Subsequent Events

On February 25, 2013, the Board of Directors of Barnes & Noble, Inc. received notice from Mr. Leonard Riggio, the Company's founder, largest stockholder and Chairman of the Board, that Mr. Riggio plans to propose to purchase all of the assets of the retail business of the Company.

Liquidity and Capital Resources

The primary sources of Barnes & Noble, Inc.'s (Barnes & Noble or the Company) cash are net cash flows from operating activities, funds available under its senior credit facility, cash received and committed in the formation of NOOK Media, LLC (NOOK Media), cash received from the Pearson strategic investment in NOOK Media and short-term vendor financing.

The Company's cash and cash equivalents were $213.6 million as of January 26, 2013, compared with $27.4 million as of January 28, 2012. This increase is due to the formation of NOOK Media as discussed below, partially offset by changes in working capital.

On January 26, 2013, the Company had no borrowings against its $1.0 billion credit facility compared to $101.6 million in the prior year period. The Company had $34.6 million of outstanding letters of credit as of January 26, 2013 compared with $32.6 million as of January 28, 2012.

The Company has arrangements with third-party manufacturers to produce its Nook products. These manufacturers procure and assemble unfinished parts and components from third-party suppliers based on forecasts provided by the Company. Given production lead times, commitments are generally made far in advance of finished product delivery. The holiday sales shortfall resulted in higher than anticipated levels of unfinished goods. As a result, the Company is in negotiations with certain vendors for purchase commitments totaling approximately $80.0 million. Based on current negotiations and product development plans, the Company has recorded a provision of $30.4 million in the third quarter for commitments which it estimates as the most likely outcome. Future charges may be required based on the final result of these negotiations as well as changes in forecasted sales.

Merchandise inventories decreased $29.9 million, or 1.7%, to $1.785 billion as of January 26, 2013, compared with $1.815 billion as of January 28, 2012. This decrease included lower trade book inventory at B&N Retail, on higher than anticipated core sales trends and improved core inventory management in the distribution centers, partially offset by an increase in inventory at B&N College related to timing of back-to-school rush and new store growth; NOOK inventories were relatively flat with the prior year. Receivables of $387.5 million at January 26, 2013 are inclusive of B&N College back-to-school rush balances due from schools, as well as NOOK holiday channel partner shipments. Prepaid expenses and other current assets increased $16.8 million, or 9.9%, to $186.3 million as of January 26, 2013, compared to $169.5 million as of January 28, 2012. This increase was primarily due to higher textbook rental inventory and higher short-term deferred taxes. Accounts Payable decreased $127.9 million, or 8.6%, to $1.361 billion as of January 26, 2013, compared to $1.489 billion as of January 28, 2012. Accounts payable was 76% and 82% of merchandise inventory as of January 26, 2013 and January 28, 2012, respectively. Accrued liabilities increased $20.5 million, or 3.8%, to $563.0 million as of January 26, 2013, compared to $542.5 million as of January 28, 2012. This increase was due to several factors, including a higher reserve for commitments for unfinished goods, deferred income (textbook rentals and member program) and general timing of expenses. Gift card liabilities of the B&N Retail segment increased $19.1 million, or 5.2%, to $386.7 million as of January 26, 2013, compared to $367.6 million as of January 28, 2012 due to increased gift card sales.

The Company's investing activities consist principally of capital expenditures for new store construction, the maintenance of existing stores, build out of Palo Alto facility, digital initiatives and enhancements to systems and the website. Capital expenditures totaled $111.1 million and $123.5 million during the 39 weeks ended January 26, 2013 and January 28, 2012, respectively.

On April 27, 2012, the Company entered into an amendment to its existing agreement with Bank of America, N.A. entered into on April 29, 2011, as administrative agent, collateral agent and swing line lender, and other lenders in order to permit the transactions contemplated by the investment agreement among the Company, Morrison Investment Holdings, Inc. (Morrison), and Microsoft Corporation (Microsoft) and to make certain other changes to the Company's 2011 Amended Credit Agreement in connection therewith. On December 21, 2012, the Company entered into an amendment to its existing agreement with Bank of America, N.A. entered into on April 29, 2011, as administrative agent, collateral agent and swing line lender, and other lenders in order to permit the transactions contemplated by the investment agreement between NOOK Media LLC and a subsidiary of Pearson plc and make certain other changes to the Company's 2011 Amended Credit Agreement in connection therewith. The 2011 Amended Credit Agreement, as amended and modified to date, is hereinafter referred to as the 2012 Amended Credit Facility.

On April 29, 2011, the Company entered into an amended and restated credit agreement (the 2011 Amended Credit Agreement) with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and other lenders, which amended and restated the credit agreement (the 2009 Credit Agreement) entered into on September 30, 2009 with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and other lenders. Under the 2011 Amended Credit Agreement, Lenders are providing up to $1.0 billion in aggregate commitments under a five-year asset-backed revolving credit facility (the 2011 Amended Credit Facility), which is secured by eligible inventory with the ability to include eligible real estate and accounts receivable and related assets. Borrowings under the 2011 Amended Credit Agreement are limited to a specified percentage of eligible inventories with the ability to include eligible real estate, accounts receivable and accrued interest, at the election of the Company, at Base Rate or LIBO Rate, plus, in each case, an Applicable Margin (each term as defined in the 2011 Amended Credit Agreement). In addition, the Company has the option to request an increase in commitments under the 2011 Amended Credit Agreement by up to $300.0 million, subject to certain restrictions.

The 2011 Amended Credit Agreement requires Availability (as defined in the 2011 Amended Credit Agreement) to be greater than the greater of (i) 10% of the Loan Cap (as defined in the 2011 Amended Credit Agreement) and (ii) $50 million. In addition, the 2011 Amended Credit Agreement contains covenants that limit, among other things, the Company's ability to incur indebtedness, create liens, make investments, make restricted payments, merge or acquire assets, dispose of assets, and contains default provisions that are typical for this type of financing, among other things. Proceeds from the 2011 Amended Credit Agreement are used for general corporate purposes, including seasonal working capital needs.

On April 27, 2012, the Company entered into an investment agreement among the Company, Morrison and Microsoft pursuant to which the Company would form a Delaware limited liability company (NOOK Media), and transfer to NOOK Media the Company's digital device, digital content and college bookstore businesses and NOOK Media would sell to Morrison, and Morrison would purchase, 300 million convertible preferred membership interests in NOOK Media for an aggregate purchase price of $300.0 million. The preferred membership interests have a liquidation preference equal to the original investment. Concurrently with its entry into this agreement, the Company has also entered into a commercial agreement with Microsoft, pursuant to which, among other things, NOOK Media would develop and distribute a Windows 8 application for e-reading and digital content purchases, and an intellectual property license and settlement agreement with Microsoft and Microsoft Licensing GP. As part of the commercial agreement, for each of the first three years after the launch of such application for Windows 8, these advance payments will be equal to $60.0 million per year. These advance payments will be subject to deferral under certain circumstances. Microsoft will also pay to NOOK Media $25.0 million each year for the first five years of the term for purposes of assisting NOOK Media in acquiring local digital reading content and technology development in the performance of NOOK Media's obligations under the commercial agreement.

On October 4, 2012, NOOK Media was formed and it has received the $300.0 million Microsoft investment. Under the terms of this transaction, NOOK Media was debt-free at inception, except for trade accounts payable and other working capital requirements. At closing, B&N Retail assumed the outstanding bank borrowings of the Company. Under the limited liability company agreement of NOOK Media, no distributions may be made by NOOK Media without Morrison's approval.

During the third quarter, the Company received $27.5 million from Microsoft related to installments on the guaranteed advance payments to NOOK Media and payments related to assisting NOOK Media in acquiring local digital reading content and technology development.

On December 21, 2012, NOOK Media entered into an agreement with a subsidiary of Pearson plc (Pearson) to make a strategic investment in NOOK Media. That transaction closed on January 22, 2013, and Pearson invested approximately $89.5 million of cash in NOOK Media at a post-money valuation of approximately $1.789 billion in exchange for preferred membership interests representing a 5% equity stake in NOOK Media. Following the closing of the transaction, the Company owns approximately 78.2% of the NOOK Media subsidiary and Microsoft, which also holds preferred membership interests, owns approximately 16.8%. The preferred membership interests have a liquidation preference equal to the original investment. In addition, NOOK Media granted warrants to Pearson to purchase up to an additional 5% of NOOK Media under certain conditions at a pre-money valuation of NOOK Media of approximately $1.789 billion.

At closing, NOOK Media and Pearson entered into a commercial agreement with respect to distributing Pearson content in connection with this strategic investment.

On August 18, 2011, the Company entered into an investment agreement between the Company and Liberty GIC, Inc. (Liberty) pursuant to which the Company issued and sold to Liberty, and Liberty purchased, 204,000 shares of the Company's Series J Preferred Stock, par value $0.001 per share (Preferred Stock), for an aggregate purchase price of $204.0 million in a private placement exempt from the registration requirements of the 1933 Act. The shares of Preferred Stock will be convertible, at the option of the holders, into shares of Common Stock representing 16.6% of the Common Stock outstanding as of August 29, 2011, (after giving pro forma effect to the issuance of the Preferred Stock), based on the initial conversion rate. The initial conversion rate reflects an initial conversion price of $17.00 and is subject to adjustment in certain circumstances. The initial dividend rate for the Preferred Stock is equal to 7.75% per annum of the initial liquidation preference of the Preferred Stock to be paid quarterly and subject to adjustment in certain circumstances. The entry into the investment agreement and the issuance and sale of the Preferred Stock was approved by the Company's Board of Directors following a recommendation made by a Special Committee of the Board of Directors. The terms, rights, obligations and preferences of the Preferred Stock are set forth in a Certificate of Designations of the Company, which was filed with the Secretary of State of the State of Delaware on August 18, 2011.

Based upon the Company's current operating levels, management believes cash and cash equivalents on hand, net cash flows from operating activities, cash received and committed in the formation of NOOK Media, short-term vendor financing and the capacity under the credit facility will be sufficient to meet the Company's normal working capital and debt service requirements for at least the next twelve months. The Company regularly evaluates its capital structure and conditions in the financing markets to ensure it maintains adequate flexibility to successfully execute its business plan.

Segments

The Company identifies its operating segments based on the way the business is managed (focusing on the financial information distributed) and the manner in which the chief operating decision maker interacts with other members of management. The Company has three operating segments: B&N Retail, B&N College and NOOK.

Seasonality

The B&N Retail business, like that of many retailers, is seasonal, with the major portion of sales and operating profit realized during its third fiscal quarter, which includes the holiday selling season.

The B&N College 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. Textbook rentals, which primarily occur at the beginning of the semester, are being recognized over the rental period.

The NOOK business, like that of many technology companies, is impacted by the launch of new products and the promotional efforts to support those new products, as well as the traditional retail holiday selling seasonality.

Business Overview

The Company's financial performance has been significantly impacted in recent years by a number of factors, including the economic downturn, increased online competition and the expanding digital market. However, the Company has benefited from reduced physical bookstore competition in the marketplace, as well as the successful execution of new merchandising strategies.

The Company derives the majority of its sales and net income from its B&N Retail and B&N College stores.

B&N Retail comparable store sales benefited as one of B&N Retail's largest competitors in the sale of physical books, Borders Group, Inc. (Borders), completed liquidating all of its stores under Chapter 11 of the Bankruptcy Code in early fiscal 2012. While the Company expects declining physical book trends to continue industry-wide as consumer spending shifts further online and toward digital products, it expects to be the beneficiary of further market consolidation as other non-book retailers reduce their presence in the book category. Additionally, the Company continues to experience positive trends in its Gift and Toys & Games businesses as a result of the successful execution of new merchandising strategies.

The Company has leveraged its unique assets, iconic brands and reach to become a leader in the distribution of digital content. In 2009, the Company entered the eBook market and the popularity of its eBook site continues to grow. Since then, the Company launched its NOOK® brand of eReading products, which provide a fun, easy-to-use and immersive digital reading experience. With NOOK®, customers gain access to the expansive NOOK Store™ of more than three million digital books, plus periodicals, comics, apps, movies and TV shows, and the ability to enjoy content across a wide array of popular devices through free NOOK Reading Apps™ and NOOK Video apps.

Over the past several years, the Company has introduced leading devices in the tablet and eReader categories. In April 2012, the Company introduced NOOK Simple Touch™ with GlowLightTM, the world's first E Ink device with patent-pending lighting technology that lets you read in the dark. In September 2012, the Company introduced NOOK® HD, the lightest and highest-resolution 7-Inch HD tablet, and NOOK ® HD+, the world's lightest full HD tablet.

In addition to NOOK® devices, the Company makes it easy for customers to enjoy any book, anytime, anywhere with its free line of NOOK® software specific application, which has won the Webby People's Voice Award. Customers can use Barnes & Noble's eReading software to access and read books from their personal

Barnes & Noble digital library on devices including Windows 8 PCs and tablets, iPad™, iPhone®, Android™ smartphones and tablets, PC and Mac®. The Lifetime Library™ helps ensure that Barnes & Noble customers will always be able to access their digital libraries on NOOK ® products and software-enabled devices and BN.com. The Company also offers NOOK Newsstand™, which provides an extensive selection of digital newspapers and magazines, available in both subscription and single copy format, NOOK Kids™, a collection of digital picture and chapter books for children, NOOK Study™, an innovative study platform and software solution for higher education, and NOOK Video™, which offers an extensive and diverse digital collection of standard and high-definition movies and TV shows available for streaming and download.

In the fall of 2012, the Company began selling NOOK® devices internationally, through its website and partnerships with leading retailers, as well as digital content in the U.K. The Company plans to continue to expand into additional international markets and believes that its partnership with Microsoft will help foster that expansion. Additionally, the Company believes that its newly formed partnership with Pearson will accelerate customer access to digital content by pairing Pearson's leading expertise in online learning with NOOK's expertise in reading technology, online commerce and customer service. The Company has made significant investments over the past three years building the valuable NOOK digital retailing platform, which has resulted in millions of digital customers buying content from Barnes & Noble. While the Company experienced disappointing NOOK device sales over the most recent holiday selling season, the Company's digital strategy will continue to center around delivering the best digital reading, shopping and content experience in the market, while also being diligent about calibrating expenses to business trends in order to scale the business to profitability over time.

As digital and electronic sales become a larger part of its business, the Company believes its footprint of more than 1,300 stores will continue to be a major competitive asset. The Company will continue to integrate its traditional retail, trade book and college bookstores businesses with its electronic and Internet offerings, using retail stores in attractive geographic markets to promote and sell digital devices and content. Customers can see, feel and experiment with the NOOK® in the Company's stores.

Although the stores will be just a part of the offering, they will remain a key driver of sales and cash flow as the Company expands its multi-channel relationships with its customers. While the Company plans to open a few retail stores in new geographic markets, the Company expects to reduce the total net number of retail stores.

B&N College provides direct access to a large and well-educated demographic group, enabling the Company to build relationships with students throughout their college years and beyond. The Company also expects to be the beneficiary of market consolidation as more and more schools outsource their bookstore management. The Company is in a unique market position to benefit from this trend given its full suite of services: bookstore management, textbook rental and digital delivery.

Although the Company believes cash on hand, cash flows from operating activities, funds available from its senior credit facility, cash received and committed in the formation of NOOK Media, cash received from the Pearson strategic investment in NOOK Media and short-term vendor financing provide the Company with adequate liquidity and capital resources for seasonal working capital requirements, the Company may raise additional capital to support the growth of its digital businesses.

Results of Operations

13 and 39 weeks ended January 26, 2013 compared with the 13 and 39 weeks ended January 28, 2012

Sales

The following table summarizes the Company's sales for the 13 and 39 weeks ended
January 26, 2013 and January 28, 2012:



                                             13 weeks ended                                                    39 weeks ended
                       January 26,                      January 28,                      January 26,                      January 28,
Dollars in thousands       2013          % Total            2012          % Total            2013          % Total            2012          % Total
B&N Retail             $  1,505,151          67.7 %     $  1,677,326          68.8 %     $  3,620,566          65.1 %     $  3,800,380          66.1 %
B&N College                 517,228          23.3 %          525,627          21.5 %        1,510,953          27.2 %        1,515,771          26.4 %
NOOK                        315,965          14.2 %          426,595          17.5 %          668,287          12.0 %          769,854          13.4 %
Elimination                (114,399 )        (5.1 )%        (190,424 )        (7.8 )%        (237,822 )        (4.3 )%        (336,516 )        (5.9 )%

Total Sales            $  2,223,945         100.0 %     $  2,439,124         100.0 %     $  5,561,984         100.0 %     $  5,749,489         100.0 %

During the 13 weeks ended January 26, 2013, the Company's sales decreased $215.2 million, or 8.8%, to $2.224 billion from $2.439 billion during the 13 weeks ended January 28, 2012. The decrease by segment is as follows:

• B&N Retail sales for the 13 weeks ended January 26, 2013 decreased $172.2 million, or 10.3%, to $1.51 billion from $1.68 billion during the same period a year ago, and accounted for 67.7% of total Company sales. The decrease was attributable to a 7.3% decrease in comparable store sales, which decreased sales by $102.1 million and lower online sales, which declined by $50.0 million. Closed store sales decreased sales by $20.9 million, offset by new stores that increased sales by $3.8 million. Core comparable store sales, which exclude sales of NOOK products, decreased 2.2% as compared to the prior year. Sales of NOOK products in the Retail segment declined during the quarter due to lower unit volume. B&N Retail also includes third-party sales of Sterling Publishing Co., Inc.

• B&N College sales decreased $8.4 million, or 1.6%, to $517.2 million during the 13 weeks ended January 26, 2013 from $525.6 million during the 13 weeks ended January 28, 2012. The decrease was attributable to a 5.2% decrease in comparable store sales which decreased sales by $27.9 million. The back-to-school rush season extended past the close of the Company's third fiscal quarter, factoring in the two additional weeks in February that contributed to this year's rush season, comparable store sales decreased 2.1% for the quarter. In addition, closed stores decreased sales by $5.1 million, offset by new stores which increased sales by $24.0 million.

• NOOK sales decreased $110.6 million, or 25.9%, to $316.0 million during the 13 weeks ended January 26, 2013 from $426.6 million during the 13 weeks ended January 28, 2012. The decrease was due to lower device unit volume, $21.2 million of incremental channel partner returns given the holiday sales shortfall and $15.4 million of promotional allowances to optimize future sales opportunities. Digital content sales increased 6.8% during the 13 weeks ended January 26, 2013.

• The elimination represents sales from NOOK to B&N Retail and B&N College on a sell through basis. Lower than last year due to lower device sales by B&N Retail.

During the 13 weeks ended January 26, 2013, B&N Retail had two store openings and 14 closings, and B&N College had four openings and no closings.

During the 39 weeks ended January 26, 2013, the Company's sales decreased $187.5 million, or 3.3%, to $5.56 billion from $5.75 billion during the 39 weeks ended January 28, 2012. The decrease by segment is as follows:

• B&N Retail sales for the 39 weeks ended January 26, 2013 decreased $179.8 million, or 4.7%, to $3.62 billion from $3.80 billion during the same period a year ago, and accounted for 65.1% of total Company sales. The decrease was attributable to a 1.9% decrease in comparable store sales, which decreased sales by $59.4 million and lower online sales, which declined by $74.0 million. Core comparable store sales, which exclude sales of NOOK products, increased 1.8% as compared to the prior year. Sales of NOOK products in the Retail segment declined due to lower unit volume. Closed stores decreased sales by $51.4 million, offset by new stores that increased sales by $3.8 million. B&N Retail also includes third-party sales of Sterling Publishing Co., Inc.

• B&N College sales decreased $4.8 million, or 0.3%, to $1.51 billion during the 39 weeks ended January 26, 2013 from $1.52 billion during the 39 weeks ended January 28, 2012. The decrease was attributable to a 2.3% decrease in comparable store sales which decreased sales by $56.7 million. The back-to-school rush season extended past the close of the Company's third fiscal quarter, factoring in the two additional weeks in February that contributed to this year's rush season, comparable store sales decreased 1.3% for the 39 weeks ended January 26, 2013. In addition closed stores also contributed to the decrease in sales by $14.5 million while new stores increased sales by $66.2 million. Sales were impacted by the continued growth of textbook rentals, which have a lower price than new or used textbooks, and a portion of rental sales are deferred over the rental period.

• NOOK sales decreased $101.6 million, or 13.2%, to $668.3 million during the 39 weeks ended January 26, 2013 from $769.9 million during the 39 weeks ended January 28, 2012. This decrease was primarily due to lower device unit volume, $21.2 million of incremental channel partner returns given the holiday sales shortfall, and $15.4 million of promotional allowances to optimize future sales opportunities, partially offset by higher content sales. Digital content sales increased 27.9% during the 39 weeks ended January 26, 2013.

• The elimination represents sales from NOOK to B&N Retail and B&N College on a sell through basis. Lower than last year due to lower device sales by B&N Retail.

During the 39 weeks ended January 26, 2013, B&N Retail had two store openings and 16 store closings, and B&N College had 40 openings and nine closings.

Cost of Sales and Occupancy



                                                                13 weeks ended                                                  39 weeks ended
. . .