common Stock). The distribution of the
Rights was automatically made on July 21, 1998 to stockholders of record on that
date. Each Right entitles the holder to purchase from the Company one
four-hundredth of a share of a new series of preferred stock, designated as
Series H Preferred Stock, par value $.001 per share (the Preferred Stock), at a
price of $225 per one four-hundredth of a share. The Rights will be exercisable
only if a person or group acquires 15 percent or more of the Company's
outstanding Common Stock or announces a tender offer or exchange offer, the
consummation of which would result in such person or group owning 15 percent or
more of the Company's outstanding Common Stock. For a further discussion of the
terms of the Preferred Stock and Rights see Note 13 of Notes to Consolidated
Financial Statements.
Formation of Xxxxxx & Xxxxx.xxx
On November 12, 1998, the Company and Bertelsmann completed the
formation of a joint venture to operate the online retail bookselling operations
of the Company's wholly owned subsidiary, Xxxxxx & Xxxxx.xxx Inc. The new
entity, Xxxxxx & Xxxxx.xxx, was structured as a limited liability company. Under
the terms of the relevant agreements, effective as of October 31, 1998, the
Company and Bertelsmann each retained a 50 percent membership interest in Xxxxxx
& Xxxxx.xxx. The Company contributed substantially all of the assets and
liabilities of its online operations to the joint venture and Bertelsmann paid
$75.0 million to the Company and made a $150.0 million cash contribution to the
joint venture. Bertelsmann also agreed to contribute an additional $50.0 million
to the joint venture for future working capital requirements. The Company
recognized a pre-tax gain during fiscal 1998 in the amount of $126.4 million, of
which $63.8 million was recognized in earnings based on the $75.0 million
received directly and $62.7 million ($36.4 million after taxes) was reflected in
additional paid-in capital based on the Company's share of the incremental
equity of the joint venture resulting from the $150.0 million Bertelsmann
contribution.
On May 25, 1999, Xxxxxx & Xxxxx.xxx Inc. completed an IPO of 28.75
million shares of Class A Common Stock and used the proceeds to purchase a 20
percent interest in Xxxxxx & Xxxxx.xxx. As a result, the Company and Bertelsmann
each retained a 40 percent interest in Xxxxxx & Xxxxx.xxx. The Company recorded
an increase in additional paid-in capital of $200.3 million ($116.2 million
after taxes) representing the Company's incremental share in the equity of
Xxxxxx & Xxxxx.xxx. The Company will continue to account for its investment
under the equity method.
Under the terms of the November 12, 1998 joint venture agreement
between the Company and Bertelsmann, the Company received a $25.0 million
payment from Bertelsmann in connection with the IPO.
The accompanying consolidated financial statements, in accordance with
the equity method of accounting, reflect the Company's investment in Xxxxxx &
Xxxxx.xxx as a single line item in the consolidated balance sheets as of January
29, 2000 and January 30, 1999 and reflect the Company's interest in the net loss
of Xxxxxx & Xxxxx.xxx as a single line item in the consolidated statements of
operations for fiscal years 1999 and 1998, as if the formation of the joint
venture had occurred at the beginning of fiscal 1998. The Company's share in the
net loss of Xxxxxx & Xxxxx.xxx for fiscal 1998 was based on a 100 percent equity
interest for the first three quarters ended October 31, 1998 (the effective date
of the limited liability company agreement), and a 50 percent equity interest
beginning on
18
November 1, 1998 through the end of the fiscal year.
As a result of the Xxxxxx & Xxxxx.xxx Inc. IPO on May 25, 1999, the
Company and Bertelsmann each retained a 40 percent interest in Xxxxxx &
Xxxxx.xxx. Accordingly, the Company's share in the net loss of Xxxxxx &
Xxxxx.xxx for fiscal 1999 was based on a 50 percent equity interest from the
beginning of fiscal 1999 through May 25, 1999 and 40 percent thereafter. The
accompanying consolidated financial statements reflect the financial position
and results of operations of Xxxxxx & Xxxxx.xxx as a consolidated wholly owned
subsidiary in fiscal 1997.
Acquisition of Babbage's Etc.
On October 28, 1999, the Company acquired Babbage's Etc., one of the
nation's largest operators of video game and entertainment software stores, for
approximately $183 million in cash plus the assumption of $26 million in certain
liabilities. If financial performance targets are met over the next two fiscal
years, Xxxxxx & Xxxxx will make additional payments of approximately $10 million
in 2001 and approximately $10 million in 2002. The acquisition was accounted for
by the purchase method. The excess of purchase price over the net assets
acquired, in the amount of approximately $202 million has been recorded as
goodwill and is being amortized using the straight-line method over an estimated
useful life of 30 years. Babbage's Etc.'s results of operations for the fourth
quarter ended January 29, 2000 are included in the consolidated financial
statements.
Newly Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) which establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS 133
requires companies to recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. The Company
will adopt SFAS 133 as required for its first quarterly filing of fiscal year
2001.
The Company from time to time enters into interest rate swap agreements
for the purpose of hedging risks attributable to changing interest rates
associated with the Company's revolving credit facility, and, in general, such
xxxxxx have been fully effective. The Company may from time to time, enter into
interest rate swaps in the future and these transactions are expected to
substantially offset the effects of changes in the underlying variable interest
rates. The Company does not believe that adoption of SFAS 133 will have a
material effect on its consolidated financial statements.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. SAB 101 did not impact the
Company's revenue recognition policies.
Year 2000
The Company completed its Year 2000 compliance plan during 1999. The
total costs incurred to implement the plan were approximately $4.3 million. The
conversion to the Year 2000 occurred without any disruptions to the Company's
critical business systems either internally or from outside sources. The Company
has no reason to believe that Year 2000 failures will materially affect it in
the future. However,
19
since it may take several additional months before it is known whether the
Company or third party vendors, suppliers or service providers may have
encountered Year 2000 problems, no assurances can be given that the Company will
not experience disruptions as a result of Year 2000 compliance failures. The
Company will continue to monitor Year 2000 exposures both internally and with
its vendors, suppliers and service providers. Such monitoring will be ongoing
and encompassed in normal operations. Associated costs are not expected to be
significant.
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, increased or
unanticipated costs or effects associated with Year 2000 compliance by the
Company or its service or supply providers, 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 Xxxxxx &
Xxxxx.xxx, 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.
20
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year 1999 1998 1997
---- ---- ----
(Thousands of dollars, except per share data)
---------------------------------------------
Sales $3,486,043 3,005,608 2,796,852
Cost of sales and occupancy 2,483,729 2,142,717 2,019,291
--------- --------- ---------
Gross profit 1,002,314 862,891 777,561
--------- ------- -------
Selling and administrative expenses 651,099 580,609 542,336
Depreciation and amortization 112,304 88,345 76,951
Pre-opening expenses 6,801 8,795 12,918
--------- --------- ---------
Operating profit 232,110 185,142 145,356
Interest (net of interest income of $1,449, $976 and $446, respectively) and
amortization of deferred financing fees (23,765) (24,412) (37,666)
Equity in net loss of Xxxxxx & Xxxxx.xxx (42,047) (71,334) --
Gain on formation of Xxxxxx & Xxxxx.xxx 25,000 63,759 --
Other income 27,337 3,414 1,913
--------- --------- ---------
Earnings before provision for income taxes, extraordinary charge and
cumulative effect of a change in accounting principle 218,635 156,569 109,603
Provision for income taxes 89,637 64,193 44,935
--------- --------- ---------
Earnings before extraordinary charge and cumulative effect of a change in
accounting principle 128,998 92,376 64,668
Extraordinary charge due to early extinguishment of debt, net of tax
benefits of $7,991 -- -- (11,499)
Cumulative effect of a change in accounting principle, net of tax benefits
of $3,125 (4,500) -- --
--------- --------- ---------
Net earnings $124,498 92,376 53,169
========= ========= =========
Earnings per common share
Basic
Earnings before extraordinary charge and cumulative effect of a change
in accounting principle $ 1.87 1.35 0.96
Extraordinary charge due to early extinguishment of debt, net of tax
benefits $ -- -- (0.17)
Cumulative effect of a change in accounting principle, net of tax
benefits $ (0.07) -- --
Net earnings $ 1.80 1.35 0.79
Diluted
Earnings before extraordinary charge and cumulative effect of a change
in accounting principle $ 1.81 1.29 0.93
Extraordinary charge due to early extinguishment of debt, net of tax
benefits $ -- -- (0.17)
Cumulative effect of a change in accounting principle, net of tax
benefits $ (0.06) -- --
Net earnings $ 1.75 1.29 0.76
Weighted average common shares outstanding
Basic 69,005,000 68,435,000 67,237,000
Diluted 71,354,000 71,677,000 69,836,000
See accompanying notes to consolidated financial statements.
21
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except per share data) January 29, 2000 January 30, 1999
--------------------------------------------- ---------------- ----------------
Assets
Current assets:
Cash and cash equivalents $ 24,247 31,081
Receivables, net 58,240 57,523
Merchandise inventories 1,102,453 945,073
Prepaid expenses and other current assets 56,579 54,634
---------- ---------
Total current assets 1,241,519 1,088,311
---------- ---------
Property and equipment:
Land and land improvements 3,247 3,197
Buildings and leasehold improvements 417,535 383,292
Fixtures and equipment 565,345 440,488
---------- ---------
986,127 826,977
Less accumulated depreciation and amortization 418,078 316,631
---------- ---------
Net property and equipment 568,049 510,346
---------- ---------
Intangible assets, net 298,011 86,980
Investment in Xxxxxx & Xxxxx.xxx 240,531 82,307
Other noncurrent assets 65,681 39,653
---------- ---------
Total assets $2,413,791 1,807,597
========== =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 599,376 498,237
Accrued liabilities 323,475 274,085
---------- ---------
Total current liabilities 922,851 772,322
---------- ---------
Long-term debt 431,600 249,100
Deferred income taxes 125,006 32,449
Other long-term liabilities 87,974 74,937
Shareholders' equity:
Common stock; $.001 par value; 300,000,000 shares authorized;
69,553,839 and 68,759,111 shares issued, respectively 70 69
Additional paid-in capital 654,584 523,517
Accumulated other comprehensive loss (1,198) --
Retained earnings 279,701 155,203
Treasury stock, at cost, 4,025,900 shares at January 29, 2000 (86,797) --
---------- ---------
Total shareholders' equity 846,360 678,789
---------- ---------
Commitments and contingencies -- --
---------- ---------
Total liabilities and shareholders' equity $2,413,791 1,807,597
========== =========
See accompanying notes to consolidated financial statements.
22
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Additional Other Treasury
Common Paid-in Comprehensive Retained Stock at
(Thousands of dollars) Stock Capital Loss Earnings Cost Total
---------------------- ------ ---------- --------------- --------- -------- -----
Balance at February 1, 1997 $ 66 446,265 -- 9,658 -- 455,989
Comprehensive earnings:
Net earnings -- -- -- 53,169 --
Total comprehensive earnings 53,169
Exercise of 1,545,580 common stock
options, including tax benefits of
$8,253 2 22,595 -- -- -- 22,597
--------- --------- ------------- ----------- ------------ ------------
Balance at January 31, 1998 68 468,860 -- 62,827 -- 531,755
Comprehensive earnings:
Net earnings -- -- -- 92,376 --
Total comprehensive earnings 92,376
Exercise of 837,281 common stock
options, including tax benefits of
$9,002 1 18,306 -- -- -- 18,307
Xxxxxx & Xxxxx.xxx issuance of
membership units (net of deferred
income taxes of $26,325) -- 36,351 -- -- -- 36,351
------- --------- ------------- ------------ ------------ ------------
Balance at January 30, 1999 69 523,517 -- 155,203 -- 678,789
Comprehensive earnings:
Net earnings -- -- -- 124,498 --
Other comprehensive loss (net of
deferred income taxes of $839) -- -- (1,198) -- --
Total comprehensive earnings 123,300
Exercise of 794,728 common stock
options, including tax benefits of
$6,302 1 14,909 -- -- -- 14,910
Xxxxxx & Xxxxx.xxx Inc. IPO (net of
deferred income taxes of $84,114) -- 116,158 -- -- -- 116,158
Treasury stock acquired, 4,025,900 shares -- -- -- -- (86,797) (86,797)
------- --------- ------------- ---------- -------- --------
Balance at January 29, 2000 $ 70 654,584 (1,198) 279,701 (86,797) 846,360
======= ======= ============= ======= ======== =======
See accompanying notes to consolidated financial statements.
23
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year 1999 1998 1997
---- ---- ----
(Thousands of dollars)
----------------------
Cash flows from operating activities:
Net earnings $ 124,498 92,376 53,169
Adjustments to reconcile net earnings to net cash flows from
operating activities:
Depreciation and amortization 112,693 88,721 78,629
Loss on disposal of property and equipment 5,636 3,291 853
Deferred taxes 9,877 14,761 11,598
Extraordinary charge due to early extinguishment of debt, net of tax
benefits -- -- 11,499
Increase in other long-term liabilities for scheduled rent increases
in long-term leases 13,472 14,031 16,350
Cumulative effect of a change in accounting principle, net of taxes 4,500 -- --
Other income (27,337) (3,414) (1,913)
Gain on formation of Xxxxxx & Xxxxx.xxx (25,000) (63,759) --
Equity in net loss of Xxxxxx & Xxxxx.xxx 42,047 71,334 --
Changes in operating assets and liabilities, net (73,055) (39,673) (2,884)
--------- --------- ---------
Net cash flows from operating activities 187,331 177,668 167,301
--------- --------- ---------
Cash flows from investing activities:
Acquisition of consolidated subsidiaries, net of cash received (175,760) -- --
Purchases of property and equipment (146,294) (141,378) (121,903)
Investment in Xxxxxx & Xxxxx.xxx -- (75,394) --
Proceeds from formation of Xxxxxx & Xxxxx.xxx 25,000 75,000 --
Proceeds from the partial sale of Chapters 21,558 -- --
Purchase of investment in xXxxxxxxx.xxx (20,000) -- --
Net increase in other noncurrent assets (9,282) (119) (11,264)
--------- --------- ---------
Net cash flows from investing activities (304,778) (141,891) (133,167)
--------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in revolving credit facility 182,500 (35,700) 244,800
Repayment of long-term debt -- -- (290,000)
Proceeds from exercise of common stock options including related tax
benefits 14,910 18,307 22,597
Payment of note premium -- -- (11,281)
Purchase of treasury stock through repurchase program (86,797) -- --
--------- --------- ---------
Net cash flows from financing activities 110,613 (17,393) (33,884)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (6,834) 18,384 250
Cash and cash equivalents at beginning of year 31,081 12,697 12,447
--------- --------- ---------
Cash and cash equivalents at end of year $ 24,247 31,081 12,697
========= ========= =========
Changes in operating assets and liabilities, net:
Receivables, net $ 3,795 (14,012) 1,700
Merchandise inventories (69,059) (93,491) (119,904)
Prepaid expenses and other current assets (8,543) (1,047) 9,721
Accounts payable and accrued liabilities 752 68,877 105,599
--------- --------- ---------
Changes in operating assets and liabilities, net $ (73,055) (39,673) (2,884)
========= ========= =========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 24,911 25,243 37,845
Income taxes $ 72,342 18,225 20,282
Supplemental disclosure of subsidiaries acquired:
Assets acquired $ 201,910
Liabilities assumed 26,150
---------
Cash paid $ 175,760
=========
See accompanying notes to consolidated financial statements.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of dollars, except per share data)
For the 52 weeks ended January 29, 2000 (fiscal 1999), January 30, 1999 (fiscal
1998) and January 31, 1998 (fiscal 1997).
1. Summary of Significant Accounting Policies
Business
Xxxxxx & Noble, Inc. (Xxxxxx & Xxxxx), through its wholly owned
subsidiaries (collectively, the Company), is primarily engaged in the sale of
books, video games and entertainment software products. The Company employs two
principal bookselling strategies: its "super" store strategy through its wholly
owned subsidiary Xxxxxx & Noble Booksellers, Inc., under its Xxxxxx & Xxxxx
Booksellers, Bookstop and Bookstar trade names (hereafter collectively referred
to as Xxxxxx & Noble stores) and its mall strategy through its wholly owned
subsidiaries X. Xxxxxx Bookseller, Inc. and Doubleday Book Shops, Inc., under
its X. Xxxxxx stores, Doubleday Book Shops and Xxxxxxxx'x Bookstore trade names
(hereafter collectively referred to as X. Xxxxxx stores). The Company is also
engaged in the online retailing of books and other products through a 40 percent
interest in xxxxxxxxxxxxxx.xxx llc (Xxxxxx & Xxxxx.xxx), as more fully described
in Note 7. The Company, through its recent acquisition of Babbage's Etc. LLC,
operates video game and entertainment software stores under the Babbage's,
Software Etc. and GameStop trade names, and a Web site, xxxxxxxx.xxx (hereafter
collectively referred to as Babbage's Etc.).
Consolidation
The consolidated financial statements include the accounts of Xxxxxx &
Xxxxx and its wholly owned subsidiaries. Investments in affiliates in which
ownership interests range from 20 percent to 50 percent, principally Xxxxxx &
Xxxxx.xxx, are accounted for under the equity method. The Company's investment
in Xxxxxx & Xxxxx.xxx has been presented in the accompanying consolidated
financial statements under the equity method as of the beginning of fiscal 1998
and as a consolidated wholly owned subsidiary for all of fiscal 1997. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, the Company is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid instruments
purchased with an original maturity of three months or less to be cash
equivalents.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market. Cost
is determined primarily by the retail inventory method on the first-in,
first-out (FIFO) basis for 83 percent and 86 percent of the Company's
merchandise inventories as of January 29, 2000 and January 30, 1999,
respectively. Merchandise inventories of Babbage's Etc., which represent 6
percent of merchandise inventories as of January 29, 2000, 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 January 29, 2000 and January 30, 1999.
Property and Equipment
Property and equipment are carried at cost, less accumulated
depreciation and amortization. For financial reporting purposes, depreciation is
computed using the straight-line method over estimated useful lives. For tax
purposes, different methods are used. Maintenance and repairs are expensed as
incurred, while betterments and major remodeling costs are capitalized.
Leasehold improvements are capitalized and amortized over the shorter of their
estimated useful lives or the terms of the respective leases. Capitalized lease
acquisition costs are being amortized over the lease terms of the underlying
leases. Costs incurred in purchasing management information systems are
capitalized and included in property and equipment. These costs are amortized
over their estimated useful lives from the date the systems become operational.
Intangible Assets and Amortization
The costs in excess of net assets of businesses acquired are carried as
intangible assets, net of accumulated amortization, in the accompanying
consolidated balance sheets. The net intangible assets, consisting primarily of
goodwill and trade names of $272,505 and $25,506 as of January 29, 2000 and
$59,365 and $27,615 as of January 30, 1999, are amortized using the
straight-line method over periods ranging from 30 to 40 years.
Amortization of goodwill and trade names included in depreciation and
amortization in the accompanying consolidated statements of operations is
$5,148, $3,257 and $3,257 during fiscal 1999, 1998 and 1997, respectively.
Accumulated amortization at January 29, 2000 and January 30, 1999 was $49,699
and $44,551, respectively.
The Company periodically evaluates the recoverability of goodwill and
considers whether this goodwill should be completely or partially written off or
the amortization periods accelerated. The Company assesses the recoverability of
this goodwill based upon several factors, including management's intention with
respect to the acquired operations and those operations' projected undiscounted
store-level cash flows.
Deferred Charges
Costs incurred to obtain long-term financing are amortized over the
terms of the respective debt agreements using the straight-line method, which
approximates the interest method. Unamortized costs
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
included in other noncurrent assets as of January 29, 2000 and January 30, 1999
were $1,969 and $1,397, respectively. Unamortized costs of $8,209 were included
in the extraordinary loss due to the early extinguishment of debt for fiscal
1997. Amortization expense included in interest and amortization of deferred
financing fees is $389, $376 and $1,678 during fiscal 1999, 1998 and 1997,
respectively.
Marketable Equity Securities
All marketable equity securities included in other noncurrent assets
are classified as available-for-sale under FASB Statement No. 115, with
unrealized gains and losses (net of taxes) shown as a component of shareholders'
equity.
Revenue Recognition
Revenue from sales of the Company's products is recognized at the time
of sale.
The Company sells memberships which entitle purchasers to additional
discounts. The membership revenue is deferred and recognized as income over the
12-month membership period.
Sales returns (which are not significant) are recognized at the time
returns are made.
Pre-opening Expenses
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP
98-5). SOP 98-5 requires an entity to expense all start-up activities, as
defined, when incurred. Prior to 1999, the Company amortized costs associated
with the opening of new stores over the respective store's first 12 months of
operations. In accordance with SOP 98-5, the Company recorded a one-time
non-cash charge reflecting the cumulative effect of a change in accounting
principle in the amount of $4,500 after taxes, representing such start-up costs
capitalized as of the beginning of fiscal year 1999. Since adoption, the Company
has expensed all such start-up costs as incurred. The effect of the change in
accounting principle on earnings in 1999 was immaterial.
Closed Store Expenses
Upon a formal decision to close or relocate a store, the Company charges
unrecoverable costs to expense. Such costs include the net book value of
abandoned fixtures and leasehold improvements and a provision for future lease
obligations, net of expected sublease recoveries. Costs associated with store
closings of $5,447 and $1,208 during fiscal 1999 and fiscal 1998, respectively,
are included in selling and administrative expenses in the accompanying
consolidated statements of operations.
Net Earnings Per Common Share
Basic earnings per share is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding.
Diluted earnings per share reflect, in periods in which they have a dilutive
effect, the impact of common shares issuable upon exercise of stock options.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Income Taxes
The provision for income taxes includes federal, state and local income
taxes currently payable and those deferred because of temporary differences
between the financial statement and tax bases of assets and liabilities. The
deferred tax assets and liabilities are measured using the enacted tax rates and
laws that are expected to be in effect when the differences reverse.
Stock Options
The Company accounts for all transactions under which employees receive
shares of stock or other equity instruments in the Company or the Company incurs
liabilities to employees in amounts based on the price of its stock in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."
Reclassifications
Certain prior-period amounts have been reclassified for comparative
purposes to conform with the 1999 presentation.
Reporting Period
The Company's fiscal year is comprised of 52 or 53 weeks, ending on the
Saturday closest to the last day of January. The reporting periods ended January
29, 2000, January 30, 1999 and January 31, 1998 each consisted of 52 weeks.
2. Receivables, Net
Receivables represent customer, bankcard, landlord and other receivables
due within one year as follows:
January 29, January 30,
2000 1999
----------- -----------
Trade accounts $9,558 6,743
Bankcard receivables 21,309 19,421
Receivables from landlords for
leasehold improvements 12,807 23,659
Other receivables 14,566 7,700
------- ------
Total receivables, net $58,240 57,523
======= ======
3. Debt
On November 18, 1997, the Company obtained an $850,000 five-year senior
revolving credit facility (the Revolving Credit Facility) with a syndicate led
by The Chase Manhattan Bank. The Revolving Credit Facility refinanced an
existing $450,000 revolving credit and $100,000 term loan facility (the Old
Facility). The Revolving Credit Facility permits borrowings at various interest
rate
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
options based on the prime rate or London Interbank Offer Rate (LIBOR)
depending upon certain financial tests. In addition, the agreement requires the
Company to pay a commitment fee up to 0.25 percent of the unused portion
depending upon certain financial tests. The Revolving Credit Facility contains
covenants, limitations and events of default typical of credit facilities of
this size and nature, including financial covenants which require the Company to
meet, among other things, cash flow and interest coverage ratios and which limit
capital expenditures. The Revolving Credit Facility is secured by the capital
stock, accounts receivable and general intangibles of the Company's
subsidiaries.
Net proceeds from the Revolving Credit Facility are available for
general corporate purposes and were used to redeem all of the Company's
outstanding $190,000 11-7/8 percent senior subordinated notes on January 15,
1998. As a result of the refinancings, the Company recorded an extraordinary
charge of $11,499 (net of applicable taxes) due to the early extinguishment of
debt during fiscal 1997. The extraordinary charge represents the payment of a
call premium associated with the redemption of the senior subordinated notes of
$6,656 (net of applicable taxes) and the write-off of unamortized fees of $4,843
(net of applicable taxes).
The Company from time to time enters into interest rate swap agreements
to manage interest costs and risk associated with changes in interest rates.
These agreements effectively convert underlying variable-rate debt based on
prime rate or LIBOR to fixed-rate debt through the exchange of fixed and
floating interest payment obligations without the exchange of underlying
principal amounts. As of January 29, 2000 and January 30, 1999 the Company had
outstanding $85,000 and $125,000 of swaps, respectively, with maturities ranging
from 2000 to 2003. The Company recorded interest expense associated with these
agreements of $470 and $440 during fiscal years 1999 and 1998, respectively.
Selected information related to the Company's revolving credit facility
is as follows:
Fiscal Year 1999 1998 1997
----------- -------- ------- -------
Balance at end of year $431,600 249,100 284,800
Average balance outstanding during the year $397,114 380,315 105,127
Maximum borrowings outstanding during the year $693,500 535,000 304,900
Weighted average interest rate during the year 6.01% 6.29% 7.12%
Interest rate at end of year 6.26% 5.77% 6.60%
Fees expensed with respect to the unused portion of the Company's
revolving credit commitment were $664, $733 and $1,204, during fiscal 1999, 1998
and 1997, respectively.
The amounts outstanding under the Company's Revolving Credit Facility
of $431,600 and $249,100 as of January 29, 2000 and January 30, 1999,
respectively, have been classified as long-term debt based on the terms of the
credit agreement and the Company's intention to maintain principal amounts
outstanding through November 2002.
The Company has no agreements to maintain compensating balances.
4. Fair Values of Financial Instruments
The carrying values of cash and cash equivalents reported in the
accompanying consolidated balance sheets approximate fair value due to the
short-term maturities of these assets. The aggregate fair
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
value of the Revolving Credit Facility approximates its carrying amount, because
of its recent and frequent repricing based upon market conditions. Investments
in publicly traded securities accounted for under Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS 115) are carried at amounts approximating fair value.
The Company maintains an investment in Chapters Inc. (Chapters), a
Canadian book retailer. The carrying value and fair value (based on quoted
market prices and conversion rates) of this investment was $18,827 and $33,201,
respectively, at January 30, 1999. Due to the partial sale of its investment in
Chapters, as more fully discussed in Note 5, the Company currently accounts for
this investment as an available-for-sale security.
Interest rate swap agreements are valued based on market quotes
obtained from dealers. The carrying value and estimated fair value of the
interest rate swaps asset (liability) was $0 and $447, respectively, at January
29, 2000, and $0 and ($2,189), respectively, at January 30, 1999.
5. Marketable Equity Securities
Marketable equity securities are carried on the balance sheet at their
fair market value as a component of other noncurrent assets. The Company did not
have any marketable equity securities on January 30, 1999 as defined by SFAS
115. The following marketable equity securities have been classified as
available-for-sale securities:
Unrealized January 29, 2000
Cost Losses Market Value
---------- ------------- ----------------
Gemstar International Ltd. $27,137 $(1,684) $25,453
Chapters 8,294 (353) 7,941
---------- ------------- --------------
$35,431 $(2,037) $33,394
========== ============= ==============
In fiscal 1998, the Company accounted for its investment in NuvoMedia
Inc. (NuvoMedia) under the cost method. In fiscal 1999, NuvoMedia was acquired
by Gemstar International Ltd. (Gemstar), a publicly traded company. Under the
terms of the agreement, NuvoMedia shareholders received Gemstar shares in
exchange for their ownership interests.
Prior to fiscal 1999, the Company accounted for its investment in
Chapters under the equity method. During fiscal 1999, the Company sold a portion
of its investment in Chapters. Subsequent to the partial sale of its investment,
the Company retained a seven percent interest in Chapters and accordingly, has
recorded the remaining investment as an available-for-sale security.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
6. Other Income
The following table sets forth the components of other income (expense), in
thousands of dollars:
Fiscal Year 1999 1998 1997
----------- ---------- ---------
Gain on sale of NuvoMedia (1) $22,356 -- --
Gain on partial sale of Chapters (2) 10,975 -- --
Equity in net earnings (losses) of
Chapters (2) (101) 1,140 1,016
Equity in net losses of xXxxxxxxx.xxx (3) (2,121) -- --
Equity in net earnings of Calendar Club
LLC (4) 1,228 2,274 897
Termination of planned acquisition of
Xxxxxx Book Group (5) (5,000) -- --
----------- ---------- ---------
$27,337 3,414 1,913
=========== ========== =========
(1) In fiscal 1999, in connection with the sale of NuvoMedia as more
fully discussed in Note 5, the Company recognized a pre-tax gain
of $22,356.
(2) During fiscal 1999, the Company sold a portion of its investment
in Chapters resulting in a pre-tax gain of $10,975. Prior to this
transaction, the Company accounted for its investment in Chapters
under the equity method.
(3) During 1999, the Company acquired a 41 percent interest in
xXxxxxxxx.xxx for $20,000. Subsequent to the fiscal 1999 year end,
the Company invested an additional $8,000 in xXxxxxxxx.xxx thereby
increasing its percentage ownership interest to 49 percent. This
investment is being accounted for under the equity method and is
reflected as a component of other noncurrent assets.
(4) The Company's 50 percent interest in Calendar Club LLC (Calendar
Club) is being accounted for under the equity method and is
reflected as a component of other noncurrent assets.
(5) In 1999, the Company and the Xxxxxx Book Group (Xxxxxx) announced
their agreement to terminate the Company's planned acquisition of
Xxxxxx. The Company's application before the Federal Trade
Commission for the purchase was formally withdrawn. As a result,
other income reflects a one-time charge of $5,000 for acquisition
costs relating primarily to legal, accounting and other
transaction related costs.
7. Xxxxxx & Xxxxx.xxx
On November 12, 1998, the Company and Bertelsmann AG (Bertelsmann)
completed the formation of a limited liability company to operate the online
retail bookselling operations of the Company's wholly owned subsidiary,
xxxxxxxxxxxxxx.xxx inc. (Xxxxxx & Xxxxx.xxx Inc.). The new entity, Xxxxxx &
Xxxxx.xxx, was structured as a limited liability company. Under the terms of the
relevant agreements, effective as of October 31, 1998, the Company and
Bertelsmann each retained a 50 percent membership interest in Xxxxxx &
Xxxxx.xxx. The Company contributed substantially all of the assets and
liabilities of its online operations to the joint venture and Bertelsmann paid
$75,000 to the Company and made a $150,000 cash contribution to the joint
venture. Bertelsmann also agreed to contribute an additional $50,000 to the
joint venture for future working capital requirements. The Company recognized a
pre-tax gain during fiscal 1998 in the amount of $126,435, of which $63,759 was
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
recognized in earnings based on the $75,000 received directly and $62,676
($36,351 after taxes) was reflected in additional paid-in capital based on the
Company's share of the incremental equity of the joint venture resulting from
the $150,000 Bertelsmann contribution.
On May 25, 1999, Xxxxxx & Xxxxx.xxx Inc. completed an initial public
offering (IPO) of 28.75 million shares of Class A Common Stock and used the
proceeds to purchase a 20 percent interest in Xxxxxx & Xxxxx.xxx. As a result,
the Company and Bertelsmann each retained a 40 percent interest in Xxxxxx &
Xxxxx.xxx. The Company recorded an increase in additional paid-in capital of
$116,158 after taxes representing the Company's incremental share in the equity
of Xxxxxx & Xxxxx.xxx. The Company will continue to account for its investment
under the equity method.
Under the terms of the November 12, 1998 joint venture agreement between
the Company and Bertelsmann, the Company received a $25,000 payment from
Bertelsmann in connection with the IPO. The Company recognized the $25,000
pre-tax gain in the second quarter of 1999. The estimated fair market value of
Xxxxxx & Xxxxx.xxx at January 29, 2000 was $742,000.
Summarized financial information for Xxxxxx & Xxxxx.xxx follows:
12 months ended
December 31,
-------------------------
1999 1998
--------- ----------
Net sales $ 202,567 61,834
Gross profit $ 42,630 14,265
Loss before taxes $ (102,405) (83,148)
Cash and cash equivalents $ 478,047 96,940
Other current assets 27,567 14,736
Noncurrent assets 173,904 90,468
Current liabilities 75,940 32,995
---------- ---------
Net assets $ 603,578 169,149
========== =========
8. Employees' Retirement and Defined Contribution Plans
As of December 31, 1999, substantially all employees of the Company were
covered under a noncontributory defined benefit pension plan (the Pension Plan).
As of January 1, 2000, the Pension Plan was amended and frozen so that employees
no longer earn benefits for subsequent service. Subsequent service continues to
be the basis for vesting of benefits not yet vested at December 31, 1999 and the
Pension Plan will continue to hold assets and pay benefits. The amendment was
treated as a curtailment in fiscal 1999 resulting in a pre-tax gain of $14,142
which is included as a reduction of selling and administrative expenses.
The Company maintains defined contribution plans (the Savings Plans) for
the benefit of substantially all employees. In addition, the Company provides
certain health care and life insurance benefits (the Postretirement Plan) to
retired employees, limited to those receiving benefits or retired as of April 1,
1993.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
A summary of the components of net periodic cost for the Pension Plan
and the Postretirement Plan follows:
Pension Plan Postretirement Plan
---------------------------------- ----------------------------------
Fiscal Year 1999 1998 1997 1999 1998 1997
----------- ---------- ----------- ----------- ----------- ----------- ----------
Service cost $4,535 4,157 3,294 -- -- --
Interest cost 2,349 2,039 1,666 151 149 315
Expected return on plan assets (2,494) (2,208) (1,803) -- -- --
Net amortization and deferral 32 36 36 (123) (135) --
--------- ---------- ---------- ----- ----- -----
Net periodic cost $4,422 4,024 3,193 28 14 315
========= ========== ========== ===== ===== =====
Total Company contributions charged to employee benefit expenses for
the Savings Plans were $3,374, $3,090 and $2,545 during fiscal 1999, 1998 and
1997, respectively.
Weighted-average actuarial assumptions used in determining the net
periodic costs of the Pension Plan and the Postretirement Plan are as follows:
Pension Plan Postretirement Plan
---------------------------------- ----------------------------------
Fiscal Year 1999 1998 1997 1999 1998 1997
----------- ---------- ----------- ----------- ----------- ----------- ----------
Discount rate 7.8% 7.3% 7.3% 7.8% 7.3% 7.3%
Expected return on plan assets 9.5% 9.5% 9.5% -- -- --
Assumed rate of compensation
increase 4.8% 4.3% 4.3% -- -- --
As a result of the formation of Xxxxxx & Xxxxx.xxx, as more fully
described in Note 7, certain assets of the Pension Plan and a portion of the
benefit obligation, were transferred to Xxxxxx & Xxxxx.xxx's defined benefit
pension plan as of the date of the formation.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The following table provides a reconciliation of benefit obligations,
plan assets and funded status of the Pension Plan and the Postretirement Plan:
Pension Plan Postretirement Plan
----------------------------------- -----------------------------------
Fiscal Year 1999 1998 1999 1998
----------- ----------------- ----------------- ----------------- -----------------
Change in benefit obligation:
Benefit obligation at beginning of
year $33,064 30,734 2,145 1,975
Service cost 4,535 4,157 -- --
Interest cost 2,349 2,039 151 149
Transfer to Xxxxxx & Xxxxx.xxx -- (642) -- --
Actuarial (gain) loss (1,707) (2,427) 272 136
Benefits paid (1,062) (797) (515) (115)
Curtailment (14,142) -- -- --
-------- ------- ------- -------
Benefit obligation at end of year $23,037 33,064 2,053 2,145
-------- ------- ------- -------
Change in plan assets:
Fair value of plan assets at
beginning of year $25,331 22,909 -- --
Actual return on assets 1,393 2,255 -- --
Employer contributions 3,374 1,395 -- --
Benefits paid (1,062) (797) -- --
Transfer to Xxxxxx & Xxxxx.xxx -- (431) -- --
-------- ------- ------- -------
Fair value of plan assets at end of
year $29,036 25,331 -- --
-------- ------- ------- -------
Funded status $5,999 (7,733) (2,053) (2,145)
Unrecognized net actuarial (gain)
loss 200 805 (1,741) (2,136)
Unrecognized prior service cost -- (183) -- --
Unrecognized net obligation
remaining -- 166 -- --
-------- ------- ------- -------
Prepaid (accrued) benefit cost $6,199 (6,945) (3,794) (4,281)
======== ======= ======= =======
The health care cost trend rate used to measure the expected cost of
the Postretirement Plan benefits is assumed to be seven percent in 2000,
declining at one-half percent decrements each year through 2004 to five percent
in 2004 and each year thereafter. The health care cost trend assumption has a
significant effect on the amounts reported. For example, a one percent increase
or decrease in the health care cost trend rate would change the accumulated
postretirement benefit obligation by approximately $193 and $171, respectively,
as of January 29, 2000, and would change the net periodic cost by approximately
$15 and $13, respectively, during fiscal 1999.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
9. Income Taxes
The Company files a consolidated federal return. Federal and state
income tax provisions for fiscal 1999, 1998 and 1997 are as follows:
Fiscal Year 1999 1998 1997
----------- ------- ------ ------
Current:
Federal $64,454 39,286 26,324
State 15,306 10,146 7,013
------- ------ ------
79,760 49,432 33,337
------- ------ ------
Deferred:
Federal 7,193 11,697 9,575
State 2,684 3,064 2,023
------- ------ ------
9,877 14,761 11,598
------- ------ ------
Total $89,637 64,193 44,935
======= ====== ======
A reconciliation between the provision for income taxes and the
expected provision for income taxes at the federal statutory rate of 35 percent
during fiscal 1999, 1998 and 1997, is as follows:
Fiscal Year 1999 1998 1997
----------- ------ ------ ------
Expected provision for income taxes at federal
statutory rate $76,522 54,799 38,361
Amortization of non-deductible goodwill and
trade names 1,342 1,251 1,140
State income taxes, net of federal income tax
benefit 11,694 8,596 5,873
Other, net 79 (453) (439)
------- ------ ------
Provision for income taxes $89,637 64,193 44,935
======= ====== ======
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The tax effects of temporary differences that give rise to significant
components of the Company's deferred tax assets and liabilities as of January
29, 2000 and January 30, 1999 are as follows:
January 29, January 30,
2000 1999
----------- -----------
Deferred tax liabilities:
Operating expenses $(15,437) (12,528)
Depreciation (31,289) (29,829)
Gain on equity increase in Xxxxxx &
Xxxxx.xxx (110,439) (26,325)
--------- ---------
Total deferred tax liabilities (157,165) (68,682)
--------- ---------
Deferred tax assets:
Inventory 4,312 4,043
Lease transactions 18,664 15,025
Reversal of estimated accruals 4,246 5,692
Restructuring charge 14,537 16,931
Insurance liability 2,673 2,502
Deferred income 4,015 11,411
Unrealized holding losses on
available-for-sale securities 839 --
Other 7,278 5,632
--------- ---------
Total deferred tax assets 56,564 61,236
--------- ---------
Net deferred tax liabilities $(100,601) (7,446)
========= =========
Deferred tax liabilities are recorded on the deferred income tax line
and deferred tax assets are recorded as a component of prepaid and other current
assets on the accompanying balance sheet.
10. Acquisition of Babbage's Etc.
On October 28, 1999, the Company acquired Babbage's Etc., one of the
nation's largest operators of video game and entertainment software stores, for
$208,670 (including assumed liabilities). If financial performance targets are
met over the next two fiscal years, the Company will make additional payments of
approximately $10,000 in 2001 and approximately $10,000 in 2002. The acquisition
was accounted for under 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 $202,386, has been recorded as goodwill
and is being amortized using the straight-line method over an estimated useful
life of 30 years.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The following table summarizes pro forma results as if the Company had
entered into the agreement on the first day of fiscal year 1998:
Fiscal Year 1999 1998
----------------------------------------------- -------------- --------------
Sales $3,815,435 3,470,774
Earnings before cumulative effect of a change
in accounting principle $125,011 93,298
Net earnings $120,511 93,298
Net earnings per common share:
Basic $1.75 1.36
Diluted $1.69 1.30
The pro forma results of operations include adjustments to give effect
to amortization of goodwill and interest expense on debt related to the
acquisition, together with related income tax effects. 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.
11. Segment Information
Historically, the Company operated as a single segment. As a result of
the acquisition of Babbage's Etc. in 1999, the Company is currently operating
under two segments and accordingly, is required to disclose information in
accordance with Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). 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 542 book "super" stores under the Xxxxxx & Xxxxx
Booksellers, Bookstop and Bookstar names which generally offer a comprehensive
title base, a cafe, a children's section, a music department, a magazine section
and a calendar of ongoing events, including author appearances and children's
activities. Additionally, this segment includes 400 small format mall-based
stores under the X. Xxxxxx Bookseller, Doubleday Book Shops and Xxxxxxxx'x
Bookstore trade names.
Video Game and Entertainment Software Stores
This segment includes 526 video game and entertainment software stores
under the Babbage's, Software Etc. and GameStop names, and a Web site,
xxxxxxxx.xxx. The principal products of these stores are comprised of video game
hardware and software and PC entertainment software. The Company's consolidated
financial statements reflect the results of Babbage's Etc. for the fourth
quarter of 1999 only.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. Segment operating profit
includes corporate expenses in each operating segment. Xxxxxx & Xxxxx evaluates
the performance of its segments and allocates resources to them
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
based on operating profit.
Summarized financial information concerning the Company's reportable
segments is presented below:
Sales Depreciation and Amortization
------------------------------------------- -----------------------------------
Fiscal Year 1999 1998 1997 1999 1998 1997
----------- -------------- -------------- ------------- ------------ ---------- -----------
Bookstores $3,262,295 3,005,608 2,796,852 $108,691 88,345 76,951
Video game & entertainment
software stores 223,748 -- -- 3,613 -- --
-------------- -------------- ------------- ------------ ---------- -----------
Total $3,486,043 3,005,608 2,796,852 $112,304 88,345 76,951
============== ============== ============= ============ ========== ===========
Equity Investment in
Operating Profit Xxxxxx & Xxxxx.xxx
-------------- -------------- ------------- ------------ ---------- -----------
Fiscal Year 1999 1998 1997 1999 1998 1997
----------- -------------- -------------- ------------- ------------ ---------- -----------
Bookstores $216,678 185,142 145,356 $240,531 82,307 --
Operating margin 6.64% 6.16% 5.20%
Video game & entertainment
software stores 15,432 -- -- -- -- --
Operating margin 6.90% NA NA
-------------- -------------- ------------- ------------ ---------- -----------
Total $232,110 185,142 145,356 $240,531 82,307 --
============== ============== ============= ============ ========== ===========
Capital Expenditures Total Assets
------------ ----------- ----------- -------------- ------------- -------------
Fiscal Year 1999 1998 1997 1999 1998 1997
----------- ------------ ----------- ----------- -------------- ------------- -------------
Bookstores $142,005 141,378 121,903 $2,076,795 1,807,597 1,591,171
Video game & entertainment
software stores 4,289 -- -- 336,996 -- --
------------ ----------- ----------- -------------- ------------- -------------
Total $146,294 141,378 121,903 $2,413,791 1,807,597 1,591,171
============ =========== =========== ============== ============= =============
A reconciliation of operating profit reported by reportable segments to
earnings before income taxes, extraordinary charge and cumulative effect of a
change in accounting principle in the consolidated financial statements is as
follows:
Fiscal Year 1999 1998 1997
----------- -------------- -------------- ---------------
Reportable segments operating profit $232,110 185,142 145,356
Interest, net (23,765) (24,412) (37,666)
Equity in net loss of Xxxxxx & Xxxxx.xxx (42,047) (71,334) --
Gain on formation of Xxxxxx & Xxxxx.xxx 25,000 63,759 --
Other income 27,337 3,414 1,913
-------------- -------------- ---------------
Consolidated earnings before income taxes, extraordinary
charge and cumulative effect of a change in accounting
principle $218,635 156,569 109,603
============== ============== ===============
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
12. Comprehensive Earnings
In 1999, as a result of the Company's investment activities (see Note
5), the Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" which establishes standards for reporting and
display of comprehensive earnings and its components in the financial
statements. Comprehensive earnings are net earnings, plus certain other items
that are recorded directly to shareholders' equity. The only such item currently
applicable to the Company is the unrealized loss on available-for-sale
securities, as follows:
Fiscal Year 1999 1998 1997
----------- ------------- ------------ ------------
Net earnings $124,498 92,376 53,169
Other comprehensive loss:
Unrealized loss on available-for-sale securities, net of
deferred income tax benefit of $839 (1,198) -- --
------------- ------------ ------------
Total comprehensive earnings $123,300 92,376 53,169
============= ============ ============
13. Shareholders' Equity
In fiscal 1999, the Board of Directors authorized a common stock
repurchase program for the purchase of up to $250,000 of the Company's common
shares. As of January 29, 2000, the Company has repurchased 4,025,900 shares at
a cost of approximately $86,797 under this program. The repurchased shares are
held in treasury.
As discussed more fully in Note 7, shareholders' equity as of January
29, 2000 includes an increase in additional paid-in capital of $116,158
representing the Company's incremental share in the equity of Xxxxxx & Xxxxx.xxx
as a result of the IPO. Shareholders' equity as of January 30, 1999 includes an
increase in additional paid-in capital of $36,351 as a result of the formation
of Xxxxxx & Xxxxx.xxx.
On July 10, 1998, the Board of Directors of the Company declared a
dividend of one Preferred Share Purchase Right (a Right) for each outstanding
share of the Company's common stock (Common Stock). The distribution of the
Rights was made on July 21, 1998 to stockholders of record on that date. Each
Right entitles the holder to purchase from the Company one four-hundredth of a
share of a new series of preferred stock, designated as Series H Preferred
Stock, at a price of $225 per one four-hundredth of a share. The Rights will be
exercisable only if a person or group acquires 15 percent or more of the
Company's outstanding Common Stock or announces a tender offer or exchange
offer, the consummation of which would result in such person or group owning 15
percent or more of the Company's outstanding Common Stock.
If a person or group acquires 15 percent or more of the Company's
outstanding Common Stock, each Right will entitle a holder (other than such
person or any member of such group) to purchase, at the Right's then current
exercise price, a number of shares of Common Stock having a market value of
twice the exercise price of the Right. In addition, if the Company is acquired
in a merger or other business combination transaction or 50 percent or more of
its consolidated assets or earning power are sold at any time after the Rights
have become exercisable, each Right will entitle its holder to purchase, at the
Right's then current exercise price, a number of the acquiring company's common
shares having a market value at
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
that time of twice the exercise price of the Right. Furthermore, at any time
after a person or group acquires 15 percent or more of the outstanding Common
Stock of the Company but prior to the acquisition of 50 percent of such stock,
the Board of Directors may, at its option, exchange part or all of the Rights
(other than Rights held by the acquiring person or group) at an exchange rate of
one four-hundredth of a share of Series H Preferred Stock or one share of the
Company's Common Stock for each Right.
The Company will be entitled to redeem the Rights at any time prior to
the acquisition by a person or group of 15 percent or more of the outstanding
Common Stock of the Company, at a price of $.01 per Right. The Rights will
expire on July 20, 2008.
The Company has 5,000,000 shares of $.001 par value preferred stock
authorized for issuance, of which 250,000 shares have been designated by the
Board of Directors as Series H Preferred Stock and reserved for issuance upon
exercise of the Rights. Each such share of Series H Preferred Stock will be
nonredeemable and junior to any other series of preferred stock the Company may
issue (unless otherwise provided in the terms of such stock) and will be
entitled to a preferred dividend equal to the greater of $2.00 per share or 400
times any dividend declared on the Company's Common Stock. In the event of
liquidation, the holders of Series H Preferred Stock will receive a preferred
liquidation payment of $1,000 per share, plus an amount equal to accrued and
unpaid dividends and distributions thereon. Each share of Series H Preferred
Stock will have 400 votes, voting together with the Company's Common Stock.
However, in the event that dividends on the Series H Preferred Stock shall be in
arrears in an amount equal to six quarterly dividends thereon, holders of the
Series H Preferred Stock shall have the right, voting as a class, to elect two
of the Company's Directors, whose terms shall extend until such time when all
accrued and unpaid dividends for all previous quarterly dividend periods and for
the current quarterly dividend period on all shares of Series H Preferred Stock
then outstanding shall have been declared and paid or set apart for payment. In
the event of any merger, consolidation or other transaction in which the
Company's Common Stock is exchanged, each share of Series H Preferred Stock will
be entitled to receive 400 times the amount and type of consideration received
per share of the Company's Common Stock. As of January 29, 2000, there were no
shares of Series H Preferred Stock outstanding.
14. Restructuring Charge
From 1989 through 1995, the Company closed, on average, between 40 and
60 mall bookstores per year primarily due to increasing competition from
superstores and declining mall traffic. During the fourth quarter of fiscal
1995, the Company accelerated its mall bookstore closing program with the aim of
forming a core of more profitable X. Xxxxxx stores, and provided for these
closing costs and asset valuation adjustments through a non-cash restructuring
charge, and early adoption of Statement of Financial Accounting Standards No.
121, "Accounting for Impairment of Long-Lived Assets and Assets to be Disposed
Of" (SFAS 121). In the fourth quarter of fiscal 1995, the Company recorded a
non-cash charge to operating earnings of $123,768 ($87,303 after tax or $1.32
per share) to reflect the aggregate impact of its restructuring plan and change
in accounting policy. The charge to earnings included a $33,000 write-down of
goodwill, and $45,862 related to the write-down of fixed assets and other
long-term assets. The Company has completed this store closing program. Costs
incurred in excess of the amount provided by the restructuring charge were
immaterial and have been included in selling and administrative expenses.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The following table sets forth the restructuring liability activity:
Lease
Provision for Termination
Store Closing Costs Other Total
--------------------------------------------------------------------------
Balance at February 1, 1997 $1,532 30,462 1,602 33,596
Fiscal 1997 payments 1,532 9,026 1,602 12,160
------- ------- ------ ------
Balance at January 31, 1998 -- 21,436 -- 21,436
Fiscal 1998 payments -- 12,968 -- 12,968
------- ------- ------ ------
Balance at January 30, 1999 -- 8,468 -- 8,468
Fiscal 1999 payments -- 8,468 -- 8,468
------- ------- ------ ------
Balance at January 29, 2000 $ -- -- -- --
======= ======= ====== ======
15. Stock Option Plans
The Company currently has two incentive plans under which stock options
have been or may be granted to officers, directors and key employees of the
Company - the 1991 Employee Incentive Plan (the 1991 Plan) and the 1996
Incentive Plan (the 1996 Plan). The options to purchase common shares generally
are issued at fair market value on the date of the grant, begin vesting after
one year in 33-1/3 percent or 25 percent increments per year, expire 10 years
from issuance and are conditioned upon continual employment during the vesting
period.
The Company increased the number of shares available for issuance under
the 1996 Plan from 6,000,000 to 11,000,000. The 1996 Plan and the 1991 Plan
allow the Company to grant options to purchase up to 11,000,000 and 4,732,704
shares of common stock, respectively.
In addition to the two incentive plans, the Company has granted stock
options to certain key executives and directors. The vesting terms and
contractual lives of these grants are similar to that of the incentive plans.
In accordance with the Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS 123), the Company discloses
the pro forma impact of recording compensation expense utilizing the
Black-Scholes model. The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the Black-Scholes model does not necessarily provide a
reliable measure of the fair value of its stock options.
Had compensation cost for the Company's stock option grants been
determined based on the fair value at the stock option grant dates consistent
with the pro forma method of SFAS 123, the Company's net earnings and diluted
earnings per share for fiscal 1999, 1998 and 1997, would have been reduced by
approximately $6,298 or $0.09 per share, $6,188 or $0.09 per share, and $3,863
or $0.06 per share, respectively.
Because the application of the pro forma disclosure provision of SFAS
123 are required only to
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
be applied to grants of options made by the Company during fiscal 1995 and
after, the above pro forma amounts may not be representative of the effects of
applying SFAS 123 to future years.
The weighted -average fair value of the options granted during fiscal
1999, 1998 and 1997 were estimated at $10.00, $12.96 and $8.05 respectively,
using the Black-Scholes option-pricing model with the following assumptions:
volatility of 35 percent for fiscal 1999 and fiscal 1998 grants, 28 percent for
fiscal 1997 grants, risk-free interest rate of 5.90 percent in fiscal 1999, 5.33
percent in fiscal 1998, and 6.54 percent in fiscal 1997, and an expected life of
6.0 years for fiscal 1999, 5.4 years for fiscal 1998 and 6.0 years for fiscal
1997.
A summary of the status of the Company's stock options is presented
below:
Weighted-Average
(Thousands of shares) Shares Exercise Price
--------------------------------------------------------------------------------
Balance, February 1, 1997 9,142 $ 11.07
Granted 2,254 19.31
Exercised (1,546) 9.28
Forfeited (186) 16.25
------
Balance, January 31, 1998 9,664 13.17
Granted 1,841 31.12
Exercised (837) 11.11
Forfeited (390) 22.35
------
Balance, January 30, 1999 10,278 16.22
Granted 2,148 22.31
Exercised (795) 11.39
Forfeited (488) 26.91
------
Balance, January 29, 2000 11,143 $ 17.27
======
Options exercisable as of January 29, 2000, January 30, 1999 and
January 31, 1998 were 7,133,000, 6,780,000 and 6,558,000, respectively. Options
available for grant under the plans were 4,243,000, 5,902,000 and 2,354,000 at
January 29, 2000, January 30, 1999 and January 31, 1998, respectively.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The following table summarizes information as of January 29, 2000
concerning outstanding and exercisable options:
Options Outstanding Options Exercisable
Weighted-
Average Weighted-
Range of Number Remaining Average Number Weighted-
Exercise Outstanding Contractual Exercise Exercisable Average
Prices (000s) Life Price (000s) Exercise Price
----------------------- ------------- -------------- ------------- --------------- -----------------
$3.21 - $3.77 556 3.36 $ 3.59 556 $ 3.59
$10.00 - $15.00 5,068 3.89 $ 12.06 5,068 $ 12.06
$17.13 - $24.25 3,729 8.27 $ 19.92 1,230 $ 19.29
$26.50 - $34.75 1,790 8.52 $ 30.73 279 $ 33.90
------ ------
$3.21 - $34.75 11,143 6.07 $ 17.27 7,133 $ 13.50
====== ======
16. Leases
The Company leases retail stores, warehouse facilities, office space and
equipment. Substantially all of the retail stores are leased under noncancelable
agreements which expire at various dates through 2036 with various renewal
options for additional periods. The agreements, which have been classified as
operating leases, generally provide for both minimum and percentage rentals and
require the Company to pay all insurance, taxes and other maintenance costs.
Percentage rentals are based on sales performance in excess of specified
minimums at various stores.
Rental expense under operating leases are as follows:
Fiscal Year 1999 1998 1997
----------- ---- ---- ----
Minimum rentals $291,964 271,201 253,472
Percentage rentals 7,502 3,183 3,216
----- ----- -----
$299,466 274,384 256,688
======== ======= =======
Future minimum annual rentals, excluding percentage rentals, required
under leases that had initial, noncancelable lease terms greater than one year,
as of January 29, 2000 are:
Fiscal Year
-----------
2000 $301,622
2001 294,336
2002 279,017
2003 257,289
2004 236,072
After 2004 1,541,439
---------
$2,909,775
==========
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
17. Litigation
In March 1998, the American Booksellers Association (ABA) and 26
independent bookstores filed a lawsuit in the United States District Court for
the Northern District of California against the Company and Borders Group, Inc.
(Borders) alleging violations of the Xxxxxxxx-Xxxxxx Act, the California Unfair
Trade Practice Act and the California Unfair Competition Law. The Complaint
seeks injunctive and declaratory relief; treble damages on behalf of each of the
bookstore plaintiffs, and, with respect to the California bookstore plaintiffs,
any other damages permitted by California law; disgorgement of money, property
and gains wrongfully obtained in connection with the purchase of books for
resale, or offered for resale, in California from March 18, 1994 until the
action is completed and pre-judgment interest on any amounts awarded in the
action, as well as attorney fees and costs. In October 0000, Xxxxxx & Xxxxx.xxx
was added as a defendant in the action. The Company intends to vigorously defend
this action.
In August 1998, The Intimate Bookshop, Inc. and its owner, Xxxxxxx
Xxxxxx, filed a lawsuit in the United States District Court for the Southern
District of New York against the Company, Borders, Xxxxxx.xxx, Inc., certain
publishers and others alleging violation of the Xxxxxxxx-Xxxxxx Act and other
federal law, New York statutes governing trade practices and common law. The
Complaint sought certification of a class consisting of all retail booksellers
in the United States, whether or not currently in business, which were in
business and were members of the ABA at any time during the four year period
preceding the filing of the Complaint. The Complaint alleged that the named
plaintiffs have suffered damages of $11,250 or more and requested treble damages
on behalf of the named plaintiffs and each of the purported class members, as
well as of injunctive and declaratory relief (including an injunction requiring
the closure of all of defendants' stores within 10 miles of any location where
plaintiff either has or had a retail bookstore during the four years preceding
the filing of the Complaint, and prohibiting the opening by defendants of any
bookstore in such areas for the next 10 years), disgorgement of alleged
discriminatory discounts, rebates, deductions and payments, punitive damages,
interest, costs, attorneys fees and other relief. The plaintiffs subsequently
amended their complaint to allege eight causes of action on behalf of the
Intimate Bookshop and Xxxxxxx Xxxxxx, accusing the Company and the other
defendants of: (i) violating Section 2(f) the Xxxxxxxx-Xxxxxx Act; (ii)
violating Section 2(c) of the Xxxxxxxx-Xxxxxx Act; (iii) violating Section
13(a)of the Xxxxxxx Act; (iv) inducing every publisher in the United States to
breach contracts with the plaintiffs; (v) interfering with the plaintiff's
advantageous business relationships; (vi) engaging in unfair competition; (vii)
violating Sections 349 and 350 of the New York General Business Law; and (viii)
being unjustly enriched. The class action allegations have been removed and the
plaintiffs voluntarily dismissed defendants Xxxxxx Xxxxxxx Publishers, Inc. and
Xxxxxx.xxx, Inc. from the case.
On April 13, 1999, the Company and the other defendants filed a motion
to dismiss the second through eighth causes of action in their entireties and
for a more definite statement of the remaining allegations of the first cause of
action. As a result, the plaintiffs' third through eighth causes of action were
dismissed with prejudice, as were all claims asserted by Xxxxxxx Xxxxxx in his
individual capacity. The Company served an Answer on April 5, 2000 denying the
material allegations of the Complaint and asserting various affirmative
defenses. The Company intends to continue to vigorously defend this action.
In addition to the above actions, various claims and lawsuits arising
in the normal course of business are pending against the Company. The subject
matter of these proceedings primarily includes
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
commercial disputes and employment issues. The results of these proceedings are
not expected to have a material adverse effect on the Company's consolidated
financial position or results of operations.
18. Certain Relationships and Related Transactions
The Company leases space for its executive offices in properties in
which Xxxxxxx Xxxxxx, chairman, chief executive officer and principal
stockholder of Xxxxxx & Noble, has a minority interest. The space was rented at
an aggregate annual rent including real estate taxes of approximately $2,753,
$1,316 and $1,309 in fiscal years 1999, 1998 and 1997, respectively.
The Company leases a 75,000 square foot office/warehouse from a
partnership in which Xxxxxxx Xxxxxx has a 50 percent interest, pursuant to a
lease expiring in 2023. Pursuant to such lease, the Company paid $573, $737 and
$743 in fiscal years 1999, 1998 and 1997, respectively.
The Company is provided with certain package shipping services by the
LTA Group, Inc. (LTA), a company in which a brother of Xxxxxxx Xxxxxx owns a 20
percent interest. The Company paid LTA $13,118, $12,571 and $11,528 for such
services during fiscal years 1999, 1998 and 1997, respectively.
The Company leases retail space in a building in which Xxxxxx & Xxxxx
College Bookstores, Inc. (B&N College), a company owned by Xxxxxxx Xxxxxx,
subleases space for its executive offices. Occupancy costs allocated by the
Company to B&N College for this space totaled $686, $725 and $634 for fiscal
years 1999, 1998 and 1997, respectively. In connection with the space, the
Company reimbursed B&N College during fiscal 1997, for a landmark tax credit
totaling $726.
B&N College allocated to the Company certain operating costs it
incurred on its behalf. These charges are included in the accompanying
consolidated statements of operations and approximated $193, $48 and $75 for
fiscal 1999, 1998 and 1997, respectively. The Company charged B&N College $1,042
and $972 for fiscal years 1999 and 1998, respectively, for capital expenditures,
business insurance and other operating costs incurred on its behalf.
The Company uses a jet aircraft owned by B&N College and pays for the
costs and expenses of operating the aircraft based upon the Company's usage.
Such costs which include fuel, insurance, personnel and other costs approximate
$2,205, $1,760 and $1,910 during fiscal 1999, 1998 and 1997, respectively, and
are included in the accompanying consolidated statements of operations.
On October 28, 1999, the Company acquired Babbage's Etc., one of the
nation's largest operators of video game and entertainment software stores, a
company majority owned by Xxxxxxx Xxxxxx, for $208,670. If financial performance
targets are met over the next two fiscal years, the Company will make additional
payments of approximately $10,000 in 2001 and approximately $10,000 in 2002.
Xxxxxx & Xxxxx.xxx purchased $74,682 and $33,444 of merchandise from
the Company during fiscal 1999 and 1998, respectively, and Xxxxxx & Xxxxx.xxx
expects to source purchases through the Company in the future. The Company has
entered into an agreement (the Supply Agreement) with Xxxxxx & Xxxxx.xxx whereby
the Company charges Xxxxxx & Xxxxx.xxx the costs associated with such purchases
plus incremental overhead incurred by the Company in connection with providing
such inventory. The Supply Agreement is subject to certain termination
provisions.
The Company has entered into agreements (the Service Agreements)
whereby Xxxxxx &
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Xxxxx.xxx receives various services from the Company, including, among others,
services for payroll processing, benefits administration, insurance (property
and casualty, medical, dental and life), tax, traffic, fulfillment and
telecommunications. In accordance with the terms of such agreements the Company
has received, and expects to continue to receive, fees in an amount equal to the
direct costs plus incremental expenses associated with providing such services.
The Company received $2,037, $856 and $250 for such services during fiscal 1999,
1998 and 1997, respectively.
The Company subleases to Xxxxxx & Xxxxx.xxx approximately one-third of
a 300,000 square foot warehouse facility located in New Jersey. The Company has
received from Xxxxxx & Xxxxx.xxx $473 and $310 for such subleased space during
fiscal 1999 and 1998, respectively.
Since 1993, the Company has used the music distributor AEC One Stop
Group, Inc. (AEC) as its primary music and video supplier and to provide a music
and video database. In 1999, AEC's parent corporation was acquired by an
investor group in which Xxxxxxx Xxxxxx was a significant minority investor. The
Company paid AEC $126,241 in connection with this agreement during fiscal 1999.
19. Selected Quarterly Financial Information (Unaudited)
A summary of quarterly financial information for each of the last two
fiscal years is as follows:
Total
Fiscal 1999 Quarter End April July October January Fiscal
On or About 1999 1999 1999 2000 Year 1999
-------------------------------------------------- ---- ---- ---- ---- ---------
Sales $ 718,336 727,165 715,903 1,324,639 3,486,043
Gross profit $ 192,371 199,275 200,490 410,178 1,002,314
Equity in net loss of Xxxxxx & Xxxxx.xxx (a) $ (11,544) (6,532) (8,736) (15,235) (42,047)
Earnings (loss) before cumulative effect of a
change in accounting principle $ (1,444) 23,543 3,387 103,512 128,998
Net earnings (loss) (b) (c) $ (5,944) 23,543 3,387 103,512 124,498
Basic earnings (loss) per common share
Earnings (loss) before cumulative effect of a
change in accounting principle $ (0.02) 0.34 0.05 1.52 1.87
Net earnings (loss) $ (0.09) 0.34 0.05 1.52 1.80
Diluted earnings (loss) per common share
Earnings (loss) before cumulative effect of a
change in accounting principle $ (0.02) 0.33 0.05 1.48 1.81
Net earnings (loss) $ (0.09) 0.33 0.05 1.48 1.75
Total
Fiscal 1998 Quarter End April July October January Fiscal
On or About 1998 1998 1998 1999 Year 1998
-------------------------------------------------- ---- ---- ---- ---- ---------
Sales $ 656,976 662,507 656,837 1,029,288 3,005,608
Gross profit $ 172,387 179,844 182,967 327,693 862,891
Equity in net loss of Xxxxxx & Xxxxx.xxx (d) $ (13,603) (23,003) (20,472) (14,256) (71,334)
Net earnings (loss) (e) $ (3,335) (5,709) (4,596) 106,016 92,376
Basic earnings (loss) per common share $ (0.05) (0.08) (0.07) 1.54 1.35
Diluted earnings (loss) per common share $ (0.05) (0.08) (0.07) 1.47 1.29
(a) As a result of the Xxxxxx & Xxxxx.xxx Inc. initial public offering on May
25, 1999, the Company retained a 40 percent interest in Xxxxxx
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
& Xxxxx.xxx. Accordingly, fiscal 1999 reflects the Company's 50 percent
interest in the net losses of Xxxxxx & Xxxxx.xxx through the date of the
IPO and 40 percent thereafter.
(b) Included in net earnings for the second quarter of fiscal 1999 is a pre-tax
gain of $25,000 ($14,750 after tax) or $0.21 per diluted share from the
receipt of $25,000 from Bertelsmann as a result of the Xxxxxx & Xxxxx.xxx
initial public offering, as well as a pre-tax gain of $10,975 ($6,475 after
tax) or $0.09 per basic and diluted common share resulting from the partial
sale of the Company's investment in Chapters.
(c) Included in net earnings for the fourth quarter of fiscal 1999 is a pre-tax
gain of $22,356 ($13,190 net of tax) or $0.18 per diluted share in
connection with the sale of the Company's investment in NuvoMedia as more
fully discussed in Note 6 of the Notes to Consolidated Financial
Statements. In addition, the fourth quarter of fiscal 1999 includes the
results of the Company's acquisition of Babbage's Etc. as more fully
discussed in Note 10 of the Notes to Consolidated Financial Statements.
(d) As a result of the formation of Xxxxxx & Xxxxx.xxx on October 31, 1998,
each quarter of fiscal 1998 presents the Company's equity in net loss of
Xxxxxx & Xxxxx.xxx as a separate line item in accordance with the equity
method of accounting. Accordingly, the first three quarters of fiscal 1998
reflect the Company's 100 percent equity in net losses of Xxxxxx &
Xxxxx.xxx and the fourth quarter reflects the Company's 50 percent interest
in the net losses of Xxxxxx & Xxxxx.xxx.
(e) Included in net earnings for the fourth quarter of fiscal 1998 is a pre-tax
gain on the formation of Xxxxxx & Xxxxx.xxx of $63,759 ($37,618 after tax)
or $0.52 per diluted share.
47
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Xxxxxx & Xxxxx, Inc.
We have audited the accompanying consolidated balance sheets of Xxxxxx &
Noble, Inc. and subsidiaries as of January 29, 2000 and January 30, 1999 and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three fiscal years in the period ended January
29, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Xxxxxx &
Xxxxx, Inc. and its subsidiaries as of January 29, 2000 and January 30, 1999 and
the results of their operations and their cash flows for each of the three
fiscal years in the period ended January 29, 2000, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the Consolidated Financial Statements,
effective January 31, 1999, the Company changed its method of accounting for
pre-opening expenses.
New York, New York
March 16, 2000
BDO Xxxxxxx, LLP
48
