<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File Number: 0-26063
barnesandnoble.com inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3926499
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
76 Ninth Avenue, New York, NY 10011
(Address of Principal Executive Offices) (Zip Code)
(212) 414-6000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes No X
------ -----
Number of shares of $.001 par value Class A Common Stock, Class B Common Stock
and Class C Common Stock outstanding as of July 31, 1999 was 28,899,210, one
and one, respectively.
<PAGE>
barnesandnoble.com inc.
June 30, 1999
Index to Form 10-Q
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements..................................... 3
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 7
Item 3: Quantitative and Qualitative Disclosure About Market
Risk..................................................... 13
PART II - OTHER INFORMATION........................................
Item 1: Legal Proceedings........................................ 14
Item 2: Changes in Securities and Use of Proceeds ............... 14
Item 3: Defaults upon Senior Securities.......................... 15
Item 4: Submission of Matters to a Vote of Security Holders...... 15
Item 5: Other Information........................................ 15
Item 6: Exhibits and Reports on Form 8-K......................... 15
Signatures............................................... 16
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
barnesandnoble.com inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands of dollars, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Pro forma (2) Pro forma (2)
three months ended six months ended
Since inception ------------------------------ ---------------------------------
March 10, 1999 to June 30, June 30, June 30, June 30,
June 30, 1999 (1) 1999 1998 1999 1998
------------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net sales $ 17,078 $ 39,065 $ 11,380 $ 71,382 $ 20,393
Cost of sales 13,411 30,482 8,733 55,498 15,736
-------- --------- --------- -------- ---------
Gross profit 3,667 8,583 2,647 15,884 4,657
-------- --------- --------- -------- ---------
Operating expenses:
Marketing and sales 9,494 22,881 19,471 41,790 26,084
Product development 1,620 4,049 2,129 7,568 3,933
General and administrative 3,095 6,937 4,782 13,044 7,871
-------- --------- --------- -------- ---------
Total operating expenses 14,209 33,867 26,382 62,402 37,888
-------- --------- --------- -------- ---------
Loss from operations (10,542) (25,284) (23,735) (46,518) (33,231)
Interest income, net 2,723 3,330 -- 4,346 --
-------- --------- --------- -------- ---------
Loss before minority interest (7,819) (21,954) (23,735) (42,172) (33,231)
Minority interest 6,309 17,563 18,988 33,738 26,585
-------- --------- --------- -------- ---------
Net loss $(1,510) $ (4,391) $ (4,747) $ (8,434) (6,646)
======== ========= ========= ======== =========
Basic and diluted loss before
minority interest per share ($0.05) ($0.15) ($0.17) ($0.29) ($0.23)
Basic and diluted weighted average
shares outstanding if
converted (3) 143,798 143,769 143,750 143,760 143,750
Basic and diluted net loss per
common share ($0.05) ($0.15) ($0.17) ($0.29) ($0.23)
Basic and diluted weighted average
common shares outstanding 28,783 28,763 28,750 28,757 28,750
</TABLE>
(1) barnesandnoble.com inc. was incorporated on March 10, 1999 but had no
activity until the Company's initial public offering on May 25, 1999.
(2) Represents pro forma results as if the shares issued in the initial
public offering of barnesandnoble.com inc. and the acquisition of the
interest in barnesandnoble.com llc was completed as of the beginning of
the earliest date presented.
(3) Represents total shares outstanding as if all outstanding membership
units in barnesandnoble.com llc had been converted into outstanding
shares of barnesandnoble.com inc. for all periods presented.
See accompanying notes to financial statements.
3
<PAGE>
barnesandnoble.com inc.
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except per share data)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31
1999 1998(1)
----------------- -------------------
<S> <C> <C>
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 360,231 $ 96,940
Marketable securities 262,509 --
Receivables, net 7,598 2,387
Merchandise inventories 2,023 1,579
Prepaid expenses and other current assets 8,907 10,770
--------- ---------
Total current assets 641,268 111,676
--------- ---------
Fixed assets, net 47,632 39,770
Restricted cash -- 50,393
Other non-current assets 130 305
--------- ---------
Total assets $ 689,030 $ 202,144
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,451 $ --
Accrued liabilities 15,737 19,804
Due to affiliate 8,231 13,191
--------- ---------
Total current liabilities 27,419 32,995
--------- ---------
Minority interest 529,289 169,149
Stockholders' equity:
Preferred Stock: $0.001 par value; 50,000,000 shares authorized; none
issued and outstanding -- --
Common Stock Class A; $0.001 par value;
750,000,000 shares authorized; 28,808,116 and 0 shares issued and
outstanding 29 --
Common Stock Class B; $0.001 par value; 1,000 shares authorized; 1
and 0 shares issued and outstanding -- --
Common Stock Class C; $0.001 par value; 1,000 shares authorized; 1
and 0 shares issued and outstanding -- --
Paid-in capital 133,803
Accumulated deficit (1,510)
--------- ---------
Total stockholders' equity 132,322 --
--------- ---------
Total liabilities and stockholders' equity $ 689,030 $ 202,144
========= =========
</TABLE>
(1) Represents the balance sheet of barnesandnoble.com llc and reflects
membership interest as minority interest.
See accompanying notes to financial statements.
4
<PAGE>
barnesandnoble.com inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Pro forma (1)
Since six months ended
inception ---------------------------------
March 10, 1999 to June 30, June 30,
June 30, 1999 1999 1998
----------------------- ---------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,510) $ (8,434) $ (6,646)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization 1,036 5,548 2,852
Loss on sale of fixed assets -- -- 205
Increase in receivables, net (3,972) (5,211) (551)
Decrease (increase) in merchandise inventories 117 (443) (41)
Decrease (increase) in prepaid expenses and other
current assets 1,538 1,863 (2,787)
Increase (decrease) in accounts payable 930 3,451 (2,682)
Increase (decrease) in due to affiliate -- (4,960) --
Increase (decrease) in accrued liabilities 3,965 (4,067) 5,504
Decrease in minority interest (6,309) (33,738) (26,585)
---------- ---------- ---------
Net cash flows from operating activities (4,205) (45,991) (30,731)
---------- ---------- ---------
Cash flows from investing activities:
Purchases of fixed assets (5,488) (13,404) (17,409)
Purchases of marketable securities (262,509) (262,509) --
Decrease in restricted cash -- 50,393 --
Proceeds from sale of fixed assets -- -- 200
Net assets of barnesandnoble.com llc at date of
acquisition 97,729 -- --
Decrease (increase) in other non-current assets 70 168 (2,093)
---------- ---------- ---------
Net cash flows from investing activities (170,198) (225,352) (19,302)
---------- ---------- ---------
Cash flows from financing activities:
Proceeds from initial public offering 484,382 484,382 --
Capital contributions from members 50,000 50,000 50,033
Proceeds from exercise of stock options 252 252 --
---------- ---------- ---------
Net cash flows from financing activities 534,634 534,634 50,033
---------- ---------- ---------
Net change in cash and cash equivalents 360,231 263,291 --
Cash and cash equivalents at beginning of period -- 96,940 --
---------- ---------- ---------
Cash and cash equivalents at end of period $ 360,231 $ 360,231 $ --
========== ========== =========
</TABLE>
(1) Represents pro forma results as if the shares issued in the initial
public offering of barnesandnoble.com inc. and the acquisition of the
interest in barnesandnoble.com llc was completed as of the beginning of
the earliest date presented.
See accompanying notes to financial statements.
5
<PAGE>
barnesandnoble.com inc.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS For the six months ended June 30,
1999 and June 30, 1998
(in thousands of dollars, except per share data)
(unaudited)
The unaudited consolidated financial statements include the accounts of
barnesandnoble.com inc. and barnesandnoble.com llc.
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly its consolidated
financial position as of June 30, 1999 and the pro forma results of its
operations and its cash flows for the six months then ended. These
consolidated financial statements are condensed and therefore do not include
all of the information and footnotes required by generally accepted accounting
principles. The consolidated financial statements should be read in
conjunction with the Company's Registration Statement on Form S-1, as amended,
filed with the Securities and Exchange Commission in connection with the
Company's initial public offering. The Company followed the same accounting
policies in preparation of this report as in such Registration Statement. Pro
forma operating results for the six months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
(1) Organization
------------
barnesandnoble.com inc. ("the Company") is a holding company whose sole
asset is a 20.0% equity interest in barnesandnoble.com llc ("bn.com") and
whose business is currently acting as the sole manager of bn.com. As sole
manager of bn.com, the Company controls all major business decisions of
bn.com. Barnes & Noble, Inc. and Bertelsmann AG each beneficially own a 40.0%
equity interest in bn.com. The acquisition of the Company's ownership interest
in bn.com resulted in consolidation of the Company with bn.com based on the
Company's control as sole manager of bn.com. As reflected in the consolidated
statements of operations, the loss before minority interest represents the
total consolidated loss for the period and the net loss represents the portion
of the loss attributable to the Company.
(2) Investments
-----------
The Company invests certain of its excess cash in debt instruments of
the U.S. Government and its agencies, and of high quality corporate issuers.
All highly liquid instruments with an original maturity of three months or
less are considered cash equivalents; those with original maturities greater
than three months are considered marketable securities. The Company classified
investments in accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities".
At June 30, 1999, short-term investments in marketable securities
consist primarily of U.S. Treasury Securities, U.S. government agency
securities and investments in high quality corporate issuers and were
classified as held-to-maturity. Unrealized holding gains and losses at June
30, 1999 were not significant.
(3) Stockholders' Equity
--------------------
On May 25, 1999, the Company completed its initial public offering of
28,750,000 shares of its Class A Common Stock. Net proceeds to the Company
aggregated to approximately $484,382,000.
6
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Overview
- --------
The Company is a holding company whose sole asset is its 20.0% equity
interest in bn.com and whose sole business is acting as sole manager of
bn.com. bn.com launched its initial online store in March 1997 and since that
time has become the fourth largest e-commerce Web site, based on the Media
Metrix June 1999 report.
bn.com has pursued a strategy of focusing on the sale of a broad range of
knowledge, information, education and entertainment related products. Through
June 1999 bn.com has offered for sale both new and out of print books, software
and magazine subscriptions. In July 1999, bn.com launched its online music store
which features the first online classical music superstore and has over 16
categories of music with over 1,000 sub-categories. The Company intends to
continue to expand its product offering within the broad categories of
knowledge, information, education and entertainment.
The results of operations discussed hereafter include the consolidated
results of the Company and bn.com. 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
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.
Pro Forma Results of Operations
- -------------------------------
Net Sales
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------------------------- -------------------------------------------------------
June 30, June 30, June 30, June 30,
1999 1998 % Change 1999 1998 % Change
-------------- ------------- --------------- ---------------- --------------- ----------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 39,065 $11,380 243% $71,382 $20,393 250%
</TABLE>
Net sales are composed of sales of books and related products, net of
returns, as well as outbound shipping and handling charges. Growth in net
sales reflects a significant increase in units sold due to the growth of the
Company's customer base and repeat purchases from the Company's existing
customers. International sales represented 8.8% and 11.5% of net sales for the
six months ended June 30, 1999 and 1998, respectively.
Gross Profit
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------------------------- -------------------------------------------------------
June 30, June 30, June 30, June 30,
1999 1998 % Change 1999 1998 % Change
-------------- ------------- --------------- ---------------- --------------- ----------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Gross profit $8,583 $2,647 224% $15,884 $4,657 241%
Gross margin 22.0% 23.3% 22.3% 22.8%
</TABLE>
7
<PAGE>
Gross profit is sales less the cost of sales, which consists of the cost
of merchandise sold to customers, and outbound and inbound shipping costs.
Although gross profit increased in absolute dollars due to the Company's
increased sales volume, gross margin decreased slightly primarily as a result
of an increase, from 40% to 50%, in the discount offered on New York Times
best sellers.
The Company intends to expand its operations by promoting new or
complementary products or sales formats and by expanding the breadth and depth
of its product and service offerings. Gross margins attributable to new
business areas may be lower than those associated with the Company's existing
business activities. In particular, the Company has launched its new online
music store. Gross margin on music sales is lower than gross margin on new
book sales, therefore to the extent music becomes a larger portion of the
Company's product mix, it is expected to have a proportionate impact on
overall product gross margin.
Marketing and Sales
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------------------------- -------------------------------------------------------
June 30, June 30, June 30, June 30,
1999 1998 % Change 1999 1998 % Change
-------------- ------------- --------------- ---------------- --------------- ----------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Marketing and
sales $22,881 $19,471 18% $41,790 $26,084 60%
Percentage of
net sales 58.6% 171.1% 58.5% 127.9%
</TABLE>
Marketing and sales expenses consist primarily of advertising and
promotional expenditures, as well as payroll and related expenses for
personnel engaged in marketing, selling and fulfillment activities. All
fulfillment costs not included in cost of sales, including the cost of
operating and staffing distribution centers and customer service, are included
in marketing and sales. Marketing and sales expenses increased primarily due
to the increases in the Company's advertising and promotional expenditures and
increased payroll and related costs associated with fulfilling customer
demand. Such expenses decreased as a percentage of net sales due to the
significant increase in net sales. The Company intends to continue pursuing
its aggressive branding and marketing campaign and expects its costs of
fulfillment to increase based on anticipated sales growth.
Product Development
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------------------------- -------------------------------------------------------
June 30, June 30, June 30, June 30,
1999 1998 % Change 1999 1998 % Change
-------------- ------------- --------------- ---------------- --------------- ----------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Product
development $4,049 $2,129 90% $7,568 $3,933 92%
Percentage of
net sales 10.4% 18.7% 10.6% 19.3%
</TABLE>
8
<PAGE>
Product development expenses consist principally of payroll and related
expenses for development, editorial and network operations personnel and
consultants, and infrastructure related to systems and telecommunications. The
increases in product development expenses were primarily attributable to
increased staffing and associated costs related to enhancing the features,
content and functionality of the Company's Web site and transaction-processing
systems, as well as increased investment in systems and telecommunications
infrastructure, including investments associated with entry into music sales
and operating expenses associated with the significant increase in net sales.
The Company believes that continued investment in product development is
critical to attaining its strategic objectives. As a result, the Company
expects product development expenses to continue to increase.
General and Administrative
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------------------------- -------------------------------------------------------
June 30, June 30, June 30, June 30,
1999 1998 % Change 1999 1998 % Change
-------------- ------------- --------------- ---------------- --------------- ----------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
General and
administrative $6,937 $4,782 45% $13,044 $7,871 66%
Percentage of
net sales 17.8% 42.0% 18.3% 38.6%
</TABLE>
General and administrative expenses consist of payroll and related
expenses for executive, accounting and administrative personnel, recruiting,
professional fees and other general corporate expenses. The increase in general
and administrative expenses was primarily a result of increased salaries and
related expenses associated with the hiring of additional personnel, legal and
other professional fees related to the Company's growth and expanded activities
and an increase in depreciation and amortization. Such expenses decreased as a
percentage of net sales due to the significant increase in net sales and the
effects of leveraging these expenses over a larger sales base. The Company
expects general and administrative expenses to increase as the Company expands
its staff and incurs additional costs related to the growth of its business,
however, the Company expects to see continued decreases of general
and administrative expenses as a percentage of sales.
Interest Income, Net
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------------------------- -------------------------------------------------------
June 30, June 30, June 30, June 30,
1999 1998 % Change 1999 1998 % Change
-------------- ------------- --------------- ---------------- --------------- ----------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income,
net $3,330 $ -- $4,346 $ -- --
Percentage of
net Sales 8.5% -- 6.1% --
</TABLE>
Interest income on cash and marketable securities increased due to the
higher cash balances resulting from the Company's financing activities. In
addition to the approximately $484.4 million raised through the Company's
initial public offering, the Company has received $200 million of capital
investment by bn.com's members since November 1998.
9
<PAGE>
Income Taxes
The Company has not generated any taxable income to date and therefore
has not paid any federal income taxes since inception. The Company has
provided a full valuation allowance on the deferred tax asset, consisting
primarily of net operating loss carryforwards, because of uncertainty
regarding its realizability.
Liquidity and Capital Resources
- -------------------------------
As of June 30, 1999, the Company's cash, cash equivalents and short-term
marketable securities were $622.7 million, compared to $96.9 million on
December 31, 1998. On May 25, 1999, the Company completed an initial public
offering of 28,750,000 shares of Class A Common Stock at a price of $18 per
share. The net proceeds to the Company from the offering were approximately
$484.4 million. At the completion of the initial public offering, the Company
received additional capital contributions of $50.0 million and reclassified
$50.4 million from restricted cash to marketable securities.
Net cash flows used by operating activities were $46.0 million for the
six months ended June 30, 1999 and $30.7 million for the six months ended June
30, 1998. Cash used in 1999 was primarily attributable to a net loss of $8.4
million and a corresponding decrease in minority interest of $33.7 million. In
addition, receivables increased $5.2 million, payables to affiliates decreased
$5.0 million and accrued liabilities decreased $4.1 million. This was
partially offset by depreciation and amortization of $5.5 million and a $3.5
million increase in accounts payable. Cash used in 1998 was primarily
attributable to a net loss of $6.6 million and a corresponding decrease in
minority interest of $26.6 million. In addition, accounts payable decreased
$2.7 million and prepaid expenses and other current assets increased $2.8
million. This was partially offset by a $5.5 million increase in accrued
liabilities and depreciation and amortization of $2.9 million.
Net cash used in investing activities of $225.4 million for the six
months ended June 30, 1999 was attributable to a $262.5 million increase in
marketable securities and purchases of fixed assets of $13.4 million,
partially offset by a $50.4 million decrease in restricted cash. Net cash used
in investing activities of $19.3 million for the six months ended June 30,
1998 was primarily attributable to purchases of fixed assets.
Net cash flows from financing activities were $534.6 million in the
first six months of 1999 due to proceeds of $484.4 million from the Company's
initial public offering and capital contributions of $50.0 million. Net cash
flows from financing activities of $50.0 million for the first six months of
1998 resulted from capital contributions.
As of June 30, 1999, the Company's principal sources of liquidity
consisted of $360.2 million of cash and cash equivalents and $262.5 million of
marketable securities. As of that date, the Company's principal commitments
consisted of obligations outstanding under operating leases and commitments
for advertising, marketing and promotion arrangements. Although the Company
has no material commitments for capital expenditures, it anticipates a
substantial increase in its capital expenditures consistent with anticipated
growth in operations, infrastructure and personnel. The Company expects to
establish two warehouse locations within the next twelve to eighteen months,
which will require it to commit to lease obligations and stock inventories,
and to purchase equipment and install leasehold improvements. In the future,
the Company will support larger inventories in order to enhance service and
availability to customers and achieve purchasing efficiencies.
The Company believes that current cash and cash equivalent balances and
short-term investments will be sufficient to meet its anticipated cash needs
for at least 12 months. However, any projection of future cash needs and cash
flows is subject to substantial uncertainty. If current cash and short term
investments in addition to cash
10
<PAGE>
generated from operations is insufficient to satisfy the Company's liquidity
requirements, the Company may seek to sell additional equity or debt securities
or to obtain a credit facility. The sale of additional equity or convertible
debt securities could result in additional dilution to the Company's
stockholders. There can be no assurance that financing will be available in
amounts or on terms acceptable to the Company, if at all. In addition, the
Company will, from time to time, consider the acquisition of or investment in
complementary businesses, products and technologies, which might increase the
Company's liquidity requirements or cause the Company to issue additional equity
or debt securities.
Year 2000
- ---------
Year 2000 Compliance
Beginning in the Year 2000, the date fields coded in some software
products and computer systems will need to accept four digit entries in order
to distinguish 21st century dates from 20th century dates and, as a result,
many companies' software and computer systems may need to be upgraded or
replaced in order to comply with such Year 2000 requirements. Systems that do
not properly recognize such information could generate erroneous data or cause
a system to fail. Significant uncertainty exists in the software industry
concerning the potential effects associated with such compliance issues.
State of Readiness
bn.com has developed a remediation plan for the Year 2000 issue that
involves identification, assessment and testing of the equipment and systems
affected:
o an assessment of information technology (IT) equipment and systems,
which includes web servers and web serving technology, has been
done;
o an assessment of non-information technology (non-IT) embedded
systems such as building security, voice mail, fire prevention,
climate control and other systems has been completed; and
o the readiness of significant third party vendors and suppliers of
services is being analyzed.
The evaluation, which is expected to be completed by the third quarter
of 1999, covers the following phases:
o development of an inventory of all IT equipment and systems and
non-IT systems that are potentially affected (100% complete);
o determination of those systems that require repair or replacement (90%
complete);
o repair or replacement of those systems (50% complete);
o testing of those repaired or replaced systems (50% complete); and
o creation of contingency plans in the event of Year 2000 failures
(25% complete).
To date, less than 10% of assessed systems have required repair or
replacement. Non-IT systems and internally developed programs have been
reviewed, and are not considered to be date sensitive to the Year 2000. Based
on this evaluation, the Company's management does not believe that bn.com's
systems and programs present Year 2000 issues.
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
11
<PAGE>
of the third party products used in bn.com internal systems and major vendors
has 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's business. Letters have been sent to
all vendors and suppliers with an operating impact seeking details of the
status of their Year 2000 program. Vendor and supplier readiness is being
assessed and tracked. As of the date of this report, replies to approximately
95% of letters have been received. These replies generally indicate that the
subject vendors and suppliers are making best efforts but cannot ensure Year
2000 compliance. The Company's management expects to have certification that
all vendors and suppliers with an operating impact are Year 2000 compliant by
the third quarter of 1999. Plans are being developed to ensure continued
availability of service through alternate channels in the event that
satisfactory commitments are not received from vendors and suppliers with an
operating impact. For the highest priority vendors and suppliers, although the
Company has received letters from these vendors confirming compliance, bn.com
is planning to conduct, in the third quarter, an integration test to Y2K
compliance where specific dates are simulated. These vendors and suppliers
include merchandise suppliers such as Barnes & Noble, Inc., Ingram Book Group,
Baker & Taylor and Alliance Entertainment Corp., and package delivery services
such as United Parcel Service and the United States Postal Service. The
failure of one of these highest priority vendors or suppliers to convert its
systems on a timely basis or in a manner compatible with bn.com's systems
could cause bn.com to incur unanticipated expenses to remedy any problems and
could adversely affect its business. In addition, the software and hardware
products used by affiliate Web sites, advertisers, customers, governmental
agencies, public utilities, telecommunication companies and others, may not be
Year 2000 compliant. If these products are not Year 2000 compliant, customers'
ability to use bn.com's Web site may be disrupted.
Costs to Address Year 2000 Compliance
To date, bn.com has incurred approximately $0.6 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 $0.8 million and will be funded
from cash on hand. However, the full impact of the Year 2000 issues cannot be
determined at this time. The failure by certain third parties to address their
Year 2000 issues on a timely basis could adversely affect bn.com's business.
Contingency Plan
bn.com has not yet completed its Year 2000 contingency plans. Such plans
include, but are not limited to, using alternative suppliers and establishing
contingent supply arrangements. The Company expects bn.com to have such plans
in place by the end of the third quarter of 1999. The worst case scenario
related to Year 2000 issues would involve a major shutdown of the Internet,
which would result in the loss of bn.com's principal revenue source until the
shutdown was resolved.
12
<PAGE>
Forward-Looking Statements
- --------------------------
This report may contain certain forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to the Company and bn.com that are based on the beliefs of
the management of the Company as well as assumptions made by and information
currently available to the management of the Company. When used in this report,
the words "anticipate," "believe," "estimate," "expect," "intend," "plan" and
similar expressions, as they relate to the Company, bn.com or the management of
the Company, identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events, the outcome of which
is subject to certain risks, including among others general economic and market
conditions, changes in product demand, the growth rate of Internet usage and
e-commerce, possible disruptions in the Company's or bn.com's computer or
telephone systems, possible increases in shipping rates or interruptions in
shipping service, effects of competition, the level and volatility of interest
rates, changes in tax and other governmental rules and regulations applicable to
the Company or bn.com and other factors that may be outside of the Company's
control. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results or outcomes may
vary materially from those described herein as anticipated, believed, estimated,
expected, intended or planned. Subsequent written and oral forward-looking
statements attributable to the Company, bn.com or persons acting on their behalf
are expressly qualified in their entirety by the cautionary statements in this
paragraph.
Item 3: Quantitative and Qualitative Disclosure about Market Risk
---------------------------------------------------------
None
13
<PAGE>
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
-----------------
bn.com is involved in various routine legal proceedings incidental to the
conduct of its business. The Company does not believe that any of these legal
proceedings will have a material adverse effect on the financial condition,
results of operations or cash flows of bn.com.
In August 1998, The Intimate Bookshop, Inc. and its owner Wallace Kuralt
filed a lawsuit in the United States District Court for the Southern District
of New York against bn.com, Barnes & Noble, Inc., Borders Group, Inc.,
Amazon.com, Inc., certain publishers and others alleging violations of the
Robinson-Patman Act and other federal law, and violations of New York statutes
governing trade practices and common law. The complaint sought class
certification of a class of all retail booksellers in the United States that
were in business four years prior to the commencement of the action. Plaintiff
seeks approximately $11.2 million in compensatory damages, as well as treble
and punitive damages, injunctive and declaratory relief, disgorgement of
alleged discriminatory discounts and attorneys' fees. Plaintiffs subsequently
amended their complaint, which then alleged eight causes of action on behalf
of the Intimate Bookshop and Wallace Kuralt accusing bn.com and the other
defendants of: (i) violating ss.2(f) of the Robinson-Patman Act; (ii) violating
ss.2(c) of the Robinson-Patman Act; (iii) violating ss.13a of the Clayton Act;
(iv) inducing every publisher in the United States to breach contracts with the
plaintiffs; (v) interfering with the plaintiff's advantageous business
relationships; (vi) engaging in unfair competition; (vii) violating ss.ss. 349
and 350 of the New York General Business Law; and (viii) being unjustly
enriched. The class action allegations have been removed and plaintiffs
voluntarily dismissed defendants Harper Collins Publishers, Inc. and Amazon.com,
Inc. from the case. On April 13, 1999, bn.com and the other defendants filed a
motion to dismiss the second through eighth causes of action in their entireties
and for a more definite statement of the remaining allegations of the first
cause of action. In response, plaintiffs voluntarily dismissed the antitrust
allegations asserted by Wallace Kuralt individually and withdrew their third
cause of action asserted for alleged violations of ss.13a of the Clayton Act.
Thereafter, the Plaintiffs indicated to the Court that Wallace Kuralt would
dismiss all claims asserted in his individual capacity and that all plaintiffs
voluntarily would dismiss the fourth through eighth causes of action in their
entireties. The remainder of the motion is currently pending before the Court.
bn.com intends to continue to vigorously defend this action.
Item 2: Changes in Securities and Use of Proceeds
-----------------------------------------
The effective date of the Company's registration statement, filed on
Form S-1 under the Securities Act of 1933 (File No. 333-64211 ) relating to
the initial public offering (the "Offering") of its Class A Common Stock, was
May 25, 1999. Pursuant to the Offering, a total of 28,750,000 shares of the
Company's Class A Common Stock were sold to an underwriting syndicate. The
managing underwriters of the Offering were Goldman, Sachs & Co., Merrill Lynch
& Co., Salomon Smith Barney and Wit Capital Corporation. The Offering was
completed on May 28, 1999, at an initial public offering price of $18.00 per
share. The Offering resulted in gross proceeds to the Company of $517.5
million, $31.1 million of which were applied to the underwriting discount and
approximately $2.0 million of which were applied to Offering expenses. As a
result, net proceeds of the Offering to the Company were approximately $484.4
million. Such net proceeds were used by the Company to acquire 28,750,000
Membership Units of bn.com. Since May 28, 1999, bn.com has invested
approximately $262.5 million of such net proceeds in short term marketable
securities. The proceeds of the Offering have been used to fund capital
expenditures and provide working capital in accordance with the Company's
prospectus. None of the net proceeds of the Offering were paid by the Company
or bn.com, directly or indirectly, to any
14
<PAGE>
director, officer of general partner of the Company or bn.com or any of their
associates, or to any persons owning ten percent or more of any class of the
Company's equity securities, or any affiliates of the Company or bn.com.
Item 3: Defaults upon Senior Securities
-------------------------------
None
Item 4: Submission of Matters to a Vote of Securities Holders
-----------------------------------------------------
None
Item 5: Other Information
-----------------
None
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit filed with this Form 10-Q: None.
(b) No report on 8-K was filed by registrant during the fiscal
quarter for which this report is filed.
15
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
barnesandnoble.com inc.
-----------------------
(Registrant)
Date: August 13, 1999 By: /s/ Marie Toulantis
--------------------------------
Marie Toulantis
Chief Financial Officer
16
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