Barnes and Noble 1998 Annual Report Download - page 41

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Capital Investment Capital expenditures totaled $141.4
million, $121.9 million and $171.9 million during fiscal 1998,
1997 and 1996, respectively. Capital expenditures in fiscal 1999,
primarily for the opening of approximately 50 new Barnes &
Noble stores as well as computer hardware and software asso-
ciated with the Company’s new store point-of-sale system, are
expected to be between $100 million and $120 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 develop-
ment of its short- and long-term strategies for at least the next
12 months.
At the Company’s Annual Meeting of Stockholders held on
June 3, 1998, the Company’s shareholders approved an amend-
ment to the Company’s Restated Certificate of Incorporation to
i n c rease the number of shares of Common Stock, par value
$ . 0 01 per share, that the Company is authorized to issue, fro m
100 , 00 0 , 000 to 300 , 000 , 0 00.
On July 10, 1998, the Board of Directors of the Company
d e c l a red a dividend of one Pre f e r red Share Pu r chase Right
(a Right) for each outstanding share of the Company’s common
stock (Common Stock). The distribution of the Rights was auto-
matically made on July 21, 1998 to stockholders of re c o rd on that
date. Each Right entitles the holder to purchase from the
C o m p a ny one four-hundredth of a share of a new series of
p r e f e r red stock, designated as Series H Pre f e r red Stock, par value
$ . 0 01 per share (the Pre f e r red Stock), at a price of $225 per one
f o u r - h u n d redth of a share. For a discussion of the terms of such
p r e f e r red stock see Note 8 of Notes to Consolidated Fi n a n c i a l
Statements. The Rights will be exercisable only if a person or
group acquires 15% 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 gro u p
owning 15% or more of the Company’s outstanding Common
Stock. For a further discussion of the terms of the Rights see
Note 8 of Notes to Consolidated Financial Statements.
Formation of barnesandnoble.com llc
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
s u b s i d i a r y, barnesandnoble.com inc. The new entity is
structured as a limited liability company under the name
barnesandnoble.com llc. Under the terms of the relevant agree-
ments, effective as of October 31, 1998, the Company and
Bertelsmann (through their respective subsidiaries) each have a
50% membership interest in barnesandnoble.com. barnesand-
noble.com inc. contributed substantially all of its assets and
liabilities to the joint venture and Bertelsmann paid $75 million
to the Company and made a $150 million cash contribution to
the joint venture. Bertelsmann also agreed to contribute an
additional $50 million to the joint venture for future working
capital requirements. In addition, if in an initial public offering
of the business of the joint venture prior to December 31, 2001,
the value of Bertelsmann’s interest exceeds the value of
Bertelsmann’s investment, Bertelsmann will pay the Company
such excess amount, up to $25 million. As a consequence of the
above transactions the Company has recognized a pre-tax gain
during fiscal 1998 in the amount of $126.4 million of which
$63.8 million has been recognized in earnings based on the $75
million received directly and $62.6 million ($36.4 million after
taxes) has been reflected in additional paid-in capital based on
the Company’s share of the incremental equity of the joint ven-
ture resulting from the $150 million Bertelsmann contribution.
The accompanying consolidated financial statements, in
a c c o rdance with the equity method of accounting, reflect the
C o m p a n y’s investment in barnesandnoble.com as a single line
item in the consolidated balance sheet as of January 30, 1999
and reflect the Company’s interest in the net loss of
b a rnesandnoble.com as a single line item in the consolidated
statement of operations for the fiscal year ended January 30 ,
1999, as if the formation of the joint ve n t u re had occurred at
the be ginning of the fiscal ye a r. Consequently, the $71.3 million
equity in net loss of barnesandnoble.com shown in the accom-
p a nying consolidated statement of operations reflects the
C o m p a ny’s one-hundred percent interest throughout the
period ending at the date of the formation of the joint ve n t u r e ,
O c t o ber 31, 1998, and the Company’s fifty percent intere s t
f rom that point through the end of the fiscal year ending
January 30, 1999. T he accompanying consolidated financial
statements reflect the financial position and results of opera-
tions of barnesandnoble.com as a consolidated wholly ow n e d
subsidiary for all other periods pre s e n t e d .
In March 1999, the Company announced the filing of a
re gistration statement with the Securities and Exchange
Commission (SEC) for an initial public offering of Class A
common stock in barnesandnoble.com inc. Prior to the
offering the Company and Bertelsmann will each own a fifty
p e rcent interest in barnesandnoble.com inc. via high vo t i n g
Class B and high voting Class C common shares, re s p e c t i ve l y.
b a rnesandnoble.com inc. will use the proceeds of the offering
to purchase a fifteen to twenty percent interest in barn e s a n d-
noble.com llc. In March 1999, the limited liability company
a greement was amended to also provide for the additional
$ 50 million cash contribution by Bertelsmann to be made to
b a rnesandnoble.com in the event of the completion of the
initial public offering.