PART I
General
Barnes & Noble, Inc. (Barnes & Noble or the Company), one of the nations largest booksellers,
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provides customers a unique experience across its multi-channel
distribution platform. As of April 29, 2017, the Company operates 633 bookstores in 50 states, maintains an eCommerce site, develops digital reading products and operates NOOK, one of the largest digital bookstores. Barnes & Noble is
utilizing the strength of its retail footprint in combination with its online and digital businesses to provide an omni-channel experience for its customers, fulfilling its commitment to offer customers any book, anytime, anywhere and in any format.
Barnes & Noble Retail (B&N Retail) operates 633 retail bookstores, primarily under the
Barnes & Noble Booksellers
®
trade name, and includes the Companys eCommerce site. B&N Retail
also includes Sterling Publishing Co., Inc. (Sterling or Sterling Publishing), a leader in general trade book publishing. The NOOK segment represents the Companys digital business, offering digital books and magazines for sale and consumption
online, NOOK
®
2
reading devices, co-branded NOOK
®
tablets and reading software for iOS, Android and Windows. The Company employed approximately 26,000 employees (11,000 full-time and 15,000 part-time employees) as of
April 29, 2017.
The Companys principal business is the sale of trade books (generally
hardcover and paperback titles), mass market paperbacks (such as mystery, romance, science fiction and other popular fiction), childrens books, eBooks and other digital content, NOOK
®
and related accessories, bargain books, magazines, gifts, café products and services, educational toys & games, music and movies direct to customers
through its bookstores or on www.barnesandnoble.com. The Company offers its customers a full suite of textbook options (new, used, digital and rental).
Recently, Barnes & Noble has experienced declining sales trends due primarily to lower store traffic and the challenging retail environment. Despite sales declines, the Company has been able to
sustain profit levels on cost reductions.
While the Company believes it has lost share on its recent sales performance, it
also sees opportunities in an industry that has become more stable.
To grow sales, the Company will leverage the strength of
its Barnes & Noble brand, knowledgeable booksellers, vast selections and retail footprint to attract customers to its omni-channel offerings. Merchandising initiatives are focused on increasing the number of value offers, improving SKU
productivity, improving inventory management processes, testing changes to existing store layouts and remerchandising select business units in stores. The Company believes there is opportunity to increase conversion by improving navigation and
discovery throughout the store, including a customer friendly and more intuitive organization of books and improved signage for easier browsing within and across sections.
In-store events also drive traffic, reinforcing Barnes & Noble as a community center where customers can meet, browse and discover. The Company is also utilizing social media, where booksellers
communicate events, promotions and new product offerings with customers at the local level.
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|
Based upon sales reported in trade publications and public filings.
|
2
|
Any references to
NOOK
®
include the Companys NOOK
®
Tablet, Samsung Galaxy Tab
®
A
NOOK
®
, Samsung Galaxy Tab
®
S2 NOOK
®
, Samsung Galaxy Tab
®
E NOOK
®
and NOOK GlowLight
TM
Plus devices, each of which includes the trademark symbol (
®
or
, as applicable) even if a trademark symbol is not included.
|
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In addition to initiatives focused on growing sales through its existing store base, the
Company is also testing new bookstore formats, which it believes could foster sales growth in the future.
BN.com and NOOK are
important components of the Companys omni-channel strategy. The Company believes that in the long term, enhancements to its BN.com platform will enable it to be more competitive in the marketplace. The Company continues to improve its overall
eCommerce user experience across channels, including desktop, tablet, mobile and app based, with the goal of providing a great device agnostic user experience. For customers interested in eBooks, the Company continues to judiciously bring new NOOK
devices and apps to market.
The Companys Membership program provides the Company with valuable data and insights into
its customer base, enabling the Company to better understand and market to its customers. Members are more productive than Non-Members, as they spend more and visit more often. The Company continues to test programs to grow sales to both Members and
Non-Members, increase Membership, improve price perception and enhance its overall customer value proposition.
In light of
the declining sales trends, the Company remains committed to right sizing its cost structure. The Company is focused on simplification throughout its organization to create efficiencies and reinvest resources to support sales growth. At B&N
Retail, the Company is focused on increasing store and supply chain productivity, streamlining operations and eliminating non-productive spend. At NOOK, the Company exited non-core businesses and outsourced certain functions, which enabled it to
close its Santa Clara, CA and Taipei offices. NOOK expects to continue to re-calibrate its cost structure commensurate with sales, further reducing its losses.
Separation of Barnes & Noble Education, Inc.
On February 26,
2015, Barnes & Noble announced plans for the legal and structural separation of Barnes & Noble Education, Inc. (Barnes & Noble Education or B&N Education) (formerly known as NOOK Media Inc.) from Barnes &
Noble into an independent public company (the Spin-Off).
On July 14, 2015, the Barnes & Noble board of
directors (the Board) approved the final distribution ratio and declared a pro rata dividend of the outstanding shares of B&N Education common stock, which resulted in the complete legal and structural separation of the two companies. The
distribution was subject to the satisfaction or waiver of certain conditions as set forth in B&N Educations Registration Statement on Form S-1, which was filed with the SEC on February 26, 2015 and was amended on April 29,
2015, June 4, 2015, June 29, 2015, July 13, 2015, July 14, 2015 and July 15, 2015.
On August 2, 2015, Barnes & Noble completed the Spin-Off of Barnes & Noble Education and distributed, on a pro
rata basis, all of the shares of B&N Education common stock to the Companys stockholders of record as of July 27, 2015. These Barnes & Noble stockholders of record as of July 27, 2015 received a distribution of 0.632
shares of B&N Education common stock for each share of Barnes & Noble common stock held as of the record date. Immediately following the completion of the Spin-Off, the Companys stockholders owned 100% of the outstanding shares of
common stock of B&N Education. Following the Spin-Off, B&N Education operates as an independent public company and as the parent of Barnes & Noble College, trading on New York Stock Exchange under the ticker symbol BNED.
In connection with the separation of B&N Education, the Company and B&N Education entered into a Separation and
Distribution Agreement on July 14, 2015 and several other ancillary agreements on August 2, 2015. These agreements govern the relationship between the Company and B&N Education after the separation and allocate between the Company and
B&N Education various assets, liabilities, rights and obligations following the separation, including employee benefits, intellectual property, information technology, insurance and tax-related assets and liabilities. The agreements also
describe the Companys future commitments to provide B&N Education with certain transition services.
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This Spin-Off is expected to be a non-taxable event for Barnes & Noble and its
shareholders, and Barnes & Nobles U.S. shareholders (other than those subject to special rules) generally will not recognize gain or loss as a result of the distribution of B&N Education shares.
History of Barnes & Noble Education, Inc.
On September 30, 2009, Barnes & Noble acquired Barnes & Noble College Booksellers, LLC (B&N College) from Leonard and Louise Riggio. From that date until October 4, 2012,
B&N College was wholly owned by Barnes & Noble Booksellers, Inc. B&N Education was initially incorporated under the name NOOK Media Inc. in July 2012 to hold Barnes & Nobles B&N College and NOOK digital
businesses. On October 4, 2012, Microsoft Corporation (Microsoft) acquired a 17.6% non-controlling preferred membership interest in B&N Educations subsidiary B&N Education, LLC (formerly NOOK Media LLC) (the LLC), and through
B&N Education, Barnes & Noble maintained an 82.4% controlling interest of the B&N College and NOOK digital businesses.
On January 22, 2013, Pearson Education, Inc. (Pearson) acquired a 5% non-controlling preferred membership interest in the LLC, entered into a commercial agreement with the LLC relating to the B&N
College business and received warrants to purchase an additional preferred membership interest in the LLC.
On
December 4, 2014, B&N Education re-acquired Microsofts interest in the LLC in exchange for cash and common stock of Barnes & Noble and the Microsoft commercial agreement was terminated effective as of such date. On
December 22, 2014, B&N Education also re-acquired Pearsons interest in the LLC and certain related warrants previously issued to Pearson. In connection with these transactions, Barnes & Noble entered into contingent payment
agreements with Microsoft and Pearson providing for additional payments upon the occurrence of certain events, including upon a sale of the NOOK digital business. As a result of these transactions, Barnes & Noble owned, prior to the
Spin-Off, 100% of B&N Education.
On May 1, 2015, B&N Education distributed to Barnes & Noble all of the
membership interests in B&N Educations NOOK digital business. As a result, B&N Education ceased to own any interest in the NOOK digital business, which remains a wholly owned subsidiary of Barnes & Noble.
Discontinued Operations of Barnes & Noble Education, Inc.
The Company has recognized the separation of B&N Education in accordance with Accounting Standards Codification (ASC) 205-20,
Discontinued Operations
. As such, the historical results of
Barnes & Noble Education for fiscal 2015 have been adjusted to include pre-spin B&N Education results and separation-related costs and exclude corporate allocations with B&N Retail, and have been classified as discontinued
operations. Additionally, discontinued operations for fiscal 2016 included investment banking fees (as they directly related to the Spin-Off), as well as pre-spin B&N Education results and separation-related costs, and excluded corporate
allocation adjustments with B&N Retail.
Series J Preferred Stock
On August 18, 2011, the Company entered into an investment agreement between the Company and Liberty GIC, Inc. (Liberty), pursuant to
which the Company issued and sold to Liberty, and Liberty purchased, 204,000 shares of the Companys Series J Preferred Stock, par value $0.001 per share (Preferred Stock), for an aggregate purchase price of $204.0 million in a private
placement exempt from the registration requirements of the 1933 Act. The shares of Preferred Stock were convertible, at the option of the holders, into shares of Common Stock representing 16.6% of the Common Stock
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outstanding as of August 29, 2011 (after giving pro forma effect to the issuance of the Preferred Stock) based on the initial conversion rate. The initial conversion rate reflected an
initial conversion price of $17.00 and was subject to adjustment in certain circumstances. The initial dividend rate for the Preferred Stock was equal to 7.75% per annum of the initial liquidation preference of the Preferred Stock paid
quarterly and subject to adjustment in certain circumstances.
On April 8, 2014, Liberty sold the majority of its shares
to qualified institutional buyers in reliance on Rule 144A under the Securities Act and had retained an approximate 10% stake of its initial investment. As a result, Liberty no longer had the right to elect two preferred stock directors to the
Companys Board. Additionally, the consent rights and pre-emptive rights, to which Liberty was previously entitled, ceased to apply.
On June 5, 2015, the Company entered into conversion agreements with five beneficial owners (Series J Holders) of its Preferred Stock, pursuant to which each of the Series J Holders had agreed to
convert (Conversion) shares of Preferred Stock it beneficially owned into shares of the Companys common stock, par value $0.001 per share (Company Common Stock), and additionally received a cash payment from the Company in connection with the
Conversion.
On July 9, 2015, the Company completed the Conversion. Pursuant to the terms of the Conversion Agreements,
the Series J Holders converted an aggregate of 103,995 shares of Preferred Stock into 6,117,342 shares of Company Common Stock, and made an aggregate cash payment to the Series J Holders of $3.7 million plus cash in lieu of fractional shares in
connection with the Conversion.
On July 10, 2015, the Company gave notice of its exercise of the right to force
conversion of all outstanding shares of its Senior Convertible Redeemable Series J Preferred Stock into Company Common Stock pursuant to Section 9 of the Certificate of Designations, Preferences and Relative Participating, Optional and Other
Special Rights and Qualifications, Limitations and Restrictions of Series J Preferred Stock, dated as of August 18, 2011 (the Forced Conversion). The effective date of the Forced Conversion was July 24, 2015. On the date of the Forced
Conversion, each share of Series J Preferred Stock was automatically converted into 59.8727 shares of Company Common Stock, which included shares of Company Common Stock reflecting accrued and unpaid dividends on Series J Preferred Stock. Each
holder of Series J Preferred Stock received whole shares of Company Common Stock and a cash amount in lieu of fractional shares of Company Common Stock.
As a result of the transactions described above, all shares of Series J Preferred Stock were retired by the Company and are no longer outstanding.
The Company was incorporated in Delaware in 1986.
Segments
The Company identifies its operating segments based on the way
the business is managed (focusing on the financial information distributed) and the manner in which the chief operating decision maker interacts with other members of management and makes decisions on the allocation of resources. The Companys
two operating segments are B&N Retail and NOOK.
B&N Retail
This segment includes 633 bookstores as of April 29, 2017, primarily under the Barnes & Noble
Booksellers trade name. These Barnes & Noble stores generally offer a comprehensive trade book title base, a café, and departments dedicated to Juvenile, Toys & Games, DVDs, Music & Vinyl, Gift, Magazine, Bargain
products and a dedicated NOOK
®
area. The stores also offer a calendar of ongoing events, including author
appearances and childrens activities. The B&N Retail segment also includes the Companys eCommerce website, www.barnesandnoble.com, and its publishing operation, Sterling Publishing.
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Barnes & Noble stores range in size from 3,000 to 60,000 square feet depending upon
market size, with an overall average store size of 26,000 square feet. In fiscal 2017, the Company reduced the Barnes & Noble store base by approximately 199,000 square feet, bringing the total square footage to 16.7 million square
feet, a net reduction of 1.2% from fiscal 2016.
The Company believes that the key elements contributing to the success of
B&N Retail are:
Proximity to Customers.
The Companys strategy has been to increase its share of the consumer
book market, as well as to increase the size of the market through a market clustering strategy. As of April 29, 2017, Barnes & Noble had stores in 161 of the total 210 Designated Market Area markets. In 68 of the 161 markets, the
Company has only one Barnes & Noble store. The Company believes its bookstores proximity to its customers strengthens its market position and increases the value of its brand. Most Barnes & Noble stores are located in
high-traffic areas with convenient access to major commercial thoroughfares and ample parking. Most stores offer extended shopping hours seven days a week.
Extensive Title Selection.
Each Barnes & Noble store features an authoritative selection of books, ranging from 22,000 to 163,000 titles. The comprehensive title selection is diverse and
reflects local interests and regional titles and authors works. Bestsellers typically represent between approximately 4% and 6% 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 at www.barnesandnoble.com by offering an option to have the book sent to the store or shipped directly to the customer. Additionally, the website allows
customers to purchase over four million eBooks, newspapers and magazines. The Company believes that its tremendous selection, including many otherwise hard-to-find titles, builds customer loyalty.
Store Design and Ambiance
. Many of the Barnes & Noble stores create a comfortable atmosphere with ample public space, a
café offering sandwiches, soups and bakery items, among other things, and public restrooms. The cafés, for which the Starbucks Corporation is the sole provider of coffee products, foster the image of the stores as a community meeting
place. In addition, the Company continues to develop and introduce new product line extensions, such as proprietary gifts and B&N Educator Program, providing education tools for teachers, librarians and parents. These offerings and services have
helped to make many of the stores neighborhood institutions.
NOOK
®
Boutique/Counter.
The Company has utilized its traditional retail bookstores to promote NOOK
®
within the bookstores. Customers have the ability to see, feel, and experiment with NOOK
®
, speak to knowledgeable booksellers, and receive pre- and post-sales customer support within the Companys
bookstores. The Company offers NOOK
®
owners Always Free NOOK
®
Support in all of its retail bookstores, as well as free Wi-Fi connectivity to enjoy the Read In Store feature to read NOOK Books for free. These
acclaimed devices, which provide a fun, easy-to-use and immersive reading experience, include the NOOK
®
Tablet,
Samsung Galaxy Tab
®
A NOOK
®
, Samsung Galaxy Tab
®
S2 NOOK
®
, Samsung Galaxy Tab
®
E NOOK
®
and NOOK
GlowLight Plus devices. The NOOK
®
devices have also opened up an additional market for NOOK
®
-related accessories such as stands, covers, lights, and other items. Through our NOOK in Education program, the
retail bookstores provide support and service to schools and educators who deploy NOOK
®
devices in their
classrooms.
Educational Toys & Games Department.
Barnes & Noble continues to expand in the
educational toys and games category with a uniquely curated offering of best in class products from around the world. With its focus on education, customers can browse and engage in monthly hands-on learning events celebrating self-expression
through arts and crafts, critical thinking skills through construction, even exploring scientific discoveries. The Educational Toys & Games Department at Barnes & Noble offers an experiential retail space where parents and
gift-givers can shop in three distinct ways: by brand, by category and by age.
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Specialty Games, Hobby & Collectibles
. Barnes & Noble, in
recognition of its customers interests, passions and pastimes, has expanded and will continue to explore the specialty, hobby, craft and collectibles category bringing a recognizable, authentic merchandising assortment together to complement
its growing specialty games and puzzle area.
Music and Movies & TV Departments.
Many of the Barnes &
Noble stores have Music and Movies & TV departments, which offer CDs, Vinyl LPs, DVDs and Blu-ray discs. These departments range in size from approximately 300 to 8,000 square feet and typically stock approximately 10,000 titles. The
Companys DVD and Blu-ray selection focuses on current and classic movies, documentaries, fitness and instructional titles, British TV series and movies, and foreign films. The music selection is tailored to the tastes of the Companys
customers, centering on classical music, jazz, pop rock, and show tunes. The Company also offers a strong selection of Vinyl titles, available in all stores, along with turntables.
Discount Pricing.
Barnes & Noble stores employ an aggressive nationwide discount pricing strategy and offer special
promotions throughout the year. The Barnes & Noble Member Program offers members greater discounts and other benefits for products and services as well as exclusive offers and promotions via email or direct mail. The Companys website,
www.barnesandnoble.com, also utilizes a competitive model that includes everyday low pricing as well as various promotional offerings designed for members and non-members alike and enables the Company to offer better value to its customers. The
Barnes & Noble Kids Club Program offers free rewards and special offers to participants and invites children to celebrate their birthday within the retail bookstores.
Community Business Development.
The Companys retail bookstores host a variety of national and local events, which feature
the many products and services it offers. Each store plans its own community-based calendar of events, including author appearances, childrens storytimes, poetry readings and book discussion groups. In addition, the Company hosts a number of
national campaigns around various themes or audiences such as Get Pop-Cultured with Barnes & Noble, Summer Reading, My Favorite Teacher Essay Contest, Educator Appreciation Days, the annual Holiday Book Drive, which provides books to at
risk children in the communities the stores serve, and Maker Faire, all of which increase traffic and sales and further reinforce Barnes & Noble as a community center.
The Company also provides fund-raising opportunities through its Bookfair program for schools and local non-profit arts and literacy
organizations, as well as a Holiday Gift Wrap program, which allows non-profit organizations to gain exposure and raise funds while wrapping gifts inside the stores. The Company believes its community business development programs encourage customer
loyalty, drive sales and traffic into its stores and provide positive publicity and media coverage.
Merchandising and
Marketing
. The Companys merchandising strategy for its Barnes & Noble stores is to be the authoritative community bookstore carrying an extensive selection of titles in all subjects, including an extensive selection of titles from
small independent publishers and university presses. Each Barnes & Noble store features an extensive selection of books from 22,000 to 163,000 unique titles, of which approximately 27,000 titles are common to virtually all stores. Each
store is tailored to reflect the lifestyles and interests of the areas customers.
Product Master, the Companys
proprietary inventory database, has approximately 19.0 million titles. It includes approximately 7.3 million active titles and provides each store with comprehensive title selections. By enhancing the Companys existing merchandise
replenishment systems, Product Master allows the Company to achieve higher in-stock positions and better productivity at the bookstore level through efficiencies in receiving, cashiering and returns processing. Complementing this extensive on-site
selection, all Barnes & Noble stores provide customers with access to the millions of books available to online shoppers at www.barnesandnoble.com by offering an option to have the book sent to the store or shipped directly to the customer.
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The Company has a multi-channel eCommerce marketing strategy that
deploys various merchandising programs and promotional activities to drive traffic to both its stores and website. At the center of this eCommerce program is the Companys website, www.barnesandnoble.com. The website serves as both the
Companys direct-to-home delivery service and as an important broadcast channel and advertising medium for the Barnes & Noble brand. For example, the online store locator at www.barnesandnoble.com receives millions of customer visits
each year providing store hours, directions, information about author events and other in-store activities. Similarly, in Barnes & Noble stores, NOOK
®
customers can access free Wi-Fi connectivity, enjoy the Read In Store feature to browse many complete eBooks for free.
Since launching its new website in June 2015, the Company has implemented a number of website fixes to address post-launch issues that
reduced website traffic and conversion, as well as to improve the overall user experience. BN.com is an important component of the Companys omni-channel strategy, and it believes that, in the long-term, the new platform will enable it to be
more competitive in the marketplace.
Another example of a multi-channel initiative is the
Barnes & Noble MasterCard
®
, a co-brand credit card issued by Barclaycard. Card members earn 5% back on
purchases at any Barnes & Noble stores or online at www.barnesandnoble.com. They also earn points for every dollar spent on purchases where MasterCard is accepted (excluding Barnes & Noble purchases); when they reach 2,500 points,
they automatically earn a $25 Barnes & Noble gift card. Customers can apply in any B&N store or online at BN.com. Upon approval, they can use the new account to receive the 5% statement credit rebate on their B&N purchase, as
well as a $25 Barnes & Noble gift card after first use of the account.
The Company believes that its website
complements its bookstores in many ways. It not only serves as a marketing tool, it offers convenient shopping alternatives for its customers.
Store Locations and Properties.
The Companys experienced real estate personnel select sites for new Barnes & Noble stores after an extensive review of demographic data and other
information relating to market potential, bookstore visibility and access, available parking, surrounding businesses, compatible nearby tenants, competition and the location of other Barnes & Noble stores. Most stores are located in
high-visibility areas adjacent to main traffic corridors in strip shopping centers, freestanding buildings and regional shopping malls. The real estate personnel continue to focus on renegotiating leases as they expire.
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The B&N Retail segment includes 633 bookstores as of April 29, 2017, primarily
under the Barnes & Noble Booksellers trade name. The number of Barnes & Noble stores located in each state as of April 29, 2017 is listed below:
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|
|
|
|
|
|
STATE
|
|
NUMBER
OF STORES
|
|
STATE
|
|
NUMBER
OF STORES
|
Alabama
|
|
7
|
|
Montana
|
|
4
|
Alaska
|
|
2
|
|
Nebraska
|
|
4
|
Arizona
|
|
15
|
|
Nevada
|
|
4
|
Arkansas
|
|
5
|
|
New Hampshire
|
|
4
|
California
|
|
71
|
|
New Jersey
|
|
23
|
Colorado
|
|
15
|
|
New Mexico
|
|
3
|
Connecticut
|
|
12
|
|
New York
|
|
38
|
Delaware
|
|
2
|
|
North Carolina
|
|
21
|
Florida
|
|
39
|
|
North Dakota
|
|
3
|
Georgia
|
|
19
|
|
Ohio
|
|
18
|
Hawaii
|
|
2
|
|
Oklahoma
|
|
5
|
Idaho
|
|
3
|
|
Oregon
|
|
7
|
Illinois
|
|
26
|
|
Pennsylvania
|
|
26
|
Indiana
|
|
12
|
|
Rhode Island
|
|
3
|
Iowa
|
|
7
|
|
South Carolina
|
|
10
|
Kansas
|
|
4
|
|
South Dakota
|
|
1
|
Kentucky
|
|
7
|
|
Tennessee
|
|
8
|
Louisiana
|
|
7
|
|
Texas
|
|
51
|
Maine
|
|
1
|
|
Utah
|
|
10
|
Maryland
|
|
13
|
|
Vermont
|
|
1
|
Massachusetts
|
|
17
|
|
Virginia
|
|
24
|
Michigan
|
|
19
|
|
Washington
|
|
17
|
Minnesota
|
|
16
|
|
West Virginia
|
|
1
|
Mississippi
|
|
3
|
|
Wisconsin
|
|
11
|
Missouri
|
|
11
|
|
Wyoming
|
|
1
|
Sterling Publishing
Sterling Publishing is a leading publisher of non-fiction trade titles. Founded in 1949, Sterling publishes a wide range of non-fiction and illustrated books and kits across a variety of imprints, in
categories such as health & wellness, music & popular culture, food & wine, crafts, puzzles & games, coloring books and history & current affairs, as well as a large childrens line. Sterling, with a
solid backlist and robust value publishing program, has a title base of approximately 15,000 eBooks and print books. In addition, Sterling also distributes approximately 1,100 titles on behalf of client publishers.
Operations
The
Company has seasoned management teams for its retail stores, including those for real estate, merchandising and store operations. Field management includes regional vice presidents and district managers supervising multiple store locations.
The Barnes & Noble management team is led by experienced management in both traditional product lines and in digital
eCommerce. The Barnes & Noble management team employs highly skilled professionals with both media expertise and supply chain management skills. This combination ensures a positive customer experience regardless of a customers
preference for a physical product or a digital one.
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Each Barnes & Noble store generally employs a store manager, two assistant store
managers, two merchandise managers, a café manager, a receiving manager and on average 30 booksellers (combination of full-time and part-time). Many Barnes & Noble stores also employ a full-time community business development
manager. The large bookseller base provides the Company with experienced employees to fill new manager positions in the Companys Barnes & Noble stores. The Company anticipates that a significant percentage of the personnel required to
manage its stores will continue to come from within its existing operations.
Field management for all of the Companys
bookstores, including regional vice presidents, district managers and store managers, participate in an annual incentive program tied to store productivity. The Company believes that the compensation of its field management is competitive with that
offered by other specialty retailers of comparable size.
Barnes & Noble has in-store training programs providing
specific information needed for success at each level, beginning with the entry-level positions of bookseller. District managers participate in annual training and merchandising conferences. Store managers are generally responsible for training
other booksellers and employees in accordance with detailed procedures and guidelines prescribed by the Company utilizing a blended learning approach, including on-the-job training, eLearning, facilitator-led training and training aids available at
each bookstore.
Purchasing
Barnes & Nobles buyers negotiate costs on select items, marketing funds, promotional discounts, cooperative advertising and showroom allowances with publishers and other suppliers for
www.barnesandnoble.com and all of the Companys bookstores. The Company has buyers who specialize in customizing inventory for bookselling in stores and online. Store inventories are further customized by store managers, who may respond to
local demand by purchasing a limited amount of fast-selling titles through a nationwide wholesaling network, including the Companys distribution centers.
The Companys B&N Retail segment purchases physical books on a regular basis from nearly 500 publishers and over 40 wholesalers or distributors. Purchases from the top five suppliers (including
publishers, wholesalers and distributors) accounted for approximately 65% of the B&N Retails book purchases during fiscal 2017, and no single supplier accounted for more than 27% of B&N Retails book purchases during this period.
Consistent with industry practice, a substantial majority of the physical book purchases are returnable for full credit, a practice which substantially reduces the Companys risk of inventory obsolescence.
Publishers periodically offer their excess inventory in the form of remainder books to book retailers and wholesalers through an auction
process, which generally favors booksellers such as the Company, who are able to buy substantial quantities. These books are generally purchased in large quantities at favorable prices and are then sold to consumers at significant discounts off
publishers list prices.
Distribution
The Company has invested significant capital in its systems and technology by building new platforms, implementing new software applications and building and maintaining efficient distribution centers.
This investment has enabled the Company to source a majority of its inventory through its own distribution centers, resulting in direct buying from vendors rather than wholesalers. Using the Companys own distribution centers rather than
wholesalers lowers distribution costs per unit, increases inventory turns, and improves product margins. The Companys distribution centers 3-prong strategy of
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(1) accelerating speed to market, (2) improving order quality (on-time, complete and damage free) and (3) reducing costs has improved just-in-time deliveries to stores as well as
deliveries to the Companys customers on orders placed via the Barnes & Noble website and through the Companys in-store order network.
As of April 29, 2017, the Company has approximately 1,745,000 square feet of distribution center capacity. The Company has an approximately 1,145,000 square foot distribution center in Monroe
Township, New Jersey, which ships merchandise to stores throughout the country and to online customers. The Company also has an approximately 600,000 square foot distribution center in Reno, Nevada, which is used to facilitate distribution to stores
and online customers in the western United States.
Information Technologies
The Company has focused a majority of its information technology resources on strategically positioning and implementing systems to
support store operations, online technology requirements, merchandising, distribution, marketing and finance.
BookMaster, the
Companys proprietary bookstore inventory management system, integrates point-of-sale features with a proprietary data warehouse-based replenishment system. BookMaster enhances communications and real-time access to the Companys network
of bookstores, distribution centers and wholesalers. The Company continues to implement systems to improve efficiencies in back office processing in the human resources, finance and merchandising areas.
The Company plans to continue to invest in technologies that will enable it to offer its customers the more convenient and user-friendly
online shopping experience. B&N Retail has licensed existing commercial technology when available and has focused its internal development efforts on those proprietary systems necessary to provide the highest level of service to its customers.
The overall mix of technologies and applications allows the Company to support a distributed, scalable and secure eCommerce environment.
The Company uses Intel
®
-based server technology in a fully
redundant configuration to power its current website, which is hosted in two Company-owned locations. Each of these sites has sufficient capacity to independently support the volume of traffic directed toward the Companys website during peak
periods. Both hosting locations are configured with redundant power, Internet telecommunications capacity and cooling to significantly reduce its exposure to downtime and service outages. Additionally, the Company believes its technology investments
are scalable to meet the future growth demands of the business.
Competition
The book business is highly competitive in every channel in which Barnes & Noble operates. B&N Retail stores compete
primarily on the quality of the shopping and store experience and the price and availability of products. The importance of price varies depending on the competitor, with some of Barnes & Nobles competitors engaging in significant
discounting and other promotional activities. B&N Retail competes with other bookstores, including Books-A-Million. It also faces competition from many online businesses, notably Amazon.com and Apple. Increases in consumer spending via the
Internet may significantly affect its ability to generate sales in B&N Retail stores. B&N Retail also faces competition from mass merchandisers, such as Costco, Target and Wal-Mart. Some of the Companys competitors have greater
financial and other resources and different business strategies than B&N Retail does. B&N Retail stores also compete with specialty retail stores that offer books in particular subject areas, independent store operators, variety discounters,
drug stores, warehouse clubs, mail-order clubs and other retailers offering books, music, toys, games, gifts and other products in its market segments.
13
The music and movie businesses are also highly competitive and the Company faces competition
from mass merchants, discounters and electronic distribution. The store experience is geared towards the Companys customer base, including a strong Blu-ray presence as well as a tailored, returnable product assortment.
Seasonality
The
B&N Retail business, like that of many retailers, is seasonal, with the major portion of sales and operating income realized during its third fiscal quarter, which includes the holiday selling season.
Employees
The
Company cultivates a culture of outgoing, helpful and knowledgeable employees. As of April 29, 2017, the B&N Retail segment had approximately 26,000 employees (11,000 full-time and 15,000 part-time employees) as of April 29, 2017. The
B&N Retail segments employees are not represented by unions.
NOOK
This segment represents the Companys digital business, including the development and support of the
Companys NOOK
®
product offerings. The digital business includes digital content such as eBooks, digital
newsstand and sales of NOOK
®
devices and accessories to B&N Retail. The underlying strategy of the NOOK
business is to offer customers any digital book, newspaper or magazine, anytime, on any device. The Company remains committed to delivering to customers the best digital bookstore experience, providing easy access to Barnes & Nobles
expansive digital collection of over four million eBooks, digital magazines and newspapers, while rationalizing its existing cost structure. As part of this commitment, the Company partners with Samsung to develop co-branded NOOK
®
tablets that feature the award-winning Barnes & Noble digital reading experience, while continuing to
develop and offer its own black-and-white NOOK
®
eReaders.
Barnes & Nobles NOOK digital bookstore and Reading Apps provide customers the ability to
purchase and read their digital content and access their Lifetime Library on a wide range of digital platforms, including Windows PCs and tablets, iPad, iPhone
®
, Android smartphones and tablets, PC and Mac
®
. Barnes & Noble has implemented innovative features on its digital platform to ensure that customers can access their NOOK content from almost all of
todays most popular devices.
NOOK currently sells a number of different devices to satisfy
customers digital needs, including the NOOK
®
Tablet, Samsung Galaxy Tab
®
A NOOK
®
, Samsung Galaxy Tab
®
S2 NOOK
®
, Samsung Galaxy Tab
®
E NOOK
®
and NOOK
GlowLight Plus devices. These devices provide customers access to the millions of books and magazines in the NOOK Store and through Google Play, Android apps and games, songs, movies and TV shows, plus popular Google services like the
Chrome browser, Gmail, YouTube, Google Search and Google Maps. NOOK GlowLight Plus provides customers a simple, easy to use, intuitive eReader on an E-Ink display that replicates the experience of reading
from physical paper and provides access to the Companys digital content store. Always Free NOOK Support in any of the B&N Retail bookstores provides customers the ability to interact with a knowledgeable bookseller to receive pre- and
post-customer sales support. The bookstores also provide free Wi-Fi connectivity for NOOK
®
devices, Read In
Store access, which allows owners to read NOOK Books for free. NOOK
®
devices also allow for digital
lending of a wide selection of books through its LendMe
®
technology.
14
Operations
The digital products group has knowledgeable product development and operational management teams in the areas of reading software, digital content retailing and mobile device development. Digital
product management oversees product concept, software development, engineering, and user experience. Operational management has historically overseen demand planning, strategic sourcing, manufacturing, return and refurbishment of hardware. The
Company expects that digital product managements role will continue to focus on eReading devices and reading platforms, while also shifting to the management of third-party partner relationships, such as NOOKs partnership with Samsung.
On April 7, 2016, the Company entered into an agreement with Bahwan CyberTek (BCT), a global
software products and services company, in which the Company outsourced certain NOOK functions, including cloud management and development support for NOOK
®
software.
The Companys development
office employs experienced engineers in the Companys digital product area. The NOOK digital products management team is currently focused on next generation digital reading products to enhance the reading experience and help consumers discover
content in new and interesting ways. The Digital Services team, which includes the Cloud and Commerce group, is responsible for maintaining and developing the NOOKs digital bookstore service.
Purchasing/Distribution
NOOK acquires the rights to distribute digital content from publishers and distributes the content on www.barnesandnoble.com, NOOK
®
devices and other eBookstore platforms. Certain digital content is distributed under an agency pricing model, in which the publishers set fixed prices for eBooks
and NOOK receives a fixed commission on content sold through the eBookstore. The majority of the Companys eBooks are sold under the agency model.
NOOK utilizes the Companys purchasing power and its distribution centers to synergistically facilitate the purchasing and shipping of devices and accessories.
Competition
The
eReader and tablet businesses are highly competitive. NOOK competes primarily on price, device functionality, consumer appeal and availability of digital content. The importance of price varies depending on the competitor, with some of
NOOKs competitors engaging in significant discounting and other promotional activities. NOOK competes with many online digital businesses, notably Amazon.com and Apple. Some of the Companys competitors have substantially greater
financial and other resources and may have different business strategies than NOOK does.
Seasonality
The NOOK business, like that of many technology companies, is impacted by the launch of new products and the promotional efforts to
support those new products, as well as the traditional retail holiday selling seasonality.
Employees
As of April 29, 2017, NOOK had 92 employees (combination of full-time and part-time). NOOK employees are not represented by unions,
and the Company believes that its relationship with its employees is generally excellent.
15
Trademarks and Service Marks
The trademarks and service marks owned by the Company and its subsidiaries include, but are not limited to, B&N
®
, Barnes & Noble
®
, Barnes &
Noble.com
®
, barnesandnoble.com
®
, Barnes & Noble
Booksellers
®
, Barnsie
®
, Noble
®
, Espari
®
, Discover Great New Writers
®
, NOOK
®
, NOOK Color
®
, NOOK Tablet
®
, Readers Tablet
®
, NOOK
Simple Touch
®
, GlowLight
®
, NOOK GlowLight, The Simple Touch
Reader
®
, NOOK Press
®
, NOOK Books
®
, NOOK
Book Enhanced
®
, NOOK Developer
®
, The NOOK Book Store
®
, NOOK
Newsstand
®
, NOOK Newspaper
®
, NOOK Kids
®
, Read In Store
®
, NOOK Friends
®
, LendMe
®
, NOOK Boutique
®
, NOOK Study
®
, ArticleView
®
, Daily Shelf
®
, Read To Me
®
, Punctuate!
®
,
Woblio, Get Pop-Cultured
®
, B-Fest
®
, B&N Readouts
®
,
SparkNotes
®
, Borders
®
, Borders Books &
Music
®
, and Waldenbooks
®
, some of which are registered or pending with the United States Patent and Trademark Office.
The Company regards its trademarks, service marks, copyrights, patents, domain names, trade dress, trade secrets, proprietary technology and similar intellectual property as important to its operations,
and it relies on trademark, copyright and patent law, domain name regulations, trade secret protection and confidentiality or license agreements to protect its proprietary rights. The Company has registered, or applied for the registration of, a
number of domain names, trademarks, service marks, patents, and copyrights by U.S. and foreign governmental authorities. Additionally, the Company has filed U.S. and international patent applications covering certain of its proprietary technology.
The Company renews its registrations, which vary in duration, as it deems appropriate from time to time.
The Company has
licensed in the past, and expects that it may license in the future, certain of its proprietary rights to third parties. Some of the Companys products are designed to include intellectual property licensed or otherwise obtained from third
parties. While it may be necessary in the future to seek or renew licenses relating to various aspects of the Companys products and business methods, the Company believes, based upon past experience and industry practice, such licenses
generally could be obtained on commercially reasonable terms; however, there is no guarantee such licenses could be obtained at all.
Available Information
The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, proxy statements and other
information with the SEC. Any materials filed by the Company with the SEC may be read and copied at the SECs Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the SECs Public Reference
Room is available by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains annual, quarterly and current reports, proxy statements and other information that issuers (including the Company) file electronically with the SEC.
The Internet address of the SECs website is
https://www.sec.gov
.
The Company makes available on its corporate
website at
www.barnesandnobleinc.com
under Investor Relations - SEC Filings, free of charge, all its SEC filings as soon as reasonably practicable after the Company electronically files such material with or furnishes
such materials to the SEC.
The Company has adopted Corporate Governance Guidelines, a Code of Business Conduct and Ethics and
written charters for the Companys Audit Committee, Compensation Committee and Corporate Governance & Nominating Committee. Each of the foregoing is available on the Companys website at
www.barnesandnobleinc.com
under
Investor Relations Corporate Governance and in print to any stockholder who requests it, in writing to the Companys Corporate Secretary, Barnes & Noble, Inc., 122 Fifth Avenue, New York, New York 10011.
In accordance with SEC rules, the Company intends to disclose any amendment (other than any technical, administrative, or other non-substantive amendment) to either of the above codes, or any waiver of any provision thereof with respect to any of
the executive officers, on the Companys website within four business days following such amendment or waiver.
16
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones faced
by the Company. Additional risks and uncertainties not presently known or that are currently deemed immaterial also may impair the Companys business operations. If any of the following risks occur, the Companys business, financial
condition, operating results and cash flows could be materially adversely affected.
Unless otherwise specified or the
context otherwise requires, references below to (1) the Company refer to Barnes & Noble, Inc. and its subsidiaries, (2) Retail business refer to the Companys business included in the Retail segment,
and (3) Digital business refer to the Companys business included in the NOOK segment, including the sales of digital content, devices and accessories.
The Companys businesses are dependent on the overall economic environment and consumer spending patterns.
A deterioration of the current economic environment could have a material adverse effect on the Companys financial condition and operating results, as well as the Companys ability to fund its
growth or its strategic business initiatives.
The Retail and Digital businesses sales are primarily dependent upon
discretionary consumer spending, which is affected by the overall economic environment, consumer confidence and other factors beyond its control. In addition, the Retail and Digital businesses sales are dependent in part on the strength of new
release products, which are controlled by publishers and other suppliers.
Because of shifting consumer preferences and demographic
shifts, coupled with the maturity of the market for traditional retail stores, the Companys sales or net income may decline unless it successfully implements its business strategies.
The Companys primary business is its operation of the Retail businesss stores across the United States, and it derived a
majority of its sales and all of its profits from the Retail businesss stores in its most recent fiscal year. Management generally believes that the Retail businesss stores are located in attractive geographic markets. Managements
strategies are subject to the risks described herein and elsewhere, and may be subject to other risks that have not yet been identified, and management cannot make assurances that its business strategies will be successful.
Intense competition from the Internet, traditional retail sources, and suppliers of digital content and hardware may adversely affect the
Companys businesses.
The book business is highly competitive in every channel in which the Company operates. The
Company faces competition from many online businesses, notably Amazon.com and Apple. Continued increases in consumer spending via the Internet may significantly affect its ability to generate sales in the Retail businesss stores. Some of the
Companys competitors may have greater financial and other resources and different business strategies than the Company does. The Company faces competition from mass merchants, discounters, the Internet and digital distribution, including,
without limitation, from digital books or eBooks and eBook readers. New and enhanced technologies, including new digital technologies and new web services technologies, may increase the Companys competition. Competition
17
may also intensify as the Companys competitors enter into business combinations or alliances or established companies in other market segments expand into its market segments. Increased
competition may reduce the Companys sales and profits.
The Retail businesss stores compete
primarily on the quality of the shopping and store experience and the price and availability of products. The importance of price varies depending on the competitor, with some of the Retail businesss competitors engaging in significant
discounting and other promotional activities. The Retail business competes with large bookstores including Books-A-Million and smaller format bookstores, including Amazon new retail stores and independent store operators. The Retail business also
faces competition from mass merchandisers, such as Costco, Target and Wal-Mart. The Retail businesss stores also compete with specialty retail stores that offer books in particular subject areas, variety discounters, drug stores,
warehouse clubs, mail-order clubs and other retailers offering books, music, toys, games, gifts and other products in its market segments. NOOK
®
competes primarily with other tablets and eBook readers on functionality, consumer appeal, availability of digital content and price.
If the Retail business is unable to renew or enter into new leases on favorable terms, or at all, its sales and earnings may decline.
Substantially all of the Retail businesss stores are located in leased premises. The Retail businesss
profitability depends in part on its ability to continue to optimize its store lease portfolio as to the number of retail stores, store locations and lease terms and conditions. Its ability to do so depends on, among other things, general economic
and business conditions and general real estate development conditions, which are beyond its control. The Retail business has 360 leases up for renewal by April 30, 2020. If the cost of leasing existing retail stores increases, the Retail
business may not be able to maintain its existing store locations as leases expire. In addition, the Retail business may not be able to enter into new leases on acceptable terms, or at all, or it may not be able to locate suitable alternative sites
or additional sites for new retail stores in a timely manner. The Retail businesss sales and earnings may decline if it fails to maintain existing store locations, enter into new leases, renew leases or relocate to alternative sites, in each
case on attractive terms.
In addition to the bookstores, the Company leases two distribution centers for its B&N Retail
operations: one in Monroe Township, New Jersey and the other in Reno, Nevada. The Retail businesss profitability depends in part on its ability to continue to optimize its distribution centers. Its ability to do so depends on, among other
things, general economic and business conditions and general real estate development conditions, which are beyond its control. Both distribution centers leases are up for renewal in 2020. If the cost of leasing these distribution centers increases,
the Retail business may not be able to maintain its existing distribution centers as leases expire. In addition, the Retail business may not be able to enter into new leases on acceptable terms, or at all, or it may not be able to locate suitable
alternative sites or in a timely manner. The Retail businesss earnings may decline if it fails to maintain existing distribution centers, enter into new leases, renew leases or relocate to alternative sites, in each case on attractive terms.
The Company is dependent upon access to the capital markets, bank credit facilities, and short-term vendor financing for its liquidity
needs.
The Company must have sufficient sources of liquidity to fund its working capital requirements, indebtedness
and Digital business. The Company believes that the combination of its cash and cash equivalents on hand, cash flow received from operations, funds available under the Companys credit facility and short-term vendor financing will be sufficient
to meet the Companys normal working capital and debt service requirements for at least the next twelve months. If these sources of liquidity do not satisfy the Companys requirements, the Company may need to seek additional financing. The
future
18
availability of financing will depend on a variety of factors, such as economic and market conditions, the availability of credit and the Companys credit rating, as well as the
Companys reputation with potential lenders. These factors could materially adversely affect the Companys ability to fund its working capital requirements, costs of borrowing, and the Companys financial position and results of
operations would be adversely impacted.
The Companys expansion into new products, services and technologies subjects it to
additional business, legal, financial and competitive risks.
The Company may require additional
capital in the future to sustain or grow the Companys online business and the Digital business. The Companys gross profits and margins in its newer activities may be lower than in its traditional activities, and it may not be successful
enough in these newer activities to recoup its investments in them. In addition, the Company may have limited or no experience in its newer products and services, and its customers may not adopt its new product or service offerings, which include
digital, web services and electronic devices, including but not limited to its NOOK
®
eBook readers and tablets,
as well as new gift products and educational toys and games products. Some of these offerings may present new and difficult technological challenges, and the Company may be subject to claims or recalls if customers of these offerings experience
service disruptions or failures or other quality issues. If any of these were to occur, it could damage the Companys reputation, limit its growth and negatively affect its operating results.
The complexity of the Companys businesses could place a significant strain on its management, operations, performance and resources.
The complexity of the Companys businesses could place a significant strain on its management, operations,
technical performance, financial resources, and internal financial control and reporting functions. The Company operates two different businesses: the Retail business and the Digital business. There can be no assurance that the Company will be
able to manage the complexity of its businesses effectively. The Companys current and planned personnel, systems, procedures and controls may not be adequate to support and effectively manage its future operations, especially as it employs
personnel in multiple geographic locations. The Company may not be able to hire, train, retain, motivate and manage the required personnel, which may limit its growth. If any of these were to occur, it could damage the Companys reputation,
limit growth, negatively affect operating results and harm its business.
The Company faces the risk of disruption of supplier
relationships and/or supply chain and/or inventory surplus.
The products that the Company sells originate from a wide
variety of domestic and international vendors. During fiscal 2017, the Retail businesss five largest suppliers accounted for approximately 65% of the dollar value of merchandise purchased. While the Company believes that its relationships
with its suppliers are strong, suppliers may modify the terms of these relationships due to general economic conditions or otherwise. The Company does not have long-term arrangements with most of its suppliers to guarantee availability of
merchandise, content, components or services, particular payment terms or the extension of credit limits. If the Companys current suppliers were to stop selling merchandise, content, components or services to it on acceptable terms, including
as a result of one or more supplier bankruptcies due to poor economic conditions, the Company may be unable to procure the same merchandise, content, components or services from other suppliers in a timely and efficient manner and on acceptable
terms, or at all.
19
In addition, certain of our merchandise, including electronic readers, are sourced, directly
or indirectly, from outside the United States, including, without limitation, from suppliers in China. Political or financial instability, merchandise quality issues, product safety concerns, trade restrictions, work stoppages, tariffs, foreign
currency exchange rates, transportation capacity and costs, inflation, civil unrest, natural disasters, outbreaks of pandemics and other factors relating to foreign trade are beyond our control and could disrupt our supply of foreign-sourced
merchandise and/or adversely affect our results of operations.
Furthermore, the Retail business is dependent on the continued
supply of trade books. The publishing industry generally has suffered recently due to, among other things, changing consumer preferences and the economic climate. A significant disruption in this industry generally could adversely impact the
Companys business. A significant unfavorable change in the Companys relationships with key suppliers could materially adversely affect its sales and profits. In addition, any significant change in the payment terms that the Company has
with its key suppliers, including payment terms, return policies, the discount or margin on products or changes to the distribution model could adversely affect its financial condition and liquidity.
The Company has arrangements with third-party manufacturers with respect to digital devices. These manufacturers procure and assemble
unfinished parts and components from third-party suppliers based on forecasts provided by the Company. Given production lead times, commitments may be made far in advance of finished product delivery.
The Companys relationship with strategic partners could have adverse impacts on the Company and its business.
The Company relies on third parties to provide certain services for its business. The Companys business may be adversely impacted if
such third parties fail to meet their obligations or to provide high levels of service to the Companys customers. Further, the Company could be subject to claims as a result of the activities, products or services provided by these
third-party service providers even though the Company was not directly involved in the circumstances leading to those claims. These claims could include, among other things, claims by the Companys customers and claims relating to data
security. Even if these claims do not result in liability to the Company, defending and investigating these claims could be expensive and time-consuming, divert personnel and other resources from the Companys business and result in adverse
publicity that could harm the Companys business.
The Companys businesses rely on certain key personnel.
Management believes that the Companys continued success will depend to a significant extent upon the efforts and abilities of
certain key personnel of the Company. The loss of the services of any of these key personnel could have a material adverse effect on the Company. The Company does not maintain key man life insurance on any of its officers or other
employees.
The Companys businesses are seasonal.
For the Companys Retail business, sales are generally highest in the third fiscal quarter and lowest in the second and fourth fiscal quarters. For fiscal 2017, 33.7% of sales and 148.9% of operating
income of the Retail business were generated in its third fiscal quarter. Operating results in the Companys businesses depend significantly upon the holiday selling season in the third fiscal quarter.
Less than satisfactory net sales during the Companys peak fiscal quarter could have a material adverse effect on its financial
condition or operating results for the year, and the Companys results of operations from those quarters may not be sufficient to cover any losses, which may be incurred in the other fiscal quarters of the year.
20
The Companys results of operations may fluctuate from quarter to quarter, which could affect the
Companys business, financial condition and results of operations.
The Companys results of operations may
fluctuate from quarter to quarter depending upon several factors, some of which are beyond its control. These factors include the timing of new product releases, weather, the level of success of the Companys product releases, the timing of
store openings and closings, shifts in the timing of certain promotions and the effect of impairments on the Companys assets. These and other factors could affect the Companys business, financial condition and results of operations, and
this makes the prediction of the Companys financial results on a quarterly basis difficult. The Companys quarterly financial results have been and may in the future be below the expectations of public market analysts and investors.
The Company may not be able to adequately protect its intellectual property rights or may be accused of infringing upon intellectual
property rights of third parties.
The Company regards its trademarks, service marks, copyrights, patents, trade dress,
trade secrets, proprietary technology and similar intellectual property as important to its success, and it relies on trademark, copyright and patent law, domain name regulations, trade secret protection and confidentiality or license agreements to
protect its proprietary rights. Laws and regulations may not adequately protect its trademarks and similar proprietary rights. The Company may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or
diminish the value of its trademarks and other proprietary rights.
The Company may not be able to discover or determine the
extent of any unauthorized use of its proprietary rights. The protection of the Companys intellectual property may require the expenditure of significant financial and managerial resources. Moreover, the steps it takes to protect its
intellectual property may not adequately protect its rights or prevent third parties from infringing or misappropriating its proprietary rights. The Company also cannot be certain that others will not independently develop or otherwise acquire
equivalent or superior technology or other intellectual property rights.
Other parties also may claim that the Company
infringes their proprietary rights. Because of the changes in Internet commerce, the electronic reader and digital content business, current extensive patent coverage, and the rapid rate of issuance of new patents, it is possible that certain
components of our products and business methods may unknowingly infringe existing patents or intellectual property rights of others. Because the Companys products include complex technology, much of which is acquired from suppliers through the
purchase of components or licensing of software, the Company and its suppliers and customers are and have been involved in or have been impacted by assertions, including both requests for licenses and litigation, regarding patent and other
intellectual property rights. The Company has been and is currently subject to, and expects to continue to be subject to, claims and legal proceedings regarding alleged infringement by it of the intellectual property rights of third parties. Such
claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, injunctions against the Company prohibiting the Company from marketing or selling certain products or the payment of damages. The
Company may need to obtain licenses from third parties who allege that it has infringed their rights, but such licenses may not be available on terms acceptable to the Company, or at all. In addition, the Company may not be able to obtain or utilize
on terms that are favorable to it, or at all, licenses or other rights with respect to intellectual property it does not own in providing services to other businesses and individuals under commercial agreements. These risks have been amplified by
the increase
21
in third parties whose primary business appears to be to assert such claims. If any infringement or other intellectual property claim made against the Company by any third-party is successful, if
the Company is required to indemnify a customer with respect to a claim against the customer, or if the Company is unable to develop non-infringing technology or license the proprietary rights on commercially reasonable terms and conditions, the
Companys business, operating results, and financial condition could be materially and adversely affected.
The Companys digital content offerings, including NOOK
®
,
depend in part on effective digital rights management technology to control access to digital content. If the digital rights management technology that it uses is compromised or otherwise malfunctions, the Company could be subject to claims, and
content providers may be unwilling to include their content in its service.
The Company faces data security risks with respect to
personal information.
The Companys business involves the receipt, storage, processing and transmission of
personal information about customers and employees. Personal information about customers is obtained in connection with the Companys membership programs, eCommerce operations, digital media businesses, as well as through retail transactions in
stores operated by the Company. The Companys online operations and the Digital business depend upon the secure transmission of confidential information over public networks, including information permitting cashless payments. We may share such
information with vendors and third parties that assist with certain aspects of our business.
The Companys handling and
use of personal information is regulated at the international, federal and state levels. Privacy and information security laws, regulations, and standards, such as the Payment Card Industry Data Security Standard, change from time to time, and
compliance with them may result in cost increases due to necessary systems changes and the development of new processes and may be difficult to achieve. If the Company fails to comply with these laws, regulations and standards, it could be subjected
to legal risk. Also, hardware, software or applications developed or procured internally or from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. In addition, even
if the Company fully complies with all laws, regulations, and standards and even though the Company has taken significant steps to protect personal information, the Company could experience a data security breach, and its reputation could be
damaged, possibly resulting in lost future sales or decreased usage of credit and debit card products. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not
recognized until launched against a target, the Company may be unable to anticipate these techniques or to implement adequate preventative measures. A party that is able to circumvent the Companys security measures could misappropriate the
Companys or its users proprietary information and cause interruption in its operations. Any compromise of the Companys data security could result in a violation of applicable privacy and other laws or standards, significant legal
and financial exposure beyond the scope or limits of insurance coverage, increased operating costs associated with remediation, negative publicity, equipment acquisitions or disposal and added personnel, and a loss of confidence in its security
measures, which could harm the business or investor confidence. Data security breaches may also result from non-technical means, for example, actions by an employee.
The Company has suffered data security breaches in the past, including the Companys discovery in 2012 that PIN pads in certain of its stores had been tampered with to allow criminal access to card
data and PIN numbers on credit and debit cards swiped through the terminals. This matter has given rise to putative class action litigation, including ongoing class action litigation, on behalf of customers, banks, or other card issuers, and
inquiries from federal and state government agencies. It is possible that additional litigation arising out of this matter may be filed on behalf of customers, banks, payment card companies
22
or stockholders seeking damages allegedly arising out of this incident and other related relief. In addition, payment card companies and associations may impose fines by reason of the tampering
and federal and state enforcement authorities may impose penalties or other remedies against the Company. At this point the Company is unable to predict the developments in, outcome of, and economic and other consequences of pending or future
litigation or government inquiries related to this matter.
The concentration of the Companys capital stock ownership with certain
executive officers, directors and their affiliates limits its stockholders ability to influence corporate matters and may involve other risks.
Leonard Riggio, the Companys Founder and Chairman, is currently the beneficial owner of an aggregate of approximately 18.0% of the Companys outstanding capital stock as of April 29, 2017.
This concentrated control may limit the ability of the Companys other stockholders to influence corporate matters and,
as a result, the Company may take certain actions, with which its other stockholders do not agree. In addition, there may be risks related to the relationships Leonard Riggio and other members of the Riggio family have with the various entities
with which the Company has related party transactions.
Changes in sales and other tax collection regulations or inability of the
Company to utilize tax credits or assets, could harm the Companys businesses or financial performance.
The
Retail business and the Digital business collected sales tax on the majority of the products and services that they sold in their respective prior fiscal years that were subject to sales tax, and they generally have continued the same policies for
sales tax within the current fiscal year. While management believes that the financial statements included elsewhere herein reflect managements best current estimate of any potential additional sales tax liability based on current
discussions with taxing authorities, there can be no assurance that the outcome of any discussions with any taxing authority will not result in the payment of sales taxes for prior periods or otherwise, or that the amount of any such payments will
not be materially in excess of any liability currently recorded. In the future, the Companys businesses may be subject to claims for not collecting sales tax on the products and services it currently sells for which sales tax is not collected.
There is a risk that existing tax credits and tax assets may not be utilized or may expire.
The Spin-Off of Barnes & Noble
Education could result in significant tax liability to the Company and its stockholders.
The Spin-Off was conditioned
on the Companys receipt of written opinions from Cravath, Swaine & Moore LLP and KPMG LLP to the effect that the Spin-Off would qualify for non-recognition of gain and loss to the Company and its stockholders, which were received.
These opinions do not address any U.S. state or local or foreign tax consequences of the Spin-Off. These opinions assume that the Spin-Off will be completed according to the terms of the Separation Agreement and rely on the facts as stated in the
Separation Agreement, the Tax Matters Agreement, the other ancillary agreements, the prospectus for the Spin-Off and a number of other documents. In addition, these opinions are based on certain representations as to factual matters from, and
certain covenants by, the Company and Barnes & Noble Education. The opinions cannot be relied on if any of the assumptions, representations or covenants are incorrect, incomplete or inaccurate or are violated in any material respect. The
opinions are not binding on the Internal Revenue Service (IRS) or the courts, and we cannot assure you that the IRS or a court will not take a contrary position. If the Spin-Off were determined not to qualify for non-recognition of gain and loss,
U.S. holders could be subject to tax. In this case, each U.S. holder who receives the Barnes & Noble Education Common Stock in the Spin-Off would generally be treated as receiving a distribution in
23
an amount equal to the fair market value of Barnes & Noble Education common stock received, which would generally result in (i) a taxable dividend to the U.S. holder to the extent
of that U.S. holders pro rata share of the Companys current and accumulated earnings and profits; (ii) a reduction in the U.S. holders basis (but not below zero) in the Companys common stock to the extent the amount
received exceeds the stockholders share of the Companys earnings and profits; and (iii) a taxable gain from the exchange of the Companys common stock to the extent the amount received exceeds the sum of the U.S. holders
share of the Companys earnings and profits and the U.S. holders basis in its common stock.
If the Spin-Off were
determined not to qualify for non-recognition of gain and loss, then the Company would recognize gain in an amount up to the fair market value of the Barnes & Noble Education stock held by the Company immediately before the Spin-Off.
The Companys classified Board of Directors and other anti-takeover defenses could deter acquisition proposals and make it
difficult for a third-party to acquire control of the Company. This could have a negative effect on the price of the Companys common stock.
The Company has a classified Board of Directors and other anti-takeover defenses in its certificate of incorporation and by-laws. These defenses could discourage potential acquisition proposals and could
delay or prevent a change in control of the Company. These deterrents could adversely affect the price of the Companys common stock and make it difficult to remove or replace members of the Board of Directors or management of the Company. The
Companys previous shareholder rights plan expired on November 17, 2012 and was not replaced. The Board may, subject to its fiduciary duties under applicable law, choose to implement a shareholder rights plan in the future.
The Companys businesses could be impacted by changes in international, federal, state or local laws, rules or regulations.
Changes in international, federal, state or local laws, rules or regulations, including, but not limited to, laws,
rules or regulations related to employment, wages, data privacy, information security, intellectual property, taxes, products, product safety, health and safety, imports and exports, anti-corruption, and anti-competition could increase the
Companys costs of doing business or otherwise impact the Companys business.
The Company faces additional operating risks
through the operation of the Digital business.
The Company faces risks related to the operation
of the Digital business. The Digital businesss content sales decreased during fiscal 2017 and may continue to decline in the future, which could affect the Companys results of operations and liquidity. Also, the sales of digital devices
and accessories declined during fiscal 2017, and there is no guarantee that the possible introduction of future
NOOK
®
digital devices (including NOOK
®
co-branded devices under the commercial agreement with Samsung) will increase future sales of digital devices or content or the earnings of the Digital business. The
previously announced efforts to rationalize the costs associated with the Digital business also may not be successful, which may adversely impact the Companys results of operations. The Digital business faces certain risks associated with its
business, including protection of digital rights and uncertainties relating to the regulation of digital content.
The Company faces
various risks as an Internet retailer.
Business risks related to its online business include risks associated with the
need to keep pace with rapid technological change, risks associated with the adoption of new products or platforms. Internet security risks, risks of system failure or inadequacy, supply chain risks, government regulation and legal
24
uncertainties with respect to the Internet, risks related to data privacy and collection of sales or other taxes by one or more states or foreign jurisdictions. If any of these risks
materializes, it could have an adverse effect on the Companys business.
The Company depends on component and product
manufacturing provided by third parties, many of whom are located outside of the U.S.
NOOK
®
and other Company products are manufactured by a third-party manufacturer outside the United States, and the Company
relies on components provided from a number of different manufacturers both within and outside the United States. Many of these manufacturers are concentrated in geographic areas outside the United States. While the Companys arrangements with
these manufacturers may lower costs, they also reduce its direct control over production. It is uncertain what effect such diminished control will have on the quality or quantity of products or services, or the Companys flexibility to respond
to changing conditions. Although arrangements with such manufacturers may contain provisions for warranty expense reimbursement, if reimbursement from such manufacturers is unenforceable or insufficient, the Company may remain responsible to the
consumer for warranty service in the event of product defects. Any unanticipated product defect or warranty liability, whether pursuant to arrangements with contract manufacturers or otherwise, could materially adversely affect the Companys
reputation, financial condition and operating results. If manufacturing in these locations is disrupted for any reason, including natural disasters, information technology system failures, military actions or economic, business, labor,
environmental, public health or political issues, the Companys financial condition and operating results could be adversely affected.
The Company, including the Digital business, may be unable to obtain a sufficient supply of components and parts that are free of minerals mined from the Democratic Republic of Congo and adjoining
countries (DRC), which could result in a shortage of such components and parts or reputational damages if the Company is unable to certify that its products are free of such minerals. The Dodd-Frank Wall Street Reform and Consumer Protection Act
included disclosure requirements regarding the use of conflict minerals mined from the DRC and procedures regarding a manufacturers efforts to prevent the sourcing of such conflict minerals. The Securities and Exchange
Commission adopted the final rules related to conflict minerals in August 2012. These rules may limit the pool of suppliers who can provide the Company DRC Conflict Free components and parts, and the Company cannot make assurances that
it will be able to obtain products or supplies in sufficient quantities that meet the DRC Conflict Free designation as proposed by the requirements. In addition, the Company may incur material costs in complying with the disclosure requirements and
procedures, including costs related to the due diligence process of determining the source of certain minerals used in the Companys products as well as costs of possible changes to products, processes, and suppliers as a result of implementing
the procedures designed to prevent the sourcing of such conflict minerals. Also, because the Companys supply chain is complex, the Company may face reputational challenges with its customers, stockholders and other stakeholders if
it is unable to sufficiently verify the origins for the defined conflict metals used in its products as required by the rules on conflict minerals. The Company filed its Conflict Minerals Report for the calendar year 2016 with the SEC on
May 31, 2017.
Government regulation is evolving and unfavorable changes could harm the Companys business.
The Company is subject to general business regulations and laws relating to all aspects of its business, including
regulations and laws relating to the Internet, online commerce, digital content and products as well as its other lines of business (including governmental investigations and litigation relating to the agency pricing model for digital content
distribution). Existing and future laws and regulations and their application and/or enforcement may impede the growth of the Internet, digital content distribution or other online services and impact digital content pricing, including requiring
25
modifications or elimination of related pricing models, including the agency pricing model. These regulations and laws may cover taxation, privacy, data protection, pricing, competition and/or
antitrust, content, copyrights, distribution, mobile communications, electronic contracts and other communications, consumer protection, the provision of online payment services, unencumbered Internet access to the Companys services, the
design and operation of websites, the characteristics and quality of products and services and employee benefits (including the costs associated with complying with the Patient Protection and Affordable Care Act). Unfavorable regulatory and legal
developments, including, among other things, the July 2013 U.S. federal court ruling that Apple Inc. violated antitrust laws by colluding to raise the price of digital books with certain U.S. publishers and the settlement between the U.S. Department
of Justice and certain U.S. publishers for allegedly colluding to raise the price of digital books, could diminish the demand for the Companys products and services, increase its cost of doing business, decrease its margins and materially
adversely impact its results of operations or financial operations.
The Company relies on third-party digital content and applications,
which may not be available to the Company on commercially reasonable terms or at all.
The Company
contracts with certain third parties to offer their digital content, including on NOOK
®
and through its
eBookstore. Its licensing arrangements with these third parties do not guarantee the continuation or renewal of these arrangements on reasonable terms, if at all. Some third-party content providers currently or in the future may offer competing
products and services, and could take action to make it more difficult or impossible for the Company to license their content in the future. Other content owners, providers or distributors may seek to limit the Companys access to, or increase
the total cost of, such content. If the Company is unable to offer a wide variety of content at reasonable prices with acceptable usage rules, its financial condition and operating results may be materially adversely affected.
The Companys businesses could be adversely impacted if it is unsuccessful in making and integrating acquisitions it has made or may decide to
pursue.
To enhance the Companys efforts to grow and compete, from time to time it has engaged in acquisitions
and entered into joint ventures, and it may engage in acquisitions or enter into joint ventures in the future. Any future acquisitions are subject to the Companys ability to identify attractive opportunities and to negotiate favorable terms
for them. Accordingly, the Company cannot make assurances that future acquisitions will be completed, or that if completed, they will be successful. These transactions may create risks such as: (1) disruption of the Companys ongoing
business, including loss of management focus on existing businesses; (2) the dilution of the equity interest of the Companys stockholders; (3) problems retaining key personnel; (4) increased debt to finance any transaction and
additional operating losses, debt and expenses of the businesses the Company acquires; (5) the difficulty of integrating a new companys accounting, financial reporting, management, information, human resources and other administrative
systems to permit effective management, and the lack of control if such integration is delayed or not implemented; (6) the difficulty of implementing at acquired companies the controls, procedures and policies appropriate for a larger public
company; and (7) potential unknown liabilities associated with an acquired company. In addition, valuations supporting the Companys acquisitions could change rapidly given the current global economic climate. The Company could
determine that such valuations have experienced impairments or other-than-temporary declines in fair value, which could adversely impact its financial condition.
ITEM 1B.
|
UNRESOLVED STAFF COMMENTS
|
None.
26
All
but one of the active Barnes & Noble stores are leased. The leases typically provide for an initial term of 10 or 15 years with one or more renewal options. Most stores are currently in renewal periods. The terms of the Barnes &
Noble store leases for its 632 leased stores open as of April 29, 2017 expire as follows:
|
|
|
|
|
Lease Terms to Expire During
(12 months ending on or about April 30)
|
|
Number of
Stores
(a)
|
|
2018
|
|
|
98
|
|
2019
|
|
|
143
|
|
2020
|
|
|
119
|
|
2021
|
|
|
82
|
|
2022
|
|
|
116
|
|
2023 and later
|
|
|
71
|
|
(a)
|
Three Barnes & Noble stores are under a month-to-month lease.
|
In addition to the bookstores, the Company leases two distribution centers for its B&N Retail operations: one in Monroe Township, New Jersey and the other in Reno, Nevada, both under leases expiring
in 2020. The Companys B&N Retail distribution centers total 1,745,000 square feet.
The Companys principal
administrative facilities are situated in New York, New York, and are covered by two leases: 184,000 square feet lease and 9,500 square feet lease, both expiring in 2023.
The Company leases two additional locations in New York, New York for office space: approximately 40,000 square feet lease for eCommerce and NOOK administrative offices and approximately 40,000 square
feet lease for Sterling Publishing administrative offices, both expiring in 2020.
The Company also leases approximately
79,000 square feet of office space in Westbury, New York under a lease expiring in 2022 and approximately 56,000 square feet of office space in Santa Clara, California under a lease expiring in 2019.
ITEM 3.
|
LEGAL PROCEEDINGS
|
The Company is involved in a variety of claims, suits, investigations and proceedings that arise from time to time in the ordinary course
of its business, including actions with respect to contracts, intellectual property, taxation, employment, benefits, securities, personal injuries and other matters. The results of these proceedings in the ordinary course of business are not
expected to have a material adverse effect on the Companys consolidated financial position or results of operations.
The Company records a liability when it believes that it is both probable that a liability will be incurred, and the amount of loss can
be reasonably estimated. The Company evaluates, at least quarterly, developments in its legal matters that could affect the amount of liability that has been previously accrued and makes adjustments as appropriate. Significant judgment is required
to determine both probability and the estimated amount of a loss or potential loss. The Company may be unable to reasonably estimate the reasonably possible loss or range of loss for a particular legal contingency for various reasons, including,
among others: (i) if the damages sought are indeterminate; (ii) if proceedings are in the early stages; (iii) if there is uncertainty as to the outcome of pending proceedings (including motions and appeals);
27
(iv) if there is uncertainty as to the likelihood of settlement and the outcome of any negotiations with respect thereto; (v) if there are significant factual issues to be determined or
resolved; (vi) if the proceedings involve a large number of parties; (vii) if relevant law is unsettled or novel or untested legal theories are presented; or (viii) if the proceedings are taking place in jurisdictions where the laws
are complex or unclear. In such instances, there is considerable uncertainty regarding the ultimate resolution of such matters, including a possible eventual loss, if any.
Legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond the Companys control. As such, there can be no assurance that the final outcome of these
matters will not materially and adversely affect the Companys business, financial condition, results of operations, or cash flows.
Except as otherwise described below with respect to the Adrea LLC (Adrea) matter, the Company has determined that a loss is reasonably possible with respect to the matters described below. Based on its
current knowledge, the Company has determined that the amount of loss or range of loss that is reasonably possible, including any reasonably possible losses in excess of amounts already accrued, is not estimable. With respect to the Adrea matter,
the Company has determined there will be a loss, as described below.
The following is a discussion of the material legal
matters involving the Company.
PIN Pad Litigation
As previously disclosed, the Company discovered that PIN pads in certain of its stores had been tampered with to allow criminal access to
card data and PIN numbers on credit and debit cards swiped through the terminals. Following public disclosure of this matter on October 24, 2012, the Company was served with four putative class action complaints (three in federal district
court in the Northern District of Illinois and one in the Northern District of California), each of which alleged on behalf of national and other classes of customers who swiped credit and debit cards in Barnes & Noble Retail stores common
law claims such as negligence, breach of contract and invasion of privacy, as well as statutory claims such as violations of the Fair Credit Reporting Act, state data breach notification statutes, and state unfair and deceptive practices
statutes. The actions sought various forms of relief including damages, injunctive or equitable relief, multiple or punitive damages, attorneys fees, costs, and interest. All four cases were transferred and/or assigned to a single
judge in the United States District Court for the Northern District of Illinois, and a single consolidated amended complaint was filed. The Company filed a motion to dismiss the consolidated amended complaint in its entirety, and in September
2013, the Court granted the motion to dismiss without prejudice. The Plaintiffs then filed an amended complaint, and the Company filed a second motion to dismiss. On October 3, 2016, the Court granted the second motion to dismiss, and
dismissed the case without prejudice; in doing so, the Court permitted plaintiffs to file a second amended complaint by October 31, 2016. On October 31, 2016, the plaintiffs filed a second amended complaint, and on
January 25, 2017 the Company filed a motion to dismiss the second amended complaint. On June 13, 2017, the Court granted the Companys motion to dismiss with prejudice.
Cassandra Carag individually and on behalf of others similarly situated v. Barnes & Noble, Inc., Barnes & Noble
Booksellers, Inc. and DOES 1 through 100 inclusive
On November 27, 2013, former Associate Store Manager Cassandra
Carag (Carag) brought suit in Sacramento County Superior Court, asserting claims on behalf of herself and all other hourly (non-exempt) Barnes & Noble employees in California in the preceding four years for unpaid regular and overtime wages
based on alleged off-the-clock work, penalties and pay based on missed meal and rest breaks, and for improper wage statements, payroll records, and untimely pay at separation as a result of
28
the alleged pay errors during employment. Via the complaint, Carag seeks to recover unpaid wages and statutory penalties for all hourly Barnes & Noble employees within California from
November 27, 2009 to present. On February 13, 2014, the Company filed an answer to the complaint in the state court and concurrently requested removal of the action to federal court. On May 30, 2014, the federal court granted
Plaintiffs motion to remand the case to state court and denied Plaintiffs motion to strike portions of the answer to the complaint (referring the latter motion to the lower court for future consideration). The Court has not yet scheduled
any further hearings or deadlines.
Adrea LLC v. Barnes & Noble, Inc., barnesandnoble.com llc and NOOK Media
LLC
On June 14, 2013, Adrea filed a complaint against Barnes & Noble, Inc., NOOK Digital, LLC (formerly
barnesandnoble.com llc) and B&N Education, LLC (formerly NOOK Media LLC) (collectively, B&N) in the United States District Court for the Southern District of New York alleging that various B&N NOOK products and related online services
infringe U.S. Patent Nos. 7,298,851 (851 patent), 7,299,501 (501 patent) and 7,620,703 (703 patent). B&N filed its Answer on August 9, 2013, denying infringement and asserting several affirmative defenses. At the same
time, B&N filed counterclaims seeking declaratory judgments of non-infringement and invalidity with respect to each of the patents-in-suit. On July 1, 2014, the Court issued a decision granting partial summary judgment in B&Ns
favor, and in particular granting B&Ns motion to dismiss one of Adreas infringement claims, and granting B&Ns motion to limit any damages award with respect to another of Adreas infringement claims.
Beginning October 7, 2014, through and including October 22, 2014, the case was tried to a jury in the Southern District of New
York. The jury returned its verdict on October 27, 2014. The jury found no infringement with respect to the 851 patent, and infringement with respect to the 501 and 703 patents. It awarded damages in the amount of $1,300,000.
The jury further found no willful infringement with respect to any patent.
On July 24, 2015, the Court granted
B&Ns post-trial application to invalidate one of the two patents (the 501 patent) the jury found to have been infringed. On September 28, 2015, the Court heard post-trial motions on the jurys infringement and validity
determinations, and on February 24, 2016, it issued a decision upholding the jurys determination of infringement and validity with respect to the 703 patent. Since the original damages award was a total award for infringement of
both patents, the Court held a new trial to determine damages for infringement of the 703 patent, which trial concluded on July 15, 2016.
On December 28, 2016, the Court issued its decision on the issue of damages, finding that (a) Adrea should be entitled to a damages award of $267,000, based on a reasonable royalty rate of 5.1
cents per unit, and (ii) Adrea was not entitled to any enhancement of damages, as B&Ns infringement was not willful. Following letter briefing, in which Adrea asked the Court to award prejudgment interest of approximately
$90,000, the Court, following B&Ns reasoning, added $3,000 in prejudgment interest to its damages award, and on January 12, 2017 entered judgment in favor of Adrea in the total amount of $270,000. Adrea subsequently moved the
Court for supplemental damages relating to any allegedly infringing products B&N may have sold that were not taken into account in the first verdict, including new devices not previously accused. In addition, Adrea asked the Clerk of the Court
to tax costs against B&N in the amount of $110,000. B&N opposed both requests, and following briefing, the court awarded supplemental damages for sales of accused devices of approximately $13,000, refused to award damages or ongoing
royalties for any new devices, and entered a final judgment of $282,000. As for the issue of costs, the Clerk awarded Adrea approximately $27,000. Both parties have requested review of the Clerks award, with B&N taking the
position that no costs should have been awarded, since Adrea was not the prevailing party for purposes of a costs award, and that in any case the award was
29
excessive. Adrea sought to recover an additional $25,000 in costs. The parties are awaiting the Courts decision on the costs issue. This will be the final proceeding in this
action, as neither party has filed a Notice of Appeal.
Café Manager Class Actions
Two former Café Managers have filed separate actions alleging similar claims of entitlement to unpaid compensation for
overtime. In each action, the plaintiff seeks to represent a class of allegedly similarly situated employees who performed the same position (Café Manager). Specifically, Christine Hartpence filed a complaint against Barnes &
Noble, Inc. (Barnes & Noble) in Philadelphia County Court of Common Pleas on May 26, 2015 (Case No.: 160503426), alleging that she is entitled to unpaid compensation for overtime under Pennsylvania law and seeking to represent a class
of allegedly similarly situated employees who performed the same position (Café Manager). On July 14, 2016, Ms. Hartpence amended her complaint to assert a purported collective action for alleged unpaid overtime compensation under
the federal Fair Labor Standards Act (FLSA), by which she sought to act as a class representative for similarly situated Café Managers throughout the United States. On July 27, 2016, Barnes & Noble removed the case to the U.S.
District Court of the Eastern District of Pennsylvania (Case No.: 16-4034). Ms. Hartpence then voluntarily dismissed her complaint and subsequently re-filed a similar complaint in the Philadelphia County Court of Common Pleas (Case No.:
161003213), where it is currently pending. The re-filed complaint alleges only claims of unpaid overtime under Pennsylvania law and alleges class claims under Pennsylvania law that are limited to current and former Café Managers within
Pennsylvania.
On September 20, 2016, Kelly Brown filed a complaint against Barnes & Noble in the U.S. District
Court for the Southern District of New York (Case No.: 16-7333) in which she also alleges that she is entitled to unpaid compensation under the FLSA and Illinois law. Ms. Brown seeks to represent a national class of all similarly situated
Café Managers under the FLSA, as well as an Illinois-based class under Illinois law. On November 9, 2016, Ms. Brown filed an amended complaint to add an additional plaintiff named Tiffany Stewart, who is a former Café
Manager who also alleges unpaid overtime compensation in violation of New York law and seeks to represent a class of similarly situated New York-based Café Managers under New York law. Since the commencement of the action, eight former
Café Managers have filed consent forms to join the action as plaintiffs. On May 2, 2017, the Court denied Plaintiffs Motion for Conditional Certification, without prejudice.
30