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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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: 0-26063
barnesandnoble.com inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-4048787
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
76 Ninth Avenue, New York, NY 10011
(Address of Principal Executive Offices) (Zip Code)
(212) 414-6000
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: NONE
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 X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K [ ]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on March 17,
2000 as reported on the NASDAQ National Market System, was approximately
$259,190,839.
Number of shares of $.001 par value Class A Common Stock, Class B Common Stock
and Class C Common Stock outstanding as of March 17, 2000 was 30,270,463, one
and one, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference to a
definitive proxy statement to be filed by the Registrant not later than April
29, 2000 pursuant to Regulation 14A.
This document contains 52 pages.
Exhibit index located on pages 27 - 31.
Table of Contents
Part I Page:
- - ------ -----
Item 1. Business................................................... 3
Item 2. Properties................................................. 14
Item 3. Legal Proceedings.......................................... 15
Item.4. Submission of Matters to a Vote of Security Holders........ 15
Part II
- - -------
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 16
Item 6. Selected Financial Data.................................... 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results Of Operations........................ 18
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk................................................ 26
Item 8. Financial Statements and Supplementary Data................ 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Disclosure.................................. 26
Part III
- - --------
Item 10. Directors and Executive Officers of the Registrant......... 26
Item 11. Executive Compensation..................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 26
Item 13. Certain Relationships and Related Transactions............. 26
Part IV
- - -------
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................ 27
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PART I
Item 1. BUSINESS
General
Prior to October 31, 1998, the business of barnesandnoble.com llc
("B&N.com") was conducted by a wholly owned subsidiary of Barnes & Noble, Inc.
("Barnes & Noble"), which subsidiary was originally incorporated on January 14,
1997 in the State of Delaware under the name Barnes & Noble Online, Inc. ("B&N
Online"). As of October 31, 1998, B&N Online contributed substantially all of
its assets and liabilities to B&N.com and Bertelsmann A.G. ("Bertelsmann")
contributed $150 million in cash to B&N.com. Bertelsmann subsequently
contributed an additional $50 million in cash to B&N.com. The completion of the
foregoing transaction resulted in Barnes & Noble and Bertelsmann each having a
50% beneficial interest in B&N.com.
On March 10, 1999, barnesandnoble.com inc. (the "Company") was
established as a new Delaware subsidiary wholly-owned by Barnes & Noble. Prior
to the effective date of the Registration Statement filed in connection with the
Company's Initial Public Offering (the "Offering") the Company filed an Amended
Charter which, among other things, reclassified its outstanding Common Stock to
one share of Class B Common Stock. The Company then issued one share of Class C
Common Stock constituting a 50.0% interest in the Company to a wholly-owned
subsidiary of Bertelsmann. The foregoing transactions in this paragraph are
collectively referred to as the "Recapitalization." Following the
Recapitalization, Barnes & Noble and Bertelsmann each had a 50% beneficial
interest in the Company through their ownership of all of the outstanding Class
B and Class C Common Stock.
In connection with the Offering, the Company issued 28,750,000 shares of
Class A Common Stock to the public and immediately thereafter contributed the
proceeds to B&N.com in exchange for 28,750,000 Membership Units in B&N.com.
Immediately following the Offering, Barnes & Noble and Bertelsmann each owned an
approximate 40.0% interest in B&N.com, with the remaining 20.0% interest owned
by the Company. As of December 31, 1999 the Company owned an approximate 20.3%
interest in B&N.com and Barnes & Noble and Bertelsmann owned approximately
39.85% each. The Company's Class B Common Stock and Class C Common Stock
(collectively, "High Vote Stock") are convertible into shares of Class A Common
Stock at any time by the holder thereof on a one-for-one basis. The holders of
Class A Common Stock and High Vote Stock generally have identical rights, except
that each holder of Class A Common Stock is entitled to one vote per share and
each holder of High Vote Stock is entitled to the number of votes per share
equal to: (i) ten, multiplied by the sum of (a) the aggregate number of High
Vote Stock owned by such holder and (b) the aggregate number of Membership Units
owned by such holder; divided by (ii) the number of shares of High Vote Stock
owned by such holder. As a result of their ownership of High Vote Stock, Barnes
& Noble and Bertelsmann each beneficially control 48.9% of the voting power
(97.8% in the aggregate) of the Company's voting stock. The Company's sole
business is to act as the sole Manager of B&N.com. As sole Manager of B&N.com,
the Company controls all of the affairs of B&N.com. Barnes & Noble and
Bertelsmann, as a result of their ownership of the High Vote Stock and
Membership Units, control both the Company and B&N.com.
B&N.com has pursued a strategy of focusing on the sale of a broad range
of knowledge, information, education and entertainment related products. Since
opening its initial online store in March 1997, B&N.com has sold products to
over 4.7 million customers in 224 countries. B&N.com has created a model for
e-commerce based upon a compelling value proposition. B&N.com's suite of online
stores is anchored by its online bookstore, and also includes online stores
offering software, magazines, music, prints & posters and related products, all
seamlessly integrated within B&N.com's Web site located at www.bn.com. B&N.com's
online bookstore, which contains over
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1 million in-print titles and 15.6 million items available for sale in
out-of-print, offers customers an easy-to-search catalog of virtually every book
currently in print, as well as an extended searchable catalog of millions of
out-of-print, previously-owned and rare books. B&N.com, through Barnes & Noble,
has the largest in-stock position of books available for immediate shipping to
customers. In addition to a comprehensive selection of books and related
products, B&N.com offers its customers fast delivery, deep discounts, easy and
secure ordering, rich editorial content and community experience.
According to Media Metrix, in January 2000, B&N.com's Web site was the
fourth most trafficked shopping site and was among the top 25 largest Web
properties on the Internet. Distribution and co-marketing agreements with major
Web portals and content sites, such as America Online ("AOL"), MSN and Lycos,
have extended B&N.com's brand and consumer exposure to its online stores.
B&N.com has also established a network of remote storefronts across the Internet
by creating direct links with over 360,000 affiliate Web sites. B&N.com is also
a leader in business-to-business e-commerce with its unique Business Solutions
program.
During 1999, B&N.com introduced many major enhancements to its online
stores, including the full rollout of its online music store. It launched its
Prints & Posters Gallery, a unique collection of images that can be produced on
demand on museum-quality canvas or high-quality paper, and its free electronic
greeting card ("eCards") service, an exclusive selection of greeting card images
that can be personalized and enhanced with animation and music. B&N.com On the
Go, a company-wide wireless strategy designed to allow customers to shop at
B&N.com from wireless devices such as the Palm VII handheld computer from Palm
Computing, was established in late 1999. In December 1999, B&N.com announced the
expansion of its presence in the online magazine subscription market through the
investment and acquisition of an equity stake in Enews.com, subsequently
completed in January 2000. In February 2000, B&N.com launched bnRadio, the first
Internet radio service linked to an e-commerce company that allows customers to
listen to full-length songs and excerpts from audio books. The full rollout of
video and DVD product lines are anticipated in 2000.
The Company believes that B&N.com's relationships with Barnes & Noble,
the nation's largest bookseller, and Bertelsmann, one of the world's largest
media companies, provide B&N.com with meaningful advantages relative to other
online retailers in its category, including:
o The superior brand recognition of the Barnes & Noble trade name,
which is a strong motivating factor in attracting customers,
especially with regard to the post-early adopter market of
consumers who have yet to make an online purchase;
o The use of Barnes & Noble's state-of-the-art distribution center as
its primary product supplier, which enables B&N.com to offer over
750,000 in-stock book titles for fast delivery, representing the
largest standing inventory of any online bookseller and to benefit
from cost savings as B&N.com lessens reliance on wholesalers, a
more expensive sourcing alternative;
o The enterprise value of Barnes & Noble and Bertelsmann, including
Barnes & Noble's network of over 1,000 retail bookstores nationwide
and Bertelsmann's position as one of the largest integrated media
companies in the world, which provides significant advantages in
attracting strategic partnerships;
o The ability to conduct cross-marketing, co-promotion and customer
acquisition programs with Bertelsmann's U.S. book clubs, which
provide B&N.com with: (i) access to millions of established book
buyers; (ii) the opportunity to directly promote its online store
to this vast audience of proven buyers; and
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(iii) a potential new stream of customers that it will be able to
acquire at a significantly lower acquisition cost as compared to
customers acquired via its other marketing channels;
o The potential ability to directly link and cross-promote B&N.com's
online stores with the online stores operated or intended to be
operated by Bertelsmann's Books Online ("BOL") in the United
Kingdom, Germany, France, the Netherlands and Italy, which will
enable B&N.com to more rapidly acquire new streams of international
customers, as well as to offer its existing customer base access to
a vast selection of foreign language books, which the Company
believes will help B&N.com further strengthen customer loyalty and
repeat business; and
o Ongoing access to the substantial book selling and direct marketing
knowledge and experience of the management of Barnes & Noble and
Bertelsmann.
Industry Background
E-Commerce. The new arena of e-commerce provides retailers with the
opportunity to serve a rapidly growing market due to increased consumer
acceptance of the Internet as an alternative shopping channel. According to
Jupiter Communications' November 1999 report, US online shopping for 1999 was
estimated at $14.9 billion and is expected to reach $78 billion in the year
2003. The total number of US online buyers at the end of 1999 was estimated at
28.8 million and is forecasted to grow to approximately 85 million by the end of
the year 2003, which represents approximately 54% of overall US online
households. The Company believes that these figures will continue to grow as
Internet use becomes easier and more pleasurable through higher-speed access and
less expensive and alternative Internet access devices.
The Internet also provides e-commerce companies with an opportunity to
serve a global market. Jupiter Communications' September 1999 estimates project
that the number of Internet-connected households worldwide will grow from
approximately 100.1 million at the end of 1999 to approximately 156.6 million by
the end of 2003. IDC estimates that the number of Web users worldwide will
exceed 315 million by the end of 2002.
The Book Industry. The size of the U.S. consumer book market, according
to Veronis Suhler, an investment banking firm specializing in, among other
things, the publishing industry, was $16.9 billion in 1998 and is expected to
grow to $22.5 billion by the year 2003. Worldwide book sales, according to
Euromonitor, were expected to be $82 billion in 1999 and are anticipated to grow
to approximately $93 billion by the year 2002. B&N.com's early history with
non-U.S. consumers indicates that the demand for U.S. published books abroad is
large and relatively untapped.
Online Shopping Forecast. Industry analysts, including Forrester Research
and Jupiter Communications, forecast continued and accelerating acceptance of
the Internet as a channel that consumers will turn to for a wide range of
products. Within the categories where B&N.com has placed its primary focus,
namely books and complementary information-based products such as music, video
and software, industry analysts forecast a large and rapidly growing market for
online sales. Forrester Research estimates that U.S. online sales of books will
grow to nearly $3.3 billion by 2004. In addition, Forrester Research estimates
U.S. online sales in 2004 for music to be $4.3 billion, software to be $3.3
billion and video to be $1.7 billion.
Products That Are Well Suited for E-Commerce. The book, music, video and
software businesses are particularly well suited for e-commerce because an
online store has virtually unlimited shelf space and can offer
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consumers anywhere the convenience of browsing through vast product information
databases. The use of sophisticated search engines and personalized services
enables users to locate books and music, for example, with convenience and speed
and to get advance notice about titles in their areas of personal interest.
Editorial content, such as synopses, excerpts, review and editorial
recommendations, and in the case of music, downloadable sound samples, make for
a more-educated and entertaining purchasing decision. The Company believes that
the presence of an online store on consumers' desktops will, in and of itself,
stimulate demand and expand the marketplace. Additionally, the Company believes
that new technology, such as portable electronic books and print-on-demand
publishing, will greatly add to the range of content that an online retailer can
offer.
Business Strategy
B&N.com has pursued a strategy of focusing on the sale of a broad range
of knowledge, information, education and entertainment related products. To
achieve this objective, B&N.com has focused its efforts on providing the highest
possible levels of value and service, which it believes are reflected in the
completeness of its product selection, the ease-of-use of its Web site, the
price of its products and the speed of delivery it can offer its customers.
While the principal focus of B&N.com is online bookselling, it continues to seek
opportunities that expand its product offering to complementary information,
entertainment and intellectual property-based products, and to present them to
customers with the highest contextual relevance. It is B&N.com's goal to be
recognized as the most innovative and customer-focused of e-commerce merchants,
making online purchasing a simple, personal and gratifying experience that
results in the highest levels of customer loyalty.
Central to achieving these objectives, B&N.com's operating strategy is
focused on rapidly extending its brand and increasing its customer and revenue
base by:
Continually Enhancing the User Experience. B&N.com is committed to
making every aspect of browsing and shopping in its online stores an easy
and pleasurable experience. It makes continual efforts to improve the
design, layout and navigation of all elements of its Web site, as well as
to ensure that the site's performance metrics are competitive, especially
with regard to page download times and the speed of all search functions.
B&N.com also strives to make the entire ordering and checkout process
easy, intuitive, fast and secure.
Offering a Large Product Selection and Fast Delivery. B&N.com
offers one of the largest selections of books, currently over 1 million
in-print titles and 15.6 million items available for sale in
out-of-print, of any online bookseller. This includes virtually every
English-language book currently in print as well as millions of
out-of-print, pre-owned and rare books. B&N.com's online databases act as
a highly searchable catalog for the spectrum of English-language books.
B&N.com, through Barnes & Noble, maintains the largest in-stock position
of any online bookseller, enabling it to uniquely serve customers by
having over 750,000 titles available for immediate shipping. Preparing
two distribution centers for operation in 2000 will bring the number of
titles available to over one million and enhance the expediting of
products as well. B&N.com's music store is rapidly growing as well,
currently having over 200,000 titles available for purchase. Over 9,500
images are available for printing on museum-quality canvas or
high-quality paper and are printed and shipped on demand from B&N.com's
strategic partner BuyEnlarge.com Inc.
Expanding Its Product Offering. B&N.com intends to be the best
place to buy books online as well as the most authoritative source for
information about books and authors. While B&N.com's major focus is and
will be selling books, the Company believes that offering complementary
information products such as
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magazines, software, music and videos, is a natural extension of
bookselling. B&N.com launched its magazine and software online stores
during 1998 and began a limited introduction of music and video products
in late 1998. In July of 1999, the full rollout of music was completed.
In October 1999, B&N.com launched its Prints & Posters Gallery and eCards
service. In January 2000, the Company completed an acquisition of
approximately 32 percent of Enews.com, the largest retailer of magazine
subscriptions on the Internet, to expand its presence in the online
magazine subscription market. Concurrently the Company entered into a
marketing agreement with Enews.com, the exclusive seller of magazines on
B&N.com's Web site, offering competitively priced subscriptions to nearly
1,000 titles. The full rollout of the video product line is expected to
be completed in 2000. Furthermore, the Company believes that B&N.com's
entire range of technologies, inclusive of its database and search
engine, automated shopping cart, and other related EDI interfaces with
vendors will enable it to position itself as a delivery mechanism for
downloadable content, such as electronic books. B&N.com's recently
announced eBook initiative with Microsoft is expected to provide
B&N.com's millions of customers with access to eBook titles designed to
deliver an on-screen computer reading experience rivaling that offered by
traditional paper-based text.
Building Brand Awareness and Driving Customer Acquisition through
Advertising and Promotion. B&N.com will continue to invest in building
its online brand and in communicating the benefits and convenience of
shopping at its online stores. The Company believes that B&N.com is well
positioned to benefit from the large post-early-adopter market that is
just beginning to access the internet, many of whom have yet to make
their first online purchase. A variety of media, including online, radio,
television, print and outdoor advertising, was selectively deployed in
1999 to further B&N.com's goal of rapidly growing its customer base. The
Company began 1999 with 1.3 million customers and grew this base to
almost 4 million by year-end. Customer retention has also been growing
steadily, with repeat business rising from 52 percent in 1998 to 66
percent in December 1999. B&N.com also benefits from the cross-marketing
with Barnes & Noble retail stores, wherever possible, as well as from
cross-marketing with Bertelsmann's U.S. book clubs and with Bertelsmann's
internet business BOL in Europe. In all of its advertising and promotion
initiatives, B&N.com seeks to continuously drive down new customer
acquisition cost, as well as to get customers to return to the site more
frequently and to increase the size of their average purchase per visit.
Leveraging its Relationship with Barnes & Noble. The Company
believes that B&N.com's relationship with Barnes & Noble provides it with
competitive advantages, including the ability to use the Barnes & Noble
state-of-the-art distribution center as its primary supplier, leverage
its well-respected brand name and utilize the substantial bookselling
experience of its management.
Strengthening and Expanding Strategic Alliances. B&N.com will
continue to provide its major strategic partners with merchandising
support, strengthening their ability to generate sales for B&N.com and to
promote B&N.com's brand. The Company believes that B&N.com's connections
to Barnes & Noble and Bertelsmann enables B&N.com to negotiate more
competitively for new strategic and marketing partners as major media and
content companies place a high value on these connections.
Increasing the Number of Web Sites in its Affiliate Network.
B&N.com's affiliate network, which was launched in October 1997,
currently has over 360,000 members. The affiliate network, which began
1999 with 48,000 members, is among the fastest-growing in e-commerce.
Continuing to Invest in Technology. The Company believes that
B&N.com currently utilizes a state-of-the-art interactive e-commerce
platform. B&N.com plans to continue to invest in technologies that
improve its
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ability to support its future growth while offering customers the most
convenient, user friendly and secure online shopping experience possible.
In particular, B&N.com plans to invest in technologies that serve to
enhance its ability to conduct personalized one-to-one marketing.
Pursuing Acquisitions and Strategic Relationships. B&N.com pursues
acquisitions, joint ventures and other similar strategic investments and
relationships with complementary businesses and companies in order to
augment or expand its current offerings. Examples of recent strategic
relationships include the following:
o In January 2000 B&N.com announced an agreement to develop and
market a co-branded credit card with MBNA America Bank, N.A., the
world's largest independent credit card company. B&N.com expects
the agreement to generate more than $25 million in revenues over
the five-year term of the agreement, which allows B&N.com to market
its products to MBNA's tens of millions of customers, among the
largest credit card customer bases in the world. The deal is the
first example of B&N.com's ability to monetize customers over
multiple channels, and is an example of the Company's ability to
attract industry-leading strategic partners.
o In January 2000 B&N.com and Microsoft announced that they would
develop an eBook Superstore using Microsoft Reader software. The
eBook initiative will provide B&N.com's millions of customers with
access to thousands of eBook titles through Microsoft Reader, a new
software application designed to deliver an on-screen computer
reading experience rivaling that offered by traditional paper-based
text.
o In December 1999 B&N.com announced its plan to expand its presence
in the growing online magazine subscription market by acquiring an
equity stake of up to 40 percent in Enews.com, the largest retailer
of magazine subscriptions on the Internet.
o B&N.com also launched B&N.com On the Go in December 1999, a
company-wide wireless strategy designed to allow customers to shop
at bn.com from wireless devices such as the Palm VII handheld
computer from Palm Computing.
B&N.com's Online Stores
The principal focus of B&N.com is online bookselling, which generated
approximately 93%, 98% and 100% of B&N.com's total revenues for the years ended
December 31, 1999, 1998 and 1997, respectively. However, B&N.com continues to
seek out opportunities to expand its product offering to complementary
information, entertainment and intellectual property-based products, and to
present them to customers with the highest contextual relevance. Accordingly, in
addition to its online bookstore, B&N.com provides online stores for software,
magazines, music, prints & posters and other information-based products of a
complementary nature. All of its online stores are seamlessly integrated and
presented to customers with B&N.com's single Web site. B&N.com's initial online
bookstore, launched in 1997, was augmented by the introduction of a magazine
store and a software store in 1998. Music, the Prints & Posters Gallery and
eCards were launched in 1999 and a full rollout of the video and DVD store is
planned for 2000.
The Company believes that the following factors make B&N.com's online
bookstore an easy and convenient way to shop for books:
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Large Selection. B&N.com's online database lists virtually every
book in print, offering over one million titles from over 30,000
publishers. B&N.com's search engine and sort capabilities allow consumers
to search and browse through the vast database in an intuitive and easy
way, with accurate and meaningful results received on virtually every
search. In October 1998, pursuant to an agreement with Advanced Book
Exchange, Inc., B&N.com introduced its out-of-print books. In December
1999 B&N.com began sourcing out-of-print books through a second,
non-commissioned vendor, ALIBRIS. B&N.com's combined
in-print/out-of-print book selection is currently over 1 million in-print
titles and 15.6 million items available for sale in out-of-print.
B&N.com's music store, to date, contains over 200,000 selections of music
titles available for purchase. An extensive collection of over 9,500
prints are currently available in the Prints & Posters Gallery. In
addition to the products available for sale, B&N.com also offers
approximately 2,000 eCards, electronic greeting card images which can be
customized and sent free of charge, and bnRadio, an internet radio
service that allows customers to listen to full-length songs and excerpts
from audio books.
Large Standing Inventory for Fast Delivery. The Company believes
that consumers will increasingly demand an assured in-stock position and
fast delivery from online booksellers. It also believes that B&N.com
offers the fastest delivery on the largest number of titles of any online
bookseller because the Barnes & Noble distribution center is able to
provide B&N.com with immediate shipment on over 750,000 titles. Preparing
two distribution centers for operation in Memphis and Reno in 2000, with
the most advanced materials handling equipment and related technology,
will offer even faster delivery and bring the number of available titles
to over one million.
Easy and Secure Ordering. B&N.com seeks to ensure that all
transactions are safe and secure. B&N.com has created a set of
applications that allow customers to establish an account to store an
address book, credit card information and shipping preferences.
Rich Editorial Content. B&N.com strives to provide its users with
the most accurate and authoritative online database about books and
authors. B&N.com's online database currently includes editorial content
such as synopses, book reviews, author biographies and user reviews on
over 1 million titles. Included in this content are book reviews from
many respected industry sources, such as The New York Times Book Review,
Publisher's Weekly and Kirkus Reviews. B&N.com's Web site includes a
microsite featuring the highly acclaimed `Reader's Catalog', a listing of
over 40,000 recommended titles, individually selected and reviewed by an
editorial board under the supervision of the New York Review of Books.
B&N.com's in-house group of editorial experts also write and commission
feature articles, columns and interviews.
Online Community. B&N.com has introduced author chats to its online
bookstore that are a natural extension of the type of community building
activities pioneered in Barnes & Noble's superstores. It was the first
online bookseller to introduce a regular series of real-time author
chats. In 1999, it started adding musicians in its online chats as well.
Since going online in May, 1997, over 1,050 authors and musicians from a
wide variety of genres have participated in these events, including JK
Rowling, Hillary Rodham Clinton, Beck, LeAnn Rimes and Michael Crichton.
B&N.com also encourages users to write their own book and music reviews.
As a result, B&N.com's Web site contains thousands of readers and
listeners reviews.
Personalized Services. B&N.com's e-nnouncements program allows
users to sign up for free e-mail book reviews. Users sign up by area of
interest and receive monthly bulletins about new and noteworthy
publications, handpicked by B&N.com's editors.
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High Level of Customer Service. The Company believes that high
levels of customer service and support are critical to retain and expand
B&N.com's customer base. B&N.com monitors orders from the time they are
placed through delivery by providing numerous points of electronic,
telephonic and personal communication to its customers. B&N.com's
customer service representatives are available seven days a week and
maintain constant customer service availability via e-mail.
B&N.com's magazine store currently offers customers the ability to obtain
subscriptions to over 1,000 magazines in 25 categories with support through
Enews.com. Subscriptions are offered at extremely competitive prices.
B&N.com's software store currently offers approximately 2,000 software
titles in eight major categories, including software for business and
productivity, games, kids and entertainment and for home and reference. The
titles that B&N.com offers encompass a title mix that represents 80% of all of
the software sold in the U.S.
B&N.com's music store currently offers over 200,000 music titles in
sixteen major categories. The site also contains more than 20,000 artist
biographies, more than 50,000 music reviews and album ratings.
B&N.com's Prints & Posters Gallery offers over 9,500 images that can be
produced on demand on museum-quality canvas or high-quality paper.
B&N.com's bnRadio, an Internet radio service that allows customers to
listen to more than 25,000 full-length songs and three-to-five minute selections
from hundreds of audio books can be accessed at http://music.bn.com/radio/. The
site features access to B&N.com's music store and audio book section.
During 2000, B&N.com plans to expand its offering of videos and DVDs by
introducing an online video store as well as other complementary information and
entertainment-based products.
Marketing and Promotion
Online Strategic Alliances. Since inception, B&N.com has aggressively
pursued strategic alliances with premier online companies and high-traffic Web
sites in order to drive traffic to its online stores. The Company believes that
B&N.com's affiliation with Barnes & Noble and Bertelsmann greatly facilitates
its ability to enter into agreements with many high profile portal and content
sites. B&N.com's largest strategic alliance is with AOL. In November 1997, it
entered into a four-year agreement with AOL to be the exclusive bookseller on
AOL's commercial service, which is the largest online service of any kind,
serving approximately 17 million members. B&N.com has also entered into
strategic alliances with MSN, Microsoft, Lycos, ZDNet, Disney, The New York
Times, CNN, TicketMaster and USA Today.
Affiliate Network. In addition to securing alliances with high-traffic
Web sites, B&N.com has established an affiliate network consisting of over
360,000 Web sites operated by third parties, whereby Web site operators can earn
referral fees by linking users from their sites to B&N.com's online stores.
B&N.com believes that its affiliate program goes beyond that of other online
retailers by: (i) paying higher referral fees; (ii) enabling members to take
content from B&N.com's online bookstore to enhance their merchandising; and
(iii) providing members with real-time reporting and analysis tools. About 4,000
affiliates are added each week to B&N.com's network.
10
Reciprocal Marketing Program. B&N.com has multiple reciprocal marketing
programs with leading e-commerce companies such as 1-800-FLOWERS.COM,
Expedia.com, jcrew.com, LL.Bean.com, PETsMART.com, PlanetRx.com and
VitaminShoppe.com. The program gives B&N.com access to new customers and revenue
opportunities through extensive online and offline marketing with the
participating companies. For instance, when customers complete shopping
transactions on a participants' site, they will find links to B&N.com. In
return, when B&N.com customers complete their transactions, they find links to
the various companies. Joint marketing initiatives are in progress to reward
customers with special offers. This program will allow B&N.com access to
millions of online buyers who have not yet purchased from the B&N.com site.
Advertising. During 1999 B&N.com continued its comprehensive national
print, radio, television and online banner campaign to significantly increase
awareness of B&N.com's Web site. It intends to continue to advertise in each of
those forms of media, allocating expenditures in relation to the effectiveness
of the advertising.
International. B&N.com believes that the demand for U.S. published books
abroad is substantial and untapped. B&N.com implements a cross-linking and
cross-marketing program with the Web sites operated by BOL in the United
Kingdom, Germany, France, the Netherlands and Italy, pursuant to which BOL
customers who wish to order from B&N.com are linked to B&N.com's Web site.
Order Fulfillment
B&N.com utilizes an extensive electronic shopping network for order
fulfillment, which is connected to the Barnes & Noble distribution center and
various book wholesalers, including the Ingram Book Company ("Ingram"), Baker &
Taylor and Bookazine. From these sources, B&N.com can quickly obtain
approximately 900,000 different titles, the majority of which are currently
sourced from the Barnes & Noble distribution center. Orders for music are
fulfilled through AEC One Stop Group, Inc. ("AEC").
Internet customer orders are processed at B&N.com's fulfillment center in
central New Jersey, which is in close proximity to the Barnes & Noble
distribution center. Additionally, B&N.com has a dedicated customer service
group in northern New Jersey.
In the second quarter of 2000, B&N.com anticipates opening its own
distribution center in Memphis, Tennessee. A second distribution center is
expected to open in Reno, Nevada within the next twelve months. These facilities
will have the most advanced materials handling equipment and technology for
direct to consumer fulfillment.
Technology
B&N.com believes that it currently has a state-of-the-art interactive
e-commerce platform, and it plans to continue to invest in technologies that
will enable B&N.com to offer its customers the most convenient and user-friendly
online shopping experience possible. B&N.com has been able to quickly establish
suites of "best of breed" solutions by following a strategy of leveraging
existing systems and the best demonstrated processes of Barnes & Noble,
licensing existing commercial technology when available and focusing its
internal development efforts on those proprietary systems necessary to provide
the highest level of value and service to its customers. The overall mix of
technologies and applications currently in use by B&N.com allow it to support a
distributed, scalable and secure e-commerce environment.
11
B&N.com uses the latest Intel-based Server Technology provided by Compaq
in a fully redundant configuration to power its Web site, which is hosted in two
separate locations. At these locations, B&N.com maintains computers that store
its web pages in electronic form and transmits them to requesting users. Such
storage and transmittal is referred to as hosting. B&N.com maintains its primary
host location in its corporate headquarters in New York. A second host location
is operated by a third party, which provides additional capacity and full
redundancy. All hosting locations are configured with excess Internet
telecommunications capacity to avoid slow response time and nine separate
Internet service providers are used. By maintaining redundant host locations,
B&N.com has significantly reduced its exposure to downtime and service outages.
B&N.com's integrated systems and tools provide functionality in the
following areas:
Title Database and Search Functionality. B&N.com has been able to
establish a comprehensive and accurate book database by employing a
multi-channel data sourcing strategy. B&N.com obtains its primary title
data directly from Barnes & Noble. Weekly updates are automatically sent
to B&N.com's servers. B&N.com complements this primary title database
content feed with data from multiple external sources and is able to
systematically evaluate data, identify inconsistencies and correct
inaccuracies. B&N.com has also developed a powerful proprietary search
engine. This software allows a user to search for books using a variety
of criteria, including author, title, keywords, subject area, ISBN
number, book format, subject, price and a series of children's age
ranges. Search results can then be sorted by user-defined sequences
including "bestseller", "date published", a "Readers Catalog highly
recommended book", or in alphabetical sequence.
E-Commerce. B&N.com has developed its e-commerce applications using
the Microsoft SiteServer Architecture. Working with Microsoft, B&N.com
has created a set of server applications that allow customers to
establish an account to store an address book, credit cards and ordering
preferences. A customer needs to set up an account only once. Once the
account has been established the customer can shop the traditional
"e-commerce" path by adding items to their shopping cart. Options for
gift certificates, gift-wrap, gift message and the ability to select from
a variety of shipping methods are available for customers.
Community and Interactivity. B&N.com has established several
applications to facilitate interaction with its customers. An
"Auditorium", which uses Microsoft's Chat technology, is used to host
real-time author chats each night on B&N.com's online bookstore. Since
going online in May, 1997, over 1,050 authors and musicians from a wide
variety of genres have participated in these chats.
Order Processing. B&N.com has created a proprietary application to
expedite orders into the fulfillment process. This application has
real-time connectivity to Barnes & Noble's distribution center as well
as other third party suppliers. In addition to immediately securing the
inventory for the customer, application logic determines the best
possible choice of shipping warehouse by evaluating purchase margin,
postage cost and customer delivery time.
Order Fulfillment and Customer Service. B&N.com has developed
propriety applications which enable it to receive products and assign it
to customers based upon various ordering, handling and shipping criteria.
B&N.com has also developed proprietary e-mail applications which are used
for customer service.
Sales Tracking and Analysis. B&N.com licenses technology from Be
Free Inc. to support its affiliate program. The software provides
sophisticated sales tracking for the members of the affiliate network
with real
12
time reporting and analysis tools. B&N.com has built a comprehensive data
warehouse to store and analyze customer, sales and online bookstore
activity data.
Competition
Both the e-commerce market and retail bookselling business are highly
competitive. Since the introduction of e-commerce to the Internet, the number of
e-commerce Web sites competing for customer attention has increased rapidly. The
Company expects future competition to intensify given the relative ease with
which new Web sites can be developed. The Company believes that the primary
competitive factors in e-commerce are brand recognition, site content, ease of
use, price, fulfillment speed, customer support and reliability. The Company
believes that B&N.com's success will depend heavily upon its ability to provide
a compelling and satisfying shopping experience. The Company believes that other
factors that will affect B&N.com's success include B&N.com's continued ability
to attract experienced marketing, technology, operations and management talent.
The nature of the Internet as an electronic marketplace (which may, among other
things, facilitate competitive entry and comparison-shopping) may render it
inherently more competitive than traditional retailing formats. Increased
competitiveness among online retailers may result in reduced operating margins,
loss of market share and a diminished brand franchise.
With respect to the sale of books, which constitutes B&N.com's largest
source of revenue, B&N.com currently competes with numerous booksellers
including other Internet-based companies such as Amazon.com, and traditional
book retailers. With respect to the sale of music, software and videos, B&N.com
competes with numerous merchants including other Internet-based companies, such
as Amazon.com, Cdnow, Reel.com, Beyond.com and traditional retailers. B&N.com's
main online competitor, Amazon.com, has a longer online operating history and a
larger existing customer base than B&N.com. B&N.com is aware that Amazon.com has
and may continue to adopt aggressive pricing and marketing strategies. B&N.com
is also aware of other online retailers that are offering substantial discounts
on products, including books, music, software and videos, which are subsidized
by advertising revenue from their Web sites. An increase in the prevalence of
this type of business model could lead to additional pricing pressures on
B&N.com's products. If and when B&N.com decides to add additional products in
its online stores, it will most probably face intense competition for those
products as well.
Seasonality
B&N.com experiences seasonality in its business, reflecting a combination
of seasonal fluctuations in Internet usage and traditional retail seasonality
patterns.
Government Regulation and Legal Uncertainties
E-commerce is new and rapidly changing, and federal and state regulation
relating to the Internet and e-commerce is evolving. Currently, there are few
laws or regulations directly applicable to the access of the Internet or
e-commerce on the Internet. Due to the increasing popularity of the Internet, it
is possible that laws and regulations may be enacted with respect to the
Internet, covering issues such as user privacy, pricing, taxation, content,
copyrights, distribution, antitrust and quality of products and services.
Additionally, the rapid growth of e-commerce, may trigger the development of
tougher consumer protection laws. The adoption of such laws or regulations could
reduce the rate of growth of the Internet, which could potentially decrease the
usage of B&N.com's online stores or could otherwise have a material adverse
effect on B&N.com's business. In addition, applicability to the Internet of
existing laws governing issues such as property ownership, copyrights and other
intellectual property issues, taxation, libel, obscenity and personal privacy is
uncertain. The vast majority of such laws were adopted prior
13
to the advent of the Internet and related technologies and, as a result, do not
contemplate or address the unique issues of the Internet and related
technologies.
Further, several telecommunications carriers have requested the Federal
Communications Commission ("FCC") to regulate telecommunications over the
Internet. Due to the increasing use of the Internet and the burden it has placed
on the current telecommunications infrastructure, telephone carriers have
requested the FCC to regulate Internet service providers and online service
providers and impose fees on those providers. If the FCC imposes access fees,
the costs of using the Internet could increase dramatically. This could result
in the reduced cost of the Internet, as a medium for commerce, which could have
a material adverse effect on B&N.com's business, financial condition, results of
operations or prospects.
Employees
As of February 29, 2000, B&N.com employed approximately 1,237 full-time
and part-time employees. B&N.com also employs independent contractors to perform
duties in various departments, including software development, editorial and
administration. B&N.com's employees are not represented by unions, and B&N.com
considers its relationship with its employees to be excellent. B&N.com believes
that its success is dependent on its ability to attract and retain qualified
personnel in numerous areas.
Item 2. PROPERTIES
B&N.com's principal administrative, marketing and technical facilities
are located in New York, New York and are covered by two leases. The leases are
for approximately 150,000 square feet of office space and expire in 2015. The
rent is approximately $1 million in 1999, $3 million in 2000, $4 million per
year through 2007, and $6 million per year thereafter.
B&N.com currently leases a 380,000 square foot building in Memphis,
Tennessee for distribution purposes. The lease term is five years commencing in
January 2000. The annual rent is approximately $1.1 million.
B&N.com entered into an agreement to lease 600,000 square feet of space
in Reno, Nevada for a second distribution facility. The building will be
completed and ready for occupancy in stages throughout 2000. The lease is for a
period of ten years commencing with substantial completion of the facility.
Annual rent for the entire completed facility will be approximately $2.1 million
for years one through five and approximately $2.4 million for years six through
ten. Four five-year options to renew are included in the terms of the lease.
B&N.com leases 30,000 square feet in New Jersey for its customer service
operations. The lease term is ten years commencing June 1, 1999. Annual rent for
years one through five is approximately $700,000. Annual rent for years five
through ten is approximately $750,000. The lease may be renewed for one
five-year period at an agreed upon prevailing fair market value rate.
Barnes & Noble leases a 300,000 square foot facility located in New
Jersey, of which B&N.com utilizes approximately 100,000 square feet for its
current fulfillment operations. B&N.com currently pays Barnes & Noble $31,800
per month for its proportionate share of such lease. This lease expires in March
2003, however, Barnes & Noble has an option to extend the lease for up to three
additional successive two-year periods.
14
Item 3. LEGAL PROCEEDINGS
B&N.com is involved in various routine legal proceedings incidental to the
conduct of its business. The Company does not believe that any of these legal
proceedings will have a material adverse effect on the financial condition,
results of operations or cash flows of B&N.com.
In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace
Kuralt, filed a lawsuit in the United States District Court for the Southern
District of New York against a predecessor of the Company, Barnes & Noble, Inc.,
Borders Group, Inc. and others, alleging violation of the Robinson-Patman Act
and other federal law, New York statutes governing trade practices and common
law. In March 2000 a Second Amended Complaint was served on the Company and
other defendants alleging a single cause of action for violations of the
Robinson-Patman Act. The Second Amended Complaint claims that the Intimate
Bookshop, Inc. has suffered damages of $10,000,000 or more and requests treble
damages, costs, attorneys' fees and interest, as well as declaratory and
injunctive relief prohibiting the defendants from violating the Robinson-Patman
Act. The Company and B&N.com intend to vigorously defend this action.
In March 1998, the American Booksellers Association and 26 independent
bookstores filed a lawsuit in the United States District Court for the Northern
District of California against Barnes & Noble, Inc. and Borders Group Inc.
alleging violations of the Robinson-Patman Act, the California Unfair Trade
Practice Act and the California Unfair Competition Law. The Complaint seeks
injunctive and declaratory relief; treble damages on behalf of each of the
bookstore plaintiffs, and, with respect to the California bookstore plaintiffs,
any other damages permitted by California law; disgorgement of money, property
and gains wrongfully obtained in connection with the purchase of books for
resale, or offered for resale, in California from March 18, 1994 until the
action is completed and pre-judgment interest on any amounts awarded in the
action, as well as attorney fees and costs. In October 1999, the Company and
B&N.com were added as defendants in the action. The Company and B&N.com intend
to vigorously defend this action.
On October 21, 1999, Amazon.com, Inc. ("Amazon") filed a lawsuit against
the Company and B&N.com in the United States District Court for the Western
District of Washington alleging that B&N.com's use of its Express Lane one-click
ordering system infringes upon Amazon's patent for its 1-Click ordering system.
The complaint seeks injunctive and declaratory relief and treble damages, as
well as attorneys fees and costs. The Company and B&N.com have filed a
counterclaim for a declaratory judgment that the Amazon patent at issue is
invalid. On December 1, 1999, the Court granted Amazon's motion for a
preliminary injunction. As a result, consistent with the Court's order, B&N.com
replaced its Express Lane feature with an Express Checkout feature requiring two
clicks. The Company and B&N.com intend to vigorously defend this action.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
15
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Class A Common Stock is listed on the NASDAQ National Market
under the symbol "BNBN" and began trading on May 25, 1999. On March 17, 2000,
the Company had 546 shareholders of record. The Company's Class A Common Stock
price at the close of business on March 17, 2000 was $8 9/16 per share.
The table below sets forth the high and low sale prices of the Company's
Class A Common Stock for the periods indicated, as reported by the NASDAQ
National Market.
High Low
---- ---
1999
----
May 25 through June 30 $ 26 5/8 $ 14 1/4
Third Quarter $ 20 7/8 $ 15
Fourth Quarter $ 23 1/2 $ 14 1/16
The Company has not declared or paid any dividends on its Common Stock and
B&N.com has not made any distributions to its members, since their respective
dates of inception. Both the Company and B&N.com do not currently anticipate
paying any dividends or distributions, except for amounts which may be
distributed by B&N.com to cover income tax liabilities, if any, of its members
arising from the taxable income of B&N.com. Cash distributions by B&N.com may
also be restricted by future debt covenants. The Company currently intends to
cause B&N.com to retain future earnings, if any, to finance the expansion of the
business of B&N.com.
Item 6. SELECTED FINANCIAL DATA (thousands of dollars, except per share data)
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and notes thereto appearing elsewhere
in this Form 10-K.
16
barnesandnoble.com inc. and subsidiary || barnesandnoble.com llc and its predecessor
-------------------------------------- || ------------------------------------------
(Consolidated) ||
Pro forma ||
year ended May 25, 1999 || January 1, Year Ended December 31,
December 31, to December 31, || 1999 to -----------------------------
1999 (1)(2) 1999 (3) || May 24, 1999 (4) 1998(4) 1997(4)
---------------- --------------- || ----------------- ------------- -----------
||
||
Statement of Operations Data: ||
Net sales $ 202,567 $ 148,263 || $ 54,304 $ 61,834 $ 11,949
Cost of sales 159,937 117,850 || 42,087 47,569 10,117
--------- --------- || --------- --------- ---------
Gross profit 42,630 30,413 || 12,217 14,265 1,832
--------- --------- || --------- --------- ---------
Operating expenses: ||
Marketing and sales 111,553 79,257 || 32,296 70,423 8,855
Technology & web site development 21,006 15,058 || 5,948 8,532 3,256
General and administrative 32,714 22,765 || 9,949 19,166 3,273
--------- --------- || --------- --------- ---------
Total operating expense 165,273 117,080 || 48,193 98,121 15,384
--------- --------- || --------- --------- ---------
Operating loss (122,643) (86,667) || (35,976) (83,856) (13,552)
Interest income, net 20,238 18,615 || 1,623 708 -
--------- --------- || --------- --------- ---------
Loss before minority interest (102,405) (68,052) || (34,353) (83,148) (13,552)
Minority interest 54,253 54,253 || - - -
--------- --------- || --------- --------- ---------
Net loss-historical (48,152) $ (13.799) || (34,353) (83,148) (13,552)
========= || ========= =========
Pro forma adjustment to ||
minority interest (5) 27,534 || 27,534 66,518 10,842
--------- || --------- --------- ---------
Net loss-pro forma (2) $ (20,618) || $ (6,819) $ (16,630) $ (2,710)
========= || ========= ========= =========
||
Basic and diluted net loss ||
per common share (6) $ (0.72) $ (0.48) || $ (0.24) $ (0.58) $ (0.09)
Basic and diluted weighted average common ||
shares outstanding (6) 28,778 28,797 || 28,750 28,750 28,750
||
Basic and diluted loss before minority ||
interest per share (6)(7) $ (0.72) $ (0.48) || $ (0.24) $ (0.58) $ (0.09)
Basic and diluted weighted average shares ||
outstanding, if converted (6)(7) 143,939 144,064 || 143,750 143,750 143,750
||
Balance Sheet Data: ||
Cash and cash equivalents $ 247,403 || $ 96,940 $ -
Long term marketable securities 71,852 || - -
Working capital 429,674 || 78,681 3,176
Total assets 679,518 || 202,144 26,327
Minority interest (8) 482,896 || - -
Equity $ 120,682 || $ 169,149 $ 19,213
(1) Includes the historical results of barnesandnoble.com llc for the entire
year and the historical results of the Company from May 25, 1999.
barnesandnoble.com inc. was incorporated on March 10, 1999, but had no
activity until the Company's initial public offering on May 25, 1999.
(2) The pro forma amounts do not give effect to the assumed charges to
operating results which might have resulted had the Company's Initial
Public Offering occurred at the beginning of the repective periods.
(3) barnesandnoble.com inc. was incorporated on March 10, 1999, but had no
activity until the Company's initial public offering on May 25, 1999.
(4) Includes the historical results of barnesandnoble.com llc and its
predecessor.
(5) Represents the approximate 80% interest of Barnes & Noble and Bertelsmann
in the net loss of barnesandnoble.com llc for periods prior to May 25,
1999.
(6) For periods prior to May 25, 1999, reflects the pro forma effect of the
shares issued in the Company's Initial Public Offering assuming they were
issued at the beginning of 1997.
(7) Includes the conversion of membership units in barnesandnoble.com llc held
by Barnes & Noble and Bertelsmann into outstanding shares of the Company.
(8) Represents the approximate 80% interest in Barnes & Noble and Bertelsmann
in the equity of barnesandnoble.com llc.
17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
This report may contain certain forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to the Company and B&N.com that are based on the beliefs of
the management of the Company as well as assumptions made by and information
currently available to the management of the Company. When used in this report,
the words "anticipate," "believe," "estimate," "expect," "intend," "plan" and
similar expressions, as they relate to the Company, B&N.com or the management of
the Company, identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events, the outcome of which
is subject to certain risks, including among others general economic and market
conditions, changes in product demand, the growth rate of Internet usage and
e-commerce, possible disruptions in the Company's or B&N.com's computer or
telephone systems, possible increases in shipping rates or interruptions in
shipping service, effects of competition, possible work stoppages or increases
in labor costs or labor shortages, unanticipated adverse litigation results or
effects, the performance of B&N.com's current and future investments and new
product initiatives, unanticipated costs associated with B&N.com's new
warehouses or the failure to successfully integrate those warehouses into
B&N.com's distribution network, unanticipated costs or affects associated with
Year 2000 compliance problems of the Company or B&N.com or their service or
supply providers, the factors described below under "Quarterly Results of
Operations," changes in tax and other governmental rules and regulations
applicable to the Company or B&N.com and other factors that may be outside of
the Company's control. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results or
outcomes may vary materially from those described herein as anticipated,
believed, estimated, expected, intended or planned. Subsequent written and oral
forward-looking statements attributable to the Company, B&N.com or persons
acting on their behalf are expressly qualified in their entirety by the
cautionary statements in this paragraph.
Overview
The Company is a holding company whose sole asset is its 20.3% equity
interest in B&N.com and whose sole business is acting as sole manager of
B&N.com. B&N.com launched its initial online store in March 1997 and since that
time has become the fourth largest e-commerce Web site, based on the Media
Metrix January 2000 report.
B&N.com has pursued a strategy of focusing on the sale of a broad range
of knowledge, information, education and entertainment related products. Through
February 2000, B&N.com has offered for sale both new and out-of -print books,
music, software, magazine subscriptions and prints & posters. In October 1999,
the Company also launched eCards, offering an exclusive selection of over 1,700
unique images that can be personalized and enhanced with animation and music.
The eCards can be sent for free through e-mail. The Company intends to continue
to expand its product offering within the broad categories of knowledge,
information, education and entertainment including entering into the video and
DVD category in 2000.
The results of operations discussed hereafter include the pro forma
results of the Company and B&N.com for the year ended December 31, 1999 and the
historical results of B&N.com and its predecessors for the years ended December
31, 1998 and 1997. In view of the rapidly changing nature of B&N.com's business
and its limited operating history, the Company believes that period-to-period
comparisons of the operating results of B&N.com,
18
including gross profit margin and operating expenses as a percentage of sales
are not necessarily meaningful and should not be relied upon as an indication of
future performance. Additionally, no analysis has been provided regarding
B&N.com's historical period of January 1, 1999 to May 24, 1999, as well as the
Company's historical period May 25, 1999 to December 31, 1999, as the Company
believes that such an analysis would not be meaningful, since there was no
change in the net asset basis of the Company due to the Recapitalization.
Results of Operations
Net Sales
Year Ended
December 31,
--------------------------------------------------------------
Pro forma
1999 % Change 1998 % Change 1997
-------------- -------------- --------------
(in thousands)
Net sales $ 202,567 228% $ 61,834 417% $11,949
Net sales are composed of sales of books, music, software, prints &
posters and related products, net of returns, as well as outbound shipping and
handling charges. In 1999, sales more than tripled from $61.8 million in 1998 to
$202.0 million in 1999. Growth in net sales reflects a significant increase in
units sold due to the growth of B&N.com's customer base and repeat purchases
from B&N.com's existing customers, in addition to the introduction of music and
prints & posters product lines during 1999. During 1999, B&N.com's cumulative
customer base more than tripled to approximately 4 million customers. Repeat
customer orders increased to 66% as of the year end December 31, 1999 from 52%
as of the year end December 31, 1998. International sales represented 6.3%,
10.0% and 10.0% of net sales for the years ended December 31, 1999, 1998 and
1997, respectively. B&N.com expects that sales from new product categories to be
introduced in 2000, coupled with its growing market share in its core business,
will result in significant sales growth in the future.
Gross Profit
Year Ended
December 31,
--------------------------------------------------------------
Pro forma
1999 % Change 1998 % Change 1997
-------------- -------------- --------------
(in thousands)
Gross profit $ 42,630 199% $ 14,265 679% $1,832
Gross margin 21.0% 23.1% 15.3%
Gross profit is net sales less the cost of sales, which consists of the
cost of merchandise sold to customers, and outbound and inbound shipping costs.
Gross profit increased due to the Company's increased sales volume, however,
gross margin decreased in 1999 to 21.0% from 23.1%. The decrease in gross margin
is due primarily to the increase, from 40% to 50%, in the discount offered on
New York Times best sellers and the introduction of music during the third
quarter of 1999, which has a lower gross margin than books. Gross margin
increased in 1998 to 23.1% from 15.3% primarily as a result of an improvement
in merchandise mix
19
The Company intends to expand its operations by promoting new or
complementary products or sales formats and by expanding the breadth and depth
of its product and service offerings. Gross margins attributable to new business
activities may be lower than those associated with the Company's existing
business activities. The Company does believe improvements to gross margin due
to better product mix, marketing partnerships, leverage in the marketplace and
internal fulfillment are expected in the future.
Marketing and Sales
Year Ended
December 31,
--------------------------------------------------------------
Pro forma
1999 % Change 1998 % Change 1997
-------------- -------------- --------------
(in thousands)
Marketing and sales $ 111,553 58% $ 70,423 695% $8,855
Percentage of net sales 55.1% 113.9% 74.1%
Marketing and sales expenses consist primarily of advertising and
promotional expenditures, as well as payroll and related expenses for personnel
engaged in marketing, selling, editorial, fulfillment and customer service
activities. Fulfillment activities include receiving of goods, picking of goods
for shipment and assembly for shipment. All fulfillment costs, including the
cost of operating and staffing distribution centers and customer service, are
included in marketing and sales. Marketing and sales expenses increased
primarily due to the increases in B&N.com's advertising and promotional
expenditures and increased payroll and related costs associated with fulfilling
customer demand. Such expenses decreased as a percentage of net sales due to the
significant increase in net sales. B&N.com is focusing on lowering the cost of
customer acquisition while continuing to pursue its aggressive branding and
marketing campaign. Fixed fulfillment costs are expected to increase in 2000 as
a result of the additional fixed costs associated with two new distribution
facilities. B&N.com expects fulfillment costs as a percentage of sales to also
be higher in 2000.
Accounting standard setters are currently reviewing financial statements
of internet companies in order to achieve a consensus with respect to the
financial statement presentation of certain items. Included in this review is
the current practice of including certain warehouse and fulfillment costs in
marketing and sales expense instead of in cost of sales. During 1999 and 1998
B&N.com included warehouse and customer service costs of $28,634 and $10,914,
respectively, in marketing and sales expense. Also being reviewed by accounting
standard setters is the practice of classifying certain coupon redemption costs
as marketing and sales expense instead of as a reduction to sales. B&N.com has
included in marketing expenses approximately $6 million, or 3% of sales, of
coupon redemptions for the full year ended 1999. No coupons were redeemed in
1998. Had B&N.com treated coupon redemptions as a reduction to sales and
marketing expense in 1999, gross margin would have decreased from 21.0% to 18.6%
and marketing and sales expense as a percentage of sales would have decreased
from 55.1% to 53.7%. In addition, the accounting standard setters are reviewing
Web site development costs. The Company's accounting for the features, content
and functionality of B&N.com's online stores, transaction-processing systems,
telecommunications infrastructure and network operations is described in Note 2
to the financial statements.
20
Technology and Web Site Development
Year Ended
December 31,
--------------------------------------------------------------
Pro forma
1999 % Change 1998 % Change 1997
-------------- -------------- --------------
(in thousands)
Technology & Web site $ 21,006 146% $ 8,532 162% $3,256
development
Percentage of net sales 10.4% 13.8% 27.2%
Technology and Web site development expenses consist principally of
payroll and related expenses for web page production, editorial and network
operations personnel and consultants, and infrastructure related to systems and
telecommunications. As a percentage of net sales, technology and Web site
development expenses have steadily decreased, demonstrating the leveraging of
these expenses. The increase in technology and Web site development expenses in
dollars, was primarily attributable to increased staffing and associated costs
related to enhancing the features, content and functionality of B&N.com's Web
site and transaction-processing systems. Technology and Web site development
expenses are also a result of increased investments in systems and
telecommunications infrastructure, including investments associated with entry
into music and print & poster sales and the development of eCards and expenses
required to support the significant increase in net sales. B&N.com believes that
continued investment in technology and Web site development is critical to
attaining its strategic objectives. As a result, B&N.com expects technology and
Web site development expenses to continue to increase. B&N.com has evaluated all
software development projects that were in progress as of December 31, 1999 to
determine whether or not it was no longer probable that any of the projects
would be placed in service. Based on that evaluation, B&N.com expects to
complete and put in service all software development projects that existed as of
year end.
General and Administrative
Year Ended
December 31,
--------------------------------------------------------------
Pro forma
1999 % Change 1998 % Change 1997
-------------- -------------- --------------
(in thousands)
General and administrative $ 32,714 71% $ 19,166 486% $3,273
Percentage of net sales 16.1% 31.0% 27.4%
General and administrative expenses consist of payroll and related
expenses for executive, finance and administrative personnel, recruiting,
professional fees and other general corporate expenses including costs to
process credit card transactions. The increase in general and administrative
expenses was primarily a result of expenses associated with the hiring of
additional personnel and professional fees related to B&N.com's growth and
expanded activities and an increase in depreciation and amortization. Such
expenses decreased as a percentage of net sales from the year ended December 31,
1998 to the year ended December 31, 1999 due to the significant increase in net
sales and the effects of leveraging these expenses over a larger sales base.
B&N.com expects general and administrative expenses
21
to increase as B&N.com expands its staff and incurs additional costs related to
the growth of its business, however, B&N.com expects continued decreases of
general and administrative expenses as a percentage of sales as it leverages
these expenses over higher sales.
Interest Income, Net
Year Ended
December 31,
--------------------------------------------------------------
Pro forma
1999 % Change 1998 % Change 1997
-------------- -------------- --------------
(in thousands)
Interest income, net $ 20,238 2,758% $ 708 N/A --
Percentage of net sales 10.0% 1.1% --
Interest income on cash and marketable securities increased in 1999 due
to the higher cash and marketable securities balances resulting from the
Company's financing activities. In addition to the approximately $484.4 million
raised through the Company's initial public offering, the Company has received
$200 million of capital investment by B&N.com's members since November 1998.
Income Taxes
The Company has not generated any taxable income to date and therefore
has not paid any federal income taxes since inception. The Company has provided
a full valuation allowance on the deferred tax asset, consisting primarily of
net operating loss carryforwards, because of uncertainty regarding its
realizability.
Seasonality
B&N.com experiences seasonality in its business, reflecting a combination
of seasonal fluctuations in Internet usage and traditional retail seasonality
patterns.
Quarterly Results of Operations
The Company expects that B&N.com may experience significant fluctuations
in its future quarterly operating results due to a variety of factors, many of
which are outside B&N.com's control. Factors that may adversely affect B&N.com's
quarterly operating results include: (i) B&N.com's ability to retain existing
customers, attract new customers at a steady rate and maintain customer
satisfaction; (ii) B&N.com's ability to acquire product and to manage
fulfillment operations; (iii) B&N.com's ability to maintain gross margins in its
existing business and in future product lines and markets; (iv) the development,
announcement, or introduction of new sites, service and products by B&N.com and
its competitors; (v) price competition; (vi) B&N.com's ability to upgrade and
develop its systems and infrastructure; (vii) the level of use of the Internet
and increasing consumer acceptance of the Internet for the purchase of consumer
products such as those offered by B&N.com; (viii) B&N.com's ability to attract
new and qualified personnel in a timely and effective manner; (ix) the level of
traffic on B&N.com's online stores; (x) B&N.com's ability to manage effectively
its development of new business segments and markets; (xi) B&N.com's ability to
successfully manage the integration of operations and technology of acquisitions
and other business combinations; (xii) technical difficulties, system downtime
or Internet brownouts; (xiii) the amount and
22
timing of operating costs and capital expenditures relating to expansion of
B&N.com's business, operations and infrastructure; (xiv) the level of returns
experienced by B&N.com; (xv) governmental regulation and taxation policies;
(xvi) disruptions in service by common carriers due to strikes or otherwise;
(xvii) general economic conditions including those specific to the Internet,
e-commerce and book industry; and (xviii) the factors described above under
"Forward Looking Statements."
Liquidity and Capital Resources
The Company finished 1999 with a debt-free balance sheet. At December 31,
1999, the Company's cash, cash equivalents and short-term marketable securities
were $478.0 million, compared to $96.9 million on December 31, 1998. In
addition, at December 31, 1999 the Company had $71.9 million in long-term
marketable securities, compared with no long-term marketable securities at
December 31, 1998. On May 25, 1999, the Company completed an initial public
offering of 28,750,000 shares of Class A Common Stock at a price of $18 per
share. The net proceeds to the Company from the offering were approximately
$484.4 million. At the completion of the initial public offering, the Company
received additional capital contributions of $50.0 million and reclassified
$50.4 million from restricted cash to marketable securities.
Net cash flows used in operating activities were $58.4 million, $54.7
million and $14.4 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Cash used in 1999 was primarily attributable to a net loss of
$48.2 million after minority interest of $54.2 million. In addition, receivables
increased $13.1 million and merchandise inventories increased $2.3 million. This
was partially offset by depreciation and amortization of $13.8 million, an
increase in payables to affiliates of $3.9 million, a $19.2 million increase in
accounts payable, an increase in accrued liabilities of $19.8 million and a
decrease of $2.6 million in prepaid expenses and other current assets. Cash used
in 1998 was primarily attributable to a net loss of $83.1 million. In addition,
net receivables increased $2.0 million, merchandise inventories increased $1.0
million, prepaid expenses and other current assets increased $1.5 million and
accounts payable decreased $3.9 million. This was partially offset by
depreciation and amortization of $6.8 million, an increase in payables to
affiliates of $13.2 million and a $16.5 million increase in accrued liabilities.
Cash used in 1997 was primarily attributable to a net loss of $13.6 million. In
addition, net receivables totaling $0.4 million, purchase of merchandise
inventories totaling $0.6 million and increases in prepaid expenses and other
current assets totaling $9.2 million utilized cash in 1997. This was partially
offset by depreciation and amortization of $2.3 million, an increase in payables
of $3.9 million and a $3.3 million increase in accrued liabilities.
Net cash used in investing activities of $327.9 million for the year
ended December 31, 1999 was attributable to a $302.5 million increase in
marketable securities, purchases of fixed assets totaling $71.9 million and a
$3.9 million increase in other non-current assets, partially offset by a $50.4
million decrease in restricted cash. Net cash used in investing activities of
$81.5 million for the year ended December 31, 1998 was primarily attributable to
purchases of fixed assets totaling $31.0 million and an increase in restricted
cash of $50.4 million. Net cash used in investing activities of $18.3 million
for the year ended December 31, 1997 was primarily attributable to purchases of
fixed assets.
Net cash flows from financing activities were $536.8 million for the year
ended December 31, 1999, primarily due to proceeds of $484.4 million from the
Company's initial public offering and capital contributions of $50.0 million.
Net cash flows from financing activities of $233.1 million and $32.8 million for
the years ended December 31, 1998 and 1997, respectively, resulted entirely from
capital contributions.
At December 31, 1999, the Company's principal sources of liquidity
consisted of $247.4 million of cash and cash equivalents and $230.6 million of
short-term marketable securities. Long term marketable securities totaled
23
$71.9 million. Preparing two distribution centers for operation in 2000 is
expected to require continued significant capital expenditures. Total capital
expenditures to complete the Memphis facility are expected to be approximately
$5 million in 2000, while total capital expenditures for the Reno facility are
expected to be approximately $20 million over the next twelve months. The
distribution centers are being established to enhance service and availability
to customers and improve purchasing efficiencies. Expenditures to stock
inventories at both facilities will also occur over the next twelve months. As
of December 31, 1999, the Company's remaining principal commitments consisted of
obligations outstanding under operating leases and commitments for advertising,
marketing and promotion arrangements. The Company anticipates a continued
increase in its capital expenditures consistent with anticipated growth in
operations, infrastructure and personnel.
The Company believes that current cash and cash equivalent balances and
short-term investments will be sufficient to meet its anticipated cash needs for
at least 12 months. However, any projection of future cash needs and cash flows
is subject to substantial uncertainty. If current cash and short term
investments in addition to cash generated from operations is insufficient to
satisfy the Company's liquidity requirements, the Company may seek to sell
additional equity or debt securities or to obtain a credit facility. The sale of
additional equity or convertible debt securities could result in additional
dilution to the Company's stockholders. There can be no assurance that financing
will be available in amounts or on terms acceptable to the Company, if at all.
In addition, the Company will, from time to time, consider the acquisition of or
investment in complementary businesses, products and technologies, which might
increase the Company's liquidity requirements or cause the Company to issue
additional equity or debt securities.
Year 2000 Compliance
Beginning in the Year 2000, the date fields coded in some software
products and computer systems needed to accept four digit entries in order to
distinguish 21st century dates from 20th century dates and, as a result, many
companies' software and computer systems needed to be upgraded or replaced in
order to comply with such Year 2000 requirements. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
B&N.com developed a remediation plan for the Year 2000 issue that involved
identification, assessment and testing of the equipment and systems affected,
including:
o an assessment of information technology (IT) equipment and systems, which
includes web servers and web serving technology;
o an assessment of non-information technology (non-IT) embedded systems such as
building security, voice mail, fire prevention, climate control and other
systems; and
o the readiness of significant third party vendors and suppliers of services.
24
The evaluation, covered the following phases:
o development of an inventory of all IT equipment and systems and non-IT
systems that were potentially affected;
o determination of those systems that required repair or replacement;
o repair or replacement of those systems;
o testing of those repaired or replaced systems; and
o creation of contingency plans in the event of Year 2000 failures.
To date, less than 10% of assessed systems have required repair or
replacement. Non-IT systems and internally developed programs were reviewed, and
were not considered to be date sensitive to the Year 2000. Based on this
evaluation, the Company's management did not believe that B&N.com's systems and
programs presented Year 2000 issues.
The Company has not experienced any material Year 2000 problems. However,
there can be no assurance that problems will not arise for the Company, its
suppliers or others with whom the Company does business with in 2000. The
Company intends to continue to monitor its compliance, as well as the compliance
of others whose operations are material to its business.
Costs to Address Year 2000 Compliance
To date, B&N.com has incurred approximately $1.0 million in connection
with identifying or evaluating Year 2000 compliance issues. Most of these
expenses have related to the opportunity cost of time spent by B&N.com's
employees evaluating its software, the current versions of its products and Year
2000 compliance matters generally. The Company expects that B&N.com's future
Year 2000 costs will be minimal and will be funded from cash on hand. However,
the full impact of the Year 2000 issues cannot be determined at this time. The
failure by certain third parties to address their Year 2000 issues on a timely
basis could adversely affect B&N.com's business.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all
fiscal quarters beginning after June 15, 2000. SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are to be recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. B&N.com does not expect that the adoption of SFAS 133 will
have a material impact on its consolidated financial statements because B&N.com
does not currently hold any derivative instruments.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB No. 101"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. SAB No. 101 did not impact the
Company's revenue recognition policies.
25
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Exhibit (a) (1)
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in this item is incorporated herein by reference
to portions of the Proxy Statement for Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission within 120 days of the close
of the fiscal year ended December 31, 1999.
Item 11. EXECUTIVE COMPENSATION
The information required in this item is incorporated herein by reference
to portions of the Proxy Statement for Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission within 120 days of the close
of the fiscal year ended December 31, 1999.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in this item is incorporated herein by reference
to portions of the Proxy Statement for Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission within 120 days of the close
of the fiscal year ended December 31, 1999.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in this item is incorporated herein by reference
to portions of the Proxy Statement for Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission within 120 days of the close
of the fiscal year ended December 31, 1999.
26
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements: Page(s)
Reports of Independent Certified Public Accountants F-1
Balance Sheets F-3
Statements of Operations F-4
Consolidated Statement of Stockholders' Equity F-5
Statements of Members' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8
(a) (2) Financial Statement Schedules:
None.
All schedules are omitted because the required information is not
present or is not present in amounts sufficient to require
submission of the schedule or because the information required is
given in the consolidated financial statements or notes thereto.
(a) (3) Exhibits
Exhibit No. Description
3.1 Form of Amended and Restated Certificate of Incorporation of the
Company. (Incorporated herein by reference to Exhibit 3.1 in
Amendment No. 2 of the Company's Registration Statement No.
333-64211, filed May 6, 1999)
3.2 Form of Amended and Restated By-laws of the Company. (Incorporated
herein by reference to Exhibit 3.2 in Amendment No. 2 of the
Company's Registration Statement No. 333-64211, filed May 6, 1999)
10.1 Form of the Company's 1999 Incentive Plan. (Incorporated herein by
reference to Exhibit 10.1 in Amendment No. 2 of the Company's
Registration Statement No. 333-64211, filed May 6, 1999)
27
10.2 Interactive Services Agreement, dated as of July 31, 1997, by and
between the Company and Lycos, Inc. (Incorporated herein by
reference to Exhibit 10.2 in Amendment No. 2 of the Company's
Registration Statement No. 333-64211, filed May 6, 1999)
10.3 Interactive Marketing Agreement, dated as of November 1, 1997, by
and between the Company and America Online, Inc. (Incorporated
herein by reference to Exhibit 10.3 in Amendment No. 2 of the
Company's Registration Statement No. 333-64211, filed May 6, 1999)
10.4 Ecommerce Merchant Agreement, dated as of October 27, 1997, between
the Company and Microsoft Corporation, together with Amendment No. 4
to Ecommerce Merchant Agreement. (Incorporated herein by reference
to Exhibit 10.4 in Amendment No. 2 of the Company's Registration
Statement No. 333-64211, filed May 6, 1999)
10.5 Formation Agreement, effective as of 11:59 p.m., October 31, 1998,
among Bertelsmann AG, BOL.US Online, Inc., Barnes & Noble, Inc., the
Company, B&N.com Holding Corp. and B&N.com Member Corp.
(Incorporated herein by reference to Exhibit 10.5 in Amendment No. 2
of the Company's Registration Statement No. 333-64211, filed May 6,
1999)
10.6 Form of Second Amended and Restated Limited Liability Company
Agreement of barnesandnoble.com llc. (Incorporated herein by
reference to Exhibit 10.6 in Amendment No. 2 of the Company's
Registration Statement No. 333-64211, filed May 6, 1999)
10.7 Form of Stockholders Agreement between Barnes & Noble, Inc. and
Bertelsmann AG. (Incorporated herein by reference to Exhibit 10.7 in
Amendment No. 2 of the Company's Registration Statement No.
333-64211, filed May 6, 1999)
10.8 Technology Sharing and Licensing Agreement, dated as of October 31,
1998, between barnesandnoble.com llc, as Licensor and BOL.Global,
Inc., as Licensee. (Incorporated herein by reference to Exhibit 10.8
in Amendment No. 2 of the Company's Registration Statement No.
333-64211, filed May 6, 1999)
10.9 Technology Sharing and Licensing Agreement, dated as of October 31,
1998, between barnesandnoble.com llc, as Licensee and BOL.Global,
Inc., as Licensor. (Incorporated herein by reference to Exhibit 10.9
in Amendment No. 2 of the Company's Registration Statement No.
333-64211, filed May 6, 1999)
10.10 Amended and Restated Services Agreement, dated as of October 31,
1998, among the Company, barnesandnoble.com llc and Barnes & Noble,
Inc. (Incorporated herein by reference to Exhibit 10.10 in Amendment
No. 2 of the Company's Registration Statement No. 333-64211, filed
May 6, 1999)
10.11 Amended and Restated Services Agreement, dated as of October 31,
1998, among the Company, barnesandnoble.com llc and Marboro Books
Corp. (Incorporated herein by reference to Exhibit 10.11 in
Amendment No. 2 of the Company's Registration Statement No.
333-64211, filed May 6, 1999)
28
10.12 Amended and Restated Trademark License Agreement, dated as of
October 31, 1998, between Barnes & Noble College Bookstores, Inc.
and barnesandnoble.com llc. (Incorporated herein by reference to
Exhibit 10.12 in Amendment No. 2 of the Company's Registration
Statement No. 333-64211, filed May 6, 1999)
10.13 Trademark License Agreement dated as of October 31, 1998, between
BOL.Global, Inc. and barnesandnoble.com llc. (Incorporated herein by
reference to Exhibit 10.13 in Amendment No. 2 of the Company's
Registration Statement No. 333-64211, filed May 6, 1999)
10.14 Supply Agreement, dated as of October 31, 1998, between
barnesandnoble.com llc and Barnes & Noble, Inc. (Incorporated herein
by reference to Exhibit 10.14 in Amendment No. 2 of the Company's
Registration Statement No. 333-64211, filed May 6, 1999)
10.15 Amended and Restated Database and Software License Agreement, dated
as of October 31, 1998, among the Company, barnesandnoble.com llc
and Barnes & Noble, Inc. (Incorporated herein by reference to
Exhibit 10.15 in Amendment No. 2 of the Company's Registration
Statement No. 333-64211, filed May 6, 1999)
10.16 Form of Amendment No. 1 to the Amended and Restated Services
Agreement, among the Company, barnesandnoble.com llc and Barnes &
Noble, Inc. (Incorporated herein by reference to Exhibit 10.16 in
Amendment No. 2 of the Company's Registration Statement No.
333-64211, filed May 6, 1999)
10.17 Form of Amendment No. 1 to the Amended and Restated Services
Agreement, among the Company, barnesandnoble.com llc and Marboro
Books Corp. (Incorporated herein by reference to Exhibit 10.17 in
Amendment No. 2 of the Company's Registration Statement No.
333-64211, filed May 6, 1999)
10.18 Form of Amendment No. 1 to the Amended and Restated Trademark
License Agreement, between Barnes & Noble College Bookstores, Inc.
and barnesandnoble.com llc. (Incorporated herein by reference to
Exhibit 10.18 in Amendment No. 2 of the Company's Registration
Statement No. 333-64211, filed May 6, 1999)
10.19 Form of Amendment No. 1 to the Trademark License Agreement, between
BOL.Global, Inc. and barnesandnoble.com llc. (Incorporated herein by
reference to Exhibit 10.19 in Amendment No. 2 of the Company's
Registration Statement No. 333-64211, filed May 6, 1999)
10.20 Form of Amendment No. 1 to the Supply Agreement, between
barnesandnoble.com llc and Barnes & Noble Inc. (Incorporated herein
by reference to Exhibit 10.20 in Amendment No. 2 of the Company's
Registration Statement No. 333-64211, filed May 6, 1999)
10.21 Form of Amendment No. 1 to the Amended and Restated Database and
Software License Agreement, among the Company, barnesandnoble.com
llc and Barnes & Noble Inc. (Incorporated herein by reference to
Exhibit 10.21 in Amendment No. 2 of the Company's Registration
Statement No. 333-64211, filed May 6, 1999)
29
10.22 Indenture of Lease and Amendments thereto, dated as of June 7, 1994,
between SDI Technologies, Inc., as Landlord, and B.Dalton
Bookseller, Inc., as Tenant. (Incorporated herein by reference to
Exhibit 10.22 in Amendment No. 2 of the Company's Registration
Statement No. 333-64211, filed May 6, 1999)
10.23 Lease, dated as of June 30, 1997, between P.A. Building Company, as
Landlord, and Barnes & Noble, Inc., as Tenant. (Incorporated herein
by reference to Exhibit 10.23 in Amendment No. 2 of the Company's
Registration Statement No. 333-64211, filed May 6, 1999)
10.24 Employment Agreement (Chief Executive Officer), dated as of November
1, 1998, among barnesandnoble.com llc, Barnes & Noble, Inc.,
Bertelsmann A.G. and Jonathan Bulkeley. (Incorporated herein by
reference to Exhibit 10.24 in Amendment No.2 of the Company's
Registration Statement No. 333-64211, filed May 6, 1999)
10.25 Deferred Compensation Plan of the Company. (Incorporated herein by
reference to Exhibit 10.25 in Amendment No. 2 of the Company's
Registration Statement No. 333-64211, filed May 6, 1999)
10.26 Retirement Plan of the Company. (Incorporated herein by reference to
Exhibit 10.26 in Amendment No. 2 of the Company's Registration
Statement No. 333-64211, filed May 6, 1999)
10.27 Form of Amendment No. 1 to the Technology Sharing and License
Agreement, between BOL.Global, Inc., as Licensor, and
barnesandnoble.com llc, as Licensee. (Incorporated herein by
reference to Exhibit 10.27 in Amendment No. 2 of the Company's
Registration Statement No. 333-64211, filed May 6, 1999)
10.28 Form of Amendment No. 1 to the Technology Sharing and License
Agreement, between BOL.Global, Inc., as Licensee, and
barnesandnoble.com llc, as Licensor. (Incorporated herein by
reference to Exhibit 10.28 in Amendment No. 2 of the Company's
Registration Statement No. 333-64211, filed May 6, 1999)
10.29 Employment Termination Agreement, dated as of February 22, 1999,
between barnesandnoble.com llc and Jeffrey Killeen. (Incorporated
herein by reference to Exhibit 10.29 in Amendment No. 2 of the
Company's Registration Statement No. 333-64211, filed May 6, 1999)
10.30 Amendment No. 1 to Second Amended and Restated Limited Liability
Company Agreement of barnesandnoble.com llc.
10.31 Amended and Restated Industrial Lease Agreement effective as of July
27, 1999 between Industrial Developments International (Tennessee),
L.P., as landlord and barnesandnoble.com llc, as tenant.
10.32 Lease Agreement, dated September 8, 1999, between ProLogis
Development Services Incorporated, as landlord, and
barnesandnoble.com llc, as tenant.
10.33 Agreement of Lease, dated as of October 1, 1999, between 111 Chelsea
LLC, as landlord, and barnesandnoble.com llc, as tenant.
30
10.34 Assignment, Assumption and Consent Agreement and Amendment to Lease
dated as of October 1, 1999, among Barnes & Noble, Inc., as
assignor, barnesandnoble.com llc, as assignee and 111 Chelsea LLC,
as landlord.
23.1 Consent of BDO Seidman, LLP.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
barnesandnoble.com inc.
-----------------------
(Registrant)
Date: March 29, 2000 By: /s/ STEPHEN RIGGIO
-------------------
Stephen Riggio
Vice Chairman and Acting Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Registrant in the
capacities and on the dates indicated:
Name Capacity Date
- - ---- -------- ----
/s/ LEONARD RIGGIO Chairman of the Board March 29, 2000
- - ---------------------------
Leonard Riggio
/s/ STEPHEN RIGGIO Vice Chairman and March 29, 2000
- - --------------------------- Acting Chief Executive Officer
Stephen Riggio (Principal Executive Officer)
/s/ MARIE J. TOULANTIS Chief Financial Officer March 29, 2000
- - --------------------------- (Principal Accounting and
Marie J. Toulantis Financial Officer)
/s/ MICHAEL N. ROSEN Secretary and Director March 29, 2000
- - ---------------------------
Michael N. Rosen
/s/ THOMAS MIDDELHOFF Director March 29, 2000
- - ---------------------------
Thomas Middelhoff
/s/ MARKUS WILHELM Director March 29, 2000
- - ---------------------------
Markus Wilhelm
/s/ KLAUS EIERHOFF Director March 29, 2000
- - ---------------------------
Klaus Eierhoff
/s/ JAN MICHIEL HESSELS Director March 29, 2000
- - ---------------------------
Jan Michiel Hessels
/s/ WILLIAM RIELLY Director March 29, 2000
- - ---------------------------
William Rielly
32
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
barnesandnoble.com inc.
We have audited the accompanying consolidated balance sheet of
barnesandnoble.com inc. and subsidiary, as of December 31, 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the period May 25, 1999 to December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
barnesandnoble.com inc. and subsidiary at December 31, 1999, and the results of
their operations and their cash flows for the period May 25, 1999 to December
31, 1999 in conformity with generally accepted accounting principles.
New York, New York
February 7, 2000
BDO Seidman, LLP
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
barnesandnoble.com llc
We have audited the accompanying balance sheet of barnesandnoble.com llc,
and its predecessor, as of December 31, 1998 and the related statements of
operations, members' equity and cash flows for the period January 1, 1999 to May
24, 1999 and the years ended December 31, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, on the basis described in Note 1 to the
financial statements, the financial position of barnesandnoble.com llc and its
predecessor at December 31, 1998, and the results of their operations and their
cash flows for the period January 1, 1999 to May 24, 1999 and the years ended
December 31, 1998 and 1997 in conformity with generally accepted accounting
principles.
New York, New York
February 7, 2000
BDO Seidman, LLP
F-2
BALANCE SHEETS
(thousands of dollars, except per share data)
barnesandnoble.com inc. ||
and subsidiary ||
(Consolidated) || barnesandnoble.com llc
December 31, || December 31,
1999 || 1998
------------ || ------------
||
ASSETS: ||
Current assets: ||
Cash and cash equivalents $ 247,403 || $ 96,940
Marketable securities 230,644 || -
Receivables, net 15,520 || 2,387
Merchandise inventories 3,886 || 1,579
Prepaid expenses and other current assets 8,161 || 10,770
--------- || --------
Total current assets 505,614 || 111,676
--------- || --------
Fixed assets, net 97,854 || 39,770
Restricted cash - || 50,393
Long term marketable securities 71,852 || -
Other non-current assets 4,198 || 305
--------- || --------
Total assets $ 679,518 || $202,144
========= || ========
||
LIABILITIES AND EQUITY ||
Current liabilities: ||
Accounts payable $ 19,204 || $ -
Accrued liabilities 39,627 || 19,804
Due to affiliate 17,109 || 13,191
--------- || --------
Total current liabilities 75,940 || 32,995
--------- || --------
Minority interest 482,896 || -
--------- || --------
Stockholders' equity: ||
Preferred Stock: $0.001 par value; 50,000,000 shares ||
authorized; none issued and outstanding - || -
Common Stock Series A; $0.001 par value; 750,000,000 ||
shares authorized; 29,347,067 and 0 shares issued and ||
outstanding, respectively 29 || -
Common Stock Series B; $0.001 par value; 1,000 shares ||
authorized; 1 and 0 shares issued and outstanding, ||
respectively - || -
Common Stock Series C; $0.001 par value; 1,000 shares ||
authorized; 1 and 0 shares issued and outstanding, ||
respectively - || -
Paid-in capital 134,452 || -
Accumulated deficit (13,799) || -
Members' equity - || 169,149
--------- || --------
Total equity 120,682 || 169,149
--------- || --------
Commitments and contingencies ||
Total liabilities and equity $ 679,518 || $202,144
========= || ========
See accompanying notes to financial statements.
F-3
STATEMENTS OF OPERATIONS
(thousands of dollars, except per share data)
barnesandnoble.com inc. and subsidiary || barnesandnoble.com llc and its predecessor
-------------------------------------- || ------------------------------------------
(Consolidated) ||
Pro forma ||
year ended May 25, 1999 || January 1, Year Ended December 31,
December 31, to December 31, || 1999 to ---------------------------------
1999 (1)(2) 1999 (3) || May 24, 1999 (4) 1998 (4) 1997 (4)
----------- ----------- || ---------------- --------------- --------------
||
Net sales $ 202,567 $ 148,263 || $ 54,304 $ 61,834 $ 11,949
||
Cost of sales 159,937 117,850 || 42,087 47,569 10,117
--------- --------- || -------- --------- --------
||
Gross Profit 42,630 30,413 || 12,217 14,265 1,832
--------- --------- || -------- --------- --------
||
Operating expenses: ||
Marketing and sales 111,553 79,257 || 32,296 70,423 8,855
Technology and web site ||
development 21,006 15,058 || 5,948 8,532 3,256
General and administrative 32,714 22,765 || 9,949 19,166 3,273
--------- --------- || -------- --------- --------
Total operating expenses 165,273 117,080 || 48,193 98,121 15,384
--------- --------- || -------- --------- --------
||
||
Loss from operations (122,643) (86,667) || (35,976) (83,856) (13,552)
Interest income, net 20,238 18,615 || 1,623 708 -
--------- --------- || -------- --------- --------
Loss before minority interest (102,405) (68,052) || (34,353) (83,148) (13,552)
||
Minority interest 54,253 54,253 || - - -
--------- --------- || -------- --------- --------
Net loss-historical (48,152) $ (13,799) || (34,353) (83,148) (13,552)
========= ||
||
Pro forma adjustment to ||
minority interest (5) 27,534 || 27,534 66,518 10,842
--------- || -------- --------- --------
Net loss-pro forma (2) $ (20,618) || $ (6,819) $ (16,630) $ (2,710)
========= || ======== ========= ========
||
Basic and diluted net loss per ||
common share (6) $ (0.72) $ (0.48) || $ (0.24) $ (0.58) $ (0.09)
Basic and diluted weighted average ||
common shares outstanding (6) 28,778 28,797 || 28,750 28,750 28,750
||
Basic and diluted loss before ||
minority interest per share (6)(7) $ (0.72) $ (0.48) || $ (0.24) $ (0.58) $ (0.09)
Basic and diluted weighted average ||
shares outstanding, if ||
converted (6) (7) 143,939 144,064 || 143,750 143,750 143,750
(1) Include the historical results of barnesandnoble.com llc for the entire year
and the historical results of the Company from May 25, 1999.
barnesandnoble.com inc. was incorporated on March 10, 1999, but had no
activity until the Company's initial public offering on May 25, 1999.
(2) The pro forma amounts do not give effect to the assumed charges to operating
results which might have resulted had the Company's Initial Public Offering
occurred at the beginning of the respective periods.
(3) barnesandnoble.com inc. was incorporated on March 10, 1999, but had no
activity until the Company's initial public offering on May 25, 1999.
(4) Includes the historical results of barnesandnoble.com llc and its
predecessor.
(5) Represents the approximate 80% interest of Barnes & Noble and Bertelsmann in
the net loss of barnesandnoble.com llc for periods prior to May 25, 1999.
(6) For periods prior to May 25, 1999, reflects the pro forma effect of the
shares issued in the Company's Initial Public Offering assuming they were
issued at the beginning of 1997.
(7) Includes the conversion of membership units in barnesandnoble.com llc held
by Barnes & Noble and Bertelsmann into outstanding shares of the
Company.
See accompanying notes to financial statements.
F-4
barnesandnoble.com inc. and subsidiary
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands of dollars)
Common
Stock Paid in Accumulated
Series A Capital Deficit
-------- ------- -------
Balance, May 24, 1999 $ - $ - $ -
Issuance of common stock in IPO 29 484,353 -
Exercise of stock options - 2,452 -
Capital contribution from
Bertelsmann - 50,000 -
Acquisition of
barnesandnoble.com llc - 134,796 -
Reclassification to minority
interest (1) - (537,149) -
Net loss, May 25, 1999 -
December 31, 1999, net of
$54,253 minority interest - - (13,799)
-------------------------------------------
Balance, December 31, 1999 $ 29 $ 134,452 $ (13,799)
===========================================
(1) To adjust minority interest based on net book equity of barnesandnoble.com
llc (after contribution of the proceeds from the Company's initial public
offering) multiplied by the ownership percentage in that entity of Barnes &
Noble and Bertelsmann.
See accompanying notes to financial statements
F-5
barnesandnoble.com llc and predecessor
STATEMENTS OF MEMBERS' EQUITY
(in thousands of dollars)
Accumulated Capital Members'
Loss Contributions Equity
----------- ------------- --------
Balance, January 1, 1997 $ - $ - $ -
Capital contributions from
Barnes & Noble, Inc., net - 32,765 32,765
Net loss, year ended
December 31, 1997 (13,552) - (13,552)
---------------------------------------
Balance, December 31, 1997 (13,552) 32,765 19,213
Capital contribution from
Barnes & Noble, Inc., net - 83,084 83,084
Capital contribution from
Bertelsmann - 150,000 150,000
Net loss, year ended
December 31, 1998 (83,148) - (83,148)
---------------------------------------
Balance, December 31, 1998 (96,700) 265,849 169,149
Net loss, January 1, 1999-
May 24, 1999 (34,353) - (34,353)
---------------------------------------
Balance, May 24, 1999 $(131,053) $265,849 $ 134,796
=======================================
See accompanying notes to financial statements
F-6
STATEMENTS OF CASH FLOWS
(in thousands of dollars)
barnesandnoble.com inc. ||
and subsidiary || barnesandnoble.com llc and its predecessor
------------------------------- || ------------------------------------------
(Consolidated) ||
Pro forma || Year
Year Ended May 25, 1999 || January 1, Ended December 31,
December 31, to December 31, || 1999 to ------------------------
1999 1999 (1) || May 24, 1999 1998 1997
-------------- -------------- || ------------ ---------- ----------
||
Cash flows from operating activities: ||
Net loss $ (48,152) $ (13,799) || $(34,353) $ (83,148) $ (13,552)
Adjustments to reconcile net loss to net ||
cash flows from operating activities: ||
Depreciation and amortization 13,848 9,336 || 4,512 6,823 2,280
Loss on sale of fixed assets - - || - 205 -
Increase in receivables, net (13,133) (11,894) || (1,239) (1,957) (430)
Increase in merchandise inventories (2,307) (1,747) || (560) (964) (615)
Decrease (increase) in prepaid expenses ||
and other current assets 2,609 2,284 || 325 (1,525) (9,245)
Increase (decrease) in accounts payable 19,204 16,683 || 2,521 (3,857) 3,857
Increase (decrease) in due to affiliate 3,918 8,878 || (4,960) 13,191 -
Increase (decrease) in accrued liabilities 19,823 27,855 || (8,032) 16,547 3,257
Minority interest in loss (54,253) (54,253) || - - -
--------- --------- || -------- --------- ---------
Net cash flows used in operating activities (58,443) (16,657) || (41,786) (54,685) (14,448)
--------- --------- || -------- --------- ---------
||
Cash flows from investing activities: ||
Purchases of fixed assets (71,889) (63,973) || (7,916) (31,035) (18,233)
Purchases of marketable securities (302,496) (302,496) || - - -
Decrease (increase) in restricted cash 50,393 - || 50,393 (50,393) -
Proceeds from sale of fixed assets - - || - 200 -
Net assets of barnesandnoble.com llc at ||
date of acquisition - 97,729 || (97,729) - -
(Increase) decrease in other non-current ||
assets (3,936) (4,034) || 98 (231) (84)
--------- --------- || -------- --------- ---------
Net cash flows used in investing activities (327,928) (272,774) || (55,154) (81,459) (18,317)
--------- --------- || -------- --------- ---------
||
Cash flows from financing activities: ||
Proceeds from initial public offering 484,382 484,382 || - - -
Capital contributions from members 50,000 50,000 || - 233,084 32,765
Proceeds from exercise of stock options 2,452 2,452 || - - -
--------- --------- || -------- --------- ---------
Net cash flows from financing activities 536,834 536,834 || - 233,084 32,765
--------- --------- || -------- --------- ---------
||
Net change in cash and cash equivalents 150,463 247,403 || (96,940) 96,940 -
Cash and cash equivalents at beginning ||
of period 96,940 - || 96,940 - -
--------- --------- || -------- --------- ---------
Cash and cash equivalents at end of period $ 247,403 $ 247,403 || $ - $ 96,940 $ -
========= ========= || ======= ========= ========
(1) barnesandnoble.com inc. was incorporated on March 10, 1999, but had no
activity until the Company's initial public offering on May 25, 1999.
See accompanying notes to financial statements.
F-7
barnesandnoble.com inc. and predecessors
NOTES TO FINANCIAL STATEMENTS
(in thousands, except per share data)
1. Business
barnesandnoble.com inc. (the "Company") is a holding company whose sole
asset is a 20.3% equity interest in barnesandnoble.com llc ("B&N.com"), an
online retailer of knowledge, information, education and entertainment related
products, and whose sole business is currently acting as sole manager of
B&N.com. As sole manager of B&N.com, the Company controls all of the affairs of
B&N.com and as a result, B&N.com is consolidated with the Company. Barnes &
Noble, Inc. ("Barnes & Noble") and Bertelsmann A.G. ("Bertelsmann") each
beneficially own a 39.85% equity interest (equivalent to an aggregate of
115,000 Membershiup Units) in B&N.com. Each Membership Unit held by these
companies is convertible into one share of the Company's Class A Common Stock.
As reflected in the statements of operations, the loss before minority interest
represents the total loss for the period and the net loss represents the portion
of the loss attributable to the Company subsequent to the commencement of its
activities.
Prior to October 31, 1998, the business of B&N.com was conducted by a
wholly owned subsidiary of Barnes & Noble, which subsidiary was originally
incorporated on January 14, 1997 in the State of Delaware under the name Barnes
& Noble Online, Inc. ("B&N Online"). Effective October 31, 1998, Barnes & Noble
and Bertelsmann completed a transaction that established B&N.com as the owner
and operator of the business (the "Formation Transaction"). In connection with
the Formation Transaction, B&N Online contributed substantially all of its
assets and liabilities to B&N.com at their historical cost and Bertelsmann
contributed $150 million and contributed an additional $50 million in cash prior
to the effective date of the public offering. B&N.com accounted for the
investment made by Bertelsmann in B&N.com as a capital contribution. The
completion of the foregoing transactions resulted in Barnes & Noble and
Bertelsmann each having a 50% beneficial interest in B&N.com, and B&N Online
changing its name to B&N Sub Corp.
On March 10, 1999, Barnes & Noble caused B&N Sub Corp. to establish the
Company. On May 24, 1999, B&N Sub Corp. transferred its ownership of the Company
to B&N.com Holding Corp ("BN.com Holding Corp."). This resulted in Barnes &
Noble owning 100% of BN.com Holding Corp. which owns 100% of the Company.
Subsequent to that, the Company filed an amended charter which, among other
things, reclassified its outstanding common stock to one share of Class B Common
Stock. The Company then issued a share of Class C Common Stock constituting a
50% interest in the Company to a wholly owned subsidiary of Bertelsmann. The
completion of the foregoing transactions resulted in Barnes & Noble and
Bertelsmann each having a 50% beneficial interest in the Company through their
ownership of all of the outstanding Class B and Class C Common Stock.
On May 25, 1999 the Company sold 28,750 shares of Class A Common Stock in a
public offering (the "Offering"). The Company used the $484,382 in proceeds of
the Offering to acquire its interest in B&N.com. The acquisition of the
ownership interest in B&N.com was treated as a reorganization of entities under
common control in a manner similar to a pooling of interests, analogous to the
type of transaction described in Emerging Issues Task Force Issue 97-2 ("EITF
97-2"). Accordingly, the net assets of B&N.com contributed by Barnes & Noble
were reported in the consolidated financial statements at Barnes & Noble's
historical cost, and the minority interests in B&N.com were based on the net
book equity of B&N.com (after contribution of the proceeds from the Offering)
multiplied by the ownership percentages of Barnes & Noble and Bertelsmann.
F-8
barnesandnoble.com inc. and predecessors
NOTES TO FINANCIAL STATEMENTS
(in thousands, except per share data)
The financial information of B&N.com and the Company's business which was
previously conducted by a wholly-owned subsidiary of Barnes & Noble is included
in the accompanying financial statements as predecessor information.
References to 1999 are to the Company as of the year end and to the Company
and its predecessor to the full year. References prior to 1999 are for B&N.com
and its predecessor. Operating information included in these notes for 1999 is
presented on a full year basis because, as a result of the reorganization
described above, it is not considered meaningful to present separate data for
the periods before and after May 25, 1999.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the period reported. Actual results
could differ from those estimates.
Restricted Cash
The amount classified as restricted cash as of December 31, 1998 in the
accompanying financial statements represents the portion of the Bertelsmann
investment remaining in a reserve account, including accumulated interest. In
connection with the Company's Offering, Bertelsmann contributed $50,000, at
which time, the restricted cash became available to B&N.com.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market as
determined on a first-in, first-out basis. B&N.com purchases a substantial
majority of its products from two major vendors, Ingram Book Group ("Ingram")
and Barnes & Noble. Ingram accounted for 22.5%, 25.9% and 50.1% of B&N.com's
inventory purchases during the years ended December 31, 1999, 1998 and 1997,
respectively. Barnes & Noble accounted for 58.9%, 60.3% and 38.5% of B&N.com's
inventory purchases during the years ended December 31, 1999, 1998 and 1997,
respectively. Barnes & Noble charges B&N.com the cost associated with such
purchases, plus incremental overhead incurred by Barnes & Noble in connection
with providing such inventory.
Fixed Assets
Fixed assets are carried at cost, less accumulated depreciation and
amortization. Computers and equipment are depreciated using the straight-line
method over their estimated useful lives of 3 to 10 years. Leasehold
improvements are capitalized and amortized over the shorter of their estimated
useful lives or the terms of the respective leases. In March 1998, the
Accounting Standards Executive Committee issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 requires all costs related to the
development of internal use software other than those
F-9
barnesandnoble.com inc. and predecessors
NOTES TO FINANCIAL STATEMENTS
(in thousands, except per share data)
incurred during the application development stage to be expensed as incurred.
Costs incurred during the application development stage are required to be
capitalized and amortized over the estimated useful life of the software.
Accordingly, direct internal and external costs associated with the development
of the features, content and functionality of B&N.com's online store,
transaction-processing systems, telecommunications infrastructure and network
operations, incurred during the application development stage, have been
capitalized, and are amortized over the estimated useful lives of three years.
B&N.com has evaluated all software development projects that were in progress as
of December 31, 1999 to determine whether or not it was no longer probable that
any of the projects would be placed in service. Based on that evaluation,
B&N.com expects to complete and put in service all software development projects
that existed as of year end.
Impairment of Long-Lived Assets
B&N.com reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable in accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("SFAS No. 121"). Recoverability of assets held and
used is measured by a comparison of the carrying amount of an asset to
undiscounted pre-tax future net cash flows expected to be generated by that
asset. An impairment loss is recognized for the amount by which the carrying
amount of the assets exceeds the fair value of the assets. To date no such
impairment has been recognized.
Fair Value of Financial Instruments
The carrying amounts for the Company's cash and cash equivalents, accounts
payable and other liabilities approximate fair value. The fair value for
marketable securities is based on quoted market prices which approximate cost.
Net Sales
Sales of B&N.com's products are recognized, net of estimated returns, at
the time the products are shipped to customers. International net sales were
$12,817, $6,212 and $1,200 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Advertising Costs
B&N.com expenses the costs of advertising for magazines, television, radio
and other media the first time the advertising takes place. Advertising expense
was $41,845, $32,435 and $3,100 for the years ended December 31, 1999, 1998 and
1997, respectively.
Technology and Web site Development
Development expenses included in the accompanying statements of operations
consist principally of indirect development costs and all costs associated with
the maintenance of the features, content and functionality of B&N.com's online
stores, transaction-processing systems, telecommunications infrastructure and
network operations.
Earnings (Loss) per Share
Basic earnings (loss) per share is computed by dividing net earnings (loss)
by the weighted-average number of common shares outstanding during the period.
Diluted earnings per share reflect, in periods in which they have a dilutive
effect, the impact of common shares issuable upon exercise of stock options.
Accordingly, diluted net loss per share for the period May 25, 1999 to December
31, 1999 excludes the effect of outstanding stock options.
F-10
barnesandnoble.com inc. and predecessors
NOTES TO FINANCIAL STATEMENTS
(in thousands, except per share data)
Net loss per share for the period May 25, 1999 to December 31, 1999 is also
presented on an "if-converted" basis which assumes the outstanding Membership
Units of B&N.com were converted into 115,000 shares of the Company and the
minority interest in the net loss was eliminated.
Income Taxes
Through October 31, 1998, B&N.com, as a wholly owned subsidiary, was
included in Barnes & Noble's U.S. consolidated income tax returns. As such, any
benefit for income taxes due to losses generated by B&N.com were realized and
recognized by Barnes & Noble. Effective November 1, 1998, the operations of the
entity were contributed to a limited liability company, and as such is not
considered a taxable entity for Federal income tax purposes and most state
income tax purposes. Any taxable income or losses recorded subsequent to the
formation of the limited liability company are reported by the members on their
respective income tax returns. As a result, no tax benefits have been allocated
to B&N.com for its losses for all periods presented.
Concentration of Credit Risk
B&N.com is subject to concentrations of credit risk from its holdings of
cash, cash equivalents and short term investments. B&N.com's credit risk is
managed by investing its cash in high-quality money market instruments and
securities of the U.S. government and its agencies, foreign governments and
high-quality corporate issuers. In addition, B&N.com's accounts receivable are
not significant and are due from domestic banks. B&N.com believes it had no
unusual concentrations of credit risk at December 31, 1999 and 1998.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal
quarters beginning after June 15, 2000. SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are to be recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. The
Company does not expect that the adoption of SFAS 133 will have a material
impact on its consolidated financial statements because B&N.com does not
currently hold any derivative instruments.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB No. 101"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. SAB No. 101 did not impact the
Company's revenue recognition policies.
3. Investments
B&N.com invests certain of its excess cash in debt instruments of the U.S.
Government and its agencies, and of high quality corporate issuers. All highly
liquid instruments with an original maturity of three months or less are
considered cash equivalents; those with original maturities greater than three
months are considered marketable securities. B&N.com classified investments in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities".
F-11
barnesandnoble.com inc. and predecessors
NOTES TO FINANCIAL STATEMENTS
(in thousands, except per share data)
At December 31, 1999, short-term investments in marketable securities
consist primarily of U.S. Treasury Securities, U.S. government agency securities
and investments in high quality corporate issuers and were classified as
held-to-maturity. Unrealized holding gains and losses at December 31, 1999 were
not significant.
4. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
December 31,
1999 1998
--------- ---------
AOL marketing advances .....................$ 2,780 $ 1,400
Other marketing advances ................... 2,899 7,905
Other current assets ....................... 2,482 1,465
--------- ---------
$ 8,161 $ 10,770
========= =========
On November 1, 1997, B&N.com and America Online ("AOL") formed a strategic
alliance pursuant to an Interactive Marketing Agreement (the "AOL Agreement")
which provides for B&N.com to be featured as the exclusive online book retailer
within AOL's commercial service which as of December 31, 1999 has approximately
20 million subscribers, excluding AOL.com. The AOL Agreement also gives B&N.com
an extensive package of placements and visibility throughout the AOL service. In
consideration of the marketing, promotion, advertising and other services AOL
will provide under the AOL Agreement, B&N.com will pay AOL a total of $40,000
over the term of the AOL Agreement, of which $18,000 has been paid as of
December 1999, and $11,000 will be paid in each of the years 2000 and 2001. The
AOL Agreement also contains revenue sharing provisions for sales above specified
amounts. B&N.com amortizes the payments associated with the AOL Agreement based
on impressions over the subsequent 12 months.
5. Fixed Assets
Fixed assets, at cost, consist of the following:
December 31,
1999 1998
---------- ----------
Computers and equipment ....................$ 56,363 $ 22,319
Leasehold improvements ..................... 10,699 8,418
Software ................................... 34,236 16,938
Construction in Progress ................... 18,263 -
---------- ----------
119,561 47,675
Less accumulated depreciation .............. 21,707 7,905
---------- ----------
Fixed assets, net .................$ 97,854 $ 39,770
========== ==========
Total capital expenditures to complete the construction in progress are
expected to be approximately $25,000.
F-12
barnesandnoble.com inc. and predecessors
NOTES TO FINANCIAL STATEMENTS
(in thousands, except per share data)
6. Accrued Liabilities
Accrued liabilities consist of the following:
December 31,
1999 1998
--------- ---------
Accrued advertising ....................$ 12,990 $ 10,727
Accrued fixed assets ................... 12,644 3,156
Accrued compensation ................... 3,470 2,509
Other .................................. 10,523 3,412
--------- ---------
$ 39,627 $ 19,804
========= =========
7. Stockholders' Equity
There are three classes of common stock authorized: Class A Common Stock
("Class A Common"), Class B Common Stock ("Class B Common") and Class C Common
Stock ("Class C Common"). The holders of Class A Common generally have rights
identical to holders of Class B Common and Class C Common (collectively "High
Vote Stock"), except that each holder of Class A Common is entitled to one vote
per share and each holder of High Vote Stock is entitled to the number of votes
per share equal to: (i) ten, multiplied by the sum of (a) the aggregate number
of High Vote Stock owned by such holder and (b) the aggregate number of
Membership Units owned by such holder; divided by (ii) the number of shares of
High Vote Stock owned by such holder. Pursuant to the Company's Amended and
Restated Certificate of Incorporation ( the "Amended Charter"), each of the
holders of the High Vote Stock has the right to directly elect three of the
Company's directors. Otherwise, holders of Class A Common and High Vote Stock
(collectively "Common Stock") generally will vote together as a single class on
all matters (including the election of the directors who are not elected
directly by the holders of the High Vote Stock) presented to the stockholders
for their vote or approval except as otherwise required by applicable Delaware
law.
The Board of Directors is authorized to issue up to an aggregate of 50
million shares of Preferred Stock. The rights and characteristics of the
Preferred Stock are at the discretion of the Board of Directors. There is no
Preferred Stock outstanding.
8. Lease Commitments
B&N.com currently leases warehouse facilities, office space and equipment
under noncancelable operating leases. Rental expense under operating lease
agreements was $2,265, $1,317 and $200 for the years ended December 31, 1999,
1998 and 1997, respectively.
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barnesandnoble.com inc. and predecessors
NOTES TO FINANCIAL STATEMENTS
(in thousands, except per share data)
Future minimum lease payments under noncancelable operating leases as of
December 31, 1999 are:
Future
Year ending Minimum Lease
December 31, Payments
-----------------------------------------------------
2000...................................$ 6,331
2001................................... 8,224
2002................................... 8,292
2003................................... 7,872
2004................................... 7,826
Thereafter............................. 70,923
--------------
$ 109,468
==============
9. Employees' Retirement and Defined Contribution Plans
B&N.com maintains a noncontributory defined benefit pension plan (the
"Pension Plan") for the benefit of substantially all of its employees who meet
certain eligibility requirements, primarily age and length of service. Benefits
provided by the Pension Plan are based on years of credited service and covered
earnings for Social Security benefits. B&N.com's contributions to the Pension
Plan are generally in amounts determined by independent consulting actuaries.
The Pension Plan was separated from the Barnes & Noble Pension Plan as of
October 31, 1998. Pension expense allocable to B&N.com for 1999 was $90 and for
the last two months of 1998 was not material. Norwest Bank is the trustee for
the Pension Plan and all assets are managed by Fidelity Investments.
Actuarial assumptions used in determining the funded status of the Pension
Plan are as follows:
December 31,
1999 1998
-------- --------
Discount rate (beginning of year).................... 7.25% 7.25%
Discount rate (end of year).......................... 7.75% 7.25%
Expected long-term rate of return on plan assets..... 9.50% 9.50%
Assumed rate of compensation increase................ 4.75% 4.25%
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barnesandnoble.com inc. and predecessors
NOTES TO FINANCIAL STATEMENTS
(in thousands, except per share data)
The following table sets forth the funded status of the Pension Plan and the
pension liability recognized for the Pension Plan in the accompanying balance
sheets:
December 31,
1999 1998
-------- --------
Actuarial present value of benefit obligation:
Vested benefits .................................$ (158) $ (160)
Non-vested benefits ............................. (73) (115)
-------- --------
Accumulated benefit obligation ...................... (231) (275)
Effect of projected future compensation increases ... (271) (363)
-------- --------
Projected benefit obligation ........................ (502) (638)
Plan assets at market value ......................... 430 429
-------- --------
Projected benefit obligation in excess of
plan assets ...................................... (72) (209)
Unrecognized net loss ............................... (6) -
Unrecognized net obligation remaining ............... - -
Unrecognized prior service cost ..................... (12) 209
-------- --------
Pension liability ...............................$ (90) $ -
======== ========
B&N.com, through Barnes & Noble, also sponsors a defined contribution plan
(the "Savings Plan") for the benefit of substantially all of its employees who
meet certain eligibility requirements, primarily age and length of service. The
Savings Plan allows employees to invest up to 15% of their current gross cash
compensation on a pre-tax or post-tax basis, at their option. Participants have
investment options of various mutual funds. B&N.com's contributions to the
Savings Plan are generally in amounts based upon a certain percentage of the
employees' pre-tax contributions and are in Barnes & Noble stock. B&N.com
charged $100 to employee benefit expenses for each of the years ended December
31,1999 and 1998.
10. Stock Incentive Plan
As of December 31, 1998, B&N.com had one incentive plan (the "1998 Plan")
under which stock options were granted to key officers, employees, consultants,
advisors, and managers of B&N.com and its subsidiaries and affiliates. The
Compensation Committee of the Board of Managers was responsible for the
administration of the 1998 Plan. Generally, options were granted at fair market
value, began vesting one year after grant in 25% increments, were to expire ten
years from issuance and were conditioned upon continual employment during the
vesting period. Options granted under the 1998 Plan were replaced with options
to purchase shares of the Class A Common Stock of the Company under the
Company's 1999 Incentive Plan (the "1999 Plan"). The 1999 Plan is substantially
the same as the 1998 Plan, and is administered by the Compensation Committee of
the Company's Board of Directors. The 1999 Plan allows the Company to grant
options to purchase 25,500 shares of the Company's Class A Common Stock.
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barnesandnoble.com inc. and predecessors
NOTES TO FINANCIAL STATEMENTS
(in thousands, except per share data)
A summary of the status of stock options as of December 31, 1999 issued under
the 1998 Plan is presented below:
Outstanding Options
-----------------------------
Weighted Average
Number of Exercise Price
Shares Per Share
--------- ----------------
Balance December 31, 1998 ............. 18,155 $ 3.94
Options granted .............. 5,903 15.20
Options canceled ............. (3,870) 5.87
Options exercised ............ (597) 4.11
--------- --------
Balance December 31, 1999 ............. 19,591 $ 6.95
========= ========
During 1998 option grants of 5,060 and 4,140 were made to Leonard Riggio
and Jonathan Bulkeley, respectively.
The following table summarizes information as of December 31, 1999
concerning outstanding and exercisable options:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Remaining Exercise Exercise
Price Number Contractual Price Number Price
Per Share Outstanding Life (in years) Per Share Exercisable Per Share
--------- ----------- --------------- --------- ----------- ---------
3.48-4.06 12,639 8.63 $ 3.90 4,869 $ 3.90
4.35-6.09 2,544 8.73 4.56 777 5.03
15.75-16.88 1,999 9.60 15.82 0 0
17.69-18.00 2,017 9.43 17.98 225 18.00
18.38-19.31 392 9.81 18.61 0 0
-------- ------- -------- ------- --------
19,591 8.85 $ 6.95 5,871 $ 4.59
======== ======= ======== ======= ========
During the year ended December 31, 1999, all option grants were granted at
fair value and as a result there was no compensation expense recorded for
options granted.
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barnesandnoble.com inc. and predecessors
NOTES TO FINANCIAL STATEMENTS
(in thousands, except per share data)
Had the Company determined the compensation cost of employee stock options
based on the fair value of the stock option grant dates in accordance with the
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), the Company's pro forma loss before minority
interest would have been increased to the pro forma amounts below:
Year Ended
December 31,
------------
1999 1998
------------ ------------
Pro forma loss before minority interest:
As reported $ (102,405) $ (83,148)
Pro forma SFAS 123 (107,336) (84,800)
Basic and diluted loss per share before
minority interest:
As reported (0.72) (0.58)
Pro forma SFAS 123 (0.75) (0.59)
The fair value for each option granted was estimated at the date of grant
using the Black-Scholes option pricing model, one of the allowable valuation
methods under SFAS 123, with the following assumptions:
Year Ended
December 31,
------------
1999 1998
------------- -----------
Average risk free interest rates 5.25% 5.25%
Average expected life (in years) 5.00 5.00
Volatility 57.50% N/A
The weighted-average fair value of the options granted during the years
1999 and 1998 was estimated to be $8.34 and $0.91, respectively, for options
granted at fair market value.
11. Litigation
B&N.com is involved in various routine legal proceedings incidental to the
conduct of its business. The Company does not believe that any of these legal
proceedings will have a material adverse effect on the financial condition,
results of operations or cash flows of B&N.com.
In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace Kuralt,
filed a lawsuit in the United States District Court for the Southern District of
New York against a predecessor of the Company, Barnes & Noble, Borders Group,
Inc. and others, alleging violation of the Robinson-Patman Act and other federal
law, New York statutes governing trade practices and common law. In March 2000,
a Second Amended Complaint was served on the Company and other defendants
alleging a single cause of action for violations of the Robinson-Patman Act. The
Second Amended Complaint claims that the Intimate Bookshop, Inc. has suffered
damages of $10,000 or more and requests treble damages, costs, attorneys' fees
and interest, as well as declaratory and injunctive relief prohibiting the
defendants from violating the Robinson-Patman Act. The Company and B&N.com
intend to vigorously defend this action.
F-17
barnesandnoble.com inc. and predecessors
NOTES TO FINANCIAL STATEMENTS
(in thousands, except per share data)
In March 1998, the American Booksellers Association and 26 independent
bookstores filed a lawsuit in the United States District Court for the Northern
District of California against Barnes & Noble and Borders Group Inc. alleging
violations of the Robinson-Patman Act, the California Unfair Trade Practice Act
and the California Unfair Competition Law. The Complaint seeks injunctive and
declaratory relief; treble damages on behalf of each of the bookstore
plaintiffs, and, with respect to the California bookstore plaintiffs, any other
damages permitted by California law; disgorgement of money, property and gains
wrongfully obtained in connection with the purchase of books for resale, or
offered for resale, in California from March 18, 1994 until the action is
completed and pre-judgment interest on any amounts awarded in the action, as
well as attorney fees and costs. In October 1999, the Company and B&N.com were
added as defendants in the action. The Company and B&N.com intend to vigorously
defend this action.
On October 21, 1999, Amazon.com, Inc. ("Amazon") filed a lawsuit against
the Company and B&N.com in the United States District Court for the Western
District of Washington alleging that B&N.com's use of its Express Lane one-click
ordering system infringes upon Amazon's patent for its 1-Click ordering system.
The complaint seeks injunctive and declaratory relief and treble damages, as
well as attorneys fees and costs. The Company and B&N.com have filed a
counterclaim for a declaratory judgment that the Amazon patent at issue is
invalid. On December 1, 1999, the Court granted Amazon's motion for a
preliminary injunction. As a result, consistent with the Court's order, B&N.com
replaced its Express Lane feature with an Express Checkout feature requiring two
clicks. The Company and B&N.com intend to vigorously defend this action.
12. Related Party Transactions
Through its distribution facilities, Barnes & Noble accounted for
approximately 58.9%, 60.3% and 38.5% or $64,112, $26,929 and $3,900, of
B&N.com's purchases during the years ended December 31, 1999, 1998 and 1997,
respectively. B&N.com has entered into an agreement (the "Supply Agreement")
with Barnes & Noble whereby Barnes & Noble charges B&N.com the costs associated
with such purchases plus incremental overhead incurred by Barnes & Noble in
connection with providing such inventory. As of December 31, 1999 and 1998,
$18,495 and $13,250, respectively, was payable to Barnes & Noble in connection
with such purchases. The Supply Agreement is subject to certain termination
provisions.
B&N.com has entered into agreements (the "Services Agreements") whereby
B&N.com receives various services from Barnes & Noble and its subsidiaries,
including, among other things, services for payroll processing, benefits
administration, insurance (property and casualty, medical, dental and life), tax
and traffic. In accordance with the terms of the Services Agreements, B&N.com
has paid, and expects to continue to pay, fees to Barnes & Noble and its
subsidiaries in an amount equal to the direct costs plus incremental expenses
associated with providing such services. B&N.com paid $1,672, $870 and $200 for
such services during the years ended December 31, 1999, 1998 and 1997,
respectively. The Services Agreements are subject to certain termination
provisions.
B&N.com subleases from Barnes & Noble approximately one-third of a 300,000
square foot warehouse facility located in New Jersey. B&N.com paid Barnes &
Noble $473, $271 and $0 for such subleased space during the years ended December
31, 1999, 1998 and 1997, respectively.
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barnesandnoble.com inc. and predecessors
NOTES TO FINANCIAL STATEMENTS
(in thousands, except per share data)
Since 1998, B&N.com has used the music distributor AEC One Stop Group, Inc.
("AEC'), as its primary supplier, to fulfill its orders for music and to provide
a music database. Subsequent to an agreement between AEC and B&N.com, AEC's
parent corporation was acquired by an investor group in which Leonard Riggio,
the Company's Chairman, was a significant minority investor. B&N.com paid AEC
$2,908 in connection with this agreement during the year ended December 31,
1999. At December 31, 1999, $4,508 was payable to AEC in connection with this
agreement.
B&N.com has entered into an agreement (the "License Agreement") with Barnes
& Noble College Bookstores, Inc., of which the principal stockholder is also a
principal stockholder/director/executive officer of Barnes & Noble and the
Company. Pursuant to the License Agreement, B&N.com has been granted an
exclusive license (the "License") to use the Barnes & Noble name and trademark
(excluding sales of college textbooks). The License Agreement is subject to
certain limitation provisions.
B&N.com has entered into an agreement (the "Database and Software License
Agreement") whereby B&N.com licenses from Barnes & Noble, the right to use
Barnes & Noble's title database, inventory sourcing and special order software.
The Database and Software License Agreement is renewable and is subject to
certain termination provisions.
B&N.com has entered into a Trademark License Agreement with Bertelsmann
Online ("BOL") (the "BOL Trademark License Agreement"), pursuant to which
B&N.com was granted a non-exclusive license to use BOL's name and trademark in
its operations and to sublicense the BOL name in accordance with the terms of
the license as the Class C Directors, in their sole discretion, see fit. The
License remains effective until B&N.com either defaults or becomes subject to
certain bankruptcy events.
B&N.com has entered into Technology Sharing and License Agreements with BOL
("the Technology Sharing License Agreements"), the subsidiary through which
Bertelsmann conducts its Internet business, pursuant to which BOL granted
B&N.com a license to view, access and use BOL's computer technology and systems,
and B&N.com granted BOL a license to view, access and use B&N.com's computer
technology and systems. These agreements remain effective until (i) the date
both parties mutually agree to terminate, or (ii) from and after the date either
Barnes & Noble or Bertelsmann cease having an equity interest of ten percent
(10%) or more in B&N.com. Following termination, each party may continue to use
in perpetuity any technology it obtained from the other prior to such
termination.
B&N.com believes that the transactions discussed above, as well as the
terms of any future transactions and agreements (including renewals of any
existing agreements) between B&N.com and its affiliates, are and will be at
least as favorable to B&N.com as could be obtained from unaffiliated parties.
The Board of Directors must approve in advance any proposed transaction or
agreement and will utilize such procedures in evaluating the terms and
provisions of such proposed transaction or agreement as are appropriate in light
of the fiduciary duties of directors under Delaware law.
F-19
barnesandnoble.com inc. and predecessors
NOTES TO FINANCIAL STATEMENTS
(in thousands, except per share data)
13. Subsequent Events
In January 2000, B&N.com acquired approximately 32% of Enews.com, the
largest retailer of magazine subscriptions on the Internet, for $26,428 in cash
and stock valued at $12,857, to expand its presence in the growing on-line
magazine subscription market.
On February 29, 2000, the Company repriced 5,994 of 16,086 outstanding
options which were originally granted at an average exercise price of $16.15.
The new exercise price for the options is $8.00, the closing market price of the
Company's stock as of February 28, 2000. Based on current accounting literature,
the Company expects to account for these repriced options as variable options in
the future.
In March 2000, B&N.com paid Jonathan Bulkeley $10,940 for the surrender
of one million stock options which was charged to expense at that time.
F-20