Barnes and Noble 2000 Annual Report Download - page 39

35
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 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 $4.5 million
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 Barnes & Noble.com
As a result of the formation of the limited liability
company with Bertelsmann, the Company began
accounting for its interest in Barnes & Noble.com under
the equity method of accounting as of the beginning
of fiscal 1998. The Company’s equity in the net loss of
Barnes & Noble.com for fiscal 1998 was $71.3 million.
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 approximately 40
percent through the end of fiscal 1999. The Company’s
equity in the net loss of Barnes & Noble.com for fiscal
1999 was $42.0 million.
Gain on Formation of Barnes & Noble.com
As a result of the formation of the limited liability
company, resulting in the receipt of $75.0 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 Barnes & Noble.com sold
by the Company to Bertelsmann.
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 fiscal 1999 in connection with the Barnes
& Noble.com Inc. 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 Ingram announced their agreement
to terminate the Company’s planned acquisition of
Ingram. 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 Ingram.
The Company sold a portion of its investment in
Chapters resulting in a pre-tax gain of $11.0 million.
2000 Annual Report ■Barnes & Noble, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued