Barnes and Noble 1999 Annual Report Download - page 36

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued 35
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
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 Barnes & Noble.com
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, Barnes & Noble.com Inc. The new
entity, Barnes & Noble.com, 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 Barnes & Noble.com. 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, Barnes & Noble.com 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 Barnes
& Noble.com. As a result, the Company and Bertelsmann each
retained a 40 percent interest in Barnes & Noble.com. 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 Barnes &
Noble.com. 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 Barnes & Noble.com 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 Barnes & Noble.com 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 Barnes & Noble.com 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 Barnes & Noble.com Inc. IPO on May 25,
1999, the Company and Bertelsmann each retained a 40
percent interest in Barnes & Noble.com. Accordingly, the
Company’s share in the net loss of Barnes & Noble.com 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 Barnes
& Noble.com as a consolidated wholly owned subsidiary
in fiscal 1997.