Barnes and Noble 2002 Annual Report Download - page 44

[NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS continued ]
43 2002 Annual Report Barnes & Noble, Inc.
16. IMPAIRMENT CHARGE
During the first quarter of fiscal 2002, the Company
deemed the decline in value in its available-for-sale
securities in Gemstar-TV Guide International, Inc.
(Gemstar) and Indigo Books & Music Inc. (Indigo) to be
other than temporary. The investments had been carried
at fair market value with unrealized gains and losses
included in shareholders’ equity. Events such as Gemstar’s
largest shareholder taking an impairment charge for its
investment, the precipitous decline in the stock price
subsequent to the abrupt resignation of one of its senior
executives, the questioning of aggressive revenue
recognition policies and the filing of a class action
lawsuit against Gemstar, were among the items which
led to management’s decision to record an impairment
for its investment in Gemstar of nearly $24,000 (before
taxes). The Company’s decision to record an impairment
charge for its investment in Indigo was based on a
review of Indigo’s financial condition and historical
share trading data. As a result, the Company recorded
a non-cash impairment charge to operating earnings
of $25,328 ($14,944 after taxes) to reclassify the
accumulated unrealized losses and to write down the
investments to their current fair market value at the
close of business on May 4, 2002. In the second quarter
of fiscal 2002, the Company sold its investment in
Gemstar resulting in a loss of $297.
During fiscal 2000, the Company recorded a non-cash
charge to operating earnings of $106,833. This charge
included approximately $69,928 of goodwill and
$32,405 of property, plant and equipment related to the
book business, primarily goodwill associated with the
purchase of B. Dalton, other mall-bookstore assets
and $6,186 of warehouse equipment. The Company’s
small-format mall-based bookstores have experienced
significant declines in sales and profitability as a result
of increased competition from book superstores and
Internet book retailers. In fiscal 2000, B. Dalton
comparable store sales declined (1.7%) compared with
an increase in comparable store sales of 0.1% in fiscal
1999. As a result, the anticipated future cash flows
from certain stores were no longer sufficient to recover
the carrying value of the underlying assets. Also,
included in this charge were other charges of $4,500
related to the write-off of certain investments which had
continuing adverse financial results. The estimated fair
value of the assets was based on anticipated future
cash flows discounted at a rate commensurate with the
risk involved.
17. STOCK OPTION PLANS
The Company grants options to purchase Barnes &
Noble, Inc. (BKS) and GameStop Corp. (GME) common
shares under the incentive plans discussed below. In
accordance with SFAS No. 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 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 the companies’ stock options. The
pro forma effect on net income and earnings per share,
had the Company applied the fair-value-recognition
provisions of SFAS No. 123, is shown in Note 1.
BKS 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 1996 Plan and the 1991 Plan allow the Company
to grant options to purchase up to 14,500,000 and
4,732,704 shares of common stock, respectively. No
more grants may be made under the 1991 Plan.
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.
On July 24, 2002, Leonard Riggio, the Company's
Chairman, entered into an Agreement with Stephen
Riggio, the Company's Chief Executive Officer, which
was approved by the Compensation Committee of the
Company’s Board of Directors. The Agreement granted
Stephen Riggio options to direct Leonard Riggio to