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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, 2001 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
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.001 par value per share
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 18,
2002 as reported on the NASDAQ National Market System, was approximately
$75,753,994.
Number of shares of $.001 par value Class A Common Stock, Class B Common Stock
and Class C Common Stock outstanding as of March 18, 2002 was 47,945,566, one
and one, respectively.
This document contains 73 pages.
Exhibit index located on pages 41 - 45.
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TABLE OF CONTENTS
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PART I
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PAGE:
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Item 1. Business.................................................. 3
Item 2. Properties................................................ 9
Item 3. Legal Proceedings......................................... 10
Item 4. Submission of Matters to a Vote of Security Holders....... 11
PART II
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...................................... 12
Item 6. Selected Financial Data.................................. 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 14
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk............................................. 23
Item 8. Financial Statements and Supplementary Data............. 24
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................. 24
PART III
Item 10. Directors and Executive Officers of the Registrant...... 25
Item 11. Executive Compensation.................................. 27
Item 12. Security Ownership of Certain Beneficial Owners
and Management.......................................... 37
Item 13. Certain Relationships and Related Transactions.......... 38
PART IV
Item 14. Exhibits, Financial Statement Schedules, Reports
on Form 8-K and Signatures.............................. 41
2
PART I
ITEM 1. BUSINESS
GENERAL
barnesandnoble.com inc. (the "Company") is a holding company whose sole
asset is its 27.6% interest in barnesandnoble.com llc ("B&N.com"), and whose
sole business is acting as sole manager of B&N.com. The remaining ownership
interests in B&N.com are owned equally by Barnes & Noble, Inc. ("Barnes &
Noble") and Bertelsmann A.G. ("Bertelsmann").
B&N.com is a leading online retailer of books, music, DVD/video and
magazine subscriptions. Since opening its online store (www.bn.com) in March
1997, B&N.com has attracted more than 11.2 million customers in 228 countries.
B&N.com's online bookstore includes the largest in-stock selection of in-print
book titles with access to 1 million titles for immediate delivery,
supplemented by more than 20 million listings from its nationwide network of
out-of-print, rare and used book dealers. B&N.com offers its customers fast
delivery, easy and secure ordering and rich editorial content.
According to Jupiter Media Metrix, in January 2002, B&N.com's Web site
was the fifth most-trafficked shopping site and was among the top 50 largest Web
properties on the Internet. Co-marketing agreements with major Web portals such
as AOL, Yahoo and MSN as well as content sites have extended B&N.com's brand and
increased consumer exposure to its site. B&N.com has also established a network
of remote storefronts across the Internet by creating direct links with more
than 512,000 affiliate Web sites.
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;
o The use of Barnes & Noble's distribution center as its primary
product supplier, which enables B&N.com to offer approximately
1 million in-stock book titles for fast delivery, representing
the largest standing inventory of any online bookseller;
B&N.com is also able to benefit from the supplier
relationships maintained by Barnes & Noble with every
significant book publisher;
o The use of Barnes & Noble's book database as the primary
source of bibliographic data, which enables B&N.com to provide
its customers with the most authoritative and accurate book
data available;
o The enterprise value of Barnes & Noble and Bertelsmann,
including Barnes & Noble's network of 900 retail bookstores
nationwide and Bertelsmann's stature as one of the largest
integrated media companies in the world, which provides
significant advantages in attracting strategic partnerships;
o Ongoing access to the substantial book selling and direct
marketing knowledge and experience of the management of Barnes
& Noble and Bertelsmann; and
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o Participation in Barnes & Noble's membership loyalty program,
READERS' ADVANTAGE(TM), which offers discounts and other
benefits to members. For a $25 annual membership fee,
participating customers receive 10% additional discounts at
Barnes & Noble stores and 5% additional discounts at B&N.com.
In addition to discounts, member benefits include sign-up
premiums and member-only events.
INDUSTRY BACKGROUND
E-COMMERCE. The arena of e-commerce provides retailers with the
opportunity to serve a rapidly growing market, fueled by increased consumer
acceptance of the Internet as an alternative shopping channel. According to the
January 2002 Forrester Research North America online shopping report, online
shopping for 2001 was $47.6 billion, and is expected to reach $130.9 billion in
the year 2004. In Jupiter Communication's November 2001 population model, the
total number of U.S. households online by the end of 2001 was 62.6 million,
which represents approximately 59% of U.S households, and is expected to reach
86.3 million by 2006 representing approximately 76% of U.S. households.
THE BOOK INDUSTRY. The size of the U.S. consumer book market, according
to Veronis Suhler & Associates, an investment banking firm specializing in,
among other things, the publishing industry, was $17.8 billion in 2000, and is
expected to grow to $20.0 billion by 2005. According to the National Association
of College Stores, Inc., the college textbook market in 2000 was $6.8 billion.
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 use to purchase a
wide range of products. Within the categories of B&N.com's focus of books, music
and DVD/video, industry analysts forecast a large and rapidly growing market for
online sales. Forrester Research estimates that North American online sales of
books will grow to over $4.7 billion by 2006. In addition, Forrester Research
estimates online sales in 2006 for music and video to be $5.5 billion and $5.9
billion, respectively. According to the Jupiter Media Metrix March 2002 report,
the U.S. online shopping population will double from 66 million to 132 million
by 2006.
PRODUCTS THAT ARE WELL SUITED FOR E-COMMERCE. The book, music and video
businesses are particularly well suited for e-commerce because an online store
has virtually unlimited shelf space and can offer consumers anywhere the
convenience of browsing through large product information databases. The use of
sophisticated search engines and personalized services enables users to find
books and music with convenience and speed and to get advance notice about new
titles in their areas of personal interest. Editorial content, such as synopses,
excerpts, reviews and recommendations, downloadable music sound samples and over
10,000 movie trailers, make for a more educated and entertaining purchasing
decision.
BROADBAND VS. DIAL-UP. Currently most households access the Internet
through a dial-up connection, which requires use of a phone line and modem, with
maximum speeds of 56 kbps. Broadband access does not use a phone line and has
speeds up to ten times faster than dial-up. The November 2001 Market Forecast
Report by Jupiter Media Metrix forecasts that there will be no net growth in the
dial-up population over the next two years, and that households will
increasingly migrate to the much quicker broadband for their primary access
technology. After 2003, broadband growth is expected to outpace that of dial-up,
leading to a slow but inevitable decline of dial-up as the primary residential
connectivity technology. The report also forecasts that broadband will serve 10
million households in the U.S. by the end of 2001, and by 2006, more than 35
million households will subscribe to a broadband service. The Company expects
the increasing utilization of broadband to have a positive impact on its sales.
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BUSINESS STRATEGY
B&N.com has aggressively pursued its strategy to be an e-commerce
leader in the sale of books, music and DVD/video. 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. B&N.com has made significant
investments to provide 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.
Central to achieving these, B&N.com's goals are to increase its
customers and revenue base by:
CONTINUALLY ENHANCING THE USER EXPERIENCE. B&N.com is committed to
making every aspect of browsing and shopping in its Web site an easy
and intuitive 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 ordering and
checkout process easy, intuitive, fast and secure. In 2001, the Company
implemented a number of enhancements to both the order checkout process
and to the account maintenance function. These improvements assist
customers in quickly completing their orders and enable them to easily
modify information in their customer accounts.
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 includes editorial content such as
synopses, book reviews, author biographies and user reviews on more
than one million titles. Included in this content are book reviews from
many respected industry sources, such as The New Yorker, Publisher's
Weekly, Kirkus Reviews, the Reader's Catalog and The Horn Book.
B&N.com's in-house editorial experts also write and commission feature
articles, columns and interviews. In addition, B&N.com offers "First
Chapters", where users can read first chapters, tables of contents and
excerpts on selected books.
During the 2001 holiday season, the Company launched the Barnes &
Noble.com Gift Guide. This comprehensive guide featured over 500
guaranteed in-stock products organized into 15 subject and interest
categories including art and photography, food and wine, fiction and
literature, home and garden, religion and science and nature. Also
featured were special, hand-picked collections, including book and
video gift sets, Christmas and holiday books, coffee table books and
gift books. Music and video selections included music and DVD box sets,
bestsellers and holiday selections. Children and teen selections were
categorized by age and included special interest collections.
The Company recently launched Barnes & Noble, Jr., featuring a
wide selection of books for children of all ages. Barnes & Noble, Jr.
also has extensive video and music selections. Streamlining the
shopping experience, the new store features clear links between product
lines and newly created age-based recommendations within each product
line. The fully cross-merchandised Barnes & Noble, Jr. focuses on new
releases, celebrated award winners and classics.
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OFFERING A LARGE PRODUCT SELECTION AND FAST DELIVERY. B&N.com has
access to the largest in-stock selection of in-print book titles available for
immediate delivery, supplemented by more than 20 million listings from its
nationwide network of out-of-print, rare and used book dealers. This includes
virtually every English-language book in print as well as millions of
out-of-print, used and rare books. B&N.com's online databases act as a highly
searchable catalogue for the full spectrum of English-language books. The
Company's distribution network ensures speedy delivery. B&N.com's search engine
and sort capabilities allow consumers to search and browse through the Company's
proprietary database in an intuitive and easy way, with accurate and meaningful
results received on virtually every search.
EXTENSIVE PRODUCT OFFERING. B&N.com is focused on becoming 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 music, videos and magazine subscriptions is a natural extension
of bookselling. B&N.com's Music Store features hundreds of thousands of albums,
as well as artist biographies and music reviews. The site also offers free music
downloads on selected songs and "The Listening Wall", where users can listen to
song samples. B&N.com's magazine store offers customers the ability to obtain
subscriptions at competitive prices to over 100,000 magazines, newspapers and
newsletters. In July 2000, B&N.com launched its Video Store, featuring tens of
thousands of movie titles available in both DVD and VHS formats. Powered by the
comprehensive All-Movie Guide database, and organized into 16 genres and more
than 800 sub-categories, B&N.com's Video Store offers virtually every video
available. Users can also access the B&N.com Screening Room featuring over
10,000 of the newest full-length video previews.
BUILDING BRAND AWARENESS AND DRIVING CUSTOMER ACQUISITION THROUGH
ONLINE ADVERTISING AND PROMOTION. B&N.com will continue to invest in building
its online brand through its key relationships. The Company began 2001 with 7.3
million customers and grew this base to 11.2 million by year-end. In its
advertising and promotion initiatives, B&N.com seeks to continuously drive down
the 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. B&N.com has formed significant strategic marketing relations with Yahoo!
("Yahoo"), America Online ("AOL") and Microsoft Network ("MSN") and has
established an extensive affiliate network, all designed to build brand
awareness and increase customer acquisition.
HIGH LEVELS OF CUSTOMER SERVICE. The Company believes that high levels
of customer service and support are crucial to retaining and expanding B&N.com's
customer base. In February 2002, B&N.com was ranked No. 2 in customer
satisfaction of the 190 companies contained in the latest American Customer
Satisfaction Index (ACSI), a quarterly survey of consumer attitudes by the
University of Michigan. In addition, B&N.com's rating increased 6.5% over the
prior year's rating, which represents one of the largest gains of any company in
the survey. 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 24 hours a day, seven days a week and maintain constant customer
service availability through e-mail.
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 to drive traffic to its own site. The Company has major
6
affiliations with the world's three largest online shopping destinations: AOL's
proprietary service, Yahoo and MSN.
SPECIAL PROMOTIONS. B&N.com frequently offers special value promotions
to its customers. In July 2001, the Company announced free shipping on customer
orders of two or more items. The response to this promotion has been
overwhelmingly positive. As a result, the Company has extended the promotion
into 2002.
AFFILIATE NETWORK. In addition to securing alliances with the nation's
three highest-trafficked Internet properties, B&N.com has established an
affiliate network of more than 512,000 Web sites operated by third parties,
whereby Web site operators can earn referral fees by linking users from their
sites to the B&N.com site.
TECHNOLOGY
B&N.com believes that it has built an industry-leading interactive
e-commerce platform, and 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. B&N.com has licensed existing commercial technology
when available and has focused its internal development efforts on those
proprietary systems necessary to provide the highest level of value and service
to its customers. The overall mix of technologies and applications in use by
B&N.com allows it to support a distributed, scalable and secure e-commerce
environment.
B&N.com uses the latest Intel-based server technology in a fully
redundant configuration to power its Web site, which is hosted in two 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 called hosting. B&N.com operates two hosting locations. Each of
the hosting locations is "co-located" within leading edge hosting facilities
that are maintained by two different hosting vendors. Either site has sufficient
capacity to support the volume of traffic directed toward B&N.com during peak
periods. Both hosting locations are configured with excess Internet
telecommunications capacity to ensure quick response time and three separate
Internet service providers are used. By maintaining redundant host locations,
B&N.com has significantly reduced its exposure to downtime and service outages.
Additionally, the Company believes its technology investments are scalable.
B&N.com's integrated systems and tools provide functionality in the
following areas:
TITLE DATABASE AND SEARCH FUNCTIONALITY. B&N.com has seamlessly
incorporated the Barnes & Noble book title database into the Web site.
The Barnes & Noble book database is a comprehensive synthesis of
multiple sources of data and content that feeds from publishers and
third party sources. B&N.com has also developed a powerful proprietary
search engine. Search results can be sorted by user-defined sequences
including "bestseller", "date published", a "Reader's Catalog highly
recommended book", or in alphabetical sequence.
E-COMMERCE. B&N.com has developed its e-commerce applications
using the Microsoft Commerce Server 2000 Architecture. B&N.com has
created a set of server applications that allow customers to securely
establish accounts and to store address books, credit cards and
ordering preferences. A customer needs to set up an account only once
and then has the ability to easily modify the components of their
account setup. When the account has been established, the customer can
shop the traditional "e-commerce" path by adding items to their
shopping cart. Gift certificates, gift-wrap, gift message and the
ability to select from a variety of shipping methods are available
options.
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ORDER PROCESSING. B&N.com has created a proprietary application to
expedite orders into the fulfillment process. This application has
real-time connectivity to B&N.com's and Barnes & Noble's distribution
centers as well as other third party suppliers. In addition to
immediately securing the inventory for customers, 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
proprietary applications that enable it to receive products and assign
them to customers based upon various ordering, handling and shipping
criteria. B&N.com utilizes licensed technology and has also developed
proprietary applications that are used for customer service.
SALES TRACKING AND ANALYSIS. B&N.com licenses technology to
support its affiliate program. The software provides sophisticated
sales tracking for the members of the affiliate network with real 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.
LEVERAGING TECHNOLOGY. B&N.com invested extensively in its Web
site, order processing, fulfillment and customer service technologies
through 2000. During 2001 and going forward, a lower rate of investment
was and will be required to maintain the Company's industry-leading
technology, providing opportunities to leverage fixed technology
expenses and capital investments.
COMPETITION
Both the e-commerce market and retail bookselling business are highly
competitive. Following the introduction of e-commerce to the Internet, a
significant number of e-commerce Web sites were launched. Despite recent
failures in other areas of the e-commerce sector, the Company expects online
bookselling competition to remain intense. The Company believes that the primary
differentiating factors in e-commerce are brand recognition, ease of use, price,
fulfillment speed, customer support, web site reliability and site content. 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
the 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.
Despite the Company's ability to gain market share, increased competitiveness
among online retailers may result in reduced operating margins and a potential
loss of market share.
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 and videos, B&N.com competes
with numerous merchants including other Internet-based companies, such as
Amazon.com, CDNOW 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 offer substantial discounts on products, including
books, music 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.
8
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 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. 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 growth of e-commerce may trigger the development of stricter
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 Web site 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 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 that the
Federal Communications Commission ("FCC") 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 that the FCC 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 significantly. This could result
in the reduced use 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 28, 2002, B&N.com employed approximately 1,168 full-time
and part-time employees. B&N.com also employs independent contractors to perform
duties in various departments. 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 situated in New York, New York, and are covered by one lease which is for
approximately 90,000 square feet of office space and expires in 2015.
The administrative office of the Company's subsidiary, Fatbrain.com,
LLC ("Fatbrain"), is located in Santa Clara, California containing approximately
64,750 square feet under a master lease that expires in 2006. This office will
be closed in 2002.
Barnes & Noble leases a 300,000 square foot facility located in Dayton,
New Jersey, of which B&N.com uses approximately 100,000 square feet for its
fulfillment operations. This lease expires in March
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2003; however, Barnes & Noble has an option to extend the lease for up to three
additional successive two-year periods.
B&N.com leases a 380,000 square foot building in Memphis, Tennessee for
distribution purposes. The lease term is five years commencing in January 2000.
B&N.com also entered into a ten-year lease for 600,000 square feet of
space in Reno, Nevada for a distribution and fulfillment facility that opened in
2000. Since opening, Barnes & Noble has subleased approximately 50 percent of
the facility. B&N.com recently determined it could not effectively utilize the
full capacity of the Reno warehouse. Accordingly, Barnes & Noble assumed
responsibility for the Reno, Nevada warehouse. Barnes & Noble has agreed to
assume the Reno lease, which expires in 2010. B&N.com employees in Reno have
become employees of Barnes & Noble. In addition to hiring the employees, Barnes
& Noble will be assuming B&N.com's lease obligation and all other operating
expenses associated with running the facility. In connection with the
transition, B&N.com will pay 50% of the rent for the Reno facility through
December 31, 2002, totaling approximately $1.6 million.
B&N.com leases 30,000 square feet in Secaucus, New Jersey for its
customer service operations. The lease term is 10 years commencing June 1, 1999.
The lease may be renewed for one five-year period at an agreed upon prevailing
fair market value rate.
Fatbrain also leased a 40,000 square foot warehousing facility located
in Erlanger, Kentucky, which was closed in 2001. The lease expires in March
2003.
ITEM 3. LEGAL PROCEEDINGS
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 $11,250,000 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 served an Answer in April 2000 denying the material allegations
of the Second Amended Complaint and asserting various affirmative defenses. On
January 11, 2002, the Company and the other defendants filed a motion for
summary judgment. A hearing on that motion was held on March 22, 2002. 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 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 attorneys' fees and costs. In October 1999, the Company and B&N.com were
added as defendants in the action. In January 2001, the Company and B&N.com
filed a motion for summary judgment seeking dismissal of all
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plaintiffs' claims. On March 20, 2001, the court granted that motion and
dismissed the Company and B&N.com from the case.
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. On February 14, 2001, a unanimous decision by the United
States Court of Appeals overturned the preliminary injunction. In March 2002,
the parties entered into a confidential settlement agreement and this lawsuit
was dismissed.
In addition to the litigations described above, the Company and B&N.com
are involved in various legal proceedings incidental to the conduct of their
business. The Company does not believe that any of those legal proceedings will
have a material adverse effect on the financial condition, results of operations
or cash flows of the Company or B&N.com.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
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 18,
2002, the Company had 1,012 shareholders of record for the Class A Common Stock.
The Company's Class A Common Stock price at the close of business on March 18,
2002 was $1.58 per share. The Company's Class B Common Stock and Class C Common
Stock, owned by Barnes & Noble and Bertelsmann, respectively, are not listed or
traded on any securities exchange.
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
---- ---
2000
----
First Quarter $ 17.50 $ 7.50
Second Quarter $ 11.13 $ 6.19
Third Quarter $ 6.88 $ 3.44
Fourth Quarter $ 4.88 $ 1.19
2001
----
First Quarter $ 2.69 $ 1.11
Second Quarter $ 2.50 $ 0.97
Third Quarter $ 1.65 $ 0.80
Fourth Quarter $ 1.68 $ 0.75
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 initial contribution. Neither the Company nor B&N.com
anticipates paying any dividends or distributions, except for amounts that 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 intends to
cause B&N.com to retain future earnings, if any, to finance the expansion of the
business of B&N.com.
As of December 31, 2001, under the Company's stockholder-approved 1999
Incentive Plan (the "1999 Incentive Plan"), there were outstanding options to
purchase 19,140,412 shares of Class A Common Stock at a weighted average
exercise price of $3.44, with 4,010,751 options available for future issuance
under the 1999 Incentive Plan.
12
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. Historical results are not necessarily
indicative of future results.
barnesandnoble.com llc
barnesandnoble.com inc and subsidiaries and its predecessor
-------------------------------------------------------------- ----------------------------
-------------------------------------------------------------- ----------------------------
(Consolidated)
Proforma
Year ended Year ended year ended May 25, 1999 January 1, Year Ended
December 31, December 31, December 31, to December 31, 1999 to December 31,
2001 2000 1999 (1) (2) 1999 May 24, 1999(3) 1998 (3)
--------- --------- --------- --------- --------- ---------
Statement of Operations Data:
Net sales $ 404,600 $ 320,115 $ 193,730 $ 139,930 $ 53,800 $ 61,834
Cost of sales 313,365 261,801 159,937 117,850 42,087 47,569
--------- --------- --------- --------- --------- ---------
Gross profit 91,235 58,314 33,793 22,080 11,713 14,265
Operating expenses:
Fulfillment and customer
service 44,637 49,880 19,395 11,743 7,652 6,689
Marketing, sales and editorial 61,418 82,620 81,682 59,181 24,140 63,734
Technology and web site
development 45,298 40,397 21,006 15,058 5,948 8,532
General and administrative 32,362 31,270 18,842 12,582 4,622 12,026
Depreciation and amortization 41,981 36,088 15,510 10,183 5,327 7,140
Impairments and other
special charges 88,213 75,051 -- -- -- --
Stock based compensation -- 11,740 -- -- -- --
Equity in net loss of equity
investments including
amortization of intangibles 28,733 30,728 -- -- -- --
--------- --------- --------- --------- --------- ---------
Total operating expenses 342,642 357,774 156,435 108,747 47,689 98,121
--------- --------- --------- --------- --------- ---------
Loss from operations (251,407) (299,460) (122,642) (86,667) (35,976) (83,856)
Interest income, net 7,041 23,737 20,238 18,615 1,623 708
--------- --------- --------- --------- --------- ---------
Loss before minority interest (244,366) (275,723) (102,404) (68,052) (34,353) (83,148)
Minority interest 176,980 210,320 54,253 54,253 -- --
--------- --------- --------- --------- --------- ---------
Net loss - historical $ (67,386) $ (65,403) (48,151) $ (13,799) (34,353) (83,148)
========= ========= ========= ========= ========= =========
Pro forma adjustment to minority
interest (4) 27,534 27,534 66,518
--------- --------- ---------
Net loss - pro forma $ (20,617) $ (6,819) $ (16,630)
========= ========= =========
Basic net loss per common share $ (1.54) $ (2.02) $ (0.72) $ (0.48) $ (0.24) $ (0.58)
Basic weighted average common
shares outstanding (5) 43,787 32,386 28,778 28,797 28,750 28,750
Diluted net loss per share (5) $ (1.54) $ (2.02) $ (0.72) $ (0.48) $ (0.24) $ (0.58)
Balance Sheet Data:
Cash and cash equivalents $ 105,125 $ 179,609 $ 247,403 $ 96,940
Long term marketable securities -- 5,000 71,852 --
Working capital 44,628 156,649 429,674 78,681
Total assets 287,376 528,935 679,518 202,144
Minority interest 105,845 282,804 482,896 --
Equity 42,758 110,144 120,682 169,149
(1) Includes the historical results of barnesnandnoble.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 proforma 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) Includes the historical results of barnesandnoble.com llc and its
predecessor.
(4) 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.
(5) For periods prior to May 25, 1999, reflects the proforma effect of the
shares issued in the Company's Initial Public Offering assuming they
were issued at the beginning of 1998.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report (including but not limited to factors discussed below, in
the "Management's Discussion and Analysis of Financial Condition and Results Of
Operations," as well as those discussed elsewhere in this Annual Report on Form
10-K) 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, the Company's ability to maintain strategic alliances with
AOL, Yahoo and MSN, 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, the level and volatility of interest rates, the
successful integration of acquired businesses, 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, the successful imposition
by state tax authorities of sales or use taxes on products sold by B&N.com to
customers in such states, 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 and elsewhere described in this report and other reports filed by
the Company with the Securities and Exchange Commission ("SEC").
OVERVIEW
The Company is a holding company whose sole asset is its 27.6% 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 is
currently ranked the fifth largest e-commerce Web site, based on the Jupiter
Media Metrix January 2002 report.
B&N.com has pursued a strategy of focusing on the sale of books, music,
DVD/video and magazine subscriptions. Since opening its online store
(www.bn.com) in March 1997, B&N.com has sold products to more than 11.2 million
customers in 228 countries. B&N.com's online bookstore includes the largest
in-stock selection of in-print book titles, supplemented by more than 20 million
listings from its nationwide network of out-of-print, rare and used book
dealers. B&N.com offers its customers fast delivery, easy and secure ordering
and rich editorial content.
14
The results of operations discussed hereafter include the results of
the Company and B&N.com for the year ended December 31, 2001 and the historical
results of B&N.com and its predecessors for the years ended December 31, 2000
and 1999 (proforma). 2000 results include Fatbrain from November 16, 2000
through December 31, 2000 only. 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, including
gross profit margin and operating expenses as a percentage of net 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 of May 25, 1999 to December 31, 1999, as the Company believes
that such an analysis would not be meaningful, because there was no change in
the net asset basis of the Company due to the recapitalization.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the
SEC, requires all companies to include in this item a discussion of critical
accounting policies or methods used in the preparation of financial statements.
Note 2 of the Notes to the Consolidated Financial Statements includes a summary
of the significant accounting policies and methods used by the Company in the
preparation of its Consolidated Financial Statements. The following is a brief
discussion of the more critical of these accounting policies and methods.
REVENUE RECOGNITION. The Company's product sales are recognized, net of
estimated returns and promotional discounts, at the time the products are
shipped to customers. Commissions received on sales of magazine subscriptions
are recorded at the net amount earned as the Company is acting as an agent in
such transactions. The Company continuously monitors and tracks product returns
and records a provision for the estimated amount of future returns, based on
historical experience. While returns have historically been within the Company's
expectations and the provisions established, the Company cannot guarantee that
it will continue to experience the same return rates that it has in the past.
Any significant increase in product return rates could have a material adverse
impact on the Company's operating results for the period or periods in which
such returns materialize.
CAPITALIZED SOFTWARE RESEARCH AND DEVELOPMENT COSTS. In accordance with
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", direct internal and external costs
associated with the development of the features and functionality of the
Company's online stores, 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. The Company's policy on capitalized software costs
determines the timing of its recognition of certain development costs. In
addition, this policy determines whether the cost is classified as development
expense or cost of license fees. Management is required to use professional
judgment in determining whether development costs meet the criteria for
immediate expense or capitalization.
IMPAIRMENT OF GOODWILL AND OTHER LONG-LIVED ASSETS. The Company's
long-lived assets include fixed assets and goodwill. At December 31, 2001, the
Company had $85,771 of fixed assets, net of accumulated depreciation, and
$16,777 of net goodwill, accounting for approximately 35.7% of the Company's
total 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"). In valuation, assets held
and used is measured by a comparison of the carrying amount of an asset to
undiscounted pre-tax future net cash flows. Future events could cause B&N.com to
conclude that impairment indicators exist and that long-lived assets may be
impaired. Any resulting impairment
15
loss could have a material adverse impact on the Company's financial condition
and results of operations. As described below in Recently Issued Accounting
Pronouncements, the Company's accounting for goodwill and long-lived assets will
be modified upon implementation of FASB 142 and 144.
RESULTS OF OPERATIONS
NET SALES
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
PROFORMA
2001 % CHANGE 2000 % CHANGE 1999
---------- ------------ ------------ --------- ----------
Net sales $ 404,600 26% $ 320,115 65% $ 193,730
Net sales are comprised of sales of books, music, video, and magazine
subscriptions, net of returns and discounts, as well as outbound shipping and
handling charges. In 2001 sales increased 26%, to $404.6 million, from $320.1
million in 2000. Growth in net sales is primarily due to the inclusion of
Fatbrain for a full year, the 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.
B&N.com acquired approximately 4 million new customers during 2001, bringing the
cumulative customer count for year-end 2001 to more than 11.2 million customers,
an increase of 35% from year-end 2000. International sales represented 5.2%,
6.4% and 6.3% of net sales for the years ended December 31, 2001, 2000 and 1999,
respectively. In 2000 sales increased 65%, to $320.1 million, from $193.7
million in 1999. Growth in net sales was primarily related to the increase in
the number of products available on the B&N.com Web site (such as the opening of
the Video Store in 2000 and the Music Store in 1999) as well as increases in new
customers and repeat customer orders.
GROSS PROFIT
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
PROFORMA
2001 % CHANGE 2000 % CHANGE 1999
---------- ------------ ------------ --------- ----------
Gross profit $ 91,235 56% $ 58,314 73% $ 33,793
Gross margin 22.5% 18.2% 17.4%
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 in 2001 to $91.2 million from $58.3 million the previous
year and gross margin increased to 22.5% from 18.2% in 2000. Gross margin
increased primarily as a result of the increased utilization of the new
distribution centers, which enabled the Company to reduce purchases from more
expensive wholesale book distributors, and a substantial reduction in
promotional discounts. These improvements were slightly offset by the Company's
introduction of a "free shipping" promotion in July 2001, resulting in a
reduction to shipping revenue as a percentage of net sales, which will
negatively affect the gross margin. Gross profit increased $24.5 million to
$58.3 million in 2000 from $33.8 million in 1999, due to the Company's increased
sales volume, and gross margin increased in 2000, to 18.2%, from 17.4% in 1999.
Gross margin increased primarily as a result of a greater percentage of orders
filled internally and a reduction of promotional discounts. The Company expects
that while generating additional revenue and gross profit, the free shipping
promotion, if continued, will have a negative impact upon the gross margin
percentage in 2002.
16
FULFILLMENT AND CUSTOMER SERVICE
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
PROFORMA
2001 % CHANGE 2000 % CHANGE 1999
---------- ------------ ------------ --------- ----------
Fulfillment and customer service $ 44,637 (11%) $ 49,880 157% $ 19,395
Percentage of net sales 11.0% 15.6% 10.0%
Fulfillment and customer service expenses consist primarily of the cost
of operating and staffing distribution and customer service centers. In 2001,
fulfillment and customer service expenses decreased on an absolute basis and as
a percentage of net sales primarily as a result of achieving more efficiency in
operations. Fulfillment expenses increased in 2000 due to the costs associated
with opening the new fulfillment centers in Memphis and Reno. B&N.com
anticipates that its fulfillment and customer service costs will decrease in
2002 in absolute dollars and as a percentage of net sales based on anticipated
further productivity improvements and expected sales growth.
MARKETING, SALES AND EDITORIAL
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
PROFORMA
2001 % CHANGE 2000 % CHANGE 1999
---------- ------------ ------------ --------- ----------
Marketing, sales and editorial $ 61,418 (26%) $ 82,620 1% $ 81,682
Percentage of net sales 15.2% 25.8% 42.2%
Marketing, sales and editorial expenses consist primarily of
advertising and promotional expenditures, as well as payroll and related
expenses for personnel engaged in marketing and selling activities. Marketing
and sales expenses decreased in 2001 primarily due to a significant reduction in
B&N.com's advertising and promotional expenditures. Such expenses decreased in
absolute dollars and as a percentage of net sales primarily due to the continued
focus on productivity of all marketing programs. The Company's sales increase
also contributed to the improvement as a percentage of net sales. The Company
expects to maintain this focus in order to continue to drive down these expenses
as a percentage of net sales. Such expenses decreased as a percentage of net
sales primarily due to the significant increase in net sales for the year ended
December 31, 2000, as well as the increased efforts of B&N.com to improve the
efficiency of marketing programs. The Company expects a continued decline of
marketing, sales and editorial expenses both in absolute dollars and as a
percentage of net sales.
TECHNOLOGY AND WEB SITE DEVELOPMENT
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
PROFORMA
2001 % CHANGE 2000 % CHANGE 1999
---------- ------------ ------------ --------- ----------
Technology and web site development $ 45,298 12% $ 40,397 92% $ 21,006
Percentage of net sales 11.2% 12.6% 10.8%
17
Technology and web site development expenses consist principally of
payroll and related expenses for Web page production, network operations
personnel and consultants, and costs of infrastructure related to systems and
telecommunications. The increase in technology and web site development expenses
on an absolute basis in 2001 was primarily due to additional expenses associated
with operating Fatbrain's Web site. However, as a percentage of net sales they
decreased from 12.6% to 11.2%. Technology and web site development expenses
increased in 2000, primarily due to integration costs related to the increased
number of new initiatives executed during 2000. B&N.com introduced a new site
design, and navigational and ordering improvements to further enhance the user
experience. The introduction of Barnes & Noble University and B&N.com's
DVD/Video Store also contributed to the increase in costs for the year. B&N.com
expects technology and web site development to decrease in dollars and as a
percentage of net sales as further efficiencies are realized and the Company
leverages its technology expenses over a larger sales base.
GENERAL AND ADMINISTRATIVE
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
PROFORMA
2001 % CHANGE 2000 % CHANGE 1999
---------- ------------ ------------ --------- ----------
General and administrative $ 32,362 3% $ 31,270 66% $ 18,842
Percentage of net sales 8.0% 9.8% 9.7%
General and administrative expenses primarily 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 2001 general and
administrative expenses was primarily due to an increase in credit card
processing costs as a result of the sales increase. The increases in general and
administrative expenses from 1999 to 2000 were primarily the result of expenses
associated with a larger personnel base and professional fees related to
B&N.com's growth and expanded activities. B&N.com expects general and
administrative expenses to decrease as it continues to focus on achieving
further efficiencies.
DEPRECIATION AND AMORTIZATION
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
PROFORMA
2001 % CHANGE 2000 % CHANGE 1999
---------- ------------ ------------ --------- ----------
Depreciation and amortization $ 41,981 16% $ 36,088 133% $ 15,510
Percentage of net sales 10.4% 11.3% 8.0%
The increase in depreciation and amortization expenses in 2001 is the
result of the increase in capital expenditures in 2000 related to both the
physical build-out of the two new warehouses and related technology expenses.
The increase in depreciation and amortization expenses in 2000 was primarily
attributable to fixed asset purchases of $104 million for the year ended
December 31, 2000, compared with fixed asset purchases of $72 million for the
year ended December 31, 1999. Capital expenditures for 2002 are expected to be
within the range of $15 to $20 million.
18
IMPAIRMENT AND OTHER SPECIAL CHARGES
YEAR ENDED DECEMBER 31,
--------------------------------------
2001 % CHANGE 2000
------------ ----------- -----------
Impairments and other special charges $ 88,213 18% $ 75,051
Percentage of net sales 21.8% 23.4%
In the fourth quarter of 2001, B&N.com recorded an impairment of assets
and other special charges of $88,213 ($0.56 per share assuming conversion of
membership units) as a component of operating expenses. These charges are
primarily related to the following:
Closure of Facilities- B&N.com is consolidating administrative and
functional operations by closing Fatbrain's Santa Clara, California
office. Fatbrain's two retail stores in San Jose and Sunnyvale,
California have also been closed. Charges include exit costs related to
the remaining term of non-cancelable lease obligations of the retail
and Santa Clara facilities, related severance costs, as well as the
abandonment of related fixed assets that will not be suited for future
use in other remaining B&N.com facilities. Furthermore, B&N.com
recently determined it could not effectively utilize the full capacity
of its Reno, Nevada distribution center. Accordingly, following Board
approval on January 29, 2002, B&N.com agreed to transfer the Reno
warehouse lease and sell the Company's inventory located in Reno to
Barnes & Noble. The Board of Barnes & Noble also approved Barnes &
Noble's assumption of the lease obligation and the hiring of all the
employees at the Reno facility. The Reno lease assignment and the
transfer of the operations of the Reno facility to Barnes & Noble is
expected to be completed during the first half of 2002. Charges related
to the Reno facility include the abandonment of fixed assets that are
not suitable for use at other B&N.com facilities.
Impairment of Fixed Assets- As of December 31, 2001, B&N.com wrote-off
certain fixed assets that were no longer used in operations.
Impairment of Other Non-Current Assets- B&N.com concluded that the
carrying amount of certain equity investments, including Powered.com,
goodwill and other investments exceeded their fair value and that the
decline was other than temporary. The impairment loss was precipitated
by the significant decline in the value of Internet sector entities,
material changes in business models, and significant, recurring
operating losses.
The consolidation of the Fatbrain administrative and functional
operations is expected to be substantially completed by the first half of 2002,
although the lease on the Santa Clara office expires in 2006. The Company's
special charges of $75,051 ($0.51 per share assuming conversion of membership
units) for the year ended December 31, 2000, were primarily related to the
impairment of fixed and other assets, including equity investments as well as
the consolidation of fulfillment operations.
STOCK-BASED COMPENSATION
YEAR ENDED
DECEMBER 31,
2000
-----------------
Stock based compensation $ 11,740
Percentage of net sales 3.7%
19
Stock-based compensation for the year ended December 31, 2000 is
attributable to expenses incurred from a termination payment to Jonathan
Bulkeley, former Chief Executive Officer, in March 2000 for the surrender and
cancellation of exercisable stock options. On March 1, 2000 the Company repriced
approximately five million (net of cancellations) of 16 million then outstanding
options, which were originally granted at an average exercise price of $16.15,
to a new exercise price of $8.00, the closing market price of the Company's
stock as of March 1, 2000. Based on current accounting pronouncements, the
Company is accounting for the repriced options as if they were variable options
and as a result has not recorded any expense due to the decrease in the
Company's stock price below the new exercise price.
EQUITY IN NET LOSS OF EQUITY INVESTMENTS INCLUDING AMORTIZATION OF INTANGIBLES
YEAR ENDED DECEMBER 31,
------------------------------
2001 % CHANGE 2000
--------- ---------- ---------
Equity in net loss of equity investments
including amortization of intangibles $ 28,733 (6%) 30,728
Percentage of net sales 7.1% 9.6%
Equity in net loss of equity investments including related amortization
of intangibles consists of losses from the Company's equity investments in
enews, inc. ("enews") and MightyWords, Inc. ("MightyWords") and goodwill
amortization on the Company's investments.
INTEREST INCOME, NET
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
PROFORMA
2001 % CHANGE 2000 % CHANGE 1999
-------- ------------ ---------- ---------- ---------
Interest income, net $ 7,041 (70%) $ 23,737 17% $ 20,238
Percentage of net sales 1.7% 7.4% 10.4%
Interest income decreased compared with last year as cash balances
decreased due to their use as a source of funding the Company's operations. In
addition, interest rates on investments significantly decreased throughout 2001.
An increase in net interest income from 1999 to 2000 reflects funds received
from the Company's initial public-offering in the second quarter of 1999 that
are currently invested in various marketable securities consisting primarily of
highly liquid U.S. Treasury Securities, U.S. government agency securities and
investments in high quality corporate issuers.
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.
20
SEASONALITY
B&N.com experiences seasonality in its business, reflecting a
combination of seasonal fluctuations in Internet usage and traditional retail
customer seasonal buying 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, services 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 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; (xviii)
the ability to secure or continue ongoing relationships with premier online
companies; and (xix) the factors described above under "Forward Looking
Statements."
LIQUIDITY AND CAPITAL RESOURCES
The Company finished 2001 with a debt-free balance sheet. At December
31, 2001, the Company's cash, cash equivalents and short-term marketable
securities were $115.3 million, compared with $212.3 million on December 31,
2000. In addition, at December 31, 2001 the Company had no long-term marketable
securities, compared with $5.0 million in long-term marketable securities at
December 31, 2000. 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 $18.00 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 $85.2 million, $168.5
million and $56.8 million for the years ended December 31, 2001, 2000 and 1999,
respectively. Cash used in 2001 was due to a net loss of $67.4 million after
minority interest decrease of $177.0 million. Additionally, accounts payable
decreased $14.4 million and accrued liabilities decreased $13.9 million. This
was offset by depreciation and amortization of $42.0 million, an increase in
payables to affiliates of $16.4 million, a decrease in receivables of $10.4
million, a decrease in prepaid expenses and other current assets of $2.0
million, impairment and special charges of $88.2 million and equity in net loss
of equity investments including amortization of intangibles of $28.7 million.
Cash used in 2000 was primarily attributable to a net loss of $65.4 million
after minority interest decrease of $210.3 million. In addition, receivables
increased $4.4 million, prepaid expenses and other current assets increased $7.8
million, accounts
21
payable decreased $10.3 million and merchandise inventories increased $37.9
million. This was offset by depreciation and amortization of $36.1 million, an
increase in payables to affiliates of $10.0 million, an increase in accrued
liabilities of $15.8 million, impairment and special charges of $75.1 million
and equity in net loss of equity investments including amortization of
intangibles of $30.7 million. Cash used in 1999 was primarily attributable to a
net loss of $48.2 million after minority interest decrease of $54.3 million. In
addition, receivables increased $13.1 million and merchandise inventories
increased $2.3 million. This was partly offset by depreciation and amortization
of $15.5 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.
Net cash flows from investing activities were $10.8 million for the
year ended December 31, 2001, primarily due to a $27.6 million decrease in
marketable securities; offset by purchases of fixed assets of $10.5 million,
acquisition and investments of businesses, net of cash acquired of $4.4 million,
and an increase of $1.9 million in other non-current assets. Net cash flows from
investing activities were $94.9 million for the year ended December 31, 2000,
primarily due to a $264.8 million decrease in marketable securities; offset by
purchases of fixed assets of $103.7 million and acquisition and investments of
businesses, net of cash acquired of $65.7 million. Net cash used in investing
activities of $329.6 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 $5.6 million increase in other
non-current assets, partly offset by a $50.4 million decrease in restricted
cash.
Net cash flows from financing activities in 2000 were $5.8 million due
to proceeds from the exercise of stock options. 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.
At December 31, 2001, the Company's principal sources of liquidity
consisted of $105.1 million of cash and cash equivalents and $10.1 million in
short-term marketable securities. At December 31, 2000 the Company's principal
sources of liquidity consisted of $179.6 million of cash and cash equivalents
and $32.7 million of short-term marketable securities. Long-term marketable
securities totaled $5 million as of December 31, 2000. As of December 31, 2001
the Company's remaining principal commitments consisted of obligations
outstanding under operating leases. The Company expects to gain leverage on
previous investments in capital associated with operations, infrastructure and
personnel. The Company has pledged a portion of its marketable securities as
collateral for stand-by letters of credit that guarantee certain of the
Company's real property lease obligations. At December 31, 2001, the total
amount of collateral pledged under these agreements was $4,432. The Company has
no unconsolidated majority owned subsidiaries and no interests in special
purpose entities.
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 are 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 capital requirements or cause the Company to issue
additional equity or debt securities.
22
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, BUSINESS COMBINATIONS ("SFAS 141"), and No. 142, GOODWILL
AND OTHER INTANGIBLE ASSETS ("SFAS 142"). SFAS 141 requires the use of the
purchase method of accounting and prohibits the use of the pooling-of-interests
method of accounting for business combinations initiated after June 30, 2001.
SFAS 141 also requires that the Company recognize acquired intangible assets
apart from goodwill if the acquired intangible assets meet certain criteria.
SFAS 141 applies to all business combinations initiated after June 30, 2001 and
for purchase business combinations completed on or after July 1, 2001. It also
requires that, upon adoption of SFAS 142, the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted for using
the purchase method. As of December 31, 2001, the net carrying amount of
goodwill is $16,777. Amortization expense during the year ended December 31,
2001 was $20,129; however, the goodwill balance as of December 31, 2001 reflects
the amount expected to be recovered from anticipated cash flows from
investments. Currently, the Company is assessing but has not yet determined how
the adoption of SFAS 141 and SFAS 142 will impact its financial position and
results of operations.
In August 2001, the FASB also issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", that is applicable to financial
statements issued for fiscal years beginning after December 15, 2001. The FASB's
new rules on asset impairment supersede SFAS No. 121, and portions of Accounting
Principles Bulletin Opinion 30, "Reporting the Results of Operations". This new
standard provides a single accounting model for long-lived assets to be disposed
of and significantly changes the criteria that would have to be met to classify
an asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. The Company believes the adoption of this
Statement will have no material impact on the Company's financial position and
operating results.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invested in enews and MightyWords primarily for strategic
purposes. Such investments have been accounted for under the equity method if
they give the Company the ability to exercise significant influence, but not
control, over an investee. This is generally defined as an ownership interest in
voting stock of the investee between 20% and 50%, although other factors, such
as representation on the investee's Board of Directors and the impact of
commercial arrangements, are considered in determining whether the equity method
is appropriate. The Company regularly reviews the carrying value of its
investments and identifies and records
23
impairment losses when events and circumstances indicate that such assets are
permanently impaired. In December 2001 B&N.com considered the MightyWords
investment impaired as the MightyWords Board of Directors had voted to dissolve
the company and distribute the remaining cash back to investors after
obligations of the company were met. At December 31, 2001 the Company's
equity-method investments amounted to $3.9 million. These investments are in
companies involved in the Internet and e-commerce industries and their fair
values are subject to significant fluctuations due to volatile market
conditions.
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 and less than one year are classified as marketable securities. Long-term
marketable securities mature within two years. B&N.com is exposed to interest
rate risk on the debt instruments that it holds. The value of the Company's
marketable securities is subject to market price volatility. As of December 31,
2001, the Company's investments totaled approximately $115 million.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Exhibit (a) (1).
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
DISCLOSURE
None.
24
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
- ----------------------------- --- ---------------------------------------
Leonard Riggio (1)(4) 61 Chairman of the Board
Stephen Riggio (1)(5) 47 Vice Chairman
Marie J. Toulantis 47 Chief Executive Officer
Kevin M. Frain 40 Chief Financial Officer
Gary A. King 44 Executive Vice President, Operations
David Gitow 41 Vice President, Chief Marketing Officer
Michael N. Rosen (1) 61 Secretary and Director
Klaus Eierhoff (2)(4) 48 Director
Jan Michiel Hessels (3) 59 Director
Patricia Higgins (6) 51 Director
Joel Klein (2)(5) 55 Director
William F. Reilly (3) 63 Director
Markus Wilhelm (2) 44 Director
- ---------
(1) Class B Director.
(2) Class C Director.
(3) Class A Director and member of the Audit Committee and the Compensation
Committee.
(4) Member of the Special Committee, the Executive Committee and the
Nominating Committee.
(5) Member of the Executive Committee.
(6) Class A Director and a member of the Audit Committee.
Mr. Leonard Riggio, a Class B Director, has been Chairman of the Board
of the Company and B&N.com since inception. Mr. Riggio has been Chairman of the
Board and a principal stockholder of Barnes & Noble since its inception in 1986,
and was Chief Executive Officer of Barnes & Noble from inception through
February 2002. Since 1965 Mr. Riggio has been Chairman of the Board, Chief
Executive Officer and the principal stockholder of Barnes & Noble College
Bookstores, Inc. ("B&N College"), one of the nation's largest operators of
college bookstores. Since 1985, Mr. Riggio has been the Chairman of the Board
and a principal beneficial owner of MBS Textbook Exchange, Inc. ("MBS"), one of
the nation's largest wholesalers of college textbooks. Mr. Riggio is also a
director of GameStop Corp. ("GameStop"), a majority-owned subsidiary of Barnes &
Noble. Mr. Leonard Riggio is the brother of Mr. Stephen Riggio.
Mr. Stephen Riggio, a Class B Director, has been a director of the
Company and B&N.com since inception and Vice Chairman since January 2000. From
January 2000 to February 2002, Mr. Riggio was also Acting Chief Executive
Officer of the Company and B&N.com, a position he previously held at B&N.com
from inception to December 1998. From February 2002 to the present Mr. Riggio
has been Chief Executive Officer of Barnes & Noble. Mr. Riggio has been Vice
Chairman of Barnes & Noble since December 1997 and a director of Barnes & Noble
since April 1997. From February 1995 to December 1997, Mr. Riggio was Chief
Operating Officer of Barnes & Noble. Mr. Riggio is also a director of iUniverse,
The National Book Foundation, The National Down's Syndrome Society and The
Association for the Help of Retarded Children. Mr. Stephen Riggio is the brother
of Mr. Leonard Riggio.
Ms. Marie J. Toulantis has been Chief Executive Officer of the Company
and B&N.com since February 2002. Ms. Toulantis was Chief Financial Officer of
the Company and B&N.com from May 1999 through
25
February 2002. From March 1999 through May 1999 Ms. Toulantis was Chief
Financial Officer of Barnes & Noble and from July 1997 through May 1999 Ms.
Toulantis was Executive Vice President, Finance of Barnes & Noble. Prior to that
Ms. Toulantis was a Senior Vice President of The Chase Manhattan Bank from May
1996 to June 1997.
Mr. Kevin M. Frain has been Chief Financial Officer of the Company and
B&N.com since February 2002. Mr. Frain is responsible for all of the financial
functions of the Company and B&N.com. From May 2001 through February 2002, Mr.
Frain was Vice President, Finance of the Company and B&N.com. Prior to that Mr.
Frain was the Treasurer of the Company and B&N.com from April 2000 to May 2001.
From January 1999 to April 2000, Mr. Frain was Director of Finance of the
Company & B&N.com. From December 1996 to January 1999, Mr. Frain was Finance
Manager for Barnes & Noble. Prior to that Mr. Frain served as Vice President,
Treasurer of Jamesway Corporation, a mass merchandise retail chain.
Mr. Gary A. King has been Executive Vice President, Operations of the
Company and B&N.com since August 2000. Mr. King is responsible for warehouse
operations, fulfillment, technology infrastructure and customer service of
B&N.com. Prior to August 2000, Mr. King was Chief Technology Officer of the
Company since inception and B&N.com since January 1999. From 1987 to December
1998 Mr. King was with Avon Products ("Avon"), serving as Vice President for
Global Information Technologies.
Mr. David Gitow has been Vice President, Chief Marketing Officer of the
Company and B&N.com since October 2001. Mr. Gitow is responsible for all partner
and customer marketing and all marketing analysis and research. Mr. Gitow served
as Chief Marketing Officer of enews from June 1999 through October 2001. Prior
to joining enews, Mr. Gitow was with AOL Time Warner for 13 years in a variety
of positions culminating in his founding and serving as President of Time Inc.
Home Entertainment.
Mr. Michael N. Rosen, a Class B Director, has been Secretary and a
director of the Company and B&N.com since inception. Mr. Rosen has been the
Chairman of Robinson Silverman Pearce Aronsohn & Berman LLP ("Robinson
Silverman"), counsel to the Company and B&N.com, for more than the past five
years. Mr. Rosen is also a director of Barnes & Noble, B&N College, MBS and
GameStop.
Dr. Klaus Eierhoff, a Class C Director, has been a director of the
Company since inception and B&N.com since November 1998. Dr. Eierhoff has been
President and Chief Executive Officer of Bertelsmann Multimedia Group and a
member of the Executive Board of Bertelsmann since January 1998. From 1990 to
1997, Dr. Eierhoff served as a member of the Executive Board of Karstadt AG. Dr.
Eierhoff is Chairman of the supervisory board of ECI, Vianen. Dr. Eierhoff is
also a member of the supervisory board of DealTime Inc. and of BOOKSPAN, a
partnership between Doubleday Direct, Inc. ("Doubleday Direct"), a wholly owned
subsidiary of Bertelsmann, and Book-of-the-Month Club Holdings LLC.
Mr. Jan Michiel Hessels, a Class A Director, has been a director of the
Company since August 1999. Mr. Hessels was the Chief Executive Officer of Royal
Vendex KBB N.V. ("Vendex") from 1990 until June 2000. Vendex is a multi-billion
dollar Netherlands-based corporation with international retailing operations.
Mr. Hessels is also a director of Schiphol Airport, Royal Vopak N.V., Royal
Philips Electronics N.V., Euronext N.V., Fortis N.V. and Heineken N.V.
Ms. Patricia Higgins, a Class A Director, has been a director of the
Company since July 2000. Ms. Higgins has been President and Chief Executive
Officer of Switch and Data Facilities Inc., an international operator of
convergent computer network centers, since November 2000. Ms. Higgins was Vice
President and
26
Chief Information Officer of Alcoa Inc. from January 1997 to April 1999. Prior
to that, Ms. Higgins held a position at Unisys Corporation as President,
Communications Worldwide Business Unit from January 1995 to January 1997. Ms.
Higgins has been a member of the Board of Directors of The Williams Companies
since 1995 and Fleet Bank N.A. since 1991.
Mr. Joel Klein, a Class C Director, has been a director of the Company
since January 2002. Mr. Klein is Chairman and Chief Executive Officer of
Bertelsmann Inc. and Chief U.S. Liaison Officer to Bertelsmann, and is a member
of the Corporate Executive Council of Bertelsmann. Mr. Klein served as Assistant
Attorney General in charge of the Antitrust Division of the United States
Department of Justice from July 1997 to September 2000; and was appointed Acting
Assistant Attorney General by President Clinton and confirmed by the Senate in
July 1997. Before joining the Justice Department in 1995 as Principal Deputy to
the Assistant Attorney General, Mr. Klein served as Deputy White House Counsel
to President Clinton.
Mr. William F. Reilly, a Class A Director, has been a director of the
Company since August 1999. Mr. Reilly founded Aurelian Communications
("Aurelian"), a special interest publisher, in February 2002. Mr. Reilly is
Chief Executive Officer of Aurelian. Mr. Reilly served as Chairman and Chief
Executive Officer of Primedia Inc., a specialty media company, from February
1990 to 1999. Mr. Reilly is a member of the Board of Directors of FMC
Corporation. Mr. Reilly serves on the Board of Trustees of the University of
Notre Dame.
Mr. Markus Wilhelm, a Class C Director, has been a director of the
Company since inception and B&N.com since November 1, 1998. Since March 2000 Mr.
Wilhelm has been Chief Executive Officer of BOOKSPAN. In March 1998, Mr. Wilhelm
was elected Chairman of the Board of Doubleday Interactive, Inc., a U.S.
Internet service provider. In 1998 as director of BOL.US Online, Inc. and
BOL.Global, Inc., Mr. Wilhelm developed and launched bol.com AG, the Internet
division of Bertelsmann. Mr. Wilhelm has been the President of Doubleday Direct
since May 1993, and its Chief Executive Officer and Chief Compliance Officer
since July 1994.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 (a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers, and persons who own
more than 10% of a registered class of the Company's securities, to file with
the SEC initial reports of ownership and reports of changes in ownership of
common stock and other equity securities of the Company. Officers, directors and
greater-than-10% stockholders are required by SEC regulation to furnish the
Company with copies of all Section 16 (a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, the Company believes that during the year ended December
31, 2001 its officers, directors and greater-than-10% stockholders complied with
all Section 16 (a) filing requirements, except that Kevin M. Frain, the
Company's Chief Financial Officer, filed a late Form 3 and David Gitow, the
Company's Vice President, Chief Marketing Officer filed his Form 3 information
on his Form 5.
Item 11. EXECUTIVE COMPENSATION
The salaries and other compensation (other than long-term compensation)
of the executive officers of the Company are paid by B&N.com. The following
table summarizes the compensation paid or accrued by the Company and B&N.com for
the year ended December 31, 2001 for the services rendered to the Company and
B&N.com, to the Chief Executive Officer and the four other most highly
compensated executive officers (collectively, the "Named Executive Officers").
Leonard Riggio, the Company's Chairman, receives no salary or other cash
compensation from the Company or B&N.com.
27
SUMMARY COMPENSATION TABLE
Long-term
Annual Compensation
------------------------------------------
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation (1)
- -------------------------------------- -------- ----------- ------------- ---------------- -----------------
Stephen Riggio (2) 2001 $ 500,000 $ 162,500 2,500,000 $ 9,552
Vice Chairman 2000 480,769 - - 6,224
1999 - - - -
Marie J. Toulantis (2) 2001 350,000 113,750 2,000,000 7,088
Chief Executive Officer 2000 350,000 - 900,000 (3) 4,609
1999 213,462 - 900,000 290
Kevin M. Frain 2001 167,308 41,875 75,000 6,992
Chief Financial Officer 2000 143,462 - 62,000 (3) 5,094
1999 105,000 - 35,000 3,343
Gary A. King 2001 350,000 113,750 750,000 7,088
Executive Vice President, 2000 298,077 - 118,500 (3) 6,229
Operations 1999 275,000 100,000 118,500 43,122 (4)
William F. Duffy (5) 2001 315,000 39,375 200,000 6,227
Vice President, Operations, 2000 315,000 - 26,750 (3) 4,896
Fulfillment and Customer 1999 292,040 112,880 26,750 4,435
Service
- ------------
(1) Except as indicated in Note (4) below, these amounts represent payments
made by the Company for life insurance premiums and for contributions
to the respective Named Executive Officers' accounts under the
Company's 401(k) Savings Plan.
(2) Mr. Riggio was Acting Chief Executive Officer and Ms. Toulantis was
Chief Financial Officer of the Company during the fiscal year ending
December 31, 2001. As of February 2002, Ms. Toulantis was named Chief
Executive Officer of the Company and Mr. Riggio became Chief Executive
Officer of Barnes & Noble.
(3) On March 1, 2000 the Company repriced approximately 5 million (net of
cancellations) of 16 million then outstanding options that were
originally granted at an average exercise price of $16.15 per share.
The new exercise price for the options is $8.00 per share, the closing
market price of the Company's stock as of March 1, 2000. Each of the
listed options for 2000 constitute repriced options, except for options
for 27,000 shares granted to Kevin M. Frain.
28
(4) Includes $42,687 for reimbursement of relocation expenses.
(5) Mr. Duffy was Vice President, Operations, Fulfillment and Customer
Service of the Company during the fiscal year ending December 31, 2001.
As of February 2002, Mr. Duffy became Executive Vice President,
Distribution and Logistics of Barnes & Noble.
OPTION GRANTS IN 2001
The following table sets forth certain information with respect to
stock grants to the Named Executive Officers during the year ended December 31,
2001.
- ----------
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants (1)
----------------------------------------------------------
Potential Realizable Value at
% of Total Assumed Annual Rates of
Number of Options Stock Price Appreciation for
Securities Granted to Exercise Option Term (2)
Underlying Employees in Price per Expiration -----------------------------
Name Options Granted Fiscal Year Share Date 5.0% 10.0%
- --------------------- ------------------ -------------- ----------- ------------ ---------------- -------------
Stephen Riggio 2,500,000 26.93% $ 1.2188 04/01/11 $ 1,916,242 $4,856,133
Marie J. Toulantis 2,000,000 21.54 1.2188 04/01/11 1,532,994 3,884,907
Kevin M. Frain 75,000 0.81 1.2188 04/01/11 57,487 145,684
Gary A. King 750,000 8.08 1.2188 04/01/11 574,873 1,456,840
William F. Duffy 200,000 2.15 1.2188 04/01/11 153,299 388,491
(1) All options were granted with an exercise price equal to or above the
fair market value of the Common Stock at the date of grant.
(2) In accordance with the rules of the Securities and Exchange Commission,
the amounts shown on this table reflect hypothetical gains that could
be achieved for the respective options if exercised at the end of the
option term. These gains are based on assumed rates of stock
appreciation of 5.0% and 10.0%, compounded annually from the date the
respective options were granted to their expiration date. The gains
shown are net of the option exercise price, but do not include
deductions for taxes or other expenses associated with the exercise.
Actual gains, if any, on stock option exercises will depend on the
future performance of the Common Stock and the date on which the
options are exercised.
29
TEN-YEAR OPTION REPRICINGS
Length of
Number of Per Share Per Share Original
Securities Market Price Exercise Option Term
Underlying of Stock at Price at New Remaining
Options Time of Time of Per Share at Date of
Repriced or Repricing or Repricing or Exercise Repricing
Name Date (1) Amended Amendment Amendment Price (in years)
- ------------------- ------------ ------------- -------------- --------------- ------------- ---------------
Stephen Riggio - - $ - $ - $ - -
Marie J. Toulantis 03/01/00 900,000 8.00 18.00 8.00 9.21
Kevin M. Frain 03/01/00 35,000 8.00 16.86 8.00 9.31
Gary A. King 03/01/00 118,500 8.00 15.75 8.00 9.42
William F. Duffy 03/01/00 26,750 8.00 15.75 8.00 9.42
- ----------
(1) On March 1, 2000, the Company repriced approximately 5 million (net of
cancellations) of 16 million then outstanding options that were
originally granted at an average exercise price of $16.15 per share.
The new exercise price for the options is $8.00 per share, the closing
market price of the Company's stock as of March 1, 2000. The options
are treated as variable options, but have had no impact on the
Company's financial statements, as the market value of the Common Stock
has not been greater than $8.00 per share during the fiscal year ending
December 31, 2001.
OPTIONS EXERCISED IN 2001 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information with respect to the
value of options held by the Named Executive Officers at December 31, 2001. No
options were exercised during 2001 by any of the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN 2001 AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at December 31, 2001 at December 31, 2001 (1)
------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------- ------------- ---------------- ---------------- ---------------
Stephen Riggio 1,035,000 2,845,000 $ - $803,000
Marie J. Toulantis 731,250 2,168,750 - 642,400
Kevin M. Frain 24,250 112,750 - 24,090
Gary A. King 158,625 852,375 - 240,900
William F. Duffy 466,188 364,312 - 64,240
-----------
(1) Based on the closing price of the Class A Common Stock on December 31,
2001 ($1.54 per share), less the option exercise price, multiplied by
the number of shares exercisable or unexercisable.
30
DEFERRED COMPENSATION PLAN
B&N.com's Deferred Compensation Plan is a non-qualified plan,
eligibility for which is limited to "Eligible Executives," who include: (i) the
Company's employees who became B&N.com employees on November 1, 1998 and were
eligible to participate in the Barnes & Noble deferred compensation plan on
October 31, 1998; and (ii) the Company's employees whose base salary for a
calendar year exceeds $130,000. An Eligible Executive may elect in each year he
or she is an Eligible Executive to defer no less than $5,000 and no more than
50% of his or her base salary to a Deferral Account. The Deferral Account of
each Eligible Executive who elects to participate in the Deferred Compensation
Plan (a "Participant") is credited or debited with investment earnings or losses
based upon the performance of the investment fund or index selected by the
Participant from among alternatives selected by an Administrative Committee
appointed by the Compensation Committee of the Board of Directors.
A participant is entitled to a distribution of his or her Deferral
Account upon retirement or following termination of employment, as elected by
the Participant, but no later than the beginning of the year in which the
Participant would attain age 70 1/2. A Participant may elect whether to receive
the distribution in a lump sum or in annual installments over not more than
fifteen (15) years.
Amounts payable under the Deferred Compensation Plan are general
unsecured obligations of B&N.com, payable out of B&N.com's general assets to the
extent not paid by a grantor trust that the Company may establish. The Company
may amend or terminate the Deferred Compensation Plan at any time without
affecting any of the rights granted prior to termination.
DEFINED CONTRIBUTION PLAN
B&N.com is a participating employer in a defined contribution plan (the
"Savings Plan"), sponsored by Barnes & Noble, 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 basis. B&N.com's
contributions to the Savings Plan are generally in amounts based upon a certain
percentage of the employees' pre-tax contributions. B&N.com provides matching
contributions to participants in the amount of 100% of the first 3% of earnings
and 50% of the next 2% contributed by them, which contributions are made
consistent with the employees direction. The Fatbrain Savings Plan was merged
into the Savings Plan on November 1, 2001.
COMPENSATION OF DIRECTORS
All directors at the time of the Company's Initial Public Offering of
Class A Common Stock (the "Offering") other than Leonard Riggio and Stephen
Riggio received options to purchase 40,000 shares of Class A Common Stock at a
per share exercise price equal to the per share Offering price. Such options
vest in four equal annual installments on the first through fourth anniversary
of the completion of the Offering. Directors taking office after the Offering
received options to purchase 40,000 shares of Class A Common Stock at an
exercise price equal to the market price on such date, with such options vesting
in four equal annual installments on the first through fourth anniversaries of
the date of grant. Directors who are not employees of the Company, B&N.com,
Barnes & Noble or Bertelsmann receive an annual fee of $40,000 plus a fee of
$2,500 for each committee meeting attended. In addition, all directors are
reimbursed for certain expenses in connection with attendance at Board of
Directors and committee meetings. Other than with respect to reimbursement of
expenses, directors who are employees or officers of the Company do not receive
additional compensation for their services as directors.
31
INCENTIVE PLAN
GENERAL. The Company's 1999 Incentive Plan (the "Incentive Plan")
provides that options to acquire shares of Class A Common Stock ("Shares") may
be granted to key officers, employees, consultants, advisors and directors of
the Company or any of its subsidiaries or affiliates as shall be selected from
time to time by a committee not fewer than two directors of the Company, as
designated by the Board of Directors. The purpose of the Incentive Plan is to
assist the Company in attracting and retaining selected individuals to serve as
directors, officers, consultants, advisors and employees of the Company and
B&N.com who will contribute to the Company's success and to achieve long-term
objectives that will inure to the benefit of all stockholders of the Company
through the additional incentive inherent in the ownership of the Common Stock.
Awards under the Incentive Plan may take the form of stock options ("Options"),
including corresponding share appreciation rights ("SARs") and reload options,
restricted stock awards and stock purchase awards.
SHARE AUTHORIZATION. The maximum number of Shares that may be the
subject of awards under the Incentive Plan is 25,500,000 Shares and in any given
year, the maximum number of Shares with respect to which awards may be granted
to any employee is 7,000,000 Shares. Shares covered by any unexercised portions
of terminated Options, Shares forfeited by participants and Shares subject to
any awards that are otherwise surrendered by a participant without receiving any
payment or other benefit with respect thereto may again be subject to new awards
under the Incentive Plan. In the event the purchase price of the Option is paid
in whole or in part through the delivery of Shares, the number of Shares
issuable in connection with the exercise of the Option shall not again be
available for the grant of awards under the Incentive Plan. Shares subject to
Options, or portions thereof, with respect to which SARs are exercised, are not
again available for the grant of awards under the Incentive Plan. The Shares to
be issued or delivered under the Incentive Plan are authorized and unissued
Shares, or issued Shares that have been acquired by the Company, or both.
INCENTIVE PLAN ADMINISTRATION. The Compensation Committee of the Board
of Directors administers the Incentive Plan. The Compensation Committee is
authorized, subject to the provisions of the Incentive Plan, to establish such
rules and regulations, as it may deem appropriate for the conduct of meetings
and proper administration of the Incentive Plan. Subject to the provisions of
the Incentive Plan, the Compensation Committee shall have authority, in its sole
discretion, to grant awards under the Incentive Plan, to interpret the
provisions of the Incentive Plan and, subject to the requirements of applicable
law, to prescribe, amend, and rescind rules and regulations relating to the
Incentive Plan or any award there under as it may deem necessary or advisable.
OPTIONS. "Incentive Stock Options" meeting requirements of Section 422
of the Code, and "Nonqualified Stock Options" that do not meet such requirements
are both available for grant under the Incentive Plan. The term of each Option
is determined by the Compensation Committee, but no Option can be exercisable
prior to six months from the date of grant or more than 10 years after the date
of grant (except in the case of Options that are not Nonqualified Stock Options,
where the Compensation Committee can specify a longer period). Options may also
be subject to restrictions on exercise, such as exercise in periodic
installments, as determined by the Compensation Committee. In general, the
exercise price for Incentive Stock Options must be at least equal to 100% of the
fair market value of the Shares on the date of grant and the exercise price for
Nonqualified Stock Options will be determined by the Compensation Committee at
the time of the grant. The exercise price can be paid in cash, or if approved by
the Compensation Committee, by delivery of a promissory note or tendering Shares
owned by the participant. Options are not transferable except by will or the
laws of descent and distribution and may generally be exercised only by the
participant (or his or her guardian or legal representative) during his or her
lifetime, provided, however, the Nonqualified Stock Options may, under certain
32
circumstances, be transferable to family members and trust for the benefit of
the participant or his or her family members.
SHARE APPRECIATION RIGHTS. The Incentive Plan provides SARs may be
granted in connection with the grant of Options. Each SAR must be associated
with a specific Option and must be granted at the time of grant of such Option.
A SAR is exercisable only to the extent the related Option is exercisable. Upon
the exercise of a SAR, the recipient is entitled to receive from the Company,
without the payment of any cash (except for any applicable withholding taxes),
up to, but no more than, an amount in cash or Shares equal to the excess of (A)
the fair market value of one Share on the date of such exercise over (B) the
exercise price of any related Option, multiplied by the number of Shares in
respect of which such SAR shall have been exercised. Upon the exercise of a SAR,
the related Option, or the portion thereof in respect of which such SAR is
exercised, will terminate. Upon the exercise of an Option granted in tandem with
a SAR, such tandem SAR will terminate.
RELOAD OPTIONS. The Compensation Committee may grant, concurrently with
the award of any Option (an "Underlying Option"), a reload option (a "Reload
Option") to such participant to purchase for cash or Shares a number of Shares
equal to the number of Shares delivered by the participant to the Company to
exercise the Underlying Option and, to the extent authorized by the Compensation
Committee, the number of shares used to satisfy tax withholding obligations.
Although an Underlying Option may be an Incentive Stock Option, a Reload Option
is not intended to qualify as an Incentive Stock Option. A Reload Option has the
same expiration date as the Underlying Option and an exercise price equal to the
fair market value of the Shares on the date of the Reload Option. A Reload
Option is exercisable six months from the date of grant. A Reload Option permits
a participant to retain the potential Share appreciation in the number of
already-owned Shares that are used to exercise an Underlying Option. Retention
of such potential appreciation is accompanied by granting options for the number
of Shares used to pay the exercise price of the Underlying Option or the related
tax-withholding obligation. In this way, Reload Options provide a participant
with the opportunity to build up ownership of Shares covered by an Underlying
Option earlier during the Option term than through a single exercise at or near
the end of the Option term.
RESTRICTED STOCK. The Company may award restricted Shares under the
Incentive Plan. Such a grant gives a participant the right to receive Shares
subject to a risk of forfeiture based upon certain conditions. The forfeiture
restrictions on the Shares may be based upon performance standards, length of
service or other criteria as the Compensation Committee may determine. Until all
restrictions are satisfied, lapsed or waived, the Company will maintain custody
over the restricted Shares but the participant will be able to vote the Shares
and will be entitled to all distributions paid with respect to the Shares, as
provided by the Compensation Committee. During such restrictive period, the
restricted Shares may not be sold, assigned, transferred, pledged or otherwise
encumbered. Upon termination of employment, the participant forfeits the right
to the Shares to the extent the applicable performance standards, length of
service requirements, or other measurement criteria have not been met.
STOCK PURCHASE AWARDS. The Incentive Plan also permits the grant of
stock purchase awards. Participants who are granted a stock purchase award are
provided with a stock purchase loan to enable them to pay the purchase price for
the Shares acquired pursuant to the award. A stock purchase loan will have a
term of years to be determined by the Compensation Committee. The purchase price
of Shares acquired with a stock purchase loan is the price equal to the fair
market value on the date of the award. The Incentive Plan provides that up to
100% of the stock purchase loan may be forgiven over the loan term subject to
such terms and conditions, as the Compensation Committee shall determine,
provided that the participant has not resigned as an employee. At the end of the
loan term, the unpaid balance of the stock purchase loan will be due and
payable. The Compensation Committee will determine the interest rate on a stock
purchase loan. Stock purchase loans will be
33
secured by a pledge to the Company of the Shares purchased pursuant to the stock
purchase award and such loans will be recourse or non-recourse to a participant,
as determined from time to time by the Compensation Committee.
ANTIDILUTION PROVISIONS. The number of Shares authorized to be issued
under the Incentive Plan and subject to outstanding awards (and the grant or
exercise price thereof) may be adjusted to prevent dilution or enlargement of
rights in the event of any dividend or other distribution, recapitalization,
stock split, reverse stock split, reorganization, merger, consolidation,
split-up, spin-off, combination, repurchase or exchange of Shares or other
securities, the issuance of warrants or other rights to purchase Shares or other
securities, or other similar capitalization change.
CHANGE IN CONTROL. Upon the occurrence of a change in control of the
Company, all Options and related SARs may become immediately exercisable, the
restricted Shares may fully vest and stock purchase loans may be forgiven in
full. All options currently outstanding vest upon a change in control of the
Company.
TERMINATION AND AMENDMENT. The Incentive Plan will terminate by its
terms and without any action by the Board of Directors in 2008. No awards may be
made after that date. Awards outstanding on such termination date will remain
valid in accordance with their terms.
The Committee may amend or alter the terms of awards under the
Incentive Plan, including to provide for the forgiveness in whole or in part of
stock purchase loans, the release of the Shares securing such loans or the
termination or modifications of the vesting or performance provisions of the
grants of restricted Shares, but no such action shall in any way impair the
rights of a participant under any award, without such participant's consent.
EMPLOYEES' RETIREMENT PLAN
As of June 30, 2000, substantially all employees of the Company were
covered under the Company's Employees' Retirement Plan (the "Retirement Plan").
The Retirement Plan is a defined benefit pension plan. As of July 1, 2000, the
Retirement Plan was amended so that employees no longer earn benefits for
subsequent service. Subsequent service continues to be the basis for vesting of
benefits not yet vested at June 30, 2000 and the Retirement Plan will continue
to hold assets and pay benefits. The amendment was treated as a curtailment in
fiscal 2000.
A participant's annual benefit is determined for an employee,
including an officer, generally as (i) 0.7% of the participant's average annual
pay as determined in accordance with the Retirement Plan up to Social
Security-covered compensation, multiplied by the participant's years of credited
service, plus (ii) 1.3% of the participant's average annual pay as determined in
accordance with the Retirement Plan in excess of Social Security-covered
compensation, multiplied by the participant's years of credited service. A
participant's maximum benefit is limited pursuant to Section 415 of the Internal
Revenue Code of 1986, as amended (the "Code") to $130,000 for 1999, indexed
annually. Compensation recognized is limited to $170,000 based upon the
Retirement Plan.
Credited years of service under the Retirement Plan as of June 30, 2000
for the Named Executive Officers are: Stephen Riggio-1, Marie J. Toulantis - 2,
Kevin Frain - 2, William F. Duffy -7 and Gary King - 2.
34
The following table illustrates the maximum annual amounts payable at
age 65 under the Retirement Plan, based on various levels of highest average
annual salary and years of credited service:
YEARS OF CREDITED SERVICE
------------------------------------------------
ASSUMED HIGHEST AVERAGE SALARY 15 20 25 30 35
- ------------------------------ -------- -------- -------- -------- --------
$100,000 $ 16,260 $ 21,680 $ 27,100 $ 32,520 $ 37,940
$125,000 21,135 28,180 35,225 42,270 49,315
$150,000 26,010 34,680 43,350 52,020 60,690
$170,000 and above (1) 29,910 39,880 49,850 59,820 69,790
- ------------
(1) The benefits shown corresponding to this compensation reflect the
compensation limit under Section 401 (a)(17) of the Code. A
participant's compensation in excess of $150,000 (as adjusted to
reflect cost-of-living increases) is disregarded for purposes of
determining highest average earnings in plan years beginning in 1994
through 1996; a participant's compensation in excess of $160,000 (as
adjusted to reflect cost-of-living increases) is disregarded for
purposes of determining highest average earnings in plan years
beginning in 1997 through 1999 and $170,000 in plan years beginning in
2000. Benefits accrued as of the last day of the plan year beginning in
1993 on the basis of compensation in excess of $150,000 are preserved.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee consists of William F. Reilly and Jan
Michiel Hessels. The Company offers compensation packages designed to attract
and retain individuals whose skills are crucial to the long-term success of the
Company. The compensation offered by the Company should reward and motivate
individual and team performance in attaining business objectives and maximizing
stockholder value.
The Compensation Committee reviews and approves the Company's executive
compensation program each year. This includes a comparison of the Company's
executive compensation, corporate performance, stock performance and total
return to the stockholders with that of peer companies, including other
e-commerce companies. In addition, the Compensation Committee considers and
reviews the full compensation package afforded by the Company to its executive
officers, including pension, insurance and other benefits.
The key elements of the Company's executive compensation package
consist of base salary, bonus and stock options. The Company's policies with
respect to each of these elements are discussed below. The Compensation
Committee makes its determinations after receiving and considering the
recommendations of the Company's Chairman.
BASE SALARIES. An executive officer's base salary is determined
primarily on the basis of the executive officer's responsibility, qualification,
experience and the competitive marketplace for executive talent. The base salary
is intended to be competitive with base salaries paid to executive officers with
comparable qualifications, experience and responsibilities at peer companies.
PERFORMANCE BONUS. The Company's management is eligible for a
performance bonus that is based on both the Company's performance and the
individual's performance and is contingent on achieving certain pre-determined
targets.
STOCK OPTIONS. Stockholder grants to executive officers promote success
by aligning employee financial interests with long-term stockholder value.
Additionally, long-term awards offer executive officers an incentive
35
for the achievement of superior performance over time and foster the retention
of key management personnel. Annual stock option grants are determined based on
various subjective factors, primarily related to the individual's performance
and potential to improve stockholder value.
CHIEF EXECUTIVE OFFICER COMPENSATION. The compensation of the Company's
Chief Executive Officer is determined pursuant to the principles noted above.
Specific consideration is given to the Chief Executive Officer's
responsibilities and experience in the industry and the compensation package
awarded to chief executive officers of peer companies.
SECTION 162(M) OF THE INTERNAL REVENUE CODE. The Compensation Committee
has considered the potential impact of Section 162(m) of the Code, adopted under
the Revenue Reconciliation Act of 1993. This section disallows a tax deduction
for any publicly held corporation, for individual compensation exceeding
$1,000,000 in any taxable year paid to its Named Executive Officers unless (i)
the compensation is payable solely on account of the attainment of performance
goals, (ii) the performance goals are determined by a compensation committee of
two or more outside directors, (iii) the material terms under which compensation
is to be paid are disclosed to and approved by stockholders and (iv) the
compensation committee certifies that the performance goals were met.
COMPENSATION COMMITTEE
Jan Michiel Hessels
William F. Reilly
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of William F. Reilly and Jan
Michiel Hessels, neither of whom is an officer or employee or former officer or
employee of the Company or B&N.com. No executive officer of the Company serves
as a member of the Board of Directors or Compensation Committee of any entity
that has one or more executive officers serving as a member of the Compensation
Committee.
PERFORMANCE GRAPH
The graph set forth below compares cumulative total return on the
Common Stock of the Company with the cumulative total return of the Standard and
Poors 500 Index ("S&P 500"), the JP Morgan H&Q Internet 100 Index, the NASDAQ
Stock Market Index and a peer group of two companies, consisting of Amazon.com,
Inc. and iVillage Inc., resulting from an initial assumed investment of $100 in
each for the period beginning on the date of the Company's Offering of the
Common Stock on May 25, 1999 and the years ending December 31, 1999, 2000 and
2001.
JP Morgan Nasdaq
BARNESANDNOBLE.COM INC. PEER GROUP H&Q INTERNET 100 S&P 500 STOCK MARKET
----------------------- ---------- ---------------- ------- ------------
05/25/99 100.00 100.00 100.00 100.00 100.00
12/31/99 78.82 131.46 181.07 111.00 160.53
12/31/00 7.29 26.43 69.67 100.89 96.56
12/31/01 8.56 18.54 44.83 88.90 76.62
36
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP OF SHARES
The Company has three classes of Common Stock, par value $0.001 per
share (the "Common Stock"). Each holder of the Company's Class A Common Stock is
entitled to one vote per share. Each holder of the Company's Class B Common
Stock or Class C Common Stock (collectively, "High Vote Stock") is entitled to
the number of votes per share equal to: (i) 10, multiplied by the sum of (a) the
aggregate number of shares of High Vote Stock owned by such holder and (b) the
aggregate number of Membership Units in B&N.com owned by such holder, divided by
(ii) the aggregate number of shares of High Vote Stock owned by such holder.
Barnes & Noble is the beneficial owner of all of the Company's outstanding Class
B Common Stock and Bertelsmann is the beneficial owner of all of the Company's
outstanding Class C Common Stock.
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of March 1, 2002 by: (i) each person known by
the Company to own beneficially more than 5% of the outstanding shares of the
Company's Class A Common Stock; (ii) each of the Company's directors; (iii) the
executive officers named in the Summary Compensation Table contained in
"Executive Compensation" below; and (iv) all current executive officers and
directors as a group.
Percentage
Number of Shares of Class A Percentage of
Name and Address of Beneficial Owner Beneficially Owned (1) Common Stock (2) Voting Power (3)
- ------------------------------------- ----------------------- ------------------ --------------------
Barnes & Noble, Inc. 57,500,001 (4) 35.9%(4)(5) 48.0%(4)(5)
122 Fifth Avenue
New York, NY 10011
Bertelsmann AG 57,500,001 (4) 35.9 (4)(5) 48.0 (4)(5)
Carl-Bertelsmann-Strasse 270
3331 Gutersloh, Germany
Leonard Riggio 2,414,437 (6) 5.0 *
Stephen Riggio 2,830,000 (7) 5.9 *
Marie J. Toulantis 1,749,250 (8) 3.7 *
Kevin M. Frain 72,812 (9) * *
Gary A. King 533,815 (10) 1.1 *
William F. Duffy 717,125 (9) 1.5 *
Klaus Eierhoff 20,000 (9) * *
Jan Michiel Hessels 20,000 (9) * *
Patricia Higgins 10,000 (9) * *
Joel Klein - - -
William F. Reilly 70,000 (11) * *
Michael N. Rosen 50,000 (11) * *
Markus Wilhelm 70,000 (11) * *
All current executive officers and 8,557,439 (12) 17.9 *
- -----------
* Represents less than 1%.
37
(1) Except as indicated in the notes below, shares of Common Stock subject
to options that are currently exercisable or exercisable within 60 days
after March 1, 2002 are deemed to be outstanding and beneficially owned
by the person holding such options for the purpose of computing the
percentage ownership of such person but are not treated as outstanding
for the purpose of computing the percentage ownership of any other
person.
(2) Includes 4,158,088 shares issued to B&N.com in connection with the
merger of Fatbrain.
(3) Represents the percentage of voting power resulting from the effect of
all outstanding High Vote Stock, assuming no conversion of that stock
into Class A Common Stock.
(4) Represents shares of High Vote Stock that are convertible into, and
Membership Units that are exchangeable for, shares of Class A Common
Stock on a one-for-one-basis at any time at the option of the holder
thereof.
(5) The percentage of Barnes & Noble is calculated after giving effect to
the Class A Common Stock beneficially owned by each of Barnes & Noble
and Bertelsmann. The percentage of Bertelsmann is calculated after
giving effect to the Class A Common Stock beneficially owned by each of
Barnes & Noble and Bertelsmann. Calculated without such effect, the
percentage interest beneficially owned by each of Barnes & Noble and
Bertelsmann would be 54.5% and the percentage of voting power
beneficially owned by each of Barnes & Noble and Bertelsmann would be
92.3%.
(6) Includes 600,000 shares each owned by B&N College and MBS. Does not
include 57,500,001 shares of Class A Common Stock beneficially owned by
Barnes & Noble. Mr. Riggio is Barnes & Noble's Chairman of the Board
and principal stockholder. Accordingly, he could be considered to
beneficially own the shares owned by Barnes & Noble. Mr. Riggio
disclaims any beneficial ownership of such shares.
(7) Includes options granted by the Company to purchase 2,630,000 shares of
Class A Common Stock.
(8) Includes options granted by the Company to purchase 1,731,250 shares of
Class A Common Stock.
(9) All of these shares are issuable upon the exercise of options granted
by the Company.
(10) Includes options granted by the Company to purchase 533,625 shares of
Class A Common Stock.
(11) Includes options granted by the Company to purchase 20,000 shares of
Class A Common Stock.
(12) Includes options granted by the Company to purchase 5,794,812 shares of
Class A Common Stock.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (IN THOUSANDS)
B&N.com has entered into agreements with Barnes & Noble, Bertelsmann
and their affiliates. The Company believes that the transactions and agreements
discussed below (including renewals of any existing agreements) between B&N.com
and its affiliates are at least as favorable to B&N.com as could be obtained
from unaffiliated parties. The Board of Directors and its Audit Committee must
approve in advance any proposed transaction or agreement with affiliates and
will utilize procedures in evaluating the terms and
38
provisions of such proposed transaction or agreement as are appropriate in light
of the fiduciary duties of directors under Delaware law.
B&N.com entered into a Supply Agreement, dated October 31, 1998, as
amended, with Barnes & Noble (the "Supply Agreement"), whereby Barnes & Noble
has agreed to supply inventory to B&N.com through Barnes & Noble's distribution
facilities and purchasing departments. Pursuant to the Supply Agreement, Barnes
& Noble charges B&N.com its actual cost to acquire the inventory plus any
incremental overhead incurred by Barnes & Noble in connection with providing
such merchandise supply services. The Company purchased $126,217, $107,167 and
$64,112 from Barnes & Noble representing 45%, 54% and 59% of the Company's
purchases for the years ended December 31, 2001, 2000 and 1999, respectively.
The charges for incremental overhead for the year ended December 31, 2001, 2000
and 1999 were $2,369, $1,947 and $1,258, respectively. At December 31, 2001 and
2000, $44,160 and $16,875, respectively, remained payable to Barnes & Noble in
connection with such purchases.
Under a Services Agreement, dated as of October 31, 1998, as amended,
between B&N.com and Barnes & Noble (the "Services Agreement"), B&N.com receives
various administrative services from Barnes & Noble, including, among other
things, services for payroll processing, benefits administration, insurance
(property and casualty, medical, dental and life) and tax administration. In
accordance with the terms of the Services Agreement, B&N.com reimburses Barnes &
Noble in an amount equal to the third-party expenses it incurs to provide such
services, plus any incremental internal costs. B&N.com was charged $4,144,
$1,755 and $1,672 for such services during the year ended December 31, 2001,
2000 and 1999 (proforma), respectively.
In 2001, B&N.com purchased merchandise directly from Calendar Club,
L.L.C. ("Calendar Club"), a company engaged in the wholesaling and retailing of
calendars, in which Barnes & Noble owns a 73.9% interest. B&N.com's purchases
from Calendar Club for the year ended December 31, 2001 totaled $1,110.
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 was
charged by Barnes & Noble $486, $485 and $473 for such subleased space during
the year ended December 31, 2001, 2000 and 1999 (proforma), respectively. The
amount paid to Barnes & Noble by B&N.com approximates the cost per square foot
paid by Barnes & Noble as tenant pursuant to its lease of the space from an
unaffiliated third party.
Since 1999, B&N.com has used AEC One Stop Group, Inc. ("AEC') as its
sole music supplier, and as one of its suppliers of DVD/video. AEC is among the
largest wholesale distributors of music, videos and DVD's in the United States.
AEC also provides B&N.com with a music, DVD and Video product database.
Subsequent to the initial supply arrangement between AEC and B&N.com, AEC's
parent corporation was acquired by an investor group in which Leonard Riggio,
Chairman of the Board of the Company and B&N.com, became a minority investor.
B&N.com was charged by AEC $29,759, $18,541 and $2,908 in connection with this
agreement for merchandise purchased during the year ended December 31, 2001,
2000 and 1999 (proforma), respectively. In addition, B&N.com was charged by AEC
$279, $301 and $19 for database services during the years ended December 31,
2001, 2000 and 1999 (proforma), respectively. At December 31, 2001 and 2000,
$9,307 and $7,803, respectively, remained payable to AEC in connection with this
agreement.
B&N.com licenses the "Barnes & Noble" name under a royalty-free license
agreement, dated as of October 31, 1998, as amended, between B&N.com and Barnes
& Noble College Bookstores, Inc. (the "License Agreement"), of which Leonard
Riggio is the principal stockholder. Pursuant to the License Agreement, the
Company has been granted an exclusive license to use the Barnes & Noble name and
trademark (excluding sales of college textbooks). Under a separate agreement
reached in January 2001 between the Company and
39
Textbooks.com, Inc. ("Textbooks.com"), a corporation owned by Leonard Riggio,,
B&N.com was granted the right to sell college textbooks on the Internet using
the "Barnes & Noble" name. Pursuant to this agreement, B&N.com pays
Textbooks.com a royalty on revenues (net of product returns, applicable sales
tax and excluding shipping and handling) realized by the Company from the sale
of books designated as textbooks. The term of the agreement is for five years
and renews annually for additional one-year periods unless terminated 12 months
prior to the end of any given term. For the years ended December 31, 2001 and
2000, the Company recorded royalty expense of $5,981 and $1,500, respectively,
under the terms of this agreement.
B&N.com has various royalty-free non-exclusive licenses dated October
31, 1998, as amended, from Barnes & Noble, and BOL. B&N.com licenses from Barnes
& Noble the right to use Barnes & Noble's database of book bibliographic data as
well as certain software applications. B&N.com licenses from Bertelsmann Online
("BOL"), the subsidiary through which Bertelsmann conducts its Internet
business, its name and trademark for use in B&N.com's operations. Under
Technology Sharing License Agreements, B&N.com was granted a royalty-free
license to view, access and use BOL's computer technology and systems, and
B&N.com granted BOL a royalty-free license to view, access and use B&N.com's
computer technology and systems. All of the agreements described in this
paragraph are subject to certain renewal and termination provisions.
Barnes & Noble commenced a marketing program in November 2000, whereby
a customer purchases a "Readers' Advantage(TM) Card" for a non-refundable annual
membership fee of $25.00. With this card, customers can receive discounts of 10%
on all Barnes & Noble store purchases and 5% on all of their purchases through
the B&N.com Web site. B&N.com and Barnes & Noble have agreed to share the
expenses, net of revenue from the sale of the cards, related to this program in
proportion to the discounts customers receive on purchases with each company.
B&N.com's net revenue generated from this program for the year ended December
31, 2001 was $636. Net revenue generated for the year ended December 31, 2000
was negligible.
B&N.com ships, through its fulfillment centers, various customer orders
on behalf of Barnes & Noble to Barnes & Noble retail stores as well as to Barnes
& Noble customers' homes. B&N.com charges Barnes & Noble the costs associated
with such shipments plus any incremental overhead incurred by B&N.com to process
these orders. The fees received are recorded as a reduction of B&N.com's total
fulfillment expense. For the years ended December 31, 2001, 2000 and 1999
(proforma), B&N.com recorded $987, $206 and $191, respectively, for shipping and
handling from Barnes & Noble. In addition, during the year 2001, B&N.com and
Barnes & Noble reached an agreement whereby B&N.com receives a commission on all
items ordered by customers at Barnes & Noble stores and shipped directly to
customers' homes by B&N.com. Commissions for these sales were recorded as
revenue and amounted to $383 for the year ended December 31, 2001.
During 2000 and 2001, Barnes & Noble subleased warehouse space from
B&N.com in Reno, Nevada. B&N.com charged Barnes & Noble $1,882 and $1,290 for
such subleased space in the years ended December 31, 2001 and 2000,
respectively. Additionally, B&N.com sold $6,186 of warehouse equipment from its
Reno warehouse to Barnes & Noble in 2001. The equipment was sold to Barnes &
Noble at its original cost. B&N.com recently determined it could not effectively
utilize the full capacity of its Reno, Nevada distribution center. Accordingly,
following Board approval on January 29, 2002, B&N.com agreed to transfer the
Reno warehouse lease and sell B&N.com's inventory located in Reno to Barnes &
Noble. Barnes & Noble purchased the inventory from B&N.com at cost for
approximately $10 million. The Board of Barnes & Noble also approved Barnes &
Noble's assumption of the lease obligation and the hiring of all of the
employees at the Reno facility. The Reno lease assignment and the transfer of
the operations of the Reno facility to Barnes & Noble is expected to be
completed during the first half of 2002.
40
In 2000, B&N.com began purchasing new and used textbooks directly from
MBS, a corporation majority-owned by Leonard Riggio. B&N.com's total purchases
for the year ended December 31, 2001 and 2000 were $13,206 and $5,746,
respectively. In addition, B&N.com maintains a link on its Web site called "Sell
Your Textbooks" which is hosted by MBS and through which B&N.com customers are
able to sell used books directly to MBS. B&N.com is paid a commission based on
the price paid by MBS to the consumer. Total commissions received for the year
ended December 31, 2001 were $16.
Under a Strategic Relationship Agreement, dated as of May 1, 2001 (the
"Strategic Relationship Agreement"), between B&N.com and GameStop, Inc.
("GameStop"), a majority-owned subsidiary of Barnes & Noble, B&N.com's Web site
refers customers to the GameStop Web site for purchases of video game hardware,
software and accessories and PC entertainment software. GameStop pays B&N.com a
referral fee based on its net sales revenue from certain eligible purchases made
by customers as a result of the redirection from the B&N.com Web site. Either
party may terminate the Strategic Relationship Agreement after May 1, 2002 on 60
days' notice. Commissions of $33 were recorded in the year ended December 31,
2001 under this agreement.
B&N.com has a 49.5% equity stake in enews, a company engaged in selling
magazine subscriptions on the Internet, and accounts for this investment under
the equity method. Substantially all of the balance of the shares are owned by
Barnes & Noble. B&N.com fulfills a majority of orders for magazine subscriptions
through enews and records a commission on these sales. Beginning in October
2000, enews subleased space from B&N.com at its New York office for an annual
rent of $95. B&N.com recorded commission income of $590 and $400 for the years
ended December 31, 2001 and 2000, respectively, and was reimbursed $295 and $65,
respectively, for expenses incurred on behalf of enews for the years ended
December 31, 2001 and 2000.
Michael N. Rosen, a director of the Company, is also the Chairman of
Robinson Silverman, outside counsel to the Company and B&N.com.
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
41
(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
2.1 Agreement and Plan of Merger, dated as of September 13, 2000, between
the Company and Fatbrain.com, Inc. (Incorporated herein by reference to
Exhibit 2.1 in the Company's Current Report on Form 8-K dated September
26, 2000)
3.1 Amended and Restated Certificate of Incorporation of the Company.
(Incorporated herein by reference to Exhibit 3.1 in the Company's Form
10-K for the year ended December 31, 2000, filed April 2, 2001)
3.2 Amended and Restated By-laws of the Company. (Incorporated herein by
reference to Exhibit 3.2 in the Company's Form 10-K for the year ended
December 31, 2000, filed April 2, 2001)
10.1 Second Amended and Restated Limited Liability Company Agreement of
barnesandnoble.com llc. (Incorporated herein by reference to Exhibit
10.1 in the Company's Form 10-K for the year ended December 31, 2000,
filed April 2, 2001)
10.2 Amendment No. 1 to Second Amended and Restated Limited Liability
Company Agreement of barnesandnoble.com llc. (Incorporated herein by
reference to Exhibit 10.30 in the Company's Form 10-K for the year
ended December 31, 1999, filed March 30, 2000)
10.3 Stockholders Agreement between Barnes & Noble, Inc. and Bertelsmann AG.
(Incorporated herein by reference to Exhibit 10.3 in the Company's Form
10-K for the year ended December 31, 2000, filed April 2, 2001)
10.4 1999 Incentive Plan of the Company. (Incorporated herein by reference
to Exhibit 10.1 in Amendment No. 3 of the Company's Registration
Statement No. 333-64211, filed May 24, 1999)
10.5 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)
10.6 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)
42
10.7 Agreement of Lease, dated as of October 1, 1999, between 111 Chelsea
LLC, as landlord, and barnesandnoble.com llc, as tenant. (Incorporated
herein by reference to Exhibit 10.33 in the Company's Form 10-K for the
year ended December 31, 1999, filed March 30, 2000)
10.8 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)
10.9 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)
10.10 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. (Incorporated
herein by reference to Exhibit 10.31 in the Company's Form 10-K for the
year ended December 31, 1999, filed March 30, 2000)
10.11 Lease Agreement, dated September 8, 1999, between ProLogis Development
Services Incorporated, as landlord, and barnesandnoble.com llc, as
tenant. (Incorporated herein by reference to Exhibit 10.32 in the
Company's Form 10-K for the year ended December 31, 1999, filed March
30, 2000)
10.12 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)
10.13 Amendment No. 1 to the Supply Agreement, between barnesandnoble.com llc
and Barnes & Noble Inc. (Incorporated herein by reference to Exhibit
10.14 in the Company's Form 10-K for the year ended December 31, 2000,
filed April 2, 2001)
10.14 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)
10.15 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 the Company's
Form 10-K for the year ended December 31, 2000, filed April 2, 2001)
10.16 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)
43
10.17 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 10.18 in the
Company's Form 10-K for the year ended December 31, 2000, filed April
2, 2001)
10.18 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)
10.19 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 10.20 in the
Company's Form 10-K for the year ended December 31, 2000, filed April
2, 2001)
10.20 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)
10.21 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 10.22 in the
Company's Form 10-K for the year ended December 31, 2000, filed April
2, 2001)
10.22 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)
10.23 Amendment No. 1 to the Trademark License Agreement, between BOL.Global,
Inc. and barnesandnoble.com llc. (Incorporated herein by reference to
Exhibit 10.24 in the Company's Form 10-K for the year ended December
31, 2000, filed April 2, 2001)
10.24 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)
10.25 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
10.26 in the Company's Form 10-K for the year ended December 31, 2000,
filed April 2, 2001)
10.26 Web Site Agreement, dated as of January 31, 2001, by and between
Textbooks.com, Inc. and barnesandnoble.com llc. (Incorporated herein by
reference to Exhibit 10.27 in the Company's Form 10-K for the year
ended December 31, 2000, filed April 2, 2001)
10.27 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)
44
10.28 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)
21.1 List of Subsidiaries
23.1 Consent of BDO Seidman, LLP.
(b) Reports on Form 8-K:
None.
45
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, 2002 By: /s/ MARIE J. TOULANTIS
----------------------------------
Marie J. Toulantis
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, 2002
- --------------------------
Leonard Riggio
/s/ STEPHEN RIGGIO Vice Chairman March 29, 2002
- --------------------------
Stephen Riggio
/s/ MARIE J. TOULANTIS Chief Executive Officer March 29, 2002
- -------------------------- (Principal Executive Officer)
Marie J. Toulantis
/s/ KEVIN M. FRAIN Chief Financial Officer (Principal March 29, 2002
- -------------------------- Accounting and Financial Officer)
Kevin M. Frain
/s/ MICHAEL N. ROSEN Secretary and Director March 29, 2002
- --------------------------
Michael N. Rosen
/s/ KLAUS EIERHOFF Director March 29, 2002
- --------------------------
Klaus Eierhoff
/s/ JOEL KLEIN Director March 29, 2002
- --------------------------
Joel Klein
/s/ MARKUS WILHELM Director March 29, 2002
- --------------------------
Markus Wilhelm
/s/ JAN MICHIEL HESSELS Director March 29, 2002
- --------------------------
Jan Michiel Hessels
/s/ WILLIAM F. REILLY Director March 29, 2002
- --------------------------
William F. Reilly
/s/ PATRICIA HIGGINS Director March 29, 2002
- --------------------------
Patricia Higgins
46
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
barnesandnoble.com inc.
We have audited the accompanying consolidated balance sheets of
barnesandnoble.com inc. and subsidiaries, as of December 31, 2001 and 2000 and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years ended December 31, 2001 and 2000 and 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 audits in accordance with auditing standards generally
accepted in the United States of America. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
barnesandnoble.com inc. and subsidiaries at December 31, 2001 and 2000, and the
results of their operations and their cash flows for the years ended December
31, 2001 and 2000 and the period May 25, 1999 to December 31, 1999 in conformity
with accounting principles generally accepted in the United States of America.
BDO Seidman, LLP
New York, New York
February 1, 2002
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
barnesandnoble.com llc
We have audited the accompanying statements of operations, members'
equity and cash flows of barnesandnoble.com llc, and its predecessor for the
period January 1, 1999 to May 24, 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 audits in accordance with auditing standards generally
accepted in the United States of America. 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 results of operations and cash flows of
barnesandnoble.com llc and its predecessor for the period January 1, 1999 to May
24, 1999 in conformity with accounting principles generally accepted in the
United States of America.
BDO Seidman, LLP
New York, New York
February 1, 2002
F-2
barnesandnoble.com inc. and predecessors
CONSOLIDATED BALANCE SHEETS
(thousands of dollars, except share data)
December 31, December 31,
2001 2000
------------ ---------
ASSETS
Current assets:
Cash and cash equivalents $ 105,125 $ 179,609
Marketable securities 10,141 32,695
Receivables, net 15,698 26,129
Merchandise inventories 48,563 48,220
Prepaid expenses and other current assets 3,874 5,983
--------- ---------
Total current assets 183,401 292,636
--------- ---------
Fixed assets, net 85,771 150,500
Long term marketable securities -- 5,000
Other non-current assets 18,204 80,799
--------- ---------
Total assets $ 287,376 $ 528,935
========= =========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 4,652 $ 19,066
Accrued liabilities 90,590 89,820
Due to affiliate 43,531 27,101
--------- ---------
Total current liabilities 138,773 135,987
--------- ---------
Minority interest 105,845 282,804
--------- ---------
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; 43,787,748 shares issued and outstanding 44 44
Common Stock Series B; $0.001 par value; 1,000 shares
authorized; 1 share issued and outstanding -- --
Common Stock Series C; $0.001 par value; 1,000 shares
authorized; 1 share issued and outstanding -- --
Paid-in capital 189,279 189,279
Accumulated deficit (146,565) (79,179)
--------- ---------
Total stockholders' equity 42,758 110,144
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' equity $ 287,376 $ 528,935
========= =========
See accompanying notes to consolidated financial statements.
F-3
barnesandnoble.com inc. and predecessors
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
barnesandnoble.com llc
barnesandnoble.com inc and subsidiaries and its predecessor
------------------------------------------------------------------ ----------------------
(Consolidated)
Proforma
Year ended Year ended year ended May 25, 1999 January 1,
December 31, December 31, December 31, to December 31, 1999 to
2001 2000 1999 (1) (2) 1999 May 24, 1999 (3)
--------------- --------------- ----------------- ---------------- -------------------
Net sales $ 404,600 $ 320,115 $ 193,730 $ 139,930 $ 53,800
Cost of sales 313,365 261,801 159,937 117,850 42,087
--------------- --------------- ----------------- ---------------- -------------------
Gross profit 91,235 58,314 33,793 22,080 11,713
Operating expenses:
Fulfillment and customer
service 44,637 49,880 19,395 11,743 7,652
Marketing, sales and editorial 61,418 82,620 81,682 59,181 24,140
Technology and web site
development 45,298 40,397 21,006 15,058 5,948
General and administrative 32,362 31,270 18,842 12,582 4,622
Depreciation and amortization 41,981 36,088 15,510 10,183 5,327
Impairments and other
special charges 88,213 75,051 -- -- --
Stock based compensation -- 11,740 -- -- --
Equity in net loss of equity
investments, including
amortization of intangibles 28,733 30,728 -- -- --
--------------- --------------- ----------------- ---------------- -------------------
Total operating expenses 342,642 357,774 156,435 108,747 47,689
--------------- --------------- ----------------- ---------------- -------------------
Loss from operations (251,407) (299,460) (122,642) (86,667) (35,976)
Interest income, net 7,041 23,737 20,238 18,615 1,623
--------------- --------------- ----------------- ---------------- -------------------
Loss before minority interest (244,366) (275,723) (102,404) (68,052) (34,353)
Minority interest 176,980 210,320 54,253 54,253 --
--------------- --------------- ----------------- ---------------- -------------------
Net loss - historical $ (67,386) $ (65,403) (48,151) $ (13,799) (34,353)
=============== =============== ================= ================ ===================
Pro forma adjustment to
minority interest (4) 27,534 27,534
----------------- -------------------
Net loss - pro forma $ (20,617) $ (6,819)
================= ===================
Basic net loss per common share $ (1.54) $ (2.02) $ (0.72) $ (0.48) $ (0.24)
Basic weighted average common
shares outstanding (5) 43,787 32,386 28,778 28,797 28,750
(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 proforma amounts do not give effect to the assumed charges to
operating results which might have resulted had the Company's Initial
Public Offering occurred on January 1, 1999.
(3) Includes the historical results of barnesandnoble.com llc and its
predecessor.
(4) 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.
(5) For periods prior to May 25, 1999, reflects the proforma effect of the
shares issued in the Company's Initial Public Offering assuming they
were issued at the beginning of 1999. All periods exclude the assumed
conversion of Membership Units and the elimination of minority
interest, as it is not dilutive.
See accompanying notes to consolidated financial statements.
F-4
barnesandnoble.com inc. and predecessors
CONSOLIDATED STATEMENTS 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)
Issuance of common stock for acquisition of
Enews.com 1 12,857 23
Exercise of stock options 1 5,773 --
Issuance of comon stock for acquisition of
Fatbrain.com 13 46,448 --
Reclassification to minority interest (2) (10,251) --
Net loss, for the year, net of $210,320
minority interest -- -- (65,403)
--------- --------- ---------
Balance, December 31, 2000 $ 44 $ 189,279 $ (79,179)
Net loss, for the year, net of $176,980
minority interest -- -- (67,386)
--------- --------- ---------
Balance, December 31, 2001 $ 44 $ 189,279 $(146,565)
========= ========= =========
(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.
(2) To adjust minority interest based on net book equity of
barnesandnoble.com llc (after the equity transactions in 2000)
multiplied by the ownership percentage in that entity of Barnes & Noble
and Bertelsmann.
See accompanying notes to consolidated financial statements.
F-5
barnesandnoble.com inc. and predecessors
STATEMENTS OF MEMBERS' EQUITY
(in thousands of dollars)
Accumulated Capital Members'
Loss Contributions Equity
----------- ------------- ---------
Balance, January 1, 1999 $ (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 consolidated financial statements.
F-6
barnesandnoble.com inc. and predecessors
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
barnesandnoble.com llc
barnesandnoble.com inc and subsidiaries and its predecessor
-------------------------------------------------------------- ----------------------
(Consolidated)
Proforma
Year ended Year ended year ended May 25, 1999 January 1,
December 31, December 31, December 31, to December 31, 1999 to
2001 2000 1999 (1) (2) 1999 May 24, 1999 (3)
------------ --------------- ----------------- --------------- -------------------
Cash flows used in operating activities:
Net loss (67,386) (65,403) (48,151) (13,799) (34,353)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation and amortization 41,981 36,088 15,510 10,183 5,327
Equity in net loss of equity investments
including amortization of intangibles 28,733 30,728 -- -- --
Impairment and other special charges 88,213 75,051 -- -- --
Changes in certain assets and liabilities,
net of effects from acquisition:
Decrease (increase) in receivables, net 10,431 (4,353) (13,133) (11,894) (1,239)
Decrease (increase) in merchandise
inventories (343) (37,921) (2,307) (1,747) (560)
Decrease (increase) in prepaid
expenses and other current assets 2,011 (7,834) 2,609 2,284 325
Increase (decrease) in accounts payable (14,414) (10,285) 19,204 16,683 2,521
Increase (decrease) in due to affiliate 16,430 9,992 3,918 8,878 (4,960)
Increase (decrease) in accrued
liabilities (13,919) 15,769 19,823 27,855 (8,032)
Minority interest in loss (176,980) (210,320) (54,253) (54,253) --
--------- --------- --------- --------- ---------
Net cash flows used in operating
activities (85,243) (168,488) (56,780) (15,810) (40,971)
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchases of fixed assets (10,529) (103,716) (71,889) (63,973) (7,916)
(Purchases) sales of marketable securities 27,554 264,801 (302,496) (302,496) --
Decrease (increase) in restricted cash -- -- 50,393 -- 50,393
Net assets of barnesandnoble.com llc at
date of acquisition -- -- -- 97,729 (97,729)
Acquisition and investments in
businesses, net of cash acquired (4,408) (65,715) -- -- --
(Increase) decrease in other
non-current assets (1,858) (449) (5,599) (4,881) (717)
--------- --------- --------- --------- ---------
Net cash flows from (used in)
investing activities 10,759 94,921 (329,591) (273,621) (55,969)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from initial public offering -- -- 484,382 484,382 --
Capital contributions from members -- -- 50,000 50,000 --
Proceeds from exercise of stock options -- 5,773 2,452 2,452 --
--------- --------- --------- --------- ---------
Net cash flows from financing
activities -- 5,773 536,834 536,834 --
--------- --------- --------- --------- ---------
Net change in cash and cash equivalents (74,484) (67,794) 150,463 247,403 (96,940)
Cash and cash equivalents at beginning of
period 179,609 247,403 96,940 -- 96,940
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period $ 105,125 $ 179,609 $ 247,403 $ 247,403 $ --
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Stock issued in connection
with business acquisitions $ 59,305
(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 consolidated financial statements.
F-7
barnesandnoble.com inc. and predecessors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
1. BUSINESS AND ORGANIZATION
barnesandnoble.com inc. (the "Company") is a holding company whose sole
asset is a 27.6% equity interest in barnesandnoble.com llc ("B&N.com"), an
online retailer of books, music, DVD/video and magazine subscriptions, 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 36.2%
equity interest (equivalent to an aggregate of 115,000 Membership 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 that, 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.
Subsequent to the Offering, the Company issued a total of 12,474 shares
in connection with an acquisition by merger of Fatbrain.com, Inc. ("Fatbrain").
Fatbrain is operated as Fatbrain.com, LLC, a wholly owned subsidiary of B&N.com.
Additionally, the Company issued 4,158,088 shares in connection with its
investment in enews, inc. ("enews"). As of December 31, 2001, the Company owned
an approximate 27.6%
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
interest in B&N.com and Barnes & Noble and Bertelsmann each owned an approximate
36.2% interest in B&N.com.
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 2001 and 2000 are to the Company as of the year-end.
References to 1999 are to 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
CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. The Company's investment in Fatbrain has been
presented in the accompanying consolidated financial statements, as a
consolidated wholly owned subsidiary beginning after the effective date of the
merger, November 16, 2000. All significant intercompany accounts and
transactions have been eliminated in consolidation. The Company has no
unconsolidated majority owned subsidiaries and no interests in special purpose
entities.
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.
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. At December 31, 2001 and 2000, B&N.com had no
significant concentrations of credit risk.
MERCHANDISE INVENTORIES
Merchandise inventories are valued at the lower of cost or market as
determined on a weighted average basis. B&N.com purchases a majority of its
products from two major vendors, Barnes & Noble and AEC One Stop Group, Inc.
("AEC"). Barnes & Noble accounted for 45.2%, 53.6% and 58.9% of B&N.com's
inventory purchases during the years ended December 31, 2001, 2000 and 1999,
respectively. AEC accounted for nearly all of the company's music and video
purchases and for 10.7%, 11.5% and 2.7% of total inventory purchases during the
years ended December 31, 2001, 2000 and 1999, respectively.
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barnesandnoble.com inc. and predecessors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
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 accordance with Statement
of Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use", direct internal and external costs associated with
the development of the features 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.
Other costs relating to internal use software are expensed as incurred. B&N.com
has evaluated all software development projects that were in progress as of
December 31, 2001 to determine whether or not it was no longer probable that any
of the projects would be placed in service. Based on that evaluation, certain
projects were deemed impaired and written off, B&N.com expects to complete and
put in service the remaining software development projects that existed as of
year-end.
GOODWILL
Goodwill represents the excess of the purchase price over the fair
value of net assets acquired in business acquisitions accounted for under the
purchase accounting method. Goodwill and other intangibles are presented net of
related accumulated amortization and impairment charges and are being amortized
over three years. The unamortized carrying balance of goodwill is assessed for
recoverability on a periodic basis. The measurement of possible impairment is
based on the ability to recover the balance of goodwill from expected future
operating cash flows. As described in Recently Issued Accounting Pronouncements
below, the Company's accounting for goodwill will be modified upon
implementation of Financial Accounting Standards Board ("FASB") Statement 142 in
2002.
INVESTMENTS IN EQUITY METHOD INVESTEES
The Company has made certain investments in business entities accounted
for under the equity method of accounting. The Company accounts for an
investment under the equity method if the investment gives the Company the
ability to exercise significant influence over the operating and financial
policies of such entity. An investment of 20% or more of the voting stock
typically denotes such influence, in the absence of other evidence to the
contrary.
The Company periodically evaluates whether the declines in fair value
of its equity investments are other-than-temporary. This evaluation consists of
reviewing qualitative and quantitative factors including operating results and
trends, as well as market prices of public companies operating in the same
sector.
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
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barnesandnoble.com inc. and predecessors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
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. As
described in Recently Issued Accounting Pronouncements below, the Company's
accounting for long-lived assets may be modified upon implementation of FASB 144
in 2002.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for the Company's cash and cash equivalents,
accounts payable, amounts due to affiliates and other liabilities approximate
fair value. The fair value for marketable securities is based on quoted market
prices that approximate cost.
NET SALES
The Company uses the guidelines set forth in FASB's Emerging Issues
Task Force ("EITF") Issue No. 99-19, "Reporting Revenue Gross, as a Principal,
versus Net as an Agent," in recording revenue. Sales of B&N.com's products are
recognized, net of estimated returns and promotional discounts, at the time the
products are shipped to customers. Commissions received on sales of magazine
subscriptions are recorded at the net amount earned as the Company is acting as
an agent in such transactions. International net sales were $18,197, $19,564 and
$12,817 for the years ended December 31, 2001 and 2000 and the proforma year
ended December 31, 1999, respectively. Allowances for doubtful accounts are
nominal.
SHIPPING AND HANDLING COSTS
The Company uses guidelines set forth in EITF Issue No. 00-10
"Accounting for Shipping and Handling Fees and Costs". Net sales reported by the
Company include revenue generated from shipping and handling charges. Costs
related to inbound and outbound shipping are classified as cost of sales.
Fulfillment and customer service costs include distribution center expenses for
activities such as receiving of goods, picking of goods for shipment and
assembly for shipment, as well as expenses to run the Company's customer service
center.
ADVERTISING COSTS
B&N.com expenses the costs of advertising for magazines, television,
radio and other media the first time the advertising takes place. Expenses for
such advertising were $3,297, $17,305 and $41,845 for the years ended December
31, 2001, 2000 and 1999 (proforma), respectively.
TECHNOLOGY AND WEB SITE DEVELOPMENT
Technology and web site 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
and functionality of B&N.com's online stores, transaction-processing systems,
telecommunications infrastructure and network operations.
NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding during the period.
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barnesandnoble.com inc. and predecessors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Diluted net loss per share is computed in a manner consistent with
basic net loss per share after giving effect to potentially dilutive securities.
Diluted net loss per share for the years ended December 31, 2001 and 2000 and
the period May 25, 1999 to December 31, 1999 excludes the assumed conversion of
the outstanding Membership Units of B&N.com into 115,000 shares of Class A
Common Stock of the Company and the minority interest in the net loss, because
it is not dilutive. Diluted net loss per share for the years ended December 31,
2001 and 2000 and the period May 25, 1999 to December 31, 1999 also excludes the
effect of outstanding stock options, none of which are dilutive.
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 are not
considered a taxable entity for federal income tax purposes and most state
income tax purposes. The members report any taxable income or losses recorded
subsequent to the formation of the limited liability company 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. The Company recognizes deferred tax
assets and liabilities based on differences between the financial reporting and
tax bases of assets and liabilities using the enacted tax rates and laws that
are expected to be in effect when the differences are expected to be recovered.
The Company provides a valuation allowance for deferred tax assets for which it
does not consider realization of such assets to be more likely than not.
STOCK OPTIONS
The Company accounts for all transactions under which employees receive
shares of stock or other equity instruments in the Company based on the price of
its stock in accordance with the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Options which have
been repriced have been treated as variable options.
RECLASSIFICATIONS
Certain prior-period amounts have been reclassified for comparative
purposes to conform to the 2001 presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, BUSINESS COMBINATIONS ("SFAS 141"), and No. 142, GOODWILL
AND OTHER INTANGIBLE ASSETS ("SFAS 142"). SFAS 141 requires the use of the
purchase method of accounting and prohibits the use of the pooling-of-interests
method of accounting for business combinations initiated after June 30, 2001.
SFAS 141 also requires that the Company recognize acquired intangible assets
apart from goodwill if the acquired intangible assets meet certain criteria.
SFAS 141 applies to all business combinations initiated after June 30, 2001 and
for purchase business combinations completed on or after July 1, 2001. It also
requires that, upon adoption of SFAS 142, the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
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barnesandnoble.com inc. and predecessors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted for using
the purchase method. As of December 31, 2001, the net carrying amount of
goodwill is $16,777. Amortization expense during the year ended December 31,
2001 was $20,129; however, the goodwill balance as of December 31, 2001 is
expected to be recovered based upon anticipated cash flows from investments.
Currently, the Company is assessing but has not yet determined how the adoption
of SFAS 141 and SFAS 142 will impact its financial position and results of
operations.
In August 2001, the FASB also issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", that is applicable to financial
statements issued for fiscal years beginning after December 15, 2001. The FASB's
new rules on asset impairment supersede SFAS No. 121, and portions of Accounting
Principles Bulletin Opinion 30, "Reporting the Results of Operations". This new
standard provides a single accounting model for long-lived assets to be disposed
of and significantly changes the criteria that would have to be met to classify
an asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. The Company believes the adoption of this new
Statement will have no material impact on the Company's financial position and
operating results.
3. MARKETABLE SECURITIES
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 and less than one year are classified as marketable securities. Long-term
marketable securities mature within two years. B&N.com classifies investments in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities".
At December 31, 2001 and 2000, marketable securities consisted
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. Long-term marketable securities at December 31, 2000 had
maturities within two years. Unrealized holding gains and losses at December 31,
2001 and 2000 were not significant.
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4. ACQUISITIONS
On November 16, 2000, the Company acquired Fatbrain.com, Inc.
("Fatbrain"), the third largest online bookseller, specializing in professional
and technical titles for the corporate marketplace, for $61,956 (paid 25% in
cash and 75% in stock totaling 12,474 shares). The shares of Fatbrain were
transferred to a wholly owned subsidiary of B&N.com in exchange for additional
Membership Units. Subsequent to the acquisition Fatbrain has been operated as
Fatbrain.com, LLC. The acquisition was accounted for under the purchase method
of accounting and, accordingly, the results of operations for the period
subsequent to the acquisition are included in the consolidated financial
statements of the Company. The excess of purchase price over the net assets
acquired, in the amount of $59,557, has been recorded as goodwill and is being
amortized using the straight-line method over an estimated useful life of three
years. In the fourth quarter of 2001, the Company determined that the carrying
value of the goodwill was impaired, resulting in a charge against the goodwill.
The total impairment of $29,976 was determined by estimating the present value
of the cash flows from Fatbrain over the next five years. As of December 31,
2001, the net balance of the goodwill on the Fatbrain purchase was $13,777 (net
of amortization and impairment charges).
The following table summarizes proforma results of operation as if
the Company had completed the merger as of January 1, 1999:
2000 1999
---- ----
Net sales $ 374,939 $ 229,068
Loss from operations (353,627) (169,815)
Loss before minority interest (329,657) (148,656)
Net loss (90,411) (39,388)
Basic and diluted net loss per share $ (2.09) $ (0.95)
The proforma results of operations include adjustments to give effect
to the amortization of goodwill in each period presented. The information has
been prepared for comparative purposes only and is not necessarily indicative of
the results of operations that actually would have resulted had the acquisition
occurred on the date indicated, or which may result in future periods.
In connection with the acquisition of Fatbrain in 2000, B&N.com
assessed and formulated plans to restructure certain operations of Fatbrain.
These plans involved the closure of the Fatbrain fulfillment facility in
Kentucky as well as a consolidation of administrative operations reducing the
workforce at Fatbrain's office in Santa Clara, California. The objectives of the
plans were to consolidate operations and leverage overhead expenses. The costs
associated with the consolidation effort were recorded as liabilities in the
purchase business combination and consist of severance and other employee costs
of $1,059, of which $1,033 has been paid through the end of 2001, and closure of
the facility of $1,876, of which $1,095 has been paid through the end of 2001.
In January 2000, the Company acquired an approximate 32% interest in
enews, the largest retailer of magazine subscriptions on the Internet, and
warrants to acquire additional common stock, for $26,428 in cash
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
and 714 shares of the Company's stock valued at $12,857, to expand its presence
in the growing on-line magazine subscription market. During 2001, the Company
increased its investment in enews to approximately 49.5%.
Summarized balance sheet information of enews is as follows:
December 31, December 31,
2001 2000
------------ -----------
Current assets ....... $ 293 $ 7,033
Noncurrent assets .... 1,136 12,961
Current liabilities .. 4,099 13,713
Noncurrent liabilities 361 160
Net assets ........... (3,031) 6,121
Summarized statement of operations information for enews, for the
period during which the Company had an investment, is as follows:
Year Ended
December 31, December 31,
2001 2000
------------ -----------
Net sales ......... $ 6,272 $ 7,783
Gross profit (loss) 3,782 (3,737)
Net loss .......... (14,890) (31,362)
In June 2000, B&N.com invested $20,000 in cash for a 25% equity
interest in MightyWords, a provider of digital content. As a result of the
purchase of Fatbrain, the Company owned approximately 53% of the shares in
MightyWords. The Company has accounted for this acquisition using the equity
method of accounting, as control of MightyWords was deemed temporary by the
management of B&N.com. In December 2001, MightyWords Board of Directors voted to
dissolve MightyWords effective as soon as possible. The Company determined that
its investment in MightyWords was impaired and took an impairment charge of
$2,907 based on the estimated net liquidation value of $3,228. Proforma results
of operations of MightyWords have not been included, as they would not have had
a material effect on the overall results of the operations of the Company.
5. FIXED ASSETS
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Fixed assets, at cost, consist of the following:
December 31,
2001 2000
-------- --------
Computers and equipment ...................... $ 80,337 $104,634
Leasehold improvements ....................... 14,760 29,721
Software ..................................... 59,540 62,701
Construction in progress ..................... 2,258 531
-------- --------
156,895 197,587
Less accumulated depreciation ................ 71,124 47,087
-------- --------
Fixed assets, net ...................... $ 85,771 $150,500
======== ========
Due to an impairment of the carrying value of certain fixed assets, B&N.com
recorded an impairment charge of $15,637 during 2001 and $22,938 during 2000
(See Note 7).
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 31,
2001 2000
-------- --------
Accrued merchandise payables.................. $ 34,628 $ 22,485
Accrued special charges....................... 13,447 18,198
Accrued fixed assets.......................... 1,714 10,424
Accrued compensation.......................... 7,674 5,618
Accrued advertising........................... 2,929 4,517
Other......................................... 30,198 28,578
-------- --------
$ 90,590 $ 89,820
-------- --------
7. IMPAIRMENT AND SPECIAL CHARGES
Impairment and Special Charges were $88,213 and $75,051 for the years
ended December 31, 2001 and 2000, respectively. In the fourth quarter of 2001,
B&N.com initiated a company-wide assessment of its cost structure, investments,
and other long-term assets including goodwill. In connection with that
assessment an impairment of fixed assets and other special charges of $88,213
($0.56 per share assuming conversion of membership units) were recorded as a
component of operating expenses during the fourth quarter of 2001. These charges
are primarily related to the following:
Closure of Facilities- B&N.com is consolidating administrative and
functional operations by closing Fatbrain's Santa Clara, California
office. Fatbrain's two retail stores in San Jose and Sunnyvale,
California have also been closed. Charges include exit costs related to
the remaining term of non-cancelable lease obligations of the retail
and Santa Clara facilities, related severance costs, as well as the
abandonment of related fixed assets that will not be suited for future
use in other remaining B&N.com facilities. Furthermore, B&N.com
recently determined it could not effectively utilize the full capacity
of its Reno, Nevada distribution center. Accordingly, following Board
approval on January 29, 2002, B&N.com agreed to transfer the Reno
warehouse lease and sell the Company's inventory located in Reno to
Barnes & Noble. The Board of Barnes & Noble also
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barnesandnoble.com inc. and predecessors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
approved Barnes & Noble's assumption of the lease obligation and the
hiring of all the employees at the Reno facility. The Reno lease
assignment and the transfer of the operations of the Reno facility to
Barnes & Noble is expected to be completed during the first half of
2002. Charges related to the Reno facility include the abandonment of
fixed assets that are not suitable for use at other B&N.com facilities.
Impairment of Fixed Assets- As of December 31, 2001, B&N.com wrote-off
certain fixed assets that were no longer used in operations.
Impairment of Other Non-Current Assets- B&N.com concluded that the
carrying amount of certain equity investments, including Powered.com,
goodwill and other investments, exceeded their fair value and that the
decline was other than temporary. The impairment loss was precipitated
by the significant decline in the value of Internet sector entities,
material changes in business models, and significant, recurring
operating losses.
The consolidation of the Fatbrain administrative and functional
operations is expected to be substantially completed by the first half of 2002,
although the lease on the Santa Clara office expires in 2006. The Company's
special charges of $75,051 ($0.51 per share assuming conversion of membership
units) for the year ended December 31, 2000 were primarily related to the
impairment of fixed and other assets, including equity investments as well as
the consolidation of fulfillment operations.
A summary of the impairment and special charges for the years ended
December 31, 2001 and 2000 are as follows:
December 31,
2001 2000
-------- --------
Facility closure costs................ $ 33,442 $ 4,871
Impairment of Fatbrain goodwill....... 29,976 -
Impairment of equity investments...... 9,158 23,115
Impairment of fixed and other assets.. 15,637 47,065
-------- --------
Total........................... $ 88,213 $ 75,051
-------- --------
The components of the accrued liability associated with the special
charges are as follows:
Balance Subsequent 2001 Balance Due within Due After
31-Dec-00 Accruals Payments 31-Dec-01 12 Months 12 Months
----------- ------------ ------------ ----------- ----------- ---------
Facility/Lease Termination Costs 1,342 6,458 (803) 6,997 3,425 3,572
Employee Termination Benefits 3,529 5,868 (4,961) 4,436 4,436
Other Impairment Charges 13,327 2,014 (13,327) 2,014 2,014
----------------------------------------------------------------------------
18,198 14,340 (19,091) 13,447 9,875 3,572
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barnesandnoble.com inc. and predecessors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
8. INCOME TAXES
The Company did not provide any current or deferred US federal or state
income tax provision or benefit for any of the periods presented because it has
experienced operating losses since inception. At December 31, 2001, the Company
had net operating loss carryforwards of approximately $105,579 related to U.S.
federal and state jurisdictions. Utilization of net operating loss
carryforwards, which begin to expire at various times starting in 2010, may be
subject to certain limitations under the Internal Revenue Code.
The deferred tax asset as of December 31, 2001 was approximately
$39,064, which consisted of net operating loss carryforwards. The Company has
provided a full valuation allowance on the deferred tax asset because of
uncertainty regarding its realization.
9. 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) 10, 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.
10. COMMITMENTS
B&N.com currently leases warehouse facilities, office space and
equipment under non-cancelable operating leases. Rental expense under operating
lease agreements was $7,772, $6,973 and $2,265 for the years ended December 31,
2001, 2000 and 1999 (proforma), respectively.
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barnesandnoble.com inc. and predecessors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Future minimum lease payments under non-cancelable operating leases as of
December 31, 2001 are:
Future
Year ending Minimum Lease
December 31, Payments
--------------------------------------------------------
2002.................................$ 8,652
2003................................. 8,026
2004................................. 7,911
2005................................. 7,309
2006................................. 6,489
Thereafter............................ 35,692
-----------------
$ 74,079
==================
The Company has pledged a portion of its marketable securities for
stand-by letters of credit that guarantee certain real property leases.
Obligations under Letters of Credit as of December 31, 2001 and 2000 were $3,989
and $5,539, respectively. The Reno warehouse lease commitment is included for
the full lease term expiring in 2010. However, if the Reno lease were excluded,
the future minimum lease payments would be reduced by $19,494 to $54,585.
11. EMPLOYEES' RETIREMENT AND DEFINED CONTRIBUTION PLANS
As of June 30, 2000, substantially all employees of the Company were
covered under the Company's Employees' Retirement Plan (the "Retirement Plan").
The Retirement Plan is a defined benefit pension plan. As of July 1, 2000, the
Retirement Plan was amended so that employees no longer earn benefits for
subsequent service. Subsequent service continues to be the basis for vesting of
benefits not yet vested at June 30, 2000 and the Retirement Plan will continue
to hold assets and pay benefits. The amendment was treated as a curtailment in
fiscal 2000.
Actuarial assumptions used in determining the funded status of the
Retirement Plan are as follows:
December 31,
2001 2000
-------- --------
Discount rate (beginning of year)................... 7.75% 7.75%
Discount rate (end of year)......................... 7.25% 7.75%
Expected long-term rate of return on plan assets.... 9.50% 9.50%
Assumed rate of compensation increase............... N/A 4.75%
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barnesandnoble.com inc. and predecessors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
The following table sets forth the funded status of the Retirement Plan
and the pension liability recognized for the Retirement Plan in the accompanying
balance sheets:
December 31,
2001 2000
-------- --------
Actuarial present value of benefit obligation:
Vested benefits ...................................... $(530) $(394)
Non-vested benefits .................................. (283) (287)
----- -----
Accumulated benefit obligation ............................ (813) (681)
Effect of projected future compensation increases ......... -- --
----- -----
Projected benefit obligation .............................. (813) (681)
Plan assets at market value ............................... 896 866
----- -----
Excess (deficiency) of plan assets over projected
benefit obligation .................................. 83 185
Unrecognized net actuarial loss ........................... 285 84
Unrecognized net obligation remaining ..................... -- --
Unrecognized prior service cost ........................... -- --
----- -----
Pension asset.............................................$ 368 $ 269
===== =====
Charges for the Retirement Plan were $0, $156 and $100 for each of the
years ended December 31, 2001, 2000 and 1999 (proforma), respectively.
B&N.com is a participating employer in a defined contribution plan (the
"Savings Plan"), sponsored by Barnes & Noble, 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 basis. B&N.com's
contributions to the Savings Plan are generally in amounts based upon a certain
percentage of the employees' pre-tax contributions. B&N.com provides matching
contributions to participants in the amount of 100% of the first 3% of earnings
and 50% of the next 2% contributed by them, which contributions are made
consistent with the employees direction. The Fatbrain Savings Plan was merged
into the Savings Plan on November 1, 2001. Charges for the Savings Plan were
$794, $428 and $188 for each of the years ended December 31, 2001, 2000 and 1999
(proforma), respectively.
B&N.com's Deferred Compensation Plan is a non-qualified plan,
eligibility for which is limited to "Eligible Executives," who include: (i) the
Company's employees who became B&N.com employees on November 1, 1998 and were
eligible to participate in the Barnes & Noble deferred compensation plan on
October 31, 1998; and (ii) the Company's employees whose base salary for a
calendar year exceeds $130,000. An Eligible Executive may elect in each year he
or she is an Eligible Executive to defer no less than $5,000 and no more than
50% of his or her base salary to a Deferral Account. The Deferral Account of
each Eligible Executive who elects to participate in the Deferred Compensation
Plan (a "Participant") is credited or debited with investment earnings or losses
based upon the performance of the investment fund or index selected by the
Participant from among alternatives selected by an Administrative Committee
appointed by the Compensation Committee of the Board of Directors.
A participant is entitled to a distribution of his or her Deferral
Account upon retirement or following termination of employment, as elected by
the Participant, but no later than the beginning of the year in which the
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barnesandnoble.com inc. and predecessors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Participant would attain age 70 1/2. A Participant may elect whether to receive
the distribution in a lump sum or in annual installments over not more than
fifteen (15) years.
Amounts payable under the Deferred Compensation Plan are general
unsecured obligations of B&N.com, payable out of B&N.com's general assets to the
extent not paid by a grantor trust, which the Company may establish. The Company
may amend or terminate the Deferred Compensation Plan at any time without
affecting any of the rights granted prior to termination.
12. 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 10 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.
A summary of the status of stock options as of December 31, 2001 is
presented below:
Outstanding Options
------------------------------------
Weighted Average
Number of Exercise Price
Shares per Share
-------------- --------------------
Balance December 31, 2000 18,890 4.93
Options granted 9,283 1.29
Options cancelled (9,033) 4.34
-------------- --------------------
Balance December 31, 2001 19,140 3.44
============== ====================
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barnesandnoble.com inc. and predecessors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
The following table summarizes information as of December 31, 2001
concerning outstanding and exercisable options:
Options Outstanding Options Exercisable
-------------------------------------- ----------------------------
Weighted Average
Range of Remaining Weighted Average Weighted Average
Exercise Price Number Contractual Exercise Price Number Exercise Price
per Share Outstanding Life (in years) per Share Exercisable per Share
- ------------------- --------------- --------------------- ---------------- ----------- ---------------
0.8000 - 2.1875 8,821 9.29 1.22 - -
2.5000 - 4.9100 6,159 7.27 3.40 3,922 3.49
5.1250 - 8.0000 3,477 7.64 7.89 1,774 7.89
8.1250 - 18.3750 683 8.32 9.46 174 9.52
--------------- --------------------- ---------------- ----------- ---------------
19,140 8.31 3.43 5,870 5.00
=============== ===================== ================ =========== ===============
Grants during 2001 and 2000 were at fair value. Therefore, no
compensation expense was recorded. On March 1, 2000, the Company repriced
approximately 5 million (net of cancellations) of 16 million then outstanding
options that were originally granted at an average exercise price of $16.15 per
share. The new exercise price for the options is $8.00 per share, the closing
market price of the Company's stock as of March 1, 2000. The options are treated
as variable options, but have had no impact on the Company's financial
statements, as the market value of the Common Stock has not been greater than
$8.00 per share as of December 31, 2000 or during the fiscal year ending
December 31, 2001.
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 net loss would have been
increased to the proforma amounts below:
Year Ended
DECEMBER 31,
------------
2001 2000
----------- -----------
Net loss:
As reported $ (67,386) $ (65,401)
Proforma SFAS 123 (78,833) (72,515)
Basic net loss per share:
As reported (1.54) (2.02)
Proforma SFAS 123 (1.80) (2.24)
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:
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barnesandnoble.com inc. and predecessors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Year Ended
December 31,
------------
2001 2000
----------- -----------
Average risk free interest rates 5.25% 5.25%
Average expected life (in years) 5.00 5.00
Volatility 112.73% 174.58%
The weighted-average fair value of the options granted during the years
2001 and 2000 was estimated to be $1.06 and $6.26, respectively, for options
granted at fair market value.
13. LITIGATION
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 $11,250 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 served an Answer in April 2000 denying the material allegations
of the Second Amended Complaint and asserting various affirmative defenses. On
January 11, 2002, the Company and the other defendants filed a motion for
summary judgment. A hearing on that motion was held on March 22, 2002. 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 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 attorneys' fees and costs. In October 1999, the Company and
B&N.com were added as defendants in the action. In January 2001, the Company and
B&N.com filed a motion for summary judgment seeking dismissal of all plaintiffs'
claims. On March 20, 2001, the court granted that motion and dismissed the
Company and B&N.com from the case.
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. On February 14, 2001, a unanimous decision by the United
States Court of Appeals overturned the
F-23
barnesandnoble.com inc. and predecessors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
preliminary injunction. In March 2002, the parties entered into a confidential
settlement agreement and this lawsuit was dismissed.
In addition to the litigations described above, the Company and B&N.com
are involved in various legal proceedings incidental to the conduct of their
business. The Company does not believe that any of those legal proceedings will
have a material adverse effect on the financial condition, results of operations
or cash flows of the Company or B&N.com.
14. RELATED PARTY TRANSACTIONS
B&N.com has entered into agreements with Barnes & Noble, Bertelsmann
and their affiliates. The Company believes that the transactions and agreements
discussed below (including renewals of any existing agreements) between B&N.com
and its affiliates are at least as favorable to B&N.com as could be obtained
from unaffiliated parties. The Board of Directors and its Audit Committee must
approve in advance any proposed transaction or agreement with affiliates and
will utilize 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.
B&N.com entered into a Supply Agreement dated October 31, 1998, as
amended, with Barnes & Noble (the "Supply Agreement"), whereby Barnes & Noble
has agreed to supply inventory to B&N.com through Barnes & Noble's distribution
facilities and purchasing departments. Pursuant to the Supply Agreement, Barnes
& Noble charges B&N.com its actual cost to acquire the inventory plus any
incremental overhead incurred by Barnes & Noble in connection with providing
such merchandise supply services. The Company purchased $126,217, $107,167 and
$64,112 from Barnes & Noble representing 45%, 54% and 59% of the Company's
purchases for the years ended December 31, 2001, 2000 and 1999, respectively.
The charges for incremental overhead for the year ended December 31, 2001, 2000
and 1999 were $2,369, $1,947 and $1,258, respectively. At December 31, 2001 and
2000, $44,160 and $16,875, respectively, remained payable to Barnes & Noble in
connection with such purchases.
Under a Services Agreement, dated as of October 31, 1998, as amended,
between B&N.com and Barnes & Noble (the "Services Agreement"), B&N.com receives
various administrative services from Barnes & Noble, including, among other
things, services for payroll processing, benefits administration, insurance
(property and casualty, medical, dental and life) and tax administration. In
accordance with the terms of the Services Agreement, B&N.com reimburses Barnes &
Noble in an amount equal to the third-party expenses it incurs to provide such
services, plus any incremental internal costs. B&N.com was charged $4,144,
$1,755 and $1,672 for such services during the year ended December 31, 2001,
2000 and 1999 (proforma), respectively.
In 2001, B&N.com purchased merchandise directly from Calendar Club,
L.L.C. ("Calendar Club"), a company engaged in the wholesaling and retailing of
calendars, in which Barnes & Noble owns a 73.9% interest. B&N.com's purchases
from Calendar Club for the year ended December 31, 2001 totaled $1,110.
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 was
charged by Barnes & Noble $486, $485 and $473 for such subleased space during
the year ended December 31, 2001, 2000 and 1999 (proforma), respectively. The
F-24
barnesandnoble.com inc. and predecessors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
amount paid to Barnes & Noble by B&N.com approximates the cost per square foot
paid by Barnes & Noble as tenant pursuant to its lease of the space from an
unaffiliated third party.
Since 1999, B&N.com has used AEC One Stop Group, Inc. ("AEC'), as its
sole music supplier, and as one of its suppliers of DVD/video. AEC is among the
largest wholesale distributors of music, videos and DVD's in the United States.
AEC also provides B&N.com with a music, DVD and Video product database.
Subsequent to the initial supply arrangement between AEC and B&N.com, AEC's
parent corporation was acquired by an investor group in which Leonard Riggio,
Chairman of the Board of the Company and B&N.com, became a minority investor.
B&N.com was charged by AEC $29,759, $18,541 and $2,908 in connection with this
agreement for merchandise purchased during the years ended December 31, 2001,
2000 and 1999 (proforma), respectively. In addition, B&N.com was charged by AEC
$279, $301 and $19 for database services during the years ended December 31,
2001, 2000 and 1999 (proforma), respectively. At December 31, 2001 and 2000,
$9,307 and $7,803, respectively, remained payable to AEC in connection with this
agreement.
B&N.com licenses the "Barnes & Noble" name under a royalty-free license
agreement, dated as of October 31, 1998, as amended, between B&N.com and Barnes
& Noble College Bookstores, Inc. (the "License Agreement"), of which Leonard
Riggio is the principal stockholder. Pursuant to the License Agreement, the
Company has been granted an exclusive license to use the Barnes & Noble name and
trademark (excluding sales of college textbooks). Under a separate agreement
reached in January 2001, between the Company and Textbooks.com, Inc.
("Textbooks.com") a corporation owned by Leonard Riggio, B&N.com was granted the
right to sell college textbooks on the Internet using the "Barnes & Noble" name.
Pursuant to this agreement, B&N.com pays Textbooks.com a royalty on revenues
(net of product returns, applicable sales tax and excluding shipping and
handling) realized by the Company from the sale of books designated as
textbooks. The term of the agreement is for five years and renews annually for
additional one-year periods unless terminated 12 months prior to the end of any
given term. For the years ended December 31, 2001 and 2000, the Company recorded
royalty expense of $5,981 and $1,500, respectively, under the terms of this
agreement.
B&N.com has various royalty-free non-exclusive licenses dated October
31, 1998, as amended, from Barnes & Noble, and BOL. B&N.com licenses from Barnes
& Noble the right to use Barnes & Noble's database of book bibliographic data as
well as certain software applications. B&N.com licenses from Bertelsmann Online
("BOL"), the subsidiary through which Bertelsmann conducts its Internet
business, its name and trademark for use in B&N.com's operations. Under
Technology Sharing License Agreements, B&N.com was granted a royalty-free
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. All of the agreements described in this paragraph are
subject to certain renewal and termination provisions.
Barnes & Noble commenced a marketing program in November 2000, whereby
a customer purchases a "Readers' Advantage(TM) Card" for a non-refundable annual
membership fee of $25.00. With this card, customers can receive discounts of 10%
on all Barnes & Noble store purchases and 5% on all of their purchases through
the B&N.com Web site. B&N.com and Barnes & Noble have agreed to share the
expenses, net of revenue generated from the sale of the cards, related to this
program in proportion to the discounts customers receive on purchases with each
company. B&N.com's net revenue generated from this program for the year ended
December 31, 2001 was $636. Net revenue generated for the year ended December
31, 2000, was negligible.
F-25
barnesandnoble.com inc. and predecessors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
B&N.com ships, through its fulfillment centers, various customer orders
on behalf of Barnes & Noble to Barnes & Noble retail stores as well as to Barnes
& Noble customers' homes. B&N.com charges Barnes & Noble the costs associated
with such shipments plus any incremental overhead incurred by B&N.com to process
these orders. The fees received are recorded as a reduction of B&N.com's total
fulfillment expense. For the years ended December 31, 2001, 2000 and 1999
(proforma), B&N.com recorded $987, $206 and $191, respectively, for shipping and
handling from Barnes & Noble. In addition, during the year 2001, B&N.com and
Barnes & Noble reached an agreement whereby B&N.com receives a commission on all
items ordered by customers at Barnes & Noble stores and shipped directly to
customers' homes by B&N.com. Commissions for these sales were recorded as
revenue and amounted to $383 for the year ended December 31, 2001.
During 2000 and 2001, Barnes & Noble subleased warehouse space from the
Company in Reno, Nevada. B&N.com charged Barnes & Noble $1,882 and $1,290 for
such subleased space in the years ended December 31, 2001 and 2000,
respectively. Additionally, B&N.com sold $6,186 of warehouse equipment from its
Reno warehouse to Barnes & Noble in 2001. The equipment was sold to Barnes &
Noble at its original cost. B&N.com recently determined it could not effectively
utilize the full capacity of its Reno, Nevada distribution center. Accordingly,
following Board approval on January 29, 2002, B&N.com agreed to transfer the
Reno warehouse lease and sell B&N.com's inventory located in Reno to Barnes &
Noble. Barnes & Noble purchased the inventory from B&N.com at cost for
approximately $10 million. The Board of Barnes & Noble also approved Barnes &
Noble's assumption of the lease obligation and the hiring of all of the
employees at the Reno facility. The Reno lease assignment and the transfer of
the operations of the Reno facility to Barnes & Noble is expected to be
completed during the first half of 2002.
In 2000, B&N.com began purchasing new and used textbooks directly from
MBS, a corporation majority-owned by Leonard Riggio. B&N.com's total purchases
for the year ended December 31, 2001 and 2000 were $13,206 and $5,746,
respectively. In addition, B&N.com maintains a link on its Web site called "Sell
Your Textbooks" which is hosted by MBS and through which B&N.com customers are
able to sell used books directly to MBS. B&N.com is paid a commission based on
the price paid by MBS to the consumer. Total commissions received for the year
ended December 31, 2001 were $16.
Under a Strategic Relationship Agreement, dated as of May 1, 2001 (the
"Strategic Relationship Agreement"), between B&N.com and GameStop, Inc.
("GameStop"), a majority-owned subsidiary of Barnes & Noble, B&N.com's Web site
refers customers to the GameStop Web site for purchases of video game hardware,
software and accessories and PC entertainment software. GameStop pays B&N.com a
referral fee based on its net sales revenue from certain eligible purchases made
by customers as a result of the redirection from the B&N.com Web site. Either
party may terminate the Strategic Relationship Agreement after May 1, 2002 on 60
days' notice. Commissions of $33 were recorded in the year ended December 31,
2001 under this agreement.
B&N.com has a 49.5% equity stake in enews, a company engaged in selling
magazine subscriptions on the Internet, and accounts for this investment under
the equity method. Substantially all of the balance of the shares are owned by
Barnes & Noble. B&N.com fulfills a majority of orders for magazine subscriptions
through enews and records a commission on these sales. Beginning in October
2000, enews subleased space from B&N.com at its New York office for an annual
rent of $95. B&N.com recorded commissions of $590 and $400 for the years ended
December 31, 2001 and 2000, respectively, and was reimbursed $295 and $65,
respectively, for expenses incurred on behalf of enews for the years ended
December 31, 2001 and 2000.
Michael N. Rosen, a director of the Company, is also the Chairman of
Robinson Silverman Pearce Aronsohn & Berman LLP, outside counsel to the Company
and B&N.com.
F-26
barnesandnoble.com inc. and predecessors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth, for the periods indicated, selected
unaudited financial data.
Three Months Ended
------------------------------------------------------------
December 31, September 30, June 30, March 31,
2001 2001 2001 2001
------------- --------------- ----------- ---------------
Net sales $ 115,037 $ 96,838 $ 83,684 $ 109,041
Gross profit 24,438 21,181 20,489 25,127
Net loss (35,251)(1) (10,558) (10,590) (10,987)
Basic net loss per common share (2) $ (0.81) $ (0.24) $ (0.24) $ (0.25)
Weighted average shares 43,787 43,787 43,787 43,787
Three Months Ended
------------------------------------------------------------
December 31, September 30, June 30, March 31,
2000 2000 2000 2000
------------- --------------- ----------- ---------------
Net sales $ 104,639 $ 74,073 $ 67,428 $ 73,975
Gross profit 22,111 14,852 10,462 10,889
Net loss (36,431)(1) (10,260) (9,572) (9,140)
Basic net loss per common share (2) $ (0.97) $ (0.33) $ (0.31) $ (0.30)
Weighted average shares 37,550 31,141 30,783 30,027
The total of quarterly per share amounts may not equal per share
amounts for the full year because of changes in the number of weighted-average
shares outstanding and the effects of rounding.
(1) Includes impairment and other special charges of $88,213 and $75,051
for the three months ended December 31, 2001 and 2000, respectively.
(2) Assumed conversion of Membership Units or exercises of stock options
are not included, as it does not result in dilution.
16. SUBSEQUENT EVENTS
During the first quarter of 2002, the Board of Directors of the Company
approved the transfer of the Reno facility to Barnes & Noble and the Board of
Directors of Barnes & Noble approved Barnes & Noble's assumption of the Reno
lease, the purchase of inventory, and the hiring of all the Reno employees. The
Reno lease assignment and the transfer of the operations of the Reno facility to
Barnes & Noble is expected to be completed during the first half of 2002.
F-27