<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 6, 1999
REGISTRATION NO. 333-64211
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
PRE-EFFECTIVE AMENDMENT NO. 2
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. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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..................... $300,000,000 $85,100
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $57,300 of this amount has been paid. The fee with respect to the additional
$100,000,000 being registered hereby is $27,800, 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 6, 1999 [LOGO]
25,000,000 Shares
barnesandnoble.com inc.
Class A Common Stock
(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 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 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 $11.00 and $13.00 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 certain 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 $1,300,000 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>
------------------------
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>
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 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 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 made pro
rata in accordance with the percentage equity interests of its members.
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 has created a model for e-
commerce based upon a compelling value proposition. 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.
During 1998, bn.com introduced many major enhancements to its online
stores, including Express LaneSM 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.
3
<PAGE>
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. bn.com's growth rate may be different.
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
world's largest bookseller, 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
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) leveraging its other
relationships with Barnes & Noble and Bertelsmann to the fullest extent
possible; (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
4
<PAGE>
(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
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(Service Mark), the BN Top
100(Service Mark) and E-nnouncements(Service Mark) 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: (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
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
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
$4.30 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
AS OF DECEMBER 31, AS OF MARCH 31,
-------------------- MARCH 31, 1999
1997 1998 1999 PRO FORMA
-------- -------- ----------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ -- $ 96,940 $ 60,936 $442,264
Working capital......... 3,176 78,681 57,057 438,385
Total assets............ 26,327 202,144 168,208 498,908
Minority interest(5).... -- -- -- 393,777
Equity(6)............... $ 19,213 $169,149 $ 148,931 85,854
</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 $281 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.
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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. The
Company 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
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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 of Recapitalization" and
"Description of Capital Stock and Membership Units."
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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 under certain circumstances 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. In connection with the Formation
Transaction, bn.com has agreed that it will not engage in the sale of
non-English-language books except through links to Bertelsmann Web sites and
Bertelsmann has agreed that its sales of English-language books in
English-speaking countries (defined as the U.S., Canada, the U.K., Australia and
New Zealand (collectively, "English-Speaking Countries")) through the Internet
will be made exclusively through bn.com's Web site, 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
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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.
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 certain 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 under certain circumstances 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.
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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 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
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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 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
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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 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 certain 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.
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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
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 of 1940, as amended (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, it 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 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.
16
<PAGE>
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. See "Dividend Policy."
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 $12.00 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 $8.57 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. 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 CERTAIN 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
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
18
<PAGE>
control of the Company. See "Description of Capital Stock and Membership
Units--Anti-Takeover Effects of Certain 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 $281 million
(approximately $323 million if the Underwriters' over-allotment option is
exercised in full) assuming an initial public offering price of $12.00 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; 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, 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 $12.00 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 $ -- $442,264(1)
------------ -------- --------
------------ -------- --------
Debt.............................................................. $ -- $ -- $ --
Minority interest................................................. -- -- 393,777(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................................................. -- -- 85,829
------------ -------- --------
Total stockholders' equity................................... -- -- 85,854
------------ -------- --------
Total capitalization....................................... $ 148,931 $ -- $479,631
------------ -------- --------
------------ -------- --------
</TABLE>
- ------------------
(1) Reflects the receipt of the Offering proceeds of approximately $281 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 $12.00 per share. See "Shares Eligible for Future Sale."
<TABLE>
<S> <C> <C>
Initial public offering price per share........................................................ $12.00
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......................................................... 2.13
------
Pro forma net tangible book value per share after the Offering................................. 3.43
------
Pro forma dilution per share to new investors assuming full conversion of all Membership Units
into shares of Class A Common Stock.......................................................... $ 8.57
------
------
</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 51.3% $ 2.75
The Company.................................... 25,000,000 17.9 300,000,000 48.7 12.00
----------- ----- ------------ -----
Total........................................ 140,000,002 100.0% $615,849,000 100.0%
----------- ----- ------------ -----
----------- ----- ------------ -----
</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 $4.30 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 $ 442,264
Working capital.............. 3,176 78,681 57,057 438,385
Total assets................. 26,327 202,144 168,208 498,908
Minority interest(5)......... -- -- -- 393,777
Equity(6).................... $ 19,213 $169,149 $ 148,931 $ 85,854
</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 $281 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 of 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.
29
<PAGE>
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, 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. The Company expects
bn.com to amortize the costs associated with the AOL Agreement over the contract
term of four years.
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 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 products. 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 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.
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 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
31
<PAGE>
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 identification of all IT equipment and systems, and non-IT systems (100%
complete);
o assessment of repair or replacement requirements (70% complete);
o repair or replacement (25% complete);
o testing;
o implementation; and
o creation of contingency plans in the event of Year 2000 failures.
To date, less than 10% of assessed systems have required repair or
replacement. Non-IT systems and internally developed programs 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 critical
third party service suppliers asking about the status of their Year 2000
program. Vendor readiness is being assessed and tracked. In the event
satisfactory commitments are not received from a key supplier, plans are being
developed for continuing availability of service through alternate channels. The
Company's management expects to have certification that all key vendors and
suppliers are Year 2000 compliant by the third quarter of 1999. For the highest
priority third party partners, 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 partners include Barnes & Noble,
Ingram Book Group, Baker & Taylor, Alliance Entertainment Corp, United Parcel
Service and the United States Postal Service. The failure of a major supplier 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.
32
<PAGE>
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. 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 developed a Year 2000-specific contingency plan. If Year
2000 compliance issues are discovered, the need for contingency plans relating
to such issues will be evaluated. bn.com intends to actively work with and
encourage suppliers to minimize the risks of business disruptions resulting from
Year 2000 issues and develop contingency plans where necessary. Such plans may
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 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 a total loss of revenue to bn.com 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 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 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 made pro rata in accordance with the percentage equity interests of
its members. 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 has created a model for e-
commerce based upon a compelling value proposition. 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 Lanesm 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
world's largest bookseller, 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 integrated media
companies in the world, which provides significant advantages in
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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. bn.com's growth rate may be different.
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. bn.com's growth rate may be different.
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. bn.com's growth rate may be different.
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 nearly $3 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. bn.com's growth rate may be
different.
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
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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 Lanesm 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.
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
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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 new customer
acquisition costs, as well as to get customers to return to its site more
frequently and to increase the size of their average purchase per visit.
LEVERAGING 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, leverage its well-respected brand name and utilize 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.
LEVERAGING 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 its major strategic partners 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 and
marketing partners 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 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.
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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 90% 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.
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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-nnouncementssm 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 strategic
alliances with Microsoft, Lycos, ZDNet, Disney, The New York Times, CNN,
TicketMaster and USA Today. See "Management's Discussion and Analysis of
Financial Condition--Liquidity and Capital Resources."
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AFFILIATE NETWORK. In addition to securing 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
leveraging existing systems and the best demonstrated processes of Barnes &
Noble, licensing existing commercial technology when available and focusing its
internal development efforts on those proprietary systems necessary to provide
the highest level of value and service to its customers. The overall mix of
technologies and applications currently in use by 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
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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
Lanesm 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 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%
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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 certain bankruptcy
events. The Company believes that, due to bn.com's 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,
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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 certain bankruptcy events 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 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
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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. 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 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 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.
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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.
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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.
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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
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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.
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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 certain
major corporate actions, 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 certain major events will require
the approval of 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
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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 certain
expenses in connection with attendance at Board of Directors and committee
meetings. Other than with respect to reimbursement of expenses, directors who
are employees or officers of the Company 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.
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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 certain 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 certain "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. 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 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
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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. Notwithstanding the foregoing,
each member of bn.com, other than the Company, may make the following permitted
transfers: (i) a transfer of all (but not less than all) of the Membership Units
owned by it (a) to any of its affiliates (other than to an affiliate of which
specified competitors own an interest) or (b) to the transferee of the
publishing or retail book store business, as the case may be, in connection with
a transfer by Bertelsmann of all (or substantially all) of its publishing
business in the U.S., or by Barnes & Noble of all (or substantially all) of its
retail book store business; or (ii) a transfer of 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."
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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 July 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.
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<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........... 862,000 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 551,250 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 $ -- $11,757,600
Jeffrey Killeen.................................... -- 2,070,000(2) -- 17,636,400
Carl Rosendorf..................................... -- 862,500 -- 7,348,500
William F. Duffy................................... -- 603,750 -- 5,143,950
John Kristie....................................... -- 603,750 -- 5,143,950
</TABLE>
- ------------------
(1) Based upon an initial public offering price of the Class A Common Stock of
$12.00 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 551,250 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 certain employees 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. Amounts equal to the
contributions of bn.com employees in deferral accounts under the Barnes & Noble
Plan will be transfered 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 certain 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 certain
conditions in connection with 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
58
<PAGE>
not fewer than two directors of the Company, as designated by the Board of
Directors. The purpose of the Incentive Plan is to assist the Company in
attracting and retaining selected individuals to serve as directors, officers,
consultants, advisors and employees of the Company and 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 $4.30 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,
under certain
59
<PAGE>
circumstances, be transferable to family members and trusts for the benefit of
the participant or his or her family members.
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.
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ANTIDILUTION PROVISIONS. The number of Shares authorized to be issued under
the Incentive Plan and subject to outstanding awards (and the grant or exercise
price thereof) may be adjusted to prevent dilution or enlargement of rights in
the event of any dividend or other distribution, recapitalization, stock split,
reverse stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase or exchange of Shares or other securities, the issuance
of warrants or other rights to purchase Shares or other securities, or other
similar capitalization change.
CHANGE IN CONTROL. Upon the occurrence of a change in control of the
Company, all Options and related SARs may become immediately exercisable, the
restricted Shares may fully vest and stock purchase loans may be forgiven in
full.
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.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of the date of this Prospectus 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>
NUMBER OF SHARES PERCENTAGE 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......................... -- -- -- -- -- --
Thomas Middelhoff........................ -- -- -- -- -- --
Markus Wilhelm........................... -- -- -- -- -- --
Klaus Eierhoff........................... -- -- -- -- -- --
All current executive officers and
directors as a group
(12 persons) (11)...................... 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)
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(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) 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, 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.
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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, provided that certain actions by the Board of Directors require approval
of each of Barnes & Noble and Bertelsmann. 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 certain 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 certain
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
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stockholders of the Company voting together as a single class. Holders of shares
of Class A Common 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.
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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 Certain 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 will be 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 CERTAIN 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, certain 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
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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
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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 certain 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
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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.
CERTAIN U.S. TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general discussion of certain 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. Certain 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, under certain circumstances, 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, as adjusted for certain items, 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 certain 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>
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,
through its ownership of the Class B Common Stock, own 100% of newly formed
barnesandnoble.com inc. (the "Company"). The Company will issue shares 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 $12.00 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>
MEMBERS'
EQUITY
--------
<S> <C>
Balance January 1, 1997.............................................................................. $ --
Net loss for year ended December 31, 1997.......................................................... (13,552)
Capital contribution from Barnes & Noble, Inc., net................................................ 32,765
--------
Balance December 31, 1997............................................................................ 19,213
Net loss for year ended December 31, 1998.......................................................... (83,148)
Capital contribution from Barnes & Noble, Inc., net................................................ 83,084
Capital contribution from Bertelsmann AG, net of $50 million subscription receivable .............. 150,000
--------
Balance December 31, 1998............................................................................ 169,149
Net loss for three months ended March 31, 1999 (unaudited)......................................... (20,218)
--------
Balance March 31, 1999 (unaudited)................................................................... $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. The Company 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
MINIMUM LEASE
YEAR ENDING PAYMENTS
DECEMBER 31,
- -------------------------------------------------------- -------------
(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 the Company. Should the FTC
determine that the Formation Transaction violated applicable antitrust laws, it
could seek to impose a number of remedies or penalties on the Company, 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.
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 $8.30 per share. As of March 31, 1999, there were 17,856,441 options
outstanding at a weighted average exercise price of $4.30 per share.
All option amounts are based upon total Membership Units outstanding of
115,000,000. Such Membership Units are subject to adjustment based upon the
actual number of units sold to barnesandnoble.com inc. in connection with its
planned public 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 65 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>
------------------------------------------------------------
------------------------------------------------------------
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
Certain 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........................................... $ 85,100
Nasdaq listing fee......................................... 50,000
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............................................ 300,000
Miscellaneous.............................................. 44,900
----------
Total................................................. $1,300,000
</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> <C>
1.1 -- Form of Underwriting Agreement.
3.1 -- Form of Amended and Restated Certificate of Incorporation of the Company.
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.(2)
10.1 -- Form of the Company's 1999 Incentive Plan.(1)
10.2 -- Interactive Services Agreement, dated as of July 31, 1997, by and between the Company and Lycos,
Inc.(1)(3)
10.3 -- Interactive Marketing Agreement, dated as of November 1, 1997, by and between the Company and
America Online, Inc.(1)(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.(1)(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.
10.7 -- Form of Stockholders Agreement between Barnes & Noble, Inc. and Bertelsmann AG.
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.
10.17 -- Form of Amendment No. 1 to the Amended and Restated Services Agreement, among the Company,
barnesandnoble.com llc and Marboro Books Corp.
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.
10.19 -- Form of Amendment No. 1 to the Trademark License Agreement, between BOL.Global, Inc. and
barnesandnoble.com llc.
10.20 -- Form of Amendment No. 1 to the Supply Agreement, between barnesandnoble.com llc and Barnes & Noble
Inc.
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.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
<S> <C> <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.
10.25 -- Deferred Compensation Plan of the Company.(1)
10.26 -- Retirement Plan of the Company.(1)
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.
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.
10.29 -- Employment Termination Agreement, dated as of February 22, 1999, between barnesandnoble.com llc
and Jeffrey Killeen.
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).(2)
24.1 -- Power of Attorney (included on signature page to this Registration Statement).(1)
27.1 -- Financial Data Schedule.
</TABLE>
- ------------------
(1) Filed with Amendment No. 1 to Registration Statement.
(2) To be filed by amendment.
(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 6, 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 6, 1999
- --------------------------------
Leonard Riggio
/s/ JONATHAN BULKELEY Chief Executive Officer May 6, 1999
- -------------------------------- (Principal Executive Officer)
Jonathan Bulkeley
/s/ MARIE J. TOULANTIS Chief Financial Officer May 6, 1999
- -------------------------------- (Principal Accounting and Financial Officer)
Marie J. Toulantis
/s/ MICHAEL N. ROSEN Secretary and a Director May 6, 1999
- --------------------------------
Michael N. Rosen
/s/ STEPHEN RIGGIO Director May 6, 1999
- --------------------------------
Stephen Riggio
/s/ THOMAS MIDDELHOFF Director May 6, 1999
- --------------------------------
Thomas Middelhoff
/s/ MARKUS WILHELM Director May 6, 1999
- --------------------------------
Markus Wilhelm
/s/ KLAUS EIERHOFF Director May 6, 1999
- --------------------------------
Klaus Eierhoff
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- ------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C>
1.1 -- Form of Underwriting Agreement.
3.1 -- Form of Amended and Restated Certificate of Incorporation of the Company.
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.(2)
10.1 -- Form of the Company's 1999 Incentive Plan.(1)
10.2 -- Interactive Services Agreement, dated as of July 31, 1997, by and between the Company
and Lycos, Inc.(1)(3)
10.3 -- Interactive Marketing Agreement, dated as of November 1, 1997, by and between the
Company and America Online, Inc.(1)(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.(1)(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.
10.7 -- Form of Stockholders Agreement between Barnes & Noble, Inc. and Bertelsmann AG.
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.
10.17 -- Form of Amendment No. 1 to the Amended and Restated Services Agreement, among the
Company, barnesandnoble.com llc and Marboro Books Corp.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- ------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <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.
10.19 -- Form of Amendment No. 1 to the Trademark License Agreement, between BOL.Global, Inc.
and barnesandnoble.com llc.
10.20 -- Form of Amendment No. 1 to the Supply Agreement, between barnesandnoble.com llc and
Barnes & Noble Inc.
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.
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.
10.25 -- Deferred Compensation Plan of the Company.(1)
10.26 -- Retirement Plan of the Company.(1)
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.
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.
10.29 -- Employment Termination Agreement, dated as of February 22, 1999, between
barnesandnoble.com llc and Jeffrey Killeen.
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).(2)
24.1 -- Power of Attorney (included on signature page to this Registration Statement).(1)
27.1 -- Financial Data Schedule.
</TABLE>
- ------------------
(1) Filed with Amendment No. 1 to Registration Statement.
(2) To be filed by amendment.
(3) Confidential Treatment Requested. Confidential portions of this document
have been redacted and have been filed separately with the Securities and
Exchange Commission.
<PAGE>
barnesandnoble.com inc.
Class A Common Stock
(par value $.001 per share)
Underwriting Agreement
----------------------
May __, 1999
Goldman, Sachs & Co.
Merrill Lynch & Co.
Salomon Smith Barney Inc.
Wit Capital Corporation
As representatives (the "Representatives") of the
several Underwriters named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
barnesandnoble.com Inc., a Delaware corporation (the "Company") proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
........ shares (the "Firm Shares") and, at the election of the Underwriters, up
to ........ additional shares (the "Optional Shares") of Class A Common Stock,
par value $.001 per share ("Stock") of the Company (the Firm Shares and the
Optional Shares that the Underwriters elect to purchase pursuant to Section 2
hereof being collectively called the "Shares") and to use the proceeds to make a
capital contribution in the capital of barnesandnoble.com llc, a Delaware
limited liability company (the "Operating Company").
1. Each of the Company and the Operating Company, jointly and severally,
represents and warrants to, and agrees with, each of the Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-64211) and all
pre-effective amendments thereto (the "Initial Registration Statement") in
respect of the Shares has been filed with the Securities and Exchange Commission
(the "Commission"); the Initial Registration Statement and any post-effective
amendment thereto, each in the form heretofore delivered to the Representatives,
and, excluding exhibits thereto, to the Representatives for each of the other
Underwriters, have been declared effective by the Commission in such form; other
than a registration statement, if any, increasing the size of the offering (a
"Rule 462(b) Registration Statement"), filed pursuant to Rule 462(b) under the
Securities Act of 1933, as amended (the "Act"), which became effective upon
filing, no other document with respect to the Initial Registration Statement has
heretofore been filed with the Commission; and no stop order suspending the
effectiveness of the Initial Registration Statement, any post-effective
amendment thereto or the Rule 462(b) Registration Statement, if any, has been
issued and no proceeding for that purpose has been initiated or threatened by
the Commission (any preliminary prospectus included in the Initial Registration
Statement or filed with the Commission pursuant to Rule 424(a) of the rules and
regulations of the Commission under the Act is hereinafter called a "Preliminary
Prospectus"; the various parts of the Initial Registration Statement and the
Rule 462(b) Registration Statement, if any, including all exhibits thereto and
including the information contained in the form of final prospectus filed with
the Commission pursuant to Rule 424(b) under the Act in accordance with Section
5(a) hereof and deemed by virtue of Rule 430A
<PAGE>
under the Act to be part of the Initial Registration Statement at the time it
was declared effective or such part of the Rule 462(b) Registration Statement,
if any, when it became or hereafter becomes effective, each as amended at the
time such part of the Initial Registration Statement became effective, is
hereinafter collectively called the "Registration Statement"; and such final
prospectus, in the form first filed pursuant to Rule 424(b) under the Act, is
hereinafter called the "Prospectus");
(b) No order preventing or suspending the use of any Preliminary Prospectus
has been issued by the Commission, and each Preliminary Prospectus, at the time
of filing thereof, conformed in all material respects to the requirements of the
Act and the rules and regulations of the Commission thereunder, and did not
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with information
furnished in writing to the Company by an Underwriter through or with the
consent of Goldman, Sachs & Co. expressly for use therein;
(c) The Registration Statement conforms, and the Prospectus and any further
amendments or supplements to the Registration Statement or the Prospectus will
conform, in all material respects to the requirements of the Act and the rules
and regulations of the Commission thereunder and do not and will not, as of the
applicable effective date as to the Registration Statement and any amendment
thereto, and as of the applicable filing date as to the Prospectus and any
amendment or supplement thereto, contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided, however, that this
representation and warranty shall not apply to any statements or omissions made
in reliance upon and in conformity with information furnished in writing to the
Company by an Underwriter through or with the consent of Goldman, Sachs & Co.
expressly for use therein;
(d) Neither the Company nor the Operating Company has sustained since the
date of the latest audited financial statements included in the Prospectus any
loss or interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus or other than any loss or interference which
would not have a material adverse effect in the general affairs, management,
financial position, stockholders' equity or results of operations of the Company
or the Operating Company (a "Material Adverse Effect"); and, since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, there has not been any change in the capital stock or
long-term debt of the Company or the Operating Company or any change, or any
development involving a prospective change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of operations of
the Company or the Operating Company, otherwise than as set forth or
contemplated in the Prospectus or other than any change or development involving
a prospective change which would not have a Material Adverse Effect;
(e) The Company and the Operating Company have good title to all personal
property owned by them free and clear of all liens, encumbrances and defects
except such as are described in the Prospectus or such as do not materially
affect the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and the Operating Company;
and any real property and buildings held under lease by the Company and the
Operating Company are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere with the
use made and proposed to be made of such property and buildings by the Company
and the Operating Company;
(f) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with power
and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus, and has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each other
2
<PAGE>
jurisdiction in which it owns or leases properties or conducts any business so
as to require such qualification, except where the failure to be so qualified
would not have a Material Adverse Effect, and the Operating Company has been
duly formed and is validly existing as a limited liability company in good
standing under the laws of the State of Delaware, with power and authority
(corporate and other) to own its properties and conduct its business as
described in the Prospectus, and has been duly qualified as a foreign
corporation for the transaction of business and is in good standing under the
laws of each other jurisdiction in which it owns or leases properties or
conducts any business so as to require qualifications, except where the failure
to be so qualified would not have a Material Adverse Effect;
(g) Neither the Company nor the Operating Company has any subsidiary (as
such term is defined in the rules and regulations under the Act) except that
contemporaneously with the consummation of the transactions contemplated in this
agreement, the Operating Company will be a subsidiary of the Company;
(h) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company (the
"Stock") have been duly and validly authorized and issued, are fully paid and
non-assessable and conform to the description of the Stock contained in the
Prospectus; the Operating Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued and outstanding limited liability
company interests (the "Membership Units") have been duly and validly authorized
and issued, are fully paid and non-assessable and are owned directly or
indirectly by Barnes & Noble Inc. or Bertelsmann AG, free and clear of all
liens, encumbrances, equities and claims, and conform to the description of the
Membership Units contained in the Prospectus.
(i) The Shares have been duly and validly authorized and, when issued and
delivered against payment therefor as provided herein, will be duly and validly
issued and fully paid and non-assessable and will conform to the description of
the Stock contained in the Prospectus;
(j) The issue and sale of the Shares by the Company and the compliance by
the Company with all of the provisions of this Agreement and the consummation of
the transactions herein contemplated will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Company or the Operating Company is a party
or by which the Company or the Operating Company is bound or to which any of the
property or assets of the Company or the Operating Company is subject, nor will
such action result in any violation of the provisions of the Certificate of
Incorporation or By-laws of the Company, any agreement among stockholders of the
Company, the Limited Liability Company Agreement of the Operating Company, or
any statute or any order, rule or regulation of any court or governmental agency
or body having jurisdiction over the Company or the Operating Company or any of
their properties except where such conflict, breach or violation would not have
a Material Adverse Effect and would not have the effect of preventing the
Company and the Operating Company from performing any of their respective
obligations under this agreement; and no consent, approval, authorization,
order, registration or qualification of or with any such court or governmental
agency or body is required for the issue and sale of the Shares or the
consummation by the Company of the transactions contemplated by this Agreement,
except the registration under the Act of the Shares and such consents,
approvals, authorizations, registrations or qualifications as may be required
under state securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters;
(k) Neither the Company nor the Operating Company is in (i) violation of
its Certificate of Incorporation or By-laws, the Limited Liability Company
Agreement of the Operating Company or any agreement among shareholders of the
Company or members of the Operating Company, as the case may be, or in (ii)
default in the performance or observance of any obligation, agreement, covenant
or condition contained in any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which it is a party or by
which it or any of its properties may be bound except, with respect to subclause
(ii), such default would not have a Material Adverse Effect;
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(l) The statements set forth in the Prospectus under the captions
"Corporate History and Recapitalization", "Description of Capital Stock and
Membership Units", insofar as they purport to constitute a summary of the terms
of the Stock and the Membership Units, under "Certain Transactions" and "Share
Eligible for Future Sale", insofar as they purport to describe the provisions of
the documents and arrangements referred to therein, and under the caption
"Underwriting", insofar as they purport to describe the provisions of the laws
and documents referred to therein, fairly describe, in all material respects,
the matters which they purport to describe and are accurate and complete in all
material respects;
(m) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or the Operating Company
is a party or of which any property of the Company or the Operating Company is
the subject which, if determined adversely to the Company or the Operating
Company, would individually or in the aggregate have a Material Adverse Effect;
and, to the best of the Company's and the Operating Company's knowledge, no such
proceedings have been threatened by governmental authorities or threatened by
others;
(n) The Company is not and, after giving effect to the offering and sale of
the Shares, will not be an "investment company" or an entity "controlled" by an
"investment company", as such terms are defined in the Investment Company Act of
1940, as amended (the "Investment Company Act");
(o) BDO Seidman, LLP, who have certified certain financial statements of
the Company and the Operating Company, are independent public accountants as
required by the Act and the rules and regulations of the Commission thereunder;
(p) Other than as set forth in the Prospectus, the Company and the
Operating Company own, possess or license, or can acquire or license on
reasonable terms, all patents, trademarks, servicemarks, trade names,
copyrights, trade secrets, information, proprietary rights and processes
("Intellectual Property") necessary for their business as described in the
Prospectus and, to the Company's and the Operating Company's knowledge,
necessary in connection with the products and services under development, in
each case, to the knowledge of the Company and the Operating Company after due
inquiry, without any conflict with or infringement of the interests of others,
and have taken all reasonable steps necessary to secure interests in such
Intellectual Property from their contractors; except as set forth in the
Prospectus, the Company and the Operating Company are not aware of outstanding
options, licenses or agreements of any kind relating to the Intellectual
Property of the Company and the Operating Company which are required to be set
forth in the Prospectus, and, except as set forth in the Prospectus, neither the
Company nor the Operating Company is a party to or bound by any options,
licenses or agreements with respect to the Intellectual Property of any other
person or entity which are required to he set forth in the Prospectus; none of
the technology employed by the Company or the Operating Company has been
obtained or is being used by the Company or the Operating Company in violation
of any contractual fiduciary obligation binding on the Company or the Operating
Company or any of their respective directors or executive officers or, to the
Company's and the Operating Company's knowledge, any of their employees or
otherwise in violation of the rights of any persons, other than any violation
which would not have a Material Adverse Effect; except as disclosed in the
Prospectus, neither the Company nor the Operating Company has received any
written or, to the Company's and the Operating Company's knowledge, oral
communications alleging that the Company or the Operating Company has violated,
infringed or conflicted with, or, by conducting its business as set forth in the
Prospectus, would violate, infringe or conflict with any of the Intellectual
Property of any other person or entity other than any such violation,
infringement or conflict which would not have a Material Adverse Effect; neither
the execution nor delivery of this Agreement, nor the operation of the Company's
and the Operating Company's business by the employees of the Company and the
Operating Company, nor the conduct of the Company's and the Operating Company's
business as described in the Prospectus will result in any breach or violation
of the terms, conditions or provisions of, constitute a default under, any
material contract, covenant or instrument known to the Company and the Operating
Company under which any
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of such employees is now obligated, other than any breach or violation which
would not have a Material Adverse Effect; and the Company and the Operating
Company have taken and will maintain reasonable measures to prevent the
unauthorized dissemination or publication of their confidential information and,
to the extent contractually required to do so, the confidential information of
third parties in their possession;
(q) The Company and the Operating Company maintain insurance of the types
and in the amounts generally deemed adequate for their business, including, but
not limited to, insurance covering real and personal property owned or leased by
the Company and the Operating Company against theft, damage, destruction, acts
of vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect, except as would not have a Material
Adverse Effect;
(r) There are no contracts, other documents or other agreements required to
be described in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Act or by the rules and regulations thereunder
which have not been described or filed as required; the contracts so described
in the Prospectus are in full force and effect on the date hereof; and neither
the Company, the Operating Company nor, to the best of the Company's and the
Operating Company's knowledge, any other party is in breach of or default in any
material respect under any of such contracts; and
(s) The Company and the Operating Company have not been advised, and have
no reason to believe, that they are not conducting business in compliance with
all applicable laws, rules and regulations of the jurisdictions in which they
are conducting business, including, without limitation, all applicable local,
state and federal environmental laws and regulations, except where failure to be
so in compliance would not have a Material Adverse Effect.
(t) The Company and the Operating Company have reviewed their operations
and any third parties with which the Company or the Operating Company has a
material relationship to evaluate the extent to which the business or operations
of the Company or the Operating Company will be affected by the Year 2000
Problem. As a result of such review, the Company and the Operating Company have
no reason to believe, and do not believe, that the Year 2000 Problem will have a
Material Adverse Effect or result in any material loss or interference with
their businesses or operations. The "Year 2000 Problem" as used herein means any
significant risk that computer hardware or software used in the receipt,
transmission, processing, manipulation, storage, retrieval, retransmission or
other utilization of data or in the operation of mechanical or electrical
systems of any kind will not, in the case of dates or time periods occurring
after December 31, 1999, function at least as effectively as in the case of
dates or time periods occurring prior to January 1, 2000.
2. Subject to the terms and conditions herein set forth, (a) the Company
agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company, at
a purchase price per share of $................, the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I hereto and (b) in the
event and to the extent that the Underwriters shall exercise the election to
purchase Optional Shares as provided below, the Company agrees to issue and sell
to each of the Underwriters, and each of the Underwriters agrees, severally and
not jointly, to purchase from the Company, at the purchase price per share set
forth in clause (a) of this Section 2, that portion of the number of Optional
Shares as to which such election shall have been exercised (to be adjusted by
you so as to eliminate fractional shares) determined by multiplying such number
of Optional Shares by a fraction, the numerator of which is the maximum number
of Optional Shares which such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule I hereto and the denominator
of which is the maximum number of Optional Shares that all of the Underwriters
are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to ................... Optional Shares, at the purchase price
per share set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
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Optional Shares may be exercised only by written notice from the Representatives
to the Company, given within a period of 30 calendar days after the date of this
Agreement, setting forth the aggregate number of Optional Shares to be purchased
and the date on which such Optional Shares are to be delivered, as determined by
the Representatives but in no event earlier than the First Time of Delivery (as
defined in Section 4 hereof) or, unless the Representatives and the Company
otherwise agree in writing, earlier than two or later than ten business days
after the date of such notice.
3. Upon the authorization by the Representatives of the release of the Firm
Shares, the several Underwriters propose to offer the Firm Shares for sale upon
the terms and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered
in such names as Goldman, Sachs & Co. may request upon at least
forty-eight hours' prior notice to the Company shall be delivered by
or on behalf of the Company to Goldman, Sachs & Co., for the account
of such Underwriter, against payment by or on behalf of such
Underwriter of the purchase price therefor by wire transfer of Federal
(same-day) funds to the account specified by the Company to Goldman,
Sachs & Co. at least forty-eight hours in advance. The Company will
cause the certificates representing the Shares to be made available
for checking and packaging at least twenty-four hours prior to the
Time of Delivery (as defined below) with respect thereto at the office
of Goldman, Sachs & Co., 85 Broad Street, New York, New York 10004
(the "Designated Office"). The time and date of such delivery and
payment shall be, with respect to the Firm Shares, 9:30 a.m., New York
City time, on ............., 19.. or such other time and date as
Goldman, Sachs & Co. and the Company may agree upon in writing, and,
with respect to the Optional Shares, 9:30 a.m., New York time, on the
date specified by Goldman, Sachs & Co. in the written notice given by
Goldman, Sachs & Co. of the Underwriters' election to purchase such
Optional Shares, or such other time and date as Goldman, Sachs & Co.
and the Company may agree upon in writing. Such time and date for
delivery of the Firm Shares is herein called the "First Time of
Delivery", such time and date for delivery of the Optional Shares, if
not the First Time of Delivery, is herein called the "Second Time of
Delivery", and each such time and date for delivery is herein called a
"Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or
on behalf of the parties hereto pursuant to Section 7 hereof,
including the cross receipt for the Shares and any additional
documents requested by the Underwriters pursuant to Section 7(j)
hereof, will be delivered at the offices of Sullivan & Cromwell, 125
Broad Street, New York, NY, 10004 (the "Closing Location"), and the
Shares will be delivered at the Designated Office, all at such Time of
Delivery. A meeting will be held at the Closing Location at
.......p.m., New York City time, on the New York Business Day next
preceding such Time of Delivery, at which meeting the final drafts of
the documents to be delivered pursuant to the preceding sentence will
be available for review by the parties hereto. For the purposes of
this Section 4, "New York Business Day" shall mean each Monday,
Tuesday, Wednesday, Thursday and Friday which is not a day on which
banking institutions in New York are generally authorized or obligated
by law or executive order to close.
5. Each of the Company and the Operating Company agrees with each of the
Underwriters:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b)
under the Act not later than the Commission's close of business on the
second business day following the execution and delivery of this
Agreement, or, if applicable, such earlier time as may be required by
Rule 430A(a)(3) under the Act; to make no further amendment or any
supplement to the Registration Statement or Prospectus which shall be
disapproved by the Representatives promptly after reasonable notice
thereof; to advise the Representatives, promptly after it receives
notice thereof, of the time when any amendment to the Registration
Statement has been filed or becomes effective or any supplement to the
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Prospectus or any amended Prospectus has been filed and to furnish the
Representatives with copies thereof; to advise the Representatives,
promptly after it receives notice thereof, of the issuance by the
Commission of any stop order or of any order preventing or suspending
the use of any Preliminary Prospectus or prospectus, of the suspension
of the qualification of the Shares for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for
any such purpose, or of any request by the Commission for the amending
or supplementing of the Registration Statement or Prospectus or for
additional information; and, in the event of the issuance of any stop
order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus or suspending any such
qualification, promptly to use its best efforts to obtain the
withdrawal of such order;
(b) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Shares for
offering and sale under the securities laws of such jurisdictions as
the Representatives may request and to comply with such laws so as to
permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the
distribution of the Shares, provided that in connection therewith the
Company shall not be required to qualify as a foreign corporation or
to file a general consent to service of process in any jurisdiction;
(c) Prior to 10:00 A.M., New York City time, on the New York
Business Day next succeeding the date of this Agreement and from time
to time, to furnish the Underwriters with copies of the Prospectus in
New York City in such quantities as the Representatives may reasonably
request, and, if the delivery of a prospectus is required at any time
prior to the expiration of nine months after the time of issue of the
Prospectus in connection with the offering or sale of the Shares and
if at such time any event shall have occurred as a result of which the
Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such Prospectus is
delivered, not misleading, or, if for any other reason it shall be
necessary during such period to amend or supplement the Prospectus in
order to comply with the Act, to notify the Representatives and upon
their request to prepare and furnish without charge to each
Underwriter and to any dealer in securities as many copies as you may
from time to time reasonably request of an amended Prospectus or a
supplement to the Prospectus which will correct such statement or
omission or effect such compliance, and in case any Underwriter is
required to deliver a prospectus in connection with sales of any of
the Shares at any time nine months or more after the time of issue of
the Prospectus, upon their request but at the expense of such
Underwriter, to prepare and deliver to such Underwriter as many copies
as the Representatives may request of an amended or supplemented
Prospectus complying with Section 10(a)(3) of the Act;
(d) To make generally available to securityholders of the Company
as soon as practicable, but in any event not later than eighteen
months after the effective date of the Registration Statement (as
defined in Rule 158(c) under the Act), an earnings statement of the
Company and its subsidiaries (which need not be audited) complying
with Section 11(a) of the Act and the rules and regulations thereunder
(including, at the option of the Company, Rule 158);
(e) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the
Prospectus, the Company and the Operating Company will not offer,
sell, contract to sell or otherwise dispose of, except as provided
hereunder, any securities of the Company that are substantially
similar to the Shares, including but not limited to any securities
that are convertible into or exchangeable for, or that represent the
right to receive, Stock or any such substantially similar securities
(other than pursuant to employee stock option plans existing on, or
upon the conversion or exchange of convertible or exchangeable
securities outstanding as of, the date of this Agreement), or any
limited liability company interest, except
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the interest in the Operating Company to be purchased by the Company
as described in the Prospectus, without the prior written consent of
the Representatives; provided, however, that the Company's ability to
convert the Company's oustanding shares of Class B Common Stock and
Class C Common Stock into shares of Class A Common Stock, or to
exchange Membership Units for shares of Class A Common Stock in
accordance with the provisions of its Certificate of Incorporation
shall not be limited by the foregoing;
(f) To furnish or make available, whether in hard copy or
electronic form, to stockholders of the Company as soon as practicable
after the end of each fiscal year an annual report (including a
balance sheet and statements of income, stockholders' equity and cash
flows of the Company and its consolidated subsidiaries certified by
independent public accountants) and, as soon as practicable after the
end of each of the first three quarters of each fiscal year (beginning
with the fiscal quarter ending after the effective date of the
Registration Statement), consolidated summary financial information of
the Company and its subsidiaries for such quarter in reasonable
detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish or make available, whether in hard
copy or electronic form, to you copies of all reports or other
communications (financial or other) furnished to stockholders of the
Company, and to deliver to you (i) as soon as they are available,
copies of any reports and financial statements furnished to or filed
with the Commission or any national securities exchange on which any
class of securities of the Company is listed; and (ii) such additional
information concerning the business and financial condition of the
Company as you may from time to time reasonably request (such
financial statements to be on a consolidated basis to the extent the
accounts of the Company and are consolidated in reports furnished to
stockholders of the Company generally or to the Commission);
(h) To use the net proceeds received by the Company from the sale
of the Shares pursuant to this Agreement in the manner specified in
the Prospectus under the caption "Use of Proceeds";
(i) To use its best efforts to list, subject to notice of
issuance, for quotation the Shares on the National Association of
Securities Dealers Automated Quotations National Market System
("NASDAQ");
(j) To file with the Commission such information on Form 10-Q or
Form 10-K as may be required by Rule 463 under the Act; and
(k) If the Company elects to rely upon Rule 462(b), the Company
shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on
the date of this Agreement, and the Company shall at the time of
filing either pay to the Commission the filing fee for the Rule 462(b)
Registration Statement or give irrevocable instructions for the
payment of such fee pursuant to Rule 111(b) under the Act.
6. The Company and the Operating Company covenant and agree with the
several Underwriters that the Company will pay or cause to be paid the
following: (i) the fees, disbursements and expenses of the Company's counsel and
accountants in connection with the registration of the Shares under the Act and
all other expenses in connection with the preparation, printing and filing of
the Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum,
closing documents (including any compilations thereof) and any other documents
in connection with the offering, purchase, sale and delivery of the Shares;
(iii) all expenses in connection with the qualification of the Shares for
offering and sale under state securities laws as provided in Section 5(b)
hereof, including the reasonable fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with the
Blue Sky survey (iv) all fees and expenses
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in connection with listing the Shares on the NASDAQ; (v) the filing fees
incident to, and the reasonable fees and disbursements of counsel for the
Underwriters in connection with, securing any required review by the National
Association of Securities Dealers, Inc. of the terms of the sale of the Shares;
(vi) the cost of preparing stock certificates; (vii) the cost and charges of any
transfer agent or registrar; and (viii) all other costs and expenses incident to
the performance of its obligations hereunder which are not otherwise
specifically provided for in this Section. It is understood, however, that,
except as provided in this Section, and Sections 8 and 11 hereof, the
Underwriters will pay all of their own costs and expenses, including the fees of
their counsel, stock transfer taxes on resale of any of the Shares by them, and
any advertising expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and the Operating Company herein are, at and as of such Time of
Delivery, true and correct, the condition that the Company and the Operating
Company shall have performed all of their respective obligations hereunder
theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed
for such filing by the rules and regulations under the Act and in
accordance with Section 5(a) hereof; if the Company has elected to
rely upon Rule 462(b), the Rule 462(b) Registration Statement shall
have become effective by 10:00 P.M., Washington, D.C. time, on the
date of this Agreement; no stop order suspending the effectiveness of
the Registration Statement or any part thereof shall have been issued
and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional
information on the part of the Commission shall have been complied
with to your reasonable satisfaction;
(b) Sullivan & Cromwell, counsel for the Underwriters, shall have
furnished to you such written opinion or opinions (a draft of each
such opinion is attached as Annex II(a) hereto), dated such Time of
Delivery, with respect to the Company and the matters covered in
paragraphs (i), (ii), (vii), (xi) and (xiii) of subsection (c) below
as well as such other related matters as you may reasonably request,
and such counsel shall have received such papers and information as
they may reasonably request to enable them to pass upon such matters;
(c) Robinson Silverman Pearce Aronsohn & Berman LLP, counsel for
the Company, shall have furnished to you their written opinion (a
draft of such opinion is attached as Annex II(b) hereto), dated such
Time of Delivery, in form and substance satisfactory to you, to the
effect that:
(i) The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority to
own, lease and operate its properties and carry on its business
as described in the Prospectus; and based solely on a certificate
of the Secretary of the State of Delaware, the Operating Company
is a limited liability company duly formed, validly existing and
in good standing under the laws of the State of Delaware, and has
all requisite limited liability company power and authority to
own, lease and operate its properties and carry on its business
as described in the Prospectus;
(ii) The Company has an authorized capitalization as set
forth in the Prospectus, and, all of the issued shares of capital
stock of the Company, (including the Shares being delivered at
such Time of Delivery) have been duly authorized, validly issued,
fully paid and nonassessable and have not been issued in
violation of any preemptive rights pursuant to law or in the
Company's Amended and Restated Certificate of Incorporation or
any agreement between stockholders, and conform in all material
respects to the description of the Stock contained in the
Prospectus. The Operating Company has an authorized
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capitalization as set forth in the Prospectus and all of the
outstanding Membership Units (including the Membership Units
being issued at such Time of Delivery), are duly authorized,
validly issued and fully paid and have not been issued in
violation of the Limited Liability Company Agreement; and conform
to the description of the Membership Units contained in the
Prospectus;
(iii) Based solely on certificates of the Secretaries of
State of the applicable jurisdictions, the Company and the
Operating Company have been duly qualified or admitted to
transact business, and are in good standing as a foreign
corporation or limited liability company, respectively, in each
jurisdiction set forth on Exhibit _ to such counsel's opinion;
(iv) The real property and buildings held under lease by the
Company and the Operating Company are held by them under valid,
subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to
be made of such property and buildings by the Company and the
Operating Company (in giving the opinion in this clause, such
counsel may state that no examination of record titles for the
purpose of such opinion has been made, and that they are relying
upon a general review of the titles of the Company and the
Operating Company, upon opinions of local counsel and abstracts,
reports and policies of title companies rendered or issued at or
subsequent to the time of acquisition of such property by the
Company or the Operating Company, upon opinions of counsel to the
lessors of such property and, in respect to matters of fact, upon
certificates of officers of the Company or the Operating Company,
provided that such counsel shall state that they believe that
both you and they are justified in relying upon such opinions,
abstracts, reports, policies and certificates);
(v) Except as set forth in the Prospectus, to such counsel's
knowledge, there is no action, proceeding, investigation or claim
pending or overtly threatened before any court, arbitrator or
administrative or governmental agency to which the Company or the
Operating Company is a party or of which any property of the
Company or the Operating Company is the subject which, if
determined adversely to the Company or the Operating Company
would have a Material Adverse Effect; and, to the knowledge of
such counsel, no such actions, proceedings, investigations or
claims are threatened;
(vi) The Company has all necessary corporate power and
authority to execute, deliver and perform its obligations under
the Agreement. The Company has taken all necessary corporate
action to execute, deliver and perform its obligations under the
Agreement, and the Agreement has been validly executed and
delivered by, and constitutes the legal, valid and binding
obligation of, the Company, enforceable against it in accordance
with its terms. The Operating Company has all necessary limited
liability company power and authority to execute, deliver and
perform its obligations under the Agreement. The Operating
Company has taken all necessary limited liability company action
to execute, deliver and perform its obligations under the
Agreement, and the Agreement has been validly executed and
delivered by, and constitutes the legal, valid and binding
obligation of, the Operating Company, enforceable against it in
accordance with its terms;
(vii) The execution, delivery and performance of the
Agreement by the Company, and compliance by it therewith
(including the issuance and sale of the Shares being delivered at
such Time of Delivery), do not and will not (a) conflict with,
constitute a default under or violate (1) any provision of the
Amended and Restated Certificate of Incorporation or Amended and
Restated By-laws or any agreement between stockholders, (2) any
provision of any material applicable law, rule or regulation,
other than federal and state securities and blue sky laws, as to
which we express no opinion, (3) to such counsel's knowledge, any
judgment, order, writ, injunction or decree to which it is
subject, or (4) any material
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agreement, contract or instrument known to us to which the
Company is a party or by which it is bound, or (b) result in or
require the creation or imposition of any security interest or
lien upon any of the Company's properties pursuant to any
material agreement, contract or instrument known to us to which
the Company is a party or by which it is bound. For purposes of
the foregoing, we have assumed that the only material agreements
are (insert a list of those agreements listed as exhibits to the
Registration Statement);
(viii) The execution, delivery and performance by the
Operating Company of the Agreement, and compliance by it
therewith, do not and will not (a) conflict with, constitute a
default under or violate (1) any provision of the Certificate of
Formation or Second Amended and Restated Limited Liability
Company Agreement, (2) any provision of any material applicable
law, rule or regulation, other than federal and state securities
and blue sky laws, as to which we express no opinion, (3) to such
counsel's knowledge, any judgment, order, writ, injunction or
decree to which it is subject, or (4) any material agreement,
contract or instrument known to us to which the Operating Company
is a party or by which it is bound, or (b) result in or require
the creation or imposition of any security interest or lien upon
any of the Operating Company's properties pursuant to any
material agreement, contract or instrument known to us to which
the Operating Company is a party or by which it is bound. For
purposes of the foregoing, we have assumed that the only material
agreements are (insert a list of those agreements listed as
exhibits to the Registration Statement);
(ix) The Company is not required to obtain any consent,
approval, certificate, license, permit, waiver, authorization of,
or declaration, filing or registration with, any governmental
authority in connection with or as a condition to the execution,
delivery or performance by the Company of the Agreement
(including the issuance and sale of the Shares being delivered at
such Time of Delivery) or the consummation by the Company of the
transactions contemplated thereby, except for the filings and
other actions required pursuant to the Securities Act of 1933, as
amended, and the rules and regulations thereunder, and except for
the other federal and state securities or blue sky laws, as to
which we express no opinion;
(x) Neither the Company nor the Operating Company is in
violation of its Certificate of Incorporation or By-laws, the
Limited Liability Company Agreement of the Operating Company or
any agreement between stockholders of the Company, as the case
may be, or in default in the performance or observance of any
material obligation, agreement, covenant or condition contained
in any indenture, mortgage, deed of trust, loan agreement, lease
or other agreement or instrument to which it is a party or by
which it or any of its properties may be bound;
(xi) To such counsel's knowledge, the statements set forth
in the Prospectus under the captions "Corporate History and
Recapitalization," and "Description of Capital Stock and
Membership Units," insofar as they purport to constitute a
summary of the terms of the Stock and the Membership Units of the
Operating Company and under the caption "Certain Transactions,"
insofar as they purport to describe the provisions of the
documents and arrangements referred to therein, are accurate,
complete and fair in all material respects;
(xii) The Company is not an "investment company" or an
entity "controlled" by an "investment company," as such terms are
defined in the Investment Company Act of 1940, as amended;
(xiii) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company
prior to such time of delivery (except as to financial statements
and related notes, financial and accounting data and supporting
11
<PAGE>
schedules included therein, as to which we express no opinion),
comply as to form in all material respects with the requirements
of the Securities Act and the rules and regulations promulgated
thereunder; In addition, such counsel has participated in the
preparation of the Registration Statement and the Prospectus and,
although such counsel assumes no responsibility for the accuracy
and completeness of the Registration Statement and Prospectus,
except for those statements referred to in subsection (xi) of
this Section 7(c), nothing has come to such counsel's attention
which causes such counsel to believe that, as of its effective
date, the Registration Statement or any further amendment thereto
made by the Company prior to such Time of Delivery (other than
the financial statements and related notes, financial and
accounting data and supporting schedules included therein, as to
which such counsel need express no opinion) contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading or that, as of its date, the Prospectus or
any further amendment or supplement thereto made by the Company
prior to such Time of Delivery (other than the financial
statements and related notes, financial and accounting data and
supporting schedules included therein, as to which such counsel
need express no opinion) contained an untrue statement of a
material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances
under which they were made, not misleading or that, as of such
Time of Delivery, either the Registration Statement or the
Prospectus or any further amendment or supplement thereto made by
the Company prior to such Time of Delivery (other than the
financial statements and related notes, financial and accounting
data and supporting schedules included therein, as to which such
counsel need express no opinion) contains an untrue statement of
a material fact or omits to state a material fact necessary to
make the statements therein, in the light of the circumstances
under which they were made, not misleading; and they do not know
of any amendment to the Registration Statement required to be
filed or of any contracts or other documents of a character
required to be filed as an exhibit to the Registration Statement
or required to be described in the Registration Statement or the
Prospectus which are not filed or described as required.
(d) On the date of the Prospectus at a time prior to the
execution of this Agreement, at 9:30 a.m., New York City time, on the
effective date of any post-effective amendment to the Registration
Statement filed subsequent to the date of this Agreement and also at
each Time of Delivery, BDO Seidman, LLP shall have furnished to you a
letter or letters, dated the respective dates of delivery thereof, in
form and substance satisfactory to you, to the effect set forth in
Annex I hereto (the executed copy of the letter delivered prior to the
execution of this Agreement is attached as Annex I(a) hereto and a
draft of the form of letter to be delivered on the effective date of
any post-effective amendment to the Registration Statement and as of
each Time of Delivery is attached as Annex I(b) hereto);
(e) (i) Neither the Company nor the Operating Company shall have
sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business
from fire, explosion, flood or other calamity, whether or not covered
by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated
in the Prospectus, and (ii) since the respective dates as of which
information is given in the Prospectus there shall not have been any
change in the capital stock or long-term debt of the Company or the
Operating Company or any change, or any development involving a
prospective change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of
the Company and the Operating Company, otherwise than as set forth or
contemplated in the Prospectus, the effect of which, in any such case
described in Clause (i) or (ii), is in the judgment of the
Representatives so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or the
12
<PAGE>
delivery of the Shares being delivered at such Time of Delivery on the
terms and in the manner contemplated in the Prospectus;
(f) On or after the date hereof, and until to the date of
settlement of the last purchase of Optional Shares, there shall not
have occurred any of the following: (i) a suspension or material
limitation in trading in securities generally on the Exchange; (ii) a
suspension or material limitation in trading in the Company's
securities on the Exchange; (iii) a general moratorium on commercial
banking activities declared by either Federal or New York State
authorities; or (iv) the outbreak or escalation of hostilities
involving the United States or the declaration by the United States of
a national emergency or war, if the effect of any such event specified
in this Clause (iv) in the judgment of the Representatives makes it
impracticable or inadvisable to proceed with the public offering or
the delivery of the Shares being delivered at such Time of Delivery on
the terms and in the manner contemplated in the Prospectus;
(g) The Shares to be sold at such Time of Delivery shall have
been duly listed, subject to notice of issuance, on the Exchange;
(h) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from each of Barnes & Noble,
Bertelsmann AG, B&N.com Holding Corp. and BOL.US Online, Inc. and each
of Leonard Riggio, Jonathan Bulkeley, Marie Toulantis, Gary King,
Brenda Marsh, Carl Rosendorf, William Duffy, Michael Rosen, Stephen
Riggio, Thomas Middelhoff, Markus Wilhelm, Klaus Eierhoff,
substantially to the effect set forth in Subsection 5(e) hereof in
form and substance satisfactory to you;
(i) The Company shall have complied with the provisions of
Section 5(c) hereof with respect to the furnishing of prospectuses on
the New York Business Day next succeeding the date of this Agreement;
(k) The Company shall have furnished or caused to be furnished to
you at such Time of Delivery certificates of officers of the Company
satisfactory to you as to the accuracy of the representations and
warranties of the Company herein at and as of such Time of Delivery,
as to the performance by the Company of all of its obligations
hereunder to be performed at or prior to such Time of Delivery, as to
the matters set forth in subsections (a) and (e) of this Section and
as to such other matters as you may reasonably request; and
8. (a) Each of the Company and the Operating Company will indemnify and
hold harmless each Underwriter against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse each Underwriter for any legal or other expenses reasonably incurred
by such Underwriter in connection with investigating or defending any such
action or claim as such expenses are incurred; provided, however, that the
Company and the Operating Company shall not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in any Preliminary Prospectus, the Registration Statement or the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company and the
Operating Company against any losses, claims, damages or liabilities to which
the Company may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact
13
<PAGE>
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through Goldman, Sachs
& Co. expressly for use therein; and will reimburse the Company for any legal or
other expenses reasonably incurred by the Company in connection with
investigating or defending any such action or claim as such expenses are
incurred.
(c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the written consent
of the indemnified party, effect the settlement or compromise of, or consent to
the entry of any judgment with respect to, any pending or threatened action or
claim in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified party is an actual or potential party
to such action or claim) unless such settlement, compromise or judgment (i)
includes an unconditional release of the indemnified party from all liability
arising out of such action or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act, by or on behalf of
any indemnified party.
(d) If the indemnification provided for in this Section 8 is unavailable to
or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
in respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law or if the indemnified
party failed to give the notice required under subsection (c) above, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand and
the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the
14
<PAGE>
Company on the one hand or the Underwriters on the other and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the Underwriters agree that
it would not be just and equitable if contributions pursuant to this subsection
(d) were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this subsection (d). The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in this subsection (d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company and the Operating Company under this
Section 8 shall be in addition to any liability which any of them may otherwise
have and shall extend, upon the same terms and conditions, to each person, if
any, who controls any Underwriter within the meaning of the Act; and the
obligations of the Underwriters under this Section 8 shall be in addition to any
liability which the respective Underwriters may otherwise have and shall extend,
upon the same terms and conditions, to each officer and director of the Company
and to each person, if any, who controls the Company within the meaning of the
Act.
9. (a) If any Underwriter shall default in its obligation to purchase the
Shares which it has agreed to purchase hereunder at a Time of Delivery, the
Representatives may in their discretion arrange for the Representatives or
another party or other parties to purchase such Shares on the terms contained
herein. If within forty-eight hours after such default by any Underwriter the
Representatives do not arrange for the purchase of such Shares, then the Company
shall be entitled to a further period of thirty-six hours within which to
procure another party or other parties satisfactory to the Representatives to
purchase such Shares on such terms. In the event that, within the respective
prescribed periods, the Representatives notify the Company that the
Representatives have so arranged for the purchase of such Shares, or the Company
notifies the Representatives that it has so arranged for the purchase of such
Shares, you or the Company shall have the right to postpone such Time of
Delivery for a period of not more than seven days, in order to effect whatever
changes may thereby be made necessary in the Registration Statement or the
Prospectus, or in any other documents or arrangements, and the Company agrees to
file promptly any amendments to the Registration Statement or the Prospectus
which in your opinion may thereby be made necessary. The term "Underwriter" as
used in this Agreement shall include any person substituted under this Section
with like effect as if such person had originally been a party to this Agreement
with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by the Representatives and
the Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased does not exceed one-eleventh of the aggregate
number of all the Shares to be purchased at such Time of Delivery, then the
Company shall have the right to require each non-defaulting Underwriter to
purchase the number of shares which such Underwriter agreed to purchase
hereunder at such Time of Delivery and, in addition, to require each
non-defaulting Underwriter to purchase its pro rata share (based on the number
of Shares which such Underwriter agreed to purchase hereunder) of the Shares of
such defaulting Underwriter or Underwriters for which such arrangements have not
been made; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
15
<PAGE>
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by the Representatives and
the Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased exceeds one-eleventh of the aggregate number of
all the Shares to be purchased at such Time of Delivery, or if the Company shall
not exercise the right described in subsection (b) above to require
non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or
Underwriters, then this Agreement (or, with respect to the Second Time of
Delivery, the obligations of the Underwriters to purchase and of the Company to
sell the Optional Shares) shall thereupon terminate, without liability on the
part of any non-defaulting Underwriter or the Company, except for the expenses
to be borne by the Company and the Underwriters as provided in Section 6 hereof
and the indemnity and contribution agreements in Section 8 hereof; but nothing
herein shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties and
other statements of the Company, the Operating Company and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of any Underwriter or any controlling person of any
Underwriter, or the Company, or any officer or director or controlling person of
the Company, and shall survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof, the
Company and the Operating Company shall not then be under any liability to any
Underwriter except as provided in Sections 6 and 8 hereof; but, if for any other
reason, any Shares are not delivered by or on behalf of the Company as provided
herein, the Company will reimburse the Underwriters through the Representatives
for all out-of-pocket expenses approved in writing by the Representatives,
including fees and disbursements of counsel, incurred by the Underwriters in
making preparations for the purchase, sale and delivery of the Shares not so
delivered, but the Company and the Operating Company shall then be under no
further liability to any Underwriter except as provided in Sections 6 and 8
hereof.
12. In all dealings hereunder, the Representatives shall act on behalf of
each of the Underwriters, and the parties hereto shall be entitled to act and
rely upon any statement, request, notice or agreement on behalf of any
Underwriter made or given by Goldman, Sachs & Co. on behalf of the
Representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 9th Floor, New York, New York 10004, Attention: Registration
Department; and if to the Company shall be delivered or sent by mail to the
address of the Company set forth in the Registration Statement, Attention:
Secretary; provided, however, that any notice to an Underwriter pursuant to
Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile
transmission to such Underwriter at its address set forth in its Underwriters'
Questionnaire, or telex constituting such Questionnaire, which address will be
supplied to the Company by you upon request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and the Operating Company and, to the extent
provided in Sections 8 and 10 hereof, the officers and directors of the Company
and each person who controls the Company or any Underwriter, and their
respective heirs, executors, administrators, successors and assigns, and no
other person shall acquire or have any right under or by virtue of this
Agreement. No purchaser of any of the Shares from any Underwriter shall be
deemed a successor or assign by reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
16
<PAGE>
16. This Agreement may be executed by any one or more of the parties hereto
in any number of counterparts, each of which shall be deemed to be an original,
but all such counterparts shall together constitute one and the same instrument.
If the foregoing is in accordance with you the understanding of the
Representatives, please sign and return to us five counterparts hereof, and upon
the acceptance hereof by the Representatives, on behalf of each of the
Underwriters, this letter and such acceptance hereof shall constitute a binding
agreement between each of the Underwriters and the Company. It is understood
that the acceptance by the Representatives of this letter on behalf of each of
the Underwriters is pursuant to the authority set forth in a form of Agreement
among Underwriters, the form of which shall be submitted to the Company for
examination upon request, but without warranty on your part as to the authority
of the signers thereof.
Very truly yours,
barnesandnoble.com inc.
By:................................
Name:
Title:
barnesandnoble.com llc
By:................................
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
Merrill Lynch & Co.
Salomon Smith Barney Inc.
Wit Capital Corporation
By: Goldman, Sachs & Co.
By:
------------------------------
Name:
Title:
For themselves and as representatives of the several Underwriters.
17
<PAGE>
SCHEDULE I
Number of Optional
Shares to be
Total Number of Purchased if
Firm Shares Maximum Option
Underwriter to be Purchased Exercised
----------- ---------------
Goldman, Sachs & Co.
Merrill Lynch & Co.
Salomon Smith Barney Inc.
Wit Capital Corporation
Total
<PAGE>
FORM OF COMFORT LETTER
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with
respect to the Company and the Operating Company within the meaning of
the Act and the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) examined
by them and included in the Prospectus or the Registration Statement
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations thereunder; and, if applicable, they have made a review in
accordance with standards established by the American Institute of
Certified Public Accountants of the unaudited consolidated interim
financial statements, selected financial data, pro forma financial
information, financial forecasts and/or condensed financial statements
derived from audited financial statements of the Company and the
Operating Company for the periods specified in such letter, as
indicated in their reports thereon, copies of which have been
furnished to the representatives of the Underwriters (the
"Representatives") and are attached hereto;
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants
of the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus as indicated in their reports thereon
copies of which have been separately furnished to the Representatives
and on the basis of specified procedures including inquiries of
officials of the Company and the Operating Company who have
responsibility for financial and accounting matters regarding whether
the unaudited condensed consolidated financial statements referred to
in paragraph (vi)(A)(i) below comply as to form in all material
respects with the applicable accounting requirements of the Act and
the related published rules and regulations, nothing came to their
attention that cause them to believe that the unaudited condensed
consolidated financial statements do not comply as to form in all
material respects with the applicable accounting requirements of the
Act and the related published rules and regulations;
(iv) The unaudited selected financial information with respect to
the consolidated results of operations and financial position of the
Operating Company for the two most recent fiscal years included in the
Prospectus agrees with the corresponding amounts (after restatements
where applicable) in the audited consolidated financial statements for
such two fiscal years of the Operating Company;
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K
and on the basis of limited procedures specified in such letter
nothing came to their attention as a result of the foregoing
procedures that caused them to believe that this information does not
conform in all material respects with the disclosure requirements of
Items 301, 302, 402 and 503(d), respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and
other information referred to below, a reading of the latest available
interim financial statements of the Company and the Operating Company,
inspection of the minute books of the Company and the Operating
Company since the date of the latest audited financial statements
included in the Prospectus, inquiries of officials of the Company and
the Operating Company responsible for financial and accounting matters
and such other inquiries and procedures as may be specified in such
letter, nothing came to their attention that caused them to believe
that:
A-1
<PAGE>
(A) (i) the unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash
flows included in the Prospectus, as applicable, do not comply as
to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and
regulations, or (ii) any material modifications should be made to
the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash
flows included in the Prospectus for them to be in conformity
with generally accepted accounting principles;
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus, as applicable, do not
agree with the corresponding items in the unaudited consolidated
financial statements from which such data and items were derived,
and any such unaudited data and items were not determined on a
basis substantially consistent with the basis for the
corresponding amounts in the audited consolidated financial
statements included in the Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived any
unaudited condensed financial statements referred to in Clause
(A) and any unaudited income statement data and balance sheet
items included in the Prospectus and referred to in Clause (B)
were not determined on a basis substantially consistent with the
basis for the audited consolidated financial statements included
in the Prospectus;
(D) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus, as applicable, do not
comply as to form in all material respects with the applicable
accounting requirements of the Act and the published rules and
regulations thereunder or the pro forma adjustments have not been
properly applied to the historical amounts in the compilation of
those statements;
(E) as of a specified date not more than five days prior to
the date of such letter, there have been any changes in the
consolidated capital stock and members' equity, as the case may
be, (other than issuances of capital stock and membership units
upon exercise of options and stock appreciation rights, upon
earn-outs of performance shares and upon conversions of
convertible securities, in each case which were outstanding on
the date of the latest financial statements included in the
Prospectus) or any increase in the consolidated long-term debt of
the Company and the Operating Company, or any decreases in
consolidated net current assets, stockholders' equity or members'
equity or other items specified by the Representatives, or any
increases in any items specified by the Representatives, in each
case as compared with amounts shown in the latest balance sheet
included in the Prospectus, except in each case for changes,
increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter; and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date
referred to in Clause (E) there were any decreases in
consolidated net revenues or operating profit or the total or per
share amounts or per membership unit amounts, as the case may be,
of consolidated net income or other items specified by the
Representatives, or any increases in any items specified by the
Representatives, in each case as compared with the comparable
period of the preceding year and with any other period of
corresponding length specified by the Representatives, except in
each case for decreases or increases which the Prospectus
discloses have occurred or may occur or which are described in
such letter; and
(vii) In addition to the examination referred to in their
report(s) included in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures referred to
in paragraphs (iii) and (vi) above, they have carried out certain
specified procedures, not constituting
A-2
<PAGE>
an examination in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Representatives, which are derived from
the general accounting records of the Company and the Operating
Company, which appear in the Prospectus, or in Part II of, or in
exhibits and schedules to, the Registration Statement specified by the
Representatives, and have compared certain of such amounts,
percentages and financial information with the accounting records of
the Company and the Operating Company and have found them to be in
agreement.
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<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
barnesandnoble.com inc.
barnesandnoble.com inc., a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
1. The name of this corporation is barnesandnoble.com inc. The original
Certificate of Incorporation was filed on March 10, 1999.
2. This Amended and Restated Certificate of Incorporation restates and
amends the original Certificate of Incorporation to read in its entirety as
follows:
"FIRST: The name of the corporation is barnesandnoble.com inc. (the
"Corporation").
SECOND: The registered office of the Corporation is to be located at
Loockerman Square, Suite L-100, City of Dover, County of Kent, State of
Delaware. The name of its registered agent at such address is The Prentice-Hall
Corporation System, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware (the "GCL").
FOURTH: (a) Authorized Capital Stock. The total number of shares of stock
that the Corporation shall have the authority to issue is 800,002,000 shares,
consisting of: (i) 750,000,000 shares of Class A Common Stock, par value $.001
per share (the "Class A Common Stock"); (ii) 1,000 shares of Class B Common
Stock, par value $.001 per share (the "Class B Common Stock"); (iii) 1,000
shares of Class C Common Stock, par value $.001 per share (the "Class C Common
Stock"); and (iv) 50,000,000 shares of Preferred Stock, par value $.001 per
share (the "Preferred Stock"), issuable in one or more series as hereinafter
provided. The Class A Common Stock, the Class B Common Stock and the Class C
Common Stock shall hereinafter collectively be called the "Common Stock." The
number of authorized shares of any class or classes of capital stock of the
Corporation may be increased or decreased (but not below the number of shares
thereof then outstanding) by each of the following, voting separately as a
class: (x) the affirmative vote of the holders of a majority of the voting power
of the stock of the Corporation entitled to vote generally in the election of
directors ("Voting Stock") irrespective of the provisions of Section 242(b)(2)
of the GCL or any corresponding provision hereinafter enacted; (y) if a Class B
Director (as defined below) is then entitled to be a member of the Special
Committee (as defined in the By-laws of the Corporation (the "By-
<PAGE>
laws")), by the affirmative vote of the holders of a majority of the Class B
Common Stock; and (z) if a Class C Director (as defined below) 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.
(b) Terms of Common Stock; Voting; Directors.
(i) Rights and Privileges; Voting Rights. (A) All shares of Common
Stock will be identical in all respects and will entitle the holders thereof to
the same rights and privileges, except as otherwise provided in this Certificate
of Incorporation.
(B) The holders of shares of Common Stock shall have the
following voting rights:
(1) Each holder of Class A Common Stock shall be entitled to
the following number of votes in person or by proxy on all matters submitted to
a vote of the stockholders of the Corporation: one (1) multiplied by the number
of shares of Class A Common Stock held by such holder.
(2) Each holder of Class B Common Stock and/or Class C
Common Stock shall be entitled to the following number of votes in person or by
proxy on all matters submitted to a vote of the stockholders of the Corporation:
ten (10) multiplied by the sum of (x) the number of shares of Class B Common
Stock and/or Class C Common Stock held by such holder and (y) the number of
Membership Units (as defined below) held by such holder. "Membership Units"
shall mean membership units in barnesandnoble.com llc, the Delaware limited
liability company in which the Corporation is the sole Manager, or any successor
entity thereto (the "Operating Company"), issued under its Limited Liability
Company Agreement (as amended, the "LLC Agreement").
(3) Except as may be provided pursuant to resolutions of the
Board, adopted pursuant to the provisions of this Certificate of Incorporation
and the By-laws, establishing any series of Preferred Stock and granting to the
holders of such shares of Preferred Stock rights to elect additional directors
under specified circumstances, and subject to Article FOURTH, Clause (b)(iii)(D)
and (E) and Article SIXTH, Clause (b) below, the Board of Directors shall
consist of nine (9) directors; provided, however, that if there shall be less
than three (3) classes of Common Stock issued and outstanding, the Board of
Directors shall consist of three (3) directors multiplied by the number of
classes of Common Stock issued and outstanding. Subject to Article FOURTH,
Clause (b)(iii)(D) and (E) and Article SIXTH, Clause (b) below: (x) the holders
of the Class B Common Stock, voting separately as a class, shall be entitled to
elect three (3) of the nine (9) directors of the Board, one (1) director for
each of the three (3) classes referred to in Clause (a) of Article SIXTH below
(each a "Class B Director"); (y) the holders of the Class C Common Stock, voting
separately as a class, shall be entitled to elect three (3) of the nine (9)
directors of the Board, one (1) director for each of the three (3) classes
referred to in Clause (a) of Article SIXTH below (each a "Class C Director");
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<PAGE>
and (z) the remaining three (3) directors, one (1) director for each of the
three (3) classes referred to in Clause (a) of Article SIXTH below (each a
"Class A Director"), shall be elected by the vote of the holders of the Common
Stock, voting as one class.
(4) Except as otherwise required in this Certificate of
Incorporation or the By-laws or by applicable law, the holders of shares of
Common Stock shall vote together as one class on all matters submitted to a vote
of stockholders of the Corporation (or if any holders of shares of Preferred
Stock are entitled to vote together with the holders of Common Stock, as a
single class with such holders of shares of Preferred Stock).
(C) Notwithstanding anything in this Certificate of Incorporation
to the contrary, no vote of the holders of Class A Common Stock, and only the
vote of seventy-five percent (75%) of the holders of each of the Class B Common
Stock and the Class C Common Stock, each voting separately as a class, shall be
required to approve a merger of the Operating Company (and optionally any one or
more of its subsidiaries) into the Corporation, and to amend this Certificate of
Incorporation accordingly, provided that the Corporation is the surviving entity
in the merger and the economic and voting interests of the holders of Class A
Common Stock in the merged entities (taken as a whole) immediately after such
merger is the same as the economic and voting interests of the holders of Class
A Common Stock in the merged entities (taken as a whole) immediately before such
merger.
(ii) Dividends and Distributions.
(A) Subject to the preferences applicable to Preferred Stock, if
any, outstanding at any time, the holders of shares of Common Stock shall be
entitled to receive such dividends and other distributions in cash, property or
shares of stock of the Corporation as may be declared thereon by the
Corporation's Board of Directors (the "Board") from time to time out of assets
or funds of the Corporation legally available therefor; provided, that, subject
to the provisions of this Section, the Corporation shall not pay dividends or
make distributions to any holders of any class of Common Stock unless
simultaneously with such dividend or distribution, as the case may be, the
Corporation makes the same dividend or distribution with respect to each
outstanding share of Common Stock regardless of class.
(B) In the case of dividends or other distributions payable in
Class A Common Stock, Class B Common Stock or Class C Common Stock including
distributions pursuant to stock splits or divisions of Class A Common Stock,
Class B Common Stock or Class C Common Stock which occur after the first date
upon which the Corporation has issued shares of any of Class A Common Stock,
Class B Common Stock or Class C Common Stock, only shares of Class A Common
Stock shall be distributed with respect to Class A Common Stock, only shares of
Class B Common Stock shall be distributed with respect to Class B Common Stock,
and only shares of Class C Common Stock shall be distributed with respect to
Class C Common Stock. In the case of any such dividend or distribution payable
in
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<PAGE>
shares of Class A Common Stock, Class B Common Stock or Class C Common Stock,
the number of shares of each class of Common Stock payable per share of such
class of Common Stock shall be equal in number.
(C) In the case of dividends or other distributions consisting of
other voting securities of the Corporation or of voting securities of any
corporation which is a wholly owned subsidiary of the Corporation, the
Corporation shall declare and pay such dividends in three separate classes of
such voting securities, identical in all respects, except that: (1) the voting
rights of each such security paid to the holders of Class B Common Stock and
Class C Common Stock, when compared to the voting rights of each such security
paid to the holders of Class A Common Stock, shall have voting rights determined
pursuant to the same formula as provided in Clause (b)(i)(B)(2) of Article
FOURTH above; (2) such security paid to the holders of Class B Common Stock
shall convert into the security paid to the holders of Class A Common Stock upon
the same terms and conditions applicable to the conversion of Class B Common
Stock into Class A Common Stock and shall have the same restrictions on transfer
and ownership applicable to the transfer and ownership of Class B Common Stock;
(3) such security paid to the holders of Class C Common Stock shall convert into
the security paid to the holders of Class A Common Stock upon the same terms and
conditions applicable to the conversion of Class C Common Stock into Class A
Common Stock and shall have the same restrictions on transfer and ownership
applicable to the transfer and ownership of Class C Common Stock; and (4) with
respect only to dividends or other distributions of voting securities of any
corporation which is a wholly owned subsidiary of the Corporation, the
respective voting rights of each such security paid to holders of Class A Common
Stock, Class B Common Stock and Class C Common Stock with respect to the
election of directors shall otherwise be as comparable as is practicable to
those of the Class A Common Stock, Class B Common Stock and Class C Common
Stock, respectively.
(D) In the case of dividends or other distributions consisting of
securities convertible into, or exchangeable for, voting securities of the
Corporation or voting securities of another corporation which is a wholly owned
subsidiary of the Corporation, the Corporation shall provide that such
convertible or exchangeable securities and the underlying securities be
identical in all respects (including, without limitation, the conversion or
exchange rate), except that: (1) the voting rights of each security underlying
the convertible or exchangeable security paid to the holders of Class B Common
Stock and Class C Common Stock, when compared to the voting rights of each
security underlying the convertible or exchangeable security paid to the holders
of the Class A Common Stock, shall have voting rights determined pursuant to the
same formula as provided in Clause (b)(i)(B)(2) of Article FOURTH above; (2)
such underlying securities paid to the holders of the Class B Common Stock shall
convert into the underlying securities paid to the holders of Class A Common
Stock upon the same terms and conditions applicable to the conversion of Class B
Common Stock into Class A Common Stock and shall have the same restrictions on
transfer and ownership applicable to the transfer and ownership of the Class B
Common Stock; and (3) such underlying securities paid to
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<PAGE>
the holders of the Class C Common Stock shall convert into the underlying
securities paid to the holders of Class A Common Stock upon the same terms and
conditions applicable to the conversion of Class C Common Stock into Class A
Common Stock and shall have the same restrictions on transfer and ownership
applicable to the transfer and ownership of the Class C Common Stock.
(iii) Conversion of Class B Common Stock and Class C Common Stock;
Exchange of Membership Units.
(A) Each holder of Class B Common Stock or Class C Common Stock
shall be entitled to convert, at any time and from time to time, any or all of
the shares of such holder's Class B Common Stock or Class C Common Stock, as the
case may be, on a one-for-one basis, into the same number of fully paid and
non-assessable shares of Class A Common Stock. Such right shall be exercised by
the surrender to the Corporation of the certificate or certificates representing
the shares of Class B Common Stock or Class C Common Stock to be converted at
any time during normal business hours at the principal executive offices of the
Corporation or at the office of the Corporation's transfer agent (the "Transfer
Agent"), accompanied by a written notice of the holder of such shares stating
that such holder desires to convert such shares, or a stated number of the
shares represented by such certificate or certificates, into an equal number of
shares of Class A Common Stock, and (if so required by the Corporation or the
Transfer Agent) by instruments of transfer, in form satisfactory to the
Corporation and to the Transfer Agent, duly executed by such holder or such
holder's duly authorized attorney, and transfer tax stamps or funds therefor, if
required pursuant to Article FOURTH, Clause (b)(iii)(I) below.
(B) Subject to adjustment as provided in Article FOURTH, Clause
(b)(iv) below, each holder (other than the Corporation) of a Membership Unit
shall be entitled to exchange, at any time and from time to time, any or all of
such holder's Membership Units, on a one-for-one basis, into the same number of
fully paid and non-assessable shares of Class A Common Stock. Such right shall
be exercised by the surrender to the Corporation of the certificate or
certificates representing the Membership Units to be exchanged at any time
during normal business hours at the principal executive offices of the
Corporation or at the office of the Transfer Agent, accompanied by a written
notice of the holder of such Membership Units stating that such holder desires
to exchange such Membership Units, or a stated number of Membership Units
represented by such certificate or certificates, into an equal number of shares
of Class A Common Stock, and by instruments of transfer to the Corporation, in
form satisfactory to the Corporation and to the Transfer Agent, duly executed by
such holder or such holder's duly authorized attorney, and transfer tax stamps
or funds therefor, if required pursuant to Article FOURTH, Clause (b)(iii)(I)
below.
(C) Each share of Class B Common Stock or Class C Common Stock
transferred by one or more Parent Entities (as defined below) to one or more
persons or
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<PAGE>
entities other than Parent Entities shall automatically convert into one (1)
fully paid and non-assessable share of Class A Common Stock upon such
disposition; provided that no such conversion shall occur solely as a result of
the pledge or hypothecation of any Class B Common Stock or Class C Common Stock
by a Parent Entity. "Parent Entities" shall mean, collectively, Barnes & Noble,
Inc. ("B&N"), Bertelsmann AG ("BAG"), and any of their respective Affiliates
(other than an Affiliate in which a Restricted Transferee owns an interest).
"Affiliate" and "Restricted Transferee" shall have the meanings ascribed thereto
in the LLC Agreement.
(D) If at any time the number of shares of Class B Common Stock
outstanding, together with the number of outstanding Membership Units held by
the holders of such Class B Common Stock, constitutes less than fifteen percent
(15%) of the number of then outstanding Membership Units, then each share of
Class B Common Stock then issued and outstanding shall thereupon be converted
automatically as of such date into one (1) fully paid and non-assessable share
of Class A Common Stock. Upon the determination by the Corporation that such
automatic conversion has occurred, notice of such automatic conversion shall be
given by the Corporation by means of a press release and written notice to all
holders of Class B Common Stock, and shall be given as soon as practicable, and
the Secretary of the Corporation shall be instructed to, and shall promptly,
request from each holder of Class B Common Stock that each such holder promptly
deliver, and each such holder shall promptly deliver, the certificate
representing each such share of Class B Common Stock to the Corporation for
exchange hereunder, together with instruments of transfer, in form satisfactory
to the Corporation and the Transfer Agent, duly executed by such holder or such
holder's duly authorized attorney, and together with transfer tax stamps or
funds therefor, if required pursuant to Article FOURTH, Clause (b)(iii)(I)
below. Effective upon such automatic conversion of the Class B Common Stock, the
Class B Directors shall be deemed to have resigned from the Board and all
committees of the Board upon which they serve, and the Board and all such
committees shall be deemed reduced in size (and no vacancies shall be created)
by such resignations.
(E) If at any time the number of shares of Class C Common Stock
outstanding, together with the number of outstanding Membership Units held by
the holders of such Class C Common Stock, constitutes less than fifteen percent
(15%) of the number of then outstanding Membership Units, then each share of
Class C Common Stock then issued and outstanding shall thereupon be converted
automatically as of such date into one (1) fully paid and non-assessable share
of Class A Common Stock. Upon the determination by the Corporation that such
automatic conversion has occurred, notice of such automatic conversion shall be
given by the Corporation by means of a press release and written notice to all
holders of Class C Common Stock, and shall be given as soon as practicable, and
the Secretary of the Corporation shall be instructed to, and shall promptly,
request from each holder of Class C Common Stock that each such holder promptly
deliver, and each such holder shall promptly deliver, the certificate
representing each such share of Class C Common Stock to the Corporation for
exchange hereunder, together with instruments of transfer, in form satisfactory
to the Corporation and the Transfer Agent, duly executed by such holder or such
holder's duly
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<PAGE>
authorized attorney, and together with transfer tax stamps or funds therefor, if
required pursuant to Article FOURTH, Clause (b)(iii)(I) below. Effective upon
such automatic conversion of the Class C Common Stock, the Class C Directors
shall be deemed to have resigned from the Board and all committees of the Board
upon which they serve, and the Board and all such committees shall be deemed
reduced in size (and no vacancies shall be created) by such resignations.
(F) As promptly as practicable following the surrender for
conversion of a certificate representing shares of Class B Common Stock or Class
C Common Stock in the manner provided in Article FOURTH, Clauses (b)(iii)(A),
(C), (D) or (E) above, or the surrender for exchange of a certificate
representing Membership Units in the manner provided in Article FOURTH, Clause
(b)(iii)(B) above, as applicable, and the payment in cash of any amount required
by the provisions of Article FOURTH, Clause (b)(iii)(I) below, the Corporation
will deliver or cause to be delivered at the office of the Transfer Agent, a
certificate or certificates representing the number of full shares of Class A
Common Stock issuable upon such conversion or exchange, issued in such name or
names as such holder may direct. Such conversion or exchange shall be deemed to
have been effected immediately prior to the close of business on the date of the
surrender of the certificate or certificates representing shares of Class B
Common Stock, Class C Common Stock or Membership Units, as the case may be. Upon
the date any such conversion or exchange is made or effected, all rights of the
holder of such shares of Class B Common Stock, Class C Common Stock or
Membership Units as such holder shall cease, and the person or persons in whose
name or names the certificate or certificates representing the shares of Class A
Common Stock are to be issued shall be treated for all purposes as having become
the record holder or holders of such shares of Class A Common Stock; provided,
however, that if any such surrender and payment occurs on any date when the
stock transfer books of the Corporation shall be closed, the person or persons
in whose name or names the certificate or certificates representing shares of
Class A Common Stock are to be issued shall be deemed the record holder or
holders thereof for all purposes immediately prior to the close of business on
the next succeeding day on which the stock transfer books are open.
(G) In the event of a reclassification or other similar
transaction as a result of which the shares of Class A Common Stock are
converted into another security, then a holder of Class B Common Stock, Class C
Common Stock or Membership Units shall be entitled to receive upon conversion or
exchange the amount of such security that such holder would have received if
such conversion or exchange had occurred immediately prior to the record date of
such reclassification or other similar transaction. No adjustments in respect of
dividends shall be made upon the conversion or exchange of any share of Class B
Common Stock, Class C Common Stock or Membership Unit; provided, however, that
if a share of Class B Common Stock, Class C Common Stock or Membership Unit
shall be converted or exchanged subsequent to the record date for the payment of
a dividend or other distribution on shares of Class B Common Stock, Class C
Common Stock or Membership Units but prior to such payment, then the registered
holder of such share or Membership Unit at the close of business on such record
date shall be entitled to receive the dividend or other distribution payable
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<PAGE>
on such share or Membership Unit on such date notwithstanding the conversion or
exchange thereof or the default in payment of the dividend or distribution due
on such date.
(H) The Corporation covenants that it will at all times reserve
and keep available out of its authorized but unissued shares of Class A Common
Stock, solely for the purpose of issuance upon conversion or exchange of the
outstanding shares of Class B Common Stock, Class C Common Stock or Membership
Units, such number of shares of Class A Common Stock that shall be issuable upon
the conversion of all such outstanding shares of Class B Common Stock and Class
C Common Stock and the exchange of all such outstanding Membership Units;
provided that nothing contained herein shall be construed to preclude the
Corporation from satisfying its obligations in respect of the conversion or
exchange of the outstanding shares of Class B Common Stock, Class C Common Stock
or Membership Units by delivery of purchased shares of Class A Common Stock
which are held in the treasury of the Corporation. The Corporation covenants
that if any shares of Class A Common Stock require registration with or approval
of any governmental authority under any federal or state law before such shares
of Class A Common Stock may be issued upon conversion or exchange, the
Corporation will cause such shares to be duly registered or approved, as the
case may be. The Corporation will use its best efforts to list the shares of
Class A Common Stock required to be delivered upon conversion or exchange prior
to such delivery upon each national securities exchange upon which the
outstanding Class A Common Stock is listed at the time of such delivery. The
Corporation covenants that all shares of Class A Common Stock that shall be
issued upon conversion or exchange of the shares of Class B Common Stock, Class
C Common Stock or Membership Units will, upon issue, be validly issued, fully
paid and non-assessable.
(I) The issuance of certificates for shares of Class A Common
Stock upon conversion or exchange of shares of Class B Common Stock, Class C
Common Stock or Membership Units shall be made without charge to the holders of
such shares or Membership Units for any stamp or other similar tax in respect of
such issuance; provided, however, that if any such certificate is to be issued
in a name other than that of the holder of the share or shares of Class B Common
Stock or Class C Common Stock converted or the Membership Units exchanged, then
the person or persons requesting the issuance thereof shall pay to the
Corporation the amount of any tax that may be payable in respect of any transfer
involved in such issuance or shall establish to the satisfaction of the
Corporation that such tax has been paid or is not payable.
(J) Shares of Class B Common Stock or Class C Common Stock that
are converted into shares of Class A Common Stock as provided herein shall
continue to be authorized shares of Class B Common Stock or Class C Common
Stock, as the case may be, and available for reissue by the Corporation;
provided, however, that no shares of Class B Common Stock or Class C Common
Stock shall be reissued except as expressly permitted by Article FOURTH, Clause
(b)(ii) above and Article FOURTH, Clause (b)(iv) below.
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(iv) Stock Splits. The Corporation shall not in any manner subdivide
(by any stock split, stock dividend, reclassification, recapitalization or
otherwise) or combine (by reverse stock split, reclassification,
recapitalization or otherwise) the outstanding shares of one class of Common
Stock unless the outstanding shares of all classes of Common Stock shall be
proportionately subdivided or combined. The exchange rights for Membership Units
shall be adjusted accordingly if there is: (A) any subdivision (by any unit
split, unit distribution, reclassification, recapitalization or otherwise) or
combination (by reverse unit split, reclassification, recapitalization or
otherwise) of the Membership Units that is not accompanied by an identical
subdivision or combination of the Common Stock; or (B) any subdivision (by any
stock split, stock dividend, reclassification, recapitalization or otherwise) or
combination (by reverse stock split, reclassification, recapitalization or
otherwise) of the Common Stock that is not accompanied by an identical
subdivision or combination of the Membership Units.
(v) Options, Rights or Warrants.
(A) The Corporation shall not make any offering of options,
rights or warrants to subscribe for shares of Class B Common Stock or Class C
Common Stock. If the Corporation makes an offering of options, rights or
warrants to subscribe for shares of any class or classes of capital stock, other
than Class B Common Stock or Class C Common Stock, to all holders of a class of
Common Stock, then the Corporation shall simultaneously make an identical
offering to all holders of the other classes of Common Stock other than to any
class of Common Stock the holders of which, voting as a separate class,
determine that such offering need not be made to such class. All such options,
rights or warrants offerings shall offer the respective holders of Class A
Common Stock, Class B Common Stock and Class C Common Stock the right to
subscribe at the same rate per share.
(B) Subject to Article FOURTH, Clauses (b)(iii)(E) and (b)(v)(A)
above, the Corporation shall have the power to create and issue, whether or not
in connection with the issue and sale of any shares of stock or other securities
of the Corporation, rights or options entitling the holders thereof to purchase
from the Corporation any shares of its capital stock of any class or classes at
the time authorized (other than Class B Common Stock or Class C Common Stock),
such rights or options to have such terms and conditions, and to be evidenced by
or in such instrument or instruments, as shall be approved by the Board.
(vi) Mergers, Consolidation, Etc. In the event that the Corporation
shall enter into any consolidation, merger, combination or other transaction in
which shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then, and in such event, the shares
of each class of Common Stock shall be exchanged for or changed into either (A)
the same amount of stock, securities, cash and/or any other property, as the
case may be, into which or for which each share of any other class of Common
Stock is exchanged or changed; provided, however, that if shares of Common Stock
are exchanged for or changed into shares of capital stock, such shares so
exchanged for or changed
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<PAGE>
into may differ to the extent and only to the extent that the Class A Common
Stock, the Class B Common Stock and the Class C Common Stock differ as provided
herein, or (B) if holders of each class of Common Stock are to receive different
distributions of stock, securities, cash and/or any other property, an amount of
stock, securities, cash and/or property per share having a value, as determined
by an independent investment banking firm of national reputation selected by the
Board, equal to the value per share into which or for which each share of any
other class of Common Stock is exchanged or changed.
(vii) Liquidation Rights. In the event of any dissolution, liquidation
or winding-up of the affairs of the Corporation, whether voluntary or
involuntary, after payment or provision for payment of the debts and other
liabilities of the Corporation and after making provision for the holders of
each series of Preferred Stock, if any, the remaining assets and funds of the
Corporation, if any, shall be divided among and paid ratably to the holders of
the shares of the Class A Common Stock, the Class B Common Stock and the Class C
Common Stock treated as a single class.
(viii) No Preemptive Rights. Except as provided in Article FOURTH,
Clause (b)(v) above, the holders of shares of Common Stock are not entitled to
any preemptive right to subscribe for, purchase or receive any part of any new
or additional issue of stock of any class, whether now or hereafter authorized,
or of bonds, debentures or other securities convertible into or exchangeable for
stock.
(ix) Reclassification. Immediately upon the effectiveness of this
Amended and Restated Certificate of Incorporation, all shares of common stock of
the Corporation issued and outstanding immediately prior to such effectiveness
shall be changed into and reclassified as one (1) share of Class B Common Stock.
Promptly after such effectiveness, the record holders of all certificates that,
immediately prior to such effectiveness, represented common stock of the
Corporation shall be entitled to receive in exchange for such certificates, upon
surrender of such certificates to the Corporation, a certificate for one (1)
share of Class B Common Stock. Until surrendered and exchanged in accordance
herewith, all certificates that, immediately prior to such effectiveness,
represented common stock of the Corporation shall represent, collectively, one
share of Class B Common Stock.
(c) Preferred Stock.
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(i) Authorization. Subject to the voting and approval procedures set
forth in the By-laws, the Board is hereby expressly granted authority to
authorize in accordance with law from time to time the issue of one or more
series of Preferred Stock and with respect to any such series to fix by
resolution or resolutions the numbers, powers, designations, preferences and
relative, participating, optional or other special rights of such series and the
qualifications, limitations or restrictions thereof, including but without
limiting the generality of the foregoing, the following:
(A) entitling the holders thereof to cumulative, non-cumulative
or partially cumulative dividends, or to no dividends;
(B) entitling the holders thereof to receive dividends payable on
a parity with, junior to, or in preference to, the dividends payable on any
other class or series of capital stock of the Corporation;
(C) entitling the holders thereof to rights upon the voluntary or
involuntary liquidation, dissolution or winding up of, or upon any other
distribution of the assets of, the Corporation, on a parity with, junior to or
in preference to, the rights of any other class or series of capital stock of
the Corporation;
(D) providing for the conversion, at the option of the holder or
of the Corporation or both, of the shares of Preferred Stock into shares of any
other class or classes of capital stock of the Corporation or of any series of
the same or any other class or classes or into property of the Corporation or
into the securities or properties of any other corporation or person, including
provision for adjustment of the conversion rate in such events as the Board
shall determine, or providing for no conversion;
(E) providing for the redemption, in whole or in part, of the
shares of Preferred Stock at the option of the Corporation or the holder
thereof, in cash, bonds or other property, at such price or prices (which amount
may vary under different conditions and at different redemption dates), within
such period or periods, and under such conditions as the Board shall so provide,
including provisions for the creation of a sinking fund for the redemption
thereof, or providing for no redemption;
(F) lacking voting rights or having limited voting rights or
enjoying general, special or multiple voting rights; and
(G) specifying the number of shares constituting that series and
the distinctive designation of that series.
All shares of any one series of Preferred Stock shall be identical in all
respects with the other shares of such series, except that shares of any one
series of Preferred Stock issued at different
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<PAGE>
times may differ as to the dates from which dividends thereon shall be
cumulative. The Board may change the powers, designation, preferences, rights,
qualifications, limitations and restrictions of, and number of shares in, any
series of Preferred Stock as to which no shares are issued and outstanding.
(ii) Dividends. Dividends on outstanding shares of Preferred Stock
shall be paid or declared and set apart for payment before any dividends shall
be paid or declared and set apart for payment on the Common Stock with respect
to the same dividend period.
(iii) Liquidation Rights. If upon any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, the assets available
for distribution to holders of shares of Preferred Stock of all series shall be
insufficient to pay such holders the full preferential amount to which they are
entitled, then such assets shall be distributed in accordance with the
respective priorities and preferential amounts (including unpaid cumulative
dividends, if any, and interest thereon, if any) payable with respect thereto,
and among shares of any series of Preferred Stock, ratably among the shares of
such series.
FIFTH: The duration of this Corporation is to be perpetual.
SIXTH: (a) Classification of Directors. Subject to Article FOURTH, Clause
(b)(iii)(D) and (E) above and Article SIXTH, Clause (b) below, the directors,
other than those who may be elected by the holders of any series of Preferred
Stock, shall be classified, with respect to the time for which they severally
hold office, into three classes of three (3) directors each, one class initially
to be elected for a term expiring at the annual meeting of stockholders to be
held in 2000, another class initially to be elected for a term expiring at the
annual meeting of stockholders to be held in 2001 and another class initially to
be elected for a term expiring at the annual meeting of stockholders to be held
in 2002, with the members of each class to hold office until their successors
have been elected and qualified. Subject to Article FOURTH, Clause (b)(iii)(D)
and (E) above and Article SIXTH, Clause (b) below, each class of three (3)
directors shall consist of one (1) Class A Director, one (1) Class B Director
and one (1) Class C Director. At each annual meeting of stockholders, the
successors of the class of directors whose term expires at that meeting shall be
elected to hold office for a term expiring at the annual meeting of stockholders
held in the third (3rd) year following the year of their election. Directors
need not be stockholders of the Corporation.
(b) Reduction in Number. (i) At any time that the holders of
Class B Common Stock transfer (other than to Parent Entities) in the aggregate
(i.e. together with all other shares of Common Stock and/or Membership Units
previously transferred by holders of Class B Common Stock other than to Parent
Entities) a number of shares of Common Stock and/or Membership Units
constituting an aggregate of more than ten percent (10%) of the number of
outstanding Membership Units (a "Class B Triggering Event"), then the number of
Class B Directors shall be reduced from three (3) to two (2) (and the resulting
size of the Board
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<PAGE>
shall be reduced by one (1)) by the automatic resignation of one of the Class B
Directors (such resigning Class B Director to be selected by the Class B
Directors within ten (10) days prior to the occurrence of the Class B Triggering
Event). In the absence of such selection within said ten-day period, the Class C
Directors shall select the Class B Director who shall be deemed to have
resigned. In calculating whether the Class B Triggering Event has occurred, each
time a transfer of shares of Common Stock and/or Membership Units occurs (other
than to a Parent Entity), a calculation shall be made with respect to the
percentage that such number of shares and/or units transferred bears to the
number of then outstanding Membership Units. This percentage shall be added to
the aggregate of such percentages calculated at the respective times of all
prior transfers by the holders of the Class B Common Stock (other than to a
Parent Entity).
(ii) At any time that the holders of Class C Common Stock
transfer (other than to Parent Entities) in the aggregate (i.e. together with
all other shares of Common Stock and/or Membership Units previously transferred
by holders of Class C Common Stock other than to Parent Entities) a number of
shares of Common Stock and/or Membership Units constituting an aggregate of more
than ten percent (10%) of the number of outstanding Membership Units (a "Class C
Triggering Event"), then the number of Class C Directors shall be reduced from
three (3) to two (2) (and the resulting size of the Board shall be reduced by
one (1)) by the automatic resignation of one of the Class C Directors (such
resigning Class C Director to be selected by the Class C Directors within ten
(10) days prior to the occurrence of the Class C Triggering Event). In the
absence of such selection within said ten-day period, the Class B Directors
shall select the Class C Director who shall be deemed to have resigned. In
calculating whether the Class C Triggering Event has occurred, each time a
transfer of shares of Common Stock and/or Membership Units occurs (other than to
a Parent Entity), a calculation shall be made with respect to the percentage
that such number of shares and/or units transferred bears to the number of then
outstanding Membership Units. This percentage shall be added to the aggregate of
such percentages calculated at the respective times of all prior transfers by
the holders of the Class C Common Stock (other than to a Parent Entity).
(c) Vacancies in the Board. Except as provided in Article FOURTH,
Clause (b)(iii)(D) and (E) and Article SIXTH, Clause (b) above, any vacancies
resulting from death, resignation, disqualification, removal or other cause with
respect to a Class A Director shall be filled by the affirmative vote of the
remaining directors then in office, even if less than a quorum of the Board. Any
vacancies resulting from death, resignation, disqualification, removal or other
cause with respect to a Class B Director shall be filled only by the affirmative
vote of the remaining Class B Directors then in office, even if less than a
quorum of the Board, or by a sole remaining Class B Director. In the absence of
a sole remaining Class B Director, such vacancies shall be filled by a majority
vote of the holders of the Class B Common Stock, voting separately as a class.
Any vacancies resulting from death, resignation, disqualification, removal or
other cause with respect to a Class C Director shall be filled only by the
affirmative vote of a majority of the remaining Class C Directors then in
office, even if less than a quorum of the Board, or by a sole remaining Class C
Director. In the absence of a sole remaining Class C Director, such
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<PAGE>
vacancies shall be filled by a majority vote of the holders of the Class C
Common Stock, voting separately as a class. Any director elected in accordance
with this Clause (c) shall hold office until the annual meeting of stockholders
at which the term of office of the class to which such director has been elected
expires, and until such director's successor shall have been duly elected and
qualified.
(d) Removal of Directors. (i) Subject to Article SIXTH, Clause
(d)(ii) below, any director may be removed from office only for cause by the
affirmative vote of the holders of at least seventy percent (70%) of the voting
power of the Voting Stock, voting together as a single class.
(ii) Notwithstanding the foregoing, (A) any Class A Director
may be removed at any time , with or without cause, by majority vote of the
holders of the Voting Stock, voting together as one class, (B) any Class B
Director may be removed at any time, with or without cause, by majority vote of
the holders of the Class B Common Stock, voting separately as a class, and (C)
any Class C Director may be removed at any time, with or without cause, by
majority vote of the holders of the Class C Common Stock, voting separately as a
class.
SEVENTH: The affirmative vote of the holders of at least seventy percent
(70%) of the issued and outstanding Voting Stock, voting as one class, shall be
required to amend or repeal this Certificate of Incorporation; provided,
however, that no such amendment shall adversely affect the rights of the holders
of Class A Common Stock, Class B Common Stock or Class C Common Stock,
respectively, unless the holders of such Class A Common Stock, Class B Common
Stock or Class C Common Stock, as the case may be, voting separately as a class,
shall by majority vote approve such amendment. Subject to Section 4.1 of the
By-laws, the Board may from time to time make, amend, supplement or repeal the
By-laws by vote of a majority of the Board; provided, however, that the
stockholders may change or amend or repeal any provision of the By-laws by each
of: (i) the affirmative vote of the holders of a majority of the Voting Stock,
voting as one class; (ii) 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 (iii) 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.
EIGHTH: Unless and except to the extent that the By-laws of the Corporation
shall so require, the election of directors of the Corporation need not be by
written ballot.
NINTH: The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, provided that such action is approved in the
manner, and otherwise complies with the requirements, set forth in this
Certificate of Incorporation, and all rights conferred upon stockholders herein
are granted subject to this reservation.
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<PAGE>
TENTH: A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability: (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under Section 174 of the GCL; or (iv) for any
transaction from which the director derived an improper personal benefit. If the
GCL is amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the GCL, as so amended. Any repeal or modification of this provision shall be
prospective only and shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification.
ELEVENTH: The Corporation, to the fullest extent permitted by Section 145
of the GCL, as the same may be amended and supplemented, may indemnify any and
all persons whom it shall have power to indemnify under said section from and
against any and all of the expenses, liabilities or other matters referred to in
or covered by said section, and the indemnification provided for herein shall
not be deemed exclusive of any other rights to which those indemnified may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such a
person."
3. This Amended and Restated Certificate of Incorporation has been duly
adopted by the Board of Directors of the Corporation and consented to in writing
and authorized by the holders of all of the issued and outstanding stock
entitled to vote thereon.
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<PAGE>
4. This Amended and Restated Certificate of Incorporation was duly adopted
in accordance with the applicable provisions of Sections 228 and 242 of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, barnesandnoble.com inc. has caused this Amended and
Restated Certificate of Incorporation to be signed and attested as of the ____
day of _________, 1999.
barnesandnoble.com inc.
By:______________________________
Name:
Title:
Attest:
By:_______________________
Name:
Title:
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<PAGE>
Exhibit 10.6
-----------------------------------
SECOND AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
barnesandnoble.com llc
Effective as of ____________, 1999
------------------------------------
<PAGE>
SECOND AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
barnesandnoble.com llc
THIS SECOND AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
(the "Agreement") of barnesandnoble.com llc, a Delaware limited liability
company (the "Company"), is made and entered into, effective as of
_____________, 1999, by and among Barnes & Noble, Inc., a corporation organized
and existing under the laws of Delaware, with its principal place of business
at 122 Fifth Avenue, New York, New York 10011 ("BN"), B&N.com Holding Corp., a
corporation organized and existing under the laws of Delaware, with its
principal place of business at 122 Fifth Avenue, New York, New York 10011 ("BN
Holding"), barnesandnoble.com inc., a corporation organized and existing under
the laws of Delaware, with its principal place of business at 76 Ninth Avenue,
New York, New York 10011 (the "Public Corp."), Bertelsmann AG, an
Aktiengesellschaft organized and existing under the laws of Germany, with its
principal place of business at Carl-Bertelsmann-Strasse 270, 33311 Gutersloh,
Germany ("BAG") and BOL.US Online, Inc., a corporation organized and existing
under the laws of Delaware, with its principal place of business at 1540
Broadway, New York, New York 10036 ("USO").
WHEREAS, the Company was formed as a limited liability company
pursuant to the Delaware Limited Liability Company Law (6 Del. C. ss. 18-101,
et seq., as it may be amended from time to time, or any successor statute (the
"LLCL")) by the filing of a Certificate of Formation with the Office of the
Secretary of State of the State of Delaware on October 27, 1998;
WHEREAS, the parties entered into an Amended and Restated Limited
Liability Company Agreement (the "Amended Agreement"), dated as of October 31,
1998, to provide for the admission of USO as a Member and to establish the
respective rights and obligations of BN Holding and USO with respect to the
Company; and
WHEREAS, the parties hereto desire to amend and restate the Amended
Agreement to reflect the addition of the Public Corp. as a Member and the sole
Manager of the LLC pursuant to the terms and conditions hereof.
NOW, THEREFORE, in consideration of the conditions and provisions
contained herein, the parties hereby agree as follows:
<PAGE>
ARTICLE I. DEFINITIONS
Section 1.1 DEFINITIONS. The following terms shall, for the purposes
of this Agreement and the Schedules and Exhibits hereto, have the following
meanings (terms defined in the singular or the plural include the plural or the
singular, as the case may be):
"Affiliate" of any Person shall mean any other Person that, directly
or indirectly, controls, is under common control with or is controlled by that
Person. For purposes of this definition, "control" (including, with its
correlative meanings, the terms "controlled by" and "under common control
with"), as used with respect to any Person, shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such Person, whether through the ownership of voting securities
or by contract or otherwise. In the case of BOL, the term "Affiliates" shall
include all Persons in which BOL directly or indirectly owns an equity interest
to the extent such Person operates under the name BOL (or a derivative thereof)
provided that no Restricted Transferee owns any equity interest therein.
"Bankruptcy" of a Member shall mean (a) the filing by a Member of a
voluntary petition seeking liquidation, reorganization, arrangement or
readjustment, in any form, of its debts under Title 11 of the United States
Code (or corresponding provisions of future laws) or any other federal, foreign
or state insolvency law, or a Member's filing of an answer consenting to or
acquiescing in any such petition; (b) the making by a Member of any assignment
for the benefit of its creditors or the admission by a Member in writing of its
inability to pay its debts as they mature; or (c) the expiration of 60 days
after the filing of an involuntary petition under Title 11 of the United States
Code (or corresponding provisions of future laws), seeking an application for
the appointment of a receiver for the assets of a Member, or an involuntary
petition seeking liquidation, reorganization, arrangement or readjustment of
its debts under any other federal, foreign or state insolvency law, provided
that the same shall not have been vacated, set aside or stayed within such
60-day period.
"BN College" shall mean Barnes & Noble College Bookstores, Inc., a New
York corporation, and any successor thereto.
"BN Directors" shall mean, collectively, the Class B Directors as
defined in the Certificate of Incorporation.
"BOL" shall mean BOL.Global, Inc., a corporation organized under the
laws of Delaware.
"Book Clubs" shall mean the business commonly known as "book clubs,"
"negative option mail-order" and "positive option mail-order" and similar
operations, which offer access to a customary and limited number of titles, to
which access is made available to the consumers by any means including through
Websites. For the avoidance of doubt, reference to such clubs or mail order or
similar operations shall include the business of acquiring customers by
direct-toconsumer methods and of selling and distributing such products by
direct marketing to customers who selected such products which were offered at
regular intervals or as special offers irrespective of the manner by which
customers are solicited or acquired.
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"By-laws" shall mean the By-laws of the Public Corp.
"Business" shall mean sale, through one or more Websites, of books to
consumers (regardless of the form in which such books are delivered and
regardless of whether the form of delivery is now known or hereafter devised),
as well as videos, magazines, software or music. For the sake of clarity, all
other activities which do not directly involve consumers, as well as the
following, are excluded from the definition of "Business":
1. the retail sale of books through traditional retail
stores;
2. sale of college textbooks through Websites;
3. Book Clubs regardless of the medium or means (whether now
known or hereafter devised, including through Websites) through which access to
such Book Clubs is made available to consumers;
4. mail-order operations; and
5. wholesale distribution of books.
"Business Day" shall mean any day, other than a Saturday or Sunday, on
which federally chartered banks in the United States are open for business.
"Certificate of Formation" shall mean the Certificate of Formation of
the Company filed on October 27, 1998 with the Secretary of State of the State
of Delaware pursuant to the LLCL.
"Certificate of Incorporation" shall mean the Amended and Restated
Certificate of Incorporation of the Public Corp. as filed on ___________, 1999
with the Secretary of State of the State of Delaware pursuant to the Delaware
General Corporation Law.
"Class A Common Stock" shall mean Class A Common Stock of the Public
Corp.
"Code" shall mean the Internal Revenue Code of 1986, as amended, or
any corresponding provisions of succeeding law.
"Company" shall have the meaning given to that term in the first
paragraph of this Agreement.
"Distributable Cash" shall mean the excess of the Company's positive
cash flow on a consolidated basis (excluding any consolidation with any
stockholder of the Public Corp.) over the Company's consolidated working
capital needs as determined in U.S. dollars in accordance with GAAP. The
Company's positive cash flow on a consolidated basis shall mean the excess of
consolidated cash receipts (excluding the proceeds of any borrowing by the
Company or any subsidiary thereof) over consolidated cash disbursements for any
given period. The Company's working capital needs shall be determined in good
faith by the Manager and shall include, but not
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be limited to, reasonable reserves for current and future operating
expenses, debt service, business expansion and acquisitions, contingencies and
emergencies.
"Depreciation" shall mean for any fiscal year or portion thereof of
the Company, an amount equal to the depreciation, amortization or other cost
recovery deduction allowable with respect to an asset for such period for
federal income tax purposes, except that (1) with respect to any asset whose
Gross Asset Value differs from its adjusted tax basis for federal income tax
purposes and which difference is being eliminated by the remedial allocation
method of Treasury Regulation Section 1.704-3(d), Depreciation shall be the
amount of book basis recovered under the rules of such Section, and (2) with
respect to any asset whose Gross Asset Value differs from its adjusted basis
for federal income tax purposes at the beginning of such period, Depreciation
shall be an amount that bears the same relationship to such beginning Gross
Asset Value as the depreciation, amortization or cost recovery deduction in
such period for federal income tax purposes bears to such beginning adjusted
tax basis; provided, however, that if the adjusted basis for federal income tax
purposes of an asset at the beginning of such period is zero, Depreciation
shall be determined with reference to such beginning Gross Asset Value using
any reasonable method selected by the Manager.
"Encumbrance" shall mean any mortgage, pledge, security interest,
lien, restriction on use or transfer, other than those imposed by law, voting
agreement, adverse claim or encumbrance or charge of any kind (including any
agreement to give any of the foregoing), any conditional sale or other title
retention agreement, any lease in the nature thereof, and the filing of, or any
agreement to give, any financing statement under the Uniform Commercial Code or
similar law of any jurisdiction.
"English Language Books" shall mean books published in the English
language.
"Fiscal Year" of the Company shall mean the twelve (12) month period
ending on December 31st.
"Foreign Language Books" shall mean books published in a language
other than English.
"GAAP" shall mean generally accepted accounting principles as in
effect from time to time, consistently applied, with respect to the
jurisdiction to which it refers.
"Governmental Body" shall mean any domestic or foreign national, state
or municipal or other local government or multi-national body (including, but
not limited to, the European Union), any subdivision, agency, commission or
authority thereof, or any quasi-governmental or private body exercising any
regulatory authority thereunder and any corporation, partnership or other
entity directly or indirectly owned by or subject to the control of any of the
foregoing.
"Gross Asset Value" shall mean, with respect to any Company asset,
such asset's adjusted basis for federal income tax purposes, except as follows:
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<PAGE>
(i) The initial Gross Asset Value of any asset
contributed by a Member to the Company shall be the gross fair market
value of such asset, as determined by the Manager in accordance with
Section 3.1(d) of the By-laws;
(ii) The Gross Asset Value of the Company assets
shall be adjusted to equal their respective gross fair market values
(taking Code Section 7701(g) into account), as determined by the
Manager, as of the following times: (x) the acquisition of an
additional interest in the Company by any new or existing Member in
exchange for more than a de minimis Capital Contribution; (y) the
distribution by the Company to a Member of more than a de minimis
amount of Company property as consideration for an interest in the
Company; and (z) the liquidation of the Company within the meaning of
Regulations Section 1.704-1(b)(2)(ii)(g); provided, however, that
adjustments pursuant to clauses (x) and (y) above shall be made only
if the Manager reasonably determines that such adjustments are
necessary or appropriate to reflect the relative economic interests of
the Members in the Company;
(iii) The Gross Asset Value of any Company asset
distributed to any Member shall be adjusted to equal the gross fair
market value (taking Code Section 7701(g) into account) of such asset
on the date of distribution as determined by the Manager; and
(iv) The Gross Asset Values of Company assets shall
be increased (or decreased) to reflect any adjustments to the adjusted
basis of such assets pursuant to Code Section 734(b) or Code Section
743(b), but only to the extent that such adjustments are taken into
account in determining Capital Accounts pursuant to Regulations
Section 1.704-1(b)(2)(iv)(m); provided, however, that Gross Asset
Values shall not be adjusted pursuant to this paragraph (iv) to the
extent the Manager determines that an adjustment pursuant to paragraph
(ii) above is necessary or appropriate in connection with a
transaction that would otherwise result in an adjustment pursuant to
this paragraph (iv).
If the Gross Asset Value of an asset has been determined or adjusted pursuant
to paragraphs (i), (ii) or (iv) above, such Gross Asset Value shall thereafter
be adjusted by the Depreciation taken into account with respect to such asset
for purposes of computing Net Profits and Net Losses.
"Incentive Plan" shall mean the 1999 Incentive Plan of the Public
Corp. or any other incentive plan adopted by the Public Corp. in accordance
with the approval procedures set forth in the Certificate of Incorporation or
By-laws.
"Manager" shall mean the Public Corp. or any successor thereto.
"Member" shall mean, at any time, BN Holding, USO and the Public Corp.
if, at such time, they own Membership Units in the Company and any Person who
at such time owns Membership Units in the Company.
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<PAGE>
"Member-Funded Debt" shall mean any non-recourse debt of the Company
which is loaned or guaranteed by any Member and/or is treated as "partner
non-recourse debt" under Section 1.704-2(b)(4) of the Treasury Regulations.
"Membership Unit" shall mean the unit representing a Member's interest
in the Company, including such Member's (i) ownership interest in the Company,
(ii) right to share in any Net Profits, Net Losses and any distributions of the
Company, and (iii) right, if any, to participate in the management of the
Company or any other decision of the Members pursuant to this Agreement.
"Minimum Gain" shall mean an amount equal to the excess of the
principal amount of debt, for which no Member is liable ("non-recourse debt"),
secured by any property of the Company over the adjusted basis of such Property
which represents the minimum taxable gain which would be recognized by the
Company if the non-recourse debt were foreclosed upon and the property were
transferred to the creditor in satisfaction thereof, and which is referred to
as "minimum gain" in Section 1.704-2(b)(2) of the Treasury Regulations. A
Member's share of Minimum Gain shall be determined pursuant to the above-cited
Treasury Regulations.
"Name License Agreements" shall mean each of the agreements between
the Company and BOL and between the Company and BN College relating to the
right to use the trade names, trademarks and domain names associated with BOL
and "Barnes and Noble," respectively.
"Net Profits" and "Net Losses" shall mean the net income or net loss
of the Company (including capital gains and losses) as determined in accordance
with the accounting methods followed by the Company for federal income tax
purposes including income exempt from tax and described in Code Section
705(a)(1)(B) and treating as deductions items of expenditure described in, or
under Treasury Regulations deemed described in, Code Section 705(a)(2)(B). For
purposes of computing Net Profits and Net Losses, gain or loss resulting from
the disposition of property, which gain or loss is recognized for federal
income tax purposes, shall be computed by reference to the Gross Asset Value of
such property rather than its adjusted tax basis. In lieu of the depreciation,
amortization and other cost recovery deductions taken into account in computing
taxable income or loss for federal income tax purposes, there shall be taken
into account Depreciation. In addition: (i) In the event the Gross Asset Value
of any Company asset is adjusted pursuant to subparagraphs (ii) or (iii) of the
definition of Gross Asset Value, the amount of such adjustment shall be treated
as an item of gain (if the adjustment increases the Gross Asset Value of the
asset) or an item of loss (if the adjustment decreases the Gross Asset Value of
the asset) from the disposition of such asset and shall be taken into account
for purposes of computing Net Profit or Net Losses; and (ii) Notwithstanding
any other provision of this definition, any items which are specially allocated
pursuant to sections 5.4(f), (g), (h), (i), (j), and (k) hereof shall not be
taken into account for purposes of computing Net Profits or Net Losses. The
amounts of the items of Company income, gain, loss or deduction available to be
specially allocated pursuant to sections 5.4(f), (g), (h), (i), (j), and (k)
hereof shall be determined by applying rules analogous to those set forth in
this definition of "Net Profits" and "Net Losses."
"Percentage Interest" shall mean a Member's aggregate economic
percentage interest in the Company as determined by dividing the number of
Membership Units owned by such
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<PAGE>
Member by the number of Membership Units then owned by all Members.
The Percentage Interests of the Members as of the effective date of this
Agreement are set forth on Schedule I.
"Permitted Encumbrances" shall mean as of a particular date (i)
Encumbrances reflected in the financial statements of the Company (including
purchase money liens which are not overdue as of a particular date or which are
being contested in good faith), (ii) Encumbrances arising out of contracts
entered into in the ordinary course of the Business, (iii) mechanics',
materialmen's or similar inchoate liens relating to liabilities not yet due and
payable and (iv) liens for current taxes not yet delinquent, to the extent the
validity thereof is being contested in good faith by appropriate proceedings,
which proceedings have the effect of preventing foreclosure or enforcement of
such liens and where adequate reserves are established and maintained in
accordance with GAAP.
"Person" shall mean an individual, sole proprietorship, corporation,
partnership, limited liability company, joint venture, trust, unincorporated
organization, mutual company, joint stock company, estate, union, employee
organization, bank, trust company, land trust, business trust or other
organization, whether or not a legal entity, or a Governmental Body.
"Prime Rate" for any period shall mean the interest rate for such
period as announced by Citibank N.A. (or its successors) at its principal
office in New York City as its base rate for loans.
"Restricted Member" shall mean USO and BN Holding.
"Restricted Transferee" shall mean amazon.com, inc., Borders Group,
Inc., America Online, Inc. ("AOL"), Microsoft, Inc. or Yahoo, Inc. or any of
their respective Affiliates.
"Services Agreements" shall mean the Amended and Restated Services
Agreement, dated as of October 31, 1998, by and between the Company and BN, and
the Amended and Restated Services Agreement, dated as of October 31, 1998, by
and between the Company and Marboro Books Corp., a New York corporation and a
wholly owned subsidiary of BN.
"Software Licenses" shall mean the Technology Sharing and License
Agreement between the Company and BOL, dated as of October 31, 1998, relating
to the exploitation of software owned by the Company, the Technology Sharing
and License Agreement between the Company and BOL, dated as of October 31,
1998, relating to the exploitation of software owned by BOL, and the Amended
and Restated Database and Software License Agreement between BN and the
Company, dated as of October 31, 1998, relating to the exploitation of software
owned by BN.
"Supply Agreement" shall mean the Supply Agreement, dated as of
October 31, 1998, between BN and the Company, as amended.
"Tax Year" shall mean the twelve (12) month period ending on June
30th.
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"Transfer" shall mean, whether directly or indirectly by merger,
operation of law or otherwise, any sale, assignment, conveyance, transfer,
donation or any other means to dispose of, or pledge, hypothecate or otherwise
encumber in any manner whatsoever, or permit or suffer any Encumbrance of any
interest in the Company (whether profits, management or Percentage Interest).
"Treasury Regulations" means the regulations promulgated by the U.S.
Department of the Treasury under the Code.
"USO Directors" shall mean, collectively, the Class C Directors as
defined in the Certificate of Incorporation.
"Website" shall mean any interactive site or area, including any
interactive site or area located on the World Wide Web portion of the Internet
or on any commercial service or network (including services such as AOL), which
is accessed via the use of any protocols, standards or platforms (including
Internet or Internet derivative protocols, standards and platforms) for remote
access by narrowband or broadband telecommunications, including POTS, ISDN,
cable, fiber optics and hybrid CD-ROM, regardless of whether access to such
site or area is secured through cable, telephone, satellite or otherwise and
regardless of whether the same is received or operated in conjunction with a
personal computer or television, together with any successor into which any of
the foregoing may evolve.
Section 1.2 USAGE GENERALLY; INTERPRETATION. Whenever the context may
require, any pronoun includes the corresponding masculine, feminine and neuter
forms. All references herein to Articles, Sections and Schedules shall be
deemed to be references to Articles, Sections and Schedules of this Agreement
unless the context otherwise requires. The words "include", "includes" and
"including" shall be deemed to be followed by the phrase "without limitation".
The words "hereof", "herein" and "hereunder" and words of similar import when
used in this Agreement refer to this Agreement as a whole and not to any
particular provision of this Agreement. Unless otherwise expressly provided
herein, any agreement, instrument or statute defined or referred to herein or
in any agreement or instrument that is referred to herein means such agreement,
instrument or statute as from time to time amended, modified or supplemented,
including (in the case of agreements or instruments) by waiver or consent and
(in the case of statutes) by succession of comparable successor statutes and
references to all attachments thereto and instruments incorporated therein.
Except to the extent a provision of this Agreement expressly incorporates
federal income tax rules by reference to sections of the Code or Treasury
Regulations or is expressly prohibited or ineffective under the LLCL, this
Agreement shall govern, even when inconsistent with, or different from, the
provisions of the LLCL or any other law or rule. To the extent any provision of
this Agreement is prohibited or ineffective under the LLCL, this Agreement
shall be deemed to be amended to the least extent necessary in order to make
this Agreement effective under the LLCL. In the event the LLCL is subsequently
amended or interpreted in such a way to make any provision of this Agreement
that was formerly invalid valid, such provision shall be considered to be valid
from the effective date of such interpretation or amendment.
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ARTICLE II. ORGANIZATIONAL AND OTHER MATTERS; MEMBERSHIP
Section 2.1 FORMATION; ADMISSION. The Company was formed as a limited
liability company under the provisions of the LLCL by the filing on October 27,
1998 of the Certificate of Formation with the Secretary of State of the State
of Delaware. Each of the Persons listed on Schedule I, by virtue of the
execution of this Agreement, are Members of the Company. The rights and
liabilities of the Members shall be as provided in the LLCL, except as is
otherwise expressly provided herein. This Agreement hereby amends and restates
the Amended Agreement in its entirety.
Section 2.2 NAME. The name of the Company shall be, and the business
of the Company shall be conducted under the name of, barnesandnoble.com llc.
Section 2.3 BUSINESS PURPOSE/OPERATION.
(a) The purpose of the Company is to engage in the Business
and/or such other businesses as determined by the Manager in accordance with
Sections 3.1 and 4.1 of the By-laws.
(b) The Company shall operate one or more Websites for the
purpose of selling English Language Books.
(c) The Websites operated by BOL and its Affiliates shall
allow access to customers of the Company who wish to order Foreign Language
Books, and the Websites operated by the Company shall promote (in a manner
approved by the Manager) the availability of Foreign Language Books which shall
be accessed through "hot links", pointers and key word indexes which transport
the customers to one or more Websites operated by BOL or its Affiliates. BOL
and its Affiliates shall be the exclusive Website to which customers of the
Company shall be allowed access with respect to the Business through any form
of links, pointers or key words for purposes of ordering Foreign Language Books
(to the extent that BOL is capable of servicing such orders), except as may be
limited by reason of applicable laws or agreements relating to sale and
distribution of books in the country to which shipment will be made. If BOL or
any of its Affiliates is unable to provide a certain Foreign Language Book, the
Company may provide access to third-party Websites ("Alternative Site") which
offers books in such language provided that the Company shall discontinue
access to such Alternative Site, and resume BOL's exclusive Website promotion
and access for such Foreign Language Book, at such time as BOL offers books in
such foreign language. In the event that BOL expands to offer music, videos,
magazines or software in languages other than English in the future, the
Company may offer access to such Websites operated by BOL or its Affiliates in
the same manner as available with respect to books. Nothing herein shall
obligate BMG Music, a New York partnership, of which Bertelsmann Music Group,
Inc. and Ariola Eurodisc, Inc. are the partners or any other Person owned
directly or indirectly by BAG which is engaged in the music business
(collectively, "BMG") to conduct business with BOL, the Company or in any
manner whatsoever affect the conduct of business by BMG through a Website.
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(d) The Websites operated by the Company shall allow access to
customers of BOL and its Affiliates who wish to order English Language Books,
and the Websites operated by BOL and its Affiliates shall promote (in a manner
approved by the Manager and the applicable boards of directors of BOL and its
Affiliates) the availability of English Language Books which shall be accessed
through "hot links", pointers and key word indexes which transport the
customers to one or more Websites operated by the Company. The Company shall be
the exclusive Website to which customers of BOL and its Affiliates shall be
allowed access with respect to the Business through any form of links, pointers
or key words for purposes of ordering English Language Books, except as
provided in Sections 2.3(e), 7.5(a), 7.5(c)(vii) and 7.5(c)(viii) and as may be
limited by reason of applicable laws or agreements relating to sale and
distribution of books in the country to which shipment will be made. In the
event that the Company expands to offer music, videos, magazines or software in
the English language in the future, BOL may offer access to such Websites
operated by the Company in the same manner as available with respect to books.
Nothing herein shall obligate BMG to conduct business with BOL, the Company or
in any manner whatsoever affect the conduct of business by BMG through a
Website.
(e) Notwithstanding the foregoing, the parties hereto will
work together, in good faith, so that each BOL Website (other than BOL.UK,
BOL.Australia and BOL.New Zealand) shall offer its customers access to English
Language Books through two equal sized buttons, one of which shall access, in
each such BOL Website's discretion, BOL.UK, BOL.Australia or BOL.New Zealand,
respectively, and one of which shall access the Company. In the case of each of
BOL.UK, BOL.Australia and BOL.New Zealand, there will be a button for
barnesandnoble.com of equal size as each such Website. The obligation to access
the Company through an equal-sized button shall not in any manner restrict or
affect the business that may be conducted by such BOL entities, except as
expressly set forth in Section 7.5.
(f) Orders for English Language Books placed by customers of
BOL or its Affiliates who enter Websites operated by BOL or its Affiliates will
be filled by the Company.
(g) Orders for Foreign Language Books placed by customers of
the Company who enter Websites operated by the Company will be filled by BOL or
its Affiliates.
(h) BN or its Affiliates will provide services for the
benefit of the Company pursuant to the Services Agreements and the Supply
Agreement.
(i) In order to minimize confusion and maximize name
recognition, the Company shall agree with BOL on cobranding of trademarks and
trade names which will be used by the Company, BOL and its Affiliates,
including identifying an affiliation or a relationship between the Company and
BOL on the first screen and/or home page and for purposes of "bridging
screens", assuring seamless order processing and avoiding confusion to the
public.
(j) Any party may engage in any activity relating to
development and exploitation of content, regardless of the medium which is used
(i.e. traditional media or Websites), except that actual sale of books on
Websites will be permitted only as set forth in this Section 2.3 and Sections
7.5, 7.6 and 7.7.
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(k) Nothing herein shall affect the right of any party, or of
BN, BAG or any of their respective Affiliates, to engage in any other business,
including sale in any manner whatsoever (including through Websites) of music,
videos, software, magazines or any other product other than books through
Websites, except as provided in Section 2.3(a) relating to Book Clubs.
(l) Notwithstanding anything to the contrary contained herein
or in any of the agreements referred to in this Agreement, BN shall not
commingle any of its (or any of its Affiliates') funds with the funds which it
(or any of its Affiliates) collects on behalf of the Company.
(m) With respect to all existing agreements to which BN (or
any of its Affiliates) is the contracting party for the sole benefit of the
Company, and which are renewed or extended during the term of this Agreement,
the Company shall use its good faith efforts to substitute itself in place of
BN (or its applicable Affiliate) as a party to, and the sole obligor under,
such agreements.
(n) BN Holding, USO and the Public Corp. are fully aware of,
have been advised and agree that each of BN Holding, USO and their respective
Affiliates are engaged in, and may, in the future, conduct activities, which
are directly or indirectly competitive with the Company without any benefit to
the Company or its Members, except to the extent explicitly set forth in this
Agreement. Each party hereby consents to such activity and agrees that such
conduct or competition will not, in and of itself, constitute any breach of
corporate or partnership opportunity, breach of fiduciary responsibility,
conflict of interest, or otherwise, or impose any obligation on BN Holding or
USO or their Affiliates.
(o) The parties acknowledge that BAG and BN or their
Affiliates may, as a result of receipt of or exposure to confidential
information, increase or enhance the knowledge and experience retained in the
unaided memories of each of their directors, officers, employees or
contractors. Notwithstanding anything to the contrary in this Agreement, BAG
and BN and their respective Affiliates and their respective directors,
employees, agents or contractors may use and disclose such residual information
(as defined below) in their respective businesses or for any purpose
whatsoever, including the design, development, manufacture, marketing, sale,
licensing, distribution and maintenance of the products and services of such
Member and its Affiliates; provided that: (i) such Member and its Affiliates
(and their respective directors, employees, agents or contractors) have not (x)
intentionally memorized the confidential information so as to reduce it to an
intangible form for the purpose of creating residual information or using same,
or (y) avoided their obligation to maintain the confidentiality of confidential
information by having a person commit such information to memory so as to
reduce it to an intangible form; and (ii) such right shall not represent a
license under any patents, copyrights or maskwork rights. Notwithstanding
anything to the contrary in this Agreement or any other agreement between the
parties which is referenced herein or in any information or documents disclosed
hereunder, the receipt by a Member or its Affiliate of confidential information
shall not create any obligation in any way limiting or restricting the
assignment and/or reassignment of such Member's (or its Affiliate's) employees
within such Member and its Affiliates. The term "residual information"
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shall mean the ideas, concepts, know-how, methods, techniques, and other
information in nontangible form which may be retained in unaided memory
by those directors, officers, employees or contractors who have had access to
confidential information.
Section 2.4 OFFICES. The Company's principal office shall be located
at 76 Ninth Avenue, 11th Floor, New York, New York 10011. The Company may have
other offices at such other places within or without the State of New York as
the Manager from time to time may select.
Section 2.5 TERM. The Company commenced on the date of the filing of
the Certificate of Formation, and the term of the Company shall continue until
the close of business on January 31, 2075, subject to extension under Section
9.1(a), or until the earlier dissolution of the Company in accordance with the
provisions of ARTICLE IX or as otherwise provided by law.
Section 2.6 MEMBERS. The Members of the Company as of the date of
this Agreement are BN Holding, USO and the Public Corp. Subject to the prior
written consent of all Members, a new Person may be admitted from time to time
as a Member; provided, however, that each such new Member shall execute an
appropriate supplement to this Agreement pursuant to which the new Member
agrees to be bound by the terms and conditions of this Agreement, as it may be
amended from time to time. Admission of a new Member shall not be cause for the
dissolution of the Company.
Section 2.7 PLACE OF MEMBERS' MEETINGS. Meetings of the Members
(each, a "Members' Meeting") shall be held at the principal office of the
Company, or at such other place as the Members shall mutually agree.
Section 2.8 MEETINGS. A Members' Meeting may be called by any Member
for any matter which is appropriate for consideration thereat. Members'
Meetings shall be held from time to time, but no fewer than once in each
calendar year. Meetings shall be chaired by the Chairman of the Company, and
the Secretary of the Meeting shall be appointed by the Chairman.
Section 2.9 TELEPHONIC MEETINGS. Members' Meetings may be held
through the use of conference telephone or similar communications equipment so
long as all Persons participating in such Members' Meetings can hear one
another at the time of such Members' Meeting. Participation in a Members'
Meeting via conference telephone or similar communications equipment in
accordance with the preceding sentence constitutes presence in person at the
Members' Meeting.
Section 2.10 NOTICE OF MEETINGS. Written notice of each Members'
Meeting shall state the place, date and hour of such Members' Meeting, and the
general nature of the business to be transacted. Notice shall be given in the
manner prescribed in Section 11.2 not fewer than ten (10) days nor more than
sixty (60) days before the date thereof.
Section 2.11 WAIVERS. Notice of a Members' Meeting need not be given
to any Member who signs a waiver of notice, in person or by proxy, whether
before or after the
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Members' Meeting. The attendance of any Member at a Members' Meeting, in
person or by proxy, without protesting prior to the conclusion of such Members'
Meeting the lack of notice of such Members' Meeting, shall constitute a waiver
of notice by such Member, provided that such Member has been given an adequate
opportunity at the meeting to protest such lack of notice.
Section 2.12 QUORUM. Members holding a majority of the Membership
Units shall constitute a quorum at a Members' Meeting for the transaction of
any business; provided, however, that in order to constitute a quorum, each of
such Members must be represented in person or by proxy. Holders of a majority
of such Membership Units present may adjourn the Members' Meeting, whether or
not a quorum is present. An adjournment may include notice of the date, hour
and place that the Members shall reconvene. Notice of the adjournment (with the
new date, time and place) shall be given to all Members who were absent at the
time of the adjournment and, unless such date, hour and place are announced at
the Members' Meeting, to the other Members.
Section 2.13 PROXIES. Every Member entitled to vote at a Members'
Meeting may authorize another Person or Persons to act for it by proxy. Every
proxy must be signed by the Member or his attorney-in-fact. No proxy shall be
valid after the expiration of eleven (11) months from the date thereof unless
otherwise provided in the proxy. Every proxy shall be revocable in writing at
the pleasure of the Member executing it.
Section 2.14 VOTING POWER. Each Membership Unit shall be entitled to
one (1) vote on all matters to be voted on by the Members.
Section 2.15 WRITTEN CONSENT. Any action required or permitted to be
taken at any Members' Meeting may be taken without a meeting if all Members
consent thereto in writing. Any such written consents shall be filed with the
minutes of the proceedings.
ARTICLE III. MANAGER; POWERS
Section 3.1 MANAGER
(a) The business, property and affairs of the Company shall
be managed under the direction of the Manager.
(b) Without limiting the foregoing provisions of this Section
3.1, the Manager shall have the general power to manage or cause the management
of the Company within the scope of the business purpose set forth in Section
2.3, including the following powers which may, subject to any limitations set
forth in this Agreement (including those set forth in Sections 4.3 and 4.4), be
delegated to the officers of the Company:
(i) to have developed and prepared a Business Plan
each year which will set forth the operating goals and plans for the Company;
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(ii) to execute and deliver or to authorize the
execution and delivery of contracts, deeds, leases, licenses, instruments of
transfer and other documents in the ordinary course of business on behalf of
the Company;
(iii) to employ, retain, consult with and dismiss
such personnel as may be required for accomplishment of the business purpose
set forth in Section 2.3;
(iv) to establish and enforce limits of authority
and internal controls with respect to all personnel and functions;
(v) to engage attorneys, consultants and accountants
for the Company;
(vi) to develop or cause to be developed accounting
procedures for the maintenance of the Company's books of account;
(vii) to appoint auditors; and
(viii) to do all such other acts as shall be
specifically authorized in this Agreement or by the Members in writing from
time to time.
Section 3.2 COMPENSATION. The Manager shall not be entitled to
compensation for services rendered to the Company in its capacity as Manager.
ARTICLE IV. OFFICERS
Section 4.1 OFFICERS. The officers of the Company (the "Officers")
shall at all times be identical to the then officers of the Public Corp. Any
changes in the officers of the Public Corp., whether by election, resignation,
removal, death or otherwise, shall automatically and concurrently take effect
with respect to the Officers of the Company. No Officer may resign unless such
Officer concurrently resigns as an officer of the Public Corp. Any resignation
by an Officer shall constitute such Officer's concurrent resignation from the
Public Corp.
Section 4.2 MANAGEMENT POLICIES. The Chief Executive Officer and other
officers and employees of the Company shall develop and implement management
policies consistent with the general policies and programs established by the
Chairman of the Company and the Manager, as approved, in accordance with the
By-laws, by its Board of Directors and, where required by the By-laws, the
Special Committee (as defined in the By-laws).
ARTICLE V. FINANCE AND CAPITAL
Section 5.1 CAPITAL CONTRIBUTIONS. The Members have made, on or prior
to the date hereof, capital contributions and have acquired the number of
Membership Units as specified opposite their respective names on Schedule I.
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Section 5.2 ADDITIONAL CAPITAL CONTRIBUTIONS. Except as set forth in
Section 10.5, no Member shall be required or permitted to make additional
capital contributions to the Company without the consent of all of the Members.
Section 5.3 MEMBERS' CAPITAL ACCOUNTS. No Member shall have any right
to withdraw any portion of its Capital Account, except as otherwise provided
herein. For purposes hereof, "Capital Account" shall mean the separate capital
account maintained for each Member in accordance with Treasury Regulations (as
hereinafter defined) Section 1.704-1(b), as of any particular date. Each
Member's initial Capital Account (as determined immediately after all of the
events described in Section 5.1 hereof) is set forth on Schedule I, which
initial Capital Accounts apply the principles of Treasury Regulation Section
1.704-1(b)(2)(iv)(d) and thereafter such Capital Accounts shall be adjusted as
follows:
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(a) The Capital Account of each Member shall be increased by:
(i) The amount of any Net Profits (and any items of
income or gain), allocated on or after the date hereof to such Member;
(ii) The amount, if any, of any Company liabilities
assumed by such Member or taken subject to or in connection with the
distribution of property to such Member by the Company on or after the date
hereof;
(iii) The amount of any cash contributed by the
Member to the Company; and
(iv) The fair market value of property contributed
to the Company by such Member on or after the date hereof.
(b) The Capital Account of each Member shall be decreased by:
(i) The amount of cash distributed to such Member by
the Company on or after the date hereof;
(ii) The amount of any Net Losses (and any items of
deduction or loss) allocated to such Member on or after the date hereof;
(iii) The fair market value of any property
distributed to such Member by the Company on or after the date hereof; and
(iv) The amount of any liabilities of such Member
assumed by the Company or taken subject to or in connection with the
contribution of property by such Member to the Company on or after the date
hereof.
The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Treasury Regulations under Section 704(b) of the Code and, to the extent not
inconsistent with the provisions of this Agreement, shall be interpreted and
applied in a manner consistent with such Treasury Regulations.
Section 5.4 PROFITS/LOSSES.
(a) Allocation of Income and Loss.
(i) Net Profits shall be allocated among the Members
in proportion to their Percentage Interests.
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(ii) Net Losses shall be allocated among the Members
in proportion to their Percentage Interests.
(iii) Whenever a proportionate part of the Net
Profits or Net Losses is allocated to a Member, every item of income, gain,
loss, deduction or credit entering into the computation of such Net Profits or
Net Losses or arising from the transactions with respect to which such Net
Profits or Net Losses were realized shall be credited or charged, as the case
may be, to such Member in the same proportion; provided, however, that
"recapture income", if any, shall be allocated to the Members who were
allocated the corresponding depreciation deductions.
(iv) If any Member Transfers all or any portion of
its Membership Units during any Fiscal Year, Net Profits and Net Losses
attributable to such transferred Membership Units for such Fiscal Year shall be
apportioned between the transferor and the transferee or computed as to such
Members on the basis of an interim closing of the books and records of the
Company, provided in all events that any apportionment described above shall be
permissible under the Code and applicable regulations thereunder.
(b) Tax credits, if any, shall be allocated among the Members
in proportion to their Percentage Interests.
(c) When the Gross Asset Value of a Company asset differs
from its basis for federal or other income tax purposes, solely for purposes of
the relevant tax and not for purposes of computing Capital Account balances,
income, gain, loss, deduction and credit with respect to such asset shall be
allocated among the Members under the remedial allocation method under Treasury
Regulation Section 1.704-3(d). The Members agree that, as of October 31, 1998,
all such differences related to goodwill, and the corresponding remedial
allocations shall be made ratably over a fifteen (15) year period.
(d) Determinations by the Members. All matters concerning the
allocation of Net Profits and Net Losses (and items of income, gain, loss and
deduction) among the Members, tax elections (except as may otherwise be
required by the income tax laws) and accounting procedures not expressly and
specifically provided by the terms of this Agreement, shall be determined in
good faith by the Manager, and on a basis which is in conformity with the
requirements imposed under Code Section 704 and the Treasury Regulations
thereunder as equitably applied among the Members.
(e) Interest. Except for interest payable pursuant to Member
loans permitted to be made hereunder, no interest shall be paid by the Company
on capital contributions, balances in Member's Capital Accounts or any other
funds contributed to the Company or distributed or distributable by the Company
under this Agreement.
(f) Minimum Gain Chargeback. Notwithstanding any provision of
Section 5.4, if there is a net decrease in Minimum Gain during a Tax Year of
the Company (including any Minimum Gain attributable to Member-Funded Debt),
each Member at the end of such year shall be allocated, before any other
allocations of Net Profits or Net Losses for such year, items of
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income and gain for such year (and, if necessary, subsequent years) in the
amount and in the proportions described in Section 1.704-2(f) of the Treasury
Regulations.
(g) Qualified Income Offset. Notwithstanding the allocations
provided for in Section 5.4(a), (b), (c), (d) or (e), no allocation of an item
of loss or deduction shall be made to a Member to the extent such allocation
would cause or increase a deficit Capital Account balance in such Member's
Capital Account as of the end of the Tax Year to which such allocation relates,
after taking into account any adjustment, allocation or distribution described
in Section l.704-1(b)(2)(ii)(d)(4), (5) or (6) of the Treasury Regulations and
such losses or deductions shall be allocated to other Members in accordance
with the positive balances in such Members' capital accounts so as to allocate
the maximum permissible losses or deductions to each Member under Treasury
Regulation 1.704-1(b)(2)(ii)(d). If any such adjustment, allocation or
distribution unexpectedly occurs, the Members shall be allocated items of
income and gain in an amount and manner to eliminate any Capital Account
deficit attributable to such adjustment, allocation or distribution as quickly
as possible. For purposes of this Section 5.4(g), there shall be excluded from
a Member's deficit Capital Account balance at the end of a Tax Year of the
Company: (x) such Member's share, determined in accordance with Section 704(b)
of the Code and Section 1.704-2(g) of the Treasury Regulations, of Minimum Gain
(provided that in the case of Minimum Gain attributable to Member-Funded Debt,
such Minimum Gain shall be allocated only to the Member or Members to which
such debt is attributable pursuant to Section 1.704-2(i) of the Treasury
Regulations); (y) the amount of any loans (other than Member-Funded Debt) for
which such Member is personally liable (whether as a result of a guarantee or
otherwise); and (z) the amount such Member is obligated to restore to the
Company under Section 1.704-l(b)(2)(ii) of the Treasury Regulations.
(h) Member-Funded Debt. Notwithstanding the allocations
provided for in Section 5.4(a), (b), (c), (d) or (e), if there is a net
increase in Minimum Gain during a Tax Year of the Company that is attributable
to Member-Funded Debt then, first depreciation, to the extent the increase in
such Minimum Gain is allocable to depreciable property, and then a
proportionate part of other deductions and expenditures described in Section
705(a)(2)(B) of the Code, shall be allocated to the lending or guaranteeing
Member, provided that, the total amount of deductions so allocated for any year
shall not exceed the increase in Minimum Gain attributable to such
Member-Funded Debt in such year.
(i) Regulatory Allocations. The allocations set forth in
Sections 5.4(f), (g), (h) and (k) (the "Regulatory Allocations") are intended
to comply with certain requirements of Section 1.704-1(b) of the Treasury
Regulations. The Regulatory Allocations shall be taken into account in
allocating other Net Profits and Net Losses and items of income, gain, loss and
deduction so that, to the extent possible, the net amount of such other
allocations and the Regulatory Allocations to each Member shall be equal to the
net amount that would have been allocated to such Member if the Regulatory
Allocations had not been made.
(j) Special Allocations. With respect to Company assets as of
October 31, 1998 that are subject to Section 5.4(c), if the remedial allocation
provisions of Section 5.4(c) or the provisions of Section 6.8(b) shall not
apply in the manner contemplated by BN Holding
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and USO, then notwithstanding Section 5.4(a), Net Profits and Net Losses or
items of income, gain, deduction or loss otherwise allocable to BN Holding and
USO shall be allocated between BN Holding and USO so that the tax consequences
are as nearly as possible identical to those tax consequences contemplated by
BN Holding and USO.
(k) Section 754 Adjustments. To the extent an adjustment to
the adjusted tax basis of any Company asset pursuant to Code Section 734(b) or
Code Section 743(b) is required, pursuant to Treasury Regulation Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining capital accounts,
the amount of such adjustment shall be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the adjustment
decreases such basis) and such gain or loss shall be allocated to the Members
in accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(m).
Section 5.5 BANKING; INVESTMENTS. All funds of the Company shall be
deposited in such bank account or accounts, or invested, and withdrawals from
any such bank account shall be made upon such signature or signatures, as shall
be established and designated by the Manager, subject to any approval by the
Special Committee required by the By-laws.
Section 5.6 DISTRIBUTIONS.
(a) Except as otherwise required by law or as provided in
this Agreement, no Member shall have any right to withdraw any portion of its
Capital Account without the consent of all the other Members.
(b) The Company shall distribute Distributable Cash to each
Member in proportion to such Member's Percentage Interest, at such times and in
such amounts as the Manager shall determine.
(c) Notwithstanding the foregoing, if as a result of any Net
Profits allocated to the Public Corp., after giving effect to all cumulative
Net Losses allocated to the Public Corp. available to the Public Corp. to
offset any such Net Profits, the Public Corp. is obligated to pay any federal,
state or local income taxes, then the Company shall distribute Distributable
Cash as follows:
(i) Within ten (10) days following the manager's
receipt of written notice from the Public Corp. stating that it
requires funds to pay federal, state or local income taxes (taking
into account any required estimated payments), the Manager shall
determine the amount of funds which the Public Corp. requires to pay
such taxes, after giving effect to the amount of cumulative Net Losses
then available to the Public Corp. (the "Tax Amount"); and
(ii) The Company shall distribute to each Member an
amount equal to: (x) the Percentage Interest of such Member multiplied
by a collective amount (the "Collective Amount") equal to (y) the Tax
Amount divided by (z) the Percentage Interest of the Public Corp.
(expressed as a decimal). In the event that the Collective Amount
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distributable to all Members pursuant to the preceding sentence
exceeds the amount of Distributable Cash, the amount otherwise
distributable to each Member shall be multiplied by a fraction, the
numerator of which shall be the Distributable Cash and the denominator
of which shall be the Collective Amount. The distribution under this
provision shall be made prior to each such required due date.
Section 5.7 RETURN OF CONTRIBUTION. Except as required by the LLCL, no
Member shall be personally liable for the return of any capital contribution,
or any portion thereof, or the return of any additions to the Capital Accounts
of the other Members, or any portion thereof, it being agreed that any return
of capital as may be made at any time, or from time to time, shall be made
solely from the assets of the Company, and only in accordance with the terms
hereof.
ARTICLE VI. ACCOUNTING; TAX MATTERS
Section 6.1 BOOKS; FISCAL YEAR. The Company shall maintain complete
and accurate books of account of the Company's affairs at the Company's
principal place of business. Such books shall be kept in accordance with U.S.
GAAP. The Company's accounting period for tax purposes shall be the Tax Year.
The Company's accounting year for all other purposes shall be the Fiscal Year,
however, the Company shall also report its results for the twelve (12) month
period ended as of June 30 of each year to BAG in German GAAP.
Section 6.2 REPORTS. The Company shall close the books of account
after the close of each month in each Fiscal Year. The Company shall prepare
and distribute to each Member a monthly statement of such Member's distributive
share of income and expense for income tax reporting purposes, as well as a
report on sales, income, expenses and other reports as are normally prepared
for USO, BN Holding and the Public Corp. and in sufficient detail to permit
each of USO, BN Holding and the Public Corp. to report its respective share of
income, expense and such other GAAP items as each of USO, BN Holding and the
Public Corp. may reasonably request. Such information shall be made available
to each Member no later than fourteen (14) days after the end of each month
(provided that the Company shall have twenty-one (21) days until June 30, 1999
and eighteen (18) days until December 31, 1999, respectively, after each month
end) and no later than August 15 of each Fiscal Year in respect of such Fiscal
Year. After the end of each Fiscal Year, the Company shall send to each Member
a report indicating such information with respect to the Member as is necessary
for purposes of reporting such amounts for federal, state and local income tax
purposes.
Section 6.3 COMPANY INFORMATION. Upon reasonable request, the Company
shall supply to any Member information regarding the Company, its sales,
receipts, payments, all accounting information and records as well as all
activities of the Company. Each Member and its representatives shall have free
access during normal business hours to discuss the operations and business of
the Company with employees or agents of the Company, and to inspect, audit or
make copies of all books, records and other information relative to the
operations and business of the Company at their own expense; provided, however,
that each Member shall preserve the
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confidentiality of such information. The Chairman or the Chief Executive
Officer of the Company shall provide all information requested by a Member.
Section 6.4 RECORDS. The Company shall keep or cause to be kept
appropriate books and records in accordance with the LLCL with respect to the
Company's business, which books and records shall at all times be kept at the
principal office of the Company. Without limiting the foregoing, the Company
shall keep at its principal office the following:
(a) a current list of the full name and the last known street
address of each Member;
(b) a copy of the Certificate of Formation and this Agreement
and all amendments thereto;
(c) copies of the Company's federal, state and local income
tax returns and reports, if any, for the three most recent Tax Years;
(d) copies of any financial statements, if any, of the
Company for the six most recent Fiscal Years; and
(e) such other documents with respect to the Company's
business as may reasonably be required from time to time by the Manager.
Section 6.5 TAX CHARACTERIZATION. It is intended that the Company be
characterized and treated as a partnership for, and solely for, U.S. federal,
state and local income tax purposes. For such purpose, (i) the Company shall be
subject to all the provisions of Subchapter K of Chapter 1 of Subtitle A of the
Code, and (ii) all references to a "Partner," to "Partners" and to the
"Partnership" in the provisions of the Code and Treasury Regulations cited in
this Agreement shall be deemed to refer to a Member, Members and the Company,
respectively.
Section 6.6 TAX RETURNS. The Members shall provide each other with
copies of all correspondence or summaries of other communication with any
taxing authority regarding any aspect of items of Company income, gain, loss or
deduction and no Member shall enter into settlement negotiations with respect
to the tax treatment of any Company item of income, gain, loss or deduction
without first giving reasonable advance notice of such intended action to the
other Members.
Section 6.7 TAX MATTERS PARTNER. Pursuant to Code Section
6231(a)(7)(A), the Public Corp. shall be the "Tax Matters Partner" of the
Company for all purposes of the Code and any corresponding state or local
statute. Each Member consents to such designation and agrees to take such
further action as may be required, by regulation or otherwise, or as may be
requested by any Member, to effectuate such designation. The Tax Matters
Partner shall cooperate with the other Members and shall promptly provide the
other Members with copies of notices or other materials from, and inform the
other Members of discussions engaged in with,
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any taxing authority and shall provide the other Members with notice of all
scheduled administrative proceedings, including meetings with agents, technical
advice conferences and appellate hearings, as soon as possible after receiving
notice of the scheduling of such proceedings. The Tax Matters Partner will
schedule such proceedings only after consulting the other Members with a view
to accommodating the reasonable convenience of both the Tax Matters Partner and
the other Members. The Tax Matters Partner shall not agree to extend the period
of limitations for assessments; file a petition or complaint in any court; file
a request for an administrative adjustment of partnership items after any
return has been filed; or enter into any settlement agreement with respect to
Company items of income, gain, loss or deduction except at the direction of the
Members. The Tax Matters Partner may request extensions to file any tax return
or statement without the written consent of, but shall so inform, the other
Members. The provisions of this Agreement regarding the Company's tax returns
shall survive the termination of the Company and the transfer of any Member's
interest in the Company and shall remain in effect for the period of time
necessary to resolve any and all matters regarding the taxation of the Company
and items of Company income, gain, loss and deduction.
Section 6.8 TAX ELECTIONS.
(a) The Manager shall determine whether to make any available
tax election.
(b) Effective for its Tax Year ended June 30, 1999, the
Company shall file with its tax return a written statement (the "Section 754
Election"), signed by the Manager, setting forth (i) the name and address of
the Company, (ii) a declaration that the Company elects under ss. 754 to apply
the provisions of Section 734(b) and Section 743(b) and (iii) such other
information as may be required under Treas. Reg. Section 1.754-1. The Company
shall allocate such special basis adjustments under Section 734(b) and Section
743(b) pursuant to Section 755.
(c) The Company shall pay all costs incurred by the Company
in connection with such special basis adjustments arising from such permitted
ownership Transfers or distributions, including reasonable attorneys' and
accountants' fees. In addition, both the transferor and the transferees of a
permitted ownership interest Transfer (or the transferee of any Company
distribution) shall (within sixty (60) days of such permitted Transfer or
distribution), provide the Company with complete and accurate information
regarding such Transfer (or distribution) to enable the Company to make special
basis adjustments and other computations in connection therewith.
Section 6.9 WITHHOLDING. Each Member hereby authorizes the Company to
withhold from or pay on behalf of or with respect to such Member any amount of
federal, state, local or foreign taxes that the Manager determines that the
Company is required to withhold or pay with respect to any amount distributable
or allocable to such Member pursuant to this Agreement, including any taxes
required to be withheld by the Company pursuant to Sections 1441, 1442, 1445 or
1446 of the Code. Any amount paid on behalf of or with respect to a Member
shall constitute a loan by the Company to such Member, which loan shall be
repaid by such Member within fifteen (15) days after notice from the Manager
that such payment must be made unless (a) the Company withholds such payment
from a distribution which would
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otherwise be made to such Member or (b) the Manager determines, in its sole
discretion, that such payment may be satisfied out of the available funds of
the Company which would, but for such payment, be distributed to such Member.
Any amounts withheld pursuant to the foregoing clauses (a) and (b) of this
Section 6.9 shall be treated as having been distributed to such Member.
ARTICLE VII. TRANSFERS/EXCLUSIVITY/NONCOMPETITION
Section 7.1 PROHIBITED TRANSFERS. Except as expressly permitted in
this Agreement, no Restricted Member or any of their respective Affiliates,
including any direct or indirect beneficial owner or ultimate parent of any
such entity (including BN and BAG), shall, directly or indirectly, Transfer any
of the right, title or interest in (i) any Membership Units or (ii) any of
their Affiliates which beneficially own, either directly or indirectly, any
Membership Units.
Section 7.2 PERMITTED TRANSFERS. Notwithstanding anything in this
Agreement to the contrary:
(a) Each Restricted Member may Transfer all (but not less
than all) of the Membership Units owned by it and its rights under this
Agreement under any of the following circumstances:
(i) Each Restricted Member may Transfer all (but not
less than all) of the Membership Units owned by it together with its rights
under this Agreement to any transferee which is an Affiliate of the
transferring Member provided that no Restricted Transferee owns an interest in
such transferee.
(ii) Each Restricted Member (or any permitted
transferee under clause (a) above) may Transfer all (but not less than all) of
the Membership Units owned by it together with its rights under this Agreement
if such Transfer is part of the Transfer (i) by BAG and its Affiliates of all
(or substantially all) of the publishing business in the United States,
operated by BAG and its Affiliates, or (ii) by BN and its Affiliates, of all
(or substantially all) of its retail book store business.
(iii) In the event of any such Transfer, a transferee
(or subsequent transferee) shall be entitled to the rights and privileges set
forth in this Agreement and shall be bound and obligated by the provisions of
this Agreement. As a condition to such Transfer permitted pursuant to this
Section 7.2(a), each transferee shall, prior to such transfer, agree in writing
to be bound by all of the provisions of this Agreement and no such transferee
shall be permitted to make any Transfer which the original transferor was not
permitted to make. In connection with any Transfer pursuant to this Section
7.2(a), the transferee shall execute and deliver to the non-transferring
Members and the Company such documents as may reasonably be requested by the
non-transferring Members or the Company to evidence the same.
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(b) Each Restricted Member may Transfer some or all of the
Membership Units owned by it to the other Restricted Member.
(c) Any Restricted Member may Transfer some or all of the
Membership Units owned by it to the Public Corp. in exchange for Class A Common
Stock in accordance with the Certificate of Incorporation.
Section 7.3 RIGHTS OF FIRST REFUSAL.
(a) Except with respect to Transfers permitted pursuant to
Sections 7.2, if, on or after October 31, 1999, a Restricted Member desires to
Transfer any of its Membership Units to any other Person (other than a
Restricted Transferee) in a bona fide transaction solely for cash
consideration, such Member (the "Offeror") shall be entitled to do so provided
that such Offeror first offers to sell such Membership Units to the other
Restricted Member (the "Offeree") at the same price and the same terms and
conditions as the Offeror would receive from such other Person. If the Offeror
shall Transfer Membership Units which are equal to more than ten percent (10%)
of the then aggregate outstanding Membership Units, the member of the Special
Committee elected by the BN Directors (if BN Holding or its Affiliate is the
Offeror) or by the USO Directors (if USO or its Affiliate is the Offeror) shall
be deemed to have resigned effective immediately upon such Transfer. The
Offeror shall submit to the Company and the Offeree a written notice (the
"Offer Notice") stating in reasonable detail such price and such terms and
conditions and identifying the Person and all Persons who beneficially own more
than five percent (5%) of such Person, proposing to purchase the Membership
Units. The Offeree shall have a period of thirty (30) days after the receipt of
the Offer Notice in which to accept or reject such offer. If the Offeree elects
to accept such offer, which acceptance must be for all and not part of the
Membership Units offered for sale, it shall so indicate within such thirty (30)
day period by notice to the Offeror. The notice required to be given by the
Offeree shall specify a date for the closing of the purchase which, subject to
the expiration or early termination of any waiting period required by any
Governmental Body and the receipt of any required approvals of any Governmental
Body, shall not be more than thirty (30) days after the date of the giving of
such notice.
(b) If the Offeree does not exercise its right to purchase
all of the Membership Units offered for sale pursuant to the provisions of this
Section 7.3, the Offeror of such Membership Units shall have the right to sell
all (but not less than all) of such offered Membership Units to the Person
identified in the Offer Notice, subject to the provisions of this Agreement on
the same terms and conditions including the Membership Unit price as specified
in the Offer Notice, free from the restrictions of Section 7.1 of this
Agreement (for purposes of such specific transaction, but not for purposes of
any subsequent transaction) in a bona fide transaction, for a period of ninety
(90) days from the date that the Offer expires hereunder, provided that any
such purchaser shall, prior to such transfer, agree in writing to be bound by
all of the provisions of this Agreement. At the end of such ninety (90) day
period, the Offeror shall notify the Company and the other Member in writing
whether its Membership Units have been sold in a bona fide transaction during
such period. To the extent not sold during such ninety (90)
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day period, all of such Membership Units shall again become subject to all of
the restrictions and provisions hereof.
(c) The purchase price per unit for the Membership Units
shall be the price per unit offered to be paid by the prospective transferee
described in the Offer Notice, which price shall be paid in cash.
(d) The closing of the purchase shall take place at the
office of the Company or such other location as shall be mutually agreeable and
the purchase price shall be paid at the closing by wire transfer of immediately
available funds. At the closing, the Offeror shall deliver to the Offeree the
certificates evidencing the Membership Units to be conveyed, duly endorsed and
in negotiable form as well as the items listed in Section 7.4.
Section 7.4 CLOSING DELIVERIES. The Offeror at a closing under this
ARTICLE VII shall deliver to the Purchaser the following:
(a) A duly executed "Deed of Transfer of Membership Units"
and the certificates representing such Membership Units, duly endorsed for
transfer, conveying to the Offeree the Membership Units being purchased by the
Offeree, free and clear of any Encumbrances, except those in this Agreement
which are expressly assumed.
(b) A statement from the Offeror that: (i) except as set
forth therein, the Offeror has no claim as against the Company for unpaid
dividends, compensation, bonuses, profit-sharing or rights or other claims of
whatsoever kind, nature or description and that all amounts due and payable by
the Company to the Offeror have been paid; and (ii) it shall guarantee the
performance of the Offeror's obligations under this Agreement.
Section 7.5 EXCLUSIVITY. The Members agree that the following
provisions shall be applicable during such time as BN and BAG (directly or
indirectly through its respective Affiliates) own Membership Units:
(a) The Company shall be the exclusive vehicle for each of BN
and BAG (and their respective Affiliates) to engage in the Business with
respect to English Language Books in English-Speaking Countries (as defined
below), except that BAG (and its Affiliates) may engage in the sale of English
Language Books through BOL.UK, BOL.Australia and BOL.New Zealand in accordance
with the provisions set forth in Section 2.3(e). For purposes of this
Agreement, "English-Speaking Countries" shall mean the U.S., Canada, the U.K.,
Australia and New Zealand.
(b) BN (and its Affiliates) shall not engage in the: (i) sale
of Foreign Language Books through Websites except through links to Websites
operated by BAG and its Affiliates; or (ii) establishment or operation of Book
Clubs through Websites.
(c) Notwithstanding any provision of this Agreement to the
contrary:
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(i) Either BN or BAG (or its respective Affiliates)
may engage in any activity described in clauses (1), (2), (4) (provided that
Websites may only be used for e-mail purposes in connection with operations
described in clause (4)) or (5) of the definition of Business;
(ii) BAG (or its Affiliates) may engage in any
activity described in clause (3) of the definition of Business;
(iii) BAG (or its Affiliates) may engage in the sale
to consumers through Websites of English Language Books, which are published by
BAG, or its Affiliates, at such times as unrelated third party publishers
(which are regarded as major publishers by industry sources) are engaged in
such sales activity;
(iv) BN (or its Affiliates) may engage in the sale to
consumers through Websites of English Language Books which are published by BN
(or its Affiliates), at such times as unrelated third party publishers (which
are regarded as major publishers by industry sources) are engaged in such sales
activity;
(v) Either BAG or BN (or its respective Affiliates)
may engage in the distribution of videos, music, software or magazines
independent of the Company;
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(vi) BAG (or its Affiliates) or BN (or its Affiliates)
may engage in the following activities relating to sale, distribution or
delivery of electronic or digitized material:
1) the actual act of transforming copyrighted
material into electronic or digitized form;
2) the services involved in providing
clearinghouse functions; and
3) the offering of such electronic or digitized
materials to wholesalers, retailers, distributors or consumers, whether through
Websites or otherwise, including (but with respect to BAG and its Affiliates
only) through Book Clubs, but only to the extent that the offering party is the
publisher of such material;
(vii) With respect to countries that are not
English-Speaking Countries, BAG (and its Affiliates) may sell English language
books without restriction, subject only to the provisions set forth in Section
2.3(e); and
(viii) Each of the Members acknowledges and agrees
that good faith de minimus sales that would otherwise constitute a violation of
this Section 7.5 shall not be considered to be such a violation.
Section 7.6 EXCEPTIONS TO EXCLUSIVITY.
Notwithstanding anything in this Agreement to the contrary, the
following shall be exempt from the restrictions set forth in Section 7.5:
(a) Any Person in which either BAG, BN, or any of their
respective Affiliates owns:
(i) ten percent (10%) or less, in case the primary
activity of such Person is the Business. For purposes of the preceding
sentence, the primary activity of a Person shall be deemed to be the Business
only if it derives twenty-five percent (25%) or more of its net revenues from
the conduct of Business for the fiscal year of such Person preceding the
acquisition;
(ii) twenty percent (20%) or less, in the case of any
Person the primary activity of which involves or is focused on sectors outside
of the Business and where the contribution from the Business, in net revenues,
is less than twenty-five percent (25%) (on a consolidated basis) but more than
ten percent (10%) (on a consolidated basis) for the fiscal year of such Person
preceding the acquisition;
(iii) any percentage of another Person, without
limitation, if the net revenues of such Person from the conduct of Business (on
a consolidated basis) is less than ten
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percent (10%) of its total net revenues for the fiscal year of such Person
preceding the acquisition; or
(iv) any acquisition of another Person where such
Person is directly engaged in the Business (directly or through one or more
units) to an extent greater than that permitted by the above provisions of this
Agreement provided that, within a period of twelve (12) months after the date
of the acquisition, the acquiring party either: (a) makes an orderly
divestiture of such portions of the acquired business which are conducted by
the acquired Person or its Affiliates to a third party; or (b) the acquiring
party offers and sells such identifiable unit which is engaged in the Business
to the Company. In case an offer is made to the Company under the preceding
sentence, the purchase price shall be determined by the offering party subject
to acceptance, on behalf of the Company, by Managers who are not appointed by
the offering party.
(v) For purposes of this Section, the ownership
interest of each of BN and BAG, respectively, shall be aggregated with the
ownership interest of any Person in which it directly or indirectly through a
chain of other Persons owns an interest of fifty percent (50%) or more.
Section 7.7 NONCOMPETITION AFTER SALE OF MEMBERSHIP UNITS.
The restrictions set forth in Section 7.5 , and the provisions of
Sections 2.3(c), (d), and (e), shall apply to a Restricted Member at all times
during which:
(a) such Member owns Membership Units; and
(b) for two (2) years after the date on which such Member
ceases to own at least ten percent (10%) of the total Membership Units
outstanding.
ARTICLE VIII. LIMITED LIABILITY; INDEMNIFICATION
Section 8.1 LIMITED LIABILITY. Except as otherwise provided under the
LLCL, the debts, obligations and liabilities of the Company, whether arising in
contract, tort or otherwise, shall be solely the debts, obligations and
liabilities of the Company and neither any Member nor the Manager shall be
obligated or liable for any such debt, obligation or liability of the Company.
Except as otherwise provided by the laws of the State of Delaware, the debts,
obligations and liabilities of any Member, whether arising in contract, tort or
otherwise, shall be solely the debts, obligations and liability of such Member
and neither any Member, the Manager (in its capacity as such) nor the Company
shall be obligated or liable for any such debt, obligation or liability of such
Member.
Section 8.2 INDEMNIFICATION.
(a) The Company shall indemnify, defend and hold harmless any
Member, the Manager or other Person (and any of their respective officers,
directors, managers, employees
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and agents), who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that he, she or it is or was a
Member, the Manager, or an officer, director, manager, employee or agent of the
Company, the Manager or any Member, or is or was serving at the request of the
Company as a director, officer, manager, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, from and
against expenses (including attorneys' fees and expenses), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such Person in
connection with such claim, action, suit or proceeding if such Person acted in
good faith and in a manner such Person reasonably believed to be in, or not
opposed to, the best interests of the Company, and, with respect to any
criminal sanction or proceeding, had no reasonable cause to believe that his,
her or its conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the Person did not act in good faith and in a manner which he, she or it
reasonably believed to be in, or not opposed to, the best interests of the
Company, and, with respect to any criminal action or proceeding, had reasonable
cause to believe that his, her or its conduct was unlawful.
(b) Expenses incurred in defending a civil or criminal
action, suit or proceeding shall be paid by the Company in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking
by or on behalf of any Member, the Manager, or any officer, director, manager,
employee or agent of the Company, the Manager or any Member to repay such
amount if it shall be ultimately determined by a court of competent
jurisdiction from which no further appeal may be taken or the time for appeal
has lapsed that such Person is not entitled to be indemnified by the Company
pursuant to the terms and conditions of this Section 8.2.
(c) The Company shall maintain insurance on behalf of any
Person who is or was a Member, the Manager, or an officer, director, employee
or agent of the Company, the Manager or any Member, or is or was serving at the
request of the Company as an officer, director, manager, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against and incurred by such Person in any such
capacity, or arising out of such Person's status as such, whether or not the
Company would have the power to indemnify such Person against such liability
under this Section 8.2.
(d) The indemnification and advancement of expenses provided
by, or granted pursuant to, this Section 8.2 shall continue as to a Person who
has ceased to be a Member, the Manager, or any officer, director, manager,
employee or agent of the Company, the Manager or any Member, and shall inure to
the benefit of the heirs, executors, administrators and other legal successors
of such Person.
(e) The indemnification provided by this Section 8.2 shall
not be deemed exclusive of any other rights to indemnification to which those
seeking indemnification may be entitled under any agreement, determination of
Members or otherwise.
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(f) Any indemnification hereunder shall be satisfied only out
of the assets of the Company (including insurance and any agreements pursuant
to which the Company and indemnified Persons are entitled to indemnification),
and the Members shall not, in such capacity, be subject to personal liability
by reason of these indemnification provisions.
(g) No Person shall be denied indemnification in whole or in
part under this Section 8.2 because such Person had an interest in the
transaction with respect to which the indemnification applies if the
transaction was otherwise permitted by the terms of this Agreement.
ARTICLE IX. DISSOLUTION; LIQUIDATION
Section 9.1 DISSOLUTION. The Company shall be dissolved and its
affairs wound up, upon the first to occur of any of the following events (each
of which shall constitute a "Dissolution Event"):
(a) The expiration of the term set forth in Section 2.5
hereof unless the Company is continued with the consent of all Members;
(b) The written consent of all Members;
(c) The entry of a decree of judicial dissolution with
respect to the Company;
(d) Any event which makes it unlawful for the business of the
Company to be carried on by the Members;
(e) Any other event not inconsistent with any provision
hereof causing a dissolution of a limited liability company under the LLCL; or
(f) The Bankruptcy of any Member; provided, however, that
upon any such event, the Company shall be deemed dissolved, but such
dissolution shall not cause the termination of the Company, it being understood
and agreed that, upon any such dissolution, the remaining Members may elect to
continue to carry on the Company business pursuant to, and subject to, all of
the terms and provisions of this Agreement.
Section 9.2 WITHDRAWAL OF MEMBERS. No Member shall have the right to
voluntarily withdraw as a Member of the Company other than following the sale
of all Membership Units owned by such Member, which sale shall be in accordance
with ARTICLE VII. Prior to October 31, 2008, no Member shall seek a decree of
judicial dissolution with respect to the Company.
Section 9.3 DISTRIBUTION UPON DISSOLUTION.
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(a) Upon dissolution, the Company shall not be terminated and
shall continue until the winding up of the affairs of the Company is completed
and a certificate of cancellation has been issued by the Secretary of State of
Delaware. Upon the winding up of the Company, the Manager, or any other Person
designated by the Manager (the "Liquidation Agent"), shall take full account of
the assets and liabilities of the Company and shall, unless the Members agree
otherwise, liquidate the assets of the Company as promptly as is consistent
with obtaining the fair value thereof. The proceeds of any liquidation shall be
applied and distributed in the following order:
(i) First, to the payment of debts and liabilities of
the Company (including payment of all indebtedness to Members and/or their
Affiliates) and the expenses of liquidation;
(ii) Second, to the establishment of any reserve which
the Liquidation Agent shall deem reasonably necessary for any contingent or
unforeseen liabilities or obligations of the Company ("Contingencies"). Such
reserve may be paid over by the Liquidation Agent to any attorney-at-law, or
acceptable party, as escrow agent, to be held for disbursement in payment of
any Contingencies and, at the expiration of such period as shall be deemed
advisable by the Liquidation Agent for distribution of the balance in the
manner hereinafter provided in this Section 9.3; and
(iii) Any balance, in accordance with the Percentage
Interest of each Member.
(b) It is the intent of the Members that the allocations
provided in Section 5.4 hereof result in the distributions required pursuant to
Section 9.3 being in accordance with positive capital accounts as provided for
in the Treasury Regulations under Section 704(b) of the Code. However, if after
giving hypothetical effect to the allocations required by Section 5.4, the
capital accounts of the Members are in such ratios or balances that
distributions pursuant to Section 9.3 would not be in accordance with the
positive capital accounts of the Members as required by Treasury Regulations
under Section 704(b) of the Code, such failure shall not affect or alter the
distributions required by Section 9.3. Rather, the Members will have the
authority to make other allocations of Net Profits or Net Losses, or items of
income, gain, loss or deduction among the Members which, to the extent
possible, will result in the capital accounts of each Member having a balance
prior to the distribution equal to the amount of the distributions to be
received by each Member pursuant to Section 9.3.
Section 9.4 TIME FOR LIQUIDATION. A reasonable amount of time shall be
allowed for the orderly liquidation of the assets of the Company and the
discharge of liabilities to creditors so as to enable the Liquidation Agent to
minimize the losses attendant upon such liquidation.
Section 9.5 WINDING UP AND FILING ARTICLES OF CANCELLATION. Upon the
commencement of the winding up of the Company, articles of cancellation shall
be delivered by the Company to the Secretary of State of Delaware for filing.
The articles of
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cancellation shall set forth the information required by the LLCL. The winding
up of the Company shall be completed when all debts, liabilities, and
obligations of the Company have been paid and discharged or reasonably adequate
provision therefor has been made and all the remaining assets of the Company
have been distributed to the Members.
ARTICLE X. MEMBERSHIP UNITS; CERTIFICATES
Section 10.1 CERTIFICATES. Membership Units shall be represented by a
certificate or certificates, setting forth upon the face thereof that the
Company is a limited liability company formed under the laws of the State of
Delaware, the name of the Member to which it is issued and the number of
Membership Units which such certificate represents. Such certificates shall be
entered in the books of the Company as they are issued, and shall be signed by
the Chairman or the Chief Executive Officer of the Company and may be sealed
with the Company's seal or a facsimile thereof. Upon any Transfer permitted
under this Agreement, the transferring Member shall surrender to the Company
and the Company shall issue to the transferring Member certificates
representing the remaining Membership Units held by such transferring Member
after taking into account such Transfer. All certificates representing
Membership Units (unless registered under the Securities Act of 1933, as
amended (the "Securities Act")), shall bear the following legend:
THE MEMBERSHIP UNITS REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY SECURITIES REGULATORY AUTHORITY OF ANY
STATE, AND MAY NOT BE SOLD, ASSIGNED, PLEDGED, ENCUMBERED,
TRANSFERRED, GRANTED AN OPTION WITH RESPECT TO OR OTHERWISE
DISPOSED OF, (I) UNLESS AND UNTIL THEY HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OR SUCH SALE, ASSIGNMENT, PLEDGE, ENCUMBRANCE,
TRANSFER, OPTION GRANT OR OTHER DISPOSITION IS EXEMPT FROM
REGISTRATION UNDER THE SECURITIES ACT AND (II) EXCEPT IN
ACCORDANCE WITH THE PROVISIONS OF THE AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT OF THE COMPANY, A COPY OF
WHICH IS AVAILABLE FOR INSPECTION AT THE OFFICES OF THE COMPANY.
Section 10.2 LOST OR DESTROYED CERTIFICATES. The Company may issue a
new certificate for Membership Units in place of any certificate or
certificates theretofore issued by it, alleged to have been lost or destroyed,
upon the making of an affidavit of that fact, and providing an indemnity in
form and substance reasonably satisfactory to the Manager, by the Person
claiming the certificate to be lost or destroyed.
Section 10.3 TRANSFER OF MEMBERSHIP UNITS. Except for Transfers duly
made in accordance with ARTICLE VII, no Transfer of Membership Units shall be
valid as
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against the Company except upon surrender to and cancellation of the
certificate therefor, accompanied by an assignment or transfer by the Member,
subject to any restrictions on Transfer contained in this Agreement.
Section 10.4 SPLITS AND RECLASSIFICATIONS. The Company shall not in
any manner subdivide (by any unit split, unit distribution, reclassification,
recapitalization or otherwise) or combine (by reverse unit split,
reclassification, recapitalization or otherwise) the outstanding Membership
Units unless an identical event is occurring with respect to the Class A Common
Stock, in which event the Membership Units shall be combined or subdivided
concurrently with and in the same manner as the Class A Common Stock.
Section 10.5 INCENTIVE PLANS; REGISTERED AND PRIVATE OFFERINGS.
(a) At any time the Public Corp. issues a share of Class A
Common Stock pursuant to an Incentive Plan (whether pursuant to the exercise of
a stock option or the grant of a restricted share award or otherwise), the
following shall occur: (i) the Public Corp. shall be deemed to contribute to
the capital of the Company an amount of cash equal to the current per share
market price of a share of Class A Common Stock on the date such share is
issued (or, if earlier, the date the related option is exercised); (ii) the
Company shall be deemed to purchase from Public Corp. a share of Class A Common
Stock for an amount of cash equal to the amount of cash deemed contributed by
the Public Corp. to the Company in clause (i) above (and such share is deemed
delivered to its owner under the Incentive Plan); (iii) the net proceeds
(including the amount of any payments made on a loan with respect to a stock
purchase award) received by the Public Corp. with respect to such share, if
any, shall be concurrently transferred to the Company (and such net proceeds so
transferred shall not constitute a capital contribution); and (iv) the Company
shall issue to the Public Corp. one (1) Membership Unit registered in the name
of the Public Corp. The Company shall retain any net proceeds that are paid
directly to the Company.
(b) At any time the Public Corp. issues a share of Class A
Common Stock pursuant to a primary public offering registered under the
Securities Act of 1933, as amended, or in a private placement, the net proceeds
received by the Public Corp. with respect to such share, if any, shall be
concurrently transferred to the Company and the Company shall issue to the
Public Corp. one (1) Membership Unit registered in the name of the Public Corp.
Section 10.6 REGULATIONS. The Manager may make such additional rules
and regulations, not inconsistent with this Agreement, as it may deem expedient
with respect to the issue, transfer and recordation of certificates for the
Membership Units.
Section 10.7 REGISTERED MEMBERS. The Company shall be entitled to
recognize the exclusive right of a Person registered on its records as the
owner of the Membership Units to receive distributions and to vote as owner of
Membership Units and shall not be bound to recognize any equitable or other
claim to or interest in such Membership Units on the part of any other Person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by the LLCL.
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ARTICLE XI. MISCELLANEOUS
Section 11.1 SEVERABILITY. The terms, conditions, and provisions of
this Agree ment are fully severable, and the decision or judgment of any court
of competent jurisdiction rendering void or unenforceable any one or more of
such terms, conditions or provisions shall not render void or unenforceable any
of the other terms, conditions or provisions hereof and such void or
unenforceable term shall be replaced with a valid and enforceable term which
would to the greatest degree possible reflect the original intentions of the
parties hereunder.
Section 11.2 NOTICES. All notices and other communications hereunder
shall be in writing and shall be given and delivered by messenger, transmitted
by telecopy or telegram (in either case followed by reputable overnight courier
sent the same day), by reputable overnight courier or mailed by certified mail,
postage prepaid, return receipt requested, to the parties at the following
addresses (or such other address as shall be specified by such party by like
notice), and shall be deemed given on the date on which so delivered by
messenger or reputable overnight courier, on the next business day following
the date on which so transmitted by telecopy, tele gram or on the third
business day following the date on which mailed by certified mail:
If to the Company or the Public Corp., to:
barnesandnoble.com llc
76 Ninth Avenue
11th Floor
New York, New York 10011
Attention: Chief Executive Officer
Fax: (212) 414-6652
If to BN or BN Holding, to:
Barnes & Noble, Inc.
122 Fifth Avenue
New York, New York 10011
Attention: Mr. Leonard Riggio
Fax: (212) 675-0413
with a copy to:
Robinson Silverman Pearce
Aronsohn & Berman LLP
1290 Avenue of the Americas
New York, New York 10104
Attention: Michael N. Rosen, Esq.
Fax: (212) 541-1400
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If to USO, to:
BOL.US Online, Inc.
1540 Broadway
New York, New York 10036
Attention: Robert J. Sorrentino
Fax: (212) 782-1010/1103 If to BAG, to:
Bertelsmann AG
Carl-Bertelsmann-Strasse 270
33311 Gutersloh, Germany
Attention: Dr. Klaus Eierhoff
Fax: (011) 49 5241 809 555
with a copy for each of USO and BAG to:
Walter, Conston, Alexander & Green, P.C.
90 Park Avenue
New York, New York 10016
Attention: Aydin S. Caginalp, Esq.
Fax: (212) 210-9444
Section 11.3 CAPTIONS. The captions at the heading of each Article or
Section of this Agreement are for convenience of reference only, and are not to
be deemed a part of the Agreement itself.
Section 11.4 ENTIRE AGREEMENT. This Agreement, including the Schedules
hereto and the other agreements and documents referenced herein or contemplated
hereby, constitutes the entire agreement and understanding of the parties
hereto with respect to the matters herein set forth, and all prior negotiations
and understandings relating to the subject matter of this Agreement are merged
herein and are superseded and canceled by this Agreement.
Section 11.5 COUNTERPARTS. This Agreement may be executed and
delivered in one or more counterparts, each of which shall be deemed an
original, and all of which shall be deemed to constitute one and the same
agreement.
Section 11.6 AMENDMENTS; WAIVER. Amendments to this Agreement may be
made from time to time, provided, however, that (a) no amendment, modification
or waiver of this Agreement or any provision hereof shall be valid or effective
unless in writing and signed by each and every Member, and (b) no amendment,
modification or waiver of Section 10.4 shall be valid or effective unless
approved by a majority of the holders of Class A Common Stock, voting
separately as a class. No consent to, or waiver, discharge or release (each, a
"Waiver") of, any provision of or breach under this Agreement shall be valid or
effective unless in writing and signed by the party giving such Waiver, and no
specific Waiver shall constitute a Waiver with respect to any other provision
or breach, whether or not of similar nature. Failure on the part of
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any party hereto to insist in any instance upon strict, complete and timely
performance by another party hereto of any provision of or obligation under
this Agreement shall not constitute a Waiver by such party of any of its rights
under this Agreement or otherwise.
Section 11.7 FURTHER ASSURANCES. Each party shall perform all other
acts and execute and deliver all other documents as may be necessary or
appropriate to carry out the purposes and intent of this Agreement.
Section 11.8 GOVERNING LAW. This Agreement shall in all respects be
governed by and construed in accordance with the laws of the State of Delaware
without giving effect to its rules on conflicts of laws.
Section 11.9 THIRD PARTY BENEFICIARY. Except as provided in Section
11.6 with respect to certain approval rights of holders of Class A Common
Stock, nothing set forth in the Agreement shall be construed to confer any
benefit to any third party who is not a party to this Agreement.
Section 11.10 ASSIGNMENT. This Agreement is personal to the parties
hereto and neither party may (except as set forth in ARTICLE VII) assign or
Transfer the rights accruing hereunder nor may performance of any duties by
either party hereunder be delegated or assumed by any other Person or legal
entity without the prior written consent of the other parties hereto.
Section 11.11 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the respective successors and permitted
assigns of each party hereto; provided, that no party hereto may Transfer (or
cause or permit to be created or existing any lien on) or assign any of such
party's Membership Units (or any portion thereof or any beneficial interest
therein) or this Agreement or such party's rights, interests or obligations
hereunder, except in accordance with the terms of this Agreement.
Section 11.12 RELATIONSHIP. This Agreement does not constitute any
Member, Manager, or any employee or agent of the Company as the agent or legal
manager of any Member for any purpose whatsoever and no Member, Manager, or any
employee or agent of the Company is granted hereby any right or authority to
assume or to create any obligation or responsibility, express or implied, on
behalf of or in the name of any Member or to bind any Member in any manner or
thing whatsoever.
Section 11.13 CONSENT TO JURISDICTION. The exclusive jurisdiction and
venue for any disputes arising out of or in connection with this Agreement will
be any state or federal court located in New York County, New York, and each
party hereby consents to personal jurisdiction in such court and consents to
service of process by means of certified or registered mail, return receipt
requested.
Section 11.14 EQUITABLE REMEDIES. Each party acknowledges that no
adequate remedy of law would be available for a breach of ARTICLES VII and VIII
of this Agreement, and that a breach of any of such Sections or Articles of
this Agreement by one party would
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irreparably injure the other and accordingly agrees that in the event of a
breach of any of such Sections or Articles of this Agreement, the respective
rights and obligations of the parties hereunder shall be enforceable by
specific performance, injunction or other equitable remedy (without bond or
security being required), and each party waives the defense in any action
and/or proceeding brought to enforce this Agreement that there exists an
adequate remedy or that the other party is not irreparably injured. Nothing in
this Section 11.14 is intended to exclude the possibility of equitable remedies
with respect to breaches of other Sections or Articles of this Agreement.
Section 11.15 FEES AND EXPENSES. Except as specifically set forth
herein, each party shall be responsible for any legal and other fees and
expenses incurred by such party in connection with the negotiation and
preparation of this Agreement and the transactions contemplated hereby.
Section 11.16 OBLIGATIONS OF BN AND BAG. By their signatures below, BN
agrees to be liable for any failure by BN Holding to perform any of its
obligations under this Agreement and any other agreements executed in
connection herewith to which it is a party, and
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BAG agrees to be liable for any failure by USO to perform any of its
obligations under this Agreement and any other agreements executed in
connection herewith to which it is a party.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the date first above written.
Bertelsmann AG
By:_______________________
Name:
Title:
BOL.US Online, Inc.
By:_______________________
Name:
Title:
Barnes & Noble, Inc.
By:________________________
Name:
Title:
B&N.com Holding Corp.
By:_______________________
Name:
Title:
barnesandnoble.com inc.
By:_______________________
Name:
Title:
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SCHEDULE I
MEMBERS; MEMBERSHIP UNITS; CAPITAL ACCOUNTS
<TABLE>
<CAPTION>
Member Membership Units Capital Account
- ------ ---------------- ---------------
<S> <C> <C>
barnesandnoble.com inc. ___________ $
Membership Units
B&N.com Holding Corp. ____________ $
Membership Units
BOL.US Online, Inc. ___________ $
Membership Units
</TABLE>
<PAGE>
-----------------------------------
STOCKHOLDERS AGREEMENT
OF
barnesandnoble.com inc.
As of _____________, 1999
------------------------------------
<PAGE>
STOCKHOLDERS AGREEMENT
OF
barnesandnoble.com inc.
THIS STOCKHOLDERS AGREEMENT, dated as of _________, 1999, by and among
Barnes & Noble, Inc., a corporation organized and existing under the laws of
Delaware, with its principal place of business at 122 Fifth Avenue, New York,
New York 10011 ("BN"), B&N.com Holding Corp., a corporation organized and
existing under the laws of Delaware, with its principal place of business at 122
Fifth Avenue, New York, New York 10011 ("BN Holding"), barnesandnoble.com inc.,
a corporation organized and existing under the laws of Delaware, with its
principal place of business at 76 Ninth Avenue, New York, New York 10011 (the
"Company"), Bertelsmann AG, an Aktiengesellschaft organized and existing under
the laws of Germany, with its principal place of business at
Carl-Bertelsmann-Strasse 270, 33311 Gutersloh, Germany ("BAG") and BOL.US
Online, Inc., a corporation organized and existing under the laws of Delaware,
with its principal place of business at 1540 Broadway, New York, New York 10036
("USO"). BN Holding and USO are sometimes hereafter referred to, collectively,
as the "Stockholders" and, individually, as a "Stockholder."
WHEREAS, the Company has an authorized capital of 750,000,000 shares of
common stock, consisting of 500,000,000 shares of Class A Common Stock, $.001
par value per share (the "Class A Common Stock"), 100,000,000 shares of Class B
Common Stock, $.001 par value per share (the "Class B Common Stock"),
100,000,000 shares of Class C Common Stock, $.001 par value per share (the
"Class C Common Stock", and together with the Class A Common Stock and the Class
B Common Stock, the "Common Stock"), and 50,000,000 shares of Preferred Stock,
$.001 par value per share.
WHEREAS, as of the date hereof BN Holding owns all of the issued and
outstanding shares of Class B Common Stock and USO owns all of the issued and
outstanding shares of Class C Common Stock;
WHEREAS, as of the date hereof BN Holding, USO and the Company are the sole
members of barnesandnoble.com llc, a Delaware limited liability company (the
"Operating Company"), with each owning an interest in the Operating Company
through the ownership of Membership Units of the Operating Company ("Membership
Units"), which Membership Units (other than Membership Units owned by the
Company) are, in accordance with the terms of the Company's Certificate of
Incorporation, exchangeable at the holder's option at any time into shares of
Class A Common Stock;
WHEREAS, BN Holding is a wholly owned subsidiary of BN and USO (indirectly)
is a wholly owned subsidiary of BAG;
<PAGE>
WHEREAS, the Stockholders desire to promote their mutual interests by
imposing certain restrictions and obligations on each other and on the shares of
Common Stock, and, further, to provide for matters pertaining to the management
and governance of the Company.
NOW, THEREFORE, in consideration of the conditions and provisions contained
herein, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. The following terms shall, for the purposes of
this Agreement and the Schedules and Exhibits hereto, have the following
meanings (terms defined in the singular or the plural include the plural or the
singular, as the case may be):
"Affiliate" of any Person shall mean any other Person that, directly or
indirectly, controls, is under common control with or is controlled by that
Person. For purposes of this definition, "control" (including, with its
correlative meanings, the terms "controlled by" and "under common control
with"), as used with respect to any Person, shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such Person, whether through the ownership of voting securities
or by contract or otherwise. In the case of BOL, the term "Affiliates" shall
include all Persons in which BOL directly or indirectly owns an equity interest
to the extent such Person operates under the name BOL (or a derivative thereof)
provided that no Restricted Transferee owns any equity interest therein.
"BN Directors" shall mean, collectively, the Class B Directors as defined
in the Certificate of Incorporation.
"Board" shall mean the Board of Directors of the Company.
"BOL" shall mean BOL.Global, Inc., a corporation organized under the laws
of Delaware.
"Business Day" shall mean any day, other than a Saturday or Sunday, on
which federally chartered banks in the United States are open for business.
"By-laws" shall mean the By-laws of the Company as in effect as of the date
of this Agreement, as the same may be amended from time to time in accordance
with the terms thereof.
"Certificate of Incorporation" shall mean the Certificate of Incorporation
of the Company as in effect as of the date of this Agreement, as the same may be
amended from time to time in accordance with the terms thereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
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"Commission" shall mean the Securities and Exchange Commission, or any
successor agency performing the functions currently performed by the Securities
and Exchange Commission.
"Encumbrance" shall mean any mortgage, pledge, security interest, lien,
restriction on use or transfer, other than those imposed by law, voting
agreement, adverse claim or encumbrance or charge of any kind (including any
agreement to give any of the foregoing), any conditional sale or other title
retention agreement, any lease in the nature thereof, and the filing of, or any
agreement to give, any financing statement under the Uniform Commercial Code or
similar law of any jurisdiction.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Commission promulgated thereunder, as
amended.
"Governmental Body" shall mean any domestic or foreign national, state or
municipal or other local government or multi-national body (including, but not
limited to, the European Union), any subdivision, agency, commission or
authority thereof, or any quasi-governmental or private body exercising any
regulatory authority thereunder and any corporation, partnership or other entity
directly or indirectly owned by or subject to the control of any of the
foregoing.
"Operating Agreement" shall mean the Second Amended and Restated Limited
Liability Company Agreement of the Operating Company, as the same may be amended
from time to timer in accordance with the terms thereof.
"Person" shall mean an individual, sole proprietorship, corporation,
partnership, limited liability company, joint venture, trust, unincorporated
organization, mutual company, joint stock company, estate, union, employee
organization, bank, trust company, land trust, business trust or other
organization, whether or not a legal entity, or a Governmental Body.
"Public Sale" shall mean a sale pursuant to an offering registered under
the Securities Act or in a transaction pursuant to Rule 144 of the Securities
Act.
"Restricted Transferee" shall mean amazon.com inc., Borders Group, Inc.,
America Online, Inc., Microsoft, Inc. or Yahoo, Inc. or any of their respective
Affiliates.
"Securities Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations of the Commission thereunder, as amended.
"Transfer" shall mean, whether directly or indirectly by merger, operation
of law or otherwise, any sale, assignment, conveyance, transfer, donation or any
other means to dispose of, or pledge, hypothecate or otherwise encumber in any
manner whatsoever, or permit or suffer any Encumbrance.
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<PAGE>
"USO Directors" shall mean, collectively, the Class C Directors as defined
in the Certificate of Incorporation.
Section 1.2 Usage Generally; Interpretation. Whenever the context may
require, any pronoun includes the corresponding masculine, feminine and neuter
forms. All references herein to Articles and Sections shall be deemed to be
references to Articles and Sections of this Agreement unless the context
otherwise requires. The words "include", "includes" and "including" shall be
deemed to be followed by the phrase "without limitation". The words "hereof",
"herein" and "hereunder" and words of similar import when used in this Agreement
refer to this Agreement as a whole and not to any particular provision of this
Agreement. Unless otherwise expressly provided herein, any agreement, instrument
or statute defined or referred to herein or in any agreement or instrument that
is referred to herein means such agreement, instrument or statute as from time
to time amended, modified or supplemented, including (in the case of agreements
or instruments) by waiver or consent and (in the case of statutes) by succession
of comparable successor statutes and references to all attachments thereto and
instruments incorporated therein.
ARTICLE II
VOTING PROVISIONS
Section 2.1 Voting Agreements. The Stockholders agree to vote all shares of
Common Stock held by them or their respective Affiliates so as to cause the
following:
(a) The election of each Class A Director (as defined in the
Certificate of Incorporation) proposed for election by the Nominating
Committee of the Board of Directors of the Company;
(b) The election of such Chairman of the Board as shall be selected by
the BN Directors, unless (if such nominee is not Leonard Riggio or Stephen
Riggio) the USO Directors reject such nominee for good reason; and
(c) The election of such Chief Executive Officer as shall be selected
by the Special Committee (as defined in the By-laws) pursuant to a search
by a nationally recognized search service selected by the Special
Committee. In connection with such process: (i) applicants shall be
interviewed by the Chairman of the Board and by the members of the Special
Committee; and (ii) any member of the Special Committee may make
recommendations.
Section 2.2 Limitations. The provisions of Section 2.1(b) hereof shall
cease to apply upon the occurrence of a Class B Triggering Event or Class C
Triggering Event (as each such term is defined in the Certificate of
Incorporation). The provisions of Section 2.1(c) hereof shall cease to apply if
both a Class B Triggering Event and a Class C Triggering Event have occurred.
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<PAGE>
ARTICLE III
TRANSFERS.
Section 3.1 Prohibited Transfers. Except as expressly permitted in this
Agreement, no Stockholder or any of their respective Affiliates, including any
direct or indirect beneficial owner or ultimate parent of any such entity
(including BN and BAG), shall, directly or indirectly, Transfer any of the
right, title or interest in (i) any shares of Common Stock or (ii) any of their
Affiliates which beneficially own, either directly or indirectly, any shares of
Common Stock. Except for Transfers duly made in accordance with this Article
III, no Transfer of Common Stock by a Stockholder shall be valid as against the
Company and its stockholders.
Section 3.2 Permitted Transfers.
(a) Notwithstanding anything in this Agreement to the contrary, each
Stockholder may Transfer all (but not less than all) of the shares of Common
Stock owned by it and its rights under this Agreement under any of the following
circumstances:
(i) Each Stockholder may Transfer all (but not less than all) of
the shares of Common Stock owned by it together with its rights under this
Agreement to any transferee which is an Affiliate of the transferring
Stockholder provided that (x) no Restricted Transferee owns an interest in such
transferee, and (y) all Membership Units owned by such transferor are also
transferred concurrently to such transferee; and
(ii) Each Stockholder (or any permitted transferee under clause
(i) above) may Transfer all (but not less than all) of the shares of Common
Stock owned by it together with its rights under this Agreement if such Transfer
is part of the Transfer (x) by BAG and its Affiliates of all (or substantially
all) of the publishing business in the United States, operated by BAG and its
Affiliates, or (y) by BN and its Affiliates, of all (or substantially all) of
its retail book store business, provided in each case that all Membership Units
owned by such transferor are also transferred concurrently to such transferee.
(iii) In the event of any Transfer pursuant to Sections 3.2(a)(i)
or (ii), a transferee (or subsequent transferee) shall be entitled to the rights
and privileges set forth in this Agreement and shall be bound and obligated by
the provisions of this Agreement. As a condition to such Transfer permitted
pursuant to this Section 3.2(a), each transferee that will own shares of Common
Stock shall, prior to such transfer, agree in writing to be bound by all of the
provisions of this Agreement and no such transferee shall be permitted to make
any Transfer which the original transferor was not permitted to make. In
connection with any Transfer pursuant to this Section 3.2(a), the transferee
shall execute and deliver to the non-transferring Stockholder and the Company
such documents as may reasonably be requested by the non-transferring
Stockholder or the Company to evidence the same.
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<PAGE>
(b) Each Stockholder may Transfer some or all of the shares of Common
Stock owned by it to the other Stockholder.
(c) Each Stockholder may Transfer some or all of the Class A Common
Stock owned by it in a Public Sale.
Section 3.3 Rights of First Refusal.
(a) Except with respect to Transfers permitted pursuant to Section
3.2, if, on or after October 31, 1999, a Stockholder desires to Transfer any
shares of Common Stock to any other Person (other than a Restricted Transferee)
in a bona fide transaction solely for cash consideration, such Stockholder (the
"Offeror") shall be entitled to do so provided that such Offeror first offers to
sell such shares of Common Stock to the other Stockholder (the "Offeree") at the
same price and the same terms and conditions as the Offeror would receive from
such other Person. If the Offeror Transfers an amount of shares of Common Stock
which (together with any Membership Units also being transferred by the Offeror)
are equal to or more than ten percent (10%) of the then aggregate outstanding
Membership Units, the member of the Special Committee elected by the BN
Directors (if BN Holding or its Affiliate is the Offeror) or by the USO
Directors (if USO or its Affiliate is the Offeror) shall be deemed to have
resigned effective immediately upon such Transfer. The Offeror shall submit to
the Company and the Offeree a written notice (the "Offer Notice") stating in
reasonable detail such price and such terms and conditions and identifying the
Person and all Persons who beneficially own more than five percent (5%) of such
Person, proposing to purchase the shares of Common Stock, and the amount of
Membership Units, if any, also being sold. The Offeree shall have a period of
thirty (30) days after the receipt of the Offer Notice in which to accept or
reject such offer. If the Offeree elects to accept such offer, which acceptance
must be for all and not part of the Common Stock and Membership Units offered
for sale, it shall so indicate within such thirty (30) day period by notice to
the Offeror. The notice required to be given by the Offeree shall specify a date
for the closing of the purchase which, subject to the expiration or early
termination of any waiting period required by any Governmental Body and the
receipt of any required approvals of any Governmental Body, shall not be more
than thirty (30) days after the date of the giving of such notice.
(b) If the Offeree does not exercise its right to purchase all of the
shares of Common Stock offered for sale pursuant to the provisions of this
Section 3.3, the Offeror of such shares of Common Stock shall have the right to
sell to the Person identified in the Offer Notice, subject to the provisions of
this Agreement, all of such shares of Common Stock and Membership Units on the
same terms and conditions including the price as specified in the Offer Notice,
free from the restrictions of Section 3.1 of this Agreement (for purposes of
such specific transaction, but not for purposes of any subsequent transaction)
in a bona fide transaction, for a period of ninety (90) days from the date that
the Offer expires hereunder, provided that any such purchaser shall prior to
such transfer, if such purchaser shall be receiving shares of Common Stock,
agree in writing to be bound by all of the provisions of this Agreement. At the
end of such
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<PAGE>
ninety (90) day period, the Offeror shall notify the Company and the Offeree in
writing whether its shares of Common Stock have been sold in a bona fide
transaction during such period. To the extent not sold during such ninety (90)
day period, all of such shares of Common Stock shall again become subject to all
of the restrictions and provisions hereof.
(c) The purchase price per share of the shares of Common Stock shall
be the price per share offered to be paid by the prospective transferee
described in the Offer Notice, which price shall be paid in cash.
(d) The closing of the purchase shall take place at the office of the
Company or such other location as shall be mutually agreeable and the purchase
price shall be paid at the closing by wire transfer of immediately available
funds. At the closing, the Offeror shall deliver to the Offeree the certificates
evidencing the shares of Common Stock to be conveyed, duly endorsed and in
negotiable form as well as the items listed in Section 3.4.
Section 3.4 Closing Deliveries. The Offeror at a closing under this Article
III shall deliver to the Offeree the following:
(a) A duly executed "Deed of Transfer" conveying to the Offeree the
shares of Common Stock being purchased by the Offeree, free and clear of any
Encumbrances, except those in this Agreement which are expressly assumed.
(b) A statement from the Offeror that: (i) except as set forth
therein, the Offeror has no claim as against the Company for unpaid dividends,
compensation, bonuses, profit-sharing or rights or other claims of whatsoever
kind, nature or description and that all amounts due and payable by the Company
to the Offeror have been paid; and (ii) it shall guarantee the performance of
the Purchaser's obligations under this Agreement.
Section 3.5 Continuity of Agreements.
(a) In the event of a permitted Transfer under Section 3.2 or 3.3
(other than a permitted transfer to an Affiliate), the Company's rights under
the Fulfillment Agreements and the Supply Agreement (as such terms are defined
in the Operating Agreement) shall terminate on the date which is six (6) months
after the date of Transfer unless otherwise provided therein.
(b) Notwithstanding the foregoing Section 3.5(a), in the event that
(i) USO is the transferring party in a transfer subject to Section 3.3, and has
complied with Section 3.3, and (ii) the Transfer is to any entity which is a
competitor of the Company and derives more than fifty percent (50%) of its
revenues from the sale of books, BN College shall have the right, by notice
given no later than ninety (90) days after the consummation of the Transfer by
USO under Section 3.3(a), to terminate the Amended and Restated Trademark
License Agreement dated as of October 31, 1998, as amended, insofar as relates
to the right granted to the Company and the
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Operating Company to use the name "Barnes and Noble" or any substantially
similar name or derivation, including "B&N" or "BN".
ARTICLE IV
REGISTRATION RIGHTS IN CLASS A COMMON STOCK.
The shares of Class A Common Stock that are issued by the Company (i) upon
conversion of Class B Common Stock or Class C Common Stock, or (ii) in exchange
for Membership Units pursuant to the Certificate of Incorporation shall have the
registration rights set forth on Annex A attached hereto, which is incorporated
herein by reference and made a part hereof as if included in full herein. The
parties agree that, subject to the advance notice requirements set forth in the
Certificate of Incorporation, any such conversion or exchange shall occur, at
the option of the exchanging or converting Stockholder, contemporaneously with
the registration of the Class A Common Stock to be received, or the consummation
of the sale of such Class A Common Stock pursuant to such registration, or at
such other time as such Stockholder shall request in writing.
ARTICLE V
CERTIFICATES
As long as this Agreement shall remain in full force and effect, there
shall be inscribed upon each certificate of Common Stock held by a Stockholder
the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, TRANSFERRED,
PLEDGED, ASSIGNED, HYPOTHECATED OR IN ANY WAY DISPOSED OF OR ENCUMBERED
EXCEPT PURSUANT TO THE TERMS AND CONDITIONS OF A CERTAIN STOCKHOLDERS
AGREEMENT DATED AS OF _____________, 1999, AND ANY AMENDMENTS THERETO,
AMONG BARNESANDNOBLE.COM INC., B&N.COM HOLDING CORP., BOL.US ONLINE, INC.,
BARNES & NOBLE, INC. AND BERTELSMANN AG, A COPY OF WHICH IS ON FILE AT THE
OFFICE OF THE COMPANY. THE HOLDER AND THE OWNER HEREOF IS SUBJECT TO THE
OBLIGATIONS THEREIN SET FORTH AND CONTAINED AND ANY SUCH DISPOSITION OR
ENCUMBRANCE IN VIOLATION OF SAID STOCKHOLDERS AGREEMENT SHALL BE NULL AND
VOID.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
SECURITIES REGULATORY AUTHORITY OF ANY STATE, AND MAY NOT BE SOLD,
ASSIGNED, PLEDGED, ENCUMBERED, TRANSFERRED, GRANTED AN OPTION WITH RESPECT
TO OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR DELIVERY
TO THE COMPANY OF AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE
COMPANY THAT SUCH SALE OR TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE
ACT.
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<PAGE>
ARTICLE VI
TERMINATION
This Agreement, other than Article IV which shall terminate in accordance
with the provisions set forth in Section 9 of Annex A of this Agreement, shall
terminate upon the occurrence of any of the following events:
(a) The written agreement of the parties hereto;
(b) The date on which there are no more shares of Common Stock owned
by any Stockholder; and
(c) The dissolution of the Company.
ARTICLE VII
MISCELLANEOUS
Section 7.1 Severability. The terms, conditions, and provisions of this
Agreement are fully severable, and the decision or judgment of any court of
competent jurisdiction rendering void or unenforceable any one or more of such
terms, conditions or provisions shall not render void or unenforceable any of
the other terms, conditions or provisions hereof and such void or unenforceable
term shall be replaced with a valid and enforceable term which would to the
greatest degree possible reflect the original intentions of the parties
hereunder.
Section 7.2 Notices. All notices and other communications hereunder shall
be in writing and shall be given and delivered by messenger, transmitted by
telecopy or telegram (in either case followed by reputable overnight courier
sent the same day), by reputable overnight courier or mailed by certified mail,
postage prepaid, return receipt requested, to the parties at the following
addresses (or such other address as shall be specified by such party by like
notice), and shall be deemed given on the date on which so delivered by
messenger or reputable overnight courier, on the next business day following the
date on which so transmitted by telecopy, telegram or on the third business day
following the date on which mailed by certified mail:
If to the Company, to:
barnesandnoble.com inc.
76 Ninth Avenue
11th Floor
New York, New York 10011
Attention: Chief Executive Officer
Fax: (212) 414-6652
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<PAGE>
If to BN or BN Holding, to:
Barnes & Noble, Inc.
122 Fifth Avenue
New York, New York 10011
Attention: Mr. Leonard Riggio
Fax: (212) 675-0413
with a copy to:
Robinson Silverman Pearce
Aronsohn & Berman LLP
1290 Avenue of the Americas
New York, New York 10104
Attention: Michael Rosen, Esq.
Fax: (212) 541-1400
If to USO, to:
Bertelsmann AG
Carl-Bertelsmann-Strasse 270
33311 Gutersloh, Germany
Attention: Dr. Klaus Eierhoff
Fax: (011) 49 5241 809 555
with a copy for each of USO to:
Walter, Conston, Alexander & Green, P.C.
90 Park Avenue
New York, New York 10016
Attention: Aydin S. Caginalp, Esq.
Fax: (212) 210-9444
Section 7.3 Captions. The captions at the heading of each article or
section of this Agreement are for convenience of reference only, and are not to
be deemed a part of the Agreement itself.
Section 7.4 Entire Agreement. This Agreement, including the annexes hereto
and the other agreements and documents referenced herein or contemplated hereby,
constitutes the entire agreement and understanding of the parties hereto with
respect to the matters herein set forth, and all prior negotiations and
understandings relating to the subject matter of this Agreement are merged
herein and are superseded and canceled by this Agreement.
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<PAGE>
Section 7.5 Counterparts. This Agreement may be executed and delivered in
one or more counterparts, each of which shall be deemed an original, and all of
which shall be deemed to constitute one and the same agreement.
Section 7.6 Amendments; Waiver. Amendments to this Agreement may be made
from time to time, provided, however, that no amendment, modification or waiver
of this Agreement or any provision hereof shall be valid or effective unless in
writing and signed by each and every Stockholder. No consent to, or waiver,
discharge or release (each, a "Waiver") of, any provision of or breach under
this Agreement shall be valid or effective unless in writing and signed by the
party giving such Waiver, and no specific Waiver shall constitute a Waiver with
respect to any other provision or breach, whether or not of similar nature.
Failure on the part of any party hereto to insist in any instance upon strict,
complete and timely performance by another party hereto of any provision of or
obligation under this Agreement shall not constitute a Waiver by such party of
any of its rights under this Agreement or otherwise.
Section 7.7 Further Assurances. Each party shall perform all other acts and
execute and deliver all other documents as may be necessary or appropriate to
carry out the purposes and intent of this Agreement.
Section 7.8 Governing Law. This Agreement shall in all respects be governed
by and construed in accordance with the laws of the State of Delaware without
giving effect to its rules on conflicts of laws.
Section 7.9 Third Party Beneficiary. Nothing set forth in the Agreement
shall be construed to confer any benefit to any third party who is not a party
to this Agreement.
Section 7.10 Assignment. This Agreement is personal to the parties hereto
and neither party may (except as set forth in Article III) assign or Transfer
the rights accruing hereunder nor may performance of any duties by either party
hereunder be delegated or assumed by any other Person or legal entity without
the prior written consent of the other parties hereto.
Section 7.11 Successors And Assigns. This Agreement shall be binding upon
and inure to the benefit of the respective successors and permitted assigns of
each party hereto; provided, that no party hereto may Transfer (or cause or
permit to be created or existing any lien on) or assign such party's Common
Stock (or any portion thereof or any beneficial interest therein) or this
Agreement or such party's rights, interests or obligations hereunder, except in
accordance with the terms of this Agreement.
Section 7.12 Relationship. This Agreement does not constitute any
Stockholder, director, or any employee or agent of the Company or the Operating
Company as the agent or legal manager of any Stockholder for any purpose
whatsoever and no Stockholder, Director, or any employee or agent of the Company
or the Operating Company is granted hereby any right or authority to assume or
to create any obligation or responsibility, express or implied, on behalf of or
in the name of any Stockholder or to bind any Stockholder in any manner or thing
whatsoever.
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<PAGE>
Section 7.13 Consent to Jurisdiction. The exclusive jurisdiction and venue
for any disputes arising out of or in connection with this Agreement will be any
state or federal court located in New York County, New York, and each party
hereby consents to personal jurisdiction in such court and consents to service
of process by means of certified or registered mail, return receipt requested.
Section 7.14 Equitable Remedies. Each party acknowledges that no adequate
remedy of law would be available for a breach of Articles II, III and IV of this
Agreement, and that a breach of any of such Articles of this Agreement by one
party would irreparably injure the other parties and accordingly agrees that in
the event of a breach of any of such Articles of this Agreement, the respective
rights and obligations of the parties hereunder shall be enforceable by specific
performance, injunction or other equitable remedy (without bond or security
being required), and each party waives the defense in any action and/or
proceeding brought to enforce this Agreement that there exists an adequate
remedy or that the other party is not irreparably injured. Nothing in this
Section 7.14 is intended to exclude the possibility of equitable remedies with
respect to breaches of other sections of this Agreement.
Section 7.15 Fees and Expenses. Except as specifically set forth herein,
each party shall be responsible for any legal and other fees and expenses
incurred by such party in connection with the negotiation and preparation of
this Agreement and the transactions contemplated hereby.
Section 7.16 Obligations of Barnes & Noble and Bertelsmann. By their
signatures below, BN agrees to be liable for any failure by BN Holding to
perform any of its obligations under this Agreement, and any other agreements
executed in connection herewith to which it is a party, and BAG agrees to be
liable for any failure by USO to perform any of its obligations under this
Agreement, and any other agreements executed in connection herewith to which it
is a party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
barnesandnoble.com inc.
By:________________________
Name:
Title:
B&N.COM HOLDING CORP.
By:________________________
Name:
Title:
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<PAGE>
BOL.US ONLINE, INC.
By:________________________
Name:
Title:
BARNES & NOBLE, INC..
By:________________________
Name:
Title:
BERTELSMANN AG
By:________________________
Name:
Title:
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<PAGE>
Annex A
Registration Rights
Section 1. Definitions
Section 1.1 Capitalized terms used herein without definition have the
meanings assigned to such terms in the Shareholders Agreement to which this
Annex A is a part of. As used in this Annex A, the following terms shall have
the following meanings:
"Holder" means any Person who owns Registrable Securities.
"IPO" means the initial public offering of the Class A Common Stock
pursuant to an offering registered under the Securities Act.
"Lock-Up Agreement" means the agreement between each Stockholder and an
underwriter for the IPO, pursuant to which such Stockholder agrees that it will
not offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge
or grant any rights with respect to any shares of Common Stock, any options or
warrants to purchase any shares of common stock, or any securities convertible
into or exchangeable for any shares of Common Stock now owned or hereafter
acquired directly by the Stockholder or with respect to which the Stockholder
has or hereafter acquires the power of disposition.
"Lock-Up Period" means the respective period agreed to by each Stockholder
and an underwriter for the IPO during which time such Stockholder agrees that it
will not offer to sell, contract to sell, or otherwise sell, dispose of, loan,
pledge or grant any rights with respect to any shares of Common Stock, any
options or warrants to purchase any shares of common stock, or any securities
convertible into or exchangeable for any shares of Common Stock now owned or
hereafter acquired directly by the Stockholder or with respect to which the
Stockholder has or hereafter acquires the power of disposition.
"Proceeding" means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
"Prospectus" means any prospectus included in a Registration Statement
(including, without limitation, a prospectus that includes any information
previously omitted from a prospectus filed as part of an effective Registration
Statement in reliance upon Rule 430A promulgated under the Securities Act), as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the Registrable Securities covered by any
Registration Statement, and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference in such Prospectus.
<PAGE>
"Registrable Securities" means shares of Class A Common Stock issued upon
conversion of shares of Class B Common Stock or Class C Common Stock or in
exchange for Membership Units; provided, however, that the shares of Class A
Common Stock that are Registrable Securities shall cease to be Registrable
Securities (x) upon the consummation of any sale of such shares pursuant to an
effective Registration Statements under the Securities Act or Rule 144
promulgated thereunder or (y) at such time as such shares of Class A Common
Stock (which are issued or which may become issued upon conversion or exchange
of any other security) become eligible for sale under Rule 144(k) under the
Securities Act.
"Registration Statement" means any Registration Statement and any
additional Registration Statement, including (in each case) the Prospectus,
amendments and supplements to such Registration Statement or Prospectus,
including pre- and post-effective amendments, all exhibits thereto, and all
material incorporated by reference in such Registration Statement to be filed
pursuant to the terms of this Annex A.
"Rule 144" means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
"Rule 158" means Rule 158 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
"Underwritten Registration or Underwritten Offering" means a registration
in connection with which securities of the Company are sold to an underwriter
for reoffering to the public pursuant to an effective Registration Statement.
Section 2. "Piggy-Back" Registrations
Section 2.1 If at any time after the IPO the Company shall determine to
register for its own account or the account of others under the Securities Act
(including (i) in connection with a public offering by the Company other than
the IPO or (ii) a demand for registration made by any stockholder of the Company
including any of the parties hereto) any of its equity securities (other than on
Form S-4 or Form S-8 or their then equivalents relating to shares of Common
Stock to be issued solely in connection with any acquisition of an entity or
business or shares of Common Stock issuable in connection with stock option or
other employee benefit plans) it shall send to each Holder written notice of
such determination and if, within 30 days after receipt of such notice, such
Holder shall so request in writing, the Company shall use its best efforts to
include in such Registration Statement all or any part of the Registrable
Securities such Holder requests to be registered.
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<PAGE>
Section 2.2 If, in connection with any offering described in Section 2.1 of
this Annex A involving an underwriting of common stock to be issued by the
Company, the managing underwriter shall impose a limitation on the number of
shares of such common stock which may be included in the Registration Statement
because in its judgment, such limitation is necessary to affect an orderly
public distribution, then, in the discretion of such managing underwriter, the
Company shall include in such Registration Statements only such portion of the
Registrable Securities with respect to which such Holders have requested
inclusion pursuant hereto as such limitation permits after the inclusion of all
shares of common stock to be registered by the Company for its own account. Any
exclusion of Registrable Securities shall be made pro rata among such Holders
seeking to include such shares, in proportion to the number of such shares
sought to be included by such Holders.
Section 3. "Demand" Registrations
Section 3.1 At any time commencing at least 180 days after the effective
date of any registration statement covering the IPO, each Holder (a "Demand
Holder") may make a written request (each a "Demand Request") for registration
under the Securities Act (a "Demand Registration") of all or part of the
Registrable Securities held by such Holder; provided, however, that the
Registrable Securities requested to be registered shall, on the date that the
Demand Request is delivered, (i) constitute at least five percent (5%) of the
shares of Common Stock outstanding, or (ii) have an aggregate minimum market
value of at least $25,000,000 before calculation of underwriting discounts and
commissions. Each Demand Request shall specify the number of Registrable Shares
proposed to be sold by such Demand Stockholder.
Section 3.2 Within 15 days after receipt of each Demand Request, the
Company shall give written notice of such Demand Request to all non-requesting
Holders and shall use its best efforts to cause such of the Registrable
Securities as may be requested by any Holders thereof (including the Holder or
Holders giving the initial notice of intent to offer) to be filed with the
Commission not later than 120 days after receipt of a Demand Request (the
"Demand Filing Date") and shall use all commercially reasonable efforts to cause
the same to be declared effective by the Commission as promptly as practicable
after such filing. Both the Demand Request and any request to join in such
Demand Request shall be considered a single Demand Request. Any inclusion of
Registrable Shares owned by a Demand Holder pursuant to a Demand Request
(including a notice to join in a prior Demand Request) shall be deemed to have
been effected pursuant to a single Demand Request.
Section 3.3 Notwithstanding any other provision set forth in this Section
3, no Holder shall be entitled to deliver a Demand Request within 90 days after
the effectiveness of any Registration Statement filed (i) by the Company
pursuant to an Underwritten Offering by the Company other than the IPO or (ii)
on behalf of any Demand Holder or any other holder of demand registration
rights.
Section 3.4 A registration will not count as a Demand Registration until it
has become effective (unless the Demand Holder withdraws all of its Registrable
Securities and the Company
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<PAGE>
has performed its obligations hereunder in all material respects, in which case
such demand will count as a Demand Registration); provided, that if, after it
has become effective, an offering of Registrable Securities pursuant to a
registration is interfered with by any stop order, injunction, or other order or
requirement of the Commission or other governmental agency or court, such
registration will be deemed not to have been effected and will not count as a
Demand Registration.
Section 3.5 The Company may defer the filing (but not the preparation) of a
registration statement required by this Section 3 until a date not later than
120 days after the Demand Filing Date if:
(a) at the time the Company receives the Demand Request, there is (i)
material non-public information regarding the Company which the Board reasonably
determines not to be in the Company's best interest to disclose and which the
Company is not otherwise required to disclose, or (ii) there is a significant
business opportunity (including but not limited to the acquisition or
disposition of assets (other than in the ordinary course of business) or any
merger, consolidation, tender offer or other similar transaction) available to
the Company which the Board reasonably determines not to be in the Company's
best interest to disclose; or
(b) prior to receiving the Demand Request, the Board had determined to
effect an Underwritten Offering and the Company had taken substantial steps and
is proceeding with reasonable diligence to effect such offering.
A deferral of the filing of a registration statement pursuant to this
Section 3.5 shall be lifted, and the requested registration statement shall be
filed forthwith, if, (x) in the case of a deferral pursuant to clause (a)(i),
the material non-public information is made public by the Company, (y) in the
case of a deferral pursuant to clause (a)(ii), the significant business
opportunity is disclosed by the Company or is terminated, or (z) in the case of
a deferral pursuant to clause (b), the proposed registration for the Company's
account is abandoned. In order to defer the filing of a registration statement
pursuant to this Section 3.5, the Company shall promptly (but in any event
within 10 days), upon determining to seek such deferral, deliver to each Demand
Holder a certificate signed by an executive officer of the Company stating that
the Company is deferring such filing pursuant to this Section 3.5 and an
approximation of the anticipated delay. Within 20 days after receiving such
certificate, the holders of a majority of the Registrable Securities held by the
Demand Holder and for which registration was previously requested may withdraw
such Demand Request by giving written notice to the Company; if withdrawn, the
Demand Request shall be deemed not to have been made for all purposes of this
Annex A.
Section 4. Registration Procedures
Whenever any Holder has requested that any Registrable Securities be
registered pursuant to this Annex A, the Company will use its reasonable best
efforts to effect the registration of such Registrable Securities and in
furtherance thereof the Company shall:
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<PAGE>
(a) prepare and file with the Commission on any appropriate form under
the Securities Act with respect to such Registrable Securities and use its
commercially reasonable efforts to cause such Registration Statement to become
effective;
(b) prepare and file with the Commission such amendments, including
post-effective amendments and supplements to the Registration Statement as may
be necessary to keep the Registration Statement continuously effective as to the
applicable Registrable Securities for a period of not less than 180 days (or
such lesser period as is necessary for the underwriters in an underwritten
offering to sell unsold allotments) and prepare and file with the Commission
such additional Registration Statements in order to register for resale under
the Securities Act all of the Registrable Securities; (ii) cause the related
Prospectus to be amended or supplemented by any required Prospectus supplement,
and as so supplemented or amended to be filed pursuant to Rule 424 (or any
similar provisions then in force) promulgated under the Securities Act; (iii)
respond as promptly as possible to any comments received from the Commission
with respect to the Registration Statements or any amendment thereto and as
promptly as possible provide the Holders true and complete copies of all
correspondence from and to the Commission relating to the Registration
Statements; and (iv) comply in all material respects with the provisions of the
Securities Act and the Exchange Act with respect to the disposition of all
Registrable Securities covered by the Registration Statements during the
applicable period in accordance with the intended methods of disposition by the
Stockholders thereof set forth in the Registration Statements as so amended or
in such Prospectus as so supplemented;
(c) (i) furnish to the Holders of Registrable Securities to be sold,
their counsel and any managing underwriters, copies of all such documents
proposed to be filed, which documents (other than those incorporated by
reference) will be subject to the review of such Stockholders, their counsel and
such managing underwriters, and (ii) cause its officers and directors, counsel
and independent certified public accountants to respond to such inquiries as
shall be necessary, in the reasonable opinion of respective counsel to such
Holders and such underwriters, to conduct a reasonable investigation within the
meaning of the Securities Act. The Company shall not file a Registration
Statement to which the holder of a majority of the Registrable Securities or its
counsel or any managing underwriters shall reasonably object in writing within
three (3) Business Days of their receipt thereof;
(d) notify the Holders of Registrable Securities to be sold, their
counsel and any managing underwriters as promptly as possible (and in the case
of (i), below, not less than five (5) days prior to such filing) and confirm
such notice in writing no later than one (1) Business Day following the day:
(i) when a Prospectus or any Prospectus supplement or
post-effective amendment to the Registration Statements is proposed to be filed;
(ii) when the Commission notifies the Company whether there will
be a "review" of such Registration Statements and whenever the Commission
comments in writing on such Registration Statements;
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(iii) with respect to the Registration Statements or any
post-effective amendment, when the same has become effective;
(iv) of any request by the Commission or any other Federal or
state governmental authority for amendments or supplements to the Registration
Statements or Prospectus or for additional information;
(v) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statements covering any or all
of the Registrable Securities or the initiation of any Proceedings for that
purpose;
(vi) if at any time any of the representations and warranties of
the Company contained in any agreement (including any underwriting agreement)
contemplated hereby ceases to be true and correct in all material respects;
(vii) of the receipt by the Company of any notification with
respect to the suspension of the qualification or exemption from qualification
of any of the Registrable Securities for sale in any jurisdiction, or the
initiation or threatening of any Proceeding for such purpose; and
(viii) of the occurrence of any event that makes any statement
made in the Registration Statements or Prospectus or any document incorporated
or deemed to be incorporated therein by reference untrue in any material respect
or that requires any revisions to the Registration Statements, Prospectus or
other documents so that, in the case of the Registration Statements or the
Prospectus, as the case may be, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading;
(e) use its best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of (i) any order suspending the effectiveness of the
Registration Statements or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment;
(f) if requested by any managing underwriter to be sold in connection
with an Underwritten Offering, (i) promptly incorporate in a Prospectus
supplement or post-effective amendment to the Registration Statement such
information as the Company reasonably agrees should be included therein and (ii)
make all required filings of such Prospectus supplement or such post-effective
amendment as soon as practicable after the Company has received notification of
the matters to be incorporated in such Prospectus supplement or post-effective
amendment; provided, however, that the Company shall not be required to take any
action pursuant to this clause (f) that would, in the opinion of counsel for the
Company, violate applicable law or be materially detrimental to the business
prospects of the Company;
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(g) furnish to each Holder of Registrable Securities to be sold, their
counsel and any managing underwriters, without charge, at least one conformed
copy of each Registration Statements and each amendment thereto, including
financial statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent requested by
such Person (including those previously furnished or incorporated by reference)
promptly after the filing of such documents with the Commission;
(h) promptly deliver to each Holder of Registrable Securities to be
sold, their counsel, and any underwriters, without charge, as many copies of the
Prospectus or Prospectuses (including each form of prospectus) and each
amendment or supplement thereto as such Persons may reasonably request; and the
Company hereby consents to the use of such Prospectus and each amendment or
supplement thereto by each of the selling Stockholders and any underwriters in
connection with the offering and sale of the Registrable Securities covered by
such Prospectus and any amendment or supplement thereto;
(i) prior to any public offering of Registrable Securities, use its
best efforts to register or qualify or cooperate with the selling Holders, any
underwriters and their counsel in connection with the registration or
qualification (or exemption from such registration or qualification) of such
Registrable Securities for offer and sale under the securities or Blue Sky laws
of such jurisdictions within the United States as any selling Holder or
underwriter requests in writing, to keep each such registration or qualification
(or exemption therefrom) effective for at least 180 days and to do any and all
other acts or things necessary or advisable to enable the disposition in such
jurisdictions of the Registrable Securities covered by a Registration Statement;
provided, however, that the Company shall not be required to qualify generally
to do business in any jurisdiction where it is not then so qualified or to take
any action that would subject it to general service of process in any such
jurisdiction where it is not then so subject or subject the Company to any
material tax in any such jurisdiction where it is not then so subject;
(j) cooperate with the selling Holders and any managing underwriters
to facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold pursuant to a Registration Statements, which
certificates shall be free, to the extent permitted by applicable law, of all
restrictive legends, and to enable such Registrable Securities to be in such
denominations and registered in such names as any such managing underwriters or
Stockholders may request at least two Business Days prior to any sale of
Registrable Securities;
(k) upon the occurrence of any event contemplated by Section
4(d)(viii) of this Annex A, as promptly as possible, prepare a supplement or
amendment, including a post-effective amendment, to the Registration Statement
or a supplement to the related Prospectus or any document incorporated or
deemed to be incorporated therein by reference, and file any other required
document so that, as thereafter delivered, neither the Registration Statements
nor such Prospectus will contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading;
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(l) use its best efforts to cause all Registrable Securities relating
to such Registration Statement to be listed on the securities exchange,
quotation system, market or over-the-counter bulletin board on which similar
securities issued by the Company are then listed;
(m) enter into such agreements (including an underwriting agreement in
form, scope and substance as is customary in Underwritten Offerings) and take
all such other actions in connection therewith (including those reasonably
requested by any managing underwriters in order to expedite or facilitate the
disposition of such Registrable Securities, and whether or not an underwriting
agreement is entered into):
(i) make such representations and warranties to such selling
Holders and such underwriters as are customarily made by issuers to underwriters
in underwritten public offerings, and confirm the same if and when requested;
(ii) in the case of an Underwritten Offering, obtain and deliver
copies thereof to the managing underwriters, if any, of opinions of counsel to
the Company and updates thereof addressed to each such underwriter, in form,
scope and substance reasonably satisfactory to any such managing underwriters
and counsel to the selling Stockholders covering the matters customarily covered
in opinions requested in Underwritten Offerings and such other matters as may be
reasonably requested by such counsel and underwriters;
(iii) immediately prior to the effectiveness of the Registration
Statement, and, in the case of an Underwritten Offering, at the time of delivery
of any Registrable Securities sold pursuant thereto, obtain and deliver copies
to the selling Holders and the managing underwriters, if any, of "cold comfort"
letters and updates thereof from the independent certified public accountants of
the Company (and, if necessary, any other independent certified public
accountants of any subsidiary of the Company or of any business acquired by the
Company for which financial statements and financial data is, or is required to
be, included in the Registration Statements), addressed to each selling Holder
and each of the underwriters, if any, in form and substance as are customary in
connection with Underwritten Offerings;
(iv) if an underwriting agreement is entered into, the same shall
contain indemnification provisions and procedures no less favorable to the
selling Holders and the underwriters, if any, other than those set forth in
Section 8 of this Annex A (or such other provisions and procedures acceptable to
the managing underwriters, if any; and
(v) deliver such documents and certificates as may be reasonably
requested by the selling Holders, their counsel and any managing underwriters to
evidence the continued validity of the representations and warranties made
pursuant to clause (i) above and to evidence compliance with any customary
conditions contained in the underwriting agreement or other agreement entered
into by the Company;
(n) make available for inspection by the selling Holders, any
representative of such Holders, any underwriter participating in any disposition
of Registrable Securities, and any
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attorney or accountant retained by such selling Holder or underwriters, at the
offices where normally kept, during reasonable business hours, all financial and
other records, pertinent corporate documents and properties of the Company and
its subsidiaries, and cause the officers, directors, agents and employees of the
Company and its subsidiaries to supply all information in each case reasonably
requested by any such Holder, representative, underwriter, attorney or
accountant in connection with the Registration Statements; provided, however,
that any information that is determined in good faith by the Company in writing
to be of a confidential nature at the time of delivery of such information shall
be kept confidential by such Persons, unless (i) disclosure of such information
is required by court or administrative order or is necessary to respond to
inquiries of regulatory authorities; (ii) disclosure of such information, in the
opinion of counsel to such Person, is required by law; (iii) such information
becomes generally available to the public other than as a result of a disclosure
or failure to safeguard by such Person; or (iv) such information becomes
available to such Person from a source other than the Company and such source is
not known by such Person to be bound by a confidentiality agreement with the
Company;
(o) comply in all material respects with all applicable rules and
regulations of the Commission and make generally available to its security
holders earning statements satisfying the provisions of Section 11(a) of the
Securities Act and Rule 158 not later than 45 days after the end of any 12-month
period (or 90 days after the end of any 12-month period if such period is a
fiscal year) (i) commencing at the end of any fiscal quarter in which
Registrable Securities are sold to underwriters in a firm commitment or best
efforts Underwritten Offering and (ii) if not sold to underwriters in such an
offering, commencing on the first day of the first fiscal quarter of the Company
after the effective date of the Registration Statements, which statement shall
conform to the requirements of Rule 158;
(p) the Company may require each selling Holder to furnish to the
Company information regarding such Holder and the distribution of such
Registrable Securities as is required by law to be disclosed in the Registration
Statements, and the Company may exclude from such registration the Registrable
Securities of any such Stockholder who unreasonably fails to furnish such
information within a reasonable time after receiving such request. If the
Registration Statements refers to any Stockholder by name or otherwise as the
holder of any securities of the Company, then such Stockholder shall have the
right to require (if such reference to such Stockholder by name or otherwise is
not required by the Securities Act or any similar Federal statute then in force)
the deletion of the reference to such Stockholder in any amendment or supplement
to the Registration Statements filed or prepared subsequent to the time that
such reference ceases to be required.
Section 5. Lock-Up Agreement
Each Holder agrees, if such Holder is so requested by the managing
underwriter in the Initial Public Offering, to enter into a Lock-Up Agreement,
provided that the lock-up period shall not exceed 180 days.
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Section 6. Stockholder Covenants
Each Holder hereby covenants and agrees that:
(a) it will not sell any Registrable Securities under the Registration
Statement until it has received notice from the Company that such Registration
Statement and any post-effective amendments thereto have become effective;
(b) it and its officers, directors or Affiliates, if any, will comply
with the prospectus delivery requirements of the Securities Act as applicable to
them in connection with sales of Registrable Securities pursuant to a
Registration Statement;
(c) by its acquisition of such Registrable Securities that, upon
receipt of a notice from the Company of the occurrence of any event of the kind
described in Section 4(d)(iv), (v), (vi), (vii) and (viii) of this Annex A, such
Holder will forthwith discontinue disposition of such Registrable Securities
under the Registration Statements until such Holder's receipt of the copies of
the supplemented Prospectus and/or amended Registration Statements or until it
is advised in writing (the "Advice") by the Company that the use of the
applicable Pro spectus may be resumed, and, in either case, has received copies
of any additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Pro spectus or Registration Statement.
Section 7. Registration Expenses
Except to the extent limited by the applicable state law, all fees and
expenses incident to the performance of or compliance with this Annex A by the
Company shall be borne by the Company whether or not pursuant to an Underwritten
Offering and whether or not any Registration Statements is filed or becomes
effective and whether or not any Registrable Securities are sold pursuant to any
Registration Statements. The fees and expenses referred to in the foregoing
sentence shall include, without limitation (i) all registration and filing fees
(including, without limitation, fees and expenses (A) with respect to filings
required to be made with any securities exchange or market on which Registrable
Securities are required hereunder to be listed and (B) in compliance with state
securities or Blue Sky laws (including, without limitation, fees and
disbursements of counsel for the Stockholders in connection with Blue Sky
qualifications of the Registrable Securities and determination of the
eligibility of the Registrable Securities for investment under the laws of such
jurisdictions as the managing underwriters, if any)); (ii) printing expenses
(including, without limitation, expenses of printing certificates for
Registrable Securities and of printing prospectuses if the printing of
prospectuses is requested by the managing underwriters, if any; (iii) messenger,
telephone and delivery expenses, (iv) fees and disbursements of counsel for the
Company; (v) Securities Act liability insurance, if the Company so desires such
insurance; (vi) fees and expenses of all other Persons retained by the Company
in connection with the consummation of the transactions contemplated by this
Annex A; and (vii) all of its internal expenses of the Company incurred in
connection with the consummation of the transactions contemplated by this Annex
A (including, without limitation, all salaries and
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expenses of its officers and employees performing legal or accounting duties,
the expense of any annual audit, the fees and expenses incurred in connection
with the listing of the Registrable Securities on any securities exchange as
required hereunder (all such expenses being referred to herein as "Registration
Expenses"); provided, however, that except as expressly set forth herein, in no
event shall Registration Expenses include any underwriting discounts,
commissions, or fees attributable to the sale of the Registrable Securities or
any counsel, accountants or other persons retained by the Holders incurred in
connection with the consummation of the transactions contemplated by this
Annex A.
Section 8. Indemnification and Contribution
Section 8.1 Indemnification by the Company. The Company shall,
notwithstanding any termination of this Annex A, indemnify and hold harmless
each Holder and their agents, brokers, investment advisors and employees of each
of them and each underwriter of the Registrable Securities and their officers,
directors, affiliates, partners and any broker or dealer through whom such
shares may be sold and each Person, if any, who controls (within the meaning of
Section 15 of the Securities Act) such Holder or any such underwriter to the
fullest extent permitted by applicable law, from and against any and all losses,
claims, damages, liabilities, costs (including, without limitation, costs of
preparation and attorneys' fees) and expenses (collectively, "Losses"), as
incurred, arising out of or relating to any untrue or alleged untrue statement
of a material fact contained in any Registration Statement, any Prospectus or
any form of prospectus or in any amendment or supplement thereto or in any
preliminary prospectus, or arising out of or relating to any omission or alleged
omission of a material fact required to be stated therein or necessary to make
the statements therein (in the case of any Prospectus or form of prospectus or
supplement thereto, in light of the circumstances under which they were made)
not misleading (in the case of any Prospectus or form of Prospectus or
supplement thereto, in light of the circumstances under which they were made),
except to the extent, but only to the extent, that such untrue statements or
omissions are based solely upon information regarding such Holder furnished in
writing to the Company by such Holder expressly for use therein, which
information was reasonably relied on by the Company for use therein or to the
extent that such information relates to such Holder or such Holder's proposed
method of distribution of Registrable Securities and was reviewed and expressly
approved in writing by such Holder expressly for use in any Registration
Statement, such Prospectus or such form of Prospectus or in any amendment or
supplement thereto. The Company shall notify the Holders promptly of the
institution, threat or assertion of any Proceeding of which the Company is aware
in connection with the transactions contemplated by this Annex A.
Section 8.2 Indemnification by Holders. Each Holder shall, severally and
not jointly, indemnify and hold harmless the Company, the directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses (as
determined by a court of competent jurisdiction in a final judgment not subject
to appeal or review) arising solely out of or based solely upon any untrue
statement of a material fact
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contained in the Registration Statements, any Prospectus, or any form of
prospectus, or arising solely out of or based solely upon any omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading to the extent, but only to the extent, that such untrue
statement or omission is contained in any information so furnished in writing by
such Holder to the Company specifically for inclusion in the Registration
Statement or such Prospectus and that such information was reasonably relied
upon by the Company for use in the Registration Statement, such Prospectus or
such form of prospectus or to the extent that such information relates to such
Holder or such Holder's proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or such form of
Prospectus. In no event shall the liability of any selling Holder hereunder be
greater in amount than the dollar amount of the net proceeds received by such
Holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation.
Section 8.3 Conduct of Indemnification Proceedings.
(a) If any Proceeding shall be brought or asserted against any Person
entitled to indemnity hereunder (an "Indemnified Party"), such Indemnified Party
promptly shall notify the Person from whom indemnity is sought (the
"Indemnifying Party") in writing, and the Indemnifying Party shall assume the
defense thereof, including the employment of counsel reasonably satisfactory to
the Indemnified Party and the payment of all fees and expenses incurred in
connection with defense thereof; provided, that the failure of any Indemnified
Party to give such notice shall not relieve the Indemnifying Party of its
obligations or liabilities pursuant to this Annex A, except (and only) to the
extent that it shall be finally determined by a court of competent jurisdiction
(which determination is not subject to appeal or further review) that such
failure shall have proximately and materially adversely prejudiced the
Indemnifying Party.
(b) An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in
writing to pay such fees and expenses; or (2) the Indemnifying Party shall have
failed promptly to assume the defense of such Proceeding and to employ counsel
reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3)
the named parties to any such Proceeding (including any impeded parties) include
both such Indemnified Party and the Indemnifying Party, and such Indemnified
Party shall have been advised by counsel that a conflict of interest is likely
to exist if the same counsel were to represent such Indemnified Party and the
Indemnifying Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying Party shall, without
the prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any
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Indemnified Party is a party, unless such settlement includes an unconditional
release of such Indemnified Party from all liability on claims that are the
subject matter of such Proceeding.
(c) All fees and expenses of the Indemnified Party (including
reasonable fees and expenses to the extent incurred in connection with
investigating or preparing to defend such Proceeding in a manner not
inconsistent with this Section) shall be paid to the Indemnified Party, as
incurred, within 10 Business Days of written notice thereof to the Indemnifying
Party (regardless of whether it is ultimately determined that an Indemnified
Party is not entitled to indemnification hereunder; provided, that the
Indemnifying Party may require such Indemnified Party to undertake to reimburse
all such fees and expenses to the extent it is finally judicially determined
that such Indemnified Party is not entitled to indemnification hereunder).
Section 8.4 Contribution.
(a) If a claim for indemnification under Section 8.1 or 8.2 is
unavailable to an Indemnified Party because of a failure or refusal of a
governmental authority to enforce such indemnification in accordance with its
terms (by reason of public policy or otherwise), then each Indemnifying Party,
in lieu of indemnifying such Indemnified Party, shall contribute to the amount
paid or payable by such Indemnified Party as a result of such Losses, in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party and Indemnified Party in connection with the actions, statements or
omissions that resulted in such Losses as well as any other relevant equitable
considerations. The relative fault of such Indemnifying Party and Indemnified
Party shall be determined by reference to, among other things, whether any
action in question, including any untrue or alleged untrue statement of a
material fact or omission or alleged omission of a material fact, has been taken
or made by, or relates to information supplied by, such Indemnifying Party or
Indemnified Party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action, statement or
omission. The amount paid or payable by a party as a result of any Losses shall
be deemed to include, subject to the limitations set forth herein, any
reasonable attorneys' or other reasonable fees or expenses incurred by such
party in connection with any Proceeding to the extent such party would have been
indemnified for such fees or expenses if the indemnification provided for in
this Section was available to such party in accordance with its terms. In no
event shall the liability of any selling Holder hereunder be greater in amount
than the dollar amount of the net proceeds received by such Holder upon the sale
of the Registrable Securities giving rise to such indemnification obligation.
(b) The parties hereto agree that it would not be just and equitable
if contribution pursuant to this Section 8 were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 8, no Stockholder shall be
required to contribute, in the aggregate, any amount in excess of the amount by
which the proceeds actually received by such Stockholder from the sale of the
Registrable Securities subject to the Proceeding exceeds the amount of any
damages that such Stockholder has otherwise been required to pay by reason of
such untrue or alleged untrue statement or
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omission or alleged omission. No Person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
(c) The indemnity and contribution agreements contained in this
Section 8 are in addition to any liability that the Indemnifying Parties may
have to the Indemnified Parties.
Section 8.5 Rule 144. Following the IPO, the Company covenants that:
(a) it will file the reports required to be filed by the Company under
the Securities Act and the Exchange Act, so to enable the Holders to sell
Registrable Securities pursuant to Rule 144 under the Securities Act;
(b) it shall cooperate with any Holder in connection with any sale,
transfer or other disposition by such Holder of any Registrable Securities
pursuant to Rule 144 under the Securities Act;
(c) it will take such action as any Holder may reasonably request, all
to the extent required from time to time to enable such Holder to sell its
Common Stock without registration under the Securities Act within the limitation
of the exemptions provided by Rule 144 promulgated under the Securities Act,
including providing any legal opinions; and
(d) upon the request of any Holder, it shall deliver to such Holder a
written certification of a duly authorized officer as to whether it has complied
with such requirements.
Section 9. Term of Registration Rights.
The rights of Holders with respect to the registration rights granted
pursuant to this Annex A shall remain in effect, subject to the terms hereof, so
long as there are Registrable Securities or securities which are convertible or
exchangable for Registrable Securities issued and outstanding.
Section 10. Miscellaneous.
Section 10.1 Entire Agreement; Amendments. This Annex A contains the entire
understanding of the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, oral or written, with respect
to such matters.
Section 10.2 Notices. Any and all notices or other communications or
deliveries required or permitted to be provided pursuant to this Annex A shall
be in writing and shall be deemed to have been received (a) upon hand delivery
(receipt acknowledged) or delivery by telex (with correct answer back received),
telecopy or facsimile (with transmission confirmation report) at the address or
number designated below (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such
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delivery (if delivered on a business day after normal business hours where such
notice is to be received) or (b) on the second business day following the date
of mailing by express courier service, fully prepaid, addressed to such address,
or upon actual receipt of such mailing, whichever shall first occur. The address
for the Company shall be: barnesandnoble.com inc., 76 Ninth Avenue, 11th Floor,
New York, New York 10011; Attention: Chief Executive Officer; fax: (212)
414-6652. The addresses for each Holder shall be maintained by the Company.
Copies of all notices shall be sent to Robinson Silverman Pearce Aronsohn &
Berman, LLP, 1290 Avenue of the Americas, New York, New York 10104, Attn:
Michael Rosen, Esq.; fax: (212) 541-1400, or such other address as may be
designated in writing hereafter, in the same manner, by such person.
Section 10.3 Remedies. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Annex A, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Annex A, including recovery of damages,
will be entitled to specific performance of its rights under this Annex A. The
Company and each Holder agree that monetary damages would not provide adequate
compensation for any losses incurred by reason of a breach by it of any of the
provisions of this Annex A and hereby further agrees that, in the event of any
action for specific performance in respect of such breach, it shall waive the
defense that a remedy at law would be adequate.
Section 10.4 No Inconsistent Agreements. Neither the Company nor any of its
subsidiaries has, as of the date hereof, nor shall the Company or any of its
subsidiaries, on or after the date of this Annex A, enter into any agreement
with respect to its securities that is inconsistent with the rights granted to
the Holders in this Annex A or otherwise conflicts with the provisions hereof.
Neither the Company nor any of its subsidiaries has previously entered into any
agreement granting any registration rights with respect to any of its securities
to any Person. Without limiting the generality of the foregoing, the Company
shall not grant to any Person the right to request the Company to register any
securities of the Company under the Securities Act unless the rights so granted
are subject in all respects to the prior rights in full of the Holders, and are
not otherwise in conflict or inconsistent with the provisions of this Annex A.
Section 10.5 Amendments and Waivers. No provision of this Annex A may be
waived or amended except in a written instrument signed, in the case of an
amendment, by both the Company and the Holders; or, in the case of a waiver, by
the party against whom enforcement of any such waiver is sought. No waiver of
any default with respect to any provision, condition or requirement of this
Annex A shall be deemed to be a continuing waiver in the future or a waiver of
any other provision, condition or requirement hereof, nor shall any delay or
omission of either party to exercise any right hereunder in any manner impair
the exercise of any such right accruing to it thereafter. Notwithstanding the
foregoing, no such amendment shall be effective to the extent that it applies to
less than all of the Holders. The Company shall not offer or pay any
consideration to a Holder for consenting to such an amendment or waiver unless
the same consideration is offered to each Holder and the same consideration is
paid to each Holder which consents to such amendment or waiver.
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Section 10.6 Successors and Assigns. This Annex A shall inure to the
benefit of and be binding upon the successors and permitted assigns of each of
the parties. The rights of each Holder hereunder, including the right to have
the Company register for resale Registrable Securities in accordance with the
terms of this Annex A, shall be automatically assignable by each Holder together
with the Registrable Security, or the securities into which such Registrable
Securities are convertible or exchangeable into, to which such rights relate if:
(i) the Holder agrees in writing with the transferee or assignee to assign such
rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment, (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee, and (b) the securities with
respect to which such registration rights are being transferred or assigned,
(iii) following such transfer or assignment the further disposition of such
securities by the transferee or assignees is restricted under the Securities Act
and applicable state securities laws, (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this Section, the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions of this Annex A, and (v) such transfer shall have been made in
accordance with the applicable requirements of any agreement applicable to the
transfer of such shares, including, without limitation, the Stockholders
Agreement.. The rights to assignment shall apply to the Holders (and to
subsequent) successors and assigns.
Section 10.7 No Third-Party Beneficiaries. This Annex A is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
Section 10.8 Cumulative Remedies. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
Section 10.9 Severability. If any term, provision, covenant or restriction
of this Annex A is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.
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AMENDMENT NO. 1
TO
AMENDED AND RESTATED
SERVICES AGREEMENT
Amendment No. 1, dated as of _____________, 1999, between Barnes & Noble,
Inc., a Delaware corporation having an office located at 122 Fifth Avenue, New
York, New York 10011 ("B&N"), and barnesandnoble.com llc, a Delaware limited
liability company having an office located at 76 Ninth Avenue, 11th Floor, New
York, New York 10011 (the "LLC"), amending that certain Amended and Restated
Services Agreement dated as of October 31, 1998, by and among B&N, the LLC and
barnesandnoble.com inc. (formerly known as Barnes & Noble Online, Inc.)
("Online") (the "Original Agreement"). Capitalized terms used but not otherwise
defined herein shall have the meanings ascribed to them in the Original
Agreement.
WHEREAS, B&N, the LLC and Online have entered into the Original Agreement;
WHEREAS, the Original Agreement may be amended upon written consent of B&N
and the LLC;
WHEREAS, B&N and the LLC wish to amend the Original Agreement as set forth
herein.
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. Amendments to Original Agreement.
(a) The second "Whereas" clause of the Original Agreement is hereby
amended by adding the phrase "as the same may be amended, modified or
supplemented from time to time," immediately before the words "the LLC
Agreement" in the fourth line thereof.
(b) The phrase "Section 4.7(a) of the LLC Agreement" in each of
Sections 6(a) and 6(c)(i) of the Original Agreement is hereby deleted and
replaced in its entirety by the phrase "Section 3.1(d)(i) of the By-laws of
barnesandnoble.com inc."
(c) The phrase "a Membership Interest of at least 10% of the
outstanding Membership Interests" in Section 6(c) of the Original Agreement is
deleted and replaced in its entirety by the phrase "Membership Units
constituting at least 10% of the then outstanding Membership Units".
-2-
<PAGE>
(d) Section 6(c)(ii)(B) of the Original Agreement is hereby deleted
and replaced in its entirety by the following language:
"(B) the LLC is in default of the terms of this Agreement
and such default continues for more than thirty (30) days after
written notice thereof to the LLC;"
2. Original Agreement in Full Force and Effect. Except as herein
expressly amended, all of the provisions of the Original Agreement remain
unchanged and in full force and effect.
3. References in Original Agreement. From and after the date hereof,
all references in the Original Agreement to "this Agreement," "hereof,"
"herein," or similar terms, shall mean and refer to the Original Agreement as
amended by this Amendment.
4. Governing Law. This Amendment shall be construed and interpreted
according to the laws of the State of New York, without regard to the conflicts
of law rules thereof.
5. Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first set forth above.
BARNES & NOBLE, INC.
By:________________________
Name:
Title:
barnesandnoble.com llc
By:________________________
Name:
Title:
-3-
<PAGE>
AMENDMENT NO. 1
TO
AMENDED AND RESTATED
SERVICES AGREEMENT
Amendment No. 1, dated as of ___________, 1999, between Marboro Books
Corp., a New York corporation having an office located at One Pond Road,
Rockleigh, New Jersey 07647 ("Marboro"), and barnesandnoble.com llc, a Delaware
limited liability company having an office located at 76 Ninth Avenue, 11th
Floor, New York, New York 10011 (the "LLC"), amending that certain Amended and
Restated Services Agreement dated as of October 31, 1998, by and among Marboro,
the LLC and barnesandnoble.com inc. (formerly known as Barnes & Noble Online,
Inc.) ("Online") (the "Original Agreement"). Capitalized terms used but not
otherwise defined herein shall have the meanings ascribed to them in the
Original Agreement.
WHEREAS, Marboro, the LLC and Online have entered into the
Original Agreement;
WHEREAS, the Original Agreement may be amended upon written
consent of Marboro and the LLC;
WHEREAS, Marboro and the LLC wish to amend the Original
Agreement as set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and
agreements herein contained and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
hereby agree as follows:
1. Amendments to Original Agreement.
(a) The second "Whereas" clause of the Original
Agreement is hereby amended by adding the phrase "as the same may be amended,
modified or supplemented from time to time," immediately before the words "the
"LLC Agreement" in the fourth line thereof.
(b) The phrase "Section 4.7(a) of the LLC Agreement"
in each of Sections 6(a) and 6(c)(i) of the Original Agreement is hereby
deleted and replaced in its entirety by the phrase "Section 3.1(d)(i) of the
By-laws of barnesandnoble.com inc."
(c) The phrase "a Membership Interest of at least
10% of the outstanding Membership Interests" in Section 6(c) of the Original
Agreement is deleted and replaced in its entirety by the phrase "Membership
Units constituting at least 10% of the then outstanding Membership Units".
<PAGE>
(d) Section 6(c)(ii)(B) of the Original Agreement is
hereby deleted and replaced in its entirety by the following language:
"(B) the LLC is in default of the terms of
this Agreement and such default continues for more
than thirty (30) days after written notice thereof
to the LLC;"
2. Original Agreement in Full Force and Effect. Except as
herein expressly amended, all of the provisions of the Original Agreement
remain unchanged and in full force and effect.
3. References in Original Agreement. From and after the date
hereof, all references in the Original Agreement to "this Agreement," "hereof,"
"herein," or similar terms, shall mean and refer to the Original Agreement as
amended by this Amendment.
4. Governing Law. This Amendment shall be construed and
interpreted according to the laws of the State of New York, without regard to
the conflicts of law rules thereof.
5. Counterparts. This Amendment may be executed in one or
more counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the date first set forth above.
MARBORO BOOKS CORP.
By:________________________
Name:
Title:
barnesandnoble.com llc
By:________________________
Name:
Title:
-2-
<PAGE>
AMENDMENT NO. 1
TO
AMENDED AND RESTATED
TRADEMARK LICENSE AGREEMENT
Amendment No. 1 , dated as of __________, 1999, between Barnes & Noble
College Bookstores, Inc., a New York corporation having an office located at 33
East 17th Street, New York, New York 10003 ("Licensor"), and barnesandnoble.com
llc, a Delaware limited liability company having an office located at 76 Ninth
Avenue, 11th Floor, New York, New York 10011 ("Licensee"), amending that certain
Amended and Restated Trademark License Agreement dated as of October 31, 1998,
by and among Licensor, Licensee and barnesandnoble.com inc. (formerly known as
Barnes & Noble Online, Inc.) ("Online") (the "Original Agreement"). Capitalized
terms used but not otherwise defined herein shall have the meanings ascribed to
them in the Original Agreement.
WHEREAS, Licensor, Licensee and Online have entered into the Original
Agreement;
WHEREAS, the Original Agreement may be amended upon written consent of
Licensor and Licensee; and
WHEREAS, Licensor and Licensee wish to amend the Original Agreement as set
forth herein.
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. Amendments to Original Agreement.
(a) The third "Whereas" clause of the Original Agreement is hereby
amended by adding the phrase "as the same may be amended, modified or
supplemented from time to time," immediately before the words "the LLC
Agreement" in the fourth line thereof.
(b) The phrase "BN Managers" in Section 1 of the Original Agreement is
hereby deleted and replaced by the phrase "BN Directors".
(c) Section 2(a) of the Original Agreement is hereby deleted and
replaced in its entirety by the following language:
"2. Term; Effects of Termination. (a) The term of this Agreement (the
"Term") shall commence on the date hereof and shall continue until terminated as
provided herein. Licensor may terminate this Agreement, on prior written notice
to Licensee: (i) if
<PAGE>
Licensee is in default of the terms of this Agreement and such default continues
for more than thirty (30) days after written notice thereof to Licensee; (ii) if
Licensee files a petition in bankruptcy or is adjudicated a bankrupt or
insolvent, or makes an assignment for the benefit of creditors, or an
arrangement pursuant to any bankruptcy law, or if Licensee discontinues or
dissolves its business or if a receiver is appointed for Licensee or for
Licensee's business and such receiver is not discharged within 30 days; or (iii)
at any time beginning one year after a transfer by BAG (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."
2. Original Agreement in Full Force and Effect. Except as herein expressly
amended, all of the provisions of the Original Agreement remain unchanged and in
full force and effect.
3. References in Original Agreement. From and after the date hereof, all
references in the Original Agreement to "this Agreement," "hereof," "herein," or
similar terms, shall mean and refer to the Original Agreement as amended by this
Amendment.
4. Governing Law. This Amendment shall be construed and interpreted
according to the laws of the State of New York, without regard to the conflicts
of law rules thereof.
5. Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first set forth above.
BARNES & NOBLE COLLEGE
BOOKSTORES, INC.
By:________________________
Name:
Title:
barnesandnoble.com llc
By:________________________
Name:
Title:
-2-
<PAGE>
AMENDMENT NO. 1
TO
TRADEMARK LICENSE AGREEMENT
Amendment No. 1 , dated as of ____________, 1999, between BOL.Global,
Inc., a Delaware corporation having an office located at 1540 Broadway, New
York, New York 10036 ("Licensor"), and barnesandnoble.com llc, a Delaware
limited liability company having an office located at 76 Ninth Avenue, 11th
Floor, New York, New York 10011 ("Licensee"), amending that certain Trademark
License Agreement dated as of October 31, 1998, by and between Licensor and
Licensee (the "Original Agreement"). Capitalized terms used but not otherwise
defined herein shall have the meanings ascribed to them in the Original
Agreement.
WHEREAS, Licensor and Licensee, having previously entered into
the Original Agreement, wish to amend the Original Agreement as set forth
herein.
NOW, THEREFORE, in consideration of the mutual promises and
agreements herein contained and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
hereby agree as follows:
1. Amendments to Original Agreement.
(a) Section 1 of the Original Agreement is hereby
amended by adding the phrase "as the same may be amended, modified or
supplemented from time to time," immediately before the words "the "LLC
Agreement" in the fourth line thereof.
(b) The phrase "USO Managers" in Section 1 of the
Original Agreement is hereby deleted and replaced by the phrase "USO Directors".
(c) Section 2(a) of the Original Agreement is hereby
deleted and replaced in its entirety by the following language:
"2. Term; Effects of Termination. (a) The term of this
Agreement (the "Term") shall commence on the date hereof and shall continue
until terminated as provided herein. Licensor may terminate this Agreement, on
prior written notice to Licensee: (i) if Licensee is in default of the terms of
this Agreement and such default continues for more than thirty (30) days after
written notice thereof to Licensee; or (ii) if Licensee files a petition in
bankruptcy or is adjudicated a bankrupt or insolvent, or makes an assignment for
the benefit of creditors, or an arrangement pursuant to any bankruptcy law, or
if Licensee discontinues or dissolves its business or if a receiver is appointed
for Licensee or for Licensee's business and such receiver is not discharged
within 30 days."
<PAGE>
2. Original Agreement in Full Force and Effect. Except as
herein expressly amended, all of the provisions of the Original Agreement remain
unchanged and in full force and effect.
3. References in Original Agreement. From and after the date
hereof, all references in the Original Agreement to "this Agreement," "hereof,"
"herein," or similar terms, shall mean and refer to the Original Agreement as
amended by this Amendment.
4. Governing Law. This Amendment shall be construed and
interpreted according to the laws of the State of New York, without regard to
the conflicts of law rules thereof.
5. Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the date first set forth above.
BOL.GLOBAL, INC.
By:
---------------------------
Name:
Title:
barnesandnoble.com llc
By:
---------------------------
Name:
Title:
-2-
<PAGE>
AMENDMENT NO. 1
TO
SUPPLY AGREEMENT
Amendment No. 1 , dated as of _____________, 1999, between Barnes & Noble,
Inc., a Delaware corporation having an office located at 122 Fifth Avenue, New
York, New York 10011 ("B&N"), and barnesandnoble.com llc, a Delaware limited
liability company having an office located at 76 Ninth Avenue, 11th Floor, New
York, New York 10011 (the "LLC"), amending that certain Supply Agreement dated
as of October 31, 1998, by and between B&N and the LLC (the "Original
Agreement"). Capitalized terms used but not otherwise defined herein shall have
the meanings ascribed to them in the Original Agreement.
WHEREAS, B&N and the LLC, having previously entered into the Original
Agreement, wish to amend the Original Agreement as set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. Amendments to Original Agreement. Paragraph 4 of the Original Agreement
is hereby deleted and replaced in its entirety by the following language:
"4. Termination. (a) The LLC, upon approval of a majority of the USO
Directors, may terminate this Agreement on thirty (30) days' prior written
notice to B&N.
(b) B&N may terminate this Agreement under any of the following
circumstances:
(i) the LLC is in default of the terms of this Agreement and such
default continues for more than thirty (30) days after written notice
thereof to the LLC;
(ii) B&N or the LLC shall (A) apply for or consent to the
appointment of, or the taking possession by, a receiver, custodian,
trustee, examiner, liquidator or the like of itself or of all or any
substantial part of its property, (B) make a general assignment for
the benefit of its creditors, (C) commence a voluntary case under the
Federal Bankruptcy Code of 1978, as amended, or (D) file a petition as
a debtor seeking to take advantage of any other law relating to
bankruptcy, insolvency, reorganization, liquidation, dissolution,
arrangement or winding-up, or composition or readjustment of its
debts;
<PAGE>
(iii) a proceeding or case shall be commenced against any of B&N
or the LLC, without such party's application or consent, seeking (A)
its reorganization, liquidation, dissolution, arrangement or
winding-up, or the composition or readjustment of its debts, (B) the
appointment of a receiver, custodian, trustee, examiner or liquidator
or the like of such party or of all or any substantial part of its
property, or (C) similar relief in respect of such party under any law
relating to bankruptcy, insolvency, reorganization, liquidation,
dissolution, arrangement or winding-up, or composition or adjustment
of debts, and such proceeding or case shall continue undismissed, or
an order, judgment or decree approving or ordering any of the
foregoing shall be entered and continue unstayed and in effect, for a
period of 60 or more days; or
(iv) at any time after June 1, 2004, if BAG or any of its
Affiliates shall have effected a permitted transfer to any third party
pursuant to the LLC Agreement or if either B&N or BAG owns less than
15% of the outstanding Membership Units."
2. Original Agreement in Full Force and Effect. Except as herein expressly
amended, all of the provisions of the Original Agreement remain unchanged and in
full force and effect.
3. References in Original Agreement. From and after the date hereof, all
references in the Original Agreement to "this Agreement," "hereof," "herein," or
similar terms, shall mean and refer to the Original Agreement as amended by this
Amendment.
4. Governing Law. This Amendment shall be construed and interpreted
according to the laws of the State of New York, without regard to the conflicts
of law rules thereof.
5. Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first set forth above.
BARNES & NOBLE, INC.
By:________________________
Name:
Title:
-2-
<PAGE>
barnesandnoble.com llc
By:________________________
Name:
Title:
<PAGE>
AMENDMENT NO. 1
TO
AMENDED AND RESTATED
DATABASE AND SOFTWARE LICENSE AGREEMENT
Amendment No. 1 , dated as of _______________, 1999, between Barnes &
Noble, Inc., a Delaware corporation having an office located at 122 Fifth
Avenue, New York, New York 10011 ("Licensor"), and barnesandnoble.com llc, a
Delaware limited liability company having an office located at 76 Ninth Avenue,
11th Floor, New York, New York 10011 ("Licensee"), amending that certain Amended
and Restated Database and Software License Agreement dated as of October 31,
1998, by and among the Licensor, Licensee and barnesandnoble.com inc. (formerly
known as Barnes & Noble Online, Inc.) ("Online") (the "Original Agreement").
Capitalized terms used but not otherwise defined herein shall have the meanings
ascribed to them in the Original Agreement.
WHEREAS, Licensor, Licensee and Online have entered into the Original
Agreement;
WHEREAS, the Original Agreement may be amended upon written consent of the
Licensor and Licensee; and
WHEREAS, Licensor and Licensee wish to amend the Original Agreement as set
forth herein.
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. Amendments to Original Agreement.
(a) The second "Whereas" clause of the Original Agreement is hereby
amended by adding the phrase "as the same may be amended, modified or
supplemented from time to time," immediately before the words "the LLC
Agreement" in the fourth line thereof.
(b) The phrase "BN Managers" in Section 1(b) of the Original Agreement
is hereby deleted and replaced by the phrase "BN Directors".
(c) Section 2(a) of the Original Agreement is hereby deleted and
replaced in its entirety by the following language:
<PAGE>
"2. Term; Effects of Termination. (a) The term of this Agreement (the
"Term") shall commence on the date hereof and shall continue until terminated as
provided herein. Licensor may terminate this Agreement, on prior written notice
to Licensee: (i) if Licensee is in default of the terms of this Agreement and
such default continues for more than thirty (30) days after written notice
thereof to Licensee; (ii) if Licensee files a petition in bankruptcy or is
adjudicated a bankrupt or insolvent, or makes an assignment for the benefit of
creditors, or an arrangement pursuant to any bankruptcy law, or if Licensee
discontinues or dissolves its business or if a receiver is appointed for
Licensee or for Licensee's business and such receiver is not discharged within
30 days; or (iii) at any time beginning one year after a transfer by BAG (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."
2. Original Agreement in Full Force and Effect. Except as herein expressly
amended, all of the provisions of the Original Agreement remain unchanged and in
full force and effect.
3. References in Original Agreement. From and after the date hereof, all
references in the Original Agreement to "this Agreement," "hereof," "herein," or
similar terms, shall mean and refer to the Original Agreement as amended by this
Amendment.
4. Governing Law. This Amendment shall be construed and interpreted
according to the laws of the State of New York, without regard to the conflicts
of law rules thereof.
5. Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first set forth above.
BARNES & NOBLE, INC.
By:________________________
Name:
Title:
barnesandnoble.com llc
By:________________________
Name:
Title:
-2-
<PAGE>
EMPLOYMENT AGREEMENT
(CHIEF EXECUTIVE OFFICER)
Agreement made as of this 1st day of November, 1998, by and among Jonathan
B. Bulkeley, of London, England ("Employee") and barnesandnoble.com llc
(referred to herein, together with any successors, as the "Company"), a joint
venture between and among Barnes & Noble, Inc. ("Barnes & Noble") and
Bertelsmann AG ("Bertelsmann").
PREAMBLE
The Board of Managers of the Company recognizes Employee's potential
contribution to the growth and success of the Company and desires to assure the
Company of Employee's employment in an executive capacity as Chief Executive and
to compensate him therefor. Employee wants to be employed by the Company and to
commit himself to serve the Company on the terms herein provided.
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties, the parties agree as follows:
1. Definitions
"Affiliate" shall mean with reference to a specified Person, any Person
that directly or indirectly through one or more intermediaries controls or is
controlled by or is under common control with the specified Person. For purposes
of this definition, "control" (including, with correlative meaning, the terms
"controlled by" and "under common control with"), as used in respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities or by contract or otherwise.
"Benefits" shall mean all the fringe benefits approved by the Board from
time to time and established by the Company for the benefit of employees
generally and/or for key employees of the Company as a class, including, but not
limited to, regular holidays, vacations, absences resulting from illness or
accident, health insurance, disability and medical plans (including dental and
prescription drug), group life insurance, and pension, profit-sharing and stock
bonus plans or their equivalent.
"Board" shall mean the Board of Managers of the Company, together with an
executive committee thereof (if any), as the same shall be constituted from time
to time.
"Cause" for termination shall mean (i) Employee's final conviction of a
felony impacting on the performance of his duties or involving a crime of moral
turpitude, or (ii) acts of Employee which constitute willful fraud on the part
of Employee in connection with his duties under this Agreement, including but
not limited to misappropriation or embezzlement in the
<PAGE>
performance of duties as an employee of the Company, or willfully engaging in
conduct materially injurious to the Company and in violation of the covenants
contained in this Agreement.
"Chairman" shall mean the individual designated by the Board from time to
time as its chairman.
"Change of Control" shall mean the occurrence of one or more of the
following three events:
(1) After the effective date of this Agreement, any Person other than
an Affiliate of Barnes & Noble or Bertelsmann becomes a beneficial owner
(as such term is defined in Rule 13d-3 promulgated under the Securities
Exchange Act of 1934) directly or indirectly of securities representing 50%
or more of the total number of votes that may be cast for the election of
managers of the Company; or
(2) Within two years after a merger, consolidation, liquidation or
sale of assets involving the Company, or a contested election of a Company
manager, or any combination of the foregoing, the individuals who were
managers of the Company immediately prior thereto shall cease to constitute
a majority of the Board; or
(3) Within two years after a tender offer or exchange offer for voting
securities of the Company, the individuals who were managers of the Company
immediately prior thereto shall cease to constitute a majority of the
Board.
"Chief Executive Officer" shall mean the individual having responsibility
to the Chairman for direction and management of the executive and operational
affairs of the Company and who reports and is accountable only to the Chairman.
"Company" shall mean barnesandnoble.com llc, a Delaware limited liability
company, together with such subsidiaries of the Company as may from time to time
exist.
"Disability" shall mean a written determination by a physician mutually
agreeable to the Company and Employee (or, in the event of Employee's total
physical or mental disability, Employee's legal representative) that Employee is
physically or mentally unable to perform his duties of Chief Executive Officer
under this Agreement and that such disability can reasonably be expected to
continue for a period of six (6) consecutive months or for shorter periods
aggregating one hundred and eighty (180) days in any twelve-(12)-month period.
If in the written determination of such physician the physical or mental
disability is reasonably permanent, such Disability shall be a "Permanent
Disability."
"Employee" shall mean Jonathan Bulkeley and, if the context requires, his
heirs, personal representatives, and permitted successors and assigns.
-2-
<PAGE>
"Person" shall mean any natural person, incorporated entity, limited or
general partnership, business trust, association, agency (governmental or
private), division, political sovereign, or subdivision or instrumentality,
including those groups identified as Apersons@ in " 13(d)(3) and 14(d)(2) of the
Securities Exchange Act of 1934.
"Territory" shall mean any state of the United States and any equivalent
section or area of any country in which the Company has revenue-producing
customers or activities.
2. Position, Responsibilities, and Term of Employment.
2.01 Position. Employee shall serve as Chief Executive Officer and in such
additional management position(s) as the Board shall designate. In this capacity
Employee shall, subject to the bylaws of the Company, and to the direction of
the Board, serve the Company by performing such duties and carrying out such
responsibilities as are normally related to the position of Chief Executive
Officer in accordance with the standards of the industry. The Board shall vote
that during the term of employment pursuant to this Agreement: (i) Employee be
elected to and continued in the office of President of the Company and such of
its subsidiaries as he may select (and such other office, if any, as shall be
denominated that of the Chief Executive Officer of the Company or such
subsidiary in the Company's or such subsidiary's Bylaws or other constituent
instruments); and (ii) neither the Company nor any of its subsidiaries shall
confer on any other officer or employee (other than the Chairman of the Board)
authority, responsibility, powers or prerogatives superior or equal to the
authority, responsibility, prerogatives and powers vested in Employee hereunder.
2.02 Best Efforts Covenant. Employee will, to the best of his ability,
devote his full professional and business time and best efforts to the
performance of his duties for the Company and its subsidiaries and Affiliates.
2.03 Exclusivity Covenant. During the Agreement's term, Employee agrees not
to acquire, assume, or participate in, directly or indirectly, any position,
investment, or interest in the Territory adverse or antagonistic to the Company,
its business or prospects, financial or otherwise, or take any action towards
any of the foregoing. The provisions of this Section shall not prevent Employee
from owning shares of any competitor of the Company so long as such shares (i)
do not constitute more than 5% of the outstanding equity of such competitor, and
(ii) are regularly traded on a recognized exchange or listed for trading by
NASDAQ in the over-the-counter market. Without limiting the generality of the
foregoing, the Company acknowledges Employee's participation as a director of
and shareholder in the firms listed on Schedule A and agrees that such
participation will not violate this Section 2.03.
2.04 Post-Employment Noncompetition Covenant. Except with the prior written
consent of the Board, Employee shall not engage in activities in the Territory
either on Employee's own behalf or that of any other business organization,
which are in direct or indirect competition with the Company for a period of one
(1) year subsequent to Employee's voluntary
-3-
<PAGE>
withdrawal from employment with the Company (except for a termination pursuant
to a Change of Control), or the Company's termination of Employee's employment
for Cause. Employee and the Company expressly declare that the territorial and
time limitations contained in this Section and the definition of ATerritory@ are
entirely reasonable at this time and are properly and necessarily required for
the adequate protection of the business and intellectual property of the
Company. If such territorial or time limitations, or any portions thereof, are
deemed to be unreasonable by a court of competent jurisdiction, whether due to
passage of time, change of circumstances or otherwise, Employee and the Company
agree to a reduction of said territorial and/or time limitations to such areas
and/or periods of time as said court shall deem reasonable.
2.05 Confidential Information. Employee recognizes and acknowledges that
the Company's trade secrets and proprietary information and know-how, as they
may exist from time to time (AConfidential Information@), are valuable, special
and unique assets of the Company's business, access to and knowledge of which
are essential to the performance of Employee's duties hereunder. Employee will
not, during or after the term of his employment by the Company, in whole or in
part, disclose such secrets, information or know-how to any Person for any
reason or purpose whatsoever, nor shall Employee make use of any such property
for his own purposes or for the benefit of any Person (except the Company) under
any circumstances during or after the term of his employment, provided that
after the term of his employment these restrictions shall not apply to such
secrets, information and know-how which are then in the public domain (provided
that Employee was not responsible, directly or indirectly, for such secrets,
information or processes entering the public domain without the Company's
consent). Employee shall have no obligation hereunder to keep confidential any
Confidential Information if and to the extent disclosure of any thereof is
specifically required by law; provided, however, that in the event disclosure is
required by applicable law, the Employee shall provide the Company with prompt
notice of such requirement, prior to making any disclosure, so that the Company
may seek an appropriate protective order. Employee agrees to hold as the
Company's property all memoranda, books, papers, letters, customer lists,
processes, computer software, records, financial information, policy and
procedure manuals, training and recruiting procedures and other data, and all
copies thereof and therefrom, in any way relating to the Company's business and
affairs, whether made by him or otherwise coming into his possession, and on
termination of his employment, or on demand of the Company at any time, to
deliver the same to the Company. Employee agrees that he will not use or
disclose to other employees of the Company, during the term of this Agreement,
confidential information belonging to his former employers, unless legally
authorized to do so.
Employee shall use his best efforts to prevent the removal of any
Confidential Information from the premises of the Company, except as required in
his normal course of employment by the Company. Employee shall use his best
efforts to cause all persons or entities to whom any Confidential Information
shall be disclosed by him hereunder to observe the terms and conditions set
forth herein as though each such person or entity was bound hereby.
-4-
<PAGE>
2.06 Records, Files. All records, files, drawings, documents, equipment and
the like relating to the business of the Company which are prepared or used by
Employee during the term of his employment under this Agreement shall be and
shall remain the sole property of the Company.
2.07 Equitable Relief. Employee acknowledges that his services to the
Company are of a unique character which give them a special value to the
Company. Employee further recognizes that violations by Employee of any one or
more of the provisions of this Section 2 may give rise to losses or damages for
which the Company cannot be reasonably or adequately compensated in an action at
law and that such violations may result in irreparable and continuing harm to
the Company. Employee agrees that, therefore, in addition to any other remedy
which the Company may have at law and equity, the Company shall be entitled to
injunctive relief to restrain any violation, actual or threatened, by Employee
of the provisions of this Agreement.
3. Compensation.
3.01 Minimal Annual Compensation. The Company shall pay to Employee for the
services to be rendered hereunder a base salary at an annual rate of four
hundred thousand dollars ($400,000) ("Minimum Annual Compensation"), calculated
as of a commencement date ("Commencement Date") of January 4, 1999. There shall
be an annual review for merit by the Board and an increase as deemed appropriate
to reflect the value of services by Employee. At no time during the term of this
Agreement shall Employee's annual base salary fall below Minimum Annual
Compensation except in the event of a general reduction of the sort described in
Section 4.02(ii). In addition, if the Board increases Employee's Minimum Annual
Compensation at any time during the term of this Agreement, such increased
Minimum Annual Compensation shall become a floor below which Employee's
compensation shall not fall at any future time during the term of this Agreement
and shall become Minimum Annual Compensation.
Employee's salary shall be payable in periodic installments, beginning on
the payment date next succeeding January 4, 1999, in accordance with the
Company's usual practice for similarly situated employees of the Company.
3.02 Incentive Compensation. In addition to Minimum Annual Compensation,
Employee shall be entitled to receive payments under the Company's incentive
compensation and/or bonus program(s) (as in effect from time to time), if any,
in such amounts as are determined by the Company to be appropriate for similarly
situated employees of the Company. Any incentive compensation which is not
deductible in the opinion of the Company's counsel, under sec. 162(m) of the
Internal Revenue Code shall be deferred and paid, without interest, in the first
year or years when and to the extent such payment may be deducted under sec.
162(m), but in any event no later than the first day of the tax year of the
Company commencing after the Employee ceases employment with the Company,
Employee's right to such payment being absolute, subject only to the provisions
of Section 2.07.
-5-
<PAGE>
3.03 Participating in Benefits. Employee shall be entitled to all Benefits
for as long as such Benefits may remain in effect and/or any substitute or
additional Benefits made available in the future to similarly situated employees
of the Company, subject to and on a basis consistent with the terms, conditions
and overall administration of such Benefits adopted by the Company. Benefits
paid to Employee shall not be deemed to be in lieu of other compensation to
Employee hereunder as described in this Section 3.
3.04 Specific Benefits.
During the term of this Agreement (and thereafter to the extent this
Agreement shall require):
(a) Employee shall be entitled to four (4) weeks of paid vacation time
per year, to be taken at times mutually acceptable to the Company and
Employee.
(b) The Company shall provide accident and health insurance for
Employee and his family with limits, extent of coverage and Employee
contributions similar to those provided by Barnes & Noble.
(c) The Company shall obtain at its expense (subject to Employee's
insurability) a term insurance policy on the life of Employee, subject to
the last sentence of this Section 3.04(c), in the face amount of $1,500,000
or such lesser amount as shall be purchasable pursuant to such last
sentence. Employee shall have the exclusive right to designate the
beneficiaries of such policy and change such beneficiaries from time to
time. Such policy and the proceeds shall be the sole property of Employee
and the Company shall not retain any benefit therein. The Company shall not
be obligated to pay premiums for such insurance in excess of $15,000 per
annum.
(d) Employee shall be entitled to sick leave benefits during the
employment period in accordance with the customary policies of the Company
for its executive officers, but in no event less than one (1) month per
year.
(e) In addition to the vacation provided pursuant to Section 3.04(a)
hereof, Employee shall be entitled to not less than ten (10) paid holidays
(other than weekends) per year, generally on such days on which the New
York Stock Exchange is closed to trading.
(f) Employee shall be entitled to receive prompt reimbursement for all
reasonable expenses incurred by him (in accordance with the policies and
procedures established by the Company or the Board for the similarly
situated employees of the Company) in performing services hereunder.
(g) Employee shall be entitled to the following benefits to cover
Employee's relocation from London to New York: (i) prompt reimbursement for
all reasonable expenses incurred in the relocation of Employee and his
family; (ii) prompt reimbursement for all reasonable travel and living
costs for Employee and his family to search for suitable housing and to
satisfactorily attend to personal affairs during the transition; (iii)
prompt reimbursement for the cost to move Employee's household goods; (iv)
temporary housing for a reasonable period of time; (v) reasonable
reimbursement to cover incidental relocation costs; and (vi) the Company
will repurchase, at Employee's
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<PAGE>
Cost, those premises in the New York metropolitan area which Employee
purchases as his principal residence in connection with his employment
hereunder if and as Employee is terminated by the Company for reason other
than Cause, dies or suffers a Permanent Disability (the "Termination
Event"). The Company's obligation to repurchase, which will be at the
option of Employee or, as appropriate, his personal representative, will
expire upon the termination of this Agreement in accordance with its terms
except in the case of termination by reason of a Termination Event, in
which case Employee or his personal representatives may elect to accept the
Company offer to repurchase by delivering notice to the Company within 60
days of the Termination Event. The Company's obligation shall be
conditioned on (i) timely notice as aforesaid and (ii) the subsequent
execution of a reasonably satisfactory purchase and sale agreement in
customary form, negotiated in good faith and conveying the premises free
and clear and in good condition, normal wear and tear excluded. Employee's
"Cost" shall mean and include the initial purchase price, including
transaction costs and brokerage commissions, plus out-of-pocket costs of
capital improvements, but not including points or fees, if any, paid in
connection with Employee's mortgage or other forms of financing. The
Company will indemnify Employee for any tax consequences suffered by
Employee because of the relocation benefits stated in subparagraphs (i)
through (v).
(h) Employee shall be eligible to participate during the employment
period in Benefits not inconsistent or duplicative of those set forth in
this Section 3.04 as the Company shall establish or maintain for its
employees or executives generally.
4. Termination.
4.01 Termination by Company for Other than Cause. If during the term of
this Agreement the Company terminates the employment of Employee and such
termination is not for Cause, then the Company shall pay to Employee an amount
equal to the monthly portion of Employee's Minimum Annual Compensation
multiplied by twenty-four (24), plus the monthly cost to the Company of the
continuation of Benefits at then current levels multiplied by twelve (12) (the
"Severance Amount"). The Employee shall be under no duty to mitigate damages nor
will the Severance Amount be diminished by earnings or income from other
sources.
The Company shall pay to Employee the Severance Amount, in one lump sum as
soon as practicable, but in no event later than sixty (60) days after the date
of such termination.
4.02 Constructive Discharge. If (i) there is a material reduction or
change of Employee's reporting relationship, job duties, responsibilities or
requirements that is inconsistent with the position or positions listed in
Section 2.01 and the Employee's prior reporting relationship, duties,
responsibilities or requirements; (ii) there is a reduction in Employee's salary
then in effect, other than a reduction comparable to reductions generally
applicable to similarly situated employees of the Company; (iii) there is a
material reduction in Employee's Benefits, other than a reduction comparable to
reductions generally applicable to similarly situated
-7-
<PAGE>
employees of the Company; (iv) the Company requires Employee to relocate to a
facility or location more than 50 miles from the Company's current location; or
(v) the Company materially breaches this Agreement, Employee may at his option
terminate his employment and such termination shall be considered to be a
termination of Employee's employment by the Company for reasons other than
Cause.
4.03 Termination by the Company for Cause. The Company shall have the right
to terminate the employment of Employee for Cause, provided that the Employee is
given at least 30 days notice of the Company's position and the opportunity to
cure the alleged deficiency. Effective as of the date that the employment of
Employee terminates by reason of Cause, this Agreement, except for Sections 2.04
through 2.07, shall terminate and no further payments of the Compensation
described in Section 3 (except for such remaining payments of Minimum Annual
Compensation under Section 3.01 relating to periods during which Employee was
employed by the Company, Benefits which are required by applicable law to be
continued, and reimbursement of prior expenses under Section 3.04) shall be
made.
4.04 Change of Control. If any time during the term of this Agreement there
is a Change of Control and Employee's employment is terminated for any reason
other than Cause within the greater of one (1) year following the Change of
Control or the remaining term of this Agreement, the Company shall pay to
Employee an amount equal to the monthly portion of Employee's Minimum Annual
Compensation multiplied by twenty (24). This amount shall be paid to Employee in
one lump sum as soon as practicable, but in no event later than sixty (60) days,
after the date that Employee's employment terminated. To the extent that
Employee is not fully vested (i) in retirement Benefits from any pension, profit
sharing or any other retirement plan or program (whether tax qualified or not)
maintained by the Company, the Company shall pay directly to Employee the
difference between the amounts which would have been paid to Employee had he
been fully vested on the date that his employment terminated and the amounts
actually paid or payable to Employee pursuant to such plans or programs; and
(ii) all Options shall vest as provided in Section 5.03.
4.05 Termination on Account of Employee's Death. In the event of Employee's
death during the term of this Agreement, this Agreement shall terminate and no
further payments of the Compensation described in Section 3 shall be made
(except that remaining payments of Minimum Annual Compensation under Section
3.01 relating to periods during which Employee was employed by the Company,
Benefits or other payments which are required by applicable law or this
Agreement to be continued, and reimbursement of prior expenses under Section
3.04 shall be made promptly, Benefits for this purpose including but not limited
to proceeds of insurance described in Section 3.04(c).
4.06 Termination on Account of Employee's Disability. If Employee ceases to
perform services for the Company because he is suffering from a Disability, the
Company shall continue to pay Employee disability benefits no less favorable
than those paid to senior executives of Barnes & Noble, including but not
limited to the proceeds of disability insurance.
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<PAGE>
5. Unit Options.
5.01 Amount of Units. The Company hereby grants to Employee, subject to all
of the terms and conditions of the Plan and this Agreement, options (AOptions@)
to acquire a total of 1,200,000 Units (AUnits@) representing Membership
Interests in the Company for $ l4.00 (fourteen dollars) per Unit.
5.02 Vesting. The Options granted in Section 5.01 shall vest in five (5)
annual increments, the first installment vesting on February 1, 1999 and the
remaining four installments on the first through fourth anniversaries of
February 1, 1999, all as set forth in the following vesting schedule:
February 1, 1999 300,000
1st Anniversary 225,000
2nd Anniversary 225,000
3rd Anniversary 225,000
4th Anniversary 225,000
5.03 Notwithstanding anything to the contrary contained in this Agreement,
all Options to acquire Units shall irrevocably vest immediately prior to the
consummation of a Change of Control and, if such event results in a successor
firm, Employee shall receive, in lieu of the Units as so vested, the cash, stock
and other securities or property in the successor firm to which he would have
been entitled if he had exercised all his Units immediately prior to the Change
or, at the Company's election, the Units shall be converted into an equivalent
number of like securities, fully vested as aforesaid, preserving the post-tax
economics of the Units, including the substantive terms thereof, in the manner
and to the extent specified in Section 5.05 in the case of Company conversion to
an association taxable as a corporation. The term of the Options shall be ten
years from the date of grant. The Options shall not be transferable except by
will or by reason of the laws of descent and distribution.
5.04 Incentive Plan. The Units shall be subject to the provisions of the
Company's Incentive Plan (the "Plan") as currently in force or, as the case may
be, as subsequently adopted or ratified nunc pro tunc, provided that, to the
extent the provisions of the Plan are inconsistent with, or materially diminish,
the rights, powers and privileges of Employee under this Agreement, the latter
shall control. The Units to be acquired upon exercise shall be economically
equivalent to the other outstanding membership interests in the Company at the
time of exercise. If there is more than one class of membership interests
outstanding, the Membership Interests to be acquired upon exercise will be of
the class that is at least equal in economic interest (but not necessarily
voting interest) to the most valuable. Without limiting the foregoing, the owner
of the Units to be acquired shall, upon exercise enjoy a capital account that
will reflect Employee's right to share proportionately in the value of the
Company as of the date of exercise.
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<PAGE>
5.05 Conversion. If the Company shall convert into an association taxable
as a corporation, regardless of the means of conversion (transfer of some or all
of the assets, transfer of Units followed by a liquidation, election or
otherwise), the economics of Employee's enjoyment of his Options shall be
preserved, meaning, for example, that the Options shall be replaced by an
equivalent number (in economic terms) of options to acquire shares of stock in
the Company's successor on the same terms and conditions as provided for herein,
without dilution or enlargement of Employee's rights and benefits, and the
burden of any tax imposed on Employee by reason of the transaction shall be
reimbursed to him as provided in Section 6. In such event, the parties agree to
negotiate in good faith and execute whatever agreement(s) are reasonable to
carry into effect and preserve the substance of this Agreement. If the
transaction involves a Change of Control, Employee's rights respecting his
Options shall be as stated in this Agreement, provided that, if the terms of the
reorganization involving the Change of Control entail an election to convert
Options to stock options in the acquiring entity, Employee's right to exercise
that election shall be preserved, including the tax indemnification provided in
this Section 5.05 and Section 6.
6. Indemnification; Right to Sell; Adjustment.
6.01 (a) Indemnification. If a federal, state, or local income tax (or any
tax of a foreign jurisdiction) shall be assessed against Employee by a tax
authority with respect to the grant, vesting or any event related to the Options
other than the tax on exercise of the Option or sale of the underlying Units,
the Company shall upon demand pay Employee a bonus in an aggregate amount equal
to the sum of: (i) an amount which, when multiplied by the difference between
Employee's Tax Rate (as hereinafter defined) for the year in which such amount
shall be paid to Employee and l00%, shall equal the additional income tax owing;
and (ii) an amount which when multiplied by the difference between Employee's
Tax Rate for the year in which such amount shall be paid to Employee and l00%
shall equal the interest and penalties, if any, payable by Employee with respect
to such tax. The term "Tax Rate" shall mean the sum of the following: (x) the
highest federal income tax rate applicable to ordinary income of an individual
taxpayer; and (y) the sum of the highest applicable state and local tax rates
for such ordinary income, reduced to account for the deductibility of state and
local taxes against federal income tax if and to the extent such state and local
taxes are so deductible by the Employee. Employee shall give the Company notice
of any proposed tax, but Employee shall be under no obligation to contest such
proposed tax, provided that Employee shall contest such proposed tax if
requested to do so by the Company and at the sole cost and expense of the
Company. It is the intention of this Section 6.01(a) to reimburse Employee for
any additional income taxes, interest and penalties thereon arising from any tax
on the Options prior to exercise thereof, with a gross-up based upon tax rates
in effect for the year of such reimbursement and taking into account all the
benefits (deductions and/or credits) available to Employee in connection with
the payment of such taxes, interest and penalties. The provisions of this
Section 6.01(a) shall survive the termination of this Agreement for any reason
whatsoever. To the extent the incomes taxes paid by Employee and reimbursed by
the Company under this Section 6.01(a) reduce the income taxes that would be
payable by Employee, his estate, or successors and assigns upon the exercise of
the
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<PAGE>
Options and/or sale of Units acquired pursuant to the exercise of the Options if
the income taxes incurred by Employee (and paid by the Company to Employee
hereunder as a bonus) had not been incurred, the Company shall be reimbursed by
Employee, or his estate, successors or assigns, as the case may be, an amount
equal to the reduction in income taxes described above.
(b) Employee shall be indemnified by the Company, qua an officer and
director of the Company and its Affiliates, against claims, etc. to the fullest
extent permitted by law, including partial indemnification, indemnification post
termination of this Agreement, indemnification of Employee's estate and like
matters.
6.02 Right of Employee to Sell Options and/or Units to the Company upon
Death, Disability, or Termination Without Cause.
(a) Put Option. If Employee shall die, suffer a Permanent Disability,
or be terminated without Cause, Employee shall have the right and option
(the "Put Option") subject to Section 6.02(c), to sell any or all of the
vested Options, or Units purchased by reason of the exercise of all or a
portion of the Options, to the Company at a price per Option equal to Fair
Value. For this purpose, the Fair Value of a Unit of the Company as of any
date shall be determined by the Board of Directors in a reasonable manner,
after considering all pertinent factors and all appropriate information and
data, including liquidity; without limiting the generality of the
foregoing, the Board of Directors shall consider and take into account
published guidelines, including those sponsored by the National Venture
Capital Association or any committee thereof. The Board of Directors may
employ outside experts and independent consultants at the expense of the
Company to assist in the valuation process. The Fair Value of an Option
shall be computed as aforesaid, except that the exercise price shall be
deducted, meaning the Fair Value is the Fair Value of the spread and, thus,
the Fair Value of an Option to purchase, say, 100,000 Units shall be the
spread per Unit times 100,000.
(b) Exercise of Put Option and Closing. Employee may exercise the Put
Option by delivering to the Company written notice of exercise within the
period set forth in Section 6.02(c) below. Such notice shall specify the
number of Units or Options to be sold. If and to the extent the Put Option
is not so exercised within such period, the Put option shall automatically
expire and terminate effective upon the expiration of such period. At the
time of delivery of notice of the exercise of the Put Option, Employee
shall tender to the Company at is principal offices the certificate(s) or
agreements, if any, representing the Units or Options which the Company is
obligated to purchase, all in form suitable for the transfer of such Units
or Options to the Company. In the event of death or disability, the Put
Option may be exercised by the Employee's beneficiaries, heirs, or legal
representatives.
Within ten (10) days of its receipt of the notice and such Units or
Options, the Company shall deliver to Employee a check in the amount of the
Fair Value of the Units being sold
-11-
<PAGE>
or the Fair Value of the Options calculated as provided above. The purchase
price may be payable, at the option of the Company, in cancellation of all
or a portion of any outstanding indebtedness of Employee to the Company or
in cash (by bank or cashier's check) or both.
(c) Term of Put Option. The Put Option shall be exercisable (i) in the
case of death or Permanent Disability, from and after the expiration of 180
days after the execution and delivery, of this Agreement, (ii) in the case
of termination by the Company without Cause, from and after the first
anniversary of such execution and delivery and the Put Option shall
terminate upon the closing of a sale of common stock of the Company or its
Affiliates registered pursuant to the Securities Act of 1933, as amended,
assuming the Options and/or Units shall have been converted into options to
acquire shares of common stock of the Company or such Affiliates.
6.03 Adjustments for Unit Splits, Unit Dividends, etc. The Unit numbers set
forth herein assume that 33,333,334 Units are outstanding immediately following
the investment by Bertelsmann in the Company. If from time to time, there is any
Unit dividend, Unit distribution or other reclassification of the Units of the
Company, any and all new, substituted or additional securities to which Employee
is entitled by reason of his ownership of the Units or Options shall be
immediately subject to adjustment in the same manner and to the same extent as
the Units, and the Option exercise price shall be appropriately adjusted as
well.
7. Miscellaneous.
7.01 Assignment. This Agreement and the rights and obligations of the
parties hereto shall bind and inure to the benefit of each of the parties hereto
and shall also bind and inure to the benefit of any successor or successors of
the Company in a reorganization, merger or consolidation and any assignee of all
or substantially all of the Company's business and properties and any personal
representative of Employee or his estate, but, except as to any such successor
of the Company or representative of Employee, neither this Agreement nor any
rights or benefits hereunder may be assigned by the Company or Employee.
7.02 Legal Fees. The Company shall pay the reasonable legal fees and out of
pocket disbursements for one counsel in representing Employee in connection with
the execution and delivery hereof.
7.03 Initial Term and Extensions. Except as otherwise provided, the term of
this Agreement shall continue from time to time until terminated by either party
on 60 days written notice to the other.
7.04 Governing Law. This Agreement shall be construed in accordance with
and governed for all purposes by internal the laws of the State of New York.
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<PAGE>
7.05 Interpretation. In case any one or more of the provisions contained in
this Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, but this Agreement
shall be construed, subject to the provisions of the last sentence of Section
2.04 as if such invalid, illegal or unenforceable provision had never been
contained herein.
7.06 Notice. Any notice required or permitted to be given hereunder shall
be effective when received and shall be sufficient if in writing and if
personally delivered or sent by prepaid cable, telex or registered air mail,
return receipt requested, to the party to receive such notice at its address set
forth at the end of this Agreement or at such other address as a party may by
notice specify to the other.
7.07 Amendment and Waiver. This Agreement may not be amended, supplemented
or waived except by a writing signed by the party against which such amendment
or waiver is to be enforced. The waiver by any party of a breach of any
provision of this Agreement shall not operate to, or be construed as a waiver
of, any other breach of that provision nor as a waiver of any breach of another
provision.
7.08 Binding Effect. This Agreement shall be binding on the successors and
assigns of the parties hereto. All obligations of Employee with respect to any
Options or Shares covered by this Agreement shall, as the context requires, bind
Employee's spouse and the divorce or death of such spouse shall not vitiate the
binding nature of such obligation.
7.09 Survival of Rights and Obligations. All rights and obligations of
Employee or the Company arising during the term of this Agreement shall continue
to have full force and effect after the termination of this Agreement unless
otherwise provided herein.
barnesandnoble.com llc
By:______________________________
Leonard Riggio, Chairman
_________________________________
Jonathan B. Bulkeley
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SCHEDULE A
Current shareholdings and board positions:
1. Quixell Ltd. - Non. Exec. Chairman, 15% holdings
2. Rocket Networks - Non. Exec. Chairman
3. International Photography Council - Non-Profit Board Member
<PAGE>
AMENDMENT NO. 1
TO
TECHNOLOGY SHARING AND
LICENSE AGREEMENT
Amendment No. 1 , dated as of __________, 1999, between BOL.Global, Inc., a
Delaware corporation having an office located at 1540 Broadway, New York, New
York 10036 ("Licensor"), and barnesandnoble.com llc, a Delaware limited
liability company having an office located at 76 Ninth Avenue, 11th Floor, New
York, New York 10011 ("Licensee"), amending that certain Technology Sharing and
License Agreement dated as of October 31, 1998, by and between Licensor and the
Licensee (the "Original Agreement"). Capitalized terms used but not otherwise
defined herein shall have the meanings ascribed to them in the Original
Agreement.
WHEREAS, Licensor and Licensee, having previously entered into the Original
Agreement, wish to amend the Original Agreement as set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. Amendments to Original Agreement.
(a) The definition of "LLC Agreement" set forth in Section I of the
Original Agreement is hereby amended by adding the phrase ", as the same may be
amended, modified or supplemented from time to time" immediately following the
words "BN Holding".
(b) The phrase "having a Membership Interest of ten percent (10%) or
more" in Section VI of the Original Agreement is hereby deleted and replaced in
its entirety by the phrase "owning ten percent (10%) or more of the then
outstanding Membership Units".
2. Original Agreement in Full Force and Effect. Except as herein expressly
amended, all of the provisions of the Original Agreement remain unchanged and in
full force and effect.
3. References in Original Agreement. From and after the date hereof, all
references in the Original Agreement to "this Agreement," "hereof," "herein," or
similar terms, shall mean and refer to the Original Agreement as amended by this
Amendment.
4. Governing Law. This Amendment shall be construed and interpreted
according to the laws of the State of New York, without regard to the conflicts
of law rules thereof.
<PAGE>
5. Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first set forth above.
BOL.GLOBAL, INC., as Licensor
By:________________________
Name:
Title:
barnesandnoble.com llc, as Licensee
By:________________________
Name:
Title:
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<PAGE>
AMENDMENT NO. 1
TO
TECHNOLOGY SHARING AND
LICENSE AGREEMENT
Amendment No. 1 , dated as of __________, 1999, between BOL.Global, Inc., a
Delaware corporation having an office located at 1540 Broadway, New York, New
York 10036 ("Licensee"), and barnesandnoble.com llc, a Delaware limited
liability company having an office located at 76 Ninth Avenue, 11th Floor, New
York, New York 10011 ("Licensor"), amending that certain Technology Sharing and
License Agreement dated as of October 31, 1998, by and between Licensor and the
Licensee (the "Original Agreement"). Capitalized terms used but not otherwise
defined herein shall have the meanings ascribed to them in the Original
Agreement.
WHEREAS, Licensor and Licensee, having previously entered into the Original
Agreement, wish to amend the Original Agreement as set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. Amendments to Original Agreement.
(a) The definition of "LLC Agreement" set forth in Section I of the
Original Agreement is hereby amended by adding the phrase ", as the same may be
amended, modified or supplemented from time to time" immediately following the
words "BN Holding".
(b) The phrase "having a Membership Interest of ten percent (10%) or
more" in Section VI of the Original Agreement is hereby deleted and replaced in
its entirety by the phrase "owning ten percent (10%) or more of the then
outstanding Membership Units".
2. Original Agreement in Full Force and Effect. Except as herein expressly
amended, all of the provisions of the Original Agreement remain unchanged and in
full force and effect.
3. References in Original Agreement. From and after the date hereof, all
references in the Original Agreement to "this Agreement," "hereof," "herein," or
similar terms, shall mean and refer to the Original Agreement as amended by this
Amendment.
4. Governing Law. This Amendment shall be construed and interpreted
according to the laws of the State of New York, without regard to the conflicts
of law rules thereof.
<PAGE>
5. Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first set forth above.
BOL GLOBAL, INC., as Licensee
By:________________________
Name:
Title:
barnesandnoble.com llc, as Licensor
By:________________________
Name:
Title:
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<PAGE>
barnesandnoble.com llc
76 Ninth Avenue
New York, New York 10011
February 22, 1999
Mr. Jeffrey Killeen
21 Woodside Lane
Westport, Connecticut 06880
Dear Mr. Killeen:
This letter is intended to set forth our agreement regarding the
termination of your employment with barnesandnoble.com llc (the "Company").
1. Your termination was effective on February 19, 1999. Our respective
obligations under this Agreement shall become effective on the date,
and only if, the Release (defined below) becomes irrevocable pursuant
to law (the "Effective Date").
2. You have concurrently executed and delivered to the Company the
attached General Release and Waiver (the "Release").
3. For the twelve-month period immediately following the Effective Date,
you shall continue to receive your $500,000 annual base salary (net of
all applicable withholding and other customary deductions) as and when
you would have received such payments if your employment with the
Company had continued. However, pursuant to your written request, the
Company shall make any or all remaining payments in a lump sum. The
Company shall also pay you for two weeks of accrued and unused
vacation time on or promptly following the Effective Date.
4. You shall be deemed fully vested with respect to 200,000 of your
600,000 options to purchase Membership Units in the Company (which are
ownership interests in the Company equivalent to shares in a
corporation). Such vested options (the "Options") shall continue to
have a per Unit exercise price of $12.00 per Unit based on 33,333,334
Units currently outstanding (a $400,000,000 valuation of the Company).
All other options shall be forfeited and of no further force or
effect.
In the event of an initial public offering with respect to the
business of the Company by an entity other than the Company, your
options will be
<PAGE>
appropriately converted into options to acquire publicly traded stock
of the entity going public. In addition, if the currently outstanding
Units are split into an amount other than 33,333,334, the 200,000
options and the per Unit exercise price shall be similarly adjusted as
per all other Company employees.
If an initial public offering by the Company or another entity taking
the Company's business public (an "IPO") is not consummated by the
second anniversary of the Effective Date, the Options shall expire and
be of no further force or effect. If an IPO is consummated within one
year following the Effective Date, you shall have 12 months following
the consummation of the IPO to exercise your options. If an IPO is
consummated after the first anniversary of the Effective Date and
prior to the second anniversary of the Effective Date, you shall have
until the later of (i) 90 days after the consummation of the IPO, or
(ii) the second anniversary of the Effective Date.
You shall not be required to enter into any lock-up arrangement in
connection with an IPO. In all circumstances, however, if you are also
selling the securities received upon any exercise of your Options, you
shall not sell more than 20,000 shares in any one day. Immediately
following the consummation of an IPO, you will be able to use Salomon
Smith Barney, the Company's agent for purposes of employee stock
option exercises, in connection with your exercise of the Options and
your sale of securities received pursuant thereto (subject to the
foregoing 20,000 share single-day sale limitation).
5. The Company shall continue to pay the employer's share of your Company
medical, insurance, disability and related benefits through the first
anniversary of the Effective Date.
6. For the six-month period immediately following the Effective Date, the
Company shall provide you with office space (including access to a
computer, a cellular and a noncellular phone, a fax machine, a copying
machine, administrative support, etc.) in a place to be determined by
the Company.
You acknowledge that Spencer Stuart and other executive search firms
used by the Company would ordinarily be restricted from engaging in a
job search for you. However, the Company agrees to waive any and all
such restrictions, and you shall be free to utilize the services of
such firms at your own expense.
-2-
<PAGE>
7. For the 12-month period immediately following the Effective Date,
without the prior written permission of the Company, you shall not,
directly or indirectly, (i) enter into the employ of or render any
services to any person or entity engaged in any Competitive Business
(as defined below); (ii) engage in any Competitive Business for your
own account; (iii) become associated with or beneficially own an
interest in any Competitive Business as an individual, partner,
shareholder, creditor, director, officer, principal, agent, employee,
trustee, consultant, advisor or in any other relationship or capacity,
except that you may beneficially own up to 5% of the publicly traded
stock of a public company; or (iv) employ or retain, or have or cause
any other person or entity to employ or retain, any person who was
employed or retained by the Company while you were employed by the
Company, other than your assistant Judy Kelser.
"Competitive Business" shall mean any e-commerce business that derives
more than 50% of its revenues from bookselling, including without
limitation Amazon.com and the e-commerce businesses of Borders Group
and Books-a-Million.
8. You shall maintain the confidentiality of all matters relating to the
Company, its business, operations, customers and suppliers, as set
forth in paragraph 10 of the Release.
9. You acknowledge that the Company will suffer substantial damage which
will be difficult to compute if you should violate any of the
provisions of paragraphs 7 or 8 above, and that such provisions are
reasonable and necessary for the protection of the business of the
Company.
If you commit a breach of any of the provisions of paragraphs 7 or 8
above, the Company shall have the right and remedy to have such
provisions specifically enforced by any court having equity
jurisdiction, it being acknowledged and agreed by you that your
obligations under paragraphs 7 and 8 above are of special, unique and
extraordinary character and that any such breach will cause
irreparable injury to the Company, and that money damages will not
provide an adequate remedy to the Company.
You further acknowledge that: (i) the rights and remedies enumerated
in this paragraph 9 shall be in addition to, and not in lieu of, any
other rights and remedies available to the Company under law or
equity; and (ii) If any provision of paragraphs 7 or 8 above is held
to be unenforceable because of the scope, duration or area of
applicability, the tribunal making such determination shall modify
such scope, duration and/or area to give them
-3-
<PAGE>
the maximum effect permissible by law, and such provision or
provisions shall then be applicable in such modified form.
-4-
<PAGE>
10. We shall mutually agree on the form and substance of internal (within
the Company) and external (outside the Company) communications
regarding the termination of your employment.
11. In the event of your death, the benefits of this Agreement shall inure
to the benefit of your legal representatives, heirs and distributees.
If you are in agreement with the foregoing, please so indicate by signing
the enclosed copy of this letter in the appropriate space below and returning it
to the undersigned.
Very truly yours,
BARNESANDNOBLE.COM LLC
By:______________________
Jonathan Bulkeley, CEO
Agreed to:
- ----------------------------
Jeffrey Killeen
Dated: March 10, 1999
-5-
<PAGE>
GENERAL RELEASE AND WAIVER
THIS DOCUMENT WILL AFFECT YOUR LEGAL RIGHTS, AND THE
LEGAL RIGHTS OF OTHER PERSONS AND ENTITIES INCLUDED
WITHIN THE DESCRIPTION OF "RELEASEE" IN PARAGRAPH 3
BELOW.
IF YOU DECIDE TO SIGN THIS DOCUMENT, YOU MUST READ IT
CAREFULLY AND COMPLETELY, AND UNDERSTAND IT FULLY,
BEFORE YOU SIGN.
1. Jeffrey Killeen ("Employee"), on his behalf and on behalf of his heirs,
executors, administrators, successors and assigns (collectively, "Releasor"),
hereby acknowledges and agrees that Employee's employment with
barnesandnoble.com llc ("Company") terminated effective February 19, 1999.
2. (a) Employee hereby agrees that in accordance with the terms and
conditions of this Release, and after the delivery to the Company of a signed
and notarized original of this Release, the expiration of seven (7) days from
the signing of this Release and Employee's compliance with paragraph 7 of this
Release, the Company, on behalf of itself and each Releasee, shall make the
payments and provide Employee with the benefits set forth in the letter
agreement to which this Release is an exhibit (the "Letter Agreement"). Such
consideration shall be referred to collectively as the "Termination
Consideration."
(b) Employee acknowledges and agrees that: (i) the Termination
Consideration includes benefits, monetary or otherwise, which were not earned or
accrued or to which Releasor was already entitled; and (ii) any monetary or
other benefits which, prior to the execution of this Release, Employee may have
earned or accrued or to which Employee may have been entitled, have been paid,
or such payments have been released, waived or settled by Releasor pursuant to
this Release.
(c) Employee also acknowledges that prior to or contemporaneous with
his execution of this Release he received all wages and other payments,
including accrued vacation pay, sick pay and bonuses if any, that may be due to
him from the Company through the date of his execution of this Release.
3. THIS PARAGRAPH PROVIDES A COMPLETE RELEASE AND WAIVER OF ALL EXISTING
AND POTENTIAL CLAIMS YOU MAY HAVE AGAINST EVERY PERSON AND ENTITY INCLUDED
WITHIN THE DESCRIPTION BELOW OF "RELEASEE." BEFORE YOU SIGN THIS RELEASE, YOU
MUST READ THIS PARAGRAPH CAREFULLY, AND MAKE SURE THAT YOU UNDERSTAND IT FULLY.
(a) In consideration of Releasor's receipt and acceptance of the
Termination Consideration from and/or on behalf of the Company, Releasor hereby
irrevocably, unconditionally and generally releases the Company, its current and
former officers, directors,
<PAGE>
managers, shareholders, members, parents, affiliates, subsidiaries, divisions,
agents, attorneys and employees, in their respective capacities as such, and the
current and former officers, directors, managers, shareholders, members, agents,
attorneys and employees of any such parent, affiliate, subsidiary or division of
the Company, in their respective capacities as such, and the heirs, executors,
administrators, receivers, successors and assigns of all of the foregoing
(collectively, "Releasee"), from or in connection with, and hereby waives and/or
settles, with prejudice, any and all actions, causes of action, suits, debts,
dues, sums of money, accounts, controversies, agreements, promises, damages,
judgments, executions, or any liability, claims or demands, known or unknown and
of any nature whatsoever and which Releasor ever had, now has or hereafter can,
shall or may have as of the date of this Release, including, without limitation,
arising directly or indirectly pursuant to or out of any aspect of Employee's
employment with the Company, the payment or nonpayment of any wages or
compensation, the performance of services for the Company or any Releasee or the
termination of such employment or services.
(b) Specifically, without limitation, this Release shall include and
apply to any rights and/or claims: (i) arising under any contract, express or
implied, written or oral; (ii) for wrongful dismissal or termination of
employment; (iii) arising under any applicable federal, state, local or other
statutes, orders, laws, ordinances, regulations or the like, or case law, that
relate to employment or employment practices and/or, specifically, that prohibit
discrimination based upon age, race, religion, sex, national origin, disability
or any other unlawful bases, including without limitation, the Civil Rights Act
of 1964, as amended, the Civil Rights Act of 1991, as amended, the Civil Rights
Acts of 1866 and 1871, as amended, the Age Discrimination in Employment Act of
1967, as amended, the Americans with Disabilities Act of 1990, as amended, the
Family Medical Leave Act of 1993, as amended, the Employee Retirement Income
Security Act of 1990, as amended, the Fair Labor Standards Act, as amended, the
Vietnam Era Veterans' Readjustment Assistance Act, as amended, the Equal Pay
Act, as amended, and any similar applicable statutes, orders, laws, ordinances,
regulations or the like, or case law, of the State of New York or any political
subdivision thereof, including without limitation, the N.Y. Executive Law, as
amended, the N.Y. Labor Law, as amended, the N.Y. Civil Rights Law, as amended,
the Administrative Code of the City of New York, as amended, and all applicable
rules and regulations promulgated pursuant to or concerning any of the foregoing
statutes, orders, laws, ordinances, regulations or the like; (iv) based upon any
other federal, state or local statutes, orders, laws, ordinances, regulations or
the like, or case law; (v) for tortious or harassing conduct, infliction of
mental distress, interference with contract, fraud, libel or slander; and (vi)
for damages, including without limitation, punitive or compensatory damages, or
for attorneys' fees, expenses, costs, wages, injunctive or equitable relief.
4. This Release shall not apply to and shall not release or waive any
rights or claims that Employee may have for benefits under the provisions of any
pension or employee benefit plans maintained by any Releasee or Employee's
rights: (a) under the Letter Agreement; (b) under this Release; and (c) to
indemnification and/or payment of defense costs in any actions in which Employee
is made a party or held liable as a result of work he performed for the Company
that was within the scope of his duties and responsibilities.
-2-
<PAGE>
5. Releasor represents and warrants that Employee has not filed or
commenced any complaints, claims, actions or proceedings of any kind against any
Releasee with any federal, state or local court or any administrative,
regulatory or arbitration agency or body, and Releasor agrees not to file or
commence any complaint, claim, action or proceeding of any kind against any
Releasee with any federal, state or local court or any administrative,
regulatory or arbitration agency or body, based upon events occurring on or
prior to the date of this Release, including without limitation, with respect to
any aspect of Employee's employment with the Company, the payment or nonpayment
of any wages or compensation, the performance of services for the Company or any
Releasee or the termination of such employment or services.
6. By executing this Release, Releasor acknowledges that: (a) Employee has
been advised by the Company to consult with an attorney before executing this
Release; (b) he was provided adequate time (i.e, at least twenty-one (21) days)
to review it and to consider whether to sign the Release; and (c) he has been
advised that he has seven (7) days following execution to revoke it ("Revocation
Period").
7. Notwithstanding anything to the contrary contained herein or in the
Letter Agreement, this Release will not be effective or enforceable until the
Revocation Period has expired, and the Termination Consideration is not payable
and shall not be delivered or paid by the Company until the Revocation Period
has expired and Employee has confirmed in writing, in the form annexed hereto as
Exhibit A, that this Release has not been revoked.
8. This Release and/or any payments made hereunder are not intended to be,
shall not be construed as and are not an admission or concession by any Releasee
of any wrongdoing or illegal or actionable acts or omissions. Employee, as and
on behalf of Releasor, hereby represents and agrees that he shall not directly
or indirectly make, and he shall not authorize any person or entity on his
behalf to make: (i) any written or oral statements, suggestions or
representations that any Releasee has made or implied any such admission or
concession; or (ii) any written or oral negative, disparaging or adverse
statements, suggestions or representations of or concerning the Company.
9. Employee hereby represents and agrees that he has kept confidential and
has not disclosed orally or in writing directly or indirectly to any person, and
in further consideration of the Company's agreement to deliver the Termination
Consideration and except as may be required by law in response to compulsory
legal process or in a legal proceeding relating to the terms of this Release
and/or of the Letter Agreement, Releasor shall keep confidential and shall not
disclose orally or in writing directly or indirectly to any person (other than
to Employee's attorney, accountant and immediate family, each of whom shall be
directed by Employee not to disclose such information), any and all information
concerning any aspect of Employee's employment with the Company, the payment or
nonpayment of any regular, overtime or other wages or compensation, the
performance of services for the Company or any Releasee or the termination of
such employment or services, including without limitation: (a) any facts, claims
or assertions relating or referring to any conduct or practices by or on behalf
of any Releasee; (b) any facts, claims or assertions relating or referring to
any experiences of
-3-
<PAGE>
Employee or treatment he received by or on behalf of any Releasee during his
employment through the date of this Release, which experiences or treatment
could have provided a factual or legal basis for any claim of any kind in any
action or proceeding before any court or administrative or arbitral body; (c)
the existence or terms of this Release; and (d) the amount of any payment made
hereunder. Notwithstanding the foregoing, in response to any inquiry concerning
any of the foregoing or otherwise, Employee (i) has stated and may state that he
voluntarily resigned his employment with the Company, that the Company has
agreed to provide him with office space and that recent changes to the Company's
health insurance plan made him eligible for continued participation in the group
health plan at his own expense at the group rate, and (ii) may describe the
positions he held and compensation he received, the job duties and functions he
performed, and the dates of commencement and termination of his employment.
10. (a) Employee hereby acknowledges that during his employment he may have
acquired proprietary, private and/or otherwise confidential information
("Confidential Information," as defined and described in this sub-paragraph)
concerning or relating to (i) the Company and any Releasee, (ii) any current or
former employee of the Company or any Releasee, (iii) any person or entity with
whom or which the Company or any Releasee transacted business during Employee's
employment (iv) any person or entity with respect to whom or which the Company
acquired any non-public information, and (v) any aspect of the operation of the
business of the Company or any Releasee, including without limitation, all
financial, operational and statistical information.
(b) Employee hereby represents and agrees that upon execution of this
Release: (i) he has returned to the Company, and has not retained any copies of,
all documents, records or materials of any kind, whether written or
electronically created or stored, which contain, relate to or refer to any
Confidential Information ("Confidential Materials"); (ii) he has not disclosed
any Confidential Information or Confidential Materials to any person or entity
without the express authorization of an authorized officer of the Company; and
(iii) in consideration of the Company's agreement to deliver the Termination
Consideration pursuant to the terms of this Release and the Letter Agreement,
Employee and/or any Releasor shall not disclose any Confidential Information or
Confidential Materials, in any manner directly or indirectly, except as shall be
required by law.
(c) In the event that Employee and/or any Releasor receives a subpoena
or any other written or oral request for any Confidential Information,
Confidential Materials or any other information concerning the Company or any
Releasee, Employee shall, within two (2) business days from his actual notice of
the service of such subpoena or other request (i) notify the Company in writing,
by fax to Jonathan Bulkeley, Chief Executive Officer of the Company (or his
successor), and (ii) provide a copy to the Company of such subpoena or other
request if in writing, and/or disclose the nature of the request for information
if oral.
(d) Employee also represents and agrees that upon the execution of this
Release he has returned to the Company all other property of the Company or any
Releasee, including without limitation, any building or other identification
related to Employee's employment, and all keys to all offices at 76 Ninth
Avenue, New York, New York and any other premises under the management or
control of any Releasee.
-4-
<PAGE>
11. Employee will comply with all reasonable requests from the Company for
assistance and/or information in connection with any matters and/or issues
relating to or encompassed within the duties and responsibilities of Employee's
employment with the Company, including without limitation, consulting with the
Company's employees and attorneys with respect to, and/or appearing as a witness
in, any dispute, controversy, action or proceeding of any kind, and in
connection with the transition of on-going matters to other employees of the
Company. The Company agrees to promptly reimburse Employee for all expenses
incurred in connection with compliance with his obligations under this
paragraph.
12. Releasor agrees to execute any other writings and/or documents
consistent with this Release and/or the Letter Agreement and reasonably
necessary to effectuate the terms of this Release and/or the Letter Agreement,
and further agrees to appear in any court or other tribunal upon thirty (30)
business days' notice if such appearance is necessary to effectuate the terms of
this Release. The Company agrees to promptly reimburse Employee for all expenses
incurred in connection with compliance with his obligations under this
paragraph.
13. The covenants, representations and acknowledgments made by Releasor in
this Release and/or the Letter Agreement shall survive the execution of this
Release and the Letter Agreement and the delivery of the Termination
Consideration. The Company shall be excused and released from any obligation to
make payment of the Termination Consideration, and Releasor shall be obligated
to return to the Company any such Termination Consideration that has been paid,
in the event that: (a) Releasor is found to have made a material misstatement
in, or has committed or commits a material breach of any term, condition,
covenant, representation or acknowledgment in this Release and/or the Letter
Agreement; and/or (b) this Release and/or the Letter Agreement is determined to
be invalid or unenforceable, or Releasor claims in any forum that this Release
and/or the Letter Agreement is invalid or unenforceable.
14. Except as contained in the Letter Agreement, this Release constitutes
the sole and complete understanding and agreement between the parties with
respect to the matters set forth herein, and there are no other agreements or
understandings, whether written or oral and whether made contemporaneously or
otherwise. No term, condition, covenant, representation or acknowledgment
contained in this Release and/or the Letter Agreement may be amended unless in a
writing signed by both parties. If any section of this Release and/or the Letter
Agreement is determined to be void, voidable or unenforceable, it shall have no
effect on the remainder of this Release and/or the Letter Agreement which shall
remain in full force and effect. If any provision of this Release and the Letter
Agreement are inconsistent or in conflict, the terms of this Release shall
control.
15. Any dispute, controversy or claim between Releasor and Releasee
("Claims", as further defined below) shall be submitted to and finally
determined by binding arbitration to be held in New York, New York before one
arbitrator according to the rules of the American Arbitration Association, with
the party not prevailing in such proceeding to be responsible for prompt
reimbursement to the prevailing party of the reasonable attorneys' fees and
costs incurred in prosecuting and/or defending such arbitration. Claims subject
to this arbitration provision are and shall be: (a) those claims which arise out
of or relate to the Letter
-5-
<PAGE>
Agreement and/or this Release, including the enforceability and/or violation of
any term or provision of the Letter Agreement and/or this Release; and/or (b) in
the event that paragraph 3 of this Release is determined or deemed to be void or
unenforceable, in whole or in part, those claims which arise out of or relate to
any rights or claims, or constituting any claims, that are described in and/or
are referred to, and were intended to be waived and released, in paragraph 3 of
this Release. This Release and the Letter Agreement, and any arbitration
hereunder or thereunder, shall in all respects be subject to, governed by and
enforced and construed pursuant to and in accordance with, the laws of the State
of New York, without regard to and excluding New York choice of law rules and
except that the interpretation and enforceability of this arbitration clause
shall be governed by the Federal Arbitration Act.
16. Employee agrees and acknowledges that: (a) he has had an adequate
opportunity to review this Release and the Letter Agreement and all of their
respective terms; (b) he understands all of the terms of this Release and the
Letter Agreement, and such terms are fair, reasonable and are not the result of
any fraud, duress, coercion, pressure or undue influence exercised by or on
behalf of any Releasee; and (c) he has agreed to and entered into this Release
and the Letter Agreement and all of the terms hereof and thereof, knowingly,
freely and voluntarily.
-------------------------------
JEFFREY KILLEEN
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK)
On the 10th day of March, 1999, personally came Jeffrey Killeen and being
duly sworn, acknowledged that he is the person described in and who executed the
foregoing Release and acknowledged that he executed same.
-------------------------------
Notary Public
-6-
<PAGE>
EXHIBIT A
March 18, 1999
BY HAND
Mr. Jonathan Bulkeley
barnesandnonble.com llc
76 Ninth Avenue
New York, New York 10011
Dear Mr. Bulkeley:
I acknowledge that pursuant to the General Release and Waiver ("Release")
executed by me on March 10, 1999, I had the right to revoke the Release within
seven (7) days after the execution of the Release (the "Revocation Period"). I
hereby confirm that the Revocation Period has expired and I have not revoked the
Release.
Very truly yours,
Jeffrey Killeen
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK)
On the 18th day of March, 1999, personally came Jeffrey Killeen and being
duly sworn, acknowledged that he is the person described in and who executed the
foregoing Release and acknowledged that he executed same.
-------------------------------
Notary Public
<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 6, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
barnesandnoble.com inc.'s financial statements as of ____________, 1999 included
in its Prospectus, and is qualified in its entirety by reference to such
financial statement
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0.000
<EPS-DILUTED> 0.000
</TABLE>
