UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK ---------------------------------------------------------------------x : THE INTIMATE BOOKSHOP, INC. : 98 Civ. 5564 (WHP) : Plaintiff, : : -against- : : BARNES & NOBLE, INC.; : BARNESANDNOBLE.COM INC.; : BORDERS GROUP, INC.; BORDERS, INC.; and : WALDEN ACQUISITION COMPANY; : : Defendants. : : ---------------------------------------------------------------------x DECLARATION OF BRENDA KURALT IN OPPOSITION TO DEFENDANTS' SUMMARY JUDGMENT MOTIONS BRENDA KURALT hereby declares, pursuant to the penalties of perjury under 28 U.S.C. <185> 1746, that the following statements are true and correct: 1. I am the secretary-treasurer and primary buyer of the plaintiff, The Intimate Bookshop, Inc. ("Intimate"), am fully familiar with the facts stated herein, and make this declaration in opposition to defendants' summary judgment motions. 2. Annexed as an attachment hereto is a copy of my expert report dated July 14, 2001. All statements of fact in said report are true and accurate, and all statements of opinion continue to be my opinion, as expert, and I remain willing to testify as to such facts and opinion if called upon to testify. @ADDRESS = Intimate's Dealings with the 14 Publishers 3. Annexed as Exhibit A hereto (and placed at the end of this V#1) is a copy of invoices to Intimate from the 14 Publishers listed in Paragraph 30-K of the 2nd Amended Complaint (not including Harry Abrams, Inc., which Publisher's name previously was withdrawn by Intimate) for book purchases made by Intimate during 1994-1996. These are copies of invoices kept in the ordinary course of Intimate's business, and it was Intimate's business to keep such records. All of these invoices were produced to defendants. These invoices show that Intimate was purchasing hardcover books in carton quantities from the Publishers, on a drop shipment basis, at discounts as set forth therein, generally 46%. 4. There were no rebates, fees, allowances or other payments or benefits received from any of the Publishers which increased the effective amount of such carton-quantity discount. Intimate's orders of less than carton quantities received lower discounts (in absence of a special deal or stock offer made to the entire industry). All co-op advertising moneys received by Intimate were paid in reimbursement for actual advertising expenses incurred by Intimate and proven to the Publishers. Intimate never received, was never offered, and was never informed about the availability to Intimate of any RDC fee, RC fee, statistical reserve, ROG fee, end-cap allowance, pocket allowance, rack allowance, display allowance, table allowance, or other fee or allowance for displaying or positioning books in any of Intimate's bookstores. 5. Also, Intimate never received and was never offered any shared markdowns from any of the Publishers. Furthermore, Intimate was not permitted to delay payment of any invoices beyond the due date without immediate threat of having further book shipments held up by the Publisher. In fact, during late 1996 through 1998, because of non-payment of invoices by Intimate, various Publishers put Intimate on hold and refused to make book shipments to Intimate. 6. Finally, Intimate never received any stock offers or offers for special deals, shared markdowns or markdowns in place from any of the Publishers as to any Dr. Seuss books, and specificallly received no offers involving a free Dr. Seuss book as part of a multi-unit offering. 7. Intimate's return rate for front list (i.e., new or recently published) hardcover and softcover books was low (averaging about 10%-15% of purchases) and, as to backlist hardcover books, Intimate's return rate was also very low, about 1% or 2%. It was good financial management to keep return rates low because Intimate was required to pay for the books it ordered, on a timely basis, so that a low return rate meant that Intimate was not paying for too many books to be held in inventory; but a zero return rate would also be inappropriate, because it would mean the loss of some book sales. Our data processing system enabled us to order properly, both as to front list and as to backlist books. 7A. Other restraints upon excessive book ordering included availability of warehouse, storage-room or selling space, the costs of handling and shipping returns, the delays in obtaining credit for returned items, and the inevitable loss of some credits because of Publishers' practices of finding fault with some returned books, denying credit for their return, and being unwilling to make any compromises by demanding full payment from Intimate under threat of stopping future book shipments; also, there was the difficulty of managing overstocks from the back room. Superstore Openings and their Effect upon Intimate 8. I was employed by Intimate when various B&N and Borders stores opened up during the 1990's in competition with one or more of Intimate's stores. For example, B&N opened a superstore in 1993 in Charlotte (across the street), and in 1994 Borders opened in Charlotte (across the street); Borders opened in 1996 in Greensboro (1,000 feet from Four Seasons mall); and B&N opened in 1996 in Winston-Salem (couple of blocks away); and a B&N opened in 1997 in Durham NC, near Chapel Hill (1.5 miles away). Each of these superstores opened up in immediate competition with one or more of Intimate's stores. 9. I observed that in connection with the opening of these superstores, both B&N and Borders advertised extensively in local newspapers, radio and television; they obtained substantial store-opening publicity; and that prospective customers could purchase all books from defendants at a discount of at least 10%, to as high as 40% for hardcover bestsellers. 10. I became aware that these superstore openings by B&N and Borders were taking customers away from Intimate because: A. Scores of customers who ordinarily would have come directly to Intimate's bookstore in Chapel Hill (where I had my office) told me that they had gone to B&N first (in Chapel Hill). B. A regular female customer from a retirement community named Carol Woods told me that she and many of her neighbors preferred to shop at Intimate, but that she and they could not overlook the fact that B&N was offering lower prices than Intimate; and she asked me if Intimate could do something to enable her and her neighbors to continue shopping at Intimate (Chapel Hill). C. Other customers told us or our employees the same thing, that they were able to buy books at a lower price at B&N, but wanted to buy from Intimate if Intimate could match B&N's low price. 11. In response to that, Intimate created the "Partners Program" and the "Rent-a-Book Program", to try to compete, by selling a $10 membership for 1 year in the Partners Program, which gave a 30% discount on bestsellers and 10% discount on all other books and merchandise. 11A. The rent-a-book program worked like a video tape rental program, with pricing from $2.50 to $4.50 for bestsellers and audio books. 12. We had a corporate customer who had Intimate select, on a regular basis, bestsellers and other new titles to circulate in their employee library. We did this for about one year, and as soon as B&N opened, they told us they were buying from B&N instead, because B&N was giving them a larger discount. 13. In Greensboro and Winston-Salem, we had school book-fair accounts, which were taken away by B&N, because (according to the volunteers who handled the school book-fair programs), they started buying instead from B&N, saying to me that B&N offered them a larger discount. 14. Durham Academy, was a private school for whom Intimate conducted annual in-store book fairs (opening Intimate's store exclusively for them late on a Sunday afternoon); Intimate gave them them a discount on all purchases, and donated a percentage of sales to the school; but when B&N opened, Intimate lost this customer to B&N, according to the head of Durham Academy's book-fair program, because of higher discounts. 15. At Intimate's Southpark store, Intimate had 25 or more corporate customers who regularly bought books from Intimate; and prior to Christmas each year about 10 of these corporations would send one buyer over to our store (open only to the buyer) to select books and other merchandise as corporate gifts. Intimate lost all of these customers during 1997 because Intimate (as a result of its deteriorating financial condition) no longer had enough selection of books to attract these corporate customers. 16. Intimate had regular store-manager meetings and after B&N and Borders store openings, our Intimate store managers told us that customers wanted to buy from Intimate but that they could not afford to buy from Intimate without comparable discounts as provided by B&N and/or Borders. 17. The store managers also reported that we were losing sales after these openings of B&N and Borders stores near to their Intimate stores, which I saw was true because Wallace Kuralt and I monitored sales on a daily basis. 18. During 1994 and 1995, we increased our advertising to try to regain or hold our customers, but this stopped in 1996, when we could no longer afford to advertise. It should be noted that the Publishers' co-op advertising was not truly available to us for advertising because of the limitations imposed by the Publishers on us (but not on B&N and Borders). Intimate's advertising generally was not reimbursed or reimbursable by Publishers because it did not qualify under their highly restrictive programs, which programs were not applicable to defendants. 19. Each of the Publishers imposed restrictions on our use of their published co-op advertising, such as the requirement that Intimate actually spend the money for radio or television time or for newspaper or magazine space; that Intimate lay out the moneys in advance; that Intimate wait until after the advertising ran, and then make application to the Publisher for refund; that Intimate prove by copies of media invoices that the advertising ran, and the dollar cost to Intimate thereof; that Intimate wait for a credit to issue for such advertising (often receiving no credit until 6 months or so after the advertising ran or had been paid for); and limiting Intimate's use of the co-op allowance to the book which created the allowance (which of course at some time would not be worth advertising, because of lack of interest, making any accrued co-op funds worthless to Intimate). 20. The ability to use co-op funds from Publishers diminished yearly from 1993 through 1997, and then became inpossible for Intimate to use because of Intimate's deteriorating financial condition and the length of time it took under Publishers' rules and practices for Intimate to obtain any reimbursement for such expenditures. 21. The new concept of the "pooled allowance", in which Publishers determined the availability of co-op money based on a percentage of last-year's purchases was not made available to Intimate by any of the Publishers. The continuing restriction of use of co-op funds to the book which created the funds made it virtually impossible to use co-op funds, because last-year's books were no longer selling and were not worth advertising. 22. We would hear from the Publishers' sales representatives that B&N and Borders were abusing the co-op advertising program, and other abuses, and obtaining advertising money to which they were not entitled. Intimate's Competition with Defendants 23. I observed that defendants' superstores had more space, more titles, more copies per title, better (more expensive) locations, more amenities (including a place to eat, drink and read books and magazines without buying them; public toilets for patrons and others; chairs scattered around the superstores for persons to read books and do their homework or research similar to a library, without fear of being asked to leave the store); also, there was free parking adjacent to the superstores and allocated solely for use of the superstore and its customers. 24. Intimate tried to find ways to keep our existing customers, but saw that we were losing many of them to defendants. We tried to provide better service, by being willing to make special orders for books which we (and usually defendants likewise) did not carry. Defendants were not as anxious to take the time to help customers put in special orders for books, but this did not seem to help our sales to any appreciable extent. 25. From time to time I saw persons I knew to have been customers of Intimate shopping in Intimate's store or walking in the shopping center, and carrying bags known to me to be used by defendants B&N and/or Borders to bag the books purchased by such defendants' customers. 26. Also, some persons tried to return books to Intimate which they had received as gifts, but the books had obviously been bought at B&N, Borders, or Waldenbooks because of stickers appearing on the books. 27. Also, many of Intimate's customers told me that they were buying books at B&N and Borders because their prices were lower, and suggested that Intimate should lower its prices to meet this price competition of defendants. I explained to about 10-15 of these customers that we could not stay in business if we sold books at the same prices that defendants were selling books for at the time. 28. Starting several days or weeks after the opening of each new superstore by defendants within Intimate's marketing area, I noticed a decline in sales, a decline in books to be reordered, a reduction in transactions (which I interpreted to mean customers), a marked decline in sales of bestsellers, and as to the store in which I worked a failure to see certain customers who I had been accustomed to seeing. 29. Also, when I visted B&N and Borders competing stores from time to time (starting in 1993 and ending in 1997 or 1998), I saw (but did not speak with) various customers or former customers of Intimate, and observed some of them purchasing books at the checkout counter of B&N and Borders. Intimate Continues as a Bookseller Awaiting Injunctive Relief 30. Intimate is unable to operate a bookstore in competition with defendants as long as defendants continue to obtain the discriminatory discounts, rebates, allowances, payments and other benefits. 31. Intimate continues its bookselling operations subsequent to closing its chain of bookstores; Intimate awaits injunctive relief to level the playing field, and thus enable Intimate to resume its bookstore operations. 32. In addition to selling used and rare books, Intimate (under the trade name Past Perfect Antiques & Books, located 73 Hillsboro Street, Pittsboro NC, in a building owned by Wallace and Brenda Kuralt) has been selling new books obtained from one of the 14 Publishers (Random House) and from a wholesaler (Baker & Taylor), and through continuing sales of about 3,000 new books (mostly hardcover) which remained in inventory after Intimate closed its chain of bookstores. 33. Although Intimate has reduced its bookselling operations, it does continue to sell used, rare and new books, and has the trained personnel (Wallace Kuralt, Brenda Kuralt, and Carole Hay, formerly a manager at Intimate's Eastgate bookstore), contacts, know-how, experience, assets, equipment (computer in storage), history of business transactions (numerous tapes of computer transactions), computer personnel, and computer software capable of running the operations of a single bookstore or a chain of bookstores. 34. The only thing preventing Intimate from operating its bookselling business as in the past is the discriminatory pricing which makes continued bookselling in competition with defendants a futile act, as evidenced by Intimate's closures of all of its bookstores, one by one, after defendants came into the market, and the history of more than 50% of all independent general booksellers in the United States which have gone out of business since the advent of defendants' superstore openings. Intimate's Purchase of Waldenbook's Returns as Remainders or Closeouts 35. Books returned by booksellers to any of the Publishers were often of little or no value to the Publishers, and certainly not worth the freight or handling costs involved in shipping the returned books back to the Publishers. 36. I recall, in about 1997, purchasing on behalf of Intimate remaindered or close-out books being offered by book wholesaler Ingram. Intimate was allowed by Ingram to buy as many of these remaindered/close-out books as Intimate wanted, according to the Ingram sales manager; the price to Intimate was $.10 per book for books having an original suggested retail price of up to $20, and $.20 per book for books having an original suggested retail price of more than $20. Intimate ordered 7 skids (about 250-300 cartons or 5,000 to 7,000 books) of these remaindered/close-out books. 37. Shortly thereafter, Intimate received the ordered books, many of which were in unopened cartons which were Waldenbook's returns to Ingram, for which, apparently, Ingram had given Waldenbook full credit on Waldenbook's returns (amounting to about 50% of the suggested retail price per book), and someone (either Waldenbooks or Ingram) had paid freight from Waldenbooks to Ingram amounting to about $.05 per book. If the average suggested retail price for 5,000 such books was $15, then Waldenbooks received a credit from Ingram, on the return, amounting to about $37,500. Intimate paid about $750 (@ $.10 and $.20) for these 5,000 books. 38. During approximately the mid to late 1980's, Wallace Kuralt, Barbara and Eric Svenson (managers of Intimate's Southpark bookstore in Charlotte NC) and I were given a tour of Random House's warehouse in Westminster, MD, conducted by the warehouse manager (Jack Gambatese). We saw huge cardboard bins (called "Gaylords") full of trade (quality) paperback books with covers, and when asked what those books were, Gambatese said the books were returns, and that they were going to be shredded. We asked if Intimate could buy the books, and Gambatese said "No", that the books were not worth reshelving (too much labor) or even to ship to Intimate in bulk lots, even though Intimate was willing to pay (and did offer) $.10 per book. 39. During this same trip, an associate of Gambatese showed us a machine they at Random House were perfecting which could slice the covers off hardcover books so the paper pages of the books could be shredded. Random House, according to this associate, was planning to shred some hardcover book returns. 40. Also, from 1980's through 1997, Intimate purchased skids of returned books from various Publishers (Viking, Harper, Random House, Simon & Schuster, and Penguin) at much lower than the low remainder prices. We paid about $.50 per book for these hardcover books, which amounted to less than 10% of the suggested retail price for such books. Some of the books were "hurt books" (i.e., perfect books returned with cosmetic imperfections such as a "ding" [blemish] or a price or name sticker from the original bookseller). 41. It should be noted that even though the Publishers would not accept any returns for credit from Intimate if the books bore any "dings" or Intimate stickers, the returned books we were buying which had stickers were stickers that indicated the books came from Waldenbooks and B. Dalton and other chain stores. Defendants Would Order Publisher's Entire Printing, Leaving Intimate with Unfulfilled Orders, Then Return the Unsold Books for Full Credit When Demand for the Book Ceased 42. The following happened many times, especially within the Christmas selling season: Intimate wanted to obtain many copies of a bestseller; the Publisher's representative would report to us that the printing had sold out, and that there were no plans to reprint. Thus, Intimate was not able to buy the book, and lost sales and customers. 43. Because the book salesman were losing commissions on sales to Intimate, they would complain to us that what was happening was that the Publishers (Random House, Viking - a Steven King book; Doubleday, Simon & Schuster and others) did not plan to reprint after the Christmas selling season was over, because they knew about or expected substantial returns of the book from B&N, Borders, and other major chains, which typically overpurchased books and then returned, for full credit, the unsold books. This practice was at a high cost to the Publisher, the author, and to Intimate. There was little comparable cost to B&N and Borders. "You Can't Sell Books from the Stock Room" - an Industry Saying 44. Two employees of B&N and Borders told me about B&N's and Borders' stocking problems in Charlotte NC. One was a female stock room employee from B&N in Charlotte NC, who later was employed by Intimate. The other was an Intimate female employee who left Intimate to work for Borders across from South Park (Charlotte) and then returned to work for Intimate. 45. Both told me that at B&N/Borders they would get in huge quantities of books of a given title, more than could be displayed "on the selling floor" to prospective customers, and these excess quantities were stored in the back rooms; this made it difficult to unpack newer shipments of books of other titles as they came in, so that many new shipments of books which came in were delayed getting onto the shelves, or not put out at all, which caused returns to be very high for B&N and Borders. 46. What was happening seemed clear to me, and it's summarized in the industry saying "You can't sell books from the stock room." Intimate used to have signs to such effect in Intimate's stock rooms, to encourage employees to expedite the receiving procedure of newly-received books to display on the selling floor. 47. None of the Publishers had any programs known to me to reward booksellers for their low, responsible return rates (such as Intimate's return rates over the years), and apparently had no program to penalize B&N or Borders for their exceedingly high return rates. Instead, B&N and Borders seems to be receiving higher benefits in proportion to the losses they were causing the Publishers through their excessively high, destructive return rates. Intimate's Distribution Center Warehouse Could Not Get Books Out to Intimate's Stores Fast Enough 48. At one time during the 1970's, before any Publishers were paying RDC or RC allowances to B&N and Borders (which were not even in existence as superstores at that time), Intimate had a warehouse functioning as a distribution center to all of Intimate's then 6-7 bookstores. Our own experience was that the distribution center was not effective in getting books out to the 6-7 Intimate bookstores on a timely basis, and we stopped our distribution center efforts during the late 1970's. 49. We learned that the double handling and double shipping of books was not cost effective, and that a distribution center only worked to any extent to service nearby Intimate bookstores (within a couple of miles) but not for Intimate bookstores located further away from the center. 50. We decided that the whole distribution center system of Intimate was inefficient (and disbanded it) because it caused a backlog of handling book shipments, which resulted in delays in getting the books to our bookstores. 51. If Publishers could have shipped their books to our distribution center several weeks prior to shipments to our retail bookstores, the distribution center might have had some use, but Publishers generally ship the books when they are ready, and do not ship the books earlier than that, unless they are requesting their printers to ship books directly from the printer's premises. Such shipments, of course, are more costly and troublesome because they would be made by a printer, which is not in the business of shipping books to multiple recipients, unlike the facilities at the Publisher's warehouse. None of the Publishers Had a Book Warehouse in North Carolina or South Carolina 52. I was aware of virtually every shipment made to Intimate by the Publishers during 1994 through 1998, because I was the person who ordered the books. I am aware of no warehouse in North Carolina or South Carolina which was owned or used by any of the Publishers to ship books to Intimate. I observed that all of our book purchases from the 14 Publishers were shipped in to Intimate from out of state. ABA Buyer's Manual or Red Book 53. Each year, with exceptions, the ABA published and distributed to its members, including Intimate, a Buyer's Manual (called the "Red Book" because of its red cover). This paperback book contained the Publishers' terms of sale and was used by Intimate and to verify the discount information set forth in our records when ordering books from the Publishers, and to verify how much discount we were getting when receiving the books and enclosed invoice and/or packing list from the Publishers. From time to time a Publisher would change the terms, and such new terms would appear in the next edition of the Buyer's Manual. Meanwhile, I would update the current Buyer's Manual to reflect any new terms. The new terms would be received either from a Publisher's representative, through direct mail from the Publisher, or through an announcement in Publisher's Weekly. 54. Intimate was never offered or given book discounts which were not published in the Red Book, as indicated above, except for special deals and stock offers which, from time to time, were made available to all booksellers. Intimate made sure that deviations from Red Book discounts, whether favorable or unfavorable to Intimate, were brought to the Publisher's attention, and no deduction or credit was taken from any invoices without the Publisher's approval in advance. Payment of all disputed amounts was made by Intimate, and sometimes Intimate received a credit memo, although belatedly, resolving a dispute in Intimate's favor. 55. Intimate did not obtain any discounts, rebates, allowances, fees, reserves, payments or other benefits not spelled out in the Red Book, as indicated above. Publishers repeatedly told us, through their representatives, that the large chains such as defendants were not getting anything that Intimate was not getting, which we found increasingly hard to believe, especially when some representatives were telling us about abuses by defendants which were taking place. Intimate's Discounts Are Accurately Stated in the Publishers' Invoices to Intimate 56. Because Intimate received none of the benefits listed in the preceding paragraph, Intimate's effective discount for the books it purchased was the discount set forth in the Publishers' invoices to Intimate, even as to books received through stock offers and special deals. The benefits described in the preceding paragraph would not appear in the Publishers' invoices to defendants unless the items were listed by the Publishers as deductions in the original invoices to defendants. Accordingly, defendants' invoices would not reflect the actual or effective discounts at which defendants were purchasing books from the Publishers. Executed this ____ day of January, 2002, at Carrboro, North Carolina. ________________________________ Brenda Kuralt