Barnes & Noble Education, Inc.
Barnes & Noble Education, Inc. (Form: 10-Q, Received: 12/09/2015 08:33:40)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________
FORM 10-Q
_______________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 1-37499
_______________________________________________
BARNES & NOBLE EDUCATION, INC.
(Exact Name of Registrant as Specified in Its Charter)
_______________________________________________
Delaware
 
46-0599018
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
120 Mountain View Blvd., Basking Ridge, NJ
 
07920
(Address of Principal Executive Offices)
 
(Zip Code)
(908) 991-2665
(Registrant’s Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
_______________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ¨     No   x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
Accelerated filer
 
¨
 
 
 
 
 
 
Non-accelerated filer
 
x   (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
As of December 2, 2015 , 48,253,244 shares of Common Stock, par value $0.01 per share, were outstanding.
 

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Table of Contents

EXPLANATORY NOTE
On February 26, 2015, Barnes & Noble, Inc. (“Barnes & Noble”) announced plans for the complete legal and structural separation of Barnes & Noble Education, Inc. (the “Company”, "us", "we") from Barnes & Noble (the “Spin-Off”). Under the Separation and Distribution Agreement between Barnes & Noble and the Company (the “Separation and Distribution Agreement”), Barnes & Noble planned to distribute all of its equity interest in us, consisting of all of the outstanding shares of our Common Stock, to Barnes & Noble’s stockholders on a pro rata basis. Following the Spin-Off, Barnes & Noble would not own any equity interest in us, and we would operate independently from Barnes & Noble.
On July 14, 2015, Barnes & Noble approved the final distribution ratio and declared a pro rata dividend of the outstanding shares of our common stock, par value $0.01 per share (“Common Stock”), to Barnes & Noble’s existing stockholders. The pro rata dividend was made on August 2, 2015 to the Barnes & Noble stockholders of record (as of July 27, 2015). Each Barnes & Noble stockholder of record received a distribution of 0.632 shares of our Common Stock for each share of Barnes & Noble common stock held on the record date.
On August 2, 2015, we completed the legal separation from Barnes & Noble, at which time we began to operate as an independent publicly-traded company. Our Common Stock began to trade on a “when-issued” basis on the New York Stock Exchange ("NYSE") under the symbol “BNED WI” beginning on July 23, 2015. On August 3, 2015, when-issued trading of our Common Stock ended, and our Common Stock began “regular-way” trading under the symbol “BNED.”
The results of operations for the 26 weeks ended November 1, 2014 and the 13 weeks ended August 1, 2015 reflected in our condensed consolidated financial statements are presented on a stand-alone basis since we were still part of Barnes & Noble, Inc. until the consummation of the Spin-Off on August 2, 2015 and the results of operations for the 13 weeks ended October 31, 2015 reflected in our condensed consolidated financial statements are presented on a consolidated basis as we are now a separate consolidated entity.



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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Fiscal Quarter Ended October 31, 2015
Index to Form 10-Q
 
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

PART I - FINANCIAL INFORMATION
 
Item 1:     Financial Statements

BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income and Comprehensive Income
(In thousands, except per share data)
(unaudited)
 
 
13 weeks ended
 
26 weeks ended
 
October 31,
2015
 
November 1,
2014
 
October 31,
2015
 
November 1,
2014
Sales:
 
 
 
 
 
 
 
Product sales and other
$
684,006

 
$
678,905

 
$
902,722

 
$
885,093

Rental income
71,858

 
72,797

 
92,125

 
92,350

Total sales
755,864

 
751,702

 
994,847

 
977,443

Cost of sales and occupancy:
 
 
 
 
 
 
 
Product and other cost of sales and occupancy
537,380

 
534,137

 
712,289

 
700,190

Rental cost of sales and occupancy
43,363

 
44,054

 
55,893

 
56,432

Total cost of sales and occupancy
580,743

 
578,191

 
768,182

 
756,622

Gross profit
175,121

 
173,511

 
226,665

 
220,821

Selling and administrative expenses
102,439

 
95,587

 
189,123

 
176,859

Depreciation and amortization
13,169

 
12,508

 
26,269

 
25,052

Operating income
59,513

 
65,416

 
11,273

 
18,910

Interest expense, net
554

 
14

 
557

 
19

Income before income taxes
58,959

 
65,402

 
10,716

 
18,891

Income tax expense
25,558

 
28,451

 
4,233

 
8,153

Net income
$
33,401

 
$
36,951

 
$
6,483

 
$
10,738

Other comprehensive earnings, net of tax

 

 

 

Total comprehensive income
$
33,401

 
$
36,951

 
$
6,483

 
$
10,738

 
 
 
 
 
 
 
 
Earnings per share of Common Stock:
 
 
 
 
 
 
 
Basic
$
0.69

 
$
0.95

 
$
0.14

 
$
0.26

Diluted
$
0.69

 
$
0.95

 
$
0.14

 
$
0.26

Weighted average shares of Common Stock outstanding:
 
 
 
 
 
 
 
Basic
48,207

 
37,505

 
44,816

 
37,471

Diluted
48,562

 
37,544

 
45,023

 
37,504

See accompanying notes to condensed consolidated financial statements.


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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except per share data)  
 
October 31,
2015
 
November 1,
2014
 
May 2,
2015
 
(unaudited)
 
(unaudited)
 
(audited)
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
214,281

 
$
252,916

 
$
59,714

Receivables, net
91,383

 
81,977

 
76,551

Merchandise inventories, net
431,023

 
340,513

 
297,424

Textbook rental inventories
83,846

 
83,245

 
47,550

Prepaid expenses and other current assets
6,304

 
4,051

 
4,625

Short-term deferred tax assets, net
24,182

 
24,345

 
24,358

Total current assets
851,019

 
787,047

 
510,222

Property and equipment:
 
 
 
 
 
Buildings and leasehold improvements
159,234

 
145,844

 
149,065

Fixtures and equipment
349,770

 
325,329

 
335,403

 
509,004

 
471,173

 
484,468

Less accumulated depreciation and amortization
398,055

 
366,914

 
376,911

Net property and equipment
110,949

 
104,259

 
107,557

Goodwill
274,070

 
274,070

 
274,070

Intangible assets, net
193,113

 
203,315

 
198,190

Other noncurrent assets
46,335

 
36,093

 
39,885

Total assets
$
1,475,486

 
$
1,404,784

 
$
1,129,924

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
475,072

 
$
431,189

 
$
170,101

Accrued liabilities
137,412

 
121,973

 
97,575

Total current liabilities
612,484

 
553,162

 
267,676

Long-term deferred taxes, net
63,739

 
75,003

 
66,091

Other long-term liabilities
69,585

 
61,726

 
69,488

Total liabilities
745,808

 
689,891

 
403,255

Commitments and contingencies

 

 

Stockholders' equity:
 
 
 
 
 
Preferred membership interests

 
384,282

 

Parent company investment

 
330,611

 
726,669

Preferred stock, $0.01 par value; authorized, 5,000 shares; issued and outstanding, none

 

 

Common stock, $0.01 par value; authorized, 200,000 shares; issued, 48,219, 0 and 0 shares, respectively; outstanding, 48,217, 0 and 0 shares, respectively
482

 

 

Additional paid-in capital
695,816

 

 

Retained earnings
33,401

 

 

Treasury stock, at cost
(21
)
 

 

Total stockholders' equity
729,678

 
714,893

 
726,669

Total liabilities and stockholders' equity
$
1,475,486

 
$
1,404,784

 
$
1,129,924

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
 
26 weeks ended
 
October 31,
2015
 
November 1,
2014
Cash flows from operating activities:
 
 
 
Net income
$
6,483

 
$
10,738

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
26,269

 
25,052

Amortization of long-term debt deferred financing costs
163

 

Deferred taxes
(2,176
)
 
(2,406
)
Stock-based compensation expense
2,970

 
2,904

Increase in other long-term liabilities
97

 
573

Changes in other operating assets and liabilities, net
158,409

 
150,720

Net cash flows provided by operating activities
192,215

 
187,581

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(24,541
)
 
(24,606
)
Net increase in other noncurrent assets
(3,412
)
 
(5,941
)
Net cash flows used in investing activities
(27,953
)
 
(30,547
)
Cash flows from financing activities:
 
 
 
Net changes in Barnes & Noble, Inc. Investment
(6,423
)
 
(48,387
)
Proceeds from borrowings on Credit Facility
8,700

 

Repayments of borrowings on Credit Facility
(8,700
)
 

Payment of deferred financing costs
(3,251
)
 

Purchase of treasury shares
(21
)
 

Net cash flows used in financing activities
(9,695
)
 
(48,387
)
Net increase in cash and cash equivalents
154,567

 
108,647

Cash and cash equivalents at beginning of period
59,714

 
144,269

Cash and cash equivalents at end of period
$
214,281

 
$
252,916

Changes in other operating assets and liabilities, net:
 
 
 
Receivables, net
$
(14,832
)
 
$
(42,976
)
Merchandise inventories
(133,599
)
 
(65,167
)
Textbook rental inventories
(36,296
)
 
(36,182
)
Prepaid expenses and other current assets
(1,681
)
 
71

Accounts payable and accrued liabilities
344,817

 
294,974

Changes in other operating assets and liabilities, net
$
158,409

 
$
150,720

See accompanying notes to condensed consolidated financial statements.


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Table of Contents

BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Consolidated Consolidated Statement of Equity
(In thousands)
(unaudited)
 
 
 
 
 
Additional
 
 
 
Preferred
 
Parent
 
 
 
 
 
 
 
Common Stock
 
Paid-In
 
Retained
 
Membership
 
Company
 
Treasury Stock
 
Total
 
 
Shares
Amount
 
Capital
 
Earnings
 
Interests
 
Investments
 
Shares
Amount
 
Equity
Balance at May 3, 2014
 

$

 
$

 
$

 
$
383,397

 
$
366,240

 

$

 
$
749,637

Net income
 
 
 
 
 
 
 
 
 
 
10,738

 
 
 
 
10,738

Net change in Barnes & Noble, Inc. Investment
 
 
 
 
 
 
 
 
 
 
(48,386
)
 
 
 
 
(48,386
)
Stock-based compensation expense
 
 
 
 
 
 
 
 
 
 
2,904

 
 
 
 
2,904

Accretive dividend on preferred stockholders
 
 
 
 
 
 
 
 
885

 
(885
)
 
 
 
 

Balance at November 1, 2014
 

$

 
$

 
$

 
$
384,282

 
$
330,611

 

$

 
$
714,893

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Preferred
 
Parent
 
 
 
 
 
 
 
Common Stock
 
Paid-In
 
Retained
 
Membership
 
Company
 
Treasury Stock
 
Total
 
 
Shares
Amount
 
Capital
 
Earnings
 
Interests
 
Investments
 
Shares
Amount
 
Equity
Balance at May 2, 2015
 

$

 
$

 
$

 
$

 
$
726,669

 

$

 
$
726,669

Net loss
 
 
 
 
 
 
 
 
 
 
(26,918
)
 
 
 
 
(26,918
)
Stock-based compensation expense
 
 
 
 
 
 
 
 
 
 
953

 
 
 
 
953

Net change in Barnes & Noble, Inc. Investment
 
 
 
 
 
 
 
 
 
 
(28,868
)
 
 
 
 
(28,868
)
Balance at August 2, 2015 (Spin-Off)
 


 

 

 

 
671,836

 


 
671,836

Net change in Barnes & Noble, Inc. Investment
 
 
 
 
 
 
 
 
 
 
22,445

 
 
 
 
22,445

Capitalization at Spin-Off
 
48,187

482

 
693,799

 
 
 
 
 
(694,281
)
 
 
 
 

Stock-based compensation expense
 
 
 
 
2,017

 
 
 
 
 
 
 
 
 
 
2,017

Vested equity awards
 
32


 
 
 
 
 
 
 
 
 
 
 
 

Shares repurchased for tax withholdings for vested stock awards
 
 
 
 
 
 
 
 
 
 
 
 
2

(21
)
 
(21
)
Net income
 
 
 
 
 
 
33,401

 
 
 
 
 
 
 
 
33,401

Balance at October 31, 2015
 
48,219

$
482

 
$
695,816

 
$
33,401

 
$

 
$

 
2

$
(21
)
 
$
729,678

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

See accompanying notes to condensed consolidated financial statements.



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Table of Contents

BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 31, 2015 and November 1, 2014
(Thousands of dollars, except share and per share data)
(unaudited)
Unless the context otherwise indicates, references in these Notes to the accompanying condensed consolidated financial statements to “we,” “us,” “our” and “the Company” refer to Barnes & Noble Education, Inc., a Delaware corporation. References to “Barnes & Noble” refer to Barnes & Noble, Inc., a Delaware corporation, and its consolidated subsidiaries (other than Barnes & Noble Education, Inc. and its consolidated subsidiaries) unless the context otherwise requires. References to “Barnes & Noble College” refer to our college bookstore business operated through our subsidiary Barnes & Noble College Booksellers, LLC. Barnes & Noble College is our only operating subsidiary.
This Form 10-Q should be read in conjunction with our Audited Consolidated Financial Statements and accompanying Notes to consolidated financial statements in our Prospectus dated July 15, 2015 and filed with the Securities and Exchange Commission (the “SEC”) on that date, which includes consolidated financial statements for the Company for each of the three fiscal years ended May 2, 2015 May 3, 2014 and April 27, 2013 (Fiscal 2015 , Fiscal 2014 and Fiscal 2013 , respectively) and the unaudited condensed consolidated financial statements in our Form 10-Q for the 13 weeks ended August 1, 2015.
Note 1. Organization
Description of Business
We are one of the largest contract operators of bookstores on college and university campuses across the United States. We create and operate campus stores that are focal points for college life and learning, enhancing the educational mission of the institution, enlivening campus culture and delivering an important revenue stream to our partner schools. We typically operate our stores under multi-year management service agreements granting us the right to operate the official school bookstore on campus. In turn, we pay the school a percentage of store sales and, in some cases, a minimum fixed guarantee.
We build relationships and derive sales by actively engaging and marketing to over 5 million students and their faculty on the campuses we serve and offer a full assortment of items in our campus stores, including course materials, which includes new and used print textbooks and digital textbooks, which are available for sale or rent, emblematic apparel and gifts, trade books, computer products, school and dorm supplies, convenience and café items and graduation products. We are a multi-channel marketer and operate school-branded e-commerce sites for each store, allowing students and faculty to purchase textbooks, course materials and other products online.
As of May 2, 2015, we operated 724 stores nationwide, which reached 24% of the total United States college and university student enrolled population. During the 26 weeks ended October 31, 2015 , we opened 28 stores and closed 9 stores. As of October 31, 2015 , we operated 743 stores nationwide.
Separation from Barnes & Noble, Inc.
On February 26, 2015, Barnes & Noble announced plans to Spin-Off its 100% equity interest in our Company. At the time of the Spin-Off on August 2, 2015, Barnes & Noble distributed all of its equity interest in us, consisting of all of the outstanding shares of our Common Stock, to Barnes & Noble’s stockholders on a pro rata basis (the “Distribution”). Following the Spin-Off, Barnes & Noble did not own any equity interest in us. On August 2, 2015, we completed the legal separation from Barnes & Noble, at which time we began to operate as an independent publicly-traded company. For details related to the Distribution of our Common Stock, see Note 5. Equity and Earnings Per Share .
In connection with the separation from Barnes & Noble, we entered into several agreements that govern the relationship between the parties after the separation and allocate between the parties various assets, liabilities, rights and obligations following the separation and also describe Barnes & Noble’s future commitments to provide us with certain transition services following the Spin-Off. For additional information related to these agreements, see Note 9. Barnes & Noble, Inc. Transactions .
The results of operations for the 26 weeks ended November 1, 2014 and the 13 weeks ended August 1, 2015 reflected in our condensed consolidated financial statements are presented on a stand-alone basis since we were still part of Barnes & Noble, Inc. until the consummation of the Spin-Off on August 2, 2015 and the results of operations for the 13 weeks ended October 31, 2015 reflected in our condensed consolidated financial statements are presented on a consolidated basis as we became a separate consolidated entity (as discussed in Note 2. Summary of Significant Accounting Policies ).


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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 31, 2015 and November 1, 2014
(Thousands of dollars, except share and per share data)
(unaudited)


Note 2. Summary of Significant Accounting Policies
Basis of Presentation
Our condensed consolidated financial statements reflect our consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements of the Company contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly its consolidated financial position and the results of its operations and cash flows for the periods reported. These consolidated financial statements are condensed and therefore do not include all of the information and footnotes required by GAAP.
Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. Due to the seasonal nature of the business, the results of operations for the 13 and 26 weeks ended October 31, 2015 are not indicative of the results expected for the 52 weeks ending April 30, 2016 (Fiscal 2016). Our business is highly seasonal, with the major portion of sales and operating profit realized during the second and third fiscal quarters, when college students generally purchase and rent textbooks for the upcoming semesters.
As discussed below, the results of operations for the 26 weeks ended November 1, 2014 and the 13 weeks ended August 1, 2015 reflected in our condensed consolidated financial statements are presented on a stand-alone basis since we were still part of Barnes & Noble, Inc. until the consummation of the Spin-Off on August 2, 2015 and the results of operations for the 13 weeks ended October 31, 2015 reflected in our condensed consolidated financial statements are presented on a consolidated basis as we became a separate consolidated entity.
Stand-alone basis financial statements
The results of operations for the 26 weeks ended November 1, 2014 (i.e. first and second quarter of fiscal 2015) and the 13 weeks ended August 1, 2015 (i.e. first quarter of fiscal 2016) (collectively referred to as the "stand-alone periods") reflected in our condensed consolidated financial statements are presented on a stand-alone basis since we were still part of Barnes & Noble, Inc.
Our condensed consolidated financial statements were derived from the consolidated financial statements and accounting records of Barnes & Noble. Our condensed consolidated financial statements include certain assets and liabilities that have historically been held at the Barnes & Noble corporate level but are specifically identifiable or otherwise attributable to us.
All intercompany transactions between us and Barnes & Noble have been included in our condensed consolidated financial statements and are considered to be effectively settled for cash in our condensed consolidated financial statements at the time the Spin-Off became effective. The total net effect of the settlement of these intercompany transactions is reflected in our condensed consolidated statements of cash flow as a financing activity and in our condensed consolidated balance sheets as “Parent company investment.”
The condensed consolidated financial statements for the stand-alone periods include an allocation for certain corporate and shared service functions historically provided by Barnes & Noble, including, but not limited to, executive oversight, accounting, treasury, tax, legal, human resources, occupancy, procurement, information technology and other shared services. These expenses have been allocated to us on the basis of direct usage when identifiable, with the remainder allocated on a pro rata basis of consolidated sales, headcount, tangible assets or other measures considered to be a reasonable reflection of the historical utilization levels of these services. Management believes the assumptions underlying our condensed consolidated financial statements, including the assumptions regarding the allocation of general corporate expenses from Barnes & Noble were reasonable.
Nevertheless, our condensed consolidated financial statements for these stand-alone periods may not include all of the actual expenses that would have been incurred had we operated as a stand-alone company and may not reflect our consolidated results of operations, financial position and cash flows had we operated as a stand-alone company during the periods presented. Actual costs that would have been incurred if we had operated as a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. As discussed below, following the Spin-Off on August 2, 2015, we began to perform these functions using our own resources or contracted services, certain of which may be provided by Barnes & Noble during a transitional period pursuant to the Transition Services Agreement (as defined in Note 9. Barnes & Noble, Inc. Transactions ).

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 31, 2015 and November 1, 2014
(Thousands of dollars, except share and per share data)
(unaudited)


Consolidated basis financial statements
The Spin-Off from Barnes & Noble, Inc. occurred on August 2, 2015 and therefore, the results of operations are presented on a consolidated basis for the 13 weeks ended October 31, 2015 (i.e. second quarter of fiscal 2016) which includes direct costs incurred with Barnes & Noble under various agreements. Certain corporate and shared service functions historically provided by Barnes & Noble (as described above) will continue to be provided by Barnes & Noble under the Transition Services Agreement. For additional information, see Note 9. Barnes & Noble, Inc. Transactions .
Use of Estimates
In preparing financial statements in conformity with GAAP, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Merchandise Inventories
Merchandise inventories, which consist of finished goods, are stated at the lower of cost or market. Cost is determined primarily by the retail inventory method. Our textbook and trade book inventories are valued using the last-in first out, or (“LIFO”), method and the related reserve was not material to the recorded amount of our inventories.
Market value of our inventory is determined based on its estimated net realizable value, which is generally the selling price. Reserves for non-returnable inventory are based on our history of liquidating non-returnable inventory.
We also estimate and accrue shortage for the period between the last physical count of inventory and the balance sheet date. Shortage rates are estimated and accrued based on historical rates and can be affected by changes in merchandise mix and changes in actual shortage trends.
Textbook Rentals Inventories
Physical textbooks out on rent are categorized as textbook rental inventories. At the time a rental transaction is consummated, the book is removed from merchandise inventories and moved to textbook rental inventories at cost. The cost of the book is amortized down to its estimated residual value over the rental period. The related amortization expense is included in cost of goods sold. At the end of the rental period, upon return, the book is removed from textbook rental inventories and recorded in merchandise inventories at its amortized cost.
Revenue Recognition
Revenue from sales of our products at physical locations is recognized at the time of sale. Revenue from sales of products ordered through our websites is recognized upon delivery and receipt of the shipment by our customers. Sales taxes collected from our customers are excluded from reported revenues. All of our sales are recognized as revenue on a “net” basis, including sales in connection with any periodic promotions offered to customers. We do not treat any promotional offers as expenses.
We rent both physical and digital textbooks. Revenue from the rental of physical textbooks is deferred and recognized over the rental period commencing at point of sale. Revenue from the rental of digital textbooks is recognized at time of sale. A software feature is imbedded within the content of our digital textbooks, such that upon expiration of the rental term the customer is no longer able to access the content. While the digital rental allows the customer to access digital content for a fixed period of time, once the digital content is delivered to the customer our performance obligation is complete. We offer a buyout option to allow the purchase of a rented book at the end of the rental period. We record the buyout purchase when the customer exercises and pays the buyout option price. In these instances, we would accelerate any remaining deferred rental revenue at the point of sale.
Research and Development Costs for Software Products
We follow the guidance in Accounting Standards Codification (“ASC”) 985-20, Cost of Software to Be Sold, Leased or Marketed, regarding software development costs to be sold, leased, or otherwise marketed. Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale. A certain amount of judgment and estimation is required to assess when technological feasibility is established, as well as the ongoing assessment of the recoverability of capitalized costs. Our products reach technological feasibility shortly before the products are available for sale and therefore research and development costs are generally expensed as incurred.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 31, 2015 and November 1, 2014
(Thousands of dollars, except share and per share data)
(unaudited)


Note 3. Recent Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2015-17, Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes ("ASU 2015-17") to simplify the presentation of deferred income taxes. The amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this update. The amendments in this update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. We are required to adopt this standard in the first quarter of fiscal 2018. This standard will impact the classification of current deferred income taxes on our condensed consolidated financial statements.
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805) - Simplifying the Accounting for Measurement-Period Adjustments ("ASU 2015-16") to simplify the accounting for measurement-period adjustments resulting from business combinations. The amendments in this update eliminate the requirement to retrospectively account for measurement-period adjustments. Instead, these adjustments will be recognized in the period the adjustment amount is determined. We are required to adopt this standard in the first quarter of fiscal 2017, but have early adopted this standard during this quarter as permitted. Adoption of this standard will impact our condensed consolidated financial statements to the extent adjustments to provisional amounts recorded for future acquisitions are determined subsequent to the period the acquisition is originally reported.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330) – Simplifying the Measurement of Inventory (“ASU 2015-11”). The amendments in this update state that inventory should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The update does not apply to inventory that is measured using last-in, first-out (“LIFO”) or the retail inventory method. The update applies to all other inventory, which includes inventory that is measured using first-in, first-out (“FIFO”) or average cost. We are required to adopt this standard in the first quarter of fiscal 2018, but have early adopted this standard during the first quarter of fiscal 2016 as permitted. This standard does not have an impact on our condensed consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-05, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”) to simplify the accounting for cloud computing arrangements. The amendments in this update requires that if a cloud computing arrangement includes a software license, then a customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer’s accounting for service contracts. We are required to adopt this standard in the first quarter of fiscal 2017 and early adoption is permitted. We are currently evaluating this standard to determine the impact of adoption on our condensed consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”) to simplify the presentation of debt issuance costs. The amendments in the update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction of the carrying amount of the debt. Recognition and measurement of debt issuance costs were not affected by this amendment. In August 2015, FASB issued ASU No. 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated With Line-of-Credit Arrangements — Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting” which clarified that the SEC would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. We are required to adopt ASU 2015-03 in the first quarter of fiscal 2017, but have early adopted this standard during the first quarter of fiscal 2016 as permitted. As discussed in Note 7. Credit Facility , debt issuance costs related to the New Credit Facility have been deferred and are presented as an asset which is subsequently amortized ratably over the term of the New Credit Facility.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date , which effectively delayed the adoption date by one year. We are required to adopt ASU 2014-09 in the first quarter of fiscal 2019 and early adoption is permitted. The guidance permits

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 31, 2015 and November 1, 2014
(Thousands of dollars, except share and per share data)
(unaudited)


companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. We have not yet selected a transition method nor have we determined the impact of adoption on our condensed consolidated financial statements.
Note 4. Segment Reporting
We identified our operating segment based on the way our business is managed (focusing on the financial information distributed) and the manner in which our chief operating decision maker interacts with other members of management. We have determined that we operate within a single reportable segment, which is entirely within the United States.
Note 5. Equity and Earnings Per Share
Equity
On February 26, 2015, Barnes & Noble announced plans to Spin-Off its 100% equity interest in our Company by distributing all of its equity interest in us, consisting of all of the outstanding shares of our Common Stock, to Barnes & Noble’s stockholders on a pro rata basis (the “Distribution”).
On July 14, 2015, Barnes & Noble approved the final distribution ratio and declared a pro rata dividend of the outstanding shares of our common stock to Barnes & Noble’s existing stockholders. The pro-rata dividend was made on August 2, 2015 to the Barnes & Noble stockholders of record (as of July 27, 2015). Each Barnes & Noble stockholder of record received a distribution of 0.632 shares of our common stock for each share of Barnes & Noble common stock held on the record date. On August 2, 2015, we completed the legal separation from Barnes & Noble, at which time we began to operate as an independent publicly-traded company. Following the Spin-Off, Barnes & Noble does not own any equity interest in us.
Following the Spin-Off on August 2, 2015, our authorized capital stock consisted of  200,000,000 shares of common stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, par value $0.01 per share. As of August 2, 2015, 48,186,900 shares of our Common Stock and 0 shares of our preferred stock were issued and outstanding. Our Common Stock began to trade on a “when-issued” basis on the NYSE under the symbol “BNED WI” beginning on July 23, 2015. On August 3, 2015, when-issued trading of our Common Stock ended, and our Common Stock began “regular-way” trading under the symbol “BNED.”
We do not intend to pay dividends on our Common Stock in the foreseeable future. The holders of our Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Holders of shares of our Common Stock do not have cumulative voting rights in the election of directors. The holders of our Common Stock will be entitled to share ratably in our assets legally available for distribution to our stockholders, subject to subject to the prior distribution rights of preferred stock, if any, then outstanding. The holders of our Common Stock do not have preemptive rights or preferential rights to subscribe for shares of our capital stock.
During the quarter, 2,409,345 shares of Common Stock were reserved for future grants, in accordance with the Barnes & Noble Education Inc. Equity Incentive Plan. See Note 11. Stock-Based Compensation .
Earnings Per Share
For periods prior to the Spin-Off from Barnes & Noble on August 2, 2015, basic earnings per share and weighted-average basic shares outstanding are based on the number of shares of Barnes & Noble common stock outstanding as of the end of the period, adjusted for the distribution ratio of 0.632  shares of our Common Stock for every one share of Barnes & Noble common stock held on the record date for the Spin-Off.
For periods prior to the Spin-Off, diluted earnings per share and weighted-average diluted shares outstanding reflect potential common shares from Barnes & Noble equity plans in which our employees participated. Certain of our employees held restricted stock units and stock options granted by Barnes & Noble which were considered participating securities.

Basic EPS is computed based upon the weighted average number of common shares outstanding for the year. Diluted EPS is computed based upon the weighted average number of common shares outstanding for the year plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of our common stock for the year. We include

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 31, 2015 and November 1, 2014
(Thousands of dollars, except share and per share data)
(unaudited)


participating securities (unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents) in the computation of EPS pursuant to the two-class method. Our participating securities consist solely of unvested restricted stock awards, which have contractual participation rights equivalent to those of stockholders of unrestricted common stock. The two-class method of computing earnings per share is an allocation method that calculates earnings per share for common stock and participating securities. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company. During the 13 and 26 weeks ended October 31, 2015 and November 1, 2014, no shares were excluded from the diluted earnings per share calculation using the two-class method as they were not antidilutive.
The following is a reconciliation of the basic and diluted loss per share calculation:
 
13 weeks ended
 
26 weeks ended
 
October 31,
2015
 
November 1,
2014
 
October 31,
2015
 
November 1,
2014
Numerator for basic earnings per share:
 
 
 
 
 
 
 
Net income
$
33,401

 
$
36,951

 
$
6,483

 
$
10,738

Accretion of dividends on preferred stock

 
(443
)
 

 
(885
)
Less allocation of earnings and dividends to participating securities
(22
)
 
(944
)
 
(26
)
 
(255
)
Net income available to common shareholders
$
33,379

 
$
35,564

 
$
6,457

 
$
9,598

 
 
 
 
 
 
 
 
Numerator for diluted earnings per share:
 
 
 
 
 
 
 
Net income available to common shareholders
$
33,379

 
$
35,564

 
$
6,457

 
$
9,598

Accretion of dividends on preferred stock (a)

 

 

 

Allocation of earnings and dividends to participating securities
22

 
944

 
26

 
255

Less diluted allocation of earnings and dividends to participating securities
(22
)
 
(943
)
 
(26
)
 
(255
)
Net income available to common shareholders
$
33,379

 
$
35,565

 
$
6,457

 
$
9,598

 
 
 
 
 
 
 
 
Denominator for basic earnings per share:
 
 
 
 
 
 
 
Basic weighted average shares of Common Stock
48,207

 
37,505

 
44,816

 
37,471

 
 
 
 
 
 
 
 
Denominator for diluted earnings per share:
 
 
 
 
 
 
 
Basic weighted average shares of Common Stock
48,207

 
37,505

 
44,816

 
37,471

Average dilutive restricted stock units
355

 

 
178

 

Average dilutive options

 
39

 
29

 
33

Diluted weighted average shares of Common Stock
48,562

 
37,544

 
45,023

 
37,504

 
 
 
 
 
 
 
 
Earnings per share of Common Stock:
 
 
 
 
 
 
 
Basic
$
0.69

 
$
0.95

 
$
0.14

 
$
0.26

Diluted
$
0.69

 
$
0.95

 
$
0.14

 
$
0.26

 
(a)
Although the Company was in a net income position for the 13 and 26 weeks ended November 1, 2014, the dilutive effect of the accretion of preferred membership interests were excluded from the calculation of earnings per share using the two-class method because the effect would be antidilutive.


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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 31, 2015 and November 1, 2014
(Thousands of dollars, except share and per share data)
(unaudited)


Note 6. Fair Values of Financial Instruments
In accordance with ASC 820, Fair Value Measurements and Disclosures , the fair value of an asset is considered to be the price at which the asset could be sold in an orderly transaction between unrelated knowledgeable and willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1—Observable inputs that reflect quoted prices in active markets
Level 2—Inputs other than quoted prices in active markets that are either directly or indirectly observable
Level 3—Unobservable inputs in which little or no market data exists, therefore requiring us to develop our own assumptions
Our financial instruments include cash and cash equivalents, receivables, accrued liabilities and accounts payable. The fair values of cash and cash equivalents, receivables accrued liabilities and accounts payable approximates their carrying values because of the short-term nature of these instruments, which are all considered Level 1.
Note 7. Credit Facility
Until August 3, 2015, we were party to an amended and restated credit facility with Barnes & Noble, as the lead borrower, and Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and other lenders, dated as of April 29, 2011 (as amended and modified to date, the “B&N Credit Facility”). The B&N Credit Facility provided for up to $1,000,000 in aggregate commitments under a five -year asset-backed revolving credit facility expiring on April 29, 2016 . The B&N Credit Facility was secured by eligible inventory and accounts receivable with the ability to include eligible real estate and related assets. We were a borrower and co-guarantor of all amounts owing under the B&N Credit Facility. All outstanding debt under the B&N Credit Facility was recorded on Barnes & Noble’s balance sheet as of August 1, 2015.
On August 3, 2015, the Company and certain of its subsidiaries from time to time party thereto entered into a credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and other lenders from time to time party thereto, under which the lenders committed to provide a five -year asset-backed revolving credit facility in an aggregate committed principal amount of $400,000 (the “New Credit Facility”). Proceeds from the New Credit Facility will be used for general corporate purposes, including seasonal working capital needs. Bank of America Merrill Lynch, J.P. Morgan Securities LLC, Wells Fargo Bank, N.A. and SunTrust Robinson Humphrey, Inc. are the joint lead arrangers for the New Credit Facility.
The Company and certain of its subsidiaries (collectively, the “Loan Parties”) will be permitted to borrow under the New Credit Facility. The New Credit Facility is secured by substantially all of the inventory, accounts receivable and related assets of the borrowers under the New Credit Facility, but excluding the equity interests in the Company and its subsidiaries, intellectual property, equipment and certain other property. The Company has the option to request an increase in commitments under the New Credit Facility of up to $100,000 , subject to certain restrictions.
As of October 31, 2015, we had no outstanding borrowings under the New Credit Facility. During the 26 weeks ended October 31, 2015, we borrowed and repaid $8,700 under the New Credit Facility. As of October 31, 2015, we have issued $3,567 in letters of credit under the facility.
We incurred debt issuance costs totaling $3,251 related to the New Credit Facility. As permitted under ASU No. 2015-15, the debt issuance costs have been deferred and are presented as an asset which is subsequently amortized ratably over the term of the credit agreement.
Interest under the New Credit Facility accrues, at the election of the Company, at a LIBOR or alternate base rate, plus, in each case, an applicable interest rate margin, which is determined by reference to the level of excess availability under the New Credit Facility. Loans will initially bear interest at LIBOR plus 2.000%  per annum, in the case of LIBOR borrowings, or at the alternate base rate plus 1.000%  per annum, in the alternative, and thereafter the interest rate will fluctuate between LIBOR plus 2.000%  per annum and LIBOR plus 1.750%  per annum (or between the alternate base rate plus 1.000%  per annum and the alternate base rate plus 0.750%  per annum), based upon the excess availability under the New Credit Facility at such time.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 31, 2015 and November 1, 2014
(Thousands of dollars, except share and per share data)
(unaudited)


The Credit Agreement contains customary negative covenants, which limit the Company’s ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets, among other things. In addition, if excess availability under the New Credit Facility were to fall below certain specified levels, certain additional covenants (including fixed charge coverage ratio requirements) would be triggered, and the lenders would have the right to assume dominion and control over the Loan Parties’ cash.
The Credit Agreement contains customary events of default, including payment defaults, material breaches of representations and warranties, covenant defaults, default on other material indebtedness, customary ERISA events of default, bankruptcy and insolvency, material judgments, invalidity of liens on collateral, change of control or cessation of business. The Credit Agreement also contains customary affirmative covenants and representations and warranties.
Note 8. Supplementary Information
Other Long-Term Liabilities
Other long-term liabilities consist primarily of tax liabilities related to the long-term tax payable associated with the LIFO reserve and deferred management service agreement costs related to college and university contracts, which we account for under lease accounting (as deferred rent). We provide for minimum contract expense (rent expense) over the lease terms (including the build-out period) on a straight-line basis. The excess of such rent expense over actual lease payments (net of school allowances) is classified as deferred rent. We had the following long-term liabilities at October 31, 2015 November 1, 2014 and May 2, 2015 :
 
 
October 31,
2015
 
November 1,
2014
 
May 2,
2015
Tax liabilities and reserves
$
63,459

 
$
58,478

 
$
63,673

Deferred rent
4,255

 
3,089

 
4,082

Other
1,871

 
159

 
1,733

Total other long-term liabilities
$
69,585

 
$
61,726

 
$
69,488

As a result of an immaterial balance sheet error correction, during the first quarter of fiscal 2016, we increased other long-term liabilities and decreased Parent company investment by $58,298 and $63,459 for the periods ended as of November 1, 2014 and May 2, 2015 , respectively. This correction related to the long-term tax payable associated with the LIFO reserve which was previously deemed contributed to Parent company capital as an intercompany liability, along with other income tax liabilities associated with our operations. The liability should not have been deemed contributed as the long-term obligation to the tax authority is required to stay with Barnes & Noble Education, Inc. as that entity would be legally obligated to pay that amount if required. Management believes it is remote that the long-term tax payable associated with the LIFO reserve will be payable or will result in a cash tax payment in the foreseeable future, assuming that LIFO will continue to be an acceptable inventory method for tax purposes. Management has assessed both quantitative and qualitative factors discussed in ASC 250, Accounting Changes and Error Corrections and Staff Accounting Bulletin 1.M, Materiality (SAB Topic 1.M) to determine that this misstatement qualifies as an immaterial balance sheet error correction. We concluded that this balance sheet misstatement is not material to an investor as it did not affect pre-tax income, net income, earnings per share or amounts reported in the statement of cash flows for any prior period financial statements.
Note 9. Barnes & Noble, Inc. Transactions
Our History with Barnes & Noble, Inc.
On September 30, 2009, Barnes & Noble acquired Barnes & Noble College Booksellers, LLC from Leonard and Louise Riggio. From that date until October 4, 2012, Barnes & Noble College Booksellers, LLC was wholly owned by Barnes & Noble Booksellers, Inc., a wholly owned subsidiary of Barnes & Noble. We were initially incorporated under the name NOOK Media Inc. in July 2012 to hold Barnes & Noble’s college and digital businesses. On October 4, 2012, Microsoft Corporation (“Microsoft”) acquired a 17.6% non-controlling preferred membership interest in our subsidiary NOOK Media LLC (“NOOK Media”), and through us, Barnes & Noble maintained an 82.4% controlling interest of the college and digital businesses.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 31, 2015 and November 1, 2014
(Thousands of dollars, except share and per share data)
(unaudited)


On January 22, 2013, Pearson Education, Inc. (“Pearson”) acquired a 5% non-controlling preferred membership interest in NOOK Media, received warrants to purchase an additional preferred membership interest in NOOK Media and entered into a commercial agreement with NOOK Media relating to the college business. See Pearson Investment below.
On December 4, 2014, we re-acquired Microsoft’s interest in NOOK Media in exchange for cash and common stock of Barnes & Noble. On December 22, 2014, we also re-acquired Pearson’s interest in NOOK Media and related warrants previously issued to Pearson in exchange for cash and common stock of Barnes & Noble. As a result of these transactions, Barnes & Noble owned 100% of our Company prior to the Spin-Off. See Microsoft Investment below.
In February 2015, we changed our name from NOOK Media Inc. to Barnes & Noble Education, Inc. and NOOK Media’s name to B&N Education, LLC.
On May 1, 2015, we distributed to Barnes & Noble all of the membership interests in NOOK Digital LLC (formerly known as barnesandnoble.com llc), which owns the NOOK digital business and which will continue to be owned by Barnes & Noble. At such time, we ceased to own any interest in the NOOK digital business. These condensed consolidated financial statements retroactively reflect the reorganization of NOOK Media Inc. as described above.
On February 26, 2015, Barnes & Noble announced plans to Spin-Off its 100% equity interest in our Company. At the time of the Spin-Off on August 2, 2015, Barnes & Noble distributed all of its equity interest in us, consisting of all of the outstanding shares of our Common Stock, to Barnes & Noble’s stockholders on a pro rata basis (the “Distribution”). Following the Spin-Off, Barnes & Noble does not own any equity interest in us. On August 2, 2015, we completed the legal separation from Barnes & Noble, at which time we began to operate as an independent publicly-traded company.
Microsoft Investment
On April 27, 2012, Barnes & Noble entered into an investment agreement pursuant to which Barnes & Noble transferred to NOOK Media its digital device, digital content and college bookstore businesses. On October 4, 2012, Morrison Investment Holdings, Inc. (“Morrison”), a subsidiary of Microsoft Corporation (“Microsoft”), acquired a 17.6% non-controlling preferred membership interest in NOOK Media. Concurrently with its entry into this agreement, Barnes & Noble also entered into a commercial agreement with Microsoft relating to the digital and college businesses investment.
On December 3, 2014, the Microsoft commercial agreement was terminated. On December 4, 2014, we re-acquired Morrison’s interest in NOOK Media in exchange for cash and common stock of Barnes & Noble.
In connection with the closing, Morrison, Barnes & Noble and Barnes & Noble Education entered into a Digital Business Contingent Payment Agreement related to Barnes & Noble’s digital business (“DBCPA”). Effective as of August 2, 2015, all of Barnes & Noble Education’s obligations under the DBCPA were either assigned to Barnes & Noble or terminated.
 
Pearson Investment
On December 21, 2012, NOOK Media entered into an agreement with Pearson, a subsidiary of Pearson plc, to make a strategic investment in NOOK Media whereby Pearson acquired a 5% non-controlling preferred membership interest in NOOK Media and received warrants to purchase up to an additional 5% of NOOK Media under certain conditions. That transaction closed on January 22, 2013.
At closing, NOOK Media and Pearson entered into a commercial agreement relating to the college business with respect to distributing Pearson content in connection with this strategic investment. On December 27, 2013, NOOK Media entered into an amendment to the commercial agreement that extended the term of the agreement and the timing of the measurement period to meet certain revenue share milestones.
On December 22, 2014, we re-acquired Pearson’s interest in NOOK Media and related warrants previously issued to Pearson in exchange for cash and common stock of Barnes & Noble. We remain a party to the commercial agreement with Pearson relating to the college business.
Allocation of General Corporate Expenses from Barnes & Noble Prior to Spin-Off
The results of operations for the 26 weeks ended November 1, 2014 (i.e. first and second quarter of fiscal 2015) and the 13 weeks ended August 1, 2015 (i.e. first quarter of fiscal 2016) (collectively referred to as the "stand-alone periods") reflected in our condensed consolidated financial statements are presented on a stand-alone basis since we were still part of Barnes & Noble, Inc.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 31, 2015 and November 1, 2014
(Thousands of dollars, except share and per share data)
(unaudited)


Our condensed consolidated financial statements were derived from the consolidated financial statements and accounting records of Barnes & Noble. Our condensed consolidated financial statements include certain assets and liabilities that have historically been held at the Barnes & Noble corporate level but are specifically identifiable or otherwise attributable to us.
All intercompany transactions between us and Barnes & Noble have been included in our condensed consolidated financial statements and are considered to be effectively settled for cash in our condensed consolidated financial statements at the time the Spin-Off became effective. The total net effect of the settlement of these intercompany transactions was reflected in our condensed consolidated statements of cash flow as a financing activity and in our condensed consolidated balance sheets as “Parent company investment.”
The condensed consolidated financial statements for the stand-alone periods include an allocation for certain corporate and shared service functions historically provided by Barnes & Noble, including, but not limited to, executive oversight, accounting, treasury, tax, legal, human resources, occupancy, procurement, information technology and other shared services. These expenses have been allocated to us on the basis of direct usage when identifiable, with the remainder allocated on a pro rata basis of consolidated sales, headcount, tangible assets or other measures considered to be a reasonable reflection of the historical utilization levels of these services. Following the Spin-Off on August 2, 2015, we began to perform these functions using our own resources or contracted services, certain of which may be provided by Barnes & Noble during a transitional period pursuant to the Transition Services Agreement.
Direct Costs Incurred Related to On-going Agreements with Barnes & Noble After the Spin-Off
The Spin-Off from Barnes & Noble, Inc. occurred on August 2, 2015 and therefore, the results of operations are presented on a consolidated basis for the 13 weeks ended October 31, 2015 (i.e. second quarter of fiscal 2016) which includes direct costs incurred with Barnes & Noble under various agreements.
In connection with the separation from Barnes & Noble, we entered into a Separation and Distribution Agreement with Barnes & Noble on July 14, 2015 and several other ancillary agreements on August 2, 2015. These agreements govern the relationship between the parties after the separation and allocate between the parties various assets, liabilities, rights and obligations following the separation, including inventory purchases, employee benefits, intellectual property, information technology, insurance and tax-related assets and liabilities. The agreements also describe Barnes & Noble’s future commitments to provide us with certain transition services following the Spin-Off. These agreements include the following:
 
a Separation and Distribution Agreement that set forth Barnes & Noble’s and our agreements regarding the principal actions that both parties took in connection with the Spin-Off and aspects of our relationship following the Spin-Off. The term of the agreement is perpetual after the Distribution date.;
a Transition Services Agreement pursuant to which Barnes & Noble agreed to provide us with specified services for a limited time to help ensure an orderly transition following the Distribution. The Transition Services Agreement specifies the calculation of our costs for these services. The agreement will expire and services under it will cease no later than two years following the Distribution date or sooner in the event we no longer require such services.;
a Tax Matters Agreement governs the respective rights, responsibilities and obligations of Barnes & Noble and us after the Spin-Off with respect to all tax matters (including tax liabilities, tax attributes, tax returns and tax contests). The agreement will expire after two years following the Distribution date.;
an Employee Matters Agreement with Barnes & Noble addressing employment, compensation and benefits matters including the allocation and treatment of assets and liabilities arising out of employee compensation and benefits programs in which our employees participated prior to the Spin-Off. The agreement will expire and services under it will cease when we no longer require such services.; and
a Trademark License Agreement pursuant to which Barnes & Noble grants us an exclusive license in certain licensed trademarks and a non-exclusive license in other licensed trademarks. The term of the agreement is perpetual after the Distribution date.
A description of the material terms and conditions of these agreements can be found in the Prospectus dated July 15, 2015 and filed with the SEC on that date. The descriptions of the Transition Services Agreement, Tax Matters Agreement, Employee Matters Agreement and Trademark License Agreement are qualified in their entirety by reference to the full text of the Transition

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 31, 2015 and November 1, 2014
(Thousands of dollars, except share and per share data)
(unaudited)


Services Agreement, Tax Matters Agreement, Employee Matters Agreement and Trademark License Agreement, which are attached as Exhibits 10.1, 10.2, 10.3 and 10.4, respectively, to the Current Report on Form 8-K dated August 2, 2015 and filed with the SEC on August 3, 2015. The description of the Separation and Distribution Agreement is qualified in its entirety by reference to the full text of the Separation and Distribution Agreement, which is attached as Exhibit 2.1 to the Quarterly Report on Form 10-Q dated August 1, 2015 and filed with the SEC on September 10, 2015.
Summary of Transactions with Barnes & Noble
During the 13 weeks ended October 31, 2015 (i.e. second quarter of fiscal 2016), we were billed $9,663 for purchases of inventory and direct costs incurred under the agreements discussed above which are included as cost of sales and occupancy and selling, general and administrative expense in the condensed consolidated statement of income.
During the 26 weeks ended November 1, 2014 (i.e. first and second quarter of fiscal 2015) and the 13 weeks ended August 1, 2015 (i.e. first quarter of fiscal 2016), we were allocated $24,238 and $13,321 , respectively, of general corporate expenses incurred by Barnes & Noble and purchases of inventory which are included as cost of sales and occupancy and selling, general and administrative expense in the condensed consolidated statement of income. For information related to allocated stock-based compensation expense, see Note 11. Stock-Based Compensation .
As of October 31, 2015, amounts due to Barnes & Noble, Inc. for book purchases and direct costs incurred under the agreements discussed above was $10,453 and is included in accounts payable and accrued expenses in the condensed consolidated balance sheet. As of November 1, 2014, amounts due from Barnes & Noble, Inc. related to intercompany loans, net of corporate allocations, income taxes, and purchases of inventory was $49,367 and is included in Parent Company Investment in the condensed consolidated balance sheet.
 
Note 10. Employees’ Defined Contribution Plan
Prior to the Spin-Off on August 2, 2015, Barnes & Noble sponsored the defined contribution plan (the “Savings Plan”) for the benefit of substantially all of our employees. Total contributions charged to employee benefit expenses for the Savings Plan prior to the Spin-Off were based on amounts allocated to us on the basis of direct usage. See Note 9. Barnes & Noble, Inc. Transactions .
Subsequent to the Spin-Off, we established a 401(k) plan and Barnes & Noble transfered to it the 401(k) plan assets relating to the account balances of our employees. Additionally, we are responsible for employer contributions to the Savings Plan and fund the contributions directly.
Total contributions charged to employee benefit expenses for the Savings Plan were $1,020 and $897 during the 13 weeks ended October 31, 2015 and November 1, 2014 , respectively, and $2,295 and $2,024 during the 26 weeks ended October 31, 2015 and November 1, 2014 , respectively.
Note 11. Stock-Based Compensation
Prior to the Spin-Off, certain of our employees were eligible to participate in Barnes & Noble equity plans pursuant to which they were granted awards of Barnes & Noble common stock. The equity-based payments recorded by us prior to the Spin-Off included the expense associated with our employees.
During the 13 weeks ended October 31, 2015, 2,409,345 shares of our Common Stock were reserved for future grants in accordance with the Barnes & Noble Education Inc. Equity Incentive Plan (the "Equity Incentive Plan"). Types of equity awards that can be granted under the Equity Incentive Plan include options, restricted stock ("RS"), restricted stock units ("RSU") and performance awards. Currently, outstanding awards are not based on performance and are based solely on continued service. We recognize compensation expense for awards ratably over the requisite service period of the award, which is generally three years. We recognize compensation expense based on the number of awards expected to vest using an estimated average forfeiture rate. We calculate the fair value of stock-based awards based on the closing price on the date the award was granted.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 31, 2015 and November 1, 2014
(Thousands of dollars, except share and per share data)
(unaudited)


During the 13 weeks ended October 31, 2015, we granted the following awards:
Barnes & Noble RSU awards held by our employees (or transfered employees) were converted to 877,426 shares of our RSUs with substantially the same vesting schedule as the forfeited awards. Compensation expense for these awards will continue to be recognized ratably over the remaining term of the unvested awards of approximately two years;
27,272 BNED RS awards were granted to former Barnes & Noble BOD members involved in the Spin-Off transaction. The awards vested during the 13 weeks ended October 31, 2015;
793,126 BNED RSU awards were granted to employees in accordance with Equity Incentive Plan;
46,080 BNED RS awards were granted to the current BOD members for annual director compensation with a one year vesting period in accordance with Equity Incentive Plan.
We recognized stock-based compensation expense for equity-based awards in selling and administrative expenses as follows:
 
13 weeks ended
 
26 weeks ended
 
October 31,
2015
 
November 1,
2014
 
October 31,
2015
 
November 1,
2014
Restricted Stock Expense
$
460

 
$
69

 
$
540

 
$
146

Restricted Stock Units Expense
1,557

 
1,381

 
2,310

 
2,284

Stock Option Expense

 
422

 
120

 
474

Stock-Based Compensation Expense
$
2,017

 
$
1,872

 
$
2,970

 
$
2,904

Total unrecognized compensation cost related to unvested awards as of October 31, 2015 was $14,379 and is expected to be recognized over a weighted-average period of 2.3 years.
Note 12. Income Taxes
We recorded an income tax expense of $25,558 on pre-tax income of $58,959 during the 13 weeks ended October 31, 2015 , which represented an effective income tax rate of 43.4% and an income tax expense of $28,451 on pre-tax income of $65,402 during the 13 weeks ended November 1, 2014 , which represented an effective income tax rate of 43.5% .
We recorded an income tax expense of $4,233 on pre-tax income of $10,716 during the 26 weeks ended October 31, 2015 , which represented an effective income tax rate of 39.5% and an income tax expense of $8,153 on pre-tax income of $18,891 during the 26 weeks ended November 1, 2014 , which represented an effective income tax rate of 43.2% .
The income tax provision for the 13 and 26 weeks ended October 31, 2015 reflects the impact of federal and state income taxes imposed upon income from operations, decreased by the impact of favorable state law and tax rate changes, partially offset by the impact of certain non-deductible expenses.
Note 13. Legal Proceedings
We are involved in a variety of claims, suits, investigations and proceedings that arise from time to time in the ordinary course of our business, including actions with respect to contracts, intellectual property, taxation, employment, benefits, 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 our condensed consolidated financial position or results of operations.

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Item 2:     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview
Description of business
We are one of the largest contract operators of bookstores on college and university campuses across the United States. We create and operate campus stores that are focal points for college life and learning, enhancing the educational mission of the institution, enlivening campus culture and delivering an important revenue stream to our partner schools. We typically operate our stores under multi-year management service agreements granting us the right to operate the official school bookstore on campus. In turn, we pay the school a percentage of store sales and, in some cases, a minimum fixed guarantee.
We build relationships and derive sales by actively engaging and marketing to over 5 million students and their faculty on the campuses we serve and offer a full assortment of items in our campus stores, including course materials consisting of new and used print textbooks and digital textbooks available for sale or rent, emblematic apparel and gifts, trade books, computer products, school and dorm supplies, convenience and café items and graduation products. We are a multi-channel marketer and operate school-branded e-commerce sites for each store, allowing students and faculty to purchase textbooks, course materials and other products online.
We provide direct access to a large and well-educated demographic group, enabling us to build relationships with students throughout their college years and beyond. We also expect to be the beneficiary of market consolidation as more and more schools outsource their bookstore management. We are in a unique market position to benefit from this trend given our full suite of services: bookstore management, textbook rental and digital delivery. We are making further investments in our college business, including the recent launch of Yuzu ® , our developing digital education platform that provides access to a wide range of rich, engaging content, including digital textbooks and select consumer titles applicable to the higher education market. We believe higher education provides a long-term growth opportunity, both organically by adding additional bookstores to our outsourcing model and also through strategic acquisition and merger activity.
As of May 2, 2015, we operated 724 stores nationwide, which reached 24% of the total United States college and university student enrolled population. During the 26 weeks ended October 31, 2015, we opened 28 stores and closed 9 stores. As of October 31, 2015, we operated 743 stores nationwide.
Separation from Barnes & Noble, Inc.
For information on our separation from Barnes & Noble, Inc. see Item 1. Financial Statements — Note 1. Organization .
On-going Agreements with Barnes & Noble, Inc.
For information on our on-going agreements with Barnes & Noble, Inc. see Item 1. Financial Statements — Note 9. Barnes & Noble, Inc. Transactions .
Strategies
Our primary business strategies to grow our business are as follows:
 
Increase Market Share with New Accounts : Historically, new store openings have been an important driver of growth in our business. For example, we increased our number of stores from 636 at the beginning of Fiscal 2012 to 724 at the end of Fiscal 2015. Looking forward, approximately 52% of college and university affiliated bookstores in the United States are operated by their respective institutions. Moreover, at the end of Fiscal 2015, we operated bookstores representing only 18% of all college and university affiliated bookstores in the United States. As more and more universities decide to outsource the management of their bookstores, we intend to aggressively pursue these opportunities and bid on these contracts. Based on the continuing trend towards outsourcing in the campus bookstore market, we expect awards of new accounts resulting in new store openings will continue to be an important driver of future growth in our business. We are in a unique position to offer academic superstores to colleges and universities.
Increase Sales at Existing Bookstores : We intend to increase sales at our existing bookstores through new product offerings, enhanced marketing efforts using mobile and other technologies, increased local social and promotional offerings and expanded sales channels to both new customers and alumni. We expect sales growth at our existing bookstores will be a driver for growth in our business.
Grow digital sales by accelerating marketing, product development efforts and the acquisition of content to support the Yuzu ® digital education product: Yuzu ® , our digital education platform, offers not only electronic reading and note-taking functionality but also engaging supplemental content that we provide in conjunction with strategic publisher partners.

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Accelerating our product development and content acquisition efforts for Yuzu ® will enable us to access the growing educational technology market on a national level by leveraging our existing campus relationships with faculty and students.
Expand opportunities through acquisitions and strategic partnerships : We believe that acquisitions and strategic partnerships will be a pillar of our growth strategy in the future. We intend to pursue strategic relationships with companies that enhance our educational services or distribution platform or that create compelling content offerings. We may also expand our current suite of digital content offerings and platform through acquisitions, internal or third party software development and strategic partnerships. Expansion into new educational verticals and markets, such as K-12, vocational and international markets, will be opportunistically evaluated.
Products & Services
As of May 2, 2015, we operated 724 stores nationwide, which reached 24% of the total United States college and university student enrolled population.
Traditional Products and Services
 
Textbook and Course Material Sales : Textbooks continue to be a core product offering of our business. We work directly with faculty to insure the correct textbooks are available in required formats before the start of classes. We provide students with affordable textbook solutions and educate them about each format through e-mail, social media engagement and new student orientation programs and in our stores.
Textbook and Course Material Rentals : We are an industry leader in textbook rentals. An increasing number of students now rent from our robust title list. The majority of all titles are available for rent. These include custom course packs and adaptive learning materials, along with traditional textbooks. In addition, we offer a convenient buyout option to allow the customer to purchase the rented book at the end of the semester, thereby enhancing our revenue and improving our inventory management processes.
General Merchandise : General merchandise sales are generated in-store, as well as online through school-branded e-commerce sites. Our stores feature collegiate and athletic apparel relating to a school and/or its athletic programs and other custom-branded school spirit products, technology, supplies and convenience items. We offer a comprehensive athletic merchandise program that leverages innovative promotional campaigns and showcases the apparel industry’s top selling performance apparel categories from leading brands including Under Armour and Nike. Other merchandise, such as laptops and other technology products, notebooks, backpacks, school and dormitory supplies and related items are also offered. In addition, as of May 2, 2015, we operated 78 customized cafés and 17 stand-alone convenience stores featuring Starbucks coffee, as well as diverse grab-and-go options including organic, vegan and gluten-free, and ethnic fare for students on the move. These offerings increase traffic and the amount of time customers spend in our stores.
Trade : We carry an extensive selection of trade, academic and reference books along with education toys and games and schedule store events, such as author signings, that extend to the entire community. The majority of our bookstores carry the most popular campus bestsellers along with academically relevant titles.
Technology Platform and Services
 
Digital Education Platform (Yuzu ® ) : Launched in the spring of 2014, the Yuzu ® digital education platform is our innovative cloud-based approach to digital learning and content delivery that may be accessed via the web or mobile app. For students, Yuzu ® combines an electronic reading and note-taking experience in a simple app, with access to a rich, engaging catalog of content. It allows students to replace or supplement multiple textbooks with an app that holds and organizes all their digital content, by course and term, annotate and highlight text, add bookmarks and “sticky notes” to important pages and use a keyword search function to find a desired passage or annotation using an interface that is simple and easy to use.
e-Commerce Platform : With an active digital community of over 4.4 million customers, our custom-branded school websites drove over $360 million of sales in Fiscal 2015, with transactions up over 14% over the prior fiscal year. Designed to appeal to students, parents and alumni, the school-branded sites offer simple and seamless textbook purchasing with free in-store pick up or shipping to any location, general merchandise promotions and collections that are customized to the individual user, as well as faculty course material adoption tools and customer service support.
FacultyEnlight ® : Our proprietary online platform enhances content search, discovery and adoption (i.e., textbook selection) by faculty on each campus. Faculty members using FacultyEnlight ® are able to compare and contrast key decision-making factors, such as cost to students and format availability; read peer product reviews; and contribute fresh perspectives and experiences and see what textbooks are being used by colleagues at other colleges and universities.
We enhance the academic and social purpose of higher education institutions by integrating our technology and systems with the school’s technology and organizational infrastructure, to forge a bond with the school and its constituencies. Our customizable

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technology delivers a seamless experience that enables faculty to research and select, and enables students to find and purchase, the most affordable course materials, maximizing savings and sales.
Segment
We identified our operating segment based on the way our business is managed (focusing on the financial information distributed) and the manner in which our chief operating decision maker interacts with other members of management. We have determined that we operate within a single reportable segment, which is entirely within the United States.
Seasonality
Our business is highly seasonal, with the major portion of sales and operating profit realized during the second and third fiscal quarters, when college students generally purchase and rent textbooks for the upcoming semesters. We rent both physical and digital textbooks. Revenue from the rental of physical textbooks is deferred and recognized over the rental period commencing at point of sale. Revenue from the rental of digital textbooks is recognized at time of sale. Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April.
Trends and Other Factors Affecting Our Business
Our business is dependent on the overall economic environment, college enrollment and consumer spending patterns. Our business is affected by funding levels at colleges and universities and by changes in enrollments at colleges and universities, changes in student enrollments and spending on textbooks and general merchandise.
Sales trends are primarily impacted by new store openings, increasing the students and faculty served, as well as changes in comparable store sales and store closings. Comparable store sales increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and does not include sales from closed stores for all periods presented.
We are awarded additional contracts for stores as colleges and universities decide to outsource their bookstore, and we also obtain new contracts for stores that were previously operated by others. We close stores at the end of their contract terms due to low profitability or because the new contract has been awarded to a competitor. As we expanded our textbook rental offerings, students have been shifting away from higher priced textbook purchases to lower priced rental options, which has resulted in lower textbook sales and increasing rental income. After several years of comparable store sales declines, primarily on lower textbook unit volume, during the 52 weeks ended May 2, 2015, our comparable store sales trends have improved for both textbook and general merchandise. Over the last three years, we have consistently opened new stores increasing our total number of stores open from 636 at the beginning of Fiscal 2012 to 724 at the end of Fiscal 2015.
General merchandise sales have continued to increase as our product assortments continue to emphasize and reflect the changing consumer trends and we evolve our presentation concepts and merchandising of product in stores and online.
Occupancy costs, which are included in cost of sales and occupancy costs and primarily consist of the payments we make to the colleges and universities to operate their official bookstores, have generally increased as a percentage of sales as a result of increased competition for renewals and new store contracts.
Selling and administrative expenses have generally increased primarily as a result of our continuing investments in Yuzu ® , our digital education platform and increased infrastructure costs to support growth and costs associated with being an independent publicly-traded company.
Elements of Results of Operations
Our condensed consolidated financial statements reflect our consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”).
Our sales are primarily derived from the sale of course materials (which include new and used textbooks and digital textbooks), emblematic apparel and gifts, trade books, computer products, school and dorm supplies, convenience and café items and graduation products. Our rental income is primarily derived from the rental of physical and digital textbooks.
Our cost of sales and occupancy primarily includes costs such as merchandise costs, textbook rental amortization and management service agreement costs related to our college and university contracts and by other facility related expenses.
Our selling and administrative expenses consist primarily of store payroll and store operating expenses. Selling and administrative expenses also include stock-based compensation and general office expenses, such as executive oversight, merchandising, field support, finance, human resources, benefits, training, legal and information technology, as well as our investments in Yuzu ® .

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As discussed below, the results of operations for the 26 weeks ended November 1, 2014 and the 13 weeks ended August 1, 2015 reflected in our condensed consolidated financial statements are presented on a stand-alone basis since we were still part of Barnes & Noble, Inc. until the consummation of the Spin-Off on August 1, 2015 and the results of operations for the 13 weeks ended October 31, 2015 reflected in our condensed consolidated financial statements are presented on a consolidated basis as we became a separate consolidated entity.
Stand-alone financial statements
The results of operations for the 26 weeks ended November 1, 2014 (i.e. first and second quarter of fiscal 2015) and the 13 weeks ended August 1, 2015 (i.e. first quarter of fiscal 2016) (collectively referred to as the "stand-alone periods") reflected in our condensed consolidated financial statements are presented on a stand-alone basis since we were still part of Barnes & Noble, Inc.
Our condensed consolidated financial statements were derived from the consolidated financial statements and accounting records of Barnes & Noble. Our condensed consolidated financial statements include certain assets and liabilities that have historically been held at the Barnes & Noble corporate level but are specifically identifiable or otherwise attributable to us.
All intercompany transactions between us and Barnes & Noble have been included in our condensed consolidated financial statements and are considered to be effectively settled for cash in our condensed consolidated financial statements at the time the Spin-Off became effective. The total net effect of the settlement of these intercompany transactions was reflected in our condensed consolidated statements of cash flow as a financing activity and in our condensed consolidated balance sheets as “Parent company investment.”
The condensed consolidated financial statements for the stand-alone periods include an allocation for certain corporate and shared service functions historically provided by Barnes & Noble, including, but not limited to, executive oversight, accounting, treasury, tax, legal, human resources, occupancy, procurement, information technology and other shared services. These expenses have been allocated to us on the basis of direct usage when identifiable, with the remainder allocated on a pro rata basis of consolidated sales, headcount, tangible assets or other measures considered to be a reasonable reflection of the historical utilization levels of these services. Management believes the assumptions underlying our condensed consolidated financial statements, including the assumptions regarding the allocation of general corporate expenses from Barnes & Noble were reasonable.
Nevertheless, our condensed consolidated financial statements for these stand-alone periods may not include all of the actual expenses that would have been incurred had we operated as a stand-alone company and may not reflect our consolidated results of operations, financial position and cash flows had we operated as a stand-alone company during the periods presented. Actual costs that would have been incurred if we had operated as a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. As discussed below, following the Spin-Off on August 2, 2015, we began to perform these functions using our own resources or contracted services.
Consolidated financial statements
The Spin-Off from Barnes & Noble, Inc. occurred on August 2, 2015 and therefore, the results of operations are presented on a consolidated basis for the 13 weeks ended October 31, 2015 (i.e. second quarter of fiscal 2016) which includes direct costs incurred with Barnes & Noble under various agreements.
Certain corporate and shared service functions historically provided by Barnes & Noble (as described above) will continue to be provided by Barnes & Noble under the Transition Services Agreement. For additional information, see Item 1. Financial Statements — Note 9. Barnes & Noble, Inc. Transactions .

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Results of Operations
 
13 weeks ended
 
26 weeks ended
Dollars in thousands
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
Sales:
 
 
 
 
 
 
 
Product sales and other
$
684,006

 
$
678,905

 
$
902,722

 
$
885,093

Rental income
71,858

 
72,797

 
92,125

 
92,350

Total sales
$
755,864

 
$
751,702

 
$
994,847

 
$
977,443

Net income
$
33,401

 
$
36,951

 
$
6,483

 
$
10,738

EBITDA (Non-GAAP) (a)
$
72,682

 
$
77,924

 
$
37,542

 
$
43,962

Comparable store sales (decrease) increase (b)
(3.0
)%
 
0.4
%
 
(1.9
)%
 
(0.2
)%
Stores opened
7

 
11

 
28

 
33

Stores closed

 
2

 
9

 
19

Number of stores open at end of period
743

 
714

 
743

 
714

 
(a)
EBITDA is a non-GAAP financial measure. See EBITDA (Non-GAAP) discussion below.
(b)
Comparable store sales increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and does not include sales from closed stores for all periods presented.
The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to total sales of the Company:  
 
13 weeks ended
 
26 weeks ended
Dollars in thousands
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
Sales:
 
 
 
 
 
 
 
Product sales and other
90.5
%
 
90.3
%
 
90.7
%
 
90.6
%
Rental income
9.5

 
9.7

 
9.3

 
9.4

Total sales
100.0

 
100.0

 
100.0

 
100.0

Cost of sales and occupancy:
 
 
 
 
 
 
 
Product and other cost of sales and occupancy (a)
78.6

 
78.7

 
78.9

 
79.1

Rental cost of sales and occupancy (a)
60.3

 
60.5

 
60.7

 
61.1

Total cost of sales and occupancy
76.8

 
76.9

 
77.2

 
77.4

Gross margin
23.2

 
23.1

 
22.8

 
22.6

Selling and administrative expenses
13.6

 
12.7

 
19.0

 
18.1

Depreciation and amortization
1.7

 
1.7

 
2.6

 
2.6

Operating income
7.9

 
8.7

 
1.2

 
1.9

Interest expense, net
0.1

 

 
0.1

 

Income before income taxes
7.8

 
8.7

 
1.1

 
1.9

Income tax expense
3.4

 
3.8

 
0.4

 
0.8

Net income
4.4
%
 
4.9
%
 
0.7
%
 
1.1
%
 
(a)
Represents the percentage these costs bear to the related sales, instead of total sales.

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Table of Contents

13 and 26 weeks ended October 31, 2015 compared with the 13 and 26 weeks ended November 1, 2014
Sales
The following table summarizes our sales for the 13 and 26 weeks ended October 31, 2015 and November 1, 2014:
 
13 weeks ended
 
26 weeks ended
Dollars in thousands
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
Product sales and other
$
684,006

 
$
678,905

 
$
902,722

 
$
885,093

Rental income
71,858

 
72,797

 
92,125

 
92,350

Total Sales
$
755,864

 
$
751,702

 
$
994,847

 
$
977,443

Our sales increased $4.2 million, or 0.6%, to $755.9 million during the 13 weeks ended October 31, 2015 from $751.7 million during the 13 weeks ended November 1, 2014 . New store openings over the past year increased sales by $34.6 million, partially offset by closed stores, which decreased sales by $4.2 million. Rental income for the 13 weeks ended October 31, 2015 declined by $0.9 million or 1.3%. Rental income was impacted by an increase in our rental deferral of $3.1 million. Excluding the impact of the deferred revenue, rental income increased by $2.2 million or 1.9%.
Comparable store sales decreased 3.0%, or $22.6 million, for the comparable 13 week sales period. Comparable store sales were negatively impacted by student enrollment, specifically in two-year community colleges. Textbook revenue decreased $24.4 million, primarily due to lower new and used textbook sales. This decrease was partially offset by a $2.2 million, or 1.3%, increase in general merchandise sales, primarily due to strong emblematic apparel sales.
Our sales increased $17.4 million, or 1.8%, to $994.8 million during the 26 weeks ended October 31, 2015 from $977.4 million during the 26 weeks ended November 1, 2014 . New store openings over the past year increased sales by $45.8 million, partially offset by closed stores, which decreased sales by $6.1 million. Rental income for the 26 weeks ended October 31,2015 declined by $0.2 million or 0.2%. Rental income was impacted by an increase in our rental deferral of $2.5 million. Excluding the impact of the deferred revenue, rental income increased by $2.3 million or 1.8%.
Comparable store sales decreased 1.9%, or $18.9 million, for the comparable 26 week sales period. Comparable store sales were negatively impacted by student enrollment, specifically in two-year community colleges. Textbook revenue decreased $27.9 million, primarily due to lower new and used textbook sales. This decrease was partially offset by a $9.2 million, or 3.5%, increase in general merchandise sales, primarily due to strong emblematic apparel sales.
We added 28 new stores and closed 9 stores during the 26 weeks ended October 31, 2015 , ending the period with a total of 743 stores.
Cost of Sales and Occupancy and Gross Margin
The following table summarizes our cost of sales and occupancy for the 13 weeks and 26 weeks ended October 31, 2015 and November 1, 2014: 
 
13 weeks ended
 
26 weeks ended
Dollars in thousands
October 31, 2015
 
% of
Related Sales
 
November 1, 2014
 
% of
Related Sales
 
October 31, 2015
 
% of
Related Sales
 
November 1, 2014
 
% of
Related Sales
Product and other cost of sales and occupancy
$
537,380

 
78.6
%
 
$
534,137

 
78.7
%
 
$
712,289

 
78.9
%
 
$
700,190

 
79.1
%
Rental cost of sales and occupancy
43,363

 
60.3
%
 
44,054

 
60.5
%
 
55,893

 
60.7
%
 
56,432

 
61.1
%
Total Cost of Sales and Occupancy
$
580,743

 
76.8
%
 
$
578,191

 
76.9
%
 
$
768,182

 
77.2
%
 
$
756,622

 
77.4
%

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The following table summarizes our gross margin for the 13 weeks and 26 weeks ended October 31, 2015 and November 1, 2014:
 
13 weeks ended
 
26 weeks ended
Dollars in thousands
October 31, 2015
 
% of
Sales
 
November 1, 2014
 
% of
Sales
 
October 31, 2015
 
% of
Sales
 
November 1, 2014
 
% of
Sales
Product and other gross margin
$
146,626

 
21.4
%
 
$
144,768

 
21.3
%
 
$
190,433

 
21.1
%
 
$
184,903

 
20.9
%
Rental gross margin
28,495

 
39.7
%
 
28,743

 
39.5
%
 
36,232

 
39.3
%
 
35,918

 
38.9
%
Gross Margin
$
175,121

 
23.2
%
 
$
173,511

 
23.1
%
 
$
226,665

 
22.8
%
 
$
220,821

 
22.6
%
Our cost of sales and occupancy decreased as a percentage of sales to 76.8% during the 13 weeks ended October 31, 2015 compared to 76.9% during the 13 weeks ended November 1, 2014 . Cost of sales and occupancy as a percentage of sales decreased due to improved textbook margins, partially offset by higher occupancy costs resulting from contract renewals and new store contracts as discussed below:
Product and other cost of sales and occupancy decreased (10 basis points), driven primarily by margin improvements (65 basis points), predominately as a result of improved inventory management strategies for used textbooks. Also contributing to the decrease was a favorable sales mix (10 basis points) resulting from higher margin general merchandise increasing as a percentage of sales. These favorable items were partially offset by increased occupancy costs (65 basis points) resulting from contract renewals and new store contracts.
Rental cost of sales and occupancy decreased (15 basis points), driven by a favorable rental mix (60 basis points) and margin improvements (15 basis points) resulting primarily from used textbook rentals. These favorable items were partially offset by increased occupancy costs (55 basis points) resulting from contract renewals and new store contracts.
Our gross margin increased $1.6 million, or 0.9%, to $175.1 million during the 13 weeks ended October 31, 2015 from $173.5 million during the 13 weeks ended November 1, 2014. This increase was due to the matters discussed above.
Our cost of sales and occupancy decreased as a percentage of sales to 77.2% during the 26 weeks ended October 31, 2015 compared to 77.4% during the 26 weeks ended November 1, 2014 . Cost of sales and occupancy as a percentage of sales decreased due to improved textbook margins, partially offset by higher occupancy costs resulting from contract renewals and new store contracts as discussed below:
Product and other cost of sales and occupancy decreased (20 basis points), driven primarily by margin improvements (60 basis points), predominately as a result of improved inventory management strategies for used textbooks. Also contributing to the decrease was a favorable sales mix (20 basis points) resulting from higher margin general merchandise increasing as a percentage of sales. These favorable items were partially offset by increased occupancy costs (60 basis points) resulting from contract renewals and new store contracts.
Rental cost of sales and occupancy decreased (45 basis points), driven by a favorable rental mix (75 basis points) and margin improvements (50 basis points) resulting primarily from used textbook rentals. These favorable items were partially offset by increased occupancy costs (80 basis points) resulting from contract renewals and new store contracts.
Our gross margin increased $5.8 million, or 2.6%, to $226.7 million during the 26 weeks ended October 31, 2015 from $220.8 million during the 13 weeks ended November 1, 2014 . This increase was due to the matters discussed above.
Selling and Administrative Expenses
 
13 weeks ended
 
26 weeks ended
Dollars in thousands
October 31, 2015
 
% of
 Sales
 
November 1, 2014
 
% of
 Sales
 
October 31, 2015
 
% of
 Sales
 
November 1, 2014
 
% of
 Sales
Total Selling and Administrative Expenses
$
102,439

 
13.6
%
 
$
95,587

 
12.7
%
 
$
189,123

 
19.0
%
 
$
176,859

 
18.1
%
During the 13 weeks ended October 31, 2015 , selling and administrative expenses increased $6.9 million, or 7.2%, to $102.4 million from $95.6 million during the 13 weeks ended November 1, 2014 . Our selling and administrative expenses increased as a percentage of sales (90 basis points) to 13.6% from 12.7%. The increase was due primarily to higher store payroll and operating expenses, predominately in new stores, (50 basis points), corporate payroll and infrastructure costs to support business growth including incremental costs associated with our separation (25 basis points), and continued investments in Yuzu ® , our digital education platform (10 basis points).

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During the 26 weeks ended October 31, 2015 , selling and administrative expenses increased $12.3 million, or 6.9%, to $189.1 million from $176.9 million during the 26 weeks ended November 1, 2014 . Our selling and administrative expenses increased as a percentage of sales (90 basis points) to 19.0% from 18.1%. The increase was due primarily to higher store payroll and operating expenses, predominately in new stores, (60 basis points), corporate payroll and infrastructure costs to support business growth including incremental costs associated with our separation (25 basis points), and continued investments in Yuzu ® , our digital education platform (10 basis points).
Depreciation and Amortization  
 
13 weeks ended
 
26 weeks ended
Dollars in thousands
October 31, 2015
 
% of
 Sales
 
November 1, 2014
 
% of
 Sales
 
October 31, 2015
 
% of
 Sales
 
November 1, 2014
 
% of
 Sales
Total Depreciation and Amortization
$
13,169

 
1.7
%
 
$
12,508

 
1.7
%
 
$
26,269

 
2.6
%
 
$
25,052

 
2.6
%
Depreciation and amortization increased $0.7 million, or 5.3%, to $13.2 million during the 13 weeks ended October 31, 2015 from $12.5 million during the 13 weeks ended November 1, 2014 . This increase was primarily attributable to additional capital expenditures.
Depreciation and amortization increased $1.2 million, or 4.9%, to $26.3 million during the 26 weeks ended October 31, 2015 from $25.1 million during the 26 weeks ended November 1, 2014 . This increase was primarily attributable to additional capital expenditures.
Operating Income
 
13 weeks ended
 
26 weeks ended
Dollars in thousands
October 31, 2015
 
% of
 Sales
 
November 1, 2014
 
% of
 Sales
 
October 31, 2015
 
% of
 Sales
 
November 1, 2014
 
% of
 Sales
Total Operating Income
$
59,513

 
7.9
%
 
$
65,416

 
8.7
%
 
$
11,273

 
1.2
%
 
$
18,910

 
1.9
%
Our operating income decreased $5.9 million, or 9.0%, to $59.5 million during the 13 weeks ended October 31, 2015 from $65.4 million during the 13 weeks ended November 1, 2014 . This decrease was due to the matters discussed above.
Our operating income decreased $7.6 million, or 40.4%, to $11.3 million during the 26 weeks ended October 31, 2015 from $18.9 million during the 26 weeks ended November 1, 2014 . This decrease was due to the matters discussed above.
Income Taxes
 
13 weeks ended
 
26 weeks ended
Dollars in thousands
October 31, 2015
 
Effective Rate
 
November 1, 2014
 
Effective Rate
 
October 31, 2015
 
Effective Rate
 
November 1, 2014
 
Effective Rate
Income Taxes
$
25,558

 
43.4
%
 
$
28,451

 
43.5
%
 
$
4,233

 
39.5
%
 
$
8,153

 
43.2
%
We recorded income tax expense of $25.6 million during the 13 weeks ended October 31, 2015 compared with income tax expense of $28.5 million during the 13 weeks ended November 1, 2014 . Our effective tax rate was 43.4% for the 13 weeks ended October 31, 2015 compared with an effective tax rate of 43.5% during the 13 weeks ended November 1, 2014 .
We recorded income tax expense of $4.2 million during the 26 weeks ended October 31, 2015 compared with income tax expense of $8.2 million during the 26 weeks ended November 1, 2014 . Our effective tax rate was 39.5% for the 26 weeks ended October 31, 2015 compared with an effective tax rate of 43.2% during the 26 weeks ended November 1, 2014 .
The income tax provision for the 13 and 26 weeks ended October 31, 2015 reflects the impact of federal and state income taxes imposed upon income from operations, decreased by the impact of favorable state law and tax rate changes, partially offset by the impact of certain non-deductible expenses.

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Net Income  
 
13 weeks ended
 
26 weeks ended
Dollars in thousands
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
Net Income
$
33,401

 
$
36,951

 
$
6,483

 
$
10,738

As a result of the factors discussed above, we reported net income of $33.4 million during the 13 weeks ended October 31, 2015 , compared with net income of $37.0 million during the 13 weeks ended November 1, 2014 .
As a result of the factors discussed above, we reported net income of $6.5 million during the 26 weeks ended October 31, 2015 , compared with net income of $10.7 million during the 26 weeks ended November 1, 2014 .

EBITDA (Non-GAAP)
To supplement our results prepared in accordance with GAAP, we use the measure of EBITDA, which is a non-GAAP financial measure as defined by the Securities and Exchange Commission (the “SEC”). We define EBITDA as net earnings (loss) plus (1) depreciation and amortization; (2) interest expense and (3) income taxes.
This non-GAAP financial measure is not intended as a substitute for and should not be considered superior to measures of financial performance prepared in accordance with GAAP. In addition, our use of this non-GAAP financial measure may be different from an EBITDA measure used by other companies, limiting its usefulness for comparison purposes. EBITDA should not be considered as an alternative to net income as an indicator of our performance or any other measures of performance derived in accordance with GAAP. As noted above, EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results reported under GAAP. The limitations of EBITDA include: (i) it does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; (ii) it does not reflect changes in, or cash requirements for, our working capital needs; (iii) it does not reflect income tax payments we may be required to make; and (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and EBITDA does not reflect any requirements for such replacements.
We believe that EBITDA is a useful performance measure, and it is used by us to facilitate a comparison of our operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business than measures under GAAP can provide alone. Our board of directors (the “Board”) and management also use EBITDA as one of the primary methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis actual results against such expectations. We review this non-GAAP measure internally to evaluate our performance and manage our operations. We believe that the inclusion of EBITDA results provides investors useful and important information regarding our operating results.
To properly and prudently evaluate our business, we encourage you to review our condensed consolidated financial statements included elsewhere in this Form 10-Q and the reconciliation from EBITDA to net earnings (loss), the most directly comparable financial measure presented in accordance with GAAP, set forth in the table below. All of the items included in the reconciliation from EBITDA to net earnings (loss) are either (i) non-cash items or (ii) items that management does not consider in assessing our on-going operating performance.
 
13 weeks ended
 
26 weeks ended
Dollars in thousands
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
EBITDA
$
72,682

 
$
77,924

 
$
37,542

 
$
43,962

Subtract:
 
 
 
 
 
 
 
Depreciation and amortization
13,169

 
12,508

 
26,269

 
25,052

Interest expense, net
554

 
14

 
557

 
19

Income taxes
25,558

 
28,451

 
4,233

 
8,153

Net income
$
33,401

 
$
36,951

 
$
6,483

 
$
10,738


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Liquidity and Capital Resources
Our business is highly seasonal. Cash flows from operating activities are typically a source of cash in the second and third fiscal quarters, when students generally purchase and rent textbooks for the upcoming semesters. Cash flows from operating activities are typically a use of cash in the first and fourth fiscal quarters, when sales volumes are materially lower than the other quarters. Our quarterly cash flows also may fluctuate depending on the timing of the start of the various school’s semesters, as well as shifts in fiscal calendar dates. These shifts in timing may affect the comparability of our results across periods.
Until August 3, 2015, we were party to the B&N Credit Facility. The B&N Credit Facility provided for up to $1 billion in aggregate commitments under a five-year asset-backed revolving credit facility expiring on April 29, 2016. The B&N Credit Facility was secured by eligible inventory and accounts receivable with the ability to include eligible real estate and related assets. We were a borrower and co-guarantor of all amounts owing under the B&N Credit Facility. All outstanding debt under the B&N Credit Facility was recorded on Barnes & Noble’s balance sheet as of August 1, 2015.
On August 3, 2015, in connection with the Spin-Off, we entered into a new five-year $400 million asset-backed revolving credit facility (the “New Credit Facility”), the proceeds of which will be used for general corporate purposes, including seasonal working capital needs. See Financing Arrangements discussion below. As of October 31, 2015, we had no outstanding borrowings under the New Credit Facility.
As of October 31, 2015, Other long-term liabilities includes $63.5 million related to the long-term tax payable associated with the LIFO reserve. Management believes it is remote that the long-term tax payable associated with the LIFO reserve will be payable or will result in a cash tax payment in the foreseeable future, assuming that LIFO will continue to be an acceptable inventory method for tax purposes.
Sources and Uses of Cash Flow
 
 
26 weeks ended
Dollars in thousands
 
October 31, 2015
 
November 1, 2014
Cash and cash equivalents at beginning of period
 
$
59,714

 
$
144,269

Net cash flows provided by operating activities
 
192,215

 
187,581

Net cash flows used in investing activities
 
(27,953
)
 
(30,547
)
Net cash flows used in financing activities
 
(9,695
)
 
(48,387
)
Cash and cash equivalents at end of period
 
$
214,281

 
$
252,916

Cash Flow from Operating Activities
Cash flows provided by operating activities during the 26 weeks ended October 31, 2015 were $192.2 million compared to $187.6 million during the 26 weeks ended November 1, 2014. This net change of $4.6 million was primarily due to changes in working capital and changes in deferred tax balances.
Cash Flow from Investing Activities
Our investing activities consist principally of capital expenditures for contractual capital investments associated with renewing existing contracts, new store construction and enhancements to internal systems and our website.
Cash flows used in investing activities during the 26 weeks ended October 31, 2015 were $(28.0) million compared to $(30.5) million during the 26 weeks ended November 1, 2014. Capital expenditures totaled $24.5 million and $24.6 million during the 26 weeks ended October 31, 2015 and November 1, 2014, respectively.
Cash Flow from Financing Activities
Cash flows used in financing activities during the 26 weeks ended October 31, 2015 decreased by $38.7 million compared to the 26 weeks ended November 1, 2014 primarily due to the net change in the Barnes & Noble, Inc. Investment.
Financing Arrangements
Until August 3, 2015, we were party to the B&N Credit Facility. All outstanding debt under the B&N Credit Facility was recorded on Barnes & Noble’s balance sheet as of August 1, 2015.
On August 3, 2015, the Company and certain of its subsidiaries from time to time party thereto entered into the Credit Agreement with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and other lenders from time to time party thereto, under which the lenders committed to provide a five-year asset-backed revolving credit facility in an

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aggregate committed principal amount of $400 million under the New Credit Facility. Proceeds from the Credit Facility are used for general corporate purposes, including seasonal working capital needs. Bank of America Merrill Lynch, J.P. Morgan Securities LLC, Wells Fargo Bank, N.A. and SunTrust Robinson Humphrey, Inc. are the joint lead arrangers for the New Credit Facility.
The Company and certain of its subsidiaries (collectively, the “Loan Parties”) will be permitted to borrow under the New Credit Facility. The New Credit Facility is secured by substantially all of the inventory, accounts receivable and related assets of the borrowers under the New Credit Facility, but excluding the equity interests in the Company and its subsidiaries, intellectual property, equipment and certain other property. The Company has the option to request an increase in commitments under the New Credit Facility of up to $100 million, subject to certain restrictions.
As of October 31, 2015, we had no outstanding borrowings under the New Credit Facility. During the 13 weeks ended October 31, 2015, we borrowed and repaid $8.7 million under the New Credit Facility. As of October 31, 2015, we have issued $3.6 in letters of credit under the facility.
We incurred debt issuance costs totaling $3.3 million related to the New Credit Facility. As permitted under ASU No. 2015-15, these debt issuance costs have been deferred and are presented as an asset which is subsequently amortized ratably over the term of the credit agreement.
Interest under the New Credit Facility accrues, at the election of the Company, at a LIBOR or alternate base rate, plus, in each case, an applicable interest rate margin, which is determined by reference to the level of excess availability under the New Credit Facility. Loans will initially bear interest at LIBOR plus 2.000% per annum, in the case of LIBOR borrowings, or at the alternate base rate plus 1.000% per annum, in the alternative, and thereafter the interest rate will fluctuate between LIBOR plus 2.000% per annum and LIBOR plus 1.750% per annum (or between the alternate base rate plus 1.000% per annum and the alternate base rate plus 0.750% per annum), based upon the excess availability under the New Credit Facility at such time.
The Credit Agreement contains customary negative covenants, which limit the Company’s ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets, among other things. In addition, if excess availability under the New Credit Facility were to fall below certain specified levels, certain additional covenants (including fixed charge coverage ratio requirements) would be triggered, and the lenders would have the right to assume dominion and control over the Loan Parties’ cash.
The Credit Agreement contains customary events of default, including payment defaults, material breaches of representations and warranties, covenant defaults, default on other material indebtedness, customary ERISA events of default, bankruptcy and insolvency, material judgments, invalidity of liens on collateral, change of control or cessation of business. The Credit Agreement also contains customary affirmative covenants and representations and warranties.
We believe that our future cash from operations, access to borrowings under the New Credit Facility and short-term vendor financing will provide adequate resources to fund our operating and financing needs for the foreseeable future. Our access to, and the availability of, financing in the future will be impacted by many factors, including the liquidity of the overall capital markets and the current state of the economy. There can be no assurances that we will have access to capital markets on acceptable terms.
Contractual Obligations
Except as noted below, our projected contractual obligations are consistent with amounts disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Prospectus dated July 15, 2015 and filed with the SEC on that date.
On August 3, 2015, the Company and certain of its subsidiaries from time to time party thereto entered into the Credit Agreement under which the lenders committed to provide a five-year asset-backed revolving credit facility in an aggregate committed principal amount of $400 million (the “New Credit Facility”). See Financing Arrangements above for additional information.
Off-Balance Sheet Arrangements
As of October 31, 2015 , we have no off-balance sheet arrangements as defined in Item 303 of Regulation S-K.
Critical Accounting Policies
During the first six months of Fiscal 2016, there were no changes in the Company’s policies regarding the use of estimates and other critical accounting policies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Prospectus dated July 15, 2015 and filed with the SEC on that date, for additional information relating to the Company’s use of estimates and other critical accounting policies.

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Table of Contents

Recent Accounting Pronouncements
See Item 1. Financial Statements — Note 3. Recent Accounting Pronouncements for information related to new accounting pronouncements.
Disclosure Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and information relating to us and our business that are based on the beliefs of our management as well as assumptions made by and information currently available to our management. When used in this communication, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “will,” “forecasts,” “projections,” and similar expressions, as they relate to us or our management, identify forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
Such statements reflect our current views with respect to future events, the outcome of which is subject to certain risks, including, among others:
 
challenges to running our company independently from Barnes & Noble now that the Spin-Off has been completed;
the potential adverse impact on our business resulting from the Spin-Off;
general competitive conditions, including actions our competitors may take to grow their businesses;
trends and challenges to our business and in the locations in which we have stores;
decisions by colleges and universities to outsource their bookstore operations or change the operation of their bookstores;
non-renewal of contracts;
the general economic environment and consumer spending patterns;
a decline in college enrollment or decreased funding available for students;
decreased consumer demand for our products, low growth or declining sales;
disruptions to our computer systems, data lines, telephone systems or supply chain, including the loss of suppliers;
changes to payment terms, return policies, the discount or margin on products or other terms with our suppliers;
risks associated with data privacy, information security and intellectual property;
work stoppages or increases in labor costs;
our ability to attract and retain employees;
possible increases in shipping rates or interruptions in shipping service, effects of competition;
obsolete or excessive inventory;
product shortages;
our ability to successfully implement our strategic initiatives;
the performance of our online, digital and other initiatives, including possible delays in the deployment of, and further enhancements to, Yuzu ® and any future higher education digital products;
technological changes;
risk that digital sales growth is less than expectations and the risk that it does not exceed the rate of investment spend;
higher-than-anticipated store closings;
changes in law or regulation;
the amount of our indebtedness and ability to comply with covenants applicable to any future debt financing;
our ability to satisfy future capital and liquidity requirements;
our ability to access the credit and capital markets at the times and in the amounts needed and on acceptable terms;

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adverse results from litigation, governmental investigations or tax-related proceedings or audits;
changes in accounting standards; and
the other risks and uncertainties detailed in the section titled “Risk Factors” in this Form 10-Q.
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described as anticipated, believed, estimated, expected, intended or planned. Subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Form 10-Q.
 
Item 3:     Quantitative and Qualitative Disclosures About Market Risk
Except as noted below, there have been no material changes to the items discussed in “ Quantitative and Qualitative Disclosures About Market Risk” in our Prospectus dated July 15, 2015 and filed with the SEC on that date.
On August 3, 2015, the Company and certain of its subsidiaries from time to time party thereto entered into the Credit Agreement under which the lenders committed to the New Credit Facility. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity - Financing Arrangements in this Form 10-Q for additional information.
We may from time to time borrow money under the New Credit Facility at various interest rate options based on LIBOR or alternate base rate (each term as defined therein) depending upon certain financial tests. Accordingly, we may be exposed to interest rate risk on borrowings under the New Credit Facility. To the extent we continue to have no outstanding debt under the New Credit Facility, a 25 basis point increase in interest rates would have increased our interest expense by $0 million in Fiscal 2016. Conversely, a 25 basis point decrease in interest rates would have reduced interest expense by $0 million in Fiscal 2016.
Item 4:     Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation (as required under Rules 13a-15(b) and 15d-15(b) under the Exchange Act) was performed under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
Management has not identified any changes in the Company’s internal control over financial reporting that occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


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PART II - OTHER INFORMATION
 
Item 1.     Legal Proceedings
We are involved in a variety of claims, suits, investigations and proceedings that arise from time to time in the ordinary course of our business, including actions with respect to contracts, intellectual property, taxation, employment, benefits, personal injuries and other matters. We record a liability when we believe that it is both probable that a loss has been incurred and the amount of loss can be reasonably estimated. Based on our current knowledge, we do not believe that there is a reasonable possibility that the final outcome of any pending or threatened legal proceedings to which we or any of our subsidiaries are a party, either individually or in the aggregate, will have a material adverse effect on our future financial results. However, legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. As such, there can be no assurance that the final outcome of these matters will not materially and adversely affect our business, financial condition, results of operations or cash flows.
The litigation matter described below is the only material legal proceeding in which we are currently involved. Under the Separation Agreement, Barnes & Noble is obligated to indemnify us against any expenses and liabilities incurred in connection with the matter; consequently, we do not expect an adverse outcome to this litigation to adversely impact our financial condition, results of operations or cash flows.
Adrea LLC v. Barnes & Noble, Inc., NOOK Digital, LLC (formerly barnesandnoble.com llc) and B&N Education, LLC (formerly Nook Media LLC):
On June 14, 2013, Adrea LLC (“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 (the “’851 patent”), 7,299,501 (the “’501 patent”) and 7,620,703 (the “’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. Discovery was commenced and completed and summary judgment motions were filed. On July 1, 2014, the Court issued a decision granting partial summary judgment in B&N’s favor, and in particular granting B&N’s motion to dismiss one of Adrea’s infringement claims, and granting B&N’s motion to limit any damages award with respect to another of Adrea’s infringement claims. Beginning October 7, 2014, through and including October 22, 2014, the case was tried before 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 patent and ‘703 patent. It awarded damages in the amount of $1.3 million. The jury further found no willful infringement with respect to any patent.
On July 24, 2015, the Court granted B&N’s post trial application to invalidate one of the two patents (the ‘501 Patent) the jury found to have been infringed. The Court then heard argument from both parties as to what steps should next occur. After considering the parties’ respective arguments, the Court has decided to first hear post-trial motions on the jury’s infringement and validity determinations, which, if decided in B&N’s favor, would knock out the jury’s findings of liability and damages altogether. The Court heard oral argument on September 28, 2015 and a decision is still pending.

Item 1A. Risk Factors
The risks and uncertainties described below are not the only ones faced by us. Additional risks and uncertainties not presently known or that are currently deemed immaterial also may impair our business operations. If any of the following risks occur, our business, financial condition, operating results and cash flows and the trading price of our Common Stock could be materially adversely affected.