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Slide 1: BARNES & NOBLE 1998 ANNUAL REPORT
Slide 2: CONTENTS Consolidated Financial Highlights Letter to Our Shareholders 1998 in Review Our Customers Speak 2 3 4 11 Community Events Authors’ Showcase Looking Ahead 12 14 15 16 1998 Bestsellers and Award Winners IN POCKET Financial Data and Shareholder Information
Slide 3: The 500th Barnes & Noble Store Dallas, Texas Store photo: Whitney Cox
Slide 4: Barnes & Noble, Inc. CONSOLIDATED FINANCIAL HIGHLIGHTS Fiscal Year (In millions of dollars, except Per Share data) 1998 $3,005.6 188.6 92.4 (2) 1997 $2,796.9 147.3 64.7 .93 13.1% 1996 (1) $2,448.1 119.7 51.2 .75 12.0% Sales Operating Profit Net Earnings Diluted Earnings Per Common Share Return on Average Equity (1) (2) 1.29 15.3% Represents the 53 weeks ended February 1, 1997. All other years presented represent 52 weeks. Before extraordinary charge due to the early extinguishment of debt, net of taxes, for fiscal 1997. Total Retail Sales (In billions) 80 3.0 barnesandnoble.com Sales (In millions) $2.8 $2.4 $3.0 60 $70.2 2.0 2 1.0 40 20 $14.6 0 ’96 ’97 ’98 0 ’96 ’97 ’98 Retail EBITDA (In millions) 300 1.2 Diluted Earnings Per Common Share $1.29 $276.9 $236.9 200 (1) $0.93(1) $179.5 .8 $0.75 100 .4 0 ’96 ’97 ’98 0 ’96 (1) ’97 ’98 Before extraordinary charge due to the early extinguishment of debt, net of taxes
Slide 5: LETTER TO OUR SHAREHOLDERS This year’s Annual Report is divided into two sections. The first is a description of our retail business along with our year-end financial results. The flip side of the report provides some information and color for our exciting and growing e-commerce enterprise, barnesandnoble.com. Although it is clear the World Wide Web, with its profound possibilities, will become a major component of the future of bookselling and publishing, we believe retail bookstores will remain the foundation of our industry. As the pictures of our new stores illustrate, shopping and browsing in a bookstore is an irreplaceable experience, and it is woven securely into the fabric of our American culture. At the same time, the Internet offers our customers yet another way to connect to Barnes & Noble. This has proved beyond dispute to increase the number of books purchased, simply because it provides the convenience of a great bookstore at the touch of a fingertip. More and more, we view barnesandnoble.com as the broadcast channel for the company, and the Barnes & Noble stores as the portal through which our e-commerce business will be nourished. And more and more, we are finding our good customers, especially avid book readers and collectors, buy books frequently across all channels of distribution. As you know, predicting the future is not so easy these days. If, as they say, an Internet year is equivalent to seven pre-Internet years, we would need to be looking 35 years into the future to do a five-year plan. Well, I’m not going to say I can see that far ahead (show me someone who can), but our shareholders and customers can be sure of one thing: The book on Barnes & Noble is only up to the second chapter! Leonard Riggio Chairman and Chief Executive Officer Len Reggio photo: Josef Astor
Slide 6: Barnes & Noble, Inc. 1998 IN REVIEW The 500th Barnes & Noble store in Dallas, Texas INTRODUCTION In 1998, Barnes & Noble celebrated the opening of its 500th store in Dallas, Texas. That store, pictured here and on the inside cover, stands as a symbol of the enduring success of our mission: bringing books and bookstores into the mainstream of American life. Our goal from the beginning was to increase the size of the market, not simply to get a bigger share of it. By all measures, our stores have done just that: selling more books to more people than had ever been thought possible. Our financial results, as you will see in this report, clearly demonstrate we have built, and continue to build, a successful business. In 1998, our stores had record-breaking sales, industry-leading comparable-store sales, operating profits in every quarter, and the highest-ever net earnings. Our debt levels continued to decline, and we generated positive cash flows for the second year in a row. In 1999, our balance sheet is stronger than ever. Store photos: Whitney Cox
Slide 7: Clockwise from top left: Calabasas, California; Baltimore, Maryland; Salt Lake City, Utah; In the marketplace, Barnes & Noble is a household name and the dominant bookselling franchise. Our stores are neighborhood institutions that have become part of the social fabric of their local communities. In this year’s report, we have featured many of our new stores and the booksellers, authors, and customers that fill them every single day. NEW STORES Meeting the needs of customers starts with having the right store in the right location. Due to our leadership position in the bookselling industry, Barnes & Noble is the retailer of choice for developers across America. Each store is uniquely designed to complement its environment and to create an ambiance for book lovers to enjoy. In 1998, we opened 50 new stores, a few of which are featured here and throughout this report.
Slide 8: Barnes & Noble, Inc. Barnes & Noble’s spectacular new “Power Plant” store added a jewel to the crown of the Inner Harbor in Baltimore. Surrounded by the architecture of an electric power plant built almost 100 years ago, the store features the building’s original four smokestacks, which extend through the roof, and exposed metal beams and brick walls. In addition, it contains a 3,000-gallon aquarium designed and built by Baltimore’s National Aquarium. Our Salt Lake City store mirrors, in its clear simplicity, the grandeur of the Rocky Mountains. The store is a natural extension of the surrounding environment; our book offerings are a reflection of the tastes of the local community. In Calabasas, California, our new store makes a spectacular architectural statement which, at the same time, exists in harmony with its surroundings. The two-story, 33,000-square-foot store has the elegance and warmth of a Mediterranean villa, and the marketing power of a true “category killer.” 6 In all, the 50 new 1998 stores are performing better, on average, than any group of new stores we have opened. Sales for the first year are significantly ahead of budget and, therefore, ahead of requirements for our targeted return on investment. More important, these stores are uniquely positioned within their communities to be both pre-emptive and long-lasting assets. 1998 RETAIL ACCOMPLISHMENTS 1998 was another strong year for Barnes & Noble, as increasing numbers of customers paid for their selections at our cash registers and by the clicking of a mouse on barnesandnoble.com. Our retail stores alone sold more than 200 million books. Placed end-to-end-to-end, these books would create a pathway of knowledge and adventure from our Union Square store in New York, go around the globe and back to our store at Lincoln Center, with enough books left over for a quick trip to Paris. Bestsellers were only a small portion of these books, approximately three to four percent of sales. The vast majority of our business comes from publishers’ backlists and the more than 50,000
Slide 9: Clockwise from top left: Orange, California; Birmingham, Alabama; Boynton Beach, Florida publisher imprints we carry, including many small independent publishers and university presses. Recently, a study by the Book Industry Study Group and the Publishers’ Marketing Association concluded that small publishers have a huge influence on the book industry, producing almost four-fifths of the titles currently in print and releasing books that sell millions of copies. They might as well have concluded that Barnes & Noble has been in the forefront of this phenomenon. RETAIL SALES EXCEED $3 BILLION In 1998, retail sales reached a new milestone, totaling $3.006 billion, an increase of eight percent over 1997. Sales at Barnes & Noble stores rose 12 percent to $2.515 billion and comprised 84 percent of total retail sales. Barnes & Noble comparable-store sales increased an industry-leading five percent. Sales were strong across all book categories, especially health and fitness, history and education. In addition, café, music, gift and children’s departments did particularly well as a result of successful new merchandising and marketing initiatives. Store photos: Whitney Cox
Slide 10: Barnes & Noble’s music and children’s departments,and café. Customer special orders increased in 1998, due in part to the rollout of BookMaster, our new in-store operating system, now installed in approximately 25 percent of the Barnes & Noble stores. BookMaster will be fully installed in the remainder of our company stores in 1999. Through this dynamic new system, store customers have access to the millions of titles available to our online shoppers with the option of in-store or home delivery. BookMaster also enhances our existing merchandise replenishment systems, resulting in higher in-stock positions and better productivity at the store level. It also facilitates efficiencies in receiving, cashiering, returns processing, and a myriad of other store tasks.
Slide 11: Barnes & Noble, Inc. From left: Mary Ellen Keating, Senior Vice President, Corporate Communications and Public Affairs; David K. Cully, President, Barnes & Noble Distribution; Stephen Riggio, Vice Chairman; Marie J. Toulantis, Executive Vice President and Chief Financial Officer; Thomas A. Tolworthy, President, Barnes & Noble Booksellers; J. Alan Kahn, Chief Operating Officer; Mitchell S. Klipper, President, Barnes & Noble Development RETAIL OPERATING PROFITS The retail business again posted operating profits in all four quarters. Operating profit for the year was $188.6 million, an increase of 16 percent over 1997, and represented 6.3 percent of sales compared with 1997’s margin of 5.8 percent. Executives photo: Douglas Levere 9 The improvement in operating margin is primarily attributable to comparable store gains, rent expense leverage, and an 85-basis-point increase in gross margin. The gross margin gain was a result of several factors, including increased direct buying from publishers and a better sales mix. Our distribution center stocked 750,000 titles at year-end, a growth of 25 percent from the prior year. The expanded title selection enabled us to supply a higher percentage of our stores and online customer orders. Due largely to the payroll costs associated with our new retail wage plan, selling and administrative (S&A) costs increased from 18.9 to 19.2 percent of sales. This plan was designed to be more competitive in today’s tightening retail labor pool. It will enable the company to reduce turnover and, therefore, training and recruitment costs in the future. In 1999, we expect the S&A-to-sales ratio to resume its historic downward trend.
Slide 12: Barnes & Noble, Inc. EARNINGS Consolidated net earnings for 1998 were $92.4 million, $1.29 per diluted share. They include 100 percent of the results of barnesandnoble.com for the first three quarters, 50 percent for the fourth quarter, and the $64 million gain on the sale of 50 percent of barnesandnoble.com to Bertelsmann AG. Net earnings, excluding barnesandnoble.com, were $96.8 million, an increase of 31 percent over 1997’s retail business net earnings (before barnesandnoble.com results and the extraordinary charge for early extinguishment of debt). Diluted earnings per share from the retail business were $1.35, an increase of 27 percent. POSITIVE CASH FLOW / STRONG BALANCE SHEET As a result of our 1998 earnings achievement, the company has considerably strengthened its balance sheet, and for the second consecutive year, generated free cash flow ($40 million). This was 10 achieved despite increased spending in new store systems, and the opening of 50 new stores. Other effects of our solid financial position are: s Earnings before interest, taxes, depreciation and amortization (EBITDA) grew to $277 million, resulting in a record EBITDA margin of 9.2 percent; s Debt to EBITDA was 0.90 on January 30, 1999, compared with 1.20 on January 31, 1998, reflecting our trend of moderating financial leverage; and s Our $850 million in senior credit facilities were more than twice our average borrowings, giving us ample liquidity. Entering 1999, the strong cash flows generated by our retail business, which had previously been the source of funding for barnesandnoble.com, are now fully available to support retail and other strategic initiatives.
Slide 13: “In today’s business world where stores normally say ‘We don’t have that’ and walk away, I want you to know that I have NEVER had that happen at a Barnes “I am in your stores often… and these two experiences in Corpus Christi and San Francisco stick out as the most rewarding for me…I needed help and got it quickly and professionally… — Paul ” & Noble bookstore. The staff at Cape Girardeau spent two days and numerous calls tracking down the tapes I wanted.” — Cookie “I think Barnes & Noble is the best thing…The music is wonderful, the selection is fantastic, and I love the coffee and the ability to browse through my selections.” — Patricia “It is a real pleasure, in this day and age, to deal with people who stress quality “I am so impressed with the friendly service that I have received…you products and quality service. Your book store is outstanding in both areas.” — Jack will not catch me shopping at any other bookstore.” — Sharon Shown above are letters from customers in Mobile, Alabama; Cape Girardeau, Missouri; Lincoln, Nebraska; Cleveland Heights, Ohio; Corpus Christi, Texas; and Cincinnati, Ohio. The social worker at Etta’s school wrote that the children “had never before received a new book that was gift wrapped with their name on it.” OUR CUSTOMERS SPEAK Barnes & Noble has revolutionized bookselling by making our stores public spaces and community institutions. They are places where every kind of customer, young and old, may browse, find a book, relax over a cup of coffee, talk with authors, and join discussion groups. As one customer wrote, “When I need a ‘pick-me-up’ or even when I’m in a good mood and decide I need a special treat, there’s only one place I really want to go. Barnes & Noble.” On this page are some of the letters we have received from customers.
Slide 14: COMMUNITY EVENTS A few of the community events that are held at Barnes & Noble stores across the country. Pictured clockwise from top left: “Swing Night” in our Madison, WI, store; opening ceremonies for the “Teen Writers Conference” in our store in Roseville, MN; Scandinavian folk singers at Barnes & Noble in Eagan, MN; Baltimore Mayor Kurt Schmoke with elementary school children at our Inner Harbor store; “Story Time” in our children’s department in Seattle, WA; women spinning wool at the “Renaissance Gala” in our Rochester, MN, store; and in the center, Clifford the Big Red Dog entertains children in our store in Salt Lake City, UT.
Slide 15: Barnes & Noble, Inc. Our more than 500 stores hosted almost 50,000 community events last year, an average of more than 125 events every day. These range from craft nights and poetry readings to feng shui seminars and game tournaments, a myriad of children’s events and much, much more. Our book discussion groups span the cultural spectrum — fiction, women’s studies, military history, cooking, parenting, languages and hundreds more. On weekends, thousands of children listen and talk to their favorite storybook characters. Winnie the Pooh, Angelina Ballerina, Clifford the Big Red Dog, Madeline and the Berenstain Bears perform in our stores and travel to visit readers young and old in hospitals, daycare centers and other community institutions. Our booksellers take the Barnes & Noble book group experience to senior centers, retirement homes and even to the workplace. Working with our stores and their communities, Barnes & Noble’s sponsorship of First Book put books in the hands of 50,000 disadvantaged children in 1998. With our customers, we raised more than $100,000 for Share Our Strength’s “Writers Harvest,” a program of author readings in our stores across the country. 13 As a good neighbor, we create programs with, and make donations to, local cultural organizations, schools, libraries, and social service agencies. For example, in Cincinnati, in honor of Dr. Martin Luther King, Jr. Day, our store and a local organization sponsored the “I Have A Dream” essay contest for young people between the ages of 15 and 30. During the year, 80 of our stores hosted essay contests for children. In Minneapolis, our support of the Minnesota Children’s Theatre includes performances at our stores to help sell tickets. In Baltimore, we helped fill the shelves of the library at the Cross Country Elementary School. In Brooklyn, we created a book discussion group for nurses at New York Methodist Hospital. And Barnes & Noble booksellers initiated the formation of more than 30 First Book Advisory Boards in communities across the country.
Slide 16: AUTHORS’ SHOWCASE Authors bring their books to life in thousands of readings and book signings in our stores. Among those featured were (pictured clockwise from top left): Toni Morrison, Tony Bennett, Emeril Lagasse, Carrie Brown, Charlie Rose taping his PBS show with Elizabeth Strout, Tom Brokaw, A. Scott Berg, Tom Wolfe, Gloria Gaynor, and Arnold Schwarzenegger. Barnes & Noble also supports Poets & Writers, a national support group for authors. Its annual award, sponsored by Barnes & Noble, this year recognized E.L. Doctrow, Edward Albee and Susan Sontag for their contributions to supporting new writers. Our highly acclaimed “Discover Great New Writers” award recognizes an author’s first novel with a $10,000 award. Carrie Brown, author of Rose’s Garden, was 1998’s winner. Elizabeth Strout and Charlie Rose: John Greene Author photos, except Emeril Lagasse, Arnold Schwarzenegger, A. Scott Berg: Andrea Renault
Slide 17: Barnes & Noble, Inc. LOOKING AHEAD More than ever before, the year ahead promises to be full of exciting opportunities and challenges. Although the 50 new stores we plan to open in 1999 will advance our market leadership, barnesandnoble.com will no doubt become a larger part of the Barnes & Noble story. The Bertelsmann investment in barnesandnoble.com, together with the expected completion of an initial public offering (IPO) for this company, has placed us in an extremely enviable position, especially given the increasingly competitive nature of the bookselling industry. Very simply, we now have two well-capitalized vehicles that can be used to explore new opportunities, in retail and in e-commerce. Thus, we move forward to complete the last year of this decade, century and millennium, in eager anticipation of the beginning of an exciting new era for commerce and for humankind. We remain committed as always to leading the evolution of the book marketplace, and to extend and advance our great franchise to the betterment of the community of authors and readers the world over. s 15
Slide 18: Barnes & Noble, Inc. 19 9 8 BESTSELLERS & AWARD WINNERS Hardcover Fiction The Street Lawyer John Grisham Doubleday (265,294) Rainbow Six Tom Clancy Putnam (240,531) A Man in Full Tom Wolfe Farrar Straus Giroux (187,919) Paradise Toni Morrison Knopf (150,364) Bag of Bones Stephen King Scribner (140,881) I Know This Much is True Wally Lamb Regan Books (136,968) Memoirs of a Geisha Arthur Golden Knopf (131,529) Message in a Bottle Nicholas Sparks Warner (117,781) Summer Sisters Judy Blume Delacorte Press (112,534) Cold Mountain Charles Frazier Grove Atlantic (111,090) Hardcover Nonfiction Tuesdays With Morrie Mitch Albom Doubleday (321,707) The Nine Steps to Financial Freedom Suze Orman Crown (274,952) The Greatest Generation Tom Brokaw Random House (234,299) Sugar Busters H. Leighton Steward; Morrison C. Bethea, MD; Sam S. Andrews, MD; & Luis A. Balart, MD Ballantine (214,569) Simple Abundance Sarah Ban Breathnach Warner (168,293) In the Meantime Iyanla Vanzant Simon & Schuster (152,217) Talking to Heaven James Van Praagh Dutton (138,462) Angela’s Ashes Frank McCourt Scribner (138,224) The Millionaire Next Door Thomas J. Stanley & William D. Danko Longstreet Press (133,518) The Century Peter Jennings & Todd Brewster Doubleday (132,798) Paperback Fiction Divine Secrets of the Ya-Ya Sisterhood Rebecca Wells HarperCollins (364,999) The Notebook Nicholas Sparks Warner (292,203) The Partner John Grisham Dell (267,652) The Horse Whisperer Nicholas Evans Dell (194,654) Cold Mountain Charles Frazier Vintage (133,433) Here on Earth Alice Hoffman Berkley (124,093) She’s Come Undone Wally Lamb Pocket (123,593) Little Altars Everywhere Rebecca Wells HarperCollins (121,059) Pretend You Don’t See Her Mary Higgins Clark Pocket (110,027) The Catcher in the Rye JD Salinger Little Brown (104,558) Paperback Nonfiction Don’t Sweat the Small Stuff Richard Carlson Hyperion (540,185) Dr. Atkins’ New Diet Revolution Robert C. Atkins Avon (392,307) Chicken Soup for the Teenage Soul Jack Canfield Health Communications (240,082) The Beanie Baby Handbook Les Fox & Sue Fox W. Highland (238,398) Protein Power Michael R. Eades, MD & Mary Dan Eades, MD Bantam (215,468) Into Thin Air Jon Krakauer Anchor (208,405) The Perfect Storm Sebastian Junger HarperCollins (171,243) Chicken Soup for the Teenage Soul II Jack Canfield, Mark Victor Hansen & Kimberly Kirberger Health Communications (169,442) Chicken Soup for the Mother’s Soul Jack Canfield, Mark Victor Hansen, Jennifer Read Hawthorne & Marci Shimoff Health Communications (146,062) Under the Tuscan Sun Frances Mayes Broadway (138,182) 16
Slide 19: Many thanks are owed to the authors whose work is the inspiration for our success. 1998 Sleepers The books that came out of nowhere to become something special: 1998 Keepers The year’s most notable books: Booker Prize Amsterdam Ian McEwan Doubleday 1998 Pulitzer Prizes Fiction: American Pastoral Philip Roth Houghton Mifflin History: Summer of the Gods: The Scopes Trial and America’s Continuing Debate Over Science and Religion Edward J. Larson Basic Books Biography: Personal History Katharine Graham Knopf Poetry: Black Zodiac Charles Wright Farrar Straus Giroux General Nonfiction: Guns, Germs, and Steel: The Fates of Human Societies Jared M. Diamond WW Norton 1998 Barnes & Noble Discover Great New Writers Award Rose’s Garden Carrie Brown Algonquin Sugar Busters H. Leighton Steward; Morrison C. Bethea, MD; Sam S. Andrews, MD; & Luis A. Balart, MD Ballantine (214,569) Bridget Jones’s Diary Helen Fielding Viking (69,665) A Walk in the Woods Bill Bryson Broadway (61,354) Blind Man’s Bluff Sherry Sontag & Christopher Drew with Annette Lawrence Drew Public Affairs (60,895) The Professor and the Madman Simon Winchester HarperCollins (37,364) We Interrupt This Broadcast Joe Garner Sourcebooks (35,464) Welcome to the World, Baby Girl Fannie Flagg Random House (32,969) Ship of Gold in the Deep Blue Sea By Gary Kinder Grove Atlantic (20,114) Harry Potter and the Sorcerer’s Stone By JK Rowling Scholastic (15,407) An Instance of the Fingerpost By Iain Pears Riverhead (12,979) 1998 National Book Critics Circle Awards Fiction: The Love of a Good Woman Alice Munro Knopf General Nonfiction: We Wish To Inform You That Tomorrow We Will Be Killed With Our Families Philip Gourevitch Farrar Straus Giroux Biography: A Beautiful Mind Sylvia Nasar Simon & Schuster Criticism: Visions of Jazz Gary Giddins Oxford University Press Poetry: The Bird Catcher Marie Ponsot Knopf 1998 Barnes & Noble Maiden Voyage Award Rewind Terry England Avon CHILDREN’S BOOK AWARDS Caldecott Medal Illustrator: Mary Azarian Snowflake Bentley Houghton Mifflin Newbery Medal Holes Louis Sachar Farrar Straus Giroux Coretta Scott King Awards Author: Angela Johnson Heaven Simon & Schuster Illustrator: Michele Wood I See the Rhythm Children’s Book Press 1998 National Book Awards Fiction: Charming Billy Alice McDermott Farrar Straus Giroux Nonfiction: Slaves in the Family Edward Ball Farrar Straus Giroux Young People’s Literature: Holes Louis Sachar Farrar Straus Giroux Poetry: This Time Gerald Stern WW Norton 1998 Nobel Prize for Literature José Saramago 1998 Tanning Prize AR Ammons 1998 Edgar Allan Poe Award Cimarron Rose James Lee Burke Hyperion 1998 Hugo Award Forever Peace Joe Haldeman Ace
Slide 20: BARNES & NOBLE 1998 ANNUAL REPORT
Slide 21: In less than two years, barnesandnoble.com has become the fourth largest e-commerce site and among the top 25 overall sites on the Web, according to Media Metrix. It has the world’s largest selection of new, out-ofprint and rare books, more than eight million. A powerful search engine, one-click ordering, extensive author chats, book reviews and expert commentary provide a fast, convenient and informed shopping experience. barnesandnoble.com is the exclusive bookseller to America Online (AOL)’s more than 16 million subscribers (Keyword: bn).
Slide 22: The virtual bookstore as seen on our television campaign.
Slide 23: barnesandnoble.com 1998 IN REVIEW From left: Gerald Luterman, Chief Financial Officer; Jonathan Bulkeley, Chief Executive Officer; and Gary King, Chief Information Officer A YEAR OF EXTRAORDINARY GROWTH 1998 was an extraordinary year of growth for barnesandnoble.com. In less than two years, we have become one of the top players in the rapidly expanding world of e-commerce with spectacular increases in sales, customers and affiliates. For the 1998 fiscal year (from January 31, 1998 to January 30, 1999), we accomplished the following: s Sales rose 381 percent, from $14.6 million to $70.2 million; 1,250,000 customers from 177 countries shopped at our site, an increase of approximately 300 percent from the 313,000 customers of one year ago; s s barnesandnoble.com became the fourth most-trafficked e-commerce site, up from 19th the year before, and among the 25 largest sites on the Internet, up from 217th in January 1998, according to Media Metrix; s Our in-stock inventory ready for immediate delivery increased from 300,000 to 750,000 titles, the largest inventory of any online bookseller; s The number of our affiliates grew from 1,000 to 55,000; and More than 750 authors have now chatted in our online Auditorium, up from 250 the year before. s Photo credits: Executives, Douglas Levere Interiors, Peter Loppacher
Slide 24: From left: Patricia Campbell, Vice President, Interactive Direct Marketing; Carl Rosendorf, Senior Vice President; Brenda Marsh, Vice President, Merchandising; and William Duffy, Vice President, Operations Built by booksellers for book lovers, barnesandnoble.com offers the widest selection of books, 3 extensive book reviews and expert commentary, along with competitive discounts. Visitors to our site have access to the largest online selection of bargain books, discounted up to 90 percent; more than 500 magazines, at discounts up to 80 percent off newsstand prices; and a unique software superstore. In addition, they enjoy fast and convenient delivery, superb customer service, the opportunity to interact with their favorite authors, and the chance to write their own reviews. It all adds up to a compelling and exciting online shopping environment that is open every hour of the day. KEY EVENTS On October 6, 1998, Barnes & Noble, Inc. announced an agreement with Bertelsmann AG – a global media, publishing and entertainment company – to acquire a 50 percent interest in barnesandnoble.com. Under the terms of the agreement, which closed on November 12, 1998, barnesandnoble.com has access to capital of $200 million. Bertelsmann’s operations in North America include Doubleday Direct, the largest direct marketing consumer book club group, with 11 general interest and specialty clubs that cumulatively have more than 5.5 million active members. Bertelsmann’s Book Division includes Random House and
Slide 25: barnesandnoble.com its affiliate companies in the U.S., U.K., Canada, Australia, New Zealand and South America, as well 4 as other publishers and book clubs in Europe. In Europe, Bertelsmann has an alliance with America Online and launched, in 1999, BooksOnline (BOL) in several European countries. barnesandnoble.com and BOL will collaborate in offering U.S. and worldwide customers a seamless experience of online shopping for a vast array of books in multiple languages. On March 18, 1999, Barnes & Noble announced the filing of a registration statement with the Securities and Exchange Commission for an initial public offering (IPO) of Class A Common Stock in barnesandnoble.com. When publicly traded, the stock will be listed on the NASDAQ national market under the symbol, “BNBN.” barnesandnoble.com will offer approximately 15 to 20 percent of its shares to the public through a syndicate of investment banks. The proceeds of the offering will be used for expansion, including new systems and distribution initiatives, and acquisitions, all to enhance the online experience. .com staff photo: Peter Loppacher
Slide 26: “I just wanted to send you a big THANK YOU! — I recently ordered a book titled Urshurak. I used your Used Book service on “The book arrived in less time than the post on the Internet! Order to delivery took less than 20 hrs!” — Wayne “Thank you for taking care of my recent book order. What a great your web page. I have been looking for this book since I first read it about way to find and buy a book. Now, if you could think of a way to your 15 years ago. You have one very happy customer here in Wisconsin. Thank you, Thank you, Thank you!” — Danielle “Thank you for making my online shopping experience so pleasant. Your book prices are better than other online book stores I checked and send over one of I was very pleased that you shipped my books as they were available instead of waiting for them all to come yummie Café Mocha’s “Just wanted to say Thanks! for the great service… I found the “Pokemon Hint Book” that was live, that would be perfect!!!” — Deonna out of stock everywhere else!” — Kristen Excerpts from our customer e-mails I appreciate your effort.” in… — Elizabeth SALES In fiscal year 1998, barnesandnoble.com’s sales rose 381 percent, to $70.2 million. In every quarter of the year, sales showed dramatic growth. In the first quarter, sales rose to $9.4 million, a 14 percent increase over sales of $8.2 million for the fourth quarter of fiscal 1997. Sales in the second quarter, $12.5 million, grew 33 percent from the first quarter of 1998. In the third quarter, sales rose 38 percent to $17.2 million from the second quarter of 1998. For the fourth quarter, sales were $31.1 million, an 81 percent jump from 1998’s third quarter.
Slide 27: Images from our advertising campaign ADDITIONS, ENHANCEMENTS, AND A NEW ADVERTISING CAMPAIGN During the year, we made significant additions and enhancements to our site, all designed to offer our customers the broadest possible selection and the best online experience. They included: s A new software superstore with more than 2,000 titles; One-click ordering; A more powerful search engine, which helps customers find any book in print by title, author, keyword, format, subject, price, or ISBN; s s s Free e-mail alerts to customers keeping them up to date on their favorite books, subjects, and authors; s An expanded selection of bargain books, over 15,000 titles, more than any other online bookseller, discounted up to 90 percent; s A cleaner design and shortened download time, enabling shoppers to get where they want faster; s An unsurpassed inventory of over six million out-of-print and rare books;
Slide 28: barnesandnoble.com s Access to more than five million newspaper and magazine articles through an agreement with Northern Light Technology; s A holiday gift center and a new “Kids!” superstore featuring “Book Boutiques” of children’s favorite characters; s Reader reviews and personal recommendations based on books customers have purchased; and s A handy bookstore locator to find the nearest Barnes & Noble retail store, complete with directions, phone number and a map. Late last fall, we championed the wonders of online shopping through an imaginative television campaign created by TBWA Chiat/Day. In 30-second commercials, customers were introduced to the virtual bookstore, a book lover’s paradise filled with millions of books. They were also transported into the author’s world, well represented by the stars of the four spots — Scott Adams, Tom Clancy, Stephen King and Frank McCourt. Our campaign aired nationally on cable and spot television, and was supported by a national print, radio and outdoor campaign. 7 Our slogan, “If we don’t have your book, nobody does,” says it all. NEW PROGRAMS AND EXCLUSIVE AGREEMENTS barnesandnoble.com has extended its reach through partnerships and programs. It has strategic partnerships with ten of the top twenty Web sites, including CNN, Lycos and USA Today. The company’s affiliate network provides the best linkage and best reporting tools, including daily updated sales information. New programs and significant agreements include: Microsoft. barnesandnoble.com entered into a multimillion-dollar marketing agreement with the Microsoft MSN™ network, which includes the WebTV Network™ service;
Slide 29: barnesandnoble.com Excerpts from our online author chats Business Solutions Program. barnesandnoble.com launched the first-ever business-to-business 8 e-commerce program designed to make corporate book and periodical purchasing convenient, controlled and cost effective. Clients include Arthur Andersen, Lucent Technologies, American Express, Toyota, CitiGroup, Gateway, BellSouth and NCR; Blue Mountain Arts. Featured on the site’s Gift Center and homepage is Blue Mountain Arts, the ninth most-trafficked site on the Web, offering inspirational books and free all-occasion e-mail greeting cards; All-Music Guide/All-Movie Guide. We signed an agreement with the All-Music Guide/All-Movie Guide, the world’s most comprehensive entertainment databases with more than 300,000 album titles and 140,000 movie listings. In 1999, we will significantly expand our product offerings in music CDs and video; and Reader’s Catalog. barnesandnoble.com acquired the rights to The Reader’s Catalog, a sister publication of The New York Review of Books, which contains 40,000 of the best books in print on any subject and commentary by experts.
Slide 30: National Book Award winners,clockwise from top left:Edward Ball, Slaves in the Family; Louis Sachar, Holes; Alice McDermott, Charming Billy; and Gerald Stern, This Time LOOKING AHEAD Our strong management team was reinforced by three key appointments in 1998. Jonathan Bulkeley, formerly head of America Online’s operations in the United Kingdom, became Chief Executive Officer. Gerald Luterman and Gary King joined barnesandnoble.com as Chief Financial Officer and Chief Information Officer, respectively. In 1999, exciting new programs continue to be part of our evolving site. They include “An Evening with...,” a monthly segment featuring readings by today’s most important authors with photographs, audio clips, and exclusive author interviews; an online “Tax Answer Center”; and a permanent “Africana” area. Two new superstores, Music and Video, will debut later this year. We entered 1999 poised to increase our market share in the fast-growing world of online retailing. Our goal is to be the leading Internet retailer of books and related products, offering the broadest selection and the best online experience. s
Slide 31: BARNES & NOBLE 1998 ANNUAL REPORT & FINANCIAL DATA SHAREHOLDER INFORMATION
Slide 32: SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data of Barnes & Noble, Inc. and its wholly owned subsidiaries (collectively, the Company) set forth on the following pages should be read in conjunction with the consolidated financial statements and notes included elsewhere in this report. The Company’s fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of January. The Statement of Operations Data for the 52 weeks ended January 30, 1999 (fiscal 1998), the 52 weeks ended January 31, 1998 (fiscal 1997) and the 53 weeks ended February 1, 1997 (fiscal 1996) and the Balance Sheet Data as of January 30, 1999 and January 31, 1998 are derived from, and are qualified by reference to, audited consolidated financial statements which are included elsewhere in this report. The Statement of Operations Data for the 52 weeks ended January 27, 1996 (fiscal 1995) and January 28, 1995 (fiscal 1994) and the Balance Sheet Data as of February 1, 1997, January 27, 1996 and January 28, 1995 are derived from audited consolidated financial statements not included in this report. Certain priorperiod amounts have been reclassified for comparative purposes. 1
Slide 33: Fiscal Year (In thousands of dollars, except per share data) 1998 1997 1996 1995 1994 STATEMENT OF OPERATIONS DATA: Sales Barnes & Noble stores B. Dalton stores barnesandnoble.com Other Total sales Cost of sales and occupancy Gross profit Selling and administrative expenses Depreciation and amortization Pre-opening expenses Restructuring charge(1) Operating profit (loss) Interest expense, net and amortization of deferred financing fees (2) Equity in net loss of barnesandnoble.com llc(3) Gain on formation of barnesandnoble.com llc(4) Earnings (loss) before provision (benefit) for income taxes and extraordinary charge Provision (benefit) for income taxes Earnings (loss) before extraordinary charge Extraordinary charge(5) Net earnings (loss) Earnings (loss) per common shar e Basic Earnings (loss) before extraordinary charge Extraordinary charge Net earnings (loss) Diluted Earnings (loss) before extraordinary charge Extraordinary charge Net earnings (loss) Weighted average common shares outstanding Basic Diluted OTHER OPERATING DATA: $ 2,515,352 468,414 — 21,842 3,005,608 2 ,14 2 ,717 862,891 5 7 7,19 5 88,345 8,795 — 188,556 (24,412) (71,334) 63,759 156,569 6 4 ,19 3 92,376 — $ 92,376 2,245,531 509,389 14,601 27,331 2,796,852 2,019,291 777,561 540,423 76,951 12,918 — 147,269 (37,666) — — 109,603 44,935 64,668 11,499 53,169 1, 8 61,17 7 564,926 — 22,021 2,448,124 1,785,392 662,732 465,687 59,806 17,571 — 119,668 (38,286) — — 81,382 30,157 51,225 — 51,225 1,349,830 603,204 — 23,866 1,976,900 1,444,555 532,345 383,692 47,881 12,160 123,768 (35,156) (28,142) — — (63,298) (10,322) (52,976) — (52,976) 952,697 646,876 — 23,158 1,622,731 1,192,123 430,608 316,457 36,617 9,021 — 68,513 (22,955) — — 45,558 20,085 25,473 — 25,473 $ $ $ $ $ $ 1.35 — 1.35 1.29 — 1.29 0.96 0.17 0.79 0.93 0.17 0.76 0.77 — 0.77 0.75 — 0.75 (0.85) — (0.85) (0.85) — (0.85) 0.42 — 0.42 0.41 — 0.41 68,435,000 71,677,000 67,237,000 69,836,000 66,103,000 67,886,000 62,434,000 62,434,000 59,970,000 61,560,000 Number of Stores Barnes & Noble stores (6) B. Dalton stores (7) Total Comparable store sales increase (decrease) (8) Barnes & Noble stores B. Dalton stores Capital Expenditures BALANCE SHEET DATA: 520 489 1,009 5.0% (1.4) $ 141,388 483 528 1,011 9.4% (1.1) 121,903 431 577 1,008 7.3% (1.0) 171,885 358 639 997 6.9% (4.3) 154,913 268 698 966 12.6% (2.3) 88,763 Working capital Total assets Long-term debt, less current portions Shareholders’ equity $ 315,989 $ 1,807,597 $ 249,100 $ 678,789 264,719 1, 5 91,171 284,800 531,755 212,692 1,446,647 290,000 455,989 226,500 1, 315 , 3 4 2 262,400 400,235 155,976 1,026,418 190,000 358,173 2
Slide 34: (In thousands of dollars) (1) Restructuring charge includes restructuring and asset impairment losses recognized upon adoption of Statement of Financial Accounting Standards No. 121, “Impairment of Long-Lived Assets and Assets to be Disposed Of.” (2) Interest expense for fiscal 1998, 1997, 1996, 1995 and 1994 is net of interest income of $976, $446, $2,288, $2,138 and $3,008, respectively. (3) On November 12, 1998, the Company and Bertelsmann AG (Bertelsmann) completed the formation of a limited liability company to operate the online retail bookselling operations of the Company’s wholly owned subsidiary, barnesandnoble.com inc. barnesandnoble.com inc. began operations in fiscal 1997. As a result of the formation of barnesandnoble.com llc (barnesandnoble.com), the Company began accounting for its interest in barnesandnoble.com under the equity method of accounting as of the beginning of fiscal 1998. Fiscal 1998 reflects a one-hundred percent equity interest in barnesandnoble.com for the first three quarters ended October 31, 1998 (also the effective date of the limited liability company agreement), and a fifty percent equity interest beginning on November 1, 1998 through the end of the fiscal year. Had the Company reported the results of barnesandnoble.com inc. under the equity method of accounting during fiscal 1997, its fiscal 1997 equity in the net loss of barnesandnoble.com inc. would have been $15,395. (4) As a result of the formation of the limited liability company, the Company has recognized a pre-tax gain during fiscal 1998 in the amount of $126,435, of which $63,759 has been recognized in earnings based on the $75,000 received directly from Bertelsmann and $62,676 ($36,351 after taxes) has been reflected in additional paid-in capital based on the Company’s share of the incremental equity of the joint venture resulting from the $150,000 Bertelsmann contribution. (5) Reflects a net extraordinary charge during fiscal 1997 due to the early extinguishment of debt, consisting of: (i) a pretax charge of $11,281 associated with the redemption premium on the Company’s senior subordinated notes; (ii) the associated write-off of $8,209 of unamortized deferred finance costs; and (iii) the related tax benefits of $7,991 on the extraordinary charge. (6) Also includes 15 Bookstop and 25 Bookstar stores as of January 30, 1999. (7) Also includes 15 Doubleday Book Shops, eight Scribner’s Bookstores and seven smaller format bookstores operated under the Barnes & Noble trade name representing the Company’s original retail strategy as of January 30, 1999. (8) Comparable store sales increase (decrease) is calculated on a 52-week basis, and includes sales of stores that have been open for 12 months for B. Dalton stores and 15 months for Barnes & Noble stores (due to the high sales volume associated with grand openings). Comparable store sales for fiscal years 1998, 1997 and 1996 include relocated Barnes & Noble stores and exclude B. Dalton stores which the Company has closed or has a formal plan to close. 3
Slide 35: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS level through efficiencies in receiving, cashiering and returns processing. Barnes & Noble stores opened during fiscal 1998 added 1.3 million square feet to the Barnes & Noble base, bringing the total square footage to 11.9 million square feet, a 10% increase over the prior year. Barnes & Noble stores contributed more than 84% of the Company’s total sales in fiscal 1998. The Company plans to open approximately 50 Barnes & Noble stores in 1999 which are expected to average 26,000 square feet in size. At the end of fiscal 1998, the Company operated 489 B.Dalton stores in 45 states and the District of Columbia. B. Dalton stores employ merchandising strategies that target the “middle-American” consumer book market, offering a wide range of bestsellers and general-interest titles. Most B. Dalton stores range in size from 2,800 to 6,000 square feet, and while they are appropriate to the size of adjacent mall tenants, the opening of superstores in nearby locations continues to have a significant impact on B. Dalton stores. The Company is continuing to execute its strategy to maximize returns from its B. Dalton division in response to declining sales attributable to superstore competition and weaker overall consumer traffic in shopping malls. Part of the Company’s strategy has been to close underperforming stores, which has resulted in the closing of, on average, between 40 and 60 B. Dalton stores per year since 1989. barnesandnoble.com, a limited liability company created in November 1998 (as discussed more fully below) was formed by combining the online bookselling operations of the Company with funds contributed by the international media company Bertelsmann AG (Bertelsmann), one of the largest integrated media companies in the world. barnesandnoble.com has the world’s largest selection of books* — more than eight million in-print and out-of-print books. In less than two years of operations, it has become the fourth most-trafficked e-commerce site and among the top 25 largest overall sites on the Internet, as of December 1998, according to Media Metrix. barnesandnoble.com has access to the largest standing inventory of any online bookseller with more than 750,000 titles ready for immediate delivery. The site’s database features more than six and one half million out-of-print and rare books, as well as the largest online selection of bargain books discounted up to 90 percent. During 1998, many major enhancements were introduced, including one-click ordering, a powerful and user friendly search engine, email book reviews and product-notification services, Software and Magazine stores, a Gift Center and Bargain Book store and online gift certificates. Also during 1998, the site began to add music and video to its product offerings, as well as an out-of-print book service. barnesandnoble.com is the exclusive bookseller to America Online (AOL)’s more than 16 million subscribers. The Company’s affiliate network pays the highest commissions with the best linking and best reporting The Company’s fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of January. As used in this section, “fiscal 1998” represents the 52 weeks ended January 30, 1999, “fiscal 1997” represents the 52 weeks ended January 31, 1998 and “fiscal 1996” represents the 53 weeks ended February 1, 1997. General Barnes & Noble, Inc. (Barnes & Noble or the Company), the world’s largest bookseller* as of January 30, 1999 operates 1,009 , bookstores. Of these 1,009 stores, 520 operate under the Barnes & Noble Booksellers, Bookstop and Bookstar trade names, (50 of which were opened in fiscal 1998), and 489 operate under the B. Dalton Bookseller, Doubleday Book Shops and Scribner’s Bookstore trade names. Through its fifty percent interest in barnesandnoble.com llc (barnesandnoble.com), the Company is also the world’s largest bookseller on the World Wide Web (http://www.barnesandnoble.com) and the exclusive bookseller on America Online (keyword: bn). Barnes & Noble publishes books under its own imprint for exclusive sale through its retail stores, mail-order catalogs and barnesandnoble.com. The Company employed approximately 29,000 full- and part-time booksellers and created nearly 2,000 new jobs nationwide during fiscal 1998 primarily due to its Barnes & Noble store expansion. Barnes & Noble is the largest operator of book “super” stores in the United States* with 520 Barnes & Noble stores located in 49 states and the District of Columbia as of January 30, 1999. With more than 30 years of bookselling experience, management has a strong sense of customers’ changing needs and the Company leads book retailing with a “community store” concept. Barnes & Noble’s typical store offers a comprehensive title base, a cafe, a children’s section, a music department and a calendar of ongoing events, including author appearances and children’s activities, that make each Barnes & Noble store an active part of its community. Barnes & Noble stores range in size from 10,000 to 60,000 square feet depending upon market size, and each store features a comprehensive selection of books, ranging from 60,000 to 175,000 titles. The title selection is diverse and reflects local interests. In addition, Barnes & Noble emphasizes books published by small and independent publishers and university presses. Bestsellers represent only 3% of Barnes & Noble store sales. Complementing this extensive on-site selection, all Barnes & Noble stores provide customers with access to the millions of books available to online shoppers while offering an option to have the book sent to the store or shipped directly to the customer. During fiscal 1999 the Company expects to complete installation of BookMaster, the Company’s new in-store operating system, in all Barnes & Noble stores. BookMaster enhances our existing merchandise replenishment systems, resulting in higher in-stock positions and better productivity at the store * Based upon information reported in trade publications and public filings. 4
Slide 36: tools, including daily updated sales information, and is the leader in business-to-business e-commerce with its unique Business Solutions program. The Company further differentiates its product offerings from those of its competitors by publishing books under its own Barnes & Noble Books imprint for exclusive sale in its retail stores, direct-mail catalogs and through barnesandnoble.com. With publishing and distribution rights to over 2,000 titles, Barnes & Noble Books offers customers high-quality books at exceptional values, while generating attractive g ross margins. The Company also maintains an investment in Chapters Inc., an Ontario company which is publicly traded on the Toronto Stock Exchange. Chapters is the largest book retailer in Canada and the third largest in North America*, operating 327 bookstores, including 52 superstores, as of the end of fiscal 1998. Results of Operations The Company’s sales, operating profit, comparable store sales, store openings, store closings, number of stores open and square feet of selling space at year end are set forth below: Fiscal Year (In thousands of dollars) 1998 $3,005,608 (1) (2) 1997 2,796,852 147,269 9.4% (1.1) 65 4 69 13 53 66 483 528 1,011 10.8 2.0 12.8 1996 2,448,124 119,668 7.3% (1.0) 91 10 101 18 72 90 431 577 1,008 9.3 2.2 11.5 Sales (1) Operating Profit $ 188,556 5.0% (1.4) 50 4 54 13 43 56 520 489 1,009 (In millions) Comparable Store Sales Increase (Decrease) Barnes & Noble stores B. Dalton stores Stores Opened Barnes & Noble stores B. Dalton stores Total Stores Closed Barnes & Noble stores B. Dalton stores Total Number of Stores Open at Year End Barnes & Noble stores B. Dalton stores Total Square Feet of Selling Space at Year End Barnes & Noble stores B. Dalton stores Total (1) 11.9 1.9 13.8 Included in fiscal 1997 are sales and operating losses associated with barnesandnoble.com of $14,601 and ($15,395), respectively. Beginning in fiscal 1998 the Company’s Consolidated Statement of Operations presents its equity in the results of operations of barnesandnoble.com as a single line item below operating profit in accordance with the equity method of accounting. The Company’s equity in the net loss of barnesandnoble.com for fiscal 1998 was ($71,334). (2) Comparable store sales for B. Dalton stores are determined using stores open at least 12 months. Comparable store sales for Barnes & Noble stores are determined using stores open at least 15 months, due to the high sales volume associated with grand openings. Comparable store sales increase (decrease) is computed on a 52-week basis for fiscal 1996. * Based upon information reported in trade publications and public filings. 5
Slide 37: The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to total sales of the Company: Fiscal Year Sales Cost of sales and occupancy Gross margin Selling and administrative expenses Depreciation and amortization Pre-opening expenses Operating margin (1) Interest expense, net and amortization of deferred financing fees Equity in net loss of barnesandnoble.com llc Gain on formation of barnesandnoble.com llc Earnings before provision for income taxes and extraordinary charge(1) Provision for income taxes (1) Earnings before extraordinary charge (1) Extraordinary charge, net Net earnings (1) 1998 100.0% 71.3 28.7 19.2 2.9 0.3 6.3 (0.8) (2.4) 2.1 1997 100.0% 72.2 27.8 19.3 2.8 0.4 5.3 (1.4) — — 1996 100.0% 72.9 27.1 19.0 2.5 0.7 4.9 (1.6) — — 5.2 2.1 3.1 — 3.1% 3.9 1.6 2.3 0.4 1.9% 3.3 1.2 2.1 — 2.1% If operating margin, earnings before provision for income taxes and extraordinary charge, provision for income taxes and earnings before extraordinary charge were presented without barnesandnoble.com during fiscal 1997, the percentage relationship that these items would bear to total sales of the Company would be 5.8%, 4.5%, 1.8% and 2.7% 52 Weeks Ended January 30, 1999 Compared with 52 Weeks Ended January 31, 1998 Sales Cost of Sales and Occupancy The Company’s sales increased 7.5% during fiscal 1998 to $3.006 billion from $2.797 billion during fiscal 1997. Fiscal 1998 sales from Barnes & Noble stores, which contributed 83.7% of total sales, increased 12.0% to $2.515 billion from $2.246 billion in fiscal 1997. The increase in sales was primarily due to the 5.0% increase in Barnes & Noble comparable store sales and the opening of an additional 50 Barnes & Noble stores during 1998. This increase was slightly offset by declining sales of B. Dalton, due to 43 store closings and a comparable store sales decline of 1.4%. In addition, fiscal 1997 includes barnesandnoble.com sales of $14.6 million whereas fiscal 1998 does not include sales for barnesandnoble.com due to the conversion to the equity method of accounting as of the beginning of the year. Excluding barnesandnoble.com sales in fiscal 1997, retail sales increased 8.0% during fiscal 1998. The Company’s cost of sales and occupancy includes costs such as rental expense, common area maintenance, merchant association dues, lease-required advertising and adjustments for LIFO. Cost of sales and occupancy increased to $2.143 billion in fiscal 1998 from $2.019 billion in fiscal 1997. The Company’s gross margin rate increased to 28.7% in fiscal 1998 from 27.8% in fiscal 1997. Excluding barnesandnoble.com in fiscal 1997 the retail gross margin rate was 27.9%. The current year improvement in gross margin reflects more direct buying, increased distribution center efficiencies, better shrinkage control, and a more-favorable merchandise mix. 6
Slide 38: Selling and Administrative Expenses Equity in Net Loss of barnesandnoble.com llc Selling and administrative expenses increased $36.8 million, or 6.8% to $577.2 million in fiscal 1998 from $540.4 million in fiscal 1997. Selling and administrative expenses decreased slightly to 19.2% of sales during fiscal 1998 from 19.3% during fiscal 1997 primarily as a result of the start-up expenses from barnesandnoble.com included in the fiscal 1997 results. Excluding barnesandnoble.com, retail selling and administrative expenses would have been 18.9% of sales in fiscal 1997 and total retail selling and administrative expenses would have increased 9.9% in fiscal 1998. The current year increase in retail selling and administrative expenses reflects the opening of an additional 50 Barnes & Noble stores, the full year implementation of a new wage plan, and expenses associated with new store system enhancements. Depreciation and Amortization As a result of the formation of the limited liability company with Bertelsmann, the Company began accounting for its interest in barnesandnoble.com under the equity method of accounting as of the beginning of fiscal 1998. The Company’s equity in the net loss of barnesandnoble.com for fiscal 1998 was $71.3 million. This reflects a one-hundred percent equity interest for the first three quarters ended October 31, 1998 (also the effective date of the limited liability company agreement), and a fifty percent equity interest beginning on November 1, 1998 through the end of the fiscal year. Had the Company reported the results of barnesandnoble.com under the equity method of accounting during fiscal 1997, its fiscal 1997 equity in the net loss of barnesandnoble.com would have been $15.4 million. Gain on Formation of barnesandnoble.com llc Depreciation and amortization increased $11.3 million, or 14.8%, to $88.3 million in fiscal 1998 from $77.0 million in fiscal 1997. The increase was primarily the result of the new Barnes & Noble stores opened during fiscal 1998 and fiscal 1997, as well as new store system enhancements made during fiscal 1998. Pre-Opening Expenses As a result of the formation of the limited liability company, resulting in the receipt of $75 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 barnesandnoble.com sold by the Company to Bertelsmann. Provision for Income Taxes Pre-opening expenses declined in fiscal 1998 to $8.8 million from $12.9 million in fiscal 1997 reflecting fewer new stores compared with prior years. Operating Profit Barnes & Noble’s effective tax rate was 41.0% during both fiscal 1998 and fiscal 1997. Earnings Operating profit increased to $188.6 million in fiscal 1998 from $147.3 million in fiscal 1997. Excluding the $15.4 million operating loss for barnesandnoble.com included in fiscal 1997, retail operating margin improved to 6.3% of sales during fiscal 1998 from 5.8% of sales in fiscal 1997. Interest Expense, Net and Amortization of Deferred Financing Fees Fiscal 1998 earnings before extraordinary charge increased $27.7 million, or 42.8%, to $92.4 million (or $1.29 per diluted share) from $64.7 million (or $0.93 per diluted share) during fiscal 1997. Before the effect of barnesandnoble.com, retail earnings before extraordinary charge increased $23.0 million, or 31.3% to $96.8 million (or $1.35 per diluted share) from $73.8 million (or $1.06 per diluted share). Interest expense, net of interest income, and amortization of deferred financing fees decreased 35.2% or $13.3 million in fiscal 1998 to $24.4 million from $37.7 million in fiscal 1997. The decline was the result of the retirement of $190 million in 11-7/8% senior subordinated notes on January 15, 1998 as well as the more-favorable rate environment and lower spreads over the London Interbank Offer Rate (LIBOR) in effect since the November 1997 refinancing. 7
Slide 39: 52 Weeks Ended January 31, 1998 Compared with 53 Weeks Ended February 1, 1997 Sales Operating Profit The Company’s sales increased 14.2% during fiscal 1997 to $2.797 billion from $2.448 billion during fiscal 1996. Fiscal 1996 includes 53 weeks; excluding the impact of the 53rd week, sales increased 16.0%. Fiscal 1997 sales from Barnes & Noble stores, which contributed 80.3% of total sales, increased 20.7% to $2.246 billion from $1.861 billion in fiscal 1996. The increase in sales was primarily due to the 9.4% increase in Barnes & Noble comparable store sales and the opening of an additional 65 Barnes & Noble stores during 1997. This increase was slightly offset by declining sales of B. Dalton stores which closed 53 stores and posted a comparable store sales decline of 1.1%. The inclusion of barnesandnoble.com as a consolidated wholly owned subsidiary also contributed to the increase in sales, posting $14.6 million of sales during its first year of operations. Cost of Sales and Occupancy Operating profit increased to $147.3 million in fiscal 1997 from $119.7 million in fiscal 1996. Despite the $15.4 million operating loss from barnesandnoble.com, operating margin improved to 5.3% of sales during fiscal 1997 from 4.9% of sales during fiscal 1996. Excluding barnesandnoble.com, retail operating margin improved to 5.8% of sales. Interest Expense, Net and Amortization of Deferred Financing Fees Interest expense, net of interest income, and amortization of deferred financing fees decreased $0.6 million in fiscal 1997 to $37.7 million from $38.3 million in fiscal 1996. The decline was primarily due to lower borrowings under the Company’s senior credit facilities. Provision for Income Taxes Barnes & Noble’s effective tax rate was 41.0% during fiscal 1997 compared with 37.1% during fiscal 1996. The fiscal 1996 provision reflected a non-recurring $3.0 million rehabilitation tax credit. Extraordinary Charge The Company’s cost of sales and occupancy includes costs such as rental expense, common area maintenance, merchant association dues, lease-required advertising and adjustments for LIFO. Cost of sales and occupancy increased 13.1% during fiscal 1997 to $2.019 billion from $1.785 billion in fiscal 1996. The Company’s gross margin rate increased to 27.8% in fiscal 1997 from 27.1% in fiscal 1996. The g ross margin expansion reflects more direct buying, reduced costs of shipping and handling, and improvements in merchandise mix. Selling and Administrative Expenses As a result of obtaining a new senior credit facility during fiscal 1997, the Company called its outstanding $190 million, 11-7/8% senior subordinated notes on January 15, 1998, at a call premium of 5.9375%. The extraordinary charge reflects (on an after-tax basis) such call premium along with the write-off of related deferred financing fees. Earnings Selling and administrative expenses increased $74.7 million, or 16.0% to $540.4 million in fiscal 1997 from $465.7 million in fiscal 1996. Selling and administrative expenses increased to 19.3% of sales during fiscal 1997 from 19.0% during fiscal 1996 primarily as a result of the start-up expenses from barnesandnoble.com. Excluding barnesandnoble.com, selling and administrative expenses would have declined to 18.9% of sales, reflecting operating leverage improvement. Depreciation and Amortization Fiscal 1997 earnings before extraordinary charge increased $13.4 million, or 26.2%, to $64.7 million (or $0.93 per diluted share) from $51.2 million (or $0.75 per diluted share) during fiscal 1996. The extraordinary charge in fiscal 1997 of $11.5 million equated to $0.17 per diluted share resulting in net earnings during fiscal 1997 of $53.2 million (or $0.76 per diluted share). All fiscal 1997 and 1996 share and per-share amounts con tained in this annual report have been restated to reflect a twofor-one split of the Company’s common stock in September of 1997, and the adoption of Statement of Financial Accounting Standards No. 128, “Earnings per Share” (SFAS 128). Implementation of SFAS 128 did not have a material effect on the Company’s diluted earnings per share. SFAS 128 requires the disclosure of basic earnings per share in addition to diluted earnings per share. Seasonality The Company’s business, like that of many retailers, is seasonal, with the major portion of sales and operating profit realized during the quarter which includes the Christmas selling season. The growth in Barnes & Noble stores continues to reduce such seasonal fluctuation. The Company has now reported operating profit for eleven consecutive quarters. Depreciation and amortization increased $17.2 million, or 28.8%, to $77.0 million in fiscal 1997 from $59.8 million in fiscal 1996. The increase was primarily the result of the new Barnes & Noble stores opened during fiscal 1997 and fiscal 1996. Pre-Opening Expenses Pre-opening expenses declined in fiscal 1997 to $12.9 million from $17.6 million in fiscal 1996 reflecting fewer new stores compared with prior years. 8
Slide 40: Liquidity and Capital Resources Working capital requirements are generally at their highest during the Company’s fiscal quarter ending on or about January 31 due to the higher payments to vendors for holiday season merchandise purchases and the replenishment of merchandise inventories following this period of increased sales. In addition, the Company’s sales and merchandise inventory levels will fluctuate from quarter-to-quarter as a result of the number and timing of new store openings, as well as the amount and timing of sales contributed by new stores. Cash flows from operating activities, funds available under its revolving credit facility and vendor financing continue to provide the Company with liquidity and capital resources for store expansion, seasonal working capital requirements and capital investments. Cash Flow Cash flows provided from operating activities were $181.1 million, $169.2 million and $119.5 million during fiscal 1998, 1997 and 1996, respectively. Fiscal 1997 cash flows from operating activities without barnesandnoble.com were $181.9 million. The slight decrease in retail operating cash flows in fiscal 1998 was due to a strategic increase in the distribution center standing inventory, the implementation of a new wage plan in fiscal 1998 and increased operating expenses associated with implementing the Company’s new store system enhancements. In fiscal 1997, the improvement in cash flows was primarily due to the improvement in net earnings. Capital Structure Continued strong cash flows from operations and a continued emphasis on working capital management, once again strengthened the Company’s balance sheet in fiscal 1998. Including the effect of the Bertelsmann contribution to barnesandnoble.com (as discussed more fully below), shareholders’ equity increased 27.7% to $678.8 million as of January 30, 1999, from $531.8 million as of January 31, 1998, and increased 20.8% as of January 30, 1999 before the Bertelsmann contribution. Return on average equity increased to 15.3% in fiscal 1998 from 13.1% during fiscal 1997. The Company has an $850 million senior credit facility (the Facility), obtained in November 1997, with a syndicate led by The Chase Manhattan Bank. The Facility is structured as a five-year revolving credit. The Facility permits borrowings at various interest rate options based on the prime rate or LIBOR depending upon certain financial tests. In addition, the agreement requires the Company to pay a commitment fee up to 0.25% of the unused portion depending upon certain financial tests. The Facility contains covenants, limitations and events of default typical of credit facilities of this size and nature. The amount outstanding under the Facility has been classified as long-term debt in the accompanying consolidated balance sheets due to both its terms and the Company’s intent and ability to maintain principal amounts outstanding through November 2 002. Borrowings under the Company’s senior credit facilities averaged $380.3 million, $184.5 million and $186.6 million and peaked at $535.0 million, $304.9 million and $292.8 million during fiscal 1998, 1997 and 1996, respectively. The increase in average and peak borrowings in fiscal 1998 is primarily the result of utilizing the Facility to retire $190 million in 11-7/8% senior subordinated notes on January 15, 1998 as well as the Company’s funding of the operations of barnesandnoble.com. As a result of this retirement and the more favorable rates contained in the current facility as compared with the facility existing until November 1997, interest expense decreased 35% from $37.7 million to $24.4 million. The ratio of debt to equity improved significantly to 0.37:1.00 as of January 30, 1999 from 0.54:1.00 as of January 31, 1998. Earnings before interest, taxes, depreciation and amortization (EBITDA) increased $52.7 million or 23.5% to $276.9 million in fiscal 1998 from $224.2 million in fiscal 1997. Without barnesandnoble.com fiscal 1997 EBITDA was $236.9 million resulting in a retail increase in EBITDA in fiscal 1998 of 16.9%. In addition, total debt to retail EBITDA decreased from 1.20 times in fiscal 1997 to .90 times in fiscal 1998. This significant improvement in EBITDA is the result of the continued maturation of the Barnes & Noble stores. The weighted-average age per square foot of the Company’s 520 Barnes & Noble stores was 3.3 years as of January 30, 1999 and is expected to increase to approximately 3.9 years by January 29, 2000. As the relatively young Barnes & Noble stores mature, and as the number of new stores opened during the fiscal year decreases as a percentage of the existing store base, the increasing operating profits of Barnes & Noble stores are expected to generate a greater portion of cash flows required for working capital, including new store inventories as well as capital expenditures and other initiatives. Additionally, due to the formation of the joint venture with Bertelsmann as discussed below, retail cash flows are now fully available to support the Company’s working capital requirements. 9
Slide 41: 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 associated 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 development 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 amendment to the Company’s Restated Certificate of Incorporation to increase the number of shares of Common Stock, par value $.001 per share, that the Company is authorized to issue, from 100,000,000 to 300,000,000. 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. For a discussion of the terms of such preferred stock see Note 8 of Notes to Consolidated Financial 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 group 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 subsidiary, 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 agreements, effective as of October 31, 1998, the Company and Bertelsmann (through their respective subsidiaries) each have a 50% membership interest in barnesandnoble.com. barnesandnoble.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 venture resulting from the $150 million Bertelsmann contribution. The accompanying consolidated financial statements, in accordance with the equity method of accounting, reflect the Company’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 barnesandnoble.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 venture had occurred at the beginning of the fiscal year. Consequently, the $71.3 million equity in net loss of barnesandnoble.com shown in the accompanying consolidated statement of operations reflects the Company’s one-hundred percent interest throughout the period ending at the date of the formation of the joint venture, October 31, 1998, and the Company’s fifty percent interest from that point through the end of the fiscal year ending January 30, 1999. The accompanying consolidated financial statements reflect the financial position and results of operations of barnesandnoble.com as a consolidated wholly owned subsidiary for all other periods presented. In March 1999, the Company announced the filing of a registration 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 percent interest in barnesandnoble.com inc. via high voting Class B and high voting Class C common shares, respectively. barnesandnoble.com inc. will use the proceeds of the offering to purchase a fifteen to twenty percent interest in barnesandnoble.com llc. In March 1999, the limited liability company agreement was amended to also provide for the additional $50 million cash contribution by Bertelsmann to be made to barnesandnoble.com in the event of the completion of the initial public offering. 10
Slide 42: Acquisition of Ingram Book Group On November 6, 1998, the Company announced an agreement to purchase the Ingram Book Group, a group of subsidiaries of privately held Ingram Industries Inc., for $600 million, consisting of approximately $200 million in cash and approximately $400 million in common stock of the Company. The closing of the transaction is subject to the satisfaction of certain conditions including the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Newly Issued Accounting Pronouncements In April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, “Reporting on the Costs of Start-Up Activities” (SOP 98-5). SOP 98-5 requires an entity to expense all start-up activities, as defined, when incurred. The Company has historically amortized costs associated with the opening of new stores over the respective store’s first 12 months of operations. In accordance with SOP 98-5, the Company will adopt its provisions effective for the fiscal year ending January 29, 2000, and will record a one-time charge reflecting the cumulative effect of a change in accounting principle in the first quarter of fiscal year 1999, in an amount estimated to be $4,500 after taxes, representing such start-up costs capitalized as of the beginning of that fiscal year. In addition, the Company will, on a prospective basis, expense all such start-up costs as incurred. Without consideration to the onetime charge, the Company’s consolidated financial statements issued subsequent to fiscal year 1998 are not expected to be materially affected by the adoption of S OP 98-5. In March 1998, the Accounting Standards Executive Committee issued Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (SOP 98-1). SOP 98-1 is effective for the Company’s fiscal year ending January 29, 2000. Adoption is not expected to have a material effect on the Company’s consolidated financial statements as the Company’s policies are substantially in compliance with S OP 98-1. In June 1998, the Financial Accounting Standards Board issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133 requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company currently plans to adopt SFAS 133 on January 30, 2000. On that date, hedging relationships will be designated anew and documented. The Company from time to time enters into interest rate swap agreements for the purpose of hedging risks attributable to changing interest rates associated with the Company’s revolving credit facility, and, in general, such hedges have been fully effective. The Company may from time to time, enter into interest rate swaps in the future and these transactions are expected to substantially offset the effects of changes in the underlying variable interest rates. The Company does not believe that adoption of SFAS 133 will have a material effect on its consolidated financial statements. Historically, the Company has not used derivative contracts for speculative purposes. Year 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The Company’s computer equipment and software and devices with embedded technology that are datesensitive may recognize a date using “00” as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in other normal business activities. In 1997, the Company began assessing how it may be impacted by the Year 2000 issue and has formulated and commenced implementation of a comprehensive plan to address all known aspects of the issue. The Company’s plan encompasses the following areas: (1) information systems that utilize date/time oriented software (IT systems), (2) computer chips, processors and controllers (non-IT systems), and (3) vendors and customers. The Company is in various stages of implementation which include remediation, testing and implementation. To date, approximately 80% of the Company’s administrative support IT systems have at least completed the remediation phase. Of this amount, approximately 80% have completed the testing and remediation phase and 20% have been replaced or upgraded. All remaining Year 2000 compliance efforts for administrative IT functions are expected to be completed by the second quarter of fiscal 1999. Approximately 90% of non-IT systems have completed the remediation, testing and implementation phases with no material replacements necessary. 11
Slide 43: The Company has been obtaining information from major vendors, suppliers, and service providers to determine if their systems will be Year 2000 compliant. There has been no indication from these sources that their systems will not be sufficiently Year 2000 compliant or that their failure to be Year 2000 compliant will cause a significant disruption in the operations of the Company. The Company is developing contingency plans to identify alternative sources which are Year 2000 compliant in the event the current parties suffer significant disruption as a result of Year 2000 compliance failures. The Company estimates that total costs to implement its Year 2000 plan will be between $4.0 million and $6.0 million of which $2.6 million has already been incurred, including $1.5 million relating to the purchase of new software and hardware modifications, and $1.1 million relating to Year 2000 consultants. The estimated total includes direct costs for systems enhancements which would have been implemented in the ordinary course of business but whose acquisition has been accelerated to ensure compliance by the Year 2000. The estimate excludes costs for scheduled system upgrades which have not been accelerated due to Year 2000 issues. The implementation of the Company’s proprietary point-of-sale system (Bookmaster), which began in 1996, is continuing and is expected to be completed in the second quar ter of fiscal 1999. Bookmaster, which is Year 2000 compliant, is an inventory management system with integrated point-of-sale features that utilizes a proprietary data-warehouse-based just-intime replenishment system. It enhances communications and real-time access to the Company’s network of stores, distribution center, and wholesalers. The Bookmaster system has been installed in approximately 25% of all Barnes & Noble stores. By the end of the second quarter of fiscal 1999 all existing Barnes & Noble and B. Dalton stores will either be utilizing the Bookmaster system or will receive Year 2000 upgrades to their existing point-of-sale systems. Should some of the Company’s systems not be available due to Year 2000 problems, in a reasonably likely worst case scenario, the Company may experience significant delays in its ability to perform certain functions. However, the Company does not expect an impairment in its ability to execute critical functions. Disclosure Regarding Forward-Looking Statements This report may contain certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to the Company that are based on the beliefs of the management of the Company as well as assumptions made by and information currently available to the management of the Company. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions, as they relate to the Company or the management of the Company, identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events, the outcome of which is subject to certain risks, including among others general economic and market conditions, decreased consumer demand for the Company’s products, possible disruptions in the Company’s computer or telephone systems, increased or unanticipated costs or effects associated with Year 2000 compliance by the Company or its service or supply providers, possible work stoppages or increases in labor costs, possible increases in shipping rates or interruptions in shipping service, effects of competition, possible disruptions or delays in the opening of new stores or the inability to obtain suitable sites for new stores, higher than anticipated store closing or relocation costs, higher interest rates, the performance of the Company’s online initiatives such as barnesandnoble.com, unanticipated increases in merchandise or occupancy costs, unanticipated adverse litigation results or effects, and other factors which may be outside of the Company’s control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described as anticipated, believed, estimated, expected, intended or planned. Subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. 12
Slide 44: CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Year (In thousands of dollars, except per share data) 1998 $ 3,005,608 2 ,14 2 ,717 862,891 5 7 7,19 5 88,345 8,795 188,556 1997 2,796,852 2,019,291 777,561 540,423 76,951 12,918 147,269 1996 2,448,124 1,785,392 662,732 465,687 59,806 17,571 119,668 Sales Cost of sales and occupancy Gross profit Selling and administrative expenses Depreciation and amortization Pre-opening expenses Operating profit Interest (net of interest income of $976, $446 and $2,288, respectively) and amortization of defer red financing fees Equity in net loss of barnesandnoble.com llc Gain on formation of barnesandnoble.com llc Earnings before provision for income taxes and extraordinary charge Provision for income taxes Earnings before extraordinary charge Extraordinary charge due to early extinguishment of debt, net of tax benefits of $7,991 Net earnings Earnings per common share Basic Earnings before extraordinary charge Extraordinary charge due to early extinguishment of debt, net of tax benefits Net earnings Diluted Earnings before extraordinary charge Extraordinary charge due to early extinguishment of debt, net of tax benefits Net earnings Weighted average common shares outstanding Basic Diluted See accompanying notes to consolidated financial statements. (24,412) (37,666) (38,286) (71,334) 63,759 — — — — 156,569 64,193 92,376 — $ 92,376 109,603 44,935 64,668 11,499 53,169 81,382 30,157 51,225 — 51,225 $ $ $ $ $ $ 1.35 — 1.35 1.29 — 1.29 0.96 0.17 0.79 0.93 0.17 0.76 0.77 — 0.77 0.75 — 0.75 68,435,000 71,677,000 67,237,000 69,836,000 66,103,000 67,886,000 Barnes & Noble, Inc. 1998 13
Slide 45: CONSOLIDATED BALANCE SHEETS (In thousands of dollars, except per share data) January 30, 1999 January 31, 1998 Assets Current assets: Cash and cash equivalents Receivables, net Merchandise inventories Prepaid expenses and other current assets Total current assets Property and equipment: Land and land improvements Buildings and leasehold improvements Fixtures and equipment $ 31,081 57,523 945,073 54,634 1,088,311 12,697 43,858 852,107 68,902 977,564 3,197 383,292 440,488 826,977 316,631 510,346 86,980 82,307 39,653 $ 1,807,597 681 3 47, 5 9 8 378,058 726,337 244,207 482,130 90,237 — 41,240 1,591,171 Less accumulated depreciation and amortization Net property and equipment Intangible assets, net Investment in barnesandnoble.com llc Other noncurrent assets Total assets Liabilities and Shareholders’ Equity Current liabilities: Accounts payable Accrued liabilities Total current liabilities Long-term debt Deferred income taxes Other long-term liabilities Shareholders’ equity: Common stock; $.001 par value; 300,000,000 shares authorized; 68,759,111 and 67,921,830 shares issued and outstanding, respectively Additional paid-in capital Retained earnings Total shareholders’ equity Commitments and contingencies Total liabilities and shareholders’ equity See accompanying notes to consolidated financial statements. $ 498,237 274,085 772,322 2 4 9,10 0 32,449 74,937 459,795 253,050 712,845 284,800 — 61,771 69 523,517 155,203 678,789 — $ 1,807,597 68 468,860 62,827 531,755 — 1,591,171 Barnes & Noble, Inc. 1998 14
Slide 46: CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (In thousands of dollars) Common Stock $ 66 — — 66 2 — 68 1 Additional paid-in capital 441,736 4,529 — 446,265 22,595 — 468,860 18,306 Retained earnings (deficit) (41,567) — 51,225 9,658 — 53,169 62,827 — Total 400,235 4,529 51,225 455,989 22,597 5 3 ,169 531,755 18,307 Balance at January 27, 1996 Exercise of 459,022 common stock options, including tax benefits of $2,272 Net earnings Balance at February 1, 1997 Exercise of 1,545,580 common stock options, including tax benefits of $8,253 Net earnings Balance at January 31, 1998 Exercise of 837,281 common stock options, including tax benefits of $9,002 barnesandnoble.com llc issuance of membership units (net of deferred income taxes of $26,325) Net earnings Balance at January 30, 1999 See accompanying notes to consolidated financial statements. — — $ 69 36,351 — 523,517 — 92,376 155,203 36,351 92,376 678,789 Barnes & Noble, Inc. 1998 15
Slide 47: CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Year (In thousands of dollars) 1998 1997 1996 Cash flows from operating activities: Net earnings Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amortization Loss (gain) on disposal of property and equipment Deferred taxes Extraordinary charge due to early extinguishment of debt, net of tax benefits Increase in other long-term liabilities for scheduled rent increases in long-term leases Gain on formation of barnesandnoble.com llc Equity in net loss of barnesandnoble.com llc Changes in operating assets and liabilities, net Net cash flows from operating activities Cash flows from investing activities: Purchases of property and equipment Investment in barnesandnoble.com llc Proceeds from formation of barnesandnoble.com llc Proceeds from sales of property and equipment Net increase in other noncur rent assets Net cash flows from investing activities Cash flows from financing activities: Net increase (decrease) in revolving credit facility Proceeds from issuance of long-term debt Repayment of long-term debt Proceeds from exercise of common stock options including related tax benefits Payment of note premium Net cash flows from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Changes in operating assets and liabilities, net: Receivables, net Merchandise inventories Prepaid expenses and other cur rent assets Accounts payable and accrued liabilities Changes in operating assets and liabilities, net Supplemental cash flow information: Cash paid during the period for: Interest Income taxes See accompanying notes to consolidated financial statements. $ 92,376 53,169 51,225 88,721 3,291 14,761 — 14,031 (63,759) 71,334 (39,673) 181,082 78,629 853 11,598 11,499 16,350 — — (2,884) 169,214 61,652 (130) 6,604 — 15,663 — — (15,477) 119,537 (141,388) (75,394) 75,000 10 (3,533) (145,305) (121,903) — — — (13, 77) 1 (135,080) (171,885) — — 177 (16,787) (188,495) (35,700) — — 18,307 — (17,393) 18,384 12,697 $ 31,081 244,800 — (290,000) 22,597 (11,281) (33,884) 250 12,447 12,697 (32,400) 100,000 — 4,529 — 72,129 3,171 9,276 12,447 $ (14,012) (93,491) (1,047) 68,877 $ (39,673) 1,700 (119,904) 9,721 105,599 (2,884) 3,461 8,148 (19,502) (7,584) (15,477) $ 25,243 $ 18,225 37,845 20,282 38,103 24,574 Barnes & Noble, Inc. 1998 16
Slide 48: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Merchandise Inventories For the 52 weeks ended January 30, 1999 (fiscal 1998), the 52 weeks ended January 31, 1998 (fiscal 1997) and the 53 weeks ended February 1, 1997 (fiscal 1996). (In thousands of dollars, except per share data) 1. Summary of Significant Accounting Policies Business Merchandise inventories are stated at the lower of cost or market. Cost is determined primarily by the retail inventory method on the first-in, first-out (FIFO) basis for 86% and 83% of the Company’s merchandise inventories as of January 30, 1999 and January 31, 1998, respectively. The remaining merchandise inventories are valued on the last-in, first-out (LIFO) method. If substantially all of the merchandise inventories currently valued at LIFO costs were valued at current costs, merchandise inventories would remain unchanged as of January 30, 1999, and would have increased approximately $5,102 as of January 31,1998. Property and Equipment Barnes & Noble, Inc. (Barnes & Noble), through its wholly owned subsidiaries (collectively, the Company), is primarily engaged in the sale of books through three principal bookselling strategies: its “super” store strategy through its wholly owned subsidiary Barnes & Noble Booksellers, Inc., under its Barnes & Noble Booksellers, Bookstop and Bookstar trade names (hereafter collectively referred to as Barnes & Noble stores), its mall strategy through its wholly owned subsidiaries B. Dalton Bookseller, Inc. and Doubleday Book Shops, Inc., under its B. Dalton stores, Doubleday Book Shops and Scribner’s Bookstore trade names (hereafter collectively referred to as B. Dalton stores), and its direct-mail strategy through its wholly owned subsidiary Marboro Books Corp. The Company is also engaged in the online retailing of books and other products through a 50% interest in barnesandnoble.com llc (barnesandnoble.com), as more fully described in Note 5. The Company’s interest in barnesandnoble.com is through its wholly owned subsidiary B&N.com Holding Corp. Consolidation The consolidated financial statements include the accounts of Barnes & Noble and its wholly owned subsidiaries. Investments in affiliates that are 20% to 50% owned, principally barnesandnoble.com, are accounted for using the equity method. The Company’s investment in barnesandnoble.com has been presented in the accompanying consolidated financial statements under the equity method as of the beginning of fiscal 1998 and as a consolidated wholly owned subsidiary for all of fiscal 1997. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior-period amounts have been reclassified for comparative purposes. Use of Estimates Property and equipment are carried at cost, less accumulated depreciation and amortization. For financial reporting purposes, depreciation is computed using the straight-line method over estimated useful lives. For tax purposes, different methods are used. Maintenance and repairs are expensed as incurred, while betterments and major remodeling costs are capitalized. Leasehold improvements are capitalized and amortized over the shorter of their estimated useful lives or the terms of the respective leases. Capitalized lease acquisition costs are being amortized over the average lease terms of the underlying leases. In March 1998, the Accounting Standards Executive Committee issued Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (SOP 98-1). This statement is effective for the Company’s fiscal year ending January 29, 2000. Adoption is not expected to have a material effect on the Company’s consolidated financial statements as the Company’s policies are substantially in compliance with SOP 98-1. Costs incurred in purchasing management information systems are capitalized and included in property and equipment. These costs are amortized over their estimated useful lives from the date the systems become operational. Intangible Assets and Amortization In preparing financial statements in conformity with generally accepted accounting principles, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The costs in excess of net assets of businesses acquired are carried as intangible assets, net of accumulated amortization, in the accompanying consolidated balance sheets. The net intangible assets, consisting primarily of goodwill and trade names, of $59,365 and $27,615 as of January 30, 1999, and $61,484 and $28,753 as of January 31, 1998, are amortized over 40 years using the straight-line method. Amortization of goodwill and trade names included in depreciation and amortization in the accompanying consolidated statements of operations is $3,257, $3,257 and $3,305 during fiscal 1998, 1997 and 1996, respectively. Accumulated amortization at January 30, 1999 and January 31, 1998 was $44,551 and $41,294, respectively. The Company considers all short-term, highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. 17
Slide 49: The Company periodically evaluates the recoverability of goodwill and considers whether this goodwill should be completely or partially written off or the amortization periods accelerated. The Company assesses the recoverability of this goodwill based upon several factors, including management’s intention with respect to the acquired operations and those operations’ projected undiscounted store-level cash flows. Deferred Charges closings of $1,208 during fiscal 1998 are included in selling and administrative expenses in the accompanying consolidated statements of operations. Net Earnings Per Common Share Costs incurred to obtain long-term financing are amortized over the terms of the respective debt agreements using the straight-line method, which approximates the interest method. Unamortized costs included in other noncurrent assets as of January 30, 1999 and January 31, 1 998 were $1,397 and $1,764, respectively. Unamortized costs of $8,2 09 were included in the extraordinary loss due to the early extinguishment of debt for fiscal 1997. Amortization expense included in interest and amortization of deferred financing fees is $376, $1,678 and $1,846 during fiscal 1998, 1997 and 1996 respectively. Revenue Recognition Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the impact of common shares issuable upon exercise of stock options. Income Taxes The provision for income taxes includes federal, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. The deferred tax assets and liabilities are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. Stock Options Revenue from sales of the Company’s products is recognized at the time of sale. The Company sells memberships which entitle purchasers to additional discounts. The membership revenue is deferred and recognized as income over the twelve-month membership period. Sales returns (which are not significant) are recognized at the time returns are made. Pre-opening Expenses The Company accounts for all transactions under which employees receive shares of stock or other equity instruments in the Company or the Company incurs liabilities to employees in amounts based on the price of its stock in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Generally, compensation expense is not recognized for stock option grants. Reporting Period In April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, “Reporting on the Costs of Start-Up Activities” (SOP 98-5). SOP 98-5 requires an entity to expense all start-up activities, as defined, when incurred. The Company has historically amortized costs associated with the opening of new stores over the respective store’s first 12 months of operations. In accordance with SOP 98-5, the Company will adopt its provisions effective for the fiscal year ending January 29, 2000, and will record a one time non-cash charge reflecting the cumulative effect of a change in accounting principle in the first quarter of fiscal year 1999, in an amount estimated to be $4,500 after taxes, representing such start-up costs capitalized as of the beginning of that fiscal year. In addition, the Company will, on a prospective basis, expense all such start-up costs as incurred. Excluding the one time charge, the Company’s consolidated financial statements are not expected to be materially affected by the adoption of SOP 98-5. Closed Store Expenses The Company’s fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of January. The reporting periods ended January 30, 1999, January 31, 1998 and February 1, 1997 contained 52 weeks, 52 weeks and 53 weeks, respectively. 2. Receivables, Net Receivables represent customer, bankcard, landlord and other receivables due within one year as follows: January 30, 1999 Trade accounts Bankcard receivables Receivables from landlords for leasehold improvements Other receivables Total receivables, net $ 6,743 19,421 23,659 7,700 $ 57,523 January 31, 1998 6,628 15,536 16,715 4,979 43,858 3. Debt On November 18, 1997, the Company obtained an $850,000 five-year senior revolving credit facility (the Revolving Credit Facility) with a syndicate led by The Chase Manhattan Bank. The Revolving Credit Facility refinanced an existing 18 Upon a formal decision to close or relocate a store, the Company charges unrecoverable costs to expense. Such costs include the net book value of abandoned fixtures and leasehold improvements and a provision for future lease obligations, net of expected sublease recoveries. Costs associated with store
Slide 50: $450,000 revolving credit and $100,000 term loan facility (the Old Facility). The Revolving Credit Facility permits borrowings at various interest rate options based on the prime rate or London Interbank Offer Rate (LIBOR) depending upon certain financial tests. In addition, the agreement requires the Company to pay a commitment fee up to 0.25% of the unused portion depending upon certain financial tests. The Revolving Credit Facility contains covenants, limitations and events of default typical of credit facilities of this size and nature, including financial covenants which require the Company to meet, among other things, cash flow and interest coverage ratios and which limit capital expenditures. The Revolving Credit Facility is secured by the capital stock, accounts receivable and general intangibles of the Company’s subsidiaries. Net proceeds from the Revolving Credit Facility are available for general corporate purposes and were used to redeem all of the Company’s outstanding $190,000, 11- 7/8% senior subordinated notes on January 15, 1998. As a result of the refinancings, the Company recorded an extraordinary charge of $11,499 (net of applicable taxes) due to the early extinguishment of debt during fiscal 1997. The extraordinary charge represents the payment of a call premium associated with the redemption of the senior subordinated notes of $6,656 (net of applicable taxes) and the write-off of unamortized fees of $4,843 (net of applicable taxes). The Company from time to time enters into interest rate swap agreements to manage interest costs and risk associated with changes in interest rates. These agreements effectively convert underlying variable — rate debt based on prime rate or LIBOR to fixed-rate debt through the exchange of fixed and floating interest payment obligations without the exchange of underlying principal amounts. As of January 30, 1999 and January 31, 1998 the Company had outstanding $125,000 of swaps with maturities ranging from 1999 to 2003. The Company recorded interest expense associated with these agreements of $440 and $306 during fiscal years 1998 and 1997, respectively. Selected information related to the Company’s revolving credit facility is as follows: Fiscal Year Balance at end of year Average balance outstanding during the year Maximum borrowings outstanding during the year Weighted average interest rate during the year Interest rate at end of year 1998 $ 249,100 1997 284,800 1996 40,000 Fees expensed with respect to the unused portion of the Company’s revolving credit commitment were $733, $1,204 and $911, during fiscal 1998, 1997 and 1996, respectively. The amounts outstanding under the Company’s Revolving Credit Facility of $249,100 and $284,800 as of January 30, 1999 and January 31, 1998, respectively, have been classified as long-term debt based on the terms of the credit agreement and the Company’s intention to maintain principal amounts outstanding through November 2002. The Company has no agreements to maintain compensating balances. 4. Fair Values of Financial Instruments The carrying values of cash and cash equivalents reported in the accompanying consolidated balance sheets approximate fair value due to the short-term maturities of these assets. The agg regate fair value of the Revolving Credit Facility approximates its carrying amount, because of its recent and frequent repricing based upon market conditions. Interest rate swap agreements are valued based on market quotes obtained from dealers. The Company also maintains an investment in Chapters Inc., a Canadian book retailer. The fair value of the investment in Chapters Inc. is based on quoted market prices and conversion rates at January 30, 1999 and January 31, 1998. The carrying amounts and fair values of the Company’s financial instruments as of January 30, 1999 and January 31, 1998 are as follows: January 30, 1999 Carrying Amount Cash and cash equivalents Revolving credit facility Interest rate swaps liability Investment in Chapters Inc. Fair Value January 31, 1998 Carrying Amount Fair Value $ 31,081 $ 249,100 $ — 31,081 249,100 2,189 33,201 12,697 284,800 — 17,686 12,697 284,800 1,463 31,445 $ 18,827 $ 380,315 105,127 101,671 $535,000 304,900 192,800 6.29% 5.77% 7.12% 6.60% 7.56% 6.87% 19
Slide 51: 5. Formation of barnesandnoble.com llc On November 12, 1998, the Company and Bertelsmann AG (Bertelsmann) completed the formation of a limited liability company to operate the online retail bookselling operations of the Company’s wholly owned subsidiary, 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 agreements, effective as of October 31, 1998, the Company and Bertelsmann each have a 50% membership interest in barnesandnoble.com. The Company contributed substantially all of the assets and liabilities of its online operations to the joint venture and Bertelsmann paid $75,000 to the Company and made a $150,000 cash contribution to the joint venture. Bertelsmann also agreed to contribute an additional $50,000 to the joint venture for future working capital requirements. In addition, if in an initial public offering (see below) of barnesandnoble.com 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 $25,000. As a consequence of the above transactions the Company has recognized a pre-tax gain during fiscal 1998 in the amount of $126,435, of which $63,759 has been recognized in 6. Employees’ Retirement and Defined Contribution Plans earnings based on the $75,000 received directly from Bertelsmann and $62,676 ($36,351 after taxes) has been reflected in additional paid-in capital based on the Company’s share of the incremental equity of the joint venture resulting from the $150,000 Bertelsmann contribution. Summarized financial information for barnesandnoble.com follows: Fiscal Year Net sales Gross profit Loss before taxes Current assets Noncurrent asset Current liabilities Net assets Barnes & Noble’s equity in loss before taxes Barnes & Noble’s equity in net assets (1) 1998 $ 70,249 $ 16,169 $(85,590) $102,114 $ 89,324 $ 26,824 $164,614 $(71,334) $ 82,307 1997(1) 14,601 2,849 (15,395) 12,197 24,879 12,268 24,808 (15,395) 24,808 Fiscal 1997 represents amounts as consolidated in the accompanying consolidated financial statements. The Company maintains a noncontributory defined benefit pension plan (the Pension Plan) and a defined contribution plan (the Savings Plan) for the benefit of substantially all employees. In addition, the Company provides certain health care and life insurance benefits (the Postretirement Plan) to retired employees, limited to those receiving benefits or retired as of April 1, 1993. A summary of the components of net periodic pension cost for the Pension Plan and other postretirement benefit cost for the Postretirement Plan follows: Pension Plan Fiscal Year Service cost Interest cost Expected return on plan assets Net amortization and deferral Net periodic cost 1998 $ 4,157 2,039 (2,208) 36 $ 4,024 1997 3,294 1,666 (1,803) 36 3,193 1996 2,542 1,354 (1,500) 36 2,432 Postretirement Plan 1998 — 149 — (135) 14 1997 — 315 — — 315 1996 — 326 — — 326 Total Company contributions charged to employee benefit expenses for the Savings plan were $3,090, $2,545 and $2,115 during fiscal 1998, 1997 and 1996, respectively. Weighted-average actuarial assumptions used in determining the net periodic pension and other post retirement benefit costs and the funded status of the Pension Plan and the Postretirement Plan are as follows: Pension Plan Fiscal Year Discount rate Expected return on plan assets Assumed rate of compensation increase 1998 7.3% 9.5% 4.3% 1997 7.3% 9.5% 4.3% 1996 7.5% 9.5% 4.0% Postretirement Plan 1998 7.3% — — 1997 7.3% — — 1996 7.5% — — As a result of the formation of barnesandnoble.com llc, as more fully described in Note 5, assets of the Pension Plan and an equivalent benefit obligation, were transferred to barnesandnoble.com’s defined benefit pension plan as of the date of the formation. 20
Slide 52: The following table provides a reconciliation of benefit obligations, plan assets and funded status of the Pension Plan and the Postretirement Plan: Pension Plan Fiscal Year Change in benefit obligation: Benefit obligation at beginning of year Service cost Interest cost Transfer to barnesandnoble.com Actuarial (gain) loss Benefits paid Benefit obligation at end of year Change in plan assets: Fair value of plan assets at beginning of year Actual return on assets Employer contributions Benefits paid Transfer to barnesandnoble.com Fair value of plan assets at end of year Funded status Unrecognized net actuarial loss (gain) Unrecognized prior service cost Unrecognized net obligation remaining Accrued Benefit Cost 1998 $ 30,734 4,157 2,039 (642) (2,427) (797) 33,064 1997 21,378 3,294 1,666 — 5,752 (1,356) 30,734 Postretirement Plan 1998 1,975 — 149 — 136 (115) 2,145 1997 4,349 — 315 — (2,544) (145) 1,975 22,909 2,255 1,395 (797) (431) 25,331 (7,733) 805 (183) 166 $ (6,945) 18,565 4,165 1,535 (1,356) — 22,909 (7,825) 3,490 (201) 220 (4,316) — — — — — — (2,145) (2,136) — — (4,281) — — — — — — (1,975) (2,407) — — (4,382) The health care cost trend rate used to measure the expected cost of the Postretirement Plan benefits is assumed to be 7.5% in 1999, declining at one-half percent decrements each year through 2004 to 5.0% in 2004 and each year thereafter. The health care cost trend assumption has a significant effect on the amounts reported. For example, a 1% increase or decrease in the health care cost trend rate would change the accumulated postretirement benefit obligation by approximately $215 and $195, respectively, as of January 30, 1999, and would change the net periodic cost by approximately $15 and $14, respectively, during fiscal 1998. 7. Income Taxes The Company files a consolidated federal return. Federal and state income tax provisions for fiscal 1998, 1997 and 1996 are as follows: Fiscal Year Current: Federal State 1998 $ 39,286 10,146 49,432 Deferred: Federal State 1997 26,324 7,013 33,337 1996 18,413 5,140 23,553 A reconciliation between the provision for income taxes and the expected provision for income taxes at the federal statutory rate of 35% during fiscal 1998, 1997 and 1996, is as follows: Fiscal Year Expected provision for income taxes at federal statutory rate Amortization of goodwill and trade names State income taxes, net of federal income tax benefit Rehabilitation tax credit Other, net Provision for income taxes 1998 1997 1996 $ 54,799 1,251 38,361 1,140 28,484 1,157 11,697 3,064 14,761 9,575 2,023 11,598 44,935 5,300 1,304 6,604 30,157 8,596 — (453) $ 64,193 5,873 — (439) 44,935 3,341 (2,974) 149 30,157 Total $ 64,193 21
Slide 53: The tax effects of temporary differences that give rise to significant components of the Company’s deferred tax assets and liabilities as of January 30, 1999 and January 31, 1998 are as follows: January 30, 1999 Deferred tax liabilities: Operating expenses Depreciation barnesandnoble.com Total deferred tax liabilities Deferred tax assets: Inventory Lease transactions Reversal of estimated accruals Restructuring charge Insurance liability Deferred income Other Total deferred tax assets Net deferred tax assets (liabilities) $ January 31, 1998 $ (12,528) (29,829) (26,325) (68,682) (10,103) (16,359) — (26,462) 4,043 15,025 5,692 16,931 2,502 11,411 5,632 61,236 (7,446) . 6,604 16,108 5,418 21,825 2,265 7,058 824 60,102 33,640 8. Shareholders’ Equity At the Company’s Annual Meeting of Stockholders held on June 3, 1998, the Company’s shareholders approved an amendment to the Company’s Restated Certificate of Incorporation to increase the number of shares of Common Stock, par value $.001 per share, that the Company is authorized to issue from 100,000,000 to 300,000,000. As discussed more fully in Note 5, shareholders’ equity as of January 30, 1999 includes an increase in additional paid-in capital of $36,351 as a result of the formation of barnesandnoble.com llc. 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 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, 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% 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% or more of the Company’s outstanding Common Stock. If a person or group acquires 15% or more of the Company’s outstanding Common Stock, each Right will entitle a holder (other than such person or any member of such group) to purchase, at the Right’s then current exercise price, a number of shares of Common Stock having a market value of twice the exercise price of the Right. In addition, if the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold at any time after the Rights have become exercisable, each Right will entitle its holder to purchase, at the Right’s then current exercise price, a number of the acquiring company’s common shares having a market value at that time of twice the exercise price of the Right. Furthermore, at any time after a person or group acquires 15% or more of the outstanding Common Stock of the Company but prior to the acquisition of 50% of such stock, the Board of Directors may, at its option, exchange part or all of the Rights (other than Rights held by the acquiring person or group) at an exchange rate of one four-hundredth of a share of Series H Preferred Stock or one share of the Company’s Common Stock for each Right. The Company will be entitled to redeem the Rights at any time prior to the acquisition by a person or group of 15% or more of the outstanding Common Stock of the Company, at a price of $.01 per Right. The Rights will expire on July 20, 2008. 22
Slide 54: The Company has 5,000,000 shares of $.001 par value preferred stock authorized for issuance, of which 250,000 shares have been designated by the Board of Directors as Series H Preferred Stock and reserved for issuance upon exercise of the Rights. Each such share of Series H Preferred Stock will be nonredeemable and junior to any other series of preferred stock the Company may issue (unless otherwise provided in the terms of such stock) and will be entitled to a preferred dividend equal to the greater of $2.00 per share or 400 times any dividend declared on the Company’s Common Stock. In the event of liquidation, the holders of Series H Preferred Stock will receive a preferred liquidation payment of $1,000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon. Each share of Series H Preferred Stock will have 400 votes, voting together with the Company’s Common Stock. However, in the event that dividends on the Series H Preferred Stock shall be in arrears in an amount equal to six quarterly dividends thereon, holders of the Series H Preferred Stock shall have the right, voting as a class, to elect two of the Company’s Directors, whose terms shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series H Preferred Stock then outstanding shall have been declared and paid or set apart for payment. In the event of any merger, consolidation or other transaction in which the Company’s Common Stock is exchanged, each share of Series H Preferred Stock will be entitled to receive 400 times the amount and type of consideration received per share of the Company’s Common Stock. As of January 30, 1999, there were no shares of Series H P referred Stock outstanding. 9. Restructuring Charge From 1989 through 1995, the Company closed, on average, between 40 and 60 mall bookstores per year primarily due to increasing competition from superstores and declining mall traffic. During the fourth quarter of fiscal 1995, the Company accelerated its mall bookstore closing program with the aim of forming a core of more profitable B. Dalton stores, and provided for these closing costs and asset valuation adjustments through a non-cash restructuring charge, and early adoption of Statement of Financial Accounting Standards No. 121, “Accounting for Impairment of Long-Lived Assets and Assets to be Disposed Of” (SFAS 121). In the fourth quarter of fiscal 1995, the Company recorded a non-cash charge to operating earnings of $123,768 ($87,303 after tax or $1.32 per share) to reflect the aggregate impact of its restructuring plan and change in accounting policy. The charge to earnings included a $33,000 write-down of goodwill, and $45,862 related to the write-down of fixed assets and other long-term assets. The Company has substantially completed the store closing program. The following table sets forth the restructuring liability activity: Provision for Store Closing Balance at January 27, 1996 Fiscal 1996 Activity Balance at February 1, 1997 Fiscal 1997 Activity Balance at January 31, 1998 Fiscal 1998 Activity Balance at January 30, 1999 $ $5,974 4,442 1,532 1,532 — — — Lease Termination Costs 32,833 2,371 30,462 9,026 21,436 12,968 8,468 Other 6,099 4,497 Total 44,906 11,310 1,602 33,596 1,602 12,160 — — — 21,436 12,968 8,468 The remaining liability, representing outstanding lease liabilities, is expected to be paid out over the next several years. 10. 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 1 991 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% or 25% increments per year, expire ten years from issuance and are conditioned upon continual employment during the vesting period. At the Company’s Annual Meeting of Stockholders held on June 3, 1998, the Company’s shareholders approved an amendment to the 1996 Plan increasing the number of shares available for issuance from 6,000,000 to 11,000,000. The 1991 Plan allows the Company to grant options to purchase up to 4,732,704 shares of common stock. 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. 23
Slide 55: In accordance with the Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 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 Company’s 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 its stock options. Had compensation cost for the Company’s stock option grants been determined based on the fair value at the stock option grant dates consistent with the method of S FAS 123, the Company’s net earnings and diluted earnings per share for fiscal 1998, 1997 and 1996, would have been reduced by approximately $6,188 or $0.09 per share, $3,863 or $0.06 per share, and $5,305 or $0.08 per share, respectively. Because the application of the pro forma disclosure provisions of SFAS 123 are required only to be applied to grants of options made by the Company during fiscal 1995 and after, the above pro forma amounts may not be representative of the effects of applying S FAS 123 to future years. The weighted-average fair value of the options granted during fiscal 1998, 1997 and 1996 were estimated at $12.96, $8.05, and $4.66 respectively, using the Black-Scholes optionpricing model with the following assumptions: volatility of 35% for fiscal 1998 grants, 28% for fiscal 1997 and 1996 grants, riskfree interest rate of 5.33% in fiscal 1998, 6.54% in fiscal 1997, and 6.63% in fiscal 1996, and an expected life of 5.4 years for fiscal 1998 and 6.0 years for fiscal 1997 and 1996. A summary of the status of the Company’s stock options is presented below: Shares 7,902 1,856 (460) (156) 9,142 2,254 (1,546) (186) 9,664 1,841 (837) (390) 10,278 Weighted-Average Exercise Price $ 9.95 14.63 4.95 14.97 11.07 19.31 9.28 16.25 13.17 31.12 11.11 22.35 $ 19.69 (In thousands of shares) Balance, January 27, 1996 Granted Exercised Forfeited Balance, February 1, 1997 Granted Exercised Forfeited Balance, January 31, 1998 Granted Exercised Forfeited Balance, January 30, 1999 Options exercisable as of January 30, 1999, January 31, 1998 and February 1, 1997 were 6,780,000, 6,558,000 and 7,070,000, respectively. Options available for grant under the plans were 5,9 02,000, 2,354,000 and 4,422,000 at January 30, 1999, January 31, 1998 and February 1, 1997, respectively. 24
Slide 56: The following table summarizes information as of January 30, 1999 concerning outstanding and exercisable options: Options Outstanding Range of Exercise Prices $ 3.21 -$ 3.77 $10.00 -$ 15.00 $ 17.13 -$24.25 $26.50 -$34.75 $ 3.21 -$34.75 Number Outstanding (000s) 818 5,384 2,870 1,206 10,278 WeightedAverage Remaining Contractural Life 4.38 4.98 8.42 9.07 6.37 WeightedAverage Exercise Price $ 3.59 $ 12.11 $ 19.93 $34.30 $16.22 Options Exercisable Number Exercisable (000s) 818 5,275 665 22 6,780 WeightedAverage Exercise Price $ 3.59 $ 12.08 $ 18.67 $ 28.92 $ 11.76 11. Leases The Company leases retail stores, warehouse facilities, office space and equipment. Substantially all of the retail stores are leased under noncancelable agreements which expire at various dates through 2028 with various renewal options for additional periods. The agreements, which have been classified as operating leases, generally provide for both minimum and percentage rentals and require the Company to pay all insurance, taxes and other maintenance costs. Percentage rentals are based on sales performance in excess of specified minimums at various stores. Rental expense under operating leases are as follows: Fiscal Year Minimum rentals Percentage rentals 1998 $ 271,201 3,183 $274,384 1997 253,472 3,216 256,688 1996 222,700 2,750 225,450 12. Litigation In March 1998, the American Booksellers Association (ABA) and 26 independent bookstores filed a lawsuit in the United States District Court for the Northern District of California against the Company and Borders Group Inc. (Borders) alleging violations of the Robinson-Patman Act, the California Unfair Trade Practice Act and the California Unfair Competition Law. The Complaint seeks injunctive and declaratory relief; treble damages on behalf of each of the bookstore plaintiffs, and, with respect to the California bookstore plaintiffs, any other damages permitted by California law; disgorgement of money, property and gains wrongfully obtained in connection with the purchase of books for resale, or offered for resale, in California from March 18, 1994 until the action is completed and pre-judgment interest on any amounts awarded in the action, as well as attorney fees and costs. In November 1998, six other independent booksellers instituted an action in the same court against the same defendants asserting similar claims and seeking similar relief. The Company intends to vigorously defend both actions. In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace Kuralt, filed a lawsuit in the United States District Court for the Southern District of New York against the Company, Borders, Amazon.com, Inc., certain publishers and others alleging violation of the Robinson-Patman Act and other federal law, New York statutes governing trade practices and common law. The Complaint seeks certification of a class consisting of all retail booksellers in the United States, whether or not currently in business, which were in business and were members of the ABA at any time during the four year period preceding the filing of the Complaint. The Complaint alleges that the named plaintiffs have suffered damages of $11.25 million or more and requests treble damages on behalf of the named plaintiffs and each of the purported class members, as well as of injunctive and declaratory relief (including an injunction requiring the closure of all of defendants’ stores within 10 miles of any location where plaintiff either has or had a retail bookstore during the four years preceding the filing of the Complaint, and prohibiting the opening by defendants of any bookstore in such areas for the next 10 years), disgorgement of alleged discriminatory discounts, rebates, deductions and 25 Future minimum annual rentals, excluding percentage rentals, required under leases that had initial, noncancelable lease terms greater than one year, as of January 30, 1999 are: Fiscal Year 1999 2000 2001 2002 2003 After 2003 $ 2 71,769 264,027 261,090 2 47,7 81 228,481 1, 5 7 7,713 $2,850,861 Future minimum annual rentals for stores scheduled for closing pursuant to the Company’s restructuring plan are included in the preceding table. Future rental payments representing the exit costs associated with these store closings were included in the Company’s non-cash restructuring charge of $123,768 recorded during fiscal 1995 and, therefore, do not represent future operating expenses.
Slide 57: payments, punitive damages, interest, costs, attorneys fees and other relief. Many of the allegations in the Complaint are similar to those contained in the action instituted by the ABA and 26 bookseller plaintiffs against the Company in March of 1998. The Company intends to vigorously defend the action. In November 1998, a former bookstore chain in Texas which has filed for bankruptcy protection, filed an amended complaint in an action in the Bankruptcy Court for the Northern District of Texas against the Company alleging various antitrust and related claims. Among other things, the plaintiff alleges that the Company conspired with national book publishers to obtain lower prices and to monopolize the Dallas/Fort Worth book retail market. The plaintiff is seeking $11 million in actual damages, plus treble damages, punitive damages, and attorneys’ fees. The Company intends to vigorously defend this action. In addition to the above actions, various claims and lawsuits arising in the normal course of business are pending against the Company. The subject matter of these proceedings primarily includes commercial disputes and employment issues. The results of these proceedings are not expected to have a material adverse effect on the Company’s consolidated financial position or results of operations. 13. Certain Relationships and Related Transactions The Company leases space for its executive offices in properties in which a principal shareholder/director/executive officer of the Company has a minority interest. The space was rented at an aggregate annual rent including real estate taxes of approximately $1,316, $1,309 and $1,307 in fiscal years 1998, 1997 and 1996, respectively. M a r bo ro Books Corp., the Company’s mail-order subsidiary, leases a 76,000 square foot office/warehouse from a partnership in which a principal shareholder/director/ executive officer of the Company has a 50% interest, pursuant to a lease expiring in 2023. Pursuant to such lease, the Company paid $737, $743 and $665 in fiscal years 1998, 1997 and 1996, respectively. The Company is provided with certain package shipping services by the L Group, Inc. (LTA), a company in which the TA brother of a principal shareholder/director/executive officer of the Company acquired a 20% interest during fiscal 1996. The Company paid LTA $12,571, $11,528 and $9,100 for such services during fiscal years 1998, 1997 and 1996, respectively. The Company leases retail space in a building in which Barnes & Noble College Bookstores, Inc. (B&N College), a company owned by a principal shareholder/director/executive officer of the Company, subleases space for its executive offices. Occupancy costs allocated by the Company to B&N College for this space totaled $725, $634 and $544 for the fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997, 26 respectively. In connection with the space, the Company reimbursed B&N College during fiscal 1997, for a landmark tax credit totaling $726. B&N College also allocated certain operating costs it incurred on behalf of the Company. These charges are included in the accompanying consolidated statements of operations and approximated $48, $75 and $115 for fiscal 1998, 1997 and 1996, respectively. The Company charged B&N College $972 and $473 for fiscal years ended January 30, 1999 and January 31, 1998, respectively, for capital expenditures, business insurance, and other operating costs incurred on their behalf. The Company uses a jet aircraft owned by B&N College and pays for the costs and expenses of operating the aircraft based upon the Company’s usage. Such costs which include fuel, insurance, personnel and other costs approximate $1,760, $1,910 and $1,685 during fiscal 1998, fiscal 1997 and fiscal 1996, respectively, and are included in the accompanying consolidated statements of operations. On November 27, 1996, Babbage’s Etc. LLC (Babbage’s), a company owned by a principal shareholder/director/executive officer of the Company, acquired substantially all of the assets of Software Etc. Stores, Inc. (Software), a company (formerly a division of the Company) in which two principal shareholderdirectors had an ownership interest, and assumed the operations of 14 retail software departments located within Barnes & Noble stores. As of January 30, 1999 there are 13 of these departments remaining. The Company pays all rent related to these properties for which it receives a license fee from Babbage’s equal to 7.0% of the gross sales of such departments. The Company also provides real estate and construction services to Babbage’s and purchases business insurance on its behalf for which the Company is reimbursed for its incremental costs to provide such services. The Company charged Software and Babbage’s, on a combined basis, $1,396, $1,430 and $1,282 during fiscal 1998, 1997 and 1996, respectively, for such services, license fees, rent, operating costs, insurance costs and benefits coverage. Babbages also purchases merchandise from the Company at prices equal to the Company’s cost to obtain and ship the merchandise. barnesandnoble.com purchased $33,444 and $4,997 of merchandise from the Company during fiscal 1998 and 1997, respectively, and barnesandnoble.com expects to source most of its purchases through the Company in the future. The Company has entered into an agreement (the Supply Agreement) with barnesandnoble.com whereby the Company charges barnesandnoble.com the costs associated with such purchases plus incremental overhead incurred by the Company in connection with providing such inventory. The Supply Agreement is subject to certain termination provisions. The Company has entered into agreements (the Service Agreements) whereby barnesandnoble.com receives various services from the Company, including, among others, services
Slide 58: for payroll processing, benefits administration, insurance (property and casualty, medical, dental and life), tax, traffic, fulfillment and telecommunications. In accordance with the terms of such agreements the Company has received, and expects to 14. Selected Quarterly Financial Information (Unaudited) continue to receive, fees in an amount equal to the direct costs plus incremental expenses associated with providing such services. The Company received $856 and $250 for such services during fiscal 1998 and 1997, respectively. A summary of quarterly financial information for each of the last two fiscal years is as follows: Fiscal 1998 Quarter End On or About Sales Gross profit Equity in net loss of barnesandnoble.com llc(1) Net earnings (loss) (2) Basic earnings (loss) per common share Diluted earnings (loss) per common share Fiscal 1997 Quarter End On or About Sales Gross profit Earnings (loss) before extraordinary charge Net earnings (loss) Basic earnings (loss) per common share Earnings (loss) before extraordinary charge Net earnings (loss) Diluted earnings (loss) per common share Earnings (loss) before extraordinary charge Net earnings (loss) (1) April 1998 $656,976 172,387 (13,603) (3,335) (0.05) (0.05) April 1997 $595,731 147,514 (3,861) (3,861) (0.06) (0.06) (0.06) (0.06) July 1998 662,507 179,844 (23,003) (5,709) (0.08) (0.08) July 1997 617,74 8 158,813 (1,366) (1,366) (0.02) (0.02) (0.02) (0.02) October 1998 656,837 182,967 (20,472) (4,596) (0.07) (0.07) October 1997 614,831 164,514 65 65 0.00 0.00 0.00 0.00 January 1999 1,029,288 327,693 (14,256) 106,016 1.54 1.47 January 1998 968,542 306,720 69, 8 3 0 58,331 1.03 0.86 0.98 0.81 Total Fiscal Year 1998 3,005,608 862,891 (71,334) 92,376 1.35 1.29 Total Fiscal Year 1997 2,796,852 777,561 64,668 53,169 0.96 0.79 0.93 0.76 As a result of the formation of barnesandnoble.com llc on October 31, 1998, each quarter of fiscal 1998 presents the Company’s equity in net loss of barnesandnoble.com llc as a separate line item in accordance with the equity method of accounting. Accordingly, the first three quarters of fiscal 1998 reflect the Company’s one-hundred percent equity in net losses of barnesandnoble.com and the fourth quarter reflects the Company’s fifty percent interest in the net losses of barnesandnoble.com. Fiscal 1997 reflects the operations of barnesandnoble.com as a consolidated wholly owned subsidiary for each quarter presented. (2) Included in net earnings for the fourth quarter of fiscal 1998 is a pre-tax gain on the formation of barnesandnoble.com llc of $63,759 ($37,618 after tax) or $0.55 and $0.52 per basic and diluted common share, respectively. 27
Slide 59: REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Barnes & Noble, Inc. We have audited the accompanying consolidated balance sheets of Barnes & Noble, Inc. and subsidiaries as of January 30, 1999 and January 31, 1998 and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the fiscal years ended January 30, 1999, January 31, 1998, and February 1, 1997, respectively. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Barnes & Noble, Inc. and its subsidiaries as of January 30, 1999 and January 31, 1998 and the results of their operations and their cash flows for the fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997, in conformity with generally accepted accounting principles. New York, New York March 10, 1999 BDO Seidman, LLP 28
Slide 60: SHAREHOLDER INFORMATION BARNES & NOBLE, INC. BOARD OF DIRECTORS BARNES & NOBLE, INC. EXECUTIVE OFFICERS Leonard Riggio Chairman and Chief Executive Officer Barnes & Noble, Inc. Stephen Riggio Vice Chairman, Barnes & Noble, Inc. Matthew A. Berdon Chairman of the New York Division Urbach, Kahn & Werlin William Dillard II President and Chief Operating Officer Dillard Department Stores, Inc. Jan Michiel Hessels Chief Executive Officer Vendex International N.V. Irene R. Miller Former Vice Chairman and Chief Financial Officer Barnes & Noble, Inc. Margaret T. Monaco Chief Administrative Officer KECALP Inc., a subsidiary of Merrill Lynch & Co., Inc. Michael N. Rosen Partner, Robinson Silverman Pearce Aronsohn & Berman LLP William Sheluck, Jr. Retired President and Chief Executive Officer Nationar Leonard Riggio Chairman and Chief Executive Officer Stephen Riggio Vice Chairman J. Alan Kahn Chief Operating Officer Mitchell S. Klipper President, Barnes & Noble Development Marie J. Toulantis Executive Vice President and Chief Financial Officer Thomas A. Tolworthy President, Barnes & Noble Booksellers David K. Cully President, Barnes & Noble Distribution Joseph Giamelli Chief Information Officer Mary Ellen Keating Senior Vice President, Corporate Communications & Public Affairs David S. Deason Vice President, Barnes & Noble Development Maureen H. Golden Vice President, Marketing & Advertising Michael N. Rosen Secretary barnesandnoble.com EXECUTIVE OFFICERS Leonard Riggio Chairman Jonathan Bulkeley Chief Executive Officer Gerald Luterman Chief Financial Officer Gary King Chief Information Officer Carl Rosendorf Senior Vice President
Slide 61: SHAREHOLDER INFORMATION PRICE RANGE OF COMMON STOCK CORPORATE INFORMATION The Company’s common stock is traded on the New York Stock Exchange (NYSE) under the symbol BKS. The following table sets forth, for the quarterly periods indicated, the high and low sales prices of the common stock on the NYSE Composite Tape (restated to adjust for the two-for-one stock split effected September 22, 1997). Fiscal Year HIGH Corporate Headquarters: Barnes & Noble, Inc. 122 Fifth Avenue New York, New York 10011 (212) 633-3300 Common Stock: New York Stock Exchange, Symbol: BKS Transfer Agent and Registrar: The Bank of New York Shareholder Relations, Department 11E P.O. Box 11258, Church Street Station New York, New York 10286 Shareholder Inquiries: (800) 524-4458 E-mail address: shareowner-svcs@bankofny.com Counsel: Robinson Silverman Pearce Aronsohn & Berman LLP New York, New York Independent Public Accountants: BDO Seidman, LLP, New York, New York Annual Meeting: The Annual Meeting of the Shareholders will be held at 10 a.m. on Wednesday, June 9, 1999 at the Marriot Marquis, 1535 Broadway, New York, New York. Shareholder Services: Inquiries from our shareholders and potential investors are always welcome. General financial information can be obtained via the Internet by visiting the Company’s Investor Relations Web site: http://www.shareholder.com/bks/ Up-to-the-minute news about Barnes & Noble, requests for Annual Reports, Form 10-K and 10-Q documents and other available financial information can be obtained toll-free by calling 1-888-BKS-NEWS. All other inquiries should be directed to: Investor Relations Department, Barnes & Noble, Inc. 122 Fifth Avenue, New York, New York 10011 Phone: (212) 633-3489 Fax: (212) 675-0413 1998 LOW HIGH 1997 LOW 1 First Quarter Second Quarter Third Quarter Fourth Quarter 39 /16 13 30 /4 31 /16 15 19 /16 15 15 /16 3 48 41 11/16 48 25 /2 1 18 1/2 22 3/8 25 13/16 22 3/16 26 3/4 32 1/4 34 1/4 As of March 31, 1999, there were 69,012,755 shares of common stock outstanding held by 2,018 shareholders of record. No dividends have been paid on the common stock since the initial public offering date and dividend payments are currently restricted as a covenant of the Company’s debt agreements. Design: Edelman Worldwide, Design Communications