Barnes and Noble 2006 Annual Report Download - page 12

The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to total
sales of the Company:
FISCAL YEAR 2006 2005 2004
Sales 100.0% 100.0% 100.0%
Cost of sales and occupancy 68.9 69.3 69.5
Gross margin 31.1 30.7 30.5
Selling and administrative expenses 22.8 22.2 21.6
Depreciation and amortization 3.2 3.4 3.7
Pre-opening expenses 0.2 0.2 0.2
Operating margin 4.8 4.9 5.0
Interest expense, net and amortization of deferred
fi nancing fees — — (0.2)
Debt redemption charge — — (0.3)
Earnings before income taxes and minority interest 4.9 4.9 4.5
Income taxes 2.0 2.0 1.9
Income before minority interest 2.9 2.9 2.6
Minority interest — — (0.1)
Income from continuing operations 2.9% 2.9% 2.5%
Stock Option Review
In July , the Company created a Special Committee
of the Board of Directors, consisting of Patricia
Higgins, to review, with the assistance of independent
outside counsel and an independent forensic auditor,
the Company’s stock option granting practices. This
review was completed and on April , , the Special
Committee presented its fi ndings and recommendations
to the Company’s Board of Directors.
Among other fi ndings, the Special Committee deter-
mined that there were numerous instances of stock
option grants for which there was an improper mea-
surement of compensation expense under Accounting
Principles Board (APB) Opinion No. , “Accounting
for Stock Issued to Employees” (APB ). Although the
Special Committee determined that there were instances
of stock options having been dated using favorable dates
that were selected with the benefi t of hindsight and that
serious mistakes were made, the Special Committee did
not fi nd any intent to defraud or fraudulent misconduct
by any individual or group of individuals. The Special
Committee found that the Company’s dating and pricing
practice for stock options was applied uniformly by
Company personnel to stock options granted and was not
used selectively to benefi t any one group or individual
within the Company. The Company has evaluated these
fi ndings and agrees with the Special Committee. The
Company has concluded, however, that the charges
are not material to the fi nancial statements in any of
the periods to which such charges relate and therefore
will not restate its historic fi nancial statements. The
Company has recorded an adjustment of . million
(. million after tax) to increase non-cash compensa-
tion expense in the fourth quarter of fi scal  to cor-
rectly present compensation expense for fi scal . The
Company has also recorded an adjustment to decrease
retained earnings by . million, increase deferred
taxes by . million and increase additional paid in
capital by . million, to correct the consolidated
balance sheet for the cumulative impact of the misstated
compensation cost in periods prior to fi scal .
In December , the Board members and all cur-
rent Section  offi cers holding options unvested as of
December ,  voluntarily agreed to reprice such
options, upon a fi nding by the Special Committee that
such options were improperly priced, to an exercise
price determined to be the appropriate fair market value
by the Special Committee. The Special Committee has
recommended that all incorrectly dated and unexercised
stock options issued to current Section  offi cers and
10 Barnes & Noble, Inc. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued