<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 1999
REGISTRATION NO. 333-64211
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
PRE-EFFECTIVE AMENDMENT NO. 3
TO
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BARNESANDNOBLE.COM INC.
(AS A SUCCESSOR REGISTRANT TO THE BARNESANDNOBLE.COM INC. WHICH FILED THE
ORIGINAL REGISTRATION STATEMENT)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5735 13-4048787
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
76 NINTH AVENUE, 11TH FLOOR
NEW YORK, NEW YORK 10011
(212) 414-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JONATHAN BULKELEY
CHIEF EXECUTIVE OFFICER
76 NINTH AVENUE, 11TH FLOOR
NEW YORK, NEW YORK 10011
(212) 414-6000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
JAY M. DORMAN, ESQ. ROBERT E. BUCKHOLZ, JR., ESQ.
H. LEIGH FELDMAN, ESQ. SULLIVAN & CROMWELL
ROBINSON SILVERMAN PEARCE ARONSOHN & BERMAN LLP 125 BROAD STREET
1290 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10004
NEW YORK, NEW YORK 10104
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS PROPOSED MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE(2)
<S> <C> <C>
Class A Common Stock, par value $.001 per share..................... $517,500,000 $145,565
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
Includes 3,750,000 shares of Class A Common Stock which the Underwriters
have an option to purchase from barnesandnoble.com inc. to cover over-
allotments, if any.
(2) $85,100 of this amount has been paid. The fee with respect to the additional
$217,500,000 being registered hereby is $60,465, which amount is being paid
herewith.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 24, 1999
25,000,000 Shares
barnesandnoble.com inc.
Class A Common Stock [LOGO]
(par value $.001 per share)
----------------------
All of the shares of Class A Common Stock offered hereby are being sold by
the Company. Immediately following the Offering, the holders of the Company's
Class A Common Stock will own over 99.9% of the outstanding capital stock of the
Company. The Company will be a holding company whose sole asset will be its
approximate 17.9% equity interest in barnesandnoble.com llc (20.0% if the
Underwriters' over-allotment option is exercised in full) and whose sole
business will be acting as the sole Manager of barnesandnoble.com llc. As sole
Manager of barnesandnoble.com llc, the Company will control all of the affairs
of barnesandnoble.com llc. Immediately following the Offering, Barnes & Noble,
Inc. and Bertelsmann AG will each beneficially own an approximate 41.1% equity
interest in barnesandnoble.com llc (40.0% if the Underwriters' over-allotment
option is exercised in full).
Holders of the Company's Class A Common Stock generally have rights
identical to holders of the Company's Class B Common Stock and Class C Common
Stock, except that in all matters to be voted on by stockholders, each holder of
the Class A Common Stock is entitled to one vote per share while each holder of
the Class B Common Stock and Class C Common Stock is entitled to a high number
of votes per share. Following the Offering, the shares of Class B Common Stock
and Class C Common Stock will represent less than 0.1% of the outstanding
capital stock of the Company but approximately 97.8% of the combined voting
power of all shares of voting stock of the Company (approximately 97.6% if the
Underwriters' over-allotment option to exercised in full) and each such class
will, pursuant to the Company's Amended and Restated Certificate of
Incorporation, have the right to directly elect three of the Company's
directors. Therefore, as the respective owners of the Class B Common Stock and
the Class C Common Stock, Barnes & Noble, Inc. and Bertelsmann AG will,
collectively, be able to exercise control over all matters requiring stockholder
approval, including the election of all directors and approval of significant
corporate transactions, and over the Company's dividend policy and access to
capital. Each share of Class B Common Stock and Class C Common Stock is
convertible into, and each Membership Unit in barnesandnoble.com llc, other than
those owned by the Company, is exchangeable for, one share of Class A Common
Stock at any time at the option of the holder thereof. See "Risk
Factors--Control by Principal Stockholders," "Risk Factors--Potential Conflicts
of Interest with Barnes & Noble," "Risk Factors--Potential Conflicts of Interest
with Bertelsmann," "Risk Factors--Receipt of Benefits from Barnes & Noble,"
"Management--Governance Documents," "Corporate History and Recapitalization" and
"Description of Capital Stock and Membership Units".
Prior to the Offering, there has been no public market for the Class A
Common Stock. It is currently anticipated that the initial public offering price
will be between $16.00 and $18.00 per share. For factors to be considered in
determining the initial public offering price, see "Underwriting". The
Underwriters have reserved for sale, at the initial public offering price, up to
2,500,000 shares of the Class A Common Stock offered hereby for employees and
directors of the Company and business associates and related persons of the
Company who have expressed an interest in purchasing such shares of Class A
Common Stock in the Offering. The number of shares available for sale to the
general public will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares not so purchased will be offered by the Underwriters
to the general public on the same basis as other shares offered hereby.
See "Risk Factors" beginning on page 9 for considerations relevant to an
investment in the Class A Common Stock.
The Company has filed an application to have the Class A Common Stock listed
on the Nasdaq National Market, under the symbol "BNBN".
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------------
<TABLE>
<CAPTION>
Initial Public Underwriting Proceeds to
Offering Price Discounts(1) Company(2)
-------------- -------------- -------------------
<S> <C> <C> <C>
Per share....................................................... $ $ $
Total(3)........................................................ $ $ $
</TABLE>
- ------------------
(1) The Company and barnesandnoble.com llc have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting".
(2) Before deducting estimated expenses of $1,400,000 payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 3,750,000 shares at the initial public offering price,
less the underwriting discount, solely to cover over-allotments. If such
option is exercised in full, the total initial public offering price,
underwriting discount and proceeds to the Company will be $ , $
and $ , respectively. See "Underwriting".
----------------------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that the shares
will be ready for delivery in New York, New York, on or about , 1999,
against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO. MERRILL LYNCH & CO.
Co-Lead Co-Lead
----------------------
SALOMON SMITH BARNEY
WIT CAPITAL CORPORATION
----------------------
The date of this Prospectus is , 1999.
<PAGE>
[GRAPHIC]
------------------------
PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
[GRAPHIC]
<PAGE>
PROSPECTUS SUMMARY
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results and those of barnesandnoble.com llc
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in Risk
Factors and elsewhere in this Prospectus.
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the financial statements
and the notes thereto appearing elsewhere in this Prospectus. Unless the context
otherwise requires, each reference to: (i) the "Company" refers to
barnesandnoble.com inc., the company whose shares of Class A Common Stock are
being offered hereby; (ii) "bn.com" refers to barnesandnoble.com llc, the
Delaware limited liability company of which the Company will be the sole
Manager; (iii) "Barnes & Noble" refers to Barnes & Noble, Inc. and its
subsidiaries; and (iv) "Bertelsmann" refers to Bertelsmann AG and its
subsidiaries. See "Corporate History and Recapitalization" for a description of
the ownership history and corporate structure of the Company and bn.com. When
this Prospectus discusses the historical business of bn.com, references to
bn.com include all predecessor companies which operated the business currently
conducted by bn.com. Unless otherwise indicated, the information contained in
this Prospectus, including all financial information, assumes that: (i) the
Underwriters' over-allotment option is not exercised; and (ii) the
recapitalization described in "Corporate History and Recapitalization" (the
"Recapitalization") has been completed.
THE COMPANY AND BN.COM
Immediately following the Offering, the holders of the Company's Class A
Common Stock will own over 99.9% of the outstanding capital stock of the
Company. The Company will be a holding company whose sole asset will be its
approximate 17.9% equity interest in bn.com (20.0% if the Underwriter's
over-allotment option is exercised in full) and whose sole business will be to
act as the sole Manager of bn.com. As sole Manager, the Company will control all
of the affairs of bn.com. Immediately following the Offering, Barnes & Noble and
Bertelsmann will collectively own less than 0.1% of the outstanding capital
stock of the Company but will control approximately 97.8% of the voting power of
all shares of voting stock of the Company (approximately 97.6% if the
Underwriters' over-allotment option is exercised in full) and will each
beneficially own an approximate 41.1% equity interest in bn.com (40.0% if the
Underwriters' over-allotment option is exercised in full). Net profits, net
losses and distributions of bn.com will generally be allocated and made pro rata
in accordance with the percentage equity interests of its members. Accordingly,
the Company will be allocated approximately 17.9% (20.0% if the Underwriter's
over-allotment option is exercised in full) of bn.com's net profits and net
losses and will receive approximately 17.9% (20.0% if the Underwriter's
over-allotment option is exercised in full) of bn.com's distributions. See
"Management--Board Committees" and "Management--Governance Documents--Operating
Agreement."
bn.com is a leading online retailer of books and complementary information,
entertainment and intellectual property-based products. Since opening its
initial online store in March 1997, bn.com has sold products to over
1.7 million customers in 181 countries. bn.com's suite of online stores is
anchored by its online bookstore and also includes online stores offering
software, magazines, music and video products, all seamlessly integrated within
its Web site located at www.bn.com. bn.com's online bookstore contains over
8 million in-print and out-of-print books. bn.com, through Barnes & Noble, has
the largest in-stock position of books available for immediate shipping to
customers. In addition to its vast product selection, bn.com's online stores
offer customers fast delivery, deep discounts, secure ordering, rich editorial
content and community experience.
According to Media Metrix, an Internet and digital media measurement
company, in March 1999, bn.com's Web site was the fourth most trafficked
shopping site and was among the top 30 largest Web properties on the Internet.
Distribution and co-marketing agreements with major Web portals and content
sites, such as America Online ("AOL"), Microsoft and Lycos, have extended
bn.com's brand and consumer exposure to its online stores. bn.com has also
established a network of remote storefronts across the Internet by creating
direct links with over 120,000 affiliate Web sites.
3
<PAGE>
During 1998, bn.com introduced many major enhancements to its online
stores, including Express Lane(ServiceMark) one-click ordering, a powerful and
user friendly search engine, email book reviews and product-notification
services, software and magazine stores, a gift center and bargain books store
and online gift certificates. Also during 1998, bn.com established an
out-of-print book service and began to add music and video to its product
offerings, initiatives scheduled to be fully rolled out during 1999.
The new arena of e-commerce provides retailers with the opportunity to
serve a rapidly growing market because consumers are increasingly accepting the
Internet as an alternative shopping channel. According to Jupiter
Communications, an independent media research firm, as of the end of 1998 almost
10 million U.S. households had made at least one online purchase. By the end of
2002 this population is expected to grow to approximately 36.5 million,
representing nearly 60% of overall U.S. online households. Further,
International Data Corporation ("IDC") estimates that the number of Web users
worldwide will exceed 130 million by the end of 1999 and will grow to over
315 million users by the end of 2002. The growth rate of bn.com's customer base
and revenues may be different from the growth rate of households making online
purchases or the growth rate of worldwide Web users.
The book, music, video and software businesses are particularly well suited
for e-commerce because an online store has virtually unlimited shelf space and
can offer consumers anywhere the convenience of browsing through vast product
information databases. The use of sophisticated search engines and personalized
services enables users to locate books and music, for example, with convenience
and speed and to get advance notice about titles in their areas of personal
interest. The Company believes that the presence of an online store on
consumers' desktops will, in and of itself, stimulate demand and expand the
marketplace.
The Company believes that bn.com's relationships with Barnes & Noble, the
nation's largest bookseller based on revenues, and Bertelsmann, one of the
world's largest media companies, provide bn.com with meaningful advantages
relative to other online retailers, including: (i) the superior brand
recognition of the Barnes & Noble trade name, which is a strong motivating
factor in attracting customers, especially with regard to the post-early adopter
market of consumers who have yet to make an online purchase; (ii) the use of
Barnes & Noble's state-of-the-art distribution center as its primary product
supplier, which enables bn.com to offer, through Barnes & Noble, over 750,000
in-stock book titles for fast delivery, representing the largest standing
inventory of any online bookseller; (iii) the enterprise value of Barnes & Noble
and Bertelsmann, including Barnes & Noble's network of over 500 retail
superstores and Bertelsmann's position as one of the largest integrated media
companies in the world, which provides a significant advantage in negotiating
with online portals, distribution partners, and content and media companies as
well as with other strategic partners; (iv) the potential ability to conduct
cross-marketing, co-promotion and customer acquisition programs with
Bertelsmann's U.S. book clubs, which will provide bn.com with access to millions
of established book buyers; (v) the ability to directly link and cross-promote
bn.com's online bookstore with the online bookstores operated or intended to be
operated by Bertelsmann Online ("BOL") in the United Kingdom, Germany, France,
the Netherlands and Italy, which will enable bn.com to more rapidly acquire new
streams of international customers; and (vi) ongoing access to the substantial
bookselling and direct marketing knowledge and experience of the management of
Barnes & Noble and Bertelsmann.
The Company and bn.com's relationship with Barnes & Noble, Bertelsmann and
their respective affiliates: (i) could cause conflicts of interest to arise
between the Company and Barnes & Noble or Bertelsmann; and (ii) have resulted
and may in the future result in limitations on the business of bn.com. Such
conflicts may arise due to common directors and officers and competing
businesses, and such limitations include the prohibitions placed on bn.com from
generating revenue from the sale of non-English-language books, in promoting the
sale of textbooks and from engaging in the book club business. See "Risk
Factors--Potential Conflicts of Interest with Barnes & Noble," "Risk Factors--
Potential Conflicts of Interest with Bertelsmann," "Risk Factors--Limitations on
bn.com's Business" and "Management--Governance Documents--Operating Agreement"
for a more detailed discussion of such conflicts and restrictions.
bn.com seeks to become the leading online retailer for consumers who want
to purchase books and complementary information-based products. Central to
achieving this objective, bn.com's operating strategy is focused on rapidly
extending its brand and increasing its customer base by: (i) continually
4
<PAGE>
enhancing the user experience of its online stores; (ii) offering a large
product selection and fast delivery; (iii) continuing to expand the product
offering within its online stores; (iv) advertising as well as cross-marketing
with Barnes & Noble and Bertelsmann properties; (v) utilizing its other
relationships with Barnes & Noble and Bertelsmann to the fullest extent possible
in order to drive more users to its online stores; (vi) strengthening and
expanding its strategic alliances with third-party Web sites and content
providers; (vii) pursuing acquisitions, joint ventures and other similar
strategic investments and relationships with complementary businesses and
companies; (viii) continuing to increase the number of Web sites in its
affiliate network; and (ix) continuing to invest in technology to further
develop state-of-the-art product, service and logistics platforms.
Prior to October 31, 1998, the business of bn.com was conducted through a
wholly owned subsidiary of Barnes & Noble. Effective October 31, 1998, Barnes &
Noble and Bertelsmann completed a transaction which established bn.com as the
owner and operator of bn.com's business (the "Formation Transaction"), with each
of Barnes & Noble and Bertelsmann having a 50.0% equity interest therein.
Immediately following the Offering, the Company, Barnes & Noble and Bertelsmann
will each have an approximate 17.9%, 41.1% and 41.1% equity interest in bn.com,
respectively, and the Company will become the sole Manager of bn.com. The
Company was incorporated on March 10, 1999 in the State of Delaware. See
"Corporate History and Recapitalization."
Below is a chart which sets forth the structure of the Company and bn.com
as of the date of the completion of the Offering:
[FLOW DIAGRAM]
Immediately following the Offering, bn.com will be controlled by the
Company as sole Manager of bn.com. Immediately following the Offering, the
holders of the Class A Common Stock will own over 99.9% of the outstanding
capital stock of the Company. However, the Company will be controlled by Barnes
& Noble and Bertelsmann, who, through their ownership of the Company's Class B
Common Stock and Class C Common Stock (collectively, "High Vote Stock"), will:
(i) each control approximately 48.9% of the voting power of all shares of voting
stock of the Company; (ii) each be able to directly elect three of the Company's
nine directors; and (iii) collectively be able to control the election of the
Company's remaining three directors. See "Risk Factors--Control by Principal
Stockholders" and "Management--Governance Documents."
5
<PAGE>
The principal executive offices of the Company and bn.com are located at 76
Ninth Avenue, 11th floor, New York, New York 10011. The Company's phone number
is 212-414-6000, and bn.com's online stores are located at www.bn.com and on AOL
(keyword bn).
barnesandnoble.com, bn.com, Express Lane(ServiceMark), the BN Top
100(ServiceMark) and E-nnouncements(ServiceMark) are trademarks and service
marks of bn.com. This Prospectus contains other product names, trade names,
trademarks and service marks of the Company and bn.com and of other
organizations, all of which are the property of their respective owners.
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock offered by the
Company................................... 25,000,000 shares
Common Stock to be outstanding after the
Offering:
Class A Common Stock(1)................... 25,000,000 shares(2)
Class B Common Stock(1)................... 1 share
Class C Common Stock(1)................... 1 share
Use of Proceeds
By the Company............................ To acquire 25,000,000 Membership Units in bn.com ("Membership
Units") representing an approximate 17.9% equity interest in bn.com
(or 28,750,000 Membership Units, representing a 20.0% equity
interest in bn.com, if the Underwriters' over-allotment option is
exercised in full). See "Use of Proceeds" and "Corporate History and
Recapitalization."
By bn.com................................. To fund anticipated operating losses, including sales and marketing
expenses and payments due under strategic alliances; enhancements to
bn.com's online stores and other capital expenditures; working
capital; and other general corporate purposes, including possible
investments in complementary businesses and acquisitions. See "Use
of Proceeds."
Voting Rights............................... The holders of Class A Common Stock generally have rights identical
to holders of High Vote Stock, except that each holder of Class A
Common Stock is entitled to one vote per share and each holder of
High Vote Stock is entitled to the number of votes per share equal
to:
o (i) ten, multiplied by the sum of (a) the aggregate number of
High Vote Stock owned by such holder and (b) the aggregate
number of Membership Units owned by such holder; divided by
o (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 Stock and
High Vote Stock (collectively
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
"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. See "Risk Factors--Control by
Principal Stockholders," "Management--Governance Documents." and
"Description of Capital Stock and Membership Units--Common Stock."
Membership Units to be outstanding after the
Offering(1)............................... 140,000,002
Proposed Nasdaq National Market
symbol.................................... "BNBN"
</TABLE>
- ------------------
(1) Shares of High Vote Stock are convertible into, and Membership Units not
owned by the Company are exchangeable for, shares of Class A Common Stock at
any time by the holder thereof on a one-for-one basis. If, immediately
following the Offering, Barnes & Noble and Bertelsmann converted their High
Vote Stock and exchanged their Membership Units, they would each own
approximately 41.1% of the outstanding Class A Common Stock (40.0% if the
Underwriters' over-allotment option is exercised in full). See "Description
of Capital Stock and Membership Units."
(2) Excludes options to purchase shares of Class A Common Stock granted under
the Company's 1999 Incentive Plan (the "Incentive Plan"). As of March 31,
1999, options for 17,856,441 shares at a weighted average exercise price of
$4.34 per share were outstanding under the Incentive Plan. See
"Management--Incentive Plan" and "Description of Capital Stock and
Membership Units."
7
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS OF DOLLARS)
The summary 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 Prospectus. The following table sets forth the historical summary data
for bn.com for the years ended December 31, 1997 and 1998, and the three-month
period ended March 31, 1998 and 1999. This data, other than the March 31, 1998
and March 31, 1999 data, has been derived from the Financial Statements, which
have been audited by BDO Seidman, LLP, independent certified public accountants,
and are included elsewhere in this Prospectus. Also set forth below are the pro
forma Statement of Operations Data for the Company and bn.com on a consolidated
basis for the year ended December 31, 1998 and the three-month period ended
March 31, 1999, which reflects the Recapitalization and the completion of the
Offering as if they had occurred on January 1, 1998, and the Balance Sheet Data
for the Company and bn.com on a consolidated basis as of March 31, 1999, which
reflects the Recapitalization, the contribution by Bertelsmann of an additional
$50 million in cash prior to the completion of the Offering and the completion
of the Offering as if they had occurred on March 31, 1999. The operating results
are not necessarily indicative of the operating results for any future period.
<TABLE>
<CAPTION>
BN.COM COMPANY(1)(2)
----------------------------------------------- -----------------------------------
YEAR ENDED THREE MONTHS THREE MONTHS
DECEMBER 31, ENDED MARCH 31, YEAR ENDED ENDED
-------------------- ----------------------- DECEMBER 31, 1998 MARCH 31, 1999
1997 1998 1998 1999 PRO FORMA PRO FORMA
-------- -------- -------- ----------- ----------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $ 11,949 $ 61,834 $ 9,013 $ 32,317 $ 61,834 $ 32,317
Loss before minority
interest.............. (13,552) (83,148) (9,496) (20,218) (83,148) (20,218)
Minority interest....... -- -- -- -- 68,265 (3) 16,599 (3)
Net loss................ $(13,552) $(83,148) $ (9,496) $ (20,218) $ (14,883)(4) $ (3,619)(4)
</TABLE>
- ------------------
<TABLE>
<CAPTION>
AS OF
MARCH 31,
AS OF DECEMBER 31, AS OF 1999
-------------------- MARCH 31, PRO FORMA
1997 1998 1999
-------- -------- ----------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ -- $ 96,940 $ 60,936 $559,664
Working capital......... 3,176 78,681 57,057 555,785
Total assets............ 26,327 202,144 168,208 616,308
Minority interest(5).... -- -- -- 490,162
Equity(6)............... $ 19,213 $169,149 $ 148,931 $106,869
</TABLE>
- ------------------
(1) Represents the consolidated financial data of the Company and bn.com on
a pro forma basis.
(2) Reflects the structure of the Company and bn.com as of the date of the
completion of the Offering, the receipt of the Offering proceeds of
approximately $398 million (after deducting the underwriting discount
and commissions and estimated Offering expenses), and gives effect to
the Recapitalization, the reclassification of approximately
$51 million of restricted cash to cash and cash equivalents, and the
contribution by Bertelsmann of an additional $50 million in cash prior
to the completion of the Offering. The pro forma operating results are
not necessarily indicative of future results because, among other
things, they do not reflect any earnings from the investments of the
net proceeds of the Offering. See "Corporate History and
Recapitalization."
(3) Represents the allocation of approximately 82.1% of the loss to Barnes
& Noble and Bertelsmann.
(4) Represents the net loss attributable to the Company.
(5) Includes the reclassification of the equity interest of Barnes & Noble
and Bertelsmann to minority interest, and the additional $50 million
contribution by Bertelsmann in cash prior to the completion of the
Offering.
(6) The actual amounts as of December 31, 1997, December 31, 1998 and
March 31, 1999 reflect the members' equity of bn.com. The pro forma
amount reflects the stockholders' equity of the Company and the
reclassification of members' equity to minority interest after the
Offering.
8
<PAGE>
RISK FACTORS
The following risk factors, as well as the other information contained in
this Prospectus, should be considered carefully before purchasing the Class A
Common Stock offered hereby. This Prospectus contains forward-looking statements
that address, among other things, business strategy, use of proceeds, projected
capital expenditures, liquidity, possible business relationships, and possible
effects of changes in government regulation, with respect to the Company and
bn.com. These statements may be found under "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," as well as in this
Prospectus generally. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including those factors discussed below and set forth in this Prospectus
generally. The risk factors set forth below primarily relate to the business of
bn.com. Such risks also affect the Company because the Company's sole asset
following the Offering will be an approximate 17.9% equity interest in bn.com.
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; ANTICIPATED LOSSES
bn.com launched its initial online store in March 1997. Accordingly, bn.com
has only a limited operating history upon which an evaluation of bn.com and its
prospects can be based. In addition, since inception, bn.com has accumulated net
losses of $116.9 million through March 31, 1999, primarily as a result of
development costs associated with opening its online stores and its marketing
efforts, which include payments to strategic alliance partners (cumulatively
$27.2 million through March 31, 1999) such as AOL, Microsoft and Lycos, as well
as payments made for advertising (cumulatively $49.0 million through March 31,
1999). The Company anticipates that bn.com will incur significant additional
costs to fund increased marketing initiatives, additional strategic alliances,
enhancements to bn.com's online stores, and technological and hardware
improvements. Although the Company anticipates increases in bn.com's revenues,
significant operating losses are anticipated for at least the foreseeable
future. To the extent that such expenses do not result in appropriate revenue
increases, bn.com's business, financial condition, results of operations or
prospects may be materially adversely affected.
COMPETITION
Both the e-commerce market and retail bookselling business are highly
competitive. Since the introduction of e-commerce to the Internet, the number of
e-commerce Web sites competing for customer attention has increased rapidly. The
Company expects future competition to intensify given the relative ease with
which new Web sites can be developed. The Company believes that the primary
competitive factors in e-commerce are brand recognition, site content, ease of
use, price, fulfillment speed, customer support and reliability. The Company
believes that bn.com's success will depend heavily upon its ability to provide a
compelling and satisfying shopping experience. The Company believes that other
factors that will affect bn.com's success include bn.com's continued ability to
attract experienced marketing, technology, operations and management talent. The
nature of the Internet as an electronic marketplace (which may, among other
things, facilitate competitive entry and comparison shopping) may render it
inherently more competitive than traditional retailing formats. Increased
competitiveness among online retailers may result in reduced operating margins,
loss of market share and a diminished brand franchise. See
"Business--Competition."
With respect to the sale of books, which constitutes bn.com's largest
source of revenue, bn.com currently competes with numerous booksellers including
other Internet-based companies, such as Amazon.com, and traditional book
retailers. With respect to the sale of music, software and videos, bn.com
competes with numerous merchants including other Internet-based companies, such
as Amazon.com, CDnow, Reel.com, Beyond.com and traditional retailers. bn.com's
main online competitor, Amazon.com, has a longer online operating history and a
larger existing customer base than bn.com. The Company is aware that Amazon.com
has and may continue to adopt aggressive pricing and marketing strategies, such
as its recently implemented policy to discount New York Times bestsellers by 50%
off publishers' list prices, which policy was immediately matched by bn.com. The
Company is also aware of other online retailers that are offering substantial
discounts on products,
9
<PAGE>
including books, music, software and videos, which are subsidized by advertising
revenue from their Web sites. An increase in the prevalence of this type of
business model could lead to additional pricing pressures on bn.com's products.
If and when bn.com decides to add additional products in its online stores, it
will probably face intense competition for those products as well. See
"Business--Competition."
MANAGEMENT OF GROWTH
Recent growth has placed, and is expected to continue to place, a
significant strain on bn.com's managerial, operational and technical resources.
The Company expects bn.com's operating expenses and staffing levels to increase
substantially in the future. To manage its growth, bn.com must expand its
operational and technical capabilities and manage its employee base while
effectively administering multiple relationships with various third parties.
There can be no assurance that bn.com will be able to manage its expanding
operations effectively. Any failure of bn.com to implement cohesive management
and operating systems, add resources on a cost effective basis or manage
bn.com's expansion could have a material adverse effect on bn.com's business,
financial conditon, results of operations or prospects.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company expects that bn.com will experience significant fluctuations in
its future quarterly operating results due to a variety of factors, many of
which are outside of bn.com's control. The Company believes that factors that
may adversely affect bn.com's quarterly operating results include: (i) bn.com's
ability to retain existing customers, attract new customers at a steady rate and
maintain customer satisfaction; (ii) bn.com's ability to acquire product and to
manage fulfillment operations; (iii) bn.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 bn.com and its competitors; (v) price competition; and (vi) bn.com's ability
to upgrade and develop its systems and infrastructure. Consequently, the Company
believes that period-to-period comparisons of bn.com's operating results will
not necessarily be meaningful and should not be relied upon as any indication of
future performance. bn.com's future quarterly operating results from time to
time may not meet the expectations of securities analysts or investors, which
may have a material adverse effect on the market price of the Class A Common
Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Quarterly Results of Operations and Seasonality."
CONTROL BY PRINCIPAL STOCKHOLDERS
Upon the completion of the Offering, Barnes & Noble will beneficially own
all of the issued and outstanding Class B Common Stock and approximately 41.1%
of the outstanding Membership Units, and Bertelsmann will beneficially own all
of the issued and outstanding Class C Common Stock and approximately 41.1% of
the outstanding Membership Units. Accordingly, following the closing of the
Offering, Barnes & Noble and Bertelsmann will, collectively, own less than 1.0%
of the outstanding Common Stock but will control approximately 97.8% of the
voting power of all shares of voting stock of the Company. Pursuant to the
Amended Charter, each of the holders of the High Vote Stock will have the right
to directly elect three of the Company's nine directors. The holders of the High
Vote Stock will also control the election of the remaining three directors. This
control may continue in the future through the High Vote Stock even if Barnes &
Noble and Bertelsmann, through their ownership of Common Stock and Membership
Units, own a minority economic interest in the Company's business. See
"Management--Governance Documents," "Corporate History and Recapitalization" and
"Description of Capital Stock and Membership Units."
10
<PAGE>
As a result, Barnes & Noble and Bertelsmann will, collectively, be able to
exercise control over all matters requiring stockholder approval, including the
election of all directors and approval of significant corporate transactions.
This ownership may have the effect of delaying or preventing a change in control
of the Company. Similarly, through their control of the Company, Barnes & Noble
and Bertelsmann will also control all affairs of bn.com, including the approval
of significant transactions. See "--Risk of Deadlock," "--Potential Conflicts of
Interest with Barnes & Noble," "--Potential Conflicts of Interest with
Bertelsmann," "--Limitations on bn.com's Business," "--Receipt of Benefits from
Barnes & Noble," "--Dependence on Key Supplier," "Business--Related Party
Agreements," "Management--Governance Documents," "Principal Stockholders,"
"Certain Transactions" and "Description of Capital Stock and Membership Units."
RISK OF DEADLOCK
Since Barnes & Noble and Bertelsmann equally share collective control of
the Company and bn.com, should they disagree on any significant matter or the
direction of bn.com, the business of bn.com may be affected during the time of
such disagreement. If such disagreement cannot be resolved, or if their
relationship should deteriorate as a result of such disagreement, it could have
a material adverse effect on the business, financial condition, results of
operations or prospects of the Company and bn.com. See "--Control by Principal
Stockholders."
POTENTIAL CONFLICTS OF INTEREST WITH BARNES & NOBLE
Following the Offering, Barnes & Noble will beneficially own approximately
48.9% of the voting power of all shares of voting stock of the Company. Mr.
Leonard Riggio, who serves as Chairman of both Barnes & Noble and the Company,
currently beneficially owns 21.9% of the common stock of Barnes & Noble.
Additionally, each of Stephen Riggio, who is the Vice Chairman and a director of
Barnes & Noble, and Michael N. Rosen, who is the Secretary and a director of
Barnes & Noble, is a director of the Company. Barnes & Noble's continuing
beneficial ownership of the Common Stock, the ownership of Barnes & Noble common
stock by directors and officers of the Company and their service as directors or
officers of both the Company & Barnes & Noble, could create conflicts of
interest when those directors and officers are faced with decisions that could
have different implications for Barnes & Noble and the Company or bn.com,
including potential acquisitions of businesses, effects of competition, the
issuance or disposition of securities by the Company, the election of new or
additional directors, the payment of dividends by the Company and bn.com and
other matters.
The Company has not instituted any formal plan or arrangement to address
potential conflicts of interest that may arise among the Company or bn.com,
Barnes & Noble and their affiliates. However, under Delaware corporate law,
officers and directors of the Company owe fiduciary duties to the Company and
its stockholders. Additionally, under Delaware law, contracts between a
corporation and a director, or another corporation in which a director has a
financial interest, may be approved by disinterested directors or by
stockholders. See "--Limitations on bn.com's Business," and
"Management--Governance Documents."
POTENTIAL CONFLICTS OF INTEREST WITH BERTELSMANN
Following the Offering, Bertelsmann will beneficially own approximately
48.9% of the voting power of all shares of voting stock of the Company.
Bertelsmann also owns, among other things, Random House, Inc., the largest book
publisher in the U.S., BMG Entertainment, one of the largest music companies in
the U.S., and BOL, which intends to operate online stores in the United Kingdom,
Germany, France, the Netherlands and Italy. Bertelsmann's publishing companies
may sell the books they publish on their Web sites, and BOL.UK, BOL.New Zealand
and BOL.Australia may sell English-language books. BOL Web sites operating in
countries that are not English-Speaking Countries ("English-Speaking Countries"
being defined as the U.S., Canada, the U.K., Australia and New Zealand,
collectively) will contain equally prominent links to bn.com and one BOL Web
site for the sale of English-language books.
11
<PAGE>
Additionally, it is possible that Bertelsmann's businesses may compete
directly with bn.com in other areas where neither Barnes & Noble nor Bertelsmann
have agreed to any type of exclusivity, such as in the sale over the Internet of
videos, software or music. Bertelsmann currently owns Getmusic.com, an Internet
music retailer. Pursuant to the Formation Transaction, bn.com has entered into
agreements which allow Bertelsmann to view, obtain and use bn.com's technology,
which, except as indicated above, may be used by Bertelsmann to compete with
bn.com.
Dr. Thomas Middelhoff, Mr. Markus Wilhelm and Dr. Klaus Eierhoff, who serve
as directors of the Company, also serve as directors or executive officers of
entities within the Bertelsmann group of companies.
Bertelsmann's continuing beneficial ownership of the Common Stock and the
services provided by directors of the Company as directors or executive officers
of entities within the Bertelsmann group of companies could create conflicts of
interest when those directors are faced with decisions that could have different
implications for Bertelsmann and the Company or bn.com, including potential
acquisitions of businesses, effects of competition, the issuance or disposition
of securities by the Company or bn.com, the election of new or additional
directors, the payment of dividends by the Company and bn.com and other matters.
The Company has not instituted any formal plan or arrangement to address
potential conflicts of interest that may arise among the Company or bn.com and
Bertelsmann and their affiliates. However, under Delaware corporate law,
officers and directors of the Company owe fiduciary duties to the Company and
its stockholders. Additionally, under Delaware law, contracts between a
corporation and a director, or another corporation in which a director has a
financial interest, may be approved by disinterested directors or by
stockholders. See "--Limitations on bn.com's Business" and
"Management--Governance Documents."
LIMITATIONS ON BN.COM'S BUSINESS
Pursuant to the Second Amended and Restated Limited Liability Company
Agreement of bn.com (the "Operating Agreement"), bn.com provides the exclusive
means for both Barnes & Noble and Bertelsmann to sell English-language books in
English-Speaking Countries through the Internet, except that the Web sites of
Bertelsmann's publishing companies may sell the books they publish on their Web
sites, and BOL.UK, BOL.New Zealand and BOL.Australia may sell English-language
books. BOL Web sites operating in non-English-Speaking Countries will contain
equally prominent links to bn.com and one BOL Web site for the sale of
English-language books. bn.com is prohibited from selling non-English-language
books, except through links with Bertelsmann Web sites for which bn.com receives
no revenue. Pursuant to the Operating Agreement, bn.com is also prohibited from
entering the book club business. The Amended and Restated Trademark License
Agreement among Barnes & Noble College Bookstores, Inc. ("B&N College") and
bn.com (the "Trademark License Agreement"), prohibits bn.com from using the
Barnes & Noble name for selling textbooks, except for sales of textbooks that
are immaterial, incidental and unsolicited. These restrictions will limit
bn.com's opportunities to grow its business through these prohibited activities.
See "Management--Governance Documents."
RECEIPT OF BENEFITS FROM BARNES & NOBLE
bn.com obtains products and services from Barnes & Noble, including having
access to Barnes & Noble's inventory of books and obtaining the benefits of
Barnes & Noble's purchasing discounts, state-of-the-art distribution center,
proprietary book title database and the promotion of the online store in Barnes
& Noble stores located in New York, New Jersey, Virginia, Alaska, Delaware,
Montana, New Hampshire and Oregon. The inability of bn.com to obtain these
products or services for any reason, including any termination of the agreements
between bn.com and Barnes & Noble with respect to such products and services,
could have a material adverse effect on bn.com's business, financial condition,
results of operations or prospects. Additional growth by bn.com may require it
to expand its distribution facilities beyond the Barnes & Noble distribution
facilities which it currently utilizes.
bn.com has entered into several agreements with Barnes & Noble and/or its
affiliates, including: (i) a Supply Agreement (the "Supply Agreement"), pursuant
to which Barnes & Noble supplies
12
<PAGE>
merchandise to bn.com; (ii) the Trademark License Agreement pursuant to which
bn.com licenses the Barnes & Noble name; and (iii) an Amended and Restated
Database and Software License Agreement (the "Database License Agreement"),
pursuant to which bn.com licenses the Barnes & Noble database.
bn.com also receives various services from Barnes & Noble and its
subsidiaries including, among others, services for payroll processing, benefits
administration, insurance (property and casualty, medical, dental and life),
tax, merchandising, traffic, fulfillment and telecommunications. In accordance
with the terms of each of the services agreements between bn.com and Barnes &
Noble and its subsidiaries (the "Services Agreements"), bn.com has paid, and
expects to continue to pay, fees to Barnes & Noble and its subsidiaries in an
amount equal to the costs of such services plus incremental overhead. In the
opinion of management, these allocations were made on a reasonable and
consistent basis; however, they are not necessarily indicative of, and it is not
practicable for management to estimate, the level of expenses which might have
been incurred had bn.com been operating as a separate, stand-alone company.
Should bn.com's relationship with Barnes & Noble terminate, and, as a
result of such termination, bn.com were to lose the benefits of the foregoing
agreements, it could have a material adverse effect on bn.com's business,
financial condition, results of operations or prospects. See "Business--Related
Party Agreements" and "Certain Transactions."
DEPENDENCE ON KEY SUPPLIER
Through its distribution facilities, Barnes & Noble accounted for
approximately 38.5% and 60.3% of bn.com's purchases during 1997 and 1998,
respectively. Pursuant to the Supply Agreement, bn.com may, at its option,
source its merchandise through Barnes & Noble, with Barnes & Noble charging
bn.com the cost of such merchandise plus incremental overhead. In connection
with the Offering, this agreement will be amended to provide that it may be
terminated by bn.com upon the approval of a majority of the directors nominated
by the holders of the Class C Common Stock (each a "Class C Director"), upon
30 days' prior written notice to Barnes & Noble, and may be terminated by Barnes
& Noble: (i) on continuing default by bn.com; (ii) on a bankruptcy or
liquidation event of bn.com or of Barnes & Noble; and (iii) at any time after
June 1, 2004 if Bertelsmann shall have effected a permitted transfer to any
third party pursuant to the Operating Agreement or if either Barnes & Noble or
Bertelsmann owns less than 15% of the outstanding Membership Units. There can be
no assurance that if the Supply Agreement were terminated, bn.com would be able
to find an alternative, comparable supplier capable of providing product on
terms satisfactory to bn.com or as favorable to bn.com. To date, Barnes & Noble
has satisfied bn.com's requirements on a timely basis. However, to the extent
that Barnes & Noble does not have sufficient capacity and is unable to satisfy
on a timely basis increasing requirements of bn.com, such capacity constraint
could have a material adverse effect on bn.com's business, financial condition,
results of operations or prospects. See "--Potential Conflicts of Interest with
Barnes & Noble," "--Potential Conflicts of Interest with Bertelsmann,"--"Receipt
of Benefits from Barnes & Noble" "Business-Related Party Agreements" and
"Certain Transactions."
DEPENDENCE UPON STRATEGIC ALLIANCES
bn.com relies on strategic alliances with third-party Web sites and content
providers to attract users to its online stores. bn.com has entered into various
agreements with companies to attract users from numerous other Web sites or
online service providers, including AOL, Microsoft and Lycos, which are
described in more detail in "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." The
Company believes that such alliances result in increased traffic to bn.com's
online stores. bn.com's ability to generate revenues from e-commerce may depend
on the increased traffic, purchases, advertising and sponsorships that bn.com
expects to generate through such strategic alliances. There can be no assurance
that these agreements will be maintained beyond their initial terms or that
additional third-party agreements will be available to bn.com on acceptable
commercial terms or at all. In addition, significant strategic alliance
agreements, like those with AOL, have traditionally been exclusive arrangements.
Accordingly, the failure to renew any such agreement may prevent bn.com from
continuing such relationship for the term of any new agreement by such party
with a competitor of bn.com. The inability to enter into new, and to maintain
13
<PAGE>
any one or more of its existing, significant strategic alliances could have a
material adverse effect on bn.com's business, financial condition, results of
operations or prospects. See "Business--Marketing and Promotion."
RISKS OF THE INTERNET AS A MEDIUM FOR COMMERCE
Consumer use of the Internet as a medium for commerce is a recent
phenomenon and is subject to a high level of uncertainty. The Internet may not
prove to be a viable commercial marketplace because of inadequate development of
the necessary infrastructure, such as reliable network backbones, or
complementary services, such as high speed modems and security procedures for
financial transactions. The viability of the Internet or its viability for
commerce may prove uncertain due to delays in the development and adoption of
new standards and protocols (for example, the next generation Internet Protocol)
to handle increased levels of Internet activity or due to increased government
regulation or taxation.
While the number of Internet users has been rising, the Internet
infrastructure may not expand fast enough to meet the increased levels of
demand. The increased use of the Internet as a medium for commerce raises
concerns regarding Internet security, reliability, pricing, accessibility and
quality of service. If use of the Internet does not continue to grow, or if the
necessary Internet infrastructure or complementary services are not developed to
effectively support growth that may occur, bn.com's business, financial
condition, results of operations or prospects could be materially adversely
affected. In addition, the nature of the Internet as an electronic marketplace
(which may, among other things, facilitate competitive entry, comparison
shopping and advertising revenue supported business models) may render it
inherently more competitive than conventional retailing formats.
RAPID TECHNOLOGY CHANGE
To remain competitive, bn.com must continue to enhance and improve the
responsiveness, functionality and features of its online stores. The Internet
and the e-commerce industry are characterized by rapid technological change,
changes in user and customer requirements and preferences, frequent new product
and service introductions embodying new technologies and the emergence of new
industry standards and practices that could render bn.com's existing online
stores and proprietary technology and systems obsolete. bn.com's success will
depend, in part, on its ability to license leading technologies useful in its
business, enhance its existing services, develop new services and technology
that address the increasingly sophisticated and varied needs of its existing and
prospective customers and respond to technological advances and emerging
industry standards and practices on a cost-effective and timely basis.
The development of a Web site and other proprietary technology entails
significant technical, financial and business risks. Further, the adoption of
new Internet, networking or telecommunications technologies may require bn.com
to devote substantial resources to modify and adapt its services. There can be
no assurance that bn.com will successfully implement new technologies or adapt
its online stores, proprietary technology and transaction-processing systems to
customer requirements or emerging industry standards. If bn.com is unable, for
technical, legal, financial or other reasons, to adapt in a timely manner in
response to changing market conditions or customer requirements, such failure
could have a material adverse effect on bn.com's business, financial condition,
results of operations or prospects.
SECURITY RISKS
Public concern over Internet security has been, and may continue to be, a
hinderance to mass market commercial use of the Internet. Despite the
implementation of network security measures by bn.com, its infrastructure is
potentially vulnerable to computer break-ins and similar disruptive problems
caused by its customers or others. Computer viruses, break-ins or other security
problems could lead to misappropriation of proprietary information and
interruptions, delays or cessation in service to bn.com's customers. Any
computer break-in could affect consumer confidence in the security of bn.com and
could seriously damage its business. Moreover, until more comprehensive security
technologies are
14
<PAGE>
developed, the security and privacy concerns of existing and potential customers
may hinder the growth of the Internet as a mass market medium for commerce.
RISK OF SYSTEM FAILURE OR INADEQUACY
bn.com's operations are dependent on its ability to maintain its computer
and telecommunications equipment in effective working order and to protect its
systems against damage from fire, natural disaster, power loss,
telecommunications failure or similar events. In addition, the growth of
bn.com's customer base may strain or exceed the capacity of its computer and
telecommunications systems and lead to degradations in performance or systems
failure. From time to time, bn.com has experienced capacity constraints and
failure of its information systems which have resulted in decreased levels of
service delivery or interruptions in service to its customers. While bn.com
continually reviews and seeks to upgrade its technical infrastructure and
provides for system redundancies and backup power to limit the likelihood of
systems overload or failure, any damage, failure or delay that causes
interruptions in bn.com's operations could have a material adverse effect on
bn.com's business, financial condition, results of operations or prospects.
RISKS ASSOCIATED WITH DOMAIN NAMES
bn.com currently holds various Web domain names relating to its brand,
including "www.bn.com." Currently, the acquisition and maintenance of domain
names is regulated by governmental agencies and their designees. For example, in
the U.S., the National Science Foundation has appointed Network Solutions, Inc.
as the current exclusive registrar for the ".com," ".net" and ".org" generic
top-level domains. The regulation of domain names in the U.S. and in foreign
countries will change in the near future. Such changes in the U.S. will include
a transition from the current system to a system which is controlled by a
non-profit corporation and the possible creation of additional top-level
domains. Requirements for holding domain names will also be affected. As a
result, there can be no assurance that bn.com will be able to acquire or
maintain relevant domain names in all countries in which it conducts business.
Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear. bn.com,
therefore, may be unable to prevent third parties from acquiring domain names
that are similar to, infringe upon or otherwise decrease the value of bn.com's
trademarks and other proprietary rights. Any such inability could have a
material adverse effect on bn.com's business, financial condition, results of
operations or prospects.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
E-commerce is new and rapidly changing, and federal and state regulation
relating to the Internet and e-commerce is evolving. Currently, there are few
laws or regulations directly applicable to the access of the Internet or
e-commerce on the Internet. Due to the increasing popularity of the Internet, it
is possible that laws and regulations may be enacted with respect to the
Internet, covering issues such as user privacy, pricing, taxation, content,
copyrights, distribution, antitrust and quality of products and services.
Additionally, the rapid growth of e-commerce may trigger the development of
tougher consumer protection laws. The adoption of such laws or regulations could
reduce the rate of growth of the Internet, which could potentially decrease the
usage of bn.com's online stores or could otherwise have a material adverse
effect on bn.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.
15
<PAGE>
Further, several telecommunications carriers have requested the Federal
Communications Commission ("FCC") to regulate telecommunications over the
Internet. Due to the increasing use of the Internet and the burden it has placed
on the current telecommunications infrastructure, telephone carriers have
requested the FCC to regulate Internet service providers and online service
providers and impose access fees on those providers. If the FCC imposes access
fees, the costs of using the Internet could increase dramatically. This could
result in the reduced use of the Internet as a medium for commerce, which could
have a material adverse effect on bn.com's business, financial condition,
results of operations or prospects.
INVESTMENT COMPANY ACT CONSIDERATIONS
The Company does not believe that it is an "investment company" under the
Investment Company Act of 1940, as amended (the "Investment Company Act").
Because the Company, as sole Manager, controls bn.com, its interest in bn.com is
not an "investment security" as that term is used in the Investment Company Act.
If the Company were to cease participation in the management of bn.com, its
interest in bn.com could be deemed an "investment security" for purposes of the
Investment Company Act. Generally, a person is an "investment company" if it
owns investment securities having a value exceeding 40% of the value of its
total assets (exclusive of U.S. government securities and cash items). Following
the Offering, the sole asset of the Company will be its equity interest in
bn.com. A determination that such investment was an investment security could
result in the Company being an investment company under the Investment Company
Act and becoming subject to the registration and other requirements of the
Investment Company Act. The Company and bn.com intend to conduct their
operations so that the Company is not deemed to be an investment company under
the Investment Company Act. However, if anything were to happen which would
cause the Company to be deemed to be an investment company under the Investment
Company Act, restrictions imposed by the Investment Company Act, including
limitations on the Company's capital structure and the Company's ability to
transact with affiliates (including Barnes & Noble and Bertelsmann), could make
it impractical for the Company to continue its business as currently conducted
and could have a material adverse effect on the business of the Company and
bn.com.
SALES AND OTHER TAXES
bn.com, in accordance with current industry practice, does not currently
collect sales or other taxes in respect of shipments of goods into states other
than New York, New Jersey and Virginia or foreign countries other than Canada.
However, one or more states or foreign countries may seek to impose sales or
other tax collection obligations on out-of-jurisdiction companies such as bn.com
which engage in e-commerce. A successful assertion by one or more states or
foreign countries that bn.com should collect sales or other taxes on the sale of
merchandise could have a material adverse effect on bn.com's business, financial
condition, results of operations or prospects. While the Company does not
believe that bn.com's relationship with Barnes & Noble would subject bn.com to
sales or use taxes in any jurisdiction where Barnes & Noble operates a retail
store, there can be no guarantee that a jurisdiction would not seek to impose a
sales or use tax based on that relationship, or that if asserted by a
jurisdiction, that bn.com would be successful in any challenge to such
assertion. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Recent federal legislation limits the imposition of state and local taxes
on Internet-related sales. In 1998, Congress passed the Internet Tax Freedom Act
which places a three-year moratorium on state and local taxes on (i) Internet
access, unless such tax was already imposed prior to October 1, 1998, and (ii)
discriminatory taxes on electronic commerce. There is a possibility that
Congress may not renew this legislation in 2001. If Congress chooses not to
renew this legislation, state and local governments would be free to impose
taxes on electronically purchased goods which could have a material adverse
effect on bn.com's business, financial condition, results of operations or
prospects.
Due to the high level of uncertainty regarding the imposition of taxes on
electronic commerce, a number of states, as well as a Congressional advisory
commission, are reviewing appropriate tax
16
<PAGE>
treatment for online companies engaged in e-commerce. Any additional laws or
regulations could have a material adverse effect on bn.com's business, financial
condition, results of operations or prospects.
FEDERAL TRADE COMMISSION REVIEW
The Federal Trade Commission (the "FTC") is currently reviewing Barnes &
Noble's proposed acquisition of the Ingram Book Company ("Ingram") pursuant to
the pre-merger notification procedures of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act"). In connection with that review, the
FTC is also reviewing the Formation Transaction, and Bertelsmann's investment in
bn.com. Should the FTC determine that the Formation Transaction violated
antitrust laws, it could seek to impose a number of remedies or penalties on
bn.com, including the unwinding of the Formation Transaction. Should this occur,
it could have a material adverse effect on bn.com's business, financial
condition, results of operations or prospects. See "Business--Legal
Proceedings."
RISKS RELATING TO FUTURE ACQUISITIONS
While bn.com will continually be searching for acquisition opportunities,
there can be no assurance that bn.com will be successful in identifying
attractive acquisitions. If any potential acquisition opportunities are
identified, there can be no assurance that bn.com will consummate such
acquisitions or, if any such acquisition does occur, that it will be successful
in enhancing bn.com's business. bn.com may in the future face competition for
acquisition opportunities, which may inhibit bn.com's ability to consummate
suitable acquisitions and increase the expense of completing acquisitions. In
addition, to the extent that bn.com completes acquisitions, such acquisitions
could pose a number of special risks, including the diversion of management's
attention, the assimilation of the operation and personnel of the acquired
companies, the integration of acquired assets with existing assets, adverse
short-term effect on reported operating results, the amortization of acquired
intangible assets and the loss of key employees. Additionally, with respect to
potential future acquisitions by bn.com, the Company's stockholders are not
expected to have the right to vote on such acquisitions.
ABSENCE OF PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for the Class A
Common Stock. Although the Company has filed an application to have the Class A
Common Stock listed on the Nasdaq National Market, there can be no assurance
that such application will be approved, or that an active public market will
develop for the Class A Common Stock. The initial public offering price will be
determined through negotiations between the Company and the Underwriters. The
negotiated initial public offering price may not be indicative of the market
price of the Class A Common Stock after the Offering. See "Underwriting."
RISKS OF POSSIBLE EXTREME VOLATILITY OF MARKET PRICE OF COMMON STOCK
The Offering price that the Company has determined, with the assistance of
the Underwriters, may have no relation to the price at which the Class A Common
Stock trades after completion of the Offering. Among the factors considered in
determining the initial public offering price will be the future prospects of
bn.com and its industry in general, sales, earnings, and certain other financial
and operating information of bn.com in recent periods, and the market prices of
securities and certain financial and other operating information of companies
engaged in activities similar to those of bn.com. The market price of the
Class A Common Stock may be extremely volatile for many reasons, including:
(i) actual or anticipated variations in bn.com's revenues and operating results;
(ii) announcements of the development of improved technology; (iii) the use of
new sales formats by bn.com or its competitors; (iv) changes in the financial
forecasts by securities analysts; (v) new conditions or trends in the Internet
and e-commerce; and (vi) general market conditions.
17
<PAGE>
Recently, market prices for Internet-based companies have experienced
extreme price and volume fluctuations, particularly after initial public
offerings. These fluctuations are often unrelated or disproportionate to the
operating performance of those companies and may not be sustainable.
NO DIVIDENDS
The Company has not declared or paid any dividends on its Common Stock and
bn.com has not made any distributions to its members, since their respective
dates of inception. Both the Company and bn.com do not currently anticipate
paying any such dividends or distributions, except for amounts which may be
distributed by bn.com to cover income tax liabilities, if any, of its members
arising from the taxable income of bn.com. Cash distributions by bn.com may also
be restricted by future debt covenants. Therefore, stockholders of the Company
may not receive dividends.
HOLDING COMPANY STRUCTURE
The Company is a holding company, the sole asset of which is its equity
interest in bn.com. The Company has no independent means of generating revenues.
As a member of bn.com, the Company will incur income taxes on its proportionate
share of any net taxable income of bn.com. The Company intends to cause bn.com
to distribute cash to its members in amounts sufficient to cover their tax
liabilities, if any. To the extent the Company needs funds to pay such taxes or
for any other purpose and bn.com is unable to provide such funds, it could have
a material adverse effect on business, financial condition, results of
operations or prospects of the Company. See "Dividend Policy."
DILUTION
Based upon the estimated initial public offering price of $17.00 per share,
purchasers of the Class A Common Stock offered hereby will (assuming the
exchange of all outstanding Membership Units and the conversion of all
outstanding shares of High Vote Stock into shares of Class A Common Stock)
experience an immediate dilution in net tangible book value of $12.74 per share
of Class A Common Stock purchased. To the extent outstanding options to purchase
Class A Common Stock are exercised, there may be further dilution. Accordingly,
should the Company be liquidated, investors may not receive the full amount of
their investment. See "Dilution."
BROAD DISCRETION IN USE OF PROCEEDS
Although the Company has generally provided for the use of the proceeds
from the Offering, as of the date of this Prospectus, bn.com cannot specify with
certainty the amount of the net proceeds of the Offering which will be allocated
for each purpose. Accordingly, bn.com's management will have broad discretion in
the application of the net proceeds. Holders of the Class A Common Stock may not
agree with bn.com's allocation of the proceeds of the Offering. See "Use of
Proceeds."
ANTI-TAKEOVER EFFECTS OF CHARTER, BY-LAWS AND DELAWARE LAW PROVISIONS; POSSIBLE
ISSUANCE OF PREFERRED STOCK
Following the Offering, the beneficial ownership of the High Vote Stock and
approximately 82.2% of the Membership Units by Barnes & Noble and Bertelsman
will give them voting control of the Company and will have the effect of
preventing a change in control of the Company without their consent.
Additionally, following the Offering, the Company's Board of Directors will have
the authority to issue up to 50 million shares of Preferred Stock without any
further vote or action by the stockholders, and to determine the price, rights,
preferences, privileges and restrictions, including voting rights of such
shares. Since the Preferred Stock could be issued with voting, liquidation,
dividend and other rights superior to those of the Class A Common Stock, the
rights of the holders of Class A Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any such Preferred Stock.
The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. Further, the provisions of the Amended Charter, including
its provisions that create a classified Board of Directors, and provisions of
18
<PAGE>
the Company's Amended and Restated By-laws (the "Amended By-laws") and of
Delaware law could have the effect of delaying or preventing a change in control
of the Company. See "Description of Capital Stock and Membership
Units--Anti-Takeover Effects of Provisions of Delaware Law and the Amended
Charter and Amended By-laws."
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. bn.com's computer
equipment and software and devices with embedded technology that are
date-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions. There can be no assurance that bn.com's computer
systems contain all necessary date code changes, or that, in the year 2000,
bn.com's computer systems will be compatible with third-party software that may
be integrated or used in conjunction with bn.com's computer systems.
There can be no assurance that the computer systems necessary to run and
maintain any of the Web sites which direct customers to bn.com's online store,
or computer systems of bn.com's suppliers or shippers, will be year 2000
compliant. The failure of the computer systems of bn.com or its suppliers,
service producers, or shippers to be year 2000 compliant could have a material
adverse effect on bn.com's business, financial condition, results of operations
or prospects.
Should bn.com or its suppliers not become year 2000 compliant, in a
reasonably likely worst case scenario, consumers may not be able to access
bn.com's Web site without serious disruptions or there may be disruptions in
shipping products purchased on bn.com's Web site. Additionally, computers used
by bn.com's customers to access bn.com's online stores may not be year 2000
compliant, thereby delaying customers' purchases of bn.com products. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
SHARES ELIGIBLE FOR FUTURE SALE
Following the Offering, 25,000,000 shares of Class A Common Stock will be
issued and outstanding. An additional 115,000,002 shares of Class A Common Stock
will be issuable upon the conversion of High Vote Stock and exchange of
Membership Units not owned by the Company, which shares have "demand" and
"piggyback" registration rights attached to them and will become eligible for
resale 180 days following the completion of the Offering, subject to Rule 144
under the Securities Act of 1933, as amended (the "Securities Act"). In
addition, as of March 31, 1999, 17,856,441 shares were issuable upon exercise of
options granted under the Incentive Plan. Of these: (i) 1,185,937 will be
eligible for sale immediately following the completion of the Offering; (ii) an
additional 698,497 will be eligible for sale within 60 days following the
completion of the Offering; and (iii) an additional 4,362,835 will become
eligible for resale 180 days following the completion of the Offering, subject
to Rule 144 under the Securities Act. The balance of shares issuable upon
exercise of options relate to options which are not scheduled to vest within
180 days following the completion of the Offering. The sale of a substantial
number of shares of Common Stock, or the perception that such sales could occur,
could adversely affect prevailing market prices for the Class A Common Stock. In
addition, any such sale or perception could make it more difficult for the
Company to sell equity securities or equity-related securities in the future at
a time and price that the Company deems appropriate. See "Principal
Stockholders," "Description of Capital Stock and Membership Units," "Shares
Eligible for Future Sale" and "Underwriting."
19
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 25,000,000 shares of Class A Common
Stock offered hereby are estimated to be approximately $398 million
(approximately $458 million if the Underwriters' over-allotment option is
exercised in full) assuming an initial public offering price of $17.00 per share
and after deducting underwriting discounts and commissions and estimated
Offering expenses.
The Company will use the net proceeds of the Offering to acquire 25,000,000
Membership Units (28,750,000 Membership Units if the Underwriters'
over-allotment option is exercised in full), representing an approximate 17.9%
(or 20.0%, as the case may be) equity interest in bn.com. The price of the
Membership Units to be acquired by the Company will equal the net price of
shares of the Class A Common Stock sold in the Offering. See "Underwriting."
Net proceeds to bn.com will be used to fund anticipated operating losses,
including sales and marketing expenses and payments due under strategic
alliances (including approximately $36.5 million which is currently due through
2001 under agreements with AOL and Lycos); enhancements to bn.com's online
stores and other capital expenditures; working capital; and other general
corporate purposes. In addition, bn.com may use a portion of such net proceeds
to acquire or invest in complementary businesses, technologies, services or
products, although there are no current agreements with respect to any such
acquisitions, investments or other transactions. As of the date of this
Prospectus, due to the rapidly changing business environment of the Internet
(which is characterized by frequent changes in technology, wide fluctuations in
the cost of advertising and strategic alliances, and the need for quick
responses to competition), the Company cannot specify with certainty the
particular uses for the net proceeds to be received by bn.com upon completion of
the Offering. Accordingly, the Company will have broad discretion in directing
the application of the net proceeds by bn.com.
Pending utilization of the net proceeds of the Offering, the Company
intends to cause bn.com to invest the funds in appropriate investments as
determined by the Company.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its capital
stock since inception and bn.com has not declared any distributions to its
members since inception. Neither the Company nor bn.com expects to pay any cash
dividends or distributions for the foreseeable future, except the Company
expects to cause bn.com to pay distributions to its members to the extent
necessary to enable such members (including the Company) to pay taxes incurred
with respect to taxable income of bn.com. The Company currently intends to cause
bn.com to retain future earnings, if any, to finance the expansion of the
business of bn.com.
20
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1999: (i) the actual
capitalization of bn.com; (ii) the actual capitalization of the Company; and
(iii) the pro forma capitalization of the Company and bn.com on a consolidated
basis as adjusted to reflect the Recapitalization and the issuance and sale by
the Company of the shares of Class A Common Stock offered by the Company hereby
at an assumed initial offering price of $17.00 per share, after deducting the
underwriting discount and commissions and estimated offering expenses, the
receipt of the estimated proceeds therefrom and the purchase of 25,000,000
Membership Units.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
----------------------------------------------
BN.COM COMPANY PRO FORMA
-------------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents......................................... $ 60,936 $ -- $559,664(1)
------------ -------- --------
------------ -------- --------
Debt.............................................................. $ -- $ -- $ --
Minority interest................................................. -- -- 490,162(2)
Members' equity................................................... 148,931 -- --(3)
Stockholders' equity:
Preferred Stock; $0.001 par value; 50,000,000 shares authorized;
none issued and outstanding.................................. -- -- --
Common Stock $0.001 par value; 100 shares issued and outstanding
on an actual basis; none on a pro forma basis................ -- -- --
Common Stock Class A; $0.001 par value; 750,000,000 shares
authorized; none issued and outstanding on an actual basis,
25,000,000 issued and outstanding on a pro forma basis....... -- -- 25
Common Stock Class B; $0.001 par value; 1,000 shares authorized;
none issued and outstanding on an actual basis, 1 share
issued and outstanding on a pro forma basis.................. -- -- --
Common Stock Class C; $0.001 par value; 1,000 shares authorized;
none issued and outstanding on an actual basis, 1 share
issued and outstanding on a pro forma basis.................. -- -- --
Paid-in capital................................................. -- -- 106,844
------------ -------- --------
Total stockholders' equity................................... -- -- 106,869
------------ -------- --------
Total capitalization....................................... $ 148,931 $ -- $597,031
------------ -------- --------
------------ -------- --------
</TABLE>
- ------------------
(1) Reflects the receipt of the Offering proceeds of approximately $398 million
(after deducting the underwriting discount and commissions and estimated
offering expenses), the $50 million cash contribution by Bertelsmann, and
the reclassification of approximately $51 million restricted cash to cash
and cash equivalents.
(2) Reflects aggregate ownership of 82.1% of bn.com by Barnes & Noble and
Bertelsmann.
(3) Reflects members' equity of bn.com and the reclassification to minority
interest.
21
<PAGE>
DILUTION
The following table illustrates the dilution in pro forma net tangible book
value (total assets less total liabilities) on a per share basis, assuming the
exchange of all outstanding Membership Units for, and the conversion of all
outstanding shares of High Vote Stock into, 115,000,002 shares of Class A Common
Stock as of the date of the Offering and the issuance of 25,000,000 shares of
Class A Common Stock offered herewith assuming an initial public offering price
of $17.00 per share. See "Shares Eligible for Future Sale."
<TABLE>
<S> <C> <C>
Initial public offering price per share........................................................ $17.00
Pro forma net tangible book value per share at March 31, 1999................................ $1.30
Increase in pro forma net tangible book value per share attributable to new investors
purchasing shares in the Offering......................................................... 2.96
------
Pro forma net tangible book value per share after the Offering................................. 4.26
------
Pro forma dilution per share to new investors assuming full conversion of all Membership Units
into shares of Class A Common Stock.......................................................... $12.74
------
------
</TABLE>
The following table summarizes the relative investment in bn.com of the
existing members and the Company, giving pro forma effect to the sale of
Membership Units to the Company. The foregoing table assumes no exercise of the
Underwriters' over-allotment options.
<TABLE>
<CAPTION>
SHARES PURCHASED CONSIDERATION AVERAGE
---------------------- ----------------------- PRICE PER
NUMBER PERCENT PAID PERCENT SHARE
----------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing members............................... 115,000,002 82.1% $315,849,000 42.6% $ 2.75
The Company.................................... 25,000,000 17.9 425,000,000 57.4 17.00
----------- ----- ------------ -----
Total........................................ 140,000,002 100.0% $740,849,000 100.0%
----------- ----- ------------ -----
----------- ----- ------------ -----
</TABLE>
The foregoing discussion and table assumes no exercise of any stock options
outstanding. At March 31, 1999, there were options outstanding to purchase
17,856,441 shares of Class A Common Stock at a weighted-average exercise price
of $4.34 per share. To the extent that any of these options are exercised, there
will be further dilution to the new investors.
22
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS OF DOLLARS)
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 Prospectus. The following table sets forth the historical selected data
for bn.com for the years ended December 31, 1997 and 1998 and the three months
ended March 31, 1998 and 1999. This data, other than the March 31, 1998 and 1999
data, has been derived from the Financial Statements, which have been audited by
BDO Seidman, LLP, independent certified public accountants, and are included
elsewhere in this Prospectus. Also set forth below are the pro forma Statement
of Operations Data for the Company and bn.com on a consolidated basis for the
year ended December 31, 1998 and the three-month period ended March 31, 1999,
which reflects the Recapitalization and the completion of the Offering as if
they had occurred on January 1, 1998, and the pro forma Balance Sheet Data for
the Company and bn.com on a consolidated basis as of March 31, 1999 which
reflects the Recapitalization, the contribution by Bertelsmann of an additional
$50 million in cash prior to the completion of the Offering and the completion
of the Offering as if they had occurred on March 31, 1999. The operating results
are not necessarily indicative of the operating results for any future period.
<TABLE>
<CAPTION>
BN.COM COMPANY(1)(2)
----------------------------------------------- -------------------------------
THREE MONTHS THREE MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31,
-------------------- ----------------------- 1998 1999
1997 1998 1998 1999 PRO FORMA PRO FORMA
-------- -------- -------- ----------- ------------ ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................... $ 11,949 $ 61,834 $ 9,013 $ 32,317 $ 61,834 $ 32,317
Cost of sales................ 10,117 47,569 7,003 25,016 47,569 25,016
-------- -------- -------- --------- -------- ---------
Gross profit............. 1,832 14,265 2,010 7,301 14,265 7,301
-------- -------- -------- --------- -------- ---------
Operating expenses:
Marketing and sales........ 8,855 70,423 6,613 18,909 70,423 18,909
Product development........ 3,256 8,532 1,804 3,519 8,532 3,519
General and
administrative........... 3,273 19,166 3,089 6,107 19,166 6,107
-------- -------- -------- --------- -------- ---------
Total operating
expenses............... 15,384 98,121 11,506 28,535 98,121 28,535
-------- -------- -------- --------- -------- ---------
Operating loss............... (13,552) (83,856) (9,496) (21,234) (83,856) (21,234)
Interest income, net......... -- 708 -- 1,016 708 1,016
-------- -------- -------- --------- -------- ---------
Loss before minority
interest................... (13,552) (83,148) (9,496) (20,218) (83,148) (20,218)
Minority interest............ -- -- -- -- 68,265 (3) 16,599 (3)
-------- -------- -------- --------- -------- ---------
Net loss..................... $(13,552) $(83,148) $ (9,496) $ (20,218) $(14,883)(4) $ (3,619)(4)
-------- -------- -------- --------- -------- ---------
-------- -------- -------- --------- -------- ---------
</TABLE>
- ------------------
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, AS OF MARCH 31,
-------------------- MARCH 31, 1999
1997 1998 1999 PRO FORMA
-------- -------- ----------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.... $ -- $ 96,940 $ 60,936 $ 559,664
Working capital.............. 3,176 78,681 57,057 555,785
Total assets................. 26,327 202,144 168,208 616,308
Minority interest(5)......... -- -- -- 490,162
Equity(6).................... $ 19,213 $169,149 $ 148,931 $ 106,869
</TABLE>
- ------------------
(1) Represents the consolidated financial data of the Company and bn.com on a
pro forma basis.
(2) Reflects the structure of the Company and bn.com as of the date of the
completion of the Offering, the receipt of the Offering proceeds of
approximately $398 million (after deducting the underwriting discount and
commissions and estimated Offering expenses), and gives effect to the
Recapitalization, the reclassification of approximately $51 million
restricted cash to cash and cash equivalents, and the contribution by
Bertelsmann of
(Footnotes continued on next page)
23
<PAGE>
(Footnotes continued from previous page)
an additional $50 million in cash prior to the completion of the Offering.
The pro forma operating results are not necessarily indicative of future
results because, among other things, they do not reflect any earnings from
the investments of the net proceeds of the Offering. See "Corporate History
and Recapitalization."
(3) Represents the allocation of approximately 82.1% of the loss to Barnes &
Noble and Bertelsmann.
(4) Represents the net loss attributable to the Company.
(5) Includes the reclassification of the equity interest of Barnes & Noble and
Bertelsmann to minority interest, and the additional $50 million
contribution by Bertelsmann in cash prior to the completion of the Offering.
(6) The actual amounts as of December 31, 1997, December 31, 1998 and March 31,
1999 reflect the members' equity of bn.com. The pro forma amount reflects
stockholders' equity of the Company and the reclassification of members'
equity to minority interest after the Offering.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is a holding company that, pursuant to the terms of the
Operating Agreement, will act as the sole Manager of, and will control all the
affairs of, bn.com. As of the date of the Prospectus, the Company has no other
business. See "Management--Governance Documents." The following is a discussion
of the operations of bn.com and should be read in conjunction with the Financial
Statements of the Company and bn.com and related Notes thereto included
elsewhere in this Prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties. The Company and bn.com's actual
results may differ materially from those anticipated in these forward-looking
statements as a result of certain factors including, but not limited to, those
set forth under "Risk Factors" and elsewhere in this Prospectus.
OVERVIEW
In 1996, recognizing increasing opportunities in e-commerce, Barnes & Noble
began expending significant resources to enter this market. bn.com, whose
business was originally commenced in January 1997, launched its initial online
store in March 1997. See "Corporate History and Recapitalization."
Since its inception, bn.com has incurred significant net losses primarily
as a result of development costs associated with opening its online stores and
its marketing efforts, which include payments to strategic alliance partners
(cumulatively $27.2 million through March 31, 1999) such as AOL, Microsoft and
Lycos, as well as payments made for advertising (cumulatively $49.0 million
through March 31, 1999). From inception through March 31, 1999, bn.com had
accumulated net losses of $116.9 million. As bn.com seeks to aggressively expand
the business of its online stores, the Company believes that bn.com's operating
expenses will significantly increase as a result of the financial commitments
related to the development of marketing channels, future strategic
relationships, and enhancements to its online stores and other capital
expenditures. The Company expects that bn.com will continue to incur losses and
generate negative cash flow from operations for the foreseeable future. Since
bn.com has relatively low gross margins compared to traditional "bricks and
mortar" retailers, the ability of bn.com to enhance profitability depends upon
its ability to substantially increase its net sales. In view of the rapidly
changing nature of bn.com's business and its limited operating history, the
Company believes that period-to-period comparisons of the operating results of
bn.com, including bn.com's gross profit margin and operating expenses as a
percentage of sales, are not necessarily meaningful and should not be relied
upon as an indication of future performance.
The financial information included herein may not necessarily be indicative
of the financial position, results of operations and cash flows had bn.com been
operating as a separate stand-alone company during the periods presented.
25
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
The following table sets forth statement of operations data as a percentage
of net sales for the period:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
MARCH 31, MARCH 31,
1998 1999
--------- ---------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................................................................. 100.0% 100.0%
Cost of sales.............................................................................. 77.7 77.4
------- -------
Gross profit............................................................................... 22.3 22.6
------- -------
Operating expenses:
Marketing and sales...................................................................... 73.4 58.5
Product development...................................................................... 20.0 10.9
General and administrative............................................................... 34.3 18.9
------- -------
Total operating expenses.............................................................. 127.7 88.3
------- -------
Operating loss............................................................................. (105.4) (65.7)
Interest income, net....................................................................... -- 3.1
------- -------
Net loss................................................................................... (105.4)% (62.6)%
------- -------
------- -------
</TABLE>
NET SALES. Net sales include the sale of books and related products,
net of returns (which are not significant), and outbound shipping charges. Net
sales increased 259% to $32.3 million for the three months ended March 31, 1999
from $9.0 million for the three months ended March 31, 1998. The increase was
primarily attributed to a significant increase in units sold due to the growth
of the related customer base. International sales represented 8.9% and 12.0% of
net sales for the three months ended March 31, 1999 and 1998, respectively.
COST OF SALES. Cost of sales consists primarily of the cost of
merchandise sold and outbound and inbound shipping costs. Cost of sales
increased 257% to $25.0 million for the three months ended March 31, 1999
compared with $7.0 million for the three months ended March 31, 1998, due to
bn.com's increased sales volume. As a percentage of sales, cost of sales
decreased from 77.7% for the three months ended March 31, 1998 to 77.4% for the
comparable period in 1999. In the future, bn.com may expand or increase the
discount it offers to its customers as well as expand its product offerings to
areas which may have lower gross margins than its existing business.
MARKETING AND SALES EXPENSES. Marketing and sales expenses consist of
expenditures related to advertising and promotion, public relations, payroll and
related expenses for personnel engaged in marketing, selling and fulfillment
activities. As a percentage of sales, marketing and sales expenses decreased to
58.5% in the first quarter of 1999 from 73.4% in the comparable prior year
period. Marketing and sales expenses increased 186% to $18.9 million for the
three months ended March 31, 1999 from $6.6 million for the three months ended
March 31, 1998. The increase in expense was primarily due to bn.com's aggressive
marketing and branding campaign which commenced in 1998 and continued into 1999,
and included advertising and promotional expenditures, costs associated with
strategic marketing agreements with leading high-traffic Web sites and AOL, and
increased personnel and related expenses required to implement bn.com's
marketing strategy and to fulfill the increased sales volume. The Company
anticipates bn.com's marketing and sales expenses to increase as it continues to
pursue its aggressive promotional and advertising campaign. For a discussion of
costs associated with material marketing agreements, see "--Liquidity and
Capital Resources."
PRODUCT DEVELOPMENT EXPENSES. Product development expenses consist
principally of payroll and related expenses for development, editorial and
network operations personnel and consultants, systems and telecommunications
infrastructure and costs of licensed content and updates thereto. Product
development expenses increased 95% to $3.5 million for the three months ended
26
<PAGE>
March 31, 1999 from $1.8 million for the three months ended March 31, 1998. This
increase was primarily due to increased staffing and associated costs related to
building and enhancing the features, content and functionality of bn.com's
online stores and transaction-processing systems, as well as increased
investment in systems and telecommunications infrastructure. The Company expects
bn.com's expenses to increase as bn.com continues to enhance the customer online
shopping experience, expand its staff and incur additional costs related to the
growth of its business.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses consist of payroll and related expenses for executive, accounting and
administrative personnel, recruiting, professional fees, other general corporate
expenses, depreciation and amortization and the allocation of direct costs for
services provided by Barnes & Noble. General and administrative expenses
increased 98% to $6.1 million for the three months ended March 31, 1999 from
$3.1 million for the three months ended March 31, 1998. This increase was
primarily due to increased salaries and related expenses associated with the
recruiting and hiring of additional personnel and a $1.4 million increase in
depreciation and amortization. The Company expects bn.com's general and
administrative expenses to continue to increase as bn.com expands its staff and
incurs additional costs to support the growth of its business.
INTEREST INCOME, NET. Net interest income on cash and cash
equivalents of $1.0 million was recorded in 1999, due to capital contribution to
bn.com by Bertelsmann.
NET LOSS. As a result of the factors discussed above, bn.com's net
loss increased to $20.2 million for the three months ended March 31, 1999 from
$9.5 million for the three months ended March 31, 1998.
YEARS ENDED DECEMBER 31, 1998 AND 1997
The following table sets forth statement of operations data as a percentage
of net sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998
--------- ---------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................................................................... 100.0% 100.0%
Cost of sales..................................................................... 84.7 76.9
------- -------
Gross profit...................................................................... 15.3 23.1
------- -------
Operating expenses:
Marketing and sales............................................................. 74.1 113.9
Product development............................................................. 27.2 13.8
General and administrative...................................................... 27.4 31.0
------- -------
Total operating expenses..................................................... 128.7 158.7
------- -------
Operating loss.................................................................... (113.4) (135.6)
Interest income, net ............................................................. -- 1.1
------- -------
Net loss.......................................................................... (113.4)% (134.5)%
------- -------
------- -------
</TABLE>
27
<PAGE>
NET SALES. bn.com launched its initial online store in March 1997,
when it became the exclusive bookseller in AOL's Marketplace. Net sales
increased 419% from $11.9 million for the year ended December 31, 1997 to $61.8
million for the year ended December 31, 1998. The increase was primarily
attributed to a significant increase in units sold due to the growth of bn.com's
online stores and the related customer base. International sales represented
9.9% and 10.0% of net sales for the year ended December 31, 1997 and December
31, 1998, respectively.
COST OF SALES. Cost of sales increased 371% to $47.6 million for the
year ended December 31, 1998 compared with $10.1 million for the year ended
December 31, 1997, due to bn.com's increased sales volume. As a percentage of
sales, cost of sales decreased from 84.7% for the year ended December 31, 1997
to 76.9% for the comparable period in 1998. The improvement is primarily
attributed to the increase in the percentage of purchases made through the
Barnes & Noble distribution facility, which increased from 38.5% in the year
ended December 31, 1997 to 60.3% in the year ended December 31, 1998.
MARKETING AND SALES EXPENSES. Marketing and sales expenses increased
691% from $8.9 million for the year ended December 31, 1997 to $70.4 million for
the year ended December 31, 1998. This increase was primarily due to bn.com's
aggressive marketing and branding campaign which was commenced in 1998 and
included advertising and promotional expenditures, costs associated with
strategic marketing agreements with leading high-traffic Web sites and AOL, and
increased personnel and related expenses required to implement bn.com's
marketing strategy and to fulfill the increased sales volume.
PRODUCT DEVELOPMENT EXPENSES. Product development expense increased
158% from $3.3 million for the year ended December 31, 1997 to $8.5 million for
the year ended December 31, 1998. This increase was primarily due to increased
staffing and associated costs related to building and enhancing the features,
content and functionality of bn.com's online stores and transaction-processing
systems, as well as increased investment in systems and telecommunications
infrastructure.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased 482% from $3.3 million for the year ended December 31, 1997
to $19.2 million for the year ended December 31, 1998. This increase was
primarily due to increased salaries and related expenses associated with the
recruiting and hiring of additional personnel and a $4.5 million increase in
depreciation and amortization.
INTEREST INCOME, NET. Net interest income on cash and cash equivalents
of $0.7 million in 1998 was recorded subsequent to the Formation Transaction and
the investment by Bertelsmann in bn.com.
NET LOSS. As a result of the factors discussed above, bn.com's net
loss increased 511% from $13.6 million for the year ended December 31, 1997 to
$83.1 million for the year ended December 31, 1998.
QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
The following table sets forth certain unaudited quarterly statement of
operations data for the eight quarters ended March 31, 1999. This unaudited
quarterly information has been derived from unaudited financial statements of
bn.com and, in the opinion of the Company's management, includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the information for the periods covered. The quarterly data
should be read in conjunction with the Financial Statements and the notes
thereto. The operating results for the quarter are not necessarily indicative of
the operating results for any future period.
28
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
(UNAUDITED)
----------------------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1997 1997 1998 1998 1998 1998 1999
-------- ------------- ------------ --------- -------- ------------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................... $ 1,593 $ 3,252 $ 7,060 $ 9,013 $ 11,380 $ 15,561 $ 25,880 $ 32,317
Cost of sales................ 1,384 2,726 5,958 7,003 8,733 12,001 19,832 25,016
------- --------- -------- --------- -------- --------- -------- ---------
Gross profit................. 209 526 1,102 2,010 2,647 3,560 6,048 7,301
------- --------- -------- --------- -------- --------- -------- ---------
Operating expenses:
Marketing and sales......... 413 2,954 5,407 6,613 19,471 14,685 29,654 18,909
Product development......... 458 1,098 1,626 1,804 2,129 2,046 2,553 3,519
General and
administrative............ 154 1,336 1,760 3,089 4,782 5,397 5,898 6,107
------- --------- -------- --------- -------- --------- -------- ---------
Total operating expenses..... 1,025 5,388 8,793 11,506 26,382 22,128 38,105 28,535
------- --------- -------- --------- -------- --------- -------- ---------
Operating loss............... (816) (4,862) (7,691) (9,496) (23,735) (18,568) (32,057) (21,234)
Interest income, net ........ -- -- -- -- -- -- 708 1,016
------- --------- -------- --------- -------- --------- -------- ---------
Net loss..................... $ (816) $ (4,862) $ (7,691) $ (9,496) $(23,735) $ (18,568) $(31,349) $ (20,218)
------- --------- -------- --------- -------- --------- -------- ---------
------- --------- -------- --------- -------- --------- -------- ---------
<CAPTION>
QUARTER ENDED
(UNAUDITED)
----------------------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1997 1997 1998 1998 1998 1998 1999
-------- ------------- ------------ --------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF NET SALES:
Net sales.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................ 86.9 83.8 84.4 77.7 76.7 77.1 76.6 77.4
------- --------- -------- --------- -------- --------- -------- ---------
Gross margin................ 13.1 16.2 15.6 22.3 23.3 22.9 23.4 22.6
------- --------- -------- --------- -------- --------- -------- ---------
Operating expenses:
Marketing and sales......... 25.9 90.8 76.6 73.4 171.1 94.4 114.6 58.5
Product development......... 28.8 33.8 23.0 20.0 18.7 13.1 9.9 10.9
General and
administrative............ 9.6 41.1 24.9 34.3 42.1 34.7 22.8 18.9
------- --------- -------- --------- -------- --------- -------- ---------
Total operating expenses..... 64.3 165.7 124.5 127.7 231.9 142.2 147.3 88.3
------- --------- -------- --------- -------- --------- -------- ---------
Operating loss............... (51.2) (149.5) (108.9) (105.4) (208.6) (119.3) (123.9) (65.7)
Interest income, net......... -- -- -- -- -- -- 2.8 3.1
------- --------- -------- --------- -------- --------- -------- ---------
Net loss..................... (51.2)% (149.5)% (108.9)% (105.4)% (208.6)% (119.3)% (121.1)% (62.6)%
------- --------- -------- --------- -------- --------- -------- ---------
------- --------- -------- --------- -------- --------- -------- ---------
</TABLE>
The Company expects that bn.com will experience significant fluctuations in
its future quarterly operating results due to a variety of factors, many of
which are outside bn.com's control. Factors that may adversely affect bn.com's
quarterly operating results include: (i) bn.com's ability to retain existing
customers, attract new customers at a steady rate and maintain customer
satisfaction; (ii) bn.com's ability to acquire product and to manage fulfillment
operations; (iii) bn.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 bn.com and
its competitors; (v) price competition; (vi) bn.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 bn.com; (viii) bn.com's ability to attract new
and qualified personnel in a timely and effective manner; (ix) the level of
traffic on bn.com's online store; (x) bn.com's ability to manage effectively its
development of new business segments and markets; (xi) bn.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 bn.com's business, operations and
infrastructure; (xiv) the level of returns experienced by bn.com; (xv)
governmental regulation and taxation policies; (xvi) disruptions in service by
common carriers due to strikes or otherwise; and (xvii) general economic
conditions and economic conditions specific to the Internet, e-commerce and the
book industry. Additionally, the Company expects that bn.com will experience
seasonality in its business, reflecting a combination of seasonal fluctuations
in Internet usage and traditional retail seasonality patterns.
INCOME TAXES
Through October 31, 1998, bn.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 bn.com prior to November 1,
1998 have been utilized by Barnes & Noble. Consequently,
29
<PAGE>
such losses are not available to offset any further tax liability. Effective
November 1, 1998, bn.com, as a result of the Formation Transaction, was no
longer a subsidiary of Barnes & Noble and as a limited liability company is not
considered a taxable entity for Federal income tax purposes and most state
income tax purposes. Any taxable income or losses recorded subsequent to the
Formation Transaction are reported by the members on their respective income tax
returns. Immediately following the Offering, the Company will own an approximate
17.9% equity interest in bn.com and will receive its pro rata share of income
and loss, and Barnes & Noble and Bertelsmann will each own an approximate 41.1%
equity interest in bn.com. As a result of the Formation Transaction, no tax
benefits have been allocated to bn.com for its losses for all periods presented.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows used by operating activities were $32.0 million for the
three months ended March 31, 1999 and $16.7 million for the three months ended
March 31, 1998. Cash used in the first quarter of 1999 was attributable to a net
loss of $20.2 million, a decrease of $12.0 million in accrued liabilities and a
$5.1 million decrease in amounts due to affiliates partially offset by an
increase in accounts payable. Cash used in the first three months of 1998 was
attributable to a net loss of $9.5 million and an increase in prepaid expenses
and other current assets. Net cash flows used by operating activities were $14.4
million for the year ended December 31, 1997 and $54.7 million for the year
ended December 31, 1998. Cash used in operating activities in 1997 was
attributable to a net loss of $13.6 million and increases in prepaid expenses
and other current assets of $9.2 million, partially offset by increases in
accounts payable and accrued liabilities as well as depreciation and
amortization. Cash used by operating activities in 1998 was attributable to a
net loss of $83.1 million partially offset by increases in payables to
affiliates and accrued liabilities as well as depreciation and amortization.
Net cash used in investing activities of $3.8 million for the three months
ended March 31, 1999 and $8.2 million for the three months ended March 31, 1998
was attributable to purchases of fixed assets. Net cash flows used by investing
activities were $18.3 million and $81.5 million for the years ended
December 31, 1997 and 1998, respectively. The increase in 1997 was primarily
attributable to purchases of fixed assets. The increase in 1998 was attributable
to purchases of fixed assets and an increase of $50.4 million in restricted
cash. For a discussion of restricted cash, see "Note 2 of Notes to Financial
Statements of bn.com."
Net cash flows from financing activities of $24.9 million in the first
three months of 1998 resulted from member contributions to bn.com. Net cash
flows from financing activities of $32.8 million and $233.1 million for the
years ended December 31, 1997 and 1998, respectively, resulted from member
contributions to bn.com.
On November 1, 1997, bn.com and AOL formed a four-year strategic alliance
pursuant to an Interactive Marketing Agreement (the "AOL Agreement") which
provides for bn.com to be featured as the exclusive online book retailer within
AOL's commercial service which has approximately 17 million members, but which
does not include AOL.com. The AOL Agreement also gives bn.com an extensive
package of placements and visibility throughout the AOL service. In
consideration of the marketing, promotion, advertising and other services AOL
will provide under the AOL Agreement, bn.com will pay AOL a total of
$40.0 million over the term of the AOL Agreement, of which $8.0 million has been
paid as of December 31, 1998, $10.0 million will be paid for in 1999 and $11.0
million will be paid in each of 2000 and 2001. The AOL Agreement also contains
revenue sharing provisions for sales over specified amounts. As of the date of
this Prospectus, no fees have been incurred pursuant to such revenue sharing
provisions. The Company expects bn.com to amortize the costs associated with the
AOL Agreement over the contract term of four years. Upon expiration of the AOL
Agreement, AOL has the right to renew the AOL Agreement for up to five
successive one-year renewal terms. The AOL Agreement may be terminated by either
party upon a material breach by the other party which is not cured within 30
days of notice, upon the bankruptcy or insolvency of the other party or upon a
change of control of the other party resulting in such other party being
controlled by a competitor of the terminating party.
30
<PAGE>
On July 31, 1997, bn.com entered into a three-year exclusive agreement with
Lycos (the "Lycos Agreement"), pursuant to which bn.com is the exclusive
bookseller on the Lycos site and Lycos has agreed to limit the sale of
advertisements on its site to two of bn.com's competitors. Under the Lycos
Agreement, visitors to Lycos' Web site may readily link to bn.com's online
stores on the Web, which is promoted by Lycos using content provided by bn.com,
for the online purchase of books and related information products. Lycos has
also (on a non-exclusive basis) licensed the use by bn.com of its proprietary
software-based search tools and certain of its trademarks and trade names. The
Lycos Agreement provides for bn.com to pay Lycos an annual fee of $4.5 million
per year through the year 2000, adjusted in the third year by mutual consent of
the parties based on increases or decreases in Lycos' Web site traffic in the
second year of the Lycos Agreement. In addition, bn.com is required to pay Lycos
a percentage of all revenues received from orders initiated from the Lycos Web
site to the extent that such percentage exceeds the annual fee in any given
year. As of the date of this Prospectus, no such additional fees have been
incurred. Pursuant to the terms of the Lycos Agreement, Lycos is obligated to
offer bn.com the right of first refusal to negotiate with Lycos for renewal of
the Lycos Agreement. The Lycos Agreement may be terminated by either party on
the occurrence of bankruptcy-related events of the other, an uncured material
breach by the other or the failure to reach agreement on the adjustments to be
made to the annual fee applicable to the third year of the Lycos Agreement.
On October 1, 1998, bn.com entered into a one-year e-commerce merchant
agreement with Microsoft Corporation (the "MSN Agreement"), pursuant to which
bn.com is given premier placements on MSN.com and MSN.com is linked to bn.com's
online stores. The MSN Agreement also provides bn.com with a broad set of
feature placements throughout MSN.com. In consideration of the services provided
under the MSN Agreement, bn.com has paid Microsoft $3.0 million. In addition,
bn.com is required to pay Microsoft a percentage of all revenues generated
through links from MSN.com, with all payments of fees first credited against the
initial payment of $3.0 million. As of the date of this Prospectus, no
additional fees have been incurred. Either party may suspend its obligations
under the MSN Agreement if the other party fails to cure an event of default
within the time periods specified therein. The MSN Agreement may be terminated
by either party at any time on 60 days prior written notice. Upon expiration of
the MSN Agreement, bn.com has a right of first negotiation to renew the
agreement. In addition, if such negotiations fail, bn.com has a right of first
refusal relating to any agreement negotiated by MSN with a third party in
connection with the sale of books.
A 1992 Supreme Court decision confirmed that the Commerce Clause of the
United States Constitution prevents a state from requiring the collection of its
sales and use tax by a mail-order company unless such company has a physical
presence in the state. However there continues to be uncertainty due to
inconsistent application of the Supreme Court decision by state and federal
courts. bn.com attempts to conduct its operations with its interpretation of the
applicable legal standard, but there can be no assurance that such compliance
will not be challenged. In recent challenges, various states have sought to
require companies to begin collection of sale and use taxes and/or pay taxes
from previous sales. As of the date of this Prospectus, bn.com has not received
assessments from any state. The Supreme Court decision also established that
Congress has the power to enact legislation which would permit states to require
collection of sales and use taxes by mail-order companies. Congress has from
time to time considered proposals for such legislation. The Company anticipates
that any legislative change, if adopted, would be applied on a prospective
basis. While there is no case law on the issue, the Company believes that this
analysis would also apply to bn.com's online business. Recently several states
and local jurisdictions have expressed an interest in taxing e-commerce
companies who do not have any contacts with their jurisdictions other than
selling products online to customers in such jurisdictions. The Internet Tax
Freedom Act imposed a moratorium on new taxes or levies on e-commerce for a
three-year period. However, there is a possibility that Congress may not renew
this legislation in 2001. Any such taxes could have an adverse effect on
e-commerce, including bn.com's business. See "Risk Factors--Sales and Other
Taxes."
bn.com's capital requirements depend on numerous factors, including the
rate of market acceptance of bn.com's online stores, the ability to expand
bn.com's customer base, the cost of upgrades to its online stores, the level of
expenditures for sales and marketing, the level of investment in distribution
and other factors. The timing and amount of such capital requirements cannot
accurately
31
<PAGE>
be predicted. Additionally, bn.com will continue to evaluate possible
investments in businesses, products and technologies, and plans to expand its
sales and marketing programs and conduct more aggressive brand promotions. The
Company believes that the net proceeds from the Offering, the $50 million
additional cash contribution to be made by Bertelsmann prior to the completion
of the Offering, bn.com's $112 million of available cash and its operating
revenue will be sufficient to meet anticipated cash needs for at least the next
12 months.
YEAR 2000
YEAR 2000 COMPLIANCE
Beginning in the Year 2000, the date fields coded in some software products
and computer systems will need to accept four digit entries in order to
distinguish 21st century dates from 20th century dates and, as a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such Year 2000 requirements. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. Significant uncertainty exists in the software industry concerning the
potential effects associated with such compliance issues.
STATE OF READINESS
bn.com has developed a remediation plan for the Year 2000 issue that
involves identification, assessment and testing of the equipment and systems
affected:
o an assessment of information technology (IT) equipment and systems, which
includes web servers and web serving technology, has been done;
o an assessment of non-information technology (non-IT) embedded systems
such as building security, voice mail, fire prevention, climate control
and other systems has been completed; and
o the readiness of significant third party vendors and suppliers of
services is being analyzed.
The evaluation, which is expected to be completed by the third quarter of
1999, covers the following phases:
o development of an inventory of all IT equipment and systems and non-IT
systems that are potentially affected (100% complete);
o determination of those systems that require repair or replacement (70%
complete);
o repair or replacement of those systems (25% complete);
o testing of those repaired or replaced systems (25% complete); and
o creation of contingency plans in the event of Year 2000 failures (25%
complete).
To date, less than 10% of assessed systems have required repair or
replacement. Non-IT systems and internally developed programs have been
reviewed, and are not considered to be date sensitive to the Year 2000. Based on
this evaluation, the Company's management does not believe that bn.com's systems
and programs present Year 2000 issues, and generally believes that they will be
Year 2000 compliant.
Although the Company's management believes that bn.com will be Year 2000
compliant, third party equipment and software is used that may not be Year 2000
compliant. An evaluation of the Year 2000 compliance of the third party products
used in bn.com internal systems and major vendors have begun, but bn.com is
unable to predict the extent to which:
o the Year 2000 issue will affect suppliers; or
o bn.com would be vulnerable to the suppliers' failure to remediate any
Year 2000 issues on a timely basis.
All vendors and suppliers have been placed in a priority category according
to their importance to bn.com business. Letters have been sent to all vendors
and suppliers with an operating impact seeking details of the status of their
Year 2000 program. Vendor and supplier readiness is being assessed and tracked.
As of the date of this Prospectus, replies to approximately 60% of letters have
been received. These replies generally indicate that the subject vendors and
suppliers are making best efforts but
32
<PAGE>
cannot ensure Year 2000 compliance. The Company's management expects to have
certification that all vendors and suppliers with an operating impact are Year
2000 compliant by the third quarter of 1999. Plans are being developed to ensure
continued availability of service through alternate channels in the event that
satisfactory commitments are not received from vendors and suppliers with an
operating impact. For the highest priority vendors and suppliers, where business
risk warrants it, bn.com is planning to conduct, in the third quarter, an
integration test of Y2K compliance where specific dates are simulated. These
vendors and suppliers include merchandise suppliers such as Barnes & Noble,
Ingram Book Group, Baker & Taylor and Alliance Entertainment Corp, and package
delivery services such as United Parcel Service and the United States Postal
Service. The failure of one of these highest priority vendors or suppliers to
convert its systems on a timely basis or in a manner compatible with bn.com's
systems could cause bn.com to incur unanticipated expenses to remedy any
problems and could adversely affect its business. In addition, the software and
hardware products used by affiliate Web sites, advertisers, customers,
governmental agencies, public utilities, telecommunication companies and others,
may not be Year 2000 compliant. If these products are not Year 2000 compliant,
customers' ability to use bn.com's Web site may be disrupted.
COSTS TO ADDRESS YEAR 2000 COMPLIANCE
To date, bn.com has incurred approximately $0.4 million in connection with
identifying or evaluating Year 2000 compliance issues. Most of these expenses
have related to the opportunity cost of time spent by bn.com's employees
evaluating its software, the current versions of its products and Year 2000
compliance matters generally. The Company expects that bn.com's future Year 2000
costs will be approximately $1.0 million and will be funded out of cash on hand.
However, the full impact of the Year 2000 issues cannot be determined at this
time. The failure by certain third parties to address their Year 2000 issues on
a timely basis could adversely affect bn.com's business.
CONTINGENCY PLAN
bn.com has not yet completed its Year 2000 contingency plans. Such plans
include, but are not limited to, using alternative suppliers and establishing
contingent supply arrangements. The Company expects bn.com to have such plans in
place by the end of the second quarter of 1999. The worst case scenario related
to Year 2000 issues would involve a major shutdown of the Internet, which would
result in the loss of bn.com's principal revenue source until the shutdown was
resolved.
33
<PAGE>
CORPORATE HISTORY AND RECAPITALIZATION
Prior to October 31, 1998, the business of bn.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"). As of October 31, 1998, in connection with the
Formation Transaction, B&N Online contributed substantially all of its assets
and liabilities to bn.com and Bertelsmann contributed $150 million in cash to
bn.com and agreed to contribute an additional $50 million in cash to bn.com
(which will be contributed prior to the completion of the Offering). Bertelsmann
also paid Barnes & Noble $75 million and will pay Barnes & Noble an additional
$25 million following the consummation of the Offering. The completion of the
foregoing transactions resulted in Barnes & Noble and Bertelsmann each having a
50% beneficial interest in bn.com. Subsequent to the Formation Transaction, B&N
Online changed its name to B&N Sub Corp.
On March 10, 1999, Barnes & Noble caused B&N Sub Corp. to establish the
Company as a new Delaware subsidiary wholly-owned by B&N Sub Corp. Prior to the
effective date of the Registration Statement filed in connection with the
Offering, B&N Sub Corp. will transfer its ownership of the Company to B&N.com
Holding Corp. ("BN.com Holding Corp."), which will result in Barnes & Noble
owning 100% of BN.com Holding Corp., which will own 100% of the Company.
Subsequent to that, the Company will file the Amended Charter which will, among
other things, reclassify its outstanding Common Stock to one share of Class B
Common Stock. The Company will then issue one share of Class C Common Stock
constituting a 50.0% interest in the Company to the wholly-owned subsidiary of
Bertelsmann owning the Membership Units in exchange for the contribution by
Bertelsmann of one Membership Unit to the Company. Concurrently therewith,
Barnes & Noble will also contribute one Membership Unit to the Company. The
foregoing transactions in this paragraph are collectively referred to as the
"Recapitalization." Following the Recapitalization, Barnes & Noble and
Bertelsmann will each have a 50% beneficial interest in the Company through
their ownership of all of the outstanding High Vote Stock.
In connection with the Offering, the Company will issue 25,000,000 shares
of Class A Common Stock offered hereby to the public and will immediately
thereafter take the net proceeds received therefrom and contribute them to
bn.com in exchange for 25,000,000 Membership Units in bn.com. Therefore,
immediately subsequent to the Offering bn.com will be owned approximately 41.1%
by Barnes & Noble, 41.1% by Bertelsmann and 17.9% by the public stockholders
purchasing shares of Class A Common Stock hereunder. However, as a result of
their ownership of High Vote Stock, Barnes & Noble and Bertelsmann will each
beneficially control 48.9% of the voting power (97.8% in the aggregate) of all
of the voting stock of the Company. The Company will be the sole Manager of
bn.com and Barnes & Noble and Bertelsmann will, as a result of their ownership
of the High Vote Stock and Membership Units, control both the Company and
bn.com. See "Management--Governance Documents."
34
<PAGE>
BUSINESS
GENERAL
Immediately following the Offering, the holders of the Company's Class A
Common Stock will own over 99.9% of the outstanding capital stock of the
Company. The Company will be a holding company whose sole asset will be its
approximate 17.9% equity interest in bn.com and whose sole business will be to
act as the sole Manager of bn.com. As sole Manager of bn.com, the Company will
control all of the affairs of bn.com. Immediately following the Offering, Barnes
& Noble and Bertelsmann will collectively own less than 0.1% of the outstanding
capital stock of the Company but will control 97.8% of the voting power of all
shares of voting stock of the Company and will each beneficially own an
approximately 41.1% equity interest in bn.com. Net profits, net losses and
distributions of bn.com will generally be allocated and made pro rata in
accordance with the percentage equity interests of its members. Accordingly, the
Company will be allocated approximately 17.9% (20.0% if the Underwriter's over-
allotment option is exercised in full) of bn.com's net profit and net losses and
will receive approximately 17.9% (20.0% if the Underwriter's over-allotment
option is exercised in full) of bn.com's distribution. The business of bn.com is
described below.
bn.com is a leading online retailer of books and complementary information,
entertainment and intellectual property-based products. Since opening its
initial online store in March 1997, bn.com has sold products to over
1.7 million customers in 181 countries. bn.com's suite of online stores is
anchored by its online bookstore, and also includes online stores offering
software, magazines, music and video products, all seamlessly integrated within
bn.com's Web site located at www.bn.com. bn.com's online bookstore, which
contains over 8 million books, offers customers an easy-to-search catalog of
virtually every book currently in print, as well as an extended searchable
catalog of millions of out-of-print, pre-owned and rare books. bn.com, through
Barnes & Noble, has the largest in-stock position of books available for
immediate shipping to customers. In addition to a comprehensive selection of
books, bn.com offers its customers fast delivery, deep discounts, easy and
secure ordering, rich editorial content and community experience.
According to Media Metrix, in March 1999, bn.com's Web site was the fourth
most trafficked shopping site and was among the top 30 largest Web properties on
the Internet. Distribution and co-marketing agreements with major Web portals
and content sites, such as AOL, Microsoft and Lycos, have extended bn.com's
brand and consumer exposure to its online stores. bn.com has also established a
network of remote storefronts across the Internet by creating direct links with
over 120,000 affiliate Web sites.
During 1998, bn.com introduced many major enhancements to its online
stores, including Express Lane(ServiceMark) one-click ordering, a powerful and
user friendly search engine, email book reviews and product-notification
services, software and magazine stores, a gift center and bargain books store
and online gift certificates. Also during 1998, bn.com established an
out-of-print book service and began to add music and video to its product
offerings, initiatives scheduled to be fully rolled out during 1999.
The Company believes that bn.com's relationships with Barnes & Noble, the
nation's largest bookseller based on revenues, and Bertelsmann, one of the
world's largest media companies, provide bn.com with meaningful advantages
relative to other online retailers in its category, including:
o The superior brand recognition of the Barnes & Noble trade name,
which is a strong motivating factor in attracting customers,
especially with regard to the post-early adopter market of consumers
who have yet to make an online purchase;
o The use of Barnes & Noble's state-of-the-art distribution center as
its primary product supplier, which enables bn.com to: (i) offer
over 750,000 in-stock book titles for fast delivery, representing
the largest standing inventory of any online bookseller; (ii) offer
such a large selection without needing to make any investment in
inventory and the ongoing expense related to the management of such
inventory; and (iii) benefit from a higher gross margin as bn.com
sources significantly less merchandise through wholesalers;
o The enterprise value of Barnes & Noble and Bertelsmann, including
Barnes & Noble's network of over 500 retail superstores and
Bertelsmann's position as one of the largest
35
<PAGE>
integrated media companies in the world, which provides significant
advantages in negotiating with online portals, distribution
partners, content and media companies as well as with other
strategic partners;
o The ability to conduct cross-marketing, co-promotion and customer
acquisition programs with Bertelsmann's U.S. book clubs, which will
provide bn.com with: (i) access to millions of established book
buyers; (ii) the opportunity to directly promote its online store to
this vast audience of proven buyers; and (iii) a potential new
stream of customers that it will be able to acquire at a
significantly lower acquisition cost as compared to customers
acquired via its other marketing channels;
o The potential ability to directly link and cross-promote bn.com's
online stores with the online stores operated or intended to be
operated by BOL in the United Kingdom, Germany, France, the
Netherlands and Italy, which will enable bn.com to more rapidly
acquire new streams of international customers, as well as to offer
its existing customer base access to a vast selection of foreign
language books, which the Company believes will help bn.com further
strengthen customer loyalty and repeat business; and
o Ongoing access to the substantial bookselling and direct marketing
knowledge and experience of the management of Barnes & Noble and
Bertelsmann.
INDUSTRY BACKGROUND
E-COMMERCE. The new arena of e-commerce provides retailers with the
opportunity to serve a rapidly growing market because consumers are increasingly
accepting the Internet as an alternative shopping channel. The Internet is
becoming an increasingly accepted method of purchasing goods among consumers.
According to Jupiter Communications, as of the end of 1998 almost 10 million
U.S. households have made at least one online purchase and by the end of 2002
this population is expected to grow to approximately 36.5 million, representing
nearly 60 percent of overall U.S. online households. The Company believes that
these figures will continue to grow as Internet use becomes easier and more
pleasurable through higher-speed access and less expensive and alternative
Internet access devices. The growth rate of bn.com's customer base and revenues
may be different from the growth rate of households making online purchases.
The Internet also provides e-commerce companies with an opportunity to
serve a global market. Jupiter Communications' April 1999 estimates project that
the number of Internet connected households worldwide will grow from
approximately 60 million at the end of 1998 to approximately 124 million by the
end of 2002. IDC estimates that the number of Web users worldwide will exceed
130 million by the end of 1999 and will grow to over 315 million users by the
end of 2002. The growth rate of bn.com's international customer base and
revenues from international sales may be different from the growth rate of
Internet-connected households worldwide or the growth rate of worldwide Web
users.
THE BOOK INDUSTRY. The size of the U.S. consumer book market, according to
Veronis Suhler, an investment banking firm specializing in, among other things,
the publishing industry, was $15.4 billion in 1997 and is expected to grow to
$17.9 billion by the year 2000. Worldwide book sales, according to Euromonitor,
were approximately $81 billion in 1998 and are expected to grow to approximately
$85 billion by the year 2000. bn.com's early history with non-U.S. consumers
indicates that the demand for U.S. published books abroad is large and
relatively untapped. The growth rate of bn.com's revenues may be different from
the growth rate of the U.S. and worldwide book markets.
ONLINE SHOPPING FORECAST. Industry analysts, including Forrester Research
and Jupiter Communications, forecast continued and accelerating acceptance of
the Internet as a channel that consumers will turn to for a wide range of
products. Within the categories where bn.com has placed its primary focus,
namely books and complementary information-based products such as music, video
and software, industry analysts forecast a large and rapidly growing market for
online sales. Forrester Research estimates that U.S. online sales of books will
grow to $2.7 billion by 2002. In addition, Forrester Research estimates U.S.
online sales in 2002 for music to be $1.9 billion, software to be $2.8 billion
and video to be $976 million. The growth rate of bn.com's revenues may be
different from the growth rate of the online sales of books, music, software or
video.
36
<PAGE>
PRODUCTS THAT ARE WELL SUITED FOR E-COMMERCE. The book, music, video and
software businesses are particularly well suited for e-commerce because an
online store has virtually unlimited shelf space and can offer consumers
anywhere the convenience of browsing through vast product information databases.
The use of sophisticated search engines and personalized services enables users
to locate books and music, for example, with convenience and speed and to get
advance notice about titles in their areas of personal interest. Editorial
content, such as synopses, excerpts, reviews and editorial recommendations, and
in the case of music, downloadable sound samples, make for a more-educated and
entertaining purchasing decision. The Company believes that the presence of
online stores on consumers' desktops will, in and of itself, stimulate demand
and expand the marketplace. Additionally, the Company believes that new
technology, such as portable electronic books and print-on-demand publishing,
will greatly add to the range of content that an online retailer can offer.
BUSINESS STRATEGY
bn.com seeks to become the leading online retailer for consumers who want
to purchase books and complementary information-based products. To achieve this
objective, bn.com has focused its efforts on providing the highest possible
levels of value and service, which it believes are reflected in the completeness
of its product selection, the ease-of-use of its Web site, the prices of its
products and the speed of delivery it can offer its customers. While the
principal focus of bn.com will be online bookselling, it will continue to seek
opportunities that expand its product offering to complementary information,
entertainment and intellectual property-based products, and to present them to
customers with the highest contextual relevance. It is bn.com's goal to be
recognized as the most innovative and customer-focused of e-commerce merchants,
making online purchasing a simple, personal and gratifying experience that
results in the highest levels of customer loyalty.
Central to achieving these objectives, bn.com's operating strategy is
focused on rapidly extending its brand and increasing its customer and revenue
base by:
CONTINUALLY ENHANCING THE USER EXPERIENCE. bn.com is committed to
making every aspect of browsing and shopping in its online stores an easy
and pleasurable experience. It makes continual efforts to improve the
design, layout and navigation of all elements of its Web site, as well as
to ensure that the site's performance metrics are competitive, especially
with regard to page download times and the speed of all search functions.
bn.com also strives to make the entire ordering and checkout process easy,
intuitive, fast and secure.
OFFERING A LARGE PRODUCT SELECTION AND FAST DELIVERY. bn.com offers
one of the largest selections of books, currently over 8 million, of any
online bookseller. This includes virtually every English-language book
currently in print as well as millions of out-of-print, pre-owned and rare
books. bn.com's online databases act as a highly searchable catalog for the
spectrum of English-language books. bn.com, through Barnes & Noble,
maintains the largest in-stock position of any online bookseller, enabling
it to uniquely serve customers by having over 750,000 titles available for
immediate shipping. During 1999, as bn.com expands its product offering
into music and video, it will adopt a similar strategy of having extensive
music and video titles available for fast delivery to customers.
EXPANDING ITS PRODUCT OFFERING. bn.com intends to be the best place
to buy books online as well as the most authoritative source for
information about books and authors. While bn.com's major focus is and will
be selling books, the Company believes that offering complementary
information products, such as magazines, software, music and videos, is a
natural extension of bookselling. bn.com launched its magazine and software
online stores during 1998, and began a limited introduction of music and
video products in late 1998, with a full rollout scheduled for 1999.
Furthermore, the Company believes that bn.com's entire range of
technologies, inclusive of its database and search engine, automated
shopping cart, Express Lane(Service Mark) one-click ordering system and
related EDI interfaces with vendors will enable it to position itself as a
delivery mechanism for downloadable content, such as electronic books.
37
<PAGE>
BUILDING BRAND AWARENESS AND DRIVING CUSTOMER ACQUISITION THROUGH
ADVERTISING AND PROMOTION. bn.com will continue to invest in building its
online brand and in communicating the benefits and convenience of shopping
at its online stores. The Company believes that bn.com is well positioned
to benefit from the large post-early-adopter market that is now beginning
to come online, many of whom have yet to make their first online purchase.
A variety of media, including online, radio, television, print and outdoor
advertising, will be selectively deployed in 1999 to further bn.com's goal
of rapidly growing its customer base, which as of March 31, 1999, stood at
approximately 1.7 million customers. bn.com will also benefit from
cross-marketing with Barnes & Noble retail stores, wherever possible, as
well as from cross-marketing with Bertelsmann's U.S. book clubs and with
BOL in Europe. In all of its advertising and promotion initiatives, bn.com
seeks to continuously drive down the costs of acquiring new customers, as
well as to get customers to return to its site more frequently and to
increase the size of their average purchase per visit.
CAPITALIZING ON ITS RELATIONSHIP WITH BARNES & NOBLE. The Company
believes that bn.com's relationship with Barnes & Noble provides it with
inherent advantages over strictly online booksellers, including being able
to use the Barnes & Noble state-of-the-art distribution center as its
primary supplier and utilize its well-respected brand name and the
substantial bookselling experience of its management. bn.com additionally
has access to the Barnes & Noble data warehouse, which compiles consumer
purchasing data from over 1,000 stores (which generated over $3 billion in
1998 annual sales) and is the single largest repository of data about U.S.
consumer book purchasing habits. The Company and bn.com's relationship with
Barnes & Noble and its affiliates: (i) could cause conflicts of interest to
arise between the Company, bn.com and Barnes & Noble and its affiliates;
and (ii) has resulted and may in the future result in limitations on the
business of bn.com. Such conflicts may arise due to common directors and
officers and competing businesses, and such limitations include the
prohibition on promoting the sale of textbooks. See "Risk
Factors--Potential Conflicts of Interest with Barnes & Noble," "Risk
Factors--Limitations on bn.com's Business" and "Management--Governance
Documents--Operating Agreement" for a more detailed discussion of such
conflicts and restrictions.
CAPITALIZING ON ITS RELATIONSHIP WITH BERTELSMANN. bn.com intends to
conduct various cross-marketing, co-promotion and customer acquisition
programs with Bertelsmann's U.S. book clubs. These programs will provide
bn.com with access to millions of established book buyers. bn.com will also
directly link and cross-promote its Web site with those of BOL, which has
or intends to have country and language-specific sites in the United
Kingdom, Germany, France, the Netherlands and Italy. The Company believes
that these programs will generate both new customers and new revenue
streams for bn.com. The Company and bn.com's relationship with Bertelsmann
and its affiliates: (i) could cause conflicts of interest to arise between
the Company, bn.com and Bertelsmann and its affiliates; and (ii) has
resulted and may in the future result in limitations on the business of
bn.com. Such conflicts may arise due to common directors and competing
businesses, and such limitations include the prohibitions placed on bn.com
from generating revenue from the sale of non-English-language books and
from engaging in the book club business. See "Risk Factors--Potential
Conflicts of Interest with Bertelsmann," "Risk Factors--Limitations on
bn.com's Business" and "Management--Governance Documents--Operating
Agreement" for a more detailed discussion of such conflicts and
restrictions.
STRENGTHENING AND EXPANDING STRATEGIC ALLIANCES. bn.com will continue
to provide the entities operating the third-party Web sites with whom it
has major strategic alliances with merchandising support, strengthening
their ability to generate sales for bn.com and to promote bn.com's brand.
The Company believes that bn.com's connection to Barnes & Noble enables
bn.com to negotiate more competitively for new strategic alliances, as
major media and content companies place a high value on the connection to
Barnes & Noble and Bertelsmann.
PURSUING ACQUISITIONS. bn.com will also pursue acquisitions, joint
ventures and other similar strategic investments and relationships with
complementary businesses and companies in order to augment or expand its
current offerings. While bn.com is continually examining those
possibilities, it has not entered into any agreements with respect to any
such acquisitions, joint
38
<PAGE>
ventures or strategic investments. There can be no assurance that any
acquisition will be successful or that companies acquired by bn.com will be
profitable.
INCREASING THE NUMBER OF WEB SITES IN ITS AFFILIATE NETWORK. bn.com's
affiliate network, which was launched in October 1997, currently has over
120,000 affiliates and is growing at a rate of approximately 1,000
affiliates per week. The Company believes that bn.com's affiliate program
goes beyond that of its competitors because it couples high commissions
with strong technology tools, with such features as online, real-time sales
reporting.
CONTINUING TO INVEST IN TECHNOLOGY. The Company believes that bn.com
currently utilizes a state-of-the-art interactive e-commerce platform.
bn.com plans to continue to invest in technologies that improve its ability
to support its future growth while offering customers the most convenient,
user-friendly and secure online shopping experience possible. In
particular, bn.com plans to invest in technologies that serve to enhance
its ability to conduct personalized one-to-one marketing.
BN.COM'S ONLINE STORES
The principal focus of bn.com will be online bookselling, which generated
98% and 100%, respectively, of bn.com's total revenues for the years ended
December 31, 1998 and December 31, 1997. However, bn.com will continue to seek
out opportunities to expand its product offering to complementary information,
entertainment and intellectual property-based products, and to present them to
customers with the highest contextual relevance. Accordingly, in addition to its
online bookstore, bn.com provides online stores for software, magazines, music,
video and other information-based products of a complementary nature. All of its
online stores are seamlessly integrated and presented to customers within
bn.com's single Web site. bn.com's initial online bookstore, launched in 1997,
was augmented by the introduction of a magazine store and a software store in
1998. Music and video products were introduced in limited scale in late 1998,
with full rollouts planned for 1999.
The Company believes that the following factors make bn.com's online
bookstore an easy and convenient way to shop for books:
LARGE SELECTION. bn.com's online database lists virtually every book
in print, offering over one million titles from over 30,000 publishers.
bn.com's recently enhanced search engine and sort capabilities allow
consumers to search and browse through the vast database in an intuitive
and easy way, with accurate and meaningful results received on virtually
every search. In October 1998, pursuant to an exclusive agreement with
Advanced Book Exchange, Inc. (the "ABE Agreement"), bn.com introduced its
out-of-print book service, which now includes millions of rare, pre-owned,
hard-to-find and out-of-print books. The ABE Agreement is perpetual but may
be terminated by either party upon 180 days prior written notice, at which
time bn.com could turn to one of several other vendors for this service.
bn.com pays ABE royalties for the use of its service. bn.com's combined
in-print/out-of-print book selection is currently over 8 million books.
LARGE STANDING INVENTORY FOR FAST DELIVERY. The Company believes that
consumers will increasingly demand an assured in-stock position and fast
delivery from online booksellers. It also believes that bn.com offers the
fastest delivery on the largest number of titles of any online bookseller
because the Barnes & Noble distribution center is able to provide bn.com
with immediate shipment on over 750,000 titles.
DEEP DISCOUNTS. bn.com was the first online bookseller to introduce
deep discounts. It offers most in-stock hard cover books at a 30% discount
off publishers' list prices and most in-stock paperbacks at a 20% discount
off publishers' list prices. bn.com also offers what the Company believes
to be the largest selection of bargain book titles with thousands of titles
available at discounts up to 91% off publishers' list prices.
EASY AND SECURE ORDERING. bn.com seeks to ensure that all
transactions are safe and secure. bn.com has created a set of applications
that allow customers to establish an account to store an address book,
credit card information and shipping preferences. Once the account has been
established, the customer can either shop the traditional e-commerce path
by adding items to their shopping cart or use bn.com's proprietary Express
Lane(Service Mark) one-click ordering feature.
39
<PAGE>
RICH EDITORIAL CONTENT. bn.com strives to provide its users with the
most accurate and authoritative online database about books and authors.
bn.com's online database currently includes editorial content such as
synopses, book reviews, author biographies and user reviews on over 650,000
titles. Included in this content are book reviews from many respected
industry sources, such as The New York Times Book Review, Publisher's
Weekly and Kirkus Reviews. bn.com's Web site recently introduced a
microsite featuring the highly acclaimed 'Reader's Catalog', a listing of
over 40,000 recommended titles, individually selected and reviewed by an
editorial board under the supervision of the New York Review of Books.
bn.com's in-house group of editorial experts also write and commission
feature articles, columns and interviews.
ONLINE COMMUNITY. bn.com has introduced author chats to its online
bookstore that are a natural extension of the type of community building
activities pioneered in Barnes & Noble's superstores. It was the first
online bookseller to introduce a regular series of real-time author chats,
and since going online, over 300 authors from a wide variety of literary
genres have participated in these events, including Kurt Vonnegut, Esther
Dyson, Frank McCourt and Anna Quindlen. bn.com also encourages users to
write their own book reviews. As a result, bn.com's Web site contains
thousands of reader reviews.
PERSONALIZED SERVICES. bn.com's e-nnouncements(Service Mark) program
allows users to sign up for free e-mail book reviews. Users sign up by area
of interest and receive monthly bulletins about new and noteworthy
publications, handpicked by bn.com's editors. bn.com is pursuing advanced
personalization applications using collaborative filtering and other
technologies and expects that it will eventually be able to provide its
customers with customized "personal bookstores" based upon their expressed
personal preferences and purchasing history.
HIGH LEVEL OF CUSTOMER SERVICE. The Company believes that high levels
of customer service and support are critical to retain and expand bn.com's
customer base. bn.com monitors orders from the time they are placed through
delivery by providing numerous points of electronic, telephonic and
personal communication to its customers. bn.com's customer service
representatives are available seven days a week and maintain constant
customer service availability via e-mail.
bn.com's magazine store currently offers customers the ability to obtain
subscriptions to over 500 magazines in 25 categories. bn.com guarantees that it
offers the lowest publisher-authorized subscription prices available to
consumers anywhere on the Internet.
bn.com's software store currently offers over 2,000 software titles in
eight major categories, including software for business and productivity, games,
kids and entertainment and for home and reference. The over 2,000 titles that
bn.com offers encompass a title mix that represents 80% of all of the software
sold in the U.S.
During 1999, bn.com plans to expand its offering of music and videos by
introducing online music and video stores, as well as other complementary
information and entertainment-based products.
MARKETING AND PROMOTION
ONLINE STRATEGIC ALLIANCES. Since inception, bn.com has aggressively
pursued strategic alliances with premier online companies and high-traffic Web
sites in order to drive traffic to its online stores. The Company believes that
bn.com's affiliation with Barnes & Noble and Bertelsmann greatly facilitates its
ability to enter into agreements with many high profile portal and content
sites. bn.com's largest strategic alliance is with AOL. In November 1997, it
entered into a four-year agreement with AOL to be the exclusive bookseller on
AOL's commercial service, which is the largest online service of any kind,
serving approximately 17 million members. bn.com has also entered into
significant strategic alliances with Microsoft and Lycos. Additionally,
strategic alliances have been entered into with ZDNet, Disney, The New York
Times, CNN, TicketMaster and USA Today. Generally, other than with respect to
significant strategic alliances (such as those with AOL, Lycos and Microsoft),
strategic alliance deals are one- or two-year arrangements which provide for
links to bn.com to be placed on the other entity's Web
40
<PAGE>
site in order to direct traffic to bn.com in exchange for which such entity
receives a commission on sales generated by customers linked to bn.com's Web
site from such entity's Web site. Sometimes bn.com will also place links to such
entities on its Web site or license content from such entities. These alliances
may also include other types of cross-marketing or promotion arrangements, such
as priority for banner advertisements. Other than from its alliance with AOL, no
strategic alliance accounts for more than 5.0% of bn.com's revenues. See
"Management's Discussion and Analysis of Financial Condition--Liquidity and
Capital Resources."
AFFILIATE NETWORK. In addition to securing strategic alliances with
high-traffic Web sites, bn.com has established an affiliate network consisting
of over 120,000 Web sites operated by third parties, whereby Web site operators
can earn commissions by linking users from their sites to bn.com's online
stores. The Company believes that bn.com's affiliate program goes beyond that of
other online retailers by: (i) paying higher commissions; (ii) enabling members
to take content from bn.com's online bookstore to enhance their merchandising;
and (iii) providing members with real-time reporting and analysis tools. bn.com
recently entered into an agreement with Tripod and Angelfire, two leading
Internet sites that allow users to market their own home pages, enabling their
significant member bases to easily join bn.com's affiliate network. bn.com
intends to add to the scope and reach of its affiliate network through such
innovative programs as its recently announced "Book Benefits Network" which
links non-profit Web sites to bn.com's online bookstore. Book Benefit members
include The New York Public Library, The Children's Defense Fund and CARE.
ADVERTISING. During 1998, bn.com began a comprehensive national print,
radio, television and online banner campaign to significantly increase awareness
of bn.com's Web site. It intends to continue to advertise in each of those forms
of media, allocating expenditures in relation to the effectiveness of the
advertising. In 1999, bn.com intends to begin cross-marketing with Bertelsmann's
U.S. book clubs, gaining access to millions of established book buyers.
INTERNATIONAL. The Company believes that the demand for English-language
books abroad is substantial and untapped. bn.com recently began to implement or
plans to implement a cross-linking and cross-marketing program with the Web
sites operated or intended to be operated by BOL in the United Kingdom, Germany,
France, the Netherlands and Italy, pursuant to which BOL customers who wish to
order English-language books are linked to bn.com's Web site.
ORDER FULFILLMENT
bn.com utilizes an extensive electronic shopping network for order
fulfillment, which is connected to the Barnes & Noble distribution center and
various book wholesalers, including the Ingram Book Company ("Ingram"), Baker &
Taylor and Bookazine. From these sources bn.com can quickly obtain approximately
900,000 different titles, the majority of which are currently sourced from the
Barnes & Noble distribution center. Orders not filled through this network are
forwarded to bn.com's special order group, which places orders directly with
publishers. Barnes & Noble previously announced its agreement to purchase
Ingram. Although the Company contemplates that such acquisition may benefit
bn.com given its relationship with Barnes & Noble, the Company believes that the
non-occurrence of such acquisition would not have a material adverse effect on
bn.com.
Internet customer orders are processed at bn.com's fulfillment center in
central New Jersey which is in close proximity to the Barnes & Noble
distribution center. Also located in central New Jersey are customer service
personnel and the special-order group. Additionally, bn.com has an in-house
telemarketing center in northern New Jersey.
TECHNOLOGY
The Company believes that bn.com currently has a state-of-the-art
interactive e-commerce platform, and it plans to continue to invest in
technologies that will enable bn.com to offer its customers the most convenient
and user-friendly online shopping experience possible. bn.com has been able to
quickly establish suites of "best of breed" solutions by following a strategy of
utilizing existing systems and the best demonstrated processes of Barnes &
Noble, licensing existing commercial technology
41
<PAGE>
when available and focusing its internal development efforts on those
proprietary systems necessary to provide the highest level of value and service
to its customers. The overall mix of technologies and applications currently in
use by bn.com allow it to support a distributed, scalable and secure
e-commerce environment.
bn.com uses the latest Intel-based Server Technology provided by Hewlett
Packard in a fully redundant configuration to power its Web site, which is
hosted in three separate locations. At these locations bn.com maintains
computers that store its web pages in electronic form and transmits them to
requesting users. Such storage and transmittal is referred to as hosting. bn.com
maintains its primary host location in its corporate headquarters in New York. A
second host location is operated by MCI, which provides additional capacity and
redundancy. The third such location is at AOL, which is dedicated to AOL
subscribers (keyword bn). All hosting locations are configured with excess
Internet telecommunications capacity to avoid slow response time and six
separate Internet service providers are used. By maintaining redundant host
locations, bn.com has significantly reduced its exposure to downtime and service
outages.
bn.com's integrated systems and tools provide functionality in the
following areas:
TITLE DATABASE AND SEARCH FUNCTIONALITY. bn.com has been able to
establish a comprehensive and accurate book database by employing a
multi-channel data sourcing strategy. bn.com obtains its primary title
database directly from Barnes & Noble. Weekly updates are automatically
sent to bn.com's servers, which utilize Microsoft SQL Server 6.5 for
database management. bn.com complements this primary title database content
feed with data from multiple external sources and is able to systematically
evaluate data, identify inconsistencies and correct inaccuracies. bn.com
has also developed a powerful proprietary search engine. This software
allows a user to search for books using a variety of criteria, including
author, title, keywords, subject area, ISBN number, book format, subject,
price and a series of children's age ranges. Search results can then be
sorted by user-defined sequences including "bestseller," "date published,"
a "Readers Catalog highly recommended book," or in alphabetical sequence.
E-COMMERCE. bn.com has developed its e-commerce applications using
the Microsoft SiteServer Architecture. Working with Microsoft, bn.com has
created a set of server applications that allow customers to establish an
account to store an address book, credit cards and ordering preferences. A
customer needs to set up an account only once. Once the account has been
established, the customer can either shop the traditional "e-commerce" path
by adding items to their shopping cart or use bn.com's proprietary Express
Lane(Service Mark) ordering feature to check out with just one click.
Options to gift-wrap, gift message and select from a variety of shipping
methods all allow customers to customize their orders. During 1998, bn.com
also added the capability for customers to buy, send and redeem online gift
certificates.
COMMUNITY, INTERACTIVE AND PERSONALIZATION. bn.com has established
several applications to facilitate interaction with its customers. An
"Auditorium," which uses Microsoft's Chat technology, is used to host
real-time author chats each night on bn.com's online bookstore. Personal
recommendations are generated through collaborative filtering technology.
ORDER PROCESSING. bn.com has created a proprietary application to
expedite orders into the fulfillment process. This application has
real-time connectivity to Barnes & Noble's distribution center, Ingram Book
Company, Baker & Taylor, and Bookazine. In addition to immediately securing
the inventory for the customer, application logic determines the best
possible choice of shipping warehouse by evaluating purchase margin,
postage cost and customer delivery time.
ORDER FULFILLMENT AND CUSTOMER SERVICE. bn.com has developed
proprietary applications which enable it to receive product and assign it
to customers based upon various ordering, handling and shipping criteria.
bn.com has also developed proprietary e-mail applications which are used
for customer service.
SALES TRACKING AND ANALYSIS. bn.com licenses technology from Be Free
Inc. to support its affiliate program. This software provides sophisticated
sales tracking for the members of the
42
<PAGE>
affiliate network with real time reporting and analysis tools. bn.com has
built a comprehensive data warehouse to store and analyze customer, sales
and online bookstore activity data.
RELATED PARTY AGREEMENTS
SUPPLY AGREEMENT. Pursuant to the Supply Agreement, Barnes & Noble
supplies products to bn.com at a price equal to cost plus incremental overhead.
Through its distribution facilities, Barnes & Noble accounted for approximately
38.5% of bn.com purchases during 1997 and approximately 60.3% of bn.com
purchases for the year ended December 31, 1998. The Company expects that bn.com
will continue to source most of its merchandise through Barnes & Noble in the
future. This agreement remains effective until terminated by either party. In
connection with the Offering, the agreement will be amended to provide that it
may be terminated by bn.com upon the approval of a majority of the Class C
Directors, upon thirty (30) days' prior written notice to Barnes & Noble and may
be terminated by Barnes & Noble: (i) on continuing default by bn.com; (ii) on a
bankruptcy or liquidation event of bn.com or of Barnes & Noble; and (iii) at any
time after June 1, 2004 if Bertelsmann shall have effected a permitted transfer
to any third party pursuant to the Operating Agreement or if either Barnes &
Noble or Bertelsmann owns less than 15% of the outstanding Membership Units. The
Company believes that, due to bn.com's relationship with Barnes & Noble, the
terms of this agreement are more favorable to bn.com than terms bn.com could
have obtained in the absence of such relationship.
TRADEMARK LICENSE AGREEMENT. In connection with the Formation Transaction,
the Company, B&N College and bn.com entered into the Trademark License
Agreement, pursuant to which B&N College granted an exclusive worldwide license
to bn.com to use the Barnes & Noble name in connection with the online sale of
books, provided that the Trademark License Agreement prohibits bn.com from using
the Barnes & Noble name for selling textbooks, except for sales of textbooks
that are immaterial, incidental and unsolicited. bn.com may sublicense the
Barnes & Noble name in accordance with the terms of the license as the Class B
Directors, in their sole discretion, see fit. The term of such license continues
until terminated. In connection with the Offering, the agreement will be amended
to provide that B&N College may terminate the agreement with notice (i) on
continuing default by bn.com (ii) on a bankruptcy or liquidation event of
bn.com, and (iii) at any time beginning one year after a transfer by Bertelsmann
(or any successor in interest) of any of its Membership Units to any third party
deriving more than 50% of its revenue from book sales at the time of the
transfer. The Company believes that, due to bn.com's relationship with Barnes &
Noble, the terms of this agreement are more favorable to bn.com than terms
bn.com could have obtained in the absence of such relationship.
DATABASE LICENSE AGREEMENT. In connection with the Formation Transaction,
Barnes & Noble, the Company and bn.com, entered into the Amended and Restated
Database and Software License Agreement, pursuant to which bn.com licenses from
Barnes & Noble, the nonexclusive right to use Barnes & Noble's title database,
inventory sourcing and special order software, customer lists and demographic
information. The term of such license continues until terminated. In connection
with the Offering, the agreement will be amended to provide that it may be
terminated by bn.com upon the approval of a majority of the Class C Directors,
upon 30 days' prior written notice to Barnes & Noble, and may be terminated by
Barnes & Noble with notice: (i) on continuing default by bn.com; (ii) on a
bankruptcy or liquidation event of bn.com or of Barnes & Noble; and (iii) at any
time beginning one year after a transfer by Bertelsmann (or any successor in
interest) of any of its Membership Units to any third party deriving more than
50% of its revenue from book sales at the time of transfer. bn.com believes
that, due to bn.com's relationship with Barnes & Noble, the terms of this
agreement are more favorable to bn.com than terms bn.com could have obtained in
the absence of such relationship.
BOL TRADEMARK LICENSE AGREEMENT. In connection with the Formation
Transaction, bn.com entered into a Trademark License Agreement with BOL (the
"BOL Trademark License Agreement"), pursuant to which bn.com was granted a
non-exclusive license to use BOL's name and trademark in its operations and to
sublicense the BOL name in accordance with the terms of the license as the
Class C Directors, in their sole discretion, see fit. This license remains
effective until bn.com either defaults or becomes subject to bankruptcy-related
events. The Company believes that, due to bn.com's
43
<PAGE>
relationship with Bertelsmann, the terms of this agreement are more favorable to
bn.com than terms bn.com could have obtained in the absence of such
relationship.
TECHNOLOGY SHARING AGREEMENTS. In connection with the Formation
Transaction, bn.com entered into Technology Sharing and License Agreements with
BOL (the "Technology Sharing License Agreements"), the subsidiary through which
Bertelsmann conducts its Internet business, pursuant to which BOL granted bn.com
a license to view, access and use BOL's computer technology and systems, and
bn.com granted BOL a license to view, access and use bn.com's computer
technology and systems. These agreements remain effective until (i) the date
both parties mutually agree to terminate, or (ii) from and after the date either
Barnes & Noble or Bertelsmann cease having an equity interest of ten percent
(10%) or more in bn.com. Following termination, each party may continue to use
in perpetuity any technology it obtained from the other prior to such
termination. The Company believes that, due to bn.com's relationship to
Bertelsmann, the terms of these agreements are more favorable to each party than
terms either party could have obtained in the absence of such relationship.
SERVICE AGREEMENTS. bn.com receives various services from Barnes & Noble
and its subsidiaries including, among others, services for payroll processing,
benefits administration, insurance (property and casualty, medical, dental and
life), tax, merchandising, traffic, fulfillment and telecommunications. In
accordance with the terms of the Services Agreements, until June 30, 1999, as
consideration for such services, bn.com will pay Barnes & Noble and its
subsidiaries an amount equal to Direct Cost (as defined below) plus Incremental
Expense (as defined below). "Direct Cost" means, with respect to each service
provided, the direct out-of-pocket expenses paid or incurred to third parties in
connection with providing such service, including, without limitation, shipping,
handling, travel expenses, payments to third parties (including, without
limitation, all professional fees), printing and postage. "Incremental Expense"
means, with respect to each service provided, all expenses paid or incurred by
Barnes & Noble and its affiliates in excess of the cost that would have been
incurred in the absence of the performance of the service. In the opinion of the
Company, these allocations were made on a reasonable and consistent basis;
however, they are not necessarily indicative of, and it is not practicable for
the Company to estimate, the level of expenses which might have been incurred
had bn.com been operating as a separate, stand-alone company. If by June 30,
1999, the parties have not agreed upon a new mutually agreeable payment
structure, Barnes & Noble will no longer be obligated to provide such services.
In addition, the Services Agreements may be terminated: (i) by bn.com upon
thirty (30) to sixty (60) days prior written notice to Barnes & Noble or its
subsidiaries, with respect to certain services provided therein; (ii) by Barnes
& Noble and its subsidiaries (a) on one hundred eighty (180) days' prior written
notice to bn.com with respect to certain services provided for therein,
(b) upon the occurrence of events relating to the bankruptcy of Barnes & Noble
or bn.com (c) within the sixty (60) day period following the one hundred
eightieth (180) day after a transfer pursuant to provisions regarding the rights
of first refusal contained in the Operating Agreement, or (d) if bn.com
defaults; or (iii) upon the date that either Barnes & Noble or Bertelsmann cease
to own at least 10% of the outstanding Membership Units of bn.com. The Company
believes that, due to bn.com's relationship with Barnes & Noble, the terms of
the Services Agreements are more favorable to bn.com than terms bn.com could
have obtained in the absence of such relationship.
COMPETITION
Both the e-commerce market and retail bookselling business are highly
competitive. Since the introduction of e-commerce to the Internet, the number of
e-commerce Web sites competing for customer attention has increased rapidly. The
Company expects future competition to intensify given the relative ease with
which new Web sites can be developed. The Company believes that the primary
competitive factors in e-commerce are brand recognition, site content, ease of
use, price, fulfillment speed, customer support and reliability. The Company
believes that bn.com's success will depend heavily upon its ability to provide a
compelling and satisfying shopping experience. The Company believes that other
factors that will affect bn.com's success include bn.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
44
<PAGE>
shopping) may render it inherently more competitive than traditional retailing
formats. Increased competitiveness among online retailers may result in reduced
operating margins, loss of market share and a diminished brand franchise.
With respect to the sale of books, which constitutes bn.com's largest
source of revenue, bn.com currently competes with numerous booksellers including
other Internet-based companies, such as Amazon.com, and traditional book
retailers. With respect to the sale of music, software and videos, bn.com
competes with numerous merchants including other Internet-based companies, such
as Amazon.com, CDnow, Reel.com, Beyond.com and traditional retailers. bn.com's
main online competitor, Amazon.com, has a longer online operating history and a
larger existing customer base than bn.com. bn.com is aware that Amazon.com has
and may continue to adopt aggressive pricing and marketing strategies such as
its recently implemented policy to discount New York Times best sellers by 50%
off publishers' list prices, which policy was immediately matched by bn.com.
bn.com is also aware of other online retailers that are offering substantial
discounts on products, including books, music, software and videos, which are
subsidized by advertising revenue from their Web sites. An increase in the
prevalence of this type of business model could lead to additional pricing
pressures on bn.com's products. If and when bn.com decides to add additional
products in its online stores, it will most probably face intense competition
for those products as well.
EMPLOYEES
As of March 31, 1999, bn.com employed approximately 701 full- and part-time
employees. bn.com also employs independent contractors to perform duties in
various departments, including software development, editorial and
administration. bn.com's employees are not represented by unions, and bn.com
considers its relationship with its employees to be excellent. bn.com believes
that its success is dependent on its ability to attract and retain qualified
personnel in numerous areas, including software development. See "Risk Factors--
Management of Growth."
FACILITIES
bn.com's principal administrative, marketing and technical facilities are
located in approximately 63,000 square feet of office space in New York, New
York. This lease expires in 2007. The rent under this lease is approximately
$0.9 million per year through 2001, and approximately $1.0 million per year
thereafter.
Barnes & Noble leases a 300,000 square foot facility, located in New
Jersey, of which bn.com utilizes approximately 100,000 square feet for its
distribution and customer services. bn.com currently pays Barnes & Noble $28,750
per month for its proportionate share of such lease. This lease expires in March
2003; however, Barnes & Noble has an option to extend the lease for up to three
additional successive two-year periods.
While bn.com's existing facilities are adequate for its current needs, due
to bn.com's recent growth, management has determined that additional office
space will be required. bn.com is currently negotiating to obtain additional
administrative, distribution and service facilities. bn.com does not believe it
will have any problems securing such additional space. bn.com does not own any
real estate.
LEGAL PROCEEDINGS
bn.com is involved in various routine legal proceedings incidental to the
conduct of its business. The Company does not believe that any of these legal
proceedings will have a material adverse effect on the financial condition,
results of operations or cash flows of bn.com.
In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace Kuralt,
filed a lawsuit in the United States District Court for the Southern District of
New York against Barnes & Noble, including bn.com, Borders Group, Inc.,
Amazon.com, certain publishers and others alleging violation of the
Robinson-Patman Act and other federal law, New York statutes governing trade
practices and common law. The complaint seeks certification of a class
consisting of all retail booksellers in the United States,
45
<PAGE>
whether or not currently in business, which were in business and were members of
the American Booksellers Association at any time during the four-year period
preceding the filing of the complaint. The complaint alleges that the named
plaintiffs have suffered damages of approximately $11.2 million or more and
requests treble damages on behalf of the named plaintiffs and each of the
purported class members, as well as of injunctive and declaratory relief
(including an injunction requiring the closure of all of defendants' stores
within 10 miles of any location where plaintiff either has or had a retail
bookstore during the four years preceding the filing of the complaint, and
prohibiting the opening by defendants of any bookstore in such areas for the
next 10 years), disgorgement of alleged discriminatory discounts, rebates,
deductions and payments, punitive damages, interest, costs, attorneys fees and
other relief. bn.com intends to vigorously defend this action.
The FTC is currently reviewing Barnes & Noble's proposed acquisition of
Ingram pursuant to the pre-merger notification procedures of the HSR Act. In
connection with that review, the FTC is also reviewing the Formation
Transaction, and Bertelsmann's investment in bn.com. Should the FTC determine
that the Formation Transaction violated applicable antitrust laws, it could seek
to impose a number of remedies or penalties on bn.com, including the unwinding
of the Formation Transaction. The Company believes that the Formation
Transaction was completed in compliance with, and did not violate, applicable
antitrust laws.
46
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following are the executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Leonard Riggio(1).................................... 58 Chairman of the Board
Jonathan Bulkeley.................................... 38 Chief Executive Officer
Marie J. Toulantis................................... 45 Chief Financial Officer
Gary King............................................ 41 Chief Information Officer
Carl Rosendorf....................................... 47 Senior Vice President, Marketing, Sales and Business
Development
William F. Duffy..................................... 43 Vice President, Operations
Brenda Marsh......................................... 45 Vice President, Merchandising
Michael N. Rosen..................................... 58 Secretary and a Director
Stephen Riggio....................................... 44 Director
Thomas Middelhoff(1)................................. 45 Director
Markus Wilhelm....................................... 41 Director
Klaus Eierhoff....................................... 35 Director
</TABLE>
- ----------
(1) Member of the Special Committee and the Nominating Committee.
MR. LEONARD RIGGIO has been Chairman of the Board of the Company and bn.com
since inception. Mr. Riggio has been Chairman of the Board, Chief Executive
Officer and a principal stockholder of Barnes & Noble since its inception in
1986. Since 1965, Mr. Riggio has been Chairman of the Board, Chief Executive
Officer and the principal stockholder of B&N College, one of the nation's
largest operators of college bookstores. For more than the past five years,
Mr. Riggio has been 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 the principal member and sole Manager of
Babbage's Etc. LLC, a national retailer of personal computer software and video
games. Mr. Leonard Riggio is the brother of Mr. Stephen Riggio.
MR. JONATHAN BULKELEY has been Chief Executive Officer of the Company since
inception and bn.com since January 1999. From July 1995 to December 1998, he was
managing director of AOL's joint venture with Bertelsmann in the United Kingdom,
responsible for the development, creation and marketing of interactive online
services in the United Kingdom. Mr. Bulkeley moved to the United Kingdom to
create AOL's operation there. During his tenure, AOL-UK became the United
Kingdom's top online provider with over 500,000 subscribers. Previously, he was
Vice President of Business Development at AOL in the United States, responsible
for the development of new revenue streams, primarily advertising and e-commerce
transactions. Under Mr. Bulkeley's direction, AOL launched aggressive programs
to attract both advertisers and direct marketers. Prior to that position, he was
General Manager of Media, in charge of the development and production of all AOL
media partnerships. Before joining AOL in 1993, Mr. Bulkeley spent eight years
at Time Inc. in a variety of roles. He was Director of Marketing and Development
for Money magazine for three years. Prior to that, he held sales and marketing
positions at Time and Discover magazines. Mr. Bulkeley is a graduate of Yale
University.
MS. MARIE J. TOULANTIS has been Chief Financial Officer of the Company and
bn.com since May 1999. From March 1999 through May 1999 she was Chief Financial
Officer of Barnes & Noble and from July 1997 through May 1999 she was Executive
Vice President, Finance of Barnes & Noble. Prior to that, she was Senior Vice
President of The Chase Manhattan Bank ("Chase") from May 1996 to June 1997,
where she was responsible for managing the bank's relationships with major
accounts, including the Barnes & Noble account. Prior to that, she held the
position of Vice President at Chase from 1987 to May 1996.
47
<PAGE>
MR. GARY KING has been Chief Information Officer of the Company since
inception and bn.com since January 1999, and is responsible for developing and
implementing global information technologies, as well as allocating and
evaluating the effectiveness of overall technology resources. From 1987 to
December 1998, he was with Avon Products serving most recently as Vice President
for Global Information Technologies. At Avon, he was responsible for the
strategic planning, evaluation, selection and implementation of all information
technology and computing architectures for Avon's $1 billion businesses in
Europe, the Middle East and Africa. He led a team of information technology
professionals in 22 markets, supporting a business that produced more than
100,000 orders daily. He also created an integrated global network for Avon,
which resulted in increased sales, cost savings, and service improvements. Prior
to Avon, Mr. King worked in a number of information systems management positions
for Burroughs and Unisys. Mr. King holds a degree in computer science.
MR. CARL ROSENDORF was Vice President, Marketing, Sales and Business
Development of the Company since inception and bn.com since June 1997, and was
promoted to Senior Vice President in January 1999. Prior to that time, from
November 1994 to July 1996, Mr. Rosendorf was one of the founders and President
of Cybersmith, a premier Internet cafe. From 1988 to 1994, Mr. Rosendorf served
as Executive Vice President of B&N College where he was responsible for
coordinating all retail operations, including buying, merchandising, store
design and construction. Mr. Rosendorf has a career in bookselling which spans
over 20 years. In June 1998, Mr. Rosendorf was named by Advertising Age Magazine
as one of the year's Digital Media Masters.
MR. WILLIAM F. DUFFY has been Vice President, Operations of the Company and
bn.com since inception. He was also Chief Financial Officer of bn.com from
inception to January 1999 and a director of bn.com from inception to October
1998. Mr. Duffy is responsible for operations, fulfillment, and customer service
of bn.com. From April 1996 to January 1998, Mr. Duffy served as Vice President,
Finance of Barnes & Noble. From 1994 to 1997, Mr. Duffy served as the Vice
President and General Manager of Marboro Books Corp., a wholly-owned subsidiary
of Barnes & Noble through which Barnes & Noble operates its mail-order business,
where he was responsible for all of the merchandising, marketing, management
information systems and creative and fulfillment operations. From 1991 to 1993,
Mr. Duffy was the Vice President of Finance for Jamesway Corporation.
MS. BRENDA MARSH has been Vice President, Merchandising of the Company
since inception and bn.com since July 1998. From 1988 until 1997, she served
first as Senior Vice President, and then President, of Sales and Market
Development for the general book group of HarperCollins, where she was
responsible for domestic and international sales. Previously, Ms. Marsh was Vice
President of Sales at Viking Penguin, and prior to that, the Director of Sales
for St. Martin's Press. She began her career in the book business as a sales
representative for Columbia University Press and Simon & Schuster. Ms. Marsh has
more than 20 years of experience working in sales and marketing for the
publishing industry.
MR. MICHAEL N. ROSEN has been Secretary and a director of the Company and
bn.com since inception. Mr. Rosen has been a senior member of Robinson Silverman
Pearce Aronsohn & Berman LLP ("Robinson Silverman"), counsel to the Company and
bn.com, for more than the past five years. Mr. Rosen is also a director of
Barnes & Noble, B&N College and MBS.
MR. STEPHEN RIGGIO has been a director of the Company and bn.com since
inception. He was Chief Executive Officer of bn.com from inception to December
1998. He 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 and, from July
1993 to February 1995, he was President of B. Dalton Bookseller, Inc., a
wholly-owned subsidiary of Barnes & Noble. From January 1987 to February 1995,
Mr. Riggio was Executive Vice President, Merchandising of Barnes & Noble.
Mr. Stephen Riggio is the brother of Mr. Leonard Riggio.
DR. THOMAS MIDDELHOFF has been a director of the Company since inception
and bn.com since November 1, 1998. Dr. Middelhoff has been Chairman and Chief
Executive Officer of Bertelsmann since November 1, 1998. In 1995,
Dr. Middelhoff was appointed to the board of AOL. From 1994 to 1998,
Dr. Middelhoff was a Member of the Executive Board of Bertelsmann, where he was
the head of
48
<PAGE>
Corporate Development and the Coordinator of Bertelsmann's multimedia
businesses. Prior to that time, Dr. Middelhoff was appointed to the board of the
Industry Division of Bertelsmann and Chairman of the Board of Managing Directors
of Mohndruck. Dr. Middelhoff received his doctorate in Business Administration.
MR. MARKUS WILHELM has been a director of the Company since inception and
bn.com since November 1, 1998. Mr. Wilhelm has been the President of Doubleday
Direct, Inc. since May 1993, and its Chief Executive Officer and Chief
Compliance Officer since July 1994. Mr. Wilhelm is responsible for Doubleday
Direct's U.S., Canadian, British and Australian book club businesses, including
their overall marketing, operations and administration. On March 15, 1998,
Mr. Wilhelm was elected Chairman of the Board of Doubleday Interactive, Inc., a
U.S. Internet service provider. On August 19, 1998, as director of BOL.US
Online, Inc. and BOL.Global, Inc., Mr. Wilhelm developed and launched bol.com.
DR. KLAUS EIERHOFF has been a director of the Company since inception and
bn.com since November 1, 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, where he was responsible for
the Logistics, Organization and EDP Departments. From 1987 to 1990,
Dr. Eierhoff served as Managing Director of Bertelsmann Distribution GmbH. Prior
to that time, Dr. Eierhoff was a member of the Board of Management of
Bertelsmann Distribution GmbH. Dr. Eierhoff received his doctorate in
Organization.
ADDITIONAL DIRECTORS; CLASSES OF DIRECTORS
Prior to or promptly following the consummation of the Offering, three
additional independent directors who are not affiliated with the Company,
bn.com, Barnes & Noble or Bertelsmann will be elected to the Company's Board of
Directors. The identity of these directors is not currently known.
Prior to the consummation of the Offering, the Board of Directors will be
divided into three classes, each of whose members will serve for a staggered
three-year term. Each class will consist of one director elected by the holders
of the Class B Common Stock (each a "Class B Director"), one Class C Director
and one director elected by all stockholders of the Company voting together as a
single class. Upon the expiration of the term of a class of directors, directors
in such class will be elected for three-year terms at the annual meeting of
stockholders in the year in which such term expires.
49
<PAGE>
EXECUTIVE OFFICERS
Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve until the next annual meeting of the Board of
Directors or until their successors have been duly elected and qualified. The
Chairman of the Board is appointed by the Class B Directors, subject to approval
of the Class C Directors. The Chief Executive Officer is selected by the Special
Committee of the Board of Directors.
The executive officers of the Company also constitute the executive
officers of bn.com, each holding the same respective office.
BOARD COMMITTEES
Prior to or immediately following the consummation of the Offering, the
Company will establish a Special Committee of the Board of Directors. The
Special Committee will consist of two members, one of whom will be selected by
the Class B Directors and one of whom will be selected by the Class C Directors.
The initial members of the Special Committee will be Leonard Riggio and Thomas
Middelhoff. The purpose of the Special Committee will be to evaluate major
corporate actions of the Company and bn.com, such as mergers, acquisitions,
capital expenditures or borrowings in excess of $20 million (each a "Major
Action"). Each Major Action will require the approval of the Special Committee
prior to being submitted for the approval of the Board of Directors.
If the sum of the number of the outstanding shares of Class B Common Stock
and Membership Units owned by the holder of the Class B Common Stock falls below
15% of the number of outstanding Membership Units or the holder of the Class B
Common Stock transfers shares of Common Stock and/or Membership Units
constituting more than 10% of the number of outstanding Membership Units (other
than in a public sale, to its affiliates or to the holder of Class C Common
Stock or its affiliates), then the holder of the Class B Common Stock will lose
the right to elect a member to the Special Committee, the Class B Director will
resign from the Special Committee, and the Special Committee will thereafter
only consist of the Class C Director, provided, that the holder of the Class C
Common Stock still has the right to appoint a member to the Special Committee.
If the sum of the number of the outstanding shares of Class C Common Stock and
the Membership Units owned by the holder of the Class C Common Stock falls below
15% of the number of outstanding Membership Units or the holder of the Class C
Common Stock transfers shares of Common Stock and/or Membership Units
constituting more than 10% of the number of outstanding Membership Units (other
than in a public sale, to its affiliates or to the holder of the Class B Common
Stock or its affiliates), then the holder of the Class C Common Stock will lose
the right to elect a member to the Special Committee, the Class C Director will
resign from the Special Committee and the Special Committee will thereafter only
consist of the Class B Director, provided, that the holder of the Class B Common
Stock still has the right to appoint a member to the Special Committee.
Prior to or promptly following the consummation of the Offering, the
Company will establish an Executive Committee which will consist of Mr. Leonard
Riggio, Dr. Thomas Middelhoff and one additional director. The Executive
Committee will exercise all of the power and authority of the Board of Directors
to the extent permitted by law, provided that Major Actions will require the
approval of the Special Committee and the full Board of Directors.
Prior to or promptly following the consummation of the Offering, the
Company will establish an Audit Committee of the Board of Directors which will
consist solely of two or more independent directors. The Audit Committee will
review, act on and report to the Board of Directors with respect to various
auditing and accounting matters, including the selection of the Company's
auditors, the scope of the annual audits, fees to be paid to the auditors, the
performance of the Company's independent auditors and the accounting practices
of the Company.
Prior to or promptly following the consummation of the Offering, the
Company will establish a Compensation Committee of the Board of Directors (the
"Compensation Committee") which will consist solely of two or more independent
directors. The Compensation Committee will determine the salaries
50
<PAGE>
and incentive compensation of the officers of the Company and provide
recommendations for the salaries and incentive compensation of the other
employees and the consultants of the Company. The Compensation Committee will
also administer the Company's 1999 Incentive Plan (described below).
Prior to or promptly following the consummation of the Offering, the
Company will establish a Nominating Committee of the Board of Directors. The
Nominating Committee will consist of a Class B Director, a Class C Director, and
an additional director chosen by the Class B Directors, subject to the approval
of the Class C Directors. The role of the Nominating Committee will be to
conduct searches for potential directors and to recommend candidates to the full
Board of Directors for its consideration. Leonard Riggio, as the Class B
Director, and Thomas Middelhoff, as the Class C Director, will be initial
members of the Nominating Committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to or promptly following the consummation of the Offering, the
Company will appoint at least two independent directors to constitute the
Compensation Committee. 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 Company's Board of
Directors or Compensation Committee except that Leonard Riggio, the Company's
Chairman of the Board, is also the Chairman of the Board of Barnes and Noble and
Michael Rosen, who is the Secretary and a director of the Company, is also the
Secretary and a director of Barnes & Noble.
COMPENSATION OF DIRECTORS
All directors other than Leonard Riggio and Stephen Riggio will receive
options to purchase 40,000 shares of Class A Common at an exercise price equal
to the initial public offering price. Such options will vest in four equal
annual installments on the first through fourth anniversary of the completion of
the Offering. Directors who are not employees or officers of the Company,
bn.com, Barnes & Noble or Bertelsmann may also receive compensation in amounts
to be determined. In addition, all directors will be reimbursed for 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 will not receive additional compensation for their
services as directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company has included in its Amended Charter provisions to indemnify its
directors and officers and the officers of bn.com to the extent permitted by
Delaware law. The Amended Charter also includes provisions to eliminate the
personal liability of its directors and officers and the officers of bn.com to
the Company and its stockholders to the fullest extent permitted by Delaware
law. Under current law, such exculpation would extend to an officer's or
director's breaches of fiduciary duty, except for (i) breaches of such person's
duty of loyalty, (ii) those instances where such person is found not to have
acted in good faith, (iii) those instances where such person received an
improper personal benefit as the result of such breach and (iv) acts in
violation of Section 174 of the Delaware General Corporation Law (the "DGCL").
The Company's Amended By-laws provide that the Company will indemnify its
directors, officers and employees and the officers and employees of bn.com
against judgments, fines, amounts paid in settlement and reasonable expenses.
Insofar as the indemnification for liabilities resulting under the
Securities Act may be permitted to directors or officers of the Company or the
officers of bn.com, the Company has been informed that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
51
<PAGE>
GOVERNANCE DOCUMENTS
AMENDED CHARTER. The Amended Charter will provide for the Company's three
classes of Common Stock and staggered Board of Directors, and will also contain
the provisions governing the voting rights of the High Vote stock, and the
conversion of the High Vote Stock and the exchange of Membership Units not owned
by the Company into shares of Class A Common Stock. For a description of these
provisions, see "--Additional Directors; Classes of Directors" and "Description
of Capital Stock and Membership Units." Pursuant to the Amended Charter, the
Board of Directors will consist of nine directors, provided that if there shall
be less than three classes of Common Stock issued and outstanding, then the
number of directors constituting the Board of Directors shall consist of a
number of directors equal to three multiplied by the number of classes of Common
Stock then issued and outstanding. The Amended Charter will also provide that
each of the Class B Common Stock and the Class C Common Stock has the right to
directly elect three directors to the Board of Directors and Barnes & Noble and
Bertelsmann, by a vote of at least 75% of their respective Class B Common Stock
and Class C Common Stock (each voting separately as a class), may, without a
vote of the holders of the Class A Common Stock, approve a merger of bn.com into
the Company.
AMENDED BY-LAWS. The Amended By-laws will provide for the Committees of
the Board of Directors, including the Special Committee. For a description of
the Committees of the Board of Directors, see "--Board Committees." The Amended
By-laws will also provide that major events, including the Major Actions, will
require the approval of the full Board of Directors. Additionally, the Amended
By-laws will provide that all actions by or on behalf of the Company with
respect to the execution, delivery, termination, amendment or waiver of any
agreement between Barnes & Noble and the Company will require the approval of a
majority of the Class C Directors, and all actions by or on behalf of the
Company with respect to the execution, delivery, termination, amendment or
waiver of any agreement between Bertelsmann and the Company will require the
approval of a majority of the Class B Directors.
STOCKHOLDERS AGREEMENT. In connection with the Offering, the Company,
Barnes & Noble and Bertelsmann will enter into a Stockholders Agreements (the
"Stockholders Agreement") which will contain "demand" and "piggyback"
registration rights with respect to shares of Class A Common Stock issued upon
conversion of High Vote Stock or in exchange for Membership Units. See
"Description of Capital Stock and Membership Units--Registration Rights."
Pursuant to the Stockholders Agreement, transfers of Common Stock beneficially
owned by Barnes & Noble and Bertelsmann will be subject to substantially the
same restrictions on transfer and rights of first refusal as the Membership
Units (which restrictions and rights are described below), provided that, when
Barnes & Noble or Bertelsmann transfer their shares of Common Stock, they must
also transfer their Membership Units to the transferee of such shares.
Notwithstanding the foregoing, Barnes & Noble and Bertelsmann are permitted to
transfer some or all of their Class A Common Stock in a public offering or
pursuant to Rule 144 under the Securities Act without being subject to the
foregoing restrictions. The Stockholders Agreement terminates on the date on
which there are no more shares of Common Stock owned by any of the parties
thereto. Pursuant to the Stockholders Agreement, each of Barnes & Noble and
Bertelsmann will also agree that, with respect to the directors not elected
directly by it, it will vote its High Vote Stock in favor of three directors
nominated by the Nominating Committee of the Board of Directors.
OPERATING AGREEMENT. In connection with the Offering, the Company, Barnes
& Noble and Bertelsmann will enter into the Operating Agreement, pursuant to
which the Company will become the sole Manager of bn.com. As the sole Manager of
bn.com, the Company, which is controlled by Barnes & Noble and Bertelsmann, will
control all of the affairs of bn.com. As such, the Company, through the Special
Committee, its Board of Directors and its officers, will be responsible for all
operational and administrative decisions of bn.com and the day-to-day management
of bn.com's business. Prior to being submitted to the Company's Board of
Directors, all Major Actions of bn.com must be approved by the Special
Committee. For a description of the Special Committee and the Major Actions it
must approve, see "--Board Committees." Additionally, the Operating Agreement
will provide that bn.com shall be the exclusive means by which each of Barnes &
Noble and Bertelsmann sell English-language books in English-Speaking Countries
through the Internet, except that the Web sites of Bertelsmann's publishing
companies may sell the books they publish on their Web sites, and BOL.UK,
BOL.New Zealand and BOL.Australia may sell
52
<PAGE>
English-language books. BOL Web sites operating in non-English-Speaking
Countries will contain equally prominent links to bn.com and one BOL Web site
for the sale of English-language books. bn.com may only sell
non-English-language books through links to BOL's Web sites. The Operating
Agreement also prohibits bn.com from operating book clubs. Pursuant to the
Operating Agreement, the above exclusivity and restrictions apply to each of
Barnes & Noble and Bertelsmann through the later of: (i) the date it ceases to
own any Membership Units or Common Stock; and (ii) two years following the date
the number of shares of Common Stock, together with the number of Membership
Units, held by such party constitutes less than 10% of the then outstanding
Membership Units. Pursuant to the Operating Agreement, in general, cash is
distributed to members, and profits and losses are allocated among members, in
accordance with their respective equity interests in bn.com.
Pursuant to the Operating Agreement, except as set forth below, neither
Barnes & Noble, Bertelsmann, nor any of their respective affiliates may directly
or indirectly transfer any right, title or interest in: (i) any Membership
Units; or (ii) any of their respective affiliates which beneficially owns,
either directly or indirectly, Membership Units. Each member of bn.com, other
than the Company, may transfer all of the Membership Units owned by it; (i) to
any of its affiliates (other than to an affiliate of which specified competitors
own an interest); or (ii) to the transferee of the publishing or retail book
store business, as the case may be, in connection with a transfer by Bertelsmann
of substantially all of its publishing business in the U.S., or by Barnes &
Noble of substantially all of its retail book store business. Additionally, each
member of bn.com, other than the Company, may transfer some or all of the
Membership Units owned by it to any other member of bn.com or to the Company in
exchange for Class A Common Stock in accordance with the Amended Charter. Except
with respect to the permitted transfers described above, if, on or after
October 31, 1999, Barnes & Noble or Bertelsmann or any of their affiliates
desires to transfer any of its Membership Units to any other person in a bona
fide transaction solely for cash consideration, it is entitled to do so provided
that it first offers to sell such Membership Units to the other in accordance
with the right of first refusal provisions of the Operating Agreement.
For a description of restrictions on the business of bn.com see "Risk
Factors--Limitations on bn.com's Business," and for a description of the
structure of the Company, see "Corporate History and Recapitalization."
53
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The salaries and other compensation (other than long-term compensation) of
the executive officers of the Company are paid by bn.com. The following table
summarizes the compensation paid or accrued by the Company and bn.com during
1998, for services rendered to the Company and bn.com, to the Chief Executive
Officer and the four other most highly compensated executive officers
(collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ---------------
--------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION(2)
- -------------------------------------- ------------ ------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Stephen Riggio(3)
Former Chief Executive Officer...... $ -- $ -- $ -- 1,380,000 $ --
Jeffrey Killeen(4)
Former Chief Operating Officer...... 490,385 100,000 -- 2,070,000 167,121(5)
Carl Rosendorf
Senior Vice President, Marketing,
Sales and Business Development...... 271,154 33,333 1,500 862,500 --
William F. Duffy(6)
Vice President, Operations.......... 255,507 110,000 23,864 603,750 --
John Kristie(7)
Former Vice President, Information
Technology.......................... 233,654 44,000 3,200 603,750 --
</TABLE>
- ------------------
(1) Consists of payments made under the Company's Retirement Plan, Deferred
Compensation Plan and Defined Contribution Plan.
(2) In accordance with the rules of the Securities and Exchange Commission,
except as indicated, other compensation in the form of perquisites and other
personal benefits has been omitted for each of the Named Executive Officers
because the aggregate amount of such perquisites and other personal benefits
constituted less than the lesser of $50,000 or 10% of the total of annual
salary and bonuses for each of such Named Executive Officers in 1998.
(3) During 1998, Mr. Riggio was paid a salary of $508,462, a bonus of $276,000
and other compensation of $4,000 by Barnes & Noble for his duties as Vice
Chairman of Barnes & Noble, which duties included being the Chief Executive
Officer of bn.com. None of this compensation has been allocated to bn.com.
As of January 4, 1999, Jonathan Bulkeley became the Chief Executive Officer
of bn.com.
(4) Mr. Killeen's employment terminated as of February 19, 1999.
(5) Consists solely of reimbursement of relocation expenses.
(6) During January 1998, Mr. Duffy was paid a salary of $31,731 by Barnes &
Noble in his capacity as Vice President, Finance of Barnes & Noble, which
duties included being the Vice President, Finance of bn.com. None of this
compensation has been allocated to bn.com.
(7) Mr. Kristie's employment terminated as of April 5, 1999.
54
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to stock
option grants to the Named Executive Officers during the year ended
December 31, 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
INDIVIDUAL GRANTS(1)(2) AT ASSUMED ANNUAL
-------------------------------------------------------------- RATES
% OF TOTAL OF STOCK PRICE
NUMBER OF OPTIONS APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OPTION TERM(3)
UNDERLYING EMPLOYEES PRICE PER -------------------------
NAME OPTION GRANTED IN FISCAL YEAR SHARE EXPIRATION DATE 5.0% 10.0%
- ------------------------- --------------- -------------- --------- --------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Stephen Riggio........... 1,380,000 7.6% $3.48 2/1/2008 $3,022,200 $ 7,659,000
Jeffrey Killeen.......... 2,070,000(4) 11.4 3.48 2/1/2008 4,533,300 11,488,500
Carl Rosendorf........... 862,500 4.8 3.48 2/1/2008 1,888,875 4,786,875
William F. Duffy......... 603,750 3.3 3.48 2/1/2008 1,322,213 3,350,813
John Kristie............. 603,750(5) 3.3 3.48 2/1/2008 1,322,213 3,350,813
</TABLE>
- ------------------
(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) All options, which were originally granted in February 1998 by bn.com and
granted by the Company as replacement options, vest and become exercisable
in equal annual installments on each February 1 of the years 1999, 2000,
2001 and 2002.
(3) In accordance with the rules of the 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.
(4) Mr. Killeen forfeited 1,380,000 of these options, which were not vested at
the time of his termination of employment.
(5) Mr. Kristie forfeited 452,813 of these options, which were not vested at the
time of his termination of employment.
55
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth certain information with respect to the
value of unexercised options held by the Named Executive Officers at
December 31, 1998. None of the Named Executive Officers exercised any options
during the year ended December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31, 1998 AT DECEMBER 31, 1998(1)
----------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Stephen Riggio..................................... -- 1,380,000 $ -- $18,657,600
Jeffrey Killeen.................................... -- 2,070,000(2) -- 27,986,400
Carl Rosendorf..................................... -- 862,500 -- 11,661,000
William F. Duffy................................... -- 603,750 -- 8,162,700
John Kristie....................................... -- 603,750 -- 8,162,700
</TABLE>
- ------------------
(1) Based upon an initial public offering price of the Class A Common Stock of
$17.00 per share.
(2) Mr. Killeen forfeited 1,380,000 of these options, which were not vested at
the time of his termination of employment.
(3) Mr. Kristie forfeited 452,813 of these options, which were not vested at the
time of his termination of employment.
EMPLOYEES' RETIREMENT PLAN
Prior to October 31, 1998, employees of bn.com were covered by a pension
plan administered by Barnes & Noble. Under the terms of the Formation
Transaction, the assets and liabilities of the Barnes & Noble pension plan were
bifurcated and a separate Employees' Retirement Plan maintained by bn.com (the
"Retirement Plan") was established for the benefit of bn.com's employees.
The Retirement Plan is a defined benefit pension plan covering all
employees whose services are performed within the U.S. (including Puerto Rico)
who are at least 21 years of age and who have completed at least one year of
service and work a minimum of 1,000 hours per year. Vesting occurs after five
years of service. The Retirement Plan provides bn.com-funded benefits based upon
an employee's years of service and highest average annual salary for any five
consecutive years in the last ten years of service.
A participant's annual benefit is determined, 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
1998, indexed annually. Compensation recognized under the Retirement Plan is
limited to $160,000 for 1997, 1998 and 1999, indexed annually in accordance with
Sections 401(a)(17) and 415(d) of the Code.
The Retirement Plan provides that, for as long as the Barnes & Noble
pension plan provides for future benefit accruals, if a participant in the
Employees' Retirement Plan becomes employed by Barnes & Noble or an affiliate by
a direct transfer of employment from bn.com, increases in such person's age and
the compensation paid by Barnes & Noble during that employment with Barnes &
Noble will be taken into account in calculating benefits under the Retirement
Plan accrued through the date of such transfer. The Retirement Plan also
provides that, with respect to any person who becomes employed by bn.com, upon a
direct transfer of employment from Barnes & Noble or an affiliate, service with
Barnes & Noble or the affiliate shall be taken into account for purposes of
vesting, eligibility and early retirement subsidies under the Retirement Plan.
56
<PAGE>
Credited years of service under the Retirement Plan as of December 31, 1998
for the individuals named in Summary Compensation Table above are: Stephen
Riggio--0, Jeffrey Killeen--1, Carl Rosendorf--2, William F. Duffy--5, John
Kristie--4.
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:
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE
---------------------------------------------------
ASSUMED HIGHEST AVERAGE SALARY 15 20 25 30 35
- ------------------------------------------------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$125,000.............................................. $21,405 $28,540 $35,675 $42,810 $49,945
$150,000.............................................. 26,280 35,040 43,800 52,560 61,320
$160,000 and above(1)................................. 28,230 37,040 47,050 56,460 65,870
</TABLE>
- ------------------
(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 or after 1997. 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.
DEFERRED COMPENSATION PLAN
Prior to October 31, 1998, one employee of bn.com participated in a
deferred compensation plan administered by Barnes & Noble (the "Barnes & Noble
Plan"). Under the terms of the Formation Transaction, a separate Deferred
Compensation Plan, maintained by bn.com was established effective November 1,
1998 for the benefit of eligible bn.com employees. An amount equal to the
contributions of the bn.com employee in a deferral account under the Barnes &
Noble Plan was transferred to the bn.com Deferred Compensation Plan.
bn.com's Deferred Compensation Plan is a non-qualified plan, eligibility
for which is limited to "Eligible Executives," who include: (i) bn.com employees
who became bn.com employees on November 1, 1998; and were eligible to
participate in the Barnes & Noble deferred compensation plan on October 31,
1998; and (ii) bn.com 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 under the Deferred Compensation Plan. An Eligible
Executive who receives a bonus may elect to defer no less than $2,500 and no
more than 100% of his or her bonus to his or her 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 bn.com, payable out of bn.com's general assets to the extent not
paid by a grantor trust which bn.com may establish. bn.com may amend or
terminate the Deferred Compensation Plan at any time without affecting any of
the rights granted prior to termination.
57
<PAGE>
DEFINED CONTRIBUTION PLAN
bn.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 or post-tax basis, at their
option. bn.com's contributions to the Savings Plan are generally in amounts
based upon a defined percentage of the employees' pre-tax contributions. bn.com
provides matching contributions to participants in the amount of 50% of the
first 5% contributed by them, which contributions are made in the form of Barnes
& Noble common stock.
EMPLOYMENT ARRANGEMENTS
bn.com entered into an Employment Agreement with Jonathan Bulkeley (the
"Bulkeley Agreement") pursuant to which, as of January 4, 1999, Mr. Bulkeley
became the Chief Executive Officer of bn.com. The Bulkeley Agreement may be
terminated by either party on 60 days prior written notice to the other.
Pursuant to the Bulkeley Agreement, Mr. Bulkeley receives an annual base salary
of $400,000. Mr. Bulkeley is also eligible to receive additional payments under
bn.com's incentive compensation and bonus programs, with such amount to be
determined by the Compensation Committee in accordance with those programs.
Additionally, Mr. Bulkeley has been granted options to purchase a total of
4,140,000 shares of Class A Common Stock at an exercise price of $4.06 per
share. One-quarter of such options vested on February 1, 1999 and the remaining
options vest in equal installments on the first, second, third and fourth
anniversary of February 1, 1999. Unvested options will terminate upon the
termination of Mr. Bulkeley's employment. bn.com maintains life insurance
coverage in the face amount of $1.5 million on Mr. Bulkeley. Mr. Bulkeley has
the exclusive right to designate the beneficiaries of such policy. In the event
of Mr. Bulkeley's death, the Bulkeley Agreement shall terminate, and
Mr. Bulkeley's legal representative shall receive from bn.com the base salary,
benefits or other payments which would otherwise be due to the end of the month
during which the termination of employment occurred. In the event termination
results from an incapacity, then bn.com shall continue paying Mr. Bulkeley
disability benefits no less favorable than those paid to senior executives of
Barnes & Noble, including but not limited to the proceeds of disability
insurance. If bn.com terminates Mr. Bulkeley for cause, provided Mr. Bulkeley is
given at least thirty days prior notice and the opportunity to cure the alleged
deficiency, then he shall receive his salary through the end of the month in
which the termination occurred. If Mr. Bulkeley's employment is terminated by
bn.com without cause, he shall receive the base salary that would otherwise be
due at the end of the month of termination multiplied by twenty-four, plus the
monthly cost to bn.com of the continuation of certain benefits at then current
levels multiplied by twelve. If Mr. Bulkeley is terminated as a result of a
"change of control" transaction (as such term is defined in the Bulkeley
Agreement), then he will receive an amount of cash equal to 24 times his then
monthly salary and all of his then unvested options will immediately vest. The
Bulkeley Agreement also contains confidentiality and non-competition provisions.
bn.com entered into a Termination Agreement with Jeffrey Killeen ("Killeen
Termination Agreement"), dated as of February 22, 1999, pursuant to which bn.com
agreed to pay Mr. Killeen the remaining portion of his 1999 annual base salary
of $500,000, plus two weeks accrued and unused vacation time, in one lump
payment. Additionally, Mr. Killeen became fully vested with respect to 690,000
of his 2,070,000 options to purchase shares of Class A Common Stock at an
exercise price of $3.48 per share; the balance of options were forfeited.
Pursuant to the Killeen Termination Agreement, bn.com will pay Mr. Killeen's
medical, insurance, disability and related benefits until February 19, 2000 (the
first anniversary of his termination date). Pursuant to the Killeen Termination
Agreement, Mr. Killeen agreed not to compete with bn.com for one year.
INCENTIVE PLAN
GENERAL. 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 of not fewer
than two directors of the Company, as designated by the Board of Directors. The
purpose of
58
<PAGE>
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 bn.com who will contribute to the Company's success and to
achieve long-term objectives which 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. The Incentive
Plan is substantially the same as the 1998 Incentive Plan (the "LLC Incentive
Plan") established by bn.com. The Incentive Plan provides for the grant of
replacement options ("Replacement Options") to employees of the Company who
received options under the LLC Incentive Plan. In connection with the
consummation of the Offering, the Company will issue Replacement Options to all
holders of outstanding options under the LLC Incentive Plan. As of March 31,
1999, options to purchase 17,856,441 shares of Class A Common Stock at a
weighted average exercise price of $4.34 per share were outstanding. The Company
will contribute all proceeds received by it upon the exercise of options under
the Incentive Plan to bn.com in exchange for Membership Units at a price per
Membership Unit equal to the exercise price of such options. See "Corporate
History and Recapitalization" and "Description of Capital Stock and Membership
Units--Options."
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 an 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 Incentive Plan is administered by the
Compensation Committee. 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
thereunder 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
will be determined by the Compensation Committee, but no Option will be
exercisable prior to six months from the date of grant or more than ten years
after the date of grant (except in the case of Options that are 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 the 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 be
transferable to family members and trusts for the benefit of the participant or
his or her family members.
59
<PAGE>
SHARE APPRECIATION RIGHTS. The Incentive Plan provides that 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 will
have 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 grant 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 accomplished 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 interest rate on a stock purchase loan will be determined by the
Compensation Committee. Stock purchase loans will be 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,
60
<PAGE>
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.
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 modification 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.
61
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of May 1, 1999 by: (i) each person known by the
Company to own beneficially more than 5% of the outstanding shares of Common
Stock; (ii) each of the Company's directors; (iii) the Named Executive Officers;
and (iv) all current executive officers and directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF SHARES PERCENTAGE OF
BENEFICIALLY OWNED(1) BENEFICIALLY OWNED VOTING POWER
------------------------- -------------------- --------------------
NAME AND ADDRESS BEFORE AFTER BEFORE AFTER BEFORE AFTER
OF BENEFICIAL OWNER OFFERING OFFERING OFFERING OFFERING OFFERING OFFERING
- ----------------------------------------- -------- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Barnes & Noble, Inc. .................... 1(2) 57,500,001(3) 50.0% 41.1% 50.0% 48.9%
122 Fifth Avenue
New York, NY 10011
Bertelsmann AG .......................... 1(4) 57,500,001(3) 50.0 41.1 50.0 48.9
Carl-Bertelsmann--Strasse 270
33311 Gutersloh, Germany
Leonard Riggio(5)........................ 1 60,030,023 50.0 70.6 50.0 49.0
Stephen Riggio(6)........................ -- 345,000 -- 1.4 -- *
Jeffrey Killeen(7)....................... -- 690,000 -- 2.7 -- *
Carl Rosendorf(8)........................ -- 215,625 -- * -- *
William F. Duffy(9)...................... -- 150,937 -- * -- *
John Kristie(10)......................... -- 150,937 -- * -- *
Michael N. Rosen(11)..................... -- -- -- -- -- --
Thomas Middelhoff(11).................... -- -- -- -- -- --
Markus Wilhelm(11)....................... -- -- -- -- -- --
Klaus Eierhoff(11)....................... -- -- -- -- -- --
All current executive officers and
directors as a group
(12 persons)(12)....................... 1 61,862,835 50.0 71.2 50.0 49.1
</TABLE>
- ------------------
* Represents less than 1%.
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
Shares of Common Stock subject to options that are currently exercisable or
exercisable within 60 days of the date of this Prospectus are deemed to be
outstanding and to be 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) Represents 1 share of Class B Common Stock.
(3) Represents shares of High Vote Stock which are convertible into, and
Membership Units which 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. See
"Description of Capital Stock and Membership Units."
(4) Represents 1 share of Class C Common Stock.
(5) Includes the 1 share of Class B Common Stock owned by Barnes & Noble
(before the Offering), and the 57,500,001 shares of Class A Common Stock
beneficially owned by Barnes and Noble (after the Offering). Mr. Leonard
Riggio beneficially owns approximately 21.9% of the common stock of Barnes
& Noble, and is its Chairman of the Board and Chief Executive Officer. Also
includes options granted by the Company to Mr. Riggio to purchase 2,530,023
shares of Class A Common Stock, which options are exercisable within
60 days following the date of this Prospectus. Excludes options granted by
the Company to Mr. Riggio to purchase 2,530,023 shares of Class A Common
Stock, which options are not exercisable within 60 days following the date
of this
(Footnotes continued on next page)
62
<PAGE>
(Footnotes continued from previous page)
Prospectus. Mr. Riggio also has expressed an interest in purchasing shares
being sold in the Offering, and may purchase up to 10% of the shares
offered.
(6) Includes options granted by the Company to Mr. Stephen Riggio to purchase
345,000 shares of Class A Common Stock, which options are exercisable
within 60 days following the date of this Prospectus. Excludes options
granted by the Company to Mr. Riggio to purchase 1,035,000 shares of
Class A Common Stock, which options are not exercisable within 60 days
following the date of this Prospectus.
(7) Includes options granted by the Company to Mr. Killeen to purchase 690,000
shares of Class A Common Stock, which options are exercisable within
60 days following the date of this Prospectus. Excludes options granted by
the Company to Mr. Killeen to purchase 1,380,000 shares of Class A Common
Stock, which options were forfeited upon Mr. Killeen's termination of
employment.
(8) Includes options granted by the Company to Mr. Rosendorf to purchase
215,625 shares of Class A Common Stock, which options are exercisable
within 60 days following the date of this Prospectus. Excludes options
granted by the Company to Mr. Rosendorf to purchase 646,875 shares of
Class A Common Stock, which options are not exercisable within 60 days
following the date of this Prospectus.
(9) Includes options granted by the Company to Mr. Duffy to purchase 150,937
shares of Class A Common Stock, which options are exercisable within 60
days following the date of this Prospectus. Excludes options granted by the
Company to Mr. Duffy to purchase 452,813 shares of Class A Common Stock,
which options are not exercisable within 60 days following the date of this
Prospectus.
(10) Includes options granted by the Company to Mr. Kristie to purchase 150,937
shares of Class A Common Stock, which options are exercisable within
60 days following the date of this Prospectus. Excludes options granted by
the Company to Mr. Kristie to purchase 452,813 shares of Class A Common
Stock, which options were forfeited upon Mr. Kristie's termination of
employment.
(11) Excludes options to purchase 40,000 shares of Class A Common Stock which
will be granted upon the consummation of the Offering, none of which will
be exercisable within 60 days following the date of this Prospectus.
(12) Includes 4,362,835 shares of Class A Common Stock issuable upon exercise of
options exercisable within 60 days following the date of this Prospectus.
Excludes 9,063,462 shares of Class A Common Stock issuable upon exercise of
options, which options are not exercisable within 60 days following the
date of this Prospectus.
The Underwriters have reserved for sale, at the initial public offering
price, up to 2,500,000 shares of the Class A Common Stock offered hereby for
employees and directors of the Company and business associates and related
persons of the Company who have expressed an interest in purchasing such shares
of Class A Common Stock in the Offering. Some of the officers and directors set
forth above may acquire additional shares of Common Stock in the Offering
through such program or otherwise.
63
<PAGE>
CERTAIN TRANSACTIONS
In connection with the Offering, Barnes & Noble and Bertelsmann will enter
into the Stockholders Agreement which will provide, among other things, for the
management of the Company and the Operating Agreement, pursuant to which the
Company will become the sole Manager of, and will control the affairs of,
bn.com. For a description of these agreements, See "Management--Governance
Documents."
bn.com and either Barnes & Noble and Bertelsmann or their affiliates have
entered into the Supply Agreement, the Trademark License Agreement, the Database
License Agreement, the BOL Trademark License Agreement, the Technology Sharing
and License Agreements and the Services Agreements. Pursuant to the Supply
Agreement, bn.com paid Barnes & Noble $26.9 million in 1998 and $3.9 million in
1997. Pursuant to the Services Agreement, bn.com paid Barnes & Noble and/or its
affiliates $0.9 million in 1998 and $0.2 million in 1997. For a description of
these agreements, see "Business--Related Party Agreements."
bn.com subleases real estate from Barnes & Noble. For a description of this
lease, see "Business--Facilities."
Thomas Middelhoff, a director of the Company, is also a director of AOL.
Prior to Mr. Middelhoff being a director of the Company, bn.com has entered into
the AOL Agreement. For a description of the AOL Agreement, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Michael N. Rosen, a director of the Company, is also a senior member of
Robinson Silverman, which firm is outside counsel to the Company and bn.com.
DESCRIPTION OF CAPITAL STOCK AND MEMBERSHIP UNITS
GENERAL
The following description of the capital stock of the Company and
provisions of the Amended Charter, and the Amended By-laws, each of which will
be in effect prior to the date of this Prospectus, are summaries thereof and are
qualified by reference to the Amended Charter and the Amended By-laws, copies of
which have been filed with the Commission as exhibits to the Company's
Registration Statement, of which this Prospectus forms a part.
The authorized capital stock of the Company consists of 750,000,000 shares
of Class A Common Stock, par value $.001 per share, 1,000 shares of Class B
Common Stock, par value $.001 per share, 1,000 shares of Class C Common Stock,
par value $.001 per share and 50,000,000 shares of Preferred Stock, par value
$.001 per share.
COMMON STOCK
As of the completion of the Offering, there will be 25,000,000 shares of
Class A Common Stock issued and outstanding, one share of Class B Common Stock
issued and outstanding and beneficially held of record by Barnes & Noble and
one share of Class C Common Stock issued and outstanding and beneficially held
of record by Bertelsmann.
VOTING RIGHTS. The holders of Class A Common Stock and High Vote Stock
generally have identical rights, except each holder of Class A Common Stock is
entitled to one vote per share and each holder of High Vote Stock is entitled to
the number of votes per share equal to: (i) ten, multiplied by the sum of
(a) the aggregate number of High Vote Stock owned by such holder and (b) the
aggregate number of Membership Units owned by such holder; divided by (ii) the
number of shares of High Vote Stock owned by such holder. Holders of the
Class B Common Stock are entitled to elect three directors to the Company's
Board of Directors and holders of the Class C Common Stock are entitled to elect
three directors to the Company's Board of Directors. The remaining directors
will be elected by all of the stockholders of the Company voting together as a
single class. Holders of shares of Class A Common
64
<PAGE>
Stock and High Vote Stock are not entitled to cumulate their votes in the
election of directors. Generally, all matters to be voted on by stockholders
must be approved by a majority (or, in the case of election of directors, by a
plurality) of the votes entitled to be cast by all shares of Class A Common
Stock and High Vote Stock present in person or represented by proxy, voting
together as a single class, subject to any voting rights granted to holders of
any Preferred Stock. Except as otherwise provided by law, and subject to any
voting rights granted to holders of any outstanding Preferred Stock, amendments
to the Amended Charter must be approved by a majority of the combined voting
power of all of Class A Common Stock and High Vote Stock, voting together as a
single class. However, amendments to the Amended Charter that would alter or
change the powers, preferences or special rights of the Class A Common Stock or
the High Vote Stock so as to affect them adversely also must be approved by a
majority of the votes entitled to be cast by the holders of the shares affected
by the amendment, voting as a separate class. Notwithstanding the foregoing, any
amendment to the Company's Amended Charter to increase or decrease the
authorized shares of any class shall be approved upon the affirmative vote of
the holders of a majority of the Common Stock, voting together as a single
class. Barnes & Noble and Bertelsmann, by a vote of at least 75% of their
respective Class B Common Stock and Class C Common Stock (each voting separately
as a class), may, without a vote of the holders of the Class A Common Stock,
approve a merger of bn.com into the Company.
DIVIDENDS. Holders of Class A Common Stock and High Vote Stock will share
ratably (based on the number of shares of Common Stock held) in any dividend
declared by the Board of Directors, subject to any preferential rights of any
outstanding Preferred Stock. Dividends consisting of shares of Class A Common
Stock and High Vote Stock may be paid only as follows: (i) shares of Class A
Common Stock may be paid only to holders of shares of Class A Common Stock, and
shares of High Vote Stock may be paid only to holders of High Vote Stock; and
(ii) shares shall be paid proportionally with respect to each outstanding share
of Class A and High Vote Stock. The Company may not subdivide or combine shares
of either class of Common Stock without at the same time proportionally
subdividing or combining shares of the other class.
CONVERSION OF HIGH VOTE STOCK. Each share of High Vote Stock is
convertible at the option of the holder thereof into one share of Class A Common
Stock. Any shares of High Vote Stock transferred to a person other than Barnes &
Noble or any of its subsidiaries or Bertelsmann or any of its subsidiaries shall
automatically convert to shares of Class A Common Stock upon such disposition.
If the number of outstanding shares of Class B Common Stock plus the number of
Membership Units owned by the holder of the Class B Common Stock falls below 15%
of the number of outstanding Membership Units, then all outstanding shares of
Class B Common Stock shall automatically convert into Class A Common Stock. If
the number of the outstanding shares of Class C Common Stock plus the number of
Membership Units owned by the holder of the Class C Common Stock falls below 15%
of the number of outstanding Membership Units, then all outstanding shares of
Class C Common Stock shall automatically convert into Class A Common Stock.
OTHER RIGHTS. In the event of any merger or consolidation of the Company
with or into another company in connection with which shares of Common Stock are
converted into or exchangeable for shares of stock, other securities or property
(including cash), all holders of Common Stock, regardless of class, will be
entitled to receive the same kind and amount of shares of stock and other
securities and property (including cash).
On liquidation, dissolution or winding up of the Company, after payment in
full of the amounts required to be paid to holders of Preferred Stock, if any,
all holders of Common Stock, regardless of class, are entitled to share ratably
in any assets available for distribution to holders of shares of Common Stock.
No shares of any class of Common Stock are subject to redemption or have
preemptive rights to purchase additional shares of Common Stock.
Upon consummation of the Offering, all the outstanding shares of Class A
Common Stock and High Vote Stock will be legally issued, fully paid and
nonassessable.
65
<PAGE>
PREFERRED STOCK
Upon the closing of the Offering, the Board of Directors will be
authorized, without further stockholder approval, to issue from time to time up
to an aggregate of 50 million shares of Preferred Stock in one or more series
and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. Upon the closing of the
Offering, there will be no shares of Preferred Stock outstanding. The Company
has no present plans to issue any shares of Preferred Stock. See
"--Anti-Takeover Effects of Provisions of Delaware Law and the Company's Amended
Charter and Amended By-laws."
OPTIONS
As of March 31, 1999, options to purchase a total of 17,856,441 shares
("Option Shares") of Class A Common Stock were outstanding, 12,391,296 of which
are subject to lock-up agreements entered into with the Underwriters. Of the
remaining 5,465,145 Option Shares, 1,185,937 will be eligible for sale
immediately following the completion of the Offering.
The total number of shares of Class A Common Stock that may be subject to
the granting of options under the Incentive Plan shall be equal to 25,500,000
shares of Common Stock. See "Management--Incentive Plan" and "Shares Eligible
for Future Sale."
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND THE AMENDED CHARTER AND
AMENDED BY-LAWS
The Company is subject to Section 203 of the DGCL, an anti-takeover law. In
general, Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years following the date the person became an interested
stockholder, unless (with certain exceptions) the "business combination" or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the interested stockholder. Generally, an "interested stockholder" is a person
who, together with affiliates and associates, owns (or within three years prior
to the determination of interested stockholder status, did own) 15% or more of a
corporation's voting stock. The existence of this provision would be expected to
have an anti-takeover effect with respect to transactions not approved in
advance by the Board of Directors, including discouraging attempts that might
result in a premium over the market price for the shares of Common Stock held by
stockholders.
Additionally, provisions of the Amended Charter and Amended By-laws, which
provisions will be in effect prior to the closing of the Offering and are
summarized in the following paragraphs, may be deemed to have an anti-takeover
effect and may delay, defer or prevent a tender offer or takeover attempt that a
stockholder might consider in its best interest, including those attempts that
might result in a premium over the market price for the shares held by
stockholders.
The relevant portions of the Amended Charter and Amended By-laws are
designed to discourage certain types of transactions that may involve an actual
or threatened change of control of the Company. These provisions are meant to
encourage persons interested in acquiring control of the Company to first
consult with the Board of Directors to negotiate terms of a potential business
combination or offer. Further, these provisions protect against an unsolicited
proposal for a takeover of the Company that may effect the long-term value of
the Company's stock or that may be otherwise unfair to the stockholders of the
Company.
CLASSIFIED BOARD OF DIRECTORS. The Board of Directors will be divided into
three classes of directors serving staggered three-year terms. As a result,
approximately one-third of the Board of Directors will be elected each year. The
Board of Directors will consist of nine directors, provided that if
66
<PAGE>
there shall be less than three classes of Common Stock issued and outstanding,
then the Board of Directors shall consist of a number of directors equal to
three multiplied by the number of classes of Common Stock then issued and
outstanding. Further, three members of the Board of Directors are elected by the
holders of the Class B Common Stock and three members of the Board of Directors
are elected by the holders of the Class C Common Stock.
These provisions may deter a stockholder from removing incumbent directors
and simultaneously gaining control of the Board of Directors by filling the
vacancies created by such removal with its own nominees.
SPECIAL MEETING OF STOCKHOLDERS. The Amended By-laws provide that special
meetings of stockholders of the Company may be called only by the Chairman of
the Board of Directors, a member of the Special Committee, or a majority of the
Board of Directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The Amended By-laws provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual meeting of stockholders, must provide timely
notice thereof in writing. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Company, not less than 30 days nor more than 60 days prior to the annual
meeting; provided, that in the event that less than 40 days' notice or prior
public disclosure of the date of the annual meeting is given or made to
stockholders, notice by the stockholder to be timely must be received by the
close of business on the 10th day following the date on which notice of the date
of the meeting is given to stockholders' or made public, whichever first occurs.
The Amended By-laws also specify certain requirements as to the form and content
of a stockholder's notice. These provisions may preclude stockholders from
bringing matters before an annual meeting of stockholders or from making
nominations for directors at an annual meeting of stockholders.
AUTHORIZED BUT UNISSUED SHARES. The authorized but unissued shares of
Common Stock and Preferred Stock are available for future issuance without
stockholder approval. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued shares of Common Stock and Preferred Stock could render
more difficult or discourage an attempt to obtain control of the Company by
means of a proxy contest, tender offer, merger or otherwise.
AMENDMENTS. The DGCL provides generally that the affirmative vote of a
majority of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or by-laws, unless a corporation's
certificate of incorporation or by-laws, as the case may be, requires a greater
percentage. The affirmative vote of the holders of at least 70% of the issued
and outstanding Common Stock, voting as one class, is required to amend or
repeal the Amended Charter. Subject to the Amended By-laws, the Board of
Directors may from time to time make, amend, supplement or repeal the Amended
By-laws by vote of a majority of the Board of Directors; provided, however, that
the stockholders may change or amend or repeal any provision of the Amended
By-laws by the affirmative vote of the holders of a majority of the Common
Stock, voting as one class, and (y) if a Class B Director is then entitled to be
a member of the Special Committee, by the affirmative vote of the holders of a
majority of the Class B Common Stock, voting separately as a class, and (z) if a
Class C Director is then entitled to be a member of the Special Committee, by
the affirmative vote of the holders of a majority of the Class C Common Stock,
voting separately as a class.
MEMBERSHIP UNITS
Immediately following the Offering, there will be 140,000,002 Membership
Units issued and outstanding, 57,500,000 of which will be beneficially owned by
Barnes & Noble, 57,500,000 of which will be beneficially owned by Bertelsmann,
and 25,000,002 of which will be beneficially owned by the Company.
The number of outstanding Membership Units owned by the Company will at all
times equal the number of shares of outstanding Common Stock. The net cash
proceeds received by the Company
67
<PAGE>
from any issuance of shares of Common Stock, including with regard to the
exercise of options issued under the Incentive Plan, shall be concurrently
transferred to bn.com in exchange for Membership Units equal in number to such
number of shares of Common Stock issued by the Company.
Pursuant to the terms of the Amended Charter, each Membership Unit not
owned by the Company is exchangeable for one share of Class A Common Stock at
any time by the holder thereof. See "Management--Governance Documents" and
"Corporate History and Recapitalization."
REGISTRATION RIGHTS
Pursuant to the Stockholders Agreement, holders ("Holders") of shares of
Class A Common Stock ("Registrable Securities") issued or to be issued upon
conversion of shares of High Vote Stock and upon the exchange of Membership
Units were granted registration rights.
The Stockholders Agreement provides that each Holder is entitled to
unlimited "piggyback" registration rights, meaning they can include their
Registrable Securities in registration statements filed by the Company. Holders
may also, subject to certain limitations, "demand" that the Company register the
Registrable Securities held by them, provided that the amount of Registrable
Securities subject to such demand constitutes at least 5% of the outstanding
Common Stock on the date of such demand or has a market value in excess of
$25 million. The Company will pay the costs associated with all such
registrations.
Shares of Class A Common Stock cease to be Registrable Securities (i) upon
the consummation of any sale of such shares pursuant to an effective
registration statement or Rule 144 under the Securities Act or (ii) when they
become eligible for sale under Rule 144(k) under the Securities Act.
Immediately following the Offering, 115,000,002 shares of Class A Common
Stock to be issued upon conversion of High Vote Stock or exchange of Membership
Units will have the foregoing registration rights.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Class A Common Stock is
ChaseMellon Shareholder Services L.L.C., New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Following the Offering, 25,000,000 shares of Class A Common Stock will be
issued and outstanding. An additional 115,000,002 shares of Class A Common Stock
will be issuable upon the conversion of High Vote Stock and exchange of
Membership Units not owned by the Company, which shares have "demand" and
"piggyback" registration rights attached to them and will become eligible for
resale 180 days following the completion of the Offering, subject to Rule 144
under the Securities Act. In addition, as of March 31, 1999, 17,856,441 shares
were issuable upon exercise of options granted under the Incentive Plan. Of
these: (i) 1,185,937 will be eligible for sale immediately following the
completion of the Offering; (ii) an additional 698,497 will be eligible for sale
within 60 days following the completion of the Offering; and (iii) an additional
4,362,835 will become eligible for resale 180 days following the completion of
the Offering, subject to Rule 144 under the Securities Act. The balance of
shares issuable upon exercise of options relate to options which are not
scheduled to vest within 180 days following the completion of the Offering. The
sale of a substantial number of shares of Common Stock, or the perception that
such sales could occur, could adversely affect prevailing market prices for the
Class A Common Stock. In addition, any such sale or perception could make it
more difficult for the Company to sell equity securities or equity-related
securities in the future at a time and price that the Company deems appropriate.
See "Principal Stockholders," "Description of Capital Stock and Membership
Units," "Shares Eligible for Future Sale" and "Underwriting."
It is anticipated that a Registration Statement on Form S-8 covering the
Class A Common Stock that may be issued pursuant to the options granted under
the Incentive Plan will be filed promptly after
68
<PAGE>
the completion of the Offering. The shares of Class A Common Stock issued
pursuant to the Form S-8 Registration Statement generally may be resold in the
public market without restriction or limitation, except in the case of
affiliates of the Company who generally may only resell such shares in
accordance with the provisions of Rule 144, other than the holding period
requirement.
U.S. TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general discussion of material United States federal
income and estate tax consequences of the purchase, ownership and disposition of
Class A Common Stock by a Non-U.S. Holder. As used herein the term "Non-U.S.
Holder" means any person or entity that is not a United States Holder ("U.S.
Holder"). A U.S. Holder is any beneficial owner of Class A Common Stock that is:
(i) a citizen or resident of the United States; (ii) a corporation, partnership
or other entity created or organized in or under the laws of the United States
or any political subdivision thereof; (iii) an estate the income of which is
subject to U.S. federal income taxation regardless of its source; and (iv) a
trust, if a U.S. Court is able to exercise primary supervision over the
administration of such trust and one or more U.S. fiduciaries have the authority
to control all substantial decisions of such trust. This discussion does not
address all aspects of United States federal income and estate taxes and does
not deal with foreign, state and local consequences that may be relevant to such
Non-U.S. Holders in light of their personal circumstances. Furthermore, this
discussion is based on provisions of the Code, existing and proposed regulations
promulgated thereunder and administrative and judicial interpretations thereof,
as of the date hereof, all of which are subject to change. EACH PROSPECTIVE
PURCHASER OF CLASS A COMMON STOCK IS ADVISED TO CONSULT A TAX ADVISOR WITH
RESPECT TO CURRENT AND POSSIBLE FUTURE TAX CONSEQUENCES OF ACQUIRING, HOLDING
AND DISPOSING OF CLASS A COMMON STOCK AS WELL AS ANY TAX CONSEQUENCES THAT MAY
ARISE UNDER THE LAWS OF ANY U.S. STATE, MUNICIPALITY OR OTHER TAXING
JURISDICTION.
DIVIDENDS
Dividends paid to Non-U.S. Holder of Class A Common Stock generally will be
subject to withholding of United States federal income tax at a 30% rate or such
lower rate as may be specified by an applicable income tax treaty. However,
dividends that are effectively connected with the conduct of trade or business
by the Non-U.S. Holder within the United States and, where a tax treaty applies,
are attributable to a United States permanent establishment of the Non-U.S.
Holder, are not subject to the withholding tax, but instead are subject to
United States federal income tax on a net income basis at applicable graduated
individual or corporate rates. Certification and disclosure requirements must be
complied with in order to be exempt from withholding under such effectively
connected income exemption. Any such effectively connected dividends received by
a foreign corporation may be subject to additional "branch profits tax" at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
Under current law, dividends paid to an address outside the United States
are presumed to be paid to a resident of such country (unless the payer has
knowledge to the contrary) for purposes of the withholding tax discussed above
and, under the current interpretation of United States Treasury regulations, for
purposes of determining the applicability of a tax treaty rate. Under recently
finalized United States Treasury regulations, a Non-U.S. Holder of Class A
Common Stock who wishes to claim the benefit of an applicable treaty rate (and
avoid back-up withholding as discussed below) for dividends paid after
December 31, 1999, will be required to satisfy applicable certification and
other requirements.
A Non-U.S. Holder of Class A Common Stock eligible for reduced rate of
United State withholding tax pursuant to an income tax treaty may obtain a
refund of any excess amounts withheld by filing an appropriate claims for refund
with the Internal Revenue Service (the "IRS").
69
<PAGE>
GAIN ON DISPOSITION OF CLASS A COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Class A Common Stock unless: (i) the gain is effectively connected with a trade
or business of the Non-U.S. Holder in the United States, and, where a tax treaty
applies, is attributable to a United States permanent establishment of the
Non-U.S. Holder; (ii) in the case of a Non-U.S. Holder who is an individual and
holds the Class A Common Stock as a capital asset, such holder is present in the
United States for 183 or more days in the taxable year of the sale or other
disposition and certain other conditions are met; or (iii) the Company is or has
been a "U.S. real property holding corporation" for United States federal income
tax purposes.
An individual Non-U.S. Holder described in clause (i) above will be subject
to tax on the net gain derived from the sale under graduated United States
federal income tax rates. An individual Non-U.S. Holder described in clause
(ii) above will be subject to a flat 30% tax on the gain derived from the sale,
which may be offset by United States source capital losses (even though the
individual is not considered a resident of the United States). If a Non-U.S.
Holder that is a foreign corporation falls under clause (i) above, it will be
subject to tax on its gain under regular graduated United States federal income
tax rates and, in addition, may be subject to the branch profits tax equal to
30% of its effectively connected earnings and profits within the meaning of the
Code for the taxable year, unless it qualifies for a lower rate under an
applicable income tax treaty.
The Company is not and does not anticipate becoming a "U.S. real property
holding corporation" for United States federal income tax purposes. If the
Company is or becomes a U.S. real property holding corporation, so long as the
Class A Common Stock continues to be regularly traded on an established
securities market, only a Non-U.S. Holder who holds or held (at any time during
the shorter of the five-year period preceding the date of disposition or the
holder's holding period) more than five percent of the Class A Common Stock will
be subject to U.S. federal income tax on the disposition of the Class A Common
Stock.
Special Rules may apply to certain Non-U.S. Holders, such as "controlled
foreign corporations", "passive foreign investment companies" and "foreign
personal holding companies", that are subject to special treatment under the
Code. Such entities should consult their own tax advisors to determine the U.S.
federal, state, local and other tax consequences that may be relevant to them.
FEDERAL ESTATE TAX
Class A Common Stock held by an individual Non-U.S. Holder at the time of
death will be included in such Holder's gross estate for United States federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to such Holder and the tax withheld with respect to
such dividends, regardless of whether withholding was required. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the Non-U.S. Holder
resides under the provisions of an applicable income tax treaty.
Under current law, backup withholding at the rate of 31% generally will not
apply to dividends paid to a Non-U.S. Holder at an address outside the United
States (unless the payer has knowledge that the payee is a U.S. person). Under
the Final Regulations, however, a Non-U.S. Holder will be subject to backup
withholding unless applicable certification requirements are met.
Payment of the proceeds of a sale of Class A Common Stock within the United
States or conducted through U.S.-related financial intermediaries is subject to
both backup withholding and information reporting unless the beneficial owner
certifies under penalties of perjury that it is a Non-U.S. Holder (and the payor
does not have actual knowledge that the beneficial owner is a United States
person) or the Holder otherwise establishes an exemption.
70
<PAGE>
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
VALIDITY OF CLASS A COMMON STOCK
The validity of the shares of Class A Common Stock offered hereby will be
passed upon for the Company by Robinson Silverman Pearce Aronsohn & Berman LLP,
1290 Avenue of the Americas, New York, New York 10104 and for the Underwriters
by Sullivan & Cromwell, 125 Broad Street, New York, New York 10004. Michael N.
Rosen, Secretary and a director of the Company, is a senior member of Robinson
Silverman Pearce Aronsohn & Berman LLP.
EXPERTS
The financial statements included in this Prospectus and in the
Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports appearing elsewhere herein and in the Registration Statement, and
are included in reliance upon such reports given upon the authority of said firm
as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act of 1933 (herein together with all amendments and
exhibits thereto referred to as the "Registration Statement"), of which this
Prospectus forms a part, with respect to the Class A Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement. For further information with respect to the Company,
bn.com and the Class A Common Stock offered hereby, reference is hereby made to
the Registration Statement. With respect to statements contained in this
Prospectus as to the contents of any agreement or other document reference is
made to the copy of such agreement or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. Upon completion of the Offering, the Company will be required to
file annual, quarterly and other information with the Commission. A copy of the
Registration Statement and any other documents filed with the Commission may be
inspected without charge at the Commission's principal office in Washington,
D.C. at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
Regional Offices at Seven World Trade Center, Suite 1300, New York, New York
10048, and Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and copies may be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, the Registration Statement and certain
other filings made with the Commission through its Electronic Data Gathering
Analysis and Retrieval ("EDGAR") system are publicly available through the
Commission's Web site located at http://www.sec.gov. The Registration Statement
has been filed with the Commission through EDGAR. Information concerning the
Company is also available for inspection at the offices of Nasdaq, 1735 K
Street, NW, Washington, D.C., 20006-1500.
71
<PAGE>
[This page intentionally left blank]
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
barnesandnoble.com inc.
Report of Independent Certified Public Accountants...................................................... F-2
Balance Sheet........................................................................................... F-3
Notes to Balance Sheet.................................................................................. F-4
barnesandnoble.com llc
Report of Independent Certified Public Accountants...................................................... F-6
Balance Sheets.......................................................................................... F-7
Statements of Operations................................................................................ F-8
Statements of Changes in Members' Equity................................................................ F-9
Statements of Cash Flows................................................................................ F-10
Notes to Financial Statements........................................................................... F-11
</TABLE>
F-1
<PAGE>
[The following is the form of opinion we will be in a position to issue
upon the consummation of the Recapitalization as defined and described in
Note 1 of the financial statements.]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors:
We have audited the accompanying balance sheet of barnesandnoble.com inc. (a
Delaware corporation) as of , 1999. The financial statement is
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of barnesandnoble.com inc. as of
, 1999, in conformity with generally accepted accounting
principles.
/s/ BDO SEIDMAN, LLP
-----------------------------
BDO Seidman, LLP
New York, New York
, 1999
F-2
<PAGE>
BARNESANDNOBLE.COM INC.
BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
, 1999
<S> <C>
ASSETS
Cash.......................................................................................... $ --
--------
Total assets........................................................................ $ --
--------
--------
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; none issued and outstanding.............................................. --
Common Stock Series B; $0.001 par value; 1,000
shares authorized; shares issued and outstanding.................................... --
Common Stock Series C; $0.001 par value; 1,000
shares authorized; shares issued and outstanding.................................... --
Paid-in capital............................................................................... --
--------
Total stockholders' equity.......................................................... $ --
--------
--------
</TABLE>
See accompanying notes to balance sheet.
F-3
<PAGE>
BARNESANDNOBLE.COM INC.
NOTES TO BALANCE SHEET
1. ORGANIZATION
barnesandnoble.com llc ("bn.com") is an online retailer of books and
complementary information, entertainment and intellectual property-based
products. Prior to October 31, 1998, the business of bn.com was conducted by a
wholly owned subsidiary of Barnes & Noble, Inc. ("Barnes & Noble"), which
subsidiary was originally incorporated on January 14, 1997 in the State of
Delaware under the name Barnes & Noble Online, Inc. ("B&N Online"). Effective
October 31, 1998, Barnes & Noble and Bertelsmann AG ("Bertelsmann") completed a
transaction that established bn.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 bn.com.
Subsequent to the Formation Transaction, B&N Online changed its name to B&N Sub
Corp.
On March 10, 1999, Barnes & Noble caused B&N Sub Corp. to establish a new
wholly owned Delaware subsidiary named barnesandnoble.com inc. Prior to the
effective date of the Offering, B&N Sub Corp. will transfer its ownership of
barnesandnoble.com inc. to B&N.com Holding Corp. ("BN.com Holding Corp."). This
will result in Barnes & Noble owning 100% of BN.com Holding Corp. which will
own 100% of newly formed barnesandnoble.com inc. (the "Company"). Subsequent to
that, the Company will file an amended charter which will, among other things,
reclassify its outstanding common stock to one share of Class B Common Stock.
The Company then will issue a share of Class C Common Stock constituting a 50%
interest in the Company to a wholly-owned subsidiary of Bertelsmann. The
foregoing transactions in this paragraph are collectively referred to as the
"Recapitalization." The completion of the foregoing transactions will result 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.
Immediately following the Offering, the Company will be a holding company
whose sole asset will be its approximate 17.9% equity interest in bn.com and
whose sole business will be acting as the sole Manager of bn.com. As sole
Manager of bn.com, the Company will control all major business decisions of
bn.com. Immediately following the Offering, Barnes & Noble, Inc. and Bertelsmann
AG will each beneficially own an approximate 41.1% equity interest in bn.com.
The acquisition of the ownership interest in bn.com using the proceeds from
the offering will result in consolidation of the Company with bn.com as a result
of the Company's control as sole Manager. Moreover, this transaction will be
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 94-2 ("EITF 94-2"). Accordingly, the net assets
of bn.com contributed by Barnes & Noble will be reported in the consolidated
financial statements at Barnes & Noble's historical cost, and the minority
interests in bn.com will be based on the net book equity of bn.com (after
contribution of the proceeds from the Offering) multiplied by the ownership
percentages of Barnes & Noble and Bertelsmann.
For purposes of comparability, the operations from inception have been
reflected in the financial statements of bn.com included elsewhere herein.
Therefore, the balance sheet of the Company is presented as if bn.com (and not
the Company) had always operated the Company's business and reflects the
financial position of the Company subsequent to the Formation Transaction after
giving effect to the Recapitalization.
2. STOCKHOLDERS' EQUITY
COMMON STOCK
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 Stock generally have
rights identical to holders of Class B Common Stock and Class C Common Stock
(collectively "High Vote Stock"), except that each holder of
F-4
<PAGE>
BARNESANDNOBLE.COM INC.
NOTES TO BALANCE SHEET--(CONTINUED)
2. STOCKHOLDERS' EQUITY--(CONTINUED)
Class A Common Stock is entitled to one vote per share and each holder of High
Vote Stock is entitled to the number of votes per share equal to: (i) ten,
multiplied by the sum of (a) the aggregate number of High Vote Stock owned by
such holder and (b) the aggregate number of Membership Units owned by such
holder; divided by (ii) the number of shares of High Vote Stock owned by such
holder. 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 Stock 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.
PREFERRED STOCK
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. As of
, 1999 there was no Preferred Stock outstanding.
3. PUBLIC OFFERING
The Company filed a registration statement on Form S-1 with the Securities
and Exchange Commission for a public offering (the "Offering") of Class A Common
Stock on September 24, 1998. The number of shares to be offered and the initial
offering price will be determined at a future date. The Company intends to use
all of the net proceeds of the Offering to buy membership units in bn.com.
bn.com intends to use such proceeds of the membership unit sale to fund future
operations.
4. INCENTIVE PLAN
The Company established a 1999 Incentive Plan ("Incentive Plan") which
provides that options to acquire shares of Class A Common Stock may be granted
to key officers, employees, and other key people. The Incentive Plan also
provides for the grant of replacement options to key officers and employees of
bn.com who received options under a prior plan. In that regard, the Company
intends to grant replacement options at prices ranging from $3.48 to $17.00 per
share. The Company will not record compensation expense in connection with the
issuance of such options because they will contain the same terms on an
equivalent share basis as the options they will replace.
F-5
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Members of barnesandnoble.com llc:
We have audited the accompanying balance sheets of barnesandnoble.com llc
(a Delaware limited liability company) as of December 31, 1997 and December 31,
1998, and the related statements of operations, members' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of barnesandnoble.com llc as of
December 31, 1997 and December 31, 1998 and the results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ BDO SEIDMAN, LLP
-----------------------------
BDO Seidman, LLP
New York, New York
May 6, 1999
F-6
<PAGE>
BARNESANDNOBLE.COM LLC
BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1999
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ -- $ 96,940 $ 60,936
Receivables, net.................................................. 430 2,387 1,732
Merchandise inventories........................................... 615 1,579 2,296
Prepaid expenses and other current assets......................... 9,245 10,770 11,370
-------- -------- ---------
Total current assets........................................... 10,290 111,676 76,334
-------- -------- ---------
Fixed assets, net................................................... 15,953 39,770 40,869
Restricted cash..................................................... -- 50,393 50,628
Other noncurrent assets............................................. 84 305 377
-------- -------- ---------
Total assets................................................... $ 26,327 $202,144 $ 168,208
-------- -------- ---------
-------- -------- ---------
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................. $ 3,857 $ -- $ 3,455
Accrued liabilities............................................... 3,257 19,804 7,757
Due to affiliate.................................................. -- 13,191 8,065
-------- -------- ---------
Total current liabilities...................................... 7,114 32,995 19,277
-------- -------- ---------
MEMBERS' EQUITY:
Members' equity................................................... 19,213 169,149 148,931
Commitments and contingencies
-------- -------- ---------
Total liabilities and members' equity.......................... $ 26,327 $202,144 $ 168,208
-------- -------- ---------
-------- -------- ---------
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
BARNESANDNOBLE.COM LLC
STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, ----------------------
------------------------- MARCH 31, MARCH 31,
1997 1998 1998 1999
-------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales................................................. $ 11,949 $ 61,834 $ 9,013 $ 32,317
Cost of sales............................................. 10,117 47,569 7,003 25,016
-------- -------- ------- ---------
Gross profit............................................ 1,832 14,265 2,010 7,301
-------- -------- ------- ---------
Operating expenses:
Marketing and sales..................................... 8,855 70,423 6,613 18,909
Product development..................................... 3,256 8,532 1,804 3,519
General and administrative.............................. 3,273 19,166 3,089 6,107
-------- -------- ------- ---------
Total operating expenses............................. 15,384 98,121 11,506 28,535
-------- -------- ------- ---------
Operating loss............................................ (13,552) (83,856) (9,496) (21,234)
Interest income, net...................................... -- 708 -- 1,016
-------- -------- ------- ---------
Net loss.................................................. $(13,552) $(83,148) $(9,496) $ (20,218)
-------- -------- ------- ---------
-------- -------- ------- ---------
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
BARNESANDNOBLE.COM LLC
STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ACCUMULATED CAPITAL MEMBERS'
LOSS CONTRIBUTIONS EQUITY
------------ -------------- --------
<S> <C> <C> <C>
Balance January 1, 1997............................................. $ -- $ -- $ --
Net loss for year ended December 31, 1997......................... (13,552) -- (13,552)
Capital contribution from Barnes & Noble, Inc., net............... -- 32,765 32,765
---------- -------- --------
Balance December 31, 1997........................................... (13,552) 32,765 19,213
Net loss for year ended December 31, 1998......................... (83,148) -- (83,148)
Capital contribution from Barnes & Noble, Inc., net............... -- 83,084 83,084
Capital contribution from Bertelsmann AG, net of $50 million
subscription receivable ....................................... -- 150,000 150,000
---------- -------- --------
Balance December 31, 1998........................................... (96,700) 265,849 169,149
Net loss for three months ended March 31, 1999 (unaudited)........ (20,218) -- (20,218)
---------- -------- --------
Balance March 31, 1999 (unaudited).................................. $ (116,918) $265,849 $148,931
---------- -------- --------
---------- -------- --------
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
BARNESANDNOBLE.COM LLC
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------- -----------------
1997 1998 1998 1999
-------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. $(13,552) $(83,148) $(9,496) $(20,218)
Adjustments to reconcile net loss to
net cash flows from operating
activities:
Depreciation and amortization...... 2,280 6,823 1,195 2,595
Loss on sale of fixed assets....... -- 205 -- --
(Increase) decrease in receivables,
net.............................. (430) (1,957) (76) 655
(Increase) decrease in merchandise
inventories...................... (615) (964) 276 (717)
Increase in prepaid expenses and
other current assets............. (9,245) (1,525) (6,481) (600)
Increase (decrease) in accounts
payable.......................... 3,857 (3,857) (2,752) 3,455
Increase (decrease) in due to
affiliate........................ -- 13,191 -- (5,126)
Increase (decrease) in accrued
liabilities...................... 3,257 16,547 684 (12,047)
-------- -------- ------- -------
Net cash flows from operating
activities.................... (14,448) (54,685) (16,650) (32,003)
-------- -------- ------- -------
Cash flows from investing activities:
Purchases of fixed assets.......... (18,233) (31,035) (7,971) (3,691)
Increase in restricted cash........ -- (50,393) -- (235)
Proceeds from sale of fixed
assets........................... -- 200 -- --
(Increase) decrease in other
noncurrent assets................ (84) (231) (246) 85
-------- -------- ------- -------
Net cash flows from investing
activities.................... (18,317) (81,459) (8,217) (3,841)
-------- -------- ------- -------
Cash flows from financing activities:
Capital contributions from
members.......................... 32,765 233,084 24,867 --
Increase in deferred financing
fees............................. -- -- -- (160)
-------- -------- ------- -------
Net cash flows from financing
activities.................... 32,765 233,084 24,867 (160)
-------- -------- ------- -------
Net change in cash and cash
equivalents........................... -- 96,940 -- (36,004)
Cash and cash equivalents at beginning
of period............................. -- -- -- 96,940
-------- -------- ------- -------
Cash and cash equivalents at end of
period................................ $ -- $ 96,940 $ -- $60,936
-------- -------- ------- -------
-------- -------- ------- -------
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
BARNESANDNOBLE.COM LLC
NOTES TO FINANCIAL STATEMENTS
1. BACKGROUND AND BASIS OF PRESENTATION
barnesandnoble.com llc ("bn.com") is an online retailer of books and
complementary information, entertainment and intellectual property-based
products. bn.com is a limited liability company whose members are Barnes &
Noble, Inc. ("Barnes & Noble") and Bertelsmann AG ("Bertelsmann"), each acting
through a wholly-owned subsidiary with a 50% ownership interest as of
December 31, 1998.
Prior to October 31, 1998, the business of bn.com was transacted by a
wholly owned subsidiary of Barnes & Noble, which subsidiary was originally
incorporated under the name Barnes & Noble Online, Inc. ("B&N Online").
Effective October 31, 1998, Barnes & Noble and Bertelsmann completed a
transaction that established bn.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 bn.com at
their historical cost and Bertelsmann contributed $150 million and will
contribute an additional $50 million in cash prior to the effective date of the
public offering. bn.com accounted for the investment made by Bertelsmann in
bn.com as a capital contribution. The accompanying financial statements reflect
the Formation Transaction as of the earliest period presented.
Prior to the Formation Transaction, bn.com relied on Barnes & Noble to
provide financing for its operations. Capital contributions from Barnes & Noble
have been included in members' equity in the statement of cash flows for all
periods presented. The cash flows are not indicative of the cash flows that
would have resulted had bn.com been operating as a separate stand-alone company
during the periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and highly liquid
investments with original maturities of three months or less.
RESTRICTED CASH
The amount classified as restricted cash in the accompanying financial
statements represents the portion of the Bertelsmann investment that will remain
in a reserve account, including accumulated interest. Upon the $50 million
contribution by Bertelsmann, the restricted cash will become available to
bn.com. The funds in the reserve account are invested in investment grade
commercial paper and bank notes with maturities not exceeding 180 days.
MERCHANDISE INVENTORIES
Inventories are valued at the lower of cost or market as determined on a
first-in, first-out basis. bn.com purchases a substantial majority of its
products from two major vendors, Ingram Book Group ("Ingram") and Barnes &
Noble. Ingram accounted for 50.1%, 25.9% and 23.3% of bn.com's inventory
purchases during the years ended December 31, 1997 and December 31, 1998, and
the three months ended March 31, 1999, respectively. Barnes & Noble accounted
for 38.5%, 60.3% and 65.9% of
F-11
<PAGE>
BARNESANDNOBLE.COM LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
bn.com's inventory purchases during the years ended December 31, 1997 and
December 31, 1998, and the three months ended March 31, 1999, respectively.
Barnes & Noble charges bn.com the cost associated with such purchases, plus
incremental overhead incurred by Barnes & Noble in connection with providing
such inventory.
FIXED ASSETS
Fixed assets are carried at cost less accumulated depreciation and
amortization. Computers and equipment are depreciated using the straight line
method over the 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. bn.com elected early adoption of
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," otherwise effective for fiscal years
beginning after December 15, 1998. Accordingly, direct internal and external
costs associated with the development of the features, content and functionality
of bn.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.
IMPAIRMENT OF LONG-LIVED ASSETS
bn.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. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to undiscounted pre-tax future net
cash flows expected to be generated by that asset. An impairment loss is
recognized for the amount by which the carrying amount of the assets exceeds the
fair value of the assets. To date no such impairment has been recognized.
NET SALES
Sales of bn.com's products are recognized, net of discounts and estimated
returns, at the time the products are shipped to customers. International net
sales were $1.2 million and $6.2 million for the years ended December 31, 1997
and December 31, 1998, respectively, and $1.1 million and $2.9 million for the
three months ended March 31, 1998 and March 31, 1999, respectively.
ADVERTISING COSTS
bn.com expenses the costs of advertising for magazines, television, radio,
and other media the first time the advertising takes place. Advertising expense
was $3.1 million and $32.4 million for the years ended December 31, 1997 and
December 31, 1998, respectively, and $4.2 million and $13.5 million for the
three months ended March 31, 1998 and March 31, 1999, respectively.
PRODUCT DEVELOPMENT
Product development expenses included in the accompanying statements of
operations consist principally of indirect development costs and all costs
associated with the maintenance of the features, content and functionality of
bn.com's online stores, transaction-processing systems, telecommunications
infrastructure and network operations.
F-12
<PAGE>
BARNESANDNOBLE.COM LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
INCOME TAXES
Through October 31, 1998, bn.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 bn.com were realized and
recognized by Barnes & Noble. Effective November 1, 1998, bn.com, as a result of
the Formation Transaction, was no longer a subsidiary of Barnes & Noble and as a
limited liability company is not considered a taxable entity for Federal income
tax purposes and most state income tax purposes. Any taxable income or losses
recorded subsequent to the Formation Transaction are reported by the members on
their respective income tax returns. As result of the Formation Transaction, no
tax benefits have been allocated to bn.com for its losses for all periods
presented.
CONCENTRATION OF CREDIT RISK
bn.com is subject to concentrations of credit risk from its holdings of
cash, cash equivalents and short-term investments. bn.com's credit risk is
managed by investing its cash in high-quality money market instruments and
securities of the U.S. government and its agencies, foreign governments and
high-quality corporate issuers. In addition, bn.com's accounts receivable are
not significant and are due from domestic banks. bn.com believes it had no
unusual concentrations of credit risk at December 31, 1998 and at March 31,
1999.
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1999
------------ ------------ ------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C>
Lycos marketing advances........................ $4,500 $ 3,000 $ 1,125
MSN marketing advances.......................... -- 2,400 1,200
AOL marketing advances.......................... 2,500 1,400 2,220
Other marketing advances........................ 2,130 2,505 4,595
Other current assets............................ 115 1,465 2,230
------ -------- --------
$9,245 $ 10,770 $ 11,370
------ -------- --------
------ -------- --------
</TABLE>
On July 31, 1997, bn.com entered into a three-year exclusive agreement with
Lycos (the "Lycos Agreement"), pursuant to which bn.com is the exclusive
bookseller on the Lycos site and Lycos has agreed to limit various types of
advertisements on its site. Under the Lycos Agreement, visitors to Lycos' Web
site may readily link to bn.com's online stores on the Web, which is promoted by
Lycos using content provided by bn.com, for the online purchase of books and
related information. The Lycos Agreement provides for bn.com to pay Lycos an
annual fee of $4.5 million per year through the year 2000. In addition, bn.com
is required to pay Lycos a percentage of all revenues received from orders
initiated from the Lycos Web site to the extent that such percentage exceeds the
annual fee in any given year. Pursuant to the terms of the Lycos Agreement,
Lycos is obligated to offer bn.com the right of first refusal to negotiate with
Lycos for renewal of the Lycos Agreement.
On October 1, 1998, bn.com entered into a one-year e-commerce merchant
agreement with Microsoft Corporation (the "MSN agreement"), pursuant to which
bn.com is given premier placements on MSN.com and MSN.com is linked to bn.com's
online stores. The agreement also provides bn.com with a broad set of feature
placements throughout MSN.com. In consideration of the services provided
F-13
<PAGE>
BARNESANDNOBLE.COM LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS--(CONTINUED)
under the MSN Agreement, bn.com has paid to Microsoft $3.0 million. In addition,
bn.com is required to pay Microsoft a percentage of revenues generated through
links from MSN.com, with all payments of fees first credited against the initial
payment of $3.0 million.
On November 1, 1997, bn.com and America Online ("AOL") formed a strategic
alliance pursuant to an Interactive Marketing Agreement (the "AOL Agreement")
which provides for bn.com to be featured as the exclusive online book retailer
within AOL's commercial service which has approximately 17 million subscribers,
excluding AOL.com. The AOL Agreement also gives bn.com an extensive package of
placements and visibility throughout the AOL service. In consideration of the
marketing, promotion, advertising and other services AOL will provide under the
AOL Agreement, bn.com will pay AOL a total of $40.0 million over the term of the
AOL Agreement, of which $8.0 million has been paid as of December 31, 1998,
$10.0 million will be paid in 1999 and $11.0 million will be paid in each of the
years 2000 and 2001. The AOL Agreement also contains revenue sharing provisions
for sales above specified amounts. bn.com amortizes the payments associated with
the AOL Agreement based on impressions over the subsequent 12 months.
4. FIXED ASSETS
Fixed assets, at cost, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1999
------------ ------------ -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C>
Computers and equipment................................... $ 9,305 $ 22,319 $23,666
Leasehold improvements.................................... 1,789 8,418 8,635
Software.................................................. 7,139 16,938 19,064
-------- -------- -------
18,233 47,675 51,365
Less accumulated depreciation............................. 2,280 7,905 10,496
-------- -------- -------
Fixed assets, net....................................... $ 15,953 $ 39,770 $40,869
-------- -------- -------
-------- -------- -------
</TABLE>
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1999
------------ ------------ -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C>
Accrued advertising....................................... $ 124 $ 10,727 $ 2,616
Accrued fixed assets...................................... -- 3,156 1,472
Accrued compensation...................................... 200 2,509 2,936
Other..................................................... 2,933 3,412 733
------ -------- -------
$3,257 $ 19,804 $ 7,757
------ -------- -------
------ -------- -------
</TABLE>
6. LEASE COMMITMENT
bn.com currently leases warehouse facilities, office space and equipment
under noncancelable operating leases. Rental expense under operating lease
agreements was $0.2 million and $1.3 million for the years ended December 31,
1997 and December 31, 1998, respectively and $0.1 million and $0.4 million for
the three months ended March 31, 1998 and March 31, 1999, respectively.
F-14
<PAGE>
BARNESANDNOBLE.COM LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LEASE COMMITMENT--(CONTINUED)
Future minimum lease payments under noncancelable operating leases as of
December 31, 1998 are:
<TABLE>
<CAPTION>
FUTURE
YEAR ENDING MINIMUM LEASE
DECEMBER 31, PAYMENTS
- ------------ -------------
(IN
THOUSANDS)
<S> <C>
1999.................................................... $ 2,035
2000.................................................... 2,062
2001.................................................... 2,089
2002.................................................... 2,201
2003.................................................... 1,286
Thereafter.............................................. 4,434
-------
$14,107
-------
-------
</TABLE>
7. RELATED PARTY TRANSACTIONS
Through its distribution facilities, Barnes & Noble accounted for
approximately 38.5% and 60.3%, or $3.9 million and $26.9 million, of bn.com's
purchases during the years ended December 31, 1997 and December 31, 1998,
respectively, and 58.1% and 65.9%, or $3.9 million and $2.4 million for the
three months ended March 31, 1998 and March 31, 1999, respectively. bn.com
expects to source most of its purchases through Barnes & Noble in the future.
bn.com has entered into an agreement (the "Supply Agreement") with Barnes &
Noble whereby Barnes & Noble charges bn.com the costs associated with such
purchases plus incremental overhead incurred by Barnes & Noble in connection
with providing such inventory. bn.com believes that such terms are more
favorable than the terms at which bn.com otherwise would be able to make such
purchases on its own. As of December 31, 1998, and March 31, 1999,
$13.2 million and $8.1 million, respectively, was payable to Barnes & Noble in
connection with such purchases. The Supply Agreement is subject to certain
termination provisions.
bn.com has entered into agreements (the "Services Agreements") whereby
bn.com receives various services from Barnes & Noble and its subsidiaries,
including, among others, services for payroll processing, benefits
administration, insurance (property and casualty, medical, dental and life),
tax, traffic, fulfillment and telecommunications. In accordance with the terms
of the Services Agreements, bn.com has paid, and expects to continue to pay,
fees to Barnes & Noble and its subsidiaries in an amount equal to the direct
costs plus incremental expenses associated with providing such services. bn.com
paid $0.2 million and $0.9 million for such services during the years ended
December 31, 1997 and December 31, 1998, respectively and $0.1 million and
$0.3 million for the three months ended March 31, 1998 and March 31, 1999,
respectively. In the opinion of management, these charges were made on a
reasonable and consistent basis; however, they are not necessarily indicative
of, and it is not practical for management to estimate the level of, expenses
which might have been incurred had bn.com been operating as a separate
stand-alone company. The Services Agreements are subject to certain termination
provisions.
bn.com has entered into an agreement (the "License Agreement") with Barnes
& Noble College Bookstores, Inc., of which the principal stockholder is also a
principal stockholder/director/executive officer of Barnes & Noble and a manager
of bn.com. Pursuant to the License Agreement, bn.com has been granted an
exclusive license (the "License") to use the Barnes & Noble name and trademark
(excluding sales of college textbooks). The License Agreement is subject to
certain termination provisions.
F-15
<PAGE>
BARNESANDNOBLE.COM LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. RELATED PARTY TRANSACTIONS--(CONTINUED)
bn.com has entered into an agreement (the "Database and Software License
Agreement") whereby bn.com licenses from Barnes & Noble, the right to use Barnes
& Noble's title database, inventory sourcing and special order software,
customer lists and demographic information. The Database and Software License
Agreement is renewable and is subject to certain termination provisions.
In connection with the Formation Transaction, bn.com entered into a
Trademark License Agreement with Bertelsmann Online ("BOL") (the "BOL Trademark
License Agreement"), pursuant to which bn.com was granted a non-exclusive
license to use BOL's name and trademark in its operations and to sublicense the
BOL name in accordance with the terms of the license as the Class C Directors,
in their sole discretion, see fit. This License remains effective until bn.com
either defaults or becomes subject to certain bankruptcy events.
In connection with the Formation Transaction, bn.com entered into
Technology Sharing and License Agreements with BOL (the "Technology Sharing
License Agreements"), the subsidiary through which Bertelsmann conducts its
Internet business, pursuant to which BOL granted bn.com a license to view,
access and use BOL's computer technology and systems, and bn.com granted BOL a
license to view, access and use bn.com's computer technology and systems. These
agreements remain effective until (i) the date both parties mutually agree to
terminate, or (ii) from and after the date either Barnes & Noble or Bertelsmann
cease having an equity interest of ten percent (10%) or more in bn.com.
Following termination, each party may continue to use in perpetuity any
technology it obtained from the other prior to such termination.
bn.com believes that the transactions discussed above, as well as the terms
of any future transactions and agreements (including renewals of any existing
agreements) between bn.com and its affiliates, are and will be at least as
favorable to bn.com as could be obtained from unaffiliated parties. The Board of
Managers must approve in advance any such proposed transaction or agreement and
will utilize such procedures in evaluating the terms and provisions of such
proposed transaction or agreement as are appropriate in light of the fiduciary
duties of directors under Delaware law.
8. LITIGATION
bn.com is involved in various routine legal proceedings incidental to the
conduct of its business. Management does not believe that any of these legal
proceedings will have a material adverse effect on the financial condition,
operations or cash flows of bn.com.
In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace Kuralt,
filed a lawsuit in the United States District Court for the Southern District of
New York against Barnes & Noble, including bn.com, Borders Group, Inc.,
Amazon.com, certain publishers and others alleging violation of the
Robinson-Patman Act and other federal law, New York statutes governing trade
practices and common law. The Complaint seeks certification of a class
consisting of all retail booksellers in the United States, whether or not
currently in business, which were in business and were members of the American
Booksellers Association at any time during the four-year period preceding the
filing of the complaint. The complaint alleges that the named plaintiffs have
suffered damages of $11.2 million or more and requests treble damages on behalf
of the named plaintiffs and each of the purported class members, as well as of
injunctive and declaratory relief (including an injunction requiring the closure
of all of defendants' stores within 10 miles of any location where plaintiff
either has or had a retail bookstore during the four years preceding the filing
of the Complaint, and prohibiting the opening by defendants of any bookstore in
such areas for the next 10 years), disgorgement of alleged discriminatory
discounts, rebates, deductions and payments, punitive damages, interest, costs,
attorneys fees and other relief. bn.com intends to vigorously defend this
action.
F-16
<PAGE>
BARNESANDNOBLE.COM LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. LITIGATION--(CONTINUED)
The Federal Trade Commission ("FTC") is currently reviewing Barnes &
Noble's proposed acquisition of Ingram pursuant to the pre-merger notification
procedures of the Hart-Scott-Rodino Antitrust Improvements Act of 1976. In
connection with that review, the FTC is also reviewing the Formation
Transaction, and Bertelsmann's investment in bn.com. Should the FTC determine
that the Formation Transaction violated applicable antitrust laws, it could seek
to impose a number of remedies or penalties on bn.com, including the unwinding
of the Formation Transaction. bn.com believes that the Formation Transaction was
completed in compliance with, and did not violate, applicable antitrust laws.
9. EMPLOYEES' RETIREMENT AND DEFINED CONTRIBUTION PLANS
bn.com, through Barnes & Noble, maintains a noncontributory defined benefit
pension plan (the "Pension Plan") for the benefit of substantially all of its
employees who meet certain eligibility requirements, primarily age and length of
service. Benefits provided by the Pension Plan are based on years of credited
service, the employee's compensation for any of five consecutive years in the
last ten years of service and covered earnings for Social Security benefits.
bn.com's contributions to the Pension Plan are generally in amounts determined
by independent consulting actuaries. The Pension Plan has been separated from
the Barnes & Noble Pension Plan as of October 31, 1998. Pension expense
allocable to bn.com for the last two months of 1998 was not material. Norwest
Bank is the trustee for the Pension Plan and all assets are managed by Fidelity
Investments.
bn.com, through Barnes & Noble, also sponsors a defined contribution plan
(the "Savings Plan") for the benefit of substantially all of its employees who
meet certain eligibility requirements, primarily age and length of service. The
Savings Plan allows employees to invest up to 15% of their current gross cash
compensation on a pre-tax or post-tax basis, at their option. Participants have
investment options of various mutual funds. bn.com's contributions to the
Savings Plan are generally in amounts based upon a certain percentage of the
employees' pre-tax contributions and are in Barnes & Noble stock. bn.com charged
$0.1 million to employee benefit expenses for fiscal 1998.
Actuarial assumptions used in determining the funded status of the Pension
Plan are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Discount rate (beginning of year)................................................................. 7.3%
Discount rate (end of year)....................................................................... 7.3%
Expected long-term rate of return on plan assets.................................................. 9.5%
Assumed rate of compensation increase............................................................. 4.3%
</TABLE>
F-17
<PAGE>
BARNESANDNOBLE.COM LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. EMPLOYEES' RETIREMENT AND DEFINED CONTRIBUTION PLANS--(CONTINUED)
The following table sets forth the funded status of the Pension Plan and
the pension liability recognized for the Pension Plan in the accompanying
consolidated balance sheets:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
--------------
(IN THOUSANDS)
<S> <C>
Actuarial present value of benefit obligation:
Vested benefits................................................................................ $ (160)
Nonvested benefits............................................................................. (115)
----------
Accumulated benefit obligation................................................................... (275)
Effect of projected future compensation increases................................................ (363)
----------
Projected benefit obligation..................................................................... (638)
Plan assets at market value...................................................................... 429
----------
Projected benefit obligation in excess of plan assets............................................ (209)
Unrecognized net loss............................................................................ --
Unrecognized net obligation remaining............................................................ --
Unrecognized prior service cost.................................................................. 209
----------
Pension liability.............................................................................. $ --
----------
----------
</TABLE>
10. STOCK INCENTIVE PLAN
As of December 31, 1998, bn.com had one incentive plan (the "1998 Plan")
under which stock options have been granted or may be granted to key officers,
employees, consultants, advisors, and managers of bn.com or any of its
subsidiaries and affiliates. The Compensation Committee of the Board of Managers
is responsible for the administration of the 1998 Plan. Generally, options are
granted at fair market value, begin vesting one year after grant in 25%
increments, expire ten years from issuance and are conditioned upon continual
employment during the vesting period. The 1998 Plan allows bn.com to grant
options to purchase 25,500,000 Membership Units. In connection with the
Offering, options granted under the 1998 Plan will be replaced with options to
purchase shares of the Class A Common Stock of barnesandnoble.com inc. under the
1999 Incentive Plan.
A summary of the status of stock options as of December 31, 1998 issued
under the 1998 Plan is presented below:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------------
MEMBERSHIP WEIGHTED AVERAGE
UNITS EXERCISE PRICE
(IN THOUSANDS) PER SHARE
-------------- ----------------
<S> <C> <C>
Granted in 1998 and Outstanding at December 31, 1998......................... 18,155 $ 3.94
-------- ------
-------- ------
</TABLE>
During 1998 option grants of 5,060,046 and 4,140,000 were made to Leonard
Riggio and Jonathan Bulkeley, respectively. During the three months ended
March 31, 1999, option grants of 1,377,413 were made at an average exercise
price of $8.80 per share. As of March 31, 1999, there were 17,856,441 options
outstanding at a weighted average exercise price of $4.34 per share.
All option amounts are based upon a total of 115,000,002 Membership Units
outstanding prior to the consummation of the Offering.
F-18
<PAGE>
BARNESANDNOBLE.COM LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. STOCK INCENTIVE PLAN--(CONTINUED)
The following table summarizes information as of December 31, 1998
concerning outstanding and exercisable options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------------------
RANGE OF WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING CONTRACTUAL PRICE EXERCISABLE PRICE
PER SHARE (IN THOUSANDS) LIFE PER SHARE (IN THOUSANDS) PER SHARE
- ----------- -------------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$3.48-$4.35 18,155 9.58 years $ 3.94 -- $ --
</TABLE>
During the year ended December 31, 1998, all option grants were granted at
fair value and as a result there was no compensation expense recorded for
options granted.
Had bn.com determined the compensation cost of employee stock options based
on the fair value at the stock option grant dates in accordance with the
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), bn.com's net loss would have been increased to the
pro forma amounts below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
---------------
(IN THOUSANDS)
<S> <C>
Net loss:
As reported $ (83,148)
Pro forma per SFAS 123 (84,800)
</TABLE>
The weighted-average fair value of the options granted during 1998 was
estimated to be $0.91 per share based on the following weighted-average
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
---------------
<S> <C>
Expected dividend yield 0.0%
Risk free interest rate 5.25%
Expected life 5 years
</TABLE>
F-19
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to the
underwriters named below (the "Underwriters"), and each of the Underwriters, for
whom Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Salomon Smith Barney Inc. and Wit Capital Corporation are acting as
representatives, has severally agreed to purchase from the Company, the
aggregate number of shares of Class A Common Stock set forth opposite its name
below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
CLASS A
UNDERWRITERS COMMON STOCK
- ------------------------------------------------------------------------------------------------- ------------
<S> <C>
Goldman, Sachs & Co..............................................................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.........................................................................
Salomon Smith Barney Inc.........................................................................
Wit Capital Corporation..........................................................................
----
Total.......................................................................................
----
----
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Class A Common Stock, in
part, directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and, in part, to certain securities dealers at
such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share to certain brokers and dealers. After the shares
of Class A Common Stock are released for sale to the public, the offering price
and other selling terms may from time to time be varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 3,750,000
additional shares of Class A Common Stock to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 25,000,000 shares of
Class A Common Stock offered.
The Company has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 180 days after the date
of this Prospectus, it will not offer, sell, contract to sell or otherwise
dispose of any securities of the Company (other than pursuant to employee stock
option plans existing, or on the conversion or exchange of convertible or
exchangeable securities outstanding, on the date of this Prospectus) which are
substantially similar to the shares of Class A Common Stock or which are
convertible into or exchangeable for securities which are substantially similar
to the shares of Class A Common Stock without the prior written consent of the
representatives, except for the shares of Class A Common Stock offered in
connection with the Offering.
Prior to this Offering, there has been no public market for the shares of
Class A Common Stock. The initial public offering price will be negotiated among
the Company and the representatives. Among the factors to be considered in
determining the initial public offering price of the Class A Common Stock, in
addition to prevailing market conditions, will be the Company's historical
performance, estimates of the business potential and earnings prospects of the
Company, an assessment of the Company's management and the consideration of the
above factors in relation to market valuation of companies in related
businesses.
Each Underwriter has also agreed that: (i) it has not offered or sold and
prior to the date six months after the date of issue of the shares of Class A
Common Stock will not offer or sell any shares of Class A Common Stock to
persons in the United Kingdom except to persons whose ordinary activities
involve
U-1
<PAGE>
them in acquiring, holding, managing or disposing of investments (as principal
or agent) for the purposes of their businesses or otherwise in circumstances
which have not resulted and will not result in an offer to the public in the
United Kingdom within the meaning of the Public Offers of Securities Regulations
1995; (ii) it has complied, and will comply, with all applicable provisions of
the Financial Services Act 1986 of Great Britain with respect to anything done
by it in relation to the shares of Class A Common Stock in, from or otherwise
involving the United Kingdom; and (iii) it has only issued or passed on and will
only issue or pass on in the United Kingdom any document received by it in
connection with the issuance of the shares of Class A Common Stock to a person
who is of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 of Great Britain or is a
person to whom the document may otherwise lawfully be issued or passed on.
Buyers of shares of Class A Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the initial public offering price.
In connection with the Offering, the Underwriters may purchase and sell
shares of the Class A Common Stock in the open market. These transactions may
include over-allotment and stabilizing transactions and purchases to cover short
positions created by the Underwriters in connection with the Offering.
Stabilizing transactions consist of certain bids or purchases for the purpose of
preventing or retarding a decline in the market price of the Class A Common
Stock; short positions created by the Underwriters involve the sale by the
Underwriters of a greater number of shares of Class A Common Stock than they are
required to purchase from the Company in the Offering. The Underwriters also may
impose a penalty bid, whereby selling concessions allowed to broker-dealers in
respect of the securities sold in the Offering may be reclaimed by the
Underwriters if such shares of Class A Common Stock are repurchased by the
Underwriters in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Class A Common
Stock, which may be higher than the price that might otherwise prevail in the
open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to 2,500,000 shares of the Class A Common
Stock offered hereby for employees and directors of the Company and business
associates and related persons of the Company who have expressed an interest in
purchasing such shares of Class A Common Stock in the Offering. The number of
shares available for sale to the general public will be reduced to the extent
such persons purchase such reserved shares. Any reserved shares not so purchased
will be offered by the Underwriters to the general public on the same basis as
other shares offered hereby. In addition, Mr. Leonard Riggio, Chairman of the
Board of the Company, has expressed an interest in purchasing shares being sold
in the Offering, and may purchase up to 10% of the shares offered.
A prospectus in electronic format is being made available on an Internet
Web site maintained by Wit Capital. In addition, all dealers purchasing shares
from Wit Capital in the Offering have agreed to make a prospectus in electronic
format available on Web sites maintained by each of these dealers.
Wit Capital, a member of the National Association of Securities Dealers,
Inc., will participate in the offering as one of the Underwriters. The National
Association of Securities Dealers, Inc. approved the membership of Wit Capital
on September 4, 1997. Since that time, Wit Capital has acted as an underwriter,
e-Manager or selected dealer in over 80 public offerings. Except for its
participation as a manager in this offering, Wit Capital has no relationship
with the Company, bn.com or any of their founders or significant stockholders.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares of
Class A Common Stock offered by them.
The Company and bn.com have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
U-2
<PAGE>
[This page intentionally left blank]
<PAGE>
[This page intentionally left blank]
<PAGE>
------------------------------------------------------------
------------------------------------------------------------
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having been
authorized. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the securities to
which it relates or an offer to sell or the solicitation of an offer to buy such
securities in any circumstances in which such offer or solicitation is unlawful.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................................... 3
Risk Factors.......................................... 9
Use of Proceeds....................................... 20
Dividend Policy....................................... 20
Capitalization........................................ 21
Dilution.............................................. 22
Selected Financial Data............................... 23
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 25
Corporate History and Recapitalization................ 34
Business.............................................. 35
Management............................................ 47
Principal Stockholders................................ 62
Certain Transactions.................................. 64
Description of Capital Stock and Membership Units..... 64
Shares Eligible for Future Sale....................... 68
U.S. Tax Consequences to Non-U.S. Holders............. 69
Validity of Class A Common Stock...................... 71
Experts............................................... 71
Additional Information................................ 71
Index to Financial Statements......................... F-1
Underwriting.......................................... U-1
</TABLE>
Through and including , 1999 (the 25th day after the date of
this Prospectus), all dealers effecting transactions in the Class A Common
Stock, whether or not participating in this distribution, may be required to
deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as Underwriters and with respect to their
unsold allotments or subscriptions.
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
25,000,000 Shares
barnesandnoble.com inc.
Class A Common Stock
(par value $.001 per share)
----------------------------
[LOGO]
----------------------------
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
WIT CAPITAL CORPORATION
Representatives of the Underwriters
------------------------------------------------------------
------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses, other than
Underwriting discounts and commissions, in connection with the issuance and
distribution of the shares of Class A Common Stock being registered, all of
which are being borne by the Company:
<TABLE>
<S> <C>
Registration fee........................................... $ 145,565
Nasdaq listing fee......................................... 95,000
Transfer agent and registrar fees.......................... 10,000
Printing and engraving..................................... 325,000
Legal fees................................................. 475,000
Blue Sky fees and expenses................................. 10,000
Accounting fees............................................ 325,000
Miscellaneous.............................................. 14,435
----------
Total................................................. $1,400,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Amended and Restated Certificate of Incorporation and Amended
and Restated By-laws require the Company to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed proceeding by reason of the fact that he is or was a director or
officer of the Company or bn.com, as the case may be, or any other person
designated by the Board of Directors (which may include any person serving at
the request of the Company as a director, officer, employee, agent, fiduciary or
trustee of another corporation, partnership, joint venture, trust, employee
benefit plan or other entity or enterprise), in each case, against certain
liabilities (including damages, judgments, amounts paid in settlement, fines,
penalties and expenses (including attorneys' fees and disbursements)), except
where such indemnification is expressly prohibited by applicable law, where such
person has engaged in willful misconduct or recklessness or where such
indemnification has been determined to be unlawful. Such indemnification as to
expenses is mandatory to the extent the individual is successful on the merits
of the matter. Delaware law permits the Company to provide similar
indemnification to employees and agents who are not directors or officers. The
determination of whether an individual meets the applicable standard of conduct
may be made by the disinterested directors, independent legal counsel or the
stockholders. Delaware law also permits indemnification in connection with a
proceeding brought by or in the right of the Company to procure a judgment in
its favor. Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act") may be permitted to directors or
officers of the Company or bn.com, as the case may be, or persons controlling
the Company pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in that Act and is
therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In March 1999, the Company issued 100 shares of Common Stock to a
subsidiary of Barnes & Noble Inc. in a private placement. No underwriters,
brokers or other agents were involved in this transaction. These securities were
issued pursuant to an exemption from registration provided by Section 4(2) of
the Securities Act.
In connection with the Offering, the Company will issue additional shares
of Common Stock to a subsidiary of Bertelsmann AG in a private placement. No
underwriters, brokers or other agents will be involved in this transaction.
These securities will be issued pursuant to an exemption from registration
provided by Section 4(2) of the Securities Act.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
The following is a list of exhibits filed as part of this Registration
Statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
<S> <C>
1.1 -- Form of Underwriting Agreement.(2)
3.1 -- Form of Amended and Restated Certificate of Incorporation of the Company.(2)
3.2 -- Form of Amended and Restated By-laws of the Company.(1)
5.1 -- Opinion of Robinson Silverman Pearce Aronsohn & Berman LLP regarding legality of the shares of
Common Stock being registered.
10.1 -- Form of the Company's 1999 Incentive Plan.
10.2 -- Interactive Services Agreement, dated as of July 31, 1997, by and between the Company and Lycos,
Inc.(3)
10.3 -- Interactive Marketing Agreement, dated as of November 1, 1997, by and between the Company and
America Online, Inc.(3)
10.4 -- Ecommerce Merchant Agreement, dated as of October 27, 1997 between the Company and Microsoft
Corporation, together with Amendment No. 4 to Ecommerce Merchant Agreement.(3)
10.5 -- Formation Agreement, effective as of 11:59 p.m., October 31, 1998, among Bertelsmann AG, BOL.US
Online, Inc., Barnes & Noble, Inc., the Company inc., B&N.com Holding Corp. and B&N.com Member
Corp.(1)
10.6 -- Form of Second Amended and Restated Limited Liability Company Agreement of barnesandnoble.com
llc.(2)
10.7 -- Form of Stockholders Agreement between Barnes & Noble, Inc. and Bertelsmann AG.(2)
10.8 -- Technology Sharing and Licensing Agreement, dated as of October 31, 1998, between
barnesandnoble.com llc, as Licensor, and BOL.Global, Inc., as Licensee.(1)
10.9 -- Technology Sharing and Licensing Agreement, dated as of October 31, 1998, between
barnesandnoble.com llc, as Licensee, and BOL. Global, Inc., as Licensor.(1)
10.10 -- Amended and Restated Services Agreement, dated as of October 31, 1998, among the Company,
barnesandnoble.com llc and Barnes & Noble, Inc.(1)
10.11 -- Amended and Restated Services Agreement, dated as of October 31, 1998, among the Company,
barnesandnoble.com llc and Marboro Books Corp.(1)
10.12 -- Amended and Restated Trademark License Agreement, dated as of October 31, 1998, between Barnes &
Noble College Bookstores, Inc. and barnesandnoble.com llc.(1)
10.13 -- Trademark License Agreement dated as of October 31, 1998 between BOL.Global, Inc. and
barnesandnoble.com llc.(1)
10.14 -- Supply Agreement, dated as of October 31, 1998, between barnesandnoble.com llc and Barnes & Noble,
Inc.(1)
10.15 -- Amended and Restated Database and Software License Agreement, dated as of October 31, 1998, among
the Company, barnesandnoble.com llc and Barnes & Noble, Inc.(1)
10.16 -- Form of Amendment No. 1 to the Amended and Restated Services Agreement, among the Company,
barnesandnoble.com llc and Barnes & Noble, Inc.(2)
10.17 -- Form of Amendment No. 1 to the Amended and Restated Services Agreement, among the Company,
barnesandnoble.com llc and Marboro Books Corp.(2)
10.18 -- Form of Amendment No. 1 to the Amended and Restated Trademark License Agreement, between Barnes &
Noble College Bookstores, Inc. and barnesandnoble.com llc.(2)
10.19 -- Form of Amendment No. 1 to the Trademark License Agreement, between BOL.Global, Inc. and
barnesandnoble.com llc.(2)
10.20 -- Form of Amendment No. 1 to the Supply Agreement, between barnesandnoble.com llc and Barnes & Noble
Inc.(2)
10.21 -- Form of Amendment No. 1 to the Amended and Restated Database and Software License Agreement, among
the Company, barnesandnoble.com llc and Barnes & Noble Inc.(2)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.22 -- Indenture of Lease and Amendments thereto, dated as of June 7, 1994, between SDI Technologies,
Inc., as Landlord, and B. Dalton Bookseller, Inc., as Tenant.(1)
10.23 -- Lease, dated as of June 30, 1997, between P.A. Building Company, as Landlord, and Barnes & Noble,
Inc., as Tenant.(1)
10.24 -- Employment Agreement (Chief Executive Officer), dated as of November 1, 1998, among
barnesandnoble.com llc, Barnes & Noble, Inc., Bertelsmann AG and Jonathan Bulkeley.(2)
10.25 -- Deferred Compensation Plan of the Company.
10.26 -- Retirement Plan of the Company.
10.27 -- Form of Amendment No. 1 to the Technology Sharing and License Agreement, between BOL.Global, Inc.,
as Licensor, and barnesandnoble.com llc, as Licensee.(2)
10.28 -- Form of Amendment No. 1 to the Technology Sharing and License Agreement, between BOL.Global, Inc.,
as Licensee, and barnesandnoble.com llc, as Licensor.(2)
10.29 -- Employment Termination Agreement, dated as of February 22, 1999, between barnesandnoble.com llc
and Jeffrey Killeen.(2)
23.1 -- Consent of BDO Seidman, LLP.
23.2 -- Consent of Robinson Silverman Pearce Aronsohn & Berman LLP (included in its opinion filed as
Exhibit 5 hereto).
24.1 -- Power of Attorney (included on signature page to this Registration Statement).(1)
27.1 -- Financial Data Schedule.(2)
</TABLE>
- ------------------
(1) Filed with Amendment No. 1 to Registration Statement.
(2) Filed with Amendment No. 2 to Registration Statement.
(3) Confidential Treatment Requested. Confidential portions of this document
have been redacted and have been filed separately with the Securities and
Exchange Commission.
ITEM 17. UNDERTAKINGS.
(i) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(ii) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(iii) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN NEW YORK, NEW YORK ON
MAY 21, 1999.
barnesandnoble.com inc.
By: /s/ LEONARD RIGGIO
-----------------------------------
Leonard Riggio
Chairman of the Board
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
- -------------------------------- ------------------------------------------------------ -----------------
<S> <C> <C>
/s/ LEONARD RIGGIO Chairman of the Board May 21, 1999
- --------------------------------
Leonard Riggio
/s/ JONATHAN BULKELEY Chief Executive Officer May 21, 1999
- -------------------------------- (Principal Executive Officer)
Jonathan Bulkeley
/s/ MARIE J. TOULANTIS Chief Financial Officer May 21, 1999
- -------------------------------- (Principal Accounting and Financial Officer)
Marie J. Toulantis
/s/ MICHAEL N. ROSEN Secretary and a Director May 21, 1999
- --------------------------------
Michael N. Rosen
/s/ STEPHEN RIGGIO Director May 21, 1999
- --------------------------------
Stephen Riggio
/s/ THOMAS MIDDELHOFF* Director May 21, 1999
- --------------------------------
Thomas Middelhoff
/s/ MARKUS WILHELM* Director May 21, 1999
- --------------------------------
Markus Wilhelm
/s/ KLAUS EIERHOFF* Director May 21, 1999
- --------------------------------
Klaus Eierhoff
- --------------------------------
* By Leonard Riggio,
as attorney-in-fact
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- ------------------------------------------------------------------------------------------- -----------
<S> <C>
1.1 -- Form of Underwriting Agreement.(2)
3.1 -- Form of Amended and Restated Certificate of Incorporation of the Company.(2)
3.2 -- Form of Amended and Restated By-laws of the Company.(1)
5.1 -- Opinion of Robinson Silverman Pearce Aronsohn & Berman LLP regarding legality of the
shares of Common Stock being registered.
10.1 -- Form of the Company's 1999 Incentive Plan.
10.2 -- Interactive Services Agreement, dated as of July 31, 1997, by and between the Company
and Lycos, Inc.(3)
10.3 -- Interactive Marketing Agreement, dated as of November 1, 1997, by and between the
Company and America Online, Inc.(3)
10.4 -- Ecommerce Merchant Agreement, dated as of October 27, 1997 between the Company and
Microsoft Corporation, together with Amendment No. 4 to Ecommerce Merchant
Agreement.(3)
10.5 -- Formation Agreement, effective as of 11:59 p.m., October 31, 1998, among Bertelsmann
AG, BOL.US Online, Inc., Barnes & Noble, Inc., the Company inc., B&N.com Holding
Corp. and B&N.com Member Corp.(1)
10.6 -- Form of Second Amended and Restated Limited Liability Company Agreement of
barnesandnoble.com llc.(2)
10.7 -- Form of Stockholders Agreement between Barnes & Noble, Inc. and Bertelsmann AG.(2)
10.8 -- Technology Sharing and Licensing Agreement, dated as of October 31, 1998, between
barnesandnoble.com llc, as Licensor, and BOL.Global, Inc., as Licensee.(1)
10.9 -- Technology Sharing and Licensing Agreement, dated as of October 31, 1998, between
barnesandnoble.com llc, as Licensee, and BOL. Global, Inc., as Licensor.(1)
10.10 -- Amended and Restated Services Agreement, dated as of October 31, 1998, among the
Company, barnesandnoble.com llc and Barnes & Noble, Inc.(1)
10.11 -- Amended and Restated Services Agreement, dated as of October 31, 1998, among the
Company, barnesandnoble.com llc and Marboro Books Corp.(1)
10.12 -- Amended and Restated Trademark License Agreement, dated as of October 31, 1998,
between Barnes & Noble College Bookstores, Inc. and barnesandnoble.com llc.(1)
10.13 -- Trademark License Agreement dated as of October 31, 1998 between BOL.Global, Inc. and
barnesandnoble.com llc.(1)
10.14 -- Supply Agreement, dated as of October 31, 1998, between barnesandnoble.com llc and
Barnes & Noble, Inc.(1)
10.15 -- Amended and Restated Database and Software License Agreement, dated as of
October 31, 1998, among the Company, barnesandnoble.com llc and Barnes & Noble,
Inc.(1)
10.16 -- Form of Amendment No. 1 to the Amended and Restated Services Agreement, among the
Company, barnesandnoble.com llc and Barnes & Noble, Inc.(2)
10.17 -- Form of Amendment No. 1 to the Amended and Restated Services Agreement, among the
Company, barnesandnoble.com llc and Marboro Books Corp.(2)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- ------------------------------------------------------------------------------------------- -----------
<S> <C>
10.18 -- Form of Amendment No. 1 to the Amended and Restated Trademark License Agreement,
between Barnes & Noble College Bookstores, Inc. and barnesandnoble.com llc.(2)
10.19 -- Form of Amendment No. 1 to the Trademark License Agreement, between BOL.Global, Inc.
and barnesandnoble.com llc.(2)
10.20 -- Form of Amendment No. 1 to the Supply Agreement, between barnesandnoble.com llc and
Barnes & Noble Inc.(2)
10.21 -- Form of Amendment No. 1 to the Amended and Restated Database and Software License
Agreement, among the Company, barnesandnoble.com llc and Barnes & Noble Inc.(2)
10.22 -- Indenture of Lease and Amendments thereto, dated as of June 7, 1994, between SDI
Technologies, Inc., as Landlord, and B. Dalton Bookseller, Inc., as Tenant.(1)
10.23 -- Lease, dated as of June 30, 1997, between P.A. Building Company, as Landlord, and
Barnes & Noble, Inc., as Tenant.(1)
10.24 -- Employment Agreement (Chief Executive Officer), dated as of November 1, 1998, among
barnesandnoble.com llc, Barnes & Noble, Inc., Bertelsmann AG and Jonathan
Bulkeley.(2)
10.25 -- Deferred Compensation Plan of the Company.
10.26 -- Retirement Plan of the Company.
10.27 -- Form of Amendment No. 1 to the Technology Sharing and License Agreement, between
BOL.Global, Inc., as Licensor, and barnesandnoble.com llc, as Licensee.(2)
10.28 -- Form of Amendment No. 1 to the Technology Sharing and License Agreement, between
BOL.Global, Inc., as Licensee, and barnesandnoble.com llc, as Licensor.(2)
10.29 -- Employment Termination Agreement, dated as of February 22, 1999, between
barnesandnoble.com llc and Jeffrey Killeen.(2)
23.1 -- Consent of BDO Seidman, LLP.
23.2 -- Consent of Robinson Silverman Pearce Aronsohn & Berman LLP (included in its opinion
filed as Exhibit 5 hereto).
24.1 -- Power of Attorney (included on signature page to this Registration Statement).(1)
27.1 -- Financial Data Schedule.(2)
</TABLE>
- ------------------
(1) Filed with Amendment No. 1 to Registration Statement.
(2) Filed with Amendment No. 2 to Registration Statement.
(3) Confidential Treatment Requested. Confidential portions of this document
have been redacted and have been filed separately with the Securities and
Exchange Commission.
<PAGE>
May 21, 1999
barnesandnoble.com inc.
76 Ninth Avenue, 11th Floor
New York, New York 10011
Ladies and Gentlemen:
We refer to the Registration Statement on Form S-1, File No. 333-64211
(the "Registration Statement"), filed by barnesandnoble.com inc. (the "Company")
with the Securities and Exchange Commission (the "Commission") for the purpose
of registering under the Securities Act of 1933, as amended, 25,000,000 shares
of the Company's Class A Common Stock, par value $.001 per share (the "Common
Stock").
As counsel to the Company, we have examined such corporate records,
documents, agreements and such matters of law as we have considered necessary or
appropriate for the purpose of this opinion.
Upon the basis of such examination, we advise you that in our opinion
the Class A Common Stock to be sold by the Company to Goldman, Sachs & Co.,
Merrill Lynch & Co., Salomon Smith Barney and Wit Capital Corporation (the
"Underwriters"), if and when paid for and issued in accordance with and subject
to the terms and conditions of the underwriting agreement between the Company
and the Underwriters in the form of Exhibit 1.1 to the Registration Statement,
will be validly issued, fully paid and nonassessable.
We are members of the New York Bar, and the opinions expressed herein
are limited to questions arising under the laws of the State of New York, the
General Corporation Law of the State of Delaware and the federal law of the
United States, and we disclaim any opinion whatsoever with respect to matters
governed by the laws of any other jurisdiction.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to this firm under "Validity of
Class A Common Stock" which is a part of the Registration Statement. In giving
this consent, we do not thereby admit that we are in the category of persons
whose consent is required under Section 7 of the Act, or the Rules and
Regulations of the Commission thereunder.
Very truly yours,
/S/ Robinson Silverman Pearce Aronsohn &
Berman LLP
<PAGE>
barnesandnoble.com inc.
1999 INCENTIVE PLAN
barnesandnoble.com inc., a corporation formed under the laws
of the State of Delaware (the "Company"), hereby establishes and adopts the
following 1999 Incentive Plan (the "Plan").
RECITALS
WHEREAS, the Company desires to encourage high levels of
performance by those individuals who are key to the success of the Company, to
attract new individuals who are highly motivated and who will contribute to
the success of the Company and to encourage such individuals to remain as
directors, officers, employees, consultants and/or advisors of the Company and
its subsidiaries and affiliates by increasing their proprietary interest in
the Company's growth and success.
WHEREAS, to attain these ends, the Company has formulated
the Plan embodied herein to authorize the granting of incentive awards through
grants of stock options ("Options"), grants of stock appreciation rights,
grants of Stock Purchase Awards (hereafter defined), and grants of Restricted
Stock Awards (hereafter defined) to those individuals whose judgment,
initiative and efforts are, have been or are expected to be responsible for
the success of the Company.
NOW, THEREFORE, the Company hereby constitutes, establishes
and adopts the following Plan and agrees to the following provisions:
ARTICLE 1.
PURPOSE OF THE PLAN
1.1. Purpose. The purpose of the 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
its subsidiaries and affiliates who will contribute to the Company's success
and to achieve long-term objectives which will inure to the benefit of all
stockholders of the Company through the additional incentive inherent in the
ownership of the Company's shares of Class A Common Stock, $.001 par value per
share ("Shares"). Options granted under the Plan will be either "incentive
stock options," intended to qualify as such under the provisions of Section
422 of the Internal Revenue Code of 1986, as from time to time amended (the
"Code"), or "nonqualified stock options." For purposes of the Plan, the term
"subsidiary" shall mean "subsidiary corporation," as such term is defined in
Section 424(f) of the Code, and "affiliate" shall have the meaning set forth
in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). For purposes of the Plan, the term "Award" shall include a
grant of an Option, a grant of a stock appreciation right, a grant of a Stock
Purchase Award, a grant of a Restricted Stock Award, or any other award made
under the terms of the Plan.
ARTICLE 2.
SHARES SUBJECT TO AWARDS
2.1. Number of Shares. Subject to the adjustment provisions
of Section 9.10 hereof, the aggregate number of Shares which may be issued
under Awards under the Plan, whether pursuant to Options, stock appreciation
rights, Stock Purchase Awards or Restricted Stock Awards shall not exceed
twenty-five
-1-
<PAGE>
million five hundred thousand (25,500,000). Options to purchase fractional
Shares may be granted or issued under the Plan. For purposes of this Section
2.1, the Shares that shall be counted toward such limitation shall include all
Shares:
(1) issued or issuable pursuant to Options that have been or
may be exercised;
(2) issued or issuable pursuant to Stock Purchase Awards;
and
(3) issued as, or subject to issuance as, a Restricted Stock
Award.
2.2. Shares Subject to Terminated Awards. The Shares covered
by any unexercised portions of terminated Options granted under Articles 4 and
6, Shares forfeited as provided in Section 8.2(a) and Shares subject to any
Awards which are otherwise surrendered by the Participant without receiving
any payment or other benefit with respect thereto may again be subject to new
Awards under the Plan. In the event the purchase price of an 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 Plan. Shares subject to Options, or portions
thereof, which have been surrendered in connection with the exercise of stock
appreciation rights shall not again be available for the grant of Awards under
the Plan.
2.3. Character of Shares. Shares delivered under the Plan
may be authorized and unissued Shares or Shares acquired by the Company, or
both.
2.4. Limitations on Grants to Individual Participant.
Subject to adjustments pursuant to the provisions of Section 9.10 hereof, the
number of Shares which may be granted hereunder to any employee during any
fiscal year under all forms of Awards shall not exceed seven million
(7,000,000) Shares. If an Option is canceled, the canceled Option shall
continue to be counted toward the seven million Share limit for the year
granted. An Option (or a stock appreciation right) that is repriced during any
fiscal year is treated as the cancellation of the Option (or stock
appreciation right) and a grant of a new Option (or stock appreciation right),
both of which shall be counted toward the seven million Share limit for that
fiscal year.
ARTICLE 3.
ELIGIBILITY AND ADMINISTRATION
3.1. Awards to Employees and Directors. (a) Participants who
receive (i) Options under Articles 4 and 6 hereof or stock appreciation rights
under Article 5 ("Optionees"), and (ii) Stock Purchase Awards under Article 7
or Restricted Stock Awards under Article 8 (in either case, a "Participant"),
shall consist of such key officers, employees, consultants, advisors and
directors of the Company or any of its subsidiaries or affiliates as the
Committee shall select from time to time, provided, however, that an Option
that is intended to qualify as an "incentive stock option" may be granted only
to an individual that is an employee of the Company or any of its
subsidiaries. The Committee's designation of an Optionee or Participant in any
year shall not require the Committee to designate such person to receive
Awards or grants in any other year. The designation of an Optionee or
Participant to receive Awards or grants under one portion of the Plan shall
not require the Committee to include such Optionee or Participant under other
portions of the Plan.
(b) No Option which is intended to qualify as an "incentive
stock option" may be granted to any employee who, at the time of such grant,
owns, directly or indirectly (within the meaning of sections 422(b)(6) and
424(d) of the Code), shares of stock possessing more than ten percent (10%) of
the
-2-
<PAGE>
total combined voting power of all classes of stock of the Company or any of
its subsidiaries or affiliates, unless at the time of such grant, (i) the
option price is fixed at not less than 110% of the Fair Market Value (as
defined below) of the Shares subject to such Option, determined on the date of
the grant, and (ii) the exercise of such Option is prohibited by its terms
after the expiration of five years from the date such Option is granted.
3.2. Administration. (a) The Plan shall be administered by a
committee (the "Committee") consisting of not fewer than two directors of the
Company (the directors of the Company being hereinafter referred to as the
"Directors"), as designated by the Directors. The Directors may remove from,
add members to, or fill vacancies in the Committee. Each member of the
Committee shall be a "Non-Employee Director" within the meaning of Rule
16b-3(b)(3)(i) of the Exchange Act and an "outside director" within the
meaning of Section 162(m)(4)(C)(i) of the Code, except that if the Directors
determine that (i) the Plan cannot or need not satisfy the requirements of
Rule 16b-3 of the Exchange Act (such that grants of Awards are not or need not
be exempt from Section 16(b) of the Exchange Act), then there may be less than
two members of the Committee and the members of the Committee need not be
"Non-Employee Directors" or (ii) they no longer want the Plan to comply with
the requirements of Code Section 162(m) and the regulations thereunder or the
Plan need not comply with such requirements, then there may be less than two
members of the Committee and the members of the Committee need not be "outside
directors."
(b) The Committee is authorized, subject to the
provisions of the Plan, to establish such rules and regulations as it may deem
appropriate for the conduct of meetings and proper administration of the Plan.
All actions of the Committee shall be taken by majority vote of its members.
(c) Subject to the provisions of the Plan, the
Committee shall have authority, in its sole discretion, to grant Awards under
the Plan, to interpret the provisions of the Plan and, subject to the
requirements of applicable law, including (if applicable) Rule 16b-3 of the
Exchange Act, to prescribe, amend, and rescind rules and regulations relating to
the Plan or any Award thereunder as it may deem necessary or advisable. All
decisions made by the Committee pursuant to the provisions of the Plan shall be
final, conclusive and binding on all persons, including the Company, its
stockholders, Directors and employees, and other Plan participants.
ARTICLE 4.
OPTIONS
4.1. Grant of Options. The Committee shall determine, within
the limitations of the Plan, those key individuals and the Directors and
employees of the Company and its subsidiaries and affiliates to whom Options
are to be granted under the Plan, the number of Shares that may be purchased
under each such Option and the option price, and shall designate such Options
at the time of the grant as either "incentive stock options" or "nonqualified
stock options"; provided, however, that Options granted to employees of an
affiliate (that is not also a subsidiary) or to non-employees of the Company
may only be "nonqualified stock options."
4.2. Stock Option Agreements; etc. All Options granted
pursuant to Article 4 and Article 6 herein (a) shall be authorized by the
Committee and (b) shall be evidenced in writing by stock option agreements
("Stock Option Agreements") in such form and containing such terms and
conditions as the Committee shall determine which are not inconsistent with
the provisions of the Plan, and, with respect to any Stock Option Agreement
granting Options which are intended to qualify as "incentive stock options,"
are not inconsistent with Section 422 of the Code. Granting of an Option
pursuant to the Plan shall impose no obligation on the recipient to exercise
such option. Any individual who is granted an Option pursuant
-3-
<PAGE>
to this Article 4 and Article 6 herein may hold more than one Option granted
pursuant to such Articles at the same time and may hold both "incentive stock
options" and "nonqualified stock options" at the same time. To the extent that
any Option does not qualify as an "incentive stock option" (whether because of
its provisions, the time or manner of its exercise or otherwise) such Option
or the portion thereof which does not so qualify shall constitute a separate
"nonqualified stock option."
4.3. Option Price. Subject to Section 3.1(b), the option
price per each Share purchasable under any "incentive stock option" granted
pursuant to this Article 4 and any "nonqualified stock option" granted
pursuant to Article 6 herein shall not be less than 100% of the Fair Market
Value (as hereinafter defined) of such Share on the date of the grant of such
Option. The option price per each Share purchasable under any "nonqualified
stock option" granted pursuant to this Article 4 shall be such amount as the
Committee shall determine at the time of the grant of such Option.
4.4. Conditions. Certain Options to be granted under the
Plan (the "Replacement Options") are intended to provide Optionees with
options that are the economic equivalent of options received by such Optionees
between November 1, 1998 and the date of the adoption of this Plan from
barnesandnoble.com llc (collectively, the "Prior Options"). Any Replacement
Option shall be in lieu of, and shall replace in its entirety, the equivalent
Prior Option, which Prior Option shall be null and void and of no further
force or effect, and any Stock Option Agreement granting any Replacement
Option shall so provide.
4.5. Other Provisions. Options granted pursuant to this
Article 4 shall be made in accordance with the terms and provisions of Article
9 hereof and any other applicable terms and provisions of the Plan.
ARTICLE 5.
STOCK APPRECIATION RIGHTS
5.1. Grant and Exercise. Stock appreciation rights may be
granted in conjunction with all or part of any Option granted under the Plan
provided such rights are granted at the time of the grant of such Option. A
"stock appreciation right" is a right to receive cash or Shares, as provided
in this Article 5, in lieu of the purchase of a Share under a related Option.
A stock appreciation right or applicable portion thereof shall terminate and
no longer be exercisable upon the termination or exercise of the related
Option, and a stock appreciation right granted with respect to less than the
full number of Shares covered by a related Option shall not be reduced until,
and then only to the extent that, the exercise or termination of the related
Option exceeds the number of Shares not covered by the stock appreciation
right. A stock appreciation right may be exercised by the holder thereof (the
"Holder"), in accordance with Section 5.2 of this Article 5, by giving written
notice thereof to the Company and surrendering the applicable portion of the
related Option. Upon giving such notice and surrender, the Holder shall be
entitled to receive an amount determined in the manner prescribed in Section
5.2 of this Article 5. Options which have been so surrendered, in whole or in
part, shall no longer be exercisable to the extent the related stock
appreciation rights have been exercised.
5.2. Terms and Conditions. Stock appreciation rights shall
be subject to such terms and conditions, not inconsistent with the provisions
of the Plan, as shall be determined from time to time by the Committee,
including the following:
(a) Stock appreciation rights shall be exercisable
only at such time or times and to the extent that the Options to
which they relate shall be exercisable in accordance with the
provisions of the Plan.
-4-
<PAGE>
(b) Upon the exercise of a stock appreciation
right, a Holder shall be entitled to receive up to, but no more than,
an amount in cash or whole Shares equal to the excess of the then
Fair Market Value of one Share over the option price per Share
specified in the related Option mul tiplied by the number of Shares
in respect of which the stock appreciation right shall have been
exercised. The Holder shall specify in his written notice of
exercise, whether payment shall be made in cash or in whole Shares.
Each stock appreciation right may be exercised only at the time and
so long as a related Option, if any, would be exercisable or as
otherwise permitted by applicable law.
(c) Upon the exercise of a stock appreciation
right, the Option or part thereof to which such stock appreciation
right is related shall be deemed to have been exercised for the
purpose of the limitation of the number of Shares to be issued under
the Plan, as set forth in Section 2.1 of the Plan.
(d) With respect to stock appreciation rights
granted in connection with an Option that is intended to be an
"incentive stock option", the following shall apply: (i) no stock
appreciation right shall be transferable by a Holder otherwise than
by will or by the laws of descent and distribution, and stock
appreciation rights shall be exercisable, during the Holder's
lifetime, only by the Holder; and (ii) stock appreciation rights
granted in connection with an Option may be exercised only when the
Fair Market Value of the Shares subject to the Option exceeds the
option price at which Shares can be acquired pursuant to the Option.
ARTICLE 6.
RELOAD OPTIONS
6.1. Authorization of Reload Options. Concurrently with the
award of any Option (such Option hereinafter referred to as the "Underlying
Option") to any participant in the Plan, the Committee may grant a reload
option (a "Reload Option") to such participant to purchase for cash or Shares
a number of Shares as specified below. A Reload Option shall be exercisable
for an amount of Shares equal to (i) the number of Shares delivered by the
Optionee to the Company to exercise the Underlying Option, and (ii) to the
extent authorized by the Committee, the number of Shares used to satisfy any
tax withholding requirement incident to the exercise of the Underlying Option,
subject to the availability of Shares under the Plan at the time of such
exercise. The grant of a Reload Option shall become effective upon the
exercise of an Underlying Option by delivering to the Company Shares held by
the Optionee for at least six months. Notwithstanding the fact that the
Underlying Option may be an "incentive stock option," a Reload Option is not
intended to qualify as an "incentive stock option" under Section 422 of the
Code.
6.2. Reload Option Amendment. Each Stock Option Agreement
shall state whether the Committee has authorized Reload Options with respect
to the Underlying Option. Upon the exercise of an Underlying Option, the
Reload Option will be evidenced by an amendment to the underlying Stock Option
Agreement.
6.3. Reload Option Price. The option price per Share
deliverable upon the exercise of a Reload Option shall be the Fair Market
Value of a Share on the date the grant of the Reload Option becomes effective.
6.4. Term and Exercise. Each Reload Option is fully
exercisable six months from the effective date of grant. The term of each
Reload Option shall be equal to the remaining option term of the Underlying
Option.
-5-
<PAGE>
6.5. Termination of Employment. No Reload Option shall be
granted to an Optionee when Options are exercised pursuant to the terms of
this Plan following termination of the Optionee's employment, unless the
Committee, in its sole discretion, shall determine otherwise.
6.6. Applicability of Other Sections. Except as otherwise
provided in this Article 6, the provisions of Article 9 applicable to Options
shall apply equally to Reload Options.
ARTICLE 7.
STOCK PURCHASE AWARDS
7.1. Grant of Stock Purchase Awards. The term "Stock
Purchase Award" means the right to purchase Shares of the Company and to pay
for such Shares through a loan made by the Company to an employee (a "Purchase
Loan") as set forth in this Article 7.
7.2. Terms of Purchase Loans. (a) Purchase Loan. Each
Purchase Loan shall be evidenced by a promissory note. The term of the
Purchase Loan shall be a period of years, as determined by the Committee, and
the proceeds of the Purchase Loan shall be used exclusively by the Participant
for purchase of Shares from the Company at a purchase price equal to their
Fair Market Value on the date of the Stock Purchase Award.
(b) Interest on Purchase Loan. A Purchase Loan
shall be non-interest bearing or shall bear interest at whatever rate the
Committee shall determine (but not in excess of the maximum rate permissible
under applicable law), payable in a manner and at such times as the Committee
shall determine. Those terms and provisions as the Committee shall determine
shall be incorporated into the promissory note evidencing the Purchase Loan.
(c) Forgiveness of Purchase Loan. Subject to
Section 7.4 hereof, the Company may forgive the repayment of up to 100% of the
principal amount of the Purchase Loan, subject to such terms and conditions as
the Committee shall determine and set forth in the promissory note evidencing
the Purchase Loan. A Participant's Purchase Loan can be prepaid at any time, and
from time to time, without penalty.
7.3. Security for Loans. (a) Stock Power and Pledge.
Purchase Loans granted to Participants shall be secured by a pledge of the
Shares acquired pursuant to the Stock Purchase Award. Such pledge shall be
evidenced by a pledge agreement (the "Pledge Agreement") containing such terms
and conditions as the Committee shall determine. Purchase Loans shall be
recourse or non-recourse with respect to a Participant, as determined from
time to time by the Committee. The share certificates for the Shares purchased
by a Participant pursuant to a Stock Purchase Award shall be issued in the
Participant's name, but shall be held by the Company as security for repayment
of the Participant's Purchase Loan together with a stock power executed in
blank by the Participant (the execution and delivery of which by the
Participant shall be a condition to the issuance of the Stock Purchase Award).
The Participant shall be entitled to exercise all rights applicable to such
Shares, including, but not limited to, the right to vote such Shares and the
right to receive dividends and other distributions made with respect to such
Shares. When the Purchase Loan and any accrued but unpaid interest thereon has
been repaid or otherwise satisfied in full, the Company shall deliver to the
Participant the share certificates for the Shares purchased by a Participant
under the Stock Purchase Award.
(b) Release and Delivery of Share Certificates
During the Term of the Purchase Loan. The Company shall release and deliver to
each Participant certificates for Shares purchased by a
-6-
<PAGE>
Participant pursuant to a Stock Purchase Award, in such amounts and on such
terms and conditions as the Committee shall determine, which shall be set
forth in the Pledge Agreement.
(c) Release and Delivery of Share Certificates
Upon Repayment of the Purchase Loan. The Company shall release and deliver to
each Participant certificates for the Shares purchased by the Participant under
the Stock Purchase Award and then held by the Company, provided the Participant
has paid or otherwise satisfied in full the balance of the Purchase Loan and any
accrued but unpaid interest thereon. In the event the balance of the Purchase
Loan is not repaid, forgiven or otherwise satisfied within 90 days after (i) the
date repayment of the Purchase Loan is due (whether in accordance with its term,
by reason of acceleration or otherwise), or (ii) such longer time as the
Committee, in its discretion, shall provide for repayment or satisfaction, the
Company shall retain those Shares then held by the Company in accordance with
the Pledge Agreement.
(d) Recourse Purchase Loans. Notwithstanding
Sections 7.3(a), (b) and (c) above, in the case of a recourse Purchase Loan, the
Committee may make a Purchase Loan on such terms as it determines, including
without limitation not requiring a pledge of the acquired shares.
7.4. Termination of Employment. (a) Termination of
Employment by Death, Disability or by the Company Without Cause; Change of
Control. In the event of a Participant's termination of employment by reason
of death, "disability" or by the Company without "cause," or in the event of a
"change of control," the Committee shall have the right (but shall not be
required) to forgive the remaining unpaid amount (principal and interest) of
the Purchase Loan in whole or in part as of the date of such occurrence.
"Change of Control," "disability" and "cause" shall have the respective
meanings as set forth in the promissory note evidencing the Purchase Loan.
(b) Termination of Employment by Voluntary
Resignation. Subject to Section 7.4(a) above, in the event of a Participant's
termination of employment for any reason, the Participant shall repay to the
Company the entire balance of the Purchase Loan and any accrued but unpaid
interest thereon, which amounts shall become immediately due and payable, unless
otherwise determined by the Committee.
7.5. Restrictions on Transfer. No Stock Purchase Award or
Shares purchased through such an Award and pledged to the Company as
collateral security for the Participant's Purchase Loan (and accrued and
unpaid interest thereon) may be otherwise pledged, sold, assigned or
transferred (other than by will or by the laws of descent and distribution).
ARTICLE 8.
RESTRICTED STOCK AWARDS
8.1. Restricted Stock Awards. (a) Grant. A grant of Shares
made pursuant to this Article 8 is referred to as a "Restricted Stock Award."
The Committee may grant to any employee an amount of Shares in such manner,
and subject to such terms and conditions relating to vesting, forfeitability
and restrictions on delivery and transfer (whether based on performance
standards, periods of service or otherwise) as the Committee shall establish
(such Shares, "Restricted Shares"). The terms of any Restricted Stock Award
granted under this Plan shall be set forth in a written agreement (a
"Restricted Stock Agreement") which shall contain provisions determined by the
Committee and not inconsistent with this Plan. The provisions of Restricted
Stock Awards need not be the same for each Participant receiving such Awards.
-7-
<PAGE>
(b) Issuance of Restricted Shares. As soon as
practicable after the date of grant of a Restricted Stock Award by the
Committee, the Company shall cause to be transferred on the books of the
Company, Shares registered in the name of the Company, as nominee for the
Participant, evidencing the Restricted Shares covered by the Award; provided,
however, such Shares shall be subject to forfeiture to the Company retroactive
to the date of grant, if a Restricted Stock Agreement delivered to the
Participant by the Company with respect to the Restricted Shares covered by the
Award is not duly executed by the Participant and timely returned to the
Company. All Restricted Shares covered by Awards under this Article 8 shall be
subject to the restrictions, terms and conditions contained in the Plan and the
Restricted Stock Agreement entered into by and between the Company and the
Participant. Until the lapse or release of all restrictions applicable to an
Award of Restricted Shares, the share certificates representing such Restricted
Shares shall be held in custody by the Company or its designee.
(c) Stockholder Rights. Beginning on the date
of grant of the Restricted Stock Award and subject to execution of the
Restricted Stock Agreement as provided in Sections 8.1(a) and (b), the
Participant shall become a stockholder of the Company with respect to all Shares
subject to the Restricted Stock Agreement and shall have all of the rights of a
stockholder, including, but not limited to, the right to vote such Shares and
the right to receive distributions made with respect to such Shares; provided,
however, that any Shares distributed as a dividend or otherwise with respect to
any Restricted Shares as to which the restrictions have not yet lapsed shall be
subject to the same restrictions as such Restricted Shares and shall be
represented by book entry and held as prescribed in Section 8.1(b).
(d) Restriction on Transferability. None of the
Restricted Shares may be assigned or transferred (other than by will or the laws
of descent and distribution), pledged or sold prior to lapse or release of the
restrictions applicable thereto.
(e) Delivery of Shares Upon Release of
Restrictions. Upon expiration or earlier termination of the forfeiture period
without a forfeiture and the satisfaction of or release from any other
conditions prescribed by the Committee, the restrictions applicable to the
Restricted Shares shall lapse. As promptly as administratively feasible
thereafter, subject to the requirements of Section 10.1, the Company shall
deliver to the Participant or, in case of the Participant's death, to the
Participant's beneficiary, one or more stock certificates for the appropriate
number of Shares, free of all such restrictions, except for any restrictions
that may be imposed by law.
8.2. Terms of Restricted Shares. (a) Forfeiture of
Restricted Shares. Subject to Section 8.2(b), all Restricted Shares shall be
forfeited and returned to the Company and all rights of the Participant with
respect to such Restricted Shares shall terminate unless the Participant
continues in the service of the Company as an employee until the expiration of
the forfeiture period for such Restricted Shares and satisfies any and all
other conditions set forth in the Restricted Stock Agreement. The Committee in
its sole discretion, shall determine the forfeiture period (which may, but
need not, lapse in installments) and any other terms and conditions applicable
with respect to any Restricted Stock Award.
(b) Waiver of Forfeiture Period. Notwithstanding
anything contained in this Article 8 to the contrary, the Committee may, in its
sole discretion, waive the forfeiture period and any other conditions set forth
in any Restricted Stock Agreement under appropriate circumstances (including the
death, disability or retirement of the Participant or a material change in
circumstances arising after the date of an Award) and subject to such terms and
conditions (including forfeiture of a proportionate number of the Restricted
Shares) as the Committee shall deem appropriate.
-8-
<PAGE>
ARTICLE 9.
GENERALLY APPLICABLE PROVISIONS
9.1. Option Period. Subject to Section 3.1(b), the period
for which an Option is exercisable shall not exceed ten years from the date
such Option is granted, provided, however, in the case of an Option that is
not intended to be an "incentive stock option," the Committee may prescribe a
period in excess of ten years. After the Option is granted, the option period
may not be reduced.
9.2. Fair Market Value. If the Shares are listed or admitted
to trading on a securities exchange registered under the Exchange Act, the
"Fair Market Value" of a Share as of a specified date shall mean the per Share
closing price of the Shares for the day immediately preceding the date as of
which Fair Market Value is being determined (or if there was no reported
closing price on such date, on the last preceding date on which the closing
price was reported) reported on the principal securities exchange on which the
Shares are listed or admitted to trading. If the Shares are not listed or
admitted to trading on any such exchange but are listed as a national market
security on the National Association of Securities Dealers, Inc. Automated
Quotations System ("NASDAQ"), traded in the over-the-counter market or listed
or traded on any similar system then in use, the Fair Market Value of a Share
shall be the last sales price for the day immediately preceding the date as of
which the Fair Market Value is being determined (or if there was no reported
sale on such date, on the last preceding date on which any reported sale
occurred) reported on such system. If the Shares are not listed or admitted to
trading on any such exchange, are not listed as a national market security on
NASDAQ and are not traded in the over-the-counter market or listed or traded
on any similar system then in use, but are quoted on NASDAQ or any similar
system then in use, the Fair Market Value of a Share shall be the average of
the closing high bid and low asked quotations on such system for the Shares on
the date in question. If the Shares are not publicly traded, Fair Market Value
shall be determined by the Committee in its sole discretion using appropriate
criteria, including without limitation the respective values of other
companies comparable to the Company in terms of product lines, markets,
profitability, growth rates, and other considerations. The Committee may, in
its sole discretion, seek the advice of outside experts in connection with any
such determination. An Option shall be considered granted on the date the
Committee acts to grant the Option or such later date as the Committee shall
specify.
9.3. Exercise of Options. Options granted under the Plan
shall be exercised by the Optionee thereof (or by his executors,
administrators, guardian or legal representative, as provided in Sections 9.6
and 9.7 hereof) as to all or part of the Shares covered thereby, by the giving
of written notice of exercise to the Company, specifying the number of Shares
to be purchased, accompanied by payment of the full purchase price for the
Shares being purchased. Full payment of such purchase price shall be made
within five (5) business days following the date of exercise and shall be made
(i) in cash or by certified check or bank check, (ii) with the consent of the
Committee, by delivery of a promissory note in favor of the Company upon such
terms and conditions as determined by the Committee, (iii) with the consent of
Committee, by tendering previously acquired Shares (valued at its Fair Market
Value, as determined by the Committee as of the date of tender), or (iv) with
the consent of the Committee, any combination of (i), (ii) and (iii);
provided, however, that payment may not be pursuant to (iii) above unless the
Optionee shall have owned the Shares being tendered in payment for a period of
at least six months prior to the date of exercise of the Option. In connection
with a tender of previously acquired Shares pursuant to clause (iii) above,
the Committee, in its sole discretion, may permit the Optionee to
constructively exchange Shares already owned by the Optionee in lieu of
actually tendering such Shares to the Company, provided that adequate
documentation concerning the ownership of the Shares to be constructively
tendered is furnished in form satisfactory to the Committee. The notice of
exercise, accompanied by such payment, shall be delivered to the Company at
its principal business office or such other office as the Committee may from
time to time direct, and shall be in such form, containing such further
provisions consistent with the provisions of the Plan, as the Committee may
from time to time prescribe. In no event may any Option granted hereunder be
-9-
<PAGE>
exercised for a fraction of a Share. The Company shall effect the transfer of
Shares purchased pursuant to an Option as soon as practicable, and, within a
reasonable time thereafter, such transfer shall be evidenced on the books of
the Company. No person exercising an Option shall have any of the rights of a
holder of Shares subject to an Option until certificates for such Shares shall
have been issued following the exercise of such Option. No adjustment shall be
made for cash dividends or other rights for which the record date is prior to
the date of such issuance.
9.4. Non-Transferability of Options. Except as provided in
Section 9.11, no Option shall be assignable or transferable by the Optionee,
other than by will or the laws of descent and distribution, and may be
exercised during the life of the Optionee only by the Optionee or his guardian
or legal representative.
9.5. Termination of Employment. In the event of the
termination of employment of an Optionee or the termination or separation from
service of an advisor or consultant or a Director (who is an Optionee) for any
reason (other than death or disability as provided below), any Option(s)
granted to such Optionee under this Plan and not previously exercised or
expired shall be deemed canceled and terminated on the day of such termination
or separation, unless the Committee decides, in its sole discretion, to extend
the term of the Option for a period not to exceed three months after the date
of such termination or separation, provided, however, that in no instance may
the term of the Option, as so extended, exceed the maximum term established
pursuant to Section 3.1(b)(ii) or 9.1 above. Notwithstanding the foregoing, in
the event of the termination or separation from service of an Optionee for any
reason other than death or disability, under conditions satisfactory to the
Company, the Committee may, in its sole discretion, allow any "nonqualified
stock options" granted to such Optionee under the Plan and not previously
exercised or expired to be exercisable for a period of time to be specified by
the Committee, provided, however, that in no instance may the term of the
Option, as so extended, exceed the maximum term established pursuant to
Section 9.1 above.
9.6. Death. In the event an Optionee dies while employed by
the Company or any of its subsidiaries or affiliates or during his term as a
Director of the Company or any of its subsidiaries or affiliates, as the case
may be, any Option(s) granted to him not previously expired or exercised
shall, to the extent exercisable on the date of death, be exercisable by the
estate of such Optionee or by any person who acquired such Option by bequest
or inheritance, at any time within one year after the death of the Optionee,
unless earlier terminated pursuant to its terms, provided, however, that if
the term of such Option would expire by its terms within six months after the
Optionee's death, the term of such Option shall be extended until six (6)
months after the Optionee's death, provided further, however, that in no
instance may the term of the Option, as so extended, exceed the maximum term
established pursuant to Section 3.1(b)(ii) or 9.1 above.
9.7. Disability. In the event of the termination of
employment of an Optionee or the separation from service of a Director (who is
an Optionee) due to total disability, the Optionee, or his guard ian or legal
representative, shall have the unqualified right to exercise any Option(s)
which have not been previously exercised or expired and which the Optionee was
eligible to exercise as of the first date of total disability (as determined
by the Committee), at any time within one year after such termination or
separation, unless earlier terminated pursuant to its terms, provided,
however, that if the term of such Option would expire by its terms within six
(6) months after such termination or separation, the term of such Option shall
be extended until six months after such termination or separation, provided
further, however, that in no instance may the term of the Option, as so
extended, exceed the maximum term established pursuant to Section 3.1(b)(ii)
or 9.1 above. The term "total disability" shall, for purposes of this Plan, be
defined in the same manner as such term is defined in Section 22(e)(3) of the
Code.
-10-
<PAGE>
9.8. Six-Month Holding Period. Notwithstanding anything to
the contrary in the Plan, each Option (or the Shares underlying the Option)
granted to an individual who is subject to Section 16 of the Ex change Act,
must be held by such individual for a combined period of at least six (6)
months from the date the Option is granted (or until such earlier date as
satisfies any legal requirement for exemption under Rule 16b-3 of the Exchange
Act and as satisfies all other applicable law); provided that the sale,
transfer or other disposition of any Shares underlying any such Option shall
be permitted within such period to the extent the sale, transfer or other
disposition is exempt under Rule 16b-3 of the Exchange Act and all other
applicable law.
9.9. Amendment and Modification of the Plan. The Board of
Directors of the Company may, from time to time, alter, amend, suspend or
terminate the Plan as it shall deem advisable, subject to any requirement for
stockholder approval imposed by applicable law or any rule of any stock
exchange or quotation system on which Shares are listed or quoted; provided
that the Board of Directors may not amend the Plan in any manner that would
result in noncompliance with Rule 16b-3 of the Exchange Act (if applicable) or
any other applicable law, except as otherwise provided in Sections 3.2 or 9.11
hereof; and further provided that the Board of Directors may not, without the
approval of the Company's stockholders, amend the Plan to increase the number
of Shares that may be the subject of Options under the Plan (except for
adjustments pursuant to Section 9.10 hereof). In addition, no amendments to,
or termination of, the Plan shall in any way impair the rights of an Optionee
or a Participant under any Award previously granted without such Optionee's or
Participant's consent.
9.10. Adjustments. In the event that the Committee shall
determine that any dividend or other distribution (whether in the form of
cash, Shares, other securities, or other property), 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 corporate transaction or event affects the Shares
with respect to which Options have been or may be issued under the Plan, such
that an adjustment is determined by the Committee to be appropriate in order
to prevent dilution or enlargement of the benefits or potential benefits
intended to be made available under the Plan, then the Committee shall, in
such manner as the Committee may deem equitable, adjust any or all of (i) the
number and type of Shares that thereafter may be made the subject of Options,
(ii) the number and type of Shares subject to outstanding Options and stock
appreciation rights, and (iii) the grant or exercise price with respect to any
Option, or, if deemed appropriate, make provision for a cash payment to the
holder of any outstanding Option; provided, in each case, that with respect to
"incentive stock options," no such adjustment shall be authorized to the
extent that such adjustment would cause such options to violate Section 422(b)
of the Code or any successor provision; and provided further, that the number
of Shares subject to any Option denominated in Shares shall always be a whole
number. In the event of any reorganization, merger, consolidation, split-up,
spin-off, or other business combination involving the Company (collectively, a
"Reorganization"), the Compensation Committee of the Board of Directors or the
Board of Directors may cause any Award outstanding as of the effective date of
the Reorganization to be canceled in consideration of a cash payment or
alternate Award made to the holder of such canceled Award equal in value to
the fair market value of such canceled Award. The determination of fair market
value shall be made by the Compensation Committee of the Board of Directors or
the Board of Directors, as the case may be, in their sole discretion.
9.11. Other Provisions. Notwithstanding anything in this
Plan to the contrary, if the Board of Directors determine that the Plan
cannot, or that an Award need not, satisfy the requirements of Rule 16b- 3 of
the Exchange Act (such that grants of Awards are not or need not be exempt
from Section 16(b) of the Exchange Act), then the Committee shall have the
authority to waive or modify those provisions of the Plan which are intended
to satisfy such Rule 16b-3 requirements. In addition, the Committee may allow
an Optionee who has been granted "nonqualified stock options" and any stock
appreciation rights granted in tandem therewith to transfer any or all of such
options (along with any tandem stock appreciation rights) to
-11-
<PAGE>
any one or more of the following persons: (i) the spouse, parent, issue,
spouse of issue, or issue of spouse ("issue" shall include all descendants
whether natural or adopted) of such Optionee; or (ii) a trust for the benefit
of those persons described in clause (i) above or for the benefit of such
Optionee, or for the benefit of any such persons and such Optionee; or (iii)
any entity in which the Optionee or its transferee is a beneficial owner;
provided, however, that such transferee shall be bound by all of the terms and
conditions of this Plan and shall execute an agreement satisfactory to the
Company evidencing such obligation; and provided further, however, that such
Optionee shall remain bound by the terms and conditions of this Plan. The
Company shall cooperate with an Optionee's transferee and the Company's
transfer agent in effectuating any transfer permitted pursuant to this Section
9.11.
ARTICLE 10.
MISCELLANEOUS
10.1. Tax Withholding. All payments or distributions made
pursuant to the Plan to an Optionee or Participant (or permitted transferee)
shall be net of any applicable federal, state and local withholding taxes
arising as a result of the grant of any Award, exercise of an Option or stock
appreciation rights or any other event occurring pursuant to this Plan. The
Company shall have the right to withhold from such Optionee or Participant (or
permitted transferee) such withholding taxes as may be required by law, or to
otherwise require the Optionee or Participant (or permitted transferee) to pay
such withholding taxes. If the Optionee or Participant (or permitted
transferee) shall fail to make such tax payments as are required, the Company
or its subsidiaries or affiliates shall, to the extent permitted by law, have
the right to deduct any such taxes from any payment of any kind otherwise due
to such Optionee or Participant (or permitted transferee) or to take such
other action as may be necessary to satisfy such withholding obligations. In
satisfaction of the requirement to pay withholding taxes, the Optionee or
Participant (or permitted transferee) may make a written election, which may
be accepted or rejected in the discretion of the Committee, to have withheld a
portion of the Shares then issuable to the Optionee (or permitted transferee)
pursuant to the Plan, having an aggregate Fair Market Value equal to the
withholding taxes.
10.2. Right of Discharge Reserved. Nothing in the Plan nor
the grant of an Award hereunder shall confer upon any employee, Director or
other individual the right to continue in the employment or service of the
Company or any subsidiary or affiliate of the Company or affect any right that
the Company or any subsidiary or affiliate of the Company may have to
terminate the employment or service of (or to demote or to exclude from future
Options under the Plan) any such employee, Director or other in dividual at
any time for any reason. Except as specifically provided by the Committee, the
Company shall not be liable for the loss of existing or potential profit from
an Award granted in the event of termination of an employment or other
relationship even if the termination is in violation of an obligation of the
Company or any subsidiary or affiliate of the Company to the employee or
Director.
10.3. Nature of Payments. All Awards made pursuant to the
Plan are in consideration of services performed or to be performed for the
Company or any subsidiary or affiliate of the Company. Any income or gain
realized pursuant to Awards under the Plan and any stock appreciation rights
constitutes a special incentive payment to the Optionee, Participant or Holder
and shall not be taken into account, to the extent permissible under
applicable law, as compensation for purposes of any of the employee benefit
plans of the Company or any subsidiary or affiliate of the Company except as
may be determined by the Committee or by the Directors or directors of the
applicable subsidiary or affiliate of the Company.
10.4. Severability. If any provision of the Plan shall be
held unlawful or otherwise invalid or unenforceable in whole or in part, such
unlawfulness, invalidity or unenforceability shall not affect any other
provision of the Plan or part thereof, each of which remain in full force and
effect. If the making of
-12-
<PAGE>
any payment or the provision of any other benefit required under the Plan
shall be held unlawful or otherwise invalid or unenforceable, such
unlawfulness, invalidity or unenforceability shall not prevent any other
payment or benefit from being made or provided under the Plan, and if the
making of any payment in full or the provision of any other benefit required
under the Plan in full would be unlawful or otherwise invalid or
unenforceable, then such unlawfulness, invalidity or unenforceability shall
not prevent such payment or benefit from being made or provided in part, to
the extent that it would not be unlawful, invalid or unenforceable, and the
maximum payment or benefit that would not be unlawful, invalid or
unenforceable shall be made or provided under the Plan.
10.5. Gender and Number; Definition of Company. In order to
shorten and to improve the understandability of the Plan document by
eliminating the repeated usage of such phrases as "his or her" and any
masculine terminology herein shall also include the feminine, and the
definition of any term herein in the singular shall also include the plural
except when otherwise indicated by the context. In addition, the term Company
as used herein shall include subsidiaries and affiliates of BarnesandNoble.com
Inc. where the context makes such inclusion appropriate.
10.6. Governing Law. The Plan and all determinations made
and actions taken thereunder, to the extent not otherwise governed by the Code
or the laws of the United States, shall be governed by the laws of the State
of Delaware and construed accordingly.
10.7. Effective Date of Plan; Termination of Plan. The Plan
shall be effective on the date of the approval of the Plan by the holders of a
majority of the shares entitled to vote at a duly constituted meeting of the
stockholders; provided, however, that the adoption of the Plan is subject to
such stockholder approval within 12 months after the date of adoption of the
Plan by the Board of Directors. The Plan shall be null and void and of no
effect if the foregoing condition is not fulfilled and in such event each
Award and related stock appreciation rights shall, notwithstanding any of the
preceding provisions of the Plan, be null and void and of no effect. Awards
may be granted under the Plan at any time and from time to time on or prior to
December 31, 2008, on which date the Plan will expire except as to Awards and
related stock appreciation rights then outstanding under the Plan. Such
outstanding Awards and stock appreciation rights shall remain in effect until
they have been exercised or terminated, or have expired.
10.8. Captions. The captions in this Plan are for
convenience of reference only, and are not intended to narrow, limit or affect
the substance or interpretation of the provisions contained herein.
-13-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
INTERACTIVE SERVICES AGREEMENT
This Interactive Services Agreement (this "Agreement") dated as of July
31, 1997, is by and between Lycos, Inc., a Delaware corporation ("Lycos"),
having an office at 500 Old Connecticut Path, Framingham, Massachusetts
01701-4576 and BarnesandNoble.com, Inc. a Delaware corporation ("B&N"), having
an office at 122 Fifth Avenue, New York, New York 10011.
RECITALS
WHEREAS, B&N is a retailer of books and offers books and other items
for sale through its Web service which is accessible through the URL
www.barnesandnoble.com (the "B&N Site");
WHEREAS, Lycos is the owner or licensee of certain Web services,
including, without limitation, the Lycos Catalog of the Internet, Pictures and
Sounds, Top 5% Reviews and other search and content areas (collectively, the
"Lycos Services"), which are accessible through the www.lycos.com (the "Lycos
Site");
WHEREAS, B&N desires that Lycos integrate links from the Lycos Services
and certain other areas on the Lycos Site to the B&N Site and that Lycos
performs various search services on behalf of B&N so that users of the Lycos
Services will have access to the B&N Site through the Lycos Services;
WHEREAS, B&N and Lycos desire to enter other arrangements as more
particularly described therein.
NOW, THEREFORE, for good and valuable consideration, receipt of which
is hereby acknowledged, B&N and Lycos hereby agree as follows:
1. Certain Definitions.
As used herein, the following terms shall have the meaning herein
ascribed:
"Lycos PowerSearch API" means the application programming interface
created and maintained by Lycos that allows B&N to create pre-defined searches
of the Lycos Catalog for the viewers of the B&N to insert the searches as
hypertext links into the HTML pages of the
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
B&N Site, such that when a viewer clicks on such link, the query is sent to
Lycos and the results are sent back to the B&N Site which displays the data in
its HTML page.
"Lycos Search API" means the application programming interface created
and maintained by Lycos that allows a viewer of the B&N Site to search the Lycos
Catalog from search boxes in the HTML pages of the B&N Site, such that when a
viewer of the B&N Site enters a search query, the query is sent to Lycos, and
the results are sent back to B&N to place into the B&N Site.
"Web" means the World Wide Web, a system for accessing and viewing
text, graphics, and sound and other media via the collection of computer
networks known as the Internet.
"Web Search Results" means the results of a query sent to the Lycos
search engine that are then displayed in HTML format by the user of the Lycos
Search API.
2. Link to B&N Site; Search Services.
(a) Subject to the terms and conditions of this Agreement as promptly
as practicable after the date hereof and, in any event, no later than September
10, 1997 (the "Effective Date"), Lycos agrees continuously throughout the terms
of this Agreement to (i) provide links to the B&N Site from selected Web pages
within the Lycos Site, including the Lycos Home Page, WebGuides and Lycos
Shopping (collectively, the "Lycos Pages"), so as to provide users of the Lycos
Site access to the B&N Site, (ii) provide links from relevant book content
related Web pages within Lycos WebGuides to relevant categories on the B&N Site;
and (iii) provide links to the B&N Site from selected Web pages within the Lycos
Search Results Pages. In addition, from time to time, during the term of this
Agreement, Lycos agrees to include links from selected Web pages within Lycos
WebGuides to pages within the Books for the Week and/or Book Review sections of
the B&N Site (all of such links referred to in the first sentence and this
sentence being referred to herein as the "B&N Links"). All B&N Links may be
modified and/or expanded from time to time throughout the term of this Agreement
pursuant to mutual agreement of the parties hereto, except that Lycos may modify
the placement of the B&N Links on the Lycos Home Page and Lycos Search Results
pages in a manner determined by Lycos, subject to compliance with clause (b)
below. Except as described in clause (c) below, each Web page within the B&N
Site which is accessed by the B&N Links will display the look and feel of the
B&N Site area, which shall include, but not be limited to, page format,
navagational bars, colors, fonts, the B&N logo, all hyperlinks appearing on the
linked B&N Site area and, in general, the overall design of the B&N Site. To the
extent access to the B&N Site from the
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-2-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
Lycos Site is deemed to be a reproduction, transmission or distribution, Lycos
is further granted a worldwide, royalty-free-license to use, reproduce,
transmit, distribute and publicly display the B&N Site so as to make the B&N
Site available to users of the Lycos Site via the Web; provided, however, that
nothing in the preceding clause shall be deemed to be in conflict with the Terms
of Usage contained on the B&N Site attached hereto as Exhibit A (as in effect on
the date hereof), as amended from time to time, which may be applicable to users
of the B&N Site, and provided, further, that in no event shall the preceding
clause grant a license to Lycos in any of the content on the B&N Site.
(b) With respect to the link from the Lycos Home Page to the B&N Site
described in clause (a) above, Lycos agrees that (i) Lycos will place, during
the term of this Agreement, a text link on the Lycos Home Page to the B&N Site,
which placement shall be made in a manner determined by Lycos, provided that the
* * * , and (ii) * * * thereto at all times during the term of this Agreement.
With respect to the link from the Lycos Search Results Pages to the B&N Site,
Lycos agrees that a text link with the phrase * * * or similar phrase will be
placed in all Lycos Search Results Pages at all times during the term of this
Agreement, which placement shall initially be substantially in the manner as set
forth on Exhibit C hereto and thereafter shall be made in a manner determined by
Lycos, provided that the link shall appear with the other text link on such
Pages.
(c) Throughout the term of this Agreement, Lycos will integrate search
capabilities within selected Web pages in the Lycos Site in order to enable a
user of the Lycos Services to search the B&N Site for particular books. The
search will be conducted through the B&N Site with the search results being
presented on a page which is created in a Lycos template incorporating the look
and feel of the Lycos Pages, including page format, navigatorial bars, colors
and the Lycos logo (the "Branded Results Page"). Every Branded Results Page will
have a URL similar to www.bandn.lycos.com. In addition, every Branded Results
Page will provide the user with the ability to initiate another search of the
B&N Site through the display of a drop-down search-related box stating "Search
BarnesandNoble.com for books on [related subject]" or similar text to be jointly
determined by B&N and Lycos. B&N will serve and maintain the Branded Results
Page throughout the term of this Agreement.
(d) Lycos will spider the HTML contents of the B&N Site and incorporate
spidered information from the B&N Site into the Lycos Catalog of the Internet.
(e) Subject to the terms and conditions of this Agreement, B&N hereby
grants Lycos the right to reproduce sand display all logos, trademarks, trade
names and similar identifying material relating to B&N (the "B&N Marks") in
connection with the promotion,
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-3-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
marketing and distribution of the Lycos Services, provided, that Lycos shall not
make any specific use of any B&N Mark which refers to B&N exclusively without
first submitting a sample of such B&N and obtaining B&N's prior consent, which
consent shall not be unreasonably withheld.
(f) During the term of this Agreement, B&N will be the exclusive book
retailer featured on the Lycos Site and Lycos will not sell any advertising on
the Lycos Site to * * * , except for current advertising agreements that are in
effect as of the date hereof and required renewals thereof, provided that Lycos
and B&N will use reasonable efforts to limit the score of any renewals. In
addition, a B&N Link containing the B&N logo will be featured on all Web pages
within the Shopping section of the Lycos WebGuides where a Lycos shopping logo
appears (the "Shopping Pages") as the exclusive bookseller available through
the Lycos Site, which B&N Link will be to the B&N Home Page (or another area
within the B&N Site designated by B&N) and shall continuously appear in the
Shopping Pages throughout the term of this Agreement.
(g) During the term of this Agreement, Lycos agrees to use commercially
reasonable efforts to maintain its status as one of the most popular catalog and
navigation services available on the Web.
3. Obligations of B&N.
(a) B&N shall display the "Powered by Lycos" logo on all Web pages
solely where search boxes, Web Search Results, and PowerSearch links are
deployed though the use of Lycos search tools, as well as appropriate copyright
notices. No such display shall appear anywhere on any B&N-owned or B&N-operated
search programs which do not utilize in any manner the Lycos Services. During
the term of this Agreement, the Lycos Services will be the exclusive Web search
and navigation service available through the B&N Site, excluding the proprietary
search tools developed by B&N for searching the B&N Site.
(b) B&N agrees to include Lycos branded bookmarks with the shipment of
all books purchased online through the B&N Site.
(c) Solely at its option, B&N agrees to deploy the Lycos Search API
tools on the B&N Site in order to integrate search of the Lycos Catalog and
Lycos Pictures and Sounds, in the manner determined by B&N, in its sole
discretion, which determination will be made and provided to Lycos within thirty
days of the execution of this Agreement.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-4-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
(d) B&N will also make its personnel available to Lycos to assist Lycos
in establishing the B&N Links between the Lyons Site and the B&N Site referred
to herein, including, establishing links to the Book Lists, Book of the Week and
Book Reviews sections of the B&N Site. B&N personnel will also assist Lycos in
implementing the feature of passing queries from Lycos to the Lycos Search API
located on the B&N Site.
(e) B&N will also make its editorial staff available to Lycos in order
to utilize the Lycos PowerSearch API tool for the creation of searches of the
Web for positioning on the B&N Site.
(f) Concurrently with the execution of this Agreement, Barnes & Noble,
Inc. will execute and deliver to Lycos the Promotion Agreement in the form of
Exhibit B attached hereto.
4. License Grant by Lycos.
(a) Lycos will provide B&N the Lycos Search API tools, which B&N,
solely at its option, may deploy on the B&N Site in order to integrate search of
the Lycos Catalog of the Internet and Lycos Pictures and Sounds. B&N will be
responsible for implementing the API within the B&N Site so as to make Web
Search Results available to users of the B&N Site.
(b) Subject to the terms and conditions of this Agreement, Lycos hereby
grants to B&N the right to use the Lycos Search API so as to provide users of
the B&N Site access to Web Search Results. To the extent such access is deemed
to be a reproduction, transmission or distribution, B&N is further granted a
worldwide, royalty-free license to use, reproduce, transmit, distribute and
publicly display Web Search Results so as to make the Web Search Results
available to users of the B&N Site via the Web.
(c) Subject to the terms and conditions of this Agreement, Lycos hereby
grants B&N the right to reproduce and display all logos, trademarks, trade names
and similar identifying material relating to the Lycos Search and Lycos
PowerSearch APIs and the Lycos bookmarks (the "Lycos Marks") in connection with
the promotion, marketing and distribution of the Web searches being available
through the B&N Site and the shipment of the Lycos bookmarks. Upon Lycos'
request, B&N will make available samples of any uses of the Lycos Marks for
approval by Lycos, such approval to be in Lycos' sole and exclusive discretion.
5. Royalties and Fees
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-5-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
(a) In consideration of Lycos' obligations under this Agreement, B&N
shall pay Lycos an annual fee of $4,500,000 per year (the "Payment"), provided
that the Payment for this third year of this Agreement shall be adjusted to an
amount as may be mutually agreed upon by the parties hereto to give effect to
increases or decreases in the audited average monthly traffic level for the
Lycos Site during the second year of this Agreement from the monthly audited
traffic level for the Lycos Site during July, 1997. If for any reason the
parties are unable to agree on the adjustment to the Payment by thirty (30) days
prior to the second anniversary of this Agreement, this Agreement may be
terminated by either party as provided in Section 11 herein. The Payment for the
first year of the Agreement will be paid by B&N in advance upon the execution of
this Agreement and the Payment for the second year of this Agreement shall be
paid by B&N in advance on the first anniversary of the date of this Agreement.
The Payment (as adjusted in the manner provided above) for the third year of
this Agreement shall be paid in equal quarterly installments in advance, with
the first payment due on the second anniversary of this Agreement and the
remaining three payments due 90, 180 and 270 days, respectively, from the second
anniversary of this Agreement.
(b) In addition to the Payments required under Section 5(a) above, B&N
shall pay Lycos a royalty * * * of the Net Revenues (as defined below) on all
transactions initiated by viewers sent to the B&N Site from the Lycos Services;
provided that B&N shall have no obligation to pay any royalties until Net
Revenues during the relevant year of the term of this Agreement equal the
Payments payable under Section 5(a) for such year. Once total Net Revenues on
all transactions initiated by viewers sent to the B&N Site from the Lycos
Services during the relevant year of the term of this Agreement exceed the
Payment for such year, such royalties shall be due and payable on a quarterly
basis based on a year commencing on the date of this Agreement or on the first
or second anniversary hereof, as the case may be. "Net Revenues" shall mean net
sales after deduction of the following: discounts, refunds, taxes, shipping and
services (i.e. gift wrapping). For purposes of this Section 5(b), the relevant
year of the term of this Agreement with respect to the third year of this
Agreement shall be extended through the expiration of the Initial Term.
(c) Any portion of the fees and royalties which has not been paid Lycos
within the applicable time set forth above shall bear interest from the original
due date at the lesser of (i) * * * and (ii) the maximum amount allowed by law.
(d) B&N shall calculate and report in writing to Lycos within thirty
days after each quarter the Net Revenues derived during such quarter on all
transactions initiated by viewers sent to the B&N Site from the Lycos Services,
and, if required under Section 5(b) above, make payment to Lycos of the
applicable royalty. B&N shall permit Lycos to audit B&N's books
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-6-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
and records with respect to Net Revenues, during normal business hours and no
more than once quarterly upon five (5) business days' notice, in order to ensure
B&N's compliance with this Section 5. B&N will pay all costs and expenses of
such audit in the event there is a discrepancy of 10% or more.
6. Term of Agreement.
The term of this Agreement shall commence on the date hereof and will
continue until the third anniversary of the Effective Date (the "Initial Term"),
unless terminated earlier as provided in Section 11 herein. Upon expiration of
the Initial Term, B&N shall have a right of first refusal to extend the term
hereof, at such rates to be determined by Lycos.
7. Representations and Warranties of the Parties.
In order to induce Lycos to enter into this Agreement, B&N hereby
warrants and represents as follows:
(a) Status. B&N is a corporation in good standing under the laws of the
state of its organization, and has the full right, power and authority to enter
into this Agreement and to grant the rights herein granted.
(b) No Conflicting Obligations. The performance by B&N pursuant to this
Agreement and/or the rights herein granted to Lycos will not conflict with or
result in a breach or violation of any of the terms or provisions, or constitute
a default under any organizational instruments of B&N or any agreement to which
B&N is a party or to which it is bound.
(c) Right to License. B&N possesses the full right and authority to
provide access to the B&N Site and to license the B&N Marks. B&N is the sole
owner and/or has the right to license, and shall continue to own and/or have the
right to license, throughout the term of the Agreement, all right, title and
interest in and to the B&N Site, except for the content written, prepared or
otherwise developed by users of the B&N Site ("User Content").
(d) Compliance with Laws and Regulations. B&N shall comply with all
applicable laws, statutes, ordinances, rules and regulations of each country,
state, city or other political entity.
(e) Clearances. Throughout the term of this Agreement, B&N shall
maintain the B&N Site and its INTERNIC registration. All fees of any nature,
including, without
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-7-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
limitation, residuals, royalties, reuse, health and welfare payments, and
similar or dissimilar fees due to third parties (including writers, composers
and performers) for rights necessary to exploit the B&N Site, as provided
herein, shall be the sole responsibility of the B&N.
(f) No Infringement. B&N has the right to enter into this Agreement and
to grant to Lycos the license provided herein and neither the B&N Site (other
than User Content) nor the B&N Marks nor any other materials or any elements or
parts thereof, nor the provision of access to the B&N Site pursuant to the
provisions hereof by Lycos, shall violate or infringe upon the copyright,
literary, privacy, publicity, trademark, service mark or any other personal,
moral or property right of any person, nor shall same constitute a libel or
defamation of any person whatsoever.
(g) General. EXCEPT FOR THE FOREGOING REPRESENTATIONS AND WARRANTIES,
B&N MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND, EITHER EXPRESS OR
IMPLIED, AS TO ANY MATTER INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF
FITNESS FOR A PARTICULAR PURPOSE, MERCHANTABILITY OR OTHERWISE WHICH WOULD
EXTEND BEYOND THE REPRESENTATIONS AND WARRANTIES CONTAINED HEREIN.
8. Representations and Warranties of Lycos. In order to induce B&N to
enter into this Agreement, Lycos represents and warrants that:
(a) Corporate Status. Lycos is a corporation in good standing under the
laws of the State of Delaware, has the full right, power and authority to enter
into this Agreement and to grant the rights herein granted.
(b) No Conflicting Obligations. The performance by Lycos pursuant to
this Agreement and/or the rights herein granted to B&N will not result in a
breach or violation of any of the terms or provisions, or constitute a default
under any organizational instruments of Lycos or any agreement to which Lycos is
a party or to which it is bound.
(c) Right to License. Lycos possesses the full right and authority to
license the Lycos Services and the Lycos Marks. Lycos is the sole owner and/or
has the right to license, and shall continue to own and/or have the right to
license, throughout the term of this Agreement, all right, title and interest,
including without limitation all rights under copyright in and to the Lycos
Services and all materials created by employees of Lycos and/or third parties,
for or in connection with the Lycos Services, and each element thereof.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-8-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
(d) Compliance with Laws and Regulations. Lycos shall comply with all
applicable laws, statutes, ordinances, rules and regulations of each country,
state, city or other political entity.
(e) Clearances. Lycos shall clear all rights in the Lycos Services and
all elements thereof for use as provided herein. All fees of any nature,
including, without limitation, residuals, royalties, reuse, health and welfare
payments, and similar or dissimilar fees due to third parties (including
writers, composers and performers) for rights necessary to exploit the Lycos
Services, as provided herein, shall be the sole responsibility of Lycos.
(f) No Infringement. Lycos has the right to enter into this Agreement
and to grant to B&N the license provided herein and neither the Lycos Services
nor any other materials or any elements or parts thereof or other material
delivered or to be delivered to B&N hereunder, shall violate or infringe upon
the copyright, literary, privacy, publicity, trademark, service mark or any
other personal, moral or property right of any person, nor shall same constitute
a libel or defamation of any person whatsoever.
(g) General. EXCEPT FOR THE FOREGOING REPRESENTATIONS AND WARRANTIES,
LYCOS MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND, EITHER EXPRESS OR
IMPLIED, AS TO ANY MATTER INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF
FITNESS FOR A PARTICULAR PURPOSE, MERCHANTABILITY OR OTHERWISE WHICH WOULD
EXTEND BEYOND THE REPRESENTATIONS AND WARRANTIES CONTAINED HEREIN.
9. Indemnification.
(a) B&N Indemnity. B&N will at all times indemnify and hold harmless
Lycos and its offices, directors, shareholders, successors and assigns from and
against any and all third party claims, damages, liabilities, costs and
expenses, including reasonable legal fees and expenses, arising out of or
relating to any breach of any warranty, representation, covenant or agreement
made by B&N in this Agreement. Lycos shall give B&N prompt written notice of any
claim, action or demand for which indemnity is claimed. B&N shall have the
right, but not the obligation, to control the defense and/or settlement of any
claim in which it is named as a party. Lycos shall have the right to participate
in any defense of a claim by B&N with counsel of Lycos' choice at its own
expense. The foregoing indemnity is conditioned upon: prompt written notice by
Lycos to B&N of any claim, action or demand for which indemnity is claimed;
complete control of the defense and settlement thereof by B&N; and such
reasonable corporation by Lycos in the defense as B&N may request.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-9-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
(b) Lycos Indemnity. Lycos will at all times defend, indemnify and hold
harmless B&N and its officers, directors, shareholders, successors and assigns
from and against any and all third party claims, damages, liabilities, costs and
expenses, including reasonable legal fees and expenses, arising out of or
relating to any breach of any warranty, representation, covenant or agreement
made by Lycos in this Agreement. B&N shall give Lycos prompt written notice of
any claim, action or demand for which indemnity is claimed. Lycos shall have the
right, but not the obligation, to control the defense and/or settlement of any
claim in which it is named as a party. B&N shall have the right to participate
in any defense of a claim by Lycos with counsel of B&S's choice at its own
expense. The foregoing indemnity is conditioned upon: prompt written notice by
B&N to Lycos of any claim, action or demand for which indemnity is claimed;
complete control of the defense and settlement thereof by Lycos; and such
reasonable cooperation by B&N in the defense as Lycos may request.
10. Confidentiality; Press Releases.
(a) Non-Disclosure Agreement. The parties agree and acknowledge that,
as a result of negotiating, entering into and performing this Agreement, each
party has and will have access to certain of the other party's Confidential
Information (as defined below). Each party also understands and agrees that
misuse and/or disclosure of that information could adversely affect the other
party's business. Accordingly, the parties agree that, during the term of this
Agreement and thereafter, each party shall use and reproduce the other party's
Confidential Information only for purposes of this Agreement and only to the
extent necessary for such purpose and shall restrict disclosure of the other
party's Confidential Information to its employees, consultants or independent
contractors with a need to know and shall not disclose the other party's
Confidential Information to any third party without the prior written approval
of the other party. Notwithstanding the foregoing, it shall not be a breach of
this Agreement for either party to disclose Confidential Information of the
other party if required to do so under law or in a judicial or other
governmental investigation or proceeding, provided the other party has been
given notice and the disclosing party has sought all available safeguards
against widespread dissemination prior to such disclosure.
(b) Confidential Information Defined. As used in this Agreement, the
term "Confidential Information" refers to: (i) the terms and conditions of this
Agreement; (ii) each party's trade secrets, business plans, strategies, methods
and/or practices; and (iii) other information relating to either party that is
not generally known to the public, including information about either party's
personnel, products, customers, marketing strategies, services or future
business plans. Notwithstanding the foregoing, the term "Confidential
Information" specifically excludes (i) information that is now in the public
domain or subsequently enters the
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-10-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
public domain by publication or otherwise through no action or fault of the
other party; (ii) information that is known to either party without restriction,
prior to receipt from the other party under this Agreement, from its own
independent sources as evidenced by such party's written records, and which was
not acquired, directly or indirectly, from the other party; (iii) information
that either party receives from any third party reasonably known by such
receiving party to have a legal right to transmit such information, and not
under any obligation to keep such information confidential; and (iv) information
independently developed by either party's employees or agents provided that
either party can show that those same employees or agents had no access to the
Confidential Information received hereunder.
(c) Press Releases. Lycos and B&N shall jointly prepare press releases
concerning the existence of this Agreement and the terms hereof. B&N shall
sponsor a public relations event in which B&N and Lycos will jointly announce
the relationship contemplated hereby. Otherwise, no public statements concerning
the existence or terms of this Agreement shall be made or released to any medium
except with the prior approval of Lycos and B&N or as required by law.
11. Termination. Either party may terminate this Agreement if (a) the
other party files a petition for bankruptcy or is adjudicated bankrupt; (b) a
petition in bankruptcy is filed against the other party and such petition is not
dismissed within sixty days of the filing date; (c) the other party becomes
insolvent or makes an assignment for the benefit of its creditors pursuant to
any bankruptcy law, or (d) a receiver is appointed for the other party or its
business. In addition, either party may terminate this Agreement upon the
occurrence of a material breach by the other party if such breach is not cured
within ninety (90) days after written notice is received by the breaching party
identifying the matter constituting the material breach. If for any reason the
parties hereto are unable to agree on the adjustment to the Payment payable for
the third year of this Agreement by thirty (30) days prior to the second
anniversary of this Agreement, either party may, in its sole discretion,
terminate this Agreement by providing notice to the other party, which
termination shall be effective on the second anniversary of this Agreement.
12. Relationship. B&N and Lycos are independent contractors under this
Agreement, and nothing herein shall be construed to create a partnership, joint
venture or agency relationship between B&N and Lycos. Neither party has
authority to enter into agreements of any kind on behalf of the other.
13. Assignment, Binding Effect. Neither Lycos nor B&N may assign this
Agreement or any of its rights or delegate any of its duties under this
Agreement without the prior written consent of the other.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-11-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
14. Choice of Law. This Agreement, its interpretation, performance or
any breach thereof, shall be construed inn accordance with, and all questions
with respect thereto shall be determined by, the laws of the Commonwealth of
Massachusetts applicable to contracts entered into and wholly to be performed
within said state.
15. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
16. Section Headings. Section headings are for convenience only and are
not a part of this Agreement.
17. Entire Agreement. This Agreement contains the entire understanding
of the parties hereto with respect to the transactions and matters contemplated
hereby, supersedes all previous agreements between Lycos and B&N concerning the
subject matter, and cannot be amended except by a writing signed by both
parties. No party hereto has relied on any statement, representation or promise
of any other party or with any other officer, agent, employee or attorney for
the other party in executing this Agreement except as expressly stated herein.
18. Limitations of Liability.
UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY
FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY DAMAGES (EVEN IF
THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES), ARISING FROM
ANY PROVISION OF THIS AGREEMENT (INCLUDING SUCH DAMAGES INCURRED BY THIRD
PARTIES), SUCH AS, BUT NOT LIMITED TO, LOSS OF REVENUE OR ANTICIPATED PROFITS OR
LOST BUSINESS. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR DAMAGES IN EXCESS OF
THE AMOUNT RECEIVED BY LYCOS UNDER THIS AGREEMENT, PROVIDED THAT THIS SECTION
DOES NOT LIMIT EITHER PARTY'S LIABILITY TO THE OTHER FOR (A) WILLFUL AND
MALICIOUS MISCONDUCT; (B) DIRECT DAMAGES TO REAL OR TANGIBLE PERSONAL PROPERTY;
(C) BODILY INJURY OR DEATH CAUSED BY NEGLIGENCE; OR (D) INDEMNIFICATION
OBLIGATIONS HEREUNDER
* * *
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-12-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
IN WITNESS WHEREOF, the parties have duly executed and delivered this
Agreement as if the date set forth above.
BARNES AND NOBLE.COM, INC. LYCOS, INC.
By: By:
-------------------------------- -------------------------------
Name: Name:
------------------------------ -----------------------------
Title: Title:
----------------------------- ----------------------------
Date: Date:
------------------------------ -----------------------------
In consideration of, and as a material inducement for, Lycos, Inc.
entering into this Agreement, the undersigned, Barnes & Noble, Inc. (the
"Guarantor") hereby unconditionally guarantees the full and prompt payment of
the obligations of BarnesandNoble.com, Inc. ("B&N") under the Agreement and
hereby covenants to and agrees with Lycos that if default shall at any time be
made by B&N in the payment of its obligations, Guarantor shall and will promptly
make such payments to Lycos. Subject to the last sentence hereof, this guaranty
is an irrevocable, absolute and unconditional guaranty, and the liability of
Guarantor hereunder shall in no way be affected, modified, impaired or
diminished by reason of any assignment, renewal, modification or extension of
the Agreement or by reason of any bankruptcy, insolvency, reorganization,
assignment for the benefit of creditors, receivership or similar action
affecting B&N. Notwithstanding the foregoing, this guaranty shall terminate at
such time as the tangible net worth of B&N (as determined in accordance with
generally accepted accounting principles) is at least $7 million, as
substantiated by written documentation provided to Lycos by B&N, provided that
the guaranty shall be reinstated immediately (subject to later termination as
provided above) in the event that B&N's tangible net worth (as computed above)
falls below $7 million at any time.
BARNES & NOBLE, INC.
By:
-------------------------
Name:
Title:
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-13-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
EXHIBIT A
MEMBERSHIP AGREEMENT LOGO
Terms of Usage For BarnesandNoble.com
Welcome to barnesandnoble.com. Barnes & Noble supports freedom of speech, both
on and off the Internet. However, the goal of this website is to provide access
to the widest selection of books to the largest group of people possible,
including children. To insure a safe, non-offensive environment for all of our
users, we have established our Membership Agreement. It spells out what you can
expect from us and what we expect from you. We intend this to be the equivalent
of your signature on a written contract. To acknowledge your agreement to the
terms of the agreement, please click on the "I agree" button found on the
registration page.
If you do not agree to follow the terms of this agreement, click the "I do not
agree" button also found on the registration page. You will still be able to
enjoy Barnes & Noble as a non-registered users, and are free to join at anytime
in the future by agreeing to our Membership Agreement.
User acknowledges that he or she may provide information regarding his or her
tastes, ratings and preferences and hereby specifically authorizes Barnes and
Noble Online, Inc., BN Online and their affiliates to use such information in
connection with any on-line or off-line offering or any electronic mail or
direct mail campaigns or offerings directed to User and that Barnes and Noble
Online, Inc., BN Online and their affiliates may use User's e-mail, home and
business address in connection with any such offering or campaign.
barnesandnoble.com is owned and operated by Barnes and Noble Online, Inc. By
accessing any areas of barnesandnoble.com users ("Users") agree to be legally
bound and to abide by the terms set forth below.
I. Trademarks
"BN Online" and "barnesandnoble.com" and service marks of Barnes and Noble
Online, Inc. All rights reserved. All other trademarks appearing on BN Online
are the property of their respective owners.
II. Disclaimers and Limitations of Liability
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
A-1
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
User expressly agrees that use of BN Online is at User's sole risk. Neither
Barnes and Noble Online, Inc., nor its affiliates, or any of their respective
officers, directors, or employees, agents, third-party content providers
("Providers"), merchants ("Merchants"), sponsors ("Sponsors"), licensors
("Licensors"), or the like, warrant that BN Online will be uninterrupted or
error free; nor do they make any warranty as to the results that may be obtained
from the use of BN Online, or as to the accuracy or reliability of any
information content, service, or merchandise provided through BN Online.
BN Online is provided on an "as is," "as available" basis without warranties of
any kind, either expressed or implied, including but not limited to, warranties
of title or implied warranties of merchantability or fitness for a particular
purpose. No oral advice or written information given by BN Online, Barnes and
Noble Online, Inc. or its affiliates, or any of their respective officers,
directors, employees, agents, Providers, merchants, Sponsors, Licensors, or the
like, shall create a warranty; nor shall User rely on any such information or
advice.
Under no circumstances shall BN Online or any other party involved in creating,
producing, or distributing BN Online be liable for any direct, indirect,
incidental, special or consequential damages that result from the use of or
inability to use BN Online, including but not limited to, reliance by a User on
any information obtained from BN Online or that result from mistakes, omissions,
interruptions, deletion of files or e-mail, errors, defects, viruses, delays in
operation or transmission, or any failure of performance, whether or not
resulting from Acts of God, communications failure, theft, destruction or
authorized access to BN Online's records, programs, or services. User hereby
acknowledges that this paragraph shall apply to all content, merchandise or
services available through BN Online. Because some states doe not allow the
exclusion or limitation of liability for consequential or incidental damages, in
such states liability is limited to the fullest extent permitted by law.
III. Content
A. Proprietary Rights
User acknowledges that BN Online contains information, data, software,
photographs, graphs, videos, typefaces, graphics, music, sounds and other
material (collectively "Content") that are protected by copyrights, trademarks,
trade secrets or other proprietary rights, and that these rights are valid and
protected in all forms, media and technologies existing now or hereinafter
developed. All Content is copyrighted as a collective work under the U.S.
Copyright laws and BN Online owns a copyright in the selection, coordination,
arrangement and enhancement of such Content. User may not modify, remove,
delete, augment, add to, publish, transmit,
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
A-2
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
participate in the transfer or sale of, create derivative works from or in any
way exploit, any of the Content, in whole or in part. If no specific
restrictions are displayed, Users may make copies of select portions of the
Content, provided that the copies are made only for User's personal use and that
User maintains any notices contained in the Content, such as all copyright
notices, trademark legends or other proprietary rights notices. Except as
provided in the preceding sentence or as permitted by the fair use privilege
under the U.S. copyright laws (see e.g. 17 U.S.C. Section 107), User may not
upload, post, reproduce, or distribute in any way Content protected by
copyright, or other proprietary right, without obtaining permission of the owner
of the copyright or other propriety right. In addition to the foregoing, use of
any software Content shall be governed by the software license agreement
accompanying such software.
B. Distribution/Uploading of Third Party Content
Except as set forth in Section III A above, User may upload to or otherwise
distribute on BN Online only Content that is not subject to any copyright or
other proprietary rights protection (collectively, "Public Content"), or Content
in which the author has given express authorization for distribution on the
World Wide Web. Any copyright or other proprietary Content distributed with the
consent of a copyright owner should contain a phrase such as "Copyright, owned
by [name of owner]; Used by Permission." The unauthorized submission or
distribution of copyrighted or other proprietary Content is illegal and could
subject the User to criminal prosecution as well as personal liability for
damages in a civil suit. User, not BN Online, Barnes and Noble Online, Inc. or
their affiliates, nor any of their respective officers, directors, employees,
agents, Merchants, Providers, Sponsors, Licensors or the like, will be liable
for any damage resulting from any infringement of copyrights or proprietary
rights, or from any other harm arising from such submission. By submitting
Content to any User submit areas, User automatically grants, or warrants that
the owner of such Content has expressly granted, BN Online the royalty-free,
perpetual, irrevocable, non-exclusive right and license to use, reproduce,
modify, adapt publish, translate, sublicense, copy and distribute the Content in
whole or in part worldwide and/or to incorporate it in other works in any form,
media, or technology now known or hereafter developed for the full term of any
copyright that may exist in such Content. User also permits any other User to
access, store, or reproduce the Content for that User's personal use. Subject to
this grant, the owner of Content placed on BN Online retains any and all rights
which may exist in such Content.
C. Third Party Content
BN Online is a distributor and not a publisher of Content supplied by third
parties and Users. BN Online has no more editorial control over such Content
than does a public library or
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
A-3
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
newsstand. Any opinions, advice, statements, services, offers, or other
information that constitutes part of Content expressed or made available by
third parties, including Providers, Merchants, sponsors, Licensors, or any other
User of BN Online are those of the respective authors or distributors and not of
BN Online, Barnes and Noble Online, Inc. or its affiliates or any of their
respective officers, directors, employees or agents. Neither BN Online, Barnes
and Noble Online, Inc. or its affiliates or any of their respective officers,
directors, employees or agents nor any third-party, including any Provider,
Merchant, Sponsor, Licensor or any other User of BN Online guarantees the
accuracy, completeness, or usefulness of any Content, nor its merchantability or
fitness for any particular purpose.
In many instances, the Content available through BN Online represents the
opinions and judgments of the respective Provider, Merchant, Sponsor, Licensor
or User not under contract with BN Online. BN Online neither endorses nor is
responsible for the accuracy or reliability of any opinion, advice, or statement
made on BN Online by anyone other than authorized BN Online employees. Under no
circumstances shall BN Online, Barnes and Noble Online, Inc. or its affiliates,
or any of their respective officers, directors, employees or agents be liable
for any loss or damage caused by a User's reliance on information obtained
through BN Online. It is the responsibility of User to evaluate the information,
opinion, advice, or other Content available through BN Online.
D. Export
The U.S. export control laws regulate the export and re-export of technology
originating in the United States. This includes the electronic transmission of
information and software to foreign countries and to certain foreign nationals.
User agrees to abide by these laws and their regulations - including but not
limited to the Export Administration Act and the Arms Export Control Act and not
to transfer, by electronic transmission or otherwise, any Content derived from
BN Online to either a foreign national or a foreign destination in violation of
such laws.
IV. BN Online's Rights
BN Online may elect to electronically monitor the User submit areas and may
disclose any Content, records or electronic communication of any kind (i) to
satisfy any law, regulation or government request, (ii) if such disclosure is
necessary or appropriate to operate BN Online, or (iii) to protect the rights or
property of BN Online, its Users, Sponsors, Providers, Licensors or Merchants.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
A-4
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
BN Online is not responsible for screening, policing, editing, or monitoring
such Content. If notified of allegedly infringing, defamatory, damaging, illegal
or offensive Content, BN Online may investigate the allegation and determine in
its sole discretion whether to remove or request the removal of such Content
from BN Online.
BN Online reserves the right to prohibit conduct, communication, or Content
which it deems in its sole discretion to be harmful to individual Users, BN
Online, the communities which make up BN Online, or any rights of BN Online or
any third party, or to violate any applicable law. Notwithstanding the
foregoing, neither BN Online nor its Providers, Merchants, Sponsors, or
Licensors can ensure prompt editing or removal of questionable Content after
online posting. Accordingly, neither BN Online, Barnes and Noble Online, Inc. or
its affiliates, or any of their respective officers, directors, employees, or
Agents nor, Provider, Merchant, Sponsor or Licensor shall assume liability for
any action or inaction with respect to conduct, communication, or Content on BN
Online.
V. Online Conduct
Any conduct by a User that in BN Online's sole discretion restricts or inhibits
any other User from using or enjoying BN Online will not be permitted. User
agrees to use BN Online only for lawful purposes. User is prohibited from
posting on or transmitting through BN Online any unlawful, harmful, threatening,
abusive, harassing, defamatory, vulgar, obscene, sexually explicit, profane,
hateful, racially, ethnically or otherwise objectionable material of any kind,
including, but not limited to, any material which encourages conduct that would
constitute a criminal offense, give rise to civil liability or otherwise violate
any applicable local, state, national or international law.
VI. Public and Private Communication
BN Online offers Users the capability to communicate on the BN Online Reader
Groups and Book Forum areas accessible to registered Users or to communicate
privately with another User. Private communication is electronic correspondence
sent or received by Users to or from other Users. BN Online will not screen
public communication in advance. BN Online is not responsible for submissions or
responses during live events.
It is BN Online's policy to respect the privacy of personal electronic
communication. Except as set forth in Section IV, BN Online will not
intentionally inspect the contents of an electronic message sent by one User to
another User, monitor discussions in private rooms, or disclose the contents of
any personal electronic communication to an unauthorized third party. BN Online
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
A-5
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
reserves the right to cooperate fully with local, state, and federal officials
in any investigation relating to any Content, including private electronic
communication, transmitted on BN Online, or the unlawful activities of any User.
BN Online reserves the right to remove any Content that it deems in its sole
discretion to be a violation of any law.
VII. Termination of Usage
BN Online may terminate User access, or suspend any User's access to all or part
of BN Online, without notice, for any conduct that BN Online, in its sole
discretion, believes is in violation of any applicable law or is harmful to the
interests of another User, a third-party Provider, a merchant, a Sponsor, a
Licensor, a service provider or BN Online.
VIII. Miscellaneous
BN Online reserves the right to distribute to Merchants or third parties certain
general User information, such as User's name and mailing address.
Users may not use BN Online to send unsolicited advertising, promotional
material, or other forms of solicitation to other Users except in those
specified areas that are designated for such a purpose.
ACKNOWLEDGMENT
This Agreement represents the entire understanding between you and BN Online
regarding your relationship with BN Online and supersedes any prior statements
or representations. IF YOU AGREE TO BE BOUND BY THE TERMS OF THIS ONLINE
SUBSCRIBER AGREEMENT, please click on the "I agree" button found on the
registration page.
If you do not agree to follow the terms of this agreement, click the "I do not
agree" button also found on the registration page. You will still be able to
enjoy Barnes & Noble as a non-registered user, and are free to join at anytime
in the future by agreeing to our Membership Agreement.
- --------------------------------------------------------------------------------
Home | Search | Cart | Registration | Community | Subjects | Bestsellers |
Customer Service | Help
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
A-6
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
EXHIBIT B
PROMOTIONAL AGREEMENT
This Agreement, dated as of July 31, 1997, is made and entered into by
and between Barnes and Noble, Inc., a Delaware corporation having offices at 122
fifth Avenue, New York, New York 10011 ("B&N"), and Lycos, Inc., a Delaware
corporation having offices at 500 Old Connecticut Path, Framingham,
Massachusetts 01701-4575 ("Lycos").
WHEREAS, the parties hereto desire that B&N perform certain promotional
activities on behalf of Lycos, subject to the terms and conditions set forth in
this Agreement.
NOW, THEREFORE, for good and valuable consideration, receipt of which
is hereby acknowledged, the parties hereto agree as follows:
1. Lycos Press Book Displays. During each quarter of each year during
the term of this Agreement, B&N shall provide the promotions described in this
Section 1; the first such promotion to be provided on or about October 1, 1997,
and, thereafter, the schedule of such promotions to be jointly determined by the
parties hereto. In connection therewith, B&N shall provide end cap space and/or
table displays featuring Lycos Press books selected and provided by Lycos (the
"Lycos Press Book") in those sections of the B&N stores which are pertinent to
the Lycos Press Books. The location(s) within each B&N store and the
presentation, duration and prominence of such displays shall be jointly
determined by the parties hereto; provided, that the placement of such displays
shall be done in a fashion which maximizes their exposure, and provided,
further, that in no event shall such promotional displays be provided during the
months of November and December during any year of the term of this Agreement.
2. Lycos Bookmarks. No less than * * * times during each year during
the term of this Agreement, B&N shall implement * * * programs during which
Lycos bookmarks (the "Lycos Bookmarks") shall be placed in the B&N stores in
locations to be jointly determined by the parties, but, in any event, such
locations shall include, if applicable, any computer, software, internet, women
or business section of the B&N stores. The schedule of such bookmark promotions
shall be jointly determined by the parties, but, in no event, shall any such
promotions be held during the months of * * * during any year of the term of
this Agreement.
3. Lycos Press and Internet Promotions. Throughout the term of this
Agreement, B&N shall promote the name "Lycos Press" and the Lycos URL
"www.lycos.com" in the internet sections of B&N's stores. The presentation,
specific location and prominence of such promotions shall be jointly determined
by the parties hereto.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
B-1
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
4. Lycos Covenant; License. (a) Lycos hereby covenants to deliver to
B&N the Lycos Press Books and Bookmarks (in the amounts agreed upon by the
parties as described in Sections 1 and 2 above) within a reasonable time prior
to the applicable promotional program commencement date to allow for B&N to
perform its obligations hereunder. (b) Lycos hereby grants to B&N a
non-exclusive license to use the Lycos Press Books and Lycos Bookmarks and the
names, titles and logos set forth on Exhibit A hereto, as the same may be
amended from time (the "License Materials") in the manner contemplated herein.
Such license shall terminate upon the effective date of the expiration or
termination of this Agreement.
5. Representations and Warranties, Understanding of the Parties. (a)
Each party represents and warrants to the other party that: (i) such party has
full corporate power and authority to execute, deliver and perform this
Agreement; (ii) this Agreement has been duly and validly executed and delivered
by such party and constitutes the legal, valid and binding obligation of such
party, enforceable against it in accordance with its terms; and (iii) the
execution, delivery and performance by such party of this Agreement and the
consummation by it of the transactions contemplated hereby do not and will not
violate (1) any provision of law, rule or regulation to which such party is
subject, (2) any order, judgment or decree applicable to such party, (3) any
provision of the bylaws of certificate of incorporation of such party, or (iv)
any agreement or other instrument by which such party is bound.
(b) Lycos further represents and warrants to B&N that it is the sole
and exclusive owner of, and/or has the right to license in the manner
contemplated herein, the Licensed Materials, and such grant does not and will
not (i) breach, conflict with or constitute a default under any agreement or
other instrument applicable to Lycos or binding upon its assets or properties,
or (ii) infringe upon any trademark, trade name, service mark, copyright or
other proprietary right of any person or entity.
(c) Each party further acknowledges that no payment is required to be
made to B&N by Lycos hereunder in connection with any of the services being
provided by B&N to Lycos herein.
6. Confidentiality. Except as otherwise provided in this Agreement or
with the consent of the other party hereto, each of B&N and Lycos agrees that al
information, including, without limitation, the terms of this Agreement,
business and financial information, customer and vendor lists, and pricing and
sales information, concerning B&N or Lycos, respectively, or any of its
affiliates provided by or on behalf of any of them shall remain strictly
confidential and secret and shall not be utilized, directly or indirectly, by
such party for its own business purposes or for any other purpose except and
solely to the extent that any such information is generally known or available
to the public through a source or sources other than such party hereto or its
affiliates.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
B-2
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
Notwithstanding the foregoing, each party is hereby authorized to deliver a copy
of any such information (a) to any person pursuant to a subpoena issued by any
court or administrative agency, (b) to its accountants, attorneys or other
agents on a confidential basis and (c) otherwise as required by applicable law,
rule, regulations or legal process, including, without limitation, the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder, and the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated thereunder.
7. Publicity. Neither party shall disclose to any third party the
existence of this Agreement or the subject matter of the terms hereof without
the prior consent of the other party. The parties hereto agree to use their best
efforts to issue a joint press release in form and content mutually agreeable to
each of them as promptly as practicable after the date hereof.
8. Indemnification. (a) Lycos hereby agrees to indemnify and hold
harmless B&N and its subsidiaries and affiliates, and their respective
directors, officers, employees, agents, shareholders, partners, members and
other owners, against any and all claims, actions, demands, liabilities, losses,
damages, judgments, settlements, costs and expenses (including reasonable
attorneys' fees) (any or all of the foregoing hereinafter referred to as
"Losses") insofar as such Losses (or actions in respect thereof) arise out of or
are based on (i) any claim that B&N's use of the Licensed Materials infringes
any trademark, trade name, service mark, copyright or other proprietary right of
any third party, or (ii) any misrepresentation of representation or warranty or
breach of a covenant or agreement made by Lycos herein.
(b) B&N hereby agrees to indemnify and hold harmless Lycos and its
subsidiaries and affiliates, and their respective directors, officers,
employees, agents, shareholders, partners, members and other owners, against any
and all Losses insofar as such Losses (or actions in respect thereof) arise out
of or are based on any misrepresentation of representation or warranty or breach
of a covenant or agreement made by B&N herein.
9. Limitation of Liability. (a) In no event shall either party be
liable to the others party for indirect, incidental, consequential, special or
exemplary damages, including, without limitation, damages for loss of revenue or
lost profits, arising from any provision of this Agreement, even if such party
had been advised of the possibility of such damages.
(b) Except as expressly set forth in this Agreement, neither party
makes any representations or warranties, express or implied, including any
implied warranty of merchantability or fitness for a particular purpose and
implied warranties arising from course of dealing or course of performance.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
B-3
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
10. Term. (a) Subject to clause (b) below, the term of this Agreement
shall commence on the date hereof and shall continue for a period of three years
after the date hereof. [Within thirty 30 days prior to the end of the term of
this Agreement, B&N shall have the right to extend the term of this Agreement
for a term to be determined by B&N at such time.]
(b) Either party shall have the right terminate this Agreement at any
time in the event that the other party material breaches any representation,
warranty or covenant made by it hereunder and such breaching party fails to cure
such breach within thirty (30) after notice thereof. Either party shall also
have the right to terminate this Agreement in the event that (i) the other party
files a petition for bankruptcy or is adjudicated bankrupt, (ii) a petition in
bankruptcy is filed against the other party and such petition is not dismissed
within sixty (60) days after the filing date, (iii) the other party becomes
insolvent or makes and assignment for the benefit of creditors pursuant to any
bankruptcy law, or (iv) a receiver is appointed for the other party or its
business.
11. Miscellaneous. (a) this Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to the conflict of law principles thereof.
(b) This Agreement constitutes the entire agreement of the parties
hereto with respect to the subject matter hereof and supersedes any and all
prior agreements, written and oral, with respect thereto. No change, amendment
or modification of any provision of this Agreement shall be valid unless set
forth in a written instrument signed by both parties.
(c) This Agreement does not constitute either party an agent, legal
representative, joint venturer, partner or employee of the other or any purpose
whatsoever and neither party is in any way authorized to make any contract,
agreement, warranty or representation or to create any obligation, express or
implied, on behalf of the other party hereto.
(d) this Agreement may be executed in any number of counterparts, each
of which shall be deemed an original and together shall constitute one and the
same instrument.
(e) This Agreement and the provisions thereof shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and their
successors and permitted assigns; provided, however, that neither party shall
have the right to assign its rights or obligations hereunder to any other person
or entity, except that B&N may assign its rights and obligations hereunder to a
subsidiary or affiliate of B&N, provided that B&N remains jointly and severally
liable with respect to such obligations.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
B-4
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
(f) Each provision of this Agreement shall be considered severable and
if, for any reason, any provision hereof is determined to be invalid or contrary
to, or in conflict with, any existing or future law or regulation of any court
or agency having valid jurisdiction, such shall not impair the operation or
effect the remaining provisions of this Agreement; and the latter shall continue
to be given full force and effect and to bind the parties hereto and such
invalid provisions shall be deemed not to be a part of this Agreement.
(g) Any and all notices and other communications to either party
hereunder shall be in writing and deemed delivered (i) upon receipt if by hand,
overnight courier or telecopy (provided that in the event of a telecopy
concurrently therewith a copy os mailed in accordance with the clause (ii)
hereof) and (ii) three days after mailing by first class, certified mail,
postage prepaid, return receipt requested (1) if to Lycos, to 500 Old Post
Connecticut Path, Framingham, Massachusetts 01701-4576, Attention: ___________,
telecopier number: ____________, and (2) if to B&N, to 122 Fifth Avenue, New
York, New York 10011, Attention: Mr. Carl Rosendorf, telecopier number (212)
727-7343, or to such other address for a party as such be specified by like
notice.
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto as of the date first above written.
BARNES & NOBLE, INC.
By:
--------------------------------------
LYCOS, INC.
By:
--------------------------------------
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
B-5
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED By barnesandnoble.com inc.
EXHIBIT C
LYC 'S
LYC 'S
Search The Largest Classified Service on the Web
Results
You Searched for
New! LYCOS PRO(Trademark) Custom Search
Get more on: alaska Choose from the categories below.
The Web Search Pictures Search Personal Homepages
--------------- -------------------------
Search TOP 5% Search Sounds Search Yellow Pages
------------- ------------- -------------------
Search Barnes & Noble Books
---------------------------
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
C-1
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
INTERACTIVE MARKETING AGREEMENT
This Interactive Marketing Agreement (the "Agreement"), dated as of
November 1, 1997 (the "Effective Date"), is between America Online, Inc.
("AOL"), a Delaware corporation, with offices at 22000 AOL Way, Dulles, Virginia
20166, and BarnesandNoble.com Inc. ("B&N"), a Delaware corporation, with offices
at 122 Fifth Avenue, New York, New York 10011. AOL and B&N may be referred to
individually as a "Party" and collectively as "Parties."
INTRODUCTION
AOL and B&N each desires to enter into an interactive marketing
relationship whereby AOL will promote and distribute an interactive site
referred to (and further defined) herein as the Affiliated B&N Site. This
relationship is further described below and is subject to the terms and
conditions set forth in this Agreement. Defined terms used but not defined in
the body of the Agreement will be as defined on Exhibit A attached hereto.
TERMS
1. PROMOTION, DISTRIBUTION AND MARKETING.
1.1. AOL Promotion of Affiliated B&N Site.
As described more fully herein, AOL shall provide B&N with
promotions through the AOL Network for the Affiliated B&N Site
(the "Promotions"). The Promotions shall be generally in
accordance with the Carriage Plan and other materials attached
hereto as Exhibit G, subject to changes therein in AOL's
reasonable editorial discretion which are (i) consistent with
the mutual objectives, intentions and relationships of the
Parties as set forth in this Agreement and (ii) designed to
satisfy the sales and Impression thresholds and Level
requirements set forth in this Agreement. Specific placements
for Promotions will include an "Anchor Tenant" position within
the Books, Video, and Music Department of the AOL Service
Shopping Channel, integrated links to the Affiliated B&N Site
from within the AOL Service "AOL Find" area and the Channel
"Search & Explore" area, and a placement during * * * of the
aggregate Impressions each * * * during the Initial Term made
on the * * * of the AOL Service Shopping Channel. AOL reserves
the right to redesign or modify the organization, structure,
"look and feel," navigation, practices and other elements of
the AOL Service at any time, provided that, if such redesign
or modification materially and adversely affects the
effectiveness of the Promotions in selling Products, AOL will
provide the Promotions with comparable promotional placement
to that existing during the Initial Term prior to such
redesign or modification, reasonably satisfactory to B&N.
1.2. Impressions.
1.2.1. Impressions Commitments. AOL will deliver or cause to be
delivered at least the following annual Impressions for the
Promotions (each an "Annual Minimum"): * * * Impressions in
Year 1, * * * Impressions in Year 2, * * * Impressions in Year
3 and * * * Impressions in Year 4.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
In addition, for each Year during the Initial Term, AOL shall
deliver or cause to be delivered to B&N an additional * * *
Impressions in Level A, * * * Impressions in Level B and * * *
Impressions in Level C (as such Levels are defined below). The
placements for such additional Impressions within such Levels
shall be as determined by AOL in its reasonable editorial
discretion. B&N shall notify AOL prior to the beginning of
each Year (except in the case of Year 1, promptly after the
date of execution of this Agreement) of its election as to
whether to use such Impressions during such Year to promote
B&N's sale of either Software (as defined below) or magazines
(but not both), provided that any change in election from the
prior Year's election shall be subject to AOL's approval in
its sole discretion. The Promotions associated with such
Impressions shall link directly to the homepage selling such
Product associated with the Affiliated B&N Site.
Notwithstanding the foregoing, AOL shall have the right before
any Year (other than Year 1) to buy out B&N's remaining rights
to such additional Impressions by reducing each of B&N's
subsequent guaranteed payments under Section 4.1 by an amount
each * * *.
1.2.2. Distribution. The Annual Minimums for each Year will be
delivered across inventory Levels A, B and C (as defined, and
collectively, the "Levels"). In Year 1, AOL will deliver no
less than * * * of each Annual Minimum in Level A,
approximately * * * of each Annual Minimum in Level B, and no
more than * * * of each Annual Minimum in Level C. In each of
Year 2, Year 3 and Year 4, AOL will deliver no less than * * *
of each Annual Minimum in Level A, approximately * * * of each
Annual Minimum in Level B, and no more than * * * of each
Annual Minimum in Level C. AOL will use reasonable efforts to
accommodate B&N's requests to re-allocate the Impressions
distribution among the Levels (subject to availability),
provided that the Parties can mutually agree upon a formula
for adjusting the aggregate Impressions commitments and
thresholds described in this Agreement based on the relative
value of the Impressions being re-allocated. AOL will use
reasonable efforts to deliver at least * * * of each Annual
Minimum within the * * * quarter of each calendar year
(excluding * * * quarter of 1997) and at least * * * of each
Annual Minimum between November 1 and Christmas Day of each
calendar year (excluding such period of 1997), in each case
across Levels substantially in accordance with the percentages
set forth above. Unless B&N agrees otherwise, not more than *
* * of Impressions in Year 1 will be listbox Promotions. In
any other Year, the Parties will mutually agree in good faith
on the maximum percentage of listbox Impressions based upon
the relative Book-selling performance of such listbox
Impressions. AOL, in its discretion, may provide Promotions
with Impressions on the AOL Service * * * or Impressions of
similar quality to the * * * as of the date hereof as
determined by AOL in its reasonable discretion (collectively,
" * * * Impressions"). If in Year 1, Transaction Revenues for
such Year do not equal or exceed * * * and B&N is not then in
breach under this Agreement, then AOL shall provide Promotions
with at least * * * Impressions in Year 2. If in Year 2,
Transaction Revenues for such Year do not equal or exceed * *
* and B&N is not then in breach under this Agreement, then AOL
shall provide Promotions with at least * * * Impressions in
Year 3. If in Year 3, Transaction Revenues for such Year do
not equal or exceed * * * and B&N is not then in breach under
this
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-2-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
Agreement, then AOL shall provide Promotions with at least * *
* Impressions during Year 4. All * * * Impressions shall be
deemed bonus Impressions and shall not be applied toward the
Annual Minimums. (Notwithstanding the foregoing, AOL is not
guaranteeing that the Affiliated B&N Site will achieve any
specific level of Transaction Revenues and AOL will not be in
breach of this Agreement solely based upon the failure of the
Affiliated B&N Site to achieve any specific level of
Transaction Revenues.)
1.2.3. Windfalls. AOL will not be obligated to provide in excess of
the Annual Minimum for the applicable Year. If AOL exceeds an
Annual Minimum by more than * * * in the applicable Year
(e.g., by more than * * * Impressions in Year 1), the excess
Impressions above such Annual Minimum (the "Excess") will
serve to reduce the subsequent Year's Annual Minimum by an
amount equal to the Excess, subject to an aggregate reduction
of no greater than * * * of the prior Year's Annual Minimum.
1.2.4. Shortfalls. AOL will, in good faith, attempt to fulfill each
Year's Annual Minimum; provided that a shortfall in
Impressions at the end of a Year (a "Shortfall") will not be
deemed a breach of the Agreement by AOL unless such shortfall
results from the bad faith or willful misconduct of AOL. Any
Shortfall will be added to the Annual Minimum for the
subsequent Year. In the event there is a Shortfall in
Impressions as of the end of the Initial Term (a "Final
Shortfall"), AOL will provide B&N (for its use) with
advertising which has a total value, based on AOL's
then-current undiscounted advertising rate card (the "Rate
Card") discounted by * * * , equal to the value of the Final
Shortfall (determined by multiplying the percentage of
Impressions that were not delivered by the total, guaranteed
payment provided for below, and taking into consideration the
relative value of the Impressions included in such Final
Shortfall). Such advertising shall be delivered to B&N on the
AOL Network within a reasonable period of time following the
Initial Term.
1.2.5. Satisfaction. AOL will not be required to deliver or cause to
be delivered in excess of * * * Impressions (the "Aggregate
Threshold"). The Annual Minimum for a given Year will be
deemed to be satisfied in the event gross Site Revenues for
such Year * * * (in the case of Year 1), * * * (in the case of
Year 2), * * * (in the case of Year 3) and * * * (in the case
of Year 4). All Impressions commitments hereunder (including,
without limitation, any shortfall remedies, but not including
placement commitments) will be deemed to be satisfied at any
such time as gross Site Revenues exceed * * * .
1.3. Promotions. The specific B&N Content to be contained within
the Promotions (including, without limitation, advertising
banners and contextual promotions) (the "Promo Content") will
be determined by B&N, subject to AOL technical limitations and
AOL's then-applicable standard policies relating to
advertising and promotions. B&N will consistently and
meaningfully update the Promo Content to be contained within
the Promotions on a no-less- than bi-weekly basis. The Parties
shall jointly consult from time to time regarding the Promo
Content to ensure that it is designed to maximize performance.
Except to the extent expressly described herein, including
without limitation as provided in Section 1.1,
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-3-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
the specific form, placement, duration and timing of the
Promotions will be as determined by AOL in its reasonable
editorial discretion. The Parties acknowledge that the pages
on the AOL Network are viewable in their * * * and,
accordingly, * * * . In the event for any reason any pages on
the AOL Network contain a * * * , B&N Promotions * * * without
B&N's prior written approval, which will not be unreasonably
withheld or delayed taking into consideration (i) AOL's
demonstration of its ability to reliably track Impressions to
the * * * portions of the pages containing the Promotions and
(ii) the comparable effectiveness of such * * * Impressions to
those * * * , in each case as demonstrated by test results
reasonably acceptable to B&N. In addition, upon B&N's request
from time to time at least fifteen (15) days, where possible,
prior to a proposed B&N-sponsored event (e.g., author chats),
AOL shall provide B&N with an electronic auditorium on the AOL
Service for B&N's exclusive use at a specified time for such
event, subject to AOL approval of such event, which shall not
be unreasonably withheld or delayed (taking into consideration
AOL's reasonable assessment of the estimated audience size
which a proposed event will attract). AOL shall also supply
pop-up capabilities for such auditorium to allow B&N to sell
Books to auditorium guests during such event. B&N and AOL
shall cooperate to promote such auditorium events on the AOL
Service (including through AOL Live). In connection with any
such event, in addition to the aforementioned notice
requirement, B&N will comply with AOL's other standard
requirements related to booking and implementation of
auditorium events.
1.4. B&N Promotion of Affiliated B&N Site and AOL. B&N will promote
the AOL Service and the availability of the Affiliated B&N
Site as set forth in Exhibit B.
1.5. Monthly Review. Within thirty (30) days (or such lesser period
as monthly reports are generally provided to AOL's other
significant commerce partners) after the end of each calendar
month during the Term, AOL will provide B&N with a review of
performance of the Promotions for such month, which will
include standard AOL reporting with respect to Impressions and
available "click-through" information, demographic and usage
information generally made available by AOL to its significant
commerce partners, and other information reasonably requested
by B&N.
2. AFFILIATED B&N SITE.
2.1. Content. B&N will market and sell through the Affiliated B&N
Site a comprehensive offering of Books. Subject to the
restrictions set forth below in this Section 2.1 and the other
terms and conditions of this Agreement, B&N may also market
and sell through the Affiliated B&N Site (i) the following
other products currently offered for sale in retail bookstores
operated by its affiliates: books-on-tape, magazines,
calendars, prepackaged computer software (including video
games) ("Software"), greeting cards, diaries, bookmarks,
booklights, bookends, bookshelves, prerecorded music compact
disks and tapes, prerecorded videotapes, coffee and B&N
insignia-branded merchandise such as mugs, T-shirts,
sweatshirts and totebags), and (ii) other products consented
to by AOL. B&N will review, delete, edit, create, update and
otherwise manage all Content available on or through the
Affiliated B&N Site which it controls in accordance with the
terms of this Agreement. B&N will ensure that the Affiliated
B&N Site does not in any respect promote, advertise or market
any Interactive Service. Except as otherwise set forth in
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-4-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
this Agreement or agreed to by AOL, neither the Promotions nor
any pages on the Affiliated B&N Site directly linked to the
Promotions ("Linked Pages") will contain promotions, links,
sponsorships or other Content (a) relating to any Products
other than Books or (b) otherwise in conflict with AOL's
standard advertising policies. On any pages within the
Affiliated B&N Site directly linked to the Linked Pages,
Content relating to any Products other than Books will be
non-prominent and ancillary to Book-related Content. Subject
to the last sentence of Section 3.3, the Affiliated B&N Site
will not contain any material, non-Book- related, third party
Content components (e.g. an aggregated offering of
sports-related links), except as otherwise mutually agreed
upon by the Parties. Nothing in this Section 2.1 is intended
to restrict B&N from selling banner or similar advertising on
the Affiliated B&N Site or the Linked Pages, except for
products which AOL has notified B&N in writing are restricted
as a result of written agreements entered into by AOL with
third party retailers of such products (subject to the last
sentence of Section 3.3).
2.2. Production Work. Except as agreed to in writing by the Parties
pursuant to the "Production Work" section of the Standard Legal
Terms & Conditions attached hereto as Exhibit E, B&N will be
responsible for all production work associated with the
Affiliated B&N Site, including all related costs and expenses.
2.3. Hosting; Communications. B&N will be responsible for all
communications, hosting and connectivity costs and expenses
associated with the Affiliated B&N Site. In addition, B&N
shall provide all computer, telephone and other equipment or
resources necessary for B&N to access the AOL Service. B&N
will create a mirrored version of the Affiliated B&N Site in
order to comply with the terms of this Agreement. B&N will
bear responsibility for the cost of such mirrored site, which
site will be hosted by AOL provided that (i) AOL's hosting
price and terms are reasonably competitive in all material
respects with others in the industry and (ii) the quality of
service supplied by AOL is reasonably satisfactory to B&N. B&N
will utilize a dedicated high speed connection to maintain
quick and reliable transport of information to and from the
B&N data center and AOL's designated data center.
2.4. Technology. B&N shall take all commercially reasonable steps
necessary to conform its promotion and sale of Products
through the Affiliated B&N Site to the then-existing
technologies identified by AOL which are optimized for the AOL
Service. AOL shall be entitled to require reasonable changes
to the Content (including, without limitation, the features or
functionality) within any Linked Pages to the extent such
Content will, in AOL's good faith judgment, adversely affect
any technical aspect of the AOL Service. AOL reserves the
right to review and test the Affiliated B&N Site from time to
time to determine whether the site is compatible with AOL's
then-available client and host software and the AOL Service.
2.5. Product Offering. B&N will use commercially reasonable efforts
to ensure that the Affiliated B&N Site includes all of the
Products and other Content (including, without limitation, any
features, offers, contests, functionality or technology) that
are then made available by or on behalf of B&N through any
Additional B&N Channel; provided, however, that: (a) such
inclusion will not be required where it is commercially or
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-5-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
technically impractical to either Party (i.e., inclusion would
cause either Party to incur substantial incremental costs);
(b) any non- Book-related Product offerings which would
otherwise be required by such inclusion remain subject to
Section 2.1 and the other terms of this Agreement; and (c)
certain limited special promotions for third parties may be
omitted, provided that comparable promotions are offered on
the Affiliated B&N Site pursuant to Section 2.8.
2.6. Special Features/Collections. B&N will, upon AOL's reasonable
request, create for offering on the Affiliated B&N Site
(within thirty (30) days of such request) and manage specific,
cobranded (i) topical collections of books (including an "AOL
Books" collection) and (ii) topical search features, each to
be linked to corresponding portions of the AOL Service.
2.7. Pricing and Terms. B&N will use commercially reasonable
efforts to ensure that: (a) the prices (and any other required
consideration) for Products in the Affiliated B&N Site do not
exceed the prices for substantially similar Products offered
by or on behalf of B&N through any Additional B&N Channel; (b)
the terms and conditions related to Products in the Affiliated
B&N Site are no less favorable in any respect to the terms and
conditions for substantially similar Products offered by or on
behalf of B&N through any Additional B&N Channel; and (c) both
the prices and the terms and conditions related to Products in
the Affiliated B&N Site are reasonably competitive in all
material respects with the prices and terms and conditions for
substantially similar Products generally offered online by
other National Book Retailers.
2.8. Special Offers. B&N will promote through the Affiliated B&N
Site on a regular and consistent basis special offers
exclusively available to AOL Members, e.g., price discounts,
shipping specials, etc. (the "Special Offers"). B&N will
provide AOL with reasonable prior notice of Special Offers so
that AOL can market the availability of such Special Offers in
the manner AOL deems appropriate in its editorial discretion,
subject to the terms and conditions hereof.
2.9. Operating Standards. B&N will ensure that the Affiliated B&N
Site complies at all times with the standards set forth in
Exhibit C. To the extent site standards are not established in
Exhibit C with respect to any aspect or portion of the
Affiliated B&N Site (or the Products or other Content
contained therein), B&N will provide such aspect or portion at
a level of accuracy, quality, completeness, and timeliness
which substantially meets or exceeds prevailing standards in
the online book retailing industry. The sale by B&N of
electronically delivered Books through the Affiliated B&N Site
shall be subject to capacity and technical limitations, and
downloading fees and related expenses, reasonably imposed or
incurred by AOL.
2.10. Traffic Flow. Except as otherwise approved by AOL, B&N will
take commercially reasonable efforts to ensure that AOL
traffic is either kept within the Affiliated B&N Site or
channeled back into the AOL Service (with the exception of
advertising links sold and implemented pursuant to the
Agreement). The Parties will work together on implementing
mutually acceptable links back from the Affiliated B&N Site to
the AOL Service.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-6-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
2.11. Marketing to AOL Purchasers. To the extent B&N sends any form
of communications to persons who were reasonably ascertainable
by B&N to be AOL Purchasers, B&N will promote the Affiliated
B&N Site as the location at which to purchase Products (as
compared to any more general or other site or location).
3. AOL EXCLUSIVITY AND RELATED OBLIGATIONS.
3.1. AOL Service. B&N will be the exclusive marketer of the
Exclusive Service within the AOL Service during the Initial
Term (the "AOL Service Exclusivity").
3.2. Greenhouse/DCI/International. B&N will be the exclusive
marketer of the Exclusive Service through the Greenhouse
Properties during the Initial Term. B&N will be the exclusive
National Book Retailer promoted by DCI through the DCI Areas
during the Initial Term (excluding brand advertising for
local, physical retail locations (other than locations
operated by a National Book Retailer) promoted through a
corresponding local DCI Area). Through the International
Services, B&N will be the exclusive American-based and
operated National Book Retailer promoted by the International
Services. Collectively, these restrictions are referred to
herein as the "Ancillary Exclusivities" (and, with the AOL
Service Exclusivity, the "Combined Exclusivities").
3.3. Third Party Limitations. To the extent a third party would be
affected by the foregoing exclusivity (a "Restricted Party")
and such party is not solely a provider of the Exclusive
Service (i.e., it is also engaged in activities other than
Book-selling), such exclusivity shall only apply to the
marketing of the Exclusive Service by such Restricted Party;
provided that the foregoing exception shall apply only after
Year 2 in the case of a National Book Retailer identified on
Exhibit F (including affiliates promoted in any way under the
same brand name marketing any of the Products referred to in
Section 2.1(i) ("Related Products")) (each an "Identified
National Book Retailer"), provided that the restrictions in
this Section 3.3 will not be violated if (i) AOL enters into
an agreement with respect to Related Products with any third
party not then an Identified National Book Retailer, (ii) such
third party thereafter becomes an Identified National Book
Retailer by way of merger, acquisition or otherwise, and (iii)
AOL was not aware of such contemplated transaction at the time
it entered into the Related Product agreement with such third
party. AOL shall not online, through the AOL Service, in any
respect (i) prior to the end of Year 2, promote, advertise,
market or distribute (including by way of direct links) any
Related Products of any Identified National Book Retailer, or
(ii) during the Initial Term, promote, advertise, market or
distribute (including by way of direct links) the Book
products of any Identified National Book Retailer. In
addition, AOL shall use commercially reasonable efforts, in
entering into agreements after the date of execution of this
Agreement with any of the then five most significant partners
in each of the commerce, "anchor tenant" and information
provider categories (each a "Significant Agreement") to
restrict the ability of such parties to online promote,
advertise (excluding banner or similar advertising), market or
distribute (including by way of direct links) the products of,
any Identified National Book Retailer through such partner's
online area appearing (a) on the AOL Service or (b) through
its affiliated site linked directly to the AOL Service, as the
case may be. To the extent AOL enters into any Significant
Agreement which does not contain the foregoing restriction,
then the restrictions imposed
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-7-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
on B&N pursuant to Section 2.1 of this Agreement shall be
deemed modified to be only as restrictive on a comparable
basis (e.g. as to the number of restricted screen levels) as
the restrictions actually imposed by AOL on the other party to
such Significant Agreement. AOL shall notify B&N promptly of
its entering into any Significant Agreement which would
require the modification to Section 2.1 described in the
previous sentence.
3.4. Exceptions. Notwithstanding anything to the contrary in this
Section, no provision of this Agreement will limit
relationships between AOL and/or the Additional Parties and
any third parties, relating to: (i) the promotion, advertising
or sale (collectively, "Promotion") of Books through an
auction or club format by or for any entity other than an
Identified National Book Retailer; (ii) the Promotion of
"audio books"/"books on tape" by or for any entity other than
an Identified National Book Retailer; (iii) the Promotion of
Books by or for any entity other than an Identified National
Book Retailer for whom such sales do not constitute at least
10% of annual revenues; (iv) the Promotion of used Books other
than used college textbooks (subject to the exception
described below) by or for any entity other than an Identified
National Book Retailer; (v) publisher Content regarding or
promoting specific Books (other than Books generally)
published by such publisher, unless expressly promoting an
Identified National Book Retailer; (vi) brand advertising
solely promoting physical retail locations for any entity
other than an Identified National Book Retailer; and (vii) AOL
commitments existing prior to the Effective Date, of which the
only material commitment is the Agreement dated June 30, 1997
(the "CUC Agreement) between AOL and CUC International, Inc.
("CUC") which provides for the nonexclusive sale by CUC of
Books through a club format and through CUC's "NetMarket"
online department store; provided that the restrictions in
this Section 3.4 related to Identified National Book Retailers
will not be violated if (x) AOL enters into an agreement with
any third party not then an Identified National Book Retailer
which, if such party were an Identified National Book
Retailer, would not be permitted under this Section 3.4, (y)
such third party thereafter becomes an Identified National
Book Retailer by way of merger, acquisition or otherwise, and
(z) AOL was not aware of such contemplated transaction at the
time it entered into the agreement with such third party. One
year from the time B&N reasonably demonstrates to AOL that B&N
is one of the top three sellers of used Books with respect to
gross sales revenue and scope of offering, the AOL Service
Exclusivity will be deemed to also cover third parties
marketing a competitive offering of used Books. B&N
acknowledges that, notwithstanding this Section 3.4, the CUC
Agreement shall not be deemed a violation of any of the
Combined Exclusivities.
3.5. Additional Provisions Regarding Greenhouse Properties, DCI
Areas and International Services. AOL shall acquire from GHN,
DCI and the International Services for the benefit of B&N,
without payment of any consideration in addition to the
amounts payable by B&N under Sections 4.1 and 4.2, the rights
and commitments set forth in this Agreement relating to such
entities. In the event that the sale, transfer or other
disposition to an unaffiliated third party of any of the
Greenhouse Properties results in a material decrease in the
Impressions being delivered through the Greenhouse Properties,
AOL shall deliver or cause to be delivered to B&N comparable
substitute Impressions through replacement properties. In
addition, AOL shall use commercially reasonable efforts to
obtain distribution for the Affiliated B&N Site through any
future non-U.S. versions of the AOL Service, and B&N
acknowledges that it may be required to pay
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-8-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
additional compensation in connection therewith. In the event
such additional amounts would be payable by B&N, B&N shall be
entitled to elect to forego adding such additional
international service to the International Services.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-9-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
4. PAYMENTS.
4.1. Guaranteed Payments. B&N will pay AOL a guaranteed amount of
$40 million as follows: (a) $2.5 million upon the execution of
this Agreement, $3.5 million by February 1, 1998 and $1
million by each of May 1, 1998 and September 1, 1998; (b) $2.5
million by each of January 1, 1999, April 1, 1999, July 1,
1999 and October 1, 1999; and (c) $2.75 million by each of
February 1, 2000, May 1, 2000, August 1, 2000, November 1,
2000, February 1, 2001, May 1, 2001, August 1, 2001 and
November 1, 2001.
4.2. Sharing of Site Revenues. In (i) the period in any Year
following the point at which Site Revenues exceed * * * (in
the case of Year 1), * * * (in the case of Year 2), * * * (in
the case of Year 3) and * * * (in the case of Year 4), (ii)
any period following the point at which Site Revenues exceed *
* * in the aggregate and (iii) any Renewal Term, B&N shall pay
to AOL with respect to Site Revenues after such point: (a) * *
* of Advertising Revenues; plus (b) * * * of Transaction
Revenues with respect to each Product other than Software
Products; plus (c) if in Year 1 or Year 2, * * * of
Transaction Revenues with respect to each Software Product;
plus (d) if in Year 3 or Year 4, * * * of Transaction Revenues
with respect to each Software Product. In the case of
Transaction Revenues arising from and traceable to a third
party area on the AOL Service ("Affiliate Sales"), Transaction
Revenues shall be net of the actual commission paid by B&N to
the entity controlling such third party area; provided that,
in no event shall the payment to AOL with respect to Affiliate
Sales be less than * * * of Transaction Revenues. In the case
of any Transaction Revenues arising through the International
Services in excess of * * * in any Year, B&N shall pay to AOL
* * * of Transaction Revenues arising during the remainder of
such Year; provided that such incremental Transaction Revenues
shall not count towards the aggregated revenue thresholds
listed above in this Section 4.2.
4.3. Alternative Revenue Streams. In the event B&N or its
Affiliates receives or desires to receive, directly or
indirectly, any compensation in connection with the Affiliated
B&N Site other than Site Revenues described herein (an
"Alternative Revenue Stream"), B&N will promptly inform AOL in
writing, and the Parties will negotiate in good faith
regarding whether B&N will be allowed to market Products
producing such Alternative Revenue Stream to AOL Members
through the Affiliated B&N Site, and if so, the equitable
portion of such Alternative Revenue Stream (if applicable)
that will be shared with AOL.
4.4. Wired Payments; Late Payments. All payments required under
this Section 4 will be paid in immediately available,
non-refundable funds wired to AOL's account. All amounts owed
hereunder not paid within fifteen (15) days following the date
such amounts are due and payable will bear interest from such
fifteenth day at the prime rate in effect at such time.
4.5. Auditing Rights. Each Party shall maintain complete, clear and
accurate records of all expenses, revenues, fees and other
transactions in connection with the performance of this
Agreement. For the sole purpose of ensuring compliance with
this Agreement, each Party shall have the right, at its
expense and not more than once every twelve (12) months, to
direct an independent certified public accounting firm to
conduct a reasonable and necessary inspection of portions of
the books and records of the other Party which
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-10-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
are relevant to such other Party's performance pursuant to
this Agreement. Any such audit may be conducted after twenty
(20) business days prior written notice.
4.6. Taxes. B&N shall collect and pay and indemnify and hold AOL
harmless from, any sales, use, excise, import or export value
added or similar tax or duty not based on AOL's net income,
including any penalties and interest, as well as any costs
associated with the collection or withholding thereof,
including attorneys' fees.
4.7. Reports.
4.7.1. Sales Reports. B&N will provide AOL in an automated
manner with a monthly report in a mutually agreed
format, detailing the following activity in such
period (and any other information mutually agreed
upon by the Parties or reasonably required for
measuring revenue activity by B&N through the
Affiliated B&N Site, if available): summary sales
information by day (date, number of Products, number
of orders, and total Transaction Revenues). If
commercially feasible, B&N will report Transaction
Revenues by AOL Network area and by Product
categories. More generally, each payment to be made
pursuant to this Section 4 shall be accompanied by a
report containing information which supports the
payment, including information identifying (i)
Transaction Revenues and all items deducted or
excluded to produce Transaction Revenues, including,
without limitation, chargebacks and credits for
returned or cancelled goods or services (and, where
possible, an explanation of the type of reason
therefor, e.g., bad credit card information, poor
customer service, etc.) and (ii) any applicable
Advertising Revenues.
4.7.2. Fraudulent Transactions. To the extent permitted by
applicable laws, B&N will provide AOL with a prompt
report of any fraudulent order, including the date,
screenname and amount associated with such order,
following B&N obtaining knowledge that the order is,
in fact, fraudulent.
5. TERM; RENEWAL; TERMINATION.
5.1. Term. Unless earlier terminated as set forth herein, the
initial term of this Agreement will be for sixteen Quarters
(the "Initial Term").
5.2. Renewal. Upon conclusion of the Initial Term, AOL will have
the right to renew this Agreement for up to five (5)
successive one-year renewal terms (each a "Renewal Term" and
together with the Initial Term, the "Term") with respect to
the AOL Service or the AOL Service and the other AOL Network
areas or portions thereof, by providing B&N with notice of
AOL's intention to renew the Agreement for a subsequent
Renewal Term no later than one hundred twenty (120) days prior
to the commencement of such Renewal Term. During any Renewal
Term: (i) B&N will not be required to pay any guaranteed,
fixed payment (subject to the applicable revenue sharing
provisions of Section 4.2) or perform the cross-promotional
obligations specified in Section 1.4; and (ii) AOL will not be
required to undertake any fixed exclusivity or
promotional/placement obligations; provided that (iii) for so
long as AOL may elect to maintain the AOL Service Exclusivity
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-11-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
commitments contained herein during a Renewal Term, B&N will
continue to perform its cross-promotional and marketing
obligations.
5.3. Termination for Breach. Either Party may terminate this
Agreement at any time in the event of a material breach of the
Agreement by the other Party which remains uncured after
thirty (30) days written notice thereof to the other Party (or
such shorter period as may be specified elsewhere in this
Agreement); provided that AOL will not be required to provide
notice to B&N in connection with B&N's failure to make any
payment to AOL required hereunder and the cure period with
respect to any scheduled payment shall be fifteen (15) days
from the date for such payment provided for herein.
5.4. Termination for Bankruptcy/Insolvency. Either Party may
terminate this Agreement immediately following written notice
to the other Party if the other Party (i) ceases to do
business in the normal course, (ii) becomes or is declared
insolvent or bankrupt, (iii) is the subject of any proceeding
related to its liquidation or insolvency (whether voluntary or
involuntary) which is not dismissed within ninety (90)
calendar days or (iv) makes an assignment for the benefit of
creditors.
5.5. Termination on Change of Control. In the event of a Change of
Control of B&N resulting in control of B&N by an Interactive
Service, AOL may terminate this Agreement by providing thirty
(30) days prior written notice to B&N of such intent to
terminate. In the event of a Change of Control of AOL
resulting in control of AOL by a National Book Retailer, B&N
may terminate this Agreement by providing thirty (30) days
prior written notice to AOL of such intent to terminate.
5.6. Termination for Impressions Shortfall. If, as of the end of
any Year, the Shortfall with respect to such Year is greater
than * * * of the Annual Minimum for such Year, B&N may
terminate this Agreement by providing thirty (30) days prior
written notice to AOL of such intent to terminate, such notice
to be given within forty-five (45) days after the end of such
Year and to be effective as of the end of the first Quarter
immediately following such Year.
6. MANAGEMENT COMMITTEE/ARBITRATION. If the Parties are unable to resolve
any dispute, controversy or claim arising under this Agreement
(excluding any disputes relating to intellectual property rights or
confidentiality) (each a "Dispute"), such Dispute shall be submitted to
the Management Committee for resolution. If the Management Committee is
unable to resolve the Dispute within ten (10) business days after
submission to them, the Dispute shall be solely and finally settled by
expedited arbitration in New York, New York under the auspices of the
American Arbitration Association; provided that the Federal Rules of
Evidence shall apply in toto to any such Dispute and, subject to the
arbitrators' discretion to limit the time for and scope of discovery,
the Federal Rules of Civil Procedure shall apply with respect to
discovery; and provided further that, consistent with the parties'
desire to avoid waste of time and unnecessary expense, any Dispute
arising from any provision of the Agreement which expressly or
implicitly provides for the parties to reach mutual agreement as to
certain terms therein shall not be submitted to arbitration but shall
be resolved in good faith by the Management Committee. The arbitrator
may enter a default decision against any Party who fails to participate
in the arbitration proceedings. For purposes herein, the "Management
Committee" shall mean a committee made
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-12-
<PAGE>
up of one (1) senior executive from each of the Parties for the purpose
of resolving Disputes under this Section and generally overseeing the
relationship between the Parties contemplated by this Agreement. Any
judgment by the arbitrator may be enforced in any court of competent
jurisdiction. The arbitrator may not amend the provisions of the
Agreement without the written agreement of the Parties.
7. BROADBAND DISTRIBUTION. To the extent that the AOL Service is delivered
through a broadband distribution modem (e.g., cable modem): (i) B&N
will, at its expense, make adjustments to the design, operations and
structure of the Affiliated B&N Site necessary to provide a competitive
user experience through such distribution; (ii) the Parties shall
negotiate in good faith regarding adjustments to the terms herein in
the event such distribution involves a material change to a Party's
cost and revenue structures under its current distribution channels;
and (iii) in the event that AOL's marketing of the Affiliated B&N Site
as provided for herein would otherwise preclude AOL from distributing
the AOL Service through a third party distributor, then the Parties
shall negotiate in good faith regarding a mutually acceptable framework
designed to permit such distribution of the AOL Service.
8. STANDARD TERMS. The Standard Online Commerce Terms & Conditions set
forth on Exhibit D attached hereto and Standard Legal Terms &
Conditions set forth on Exhibit E attached hereto are each hereby made
a part of this Agreement.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the
Effective Date.
AMERICA ONLINE, INC. BARNESANDNOBLE.COM INC.
By: By:
--------------------------- ---------------------------
Print Name: Print Name:
------------------- -------------------
Title: Title:
------------------------ -----------------------
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-13-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
EXHIBIT A
Definitions
The following definitions will apply to this Agreement:
Additional B&N Channel. Any other online distribution channel through which B&N
makes available an offering comparable in nature to the Affiliated B&N Site.
Advertising Revenues. The combination of AOL Advertising Revenues and Internet
Advertising Revenues:
AOL Advertising Revenues. Aggregate amounts collected plus the fair
market value of any other compensation received (such as barter
advertising, but excluding coop advertising (which includes advertising
of B&N and B&N Products by members of B&N's "Affiliates Program", and
third party Content permitted under Section 2.1) by B&N or its agents,
as the case may be, arising from the license or sale of advertisements,
promotions, links or sponsorships ("Advertisements") to appear within
any pages of the Affiliated B&N Site which may be exclusively available
to AOL Members ("AOL-based Advertisements"), less applicable
Advertising Sales Commissions.
Internet Advertising Revenues. For each Advertisement on a page of the
Affiliated B&N Site which is not exclusively available to AOL Members,
the product of: (a) the amount collected plus the fair market value of
any other compensation received (such as barter advertising, but
excluding coop advertising (which includes advertising of B&N and B&N
Products by members of B&N's "Affiliates Program", and third party
Content permitted under Section 2.1) by B&N or its agents arising from
the license or sale of such Advertisement attributable to a given
period of time, less applicable Advertising Sales Commissions, and (b)
the quotient of (i) Impressions on the page containing such
Advertisement by AOL Members for such period of time divided by (ii)
total Impressions on the page containing such Advertisement by all
users for such period of time (the "Internet Advertising Quotient") (or
such other percentage or formula as is mutually agreed upon in writing
by the Parties). B&N will be responsible for calculating the Internet
Advertising Quotient related to Internet Advertising Revenues.
Advertising Sales Commission. (i) Actual amounts paid as commission to third
party agencies in connection with sale of the Advertisement or (ii) 15% in the
event the Party has sold the Advertisement directly and will not be deducting
any third party agency commissions.
Affiliated B&N Site. The specific area in the AOL Service to be promoted and
distributed by AOL hereunder through which B&N can market and complete
transactions regarding its Products.
AOL Look and Feel. The elements of graphics, design, organization, presentation,
layout, user interface, navigation and stylistic convention (including the
digital implementations thereof) which are generally associated with Interactive
Sites within the AOL Service or AOL.com.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-14-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
AOL Member. Any authorized user of the AOL Network, including any sub-accounts
using the AOL Network under an authorized master account.
AOL Network. (i) The AOL Service and (ii) any other product or service owned,
operated, distributed or authorized to be distributed by or through AOL or its
affiliates worldwide through which such party elects to offer Promotions.
AOL Purchaser. Any person or entity who enters the Affiliated B&N Site from the
AOL Network, including, without limitation, from any third party area therein
(to the extent entry from such third party area is traceable through both
Parties' commercially reasonable efforts), and generates Transaction Revenues
(regardless of whether such person or entity provides an e-mail address during
registration which includes a domain other than an "AOL.com" domain); provided
that any person or entity reasonably traceable as an AOL Purchaser at the time
of a subsequent purchase who has previously satisfied the definition of AOL
Purchaser will remain an AOL Purchaser, and such subsequent purchase by such
person or entity through a B&N Interactive Site will also give rise to
Transaction Revenues hereunder (and will not be conditioned on the person or
entity's satisfaction of the first clause of this definition set forth above).
AOL Service. The U.S. version of the proprietary America Online(Registered)
brand service, specifically excluding (a) AOL.com or any other AOL Interactive
Site, (b) any international versions of the AOL Service (e.g., the International
Services), (c) "Driveway," "AOL NetFind," "AOL Instant Messenger" or any
similar, separate subproduct which may be available through the U.S. version of
the America Online(Registered) brand service, (d) DCI Areas, Greenhouse
Properties or any similar "sub-service" offered by or through the U.S. version
of the America Online(Registered) brand service, (e) classifieds, yellow pages,
search and directory resources or similar directory products, (f) any other
programming or content area offered by or through the U.S. version of the
America Online(Registered) brand service over which AOL does not exercise
operational control, and (g) any third party information provider areas or
brands which may be acquired by AOL subsequent to the Effective Date
(collectively, the "Excluded Areas"), but specifically including any successor
or subsequently created affiliated service designed to, or which effectively
does, replace or displace or result in a migration of a majority of AOL Members
from, the U.S. version of the proprietary America Online(Registered) brand
service.
Books. New, paper-based, retail books, and electronically delivered versions of
such books (provided such books have ISBN numbers and are enhanced only as to
navigation as such term is currently understood), and new and used college
textbooks (in each case for so long as B&N actively markets such Product
category).
Change of Control. (a) The consummation of a reorganization, merger or
consolidation or sale or other disposition of substantially all of the assets of
a Party other than to an entity controlled by, controlling or under common
control with, such Party; or (b) the acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1933, as amended) of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under such Act) of more than 50% of either (i) the then
outstanding shares of common stock of such Party; or (ii) the combined voting
power of the then outstanding voting securities of such Party entitled to vote
generally in the election of directors.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-15-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
Confidential Information. Any information relating to or disclosed in the course
of the Agreement, which is or should be reasonably understood to be confidential
or proprietary to the disclosing Party, including, but not limited to, the
material terms of this Agreement, information about AOL Members and B&N
customers, technical processes and formulas, source codes, product designs,
sales, cost and other unpublished financial information, product and business
plans, projections, and marketing data. "Confidential Information" will not
include information (a) already lawfully known to or independently developed by
the receiving Party, (b) disclosed in published materials, (c) generally known
to the public, (d) lawfully obtained from any third party, or (e) information
required to be disclosed by law.
Content. Information, materials, features, Products, advertisements, promotions,
links, pointers and software, including any modifications, upgrades, updates,
enhancements and related documentation.
DCI Areas. The comprehensive, local, interactive programming areas created by
Digital Cities, Inc. ("DCI") and distributed under the DCI brand through
AOL-based content forms on the AOL Service (excluding the applicable Excluded
Areas).
Exclusive Service. The marketing of Books online to consumers on a retail basis.
Greenhouse Properties. Subject to Section 3.5 of the Agreement, the following
interactive content properties majority-owned by Greenhouse Networks, Inc.
("GHN") and distributed under a "Greenhouse"-affiliated brand through AOL-based
content forms on the AOL Service (excluding the applicable Excluded Areas):
Entertainment Asylum, Electra, Love@AOL, Santa's Homepage, and Extreme Fans.
Impressions. User exposure to the page containing the applicable Promotion, as
such exposure may be reasonably determined and measured by AOL in accordance
with its standard methodologies and protocols.
Interactive Service. Any entity or division that as its primary business offers
online or Internet connectivity (or any successor form of connectivity),
aggregates and/or distributes a broad selection of third-party interactive
Content, or provides interactive navigational services (including, without
limitation, any online service providers, Internet service providers, @Home or
other broadband providers, search or directory providers, "push" product
providers such as the Pointcast Network or providers of interactive navigational
environments such as Microsoft's "Active Desktop").
Interactive Site. Any interactive site or area (other than the Affiliated B&N
Site or the AOL Network) which is managed, maintained, owned or controlled by a
Party or its agents, including, by way of example and without limitation, (i) a
Party's site on the World Wide Web portion of the Internet or (ii) a channel or
area delivered through a "push" product such as the Pointcast Network or
interactive environment such as Microsoft's proposed "Active Desktop."
International Services. The versions of the AOL Service currently marketed in
the United Kingdom, France, Japan, Australia and Canada under the AOL brand by
affiliates of AOL, and any future non-U.S. online Internet services marketed
under the AOL brand by AOL or any of its affiliates added pursuant to Section
3.5 of the Agreement, in each case excluding the applicable Excluded Areas.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-16-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
Level A. Inventory within the AOL Network that would, in both Parties'
reasonable judgment, fall within the top third of advertising inventory, based
on (the "Measurement Criteria") (i) the "cpm" for such inventory published on
AOL's then-current advertising Rate Card (or, for promotional inventory which
does not have a published "cpm," an assumed "cpm" reasonably determined based on
the comparability of such inventory to inventory with published "cpm's" in AOL's
then-current advertising Rate Card), (ii) the monthly average "sellthrough" over
the prior three month period (or shorter period of availability) for such
inventory, and (iii) effectiveness with respect to bookselling. Current examples
include the following AOL Service areas: Shopping, Personal Finance, News,
Influence, and Computers.
Level B. Inventory within the AOL Network that would, in both Parties'
reasonable judgment, fall within the middle third of advertising inventory,
based on the Measurement Criteria. Current examples include the following AOL
Service areas: Greenhouse, Digital Cities, International, Secondary Channels and
Advertising.
Level C. Inventory within the AOL Network that would, in both Parties'
reasonable judgment, fall within the lowest third of advertising inventory,
based on the Measurement Criteria. Current examples include the following AOL
Service areas: People Connection, Love@AOL and Find/Search.
Licensed Content. All Content offered through the Affiliated B&N Site pursuant
to this Agreement, including any modifications, upgrades, updates, enhancements,
and related documentation.
National Book Retailer. The entities listed on Exhibit F, together with any
future third party entities that have book-retailing operations comparable in
scope and nature to, and materially competitive with, B&N.
Site Revenues. The combination of Transaction Revenues and Advertising Revenues.
Product. Any product, good or service which B&N offers, sells or licenses to AOL
Purchasers through (i) the Affiliated B&N Site (including through any
Interactive Site linked thereto) or (ii) an "offline" means (e.g., toll-free
number) for receiving orders related to specific offers within the Affiliated
B&N Site requiring purchasers to reference a specific promotional identifier or
tracking code.
Quarter. Beginning with the Effective Date, (i) for Year 1, the first two
three-month periods followed by two four-month periods, (ii) for Year 2, the
first three three-month periods followed by one four-month period, and (iii) for
each of Year 3 and Year 4, four three-month periods. For example, in Year 1, the
Quarters would be November 1, 1997 - January 31, 1998, February 1, 1998 - April
30, 1998, May 1, 1998 - August 30, 1998 and September 1, 1998 - December 31,
1998.
Transaction Revenues. Aggregate amounts paid by AOL Purchasers to B&N or its
agents in connection with the sale, licensing, distribution or provision of any
Products, excluding, in each case, (a) handling, shipping, and service charges,
(b) amounts collected for sales or use taxes or duties, and (c) credits and
chargebacks for returned or cancelled goods or services, but not excluding cost
of goods sold or any similar cost.
Year. The first four Quarters in the case of Year 1, the second four Quarters in
the case of Year 2, the third four Quarters in the case of Year 3 and the fourth
four Quarters in the case of Year 4.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-17-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
EXHIBIT B
B&N Cross-Promotion
Online
In each B&N Interactive Site (excluding those devoted to providing information
about physical Barnes & Noble store locations), B&N will include on its homepage
a "Try AOL" feature through which users can obtain promotional information about
AOL products and services and, at AOL's option, download or order AOL's
then-current version of client software for the AOL Service or software for any
other AOL products or services (e.g., AOL's Instant Messenger service).1
Offline
In instances when B&N makes promotional reference to its Interactive Sites
(e.g., in television, radio and print advertisements), B&N will include a
specific reference (verbally where possible) of the Affiliated B&N Site's
availability through America Online(Registered) which is at least equal in
prominence to references for any other B&N Interactive Site. Any listings of the
URL(s) for B&N Interactive Sites by B&N will include a listing of the AOL
"keyword" for the Affiliated B&N Site of at least equal prominence to the URL
reference.
- --------
1 AOL will pay B&N a standard bounty for each person who registers for the AOL
Network using B&N's special identifier for this promotion and subsequently pays
AOL monthly usage fees across at least two (2) billing cycles for the use of the
AOL Network. Note that if this promotion is delivered through Microsoft's Active
Desktop or any other "push" product (an "Operating System"), such feature will
link users directly to AOL software within the Operating System or direct users
without Internet access to an AOL application setup program within the Operating
System (all subject to any standard policies of the Operating System).
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-18-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
EXHIBIT C
Operating Standards
General. Subject to limitations imposed by AOL pursuant to the Agreement (such
as limiting the offering of non-Book Products or third party Content under
Section 2.1), the Affiliated B&N Site (including the Products and other Content
contained therein) will generally be in the top three (3) in the online book
retailing industry with respect to all material, published performance and
quality averages or standards. In that regard, the (i) pricing of Products, (ii)
scope and selection of Products, (iii) quality of Products, (iv) customer
service and fulfillment associated with the marketing and sale of Products, (v)
design/graphical user interface and ease-ofuse of the Affiliated B&N Site and
(vi) functionality associated with the Affiliated B&N Site, will, with respect
to each measure, be competitive in all material respects with that which is
offered by any National Book Retailer. AOL reserves the right to conduct focus
group testing to assess the competitiveness of the design, ease-of-use and
functionality of the Affiliated B&N Site.
Hosting; Capacity. B&N will provide all computer servers, routers, switches and
associated hardware in an amount reasonably necessary to meet anticipated
traffic demands, adequate power supply (including generator back-up) and ORWELL,
adequate insurance, adequate service contracts and all necessary equipment
racks, floor space, network cabling, and power distribution to support the
Affiliated B&N Site (collectively, "Hosting Infrastructure"). In the event B&N
fails to satisfy this requirement, AOL will have the right (in addition to any
other remedies available to AOL hereunder) to regulate the promotions it
provides to B&N hereunder to the extent necessary to minimize user delays until
such time as B&N corrects its infrastructure deficiencies.
Speed; Accessibility. B&N will ensure that the performance and availability of
the Affiliated B&N Site: (a) is monitored on a continuous, 24/7 basis and (b)
remains competitive in all material respects with the performance and
availability of other similar sites based on similar form technology. B&N will
use commercially reasonable efforts to ensure that: (a) the functionality and
features within the Affiliated B&N Site are optimized for the AOL client
software then in use by AOL Members; and (b) the Affiliated B&N Site is designed
and populated in a manner that minimizes delays when AOL Members attempt to
access such site.
Service Level Response. B&N agrees to use commercially reasonable efforts to
provide the following service levels in response to problems with or
improvements to the Affiliated B&N Site.
1. For material functions of software that are or have become entirely or
substantially inoperable, B&N will provide a bug fix or workaround
within two business days after the first report of such error.
2. For functions of the software that are impaired or that otherwise fail
to operate in accordance with agreed upon specifications, B&N will
provide a bug fix or workaround within three business days after the
first report of such error.
3. For errors disabling only certain non-essential functions, B&N will
provide a bug fix or workaround within sixty days after the first
report of such error.
4. For all other errors, B&N will address these requests on a case-by-case
basis as soon as reasonably feasible.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-19-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
Monitoring. AOL Network Operations Center (NOC) will work with a B&N-designated
technical contact in the event of any performance malfunction or other emergency
related to the Affiliated B&N Site and will either assist or work in parallel
with B&N's contact using B&N tools and procedures, as applicable. The Parties
will develop a process to monitor performance and member behavior with respect
to access, capacity, security and related issues both during normal operations
and during special promotions/events. The Parties will also enter into a Service
Level Agreement with AOL on customary terms and conditions which will provide
B&N with
(a) technical due diligence, and supplemental quarterly review, of the
Affiliated B&N Site, and (b) a primary AOL technical contact.
Telecommunications. The Parties agree to explore encryption methodology to
secure data communications between the Parties' data centers. The network
between the Parties will be configured such that no single component failure
will significantly impact AOL Members. The network will be sized such that no
single line runs at more than 70% average utilization for a five-minute peak in
a daily period.
Security Review. B&N and AOL will work together to perform an initial security
review of, and to perform tests of, the B&N system, network, and service
security in order to evaluate the security risks and provide recommendations to
B&N, including periodic follow-up reviews as reasonably required by B&N or AOL.
B&N will use commercially reasonable best efforts to fix any security risks or
breaches of security as may be identified by AOL's Operations Security. Specific
services to be performed on behalf of B&N by AOL's Operations Security team will
be as determined by AOL in its sole discretion. The Affiliated B&N Site will use
Internet Industry Standard encryption for private member information (i.e.
40-bit SSL encryption).
Technical Performance. B&N will perform the following technical obligations (and
any reasonable updates thereto from time to time by AOL):
1. B&N will design the Affiliated B&N Site to support the Windows versions
of the Microsoft Internet Explorer 4.0, 3.02 (32-bit) and 3.01 (16-bit)
browsers, and make commercially reasonable efforts to support all other
AOL browsers listed at: http://webmaster.info.aol.com/BrowTable.html.
2. B&N will configure the server from which it serves the site to examine
the HTTP User-Agent field in order to identify the AOL Member-Agents
listed at: http://webmaster.info.aol.com/Brow2Text.html (the "AOL
Member-Agents").
3. B&N will design its site to support HTTP 1.0 or later protocol as
defined in RFC 1945 (available at
http://ds.internic.net/rfc/rfc1945.text) and to adhere to AOL's
parameters for refreshing cached information listed at
http://webmaster.info.aol.com/CacheText.html.
4. B&N will provide continuous navigational ability for AOL Members to
return to a mutually agreed-upon point on the AOL Network from the
Affiliated B&N Site.
5. B&N will use commercially reasonable efforts to ensure that the
majority of the Affiliated B&N Site (in particular its graphics) is
designed to conform with the AOL proxy and caching system.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-20-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
EXHIBIT D
Standard Online Commerce Terms & Conditions
1. AOL Network Distribution. Except for members of B&N's "Affiliates Program,"
B&N will not authorize or permit any third party to distribute or promote the
Affiliated B&N Site through the AOL Network absent AOL's prior written approval.
Nothing in this Section 1 is intended to modify any agreement between AOL and
any member of B&N's "Affiliates Program."
2. Provision of Other Content. In the event that AOL notifies B&N that (i) as
reasonably determined by AOL, any Content within the Affiliated B&N Site
violates AOL's then-standard Terms of Service (as set forth on the America
Online(Registered) brand service), the terms of this Agreement or any other
standard, written AOL policy or (ii) AOL reasonably objects to the inclusion of
any Content within the Affiliated B&N Site (other than any specific items of
Content which may be expressly identified in this Agreement), then B&N shall
take commercially reasonable steps to block access by AOL Members to such
Content using B&N's then-available technology. In the event that B&N cannot,
through its commercially reasonable efforts, block access by AOL Members to the
Content in question, then B&N shall provide AOL prompt written notice of such
fact. AOL may then, at its option, restrict access from the AOL Network to the
Content in question using technology available to AOL. B&N will cooperate with
AOL's reasonable requests to the extent AOL elects to implement any such access
restrictions.
3. Contests. B&N will take all steps necessary to ensure that any contest,
sweepstakes or similar promotion conducted or promoted through the Affiliated
B&N Site (a "Contest") complies with all applicable federal, state and local
laws and regulations.
4. Navigational Icons. Subject to the prior consent of B&N, which consent will
not be unreasonably withheld with respect to links within the AOL Network, AOL
will be entitled to establish navigational icons, links and pointers connecting
the Affiliated B&N Site (or portions thereof) with other content areas on or
outside of the AOL Network.
5. Disclaimers. Upon AOL's request, B&N agrees to include within the Rainman
Screens a product disclaimer (the specific form and substance to be mutually
agreed upon by the Parties) indicating that transactions are solely between B&N
and AOL Members purchasing products from B&N.
6. AOL Look and Feel. B&N acknowledges and agrees that AOL will own all right,
title and interest in and to the elements of graphics, design, organization,
presentation, layout, user interface, navigation and stylistic convention
(including the digital implementations thereof) which are generally associated
with online areas contained within the AOL Network ("the AOL Look and Feel"),
subject to B&N's ownership rights in any B&N trademarks, copyrighted material or
other material in which B&N has a proprietary interest, within the Affiliated
B&N Site.
7. Management of the Affiliated B&N Site. B&N will manage, review, delete, edit,
create, update and otherwise manage all Products available on or through the
Affiliated B&N Site, in a timely and professional manner and in accordance with
the terms of this Agreement. B&N will use its best efforts to ensure that the
Affiliated B&N Site is current, accurate and well-organized at all times. B&N
warrants that the Affiliated B&N Site, including all Products and Contents
available therein: (i) will not infringe on or violate any
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-21-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
copyright, trademark, U.S. patent or any other third party right, including
without limitation, any music performance or other music-related rights; (ii)
will not violate AOL's then-applicable Terms of Service; and (iii) will not
contain any Product which violates any applicable law or regulation, including
those relating to contests, sweepstakes or similar promotions. AOL will have no
obligations with respect to the Products available on or through the Affiliated
B&N Site, including, but not limited to, any duty to review or monitor any such
Products.
8. Duty to Inform. B&N will promptly inform AOL of any information of which it
has knowledge related to the B&N Service or Affiliated B&N Site which could
reasonably lead to a claim, demand, or liability of or against AOL and/or its
affiliates by any third party.
9. Customer Service. It is the sole responsibility of B&N to provide customer
service to persons or entities purchasing Products through the AOL Network
("Customers"). B&N will bear full responsibility for all customer service,
including without limitation, order processing, billing, fulfillment, shipment,
collection and other customer service associated with any Products offered, sold
or licensed through the Affiliated B&N Site, and AOL will have no obligations
whatsoever with respect thereto. B&N will receive all emails from Customers via
a computer available to B&N's customer service staff and generally respond to
such emails within one business day of receipt. B&N will receive all orders
electronically and generally process all orders within one business day of
receipt, provided Products ordered are not advance order items. B&N will ensure
that all orders of Products are received, processed, fulfilled and delivered on
a timely and professional basis. B&N will offer AOL Members who purchase
Products through such Affiliated B&N Site a money back satisfaction guarantee.
B&N will bear all responsibility for compliance with federal, state and local
laws in the event that Products are out of stock or are no longer available at
the time an order is received. B&N will also comply with the requirements of any
federal, state or local consumer protection or disclosure law. Payment for
Products will be collected by B&N directly from customers. B&N's order
fulfillment operation will be subject to AOL's reasonable review.
10. Production Work. In the event that B&N requests AOL's production assistance
in connection with (i) ongoing programming and maintenance related to the
Affiliated B&N Site, (ii) a redesign of or addition to the Affiliated B&N Site
(e.g., a change to an existing screen format or construction of a new custom
form), (iii) production to modify work performed by a third party provider or
(iv) any other type of production work, B&N will work with AOL to develop a
detailed production plan for the requested production assistance (the
"Production Plan"). Following receipt of the Production Plan, AOL will notify
B&N of (i) AOL's availability to perform the requested production work, (ii) the
proposed fee or fee structure for the requested production and maintenance work
and (iii) the estimated development schedule for such work. To the extent the
Parties reach agreement regarding implementation of an agreed-upon Production
Plan, such agreement will be reflected in a separate work order signed by the
Parties. To the extent B&N elects to retain a third party provider to perform
any such production work, work produced by such third party provider must
generally conform to AOL's production Standards & Practices (a copy of which
will be supplied by AOL to B&N upon request). The specific production resources
which AOL allocates to any production work to be performed on behalf of B&N will
be as determined by AOL in its sole discretion.
11. Overhead Accounts. AOL will grant B&N a reasonable number of overhead
accounts on the AOL Network. B&N will be responsible for the actions taken under
or through its overhead accounts, which actions are subject to AOL's applicable
Terms of Service and for any surcharges, including, without limitation, all
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-22-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
premium charges, transaction charges, and any applicable communication
surcharges incurred by any overhead Account issued to B&N, but B&N will not be
liable for charges incurred by any overhead account relating to AOL's standard
monthly usage fees and standard hourly charges, which charges AOL will bear.
Upon the termination of this Agreement, all overhead accounts, related screen
names and any associated usage credits or similar rights, will automatically
terminate. AOL will have no liability for loss of any data or content related to
the proper termination of any overhead account.
12. Merchant Certification Program. If B&N elects to participate in any
generally applicable "Certified Merchant" program operated by AOL or its
authorized agents or contractors, B&N will need to, on an ongoing basis, meet
certain reasonable standards relating to provision of electronic commerce
through the AOL Network and B&N may also be required to pay certain reasonable
certification fees to the applicable entity operating the program.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-23-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
EXHIBIT E
Standard Legal Terms & Conditions
1. Promotional Materials/Press Releases. Each Party will submit to the other
Party, for its prior written approval, which will not be unreasonably withheld
or delayed, any marketing, advertising, press releases, and all other
promotional materials related to the Affiliated B&N Site and/or referencing the
other Party and/or its trade names, trademarks, logos and service marks (the
"Materials"); provided, however, that either Party's use of unaltered screen
shots of the Affiliated B&N Site for promotional purposes will not require the
approval of the other Party so long as the AOL Network is clearly identified as
the source of such screen shots. Each Party will solicit and reasonably consider
the views of the other Party in designing and implementing such Materials. Once
approved, the Materials may be used by a Party and its affiliates for the
purpose of promoting the Affiliated B&N Site and the content contained therein
and reused for such purpose until such approval is withdrawn with reasonable
prior notice. In the event such approval is withdrawn, reasonable quantities of
existing inventories of Materials may be depleted. Notwithstanding the
foregoing, either Party may issue press releases and other disclosures as
required by law or as reasonably advised by legal counsel without the consent of
the other Party and in such event, prompt notice thereof will be provided to the
other Party.
2. License. B&N hereby grants AOL a non-exclusive worldwide license to market,
license, distribute, reproduce, display, perform, transmit and promote the
Affiliated B&N Site and, for the benefit of the Affiliated B&N Site, the
Products contained therein (or any portion thereof) through such areas or
features of the AOL Network as AOL deems appropriate. AOL Members will have the
right to access and use the Affiliated B&N Site. Subject to the foregoing
license, B&N retains all right, title and interest in the Affiliated B&N Site
and the Contents thereof.
3. Trademark License. In designing and implementing the Materials and subject to
the other provisions contained herein, including without limitation Section 1
above, (a) B&N will be entitled to use the following trade names, trademarks,
and service marks of AOL (collectively, the "AOL Marks"): the "America
Online(Registered)" brand service, "AOL(Trademark)" service/software and AOL's
triangle logo; and AOL and its Affiliates will be entitled to use the "Barnes &
Noble(Registered)" trademark (the "B&N Mark, and together with the AOL Marks,
the "Marks"); provided that each Party: (i) does not create a unitary composite
mark involving a Mark of the other Party without the prior written approval of
such other Party; and (ii) displays symbols and notices clearly and sufficiently
indicating the trademark status and ownership of the other Party's Marks as
instructed by the other Party.
4. Ownership of Trademarks. Each Party acknowledges the ownership of the other
Party in the Marks of the other Party and agrees that all use of the other
Party's Marks will inure to the benefit, and be on behalf, of the other Party.
Each Party acknowledges that its utilization of the other Party's Marks will not
create in it, nor will it represent it has, any right, title, or interest in or
to such Marks other than the licenses expressly granted herein. Each Party
agrees not to do anything contesting or impairing the trademark rights of the
other Party.
5. Quality Standards. Each Party agrees that the nature and quality of its
products and services supplied in connection with the other Party's Marks will
conform to quality standards set by the other Party. Each Party agrees to supply
the
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-24-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
other Party, upon request, with a reasonable number of samples of any
Materials publicly disseminated by such Party which utilize the other Party's
Marks. Each Party will comply with all applicable laws, regulations, and customs
and obtain any required government approvals pertaining to use of the other
Party's marks.
6. Infringement Proceedings. Each Party agrees to promptly notify the other
Party of any unauthorized use of the other Party's Marks of which it has actual
knowledge. Each Party will have the sole right and discretion to bring
proceedings alleging infringement of its Marks or unfair competition related
thereto; provided, however, that each Party agrees to provide the other Party
with its reasonable cooperation and assistance with respect to any such
infringement proceedings.
7. Representations and Warranties. Each Party represents and warrants to the
other Party that: (i) such Party has the full corporate right, power and
authority to enter into this Agreement and to perform the acts required of it
hereunder; (ii) the execution of this Agreement by such Party, and the
performance by such Party of its obligations and duties hereunder, do not and
will not violate any agreement to which such Party is a party or by which it is
otherwise bound; (iii) when executed and delivered by such Party, this Agreement
will constitute the legal, valid and binding obligation of such Party,
enforceable against such Party in accordance with its terms; and (iv) such Party
acknowledges that the other Party makes no representations, warranties or
agreements related to the subject matter hereof that are not expressly provided
for in this Agreement. Each Party further represents and warrants to the other
Party that it is the sole and exclusive owner of the B&N Mark or the AOL Marks,
as the case may be, and/or has the right and power to license to the other Party
the B&N Mark or the AOL Marks, as the case may be, and such license does not and
will not (i) breach, conflict with or constitute a default under any agreement
or other instrument applicable to such Party or binding upon its assets or
properties or (ii) infringe upon any trademark, trade name, service mark,
copyright or other proprietary right of any other person or entity.
8. Confidentiality. Each Party acknowledges that Confidential Information may be
disclosed to the other Party during the course of this Agreement. Each Party
agrees that it will take reasonable steps, at least substantially equivalent to
the steps it takes to protect its own proprietary information, during the term
of this Agreement, and for a period of five (5) years following expiration or
termination of this Agreement, to prevent the duplication or disclosure of
Confidential Information of the other Party, other than by or to its employees
or agents who must have access to such Confidential Information to perform such
Party's obligations hereunder. Notwithstanding the foregoing, either Party may
issue a press release or other disclosure containing Confidential Information
without the consent of the other Party, to the extent such disclosure is
required by law, rule, regulation or government or court order. In such event,
the disclosing Party will provide at least five (5) business days prior written
notice of such proposed disclosure to the other Party. Further, in the event
such disclosure is required of either Party under the laws, rules or regulations
of the Securities and Exchange Commission or any other applicable governing
body, such Party will (i) redact mutually agreed-upon portions of this Agreement
to the fullest extent permitted under applicable laws, rules and regulations and
(ii) submit a request to such governing body that such portions and other
provisions of this Agreement receive confidential treatment under the laws,
rules and regulations of the Securities and Exchange Commission or otherwise be
held in the strictest confidence to the fullest extent permitted under the laws,
rules or regulations of any other applicable governing body.
9. Limitation of Liability; Disclaimer; Indemnification.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-25-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
9.1. Liability. UNDER NO CIRCUMSTANCES WILL EITHER PARTY BE LIABLE TO THE OTHER
PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY DAMAGES
(EVEN IF THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES),
ARISING FROM BREACH OF THE AGREEMENT, THE SALE OF PRODUCTS, THE USE OR INABILITY
TO USE THE AOL NETWORK, THE AOL SERVICE, AOL.COM OR THE AFFILIATED B&N SITE, OR
ARISING FROM ANY OTHER PROVISION OF THIS AGREEMENT, SUCH AS, BUT NOT LIMITED TO,
LOSS OF REVENUE OR ANTICIPATED PROFITS OR LOST BUSINESS ("COLLECTIVELY,
"DISCLAIMED DAMAGES"); PROVIDED THAT EACH PARTY WILL REMAIN LIABLE TO THE OTHER
PARTY TO THE EXTENT ANY DISCLAIMED DAMAGES ARE CLAIMED BY A THIRD PARTY AND ARE
SUBJECT TO INDEMNIFICATION PURSUANT TO SECTION 9.3. EXCEPT AS PROVIDED IN
SECTION 9.3, NEITHER PARTY WILL BE LIABLE TO THE OTHER PARTY FOR MORE THAN
$40,000,000; PROVIDED THAT EACH PARTY WILL REMAIN LIABLE FOR THE AGGREGATE
AMOUNT OF ANY PAYMENT OBLIGATIONS OWED TO THE OTHER PARTY PURSUANT TO SECTION 4.
9.2. No Additional Warranties. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT,
NEITHER PARTY MAKES ANY, AND EACH PARTY HEREBY SPECIFICALLY DISCLAIMS ANY
REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE AOL NETWORK,
THE AOL SERVICE, AOL.COM OR THE AFFILIATED B&N SITE, INCLUDING ANY IMPLIED
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND IMPLIED
WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE. WITHOUT
LIMITING THE GENERALITY OF THE FOREGOING, AOL SPECIFICALLY DISCLAIMS ANY
WARRANTY REGARDING THE PROFITABILITY OF THE AFFILIATED B&N SITE.
9.3. Indemnity. Either Party will defend, indemnify, save and hold harmless the
other Party and the officers, directors, agents, affiliates, distributors,
franchisees and employees of the other Party from any and all third party
claims, demands, liabilities, costs or expenses, including reasonable attorneys'
fees ("Liabilities"), resulting from the indemnifying Party's material breach of
any duty, representation, or warranty of this Agreement, except where
Liabilities result from the gross negligence or knowing and willful misconduct
of the other Party.
9.4. Claims. Each Party agrees to (i) promptly notify the other Party in writing
of any indemnifiable claim and give the other Party the opportunity to defend or
negotiate a settlement of any such claim at such other Party's expense, and (ii)
cooperate fully with the other Party, at that other Party's expense, in
defending or settling such claim. AOL reserves the right, at its own expense, to
assume the exclusive defense and control of any matter otherwise subject to
indemnification by B&N hereunder, and in such event, B&N will have no further
obligation to provide indemnification for such matter hereunder.
9.5. Acknowledgment. AOL and B&N each acknowledges that the provisions of this
Agreement were negotiated to reflect an informed, voluntary allocation between
them of all risks (both known and unknown) associated with the transactions
contemplated hereunder. The limitations and disclaimers related to warranties
and liability contained in this Agreement are intended to limit the
circumstances and extent of liability. The provisions of this Section 9 will be
enforceable independent of and severable from any other enforceable or
unenforceable provision of this Agreement.
10. Solicitation of AOL Members. During the term of this Agreement, and for the
two-year
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-26-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
period following the expiration or termination of this Agreement, neither B&N
nor its agents will use the AOL Network to (i) solicit, or participate in the
solicitation of AOL Members when that solicitation is for the benefit of any
entity (including B&N) which could reasonably be construed to be or become in
competition with AOL or (ii) promote any services which could reasonably be
construed to be in competition with AOL including, but not limited to, services
available through the Internet. In addition, B&N may not send AOL Members e-mail
communications promoting B&N's Products through the AOL Network without a "Prior
Business Relationship." For purposes of this Agreement, a "Prior Business
Relationship" will mean that the AOL User has either (i) engaged in a
transaction with B&N through the AOL Network or (ii) voluntarily provided
information to B&N through a contest, registration, or other communication,
which included notice to the AOL User that the information provided by the AOL
User could result in an e-mail being sent to that AOL User by B&N or its agents.
A Prior Business Relationship does not exist by virtue of an AOL User's visit to
an Affiliated B&N Site (absent the elements above). More generally, B&N will be
subject to any standard policies regarding e-mail distribution through the AOL
Network which AOL may implement.
11. Collection of User Information. B&N is prohibited from collecting AOL Member
screennames from public or private areas of the AOL Network, except as
specifically provided below. B&N will ensure that any survey, questionnaire or
other means of collecting AOL Member screennames or AOL User email addresses,
names, addresses or other identifying information ("User Information"),
including, without limitation, requests directed to specific AOL Member
screennames and automated methods of collecting screennames (an "Information
Request") complies with (i) all applicable laws and regulations and (ii) any
privacy policies which have been issued by AOL in writing during the Term (the
"AOL Privacy Policies"). Each Information Request will clearly and conspicuously
specify to the AOL Members at issue the purpose for which User Information
collected through the Information Request will be used (the "Specified
Purpose").
12. Use of User Information. B&N will restrict use of the User Information
collected through an Information Request to the Specified Purpose. In no event
will B&N (i) provide User Information to any third party (except to the extent
specifically (a) permitted under the AOL Privacy Policies or (b) authorized by
the members in question), (ii) rent, sell or barter User Information, (iii)
identify, promote or otherwise disclose such User Information in a manner that
identifies AOL Members as end-users of the AOL Service, AOL.com or the AOL
Network or (iv) otherwise use any User Information in contravention of Section
10 above. Notwithstanding the foregoing, in the case of AOL Members who purchase
Products from B&N, B&N will be entitled to use User Information from such AOL
Members as part of B&N's aggregate list of Customers; provided that B&N's use
does not in any way identify, promote or otherwise disclose such User
Information in a manner that identifies AOL Members as end-users of the AOL
Service, AOL.com or the AOL Network. In addition, B&N will not use any User
Information for any purpose (including any Specified Purpose) not directly
related to the business purpose of the Affiliated B&N Site.
13. Excuse. Neither Party will be liable for, or be considered in breach of or
default under this Agreement on account of, any delay or failure to perform as
required by this Agreement as a result of any causes or conditions which are
beyond such Party's reasonable control and which such Party is unable to
overcome by the exercise of reasonable diligence.
14. Independent Contractors. The Parties to this Agreement are independent
contractors. Neither Party is an agent, representative or partner of the other
Party. Neither Party will have
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-27-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
any right, power or authority to enter into any agreement for or on behalf of,
or incur any obligation or liability of, or to otherwise bind, the other Party.
This Agreement will not be interpreted or construed to create an association,
agency, joint venture or partnership between the Parties or to impose any
liability attributable to such a relationship upon either Party.
15. Notice. Any notice, approval, request, authorization, direction or other
communication under this Agreement will be given in writing and will be deemed
to have been delivered and given for all purposes on the delivery date if
delivered by electronic mail on the AOL Network or (i) on the delivery date if
delivered personally to the Party to whom the same is directed or by a
commercial overnight carrier, with written verification of receipt, or (ii) five
business days after the mailing date, whether or not actually received, if sent
by U.S. mail, return receipt requested, postage and charges prepaid, or any
other means of rapid mail delivery for which a receipt is available, (a) if to
AOL, to David Colburn with a copy to Adam Lehman, each at the address of AOL set
forth in the first paragraph of this Agreement, and (b) if to B&N, to Carl
Rosendorf at the address of AOL set forth in the first paragraph of this
Agreement, with a copy to Jay Dorman at Robinson Silverman Pearce Aronsohn &
Berman LLP, 1290 Avenue of the Americas, New York, New York 10104.
16. No Waiver. The failure of either Party to insist upon or enforce strict
performance by the other Party of any provision of this Agreement or to exercise
any right under this Agreement will not be construed as a waiver or
relinquishment to any extent of such Party's right to assert or rely upon any
such provision or right in that or any other instance; rather, the same will be
and remain in full force and effect.
17. Return of Information. Upon the expiration or termination of this Agreement,
each Party will, upon the written request of the other Party, return or destroy
(at the option of the Party receiving the request) all confidential information,
documents, manuals and other confidential materials specified by the other
Party.
18. Survival. Sections 8 through 12 of this Exhibit will survive the completion,
expiration, termination or cancellation of this Agreement.
19. Entire Agreement. This Agreement sets forth the entire agreement and
supersedes any and all prior agreements of the Parties with respect to the
transactions set forth herein, including without limitation the Interactive
Marketing Agreement between the Parties dated as of January 24, 1997, except for
advertising ordered prior to the execution of the Agreement plus approximately
$44,000 of additional advertising to be ordered under Section 3.3 of the prior
agreement. Neither Party will be bound by, and each Party specifically objects
to, any term, condition or other provision which is different from or in
addition to the provisions of this Agreement (whether or not it would materially
alter this Agreement) and which is proffered by the other Party in any
correspondence or other document, unless the Party to be bound thereby
specifically agrees to such provision in writing.
20. Amendment. No change, amendment or modification of any provision of this
Agreement will be valid unless set forth in a written instrument signed by the
Party subject to enforcement of such amendment.
21. Further Assurances. Each Party will take such action (including, but not
limited to, the execution, acknowledgment and delivery of documents) as may
reasonably be requested by any other Party for the implementation or continuing
performance of this Agreement.
22. Assignment. Neither Party will assign this Agreement or any right, interest
or benefit under this Agreement without the prior written consent of the other
Party, except to an entity controlled by, controlling or under common control
with, the assigning Party. Subject to the foregoing, this
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-28-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
Agreement will be fully binding upon, inure to the benefit of and be enforceable
by the Parties hereto and their respective successors and assigns.
23. Construction; Severability. In the event that any provision of this
Agreement conflicts with the law under which this Agreement is to be construed
or if any such provision is held invalid by a court with jurisdiction over the
Parties to this Agreement, (i) such provision will be deemed to be restated to
reflect as nearly as possible the original intentions of the Parties in
accordance with applicable law, and (ii) the remaining terms, provisions,
covenants and restrictions of this Agreement will remain in full force and
effect.
24. Remedies. Except where otherwise specified, the rights and remedies granted
to a Party under this Agreement are cumulative and in addition to, and not in
lieu of, any other rights or remedies which the Party may possess at law or in
equity; provided that, in connection with any dispute hereunder, B&N will be not
entitled to offset any disputed amounts that it claims to be due and payable
from AOL against amounts otherwise payable by B&N to AOL.
25. Applicable Law; Jurisdiction. This Agreement will be interpreted, construed
and enforced in all respects in accordance with the laws of the Commonwealth of
Virginia except for its conflicts of laws principles.
26. Export Controls. Both Parties will adhere to all applicable laws,
regulations and rules relating to the export of technical data and will not
export or re-export any technical data, any products received from the other
Party or the direct product of such technical data to any proscribed country
listed in such applicable laws, regulations and rules unless properly
authorized.
27. Headings. The captions and headings used in this Agreement are inserted for
convenience only and will not affect the meaning or interpretation of this
Agreement.
28. Counterparts. This Agreement may be executed in counterparts, each of which
will be deemed an original and all of which together will constitute one and the
same document.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-29-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
EXHIBIT F
National Book Retailers
Borders
Waldenbooks
Crown Books
Books-a-Million
Amazon.com
Books.com
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-30-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
EXHIBIT G
Carriage Plan and Promotion Examples
See attached items.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-31-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
Microsoft Confidential
ECOMMERCE MERCHANT
AGREEMENT FOR The Plaza on MSN
P R E A M B L E
The Microsoft Network, L.L.C., a Delaware limited liability company ("MSP"), by
and through its manager, Microsoft Corporation ("Microsoft"), agrees with the
undersigned ("Merchant") that the Merchant specified in the Schedule will be
offered a link mall service to "Merchant Site", www.barnesandnoble.com, as part
of The Microsoft Network pursuant to the General Terms and all Exhibits and
Riders attached hereto. Terms not defined shall have the meanings ascribed to
them in the General Terms attached hereto.
S C H E D U L E
Merchant Name: BarnesandNoble.com Inc.
Entity Type (if incorporated, state place of incorporation): Delaware
Principal Place of Business (list state if in U.S.A.; list country if outside
U.S.A.):
Merchant Address
122 Fifth Avenue, New York, NY 10011
Address for Notices:
(122 Fifth Avenue, NY 10011
Phone: Attention: Carl Rosendoft, Vice President, New Business Development
Facsimile Number: 212-727-7343
Email Address ([email protected])
MSP SERVICES:
MSP will provide live link(s) from the Microsoft Web Site(s) as designated by
MSP in its sole discretion, to The Plaza on MSN on MSN's Premier Service. From
The Plaza on MSN on MSN's Premier Service, MSP will provide a link directly to
the Merchant Web Site.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
Microsoft Confidential
Merchant SERVICES:
Merchants co-branded URL: http://www.barnesandnoblt.com
Merchants e-mail address for Customer Service to the co-branded site: (your
customer service e-mail address here)
Merchant.
Merchant shall deliver via e-mail to MSP within seven (7) days after the last
day of each week an accounting setting forth the amount of Gross Revenue,
the basis of the calculation thereof, the amount of commission payable, if
any, for such period and sales/title tracking information (which shall
include a tracking mechanism that determines through which Microsoft Web
Site a Microsoft customers has obtained access to the Merchant site, in
addition to Monthly User information which must include at a minimum:
o Traffic by referring web link
o Number of page views
o Number of unique users)
In addition, Merchant will supply MSP with a password, beginning December 1,
1997, which will enable MSP to enter a password protected area on the Merchant
Site and obtain MSP's accounting statistics as of a recent date.
In addition, within thirty (30) days after the end of each three-month
anniversary of the date of execution of this Agreement, Merchant will provide
MSP with a statement of activity containing information similar in nature to
that described in the clause above.
Merchant will maintain sole responsibility for all costs for Merchant Site
development, management, tracking, support, and maintenance. Merchant will
ensure that the site content is refreshed as appropriate on a regular basis.
Merchant will make every reasonable effort to ensure that site is "live" for
all customers. MSP will maintain sole responsibility for all costs for The
Plaza on MSN's Premier Service, including development, management, support, and
maintenance.
Merchant is solely responsible for product quality, product availability,
product fulfillment and customer service for all Products and or services
offered and/or sold on the Merchant Site. MSP acts as a link operator only, and
will provide marketing support only as noted in this contract under Special
Provisions.
Fees:
Guaranteed Fee: During the Term Merchant shall pay * * * to MSP no later than
the 5th day of each month. Merchant is responsible for ensuring that all
payments are made on a timely basis, MSP will not invoice Merchant for any
amounts owing pursuant to this Agreement
Commission: In addition to the Guaranteed Fee, Merchant shall pay MSP * * * of
Merchant's Gross Revenue less actual returns and actual bad debt incurred
during the applicable period. Each * * * period (based on the anniversary date
of execution of this Agreement) Merchant shall be entitled to * * * (or the
equivalent of * * * ) of the Guaranteed Fee applicable to * * * period from any
Commissions owing to MSP for the applicable * * * period. The Commission shall
be payable monthly to MSP no later than 30 days after each three-month period
on the anniversary of signing this Agreement for all transactions occurring
during the previous quarter. All payments of the Fees must be in a form
acceptable to MSP, in its sole discretion, and addressed to Deborah Levinger,
c/o Microsoft Corporation, One Microsoft Way, Redmond, WA 98052
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
Microsoft Confidential
Term end Date: Renewal Options (if any): Both parties
June 30, 1998 reserve the right to negotiate contract
renewal. Either party may elect to
terminate this Agreement in writing at
Term Start Date: any time, but not less than 60 days'
15 October 1997 notice to the other party.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-3-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
Microsoft Confidential
Special Provisions (if any):
Merchant will provide the following:
o Electronic mail capabilities between the customer and Merchant and customer
service standards & practices at a level at least as high as that of the
electronic commerce industry to all customers.
o Information regarding Merchant promotions, upon MSP's request for such
information and Merchant's agreement to so deliver, to be used by MSP, in its
sole discretion, in the pre-programed Daily Specials area of The Plaza on MSN on
MSN's Premier Service, as per specifications provided by MSP. Promotional
activities are subject to change based on business and technology requirements
as seen by MSP; provided that no changes shall be made to the promotional
information provided by Merchant to MSP, without Merchant's prior approval,
which shall not be unreasonably withheld. MSP makes no claims or guarantees of
level of promotional activities.
o Merchant agrees to comply with MSP Logo Policies as detailed in Exhibit A.
o The Plaza on MSN on MSN's Premier Service's "GO BACK to The Plaza" button or
similar reverse link agreed upon by both parties - to be used for linking from
the Merchant site back to The Plaza on MSN on MSN Premier Service at
www.plaza.msn.com. This link will be available on Merchant site no later than
January 1, 1998.
o Provide MSP with technical specification for reverse link as referenced above,
as well as insertion of reverse links on every page of Merchant site if Customer
has come from any Microsoft Site.
MSP will provide the following:
o The Plaza on MSN on MSN's Premier Service's "GO BACK to The Plaza" button or
similar reverse link agreed upon by both parties - to be used for linking from
the Merchant site back to The Plaza on MSN on MSN Premier Service at
www.plaza.msn.com. This will be determined by MSP in its sole discretion, and
will be available on Merchant site no later than January 1,1998.
o Merchandising calendar and plan based on retail holidays, for the purpose of
product promotional planning with Merchant.
o Reasonable efforts to ensure that The Plaza on MSN on MSN's Premier Service
tenants are of high quality and stature in their respective industries.
o MSP Policies as Exhibit A.
o Provided that Merchant's Site is fully functional and all other aspects
necessary to link between The Plaza on MSN on MSN's Premier Service and such
Merchant Site are completed no later than 15 October 1997 then MSP shall ensure
that no bookseller-only merchant shall be included in The Plaza on MSN on MSN's
Premier Service during the Term. General "bookseller" shall mean any bookseller
excluding specialty booksellers and/or Merchants whose primary business is not
selling books, but may sell books as a part of their total product offering.
o Merchant's position and treatment (logo, name, or button, as appropriate) on
The Plaza on MSN on MSN's Premier Service home page will be in a prominent
position, continuously and throughout the term of this Agreement.
MSP disclaims any implied warrants, promises, or guarantees of site traffic to
Merchants, number of unique users/consumers, Merchant product promotion
rotation, or industry-specific exclusivity. Merchant disclaims any implied
warranties, promises, or guarantees of commissions (other than the Guaranteed
Fee) payable to MSP hereunder.
E N D O F S C H E D U L E
THIS AGREEMENT CONSISTS OF THE PREAMBLE, THE SCHEDULE, THE GENERAL TERMS, AND
ALL ATTACHED RIDERS AND EXHIBITS THAT ARE SIGNED ON BEHALF OF BOTH MSP AND
Merchant.
<TABLE>
<S> <C>
THE MICROSOFT NETWORK, L.L.C. ("MSP"), BarnesandNoble.com Inc.
by and through its manger, ("Merchant")
MICROSOFT CORPORATION
("Microsoft")
By (signature) /s/D. Levinger By (signature) /s/Carl S. Rosendorf, VP
---------------------- ------------------------
Name D. Levinger Name Carl Rosendorf
------------------------------ --------------------------------
Title Business Manager, The Plaza Title Vice President-New Business Development
------------------------------ ---------------------------------------
Date: 10/27/97 Date:
</TABLE>
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-4-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
Microsoft Confidential
GENERAL TERMS
1. Definitions. As used herein, the following terms are defined and used in this
Agreement as follows:
1.1 Affiliate. When used in reference to either party, any company or entity
which controls, or is controlled by, or is under common control with such party.
1.2 Gross Revenue. The aggregate of all kinds of consideration, including,
but not limited to, cash, barter and any other in-kind consideration, received
by Merchant or any other party on behalf of Merchant for purchases initiated at
The Plaza on MSN on MSN's Premier Service, any Microsoft Web Site, the MSN
Transition Page or the Mirrored Web Site.
1.3 Microsoft Web Sites. Web sites operated by or affiliated with MSP which
may include, at MSP's sole discretion for the purposes hereof, MSN Premier
Service, MSNBC, msn.com, home.microsoft.com and/or other services as they become
available.
1.4 MSN. The Microsoft Network online service, operating on open Microsoft
and/or internet-based platforms, including, without limitation, (a) www.msn.com
and related Web Sites (which may include those managed by third parties and
those based overseas by MSP or Microsoft), and (b) MSN-branded Web pages that
are part of a third party's Web Site.
1.5 Plaza Tenant. Each Web Site operator participating in The Plaza on MSN on
MSN's Premier Service.
1.6 The Plaza on MSN on MSN's Premier Service. The MSN service referred to as
"The Plaza on MSN on MSN's Premier Service on MSN" or by such other name as MSP
may determine in its sole discretion (as solely branded by MSP or co-branded
with its sponsors) in which goods and services from Plaza Tenants are offered
for purchase.
1.7 Product. Any product or service sold or otherwise provided by Merchant to
a customer or internet user during access by such customer or internet user to
the Merchant Site by means of The Plaza on MSN on MSN's Premier Service, or any
other Microsoft Web Site.
1.8 Web (and related terms). That part of the Internet known as the World
Wide Web, containing, inter alia, pages written in hypertext markup language
(HTML). A "Web page" is a document on the Web which has a distinct URL address.
A "Web Site" is a collection of inter-related Web pages.
1.9 Net Sales. Gross Revenue less amounts collected by Merchant for sales
taxes, duties, gift wrapping, shipping, handling, and similar charges, amounts
due to credit card fraud and bad debt and credits for returned goods. All
available books on the Merchant Site will be included in the computation of Net
Sales, regardless of whether the book is a Fast Delivery or a Special Order
item.
2. Term. Subject to extension (if an option or renewal period is specified in
the Schedule), the period during which transactions on the Merchant Site will be
offered as part of The Plaza on MSN on MSN's Premier Service ("Term") begins on
the Start Date and ends on the End Date, as specified in the Schedule. Either
party may elect to terminate this Agreement at any time, upon not less than 60
days' notice to the other party.
3. Merchant Obligations.
3.1 Generally. Merchant will enable access to the Merchant Site throughout
the Term. The Merchant will monitor all sales and other activity in the Merchant
Site to verify ongoing operation of the Merchant Site and its capacity to track
customers and/or Internet users accessing the Merchant Site by means of The
Plaza on MSN on MSN's Premier Service. Merchant will ensure that customers and
Internet users are timely advised of their purchases and will, for audit
purposes only, provide MSP with electronic copies.
3.2 No Exclusivity. The Merchant Site is not exclusive to MSN; that is, at
all times during the Term, the Merchant Site may offer any Internet users the
right and/or ability to purchase Products at the Merchant Site by any means.
4. MSP Obligations.
4.1 Operation of The Plaza on MSN on MSN's Premier Service. Throughout the
Term, MSP will operate The Plaza on MSN on MSN's Premier Service in accordance
with the terms of this Agreement. The quantity, identity and mix of Plaza
Tenants shall be determined by MSP in its sole discretion.
5. Promotion and Marketing.
5.1 Generally. MSP and Merchant will cooperate in promotional, advertising
and marketing activities in connection with the availability of the Merchant
Site as the parties may mutually deem advisable. All such activities as
undertaken by either party will comply with applicable laws and regulations.
5.2 Use of Materials. (a) Subject to Merchant's prior written approval, which
shall not be unreasonably withheld, MSP may use the name and logo of the
Merchant Site (as provided in Section 15) in promoting, advertising and
marketing The Plaza on MSN on MSN's Premier Service, provided that references to
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-5-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
Microsoft Confidential
Merchant and/or the Merchant Site and use of Merchant and/or Merchant Site logos
will be in compliance with Section 15 and be less prominent than references to
The Plaza on MSN on MSN's Premier Service and/or use of MSN logos or screen
shots. Provided that Merchant provides MSP with not less than three current,
preapproved screen shots of the Merchant Site, MSP's use of other screen shots
from the Merchant Site in MSN marketing for The Plaza on MSN on MSN's Premier
Service will be subject to Merchant's prior written approval. All requests for
Merchant's approval shall be deemed approved if Merchant fails to respond to any
request by MSP under this paragraph within 5 business days. Merchant will use
its best efforts to use the materials in accordance with MSP's policies. MSP
will provide Merchant with such policies as they are amended from time to time.
All approvals expire upon expiration of this contract.
(b) Subject to MSP's written approval, which will not be unreasonably withheld,
Merchant may use MSN's name and logo, and MSN-furnished marketing materials,
provided that all such use will be in compliance with Section 15 and MSP
policies. Merchant agrees to use MSN-furnished marketing materials solely for
the purpose of promoting, advertising and marketing the availability of the
Merchant Site on The Plaza on MSN on MSN's Premier Service. Merchant may not use
screen shots of MSN areas or sites outside the Merchant Site for any purpose.
All requests for MSP's approval shall be deemed approved if MSP fails to respond
to any request by Merchant under this paragraph within 5 business days. Merchant
will use its best efforts to use the materials in accordance with MSP's
policies; provided that MSP furnishes to Merchant such policies as they are
amended from time to time. All approvals expire upon expiration of this
contract.
6. Sponsorship and Advertising. MSP may include paid advertising, consisting of
Web link banners, in The Plaza on MSN on MSN's Premier Service. MSP may also
designate sponsors of all or any portion of The Plaza on MSN on MSN's Premier
Service as it deems advisable.
7. Product Transactions.
7.1 MSP will be entitled to the fee(s) specified in the Schedule.
7.2 Statements. Refer to applicable terms of Schedule.
(a) MSP may, at its expense, cause an audit to be made of the applicable
records in order to verify statements issued by Merchant. Such audit shall be
conducted upon no less than 5 days advance notice to Merchant during regular
business hours at Merchant's offices and in such a manner as not to interfere
with Merchant's normal business activities. Such audits shall be made no more
often than once every twelve (12) months during the Term and for a period of two
(2) years following the end of the Term. If an audit reveals that Merchant has
under-paid MSP by ten percent (10%) or more of the amounts due for any audited
period of time, Merchant agrees, in addition to recomputing and making immediate
payment to MSP of all amounts due, plus interest at the highest prime rate set
forth from time to time in the Wall Street Journal in the United States plus two
percentage points (or, if less, at a rate equal to the highest rate permitted
under applicable law), based on the actual and true amounts due and owing, to
pay MSP all reasonable costs and expenses incurred by MSP in conducting such
audit, including, but not limited to, any amounts paid to any auditor or
attorney. MSP shall have the right to audit a Merchant's site for accuracy of
site traffic and customer transactions.
7.3 Taxes. Merchant acknowledges and agrees that MSP has no responsibility
with respect to tax billing or collecting relating to sales made and/or charges
assessed to customers or other internet users accessing the Merchant Site by
means of The Plaza on MSN on MSN's Premier Service or any other Microsoft Web
Site.
8. Hosting. Merchant is solely responsible for hosting of the Merchant Site
(including the MSN Transition Page) and MSP is solely responsible for hosting of
all programs, content, pages and materials comprising The Plaza on MSN on MSN's
Premier Service.
9. Tracking.
9.1 Generally. Merchant agrees to (a) use usage tracking tools that can
provide MSP the specified tracking information and resources to enable
assessment and verification of data relating to Merchant Site usage by means of
The Plaza on MSN on MSN's Premier Service, (b) provide access to MSP to log
files relating to Merchant Site usage by means of The Plaza on MSN on MSN's
Premier Service, delivered and formatted in a manner reasonably specified by
MSP, and (c) follow such other directions and procedures as are reasonably
determined to be necessary by MSP to enable resolution of customer and/or
internet user support issues relating to usage of the Merchant Site by means of
The Plaza on MSN on MSN's Premier Service.
10. Confidentiality. Neither party will use or disclose to any third party, any
confidential information of the non-disclosing party. As used herein, the term
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-6-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
Microsoft Confidential
"confidential information" means all non-public information that a party
designates as being confidential, or which, under the circumstances of
disclosure ought to be treated as confidential including but not limited to the
terms of this Agreement, know-how and materials provided pursuant to this
Agreement, provided that either party may disclose the terms of this Agreement
in confidence to its immediate legal and financial consultants and advisors as
required in the ordinary course of such party's business, provided that such
immediate legal and financial consultants and advisors agree in advance to be
bound by the confidentiality provisions set forth in this Section 10. All
tangible materials containing Confidential Information ("Confidential
Materials"), including documents, tapes, computer disks and other fixed storage
devices (whether or not machine or user readable), are the properly of the
providing party. No later than 15 business days following the End Date,
Confidential Materials in either party's possession must be resumed or
destroyed (with appropriate certification of destruction if not returned). This
Section 10 will survive any suspension, termination or expiration of this
Agreement. Subject to the prior written approval of the other Party, either
Party may use the name of such other Party in press release or public
announcement(s) relating to the rights and obligations set forth in this
Agreement and/or the relationship established by this Agreement; provided that
neither Party shall issue any such press release or make any such public
announcement(s) without the express prior written consent of the other Party.
11. Warranties.
11.1 By Merchant. Merchant warrants, represents and agrees that (a) Products
offered, sold or otherwise provided as part of the Merchant Site are made,
offered, sold or otherwise provided in compliance with applicable laws and will
not infringe the copyrights, trademarks, service marks or any other proprietary
right of any third party, (b) Merchant will use its best efforts to ensure that
the operation of the Merchant Site is in compliance with MSP's policies,
procedures and/or technical specifications which may be provided by MSP from
time to time during the Term and all applicable laws, and (c) Merchant has the
power and authority to enter into and perform its obligations under this
Agreement.
11.2 By MSP. MSP warrants, represents and agrees that MSP has the power and
authority to enter into and perform its obligations under this Agreement.
11.3 Each Party represents and warrants to the other Party that: (i) such
Party has the full corporate right, power and authority to enter into this
Agreement and to perform the acts required of it hereunder; (ii) the execution
of this Agreement by such Party, and the performance by such Party of its
obligations and duties hereunder, do not and will not violate any agreement to
which such Party is a party or by which it is otherwise bound; and (iii) when
executed and delivered by such Party, this Agreement will constitute the legal,
valid and binding obligation of such Party, enforceable against such Party in
accordance with its terms.
11.4 No Additional Warranties. THIS SECTION 11 CONTAINS THE ONLY WARRANTIES
MADE BY MERCHANT AND MSP. ANY AND ALL OTHER WARRANTIES, INCLUDING FOR
NON-INFRINGEMENT AND THE OPERATION, FUNCTIONALITY, INTERRUPTION OR LACK OF
RESOURCES OF MSN OR THE MERCHANT SITE, ARE EXPRESSLY EXCLUDED AND DECLINED. EACH
PARTY DISCLAIMS ANY IMPLIED WARRANTIES, PROMISES AND CONDITIONS OF
MERCHANTABILITY AND/OR FITNESS FOR A PARTICULAR PURPOSE, WHETHER AS TO MSN OR
THE MERCHANT SITE, THE TECHNOLOGY DEPLOYED IN CONNECTION THEREWITH, OR PRODUCTS
OR SERVICES OFFERED AND/OR SOLD IN CONNECTION THEREWITH.
11.5 Liability. TO THE MAXIMUM EXTENT PERMITTED BY LAW, NEITHER PARTY IS
LIABLE TO THE OTHER FOR ANY INDIRECT, SPECIAL, EXEMPLARY, CONSEQUENTIAL,
INCIDENTAL OR PUNITIVE DAMAGES INCURRED BY THE OTHER PARTY EVEN IF THE OTHER
PARTY HAS BEEN ADVISED THAT SUCH DAMAGES ARE POSSIBLE.
11.6 Survival. Each party's representations and warranties survive the
termination of this Agreement.
12. Indemnification.
12.1 Scope of Obligation. Each party will indemnify and hold harmless the
other party, and the other party's Affiliates, from and against any claims,
actions, losses, liabilities, damages, settlements, judgments, arbitration
awards, costs and expenses (including reasonable outside attorneys' fees and
expenses) (collectively "Claims") resulting from such party's breach (or, with
respect to the defense thereof, alleged breach) of its covenants, warranties and
representations as set forth in this Agreement or resulting from either party's
approved use of materials obtained from the other party hereunder (including,
without limitation, logos, trademarks or trademarks of the other party) which
infringes the trademark or copyright or other proprietary rights of any third
party; provided, however, that neither party shall be obligated to indemnify the
other party for claims arising
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-7-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
Microsoft Confidential
out of use of materials created by third party users of the Microsoft Web Sites
or the Merchant Site, as the case may be. For purposes hereof, Merchant's
indemnity obligation hereunder extends equally to MSP and Microsoft.
12.2 Manner of Exercise. If a party requests to be indemnified ("requesting
party"), it must give prompt notice to the other party ("requested party")
specifying all relevant details of the Claim. The requested party may, at its
option, defend the Claim, in which event the requesting party will cooperate
fully and may participate in such defense with counsel of its own choice,
provided that it will be responsible for all expenses relating to such separate
counsel. If the requested party assumes the defense of a Claim, its obligation
will be limited to paying the attorneys' fees, costs and expenses associated
with such defense (except as otherwise expressly provided herein) and holding
harmless the requesting party from and against any judgment paid on account of
such Claim or monetary settlement the requested party has made (with the
requesting party's approval, not to be unreasonably withheld) or approved. The
requesting party may, if needed or desired, join the requested party as a party
in any litigation in respect of a Claim for which indemnity is requested. No
settlement may be made without the requested party's prior approval. Neither
party is responsible for loss of profits or consequential damages incurred by
the other due to a Claim. If either party fails to fulfill its material
obligations, the other party will be deemed excused from its obligations
pursuant to Section 12.1.
12.3 Survival. This Section 12 will survive any suspension, termination or
expiration of this Agreement.
13. Default and Breach.
13.1 Events of Default. After giving notice to the defaulting party and
following the completion of the applicable cure period set forth in Section
13.2, the nondefaulting party may declare the other party to be in breach of
this Agreement and may exercise the remedies specified in Section 13.3 upon the
occurrence of any of the following default events:
(a) failure to perform or comply with any material provision of this
Agreement, including without limitation either party's failure to file or
provide required statements and/or make payments due;
(b) admission in writing of an inability to pay debts as they mature, or
making an assignment for the benefit of creditors;
(c) impairment of financial condition such that the other party has
justifiable grounds to believe and can reasonably demonstrate that the impaired
party will be unable to fulfill its obligations under this Agreement; or
(d) filing of a petition under any bankruptcy act, receivership statute
or similar law or statute, by either party, or the filing of such a petition by
any third party against either party, or the making of an application for a
receiver by either party, where such petition or application is not dismissed or
otherwise favorably resolved within 60 days.
13.2 Cure Period. (a) Subject to Section 13.2(b), upon receiving a default
notice, the defaulting party will have 15 business days to cure the default,
provided that if the default is not reasonably susceptible of cure within such
period, the non-defaulting party's right to exercise the remedies specified in
Section 13.3 will be suspended for so long as the other party diligently pursues
all reasonable steps to cure as expeditiously as possible. Notwithstanding the
foregoing, such suspension (i) will not arise for default events that are
incapable of cure, and (ii) may nonetheless result in early termination of this
Agreement upon notice given by the non-defaulting party if cure is uncompleted
after 90 days.
(b) Notwithstanding Section 13.2(a), (i) the non-payment of monies due
must always be cured within the 15-business day cure period. and (ii) unless
both parties otherwise expressly agrees in writing, there shall be a 48-hour
cure period with respect to the operation of the Merchant Site in accordance
with MSP's published policies, procedures and technical specifications, and in
compliance with applicable laws.
13.3 Remedies. If either party fails to timely cure an event of default (if
cure is authorized pursuant to Section 13.2), subject only to Section 16.3, the
nondefaulting party will have the right to declare the other party in breach of
this Agreement and suspend performance or, alternatively, terminate this
Agreement upon notice, whereupon the non-defaulting party's obligations will
immediately cease. The non-defaulting party's rights are cumulative and not in
lieu of any other rights and remedies under this Agreement or otherwise provided
by law or in equity. Upon suspension or termination, neither party will hold
itself out as having rights or powers pursuant to this Agreement (except in
respect of provisions of this Agreement that survives suspension or
termination). Time is of the essence of this Agreement.
14. Notices. All notices given hereunder must be in writing and personally
delivered, or sent by registered or certified mail (return receipt requested),
facsimile, email or overnight courier. A notice sent by facsimile or email must
be confirmed by sending a copy of such notice by
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-8-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
Microsoft Confidential
registered or certified mail or overnight courier. Notices will be deemed given
on the date received. Notices to MSP must be sent to One Microsoft Way, Redmond,
WA 98052-6399 USA (facsimile number (206) 936-7329), Attention: Director,
Business Development. Notices to Merchant must be sent to the address for
notices specified in the Schedule. Either party may change its address for
notices at any time by giving notice to the other party as provided herein.
15. Intellectual Property. Each party will use the appropriate trademark,
product description and trademark symbol (either "TM" or "Registered") and
copyright symbol (Copyright), and clearly indicate ownership of trademarks,
trade names and/or product names ("Marks") and copyrights, whenever first
mentioned in any advertisement, brochure or other material in connection with
MSN or the Merchant Site. Each party will, upon request, provide the other party
with samples of marketing literature that include the other party's Marks or
copyrights. Each party agrees that, as between the parties, (a) the other
party's Marks and copyrights and the good will associated therewith are and will
remain the sole property of the other party; (b) this Agreement does not confer
in either party any right of ownership in the other party's Marks or copyrights;
(c) all uses by one party of the other party's Marks and/or copyrights will
inure to the benefit of the owning party; and (d) when using the other party's
materials, if any such materials contain copyright, patent, trademark or other
notices evidencing the other party's ownership of rights in intellectual
property, the using party will not delete, modify, remove or diminish the
prominence of any such notices.
16. Other Provisions.
16.1 No Ongoing Waiver. No waiver of any breach of any provision of this
Agreement constitutes a waiver of any prior, concurrent or subsequent breach of
the same or any other provisions, and will not be effective unless made in
writing and signed by an authorized representative of the waiving party.
16.2 Excuse. Neither party is liable for, and will not be considered in
default or breach of this Agreement on account of, any delay or failure to
perform as required by this Agreement as a result of causes or conditions beyond
such party's reasonable control which such party is unable to overcome by the
exercise of reasonable diligence, provided that the affected party will use
reasonable efforts to resume normal performance as promptly as possible.
16.3 Dispute Resolution. If a dispute arises hereunder, upon either party's
written request (containing a statement specifying the basis of the dispute),
the parties will each appoint a senior representative to attempt in good faith
to resolve the dispute. Except for disputes where preliminary injunctive relief
is an appropriate remedy, no formal legal proceedings may be commenced with
respect to any dispute until either party determines in good faith (but no
earlier than five business days following the initiation of discussion) that
amicable resolution through continued negotiation appears unlikely.
16.4 Governing Law; Venue; Attorneys' Fees. This Agreement is governed by the
laws of the State of Washington, U.S.A. All actions, proceedings or litigation
relating hereto will be instituted and prosecuted solely within King County,
State of Washington, U.S.A. MSP and Merchant hereby consent to the jurisdiction
of the state courts of Washington and the federal courts located within such
state with respect to any action, dispute or other matter arising out of or
relating to this Agreement. In any legal proceeding between the parties relating
to the enforcement of any rights arising out of or relating to this Agreement,
the primarily prevailing party will be entitled to recover its reasonable
attorneys' fees and court costs.
16.5 Riders, Schedules, and Exhibits. All Riders, Schedules, and Exhibits
attached to this Agreement that are contemporaneously signed on behalf of both
parties are incorporated herein by this reference.
16.6 Assignment; Transfer of Control. (a) This Agreement may not be assigned,
by operation of law or otherwise, by either party without the other party's
prior written consent. Notwithstanding the foregoing, any assignment of this
Agreement to a person or entity acquiring all or substantially all of the assets
of either party where such assignment results in the transfer of management or
control or significant ownership interest in either party will give the
non-assigning party the right to terminate this Agreement as provided in Section
16.6(b). In any assignment proposed, the proposed assignee must agree in writing
to be bound by the terms of this Agreement. Any assignment contrary to this
Section 16.6(a) will be void and of no effect.
(b) In the event of the anticipated sale or transfer of management or
control of (or a significant ownership interest in) either party ("Transfer"),
assigning party will give notice to the non-assigning party of such Transfer
(including the proposed transferee) not less than 30 days prior to the effective
date of such Transfer (if such Transfer is voluntary) or as soon as possible
after the Transfer (if such Transfer is involuntary). Upon the occurrence of a
Transfer, the non-assigning party may elect to terminate this Agreement. The
non-assigning
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-9-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
Microsoft Confidential
party must give notice to the assigning party of the non-assigning party's
election to terminate this Agreement due to the Transfer within 15 business days
after the later of the following dates: (i) the date on which the non-assigning
party ascertains the occurrence of the Transfer, or (ii) the date on which the
non-assigning party receives the assigning party's notice of such Transfer.
(c) Neither party will pledge or hypothecate its rights or delegate its
obligations under this Agreement except as part of a permitted assignment of
rights.
16.7 Relationship of Parties. This Agreement does not create or constitute a
partnership, joint venture or agency relationship or the grant of a franchise as
defined in the Washington Franchise Investment Protection Act, RCW 19.100, as
amended, or 16 CFR Section 436.2 or otherwise.
16.8 Section Headings. Headings and captions used in this Agreement
(including attached Riders and Exhibits) are for convenience only and do not
supersede or modify any provisions.
16.9 Amendments. This Agreement may only be amended by a written instrument
duly signed by authorized representatives of both MSP and Merchant.
16.10 Third Party Enforcement. Merchant agrees that its obligations under
this Agreement may be enforced by or on behalf of any Affiliate of MSP.
16.11 Meaning of "purchase" or "sale". As used herein, a "purchase" or "sale"
includes a license and/or a licensing arrangement; where applicable, use of such
terminology will not be deemed to waive, impair, or otherwise affect the
intellectual property rights of MSP, Microsoft or Merchant.
16.12 This Agreement shall not be modified except by a written agreement
dated subsequent to the date of this Agreement and signed on behalf of Merchant
and MSP by their respective duly authorized representatives.
16.13 If any provision of this Agreement shall be held by a court of
competent jurisdiction to be illegal, invalid or unenforceable, the remaining
provisions shall remain in full force and effect.
17. Entire Agreement. This Agreement embodies the entire agreement between the
parties and supersedes all previous and contemporaneous agreements,
understandings and arrangements with respect to the subject matter hereof,
whether oral or written. Independent Investigation. Both parties acknowledge
that they have read this Agreement and agree to all its terms and conditions.
Both parties understand that they may at any time (directly or indirectly)
solicit customer referrals and enter into agreements with other entities on
terms that may differ from those contained in this Agreement. It is further
understood that both parties may operate web sites that are similar to or
compete with each others web sites. Both parties agree that they are not relying
on any representation, guarantee or statement other than set forth in this
Agreement.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-10-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
Microsoft Confidential
Revised: 8/27/1997
EXHIBIT A
MSP Policies
GUIDELINES FOR DISPLAYING THE PLAZA
ON MSN(Trademark) LINK LOGO
These are the Microsoft policies for displaying the Plaza on MSN link logo by
Plaza merchants who have executed a standard ECOMMERCE MERCHANT AGREEMENT FOR
The Plaza on MSN (the "Agreement"). Please consult Microsoft's other trademark
and logo policies for questions concerning other brands.
1. Except as Microsoft may authorize elsewhere, you may display only the link
logo shown below ("Logo"). By downloading the Logo, you agree to be bound
by these Policies.
2. You may only display the Logo on your Mirrored Web Site, as this term is
defined in the Agreement, and not in any other manner. It must always be an
active link to The Plaza on MSN Homepage at http://www.plaza.msn.com/. HTML
code for the link is shown below.
3. The Logo gif includes the words "Go back to Plaza", describing the
significance of the Logo on your site (i.e., the Logo is a link to The
Plaza, not an endorsement of your site). You may not remove or alter this
or any other element of the Logo.
4. You may only display the Logo on your Mirrored Web Site if it makes
accurate references to The Plaza on MSN. The Logo must be displayed
adjacent to those references or at the top of the same page. Your web page
title and other trademarks and logos must appear at least as prominent as
the Logo. You may not display the Logo in any manner that implies
sponsorship, endorsement, or license by Microsoft.
5. The Logo must appear by itself, with a minimum spacing (the height of the
Logo) between each side of the Logo and other graphic or textual elements
on your page. The Logo may not be used as a feature or design element of
any other Logo.
6. Except for size subject to the terms herein, you may not alter the Logo in
any manner, including proportions, colors, elements, etc., or animate,
morph or otherwise distort its perspective or two-dimensional appearance.
7. You may not display the Logo on any site that disparages Microsoft, or its
products or services, infringes any Microsoft intellectual property or
other rights, or violates any state, federal or international law.
8. These Policies do not grant a license or any other right in Microsoft's
logos or trademarks. Microsoft reserves the right in its sole discretion to
terminate or modify permission to display the Logo at any time. Microsoft
reserves the right to take action against any use that does not conform to
these Policies, infringes any Microsoft intellectual property or other
right, or violates other applicable law.
9. MICROSOFT DISCLAIMS ANY WARRANTIES THAT MAY BE EXPRESS OR IMPLIED BY LAW
REGARDING THE LOGO, INCLUDING WARRANTIES AGAINST INFRINGEMENT.
[GO BACK TO PLAZA]
[[HTML code]]
Displaying the MSN(Trademark)/The Microsoft(Registered) Network
Link Logo
on Non-Microsoft Web Sites
[GRAPHIC]
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-11-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
Microsoft Confidential
1. Except as Microsoft may authorize elsewhere, non-Microsoft Web sites may
display only the link logo shown above ("Logo") and provided by Microsoft
from time to time for the purposes set forth below. By displaying the Logo,
you agree to be bound by these Terms.
2. You may only display the Logo on your Web site, and not in any other
manner. It must always be an active link to the MSN Homepage at
http:/www.msn.com/. HTML code for the link is shown below.
3. The Logo gif includes the words "Click here for MSN", describing the
significance of the Logo on your site (i.e., the Logo is a link to MSN, not
an endorsement of your site). You may not alter this or any other element
of the Logo, or replace it with any other element.
4. You may only display the Logo on your Web pages if they make accurate
references to MSN or its products or services. The Logo must be displayed
adjacent to those references or at the bottom of the same page. Your Web
page title and other trademarks and logos must appear at least as prominent
as the Logo. You may not display the Logo in any manner that implies
sponsorship, endorsement, or license by Microsoft.
5. The Logo must appear by itself, with a minimum spacing (the height of the
Logo) around the Logo to separate it from other graphic or textual elements
on your page. The Logo may not be used as a feature or design element of
any other Logo.
6. You may not alter the Logo in any manner, including size, proportions,
colors, elements, etc., or animate, morph or otherwise distort its
perspective or two-dimensional appearance.
7. You may not display the Logo on any site that disparages Microsoft or its
products or services, infringes any Microsoft intellectual property or
other rights, or violates any law of any jurisdiction.
8. These Terms do not grant a license or any other right in Microsoft's logos
or trademarks. Microsoft reserves the right in its sole discretion to
terminate or modify permission to display the Logo at any time. Microsoft
reserves the right to take action against any use that does not conform to
these Terms, infringes any Microsoft intellectual property or other right,
or violates other applicable law.
9. MICROSOFT DISCLAIMS ANY WARRANTIES THAT MAY BE EXPRESS OR IMPLIED BY LAW
REGARDING THE LOGO, INCLUDING WARRANTIES AGAINST INFRINGEMENT.
[[HTML code]]
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-12-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
CONTRACT NUMBER:
--------------------
AMENDMENT NUMBER 4 TO
ECOMMERCE MERCHANT AGREEMENT
This AMENDMENT NUMBER 4 TO THE ECOMMERCE MERCHANT AGREEMENT, dated as of the
27th day of October 1997 (the "Agreement"), is made by and between Microsoft
Corporation, a Washington U.S.A. corporation ("Microsoft"), and
barnesandnoble.com inc., a Delaware U.S.A. Corporation ("Merchant"), to amend
the Agreement as set forth herein. Unless otherwise defined herein all defined
terms have the same meanings set forth in the Agreement:
WHEREAS, Microsoft's online e-commerce offerings are undergoing upgrading and
improvement, and therefore an amendment to the terms set forth in the Agreement
is necessary;
Now, therefore, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree that the
following shall be added to the Agreement and, as to the financial terms,
obligations and other matters expressly set forth herein, shall supercede the
terms of the Agreement:
10. Microsoft maintains a web-based portal site intended for users in the
United States and currently known as "MSN.COM" ("Portal Site").
10.1. Microsoft currently anticipates that, among other things, the Portal
Site will feature a home page as its top-most page ("Home Page") and
several secondary pages grouped by content theme ("Channels"). The
Channels will be available from the Home Page via persistent
hypertext links prominently displayed above the fold in a bar on the
leftmost portion of the Home Page. Examples of Channels that
Microsoft currently expects to feature on the Portal Site include:
Autos, Business, Computing, Games, Health, News, Personal Finance,
Real Estate, Shopping, Sports, Travel, and Women. Absent technical
issues or other such critical obstacles, Microsoft currently
anticipates that the Channels will launch on or about October 1, 1998
("Launch Date").
10.2. The Portal Site will also feature a Microsoft developed (or licensed)
web-search capability ("Search") utilizing key words as the search
parameter.
10.3. The Home Page will also feature a text-based advertising space above
the fold ("Home Page Ad Space"). The Home Page further will feature a
section of persistent hypertext links that will be available on every
page of the Portal Site ("Quick Links"). The Quick Links will link to
specific secondary pages such as, by way of example, an online
encyclopedia, yellow page-style business listings, and television
listings.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-13-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
10.4. The Shopping Channel shall feature persistent sections on its topmost
page above the fold as follows:
10.4.1. a rotating set of graphic buttons consisting of merchants'
logos and providing links to those merchants' sites in a
section labeled "Plaza Merchants";
10.4.2. a section that will feature on a rotating basis specials from
merchants in a section called "Plaza Specials"; and
10.4.3. a section that feature recommendations for gifts based on
seasonal or holiday themes (e.g., back-to-school, Christmas,
Father's Day) that will feature appropriate hypertext links
to merchants' sites.
10.5. The Shopping Channel will have a series of persistent secondary pages
that will group merchants by product category. Each of these
secondary pages will be entitled "Departments." Persistent links to
the Departments will be placed on the Shopping Channel Home Page in a
section entitled "Shopping Categories." The Shopping Channel will
feature a "Book Department" featuring only book-related merchants and
content.
11. During the Term (as defined herein), Microsoft will accord Merchant Premier
Anchor Provider Status in the Book Category for the Portal Site.
Specifically:
11.1. Microsoft will provide to Merchant on a * * * . Microsoft will supply
the specification for this space to Merchant in writing in a timely
manner and Merchant shall comply with it. Microsoft shall not provide
the Home Page Ad Space to any other third-party bookseller.
11.2. Microsoft will provide Merchant with a persistent Quick Link labeled
"Buy Books" that will link to the Merchant Site. Microsoft shall not
provide any other third-party bookseller with a * * * .
11.3. In the Shopping Channel, Microsoft also will do the following:
11.3.1. Microsoft will feature Merchant's branded logo button * * *
in the Plaza Merchants section on an equal rotation basis
with other merchants with buttons in this section;
11.3.2. Microsoft will feature Merchant * * * in the Plaza Special
section;
11.3.3. Microsoft will include Merchant in Gift Guides * * * ; and
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-14-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
11.3.4. Microsoft will feature a direct hyperlink to Merchant's Site
immediately below the link labeled "Books" in the Shopping
Categories section.
11.4. In the Book Department of the Shopping Channel, Microsoft will accord
Merchant the * * * of all merchants featured in the Book Department
and accord the top featured product space during the entire Term.
11.5. Microsoft will accord Merchant the opportunity to have its textual
message included in all overall Plaza email campaigns targeted to
Plaza registered users that have consented to receiving such
e-mailings. Such campaigns will take place at least * * * during the
Term. Microsoft will also accord Merchant the opportunity to have its
textual message included in Portal Site email campaigns targeted to
Portal Site registered users that have consented to receiving such
e-mailings.
11.6. For a period of one year from the launch of Search ("Launch Year
One"), Microsoft will ensure that Merchant=s Site is served up to
users as the only search result associated with * * * specific
book-related Key Words to be submitted to Microsoft by Merchant and
subject to Microsoft's reasonable approval. Such Key Words may be
updated from time to time by Merchant subject to Microsoft's
reasonable approval. Merchant will be able to select the first * * *
book words with priority over any other book partner. The parties may
mutually agree upon additional keywords that will serve up Merchant's
Site as a result on a non-exclusive basis. If Launch Year One ends
after the expiration of the Term, this Section 2.6 shall survive the
expiration of the Term and last until the end of Launch Year One.
11.7. Microsoft, on terms to be agreed upon by the parties at a later date,
will integrate Merchant at least * * * of the following Channels
(listed in order of preference): * * * . If and when the parties
agree to such terms, they agree that those terms will include a
provision that Merchant will be granted Premier Anchor Provider
Status on the Entertainment Channel.
11.8. Microsoft will use commercially reasonable efforts to integrate
Merchant under terms to be mutually agreed upon into any integrated
search feature made available on the Portal Site.
12 Microsoft's efforts as described above shall deliver at least * * *
impressions of the Merchant Site during the Term.
13. Except as otherwise set forth in Section 2.6, the term of the rights and
obligations under this Amendment ("Term") shall commence on October 1, 1998
and end on September 30, 1999.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-15-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
14. In consideration for the above-described rights and obligations set forth
herein, Merchant shall pay to Microsoft the following amounts:
14.1. Guaranteed Fee: As a nonrefundable advance against the Commissions
set forth in Section 5.2, Merchant shall pay $3,000,000 to Microsoft
upon execution of this Amendment.
14.2. Commission: In addition to the Guaranteed Fee, Merchant shall pay
Microsoft * * * of Merchant=s Gross Revenue less actual returns and
actual bad debt incurred during the Term. The Commission shall be
payable monthly to Microsoft no later than 30 days after each
three-month period on the anniversary of the Launch Date for all
transactions occurring during the previous three-month period. All
payments of the Fees shall first be credited against the Guaranteed
Fee set forth in Section 5.1 and shall thereafter be in a form
acceptable to Microsoft, in its sole discretion, and addressed to
Deborah Levinger, c/o Microsoft Corporation, One Microsoft Way,
Redmond, WA 98052
14.3. Merchant is responsible for ensuring that all payments are made on a
timely basis, MSP will not invoice Merchant for any amounts owing
pursuant to this Agreement.
15. Merchant will use commercially reasonable efforts to make special offers of
real value to Portal Site users.
16. The parties agree to exercise mutual good faith efforts to promote buying
books via the Portal Site.
17. At least 30 days prior to the expiration of the Term, the parties hereto
shall commence negotiating the renewal of this Amendment and shall
negotiate for a period of thirty days (the "Negotiation Period"). If the
parties do not reach an agreement with respect thereto prior to the
expiration of the Negotiation Period, Microsoft may negotiate with a third
party to be the Premier Anchor Provider Status in the Book Category for the
Portal Site; provided, however, Microsoft shall not enter into any
agreement with respect thereto with such third party for the 2 month period
following expiration of the Negotiation Period without first offering to
Merchant the opportunity to enter into such agreement on terms and
conditions at least as favorable to Merchant as those offered to or by
Microsoft by or to such third party. Merchant shall have five (5) business
days from the date of receipt of written notice from Microsoft of any such
offer (which offer shall be irrevocable during at least such five (5)
business days and said notice thereof shall contain full details in regard
thereto) in which to accept or reject such offer. If Merchant rejects or
does not accept such written offer within five (5) business days after
receipt thereof, Microsoft will be free to enter into such agreement with a
third party.
***Confidential portions of this document have been redacted and have been
separately filed with the Commission.
-16-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY barnesandnoble.com inc.
Except as expressly provided herein, the Agreement is not otherwise modified in
any respect, and the same as hereby supplemented and amended is hereby ratified
and confirmed in all respects (including, specifically, Merchant's tracking and
reporting obligations, and the requirement of a "GO BACK" button on the
Merchant Site).
WHEREBY, the parties enter into this Amendment as of the later of the two
signature dates below.
MICROSOFT CORPORATION BARNESANDNOBLE.COM INC
- -------------------------------------- ------------------------------------
By (signature) By (signature)
- -------------------------------------- ------------------------------------
Name (print) Name (print)
- -------------------------------------- ------------------------------------
Title Title
- -------------------------------------- ------------------------------------
Date Date
<PAGE>
BARNESANDNOBLE.COM LLC
DEFERRED COMPENSATION PLAN
Effective as of November 1, 1998
<PAGE>
Prior to November 1, 1998, Barnes & Noble, Inc. ("B&N") maintained the Barnes &
Noble, Inc. Deferred Compensation Plan (the "Prior Plan") for the eligible
employees of B&N and its subsidiaries.
Effective as of October 31, 1998, B&N and Bertelsmann, A.G. entered into an
agreement to form a joint venture, barnesandnoble.com LLC (the "Agreement").
Pursuant to terms of the Agreement, all employees of Barnes & Noble. Com, Inc.
were transferred to the employ of barnesandnoble.com LLC (the "Company").
Under the terms of the Agreement, the Company agreed to establish a new
nonqualified deferred compensation plan to cover eligible employees of the
Company or any of its subsidiaries.
The Company also agreed under the Agreement to accept a transfer of the account
balances maintained under the Prior Plan on behalf of the employees of the
Company who immediately prior to November 1, 1998 were employees of B&N.
Accordingly, the Company adopted, as of November 1, 1998, the barnesandnoble.com
LLC Deferred Compensation Plan (the "Plan") as a new plan and as an amendment
and continuation of the Prior Plan.
All benefits payable under the Plan, which constitutes a nonqualified, unfunded
deferred compensation plan for select group of management or highly-compensated
employees under Title I of ERISA shall be paid out of general assets of the
Company. The Company may establish and fund a trust in order to aid it in
providing benefits due under the Plan.
<PAGE>
BARNESANDNOBLE.COM LLC DEFERRED COMPENSATION PLAN
TABLE OF CONTENTS
Page
Article
INTRODUCTION
1. DEFINITIONS..................................................1
2. PARTICIPATION................................................3
3. DEFERRALS ...................................................5
4. MAINTENANCE OF ACCOUNTS......................................8
5. PAYMENT OF BENEFITS.........................................10
6. AMENDMENT OR TERMINATION....................................14
7. GENERAL PROVISIONS..........................................15
8. ADMINISTRATION..............................................20
9. SIGNATURE AND VERIFICATION..................................21
<PAGE>
ARTICLE 1. DEFINITIONS
1.01 "Administrative Committee" shall mean the person or persons appointed by
the Compensation Committee of the Board of Directors to administer the
Plan as provided in Section 8.01.
1.02 "Associated Company" shall mean (a) any corporation that is a member of
a controlled group of corporations (as defined in Code Section 414(b))
that includes the Company, (b) any trade or business (whether or not
incorporated) that is under common control (as defined in Code Section
414(c)) with the Company, (c) any member of an affiliated service group
(as defined in Code Section 414(m)) that includes the Company; and (d)
any other entity required to be aggregated with the Company pursuant to
final or temporary regulations under Code Section 414(o).
1.03 "Base Salary" shall mean the annual base fixed compensation paid
periodically during the calendar year, determined prior to any pre-tax
contributions under a "qualified cash or deferred arrangement" (as
defined under Code Section 401(k) and its applicable regulations) or
under a "cafeteria plan" (as defined under Code Section 125 and its
applicable regulations) and any deferrals under Article 3, but excluding
any overtime, bonuses, or any other form of compensation; except to the
extent otherwise deemed "Base Salary" for purposes of the Plan under
rules as are adopted by the Compensation Committee.
1.04 "Beneficiary" shall mean the person or persons designated by a
Participant pursuant to the provisions of Section 5.06 in a time and
manner determined by the Administrative Committee to receive the
amounts, if any, payable under the Plan upon the death of the
Participant.
1.05 "Bonus" shall mean the cash amount, if any, awarded to an employee of
the Company under the Company's executive bonus program, or other
compensation program approved by the Compensation Committee as a bonus
hereunder.
1.06 "Board of Directors" or "Board" shall mean the Board of Managers of the
Corporation, as from time to time constituted, or such body or entity
that succeeds to the authority of the Board of Managers.
1.07 "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
1.08 "Company" shall mean the Corporation, and any successor thereto, with
respect to its employees and any Associated Company authorized by the
Compensation Committee to participate in the Plan, with respect to their
employees.
1.09 "Compensation Committee" shall mean the Compensation Committee of the
Board of Directors.
1.10 "Corporation" shall mean barnesandnoble.com LLC or any successor by
merger, purchase, or otherwise.
<PAGE>
1.11 "Deferral Account" shall mean the bookkeeping account maintained for
each Participant to record the amount of Base Salary and/or Bonus such
Participant has elected to defer in accordance with Article 3, adjusted
pursuant to Article 4.
1.12 "Deferral Agreement" shall mean the completed agreement, including any
amendments, attachments and appendices thereto, in such form approved by
the Administrative Committee, between an Eligible Executive and the
Company, under which the Eligible Executive agrees to defer a portion of
his Base Salary and/or Bonus under the Plan.
1.13 "Deferrals" shall mean the amount of deferrals credited to a Participant
pursuant to Section 3.02.
1.14 "Effective Date" shall mean November 1, 1998.
1.15 "Employee" shall mean any person who is employed by the Company.
1.16 "Eligible Executive" shall mean an Employee of the Company who is
eligible to participate in the Plan as provided in Section 2.01.
1.17 "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time.
1.18 "Participant" shall mean, except as otherwise provided in Article 2,
each Eligible Executive who has executed a Deferral Agreement pursuant
to the requirements of Section 2.02 and is credited with an amount under
Section 3.03.
1.19 "Plan" shall mean the barnesandnoble.com LLC Deferred Compensation Plan
as set forth in this document and any appendices thereto, as it may be
amended from time to time.
1.20 "Plan Year" shall mean the 12-month period commencing on any January 1;
provided, however, that the first Plan Year shall commence on November
1, 1998 and end on December 31, 1998.
1.21 "Prior Plan" shall mean the Barnes & Noble, Inc. Deferred Compensation
Plan as in effect on October 31, 1998.
1.22 "Reporting Date" shall mean any day on which the New York Stock Exchange
is open.
1.23 "Retirement" shall mean any termination of employment by an Eligible
Executive (i) after the date the Eligible Executive has attained age 55
and has completed five "Years of Service" (as such term is defined under
the barnesandnoble.com LLC Retirement Plan as in effect on the date of
such termination) or (ii) as a result of his "Total and Permanent
Disability" (as such term is defined under the Barnes & Noble, Inc.
401(k) Savings Plan as in effect on the date of such termination).
-2-
<PAGE>
ARTICLE 2. PARTICIPATION
2.01 Eligibility
(a) An Employee whose Base Salary as of October 1 of a calendar year exceeds
$130,000, shall be an Eligible Executive with respect to the Plan Year
following such calendar year and thereby eligible to participate in this
Plan and execute a Deferral Agreement authorizing Deferrals under this
Plan with respect to his Base Salary or Bonus which would otherwise be
payable in the Plan Year following such October 1.
(b) An Employee who is first employed or reemployed after October 1 of a
calendar year, and whose Base Salary on such employment or reemployment
date, whichever is applicable, exceeds $130,000 shall be an Eligible
Executive with respect to the following Plan Year and thereby eligible
to participate in the Plan with respect to his Base Salary or Bonus
which is otherwise paid in the Plan Year following his date of
employment or reemployment, whichever is applicable.
(c) Notwithstanding the foregoing, an Employee who was an Eligible Executive
under the Prior Plan as of October 31, 1998 and who became an Employee
of the Corporation on November 1, 1998 shall be an Eligible Executive
with respect to the first Plan Year which commences November 1, 1998 and
thereby eligible to participate in the Plan with respect to such Plan
Year, subject to the provisions of Section 3.01(a)(v).
(d) Notwithstanding the foregoing, an Employee who is first employed or
reemployed on or after January 1, 1999 and whose Base Salary on such
date of employment or reemployment, whichever is applicable, exceeds
$130,000 shall be an Eligible Executive with respect to the Plan Year in
which his date of employment or reemployment occurs and thereby eligible
to participate in the Plan with respect to such Plan Year, subject to
the provisions of Section 3.01(a)(v).
2.02 In General
(a) An individual who is determined to be an Eligible Executive with respect
to a Plan Year and who desires to have deferrals credited on his behalf
pursuant to Article 3 for such Plan Year must execute a Deferral
Agreement with the Administrative Committee authorizing Deferrals under
this Plan for such year in accordance with the provisions of Sections
3.01 and 3.02.
(b) The Deferral Agreement shall be in writing and be properly completed
upon a form approved by the Administrative Committee, which shall be the
sole judge of the proper completion thereof. Such Deferral Agreement
shall provide, subject to the provisions of Section 3.02, for the
deferral of a portion of the Eligible Executive's Base Salary and/or
Bonus earned after the effective date of the election and shall include
such other provisions as the Administrative Committee deems appropriate.
-3-
<PAGE>
2.03 Termination of Participation
(a) Participation shall cease when all benefits to which a Participant is
entitled to hereunder are distributed to him.
(b) If a former Participant who has terminated employment with the Company
and whose participation in the Plan ceased under Section 2.03(a) is
reemployed as an Eligible Executive, the former Participant may again
become a Participant in accordance with the provisions of Section 2.01.
-4-
<PAGE>
ARTICLE 3. DEFERRALS
3.01 Filing Requirements
(a) (i) Prior to the close of business on October 1 of any Plan Year
commencing on or after the Effective Date, an Employee who is
determined to be an Eligible Executive on the basis of his Base
Salary on such October 1 in accordance with Section 2.01(b) may
elect, subject to Section 3.02(a), to defer a portion of his Base
Salary that is otherwise earned and payable in the Plan Year
following such October 1 and/or a portion of his Bonus otherwise
payable in the Plan Year following such October 1 by filing a
Deferral Agreement with the Administrative Committee.
(ii) In the event October 1 does not fall on a business day, such
filing must be made by the close of business on the next business
day.
(iii) Notwithstanding the foregoing, if an Employee becomes an Eligible
Executive with respect to a Plan Year pursuant to the provisions
of Section 2.01(b) he may elect, subject to Section 3.02(a), to
defer a portion of his Base Salary or Bonus which would otherwise
be payable in the Plan Year next following his date of employment
or reemployment, by filing a Deferral Agreement with the
Administrative Committee prior to the close of business on the
tenth business day following the date of his employment or
reemployment, whichever is applicable; provided, however that the
Bonus may be deferred only if the amount otherwise payable in
that year has not already been determined by appropriate action
of the Company.
(iv) Notwithstanding the foregoing, if an Employee becomes an Eligible
Executive with respect to the first Plan Year which commences
November 1, 1998, pursuant to the provisions of Section 2.01(c),
any deferral agreement in effect under the Prior Plan with
respect to the 1998 calendar year shall continue to be in effect
for the first Plan Year with respect to any Base Salary or Bonus
that is otherwise earned and payable to said Eligible Executive
in said first Plan Year.
(v) Notwithstanding the foregoing, if an Employee becomes an Eligible
Executive with respect to a Plan Year pursuant to the provisions
of Section 2.01(d) he may elect, subject to Section 3.02(a), to
defer a portion of his Base Salary or Bonus otherwise payable in
that Plan Year by filing a Deferral Agreement with the
Administrative Committee prior to the close of business on the
tenth business day following the date of his employment or
reemployment, whichever is applicable. Such Deferral Agreement
shall be effective only with respect to Base Salary and Bonus
otherwise payable to the Eligible Executive commencing with the
first practicable payroll period following the Administrative
Committee's receipt of the Deferral Agreement; provided however,
Bonus may only be deferred if the Bonus otherwise payable in that
Plan Year has not already been determined by appropriate action
of the Company.
-5-
<PAGE>
(b) A Participant's election to defer a portion of Base Salary or Bonus for
any Plan Year shall become irrevocable on the last day the deferral of
such Base Salary or Bonus may be elected under Section 3.01(a). A
Participant may revoke or change his election to defer a portion of Base
Salary or Bonus at any time prior to the date the election becomes
irrevocable. Any such revocation or change shall be made in a form and
manner determined by the Administrative Committee.
(c) Except as otherwise provided in Section 3.01(a)(v), a Participant's
Deferral Agreement shall apply only with respect to Base Salary earned
in the calendar year following the calendar year in which the Deferral
Agreement is filed with the Administrative Committee under Section
3.01(a). A Participant's Deferral Agreement shall only apply to a Bonus
determined after the Deferral Agreement is filed with the Administrative
Committee under Section 3.01(a). Subject to the provisions of Section
3.02, an Eligible Executive must file, in accordance with the provisions
of Section 3.01(a), a new Deferral Agreement for each Plan Year the
Eligible Executive is eligible for and elects to defer a portion of
Bonus or Base Salary.
(d) If a Participant ceases to be an Eligible Executive on the basis of his
Base Salary as of October 1 of a calendar year but continues to be
employed by the Company, he shall continue to be a Participant and his
Deferral Agreement currently in effect for the Plan Year in which such
October 1 occurs shall remain in force for the remainder of such Plan
Year, but such Participant shall not be eligible to defer any portion of
his Base Salary or Bonus earned in a subsequent Plan Year until such
time as he shall once again become an Eligible Executive.
3.02 Amount of Deferral
(a) (i) An Eligible Executive may defer for any Plan Year a specified
dollar amount of his Base Salary otherwise earned and payable in
that Plan Year, provided such amount is not less than $5,000 and
does not exceed 50% of his Base Salary payable in that Plan Year.
(ii) An Eligible Executive may defer for any Plan Year a specified
dollar amount of his Bonus otherwise payable in that Plan Year,
provided such amount is not less than $2,500 and does not exceed
100% of his Bonus payable in that Plan Year.
(b) The Administrative Committee may establish other maximum or minimum
limits on the amount of Base Salary or Bonus which may be deferred
and/or the timing of such deferral. Eligible Executives shall be given
written notice of any such limits at least ten business days prior to
the date they take effect.
(c) Notwithstanding anything in this Plan to the contrary, if an Eligible
Executive:
(i) receives a withdrawal of deferred cash contributions on account
of hardship from any plan which is maintained by the Company and
which meets the requirements of Code Section 401(k) (or any
successor thereto); and
(ii) is precluded from making contributions to such 401(k) plan for at
least 12 months after receipt of the hardship withdrawal;
-6-
<PAGE>
no amounts shall be deferred under this Plan under the Eligible
Executive's Deferral Agreement with respect to Base Salary or Bonus
until such time as the Eligible Executive is again permitted to
contribute to such 401(k) plan. Any Base Salary or Bonus payment which
would have been deferred pursuant to a Deferral Agreement but for the
application of this Section 3.02(c) shall be paid to the Eligible
Executive as if he had not entered into the Deferral Agreement.
3.03 Crediting to Deferral Account
The amount of Deferrals shall be credited to such Participant's Deferral
Account no later than the first business day of the first calendar month
following the date the Base Salary or Bonus would have been paid to the
Participant in the absence of a Deferral Agreement.
3.04 Vesting
A Participant shall at all times be 100% vested in his Deferral Account.
-7-
<PAGE>
ARTICLE 4. MAINTENANCE OF ACCOUNTS
4.01 Adjustment of Account
(a) As of each Reporting Date, each Deferral Account shall be credited or
debited with the amount of earnings or losses with which such Deferral
Account would have been credited or debited, assuming it had been
invested in one or more investment funds, or earned the rate of return
of one or more indices of investment performance, designated by the
Administrative Committee and elected by the Participant pursuant to
Section 4.02 for purposes of measuring the investment performance of his
Deferral Account.
(b) The Administrative Committee shall designate at least one investment
fund or index of investment performance and may designate other
investment funds or investment indices to be used to measure the
investment performance of a Participant's Deferral Account. The
designation of any such investment funds or indices shall not require
the Company to invest or earmark their general assets in any specific
manner. The Administrative Committee may change the designation of
investment funds or indices from time to time, in its sole discretion,
and any such change shall not be deemed to be an amendment affecting
Participants' rights under Section 6.02. The Administrative Committee
shall provide Participants with an advance notice of any changes in the
designation of investment funds or indices.
4.02 Investment Performance Elections
In the event the Administrative Committee designates more than one
investment fund or index of investment performance under Section 4.01,
each Participant shall file an investment election with the
Administrative Committee with respect to the investment of his Deferral
Account within such time period and on such form as the Administrative
Committee may prescribe. The election shall designate the investment
fund or funds or index or indices of investment performance which shall
be used to measure the investment performance of the Participant's
Deferral Account.
4.03 Changing Investment Elections
(a) A Participant may change his election of the investment fund or funds or
index or indices of investment performance used to measure the future
investment performance of his future Deferrals within such time periods
and in such manner prescribed by the Administrative Committee. The
election shall be effective as soon as administratively practicable
after the date on which the notice is timely filed.
(b) A Participant may change his election of investment funds or index or
indices of investment performance used to measure the future investment
performance of his existing account balance within such time periods and
in such manner prescribed by the Administrative Committee. The election
shall be effective as soon as administratively practicable after the
date on which the notice is timely filed.
-8-
<PAGE>
4.04 Individual Accounts
The Administrative Committee shall maintain, or cause to be maintained
on its books, records showing the individual balance of each
Participant's Deferral Account. At least once a calendar quarter each
Participant shall be furnished with a statement setting forth the value
of his Deferral Account.
4.05 Valuation of Accounts
(a) The Administrative Committee shall value or cause to be valued each
Participant's Deferral Account on each Reporting Date. On each Reporting
Date there shall be allocated to the Deferral Account of each
Participant the appropriate amount determined in accordance with Section
4.01.
(b) Whenever an event requires a determination of the value of Participant's
Deferral Account, the value shall be computed as of the Reporting Date
coincident with, or immediately following, the date of the event.
-9-
<PAGE>
ARTICLE 5. PAYMENT OF BENEFITS
5.01 Commencement of Payment
(a) The distribution of the portion of Participant's Deferral Account
attributable to deferrals of Base Salary or Bonus for each Plan Year
made pursuant to the Deferral Agreement applicable to such Plan Year
shall commence, pursuant to Section 5.02, on or as soon as practicable
after the occurrence of one of the following events, as designated by
the Participant on such Deferral Agreement:
(i) the month following the Participant's Retirement;
(ii) the month following the Participant's termination of employment;
or
(iii) the beginning of a designated year not later than the year in
which the Participant would attain age 70 1/2.
In the event a Participant elects (iii) above, he may not elect a year
that commences less than three (3) full calendar years subsequent to the
calendar year in which the amount is first treated as being credited to
the Participant's Deferral Account.
(b) Notwithstanding the foregoing, in the event a Participant terminates
employment or retires prior to the designated distribution event date
elected pursuant to paragraph (a)(iii) above, the distribution of his
entire Deferral Account shall commence, pursuant to Section 5.02, as
soon as practicable after the month following his termination of
employment or Retirement.
(c) A Participant shall not change his designation of the event which
entitles him to distribution of any portion of his Deferral Account,
except as otherwise provided in Section 5.03.
(d) Commencement of payment with respect to any amounts transferred to the
Plan from the Prior Plan shall be governed by the Participant's election
made under the Prior Plan with respect to said transferred amounts,
unless otherwise provided in Section 5.03.
5.02 Method of Payment
(a) Except as otherwise provided in the second and third sentences of this
paragraph (a) and paragraph (b) below, the distribution of the portion
of the Participant's Deferral Account attributable to deferrals of Base
Salary or Bonus made pursuant to a particular Deferral Agreement shall
be made in cash in a single lump sum. However, with respect to a
Participant who elects payments to commence pursuant to Section
5.01(a)(i), at the time such Participant makes an election of a
distribution event date under Section 5.01 the Participant may also
elect that the portion of his Deferral Account attributable to deferrals
of Base Salary or Bonus made pursuant to Deferral Agreements for Plan
Years commencing prior to January 1, 1999 shall be made payable as of
such distribution event date in ratable annual cash installments for a
period of years, not to exceed 15 years, designated by the Participant
on his Deferral Agreement instead of in a single lump sum cash payment.
Effective as of September 1, 1998, if a Participant elects to commence
payments of the portion of his Deferral Account
-10-
<PAGE>
attributable to deferrals of Base Salary or Bonus applicable to a Plan
Year commencing on or after January 1, 1999 pursuant to Section
5.01(a)(i), such Participant may also elect at the time he makes an
election of a distribution event date under Section 5.01 regarding a
deferral of Base Salary or Bonus made pursuant to a Deferral Agreement
applicable to a Plan Year commencing on or after January 1, 1999 to have
the portion of his Deferral Account attributable to such deferral
payable as of such distribution event date in ratable annual
installments for a period of years, not to exceed 15 years, as
designated by the Participant on his Deferral Agreement, instead of in a
single lump sum cash payment.
During an installment payment period, the Participant's Deferral Account
shall continue to be credited with earnings or losses as described in
Section 4.01. The first installment or lump sum payment shall be made as
soon as administratively practicable following the Reporting Date
coincident with or preceding the applicable distribution event date
designated pursuant to Section 5.01 or 5.03. However, in the event
payment is to be made pursuant to Section 5.01(b), the lump sum payment
shall be made as soon as administratively practicable following the
Reporting Date coincident with or next following the Participant's
termination of employment or date of Retirement, if earlier. Subsequent
installments, if any, shall be paid as soon as practicable following the
beginning of the following calendar year and each subsequent year of the
installment period. The amount of each installment shall equal the
balance of the portion of the Participant's Deferral Account subject to
such installment payment option as of each Reporting Date of
determination divided by the number of remaining installments (including
the installment being determined).
(b) If a Participant dies before payment of the entire balance of his
Deferral Account, an amount equal to the unpaid portion thereof as of
the date of his death shall be payable in one lump sum to his
Beneficiary as soon as practicable after the Reporting Date coincident
with or next following the Participant's date of death.
(c) A Participant shall not change his method of payment, except as
otherwise provided in Section 5.03.
(d) The method of payment with respect to amounts transferred to this Plan
from the Prior Plan shall be governed by the Participant's election made
under the Prior Plan with respect to said transferred amounts, unless
otherwise provided in Section 5.03.
5.03 Change of Distribution Election
A Participant may change his elections under Section 5.01 or Section
5.02 at any time by duly completing, executing, and filing with the
Administrative Committee a new election on an appropriate form
designated by the Administrative Committee; provided however, that for
any such change of election to be effective, a full calendar year must
pass between the calendar year during which the Participant duly makes
the change of election and the calendar year during which any portion of
the Participant's Deferral Account is first to become payable after
taking the change of election into account.
-11-
<PAGE>
5.04 Withdrawals
(a) Subject to approval by the Administrative Committee and the provisions
of paragraph (b) below, at any time before the total amount of a
Participant's Deferral Account is distributed from the Plan in
accordance with the foregoing provisions of this Article 5, a
Participant who is in active service may elect to withdraw all or any
fixed dollar portion of the amount of his Deferral Account by duly
completing, executing, and filing with the Administrative Committee the
appropriate form designated by the Administrative Committee. The
withdrawal payment to the Participant shall be made in a lump sum as
soon as practicable after the Reporting Date coincident with or next
following the date the corresponding withdrawal request is duly approved
by the Administrative Committee.
(b) In the event the Administrative Committee approves a Participant's
withdrawal request, then the Participant shall be subject to a
forfeiture penalty of 10 percent of the amount of the withdrawal, unless
the Participant proves to the Compensation Committee with such evidence
as the Compensation Committee may deem appropriate that the withdrawal
request is occasioned by severe financial hardship. In the event such
Participant incurs a forfeiture penalty under this Section 5.04(b), such
amount shall be permanently forfeited and debited from the Participant's
Deferral Account by the Company at the time the withdrawal payment is
made to the Participant, and any such amounts forfeited and debited from
the Participant's Deferral Account shall, in no event and in no manner,
be ever again credited to the individual under this Plan.
5.05 Tax Increases
Notwithstanding the provisions of Sections 5.01 and 5.03, in the event a
Participant's Deferral Account is being paid in installment payments
under Section 5.02, and during said payout period Federal personal
income tax rates for the highest marginal tax rate are scheduled to
increase by 5 or more percentage points, at the direction of the
Compensation Committee, any remaining installment payments to be paid
after the effective date of such increase shall be paid in one lump sum
prior to said effective date.
5.06 Designation of Beneficiary
Each Participant shall file with the Administrative Committee a written
designation of one or more persons as the Beneficiary who shall be
entitled to receive the amount, if any, payable under the Plan upon his
death pursuant to Section 5.02(b). A Participant may, from time to time,
revoke or change his Beneficiary designation without the consent of any
prior Beneficiary by filing a new designation with the Administrative
Committee. The last such designation received by the Administrative
Committee shall be controlling; provided, however, that no designation,
or change or revocation thereof, shall be effective unless received by
the Administrative Committee prior to the Participant's death, and in no
event shall it be effective as of a date prior to such receipt. If no
such Beneficiary designation is in effect at the time of a Participant's
death, or if no designated Beneficiary survives the Participant, the
Participant's surviving spouse, if any, shall be deemed to have been
designated his Beneficiary, otherwise the Participant's estate shall be
deemed to have been designated as
-12-
<PAGE>
his Beneficiary, and shall receive the payment of the amount, if any,
payable under the Plan upon his death.
5.07 Debiting Accounts
Any amounts debited from a Participant's Deferral Account by reason of a
distribution, withdrawal, or otherwise under this Article 5, shall be
debited from the Participant's Deferral Account and the investment
options under which such amount is credited, and such other accounts,
subaccounts, options, or other allocations in the same proportion that
the Participant's entire Deferral Account is credited at the time such
debit is made, as determined by the Administrative Committee.
-13-
<PAGE>
ARTICLE 6. AMENDMENT OR TERMINATION
6.01 Right to Terminate
The Corporation may, by action of the Board of Directors, terminate this
Plan and the related Deferral Agreements at any time. In the event the
Plan and related Deferral Agreements are terminated, each Participant or
Beneficiary shall receive a single sum payment in cash equal to the
balance of the Participant's Deferral Account. The single sum payment
shall be made as soon as practicable following the date the Plan is
terminated and shall be in lieu of any other benefit which may be
payable to the Participant or Beneficiary under this Plan.
6.02 Right to Amend
The Compensation Committee may amend or modify this Plan and the related
Deferral Agreements in any way either retroactively or prospectively;
provided, however, no amendment or modification shall reduce the balance
of a Participant's Deferral Account as of the date of such amendment or
modification, as adjusted pursuant to Article 4. Notwithstanding the
foregoing, a change in any investment fund or index under Section 4.01
shall not be deemed to adversely affect any Participant's rights to his
Deferral Account.
-14-
<PAGE>
ARTICLE 7. GENERAL PROVISIONS
7.01 Funding
(a) All amounts payable in accordance with this Plan shall constitute a
general unsecured obligation of the Company. Such amounts, as well as
any administrative costs relating to the Plan, shall be paid out of the
general assets of the Company, to the extent not paid by a grantor trust
established pursuant to paragraph (b) below. The Administrative
Committee may decide that a Participant's Account may be reduced to
reflect allocable administrative expense.
(b) The Corporation may, for administrative reasons, establish a grantor
trust for the benefit of Participants participating in the Plan. The
assets of said trust will be held separate and apart from other
Corporation funds, and shall be used exclusively for the purposes set
forth in the Plan and the applicable trust agreement, subject to the
following conditions:
(i) the creation of said trust shall not cause the Plan to be other
than "unfunded" for purposes of Title I of ERISA;
(ii) the Corporation shall be treated as "grantor" of said trust for
purposes of Code Section 677; and
(iii) said trust agreement shall provide that its assets may be used to
satisfy claims of the Corporation's general creditors, and the
rights of such general creditors are enforceable by them under
federal and state law.
7.02 No Contract of Employment
The Plan is not a contract of employment and the terms of employment of
any Participant shall not be affected in any way by this Plan or related
instruments, except as specifically provided therein. The establishment
of the Plan shall not be construed as conferring any legal rights upon
any person for a continuation of employment, nor shall it interfere with
the rights of the Company to discharge any person and to treat him
without regard to the effect which such treatment might have upon him
under this Plan. Each Participant and all persons who may have or claim
any right by reason of his participation shall be bound by the terms of
this Plan and all Deferral Agreements entered into pursuant thereto.
7.03 Unsecured Interest
Neither the Company nor the Compensation Committee nor the
Administrative Committee in any way guarantees the performance of the
investment funds or indices a Participant may designate under Article 4.
No special or separate fund shall be established, and no segregation of
assets shall be made, to assure the payments thereunder. No Participant
hereunder shall have any right, title, or interest whatsoever in any
specific assets of the Company. Nothing contained in this Plan and no
action taken pursuant to its provisions shall create or be construed to
create a trust of any kind or a fiduciary relationship between the
Company and a Participant or any other person. To the extent that any
person acquires a right to receive
-15-
<PAGE>
payments under this Plan, such right shall be no greater than the right
of any unsecured creditor of the Company.
7.04 Facility of Payment
In the event that the Administrative Committee shall find that a
Participant or Beneficiary is unable to care for his affairs because of
illness or accident or is a minor or has died, the Administrative
Committee may direct that any benefit payment due him, unless claim
shall have been made therefor by a duly appointed legal representative,
be paid on his behalf to his spouse, a child, a parent or other blood
relative, and any such payment so made shall thereby be a complete
discharge of the liability of the Plan for that payment.
7.05 Withholding Taxes
The Company shall have the right to deduct from each payment to be made
under the Plan any required withholding taxes.
7.06 Nonalienation
Subject to any applicable law, no benefit under the Plan shall be
subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance or charge, and any attempt to do so
shall be void, nor shall any such benefit be in any manner liable for or
subject to garnishment, attachment, execution or levy, or liable for or
subject to the debts, contracts, liabilities, engagements or torts of a
person entitled to such benefits.
7.07 Mergers/Transfers
(a) This Plan shall be binding upon and inure to the benefit of the Company
and its successors and assignees and the Participant, his designees and
his estate. Nothing in this Plan shall preclude the Company from
consolidating or merging into or with, or transferring all or
substantially all of its assets to, another corporation which assumes
this Plan and all obligations of the Company hereunder. Upon such a
consolidation, merger or transfer of assets and assumption, the term
"Company" shall refer to such other corporation and this Plan shall
continue in full force and effect.
(b) Notwithstanding any Plan provisions to the contrary, at the discretion
and direction of the Corporation, liabilities with respect to benefits
accrued by a Participant under a Plan maintained by such Participant's
former employer may be transferred to this Plan and upon such transfer
become the obligation of the Company.
7.08 Limitation of Liability
The Company, the members of the Compensation Committee and of the
Administrative Committee, and any officer, employee or agent of the
Company shall not incur any liability individually or on behalf of any
other individuals or on behalf of the Company for any act or failure to
act, made in good faith in relation to this Plan.
-16-
<PAGE>
7.09 Indemnification
The Company, the members of the Compensation Committee and of the
Administrative Committee, and the officers, employees and agents of the
Company shall, unless prohibited by any applicable law, be indemnified
against any and all liabilities arising by reason of any act or failure
to act in relation to the Plan including, without limitation, expenses
reasonably incurred in the defense of any claim relating to the Plan,
amounts paid in any compromise or settlement relating to the Plan and
any civil penalty or excise tax imposed by any applicable statute, if:
(a) the act or failure to act shall have occurred
(i) in the course of the person's service as an officer,
employee or agent of the Company or as a member of the
Compensation Committee or of the Administrative
Committee,
(ii) in connection with a service provided with or without
charge to the Plan or to the Participants or
Beneficiaries of the Plan, if such service was requested
by the Compensation Committee or the Administrative
Committee; and
(b) the act or failure to act is in good faith and in, or not opposed
to, the best interests of the Company.
This determination shall be made by the Corporation and, if such
determination is made in good faith and not arbitrarily or capriciously,
shall be conclusive.
The foregoing indemnification shall be from the assets of the Company.
However, the Company's obligation hereunder shall be offset to the
extent of any otherwise applicable insurance coverage under a policy
maintained by the Company or any other person, or other source of
indemnification.
7.10 Claims Procedure
(a) Submission of Claims
Claims for benefits under the Plan shall be submitted in writing to the
Administrative Committee or to an individual designated by the
Administrative Committee for this purpose.
(b) Denial of Claim
If any claim for benefits is wholly or partially denied, the claimant
shall be given written notice within 90 days following the date on which
the claim is filed, which notice shall set forth the following:
(i) the specific reason or reasons for the denial;
(ii) specific reference to pertinent Plan provisions on which the
denial is based;
-17-
<PAGE>
(iii) a description of any additional material or information necessary
for the claimant to perfect the claim and an explanation of why
such material or information is necessary; and
(iv) an explanation of the Plan's claim review procedure.
If special circumstances require an extension of time for processing the
claim, written notice of an extension shall be furnished to the claimant
prior to the end of the initial period of 90 days following the date on
which the claim is filed. Such an extension may not exceed a period of
90 days beyond the end of said initial period.
If the claim has not been granted and written notice of the denial of
the claim is not furnished within 90 days following the date on which
the claim is filed, the claim shall be deemed denied for the purpose of
proceeding to the claim review procedure.
(c) Claim Review Procedure
The claimant or his authorized representative shall have 60 days
after the earlier of (i) receipt of written notification of denial of a
claim or (ii) expiration of the 90-day period (or any extended period up
to 180 days pursuant to Section 7.10(b)) following the date on which the
claim is filed, to request a review of the denial by making written
request to the Administrative Committee, and may review pertinent
documents and submit issues and comments in writing within such 60-day
period.
Not later than 60 days after receipt of the request for review, the
Administrative Committee shall render and furnish to the claimant a
written decision, which shall include specific reasons for the decision
and shall make specific references to pertinent Plan provisions on which
it is based. If special circumstances require an extension of time for
processing, the decision shall be rendered as soon as possible, but not
later than 120 days after receipt of the request for review, provided
that written notice and explanation of the delay are given to the
claimant prior to commencement of the extension. Such decision by the
Administrative Committee shall not be subject to further review. If a
decision on review is not furnished to a claimant within the specified
time period, the claim shall be deemed to have been denied on review.
(d) Exhaustion of Remedy
No claimant shall institute any action or proceeding in any state or
federal court of law or equity or before any administrative tribunal or
arbitrator for a claim for benefits under the Plan until the claimant
has first exhausted the procedures set forth in this Section.
7.11 Acceleration of Payment
Notwithstanding any other provision of the Plan to the contrary, the
Company shall make payments hereunder to a Participant before such
payments are otherwise due if it determines, based on a change in the
tax or revenue laws of the United States of America, a published ruling
or similar announcement issued by the Internal Revenue Service, a
regulation issued
-18-
<PAGE>
by the Secretary of the Treasury or his delegate, a decision by a court
of competent jurisdiction involving a Participant or Beneficiary, or a
closing agreement made under Code Section 7121 that is approved by the
Internal Revenue Service and involves a Participant or Beneficiary, that
a Participant or Beneficiary has recognized or will recognize income for
federal income tax purposes with respect to amounts that are or will be
payable to him under the Plan before they are paid to him.
7.12 Payment of Expenses
All administrative expenses of the Plan and all benefits under the Plan
shall be paid from the general assets of the Company, except as
otherwise may be provided herein.
7.13 Construction
(a) The Plan is intended to constitute an unfunded deferred compensation
arrangement for a select group of management or highly compensated
employees and therefore exempt from the requirements of parts 2, 3 and 4
of Subtitle B of Title I of ERISA (pursuant to Sections 201(2),
301(a)(3) and 401(a)(1) of ERISA), and all rights hereunder shall be
governed by ERISA. Subject to the preceding sentence, the Plan shall be
construed, regulated and administered in accordance with the laws of the
State of New York, subject to the provisions of applicable federal laws.
(b) The masculine pronoun shall mean the feminine wherever appropriate.
(c) The illegality of any particular provision of this document shall not
affect the other provisions, and the document shall be construed in all
respects as if such invalid provision were omitted.
(d) Article or Section references herein shall mean references to such
Articles or Sections as contained herein, unless otherwise indicated.
-19-
<PAGE>
ARTICLE 8. ADMINISTRATION
8.01
(a) The Administrative Committee shall have the exclusive responsibility and
complete discretionary authority to control the operation, management
and administration of the Plan, with all powers necessary to enable it
to properly carry out such responsibilities, including, but not limited
to, the power to interpret the Plan and any related documents, to
establish procedures for making any elections called for under the Plan,
to make factual determinations regarding any and all matters arising
hereunder, including, but not limited to, the right to determine
eligibility for benefits, the right to construe the terms of the Plan,
the right to remedy possible ambiguities, inequities, inconsistencies or
omissions, and the right to resolve all interpretive, equitable or other
questions arising under the Plan. The decisions of the Administrative
Committee on all matters shall be final, binding and conclusive on all
persons to the extent permitted by law. The Administrative Committee may
appoint one or more individuals and delegate such of its power and
duties described herein as it deems desirable to any such individuals as
to any matter within the jurisdiction of such delegations.
(b) To the extent permitted by law, all agents and representatives of the
Administrative Committee shall be indemnified by the Company and saved
harmless against any claims and the expenses of defending against such
claims, resulting from any action or conduct relating to the
administration of the Plan, except claims arising from gross negligence,
willful neglect or willful misconduct.
-20-
<PAGE>
ARTICLE 9. SIGNATURE AND VERIFICATION
IN WITNESS WHEREOF, the Corporation has caused this Plan to be executed as of
the 1st day of November, 1998.
---------------------------------------
---------------------------------------
Attest:
---------------------
-21-
<PAGE>
BARNESANDNOBLE.COM LLC
RETIREMENT PLAN
Effective as of November 1, 1998
<PAGE>
BARNESANDNOBLE.COM LLC
RETIREMENT PLAN
INTRODUCTION
The barnesandnoble.com LLC Retirement Plan (the "Plan") was established
effective November 1, 1998 to cover employees of barnesandnoble.com LLC. This
Plan was adopted by barnesandnoble.com LLC as an amendment and continuation of
the Barnes & Noble, Inc. Employees' Retirement Plan and shall provide past
service benefits for certain employees for whom liabilities and assets were
transferred to this Plan from the Barnes and Noble, Inc. Employees' Retirement
Plan.
Participation in the Plan is available, as set forth herein, to eligible
employees of barnesandnoble.com LLC and of such affiliates of barnesandnoble.com
LLC as may become participating employers under the Plan.
<PAGE>
BARNESANDNOBLE.COM LLC
RETIREMENT PLAN
TABLE OF CONTENTS
Page
ARTICLE 1. DEFINITIONS.....................................................1
ARTICLE 2. PARTICIPATION...................................................17
2.01 Participation Requirements......................................17
2.02 Determination of Eligibility Service............................17
2.03 Events Affecting Participation..................................18
2.04 Participation upon Reemployment.................................18
ARTICLE 3. SERVICE.........................................................19
3.01 Years of Vesting Service........................................19
3.02 Credited Service................................................21
3.03 Restoration of Retired Participant or Other Former Eligible
Employee to Service.............................................23
ARTICLE 4. ELIGIBILITY FOR AND AMOUNT OF BENEFITS..........................28
4.01 Normal Retirement...............................................28
4.02 Late Retirement.................................................29
4.04 Vesting.........................................................33
4.05 Spouse's Pension................................................33
4.06 Maximum Benefit Limitation......................................38
4.07 Transfers and Employment with an Affiliate......................40
ARTICLE 5. PAYMENT OF PENSIONS.............................................41
5.01 Automatic Form of Payment.......................................41
5.02 Optional Forms of Payment.......................................43
5.03 Election of Options.............................................45
5.04 Commencement of Payments........................................48
5.05 Distribution Limitation.........................................49
5.06 Direct Rollover of Certain Distributions........................49
-i-
<PAGE>
BARNESANDNOBLE.COM LLC
RETIREMENT PLAN
TABLE OF CONTENTS
(cont'd)
Page
ARTICLE 6. CONTRIBUTIONS...................................................52
6.01 Employer's Contributions........................................52
6.02 Return of Contributions.........................................52
ARTICLE 7. ADMINISTRATION OF PLAN..........................................54
7.01 Plan Sponsor and Plan Administrator.............................54
7.02 Administrative Responsibilities.................................54
7.03 Delegation of Responsibilities..................................55
7.04 Certified Earnings and Bonding..................................56
7.05 Service in More Than One Fiduciary Capacity.....................56
7.06 Indemnification.................................................56
7.07 Establishment of Rules..........................................56
7.08 Correction of Errors............................................57
7.09 Prudent Conduct.................................................57
7.10 Actuary.........................................................58
7.11 Maintenance of Accounts.........................................58
7.12 Records.........................................................58
7.13 Appointment of Investment Manager...............................59
7.14 Expenses of Administration......................................59
7.15 Claims and Review Procedures....................................60
ARTICLE 8. MANAGEMENT OF FUNDS.............................................63
8.01 Funding Agent...................................................63
8.02 Exclusive Benefit Rule..........................................64
8.03 Funding Policy..................................................64
ARTICLE 9. GENERAL PROVISIONS..............................................65
9.01 Nonalienation...................................................65
9.02 Conditions of Employment Not Affected by Plan...................66
9.03 Facility of Payment.............................................66
9.04 Information.....................................................66
9.05 Top-Heavy Provisions............................................67
9.06 Offsets.........................................................72
-ii-
<PAGE>
BARNESANDNOBLE.COM LLC
RETIREMENT PLAN
TABLE OF CONTENTS
(cont'd)
Page
9.07 Construction....................................................72
9.08 Prevention of Escheat...........................................73
ARTICLE 10. AMENDMENT, MERGER, AND TERMINATION.............................74
10.01 Amendment of Plan...............................................74
10.02 Merger, Consolidation, or Transfer..............................74
10.03 Additional Participating Employers..............................75
10.04 Termination of Plan.............................................76
APPENDIX A. ACTUARIAL FACTORS..............................................79
APPENDIX B. SPECIAL PROVISIONS APPLICABLE TO PARTICIPANTS
WHO TRANSFER DIRECTLY BETWEEN AN EMPLOYER AND
BARNES & NOBLE, INC....................................................81
-iii-
<PAGE>
BARNESANDNOBLE.COM LLC
ARTICLE 1. DEFINITIONS
1.01 "Accrued Benefit" means, as of any date of determination, the normal
retirement Pension of a Participant computed under Section 4.01 on the
basis of the Participant's Final Average Compensation, the number of
years of Credited Service and other applicable components of the Plan
formula, as of that date.
1.02 "Actuarial Equivalent" means the equivalent value when computed on the
basis of the IRS Mortality Table and IRS Interest Rate, except as
otherwise specified in the Plan or Appendix A.
1.03 "Administrator" means the Company in its role described in Article 7.
1.04 "Affiliate" means any company not participating in the Plan which is
(i) a member of a controlled group of corporations (as defined in
Section 414(b) of the Code) which also includes as a member the
Employer; (ii) any trade or business under common control (as defined
in Section 414(c) of the Code) with the Employer; (iii) any
organization (whether or not incorporated) which is a member of an
affiliated service group (as defined in Section 414(m) of the Code)
which includes the Employer; or (iv) any other entity required to be
aggregated with the Employer pursuant to regulations under Section
414(o) of the Code. Notwithstanding the foregoing sentence, for
purposes of Section 4.06, Section 3.01(e)(iii), and Section
3.02(c)(iii), the definitions in Sections 414(b) and (c) of the Code
shall be modified as provided in Section 415(h) of the Code.
-1-
<PAGE>
1.05 "Annuity Starting Date" means, unless the Plan expressly provides
otherwise, the first day of the first period for which an amount is due
as an annuity or any other form.
1.06 "Barnes & Noble, Inc." means Barnes & Noble, Inc. or one of its
affiliates, as such term is defined in the Barnes & Noble Plan.
1.07 "Barnes & Noble Plan" means the Barnes & Noble, Inc. Employees'
Retirement Plan as in effect on October 31, 1998.
1.08 "Beneficiary" means the person or persons named by a Participant by
written designation filed with the Administrator to receive payments
after the Participant's death.
1.09 "Board of Directors" means the Board of Managers of the Company, as
from time to time constituted, or such body or entity that succeeds to
the authority of the Board of Managers.
1.10 "Break in Service" means a period which constitutes a break in an
Eligible Employee's Years of Vesting Service, as provided in Section
3.01(c).
1.11 "Certified Earnings" means, except as otherwise provided in an Appendix
hereto, the basic cash remuneration paid to an Eligible Employee for
services rendered to the Employer, determined prior to any pre-tax
contributions under a "qualified cash or deferred arrangement" (as
defined under Section 401(k) of the Code and its applicable
-2-
<PAGE>
regulations) or under a "cafeteria plan" (as defined under Section 125
of the Code and its applicable regulations), including salary, hourly
wages, commissions, overtime pay, and bonus pay, but excluding (a)
expense allowances or reimbursements, payments or contributions to or
for the benefit of the Participant under this Plan or any other
employee benefit plan, deferred compensation payments under any
deferred compensation plan, merchandise discounts or benefits in the
form or use of property, except to the extent such amounts are required
to be included in determining the Eligible Employee's regular rate of
pay under the Federal Fair Labor Standards Act for purposes of
computing his overtime pay, (b) any bonus paid to the Eligible Employee
under a plan or policy of the Employer that is paid in a calendar year
other than the calendar year in which such bonus would normally be paid
under such plan or policy, or (c) amounts paid by any entity other than
the Employer.
Notwithstanding the foregoing with respect to an Eligible Employee who
is first employed by the Company on the Effective Date and who
immediately prior to such date was either (i) a participant in the
Barnes & Noble, Inc. Plan, or (ii) was employed by Barnes & Noble, Inc.
and then in the process of satisfying the eligibility requirements for
participation in the Barnes & Noble Plan, basic cash remuneration paid
to said Eligible Employee as an employee of Barnes & Noble, Inc. prior
to the Effective Date shall be recognized as Certified Earnings under
this Section 1.11 and shall be included in the calculation of Final
Average Compensation under Section 1.21 to the extent such remuneration
would have been recognized as "certified earnings under the provisions
of the Plan had it been paid to such Participant while an Eligible
Employee.
-3-
<PAGE>
Certified Earnings taken into account for any purpose under the Plan,
including the determination of Final Average Compensation, shall not
exceed $150,000, as adjusted in accordance with Sections 401(a)(17)(B)
and 415(d)(1)A) of the Code. With respect to a Participant who had the
liabilities attributable to his benefits accrued under the Barnes &
Noble Plan prior to the Effective Date transferred from the Barnes &
Noble Plan to this Plan, Certified Earnings taken into account for any
purpose under the Plan, including the determination of Final Average
Compensation with respect to the period January 1, 1989 through
December 31, 1993, shall not exceed $200,000 per year; provided,
however, as of January 1 of each calendar year on and after January 1,
1990 and before January 1, 1994, the applicable limitation as
determined by the Commissioner of Internal Revenue for that calendar
year shall become effective as the maximum Certified Earnings to be
taken into account for Plan purposes for that calendar year only in
lieu of the $200,000 limitation set forth above.
1.12 "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
1.13 "Company" means barnesandnoble.com LLC and any successor thereof by
merger, purchase, or otherwise.
1.14 "Covered Compensation" means, for any Participant, the average, rounded
to the nearest $3,000, of the taxable wage bases in effect under
Section 230 of the Social Security Act for each year in the 35-year
period ending with the calendar year in which the Participant attains
(or will attain) his Social Security Retirement Age. In determining a
Participant's
-4-
<PAGE>
Covered Compensation for any Plan Year, the taxable wage base for the
current Plan Year and any subsequent Plan Year shall be assumed to be
the same as the taxable wage base in effect as of the beginning of the
Plan Year for which the determination is made.
1.15 "Credited Service" means service recognized for purposes of computing
the amount of any benefit, determined as provided in Section 3.02.
1.16 "Effective Date" means November 1, 1998.
1.17 "Eligible Employee" means any Employee who receives from an Employer
compensation other than a pension, severance pay, retainer or fee under
contract, but excluding any individual classified by the Employer as a
Leased Employee or independent contractor, regardless of their
classification by the Internal Revenue Service for tax withholding
purposes, any person who is included in a unit of Employees covered by
a collective bargaining agreement which does not provide for his
membership in the Plan, any non-resident alien with no U.S.-source
income [as described in Code Section 861(a)(3)], and any Employee whose
services are performed outside the continental United States (including
Alaska and Puerto Rico) or Hawaii, or whose base of operations is
outside the continental U.S. (including Alaska and Puerto Rico) or
Hawaii.
1.18 "Employee" means any person who is employed by an Employer.
-5-
<PAGE>
1.19 "Employer" means the Company with respect to its employees; or any
other company participating in the Plan as provided in Section 10.03
with respect to its employees.
1.20 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
1.21 "Final Average Compensation" means the average annual Certified
Earnings of a Participant during the five consecutive calendar years in
the last ten or fewer calendar years during which he completes at least
1,000 Hours of Service in each such calendar year affording the highest
such average, or during all of the calendar years in which he completes
1,000 Hours of Service, if less than five years. The calendar year in
which the Participant first completes an Hour of Service and/or the
calendar years in which he incurs a Termination of Employment shall be
included in the determination of Final Average Compensation, even if he
completed less than 1,000 Hours of Service in each of such calendar
years, if the inclusion of Certified Earnings in either or both of such
calendar years results in a higher Final Average Compensation, provided
that such calendar years are within the last ten consecutive calendar
years.
1.22 "Five Percent Owner" means with respect to a corporation, any person
who owns (or is considered as owning within the meaning of Code Section
318) more than 5 percent of the outstanding stock of the corporation or
stock possessing more than 5 percent of the total voting power of the
corporation.
-6-
<PAGE>
1.23 "Funding Agent" means the trustee or trustees or the legal reserve life
insurance company by whom the funds of the Plan are held, as provided
in Article 8.
1.24 "Highly-Compensated Employee" means any employee of the Employer or an
Affiliate (whether or not eligible for the Plan) who:
(a) was a Five Percent Owner for such Plan Year or the prior Plan
Year, or
(b) for the preceding Plan Year received Statutory Compensation in
excess of $80,000 (as adjusted by the Secretary of the Treasury
from time to time), and, if the Employer so elects, was among the
highest 20 percent of employees for the preceding Plan Year when
ranked by Statutory Compensation paid for that year excluding, for
purposes of determining the number of such employees, such
employees as the Administrator may determine on a consistent basis
pursuant to Section 414(q) of the Code. For this purpose,
"Statutory Compensation" shall mean the wages, salaries, and other
amounts paid in respect of an employee for services actually
rendered to an Employer or an Affiliate and including amounts
excluded from the income of an employee pursuant to Sections 125,
402(e)(3), 402(h)(1)(B), and 403(b) of the Code, but excluding
deferred compensation, stock options, and other distributions
which receive special tax benefits under the Code.
Notwithstanding the foregoing, employees who are nonresident aliens and
who receive no earned income from the Employer or an Affiliate which
constitutes income from sources within the United States shall be
disregarded for all purposes of this Section.
-7-
<PAGE>
The provisions of this Section shall be further subject to such
additional requirements as shall be described in Section 414(q) of the
Code and its applicable regulations, which shall override any aspects
of this Section inconsistent therewith.
1.25 "Hour of Service" means, with respect to any applicable computation
period,
(a) each hour for which the Employee is paid or entitled to payment
for the performance of duties for the Employer or an Affiliate,
(b) each hour for which an Employee is paid or entitled to payment by
the Employer or an Affiliate on account of a period during which
no duties are performed, whether or not the employment
relationship has terminated, due to vacation, holiday, illness,
incapacity (including disability), layoff, jury duty, military
duty or leave of absence, but not more than 501 hours for any
single continuous period,
(c) each hour for which back pay, irrespective of mitigation of
damages, is either awarded or agreed to by the Employer or an
Affiliate, excluding any hour credited under (a) or (b), which
shall be credited to the computation period or periods to which
the award, agreement or payment pertains, rather than to the
computation period in which the award, agreement or payment is
made,
(d) solely for purposes of determining whether an Employee has
incurred a Break in Service under the Plan, each hour for which an
Employee would normally be credited under paragraph (a) or (b)
above during a period of Parental Leave but not more than 501
hours for any single continuous period. In the case in which hours
cannot be determined, eight hours of service per day of such
absence shall be credited. However, the number of hours credited
to an Employee under this
-8-
<PAGE>
paragraph (d) during the computation period in which the Parental
Leave began, when added to the hours credited to an Employee under
paragraphs (a) through (c) above during that computation period,
shall not exceed 501. If the number of hours credited under this
paragraph (d) for the computation period in which the Parental
Leave began is zero, the provisions of this paragraph (d) shall
apply as though the Parental Leave began in the immediately
following computation period, and
(e) solely for purposes of determining whether an Employee has
incurred a Break in Service under the Plan, each hour for which an
Employee would normally be credited under paragraph (a) or (b)
above during a period of leave for the birth, adoption or
placement of a child, to care for a spouse or an immediate family
member with a serious illness or for the Employee's own illness
pursuant to the Family and Medical Leave Act of 1993 and its
regulations.
For purposes of paragraph (b), a payment shall be deemed to be made by
or due from an Employer or Affiliate regardless of whether such payment
is made by or due from an Employer or Affiliate directly, or indirectly
through, among others, a trust fund or insurer to which the Employer or
Affiliate contributes or pays premiums, and regardless of whether
contributions made or due to the trust fund, insurer or other entity
are for the benefit of particular Employees or are on behalf of a group
of Employees in the aggregate.
-9-
<PAGE>
No more than 501 hours shall be credited under paragraph (b) above for
the non-performance of duties for any single continuous period (whether
or not such period occurs in a single computation period).
No hours shall be credited on account of any period during which the
Employee performs no duties and receives payment solely for the purpose
of complying with unemployment compensation, workers' compensation or
disability insurance laws.
The Hours of Service credited shall be determined as required by Title
29 of the Code of Federal Regulations, Section 2530.200b-2(b) and (c).
In crediting Hours of Service hereunder, each Employee for whom the
Employer or Affiliate does not maintain hourly work records and who
completes at least one Hour of Service (pursuant to paragraphs (a),
(b), or (c) above) during any week shall be credited with 45 Hours of
Service for such week. For each other Employee, Hours of Service shall
be credited based on the number of hours actually worked.
Notwithstanding the foregoing, with respect to an Employee who is first
employed by the Company on the Effective Date and who immediately prior
to such date was employed by Barnes & Noble, Inc., Hours of Service
shall include each hour of service rendered by said Employee as an
employee of Barnes & Noble, Inc. prior to November 1, 1998 to the
extent said hour of service would have been recognized under the Plan
had it been rendered as an Employee.
-10-
<PAGE>
1.26 "IRS Interest Rate" means the annual rate of interest on 30-year
Treasury Securities as published by the Commissioner in the calendar
month preceding the applicable Stability Period.
1.27 "IRS Mortality Table" means the mortality table prescribed by the
Secretary of the Treasury under Section 417(e)(3)(A)(ii)(I) of the Code
as in effect on the first day of the applicable Stability Period.
1.28 "Leased Employee" means any person as so defined in Section 414(n) of
the Code.
1.29 "Limitation Year" means the calendar year.
1.30 "Normal Retirement Age" means an Eligible Employee's 65th birthday or
the fifth anniversary of the date he becomes a Participant, if later.
1.31 "Normal Retirement Date" means the last day of the calendar month in
which an Eligible Employee reaches his Normal Retirement Age.
-11-
<PAGE>
1.32 "Parental Leave" means a period in which the Eligible Employee is
absent from work immediately following his active employment because of
the Eligible Employee's pregnancy, the birth of the Eligible Employee's
child, the placement of a child with the Eligible Employee in
connection with the adoption of that child by the Eligible Employee, or
for purposes of caring for that child for a period beginning
immediately following birth or placement.
1.33 "Participant" means any person included in the participation of the
Plan, as provided in Article 2.
1.34 "Pension" means annual payments under the Plan as provided in Article
5.
1.35 "Plan" means the barnesandnoble.com LLC Retirement Plan, as set forth
in this document or as amended from time to time.
1.36 "Plan Year" means the calendar year.
-12-
<PAGE>
1.37 "Protected Benefit" means, as of any date of determination, the Accrued
Benefit of a Participant and
(a) any right of the Participant under the terms of the Plan as of
such date to have such Accrued Benefit commence on a date other
than the Normal Retirement Date,
(b) any right of the Participant under the terms of the Plan as of
such date to have such Accrued Benefit payable in an optional form
of payment, and
(c) the methodology under the terms of the Plan as of such date for
determining the amount of benefit payable as a result of the
exercise of any right of the Participant expressed in paragraph
(a) or (b) above.
For the sole purposes of paragraph (c) above, any provision of the Plan
that requires payment of a Participant's Pension in a form other than
that described in Section 5.01(a) shall be considered to be the
exercise of a right by the Participant therefor.
1.38 "Qualified Joint and Survivor Annuity" means an annuity described in
Section 5.01(b).
1.39 "Social Security Retirement Age" means age 65 with respect to a
Participant who was born before January 1, 1938; age 66 with respect to
a Participant who was born after December 31, 1937 and before January
1, 1955; and age 67 with respect to a Participant who was born after
December 31, 1954.
-13-
<PAGE>
1.40 "Spousal Consent" means the irrevocable, written consent given by a
Participant's spouse to an election made by the Participant of a
specified form of Pension, a designation of a specified Beneficiary as
provided in Article 5, or the waiver of the spouse's benefit payable
under Section 4.05. The specified form or specified Beneficiary shall
not be changed unless further Spousal Consent is given, unless the
spouse expressly waives the right to consent to any future changes.
Spousal Consent shall be duly witnessed by a notary public and shall
acknowledge the effect on the spouse of the Participant's election. The
requirement for Spousal Consent may be waived by the Administrator in
the event that the Participant establishes to its satisfaction that he
has no spouse, that such spouse cannot be located, that a legal
separation has occurred or under such other circumstances as may be
permitted under applicable Treasury Department regulations. Spousal
Consent shall be applicable only to the particular spouse who provides
such consent.
1.41 "Stability Period" means the Plan Year in which occurs the Annuity
Starting Date for the distribution.
1.42 "Suspendible Month" means a month in which the Participant completes at
least 40 Hours of Service with the Employer or an Affiliate.
-14-
<PAGE>
1.43 "Termination of Employment" means, except as otherwise provided in an
Appendix hereto, the date the Employee's employment with the Employer
and all Affiliates ceases, as determined by the Employer, due to his
resignation, discharge, retirement, death, failure to return to active
service at the end of an authorized leave of absence or the authorized
extension(s) thereof, failure to return to service when duly called
following a temporary layoff, or the occurrence of any event or
circumstance under the policy of the Employer or Affiliate, or
predecessor employer, in effect from time to time that results in the
termination of the Employer/Employee relationship; provided, however,
that a Termination of Employment shall not be deemed to have occurred
while an Employee, prior to his Normal Retirement Date, is receiving,
or fulfilling a six-month waiting period to be eligible to receive,
payments under a long-term disability plan of the Employer (assuming
the Employee makes timely application therefor).
1.44 "Trustee" means the trustee or trustees of the separate trust forming
part of this Plan and any additional or successor trustees as may be
appointed by the Company pursuant to Article 8.
1.45 "Trust Fund" means the aggregate of assets described in Article 8.
1.46 "Year of Eligibility Service" means the period of service recognized
for purposes of determining eligibility for participation in the Plan,
determined as provided in Section 2.02.
-15-
<PAGE>
1.47 "Years of Vesting Service" means the period of service recognized for
purposes of determining eligibility for certain benefits under the
Plan, determined as provided in Section 3.01.
-16-
<PAGE>
ARTICLE 2. PARTICIPATION
2.01 Participation Requirements
Every Eligible Employee employed on the Effective Date who was a
participant in the Barnes & Noble Plan on October 31, 1998 shall become
a Participant on November 1, 1998. Every other Eligible Employee shall
become a Participant in the Plan as of the first day of the calendar
month coinciding with or immediately following (a) the date he
completes one Year of Eligibility Service or (b) his 21st birthday,
whichever is later, provided he is then an Eligible Employee.
2.02 Determination of Eligibility Service
Solely for purposes of this Article and except as otherwise provided in
an Appendix, a Year of Eligibility Service shall be the 12-month period
beginning on the date an Eligible Employee first completes an Hour of
Service upon hire or rehire, or any Plan Year beginning after that
date, in which he completes at least 1,000 Hours of Service. In the
event an Eligible Employee incurs a Break in Service prior to his
completing one Year of Eligibility Service, upon his reemployment, he
shall be credited with one Year of Eligibility Service for the 12-month
period beginning on the date he first completes an Hour of Service
after he incurs a Break in Service or any Plan Year beginning after
that date, in which he completes at least 1,000 Hours of Service.
Notwithstanding the foregoing, with respect to an Employee who is first
employed by the Company on the Effective Date and who was employed by
Barnes & Noble, Inc. immediately prior to that date and then in the
process of satisfying the eligibility requirements for participation in
-17-
<PAGE>
the Barnes & Noble Plan, the service said Eligible Employee rendered as
an employee of Barnes & Noble prior to the Effective Date shall be
recognized in determining if such Eligible Employee has completed a
Year of Eligibility Service to the extent said period of employment
would have been recognized under the Plan had it been rendered as an
Employee.
2.03 Events Affecting Participation
Except as otherwise provided in an Appendix hereto, a person's
participation in the Plan shall end when he is no longer employed by
the Employer or an Affiliate if he is not entitled to either an
immediate or a deferred Pension under the Plan. Participation shall
continue while on approved leave of absence from service or during a
period while he is not an Eligible Employee but is in the employ of the
Employer or an Affiliate, but no Years of Vesting Service or Credited
Service shall be counted for that period, except as specifically
provided in Article 3 and Section 4.07, and such person's benefit shall
be determined in accordance with the provisions of the Plan in effect
on the date he ceased to be an Eligible Employee.
2.04 Participation upon Reemployment
If an Eligible Employee's participation in the Plan ends and he again
becomes an Eligible Employee, he shall be considered a new Eligible
Employee for all purposes of the Plan, except as provided in Section
3.03.
-18-
<PAGE>
ARTICLE 3. SERVICE
3.01 Years of Vesting Service
(a) A Plan Year in which an Eligible Employee completes at least 1,000
Hours of Service counts as a full Year of Vesting Service. Except
as provided below, no Years of Vesting Service is counted for any
Plan Year in which an Eligible Employee completes less than 1,000
Hours of Service, except that the Plan Year during which he first
completed an Hour of Service and the Plan Year containing his
Termination of Employment shall be aggregated for the purpose of
determining if the Eligible Employee shall be credited with an
additional Year of Vesting Service, provided the Eligible Employee
works at an annualized rate of 1,000 Hours of Service in the Plan
Year in which his Termination of Employment occurs.
(b) An Eligible Employee shall incur a one-year Break in Service for
any Plan Year after the year in which an Eligible Employee first
becomes employed during which he does not complete more than 500
Hours of Service. If an Eligible Employee who has not completed
the vesting requirements for a vested Pension has a Break in
Service in which the number of consecutive one-year Breaks in
Service equals or exceeds five, the service rendered before his
most recent Break in Service shall be excluded from his Years of
Vesting Service. If an Eligible Employee terminates his employment
with the Employer and all Affiliates and is reemployed after
having a Break in Service, his service before the Break in Service
shall be excluded from his Years of Vesting Service, except as
provided
-19-
<PAGE>
in Section 3.03. A period during which an Eligible Employee is on
a leave of absence approved by the Employer or on temporary layoff
shall not be considered as a Break in Service, provided he returns
to work at the end of an approved leave of absence or upon recall
when notified after a temporary layoff.
(c) If an Eligible Employee shall have been absent from the service of
the Employer because of service in the uniformed forces of the
United States and if he shall have returned to the service of the
Employer having applied to return while his reemployment rights
were protected by law, that absence shall not count as a Break in
Service, but instead shall be counted as Years of Vesting Service.
(d) Each of the following periods of service shall be counted in a
person's Years of Vesting Service to the extent that it would be
recognized under paragraphs (a) through (c) above with respect to
Eligible Employees:
(i) a period of service as an Employee, but not an Eligible
Employee, of the Employer,
(ii) a period of service as an employee of an Affiliate
(excluding any period of service prior to the date the
entity became an Affiliate, unless otherwise provided by
the Board of Directors),
(iii) in the case of a person who is a Leased Employee before or
after a period of service as an Eligible Employee or a
period of service described in (i) or (ii) above, a period
during which he has performed services for the Employer or
an Affiliate as a Leased Employee, and
-20-
<PAGE>
(iv) in the case of a person who is first employed by the
Company as an Employee on the Effective Date and who
immediately prior to such date was employed by Barnes &
Noble, Inc., the period of service he rendered prior to
November 1, 1998 as an employee of Barnes & Noble, Inc.
The Break in Service rules of Sections 3.01 and 3.03 shall be applied
as though all such periods of service were service as an Eligible Employee.
3.02 Credited Service
(a) Except as otherwise provided below or in an Appendix hereto, a
full year of Credited Service shall be counted for each Plan Year
during which an Eligible Employee completes 1,000 Hours of Service
as an Eligible Employee. If an Eligible Employee does not complete
1,000 Hours of Service during the Plan Years in which he first
completes an Hour of Service or incurs his Termination of
Employment, he shall receive credit for a fractional year equal to
the actual number of months worked during such Plan Years,
provided that he was working at the rate of 1,000 Hours of Service
per Plan Year. For purposes of the preceding sentence, an Eligible
Employee shall receive credit for a month of service, provided he
has worked 15 or more days during such month.
(b) Credited Service shall include, to the extent required by law, any
period of absence from service with the Employer due to service in
the uniformed forces of the United States which is counted in an
Eligible Employee's Years of Vesting
-21-
<PAGE>
Service as provided in Section 3.01(d) and which occurs after the
date the Employee meets the requirements to be an Eligible
Employee.
(c) Except as provided in paragraph (d) below, Credited Service shall
not be credited for any period in which a Participant is (i) not
an Eligible Employee but is in the employ of the Employer, or (ii)
in the employ of an Affiliate, or (iii) performing services for
the Employer or an Affiliate as a Leased Employee.
(d) Credited Service shall include, with respect to a person who
becomes an Employee on the Effective Date and who immediately
prior to that date was employed by Barnes & Noble, Inc., the
period of employment rendered as an "eligible employee" of Barnes
& Noble, Inc. prior to the Effective Date, to the extent such
employment was recognized for benefit accruals under the terms of
the Barnes & Noble Plan and in the event said Eligible Employee
was not a participant in the Barnes & Noble Plan on October 31,
1998, but was then in the process of satisfying the eligibility
requirements for participation in the Barnes & Noble Plan, to the
extent said period of employment would have been recognized under
the provisions of this Plan for benefit accrual purposes had it
been rendered as an Eligible Employee.
3.03 Restoration of Retired Participant or Other Former Eligible Employee to
Service
(a) If a Participant in receipt of a Pension is restored to service
with the Employer as an Eligible Employee, the following shall
apply:
(i) His Pension shall continue through the month in which he
completes at least 960 Hours of Service, after which (A) if
his restoration to service
-22-
<PAGE>
occurs after his Normal Retirement Date, his Pension shall
be suspended during each Suspendible Month (unless the
provisions of Sections 4.02(c) and 5.04(b) are applicable),
and any optional benefit shall remain in effect, unless the
Participant shall elect otherwise; if the Participant had
commenced payment prior to his Normal Retirement Date,
however, any additional Pension he accrues after his
restoration to service shall be paid to his surviving
spouse in accordance with the provisions of Section 4.05 if
he should die in active service, and (B) if his restoration
to service occurs before his Normal Retirement Date, his
Pension shall be suspended during each Suspendible Month
(unless the provisions of Sections 4.02(c) and 5.04(b) are
applicable), and any election of an optional benefit in
effect shall be void.
(ii) Any Years of Vesting Service and Credited Service to which
he was entitled when he retired or terminated service shall
be restored to him.
(iii) Upon later retirement or termination his Pension shall be
based on the benefit formula then in effect and his
Certified Earnings and Credited Service before and after
the period when he was not in the service of the Employer
reduced by an amount that is the Actuarial Equivalent of
the benefits, if any, he received before the earlier of the
date of his restoration to service or his Normal Retirement
Date.
(iv) The part of the Participant's Pension upon later retirement
payable with respect to Credited Service rendered before
his previous Termination of
-23-
<PAGE>
Employment shall never be less than the amount of his
previous Pension modified to reflect any option in effect
on his later retirement.
(v) Pon later retirement of a Participant in service after his
Normal Retirement Date, payment of the Participant's
Pension shall resume no later than the third month after
the latest Suspendible Month during the period of
restoration, and shall be adjusted, if necessary, in
compliance with Title 29 of the Code of Federal
Regulations, Section 2530.203-3 in a consistent and
nondiscriminatory manner.
(vi) If a monthly Pension payment is made for a calendar month
and it is determined after the Participant's later
retirement and subsequent recommencement of benefits that
such payment was subject to permanent withholding pursuant
to the provisions of this paragraph (a), the amount of such
payment shall be applied as an offset against subsequent
monthly payments unless the Participant has previously
repaid the overpayment. However, the amount of any such
offset shall not exceed, in any month after the Participant
attains Normal Retirement Age, 25 percent of the monthly
total benefit payment that would have been paid but for the
offset.
(vii) The Employer shall notify a Participant of any suspension
under subparagraph (i) above. The notice shall conform to
the requirements of Section 2530.203-3(b)(4) of the
Department of Labor Regulations. The provisions of this
Section shall be administered in accordance with Section
2530.203-3 of the Department of Labor Regulations.
-24-
<PAGE>
(b) If a Participant entitled to but not in receipt of a Pension, or a
former Participant, or an Eligible Employee who was never a
Participant is reemployed without having had a Break in Service,
his Years of Vesting Service and Credited Service shall be
determined as provided in Sections 3.01 and 3.02, and if
reemployed as an Eligible Employee, he shall, in the case of a
former Participant, immediately be restored as a Participant as of
his date of reemployment, and in the case of an Eligible Employee
who was never a Participant, become a Participant in accordance
with Section 2.01. However, if a former Participant received a
lump sum settlement in lieu of a Pension, the Credited Service to
which he was entitled at the time of his termination of service
shall be restored to him in accordance with the provisions of
Section 3.03(c)(ii).
(c) If a Participant entitled to but not in receipt of a Pension or a
former Participant who received a lump sum settlement in lieu of a
Pension is reemployed after having had a Break in Service, the
following shall apply:
(i) The Years of Vesting Service to which he was previously
entitled shall be restored to him, and if reemployed as an
Eligible Employee, he shall immediately be restored as a
Participant as of his date of reemployment.
(ii) Any Credited Service to which the Participant was entitled
at the time of his termination of service shall be restored
to him, except that if he received a lump sum settlement by
the end of the second Plan Year following the Plan Year in
which he incurred a Termination of Employment, that
Credited Service shall not be restored to him.
-25-
<PAGE>
(iii) Upon later termination or retirement of a Participant whose
previous Credited Service has been restored under this
paragraph (c), his Pension shall be based on the benefit
formula then in effect and his Certified Earnings and
Credited Service before and after the period when he was
not in the service of the Employer, and shall be reduced,
if applicable, but not below zero, by an amount of
Actuarial Equivalent value to any lump sum settlement
received upon his prior termination. However, in no event
shall the reduction provided for in the preceding sentence
exceed the portion of the Participant's Pension based on
the period of Credited Service included in the calculation
of the lump sum payment.
(d) If a former Participant who is not entitled to a Pension is
restored to service, either as an Eligible Employee or as an
Employee, after having had a Break in Service, the following shall
apply:
(i) He shall again become a Participant as of his date of
restoration to service as an Eligible Employee.
(ii) Upon his restoration to participation, the Years of Vesting
Service to which he was previously entitled shall be
restored to him if the total number of consecutive one-year
Breaks in Service does not equal or exceed five.
(iii) Any Credited Service to which the Participant was entitled
at the time of his Termination of Employment of service
which is included in the Years of Vesting Service so
restored shall be restored to him.
-26-
<PAGE>
(iv) Upon later termination or retirement of a Participant whose
previous Credited Service has been restored under this
paragraph (d), his Pension, if any, shall be based on the
benefit formula then in effect and his Certified Earnings
and Credited Service before and after the period when he
was not an Eligible Employee.
(e) If an Eligible Employee who was never a Participant is restored to
service with the Employer, after having had a Break in Service,
the Years of Vesting Service to which he was previously entitled
under Section 3.01 shall be restored to him if he would be
entitled to nonforfeitable benefits under the Plan if he were a
Participant, or otherwise, if the total number of consecutive
one-year Breaks in Service does not equal or exceed five.
-27-
<PAGE>
ARTICLE 4. ELIGIBILITY FOR AND AMOUNT OF BENEFITS
4.01 Normal Retirement
(a) The right of a Participant to his normal retirement Pension shall
be nonforfeitable as of his Normal Retirement Age. A Participant
who has attained his Normal Retirement Age may retire from service
with the Employer and all Affiliates and receive a normal
retirement Pension beginning on his Normal Retirement Date, or he
may postpone his retirement and remain in service after his Normal
Retirement Date, in which event the provisions of Section 4.02
shall be applicable.
(b) Subject to the provisions of Section 5.01, the annual normal
retirement Pension payable upon retirement on a Participant's
Normal Retirement Date (provided he is alive on such date) shall
be equal to .7 percent of the Participant's Final Average
Compensation not in excess of Covered Compensation, plus 1.3
percent of such Final Average Compensation in excess of Covered
Compensation, multiplied by the number of years of his Credited
Service up to 35 such years; provided, however, that the annual
normal retirement Pension of a Participant who had the liabilities
attributable to his benefits accrued under the Barnes & Noble Plan
prior to the Effective Date transferred from the Barnes & Noble
Plan to this Plan and who is affected by the imposition of the
$150,000 limitation on Certified Earnings provided in Section 1.11
shall be equal to the greater of (i) the Participant's Pension
calculated under the provisions of the Plan as determined with
regard to such imposition or (ii) a Pension equal to the
Participant's Accrued Benefit determined as of December 31, 1993
plus the Participant's Accrued Benefit based solely on service
after such date under the provisions of the Plan as
-28-
<PAGE>
determined with regard to such imposition. For purposes of the
Plan, the Accrued Benefit as of December 31, 1993 shall be
determined with regard to the $200,000 limitation on Certified
Earnings provided in Section 1.09, but not less than the
Participant's Accrued Benefit determined as of December 31, 1988.
However, the annual normal retirement Pension shall never be less
than the greatest annual amount of reduced early retirement
Pension which the Participant could have received under Section
4.03 before his Normal Retirement Date and no increase in Covered
Compensation shall decrease a Participant's Accrued Benefit under
the Plan.
(c) Except as otherwise provided in Section 401(l) of the Code and
applicable regulations thereunder, the cumulative permitted
disparity fraction for purposes of computing a Participant's
normal retirement Pension shall not exceed 35.
(d) Notwithstanding the foregoing, the minimum monthly Pension payable
to a Participant shall be equal to $2.00 multiplied by his years
of Credited Service.
4.02 Late Retirement
(a) If a Participant postpones his retirement as provided in Section
4.01(a), upon his Termination of Employment from the Employer and
all Affiliates, he shall be entitled to a late retirement Pension
beginning on the first day of the calendar month after the
Administrator receives his written application to retire, which
shall be his late retirement date.
-29-
<PAGE>
(b) A Participant who remains in service after his Normal Retirement
Date shall be entitled to a monthly retirement Pension for each
month during the postponement period which does not constitute a
Suspendible Month. Upon later retirement, the Participant shall be
entitled to an immediate late retirement Pension beginning on the
Participant's late retirement date (provided he is alive on such
date), and subject to the provisions of Section 5.01, shall be
equal to the amount determined in accordance with Section 4.01
based on the Participant's Credited Service and Final Average
Compensation as of his late retirement date reduced by an amount
that is the Actuarial Equivalent of any benefits he previously
received pursuant to the preceding sentence; provided that if the
Participant's actual late retirement date is later than the first
day of the first Plan Year following his Normal Retirement Date,
his late retirement Pension shall be recomputed as of the first
day of each subsequent Plan Year before the Participant's actual
late retirement date (and as of his actual late retirement date)
as if each such date were the Participant's late retirement date;
and provided further that no reduction hereunder as of the date of
any such recomputation shall reduce the Participant's late
retirement Pension below the amount of late retirement Pension
payable to the Participant prior to such recomputation.
(c) In the event a Participant commences receipt of his Pension while
in active service under Section 5.04(b), such commencement date
shall be the Participant's Annuity Starting Date for purposes of
Article 5, and the Participant shall receive a late retirement
Pension commencing on such date in an amount determined as if he
had retired on such date and shall be paid in accordance with the
Participant's
-30-
<PAGE>
form of payment election made pursuant to Article 5. As of each
succeeding December 31 prior to the Participant's actual late
retirement date (and as of his actual late retirement date), the
Participant's Pension shall be recomputed to reflect additional
accruals. The Participant's recomputed Pension shall then be
reduced by the Actuarial Equivalent of the total payments of his
late retirement Pension made with respect to monthly payments that
were not suspendible months of continued employment which were
paid prior to each such recomputation to arrive at the
Participant's late retirement Pension; provided that no such
reduction shall reduce the Participant's late retirement Pension
below the amount of late retirement Pension payable to the
Participant prior to the recomputation of such Pension.
(d) Notwithstanding paragraphs (b) and (c) above, in the event a
Participant remains in service after the April 1 following the
calendar year in which he or she attains age 70 1/2, and does not
commence payment of his Pension while in service under the
provisions of Section 5.04(b), then his Pension shall be the
greater of (i) his Pension determined at his actual late
retirement date taking into account the Participant's Credited
Service and Final Average Compensation at that date, or (ii) the
sum of an amount of Actuarial Equivalent to his Pension determined
at the end of the Plan Year preceding such April 1 plus the
additional benefit accruals under the Plan's terms after the end
of the Plan Year preceding such April 1 to reflect the delay in
the payment of benefits. Amounts of Actuarial Equivalent shall be
calculated using the Plan's late retirement actuarial equivalence
factors
-31-
<PAGE>
and shall be applied on a year-by-year basis measured from the
aforesaid date and shall offset any benefits that would otherwise
accrue during the year.
4.03 Early Retirement
(a) A Participant who has not reached his Normal Retirement Date but
who, prior to his Termination of Employment from the Employer and
all Affiliates, has reached his 55th birthday and completed five
Years of Vesting Service may retire from service with the Employer
and all Affiliates and receive an early retirement Pension
beginning on the first day of the calendar month after the
Administrator receives his written application to retire, which
shall be his early retirement date (provided he is living on such
date).
(b) The early retirement Pension shall be a deferred Pension beginning
on the Participant's Normal Retirement Date, and subject to the
provisions of Section 5.01, shall be equal to his Accrued Benefit.
However, the Participant may elect to receive an early retirement
Pension beginning on the first day of any calendar month before
his Normal Retirement Date, provided that an early payment date
shall be subject to the notice and timing requirements described
in Section 5.03(b) and (c). In that case, the Participant's
Pension shall be reduced pursuant to Table 2 of Appendix A.
-32-
<PAGE>
4.04 Vesting
(a) Participant shall be 100 percent vested in, and have a
nonforfeitable right to, his Accrued Benefit upon completion of
five Years of Vesting Service, counted since the first day of the
Plan Year in which his 18th birthday occurs. If the Participant
incurs a Termination of Employment for reasons other than
retirement or death, he shall be eligible to receive his vested
Pension after the Administrator receives his written application
for the Pension.
(b) The vested Pension shall begin on the Participant's Normal
Retirement Date, and subject to the provisions of Section 5.01,
shall be equal to his Accrued Benefit. However, the Participant
may elect to have his vested Pension begin on the first day of any
calendar month before his Normal Retirement Date (provided he is
living on such date). In that case, the Participant's Pension
shall be reduced pursuant to Table 2 of Appendix A.
4.05 Spouse's Pension
(a) If a married Participant:
(i) dies in active service after reaching age 55 and completing
15 years of Credited Service, or
(ii) dies in active service prior to reaching age 55 and
completing 15 years of Credited Service but after having
met the requirements for a Pension pursuant to Section
4.01, 4.02, 4.03 or 4.04, or
(iii) dies after retiring on any Pension, or after terminating
service with entitlement to a vested Pension, but in either
case before his Annuity
-33-
<PAGE>
Starting Date, a spouse's Pension shall be payable to his
surviving spouse for life provided that he and his spouse
have been married throughout the one-year period ending on
the date of his death.
(b) The spouse's Pension shall commence on what would have been the
Participant's Normal Retirement Date (or the first day of the
month following his date of death, if later). However, the
Participant's spouse may elect to begin receiving payments as of
the first day of any month following the Participant's date of
death and prior to what would have been his Normal Retirement
Date, provided such election is made on a form provided by the
Administrator during the 90-day period ending on the date the
payments to the spouse commence.
(c) (i) The spouse's Pension payable to the eligible spouse, if
any, of a married Participant described in paragraph (a)(i)
above shall be equal to 50 percent of the monthly Pension
the Participant would have received if he had a Termination
of Employment on the day before his death and elected to
have his Pension commence on his Normal Retirement Date in
the form of a single life annuity. This spouse's Pension
shall be payable for the life of the eligible spouse and
shall not be reduced for commencement prior to what would
have been the Participant's Normal Retirement Date.
(ii) Before reduction in accordance with paragraph (d) below
(with regard to a Participant who has had a Termination of
Employment), the spouse's Pension payable to the eligible
spouse, if any, of a Participant described in paragraph
(a)(ii) or (a)(iii) above, shall be equal to the amount of
benefit the spouse would have received if the Pension to
which the Participant
-34-
<PAGE>
was entitled at his date of death had commenced on his
Normal Retirement Date (or the first day of the month
following his date of death, if later) in the form of a
Qualified Joint and Survivor Annuity and the Participant
had died immediately thereafter. However, if within the 90
day period prior to his Annuity Starting Date a Participant
has elected an optional form of Pension which provides for
monthly payments to his spouse for life in an amount equal
to at least 50 percent but not more than 100 percent of the
monthly amount payable under the option for the life of the
Participant and such option is the Actuarial Equivalent of
the Qualified Joint and Survivor Annuity, such optional
form of Pension shall be used for computing the spouse's
Pension instead of the Qualified Joint and Survivor
Annuity. The spouse's Pension shall be further adjusted to
reflect its commencement prior to the Participant's Normal
Retirement Date as follows:
(A) if the spouse of a Participant who dies after having
met the requirements for early retirement elects early
commencement in accordance with paragraph (b) above,
the amount of the Pension payable to the spouse will
be based on the amount of early retirement Pension to
which the Participant would have been entitled if he
had requested benefit commencement at that earlier
date, reduced in accordance with Section 4.03(b); and
(B) if the spouse of any other Participant who dies prior
to his Annuity Starting Date elects early commencement
in accordance with
-35-
<PAGE>
paragraph (b) above, the amount of the Pension payable
to the spouse shall be based on the amount of vested
Pension to which the Participant would have been
entitled if he had requested benefit commencement at
that earlier date, reduced in accordance with Section
4.04(c).
(d) With respect to a Participant who has incurred a Termination of
Employment and whose spouse would have been entitled to a spouse's
Pension under this Section had the Participant's death occurred
prior to his Annuity Starting Date, the Pension subsequently
payable to such Participant or the spouse's Pension payable to his
spouse after his death, whichever is applicable, shall be reduced
by the applicable percentage shown in the following table for each
full month that the provisions of this Section 4.05 are in effect
with respect to the Participant after his Termination of
Employment and prior to the Participant's Annuity Starting Date or
his date of death, if earlier. Notwithstanding the foregoing, no
such reduction shall be made with respect to any period before the
later of (i) the date the Administrator furnishes the Participant
the notice of his right to waive the spouse's Pension in
accordance with paragraph (e) below or (ii) the commencement of
the election period specified in paragraph (f) below.
-36-
<PAGE>
Monthly Reduction for Spouse's Coverage
After Retirement or
Other Termination of Service
- ---------------------------------------------------------------
Age Reduction
============================= ==========================
55 but less than 65 .05%
45 but less than 55 .03%
less than 45 .01%
(e) The Employer shall furnish to each Participant a written
explanation in nontechnical language which describes (i) the terms
and conditions of the spouse's Pension, including an explanation
of the relative financial effect on the Participant's Pension of
an election to waive the spouse's Pension, (ii) the Participant's
right to make, and the effect of, an election to waive the
spouse's Pension, (iii) the rights of the Participant's spouse,
and (vi) the right to make, and the effect of, a revocation of
such an election. The Employer shall furnish the written
explanation of the spouse's Pension to each Participant as soon as
practicable following the date the Participant incurs a
Termination of Employment, but in no case later than one year
after such date. The written explanation described above shall be
furnished to a Participant even though he is not married.
(f) An election to waive the spouse's Pension provided under this
Section, or any revocation of that election, may be made at any
time during the period beginning on the date of the Participant's
Termination of Employment and ending on the Participant's Annuity
Starting Date or his date of death, if earlier. Any election to
waive the spouse's Pension or any revocation of that election
shall be made on a
-37-
<PAGE>
form provided by the Administrator, and shall be effective when
received by the Administrator. Any election to waive the spouse's
Pension shall be effective only if it includes Spousal Consent to
such election.
4.06 Maximum Benefit Limitation
Notwithstanding any provision of the Plan to the contrary, the maximum
annual Pension payable to a Participant under the Plan shall be subject
to the limitations set forth in Section 415 of the Code and any
regulations or rulings issued thereunder. If the Pension begins before
the Participant's 62nd birthday, the dollar limitation described in
Section 415(b)(1)(A) of the Code shall be the Actuarial Equivalent of
the maximum benefit payable at age 62. If the Pension begins after the
Participant's Social Security Retirement Age, such dollar limitation
shall be the Actuarial Equivalent of the maximum benefit payable at the
Social Security Retirement Age. If the Pension is payable neither as a
life annuity nor as a qualified joint and survivor annuity with the
Participant's spouse as beneficiary, the maximum limitation shall be
the Actuarial Equivalent of the maximum limitation otherwise
applicable. Actuarial Equivalent for the purposes of this Section 4.06
shall be determined in accordance with Section 415(b) of the Code and
the regulations or rulings issued thereunder and using the Plan's early
retirement, late retirement or optional benefit factors as appropriate,
or if less, using factors calculated from the IRS Mortality Table, if
applicable, and (i) with respect to an adjustment required under
Section 415(b)(2)(B) or (C) of the Code, the IRS Interest Rate if the
Pension is subject to the provisions of Section 417(e)(3) of the Code
or 5 percent otherwise; and (ii) with
-38-
<PAGE>
respect to an adjustment required under Section 415(b)(2)(D) of the
Code, an interest rate of 5 percent.
For limitation years commencing prior to January 1, 2000, if a
Participant is a participant in any qualified defined contribution plan
required to be taken into account for purposes of applying the combined
plan limitations contained in Section 415(e) of the Code, then for any
year the sum of the defined benefit plan fraction and the defined
contribution plan fraction, as such terms are defined in said Section
415(e), shall not exceed 1.0.
As of January 1 of each calendar year, the dollar limitation, as
determined by the Commissioner of Internal Revenue for that calendar
year, shall become effective as the maximum permissible dollar amount
of Pensions payable under the Plan during the Limitation Year ending
within that calendar year, including Pensions payable to Participants
who retired prior to that Limitation Year.
The benefit payable to a Participant's spouse under a qualified joint
and survivor annuity or under a qualified preretirement survivor
annuity shall be subject to the dollar limitation which would apply if
the benefits were payable to the Participant in the form of a life
annuity. The amount of the benefit payable to the spouse, and which is
subject to the preceding sentence, shall be computed from the
Participant's accrued benefit and the Participant's actual or deemed
benefit election, under Section 4.05, before application of this
Section 4.06.
-39-
<PAGE>
4.07 Transfers and Employment with an Affiliate
(a) If an Eligible Employee (i) becomes employed by the Employer in
any capacity other than as an Eligible Employee as defined in
Article 1, (ii) becomes employed by an Affiliate, or (iii) becomes
a Leased Employee, he shall retain any Credited Service he has
under this Plan. Upon his later retirement or termination of
employment with the Employer or Affiliate (or upon benefit
commencement in the case of a Leased Employee), any benefits to
which the Eligible Employee is entitled under the Plan shall be
determined under the Plan provisions in effect on the date he
ceases to be an Eligible Employee as defined in Article 1, and
only on the basis of his Credited Service accrued and Certified
Earnings paid while he was an Eligible Employee as defined in
Article 1.
(b) Subject to the Break in Service provisions of Article 3, in the
case of a person who (i) was originally employed by the Employer
in any capacity other than as an Eligible Employee as defined in
Article 1, (ii) was originally employed by an Affiliate, or (iii)
was originally providing services to the Employer as a Leased
Employee, and thereafter becomes an Eligible Employee, upon his
later retirement or termination of employment, the benefits
payable under the Plan shall be computed under the Plan provisions
in effect at that time, and only on the basis of the Credited
Service accrued and Certified Earnings paid while he is an
Eligible Employee as defined in Article 1.
-40-
<PAGE>
ARTICLE 5. PAYMENT OF PENSIONS
5.01 Automatic Form of Payment
(a) If the Participant is not married on his Annuity Starting Date,
his Pension shall be payable in monthly installments ending with
the last monthly payment before death, unless the Participant has
elected an optional benefit as provided in Section 5.02.
(b) If the Participant is married on his Annuity Starting Date, and if
he has not elected an optional form of benefit as provided in
Section 5.02, the Pension payable shall be in the form of a
Qualified Joint and Survivor Annuity that is the Actuarial
Equivalent of the Pension otherwise payable, providing for a
reduced Pension payable to the Participant during his life, and
after his death providing that one-half of that reduced Pension
will continue to be paid during the life of, and to, the spouse to
whom he was married on his Annuity Starting Date. Notwithstanding
the preceding, if an option described in Section 5.02 provides for
payments continuing after the Participant's death for the life of
a Beneficiary at a rate of at least 50 percent but not more than
100 percent of the Pension payable for the life of the Participant
and if such option, with the spouse to whom the Participant is
married on his Annuity Starting Date named as Beneficiary, would
be of greater actuarial value than the joint and survivor annuity
described above, such option with such spouse as Beneficiary shall
be the Qualified Joint and Survivor Annuity.
-41-
<PAGE>
(c) In any case, a lump sum payment that is the Actuarial Equivalent
shall be made in lieu of all benefits if the present value of the
Pension payable to or on the behalf of the Participant determined
as of the Participant's Normal Retirement Date or actual
Termination of Employment, if later, amounts to $5,000 or less. In
determining the amount of a lump sum payment payable under this
paragraph, (i) Actuarial Equivalent shall mean a benefit, in the
case of a lump sum benefit payable prior to a Participant's Normal
Retirement Date, of equivalent value to the benefit which would
otherwise have been provided commencing at the Participant's
Normal Retirement Date, and (ii) the Actuarial Equivalent shall be
determined by using the IRS Mortality Table and the IRS Interest
Rate. Unless otherwise permitted by applicable law, the
determination as to whether a lump sum payment is due shall be
made as soon as practicable following the Participant's
termination of service or death. Any lump sum benefit payable
shall be made as soon as practicable following such determination
and in any event prior to the date Pension payments would have
otherwise commenced as an annuity.
In the event a Participant is not entitled to any Pension upon
his Termination of Employment, he shall be deemed cashed-out
under the provisions of this paragraph (c) as of the date he
terminated service. However, if a Participant described in the
preceding sentence is subsequently restored to service, the
provisions of Section 3.03 shall apply to him without regard to
such sentence.
-42-
<PAGE>
5.02 Optional Forms of Payment
Any Participant may, subject to the provisions of Section 5.03, elect
to convert the Pension otherwise payable to him into an optional
benefit that is the Actuarial Equivalent, as provided in one of the
options named below.
Life Annuity A Pension payable during the
Participant's life with no Pension
payable after his death.
Ten-Year Certain and Life A modified Pension payable during the
Option Participant's life; if the Participant
dies within 120 months of his Annuity
Starting Date, the balance of those
monthly payments shall be paid to the
Beneficiary named by him when he elected
the option; provided that if the
Beneficiary does not survive the
120-month period, a lump sum payment
that is the Actuarial Equivalent as
determined in Table 1 of Appendix A of
the remaining payments shall be paid to
the estate of the last to survive of the
Participant and the Beneficiary.
50% Joint & Survivor A modified Pension payable during the
Option Participant's life and after his death
payable at 50 percent of the rate of his
modified Pension during the life of, and
to, the Beneficiary named by him when he
elected the option. The Pension payable
to the Participant shall be determined
by multiplying the amount that would be
paid to the Participant as a single life
annuity by a reduction factor of 90
percent, increased by 1/2 of 1 percent
(but not to more than 100 percent) for
each year by which the Beneficiary is
older than the Participant and decreased
by 1/2 of 1 percent for each year the
Beneficiary is younger than the
Participant.
-43-
<PAGE>
75% Joint & Survivor A modified Pension payable during the
Option Participant's life and after his death
payable at 75 percent of the rate of his
modified Pension during the life of, and
to, the Beneficiary named by him when he
elected the option. The Pension payable
to the Participant shall be determined
by multiplying the amount that would be
paid to the Participant as a single life
annuity by a reduction factor of 85
percent, increased by 1/2 of 1 percent
(but not to more than 100 percent) for
each year by which the Beneficiary is
older than the Participant and decreased
by 1/2 of 1 percent for each year the
Beneficiary is younger than the
Participant.
100% Joint & Survivor A modified Pension payable during the
Option Participant's life and after his death
payable at 100 percent of the rate of
his modified Pension during the life of,
and to, the Beneficiary named by him
when he elected the option. The Pension
payable to the Participant shall be
determined by multiplying the amount
that would be paid to the Participant as
a single life annuity by a reduction
factor of 80 percent, increased by 1/2
of 1 percent (but not to more than 100
percent) for each year by which the
Beneficiary is older than the
Participant and decreased by 1/2 of 1
percent for each year the Beneficiary is
younger than the Participant.
-44-
<PAGE>
Lump Sum or Installment If the total present value of the
Option Pension payable is more than $5,000 but
less than $7,000, the Participant may
elect either a single cash lump sum or
monthly installments over a period to be
selected by the Participant. In
determining the amount of a lump sum
optional benefit available under this
Section, (a) Actuarial Equivalent shall
mean a benefit, in the case of a lump
sum benefit payable prior to a
Participant's Normal Retirement Date, of
equivalent value to the benefit which
would otherwise have been provided
commencing at the Participant's Normal
Retirement Date, and (b) Actuarial
Equivalent shall be determined on the
basis of the IRS Mortality Table and the
IRS Interest Rate.
If a Participant dies after Pension payments have commenced, any
payments continuing on to his spouse or Beneficiary shall be
distributed at least as rapidly as under the method of distribution
being used as of the Participant's date of death.
5.03 Election of Options
(a) A married Participant's election of any option shall only be
effective if Spousal Consent to the election is received by the
Administrator, unless:
(i) the option provides for monthly payments to his spouse for
life after the21 Participant's death, in an amount equal to
at least 50 percent but not more than 100 percent of the
monthly amount payable under the option to the Participant,
and
-45-
<PAGE>
(ii) the option is of actuarial equivalent value to the
Qualified Joint and Survivor Annuity.
(b) The Employer shall furnish to each Participant, a written
explanation in nontechnical language of the terms and conditions
of the Pension payable to the Participant in the normal and
optional forms described in Sections 5.01 and 5.02. Such
explanation shall include a general description of the eligibility
conditions for, and the material features and relative values of,
the optional forms of Pensions under the Plan, any rights the
Participant may have to defer commencement of his Pension, the
requirement for Spousal Consent as provided in paragraph (a)
above, and the right of the Participant to make, and to revoke,
elections under Section 5.02.
(c) The Employer must provide the notice required by paragraph (b) no
more than 90 days and no less than 30 days prior to the
Participant's Annuity Starting Date. A Participant's Annuity
Starting Date may not occur less than 30 days after receipt of the
notice described in paragraph (b). An election under Section 5.02
shall be made on a form provided by the Administrator and may be
made during the 90-day period ending on the Participant's Annuity
Starting Date, but not prior to the date the Participant receives
the written explanation described in paragraph (b).
(d) Notwithstanding the provisions of paragraph (c) above, a
Participant may, after having received the notice, affirmatively
elect to have his benefit commence sooner than 30 days following
his receipt of the notice, provided all of the following
requirements are met:
-46-
<PAGE>
(i) the Administrator clearly informs the Participant that he
has a period of at least 30 days after receiving the notice
to decide when to have his benefits begin, and if
applicable, to choose a particular optional form of
payment;
(ii) the Participant affirmatively elects a date for his
benefits to begin, and if applicable, an optional form of
payment, after receiving the notice;
(iii) the Participant is permitted to revoke his election until
the later of his Annuity Starting Date or seven days
following the day he received the notice;
(iv) payment does not commence less than seven days following
the day after the notice is received by the Participant;
and
(v) the Participant's Annuity Starting Date is after the date
the notice is provided.
(e) An election of an option under Section 5.02 may be revoked on a
form provided by the Administrator, and subsequent elections and
revocations may be made at any time and from time to time during
the election period specified in paragraph (c) or (d) above,
whichever is applicable. An election of an optional benefit shall
be effective on the Participant's Annuity Starting Date and may
not be modified or revoked after his Annuity Starting Date unless
otherwise provided under paragraph (d) above. A revocation of any
election shall be effective when the completed form is filed with
the Administrator. If a Participant who has elected an optional
benefit dies before the date the election of the option becomes
effective, the election shall be revoked except as provided in
Section 4.05(c). If
-47-
<PAGE>
the Beneficiary designated under an option dies before the date
the election of the option becomes effective, the election shall
be revoked.
5.04 Commencement of Payments
(a) Except as otherwise provided in Article 4 or this Article 5 or
under Title 29 of the Code of Federal Regulation Section
2530.203-3 as promulgated by the U.S. Department of Labor, payment
of a Participant's Pension shall begin as soon as administratively
practicable following the latest of (i) the Participant's 65th
birthday, (ii) the fifth anniversary of the date on which he
became a Participant, or (iii) the Participant's Termination of
Employment, (but not more than 60 days after the close of the Plan
Year in which the latest of (i), (ii) or (iii) occurs); provided,
however, that if the amount of the payment to be made cannot be
determined by 60 days following the Plan Year in which the latest
of (i), (ii), or (iii) occur, a payment retroactive to that date
shall be made.
(b) Notwithstanding the preceding paragraph, in the case of a
Participant in active service who is a five percent owner (as
defined in Section 416(i) of the Code) of the Employer, the
Participant's Pension shall begin not later than the April 1
following the calendar year in which he attains age 70 1/2. In the
case of any other Participant in active service who attains age 70
1/2, payment of such Participant's Pension shall begin not later
than April 1 of the calendar year following the calendar year in
which he attains age 70 1/2, provided that such commencement in
active service shall not be required with respect to a Participant
who attains age
-48-
<PAGE>
70 1/2 prior to January 1, 1988 and who is not a 5-percent owner
as described above.
5.05 Distribution Limitation
Notwithstanding any other provision of this Article 5, all
distributions from this Plan shall conform to the regulations issued
under Section 401(a)(9) of the Code, including the incidental death
benefit provisions of Section 401(a)(9)(G) of the Code. Further, such
regulations shall override any Plan provision that is inconsistent with
Section 401(a)(9) of the Code. For purposes of Section 401(a)(9) of the
Code, the life expectancies of Participants and their spouses shall not
be recalculated.
5.06 Direct Rollover of Certain Distributions
(a) Notwithstanding any provision of the Plan to the contrary that
would otherwise limit a distributee's election under this Article,
a distributee may elect, at the time and in the manner prescribed
by the Administrator, to have any portion of an eligible rollover
distribution paid directly to an eligible retirement plan
specified by the distributee in a direct rollover.
(b) The following definitions apply to the terms used in this Section:
(i) An "eligible rollover distribution" is any distribution of
all or any portion of the balance to the credit of the
distributee, except that an eligible rollover distribution
does not include: any distribution that is one of a series
of substantially equal periodic payments (not less
frequently than annually) made for the life (or life
expectancy) of the distributee or the
-49-
<PAGE>
joint lives (or joint life expectancies) of the distributee
and the distributee's designated beneficiary, or for a
specified period of ten years or more; any distribution to
the extent such distribution is required under Section
401(a)(9) of the Code; and the portion of any distribution
that is not includible in gross income (determined without
regard to the exclusion for net unrealized appreciation
with respect to employer securities);
(ii) An "eligible retirement plan" is an individual retirement
account described in Section 408(a) of the Code, an
individual retirement annuity described in Section 408(b)
of the Code, an annuity plan described in Section 403(a) of
the Code, or a qualified trust described in Section 401(a)
of the Code, that accepts the distributee's eligible
rollover distribution. However, in the case of an eligible
rollover distribution to the surviving spouse, an eligible
retirement plan is an individual retirement account or
individual retirement annuity;
(iii) A "distributee" includes an Eligible Employee or former
Eligible Employee. In addition, the Eligible Employee's or
former Eligible Employee's surviving spouse and the
Eligible Employee's or former Eligible Employee's spouse or
former spouse who is the alternate payee under a qualified
domestic relations order, as defined in Section 414(p) of
the Code, are distributees with regard to the interest of
the spouse or former spouse; and
(iv) A "direct rollover" is a payment by the Plan to the
eligible retirement plan specified by the distributee.
-50-
<PAGE>
In the event that the provisions of this Section 5.06 or any part
thereof cease to be required by law as a result of subsequent
legislation or otherwise, this Section or any applicable part thereof
shall be ineffective without the necessity of further amendments to the
Plan.
-51-
<PAGE>
ARTICLE 6. CONTRIBUTIONS
6.01 Employer's Contributions
It is the intention of the Employer to continue the Plan and make the
contributions that are necessary to maintain the Plan on a sound
actuarial basis and to meet the minimum funding standards prescribed by
law. However, subject to the provisions of Article 10, the Employer may
discontinue its contributions for any reason at any time.
6.02 Return of Contributions
(a) If a contribution is conditioned on initial qualification of the
Plan under Section 401(a) of the Code, and if the Commissioner of
Internal Revenue, on timely application made after the
establishment of the Plan, determines that the Plan is not
initially so qualified, or refuses, in writing, to issue a
determination as to whether the Plan is so qualified, said
contribution shall be returned to the Company without interest.
The return shall be made within one year after the date of the
final determination of the denial of qualification. The provisions
of this paragraph (a) shall apply only if the application for the
determination is made by the time prescribed by law for filing the
Company's return for the taxable year in which the Plan was
adopted, or such later date as the Secretary of the Treasury may
prescribe.
(b) The Employer's contributions to the Plan are conditioned upon
their deductibility under Section 404 of the Code. If all or part
of the Employer's deductions for contributions to the Plan are
disallowed by the Internal Revenue Service, the
-52-
<PAGE>
portion of the contributions to which that disallowance applies
shall be returned to the Employer without interest, but reduced by
any investment loss attributable to those contributions. The
return shall be made within one year after the date of the
disallowance of deduction.
(c) The Employer may recover without interest the amount of its
contributions to the Plan made on account of a mistake in fact,
reduced by any investment loss attributable to those
contributions, if recovery is made within one year after the date
of those contributions.
-53-
<PAGE>
ARTICLE 7. ADMINISTRATION OF PLAN
7.01 Plan Sponsor and Plan Administrator
The Company shall be the "plan administrator" and the "plan sponsor" of
the Plan, as such terms are used in ERISA and the Code.
7.02 Administrative Responsibilities
(a) Except as expressly otherwise provided herein, the Company shall
be the named fiduciary that has the authority to control and
manage the administration and operation of the Plan, and shall
have the sole and complete discretion to interpret and administer
the terms of the Plan and to determine eligibility for benefits
and the amount of any such benefits pursuant to the terms of the
Plan, and in so doing the Company may correct defects, supply
omissions and reconcile inconsistencies to the extent necessary to
effectuate the Plan, and such actions shall be binding and
conclusive on all persons. The Company shall prescribe such forms,
make such rules, regulations, interpretations and computations and
shall take such other action to administer the Plan as it may deem
appropriate. In administering the Plan, the Company shall act in a
nondiscriminatory manner to the extent required by Section 401(a)
and related provisions of the Code and shall at all times
discharge its duties with respect to the Plan in accordance with
the standards set forth in Section 404(a)(1) of ERISA.
-54-
<PAGE>
(b) Except in cases where the Plan expressly requires action on behalf
of the Company to be taken by the Board of Directors, action on
behalf of the Company may be taken by any of the following:
(i) the Board of Directors;
(ii) the chief executive officer of the Company; or
(iii) any person or persons or committee to whom responsibilities
for the operation and administration of the Plan are
allocated, by resolution of the Board of Directors or by
written instrument executed by the chief executive officer
of the Company and filed with its permanent records, but
action of such person or persons or committee shall be
within the scope of said allocation.
7.03 Delegation of Responsibilities
The Company may engage such attorneys, actuaries, accountants,
consultants or other persons to render advice or to perform services
with regard to any of its responsibilities under the Plan as it shall
determine to be necessary or appropriate. The duties and
responsibilities of the Company under the Plan shall be carried out by
the directors, officers and employees of the Company, acting on behalf
of the Company in their capacities as directors, officers and employees
and not as individual fiduciaries.
-55-
<PAGE>
7.04 Certified Earnings and Bonding
Except to the extent permitted by applicable regulations, no Eligible
Employee shall receive any compensation from the Plan for his services
rendered to the Plan. The Company shall purchase such bonds as may be
required under ERISA.
7.05 Service in More Than One Fiduciary Capacity
Any individual, entity or group of persons may serve in more than one
fiduciary capacity with respect to the Plan and/or the funds of the
Plan.
7.06 Indemnification
In addition to any other applicable arrangements for indemnification,
the Employers jointly and severally agree to indemnify and hold
harmless, to the extent permitted by law, each director, officer, and
employee of the Employers against any and all liabilities, losses,
costs, or expenses (including legal fees) of whatsoever kind and nature
which may be imposed on, incurred by, or asserted against such person
at any time by reason of such person's services as a fiduciary in
connection with the Plan, but only if such person did not act
dishonestly, or in bad faith, or in willful violation of the law or
regulations under which such liability, loss, cost, or expense arises.
7.07 Establishment of Rules
Subject to the limitations of the Plan, the Administrator from time to
time shall establish rules for the administration of the Plan and the
transaction of Plan business. The Administrator shall have
discretionary authority to interpret the Plan and to make factual
-56-
<PAGE>
determinations (including but not limited to, determination of an
individual's eligibility for Plan participation, the right and amount
of any benefit payable under the Plan and the date on which any
individual ceases to be a Participant). The determination of the
Administrator as to the interpretation of the Plan or any disputed
question shall be conclusive and final to the extent permitted by
applicable law.
7.08 Correction of Errors
It is recognized that in the operation and administration of the Plan
certain mathematical and accounting errors may be made or mistakes may
arise by reason of factual errors in information supplied to the
Employer or Funding Agent. The Company shall have power to cause such
equitable adjustments to be made to correct for such errors as the
Company in its discretion considers appropriate. Such adjustments shall
be final and binding on all persons.
7.09 Prudent Conduct
The Administrator shall use that degree of care, skill, prudence and
diligence that a prudent man acting in a like capacity and familiar
with such matters would use in a similar situation.
7.10 Actuary
As an aid to the Administrator in fixing the rate of contributions
payable to the Plan, the actuary designated by the Company shall make
annual actuarial valuations of the
-57-
<PAGE>
contingent assets and liabilities of the Plan, and shall submit to the
Company the rates of contribution recommended for use.
7.11 Maintenance of Accounts
The Administrator shall maintain accounts showing the fiscal
transactions of the Plan and shall keep in convenient form such data as
may be necessary for actuarial valuations of the Plan.
7.12 Records
Each Employer, each fiduciary with respect to the Plan, and each other
person performing any functions in the operation or administration of
the Plan or the management or control of the assets of the Plan shall
keep such records as may be necessary or appropriate in the discharge
of their respective functions hereunder, including records required by
ERISA or any other applicable law. Records shall be retained as long as
necessary for the proper administration of the Plan and at least for
any period required by ERISA or other applicable law.
7.13 Appointment of Investment Manager
The Company, in its sole discretion, shall determine the investment
policy for the Plan. However, the Company may, in its sole discretion,
appoint one or more investment managers to manage the assets of the
Plan (including the power to acquire and dispose of all or part of such
assets) as the Company shall designate. In that event, the authority
-58-
<PAGE>
over and responsibility for the management of the assets so designated
shall be the sole responsibility of that investment manager.
For purposes of this Article, the term "investment manager" means an
individual who:
(a) Has the power to manage, acquire or dispose of any asset of the
Plan;
(b) Is (i) registered as an investment advisor under the Investment
Advisors Act of 1940, (ii) is a bank, as defined in that Act, or
(iii) is an insurance company qualified to perform services
described in paragraph (a) above; and
(c) Has acknowledged in writing that he is a fiduciary with respect to
the Plan.
7.14 Expenses of Administration
All expenses that arise in connection with the administration of the
Plan, including but not limited to the compensation of the Trustee,
administrative expenses and proper charges and disbursements of the
Trustee and compensation and other expenses and charges of any enrolled
actuary, counsel, accountant, specialist, or other person who has been
retained by the Company in connection with the administration thereof,
shall be paid from the funds of the Plan held by the Trustee under the
trust agreement adopted for use in implementing the Plan, to the extent
not paid by the Employer.
7.15 Claims and Review Procedures
(a) Applications for benefits and inquiries concerning the Plan (or
concerning present or future rights to benefits under the Plan)
shall be submitted to the Company in writing. An application for
benefits shall be submitted on the prescribed form and
-59-
<PAGE>
shall be signed by the Participant, or in the case of a benefit
payable after his death, by his Beneficiary.
(b) In the event that an application for benefits is denied in whole
or in part, the Company shall notify the applicant in writing of
the denial and of the right to review of the denial. The written
notice shall set forth, in a manner calculated to be understood by
the applicant, specific reasons for the denial, specific
references to the provisions of the Plan on which the denial is
based, a description of any information or material necessary for
the applicant to perfect the application, an explanation of why
the material is necessary, and an explanation of the review
procedure under the Plan. The written notice shall be given to the
applicant within a reasonable period of time (not more than 90
days) after the Company received the application, unless special
circumstances require further time for processing and the
applicant is advised of the extension. In no event shall the
notice be given more than 180 days after the Company received the
application.
(c) The Company shall from time to time appoint a committee (the
"Review Panel") that shall consist of three individuals who may,
but need not, be Eligible Employees. The Review Panel shall be the
named fiduciary that has the authority to act with respect to any
appeal from a denial of benefits or a determination of benefit
rights.
(d) An applicant whose application for benefits was denied in whole or
part, or the applicant's duly authorized representative, may
appeal the denial by submitting to the Review Panel a request for
a review of the application within 60 days after receiving written
notice of the denial from the Company. The Company shall
-60-
<PAGE>
give the applicant or his representative an opportunity to review
pertinent materials, other than legally privileged documents, in
preparing the request for a review. The request for a review shall
be in writing and addressed to the Review Panel. The request for a
review shall set forth all of the grounds on which it is based,
all facts in support of the request and any other matters that the
applicant deems pertinent. The Review Panel may require the
applicant to submit such additional facts, documents or other
materials as it may deem necessary or appropriate in making its
review.
(e) The Review Panel shall act on each request for a review within 60
days after receipt, unless special circumstances require further
time for processing and the applicant is advised of the extension.
In no event shall the decision on review be rendered more than 120
days after the Review Panel received the request for a review. The
Review Panel shall give prompt written notice of its decision to
the applicant and or the Company. In the event that the Review
Panel confirms the denial of the application for benefits in whole
or in part, the notice shall set forth, in a manner calculated to
be understood by the applicant, the specific reasons for the
decision and specific references to the provisions of the Plan on
which the decision is based.
(f) The Review Panel shall adopt such rules, procedures and
interpretations of the Plan as it deems necessary or appropriate
in carrying out its responsibilities under this Section 7.15. In
carrying out such responsibilities, the Review Panel shall have
the sole and complete discretion to interpret and administer the
terms of the Plan and to determine eligibility for benefits and
the amount of any such benefits
-61-
<PAGE>
pursuant to the terms of the Plan, and in so doing the Review
Panel may correct defects, supply omissions and reconcile
inconsistencies to the extent necessary to effectuate the Plan,
and such actions shall be binding and conclusive on all persons.
(g) No legal action for benefits under the Plan shall be brought
unless and until the claimant (i) has submitted a written
application for benefits in accordance with paragraph (a), (ii)
has been notified by the Company that the application is denied,
(iii) has filed a written request for a review of the application
in accordance with paragraph (d) and (iv) has been notified in
writing that the Review Panel has affirmed the denial of the
application; provided, however, that legal action may be brought
after the Company or the Review Panel has failed to take any
action on the claim within the time prescribed by paragraphs (b)
and (e) above.
-62-
<PAGE>
ARTICLE 8. MANAGEMENT OF FUNDS
8.01 Funding Agent
(a) All the funds of the Plan shall be held by a Funding Agent
appointed from time to time by the Company under a trust
instrument or an insurance or annuity contract adopted, or as
amended, by the Company for use in providing the benefits of the
Plan and paying its expenses not paid directly by the Company. The
Company shall have the right to determine the form and substance
of each trust agreement and group annuity contract under which any
part of the funds of the Plan is held, subject only to the
requirement that they are not inconsistent with the provisions of
the Plan. Any such trust agreement may contain provisions pursuant
to which the trustee will make investments on direction of a third
party. The Company shall have no liability for the payment of
benefits under the Plan nor for the administration of the funds
paid over to the Funding Agent.
(b) The Company shall issue such written directions to the Funding
Agent as are necessary to accomplish distributions to the
Participants and Beneficiaries in accordance with the provisions
of the Plan.
(c) The Funding Agent shall be entitled to receive such reasonable
compensation for its services as may be agreed upon with the
Company. The Funding Agent shall also be entitled to reimbursement
for all reasonable and necessary costs, expenses, and
disbursements incurred by it in the performance of its services.
Such compensation and reimbursements shall be paid from the Trust
Fund if not paid directly by the Company.
-63-
<PAGE>
8.02 Exclusive Benefit Rule
Except as otherwise provided in the Plan, no part of the corpus or
income of the funds of the Plan shall be used for, or diverted to,
purposes other than for the exclusive benefit of Participants and other
persons entitled to benefits under the Plan and paying Plan expenses
not otherwise paid by the Employer, before the satisfaction of all
liabilities with respect to them. No person shall have any interest in
or right to any part of the earnings of the funds of the Plan, or any
right in, or to, any part of the assets held under the Plan, except as
and to the extent expressly provided in the Plan.
8.03 Funding Policy
The Company shall adopt a procedure, and revise it from time to time as
it shall consider advisable, for establishing and carrying out a
funding policy and method consistent with the objectives of the Plan
and the requirements of ERISA. It shall advise each Funding Agent of
the funding policy in effect from time to time.
-64-
<PAGE>
ARTICLE 9. GENERAL PROVISIONS
9.01 Nonalienation
Except as required by any applicable law, no benefit under the Plan
shall in any manner be anticipated, assigned or alienated, and any
attempt to do so shall be void. However, payment shall be made in
accordance with the provisions of any judgment, decree, or order which:
(a) creates for, or assigns to, a spouse, former spouse, child or
other dependent of a Participant the right to receive all or a
portion of the Participant's benefits under the Plan for the
purpose of providing child support, alimony payments or marital
property rights to that spouse, child or dependent,
(b) is made pursuant to a State domestic relations law,
(c) does not require the Plan to provide any type of benefit, or any
option, not otherwise provided under the Plan, and
(d) otherwise meets the requirements of Section 206(d) of ERISA, as
amended, as a "qualified domestic relations order," as determined
by the Administrator.
If the present value of any series of payments meeting the criteria set
forth in clauses (a) through (d) above amounts to $5,000 or less, a
lump sum payment that is the Actuarial Equivalent, determined in the
manner described in Section 5.01(c), shall be made in lieu of the
series of payments.
-65-
<PAGE>
9.02 Conditions of Employment Not Affected by Plan
Participation in the Plan shall not confer any legal rights upon any
Eligible Employee or other person for a continuation of employment, nor
shall it interfere with the right of the Employer (which right is
hereby reserved) to discharge any Eligible Employee and to treat him
without regard to the effect which that treatment might have upon him
as a Participant or potential Participant of the Plan.
9.03 Facility of Payment
If in the opinion of the Administrator a Participant or other person
entitled to a benefit hereunder is unable to care for his affairs
because of illness or accident or because he is a minor, the
Administrator may direct that any benefit due him, unless claim shall
have been made for the benefit by a duly appointed guardian or other
legal representative, be paid to his spouse, a child, a parent or other
blood relative, or any other person or institution then in the opinion
of the Administrator caring for or maintaining the Participant or other
person during this period, or to a person with whom he resides. Any
payment so made shall be a complete discharge of the liabilities of the
Plan for that benefit.
9.04 Information
Each Participant or other person entitled to a benefit, before any
benefit shall be payable to him or on his account under the Plan, shall
file with the Company the information that it shall require to
establish his rights and benefits under the Plan.
-66-
<PAGE>
9.05 Top-Heavy Provisions
(a) The following definitions apply to the terms used in this Section:
(i) "applicable determination date" means the last day of the
preceding Plan Year;
(ii) "top-heavy ratio" means the ratio of (A) the present value
of the cumulative Accrued Benefits under the Plan for key
employees to (B) the present value of the cumulative
Accrued Benefits under the Plan for all key employees and
non-key employees; provided, however, that if an individual
has not performed services for the Employer at any time
during the five-year period ending on the applicable
determination date, any accrued benefit for such individual
(and the account of such individual) shall not be taken
into account;
(iii) "applicable valuation date" means the date within the
preceding Plan Year as of which annual Plan costs are or
would be computed for minimum funding purposes;
(iv) "key employee" means an employee who is in a category of
employees determined in accordance with the provisions of
Section 416(i)(1) and (5) of the Code and any regulations
thereunder, and where applicable, on the basis of the
Eligible Employee's remuneration (which, with respect to
any Eligible Employee, shall mean the wages, salaries, and
other amounts paid in respect of such Eligible Employee by
the Employer or an Affiliate for personal services actually
rendered, determined before any pre-tax contributions under
a "qualified cash or deferred arrangement," as defined
-67-
<PAGE>
in Section 401(k) of the Code and its applicable
regulations, or under a "cafeteria plan," as defined in
Section 125 of the Code and its applicable regulations, and
shall include, but not by way of limitation, bonuses,
overtime payments, and commissions, and shall exclude
deferred compensation, stock options, and other
distributions which receive special tax benefits under the
Code);
(v) "non-key employee" means any employee who is not a key
employee;
(vi) "average remuneration" means the average annual
remuneration of a Participant for the five consecutive
years of his Years of Vesting Service during which he
received the greatest aggregate remuneration, as limited by
Section 401(a)(17) of the Code, from the Employer or an
Affiliate, excluding any remuneration for service after the
last Plan Year with respect to which the Plan is top-heavy;
(vii) "required aggregation group" means each other qualified
plan of the Employer or an Affiliate (including plans that
terminated within the five-year period ending on the
determination date) in which there are members who are key
employees or which enables the Plan to meet the
requirements of Section 401(a)(4) or 410 of the Code; and
(viii) "permissive aggregation group" means each plan in the
required aggregation group and any other qualified plan(s)
of the Employer or an Affiliate in which all members are
non-key employees, if the resulting aggregation group
continues to meet the requirements of Sections 401(a)(4)
and 410 of the Code.
-68-
<PAGE>
(b) For purposes of this Section, the Plan shall be "top-heavy" with
respect to any Plan Year if as of the applicable determination
date the top-heavy ratio exceeds 60 percent. The top-heavy ratio
shall be determined as of the applicable valuation date in
accordance with Section 416(g)(3) and (4)(B) of the Code on the
basis of the UP-1984 Mortality Table and an interest rate of 5
percent per year compounded annually. For purposes of determining
whether the Plan is top-heavy, the present value of Accrued
Benefits under the Plan will be combined with the present value of
accrued benefits or account balances under each other plan in the
required aggregation group, and in the Employer's discretion, may
be combined with the present value of accrued benefits or account
balances under any other qualified plan(s) in the permissive
aggregation group. The accrued benefit of a non-key employee under
the Plan or any other defined benefit plan in the aggregation
group shall be (i) determined under the method, if any, that
uniformly applies for accrual purposes under all plans maintained
by the Employer or an Affiliate, or (ii) if there is no such
method, as if such benefit accrued not more rapidly than the
slowest accrual rate permitted under the fractional rule described
in Section 411(b)(1)(C) of the Code.
(c) The following provisions shall be applicable to Participants for
any Plan Year with respect to which the Plan is top-heavy:
(i) In lieu of the vesting requirements specified in Section
4.04, a Participant shall be vested in, and have a
nonforfeitable right to, a percentage of his Accrued
Benefit determined in accordance with the provisions of
-69-
<PAGE>
Section 1.01 and subparagraph (ii) below, as set forth in
the following vesting schedule:
Years of Vesting Percentage
Service Vested
------------------------- ------------------------
Less than 2 years 0%
2 years 20
3 years 40
4 years 60
5 or more years 100
(ii) The Accrued Benefit of a Participant who is a non-key
employee shall not be less than 2 percent of his average
remuneration multiplied by the number of years of his Years
of Vesting Service, not in excess of 10, during the Plan
Years for which the Plan is top-heavy. That minimum benefit
shall be payable at a Participant's Normal Retirement Date.
If payments commence at a time other than the Participant's
Normal Retirement Date, the minimum Accrued Benefit shall
be the Actuarial Equivalent of that minimum benefit.
(iii) The multiplier "1.25" in Sections 415(e)(2)(B)(i) and
(3)(B)(i) of the Code shall be reduced to "1.0," and the
dollar amount "$51,875" in Section 415(e)(6)(B)(i)(I) of
the Code shall be reduced to "$41,500."
(d) If the Plan is top-heavy with respect to a Plan Year and ceases to
be top-heavy for a subsequent Plan Year, the following provisions
shall be applicable:
(i) The Accrued Benefit in any such subsequent Plan Year shall
not be less than the minimum Accrued Benefit provided in
paragraph
-70-
<PAGE>
(c)(ii) above, computed as of the end of the most recent
Plan Year for which the Plan was top-heavy.
(ii) If a Participant has completed three years of Years of
Vesting Service on or before the last day of the most
recent Plan Year for which the Plan was top-heavy, the
vesting schedule set forth in paragraph (c)(i) above shall
continue to be applicable.
(iii) If a Participant has completed at least two, but less than
three, years of Years of Vesting Service on or before the
last day of the most recent Plan Year for which the Plan
was top-heavy, the vesting provisions of Section 4.04 shall
again be applicable; provided, however, that in no event
shall the vested percentage of a Participant's Accrued
Benefit be less than the percentage determined under
paragraph (c)(i) above as of the last day of the most
recent Plan Year for which the Plan was top-heavy.
9.06 Offsets
Notwithstanding the foregoing provisions, the monthly amounts otherwise
payable hereunder shall be reduced by the amount (expressed on a
comparable basis that is an Actuarial Equivalent) of the monthly
pension, if any, to which the Participant is entitled under any other
pension plan that meets the requirements of Section 401(a) of the Code,
or any comparable section or sections of any future legislation that
amends, supplements, or supersedes said section, and that is financed
in whole or in part by an Employer but
-71-
<PAGE>
only to the extent such other pension is attributable to employer
contributions and to the same period of service for which the pension
is being paid under this Plan.
9.07 Construction
(a) The Plan shall be construed, regulated and administered under
ERISA as in effect from time to time, and the laws of the State of
New York, except where ERISA controls.
(b) The masculine pronoun shall mean the feminine where appropriate,
and vice versa.
(c) The titles and headings of the Articles and Sections in this Plan
are for convenience only. In case of ambiguity or inconsistency,
the text rather than the titles or headings shall control.
9.08 Prevention of Escheat
If the Administrator cannot ascertain the whereabouts of any person to
whom a payment is due under the Plan, the Administrator may, no earlier
than three years from the date such payment is due, mail a notice of
such due and owing payment to the last known address of such person as
shown on the records of the Administrator or the Employer. If such
person has not made written claim therefor within three months of the
date of the mailing, the Administrator may, if it so elects and upon
receiving advice from counsel to the Plan, direct that such payment and
all remaining payments otherwise due such person be canceled on the
records of the Plan and the amount thereof applied to reduce the
contributions of the Employer. Upon such cancellation, the Plan shall
have no further
-72-
<PAGE>
liability therefor except that, in the event such person or his
Beneficiary later notifies the Administrator of his whereabouts and
requests the payment or payments due to him under the Plan, the amount
so applied shall be paid to him in accordance with the provisions of
the Plan.
-73-
<PAGE>
ARTICLE 10. AMENDMENT, MERGER, AND TERMINATION
10.01 Amendment of Plan
The Company, by action of its Board of Directors or by action of a
person so authorized by resolution of the Board of Directors, reserves
the right at any time and from time to time, and retroactively if
deemed necessary or appropriate, to amend in whole or in part any or
all of the provisions of the Plan. However, no amendment shall make it
possible for any part of the funds of the Plan to be used for, or
diverted to, purposes other than for the exclusive benefit of persons
entitled to benefits under the Plan, before the satisfaction of all
liabilities with respect to them. No amendment shall be made which has
the effect of decreasing the Protected Benefit of any Participant or of
reducing the nonforfeitable percentage of the Accrued Benefit of a
Participant below the nonforfeitable percentage computed under the Plan
as in effect on the date on which the amendment is adopted, or if
later, the date on which the amendment becomes effective.
10.02 Merger, Consolidation, or Transfer
The Board of Directors may, in its sole discretion, merge this Plan
with another qualified plan or transfer a portion of the assets and
liabilities under the Plan to another qualified plan, subject to any
applicable legal requirements. However, the Plan may not be merged or
consolidated with, and its assets or liabilities may not be transferred
to, any other plan unless each person entitled to benefits under the
Plan would, if the resulting plan were then terminated, receive a
benefit immediately after the merger, consolidation, or transfer
-74-
<PAGE>
which is equal to or greater than the benefit he would have been
entitled to receive immediately before the merger, consolidation, or
transfer if the Plan had then terminated.
10.03 Additional Participating Employers
(a) If any company is now or becomes a subsidiary or associated
company of an Employer, the Board of Directors may include the
employees of that company in the membership of the Plan upon
appropriate action by that company necessary to adopt the Plan. In
that event, or if any persons become Eligible Employees of an
Employer as the result of merger or consolidation or as the result
of acquisition of all or part of the assets or business of another
company, the Board of Directors shall determine to what extent, if
any, credit and benefits shall be granted for previous service
with the subsidiary, associated or other company, but subject to
the continued qualification of the trust for the Plan as
tax-exempt under the Code.
(b) Any subsidiary or associated company may terminate its
participation in the Plan upon appropriate action by it, in which
event the funds of the Plan held on account of Participants in the
employ of that company shall be determined by the Administrator
and shall be applied as provided in Section 10.04 if the Plan
should be terminated, or shall be segregated by the Trustee as a
separate trust, pursuant to certification to the Trustee by the
Administrator, continuing the Plan as a separate plan for the
employees of that company under which the board of directors of
that company shall succeed to all the powers and duties of the
Board of Directors, including the appointment of the
administrator.
-75-
<PAGE>
10.04 Termination of Plan
The Company, by action of its Board of Directors, may terminate the
Plan for any reason at any time. In case of termination of the Plan,
the rights of Participants to their Protected Benefits as of the date
of the termination, to the extent then funded or protected by law, if
greater, shall be nonforfeitable. The funds of the Plan shall be used
for the exclusive benefit of persons entitled to benefits under the
Plan as of the date of termination, except as provided in Section 6.02.
However, any funds not required to satisfy all liabilities of the Plan
for benefits because of erroneous actuarial computation shall be
returned to the Employer. The Administrator shall determine on the
basis of actuarial valuation the share of the funds of the Plan
allocable to each person entitled to benefits under the Plan in
accordance with Section 4044 of ERISA, or corresponding provision of
any applicable law in effect at the time. In the event of a partial
termination of the Plan, the provisions of this Section shall be
applicable to the Participants affected by that partial termination.
10.05 Limitation Concerning Highly-Compensated Employees or
Highly-Compensated Former Employees
(a) The provisions of this Section shall apply (i) in the event the
Plan is terminated, to any Participant who is a Highly-Compensated
Employee or highly-compensated former employee (as those terms are
defined in Section 414(q) of the Code) of the Employer or an
Affiliate and (ii) in any other event, to any Participant who is
one of the 25 Highly-Compensated Employees or highly-compensated
former employees of the Employer or Affiliate with the greatest
compensation in any Plan Year. The amount of the annual payments
to any one of the Participants to
-76-
<PAGE>
whom this Section applies shall not be greater than an amount
equal to the annual payments that would be made on behalf of the
Participant during the year under a single life annuity that is
the Actuarial Equivalent of the sum of the Participant's Accrued
Benefit and the Participant's other benefits under the Plan.
(b) If, (i) after payment of Pension or other benefits to any one of
the Participants to whom this Section applies, the value of Plan
assets equals or exceeds 110 percent of the value of current
liabilities (as that term is defined in Section 412(l)(7) of the
Code) of the Plan, (ii) the value of the Accrued Benefit and other
benefits of any one of the Participants to whom this Section
applies is less than 1 percent of the value of current liabilities
of the Plan, or (iii) the value of the benefits payable to a
Participant to whom this Section applies does not exceed the
amount described in Section 411(a)(11)(A) of the Code, the
provisions of paragraph (a) above will not be applicable to the
payment of benefits to such Participant.
(c) Notwithstanding paragraph (a) of this Section, in the event the
Plan is terminated, the restriction of this Section shall not be
applicable if the benefit payable to any Highly-Compensated
Employee and any highly-compensated former employee is limited to
a benefit that is nondiscriminatory under Section 401(a)(4) of the
Code.
(d) If it should subsequently be determined by statute, court decision
acquiesced in by the Commissioner of Internal Revenue, or ruling
by the Commissioner of Internal Revenue, that the provisions of
this Section are no longer necessary to qualify the Plan under the
Code, this Section shall be ineffective without the necessity of
further amendment to the Plan.
-77-
<PAGE>
BARNESANDNOBLE.COM LLC
RETIREMENT PLAN
APPENDIX A. ACTUARIAL FACTORS
TABLE 1
TEN-YEAR CERTAIN & LIFE FACTOR REDUCTION CHART
Nearest Age Factor
- ------------------------------------- -------------------------------------
65 .930
64 .935
63 .940
62 .945
61 .950
60 .955
59 .960
58 .965
57 .970
56 .975
55 .980
54 .985
53 .990
52 .995
51 or less 1.000
-78-
<PAGE>
BARNESANDNOBLE.COM LLC
RETIREMENT PLAN
APPENDIX A
(cont'd)
TABLE 2
REDUCTION FACTORS IF BENEFITS BEGIN BEFORE
NORMAL RETIREMENT DATE
LIFE ONLY BENEFITS
(Interpolate for ages less than a whole year.)
Age Reduction Factor Age Reduction Factor
- --------------- --------------------------- --------------------------
64 .933 44 .194
63 .867 43 .179
62 .800 42 .165
61 .733 41 .153
60 .667 40 .141
59 .633 39 .131
58 .600 38 .121
57 .567 37 .112
56 .533 36 .104
55 .500 35 .097
54 .456 34 .090
53 .417 33 .083
52 .381 32 .077
51 .349 31 .072
50 .320 30 .067
49 .293 29 .062
48 .270 28 .058
47 .248 27 .054
46 .228 26 .050
45 .210 25 .047
-79-
<PAGE>
BARNESANDNOBLE.COM LLC
RETIREMENT PLAN
APPENDIX B.
SPECIAL PROVISIONS APPLICABLE TO PARTICIPANTS WHO TRANSFER
DIRECTLY BETWEEN AN EMPLOYER AND BARNES & NOBLE, INC.
Except as otherwise modified or expanded in this Appendix B, the provisions of
this Plan, as contained in the text to which this Appendix is attached, shall
determine the benefits payable to or on behalf of a Participant covered under
this Appendix. The Plan Sections referenced below are hereby modified or
expanded in accordance with the following special provisions applicable to said
Participant.
ARTICLE 1. DEFINITIONS
Section 1.11 - Certified Earnings
- ---------------------------------
If, after the Effective Date, a Participant transfers directly from the employ
of an Employer to the employ of Barnes & Noble, Inc. ("Transferred
Participant"), the remuneration paid to said Transferred Participant after said
transfer and during any period of employment with Barnes & Noble, Inc. which is
recognized under the provisions of Section 3.01 of this Appendix B as Years of
Vesting Service shall be recognized as "Certified Earnings" under Section 1.11
and included in the calculation of Final Average Compensation under Section 1.21
of the Plan to the extent such remuneration would have been recognized as
Certified Earnings under Section 1.11 of the Plan had it been earned while
employed as an Eligible Employee.
-80-
<PAGE>
Notwithstanding any Plan provisions to the contrary, the provisions of this
Section 1.11 of this Appendix B shall cease to be applicable on and after the
date the Barnes & Noble Plan ceases to provide future benefit accruals for the
employees of Barnes & Noble, Inc. (the "Freeze Date") and any remuneration paid
to a Transferred Participant after the Freeze Date shall not be recognized as
Certified Earnings under the provisions of the Plan and this Appendix B.
Anything contained herein to the contrary notwithstanding, if any Transferred
Participant ceases to be employed by Barnes & Noble, Inc. and is subsequently
reemployed by Barnes & Noble, Inc. remuneration paid to said Participant during
the period of subsequent employment with Barnes & Noble, Inc. shall not be
recognized as Certified Earnings under Section 1.11.
If, after the Effective Date, an Employee transfers directly from the employ of
Barnes & Noble, Inc. to the employ of the Employer, the remuneration paid to
said Eligible Employee prior to the transfer and during any period of employment
with Barnes & Noble, Inc., as an "eligible employee" as such term is defined
under the provisions of the Barnes & Noble Plan which is recognized under the
provisions of Section 3.01 of this Appendix B as Years of Vesting Service shall
be recognized as "Certified Earnings" under Section 1.11 and included in the
calculation of Final Average Compensation under Section 1.21 of the Plan to the
extent such remuneration would have been recognized as Certified Earnings under
Section 1.11 of the Plan had it been earned while employed as an Eligible
Employee.
-81-
<PAGE>
Section 1.43 - Termination of Employment
- ----------------------------------------
If an Employee transfers directly from the employ of an Employer to the employ
of Barnes & Noble, Inc., a Termination of Employment under the provisions of
this Plan shall not be deemed to have occurred while said Employee remains in
the continuous employ of Barnes & Noble, Inc.
ARTICLE 2. PARTICIPATION
Section 2.02 - Determination of Eligibility Service
- ---------------------------------------------------
With respect to an Eligible Employee who, after the Effective Date, transfers
directly from the employ of Barnes & Noble, Inc. to the employ of an Employer,
the period of said Employee's service rendered immediately prior to said
transfer as an employee of Barnes & Noble, Inc. shall be recognized as Years of
Eligibility Service under Section 2.02 of the Plan, to the extent said period of
employment would have been recognized under the Plan had it been rendered as an
Employee.
ARTICLE 3. SERVICE
Section 3.01 - Years of Vesting Service
- ---------------------------------------
If, after the Effective Date, a Participant transfers directly from the employ
of an Employer to the employ of Barnes & Noble, Inc., the period of said
Participant's employment with Barnes & Noble, Inc. rendered after said direct
transfer shall be recognized as Years of Vesting Service under the provisions of
Section 3.01, to the extent said period of employment would have been recognized
under the Plan had it been rendered as an Employee. The increases in said
Participant's age during any period of employment with Barnes & Noble, Inc.,
which is recognized as Years of Vesting Service under the provisions of this
Section 3.01, shall be
-82-
<PAGE>
recognized for eligibility and early retirement subsidy purposes under the
provisions of this Plan, and such Participant shall not incur a Termination of
Employment under this Plan while he remains in the continuous employ of Barnes &
Noble, Inc.
Anything contained herein to the contrary notwithstanding, if any such
Participant ceases to be employed by Barnes & Noble, Inc. and is subsequently
reemployed by Barnes & Noble, Inc., the subsequent employment with Barnes &
Noble, Inc. shall not be recognized as Years of Vesting Service under Section
3.01.
If an Employee, after the Effective Date, transfers directly from the employ of
Barnes & Noble, Inc. to the employ of the Employer, the period of said
Participant's employment with Barnes & Noble, Inc. rendered prior to said direct
transfer shall be recognized as Years of Vesting Service under the provisions of
Section 3.01, to the extent said period of employment would have been recognized
under the Plan had it been rendered as an Employee.
-83-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
barnesandnoble.com inc.
New York, New York
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form S-1 of our report dated , 1999,
relating to the financial statements of barnesandnoble.com inc. and January 29,
1999, relating to the financial statements of barnesandnoble.com llc.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
--------------------------------------
BDO Seidman, LLP
New York, New York
May 24, 1999
