Barnes & Noble Education, Inc.
Barnes & Noble Education, Inc. (Form: 10-Q, Received: 09/10/2015 16:08:44)
Table of Contents

 

 

UNITED STATES

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 August 1, 2015

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: 1-37499

 

 

BARNES & NOBLE EDUCATION, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   46-0599018

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

120 Mountain View Blvd., Basking Ridge, NJ   07920
(Address of Principal Executive Offices)   (Zip Code)

(908) 991-2665

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

As of August 30, 2015, 48,197,127 shares of Common Stock, par value $0.01 per share, were outstanding.

 

 

 


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EXPLANATORY NOTE

On February 26, 2015, Barnes & Noble, Inc. (“Barnes & Noble”) announced plans for the complete legal and structural separation of Barnes & Noble Education, Inc. (the “Company”) from Barnes & Noble (the “Spin-Off”). Under the Separation and Distribution Agreement between Barnes & Noble and the Company (the “Separation and Distribution Agreement”), Barnes & Noble planned to distribute all of its equity interest in us, consisting of all of the outstanding shares of our Common Stock, to Barnes & Noble’s stockholders on a pro rata basis. Following the Spin-Off, Barnes & Noble would not own any equity interest in us, and we would operate independently from Barnes & Noble.

On July 14, 2015, Barnes & Noble approved the final distribution ratio and declared a pro rata dividend of the outstanding shares of our common stock, par value $0.01 per share (“Common Stock”), to Barnes & Noble’s existing stockholders. The pro rata dividend was made on August 2, 2015 to the Barnes & Noble stockholders of record (as of July 27, 2015). Each Barnes & Noble stockholder of record received a distribution of 0.632 shares of our Common Stock for each share of Barnes & Noble common stock held on the record date.

On August 2, 2015, we completed the legal separation from Barnes & Noble, at which time we began to operate as an independent publicly-traded company. Our Common Stock began to trade on a “when-issued” basis on the NYSE under the symbol “BNED WI” beginning on July 23, 2015. On August 3, 2015, when-issued trading of our Common Stock ended, our Common Stock began “regular-way” trading under the symbol “BNED.”

Since the consummation of the Spin-Off occurred after the end of the August 1, 2015 quarter covered by this Form 10-Q, this Form 10-Q reflects the results of the Company for periods prior to the completion of the Spin-Off.


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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Fiscal Quarter Ended August 1, 2015

Index to Form 10-Q

 

             Page No.  
PART I -  

FINANCIAL INFORMATION

  
Item 1.  

Financial Statements (Unaudited)

  
 

Consolidated Statements of Operations and Comprehensive Loss – For the 13 weeks ended August 1, 2015 and August 2, 2014

     3   
 

Consolidated Balance Sheets – As of August 1, 2015, August 2, 2014 and May 2, 2015

     4   
 

Consolidated Statements of Cash Flows – For the 13 weeks ended August  1, 2015 and August 2, 2014

     5   
 

Notes to Consolidated Financial Statements

     6   
 

Note 1.

 

Organization

     6   
 

Note 2.

 

Summary of Significant Accounting Policies

     7   
 

Note 3.

 

Recent Accounting Pronouncements

     9   
 

Note 4.

 

Segment Reporting

     10   
 

Note 5.

 

Net Earnings (Loss) Per Share

     10   
 

Note 6.

 

Fair Values of Financial Instruments

     10   
 

Note 7.

 

Credit Facility

     11   
 

Note 8.

 

Other Long-Term Liabilities

     11   
 

Note 9.

 

Employees’ Defined Contribution Plan

     12   
 

Note 10.

 

Stock-Based Compensation

     12   
 

Note 11.

 

Income Taxes

     12   
 

Note 12.

 

Investments

     12   
 

Note 13.

 

Legal Proceedings

     13   
 

Note 14.

 

Parent Company Transactions

     13   
 

Note 15.

 

Subsequent Events

     14   
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     16   
 

Results of Operations

     19   
 

EBITDA (Non-GAAP)

     22   
 

Liquidity

     23   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     26   
Item 4.  

Controls and Procedures

     27   
PART II -  

OTHER INFORMATION

  
Item 1.  

Legal Proceedings

     28   
Item 1A.  

Risk Factors

     29   
Item 6.  

Exhibits

     38   
 

SIGNATURES

     39   
 

EXHIBIT INDEX

     40   


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PART I - FINANCIAL INFORMATION

 

Item 1: Financial Statements

BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except per share data)

(unaudited)

 

                                                                 
     13 weeks ended  
     August 1,
2015
    August 2,
2014
 

Sales:

    

Product sales and other

   $   218,716      $   206,188   

Rental income

     20,267        19,553   
  

 

 

   

 

 

 

Total sales

     238,983        225,741   
  

 

 

   

 

 

 

Cost of sales and occupancy:

    

Product and other cost of sales and occupancy

     174,909        166,053   

Rental cost of sales and occupancy

     12,530        12,378   
  

 

 

   

 

 

 

Total cost of sales and occupancy

     187,439        178,431   
  

 

 

   

 

 

 

Gross profit

     51,544        47,310   

Selling and administrative expenses

     86,684        81,272   

Depreciation and amortization

     13,100        12,544   
  

 

 

   

 

 

 

Operating loss

     (48,240     (46,506

Interest expense, net

     3        5   
  

 

 

   

 

 

 

Loss before income taxes

     (48,243     (46,511

Income tax benefit

     (21,325     (20,298
  

 

 

   

 

 

 

Net loss

   $ (26,918   $ (26,213
  

 

 

   

 

 

 

Other comprehensive earnings, net of tax

     —         —    
  

 

 

   

 

 

 

Total comprehensive loss

   $ (26,918   $ (26,213
  

 

 

   

 

 

 

Loss per common share

    

Basic

   $ (0.65   $ (0.71

Diluted

   $ (0.65   $ (0.71

Weighted average common shares outstanding

    

Basic

     41,426        37,437   

Diluted

     41,426        37,437   

See accompanying notes to consolidated financial statements.

 

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands)

 

     August 1,
2015
     August 2,
2014
     May 2,
2015
 
     (unaudited)      (unaudited)      (audited)  
ASSETS         

Current assets:

        

Cash and cash equivalents

   $ 16,029       $ 45,803       $ 59,714   

Receivables, net

     35,461         32,032         76,551   

Merchandise inventories, net

     766,767         695,040         297,424   

Textbook rental inventories

     7,640         7,438         47,550   

Prepaid expenses and other current assets

     7,623         5,629         4,625   

Short-term deferred tax assets, net

     23,265         21,816         24,358   
  

 

 

    

 

 

    

 

 

 

Total current assets

     856,785         807,758         510,222   
  

 

 

    

 

 

    

 

 

 

Property and equipment:

        

Buildings and leasehold improvements

     154,524         137,753         149,065   

Fixtures and equipment

     341,708         318,389         335,403   
  

 

 

    

 

 

    

 

 

 
     496,232         456,142         484,468   

Less accumulated depreciation and amortization

     387,449         357,258         376,911   
  

 

 

    

 

 

    

 

 

 

Net property and equipment

     108,783         98,884         107,557   
  

 

 

    

 

 

    

 

 

 

Goodwill

     274,070         274,070         274,070   

Intangible assets, net

     195,627         205,878         198,190   

Other noncurrent assets

     44,738         34,233         39,885   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 1,480,003       $ 1,420,823       $ 1,129,924   
  

 

 

    

 

 

    

 

 

 
LIABILITIES AND PARENT COMPANY EQUITY         

Current liabilities:

        

Accounts payable

   $ 603,928       $ 538,028       $ 170,101   

Accrued liabilities

     61,647         67,268         97,575   
  

 

 

    

 

 

    

 

 

 

Total current liabilities

     665,575         605,296         267,676   
  

 

 

    

 

 

    

 

 

 

Long-term deferred taxes, net

     73,037         80,584         66,091   

Other long-term liabilities

     69,555         61,164         69,488   

Preferred membership interests

     —           383,839         —     

Parent company investment

     671,836         289,940         726,669   

Commitments and contingencies

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total liabilities and Parent Company equity

   $ 1,480,003       $ 1,420,823       $ 1,129,924   
  

 

 

    

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the 13 weeks ended August 1, 2015 and August 2, 2014

(In thousands)

(unaudited)

 

     13 weeks ended  
     August 1,
2015
    August 2,
2014
 

Cash flows from operating activities:

    

Net loss

   $ (26,918   $ (26,213

Adjustments to reconcile net loss to net cash flows from operating activities:

    

Depreciation and amortization

     13,100        12,544   

Deferred taxes

     8,039        5,704   

Stock-based compensation expense

     953        1,191   

Increase in other long-term liabilities

     67        11   

Changes in other operating assets and liabilities, net

     6,558        (27,520
  

 

 

   

 

 

 

Net cash flows provided by (used in) operating activities

     1,799        (34,283
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (11,763     (9,265

Net increase in other noncurrent assets

     (4,853     (4,082
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (16,616     (13,347
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net transfers to Parent

     (28,868     (50,836
  

 

 

   

 

 

 

Net cash flows used in financing activities

     (28,868     (50,836
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (43,685     (98,466

Cash and cash equivalents at beginning of period

     59,714        144,269   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 16,029      $ 45,803   
  

 

 

   

 

 

 

Changes in other operating assets and liabilities, net:

    

Receivables, net

   $ 41,090      $ 6,969   

Merchandise inventories

     (469,343     (419,694

Textbook rental inventories

     39,910        39,625   

Prepaid expenses and other current assets

     (2,998     (1,507

Accounts payable and accrued liabilities

     397,899        347,087   
  

 

 

   

 

 

 

Changes in other operating assets and liabilities, net

   $ 6,558      $ (27,520
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the 13 weeks ended August 1, 2015 and August 2, 2014

(Thousands of dollars, except per share data)

(unaudited)

Unless the context otherwise indicates, references in these Notes to the accompanying consolidated financial statements to “we,” “us,” “our” and “the Company” refer to Barnes & Noble Education, Inc., a Delaware corporation. References to “Barnes & Noble” or “Parent” refer to Barnes & Noble, Inc., a Delaware corporation, and its consolidated subsidiaries (other than Barnes & Noble Education, Inc. and its consolidated subsidiaries) unless the context otherwise requires. References to “Barnes & Noble College” refer to our college bookstore business operated through our subsidiary Barnes & Noble College Booksellers, LLC. Barnes & Noble College is our only operating subsidiary.

This Form 10-Q should be read in conjunction with our Audited Consolidated Financial Statements and accompanying Notes to consolidated financial statements in our Prospectus dated July 15, 2015 and filed with the Securities and Exchange Commission (the “SEC”) on that date, which includes consolidated financial statements for the Company for each of the three fiscal years ended May 2, 2015, May 3, 2014 and April 27, 2013 (Fiscal 2015, Fiscal 2014 and Fiscal 2013, respectively).

Note 1. Organization

Description of Business

We are one of the largest contract operators of bookstores on college and university campuses across the United States. We create and operate campus stores that are focal points for college life and learning, enhancing the educational mission of the institution, enlivening campus culture and delivering an important revenue stream to our partner schools. We typically operate our stores under multi-year management service agreements granting us the right to operate the official school bookstore on campus. In turn, we pay the school a percentage of store sales and, in some cases, a minimum fixed guarantee.

We build relationships and derive sales by actively engaging and marketing to over 5 million students and their faculty on the campuses we serve and offer a full assortment of items in our campus stores, including course materials, which includes new and used print textbooks and digital textbooks, which are available for sale or rent, emblematic apparel and gifts, trade books, computer products, school and dorm supplies, convenience and café items and graduation products. We are a multi-channel marketer and operate school-branded e-commerce sites for each store, allowing students and faculty to purchase textbooks, course materials and other products online.

As of May 2, 2015, we operated 724 stores nationwide, which reached 24% of the total United States college and university student enrolled population. During the 13 weeks ended August 1, 2015, we opened 21 stores and closed 9 stores. As of August 1, 2015, we operated 736 stores nationwide.

On February 26, 2015, Barnes & Noble announced plans for the Spin-Off (as discussed below). On August 2, 2015, we completed a legal separation from Barnes & Noble, at which time we began to operate as an independent publicly-traded company. This Form 10-Q for the quarter ended August 1, 2015 reflects the consolidated financial statements prior to the Spin-Off on August 2, 2015 and as such, our consolidated financial statements have been prepared on a stand-alone basis and are derived from the consolidated financial statements and accounting records of Barnes & Noble (as discussed in Note 2. Summary of Significant Accounting Policies ).

Our History

On September 30, 2009, Barnes & Noble acquired Barnes & Noble College Booksellers, LLC from Leonard and Louise Riggio. From that date until October 4, 2012, Barnes & Noble College Booksellers, LLC was wholly owned by Barnes & Noble Booksellers, Inc., a wholly owned subsidiary of Barnes & Noble. We were initially incorporated under the name NOOK Media Inc. in July 2012 to hold Barnes & Noble’s college and digital businesses. On October 4, 2012, Microsoft Corporation (“Microsoft”) acquired a 17.6% non-controlling preferred membership interest in our subsidiary NOOK Media LLC (“NOOK Media”), and through us, Barnes & Noble maintained an 82.4% controlling interest of the college and digital businesses.

On January 22, 2013, Pearson Education, Inc. (“Pearson”) acquired a 5% non-controlling preferred membership interest in NOOK Media, received warrants to purchase an additional preferred membership interest in NOOK Media and entered into a commercial agreement with NOOK Media relating to the college business.

 

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the 13 weeks ended August 1, 2015 and August 2, 2014

(Thousands of dollars, except per share data)

(unaudited)

 

On December 4, 2014, we re-acquired Microsoft’s interest in NOOK Media in exchange for cash and common stock of Barnes & Noble. On December 22, 2014, we also re-acquired Pearson’s interest in NOOK Media and related warrants previously issued to Pearson in exchange for cash and common stock of Barnes & Noble. As a result of these transactions, Barnes & Noble owned 100% of our Company prior to the Spin-Off. See Note 12. Investments .

In February 2015, we changed our name from NOOK Media Inc. to Barnes & Noble Education, Inc. and NOOK Media’s name to B&N Education, LLC.

On May 1, 2015, we distributed to Barnes & Noble all of the membership interests in NOOK Digital LLC (formerly known as barnesandnoble.com llc), which owns the NOOK digital business and which will continue to be owned by Barnes & Noble. At such time, we ceased to own any interest in the NOOK digital business. These consolidated financial statements retroactively reflect the reorganization of NOOK Media Inc. as described above.

Separation from Barnes & Noble, Inc.

The final distribution and legal separation of the Company from Barnes & Noble occurred on August 2, 2015. See Note 15. Subsequent Events .

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

Our consolidated financial statements have been prepared on a stand-alone basis and are derived from the consolidated financial statements and accounting records of Barnes & Noble. Our consolidated financial statements reflect our financial position, results of operations and cash flows as we were historically managed, in conformity with accounting principles generally accepted in the United States (“GAAP”). Our consolidated financial statements include certain assets and liabilities that have historically been held at the Barnes & Noble corporate level but are specifically identifiable or otherwise attributable to us.

All intercompany transactions between us and Barnes & Noble have been included in our consolidated financial statements and are considered to be effectively settled for cash in our consolidated financial statements at the time the Spin-Off is recorded. The total net effect of the settlement of these intercompany transactions is reflected in our consolidated statements of cash flow as a financing activity and in the consolidated balance sheets as “Parent company investment.”

The historical costs and expenses reflected in our financial statements include an allocation for certain corporate and shared service functions historically provided by Barnes & Noble including, but not limited to, executive oversight, accounting, treasury, tax, legal, human resources, occupancy, procurement, information technology, and other shared services. These expenses have been allocated to us on the basis of direct usage when identifiable, with the remainder allocated on a pro-rata basis of consolidated sales, headcount, tangible assets or other measures considered to be a reasonable reflection of the historical utilization levels of these services.

Our management believes the assumptions underlying our consolidated financial statements, including the assumptions regarding the allocation of general corporate expenses from Barnes & Noble are reasonable. Nevertheless, our consolidated financial statements may not include all of the actual expenses that would have been incurred had we operated as a stand-alone company during the periods presented and may not reflect our consolidated results of operations, financial position and cash flows had we operated as a stand-alone company during the periods presented. Actual costs that would have been incurred if we had operated as a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. Following the Spin-Off, we will perform these functions using our own resources or contracted services. Under the Transition Services Agreement with Barnes & Noble, some of these functions will continue to be provided by Barnes & Noble. See Note 15. Subsequent Events .

In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements of the Company contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly its consolidated financial position as of August 1, 2015 and the results of its operations and cash flows for the 13 weeks then ended. These consolidated financial

 

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the 13 weeks ended August 1, 2015 and August 2, 2014

(Thousands of dollars, except per share data)

(unaudited)

 

statements are condensed and therefore do not include all of the information and footnotes required by generally accepted accounting principles.

Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. Due to the seasonal nature of the business, the results of operations for the 13 weeks ended August 1, 2015 are not indicative of the results expected for the 52 weeks ending April 30, 2016 (Fiscal 2016). Our business is highly seasonal, with the major portion of sales and operating profit realized during the second and third fiscal quarters, when college students generally purchase and rent textbooks for the upcoming semesters.

Use of Estimates

In preparing financial statements in conformity with GAAP, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.

Merchandise Inventories

Merchandise inventories, which consist of finished goods, are stated at the lower of cost or market. Cost is determined primarily by the retail inventory method. Our textbook and trade book inventories are valued using the last-in first out, or (“LIFO”), method and the related reserve was not material to the recorded amount of our inventories.

Market value of our inventory is determined based on its estimated net realizable value, which is generally the selling price. Reserves for non-returnable inventory are based on our history of liquidating non-returnable inventory.

We also estimate and accrue shortage for the period between the last physical count of inventory and the balance sheet date. Shortage rates are estimated and accrued based on historical rates and can be affected by changes in merchandise mix and changes in actual shortage trends.

Textbook Rentals Inventories

Physical textbooks out on rent are categorized as textbook rental inventories. At the time a rental transaction is consummated, the book is removed from merchandise inventories and moved to textbook rental inventories at cost. The cost of the book is amortized down to its estimated residual value over the rental period. The related amortization expense is included in cost of goods sold. At the end of the rental period, upon return, the book is removed from textbook rental inventories and recorded in merchandise inventories at its amortized cost.

Revenue Recognition

Revenue from sales of our products is recognized at the time of sale or shipment. Revenue from sales of products ordered through our websites is recognized upon delivery and receipt of the shipment by our customers. Sales taxes collected from our customers are excluded from reported revenues. All of our sales are recognized as revenue on a “net” basis, including sales in connection with any periodic promotions offered to customers. We do not treat any promotional offers as expenses.

We rent both physical and digital textbooks. Revenue from the rental of physical textbooks is deferred and recognized over the rental period commencing at point of sale. Revenue from the rental of digital textbooks is recognized at time of sale. A software feature is imbedded within the content of our digital textbooks, such that upon expiration of the rental term the customer is no longer able to access the content. While the digital rental allows the customer to access digital content for a fixed period of time, once the digital content is delivered to the customer our performance obligation is complete. The Company offers a buyout option to allow the purchase of a rented book at the end of the semester. The Company records the buyout purchase when the customer exercises and pays the buyout option price. In these instances, the Company would accelerate any remaining deferred rental revenue at the point of sale.

 

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the 13 weeks ended August 1, 2015 and August 2, 2014

(Thousands of dollars, except per share data)

(unaudited)

 

Research and Development Costs for Software Products

We follow the guidance in Accounting Standards Codification (“ASC”) 985-20, Cost of Software to Be Sold, Leased or Marketed, regarding software development costs to be sold, leased, or otherwise marketed. Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale. A certain amount of judgment and estimation is required to assess when technological feasibility is established, as well as the ongoing assessment of the recoverability of capitalized costs. Our products reach technological feasibility shortly before the products are available for sale and therefore research and development costs are generally expensed as incurred.

Note 3. Recent Accounting Pronouncements

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2015-11, Inventory (Topic 330) – Simplifying the Measurement of Inventory (“ASU 2015-11”). The amendments in this update state that inventory should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The update does not apply to inventory that is measured using last-in, first-out (“LIFO”) or the retail inventory method. The update applies to all other inventory, which includes inventory that is measured using first-in, first-out (“FIFO”) or average cost. We are required to adopt this standard in the first quarter of fiscal 2018, but have early adopted this standard this quarter as permitted. This standard does not have an impact on our consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-05, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”) to simplify the accounting for cloud computing arrangements. The amendments in this update requires that if a cloud computing arrangement includes a software license, then a customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer’s accounting for service contracts. We are required to adopt this standard in the first quarter of fiscal 2017 and early adoption is permitted. We are currently evaluating this standard to determine the impact of adoption on our consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”) to simplify the presentation of debt issuance costs. The amendments in the update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction of the carrying amount of the debt. Recognition and measurement of debt issuance costs were not affected by this amendment. In August 2015, FASB issued ASU No. 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated With Line-of-Credit Arrangements — Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting” which clarified that the SEC would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. We are required to adopt ASU 2015-03 in the first quarter of fiscal 2017, but have early adopted this standard this quarter as permitted. This standard does not have an impact on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date , which effectively delayed the adoption date by one year. We are required to adopt ASU 2014-09 in the first quarter of fiscal 2019 and early adoption is permitted. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. We have not yet selected a transition method nor have we determined the impact of adoption on our consolidated financial statements.

 

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the 13 weeks ended August 1, 2015 and August 2, 2014

(Thousands of dollars, except per share data)

(unaudited)

 

Note 4. Segment Reporting

We identify our operating segments based on the way our business is managed (focusing on the financial information distributed) and the manner in which our chief operating decision maker interacts with other members of management. We have determined that we operate within a single reportable segment, which is entirely within the United States.

Note 5. Net Earnings (Loss) Per Share

In accordance with ASC 260-10-45, Share-Based Payment Arrangements and Participating Securities and the Two-Class Method, unvested restricted shares, unvested restricted stock units and shares issuable under the our deferred compensation plan are considered participating securities. During periods of net income, the calculation of earnings per share for common stock are reclassified to exclude the income attributable to the unvested restricted shares, unvested restricted stock units and shares issuable under the our deferred compensation plan from the numerator and exclude the dilutive impact of those shares from the denominator. Diluted earnings per share was calculated using the two-class method for stock options, restricted stock and restricted stock units, and the if-converted method for the preferred stock.

During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company. Due to the net loss during the 13 weeks ended August 1, 2015 and August 2, 2014, participating securities in the amounts of 785,705 and 995,701, respectively, were excluded in the calculation of loss per share using the two-class method because the effect would be antidilutive. The Company’s outstanding dilutive stock options of 57,875 and 26,891 for the 13 weeks ended August 1, 2015 and August 2, 2014, respectively, and accretion/payments of dividends on preferred shares were also excluded from the calculation of loss per share using the two-class method because the effect would be antidilutive.

The following is a reconciliation of the basic and diluted loss per share calculation:

 

     13 weeks ended  
     August 1,
2015
     August 2,
2014
 

Numerator for basic loss per share:

     

Net loss

   $ (26,918    $ (26,213

Accretion of dividends on preferred stock

     —           (443
  

 

 

    

 

 

 

Net loss available to common shareholders

   $ (26,918    $ (26,656
  

 

 

    

 

 

 

Numerator for diluted loss per share:

     

Net loss available to common shareholders

   $ (26,918    $ (26,656
  

 

 

    

 

 

 

Denominator for basic and diluted earnings per share:

     

Basic weighted average common shares (in thousands) (a)

     41,426         37,437   

Loss per common share:

     

Basic

   $ (0.65    $ (0.71

Diluted

   $ (0.65    $ (0.71

 

(a) Basic earnings per share and weighted-average basic shares outstanding are based on the number of shares of Barnes & Noble common stock outstanding as of the end of the period, adjusted for an assumed distribution ratio of 0.632 shares of our Common Stock for every one share of Barnes & Noble common stock held on the record date for the Spin-Off.

Note 6. Fair Values of Financial Instruments

In accordance with ASC 820, Fair Value Measurements and Disclosures , the fair value of an asset is considered to be the price at which the asset could be sold in an orderly transaction between unrelated knowledgeable and willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the

 

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the 13 weeks ended August 1, 2015 and August 2, 2014

(Thousands of dollars, except per share data)

(unaudited)

 

liability with the creditor. Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

Level 1—Observable inputs that reflect quoted prices in active markets

Level 2—Inputs other than quoted prices in active markets that are either directly or indirectly observable

Level 3—Unobservable inputs in which little or no market data exists, therefore requiring us to develop our own assumptions

Our financial instruments include cash and cash equivalents, receivables, accrued liabilities and accounts payable. The fair values of cash, receivables accrued liabilities and accounts payable approximates their carrying values because of the short-term nature of these instruments, which are all considered Level 1.

Note 7. Credit Facility

Until August 3, 2015, we were party to an amended and restated credit facility with Barnes & Noble, as the lead borrower, and Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and other lenders, dated as of April 29, 2011 (as amended and modified to date, the “B&N Credit Facility”). The B&N Credit Facility provided for up to $1,000,000 in aggregate commitments under a five-year asset-backed revolving credit facility expiring on April 29, 2016. The B&N Credit Facility was secured by eligible inventory and accounts receivable with the ability to include eligible real estate and related assets. We were a borrower and co-guarantor of all amounts owing under the B&N Credit Facility. All outstanding debt under the B&N Credit Facility was recorded on Barnes & Noble’s balance sheet as of August 1, 2015.

On August 3, 2015, in connection with the Spin-Off, we entered into a new five-year $400 million asset-backed revolving credit facility, the proceeds of which will be used for general corporate purposes, including seasonal working capital needs. See Note 15. Subsequent Events .

Note 8. Other Long-Term Liabilities

Other long-term liabilities consist primarily of tax liabilities related to the long-term tax payable associated with the LIFO reserve and deferred management service agreement costs related to college and university contracts, which we account for under lease accounting (as deferred rent). We provide for minimum contract expense (rent expense) over the lease terms (including the build-out period) on a straight-line basis. The excess of such rent expense over actual lease payments (net of school allowances) is classified as deferred rent. We had the following long-term liabilities at August 1, 2015, August 2, 2014 and May 2, 2015:

 

     August 1,
2015
     August 2,
2014
     May 2,
2015
 

Tax liabilities and reserves

   $ 63,699       $ 58,478       $ 63,673   

Deferred rent

     4,052         2,465         4,082   

Other

     1,804         221         1,733   
  

 

 

    

 

 

    

 

 

 

Total other long-term liabilities

   $ 69,555       $ 61,164       $ 69,488   
  

 

 

    

 

 

    

 

 

 

As a result of an immaterial balance sheet error correction, during the quarter, we increased other long-term liabilities and decreased Parent company investment by $58,298 and $63,459 for the periods ended as of August 2, 2014 and May 2, 2015, respectively. This correction related to the long-term tax payable associated with the LIFO reserve which was previously deemed contributed to Parent company capital as an intercompany liability, along with other income tax liabilities associated with our operations. The liability should not have been deemed contributed as the long-term obligation to the tax authority is required to stay with Barnes & Noble Education, Inc. as that entity would be legally obligated to pay that amount if required. Management believes it is remote that the long-term tax payable associated with the LIFO reserve will be payable or will result in a cash tax payment in the foreseeable future, assuming that LIFO will continue to be an acceptable inventory method for tax purposes. Management has assessed both quantitative and qualitative factors discussed in ASC 250, Accounting Changes and Error Corrections and Staff Accounting Bulletin 1.M, Materiality (SAB Topic 1.M) to determine that this misstatement qualifies as an immaterial balance sheet error correction. We concluded that this balance sheet misstatement is not material to an investor as it did not affect Pre-tax income, Net income, earnings per share or amounts reported in the statement of cash flows for any prior period financial statements.

 

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the 13 weeks ended August 1, 2015 and August 2, 2014

(Thousands of dollars, except per share data)

(unaudited)

 

Note 9. Employees’ Defined Contribution Plan

Barnes & Noble sponsors the defined contribution plan (the “Savings Plan”) for the benefit of substantially all of our employees. Total contributions charged to employee benefit expenses for the Savings Plan were $1,275 and $1,127 during the 13 weeks ended August 1, 2015 and August 2, 2014, respectively.

Note 10. Stock-Based Compensation

Barnes & Noble sponsors the share-based incentive plans in which certain of our employees participate. For the 13 weeks ended August 1, 2015 and August 2, 2014, we recognized stock-based compensation expense in selling and administrative expenses as follows:

 

     13 weeks ended  
     August 1,
2015
     August 2,
2014
 

Restricted Stock Expense

   $ 80       $ 77   

Restricted Stock Units Expense

     753         903   

Stock Option Expense

     120         52   
  

 

 

    

 

 

 

Stock-Based Compensation Expense

   $ 953       $ 1,032   
  

 

 

    

 

 

 

Note 11. Income Taxes

We recorded an income tax benefit of $21,325 on pre-tax loss of $48,243 during the 13 weeks ended August 1, 2015, which represented an effective income tax rate of 44.2% and an income tax benefit of $20,298 on pre-tax loss of $46,511 during the 13 weeks ended August 2, 2014, which represented an effective income tax rate of 43.6%.

The income tax provision for the 13 weeks ended August 1, 2015 reflects the impact of federal and state income taxes imposed upon income from operations, increased by the impact of certain non-deductible expenses.

Note 12. Investments

Microsoft Investment

On April 27, 2012, Barnes & Noble entered into an investment agreement pursuant to which Barnes & Noble transferred to NOOK Media its digital device, digital content and college bookstore businesses, and Morrison Investment Holdings, Inc. (“Morrison”), a subsidiary of Microsoft Corporation (“Microsoft”), acquired a 17.6% non-controlling preferred membership interest in NOOK Media. Concurrently with its entry into this agreement, Barnes & Noble also entered into a commercial agreement with Microsoft relating to the digital and college businesses investment. That transaction closed on October 4, 2012.

On December 3, 2014, the Microsoft commercial agreement was terminated. On December 4, 2014, we re-acquired Morrison’s interest in NOOK Media in exchange for cash and common stock of Barnes & Noble.

In connection with the closing, Morrison, Barnes & Noble and Barnes & Noble Education entered into a Digital Business Contingent Payment Agreement related to Barnes & Noble’s digital business (“DBCPA”). Effective as of August 2, 2015, all of Barnes & Noble Education’s obligations under the DBCPA were either assigned to Barnes & Noble or terminated.

 

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the 13 weeks ended August 1, 2015 and August 2, 2014

(Thousands of dollars, except per share data)

(unaudited)

 

Pearson Investment

On December 21, 2012, NOOK Media entered into an agreement with Pearson, a subsidiary of Pearson plc, to make a strategic investment in NOOK Media whereby Pearson acquired a 5% non-controlling preferred membership interest in NOOK Media and received warrants to purchase up to an additional 5% of NOOK Media under certain conditions. That transaction closed on January 22, 2013.

At closing, NOOK Media and Pearson entered into a commercial agreement relating to the college business with respect to distributing Pearson content in connection with this strategic investment. On December 27, 2013, NOOK Media entered into an amendment to the commercial agreement that extended the term of the agreement and the timing of the measurement period to meet certain revenue share milestones.

On December 22, 2014, we re-acquired Pearson’s interest in NOOK Media and related warrants previously issued to Pearson in exchange for cash and common stock of Barnes & Noble. We remain a party to the commercial agreement with Pearson relating to the college business.

Note 13. Legal Proceedings

We are involved in a variety of claims, suits, investigations and proceedings that arise from time to time in the ordinary course of our business, including actions with respect to contracts, intellectual property, taxation, employment, benefits, personal injuries and other matters. The results of these proceedings in the ordinary course of business are not expected to have a material adverse effect on our consolidated financial position or results of operations.

Note 14. Parent Company Transactions

Allocation of General Corporate Expenses

Our consolidated financial statements have been prepared on a stand-alone basis and are derived from the consolidated financial statements and accounting records of Barnes & Noble. See Note 2. Summary of Accounting Significant Policies – Basis of Presentation .

The historical costs and expenses reflected in our consolidated financial statements include an allocation for certain corporate and shared service functions historically provided by Barnes & Noble including, but not limited to, executive oversight, accounting, treasury, tax, legal, human resources, occupancy, procurement, information technology, and other shared services. These expenses have been allocated to us on the basis of direct usage when identifiable, with the remainder allocated on a pro-rata basis of consolidated sales, headcount, tangible assets or other measures considered to be a reasonable reflection of the historical utilization levels of these services. During the 13 weeks ended August 1, 2015 and August 2, 2014, we were allocated $4,798 and $5,725, respectively, of general corporate expenses incurred by Barnes & Noble which are included as cost of sales and occupancy and selling, general and administrative expenses in the consolidated statement of operations.

Parent Company Equity

The components of the net transfers (to)/from parent as of August 1, 2015, August 2, 2014 and May 2, 2015 are as follows:

 

     August 1,
2015
     August 2,
2014
 

Corporate allocations including income taxes

   $ (16,528    $ (14,573

Net intercompany contributions/(dividends)

     (11,387      (35,072
  

 

 

    

 

 

 

Total net transfers to Parent

   $ (27,915    $ (49,645
  

 

 

    

 

 

 

 

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the 13 weeks ended August 1, 2015 and August 2, 2014

(Thousands of dollars, except per share data)

(unaudited)

 

All intercompany transactions between us and Barnes & Noble have been included in our consolidated financial statements and are considered to be effectively settled for cash in our consolidated financial statements at the time the Spin-Off is recorded. The total net effect of the settlement of these intercompany transactions is reflected in our consolidated statements of cash flow as a financing activity and in the consolidated balance sheets as “Parent company investment.”

Note 15. Subsequent Events

Separation from Barnes & Noble, Inc.

On February 26, 2015, Barnes & Noble announced plans for the Spin-Off. Under the Separation and Distribution Agreement, Barnes & Noble planned to distribute all of its equity interest in us, consisting of all of the outstanding shares of our Common Stock, to Barnes & Noble’s stockholders on a pro rata basis. Following the Spin-Off, Barnes & Noble would not own any equity interest in us, and we would operate independently from Barnes & Noble.

On July 14, 2015, Barnes & Noble approved the final distribution ratio and declared a pro rata dividend of the outstanding shares of our common stock to Barnes & Noble’s existing stockholders. The pro rata dividend was made on August 2, 2015 to the Barnes & Noble stockholders of record (as of July 27, 2015). Each Barnes & Noble stockholder of record received a distribution of 0.632 shares of our Common Stock for each share of Barnes & Noble Common Stock held on the record date (the “Distribution”). On August 2, 2015, we completed the legal separation from Barnes & Noble, at which time we began to operate as an independent publicly-traded company.

Following the Spin-Off on August 2, 2015, our authorized capital stock consisted of 200 million shares of Common Stock and five million shares of preferred stock, par value $0.01 per share. As of August 2, 2015, 48,186,900 shares and 0 shares of our Common Stock and preferred stock, respectively, were issued and outstanding. Our Common Stock began to trade on a “when-issued” basis on the NYSE under the symbol “BNED WI” beginning on July 23, 2015. On August 3, 2015, when-issued trading of our Common Stock ended, our Common Stock began “regular-way” trading under the symbol “BNED.”

On-going Agreements with Barnes & Noble

In connection with the separation from Barnes & Noble, we entered into a Separation and Distribution Agreement with Barnes & Noble on July 14, 2015 and several other ancillary agreements on August 2, 2015. These agreements govern the relationship between the parties after the separation and allocate between the parties various assets, liabilities, rights and obligations following the separation, including employee benefits, intellectual property, information technology, insurance and tax-related assets and liabilities. The agreements also describe Barnes & Noble’s future commitments to provide us with certain transition services following the Spin-Off. These agreements include the following:

 

    a Separation and Distribution Agreement that set forth Barnes & Noble’s and our agreements regarding the principal actions that both parties took in connection with the Spin-Off and aspects of our relationship following the Spin-Off;

 

    a Transition Services Agreement pursuant to which Barnes & Noble agreed to provide us with specified services for a limited time to help ensure an orderly transition following the Distribution. The Transition Services Agreement specifies the calculation of our costs for these services;

 

    a Tax Matters Agreement governs the respective rights, responsibilities and obligations of Barnes & Noble and us after the Spin-Off with respect to all tax matters (including tax liabilities, tax attributes, tax returns and tax contests);

 

    an Employee Matters Agreement with Barnes & Noble addressing employment, compensation and benefits matters; and

 

    a Trademark License Agreement pursuant to which Barnes & Noble grants us an exclusive license in certain licensed trademarks and a non-exclusive license in other licensed trademarks.

A description of the material terms and conditions of these agreements can be found in the section titled “Certain Relationships and Related Party Transactions” of the Prospectus dated July 15, 2015 and filed with the SEC on that date. The descriptions of the Transition Services Agreement, Tax Matters Agreement, Employee Matters Agreement and Trademark License Agreement are qualified in their entirety by reference to the full text of the Transition Services Agreement, Tax Matters Agreement, Employee

 

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the 13 weeks ended August 1, 2015 and August 2, 2014

(Thousands of dollars, except per share data)

(unaudited)

 

Matters Agreement and Trademark License Agreement, which are attached as Exhibits 10.1, 10.2, 10.3 and 10.4, respectively, to the Current Report on Form 8-K dated August 2, 2015 and filed with the SEC on August 3, 2015. The description of the Separation and Distribution Agreement is qualified in its entirety by reference to the full text of the Separation and Distribution Agreement, which is attached as Exhibit 2.1 to this Form 10-Q.

New Credit Facility

Until August 3, 2015, we were party to the B&N Credit Facility. All outstanding debt under the B&N Credit Facility was recorded on Barnes & Noble’s balance sheet as of August 1, 2015. See Note 7. Credit Facility .

On August 3, 2015, the Company and certain of its subsidiaries from time to time party thereto entered into a credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and other lenders from time to time party thereto, under which the lenders committed to provide a five-year asset-backed revolving credit facility in an aggregate committed principal amount of $400,000 (the “New Credit Facility”). Proceeds from the New Credit Facility will be used for general corporate purposes, including seasonal working capital needs. Bank of America Merrill Lynch, J.P. Morgan Securities LLC, Wells Fargo Bank, N.A. and SunTrust Robinson Humphrey, Inc. are the joint lead arrangers for the New Credit Facility.

The Company and certain of its subsidiaries (collectively, the “Loan Parties”) will be permitted to borrow under the New Credit Facility. The New Credit Facility is secured by substantially all of the inventory, accounts receivable and related assets of the borrowers under the New Credit Facility, but excluding the equity interests in the Company and its subsidiaries, intellectual property, equipment and certain other property. The Company has the option to request an increase in commitments under the New Credit Facility of up to $100,000, subject to certain restrictions.

Interest under the New Credit Facility accrues, at the election of the Company, at a LIBOR or alternate base rate, plus, in each case, an applicable interest rate margin, which is determined by reference to the level of excess availability under the New Credit Facility. Loans will initially bear interest at LIBOR plus 2.000% per annum, in the case of LIBOR borrowings, or at the alternate base rate plus 1.000% per annum, in the alternative, and thereafter the interest rate will fluctuate between LIBOR plus 2.000% per annum and LIBOR plus 1.750% per annum (or between the alternate base rate plus 1.000% per annum and the alternate base rate plus 0.750% per annum), based upon the excess availability under the New Credit Facility at such time.

The Credit Agreement contains customary negative covenants, which limit the Company’s ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets, among other things. In addition, if excess availability under the New Credit Facility were to fall below certain specified levels, certain additional covenants (including fixed charge coverage ratio requirements) would be triggered, and the lenders will assume dominion and control over the Loan Parties’ cash.

The Credit Agreement contains customary events of default, including payment defaults, material breaches of representations and warranties, covenant defaults, default on other material indebtedness, customary ERISA events of default, bankruptcy and insolvency, material judgments, invalidity of liens on collateral, change of control or cessation of business. The Credit Agreement also contains customary affirmative covenants and representations and warranties.

 

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Description of business

We are one of the largest contract operators of bookstores on college and university campuses across the United States. We create and operate campus stores that are focal points for college life and learning, enhancing the educational mission of the institution, enlivening campus culture and delivering an important revenue stream to our partner schools. We typically operate our stores under multi-year management service agreements granting us the right to operate the official school bookstore on campus. In turn, we pay the school a percentage of store sales and, in some cases, a minimum fixed guarantee.

We build relationships and derive sales by actively engaging and marketing to over 5 million students and their faculty on the campuses we serve and offer a full assortment of items in our campus stores, including course materials, which includes new and used print textbooks and digital textbooks, which are available for sale or rent, emblematic apparel and gifts, trade books, computer products, school and dorm supplies, convenience and café items and graduation products. We are a multi-channel marketer and operate school-branded e-commerce sites for each store, allowing students and faculty to purchase textbooks, course materials and other products online.

We provide direct access to a large and well-educated demographic group, enabling us to build relationships with students throughout their college years and beyond. We also expect to be the beneficiary of market consolidation as more and more schools outsource their bookstore management. We are in a unique market position to benefit from this trend given our full suite of services: bookstore management, textbook rental and digital delivery. We are making further investments in our college business, including the recent launch of Yuzu ® , our developing digital education platform that provides access to a wide range of rich, engaging content, including digital textbooks and select consumer titles applicable to the higher education market. We believe higher education provides a long-term growth opportunity, both organically by adding additional bookstores to our outsourcing model, and also, through strategic acquisition and merger activity.

As of May 2, 2015, we operated 724 stores nationwide, which reached 24% of the total United States college and university student enrolled population. During the 13 weeks ended August 1, 2015, we opened 21 stores and closed 9 stores. As of August 1, 2015, we operated 736 stores nationwide.

Separation from Barnes & Noble

For information on our separation from Barnes & Noble, see Item 1. Financial Statements — Note 15. Subsequent Events .

Since the consummation of the Spin-Off occurred after the end of the August 1, 2015 quarter covered by this Form 10-Q, this Form 10-Q, including the consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, reflects our results for periods prior to the completion of the Spin-Off.

On-going Agreements with Barnes & Noble

For information on our on-going agreements with Barnes & Noble, see Item 1. Financial Statements — Note 15. Subsequent Events .

Strategies

Our primary business strategies to grow our business are as follows:

 

    Increase Sales at Existing Bookstores : We intend to increase sales at our existing bookstores through new product offerings, enhanced marketing efforts using mobile and other technologies, increased local social and promotional offerings and expanded sales channels to both new customers and alumni. We expect sales growth at our existing bookstores will be a driver for growth in our business.

 

   

Increase Market Share with New Accounts : Historically, new store openings have been an important driver of growth in our business. For example, we increased our number of stores from 636 at the beginning of Fiscal 2012 to 724 at the end of Fiscal 2015. Looking forward, approximately 52% of college and university affiliated bookstores in the United States are operated by their respective institutions. Moreover, at the end of Fiscal 2015, we operated bookstores representing only 18% of all college and university affiliated bookstores in the United States. As more and more universities decide to outsource the

 

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management of their bookstores, we intend to aggressively pursue these opportunities and bid on these contracts. Based on the continuing trend towards outsourcing in the campus bookstore market, we expect awards of new accounts resulting in new store openings will continue to be an important driver of future growth in our business. We are in a unique position to offer academic superstores to colleges and universities.

 

    Grow digital sales by accelerating marketing, product development efforts and the acquisition of content to support the Yuzu ® digital education product: Yuzu ® , our digital education platform, offers not only electronic reading and note-taking functionality but also engaging supplemental content that we provide in conjunction with strategic publisher partners. Accelerating our product development and content acquisition efforts for Yuzu ® will enable us to access the growing educational technology market on a national level by leveraging our existing campus relationships with faculty and students.

 

    Expand opportunities through acquisitions and strategic partnerships : We believe that acquisitions and strategic partnerships will be a pillar of our growth strategy in the future. We intend to pursue strategic relationships with companies that enhance our educational services or distribution platform or that create compelling content offerings. We may also expand our current suite of digital content offerings and platform through acquisitions, internal or third party software development and strategic partnerships. Expansion into new educational verticals and markets, such as K-12, vocational and international markets, will be opportunistically evaluated.

Products & Services

As of May 2, 2015, we operated 724 stores nationwide, which reached 24% of the total United States college and university student enrolled population.

Traditional Products and Services

 

    Textbook and Course Material Sales : Textbooks continue to be a core product offering of our business. We work directly with faculty to insure the correct textbooks are available in required formats before the start of classes. We provide students with affordable textbook solutions and educate them about each format through e-mail, social media engagement and new student orientation programs and in our stores.

 

    Textbook and Course Material Rentals : We are an industry leader in textbook rentals. An increasing number of students now rent from our robust title list. The majority of all titles are available for rent. These include custom course packs and adaptive learning materials, along with traditional textbooks. In addition, we offer a convenient buyout option to allow the customer to purchase the rented book at the end of the semester, thereby enhancing our revenue and improving our inventory management processes.

 

    General Merchandise : General merchandise sales are generated in-store, as well as online through school-branded e-commerce sites. Our stores feature collegiate and athletic apparel relating to a school and/or its athletic programs and other custom-branded school spirit products, technology, supplies and convenience items. We offer a comprehensive athletic merchandise program that leverages innovative promotional campaigns and showcases the apparel industry’s top selling performance apparel categories from leading brands including Under Armour and Nike. Other merchandise, such as laptops and other technology products, notebooks, backpacks, school and dormitory supplies and related items are also offered. In addition, as of May 2, 2015, we operated 78 customized cafés and 17 stand-alone convenience stores featuring Starbucks coffee, as well as diverse grab-and-go options including organic, vegan and gluten-free, and ethnic fare for students on the move. These offerings increase traffic and the amount of time customers spend in our stores.

 

    Trade : We carry an extensive selection of trade, academic and reference books along with education toys and games and schedule store events, such as author signings, that extend to the entire community. The majority of our bookstores carry the most popular campus bestsellers along with academically relevant titles.

Technology Platform and Services

 

    Digital Education Platform (Yuzu ® ) : Launched in the spring of 2014, the Yuzu ® digital education platform is our innovative cloud-based approach to digital learning and content delivery that may be accessed via the web or mobile app. For students, Yuzu ® combines an electronic reading and note-taking experience in a simple app, with access to a rich, engaging catalog of content. It allows students to replace or supplement multiple textbooks with an app that holds and organizes all their digital content, by course and term, annotate and highlight text, add bookmarks and “sticky notes” to important pages and use a keyword search function to find a desired passage or annotation using an interface that is simple and easy to use.

 

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    e-Commerce Platform : With an active digital community of over 4.4 million customers, our custom-branded school websites drove over $360 million of sales in Fiscal 2015, with transactions up over 14% over the prior fiscal year. Designed to appeal to students, parents and alumni, the school-branded sites offer simple and seamless textbook purchasing with free in-store pick up or shipping to any location, general merchandise promotions and collections that are customized to the individual user, as well as faculty course material adoption tools and customer service support.

 

    FacultyEnlight ® : Our proprietary online platform enhances content search, discovery and adoption (i.e., textbook selection) by faculty on each campus. Faculty members using FacultyEnlight ® are able to compare and contrast key decision-making factors, such as cost to students and format availability; read peer product reviews; and contribute fresh perspectives and experiences and see what textbooks are being used by colleagues at other colleges and universities.

We enhance the academic and social purpose of higher education institutions by integrating our technology and systems with the school’s technology and organizational infrastructure, to forge a bond with the school and its constituencies. Our customizable technology delivers a seamless experience that enables faculty to research and select, and enables students to find and purchase, the most affordable course materials, maximizing savings and sales.

Segment

We identify our operating segments based on the way our business is managed (focusing on the financial information distributed) and the manner in which our chief operating decision maker interacts with other members of management. We have determined that we operate within a single reportable segment, which is entirely within the United States.

Seasonality

Our business is highly seasonal, with the major portion of sales and operating profit realized during the second and third fiscal quarters, when college students generally purchase and rent textbooks for the upcoming semesters. We rent both physical and digital textbooks. Revenue from the rental of physical textbooks is deferred and recognized over the rental period commencing at point of sale. Revenue from the rental of digital textbooks is recognized at time of sale. Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April.

Trends and Other Factors Affecting Our Business

Sales trends are primarily impacted by new store openings, increasing the students and faculty served, as well as changes in comparable store sales and store closings. Comparable store sales increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and does not include sales from closed stores for all periods presented.

We are awarded additional contracts for stores as colleges and universities decide to outsource their bookstore, and we also obtain new contracts for stores that were previously operated by others. We close stores at the end of their contract terms due to low profitability or because the new contract has been awarded to a competitor. As we expanded our textbook rental offerings, students have been shifting away from higher priced textbook purchases to lower priced rental options, which has resulted in lower textbook sales and increasing rental income. After several years of comparable store sales declines, primarily on lower textbook unit volume, during the 52 weeks ended May 2, 2015, our comparable store sales trends have improved for both textbook and general merchandise. Over the last three years, we have consistently opened new stores increasing our total number of stores open from 636 at the beginning of Fiscal 2012 to 724 at the end of Fiscal 2015.

Occupancy costs, which are included in cost of sales and occupancy costs, primarily consist of the payments we make to the colleges and universities to operate their official bookstores, have generally increased as a percentage of sales, driven by increased competition for renewals and new store contracts.

Selling and administrative expenses have generally increased primarily as a result of our continuing investments in Yuzu ® , our digital education platform and increased infrastructure costs to support growth.

Elements of Results of Operations

Our consolidated financial statements have been prepared on a stand-alone basis and are derived from the consolidated financial statements and accounting records of Barnes & Noble. Our consolidated financial statements reflect our consolidated financial position, results of operations and cash flows as we were historically managed, in conformity with accounting principles generally accepted in the United States (“GAAP”). Our consolidated financial statements include certain assets and liabilities that have historically been held at the Barnes & Noble corporate level but are specifically identifiable or otherwise attributable to us.

 

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All intercompany transactions between us and Barnes & Noble have been included in our consolidated financial statements and are considered to be effectively settled for cash in our consolidated financial statements at the time the Spin-Off becomes effective. The total net effect of the settlement of these intercompany transactions is reflected in our consolidated statements of cash flow as a financing activity and in our consolidated balance sheets as “Parent company investment.”

The historical costs and expenses reflected in our consolidated financial statements include an allocation for certain corporate and shared service functions historically provided by Barnes & Noble, including, but not limited to, executive oversight, accounting, treasury, tax, legal, human resources, occupancy, procurement, information technology and other shared services. These expenses have been allocated to us on the basis of direct usage when identifiable, with the remainder allocated on a pro rata basis of consolidated sales, headcount, tangible assets or other measures considered to be a reasonable reflection of the historical utilization levels of these services.

Our management believes the assumptions underlying our consolidated financial statements, including the assumptions regarding the allocation of general corporate expenses from Barnes & Noble are reasonable. Nevertheless, our consolidated financial statements may not include all of the actual expenses that would have been incurred had we operated as a stand-alone company during the periods presented and may not reflect our consolidated results of operations, financial position and cash flows had we operated as a stand-alone company during the periods presented. Actual costs that would have been incurred if we had operated as a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. Following the Spin-Off, we will perform these functions using our own resources or contracted services. Under the Transition Services Agreement with Barnes & Noble, some of these functions will continue to be provided by Barnes & Noble. See Item 1. Financial Statements — Note 15. Subsequent Events .

Our sales are primarily derived from the sale of course materials (which include new and used textbooks and digital textbooks), emblematic apparel and gifts, trade books, computer products, school and dorm supplies, convenience and café items and graduation products. Our rental income is primarily derived from the rental of physical and digital textbooks.

Our cost of sales and occupancy primarily includes costs such as merchandise costs, textbook rental amortization and management service agreement costs related to our college and university contracts and by other facility related expenses.

Our selling and administrative expenses consist primarily of store payroll and store operating expenses. Selling and administrative expenses also include general office expenses, such as executive oversight, merchandising, field support, finance, human resources, benefits, training, legal and information technology, as well as our investments in Yuzu ® .

Results of Operations

 

     13 weeks ended  

Dollars in thousands

   August 1,
2015
    August 2,
2014
 

Sales:

    

Product sales and other

   $ 218,716      $ 206,188   

Rental income

     20,267        19,553   
  

 

 

   

 

 

 

Total sales

   $ 238,983      $ 225,741   
  

 

 

   

 

 

 

Net loss

   $ (26,918   $ (26,213

EBITDA (Non-GAAP) (a)

   $ (35,140   $ (33,962

Comparable store sales increase (decrease) (b)

     1.8     (2.0 )% 

Stores opened

     21        22   

Stores closed

     9        17   

Number of stores open at end of period

     736        705   

 

(a) EBITDA is a non-GAAP financial measure. See EBITDA (Non-GAAP) discussion below.
(b) Comparable store sales increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and does not include sales from closed stores for all periods presented.

 

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The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to total sales of the Company:

 

     13 weeks ended  

Dollars in thousands

   August 1,
2015
    August 2,
2014
 

Sales:

    

Product sales and other

     91.5     91.3

Rental income

     8.5        8.7   
  

 

 

   

 

 

 

Total sales

  100.0      100.0   
  

 

 

   

 

 

 

Cost of sales and occupancy:

Product and other cost of sales and occupancy (a)

  80.0      80.5   

Rental cost of sales and occupancy (a)

  61.8      63.3   
  

 

 

   

 

 

 

Total cost of sales and occupancy

  78.4      79.0   
  

 

 

   

 

 

 

Gross margin

  21.6      21.0   

Selling and administrative expenses

  36.3      36.0   

Depreciation and amortization

  5.5      5.6   
  

 

 

   

 

 

 

Operating loss

  (20.2   (20.6

Interest expense, net

  0.0      0.0   
  

 

 

   

 

 

 

Loss before income taxes

  (20.2   (20.6

Income tax benefit

  (8.9   (9.0
  

 

 

   

 

 

 

Net loss

  (11.3 )%    (11.6 )% 
  

 

 

   

 

 

 

 

(a) Represents the percentage these costs bear to the related sales, instead of total sales.

13 weeks ended August 1, 2015 compared with the 13 weeks ended August 2, 2014

Sales

The following table summarizes our sales for the 13 weeks ended August 1, 2015 and the 13 weeks ended August 2, 2014:

 

     13 weeks ended  

Dollars in thousands

   August 1,
2015
     August 2,
2014
 

Product sales and other

   $ 218,716       $ 206,188   

Rental income

     20,267         19,553   
  

 

 

    

 

 

 

Total Sales

$ 238,983    $ 225,741   
  

 

 

    

 

 

 

Our sales increased $13.3 million, or 5.9%, to $239.0 million during the 13 weeks ended August 1, 2015 from $225.7 million during the 13 weeks ended August 2, 2014. New store openings over the past year increased sales by $11.2 million, partially offset by closed stores, which decreased sales by $1.8 million.

Comparable store sales increased 1.8%, or $3.7 million, for the comparable sales period. General merchandise sales increased $6.9 million, or 7.3%, primarily due to strong emblematic apparel sales, partially offset by a $3.2 million decrease in textbooks and trade books during the summer semester. General merchandise sales have continued to increase as our product assortments continue to emphasize and reflect the changing consumer trends and we evolve our presentation concepts and merchandising of product in stores and online.

We added 21 new stores and closed 9 stores during the 13 weeks ended August 1, 2015, ending the period with a total of 736 stores.

 

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Cost of Sales and Occupancy

The following table summarizes our cost of sales and occupancy for the 13 weeks ended August 1, 2015 and the 13 weeks ended August 2, 2014:

 

     13 weeks ended  

Dollars in thousands

   August 1,
2015
     % of
Related Sales
    August 2,
2014
     % of
Related Sales
 

Product and other cost of sales and occupancy

   $ 174,909         80.0   $ 166,053         80.5

Rental cost of sales and occupancy

     12,530         61.8     12,378         63.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Cost of Sales and Occupancy

$ 187,439      78.4 $ 178,431      79.0
  

 

 

      

 

 

    

Our cost of sales and occupancy decreased as a percentage of sales to 78.4% during the 13 weeks ended August 1, 2015 compared to 79.0% during the 13 weeks ended August 2, 2014. Cost of sales and occupancy as a percentage of sales decreased due to a favorable sales mix, including a favorable mix of used textbook rentals and recognizing previously deferred high margin rentals and improved textbook margins, partially offset by higher occupancy costs resulting from contract renewals as discussed below:

 

    Product and other cost of sales and occupancy decreased by 55 basis points, primarily driven by margin improvements of 105 basis points, partially offset by increased occupancy costs resulting from contract renewals of 50 basis points.

 

    Rental cost of sales and occupancy decreased by 150 basis points driven by a favorable sales mix, including a favorable mix of used textbook rentals and recognizing previously deferred high margin rentals of 285 basis points partially offset by increased occupancy costs resulting from contract renewals of 135 basis points.

Gross Margin

 

     13 weeks ended  

Dollars in thousands

   August 1,
2015
     % of
Sales
    August 2,
2014
     % of
Sales
 

Gross Margin

   $ 51,544         21.6   $ 47,310         21.0
  

 

 

      

 

 

    

Our gross margin increased $4.2 million, or 8.9%, to $51.5 million during the 13 weeks ended August 1, 2015 from $47.3 million during the 13 weeks ended August 2, 2014. This increase was due to the matters discussed above.

Selling and Administrative Expenses

 

     13 weeks ended  

Dollars in thousands

   August 1,
2015
     % of
Sales
    August 2,
2014
     % of
Sales
 

Total Selling and Administrative Expenses

   $ 86,684         36.3   $ 81,272         36.0
  

 

 

      

 

 

    

Selling and administrative expenses increased $5.4 million, or 6.7%, to $86.7 million during the 13 weeks ended August 1, 2015 from $81.3 million during the 13 weeks ended August 2, 2014. Our selling and administrative expenses increased as a percentage of sales by 30 basis points to 36.3% from 36.0%, due primarily to higher store payroll and operating expenses, primarily in new stores in a low volume sales quarter, which increased selling and administrative expenses as a percentage of sales by 45 basis points. This variance is partially offset by lower corporate overhead costs, which decreased selling and administrative expenses as a percentage of sales by 20 basis points.

Depreciation and Amortization

 

     13 weeks ended  

Dollars in thousands

   August 1,
2015
     % of
Sales
    August 2,
2014
     % of
Sales
 

Total Depreciation and Amortization

   $ 13,100         5.5   $ 12,544         5.6
  

 

 

      

 

 

    

Depreciation and amortization increased $0.6 million, or 4.4%, to $13.1 million during the 13 weeks ended August 1, 2015 from $12.5 million during the 13 weeks ended August 2, 2014. This increase was primarily attributable to additional capital expenditures.

 

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Operating Loss

 

     13 weeks ended  

Dollars in thousands

   August 1,
2015
     % of
Sales
    August 2,
2014
     % of
Sales
 

Total Operating Loss

   $ (48,240      (20.2 )%    $ (46,506      (20.6 )% 
  

 

 

      

 

 

    

Our operating loss increased $1.7 million, or 3.7%, to $(48.2) million during the 13 weeks ended August 1, 2015 from $(46.5) million during the 13 weeks ended August 2, 2014. This decrease was due to the matters discussed above.

Income Taxes

 

     13 weeks ended  

Dollars in thousands

   August 1,
2015
     Effective
Rate
    August 2,
2014
     Effective
Rate
 

Income Taxes

   $ (21,325      44.2   $ (20,298      43.6
  

 

 

      

 

 

    

We recorded an income tax benefit of $21.3 million during the 13 weeks ended August 1, 2015 compared with an income tax benefit of $20.3 million during the 13 weeks ended August 2, 2014. Our effective tax rate was 44.2% for the 13 weeks ended August 1, 2015 compared with an effective tax rate of 43.6% during the 13 weeks ended August 2, 2014.

Net Loss

 

     13 weeks ended  

Dollars in thousands

   August 1,
2015
     August 2,
2014
 

Net Loss

   $ (26,918    $ (26,213
  

 

 

    

 

 

 

As a result of the factors discussed above, we reported net loss of $26.9 million during the 13 weeks ended August 1, 2015, compared with net loss of $26.2 million during the 13 weeks ended August 2, 2014.

EBITDA (Non-GAAP)

To supplement our results prepared in accordance with GAAP, we use the measure of EBITDA, which is a non-GAAP financial measure as defined by the Securities and Exchange Commission (the “SEC”). We define EBITDA as net earnings (loss) plus (1) depreciation and amortization; (2) interest expense and (3) income taxes.

This non-GAAP financial measure is not intended as a substitute for and should not be considered as superior to measures of financial performance prepared in accordance with GAAP. In addition, our use of this non-GAAP financial measure may be different from an EBITDA measure used by other companies, limiting its usefulness for comparison purposes. EBITDA should not be considered as an alternative to net income as an indicator of our performance or any other measures of performance derived in accordance with GAAP. As noted above, EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results reported under GAAP. The limitations of EBITDA include: (i) it does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; (ii) it does not reflect changes in, or cash requirements for, our working capital needs; (iii) it does not reflect income tax payments we may be required to make; and (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and EBITDA does not reflect any requirements for such replacements.

We believe that EBITDA is a useful performance measure, and it is used by us to facilitate a comparison of our operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business than measures under GAAP can provide alone. Our board of directors (the “Board”) and management also use EBITDA as one of the primary methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis actual results against such expectations. We review this non-GAAP measure internally to evaluate our performance and manage our operations. We believe that the inclusion of EBITDA results provides investors useful and important information regarding our operating results.

 

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To properly and prudently evaluate our business, we encourage you to review our consolidated financial statements included elsewhere in this Form 10-Q and the reconciliation from EBITDA to net earnings (loss), the most directly comparable financial measure presented in accordance with GAAP, set forth in the table below. All of the items included in the reconciliation from EBITDA to net earnings (loss) are either (i) non-cash items or (ii) items that management does not consider in assessing our on-going operating performance.

 

     13 weeks ended  

Dollars in thousands

   August 1,
2015
     August 2,
2014
 

EBITDA

   $ (35,140    $ (33,962

Subtract:

     

Depreciation and amortization

     13,100         12,544   

Interest expense, net

     3         5   

Income taxes

     (21,325      (20,298
  

 

 

    

 

 

 

Net loss

   $ (26,918    $ (26,213
  

 

 

    

 

 

 

Liquidity and Capital Resources

Our business is highly seasonal. Cash flows from operating activities are typically a source of cash in the second and third fiscal quarters, when students generally purchase and rent textbooks for the upcoming semesters. Cash flows from operating activities are typically a use of cash in the first and fourth fiscal quarters, when sales volumes are materially lower than the other quarters. Our quarterly cash flows also may fluctuate depending on the timing of the start of the various school’s semesters, as well as shifts in fiscal calendar dates. These shifts in timing may affect the comparability of our results across periods.

Until August 3, 2015, we were party to the B&N Credit Facility. The B&N Credit Facility provided for up to $1 billion in aggregate commitments under a five-year asset-backed revolving credit facility expiring on April 29, 2016. The B&N Credit Facility was secured by eligible inventory and accounts receivable with the ability to include eligible real estate and related assets. We were a borrower and co-guarantor of all amounts owing under the B&N Credit Facility. All outstanding debt under the B&N Credit Facility was recorded on Barnes & Noble’s balance sheet as of August 1, 2015.

On August 3, 2015, in connection with the Spin-Off, we entered into a new five-year $400 million asset-backed revolving credit facility (the “New Credit Facility”), the proceeds of which will be used for general corporate purposes, including seasonal working capital needs. See Financing Arrangements discussion below.

As of August 1, 2015, Other long-term liabilities includes $63.5 million related to the long-term tax payable associated with the LIFO reserve. Management believes it is remote that the long-term tax payable associated with the LIFO reserve will be payable or will result in a cash tax payment in the foreseeable future, assuming that LIFO will continue to be an acceptable inventory method for tax purposes.

Sources and Uses of Cash Flow

 

     13 weeks ended  

Dollars in thousands

   August 1,
2015
     August 2,
2014
 

Cash and cash equivalents at beginning of period

   $ 59,714       $ 144,269   

Net cash flows provided by (used in) operating activities

     1,799         (34,283

Net cash flows used in investing activities

     (16,616      (13,347

Net cash flows used in financing activities

     (28,868      (50,836
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 16,029       $ 45,803   
  

 

 

    

 

 

 

 

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Cash Flow from Operating Activities

Cash flows provided by operating activities during the 13 weeks ended August 1, 2015 were $1.8 million compared to cash flows used in operating activities of $(34.3) million during the 13 weeks ended August 2, 2014. This net change of $36.1 million was primarily due to changes in working capital.

Cash Flow from Investing Activities

Our investing activities consist principally of capital expenditures for contractual capital investments associated with renewing existing contracts, new store construction, digital initiatives and enhancements to internal systems and our website.

Cash flows used in investing activities during the 13 weeks ended August 1, 2015 were $(16.6) million compared to $(13.3) million during the 13 weeks ended August 2, 2014. Capital expenditures totaled $11.8 million and $9.3 million during the 13 weeks ended August 1, 2015 and August 2, 2014, respectively.

Cash Flow from Financing Activities

Cash flows used in financing activities during the 13 weeks ended August 1, 2015 decreased by $22.0 million compared to the 13 weeks ended August 2, 2014 primarily due to the change in net transfers to Barnes & Noble prior to the Spin-Off.

Financing Arrangements

Until August 3, 2015, we were party to the B&N Credit Facility. All outstanding debt under the B&N Credit Facility was recorded on Barnes & Noble’s balance sheet as of August 1, 2015.

On August 3, 2015, the Company and certain of its subsidiaries from time to time party thereto entered into the Credit Agreement) with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and other lenders from time to time party thereto, under which the lenders committed to provide a five-year asset-backed revolving credit facility in an aggregate committed principal amount of $400 million under the New Credit Facility. Proceeds from the Credit Facility are used for general corporate purposes, including seasonal working capital needs. Bank of America Merrill Lynch, J.P. Morgan Securities LLC, Wells Fargo Bank, N.A. and SunTrust Robinson Humphrey, Inc. are the joint lead arrangers for the New Credit Facility.

The Company and certain of its subsidiaries (collectively, the “Loan Parties”) will be permitted to borrow under the New Credit Facility. The New Credit Facility is secured by substantially all of the inventory, accounts receivable and related assets of the borrowers under the New Credit Facility, but excluding the equity interests in the Company and its subsidiaries, intellectual property, equipment and certain other property. The Company has the option to request an increase in commitments under the New Credit Facility of up to $100 million, subject to certain restrictions.

Interest under the New Credit Facility accrues, at the election of the Company, at a LIBOR or alternate base rate, plus, in each case, an applicable interest rate margin, which is determined by reference to the level of excess availability under the New Credit Facility. Loans will initially bear interest at LIBOR plus 2.000% per annum, in the case of LIBOR borrowings, or at the alternate base rate plus 1.000% per annum, in the alternative, and thereafter the interest rate will fluctuate between LIBOR plus 2.000% per annum and LIBOR plus 1.750% per annum (or between the alternate base rate plus 1.000% per annum and the alternate base rate plus 0.750% per annum), based upon the excess availability under the New Credit Facility at such time.

The Credit Agreement contains customary negative covenants, which limit the Company’s ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets, among other things. In addition, if excess availability under the New Credit Facility were to fall below certain specified levels, certain additional covenants (including fixed charge coverage ratio requirements) would be triggered, and the lenders will assume dominion and control over the Loan Parties’ cash.

The Credit Agreement contains customary events of default, including payment defaults, material breaches of representations and warranties, covenant defaults, default on other material indebtedness, customary ERISA events of default, bankruptcy and insolvency, material judgments, invalidity of liens on collateral, change of control or cessation of business. The Credit Agreement also contains customary affirmative covenants and representations and warranties.

We believe that our future cash from operations, access to borrowings under the New Credit Facility and short-term vendor financing will provide adequate resources to fund our operating and financing needs for the foreseeable future. Our access to, and the

 

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availability of, financing in the future will be impacted by many factors, including the liquidity of the overall capital markets and the current state of the economy. There can be no assurances that we will have access to capital markets on acceptable terms.

Contractual Obligations

Except as noted below, our projected contractual obligations are consistent with amounts disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Prospectus dated July 15, 2015 and filed with the SEC on that date.

On August 3, 2015, the Company and certain of its subsidiaries from time to time party thereto entered into the Credit Agreement under which the lenders committed to provide a five-year asset-backed revolving credit facility in an aggregate committed principal amount of $400 million (the “New Credit Facility”). See Financing Arrangements above for additional information.

Off-Balance Sheet Arrangements

As of August 1, 2015, we have no off-balance sheet arrangements as defined in Item 303 of Regulation S-K.

Critical Accounting Policies

During the first quarter of Fiscal 2016, there were no changes in the Company’s policies regarding the use of estimates and other critical accounting policies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Prospectus dated July 15, 2015 and filed with the SEC on that date, for additional information relating to the Company’s use of estimates and other critical accounting policies.

Recent Accounting Pronouncements

See Item 1. Financial Statements — Note 3. Recent Accounting Pronouncements for information related to new accounting pronouncements.

Disclosure Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and information relating to us and our business that are based on the beliefs of our management as well as assumptions made by and information currently available to our management. When used in this communication, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “will,” “forecasts,” “projections,” and similar expressions, as they relate to us or our management, identify forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

Such statements reflect our current views with respect to future events, the outcome of which is subject to certain risks, including, among others:

 

    challenges to running our company independently from Barnes & Noble now that the Spin-Off has been completed;

 

    the potential adverse impact on our business resulting from the Spin-Off;

 

    general competitive conditions, including actions our competitors may take to grow their businesses;

 

    trends and challenges to our business and in the locations in which we have stores;

 

    decisions by colleges and universities to outsource their bookstore operations or change the operation of their bookstores;

 

    non-renewal of contracts;

 

    the general economic environment, college enrollment and consumer spending patterns, including decreases in university spending;

 

    decreased consumer demand for our products, low growth or declining sales;

 

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Table of Contents
    disruptions to our computer systems, data lines, telephone systems or supply chain, including the loss of suppliers;

 

    changes to payment terms, return policies, the discount or margin on products or other terms with our suppliers;

 

    risks associated with data privacy, information security and intellectual property;

 

    work stoppages or increases in labor costs;

 

    our ability to attract and retain employees;

 

    possible increases in shipping rates or interruptions in shipping service, effects of competition;

 

    obsolete or excessive inventory;

 

    product shortages;

 

    our ability to successfully implement our strategic initiatives;

 

    the performance of our online, digital and other initiatives, including possible delays in the deployment of, and further enhancements to, Yuzu ® and any future higher education digital products;

 

    technological changes;

 

    risk that digital sales growth is less than expectations and the risk that it does not exceed the rate of investment spend;

 

    higher-than-anticipated store closings;

 

    changes in law or regulation;

 

    the amount of our indebtedness and ability to comply with covenants applicable to any future debt financing;

 

    our ability to satisfy future capital and liquidity requirements;

 

    our ability to access the credit and capital markets at the times and in the amounts needed and on acceptable terms;

 

    adverse results from litigation, governmental investigations or tax-related proceedings or audits;

 

    changes in accounting standards; and

 

    the other risks and uncertainties detailed in the section titled “Risk Factors” in this Form 10-Q.

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 as anticipated, believed, estimated, expected, intended or planned. Subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Form 10-Q.

 

Item 3: Quantitative and Qualitative Disclosures About Market Risk

Except as noted below, there have been no material changes to the items discussed in “ Quantitative and Qualitative Disclosures About Market Risk” in our Prospectus dated July 15, 2015 and filed with the SEC on that date.

On August 3, 2015, the Company and certain of its subsidiaries from time to time party thereto entered into the Credit Agreement under which the lenders committed to the New Credit Facility. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity - Financing Arrangements in this Form 10-Q for additional information.

We may from time to time borrow money under the New Credit Facility at various interest rate options based on LIBOR or alternate base rate (each term as defined therein) depending upon certain financial tests. Accordingly, we may be exposed to interest rate risk on borrowings under the New Credit Facility. To the extent we continue to have no outstanding debt under the New Credit Facility, a 25 basis point increase in interest rates would have increased our interest expense by $0 million in Fiscal 2016. Conversely, a 25 basis point decrease in interest rates would have reduced interest expense by $0 million in Fiscal 2016.

 

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Item 4: Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation (as required under Rules 13a-15(b) and 15d-15(b) under the Exchange Act) was performed under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

Management has not identified any changes in the Company’s internal control over financial reporting that occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

We are involved in a variety of claims, suits, investigations and proceedings that arise from time to time in the ordinary course of our business, including actions with respect to contracts, intellectual property, taxation, employment, benefits, personal injuries and other matters. The results of these proceedings in the ordinary course of business are not expected to have a material adverse effect on our consolidated financial position or results of operations.

We record a liability when we believe that it is both probable that a liability will be incurred, and the amount of loss can be reasonably estimated. We evaluate, at least quarterly, developments in our legal matters that could affect the amount of liability that has been previously accrued and makes adjustments as appropriate. Significant judgment is required to determine both probability and the estimated amount of a loss or potential loss. We may be unable to reasonably estimate the reasonably possible loss or range of loss for a particular legal contingency for various reasons, including, among others: (i) if the damages sought are indeterminate; (ii) if proceedings are in the early stages; (iii) if there is uncertainty as to the outcome of pending proceedings (including motions and appeals); (iv) if there is uncertainty as to the likelihood of settlement and the outcome of any negotiations with respect thereto; (v) if there are significant factual issues to be determined or resolved; (vi) if the proceedings involve a large number of parties; (vii) if relevant law is unsettled or novel or untested legal theories are presented; or (viii) if the proceedings are taking place in jurisdictions where the laws are complex or unclear. In such instances, there is considerable uncertainty regarding the ultimate resolution of such matters, including a possible eventual loss, if any. With respect to the legal matters described below, we have determined, based on its current knowledge, that the amount of loss or range of loss, that is reasonably possible including any reasonably possible losses in excess of amounts already accrued, is not reasonably estimable. However, legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. As such, there can be no assurance that the final outcome of these matters will not materially and adversely affect our business, financial condition, results of operations, or cash flows.

The litigation matter described below is the only material legal proceeding in which we are involved. Under the Separation Agreement, Barnes & Noble will indemnify us against any expenses and liabilities incurred in connection with the matter.

Adrea LLC v. Barnes & Noble, Inc., NOOK Digital, LLC (formerly barnesandnoble.com llc) and B&N Education, LLC (formerly Nook Media LLC)

On June 14, 2013, Adrea LLC (“Adrea”) filed a complaint against Barnes & Noble, Inc., NOOK Digital, LLC (formerly barnesandnoble.com llc) and B&N Education, LLC (formerly NOOK Media LLC) (collectively, “B&N”) in the United States District Court for the Southern District of New York alleging that various B&N NOOK products and related online services infringe U.S. Patent Nos. 7,298,851 (the “’851 patent”), 7,299,501 (the “’501 patent”) and 7,620,703 (the “’703 patent”). B&N filed its Answer on August 9, 2013, denying infringement and asserting several affirmative defenses. At the same time, B&N filed counterclaims seeking declaratory judgments of non-infringement and invalidity with respect to each of the patents-in-suit. Following the claim construction hearing held on November 1, 2013 (as to which the Court issued a claim construction order on December 1, 2013), the Court set a further amended case management schedule, under which fact discovery was to be (and has been) substantially completed by November 20, 2013, and concluded by December 9, 2013; and expert disclosures and discovery were to be (and have been) completed by January 17, 2014. According to the amended case management schedule, summary judgment motion briefing was to have been, and has now been completed as of February 21, 2014. The final pretrial conference, originally scheduled to be held on February 28, 2014, was adjourned by the Court until April 10, 2014. On that date the summary judgment motions were orally argued to the Court, and the Court reserved decision on such motions until a later date. The parties then discussed various pretrial proceedings with the Court, and the Court set the date of October 6, 2014 for trial. Subsequently, on July 1, 2014, the Court issued a decision granting partial summary judgment in B&N’s favor, and in particular granting B&N’s motion to dismiss one of Adrea’s infringement claims, and granting B&N’s motion to limit any damages award with respect to another of Adrea’s infringement claims.

Beginning October 7, 2014, through and including October 22, 2014, the case was tried before a jury in the Southern District of New York. The jury returned its verdict on October 27, 2014. The jury found no infringement with respect to the ‘851 patent, and infringement with respect to the ‘501 patent and ‘703 patent. It awarded damages in the amount of $1.3 million. The jury further found no willful infringement with respect to any patent.

On July 24, 2015, the Court granted B&N’s post trial application to invalidate one of the two patents (the ‘501 Patent) the jury found to have been infringed. The Court then heard argument from both parties as to what steps should next occur. After considering the parties’ respective arguments, the Court has decided to first hear post-trial motions on the jury’s infringement and validity

 

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determinations, which, if decided in B&N’s favor, would knock out the jury’s findings of liability and damages altogether. After full briefing, the Court will hear oral argument on September 28, 2015.

 

Item 1A. Risk Factors

The risks and uncertainties described below are not the only ones faced by us. Additional risks and uncertainties not presently known or that are currently deemed immaterial also may impair our business operations. If any of the following risks occur, our business, financial condition, operating results and cash flows and the trading price of our Common Stock could be materially adversely affected.

Risks Relating to Our Business

We face significant competition in our business, and we expect such competition to increase.

The market for course materials, including textbooks and supplemental materials, is intensely competitive and subject to rapid change. We are experiencing growing competition from alternative media and alternative sources of textbooks and course-related materials, such as websites that sell textbooks, eBooks, digital content and other merchandise directly to students; online resources; publishers bypassing the bookstore distribution channel by selling directly to students and educational institutions; print-on-demand textbooks; textbook rental companies; and student-to-student transactions over the Internet. We also have competition from other college bookstore operators and educational content providers, including Follett Corporation, a contract operator of campus bookstores, which recently acquired Nebraska Book Company, a contract operator of on-campus and off-campus bookstores; Amazon.com, an e-commerce operator and a provider of contract services to colleges and universities; BBA Solutions, a college textbook retailer; Chegg.com, an online textbook rental company; CourseSmart, a digital course materials provider; Akademos, a virtual bookstore and marketplace for academic institutions; Rafter, a course materials management solution for higher educational institutions; bn.com, the e-commerce platform of Barnes & Noble, and MBS Direct, an online bookstore provider; providers of eTextbooks, such as Apple iTunes, CourseSmart, Blackboard, Rafter and Google; and various private textbook rental websites. In addition, Amazon, Akademos and Rafter have recently begun to develop relationships with colleges and universities to provide online bookstore solutions. Many students purchase from multiple textbook providers, are highly price sensitive and can easily shift spending from one provider or format to another. As a consequence, in addition to being competitive in the services we provide to our customers, our textbook business faces significant price competition. Some of our competitors have adopted, and may continue to adopt, aggressive pricing policies and devote substantial resources to marketing, website and systems development. In addition, a variety of business models are being pursued for the provision of print textbooks, some of which may be more profitable or successful than our business model.

We may not be able to enter into new contracts and contracts for existing or additional college and university affiliated bookstores may not be profitable.

An important part of our business strategy is to expand sales for our college bookstore operations by being awarded additional contracts to manage bookstores for colleges and universities. Our ability to obtain those additional contracts is subject to a number of factors that we are not able to control. In addition, the anticipated strategic benefits of new and additional college and university bookstores may not be realized at all or may not be realized within the time frames contemplated by management. In particular, contracts for additional managed stores may involve a number of special risks, including adverse short-term effects on operating results, diversion of management’s attention and other resources, standardization of accounting systems, dependence on retaining, hiring and training key personnel, unanticipated problems or legal liabilities, and actions of our competitors and customers. Because certain terms of any contract are generally fixed for the initial term of the contract and involve judgments and estimates that may not be accurate, including for reasons outside of our control, we have contracts that are not profitable and may have such contracts in the future. Even if we have the right to terminate a contract, we may be reluctant to do so even when a contract is unprofitable due to, among other factors, the potential effect on our reputation.

We may not be able to successfully retain or renew our managed bookstore contracts on profitable terms.

We face significant competition in retaining existing store contracts and when renewing those contracts as they expire. Our contracts are typically for five years with renewal options but can range from two to 15 years, and most contracts are cancelable by either party without penalty, typically with 120 days’ notice. We may not be successful in retaining our current contracts, renewing our current contracts or renewing our current contracts on terms that provide us the opportunity to improve or maintain the profitability of managing stores that are the subject matter of such contracts.

 

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Our business is dependent on the overall economic environment, college enrollment and consumer spending patterns.

A deterioration of the current economic environment could have a material adverse effect on our financial condition and operating results, as well as our ability to fund our growth and strategic business initiatives. Our business is affected by funding levels at colleges and universities and by changes in enrollments at colleges and universities, changes in student enrollments and lower spending on textbooks and general merchandise. The growth of our business depends on our ability to attract new students and to increase the level of engagement by existing students. To the extent we are unable to attract new students or students spend less generally, our business could be adversely affected.

We face the risk of disruption of supplier relationships and/or supply chain and/or inventory surplus.

The products that we sell originate from a wide variety of domestic and international vendors. During Fiscal 2015, our four largest suppliers accounted for approximately 47% of our merchandise purchased, with the largest supplier accounting for approximately 19% of our merchandise purchased. While we believe that our relationships with our suppliers are good, suppliers may modify the terms of these relationships due to general economic conditions or otherwise.

We do not have long-term arrangements with most of our suppliers to guarantee availability of merchandise, content or services, particular payment terms or the extension of credit limits. If our current suppliers were to stop selling merchandise, content or services to us on acceptable terms, including as a result of one or more supplier bankruptcies due to poor economic conditions, we may be unable to procure the same merchandise, content or services from other suppliers in a timely and efficient manner and on acceptable terms, or at all. In addition, our business is dependent on the continued supply of textbooks. The publishing industry generally has suffered recently due to, among other things, changing consumer preferences away from the print medium and the economic climate. A significant disruption in this industry generally or a significant unfavorable change in our relationships with key suppliers could adversely impact our business. In addition, any significant change in the terms that we have with our key suppliers including, payment terms, return policies, the discount or margin on products or changes to the distribution model of textbooks, could adversely affect our financial condition and liquidity. Furthermore, certain of our merchandise is sourced indirectly from outside the United States. Political or financial instability, merchandise quality issues, product safety concerns, trade restrictions, work stoppages, tariffs, foreign currency exchange rates, transportation capacity and costs, inflation, civil unrest, natural disasters, outbreaks of pandemics and other factors relating to foreign trade are beyond our control and could disrupt our supply of foreign-sourced merchandise.

In addition, we have significantly increased our textbook rental business, offering students a lower cost alternative to purchasing textbooks, which is also subject to certain inventory risks such as textbooks not being resold or re-rented due to delayed returns or poor condition, or faculty members not continuing to adopt or use certain textbooks.

We are dependent upon access to the capital markets, bank credit facilities, and short-term vendor financing for liquidity needs.

We must have sufficient sources of liquidity to fund working capital requirements. We believe that the combination of cash-on-hand, cash flow received from operations, funds available under our revolving senior credit facility and short-term vendor financing will be sufficient to meet our normal working capital and debt service requirements for at least the next twelve months. If these sources of liquidity do not satisfy our requirements, we may need to seek additional financing. The future availability of financing will depend on a variety of factors, such as economic and market conditions, and the availability of credit. These factors could materially adversely affect our costs of borrowing, and our financial position and results of operations would be adversely impacted.

Our business relies on certain key personnel.

Management believes that our continued success will depend to a significant extent upon the efforts and abilities of certain of our key personnel. The loss of the services of any of these key personnel could have a material adverse effect on our business. We do not maintain “key man” life insurance on any of our officers or other employees.

Our business is seasonal.

Our business is seasonal, with sales generally highest in the second and third fiscal quarters, when college students generally purchase textbooks for the upcoming semesters, and lowest in the first and fourth fiscal quarters. Less than satisfactory net sales during our peak fiscal quarters could have a material adverse effect on our financial condition or operating results for the year, and our results of operations from those quarters may not be sufficient to cover any losses that may be incurred in the other fiscal quarters of the year.

 

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Our results also depend on the successful implementation of our strategic initiatives. We may not be able to implement these strategies successfully, on a timely basis or at all.

Our ability to grow depends upon a number of factors, including our ability to implement our strategic initiatives to retain and expand existing customer relationships, acquire new accounts, expand sales channels and marketing efforts, develop and market Yuzu ® and other higher education digital products and adapt to changing industry trends. While we believe we have the capital resources, experience, management resources and internal systems to successfully operate our business, we may not be successful in implementing these strategies. Further, even if successfully implemented, our business strategy may not ultimately produce positive results.

We face data security risks with respect to personal information.

Our business involves the receipt, storage, processing and transmission of personal information about customers and employees. We may share information about such persons with vendors and third parties that assist with certain aspects of our business. Also, in connection with our student financial aid platform and the processing of university debit cards, we secure and have access to certain student personal information that has been provided to us by the universities we serve. Our handling and use of personal information is regulated at the international, federal and state levels. Privacy and information security laws, regulations, and standards such as the Payment Card Industry Data Security Standard change from time to time, and compliance with them may result in cost increases due to necessary systems changes and the development of new processes and may be difficult to achieve. If we fail to comply with these laws, regulations and standards, we could be subjected to legal risk. In addition, even if we fully comply with all laws, regulations and standards and even though we have taken significant steps to protect personal information, we could experience a data security breach, and our reputation could be damaged, possibly resulting in lost future sales or decreased usage of credit and debit card products. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. A party that is able to circumvent our security measures could misappropriate our or our users’ proprietary information and cause interruption in our operations. Any compromise of our data security could result in a violation of applicable privacy and other laws or standards, significant legal and financial exposure beyond the scope or limits of insurance coverage, increased operating costs associated with remediation, equipment acquisitions or disposal and added personnel, and a loss of confidence in our security measures, which could harm our business or affect investor confidence. Data security breaches may also result from non-technical means, for example, actions by an employee.

Our business could be impacted by changes in federal, state, local or international laws, rules or regulations.

We are subject to general business regulations and laws relating to all aspects of our business. These regulations and laws may cover taxation, privacy, data protection, our access to student financial aid, pricing and availability of educational materials, competition and/or antitrust, content, copyrights, distribution, college distribution, mobile communications, electronic contracts and other communications, consumer protection, the provision of online payment services, unencumbered Internet access to our services, the design and operation of websites, digital content (including governmental investigations and litigation relating to the agency pricing model for digital content distribution), the characteristics and quality of products and services and employee benefits (including the costs associated with complying with the Patient Protection and Affordable Care Act). Changes in federal, state, local or international laws, rules or regulations relating to these matters could increase our costs of doing business or otherwise impact our business.

Changes in tax laws and regulations might adversely impact our businesses or financial performance.

We collected sales tax on the majority of the products and services that we sold in our respective prior fiscal years that were subject to sales tax, and we generally have continued the same policies for sales tax within the current fiscal year. While management believes that the financial statements included elsewhere in this Form 10-Q reflect management’s best current estimate of any potential additional sales tax liability based on current discussions with taxing authorities, we cannot assure you that the outcome of any discussions with any taxing authority will not result in the payment of sales taxes for prior periods or otherwise, or that the amount of any such payments will not be materially in excess of any liability currently recorded. In the future, our businesses may be subject to claims for not collecting sales tax on the products and services we currently sell for which sales tax is not collected. In addition, our provision for income taxes and our obligation to pay income tax is based on existing federal, state and local tax laws. Changes to these laws, in particular as they relate to depreciation, amortization and cost of goods sold, could have a significant impact on our income tax provision, our projected cash tax liability, or both.

 

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Our expansion into new products, services and technologies subjects us to additional business, legal, financial and competitive risks.

We may require additional capital in the future to sustain or grow our business. Our gross profits and margins in our newer activities may be lower than in our traditional activities, and we may not be successful enough in these newer activities to recoup our investments in them. In addition, we may have limited or no experience in our newer products and services, and our customers may not adopt our new product or service offerings. Some of these offerings, such as our commercial agreement with Pearson, may present new and difficult technological challenges, and we may be subject to claims if customers of these offerings experience service disruptions or failures or other quality issues.

We may not be able to adequately protect our intellectual property rights or may be accused of infringing upon intellectual property rights of third parties.

We regard our trademarks, service marks, copyrights, patents, trade dress, trade secrets, proprietary technology and similar intellectual property as important to our success, and we rely on trademark, copyright and patent law, domain name regulations, trade secret protection and confidentiality or license agreements to protect our proprietary rights, including our use of the Barnes & Noble trademark. Laws and regulations may not adequately protect our trademarks and similar proprietary rights. We may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or diminish the value of our trademarks and other proprietary or licensed rights.

We may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. The protection of our intellectual property may require the expenditure of significant financial and managerial resources. Moreover, the steps we take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights. We also cannot be certain that others will not independently develop or otherwise acquire equivalent or superior technology or other intellectual property rights.

Other parties also may claim that we infringe their proprietary rights. Because of the changes in Internet commerce and digital content businesses, current extensive patent coverage, and the rapid rate of issuance of new patents, it is possible that certain components of our products and business methods may unknowingly infringe existing patents or intellectual property rights of others.

Our digital content offerings depend in part on effective digital rights management technology to control access to digital content. If the digital rights management technology that we use is compromised or otherwise malfunctions, we could be subject to claims, and content providers may be unwilling to include their content in our service.

We do not own the Barnes & Noble trademark and instead rely on a license of that trademark and certain other trademarks, which license imposes limits on what those trademarks can be used to do.

In connection with the Spin-Off, Barnes & Noble granted us an exclusive, perpetual, fully paid up, non-transferable and non-assignable license to use the trademarks “Barnes & Noble College,” “B&N College,” “Barnes & Noble Education” and “B&N Education” and the non-exclusive, perpetual, fully paid up, non-transferable and non-assignable license to use the marks “Barnes & Noble,” “B&N” and “BN,” solely in connection with the contract management of college and university bookstores and other bookstores associated with academic institutions and related websites as well as education products and services (including digital education products and services) and related websites. These restrictions may materially limit our ability to use the licensed marks in the expansion of our operations in the future. In addition, we are reliant on Barnes & Noble to maintain the licensed trademarks.

We rely on third-party digital content and applications, which may not be available to us on commercially reasonable terms or at all.

We contract with certain third-parties to offer their digital content. Our licensing arrangements with these third-parties do not guarantee the continuation or renewal of these arrangements on reasonable terms, if at all. Some third-party content providers currently or in the future may offer competing products and services, and could take action to make it more difficult or impossible for us to license our content in the future. Other content owners, providers or distributors may seek to limit our access to, or increase the total cost of, such content. If we are unable to offer a wide variety of content at reasonable prices with acceptable usage rules, our business may be materially adversely affected.

 

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Risks Relating to Our Recent Spin-Off from Barnes & Noble

We could have an indemnification obligation to Barnes & Noble if the Spin-Off were determined not to qualify for non-recognition treatment.

If, due to any of our covenants in the Tax Matters Agreement being breached, it were determined as a tax matter that the Spin-Off did not qualify for non-recognition of gain and loss, we could be required to indemnify Barnes & Noble for the resulting taxes and related expenses. In addition, Section 355(e) of the Internal Revenue Code of 1986, as amended (the “Code”), generally creates a presumption that the Spin-Off would be taxable to Barnes & Noble, but not to holders, if we or our stockholders were to engage in transactions that result in a 50% or greater change by vote or value in the ownership of our stock during the four-year period beginning on the date that begins two years before the date of the Spin-Off, unless it were established that such transactions and the Spin-Off were not part of a plan or series of related transactions giving effect to such a change in ownership. If the Spin-Off were taxable to Barnes & Noble due to such 50% or greater change in the ownership of our stock, Barnes & Noble would have to recognize gain in an amount up to the fair market value of our stock held by it immediately before the Spin-Off, and we generally would be required to indemnify Barnes & Noble for the tax on such gain and related expenses. See “Certain Relationships and Related Party Transactions—Agreements with Barnes & Noble—Tax Matters Agreement” in our Prospectus dated July 15, 2015 and filed with SEC on that date for more information.

We have agreed to numerous restrictions to preserve the non-recognition treatment of the Spin-Off, which may reduce our strategic and operating flexibility.

We have agreed in the Tax Matters Agreement to covenants and indemnification obligations that address compliance with Section 355(e) of the Code. These covenants and indemnification obligations may limit our ability to pursue strategic transactions or engage in new businesses or other transactions that might maximize the value of our business, and could discourage or delay a strategic transaction that our stockholders may consider favorable. See “Certain Relationships and Related Party Transactions—Agreements with Barnes & Noble—Tax Matters Agreement” in our Prospectus dated July 15, 2015 and filed with SEC on that date for more information.

We may be unable to achieve some or all of the benefits that we expect to achieve from the Spin-Off.

We believe that, as an independent publicly-traded company, we will be able to, among other things, better focus our financial and operational resources on our specific business, implement and maintain a capital structure designed to meet our specific needs, design and implement corporate strategies and policies that are targeted to our business, more effectively respond to industry dynamics and create effective incentives for our management and employees that are more closely tied to our business performance. However, by separating from Barnes & Noble, we may be more susceptible to market fluctuations and have less leverage with suppliers, and we may experience other adverse events. In addition, we may be unable to achieve some or all of the benefits that we expect to achieve as an independent company in the time we expect, if at all.

We may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as an independent publicly-traded company, and we may experience increased costs after the Spin-Off.

In the past, Barnes & Noble provided us with various corporate services. Following the Spin-Off, Barnes & Noble has no obligation to provide us with assistance other than the transition services described under “Certain Relationships and Related Party Transactions—Agreements with Barnes & Noble” in our Prospectus dated July 15, 2015 and filed with SEC on that date. These services do not include every service that we have received from Barnes & Noble in the past, and Barnes & Noble is only obligated to provide these services for limited periods from the date of the Spin-Off. Accordingly, following the Spin-Off, we need to provide internally or obtain from unaffiliated third parties the services we previously received from Barnes & Noble prior to the Spin-Off. We may be unable to replace these services in a timely manner or on terms and conditions as favorable as those we receive from Barnes & Noble. We may be unable to successfully establish the infrastructure or implement the changes necessary to operate independently or may incur additional costs. If we fail to obtain the services necessary to operate effectively or if we incur greater costs in obtaining these services, our business, financial condition and results of operations may be adversely affected.

 

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We have no operating history as an independent publicly-traded company, and our historical financial information is not necessarily representative of the results we would have achieved as an independent publicly-traded company and may not be a reliable indicator of our future results.

We derived the historical financial information included in this Form 10-Q from Barnes & Noble’s consolidated financial statements, and this information does not necessarily reflect the results of operations and financial position we would have achieved as an independent publicly-traded company during the periods presented or those that we will achieve in the future. This is primarily because of the following factors:

 

    Prior to the Spin-Off, we operated as part of Barnes & Noble’s broader corporate organization, and Barnes & Noble performed various corporate functions for us. Our historical financial information reflects allocations of corporate expenses from Barnes & Noble for these and similar functions. These allocations may not reflect the costs we will incur for similar services in the future as an independent publicly-traded company.

 

    We have entered into transactions with Barnes & Noble that did not exist prior to the Spin-Off and modified our existing agreements with Barnes & Noble, such as Barnes & Noble’s provision of transition services, which will cause us to incur new costs.

 

    Our historical financial information does not reflect changes that we expect to experience in the future as a result of our separation from Barnes & Noble, including changes in our cost structure, personnel needs, tax structure, financing and business operations. As part of Barnes & Noble, we enjoyed certain benefits from Barnes & Noble’s operating diversity, size, purchasing power, borrowing leverage and available capital for investments, and we lost these benefits after the Spin-Off. As an independent entity, we may be unable to purchase goods, services and technologies, such as insurance and health care benefits and computer software licenses or access capital markets on terms as favorable to us as those we obtained as part of Barnes & Noble prior to the Spin-Off.

Following the Spin-Off, we are now also responsible for the additional costs associated with being an independent publicly-traded company, including costs related to corporate governance, investor and public relations and public reporting. In addition, certain costs incurred by Barnes & Noble, including executive oversight, accounting, treasury, tax, legal, human resources, occupancy, procurement, information technology and other shared services, had historically been allocated to us by Barnes & Noble; but these allocations may not reflect the future level of these costs to us as we provide these services ourselves. Therefore, our historical financial statements may not be indicative of our future performance as an independent publicly-traded company. We cannot assure you that our operating results will continue at a similar level when we are an independent publicly-traded company. For additional information about our past financial performance and the basis of presentation of our financial statements, see “Financial Statements (Unaudited)” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q as well as the historical financial statements and the notes thereto included in our Prospectus dated July 15, 2015 and filed with SEC on that date.

We may not be able to access the credit and capital markets at the times and in the amounts needed on acceptable terms.

From time to time we may need to access the long-term and short-term capital markets to obtain financing. Although we believe our current sources of capital will permit us to finance our operations for the foreseeable future on acceptable terms and conditions, we have not previously accessed the capital markets as an independent public company, and our access to, and the availability of, financing on acceptable terms and conditions in the future will be impacted by many factors, including our financial performance, our credit ratings or absence thereof, the liquidity of the overall capital markets and the state of the economy. We cannot assure you that we will have access to the capital markets at the times and in the amounts needed or on terms acceptable to us.

Some of our contracts contain provisions requiring the consent of third parties in connection with the Spin-Off.

Some of our contracts contain provisions that required the consent of third parties to the Spin-Off. Failure to obtain such consents on commercially reasonable and satisfactory terms may impair our entitlement to the benefit of these contracts in the future.

We may have been able to receive better terms from unaffiliated third parties than the terms we received in our agreements with Barnes & Noble.

We entered into agreements with Barnes & Noble related to our separation from Barnes & Noble, including the Separation Agreement, Transition Services Agreement, Tax Matters Agreement, the Trademark License Agreement and Employee Matters Agreement, while we were still part of Barnes & Noble. Accordingly, these agreements may not reflect terms that would have resulted from arms-length negotiations between unaffiliated parties. The terms of the agreements relate to, among other things, allocations of assets, liabilities, rights, indemnifications and other obligations between Barnes & Noble and us. We may have received better terms from third parties than we received from Barnes & Noble because third parties would have competed with each other to win our

 

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business but we are now bound by the terms of the agreements we entered into with Barnes & Noble. See “Certain Relationships and Related Party Transactions” in our Prospectus dated July 15, 2015 and filed with SEC on that date for more information.

Risks Relating to our Common Stock and the Securities Market

A market for our Common Stock did not exist before the Spin-Off, and an active trading market may not develop or be sustained now that the Spin-Off has been completed. Our stock price may fluctuate significantly.

There was no public market for our Common Stock prior to August 3, 2015, and an active trading market for the Common Stock may not develop as a result of the Spin-Off or may not be sustained in the future. The lack of an active market may make it more difficult for stockholders to sell our shares and could lead to our share price being depressed or volatile.

We cannot predict the prices at which our Common Stock may trade. The market price of our Common Stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including:

 

    actual or anticipated fluctuations in our operating results due to factors related to our businesses;

 

    success or failure of our business strategies, including our digital education initiative;

 

    our quarterly or annual earnings or those of other companies in our industries;

 

    our ability to obtain financing as needed;

 

    announcements by us or our competitors of significant acquisitions or dispositions;

 

    changes in accounting standards, policies, guidance, interpretations or principles;

 

    the failure of securities analysts to cover our Common Stock after the Spin-Off;

 

    changes in earnings estimates by securities analysts or our ability to meet those estimates;

 

    the operating and stock price performance of other comparable companies;

 

    investor perception of our Company and the college bookstore industry;

 

    overall market fluctuations;

 

    results from any material litigation or government investigation;

 

    changes in laws and regulations (including tax laws and regulations) affecting our business;

 

    changes in capital gains taxes and taxes on dividends affecting stockholders; and

 

    general economic conditions and other external factors.

Furthermore, our business profile and market capitalization may not fit the investment objectives of some Barnes & Noble stockholders and, as a result, these Barnes & Noble stockholders may sell, or may have sold, their shares of our Common Stock after the Spin-Off. See “Risk Factors—Substantial sales of our Common Stock may occur in connection with the Spin-Off, which could cause our stock price to decline.” Low trading volume for our Common Stock, which may occur if an active trading market does not develop, among other reasons, would amplify the effect of the above factors on our stock price volatility.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could adversely affect the trading price of our Common Stock.

Substantial sales of the Common Stock may occur in connection with the Spin-Off, which could cause our stock price to decline.

Barnes & Noble stockholders that received shares of our Common Stock in the Spin-Off generally may sell those shares in the public market. Although we had and have no actual knowledge of any plan or intention of any significant stockholder to sell our Common Stock following the Spin-Off, it is likely that some Barnes & Noble stockholders, possibly including some of its larger stockholders, will sell their shares received in the Spin-Off if, for reasons such as our business profile or market capitalization as an independent company, we do not fit their investment objectives, or, in the case of index funds, we are not a participant in the index in which they are investing. The sales of significant amounts of our Common Stock or the perception in the market that this will occur may decrease the market price of our Common Stock.

 

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The concentration of our capital stock ownership may limit our stockholders’ ability to influence corporate matters and may involve other risks.

A portion of our capital stock is controlled by a few stockholders. This control may limit the ability of the Company’s other stockholders to influence corporate matters and, as a result, we may take actions with which our other stockholders do not agree.

We do not intend to pay any cash dividends in the foreseeable future and, therefore, any return on your investment in our Common Stock must come from increases in the fair market value and trading price of our Common Stock.

We do not intend to pay cash dividends on our Common Stock in the foreseeable future. We expect to retain future earnings, if any, for reinvestment in our business. Also, our credit agreements may restrict our ability to pay dividends. Whether we pay cash dividends in the future will be at the discretion of our Board and will be dependent upon our financial condition, results of operations, cash requirements, future prospects and any other factors our Board deems relevant. Therefore, any return on your investment in our Common Stock must come from increases in the fair market value and trading price of our Common Stock. For more information, see “Dividend Policy” in our Prospectus dated July 15, 2015 and filed with SEC on that date.

Your percentage ownership in the Company may be diluted in the future.

Your percentage ownership in the Company may be diluted in the future because of equity awards that we expect to grant to our directors, officers and other employees. Prior to the Spin-Off, we approved an incentive plan that provides for the grant of Common Stock-based equity awards to our directors, officers and other employees. In addition, we may issue equity as all or part of the consideration paid for acquisitions and strategic investments that we may make in the future or as necessary to finance our ongoing operations.

Provisions in our Amended and Restated Certificate of Incorporation and Amended and Restated By-laws and of Delaware law may prevent or delay an acquisition of the Company, which could affect the trading price of our Common Stock.

Our Amended and Restated Certificate of Incorporation and our Amended and Restated By-laws contain provisions which, together with applicable Delaware law, may discourage, delay or prevent a merger or acquisition that our stockholders consider favorable, including provisions that:

 

    divide our Board into three staggered classes of directors that are each elected to three-year terms;

 

    prohibit stockholder action by written consent;

 

    authorize the issuance of “blank check” preferred stock that could be issued by our Board to increase the number of outstanding shares of capital stock, making a takeover more difficult and expensive;

 

    provide that special meetings of the stockholders may be called only by or at the direction of a majority of our Board or the chairman of our Board; and

 

    require advance notice to be given by stockholders for any stockholder proposals or director nominations.

In addition, Section 203 of the General Corporation Law of the State of Delaware, or the DGCL, may affect the ability of an “interested stockholder” to engage in certain business combinations, for a period of three years following the time that the stockholder becomes an “interested stockholder”.

These provisions may discourage, delay or prevent certain types of transactions involving an actual or a threatened acquisition or change in control of the Company, including unsolicited takeover attempts, even though the transaction may offer our stockholders the opportunity to sell their Common Stock at a price above the prevailing market price. See “Description of Our Capital Stock—Certain Provisions of Delaware Law, Our Amended and Restated Certificate of Incorporation and Amended and Restated By-laws” in our Prospectus dated July 15, 2015 and filed with SEC on that date for more information.

Our Amended and Restated By-laws designate courts in the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our Amended and Restated By-laws provide that, subject to limited exceptions, the state and federal courts of the State of Delaware are the sole and exclusive forum for (a) any derivative action or proceeding brought on our behalf, (b) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (c) any action asserting a claim arising pursuant to any provision of the DGCL, our Amended and Restated Certificate of Incorporation or our Amended and Restated By-laws or (d) any other action asserting a claim that is governed by the internal affairs doctrine. Any person

 

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or entity purchasing or otherwise acquiring or holding any interest in shares of our capital stock will be deemed to have notice of and to have consented to these provisions. This provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees.

Alternatively, if a court were to find this provision of our Amended and Restated By-laws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions.

 

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Table of Contents
Item 6. Exhibits

 

    2.1    Separation and Distribution Agreement, dated as of July 14, 2015, between Barnes & Noble, Inc. and Barnes & Noble Education, Inc.
    3.1†    Amended and Restated Certificate of Incorporation of Barnes & Noble Education, Inc., filed as Exhibit 3.1 to the Report on Form 8-K filed with the SEC on August 3, 2015, and incorporated herein by reference.
    3.2†    Amended and Restated By-Laws of Barnes & Noble Education, Inc., filed as Exhibit 3.2 to the Report on Form 8-K filed with the SEC on August 3, 2015, and incorporated herein by reference.
  10. 1*†    Amended and Restated Employment Agreement, dated June 25, 2015, between Barnes & Noble Education, Inc. and Max J. Roberts, filed as Exhibit 10.9 to the Company’s Registration Statement on Form S-1 initially filed with the SEC on February 26, 2015 and as amended on April 29, 2015, June 4, 2015, June 29, 2015, July 13, 2015, July 14, 2015 and July 15, 2015 (File No. 333-202298).
  10.2*†    Amended and Restated Employment Agreement, dated June 24, 2015, between Barnes & Noble Education, Inc. and Barry Brover, filed as Exhibit 10.10 to the Company’s Registration Statement on Form S-1 initially filed with the SEC on February 26, 2015 and as amended on April 29, 2015, June 4, 2015, June 29, 2015, July 13, 2015, July 14, 2015 and July 15, 2015 (File No. 333-202298).
  10.3*†    Amended and Restated Employment Agreement, dated June 24, 2015, between Barnes & Noble Education, Inc. and Patrick Maloney, filed as Exhibit 10.11 to the Company’s Registration Statement on Form S-1 initially filed with the SEC on February 26, 2015 and as amended on April 29, 2015, June 4, 2015, June 29, 2015, July 13, 2015, July 14, 2015 and July 15, 2015 (File No. 333-202298).
  10.4*†    Amended and Restated Employment Agreement, dated June 24, 2015, between Barnes & Noble Education, Inc. and William Maloney, filed as Exhibit 10.12 to the Company’s Registration Statement on Form S-1 initially filed with the SEC on February 26, 2015 and as amended on April 29, 2015, June 4, 2015, June 29, 2015, July 13, 2015, July 14, 2015 and July 15, 2015 (File No. 333-202298).
  10.5*†    Employment Agreement, dated June 26, 2015, between Barnes & Noble Education, Inc. and Michael P. Huseby, filed as Exhibit 10.13 to the Company’s Registration Statement on Form S-1 initially filed with the SEC on February 26, 2015 and as amended on April 29, 2015, June 4, 2015, June 29, 2015, July 13, 2015, July 14, 2015 and July 15, 2015 (File No. 333-202298).
  31.1    Certification by the Chief Executive Officer pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification by the Chief Financial Officer pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

* Denotes management contract or compensatory plan or arrangement.
Not filed herewith, but incorporated herein by reference.

 

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Table of Contents

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.

 

BARNES & NOBLE EDUCATION, INC.
(Registrant)

By:

  / S / BARRY BROVER
  Barry Brover
  Chief Financial Officer
  (principal financial officer)

By:

  / S / SEEMA PAUL
  Seema Paul
  Chief Accounting Officer
  (principal accounting officer)

September 10, 2015

 

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Table of Contents

EXHIBIT INDEX

 

    2.1    Separation and Distribution Agreement, dated as of July 14, 2015, between Barnes & Noble, Inc. and Barnes & Noble Education, Inc.
  31.1    Certification by the Chief Executive Officer pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification by the Chief Financial Officer pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

40

Exhibit 2.1

 

 

SEPARATION AND DISTRIBUTION AGREEMENT

by and between

BARNES & NOBLE, INC.

and

BARNES & NOBLE EDUCATION, INC.

Dated as of July 14, 2015

 

 


ARTICLE I   
Definitions   
ARTICLE II   
The Separation   
SECTION 2.01. Transfer of Assets and Assumption of Liabilities      12   
SECTION 2.02. Certain Matters Governed Exclusively by Ancillary Agreements      14   
SECTION 2.03. Termination of Agreements      14   
SECTION 2.04. Shared Contracts      15   
SECTION 2.05. Disclaimer of Representations and Warranties      15   
ARTICLE III   
Credit Support   
SECTION 3.01. Replacement of Credit Support      16   
SECTION 3.02. Credit Support      16   
ARTICLE IV   
Actions Pending the Distribution   
SECTION 4.01. Actions Prior to the Distribution      19   
SECTION 4.02. Conditions Precedent to Consummation of the Distribution      20   
ARTICLE V   
The Distribution   
SECTION 5.01. The Distribution      22   
SECTION 5.02. Fractional Shares      22   
SECTION 5.03. Sole Discretion of B&N      22   
ARTICLE VI   
Mutual Releases; Indemnification   
SECTION 6.01. Release of Pre-Distribution Claims      23   

 

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SECTION 6.02. Indemnification by BNED      25   
SECTION 6.03. Indemnification by B&N      25   
SECTION 6.04. Indemnification Obligations Net of Insurance Proceeds and Third-Party Proceeds      25   
SECTION 6.05. Procedures for Indemnification of Third-Party Claims      26   
SECTION 6.06. Additional Matters      28   
SECTION 6.07. Remedies Cumulative      28   
SECTION 6.08. Survival of Indemnities      28   
SECTION 6.09. Limitation on Liability      28   
ARTICLE VII   
Access to Information; Litigation; Confidentiality   
SECTION 7.01. Agreement for Exchange of Information; Archives      29   
SECTION 7.02. Ownership of Information      30   
SECTION 7.03. Compensation for Providing Information      30   
SECTION 7.04. Record Retention      30   
SECTION 7.05. Accounting Information      30   
SECTION 7.06. Limitations of Liability      31   
SECTION 7.07. Conduct of Pending Litigation Matters      32   
SECTION 7.08. Production of Witnesses; Records; Cooperation      32   
SECTION 7.09. Confidential Information      33   
ARTICLE VIII   
Insurance   
SECTION 8.01. Insurance      34   
ARTICLE IX   
Ongoing Commercial Matters   
SECTION 9.01. B&N Systems and Distribution Facilities      36   
SECTION 9.02. Gift Cards      37   
SECTION 9.03. Additional Access and Services      37   
SECTION 9.04. Indemnification      37   
SECTION 9.05. Term and Termination      38   
ARTICLE X   
Further Assurances and Additional Covenants   
SECTION 10.01. Further Assurances      38   

 

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ARTICLE XI   
Termination   
SECTION 11.01. Termination      39   
SECTION 11.02. Effect of Termination      39   
ARTICLE XII   
Miscellaneous   
SECTION 12.01. Counterparts; Entire Agreement; Corporate Power      39   
SECTION 12.02. Governing Law; Jurisdiction      40   
SECTION 12.03. Assignability      40   
SECTION 12.04. Third-Party Beneficiaries      40   
SECTION 12.05. Notices      41   
SECTION 12.06. Severability      41   
SECTION 12.07. Publicity      41   
SECTION 12.08. Expenses      42   
SECTION 12.09. Headings      42   
SECTION 12.10. Survival of Covenants      42   
SECTION 12.11. Waivers of Default      42   
SECTION 12.12. Specific Performance      42   
SECTION 12.13. Amendments      42   
SECTION 12.14. Interpretation      42   

 

Schedule 1(a)   -   Internal Transactions
Schedule 1(b)   -   BNED Equity Interests
Schedule 1(c)   -   BNED Assets
Schedule 1(d)   -   BNED Liabilities
Schedule 1(e)   -   B&N Retained Liabilities
Schedule 1(f)   -   Payables Transactions
Schedule 2.03   -   Terminating Intercompany Agreements
Schedule 3.01(a)   -   Surviving B&N Credit Support Instruments
Schedule 9.01(a)     Product Procurement Systems and Merchandising Systems
Schedule 9.01(b)     Distribution Facilities
Schedule 9.02     Gift Cards
Schedule 9.03     Additional Access and Services
Exhibit A     Form of Joint Defense Agreement

 

iii


SEPARATION AND DISTRIBUTION AGREEMENT dated as of July 14, 2015, by and between Barnes & Noble, Inc., a Delaware corporation (“ B&N ”), and Barnes & Noble Education, Inc., a Delaware corporation (“ BNED ”). Capitalized terms used herein and not otherwise defined shall have the respective meanings assigned to them in Article I hereof.

RECITALS

WHEREAS the board of directors of B&N has determined that it is in the best interests of B&N and its stockholders to distribute its entire interest in its wholly owned Subsidiary, BNED, by way of a dividend of stock to be made to holders of B&N Common Stock;

WHEREAS in furtherance of the foregoing, it is appropriate and desirable to effect the Spin-Off, as more fully described in this Agreement;

WHEREAS B&N and BNED have prepared, and BNED has filed with the Commission, the Form S-1, which includes the Prospectus;

WHEREAS B&N and BNED intend that each of the Stock Split and Distribution qualify for its Intended Tax Treatment; and

WHEREAS it is appropriate and desirable to set forth the principal corporate transactions required to effect the Spin-Off and certain other agreements that will govern certain matters relating to the Spin-Off and the relationship of B&N, BNED and their respective Subsidiaries following the Distribution.

NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement, the Parties, intending to be legally bound, hereby agree as follows:

ARTICLE I

Definitions

For the purposes of this Agreement, the following terms shall have the following meanings:

Action ” means any claim, demand, action, suit, countersuit, arbitration, inquiry, proceeding or investigation by or before any Governmental Authority or any Federal, state, local, foreign or international arbitration or mediation tribunal.

Affiliate ” of any Person means a Person that controls, is controlled by or is under common control with such Person. As used herein, “control” of any entity means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such entity, whether through ownership of voting securities or other interests, by contract or otherwise; provided , however , that (i) BNED and the other members of the BNED Group shall


not be considered Affiliates of B&N or any of the other members of the B&N Group and (ii) B&N and the other members of the B&N Group shall not be considered Affiliates of BNED or any of the other members of the BNED Group.

Agent ” means Computershare, the distribution agent appointed by B&N to distribute to the Record Holders, pursuant to the Distribution, the shares of BNED Common Stock held by B&N.

Agreement ” means this Separation and Distribution Agreement, including the Schedules and Exhibits hereto.

Ancillary Agreements ” means the TSA, TMA, EMA and any other instruments, assignments, documents and agreements executed in connection with the implementation of the transactions contemplated by this Agreement.

Assets ” means all assets, properties and rights (including goodwill), wherever located (including in the possession of vendors or other third parties or elsewhere), whether real, personal or mixed, tangible or intangible, or accrued or contingent, in each case whether or not recorded or reflected or required to be recorded or reflected on the books and records or financial statements of any Person, including the following:

(a) all accounting and other books, records and files, whether in paper, microfilm, microfiche, computer tape or disc, magnetic tape, electronic recording or any other form;

(b) all apparatus, computers and other electronic data processing equipment, fixtures, machinery, furniture, office and other equipment, including hardware systems, circuits and other computer and telecommunication assets and equipment, automobiles, trucks, aircraft, motor vehicles and other transportation equipment, special and general tools, test devices, prototypes and models and other tangible personal property;

(c) all inventories of goods and products;

(d) all interests in real property of whatever nature, including easements, whether as owner, mortgagee or holder of a Security Interest in real property, lessor, sublessor, lessee, sublessee or otherwise;

(e) all interests in any capital stock or other equity interests of any Subsidiary or any other Person; all bonds, notes, debentures or other securities issued by any Subsidiary or any other Person; all loans, advances or other extensions of credit or capital contributions to any Subsidiary or any other Person; all other investments in securities of any Person; and all rights as a partner, joint venturer or participant;

(f) all license agreements, leases of personal property, open purchase orders for goods, products or services, unfilled orders for goods and products and other contracts, agreements or commitments and all rights arising thereunder;

(g) all deposits, letters of credit, performance bonds and other surety bonds;

 

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(h) all written technical information, data, specifications, research and development information, operating and maintenance manuals and materials and analyses prepared by consultants and other third parties;

(i) all United States, state, multinational and foreign intellectual property, including patents, copyrights, trade names, trademarks, service marks, slogans, logos, trade dresses and other source indicators and the goodwill of the business symbolized thereby; all registrations, applications, recordings, disclosures, renewals, continuations, continuations-in-part, divisions, reissues, reexaminations, foreign counterparts and other legal protections and rights related to any of the foregoing; mask works, trade secrets, inventions and other proprietary information, including know-how, processes, formulae, techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information and business and marketing plans and proposals, discoveries, inventions, licenses from third parties granting the right to use any of the foregoing and all tangible embodiments of the foregoing in whatever form or medium;

(j) all computer applications, programs, software and other code (in object and source code form), including operating software, network software, firmware, middleware, design software, design tools, systems documentation, instructions, ASP, HTML, DHTML, SHTML and XML files, cgi and other scripts, APIs, web widgets, algorithms, models, methodologies, files, documentation related to any of the foregoing and all tangible embodiments of the foregoing in whatever form or medium now known or yet to be created;

(k) all Internet URLs, domain names, social media handles and Internet user names;

(l) all websites, databases, content, text, graphics, images, audio, video, data and other copyrightable works or other works of authorship including all translations, adaptations, derivations and combinations thereof;

(m) all cost information, sales and pricing data, customer prospect lists, supplier records, customer and supplier lists, subscriber, customer and vendor data, correspondence and lists, product literature and other advertising and promotional materials, artwork, design and development files, vendor and customer drawings, formulations and specifications, server and traffic logs, quality records and reports and other books, records, studies, surveys, reports, plans, business records and documents;

(n) all prepaid expenses, trade accounts and other accounts and notes receivable (whether current or non-current);

(o) all claims or rights against any Person arising from the ownership of any other Asset, all rights in connection with any bids or offers, all claims, causes in action, lawsuits, judgments or similar rights, all rights under express or implied warranties, all rights of recovery and all rights of setoff of any kind and demands of any nature, in each case whether accrued or contingent, whether in tort, contract or otherwise and whether arising by way of counterclaim or otherwise;

 

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(p) all rights under insurance policies and all rights in the nature of insurance, indemnification or contribution;

(q) all licenses (including radio and similar licenses), permits, approvals and authorizations that have been issued by any Governmental Authority and all pending applications therefor;

(r) Cash, bank accounts, lock boxes and other deposit arrangements;

(s) interest rate, currency, commodity or other swap, collar, cap or other hedging or similar agreements or arrangements; and

(t) all goodwill as a going concern and other intangible properties.

Bank Debt Incurrence ” has the meaning set forth in Schedule 1(a).

BNED ” has the meaning set forth in the preamble.

BNED Assets ” means, without duplication, the following Assets:

(a) all Assets held by the BNED Group;

(b) all interests in the capital stock of, or other equity interests in, the members of the BNED Group (other than BNED) and all other equity, partnership, membership, joint venture and similar interests set forth on Schedule 1(b);

(c) all Assets reflected on the BNED Business Balance Sheet, and all Assets acquired after the date of the BNED Business Balance Sheet that, had they been acquired on or before such date and owned as of such date, would have been reflected on the BNED Business Balance Sheet if prepared in accordance with GAAP applied on a consistent basis, subject to any dispositions of such Assets subsequent to the date of the BNED Business Balance Sheet;

(d) the Assets listed or described on Schedule 1(c);

(e) the rights related to the BNED Portion of any Shared Contract;

(f) all other Assets that are expressly provided by this Agreement or any Ancillary Agreement as Assets to be assigned to or retained by, or allocated to, any member of the BNED Group; and

(g) all Assets held by a member of the B&N Group that are determined by B&N, in good faith prior to the Distribution Date, to be primarily related to or used or held for use primarily in connection with the business or operations of the BNED Business.

Notwithstanding the foregoing, the BNED Assets shall not include (i) any Assets governed by the TMA, (ii) the rights related to the B&N Portion of Shared Contracts, (iii) any Assets determined by B&N, in good faith prior to the Distribution Date, to arise primarily from the business or operations of the B&N Business (unless otherwise expressly provided in this Agreement) and (iv) Assets required by B&N to perform its obligations under the TSA.

 

4


BNED Business ” means the business conducted and proposed to be conducted by BNED and its Subsidiaries as described in the Form S-1.

BNED Business Balance Sheet ” means the audited balance sheet of the BNED Business, including the notes thereto included in the Form S-1.

BNED Common Stock ” means the common stock, $0.01 par value per share, of BNED.

BNED Entities ” means the entities, the equity, partnership, membership, joint venture or similar interests of which are set forth on Schedule 1(b).

BNED Group ” means (a) BNED, (b) each Person that will be a Subsidiary of BNED immediately prior to the Distribution, including the entities set forth on Schedule 1(b) under the caption “Subsidiaries”, and (c) each Person that becomes a Subsidiary of BNED after the Distribution, including in each case any Person that is merged or consolidated with and into BNED or any Subsidiary of BNED.

BNED Indemnitees ” has the meaning set forth in Section 6.03.

BNED Liabilities ” means, without duplication, the following Liabilities:

(a) all Liabilities of the BNED Group and the BNED Entities;

(b) all Liabilities to the extent relating to, arising out of or resulting from:

(i) the operation or conduct of the BNED Business as conducted at any time prior to the Distribution (including any Liability to the extent relating to, arising out of or resulting from any act or failure to act by any director, officer, employee, agent or representative (whether or not such act or failure to act is or was within such Person’s authority), which act or failure to act relates to the BNED Business);

(ii) the operation or conduct of the BNED Business or any other business conducted by BNED or any other member of the BNED Group at any time after the Distribution (including any Liability relating to, arising out of or resulting from any act or failure to act by any director, officer, employee, agent or representative (whether or not such act or failure to act is or was within such Person’s authority));

(iii) any terminated, divested or discontinued businesses or operations of the BNED Business; or

(iv) the BNED Assets;

 

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(c) all Liabilities reflected as liabilities or obligations on the BNED Business Balance Sheet, and all Liabilities arising or assumed after the date of the BNED Business Balance Sheet that, had they arisen or been assumed on or before such date and been existing obligations as of such date, would have been reflected on the BNED Business Balance Sheet if prepared in accordance with GAAP applied on a consistent basis, subject to any discharge of such Liabilities subsequent to the date of the BNED Business Balance Sheet;

(d) the Liabilities listed or described on Schedule 1(d);

(e) the obligations related to the BNED Portion of any Shared Contract and any other Liabilities relating to the acts or omissions of the BNED Group relating to any Shared Contract;

(f) all other Liabilities that are expressly provided by this Agreement or any Ancillary Agreement as Liabilities to be assumed or retained by, or allocated to, any member of the BNED Group; and

(g) all Liabilities to the extent relating to, arising out of or resulting from any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information contained in, or incorporated by reference into, the Form S-1 and any other documents filed with the Commission in connection with the Spin-Off or as contemplated by this Agreement, other than with respect to the B&N Disclosure Sections.

Notwithstanding the foregoing, the BNED Liabilities shall not include (i) any B&N Retained Liabilities, (ii) any Liabilities governed by the TMA, (iii) any obligations related to the B&N Portion of any Shared Contract or (iv) any Liabilities determined by B&N, in good faith prior to the Distribution Date, to be primarily related to the business or operations of the B&N Business (unless otherwise expressly provided in this Agreement).

BNED Primary Credit Instrument ” means the credit instruments of BNED set forth on Schedule 3.01(a).

BNED Portion ” has the meaning set forth in Section 2.04.

Booksellers ” means Barnes & Noble Booksellers, Inc., a Delaware corporation.

B&N ” has the meaning set forth in the preamble.

B&N Assets ” means (i) all Assets of the B&N Group, (ii) any Assets held by a member of the BNED Group determined by B&N, in good faith prior to the Distribution Date, to be primarily related to or used primarily in connection with the business or operations of the B&N Business, and (iii) the rights related to the B&N Portion of any Shared Contract. Notwithstanding the foregoing, the B&N Assets shall not include (a) any Assets governed by the TMA, (b) the BNED Assets and (c) any Assets required by BNED to perform its obligations under the TSA.

 

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B&N Business ” means the business and operations conducted by B&N and its Subsidiaries other than the BNED Business.

B&N Common Stock ” means the common stock, par value $.001 per share, of B&N.

B&N Competitor ” has the meaning set forth in the TLA.

B&N Credit Agreement ” means the Credit Agreement, dated April 29, 2011, among B&N, Bank of America N.A., as administrative agent, collateral agent and swing line lender and other lenders party thereto.

B&N Credit Support Instruments ” has the meaning set forth in Section 3.01(a).

B&N Credit Support Payment ” has the meaning set forth in Section 3.02(c)(i).

B&N Format ” has the meaning set forth in the TLA.

B&N Disclosure Sections ” means all information set forth in or omitted from the Form S-1 to the extent relating to (a) the B&N Group, (b) the B&N Liabilities, (c) the B&N Assets or (d) the substantive disclosure set forth in the Form S-1 relating to B&N’s board of directors’ consideration of the Spin-Off, including the section entitled “Reasons for the Spin-Off”.

B&N Group ” means B&N and each of its Subsidiaries, but excluding any member of the BNED Group.

B&N Indemnitees ” has the meaning set forth in Section 6.02.

B&N-Issued Gift Cards ” means gift cards issued by Barnes & Noble Marketing Services LLC.

B&N Liabilities ” means (i) all Liabilities of the B&N Group, (ii) the B&N Retained Liabilities, (iii) any obligations related to the B&N Portion of any Shared Contract and any other Liabilities relating to the acts or omissions of the B&N Group relating to any Shared Contract, or (iv) any Liabilities determined by B&N, in good faith, to be primarily related to the business or operations of the B&N Business (unless otherwise expressly provided in this Agreement). Notwithstanding the foregoing, the B&N Liabilities shall not include (a) any Liabilities governed by the TMA or (b) the BNED Liabilities.

B&N Portion ” has the meaning set forth in Section 2.04.

B&N Retained Liabilities ” means the Liabilities to be retained by the B&N Group set forth on Schedule 1(e).

Cash ” means cash, cash equivalents, bank deposits and marketable securities, whether denominated in United States dollars or otherwise.

 

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Commission ” means the Securities and Exchange Commission.

Consents ” means any consents, waivers or approvals from, or notification requirements to, any Person other than a member of either Group.

Credit Support Instruments ” has the meaning set forth in Section 3.01(a).

Credit Support Period ” means the period from the Distribution Date until the date on which all Surviving B&N Credit Support Instruments are released.

Default Interest Rate ” means the rate of (i) 3-month LIBOR as of the date that such payment giving rise to such default was required to be made plus (ii) 3.75%.

Determination ” has the meaning set forth in the TMA.

Distribution ” means the distribution by B&N to the Record Holders, on a pro rata basis, of all of the outstanding shares of BNED Common Stock owned by B&N on the Distribution Date.

Distribution Date ” means the date, determined by B&N in accordance with Section 5.03, on which the Distribution occurs.

D&O Policies ” has the meaning set forth in Section 8.01(b).

EMA ” means the Employee Matters Agreement to be entered into as of the Distribution Date by and between B&N and BNED.

Exchange Act ” means the Securities Exchange Act of 1934, as amended, together with the rules and regulations promulgated thereunder.

Field of Use ” has the meaning set forth in the TLA.

First Post-Distribution Report ” has the meaning set forth in Section 12.07.

Form S-1 ” means the registration statement on Form S-1 filed by BNED with the Commission to effect the registration of the distribution of the BNED Common Stock pursuant to the Securities Act in connection with the Distribution, as such registration statement may be amended or supplemented from time to time.

Governmental Approvals ” means any notices, reports or other filings to be given to or made with, or any Consents, registrations or permits to be obtained from, any Governmental Authority.

Governmental Authority ” means any Federal, state, local, foreign or international court, government, department, commission, board, bureau, agency, official or other legislative, judicial, regulatory, administrative or governmental authority.

Group ” means either the B&N Group or the BNED Group, as the context requires.

 

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Indemnifying Party ” has the meaning set forth in Section 6.04(a).

Indemnitee ” has the meaning set forth in Section 6.04(a).

Indemnity Payment ” has the meaning set forth in Section 6.04(a).

Information ” means information, whether or not patentable, copyrightable or protectable as a trade secret, in written, oral, electronic or other tangible or intangible forms, stored in any medium now known or yet to be created, including studies, reports, records, books, contracts, instruments, surveys, discoveries, ideas, concepts, know-how, techniques, designs, specifications, drawings, blueprints, diagrams, models, prototypes, samples, flow charts, data, computer data, disks, diskettes, tapes, computer programs or other software, marketing plans, customer names, communications by or to attorneys (including attorney-client privileged communications), memos and other materials prepared by attorneys or under their direction (including attorney work product) and other technical, financial, employee or business information or data, documents, correspondence, materials and files.

Insurance Proceeds ” means those monies:

(a) received by an insured (or its successor-in-interest) from an insurance carrier;

(b) paid by an insurance carrier on behalf of the insured (or its successor-in-interest); or

(c) received (including by way of setoff) from any third party in the nature of insurance, contribution or indemnification in respect of any Liability;

in any such case net of any applicable premium adjustments (including reserves and retrospectively rated premium adjustments), net of any costs or expenses incurred in the collection thereof and net of any Taxes resulting from the receipt thereof.

Intended Tax Treatment ” has the meaning set forth in the TMA.

Intercompany Accounts ” has the meaning set forth in Section 2.03(a).

Intercompany Agreements ” has the meaning set forth in Section 2.03(a).

Internal Distribution ” means the transaction in which Booksellers transfers and assigns to B&N, and B&N acquires, assumes and accepts from Booksellers, all its rights, title, obligations and interests in, to and under all the equity interests in BNED held by Booksellers, which represent 100% of the equity interests in BNED.

Internal Transactions ” means the Bank Debt Incurrence, Payable Transactions, Internal Distribution and Stock Split, each as described on Schedule 1(a).

Law ” means any statute, law, regulation, ordinance, rule, judgment, rule of common law, order, decree, government approval, concession, grant, franchise, license, agreement, directive, guideline, policy, requirement or other governmental restriction or any similar form of decision of, or determination by, or any interpretation or administration of any of the foregoing by, any Governmental Authority, whether now or hereinafter in effect and, in each case, as amended.

 

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Liabilities ” means any and all claims, debts, demands, actions, causes of action, suits, damages, obligations, accruals, accounts payable, reckonings, bonds, indemnities and similar obligations, agreements, promises, guarantees, make-whole agreements and similar obligations, and other liabilities and requirements, including all contractual obligations, whether absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising, and including those arising under any Law, Action, threatened or contemplated Action or any award of any arbitrator or mediator of any kind, and those arising under any contract, commitment or undertaking, including those arising under this Agreement, in each case, whether or not recorded or reflected or required to be recorded or reflected on the books and records or financial statements of any Person.

Litigation Conditions ” has the meaning set forth in Section 6.05(b).

NYSE ” means the New York Stock Exchange.

Party ” means either party hereto, and “ Parties ” means both parties hereto.

Pass-Through Cost ” with respect to any service provided by B&N to BNED, means the sum of (i) the direct cost to B&N of providing such service plus (ii) an allocation of the related employee overhead (including compensation and benefit costs) calculated in good faith based on reasonable and rational methodologies chosen by the Service Provider, which methodologies shall be provided to the Recipient upon such request from the Recipient.

Payables Transactions ” means the intercompany payables transactions set forth on Schedule 1(f) to be settled as set forth on Schedule 1(f).

Person ” means an individual, a general or limited partnership, a corporation, a trust, a joint venture, an unincorporated organization, a limited liability company, any other entity and any Governmental Authority.

Pre-Separation Claims-Based Insurance Claim ” means any claim made against the BNED Group or B&N Group and reported to the applicable insurer(s) prior to the Distribution Date in respect of an act or omission occurring prior to the Distribution Date that results in a Liability under a “claims-made-based” insurance policy of the B&N Group in effect prior to the Distribution Date or any extended reporting period thereof.

Pre-Separation Insurance Claim ” means a (i) Pre-Separation Claims-Based Insurance Claim or (ii) Action (whether made prior to, on or following the Distribution Date) in respect of a Liability occurring prior to the Distribution Date under an “occurrence-based” insurance policy of any member of the B&N Group in effect prior to the Distribution Date.

Prospectus ” means the prospectus contained in the Form S-1.

 

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Record Date ” means the close of business on the date to be determined by the B&N board of directors as the record date for determining the shares of B&N Common Stock in respect of which shares of BNED Common Stock will be distributed pursuant to the Distribution.

Record Holders ” has the meaning set forth in Section 5.01(b).

Retail Store ” means a retail store operated by B&N or one of its Subsidiaries.

Retained Information ” has the meaning set forth in Section 7.04.

Security Interest ” means any mortgage, security interest, pledge, lien, charge, claim, option, right to acquire, voting or other restriction, right-of-way, covenant, condition, easement, encroachment, restriction on transfer or other encumbrance of any nature whatsoever.

Separation ” means (a) the Internal Transactions, (b) any actions to be taken pursuant to Article II and (c) any other transfers of Assets and assumptions of Liabilities, in each case, between a member of one Group and a member of the other Group, provided for in this Agreement or in any Ancillary Agreement.

Shared Contract ” means any contract or agreement of any member of either Group that relates in any material respect to both the BNED Business and the B&N Business; provided that the Parties may, by mutual consent, elect to include in, or exclude from, this definition any contract or agreement.

Spin-Off ” means the Separation and the Distribution.

Stock Split ” has the meaning set forth in Schedule 1(a).

Subsidiary ” of any Person means any corporation or other organization whether incorporated or unincorporated of which at least a majority of the securities or interests having by the terms thereof ordinary voting power to elect at least a majority of the board of directors or others performing similar functions with respect to such corporation or other organization, is directly or indirectly owned or controlled by such Person or by any one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries.

Surviving B&N Credit Support Instruments ” has the meaning set forth in Section 3.01(a)(i).

Surviving BNED Credit Support Instrument ” has the meaning set forth in Section 3.01(a)(ii).

Tax Opinion Representations ” has the meaning set forth in the TMA.

Taxes ” has the meaning set forth in the TMA.

Termination Event ” has the meaning set forth in Section 9.05(c).

 

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Third-Party Claim ” means any assertion by a Person (including any Governmental Authority) who is not a member of the B&N Group or the BNED Group of any claim, or the commencement by any such Person of any Action, against any member of the B&N Group or the BNED Group.

Third-Party Proceeds ” has the meaning set forth in Section 6.04(a).

TLA ” means the Trademark License Agreement to be entered into as of the Distribution Date by and between B&N and BNED.

TMA ” means the Tax Matters Agreement to be entered into as of the Distribution Date by and between B&N and BNED.

TSA ” means the Transition Services Agreement to be entered into as of the Distribution Date between B&N and BNED.

ARTICLE II

The Separation

SECTION 2.01.  Transfer of Assets and Assumption of Liabilities.  (a) Prior to the Distribution, and subject to Section 2.01(e), the Parties shall cause the Internal Transactions to be completed.

(b) Subject to Section 2.01(e), prior to the Distribution, the Parties shall, and shall cause their respective Group members to, execute such instruments of assignment and transfer and take such other corporate actions as are necessary to (i) transfer and convey to one or more members of the BNED Group all of the right, title and interest of the B&N Group in, to and under all BNED Assets not already owned by the BNED Group, (ii) transfer and convey to one or more members of the B&N Group all of the right, title and interest of the BNED Group in, to and under all B&N Assets not already owned by the B&N Group, (iii) cause one or more members of the BNED Group to assume all of the BNED Liabilities to the extent such Liabilities would otherwise remain obligations of any member of the B&N Group and (iv) cause one or more members of the B&N Group to assume all of the B&N Liabilities to the extent such Liabilities would otherwise remain obligations of any member of the BNED Group. Notwithstanding anything to the contrary, neither Party shall be required to transfer any Information except as required by Article VII.

(c) In the event that it is discovered after the Distribution that there was an omission of (i) the transfer or conveyance by BNED (or a member of the BNED Group) or the acceptance or assumption by B&N (or a member of the B&N Group) of any B&N Asset or B&N Liability, as the case may be, (ii) the transfer or conveyance by B&N (or a member of the B&N Group) or the acceptance or assumption by BNED (or a member of the BNED Group) of any BNED Asset or BNED Liability, as the case may be, or (iii) the transfer or conveyance by one Party (or any other member of its Group) to, or the acceptance or assumption by, the other Party (or any other member of its Group) of any Asset or Liability, as the case may be, that, had the Parties given specific consideration to such Asset or Liability prior to the Distribution, would have otherwise been so transferred, conveyed, accepted or assumed, as the case may be, pursuant

 

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to this Agreement or the Ancillary Agreements, the Parties shall use reasonable best efforts to promptly effect such transfer, conveyance, acceptance or assumption of such Asset or Liability. Any transfer, conveyance, acceptance or assumption made pursuant to this Section 2.01(c) shall be treated by the Parties for all purposes as if it had occurred immediately prior to the Distribution, except as otherwise required by applicable Law or a Determination.

(d) In the event that it is discovered after the Distribution that there was a transfer or conveyance (i) by BNED (or a member of the BNED Group) or the acceptance or assumption by B&N (or a member of the B&N Group) of any BNED Asset or BNED Liability, as the case may be, or (ii) by B&N (or a member of the B&N Group) and the acceptance or assumption by BNED (or a member of the BNED Group) of any B&N Asset or B&N Liability, the Parties shall use reasonable best efforts to promptly transfer or convey such Asset or Liability back to the transferring or conveying Party or to rescind any acceptance or assumption of such Asset or Liability, as the case may be. Any transfer or conveyance made or acceptance or assumption rescinded pursuant to this Section 2.01(d) shall be treated by the Parties for all purposes as if such Asset or Liability had never been originally transferred, conveyed, accepted or assumed, as the case may be, except as otherwise required by applicable Law or a Determination.

(e) In the event that after the Distribution (i) B&N (or a member of the B&N Group) receives any funds properly belonging to BNED (or a member of the BNED Group), or (ii) BNED (or a member of the BNED Group) receives any funds properly belonging to B&N (or a member of the B&N Group), the Parties shall use reasonable best efforts to promptly advise the other party, segregate and hold such funds in trust for the benefit of such other Party and promptly deliver such funds, together with any interest earned thereon, to an account or accounts designated in writing by such other Party.

(f) In the event that after the Distribution (i) B&N (or a member of the B&N Group) receives any communications (including, among other things, communications through B&N’s “We Listen” hotline or other similar channels of communication), notices or inquiries relating to BNED (or a member of the BNED Group), or (ii) BNED (or a member of the BNED Group) receives any communications, notices or inquiries relating to B&N (or a member of the B&N Group), the relevant Party shall use reasonable best efforts to notify the other Party thereof as promptly as reasonably practicable.

(g) To the extent that any transfer or conveyance of any Asset or acceptance or assumption of any Liability required by this Agreement to be so transferred, conveyed, accepted or assumed shall not have been completed prior to the Distribution, the Parties shall use reasonable best efforts to effect such transfer, conveyance, acceptance or assumption as promptly following the Distribution as shall be practicable. Nothing in this Agreement shall be deemed to require the transfer or conveyance of any Assets or the acceptance or assumption of any Liabilities which by their terms or operation of Law cannot be so transferred, conveyed, accepted or assumed; provided , however , that the Parties shall use reasonable best efforts to obtain any necessary Consents for the transfer, conveyance, acceptance or assumption (as applicable) of all Assets and Liabilities required by this Agreement to be so transferred, conveyed, accepted or assumed. In the event that any such transfer, conveyance, acceptance or assumption (as applicable) has not been completed effective as of and after the Distribution, the Party retaining

 

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such Asset or Liability shall thereafter hold such Asset for the use and benefit of the Party entitled thereto (at the expense of the Party entitled thereto) and retain such Liability for the account, and at the expense, of the Party by whom such Liability should have been assumed or accepted pursuant to this Agreement, and take such other actions as may be reasonably requested by the Party to which such Asset should have been transferred or conveyed, or by whom such Liability should have been assumed or accepted, as the case may be, in order to place such Party, insofar as reasonably possible, in the same position as would have existed had such Asset or Liability been transferred, conveyed, accepted or assumed (as applicable) as contemplated by this Agreement, including possession, use, risk of loss, potential for gain and control over such Asset or Liability. As and when any such Asset or Liability becomes transferable, the Parties shall use reasonable best efforts to promptly effect such transfer, conveyance, acceptance or assumption (as applicable). Any transfer, conveyance, acceptance or assumption made pursuant to this Section 2.01(e) shall be treated by the Parties for all purposes as if it had occurred immediately prior to the Distribution, except as otherwise required by applicable Law or a Determination.

(h) The Party retaining any Asset or Liability due to the deferral of the transfer and conveyance of such Asset or the deferral of the acceptance and assumption of such Liability pursuant to this Section 2.01 or otherwise shall not be obligated by this Agreement, in connection with this Section 2.01, to expend any money or take any action that would require the expenditure of money unless and to the extent the Party entitled to such Asset or the Party intended to assume such Liability advances or agrees to reimburse it for the applicable expenditures.

SECTION 2.02. Certain Matters Governed Exclusively by Ancillary Agreements.  Each of B&N and BNED agrees on behalf of itself and the members of its Group that, except as explicitly provided in this Agreement or any Ancillary Agreement, (i) the TMA shall exclusively govern all matters relating to Taxes between such parties (except as explicitly provided in the EMA and TSA), (ii) the EMA shall exclusively govern the allocation of Assets and Liabilities related to employee and employee benefits-related matters (except for those matters involving the Payables Transactions which are governed by Schedule 1(f) hereto), including the existing equity plans with respect to employees and former employees of members of both the B&N Group and the BNED Group (it being understood that any such Assets and Liabilities, as allocated pursuant to the EMA, shall constitute BNED Assets, BNED Liabilities, B&N Assets or B&N Liabilities, as applicable, hereunder and shall be subject to Article VI hereof), and (iii) the TSA shall exclusively govern all matters relating to the provision of certain services identified therein to be provided by each Party to the other on a transitional basis following the Distribution.

SECTION 2.03.  Termination of Agreements.  (a) Except as set forth in Section 2.03(b) or as otherwise provided by the steps constituting the Internal Transactions, in furtherance of the releases and other provisions of Section 6.01, effective as of the Distribution, BNED and each other member of the BNED Group, on the one hand, and B&N and each other member of the B&N Group, on the other hand, hereby agree they will terminate any and all agreements, arrangements, commitments and understandings, oral or written (“ Intercompany Agreements ”), including all intercompany accounts payable or accounts receivable (“ Intercompany Accounts ”), between such parties and in effect or accrued as of the Distribution

 

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and including the agreements set forth on Schedule 2.03. No such terminated Intercompany Agreement or Intercompany Account (including any provision thereof that purports to survive termination) shall be of any further force or effect after the Distribution. Each Party shall, at the reasonable request of the other Party, take, or cause to be taken, such other actions as may be necessary to effect the foregoing. The Parties, on behalf of the members of their respective Groups, hereby waive any advance notice provision or other termination requirements with respect to any Intercompany Agreement.

(b) The provisions of Section 2.03(a) shall not apply to any of the following Intercompany Agreements or Intercompany Accounts (or to any of the provisions thereof): this Agreement and the Ancillary Agreements (and each other Intercompany Agreement or Intercompany Account expressly contemplated by this Agreement or any Ancillary Agreement to be entered into by either Party or any other member of its Group).

SECTION 2.04.  Shared Contracts.  The Parties shall, and shall cause the members of their respective Groups to, use their respective reasonable best efforts to work together (and, if necessary and desirable, to work with the third party to such Shared Contract) in an effort to divide, partially assign, modify and/or replicate (in whole or in part) the respective rights and obligations under and in respect of any Shared Contract, such that (a) a member of the BNED Group is the beneficiary of the rights and is responsible for the obligations related to that portion of such Shared Contract relating to the BNED Business (the “ BNED Portion ”), which rights shall be a BNED Asset and which obligations shall be a BNED Liability and (b) a member of the B&N Group is the beneficiary of the rights and is responsible for the obligations related to such Shared Contract not relating to the BNED Business (the “ B&N Portion ”), which rights shall be a B&N Asset and which obligations shall be a B&N Liability. If the Parties, or their respective Group members, as applicable, are not able to enter into an arrangement to formally divide, partially assign, modify and/or replicate such Shared Contract prior to the Distribution as contemplated by the previous sentence, then the Parties shall, and shall cause their respective Group members to, cooperate in any lawful arrangement to provide that, following the Distribution and until the earlier of five years after the Distribution Date and such time as the formal division, partial assignment, modification and/or replication of such Shared Contract as contemplated by the previous sentence is effected, a member of the BNED Group shall receive the interest in the benefits and obligations of the BNED Portion under such Shared Contract and a member of the B&N Group shall receive the interest in the benefits and obligations of the B&N Portion under such Shared Contract.

SECTION 2.05.  Disclaimer of Representations and Warranties.  Each of B&N (on behalf of itself and each other member of the B&N Group) and BNED (on behalf of itself and each other member of the BNED Group) understands and agrees that, except as expressly set forth in this Agreement, any Ancillary Agreement or the Tax Opinion Representations, no party to this Agreement, any Ancillary Agreement or any other agreement or document contemplated by this Agreement or any Ancillary Agreement is representing or warranting in any way as to any Assets or Liabilities transferred or assumed as contemplated hereby or thereby, as to the sufficiency of the Assets or Liabilities transferred or assumed hereby or thereby for the conduct and operations of the BNED Business or the B&N Business, as applicable, as to any Governmental Approvals or other Consents required in connection therewith or in connection with any past transfers of the Assets or assumptions of the Liabilities,

 

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as to the value or freedom from any Security Interests of, or any other matter concerning, any Assets or Liabilities of such party, or as to the absence of any defenses or rights of setoff or freedom from counterclaim with respect to any claim or other Asset, including any accounts receivable, of any such Party, or as to the legal sufficiency of any assignment, document or instrument delivered hereunder to convey title to any Asset or thing of value upon the execution, delivery and filing hereof or thereof. Except as may expressly be set forth herein, any such Assets are being transferred on an “as is”, “where is” basis and the respective transferees shall bear the economic and legal risks that (a) any conveyance shall prove to be insufficient to vest in the transferee good and marketable title, free and clear of any Security Interest, and (b) any necessary Governmental Approvals or other Consents are not obtained or that any requirements of Laws or judgments are not complied with.

ARTICLE III

Credit Support

SECTION 3.01.  Replacement of Credit Support.  (a) (i) BNED shall use reasonable best efforts to arrange, at its sole cost and expense and effective on or prior to the Distribution Date, the replacement of all guarantees, covenants, indemnities, surety bonds, letters of credit or similar assurances or credit support (“ Credit Support Instruments ”) provided by or through B&N or any other member of the B&N Group for the benefit of BNED or any other member of the BNED Group (“ B&N Credit Support Instruments ”), other than any of the B&N Credit Support Instruments set forth on Schedule 3.01(a) (the “ Surviving B&N Credit Support Instruments ”), with alternate arrangements that do not require any credit support from B&N or any other member of the B&N Group, and shall use reasonable best efforts to obtain from the beneficiaries of such Credit Support Instruments written releases (which in the case of a letter of credit or bank guarantee would be effective upon surrender of the original B&N Credit Support Instrument to the originating bank and such bank’s confirmation to B&N of cancelation thereof) indicating that B&N or such other member of the B&N Group will, effective upon the consummation of the Distribution, have no liability with respect to such Credit Support Instruments, in each case reasonably satisfactory to B&N; provided , however , that (i) in the event that BNED shall not have obtained all such releases on or prior to the Distribution Date, Section 3.02 shall govern all such unreleased B&N Credit Support Instruments and (ii) Section 3.02 shall also govern all Surviving B&N Credit Support Instruments.

(ii) The Credit Support Instrument provided by or through BNED or any other member of the BNED Group for the benefit of B&N or any other member of the B&N Group set forth on Schedule 3.01(a) (the “ Surviving BNED Credit Support Instrument ”) shall continue following the Distribution Date and shall be governed by Section 3.02.

(b) B&N and BNED shall provide each other with written notice of the existence of all Credit Support Instruments a reasonable period prior to the Distribution.

SECTION 3.02.  Credit Support.  (a) B&N hereby agrees that, during the Credit Support Period and any subsequent period that a particular Surviving B&N Credit Support Instrument remains outstanding despite BNED’s having used its reasonable best efforts to cause such Credit Support Instruments to be replaced pursuant to Section 3.01(a), (i) for the benefit of

 

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BNED, it will maintain, continue, satisfy and comply in full with, and cause its subsidiaries to maintain and continue, satisfy and comply in full with, and will not take any action, or cause any of its subsidiaries to take any action, to terminate (other than at the request of BNED), the Surviving B&N Credit Support Instruments and (ii) it will, and will cause its subsidiaries to, renew or extend any such Surviving B&N Support Credit Instruments, in each case, during the Credit Support Period; provided that (x) B&N and its subsidiaries shall not be required to renew or extend any Surviving B&N Credit Support Instrument (A) beyond the expiration date of the relevant BNED Primary Credit Instrument in support or guarantee of which such Surviving B&N Credit Support Instrument has been provided or (B) which has been released or replaced pursuant to Section 3.01(a) and (y) B&N and its subsidiaries shall be permitted to terminate and shall not be required to renew or extend any Surviving B&N Credit Support Instrument so long as concurrently with such termination or expiration, it replaces such Surviving B&N Credit Support Instrument with another guarantee, letter of credit, surety bond or similar instrument or other arrangement in support of the relevant BNED Primary Credit Instrument in form and substance reasonably satisfactory to the beneficiary of such BNED Primary Credit Instrument, which replacement instrument shall be treated as a Surviving B&N Credit Support Instrument for all purposes hereunder.

(b)  Additional BNED Credit Support Instruments.  If at any time either of B&N or BNED shall identify a credit instrument of BNED (each, an “ Additional BNED Primary Credit Instrument ”) and corresponding guarantee or similar credit instrument of B&N or its subsidiaries in respect of such Additional BNED Primary Credit Instrument (each, an “ Additional B&N Credit Support Instrument ”) that existed prior to the Distribution Date and that, had B&N and BNED been aware of such Additional BNED Primary Credit Instrument and Additional B&N Credit Support Instrument prior to the Distribution Date, would have been identified as a BNED Primary Credit Instrument and a Surviving B&N Credit Support Instrument, respectively, on the Distribution Date, (i) such Additional BNED Primary Credit Instrument and Additional B&N Credit Support Instrument shall be deemed to be a BNED Primary Credit Instrument and a Surviving B&N Credit Support Instrument, respectively, for all purposes hereunder and (ii) BNED shall pay to B&N all amounts in respect of such Additional B&N Credit Support Instrument which it would have been obligated to pay pursuant to this Section 3.02 (including amounts payable pursuant to Section 3.02 (c) hereof) since the Distribution Date had such Additional B&N Credit Support Instrument been identified as a Surviving B&N Credit Support Instrument hereunder on the Distribution Date.

(c)  Reimbursement, Expenses, Indemnity .

(i) If B&N or any of its subsidiaries shall make any payment (“ B&N Credit Support Payment ”) in respect of or in connection with any Surviving B&N Credit Support Instrument, including any payment in the form of collateral delivered by B&N in respect of any Surviving B&N Credit Support Instrument, BNED shall promptly, but in any event within ten business days of written demand therefor, reimburse B&N in full for the amount of such B&N Credit Support Payment, together with any interest accrued thereon. BNED’s reimbursement obligations hereunder shall not be construed to limit or waive the rights of subrogation that B&N or any of its subsidiaries may have in respect of any B&N Credit Support Payment and BNED hereby acknowledges and affirms that B&N and its subsidiaries have not waived their rights of subrogation.

 

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(ii) BNED shall pay all reasonable and actual out-of-pocket expenses incurred by B&N and its subsidiaries (including the reasonable and actual fees, charges and disbursements of counsel for B&N) after the Distribution Date in connection with (i) Surviving B&N Credit Support Instruments (including the continuation, extension or renewal of any Surviving B&N Credit Instrument) and any agreement entered into in connection with any of the foregoing or any amendments or other modifications to any of the foregoing (whether or not the transactions contemplated hereby or thereby shall be consummated) or (ii) the enforcement or protection of its rights in connection with any of the foregoing, including its rights under this Section 3.02(c); provided that BNED shall not be required to pay any such expenses incurred in connection with the voluntary replacement by B&N of a Surviving B&N Credit Support Instrument pursuant to clause (y) of Section 3.02(a) hereof.

(iii) BNED shall defend, hold harmless, and indemnify each B&N Indemnitee from and against any charges, suits, damages, costs, expenses, judgments, penalties, claims, liabilities or losses of any kind or nature whatsoever, including reasonable attorney fees and expenses, that may be sustained or suffered by or secured against any B&N Indemnitee arising out of, in connection with, or as a result of this Section 3.02 or any agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder or thereunder or the consummation of the transactions contemplated hereby or thereby (including the continuation, extension or renewal of any Surviving B&N Credit Support Instrument), or the use of, or the proposed use of, the Surviving B&N Credit Support Instruments, or any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any B&N Indemnitee is a party thereto; provided that such indemnity shall not, as to any B&N Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are found in a judgment by a court of competent jurisdiction to have resulted from the gross negligence or wilful misconduct of such B&N Indemnitee or such B&N Indemnitee’s breach of its obligations hereunder.

(iv) All amounts due under this Section 3.02(c) shall be payable promptly after written demand therefor, and in any event within ten business days following such demand, in immediately available funds in U.S. Dollars to an account of B&N specified in writing and shall not be subject to reduction by way of setoff or counterclaim. If any payment hereunder would be due and payable on a day that is not a business day, such payment shall instead be due on the immediately preceding business day.

(v) Any amount payable hereunder shall bear interest at a rate per annum equal to the Default Interest Rate, calculated on a daily basis, from (i) in the case of any B&N Credit Support Payment, the date on which such B&N Credit Support Payment was made and (ii) in the case of any other amount payable hereunder, the date immediately following the date by which such amount was required to be paid pursuant to paragraph (iv) above until the date on which BNED shall make payment in full of such amount (including all interest accrued thereon pursuant to this paragraph (v)) to B&N.

 

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(vi) BNED hereby authorizes B&N at any time and from time to time when any amount owed by BNED to B&N pursuant to this Section 3.02 is due and payable to it and has not been paid, to the fullest extent permitted by Law, to set off and apply any and all indebtedness at any time owing by B&N to or for the credit or the account of BNED against any of and all of the amounts payable by BNED to B&N hereunder; provided that B&N shall not be permitted to exercise any right of setoff pursuant to this paragraph unless demand for payment has been made pursuant to paragraph (iv) of this Section 3.02(c) and the period within which BNED was required to make such payment has expired. B&N shall notify BNED promptly of any such setoff and the application made by B&N of the proceeds thereof; provided that the failure to give such notice shall not affect the validity of such setoff and application. The rights of B&N under this paragraph are in addition to other rights and remedies (including other rights of setoff) which B&N may have.

(vii) The provisions of this Section 3.02 shall survive and remain in full force and effect regardless of the consummation of the Spin-Off or by any of the agreements referred to herein or the termination of this Agreement or any such other agreements or any provision hereof or thereof.

(d)  Surviving B&N Credit Support Instruments . The provisions of Section 3.02(a) and (c) shall apply mutatis   mutandis to the Surviving B&N Credit Instrument.

ARTICLE IV

Actions Pending the Distribution

SECTION 4.01.  Actions Prior to the Distribution.  (a) Subject to the conditions specified in Section 4.02 and subject to Section 5.03, B&N and BNED shall use reasonable best efforts to consummate the Distribution. Such efforts shall include taking the actions specified in this Section 4.01.

(b) Prior to the Distribution, B&N shall mail the Prospectus to the Record Holders.

(c) BNED shall prepare, file with the Commission and use its reasonable best efforts to cause to become effective any registration statements or amendments thereto required to effect the establishment of, or amendments to, any employee benefit and other plans necessary or appropriate in connection with the transactions contemplated by this Agreement or any of the Ancillary Agreements.

(d) B&N and BNED shall take all such action as may be necessary or appropriate under the securities or blue sky laws of the states or other political subdivisions of the United States or of other foreign jurisdictions in connection with the Distribution.

(e) BNED shall prepare and file, and shall use reasonable best efforts to have approved prior to the Distribution, an application for the listing of the BNED Common Stock to be distributed in the Distribution on the NYSE, subject to official notice of distribution.

 

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(f) Prior to the Distribution, B&N shall have duly elected members of the BNED board of directors, and such individuals shall be the members of the BNED board of directors effective as of immediately after the Distribution; provided , however , that to the extent required by any Law or requirement of the NYSE or any other national securities exchange, as applicable, one independent director shall be appointed prior to the date on which “when-issued” trading of the BNED Common Stock begins on the NYSE and begin his or her term prior to the Distribution and shall serve on BNED’s Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee.

(g) Prior to the Distribution, B&N shall deliver or cause to be delivered to BNED resignations, effective as of immediately after the Distribution, of each individual who will be an employee of any member of the B&N Group after the Distribution and who is an officer or director of any member of the BNED Group immediately prior to the Distribution.

(h) As of immediately prior to the Distribution, the Amended and Restated Certificate of Incorporation and the Amended and Restated By-laws of BNED, each in substantially the form filed as an exhibit to the Form S-1, shall be in effect.

(i) B&N and BNED shall, subject to Section 5.03, take all reasonable steps necessary and appropriate to cause the conditions set forth in Section 4.02 to be satisfied and to effect the Distribution on the Distribution Date.

SECTION 4.02.  Conditions Precedent to Consummation of the Distribution.  Subject to Section 5.03, as soon as practicable after the date of this Agreement, the Parties shall use reasonable best efforts to satisfy the following conditions prior to the consummation of the Distribution. The obligations of the Parties to consummate the Distribution shall be conditioned on the satisfaction, or waiver by B&N, of the following conditions:

(a) The board of directors of B&N shall have authorized and approved the Spin-Off and not withdrawn such authorization and approval, and shall have declared the dividend of BNED Common Stock to B&N stockholders.

(b) Each Ancillary Agreement shall have been executed by each party to such agreements.

(c) BNED shall have entered into a credit facility and any other financing the BNED board of directors determines to be necessary or advisable, in each case, on terms and conditions acceptable to BNED.

(d) B&N shall have obtained an amendment to or replacement of the B&N Credit Agreement permitting the Spin-Off.

(e) The Commission shall have declared effective the Form S-1, of which the Prospectus is a part, under the Securities Act of 1933, and no stop order suspending the effectiveness of the Form S-1 shall be in effect and no proceedings for that purpose shall be pending before or threatened by the Commission.

 

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(f) The BNED Common Stock shall have been accepted for listing on the NYSE or another national securities exchange approved by B&N, subject to official notice of issuance.

(g) B&N shall have received the written opinions of Cravath, Swaine & Moore LLP and KPMG LLP, which shall remain in full force and effect, that, subject to the accuracy of and compliance with the relevant Tax Opinion Representations, the Spin-Off will qualify for its Intended Tax Treatment.

(h) The B&N board of directors shall have received a solvency opinion from a financial advisor, in the form and substance acceptable to the B&N board of directors, regarding the effect of the Spin-Off.

(i) No order, injunction or decree issued by any Governmental Authority of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Spin-Off shall be in effect, and no other event outside the control of B&N shall have occurred or failed to occur that prevents the consummation of the Spin-Off.

(j) No other events or developments shall have occurred prior to the Distribution Date that, in the judgment of the board of directors of B&N, would result in the Spin-Off having a material adverse effect on B&N or its stockholders.

(k) Prior to the Distribution Date, the Prospectus shall have been mailed to the holders of B&N Common Stock.

(l) B&N shall have duly elected the individuals listed as members of post-Spin-Off BNED board of directors in the Form S-1, and such individuals shall be the members of BNED board of directors; provided that BNED current directors shall appoint at least one independent director to serve on the Audit Committee prior to the date on which “when-issued” trading of BNED Common Stock commences.

(m) Immediately prior to the Distribution Date, the Amended and Restated Certificate of Incorporation and the Amended and Restated By-laws of BNED, each in substantially the form filed as an exhibit to the Form S-1, shall be in effect.

(n) B&N shall have received a certificate signed by the Chief Financial Officer of BNED, dated as of the Distribution Date, certifying the satisfaction of the conditions set forth in this Section 4.02.

The foregoing conditions are for the sole benefit of B&N and shall not give rise to or create any duty on the part of B&N or the B&N board of directors to waive or not waive such conditions or in any way limit the right of B&N to terminate this Agreement as set forth in Article XI or alter the consequences of any such termination from those specified in such Article. Any determination made by the B&N board of directors prior to the Distribution concerning the satisfaction or waiver of any or all of the conditions set forth in this Section 4.02 shall be conclusive.

 

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ARTICLE V

The Distribution

SECTION 5.01.  The Distribution.  (a) BNED shall cooperate with B&N to accomplish the Distribution and shall, at the direction of B&N, use its reasonable best efforts to promptly take any and all actions necessary or desirable to effect the Distribution. B&N or BNED, as the case may be, will provide, or cause the applicable member of its Group to provide, to the Agent all share certificates and any information required in order to complete the Distribution.

(b) Subject to the terms and conditions set forth in this Agreement, (i) after completion of the Internal Transactions and on or prior to the Distribution Date, for the benefit of and distribution to the holders of B&N Common Stock as of the Record Date (the “ Record Holders ”), B&N will deliver to the Agent all of the issued and outstanding shares of BNED Common Stock then owned by B&N or any other member of the B&N Group and book-entry authorizations for such shares and (ii) on the Distribution Date, B&N shall instruct the Agent to distribute, by means of a pro   rata dividend based on the aggregate number of shares of B&N Common Stock held by each applicable Record Holder, to each Record Holder (or such Record Holder’s bank or brokerage firm on such Record Holder’s behalf) electronically, by direct registration in book-entry form, the number of shares of BNED Common Stock to which such Record Holder is entitled based on a distribution ratio to be determined by B&N in its sole discretion. The Distribution shall be effective at 12:01 a.m. New York City time on the Distribution Date. On or as soon as practicable after the Distribution Date, the Agent will mail to each Record Holder an account statement indicating the number of shares of BNED Common Stock that have been registered in book-entry form in the name of such Record Holder.

SECTION 5.02.  Fractional Shares.  The Agent and B&N shall, as soon as practicable after the Distribution Date, (a) determine the number of whole shares and fractional shares of BNED Common Stock allocable to each Record Holder, (b) aggregate all such fractional shares into whole shares and sell the whole shares obtained thereby in open market transactions at then prevailing trading prices on behalf of holders who would otherwise be entitled to fractional share interests and (c) distribute to each such holder, or for the benefit of each beneficial owner, such holder’s or owner’s ratable share of the net proceeds of such sale, based upon the average gross selling price per share of BNED Common Stock after making appropriate deductions for any amount required to be withheld under applicable Tax Law and less any brokers’ charges, commissions or transfer Taxes. The Agent, in its sole discretion, will determine the timing and method of selling such fractional shares, the selling price of such fractional shares and the broker-dealer through which such fractional shares will be sold; provided , however , that the designated broker-dealer is not an Affiliate of B&N or BNED. Neither B&N nor BNED will pay any interest on the proceeds from the sale of fractional shares.

SECTION 5.03.  Sole Discretion of B&N.  B&N shall, in its sole and absolute discretion, determine the Record Date, the Distribution Date and all terms of the Distribution, including the form, structure and terms of any transactions and/or offerings to effect the Distribution and the timing of and conditions to the consummation thereof. In addition and notwithstanding anything to the contrary set forth below, B&N may at any time and from time to

 

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time until the Distribution decide to abandon the Distribution including by accelerating or delaying the timing of the consummation of all or part of the Distribution or modifying or changing the terms of the Distribution if, at any time, the B&N board of directors determines, in its sole and absolute discretion, that the Distribution is not in the best interests of B&N or its stockholders or is otherwise not advisable.

ARTICLE VI

Mutual Releases; Indemnification

SECTION 6.01.  Release of Pre-Distribution Claims.  (a) Except as provided in Section 6.01(c) or elsewhere in this Agreement or the Ancillary Agreements, effective as of the Distribution, BNED does hereby, for itself and each other member of the BNED Group, their respective Affiliates, to the extent it may legally do so, successors and assigns, and all Persons who at any time on or prior to the Distribution have been stockholders, directors, officers, agents or employees of any member of the BNED Group (in each case, in their respective capacities as such), remise, release and forever discharge B&N and the other members of the B&N Group, their respective Affiliates, successors and assigns, and all Persons who at any time on or prior to the Distribution have been stockholders, directors, officers, agents or employees of any member of the B&N Group (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, from any and all BNED Liabilities whatsoever, whether at Law or in equity (including any right of contribution), whether arising under any contract or agreement, by operation of Law or otherwise, existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the Distribution, including in connection with the Spin-Off and all other activities to implement the Spin-Off.

(b) Except as provided in Section 6.01(c) or elsewhere in this Agreement or the Ancillary Agreements, effective as of the Distribution, B&N does hereby, for itself and each other member of the B&N Group, their respective Affiliates, to the extent it may legally do so, successors and assigns, and all Persons who at any time on or prior to the Distribution have been stockholders, directors, officers, agents or employees of any member of the B&N Group (in each case, in their respective capacities as such), remise, release and forever discharge BNED, the other members of the BNED Group, their respective Affiliates, successors and assigns, and all Persons who at any time on or prior to the Distribution have been stockholders, directors, officers, agents or employees of any member of the BNED Group (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, from any and all B&N Liabilities whatsoever, whether at Law or in equity (including any right of contribution), whether arising under any contract or agreement, by operation of Law or otherwise, existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the Distribution, including in connection with the Spin-Off and all other activities to implement the Spin-Off.

 

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(c) Nothing contained in Section 6.01(a) or (b) shall impair any right of any Person to enforce this Agreement, any Ancillary Agreement or any Intercompany Agreement or Intercompany Account that is specified in Section 2.03(b) not to terminate as of the Distribution, in each case in accordance with its terms. Nothing contained in Section 6.01(a) or (b) shall release any Person from:

(i) any Liability provided in or resulting from any agreement among any members of the B&N Group or the BNED Group that is specified in Section 2.03(b) as not terminating as of the Distribution, or any other Liability specified in such Section 2.03(b) as not to terminate as of the Distribution;

(ii) any Liability, contingent or otherwise, assumed, transferred, assigned or allocated to the Group of which such Person is a member in accordance with, or any other Liability of any member of any Group under, this Agreement or any Ancillary Agreement;

(iii) any Liability provided in or resulting from any other agreement or understanding that is entered into after the Distribution between one Party (and/or a member of such Party’s Group), on the one hand, and the other Party (and/or a member of such Party’s Group), on the other hand;

(iv) any Liability that the Parties may have with respect to indemnification or contribution pursuant to this Agreement or any Ancillary Agreement for claims brought against the Parties, the members of their respective Groups or any of their respective directors, officers, employees or agents, by third Persons, which Liability shall be governed by the provisions of this Article VI or, if applicable, the appropriate provisions of the relevant Ancillary Agreement; or

(v) any Liability the release of which would result in the release of any Person not otherwise intended to be released pursuant to this Section 6.01.

(d) BNED shall not make, and shall not permit any other member of the BNED Group to make, any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against B&N or any other member of the B&N Group, or any other Person released pursuant to Section 6.01(a), with respect to any Liabilities released pursuant to Section 6.01(a). B&N shall not make, and shall not permit any other member of the B&N Group to make, any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification against BNED or any other member of the BNED Group, or any other Person released pursuant to Section 6.01(b), with respect to any Liabilities released pursuant to Section 6.01(b).

(e) It is the intent of each of B&N and BNED, by virtue of the provisions of this Section 6.01, to provide for a full and complete release and discharge of all Liabilities existing or arising from all acts and events occurring or failing to occur or alleged to have occurred or to have failed to occur and all conditions existing or alleged to have existed on or before the Distribution Date, between or among BNED or any other member of the BNED Group, on the one hand, and B&N or any other member of the B&N Group, on the other hand (including any contractual agreements or arrangements existing or alleged to exist between or

 

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among any such members on or before the Distribution Date), except as set forth in Section 6.01(c) or elsewhere in this Agreement or in any Ancillary Agreement. At any time, at the request of the other Party, each Party shall cause each member of its respective Group to execute and deliver releases reflecting the provisions hereof.

SECTION 6.02.  Indemnification by BNED.  Subject to Section 6.04, BNED shall indemnify, defend and hold harmless B&N, each other member of the B&N Group and each of their respective former and current directors, officers and employees, and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the “ B&N Indemnitees ”), from and against any and all Liabilities of the B&N Indemnitees relating to, arising out of or resulting from any of the following items (without duplication):

(a) the BNED Liabilities (including with respect to Shared Contracts), including the failure of BNED or any other member of the BNED Group or any other Person to pay, perform or otherwise promptly discharge any BNED Liability in accordance with its terms;

(b) any breach by BNED or any other member of the BNED Group of this Agreement or any Ancillary Agreement unless such Ancillary Agreement expressly provides for separate indemnification therein (which shall be controlling); and

(c) any breach by BNED of any of the representations and warranties made by BNED on behalf of itself and the members of the BNED Group in Section 12.01(c).

SECTION 6.03.  Indemnification by B&N.  Subject to Section 6.04, B&N shall indemnify, defend and hold harmless BNED, each other member of the BNED Group and each of their respective former and current directors, officers and employees, and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the “ BNED Indemnitees ”), from and against any and all Liabilities of the BNED Indemnitees relating to, arising out of or resulting from any of the following items (without duplication):

(a) the B&N Liabilities (including with respect to Shared Contracts), including the failure of B&N or any other member of the B&N Group or any other Person to pay, perform or otherwise promptly discharge any B&N Liability in accordance with its terms;

(b) any breach by B&N or any other member of the B&N Group of this Agreement or any Ancillary Agreement unless such Ancillary Agreement expressly provides for separate indemnification therein (which shall be controlling); and

(c) any breach by B&N of any of the representations and warranties made by B&N on behalf of itself and the members of the B&N Group in Section 12.01(c).

SECTION 6.04.  Indemnification Obligations Net of Insurance Proceeds and Third-Party Proceeds.  (a) The Parties intend that any Liability subject to indemnification or reimbursement pursuant to this Agreement will be net of (i) Insurance Proceeds that actually reduce the amount of, or are paid to the applicable Indemnitee in respect of, such Liability or (ii) other amounts recovered from any third party that actually reduce the amount of, or are paid to the applicable Indemnitee in respect of, such Liability (“ Third-Party Proceeds ”). Accordingly, the amount that either Party (an “ Indemnifying Party ”) is required to pay to any Person entitled

 

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to indemnification or reimbursement pursuant to this Agreement (an “ Indemnitee ”) will be reduced by any Insurance Proceeds or Third-Party Proceeds theretofore actually recovered by or on behalf of the Indemnitee from a third party in respect of the related Liability. If an Indemnitee receives a payment required by this Agreement from an Indemnifying Party in respect of any Liability (an “ Indemnity Payment ”) and subsequently receives Insurance Proceeds or Third-Party Proceeds in respect of such Liability, then the Indemnitee will pay to the Indemnifying Party an amount equal to the excess of the Indemnity Payment received over the amount of the Indemnity Payment that would have been due if such Insurance Proceeds or Third-Party Proceeds had been received, realized or recovered before the Indemnity Payment was made.

(b) An insurer that would otherwise be obligated to pay any claim shall not be relieved of the responsibility with respect thereto or have any subrogation rights with respect thereto by virtue of the indemnification provisions hereof, it being expressly understood and agreed that no insurer or any other third party shall be entitled to a “wind-fall” ( i.e. , a benefit they would not be entitled to receive in the absence of the indemnification provisions) by virtue of the indemnification provisions hereof. Each member of the B&N Group and BNED Group shall use reasonable best efforts to seek to collect or recover any Insurance Proceeds and any Third-Party Proceeds to which such Person is entitled in connection with any Liability for which such Person seeks indemnification pursuant to this Article VI; provided , however , that such Person’s inability to collect or recover any such Insurance Proceeds or Third-Party Proceeds shall not limit the Indemnifying Party’s obligations hereunder.

(c) The calculation of any Indemnity Payments required by this Agreement shall be subject to Section 5.04 of the TMA.

SECTION 6.05.  Procedures for Indemnification of Third-Party Claims.  (a) If an Indemnitee shall receive notice or otherwise learn of a Third-Party Claim with respect to which an Indemnifying Party may be obligated to provide indemnification to such Indemnitee pursuant to this Agreement, such Indemnitee shall give such Indemnifying Party written notice thereof as soon as reasonably practicable, but no later than 30 days after becoming aware of such Third-Party Claim. Any such notice shall describe the Third-Party Claim in reasonable detail. Notwithstanding the foregoing, the failure of any Indemnitee or other Person to give notice as provided in this Section 6.05(a) shall not relieve the related Indemnifying Party of its obligations under this Article VI, except to the extent that such Indemnifying Party is actually prejudiced by such failure to give notice.

(b) The Indemnifying Party shall have the right, exercisable by written notice to the Indemnitee within 30 calendar days after receipt of notice from an Indemnitee in accordance with Section 6.05(a) (or sooner, if the nature of such Third-Party Claim so requires), to assume and conduct the defense of such Third-Party Claim in accordance with the limits set forth in this Agreement with counsel selected by the Indemnifying Party and reasonably acceptable to the Indemnitee; provided , however , (i) the defense of such Third-Party Claim by the Indemnifying Party will not, in the reasonable judgment of the Indemnitee, affect the Indemnitee or any of its controlled Affiliates in a materially adverse manner and (ii) the Third-Party Claim solely seeks (and continues to seek) monetary damages (the conditions set forth in clauses (i) and (ii), collectively, the “ Litigation Conditions ”).

 

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(c) If the Indemnifying Party elects not to assume the defense of a Third-Party Claim in accordance with this Agreement, or fails to notify an Indemnitee of its election as provided in Section 6.05(b) or if one of the Litigation Conditions is not satisfied or waived by the Indemnitee, such Indemnitee may defend such Third-Party Claim at the cost and expense of the Indemnifying Party.

(d) If the Indemnifying Party elects to assume the defense of a Third-Party Claim in accordance with the terms of this Agreement, the Indemnitees shall, subject to the terms of this Agreement, cooperate with the Indemnifying Party with respect to the defense of such Third-Party Claim.

(e) If the Indemnifying Party elects to assume the defense of a Third-Party Claim in accordance with the terms of this Agreement, the Indemnifying Party will not be liable for any additional legal expenses subsequently incurred by the Indemnitee in connection with the defense of the Third-Party Claim; provided , however , that if (i) the Litigation Conditions cease to be met or (ii) the Indemnifying Party fails to take reasonable steps necessary to defend diligently such Third-Party Claim, the Indemnitee may assume its own defense, and the Indemnifying Party will be liable for all reasonable costs or expenses paid or incurred in connection with such defense. The Indemnifying Party or the Indemnitee, as the case may be, shall have the right to participate in (but, subject to the prior sentence, not control), at its own expense, the defense of any Third-Party Claim that the other is defending as provided in this Agreement. In the event, however, that such Indemnitee reasonably determines that representation by counsel to the Indemnifying Party of both such Indemnifying Party and the Indemnitee could reasonably be expected to present such counsel with a conflict of interest, then the Indemnitee may employ separate counsel to represent or defend it in any such action or proceeding and the Indemnifying Party will pay the reasonable fees and expenses of such counsel.

(f) No Indemnifying Party shall consent to entry of any judgment or enter into any settlement of any Third-Party Claim without the consent of the applicable Indemnitee or Indemnitees; provided , however , that such Indemnitee(s) shall be required to consent to such entry of judgment or to such settlement that the Indemnifying Party may recommend if the judgment or settlement (i) contains no finding or admission of any violation of Law or any violation of the rights of any Person, (ii) involves only monetary relief which the Indemnifying Party has agreed to pay and (iii) includes a full and unconditional release of the Indemnitee. Notwithstanding the foregoing, in no event shall an Indemnitee be required to consent to any entry of judgment or settlement if the effect thereof is to permit any injunction, declaratory judgment, other order or other nonmonetary relief to be entered, directly or indirectly, against any Indemnitee.

(g) Whether or not the Indemnifying Party assumes the defense of a Third-Party Claim, no Indemnitee shall admit any liability with respect to, or settle, compromise or discharge, such Third-Party Claim without the Indemnifying Party’s prior written consent (such consent not to be unreasonably withheld or delayed).

 

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SECTION 6.06.  Additional Matters.  (a) Any claim on account of a Liability that does not result from a Third-Party Claim shall be asserted by written notice given by the Indemnitee to the related Indemnifying Party. Such Indemnifying Party shall have a period of 30 days after the receipt of such notice within which to respond thereto. If such Indemnifying Party does not respond within such 30-day period, such Indemnifying Party shall be deemed to have refused to accept responsibility to make payment. If such Indemnifying Party does not respond within such 30-day period or rejects such claim in whole or in part, such Indemnitee shall be free to pursue such remedies as may be available to such Party as contemplated by this Agreement.

(b) In the event of payment by or on behalf of any Indemnifying Party to any Indemnitee in connection with any Third-Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the place of such Indemnitee as to any events or circumstances in respect of which such Indemnitee may have any right, defense or claim relating to such Third-Party Claim against any claimant or plaintiff asserting such Third-Party Claim or against any other Person. Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense of such Indemnifying Party, in prosecuting any subrogated right, defense or claim.

(c) In the event of an Action relating to a Liability that has been allocated to an Indemnifying Party pursuant to the terms of this Agreement or any Ancillary Agreement in which the Indemnifying Party is not a named defendant, if the Indemnifying Party shall so request, the Parties shall endeavor to substitute the Indemnifying Party for the named defendant or add the Indemnifying Party as an additional named defendant, if at all practicable. If such substitution or addition cannot be achieved for any reason or is not requested, the named defendant shall allow the Indemnifying Party to manage the Action as set forth in this Section, the Indemnifying Party shall fully indemnify the named defendant against all reasonable costs of defending the Action (including court costs, sanctions imposed by a court, attorneys’ fees, experts, fees and all other external expenses), the costs of any judgment or settlement and the cost of any interest or penalties relating to any judgment or settlement.

SECTION 6.07.  Remedies Cumulative.  The remedies provided in this Article VI shall be cumulative and, subject to the provisions of Article X, shall not preclude assertion by any Indemnitee of any other rights or the seeking of any and all other remedies against any Indemnifying Party.

SECTION 6.08.  Survival of Indemnities.  The rights and obligations of each of B&N and BNED and their respective Indemnitees under this Article VI shall survive the sale or other transfer by any Party or its Affiliates of any Assets or businesses or the assignment by it of any Liabilities.

SECTION 6.09.  Limitation on Liability.  Except as may expressly be set forth in this Agreement, none of B&N, BNED or any other member of either Group shall in any event have any Liability to the other or to any other member of the other’s Group, or to any other B&N Indemnitee or BNED Indemnitee, as applicable, under this Agreement (i) with respect to any matter to the extent that such Party seeking indemnification has engaged in any knowing violation of Law or fraud in connection therewith or (ii) for any punitive or exemplary damages (except to the extent payable to a third party), whether or not caused by or resulting from negligence or breach of obligations hereunder.

 

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ARTICLE VII

Access to Information; Litigation; Confidentiality

SECTION 7.01. Agreement for Exchange of Information; Archives.  (a) Except in the case of an adversarial Action or threatened adversarial Action by either B&N or BNED or a Person or Persons in its Group against the other Party or a Person or Persons in its Group, and subject to Section 7.01(b), each of B&N and BNED, on behalf of its respective Group, shall provide, or cause to be provided, to the other Party, at any time after the Distribution, as soon as reasonably practicable after written request therefor, any Information relating to time periods on or prior to the Distribution Date in the possession or under the control of such respective Group, which B&N or BNED, or any member of its respective Group, as applicable, reasonably needs (i) to comply with reporting, disclosure, filing or other requirements imposed on B&N or BNED, or any member of its respective Group, as applicable (including under applicable securities laws), by any national securities exchange or any Governmental Authority having jurisdiction over B&N or BNED, or any member of its respective Group, as applicable, (ii) for use in any other judicial, regulatory, administrative or other proceeding or in order to satisfy audit, accounting, regulatory, litigation or other similar requirements or (iii) to comply with its obligations under this Agreement or any Ancillary Agreement. The receiving Party shall use any Information received pursuant to this Section 7.01(a) solely to the extent reasonably necessary to satisfy the applicable obligations or requirements described in clause (i), (ii) or (iii) of the immediately preceding sentence.

(b) In the event that either B&N or BNED determines that the exchange of any Information pursuant to Section 7.01(a) could violate any Law or agreement or waive or jeopardize any attorney-client privilege or attorney work product protection, such Party shall not be required to provide access to or furnish such Information to the other Party; provided , however , that both B&N and BNED shall take all commercially reasonable measures to permit the compliance with Section 7.01(a) in a manner that avoids any such harm or consequence. Both B&N and BNED intend that any provision of access to or the furnishing of Information pursuant to this Section 7.01 that would otherwise be within the ambit of any legal privilege shall not operate as waiver of such privilege.

(c) Each of BNED and B&N agrees, on behalf of itself and each member of the Group of which it is a member, not to disclose or otherwise waive any privilege or protection attaching to any privileged Information relating to a member of the other Group or relating to or arising in connection with the relationship between the Groups prior to the Distribution, without providing prompt written notice to and obtaining the prior written consent of the other (not to be unreasonably withheld or delayed).

(d) B&N and BNED each agree that it will only process personal data provided to it by the other Group in accordance with all applicable privacy and data protection law obligations and will implement and maintain at all times appropriate technical and organizational measures to protect such personal data against unauthorized or unlawful processing and accidental loss, destruction, damage, alteration and disclosure. In addition, each Party agrees to provide reasonable assistance to the other Party in respect of any obligations under privacy and data protection legislation affecting the disclosure of such personal data to the other Party and will not knowingly process such personal data in such a way to cause the other Party to violate any of its obligations under any applicable privacy and data protection legislation.

 

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SECTION 7.02.  Ownership of Information.  Any Information owned by one Group that is provided to the requesting Party hereunder shall be deemed to remain the property of the providing Party. Except as specifically set forth herein, nothing herein shall be construed as granting or conferring rights of license or otherwise in any such Information.

SECTION 7.03.  Compensation for Providing Information.  B&N and BNED shall reimburse each other for the reasonable costs, if any, in complying with a request for Information pursuant to this Article VII. Except as may be otherwise specifically provided elsewhere in this Agreement, such costs shall be computed in accordance with BNED’s or B&N’s, as applicable, standard methodology and procedures.

SECTION 7.04.  Record Retention.  To facilitate the possible exchange of Information pursuant to this Article VII and other provisions of this Agreement, each Party shall use its reasonable best efforts to retain all Information in such Party’s possession relating to the other Party or its businesses, Assets or Liabilities, this Agreement or the Ancillary Agreements (the “ Retained Information ”) in accordance with its respective record retention policy as in effect on the date hereof or such longer or shorter period as required by Law, this Agreement or the Ancillary Agreements.

SECTION 7.05.  Accounting Information.  Without limiting the generality of Section 7.01 but subject to Section 7.01(b):

(a) Until the end of the first full fiscal year of B&N occurring after the Distribution Date (and for a reasonable period of time afterwards as required by Law for B&N to prepare consolidated financial statements or complete a financial statement audit for any period during which the financial results of the BNED Group were consolidated with those of B&N), BNED shall use its reasonable best efforts to enable B&N to meet its timetable for dissemination of its financial statements and to enable B&N’s auditors to timely complete their annual audit and quarterly reviews of financial statements. As part of such efforts, to the extent reasonably necessary for the preparation of financial statements or completing an audit or review of financial statements or an audit of internal control over financial reporting, (i) BNED shall authorize and direct its auditors to make available to B&N’s auditors, within a reasonable time prior to the date of B&N’s auditors’ opinion or review report, both (x) the personnel who performed or will perform the annual audits and quarterly reviews of BNED and (y) work papers related to such annual audits and quarterly reviews, to enable B&N’s auditors to perform any procedures they consider reasonably necessary to take responsibility for the work of BNED’s auditors as it relates to B&N’s auditors’ opinion or report and (ii) until all governmental audits or other inquiries are complete, BNED shall provide reasonable access during normal business hours for B&N’s internal auditors, counsel and other designated representatives to (x) the premises of BNED and its Subsidiaries and all Information (and duplicating rights) within the knowledge, possession or control of BNED and its Subsidiaries, (y) the officers and employees of BNED and its Subsidiaries, so that B&N may conduct reasonable audits relating to the financial statements provided by BNED and its Subsidiaries, and (z) the IT systems of BNED, so

 

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that B&N may conduct reasonable testing of such IT systems in connection with the audits of financial statements; provided , however , that such access shall not be unreasonably disruptive to the business and affairs of the BNED Group.

(b) Until the end of the first full fiscal year of BNED occurring after the Distribution Date (and for a reasonable period of time afterwards or as required by Law), B&N shall use its reasonable best efforts to enable BNED to meet its timetable for dissemination of its financial statements and to enable BNED’s auditors to timely complete their annual audit and quarterly reviews of financial statements. As part of such efforts, to the extent reasonably necessary for the preparation of financial statements or completing an audit or review of financial statements or an audit of internal control over financial reporting, (i) B&N shall authorize and direct its auditors to make available to BNED’s auditors, within a reasonable time prior to the date of BNED’s auditors’ opinion or review report, both (x) the personnel who performed or will perform the annual audits and quarterly reviews of B&N and (y) work papers related to such annual audits and quarterly reviews, to enable BNED’s auditors to perform any procedures they consider reasonably necessary to take responsibility for the work of B&N’s auditors as it relates to BNED’s auditors’ opinion or report and (ii) until all governmental audits or other inquires are complete, B&N shall provide reasonable access during normal business hours for BNED’s internal auditors, counsel and other designated representatives to (x) the premises of B&N and its Subsidiaries and all Information (and duplicating rights) within the knowledge, possession or control of B&N and its Subsidiaries and (y) the officers and employees of B&N and its Subsidiaries, so that BNED may conduct reasonable audits relating to the financial statements provided by B&N and its Subsidiaries, and (z) the IT systems of B&N, so that BNED may conduct reasonable testing of such IT systems in connection with the audits of financial statements; provided , however , that such access shall not be unreasonably disruptive to the business and affairs of the B&N Group.

(c) In order to enable the principal executive officer(s) and principal financial officer(s) (as such terms are defined in the rules and regulations of the Commission) of B&N to make any certifications required of them under Section 302 or 906 of the Sarbanes-Oxley Act of 2002, BNED shall, within a reasonable period of time following a request from B&N in anticipation of filing such reports, cause its principal executive officer(s) and principal financial officer(s) to provide B&N with certifications of such officers in support of the certifications of B&N’s principal executive officer(s) and principal financial officer(s) required under Section 302 or 906 of the Sarbanes-Oxley Act of 2002 with respect to B&N’s Quarterly Report on Form 10-Q filed with respect to the fiscal quarter during which the Distribution Date occurs (unless such quarter is the fourth fiscal quarter), each subsequent fiscal quarter through the third fiscal quarter of the year in which the Distribution Date occurs and B&N’s Annual Report on Form 10-K filed with respect to the fiscal year during which the Distribution Date occurs. Such certifications shall be provided in substantially the same form and manner as such BNED officers provided prior to the Distribution (reflecting any changes in certifications necessitated by the Spin-Off or any other transactions related thereto) or as otherwise agreed upon between B&N and BNED.

SECTION 7.06.  Limitations of Liability.  Neither B&N nor BNED shall have any Liability to the other Party in the event that any Information exchanged or provided pursuant to this Agreement that is an estimate or forecast, or that is based on an estimate or

 

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forecast, is found to be inaccurate in the absence of wilful misconduct by the providing Person. Neither B&N nor BNED shall have any Liability to the other Party if any Information is destroyed after reasonable best efforts by BNED or B&N, as applicable, to comply with the provisions of Section 7.04.

SECTION 7.07.  Conduct of Pending Litigation Matters.  BNED and B&N shall enter into one or more joint defense agreements, substantially in the form of Exhibit A hereto, with respect to litigation matters pending as of the date hereof that involve members of both the B&N Group and the BNED Group.

SECTION 7.08.  Production of Witnesses; Records; Cooperation.  (a) After the Distribution Date and until the third anniversary thereof, except in the case of an adversarial Action or threatened adversarial Action by either B&N or BNED or a Person or Persons in its Group against the other Party or a Person or Persons in its Group, each of B&N and BNED shall take all reasonable steps to make available, upon written request, the former, current and future directors, officers, employees, other personnel and agents of the Persons in its respective Group (whether as witnesses or otherwise) and any books, records or other documents within its control or that it otherwise has the ability to make available, to the extent that such Person (giving consideration to business demands of such directors, officers, employees, other personnel and agents) or books, records or other documents may reasonably be required in connection with any Action or threatened or contemplated Action (including preparation for such Action) in which B&N or BNED, as applicable, may from time to time be involved, regardless of whether such Action is a matter with respect to which indemnification may be sought hereunder. The requesting Party shall bear all reasonable out-of-pocket costs and expenses in connection therewith.

(b) Without limiting the foregoing, B&N and BNED shall use their reasonable best efforts to cooperate and consult to the extent reasonably necessary with respect to any Actions or threatened or contemplated Actions, other than an adversarial Action against the other Group.

(c) The obligation of B&N and BNED to make available former, current and future directors, officers, employees and other personnel and agents or provide witnesses and experts pursuant to this Section 7.08 is intended to be interpreted in a manner so as to facilitate cooperation and shall include the obligation to make available employees and other officers without regard to whether such individual or the employer of such individual could assert a possible business conflict (subject to the exception set forth in the first sentence of Section 7.08(a)). Without limiting the foregoing, each of B&N and BNED agrees that neither it nor any Person or Persons in its respective Group will take any adverse action against any employee of its Group based on such employee’s provision of assistance or information to each other pursuant to this Section 7.08.

(d) Upon the reasonable request of B&N or BNED, in connection with any Action contemplated by this Article VII, B&N and BNED will enter into a mutually acceptable common interest agreement so as to maintain to the extent practicable any applicable attorney-client privilege or work product immunity of any member of either Group.

 

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SECTION 7.09.  Confidential Information.  (a) Each of B&N and BNED, on behalf of itself and each Person in its respective Group, shall hold, and cause its respective directors, officers, employees, agents, accountants, counsel and other advisors and representatives to hold, in strict confidence and not release or disclose, with at least the same degree of care, but no less than a reasonable degree of care, that it applies to its own confidential and proprietary information pursuant to policies in effect as of the Distribution Date, all Information concerning the other Group or its business that is either in its possession (including Information in its possession prior to the Distribution) or furnished by the other Group or its respective directors, officers, employees, agents, accountants, counsel and other advisors and representatives at any time pursuant to this Agreement, and shall not use any such Information other than for such purposes as shall be expressly permitted hereunder, except, in each case, to the extent that such Information is (i) in the public domain through no fault of any member of the B&N Group or the BNED Group, as applicable, or any of its respective directors, officers, employees, agents, accountants, counsel and other advisors and representatives, (ii) later lawfully acquired from other sources by any of B&N, BNED or its respective Group, employees, directors or agents, accountants, counsel and other advisors and representatives, as applicable, which sources are not themselves bound by a confidentiality obligation to the knowledge of any of B&N, BNED or Persons in its respective Group, as applicable, (iii) independently generated without reference to any proprietary or confidential Information of the B&N Group or the BNED Group, as applicable, or (iv) required to be disclosed by Law; provided , however , that the Person required to disclose such Information gives the applicable Person prompt, and to the extent reasonably practicable, prior notice of such disclosure and an opportunity to contest such disclosure and shall use commercially reasonable efforts to cooperate, at the expense of the requesting Person, in seeking any reasonable protective arrangements requested by such Person. In the event that such appropriate protective order or other remedy is not obtained, the Person that is required to disclose such Information shall furnish, or cause to be furnished, only that portion of such Information that is legally required to be disclosed and shall take commercially reasonable steps to ensure that confidential treatment is accorded such Information. Notwithstanding the foregoing, each of B&N and BNED may release or disclose, or permit to be released or disclosed, any such Information concerning the other Group (x) to their respective directors, officers, employees, agents, accountants, counsel and other advisors and representatives who need to know such Information (who shall be advised of the obligations hereunder with respect to such Information), and (y) to any nationally recognized statistical rating organization as it reasonably deems necessary, solely for the purpose of obtaining a rating of securities or other debt instruments upon normal terms and conditions; provided , however , that the Party whose Information is being disclosed or released to such rating organization is promptly notified thereof.

(b) Without limiting the foregoing, when any Information concerning the other Group or its business is no longer needed for the purposes contemplated by this Agreement or any Ancillary Agreement, each of B&N and BNED will, promptly after request of the other Party, either return all Information in a tangible form (including all copies thereof and all notes, extracts or summaries based thereon) or certify to the other Party, as applicable, that it has destroyed such Information (and used commercially reasonable efforts to destroy all such Information electronically preserved or recorded within any computerized data storage device or component (including any hard-drive or database)).

 

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ARTICLE VIII

Insurance

SECTION 8.01.  Insurance.  (a) Until the Distribution Date, B&N shall (i) cause the members of the BNED Group and their respective employees, officers and directors to continue to be covered as insured parties under B&N’s policies of insurance in a manner which is no less favorable than the coverage provided for the B&N Group and (ii) permit the members of the BNED Group and their respective employees, officers and directors to submit claims arising from or relating to facts, circumstances, events or matters that occurred prior to the Distribution Date to the extent permitted under such policies. With respect to policies currently procured by BNED for the sole benefit of the BNED Group, BNED shall continue to maintain such insurance coverage through the Distribution Date in a manner no less favorable than currently provided. Without limiting any of the rights or obligations of the parties pursuant to Sections 8.01(b)-(e), B&N and BNED acknowledge that, as of the Distribution Date, B&N intends to take such action as it may deem necessary or desirable to remove the members of the BNED Group and their respective employees, officers and directors as insured parties under any policy of insurance issued to any member of the B&N Group by any insurance carrier effective on the Distribution Date. Except to the extent otherwise provided below or otherwise mutually agreed, the BNED Group will not be entitled from and after the Distribution Date to make any claims for insurance thereunder to the extent such claims are based upon facts, circumstances, events or matters occurring on or after the Distribution Date or to the extent any claims are made pursuant to any B&N claims-made policies on or after the Distribution Date. No member of the B&N Group shall be deemed to have made any representation or warranty as to the availability of any coverage under any such insurance policy. Nothing in this Section 8.01(a) shall apply to any employee-related insurance matters that are expressly addressed in the EMA.

(b) Effective as of the Distribution Date, all D&O Policies of the B&N Group shall be converted to run off policies, and each of the B&N Group and the BNED Group shall purchase D&O Policies with respect to claims arising after the Distribution Date. From and after the Distribution Date, to the extent that any Pre-Separation Insurance Claim has been duly reported on or before the six-year anniversary of the Distribution Date under the directors and officers liability insurance policies (“ D&O Policies ”) maintained by members of the B&N Group, B&N shall not, and shall cause the members of the B&N Group not to, take any action that would limit the coverage of the individuals who acted as directors or officers of the B&N Group and members of the BNED Group prior to the Distribution Date under any D&O Policies maintained by the members of the B&N Group. B&N shall continue to be responsible for the deductible or retention related to any such Pre-Separation Insurance Claim under the D&O Policies, in an aggregate amount not to exceed the applicable deductible. B&N shall, and shall cause members of the B&N Group to, reasonably cooperate with the individuals who acted as directors and officers of the B&N Group or members of the BNED Group on or prior to the Distribution Date in their pursuit of any coverage claims under such D&O Policies which could inure to the benefit of such individuals.

(c) Existing primary casualty policies will remain in effect for the B&N Group and BNED until the Distribution Date. Effective as of the Distribution Date, the BNED Group shall purchase workers compensation, commercial general liability and automobile

 

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liability policies with respect to claims arising after the Distribution Date. B&N shall not, and shall cause the members of the B&N Group not to, take any action that would limit the coverage available to BNED (or members of the BNED Group) prior to the Distribution Date under any existing primary casualty policies maintained by the members of the B&N Group. Any claim fees associated with Pre-Separation losses under the existing primary casualty policies will be assumed by BNED. Assuming acceptance and agreement of the insurance carrier, on or about the six-month anniversary of the Distribution Date, BNED agrees to assume and accept any claims and liabilities with respect to BNED (or any member of the BNED group) existing under the casualty policies of the B&N Group and those liabilities are to be transferred to BNED. BNED shall bear all costs associated with such transfer and assignment. In connection with such transfer and assignment, B&N and BNED shall cooperate to reduce the letter of credit in favor of the insurers under the existing primary casualty policies with the removal of BNED from such policies.

(d) Effective as of the Distribution Date, the BNED Group shall purchase property policies in respect of real and personal property, ocean cargo and crime policies and excess liability and umbrella policies with respect to claims arising from and after the Distribution Date. After the Distribution Date, to the extent that any Pre-Separation Insurance Claim has been duly reported as having occurred prior to the Distribution Date, under property policies in respect of real and personal property, ocean cargo and crime policies and excess liability and umbrella policies maintained by members of the B&N Group, B&N shall not, and shall cause the members of the B&N Group not to, take any action that would limit the coverage available to BNED or any member of the BNED Group prior to the Distribution Date under any such policies maintained by the members of the B&N Group. Any claim settlement funds owed to BNED under any such policies will be distributed at the conclusion of the claim.

(e) Effective as of the Distribution Date, all fiduciary policies and cyberliability policies (including relating to errors and omissions and media) of the B&N Group shall continue and the BNED Group shall purchase fiduciary policies and cyberliability policies (including relating to errors and omissions and media) with respect to claims arising after the Distribution Date. From and after the Distribution Date, to the extent that any Pre-Separation Claims-Based Insurance Claim has been duly reported on or before the Distribution Date under any insurance policies with respect to fiduciary or cyberliability losses, maintained by members of the B&N Group, B&N shall not, and shall cause the member of the B&N Group not to, take any action that would limit the coverage available under the fiduciary policies or the cyberliability policies (including relating to errors and omissions and media) maintained by the members of the B&N Group. B&N shall continue to be responsible the deductible or retention related to such Pre-Separation Insurance Claims under the fiduciary policies and the cyberliability policies (including relating to errors and omissions and media). Any claim settlement funds owed to BNED will be distributed at the conclusion of the claim.

(f) B&N shall provide, and shall cause other members of the B&N Group to provide, such cooperation as is reasonably requested by BNED in order for BNED to have in effect from and after the Distribution Date such new insurance policies as BNED deems appropriate with respect to claims reported on or after the Distribution Date. In accordance with Sections 8.01(c)-(e), B&N shall, and shall cause members of the B&N Group to, reasonably cooperate with BNED (or members of the BNED Group) in their pursuit of any coverage claims

 

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under any such policies which could inure to the benefit of such entities. Except for the policies referred to therein and to the extent otherwise required under Sections 8.01(b)-(e), the B&N Group may, at any time, without liability or obligation to the BNED Group, amend, commute, terminate, buy-out, extinguish liability under or otherwise modify any insurance policy (and such claims will be subject to any such amendments, commutations, terminations, buy-outs, extinguishments and modifications); provided , however , that B&N will immediately notify BNED of any termination of any insurance policy.

(g) B&N shall not be liable to BNED for claims, or portions of claims, not reimbursed by insurers under any policy for any reason, including coinsurance provisions, deductibles, quota share deductibles, self-insured retentions, bankruptcy or insolvency of any insurance carrier(s), policy limitations or restrictions (including exhaustion of limits), any coverage disputes, any failure to timely file a claim by any member of the B&N Group or any member of the BNED Group or any defect in such claim or its processing. With respect to insurance claims solely of the BNED Group, BNED shall control the conduct of the resolution of any dispute with the applicable insurer and B&N shall cooperate in good faith in the resolution of any such dispute, and BNED shall reimburse B&N for all out-of-pocket costs and expenses incurred by B&N in connection therewith. In the event that insurable claims of both B&N and BNED (or the members of their respective Groups) exist relating to the same occurrence, the Parties shall jointly defend and waive any conflict of interest necessary to the conduct of the joint defense and shall not settle or compromise any such claim without the consent of the other (which consent shall not be unreasonably withheld or delayed subject to the terms and conditions of the applicable insurance policy). Nothing in this Section 8.01 shall be construed to limit or otherwise alter in any way the obligations of the Parties, including those created by this Agreement, by operation of Law or otherwise.

(h) The parties shall use reasonable best efforts to cooperate with respect to the various insurance matters contemplated by this Section 8.01.

ARTICLE IX

Ongoing Commercial Matters

SECTION 9.01.  B&N Systems and Distribution Facilities.  (a) B&N shall provide to BNED, on an “as is, where is” basis (with all faults and without any representations or warranties or performance standards), non-transferable access to B&N’s product procurement systems pursuant to the terms and conditions set forth on Schedule 9.01(a). BNED shall reimburse B&N for all purchases made by BNED through B&N’s product procurement systems and merchandising systems as a result of the access contemplated by this Section 9.01 within 30 days of receipt of an invoice for such purchases from B&N.

(b) B&N shall provide to BNED, on an “as is, where is” basis (with all faults and without any representations or warranties or performance standards), non-transferable access to use B&N’s distribution facilities pursuant to the terms and conditions set forth on Schedule 9.01(b) in connection with the use of B&N’s product procurement systems as contemplated by Section 9.01(a).

 

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(c) B&N shall be permitted to transfer its systems and facilities to be maintained by a third party. B&N shall use commercially reasonable efforts to ensure that such systems and facilities shall continue to be provided to BNED as contemplated by this Section 9.01, but there can be no assurance that any such third party(ies) shall continue to provide BNED access to such systems or facilities, as applicable. BNED shall reimburse B&N on a Pass-Through Cost basis for any costs and expenses associated with B&N’s efforts under this Section 9.01(c).

(d) B&N shall only be obligated to provide the access contemplated by this Section 9.01 and Section 9.03 to the extent consistent with applicable Law. In the event B&N determines that the continued provision of all or any portion of such access is inconsistent with applicable Law, the Parties will discuss in good faith potential modifications or alternative arrangements that would comply with applicable Law.

SECTION 9.02.  Gift Cards.  B&N shall (i) make available to BNED for sale in the BNED Business B&N-Issued Gift Cards and (ii) issue gift cards skinned as reasonably requested by BNED, and BNED shall honor B&N-Issued Gift Cards, pursuant to the terms and conditions set forth on Schedule 9.02.

SECTION 9.03.  Additional Access and Services.  (a) In connection with BNED’s conduct of the BNED Business, B&N shall provide to BNED, on a commercially reasonable and “as-is, where-is” basis (with all faults and without any representations or warranties or performance standards), non-transferable access to the information and services set forth on Schedule 9.03 relating to the B&N Format pursuant to the terms and conditions thereon.

(b) For so long as the services contemplated by Section 9.03(a) are provided, BNED shall promptly correct any deviations from the B&N Format upon written notice by B&N of any such deviations; provided , however , in the event that B&N substantially changes the B&N Format as of the date of this Agreement, BNED may choose at its sole discretion to either adhere to the B&N Format existing as of the date of this Agreement or the B&N Format existing as of the date such changes take effect. For the avoidance of doubt, B&N’s reasonable update of the B&N Format shall not constitute a substantial change hereunder, including general maintenance and normal upkeep. In the event that BNED opens any new bookstores or renovates to any material extent any of its existing bookstores, all such new or renovated bookstores shall adhere to the then-current B&N Format.

(c) B&N shall remit to BNED all showroom payments obtained from publishers with respect to purchases made by or on behalf of BNED or its subsidiaries for so long as any showroom agreement remains in effect that includes payments to B&N with respect to purchases made by or on behalf of BNED or its subsidiaries.

SECTION 9.04.  Indemnification.  Each of B&N and BNED shall indemnify, defend and hold harmless the other Party from any losses, costs, damages or liability incurred by the other Party arising out of or resulting from (i) B&N’s provision of access and services pursuant to Sections 9.01(a) and (b) and 9.03 and (ii) errors and data breaches for transactions involving B&N-Issued Gift Cards pursuant to Section 9.02.

 

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SECTION 9.05. Term and Termination.  (a) The term of this Article IX shall be for so long as B&N continues to utilize the products and services identified in this Article IX (the “ B&N Commercial Services ”) in the operation of its own business.

(b) BNED may terminate this Article IX and the license and rights granted to it hereunder by B&N upon written notice to B&N. Such notice shall specify the effective date of such termination.

(c) B&N may terminate this Article IX upon written notice to BNED if BNED has materially breached any provision of this Article IX and has not cured such breach within thirty (30) days after written notice of such breach has been given by B&N to BNED. Additionally, B&N may terminate this Article IX immediately in the event BNED (x) (i) no longer continues to operate as a going concern, (ii) no longer continues to operate in the Field of Use or (iii) changes its name such that it no longer includes “Barnes & Noble” or the abbreviation “B&N”, or otherwise ceases to use the Licensed Marks (as defined in the TLA Agreement) in identifying its business or (y) upon the occurrence of a BNED Fundamental Change (as defined in the TLA) (each event described in this paragraph, a “ Termination Event ”).

(d) Upon termination or expiration of this Article IX, BNED shall use commercially reasonable efforts to wind down and to cease its and its sub-licensees’ use of the B&N Commercial Services as soon as commercially practicable but in no event later than (A) with respect to each of Section 9.05(c)(i), (ii) and (iii), the end of one hundred and eighty (180) days from the date of such termination or expiration and (B) with respect to Section 9.05(c)(iv), the end of thirty (30) days from the date of such termination.

ARTICLE X

Further Assurances and Additional Covenants

SECTION 10.01.  Further Assurances.  (a) In addition to the actions specifically provided for elsewhere in this Agreement, each of the Parties shall use reasonable best efforts, prior to, on and after the Distribution Date, to take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable Laws and agreements to consummate and make effective the transactions contemplated by this Agreement.

(b) Without limiting the foregoing, prior to, on and after the Distribution Date, each Party shall cooperate with the other Party, without any further consideration, but at the expense of the requesting Party, (i) to execute and deliver, or use reasonable best efforts to execute and deliver, or cause to be executed and delivered, all instruments, including any instruments of conveyance, assignment and transfer as such Party may reasonably be requested to execute and deliver by the other Party, (ii) to make, or cause to be made, all filings with, and to obtain, or cause to be obtained, all Consents of any Governmental Authority or any other Person under any permit, license, agreement, indenture or other instrument, (iii) to obtain, or cause to be obtained, any Governmental Approvals or other Consents required to effect the Spin-Off and (iv) to take, or cause to be taken, all such other actions as such Party may reasonably be requested to take by the other Party from time to time, consistent with the terms of this

 

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Agreement and the Ancillary Agreements, in order to effectuate the provisions and purposes of this Agreement and any transfers of Assets or assignments and assumptions of Liabilities hereunder and the other transactions contemplated hereby.

(c) On or prior to the Distribution Date, B&N and BNED, in their respective capacities as direct and indirect stockholders of their respective Subsidiaries, shall each ratify any actions that are reasonably necessary or desirable to be taken by BNED or any other Subsidiary of B&N, as the case may be, to effectuate the transactions contemplated by this Agreement.

(d) Prior to the Distribution, if either Party identifies any commercial or other service that is needed to ensure a smooth and orderly transition of its business in connection with the consummation of the transactions contemplated hereby, and that is not otherwise governed by the provisions of this Agreement or any Ancillary Agreement, the Parties will cooperate in determining whether there is a mutually acceptable arm’s-length basis on which the other Party will provide such service.

(e) B&N and BNED shall settle the Payables Transactions in accordance with Schedule 1(f). As soon as reasonably possible following the Distribution Date, the Parties agree to determine and settle the final amounts of the Payables Transactions to the extent such amounts have not previously been settled.

ARTICLE XI

Termination

SECTION 11.01.  Termination.  Subject to Sections 3.02(c)(vii) and 9.05, this Agreement may be terminated by B&N at any time, in its sole discretion, prior to the Distribution.

SECTION 11.02.  Effect of Termination.  In the event of any termination of this Agreement prior to the Distribution, neither Party (nor any of its directors or officers) shall have any Liability or further obligation to the other Party under this Agreement or the Ancillary Agreements.

ARTICLE XII

Miscellaneous

SECTION 12.01.  Counterparts; Entire Agreement; Corporate Power.  (a) This Agreement may be executed in one or more counterparts, all of which counterparts shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each Party and delivered to the other Party. This Agreement may be executed by facsimile or PDF signature and a facsimile or PDF signature shall constitute an original for all purposes.

 

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(b) This Agreement, the Ancillary Agreements and the Appendices, Exhibits and Schedules hereto and thereto contain the entire agreement between the Parties with respect to the subject matter hereof and supersede all previous agreements, negotiations, discussions, writings, understandings, commitments and conversations with respect to such subject matter, and there are no agreements or understandings between the Parties with respect to the subject matter hereof other than those set forth or referred to herein or therein.

(c) B&N represents on behalf of itself and each other member of the B&N Group, and BNED represents on behalf of itself and each other member of the BNED Group, as follows:

(i) each such Person has the requisite corporate or other power and authority and has taken all corporate or other action necessary in order to execute, deliver and perform each of this Agreement and each Ancillary Agreement to which it is a party and to consummate the transactions contemplated hereby and thereby; and

(ii) this Agreement and each Ancillary Agreement to which it is a party has been (or, in the case of any Ancillary Agreement, will be on or prior to the Distribution Date) duly executed and delivered by it and constitutes, or will constitute, a valid and binding agreement of it enforceable in accordance with the terms thereof.

SECTION 12.02.  Governing Law; Jurisdiction.  This Agreement shall be governed by, and construed in accordance with, the Laws of the State of New York, regardless of the Laws that might otherwise govern under applicable principles of conflicts of Laws thereof. Each Party irrevocably consents to the exclusive jurisdiction, forum and venue of the Commercial Division of the Supreme Court of the State of New York, New York County and the United States District Court for the Southern District of New York over any and all claims, disputes, controversies or disagreements between the Parties or any of their respective Subsidiaries, Affiliates, successors and assigns under or related to this Agreement or any document executed pursuant to this Agreement or any of the transactions contemplated hereby or thereby.

SECTION 12.03.  Assignability.  Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned, in whole or in part, by operation of Law or otherwise by either Party without the prior written consent of the other Party. Any purported assignment without such consent shall be void. Subject to the preceding sentences, this Agreement will be binding upon, inure to the benefit of, and be enforceable by, the Parties and their respective successors and assigns. No assignment permitted by this Section 12.03 shall release the assigning Party from liability for the full performance of its obligations under this Agreement.

SECTION 12.04.  Third-Party Beneficiaries.  Except for the indemnification rights under this Agreement of any B&N Indemnitee or BNED Indemnitee in their respective capacities as such, (a) the provisions of this Agreement are solely for the benefit of the Parties hereto and are not intended to confer upon any Person except the Parties hereto any rights or remedies hereunder and (b) there are no third-party beneficiaries of this Agreement and this Agreement shall not provide any third person with any remedy, claim, liability, reimbursement, cause of action or other right in excess of those existing without reference to this Agreement.

 

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SECTION 12.05.  Notices.  All notices or other communications under this Agreement shall be in writing and shall be deemed to be duly given when (a) delivered in person, (b) on the date received, if sent by a nationally recognized delivery or courier service or (c) upon the earlier of confirmed receipt or the fifth business day following the date of mailing if sent by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

If to B&N, to:

Barnes & Noble, Inc.

122 Fifth Avenue

New York, NY 10011

Attn: Vice President, General Counsel & Secretary

Facsimile: (212) 463-5683

If to BNED, to:

Barnes & Noble Education, Inc.

120 Mountain View Blvd

Basking Ridge, NJ 07920

Attn: Vice President, General Counsel & Secretary

Either Party may, by notice to the other Party, change the address to which such notices are to be given.

SECTION 12.06. Severability.  If any provision of this Agreement or the application thereof to any Person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to Persons or circumstances or in jurisdictions other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either Party. Upon any such determination, any such provision, to the extent determined to be invalid, void or unenforceable, shall be deemed replaced by a provision that such court determines is valid and enforceable and that comes closest to expressing the intention of the invalid, void or unenforceable provision.

SECTION 12.07.  Publicity.  Each of B&N and BNED shall consult with the other, and shall, subject to the requirements of Section 7.09, provide the other Party the opportunity to review and comment upon, any press releases or other public statements in connection with the Spin-Off or any of the other transactions contemplated hereby and any filings with any Governmental Authority or national securities exchange with respect thereto, in each case prior to the issuance or filing thereof, as applicable (including the Form S-1, the Parties’ respective Current Reports on Form 8-K to be filed on the Distribution Date, the Parties’ respective Quarterly Reports on Form 10-Q filed with respect to the fiscal quarter during which the Distribution Date occurs, or if such quarter is the fourth fiscal quarter, the Parties’ respective Annual Reports on Form 10-K filed with respect to the fiscal year during which the Distribution

 

41


Date occurs (each such Quarterly Report on Form 10-Q or Annual Report on Form 10-K, a “ First Post-Distribution Report ”)). Each Party’s obligations pursuant to this Section 12.07 shall terminate on the date on which such Party’s First Post-Distribution Report is filed with the Commission.

SECTION 12.08.  Expenses.  Except as expressly set forth in this Agreement or in any Ancillary Agreement, all third-party fees, costs and expenses paid or incurred in connection with the Spin-Off will be paid by the Party incurring such fees or expenses, whether or not the Distribution is consummated, or as otherwise agreed by the Parties. Subject to the preceding sentence, B&N shall bear the costs and expenses in connection with the Distribution.

SECTION 12.09.  Headings.  The article, section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

SECTION 12.10.  Survival of Covenants.  Except as expressly set forth in this Agreement, the covenants in this Agreement and the liabilities for the breach of any obligations in this Agreement shall survive the Spin-Off and shall remain in full force and effect.

SECTION 12.11.  Waivers of Default.  No failure or delay of any Party (or the applicable member of its Group) in exercising any right or remedy under this Agreement or any Ancillary Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such right or power, or any course of conduct, preclude any other or further exercise thereof or the exercise of any other right or power. Waiver by any Party of any default by the other Party of any provision of this Agreement shall not be deemed a waiver by the waiving Party of any subsequent or other default.

SECTION 12.12.  Specific Performance.  Notwithstanding the procedures set forth in Article X, in the event of any actual or threatened default in, or breach of, any of the terms, conditions and provisions of this Agreement, the affected Party shall have the right to specific performance and injunctive or other equitable relief of its rights under this Agreement, in addition to any and all other rights and remedies at Law or in equity, and all such rights and remedies shall be cumulative. The other Party shall not oppose the granting of such relief on the basis that money damages are an adequate remedy. The Parties agree that the remedies at Law for any breach or threatened breach hereof, including monetary damages, are inadequate compensation for any loss and that any defense in any action for specific performance that a remedy at Law would be adequate is waived. Any requirements for the securing or posting of any bond with such remedy are waived.

SECTION 12.13.  Amendments.  No provisions of this Agreement shall be deemed waived, amended, supplemented or modified by any Party, unless such waiver, amendment, supplement or modification is in writing and signed by the authorized representative of each Party.

SECTION 12.14.  Interpretation.  Words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other gender as the context requires. The terms “hereof,” “herein” “and “herewith” and words of similar import, unless otherwise stated, shall be construed to refer to this Agreement as a whole (including all of the Schedules hereto) and not to any particular provision of this Agreement. Article, Section or Schedule references are to the articles, sections and schedules of or to this Agreement unless otherwise specified. Any capitalized terms used in any Schedule to this Agreement or to any Ancillary Agreement but not otherwise defined therein shall have the meaning as defined in this Agreement or the Ancillary Agreement to which such Schedule is attached, as applicable. Any reference herein to this Agreement, unless otherwise stated, shall be construed to refer to this Agreement as amended, supplemented or otherwise modified from time to time, as permitted by Section 12.13. The word “including” and words of similar import when used in this Agreement shall mean “including, without limitation,” unless the context otherwise requires or unless otherwise specified. The word “or” shall not be exclusive.

 

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IN WITNESS WHEREOF, the Parties have caused this Separation and Distribution Agreement to be executed by their duly authorized representatives.

 

BARNES & NOBLE, INC.,
By:  

/s/ Bradley A. Feuer

Name:   Bradley A. Feuer
Title:   General Counsel
BARNES & NOBLE EDUCATION, INC.,
By:  

/s/ Michael P. Huseby

Name:   Michael P. Huseby
Title:   Executive Chairman


SCHEDULE 1(a)

Schedule 1(a)

Internal Transactions

The Internal Transactions will take place in the following steps, all of which have occurred or will occur prior to the Distribution in the following order, unless otherwise determined by the Parties:

 

Step 1:  Bank Debt Incurrence
   BNED establishes a revolving credit facility with a syndicate of third-party lenders (the “ Bank Debt Incurrence ”)
Step 2:  Payable Transactions
   BNED completes the Payables Transactions on the terms set forth in Schedule 1(f).
Step 3:  Internal Distribution
   B&N completes the Internal Distribution.
Step 4:  Stock Split
   BNED effects a stock split of BNED Common Stock to result in the number of shares needed to be distributed in the Distribution in accordance with the distribution ratio as set forth on the Form S-1 (the “ Stock Split ”).


SCHEDULE 1(b)

Schedule 1(b)

BNED Equity Interests

Part 1 - Subsidiaries

NOOK Media Member Two LLC

B&N Education, LLC

Barnes & Noble College Booksellers, LLC

Part 2 - Joint Ventures and Minority Investments

Minority Investments

Flashnotes, Inc.


SCHEDULE 1(c)

Schedule 1(c)

BNED Assets

 

  1. bncampus.com

 

  2. bncampusworks.com

 

  3. bncampusworks.net

 

  4. bnescholar.com

 

  5. bnscholar.com

 

  6. bnscholar.net

 

  7. bnsmarts.com

 

  8. bnsmarts.net


SCHEDULE 1(d)

Schedule 1(d)

BNED Liabilities

Lease Agreement between CDV III Riverpark LLC and Nook Digital, LLC (f/k/a barnesandnoble.com llc and successor in interest to Barnes & Noble, Inc.) dated as of 03.28.2012


SCHEDULE 1(e)

Schedule 1(e)

B&N Retained Liabilities

Any and all liabilities arising out of or relating to the following:

 

  1. Adrea LLC v. Barnes & Noble, Inc., Nook Digital, LLC (formerly known as barnesandnoble.com llc) and B&N Education, LLC (formerly known as Nook Media LLC)


SCHEDULE 1(f)

Schedule 1(f)

Payables Transactions

The following actions constituting the Payables Transactions will take place as and at such times specified below, unless otherwise determined by the Parties:

 

  1. An intercompany single tax payable will be contributed to the equity of BNED by B&N immediately prior to the Distribution.

 

  2. All other intercompany payable transactions shall be settled through cash payments to be made prior to the Distribution Date.


SCHEDULE 2.03

Schedule 2.03

Terminating Intercompany Agreements

For the avoidance of doubt, the following agreements shall be terminated upon the Distribution:

 

  1. Retail Agreement between B&N and B&N Education, LLC (f/k/a NOOK Media LLC) dated as of October 4, 2012

 

  2. Separation Agreement between B&N and B&N Education, LLC (f/k/a NOOK Media LLC) dated as of October 4, 2012

 

  3. Transition Services Agreement between B&N and B&N Education, LLC (f/k/a NOOK Media LLC) dated as of October 4, 2012

 

  4. Tax Sharing Agreement among B&N and certain of its subsidiaries, dated as of October 4, 2012, as it relates to BNED only

 

  5. Tax Sharing Agreement among B&N Education LLC (f/k/a NOOK Media LLC) and certain of its subsidiaries, dated as of October 4, 2012]

 

  6. Section 2 of the Assignment and Assumption Agreement between B&N and BNED dated as of April 30, 2015 (the “ Assignment and Assumption Agreement ”), relating to the indemnification by BNED of B&N for any payments made by B&N Group pursuant to the Microsoft Agreement or the Pearson Agreement (each as defined in the Assignment and Assumption Agreement)


SCHEDULE 3.01(a)

Schedule 3.01(a)

Surviving B&N Credit Support Instruments

Guarantee by B&N Education, LLC (f/k/a NOOK Media LLC) of the obligations of Nook Digital, LLC in connection with the lease for 300 Hamilton Avenue, Palo Alto, California 94301.

Guarantee by B&N of the obligations of Barnes & Noble College Booksellers, LLC in connection with the lease for 355-365 Ravendale Drive, Mountain View, California 94043.


SCHEDULE 9.01(a)

Schedule 9.01(a)

Product Procurement Systems and Merchandising Systems

 

Description of Commercial Matter/Service:

  

End Date:

  

Fee:

BookMaster, IMM and SRS:  Pursuant to Section 9.01(a) and subject to the following terms and conditions, B&N shall provide BNED access to B&N’s product procurement systems and merchandising systems, including BookMaster, IMM and SRS. B&N shall provide BNED access to B&N’s product master system, report, training documentation, file interfaces, BookMaster store WiFi, Level 2 and 3 Support, new store setup and installation, ID access management and ongoing updates, fixes and patches.

 

Such access is provided to BNED (i) solely for use in the BNED Business, (ii) as such systems are in effect on the date of this Agreement, (iii) to the extent such systems continue to be used and supported by B&N in its sole discretion, (iv) to the extent such access is not prohibited by applicable Law or contractual restrictions on B&N, (v) to the extent all third party licenses or permissions have been obtained, and (vi) in the case of BookMaster, solely in the stores in which such system is used. BNED shall not receive any rights or licenses in such systems or software.

 

BNED’s Right to Return

 

BNED shall have the right to return merchandise purchased through such systems (and receive credit for such returns) in accordance with the return practices in effect as of the date this Agreement.

   Perpetual unless a Termination Event shall have occurred, in which case the end date shall be the Termination Date.   

Annual fee of $100,000 for up to 100 stores; and

 

$ 1,000 per additional store, plus Pass-Through Cost.

Image Service (Book Jacket):  B&N shall provide BNED access to B&N’s image service to the extent BNED shall have the right to use the images provided by B&N.    The second anniversary of the date of the Distribution unless a Termination Event    Pass-Through Cost


Description of Commercial Matter/Service:

  

End Date:

  

Fee:

  

shall have occurred, in which case the end date shall be the Termination Date.

 

BNED has the right to extend the term for another year, in which case the end date shall be the third anniversary of the Distribution.

  
System Upgrades:  B&N shall provide BNED the supporting hardware and networking equipment for upgrading the product procurement systems and merchandising systems at the same time that B&N upgrades such systems used in B&N Retail Stores generally. BNED shall upgrade such product procurement systems and merchandising systems as required by B&N so long as it has access to such systems.    Perpetual unless a Termination Event shall have occurred, in which case the end date shall be the Termination Date.    BNED shall bear its proportionate (based on the number of stores) cost of the supporting hardware and networking equipment provided by B&N in connection with the system upgrade.


SCHEDULE 9.01(b)

Schedule 9.01(b)

Distribution Facilities

 

Description of Service:

  

End Date:

  

Fee:

Distribution Facilities:  Pursuant to Section 9.01(b) and subject to the following terms and conditions, B&N shall provide BNED access to B&N’s distribution facilities in connection with the use of B&N’s product procurement systems. Such access is provided to BNED (i) solely for use in the BNED Business, (ii) as such systems are in effect on the date of this Agreement and (iii) to the extent such access is not prohibited by applicable Law or contractual restrictions on B&N.    Perpetual unless a Termination Event shall have occurred, in which case the end date shall be the Termination Date.   

Per-unit fee of $0.686 for each item shipped from a B&N distribution center plus Pass-Through Cost for any incremental costs associated with such access and services being provided to BNED and any freight costs and expenses other than those included in the per unit fee.

 

The per-unit fee shall be subject to annual review by B&N and adjustment following such reviews to reflect B&N’s costs of providing such services.


SCHEDULE 9.02

Schedule 9.02

Gift Cards

 

Description of Service:

  

End Date:

  

Fee:

B&N-Issued Gift Cards:  Pursuant to Section 9.02 and subject to the following terms and conditions, B&N shall make available to BNED for sale in the BNED Business B&N-Issued Gift Cards, and BNED shall honor B&N-issued Gift Cards.

 

BNED Client Branded Gift Cards: Pursuant to Section 9.02, B&N shall print and issue B&N- Issued Gift Cards skinned with respect to particular clients and with the client’s permission as reasonably requested by BNED and shall make such gift cards available to BNED for sale in the BNED Business.

 

Remission of Proceeds:  BNED shall remit to B&N, within 15 days after the end of each month, the proceeds from the sale of B&N-Issued Gift Cards in the BNED Business during such month.

 

Remission of Redemptions:  B&N shall remit to BNED, within 15 days after the end of each month, the face-value of all B&N-Issued Gift Cards (including skinned gift cards) redeemed at BNED stores during such month.

   Perpetual unless a Termination Event shall have occurred, in which case the end date shall be the Termination Date.   

B&N shall charge BNED for its share of the overhead costs of issuing B&N-Issued Gift Cards, determined based on the dollar value of B&N-Issued Gift Cards redeemed by BNED divided by the total dollar value of all B&N-Issued Gift Cards that are redeemed. For the avoidance of doubt, the overhead costs of issuing B&N-Issued Gift Cards shall not include any discounts offered to third-party distributors of B&N-Issued Gift Cards.

 

Without duplication, B&N shall charge BNED for the Pass-Through Costs directly attributable to issuing BNED client branded gift cards.


SCHEDULE 9.03

Schedule 9.03

Additional Access and Services

 

Description of Service:

  

End Date:

  

Fee:

B&N Format:  Pursuant to Section 9.03 and subject to the following terms and conditions, B&N shall provide BNED access to (i) all design schema used in the design and construction of Retail Stores and B&N cafés located within such stores, including new merchandise concepts, store relays and consumables ( e.g., shopping bags, B&N logo cups), (ii) store support and training and development materials for B&N’s product procurement systems as described in Section 9.01(a), and (iii) other marketing and promotional packages used in Retail Stores as set forth below.

 

Marketing:  B&N shall provide marketing packages to BNED at the same time as such marketing packages are provided to B&N’s Retail Stores generally. Such marketing packages include retail marketing plans and calendars, monthly sign package, graphic arts, author promotions and prism.

 

Fixtures and Planograms:  B&N shall provide BNED access to store fixtures and planograms used in B&N’s Retail Stores and B&N Cafés located within such stores.

 

Café Product Mix:  B&N shall provide BNED advance notice related to the product mix offered at such B&N Cafés to the extent practicable.

   Perpetual unless B&N discontinues the operation of Retail Stores, in which chase the end date shall be such date and otherwise if a Termination Event shall have occurred, in which case the end date shall be the Termination Date.   

For services provided by B&N employees: Pass-Through Cost.

 

For outside Service Providers: (i) all direct costs to B&N relating to such Service directly attributable to BNED plus (ii) an allocation of all other costs associated with such Service as determined in good faith by B&N.


EXHIBIT A

PRIVILEGED & CONFIDENTIAL

ATTORNEY CLIENT COMMUNICATION

ATTORNEY WORK PRODUCT

JOINT DEFENSE MATERIAL

JOINT DEFENSE AND COMMON INTEREST PRIVILEGE AGREEMENT

1. This Joint Defense and Common Interest Privilege Agreement, dated as of [    ] [            ], 2015 (this “ Agreement ”), by and among [List B&N and BNED parties to the relevant litigation] (collectively, the “ Parties ”) and their counsel, will memorialize certain understandings pertaining to the common interest and defense of the Parties hereto in each matter set forth on Schedule A hereto (each, a “ Matter ” and, collectively, the “ Litigation ”).

2. The Parties believe that there is a mutuality of interest in their common defense in the Litigation. In this regard, the Parties wish to continue to pursue their separate but common interests, and avoid any suggestion of waiver of privileged communications.

3. Accordingly, it is the Parties’ intention and understanding that communications among the Parties, joint interviews of prospective witnesses and other sharing of information, whether written or verbal, are confidential and are protected from disclosure to any third party by the clients’ attorney-client privilege, the attorneys’ work product privileges, the joint defense privilege and the common interest privilege. Such communications and/or exchanges of information in connection with the undersigned Parties’ common defense efforts is not intended to waive any attorney-client, work product, joint defense, or common interest privileges otherwise available. The Parties consider such mutual sharing and disclosure of matters of common concern essential to the preparation of an effective defense by the clients with respect to each Matter, and essential to the effective representation by counsel of their clients. These mutual disclosures and exchanges of information, therefore, are protected by the “joint defense privilege” and “common interest privilege” recognized in cases such as In re United Mine Workers of America Employee Benefit Plans Litig. , 159 F.R.D. 307 (D.D.C. 1994).

4. It is also understood and agreed that all memoranda of law, debriefing memoranda, factual summaries, digests, draft pleadings and affidavits, and other written materials which would otherwise be protected from disclosure to third parties on grounds of privilege, and which are or have been exchanged among the undersigned counsel and their respective clients in connection with any of the Matters referenced in Paragraph 1 above, will remain confidential and protected from disclosure to any third party by the attorney-client, a attorney work product, joint defense and common interest privileges.

5. Except for purposes of enforcing this Agreement or otherwise obtaining the benefits intended to be obtained from this Agreement, the fact of this Agreement and its contents shall remain confidential and protected from disclosure to any third party by the attorney-client, attorney work product, joint defense and common interest privileges.

6. None of the documents and other information shared among the Parties and their counsel pursuant to this Agreement shall be disclosed to third parties. It is understood that information and documents obtained by counsel pursuant to this Agreement may be used by

 

A-1


counsel as a factual predicate to formulate questions of witnesses, including those witnesses who may be called to testify in the Matters or related proceedings. In propounding such questions, however, the protected information or documents may not be specifically described or otherwise disclosed.

7. The Parties understand and agree that all material and information disclosed or shared pursuant to this Agreement shall be used only in connection with the defense of clients involved in the Litigation and shall not be used for any other purpose without the prior express written consent of the Parties that provided the protected material.

8. Nothing in this Agreement shall obligate any of the undersigned attorneys or their respective clients to disclose or share any information or materials that he/she determines should not be disclosed. Nor shall anything in this Agreement prevent any of the undersigned attorneys or their respective clients from imposing additional conditions under which materials or information may be shared or disclosed. Notwithstanding the foregoing, nothing in this Agreement is intended to impair or limit any other agreement between or among any of the Parties with respect to access to books and records.

9. The Parties acknowledge that disclosure of any protected material in violation of the Agreement will cause irreparable harm to the undersigned and their respective clients for which there is no adequate remedy at law. Each of the Parties acknowledges that immediate injunctive relief is an appropriate and necessary remedy for any violation or threatened violation of the Agreement.

10. If any person or entity that is not a party to this Agreement requests or demands, by subpoena or otherwise, any protected material that has been provided to one of the Parties by another Party, the Party that has received the request shall immediately notify the supplying Party. Each Party will take all reasonable steps necessary to preserve all applicable rights and privileges with respect to such protected material and shall cooperate fully with the other Parties in any proceedings relating to the disclosure of such protected materials. This Agreement shall continue in effect notwithstanding any conclusion or resolution as to any Party in any of the Matters. The Parties understand and agree that they will continue to be bound by this Agreement following any such conclusion or resolution.

11. Any waiver in any particular instance of the rights and limitations contained herein shall not be deemed, and is not intended to be, a general waiver of any rights or limitations contained herein and shall not operate as a waiver beyond the particular instance.

12. The Parties and their counsel agree to the following procedures with respect to the conduct of their defense in each of the Matters:

 

  A. Unless one or more of the Parties decides there is a conflict between the Parties in the conduct of the defense of any of the Matters, the Parties shall be represented by the same law firms, at [    ] expense, for each of the Matters. [    ] shall retain the right to select such additional counsel for the Parties as they agree.

 

A-2


  B. [    ] and counsel for it shall control the conduct of each Matter, including, without limitation, retaining day-to-day responsibilities for the conduct of each Matter; provided , however , that [    ] and its counsel shall report periodically to [    ] regarding the conduct and progress of each such Matter.

 

  C. Each of the Parties shall reasonably cooperate with each other in the defense of each Matter and shall be obligated to provide such litigation support as is deemed necessary by its counsel, including, but not limited to, identification and production of their documents (or access thereto) and identification and production of witnesses/employees (or access thereto).

 

  D. The Parties shall take all steps necessary to ensure that they coordinate with the Government, prior to releasing any responses to discovery, the filing of any documents with the Court or taking any other substantive action in each Matter.

13. The Parties understand and agree that modifications of this Agreement can be made only if such modifications are in writing and signed by counsel for all Parties.

14. By signing this Agreement, each of the undersigned attorneys certifies that he/she has explained the contents of the Agreement to his/her respective client(s) and that each agrees to abide by the understandings reflected herein.

15. Counsel may become a party to this Agreement on his/her own behalf and on behalf of his/her client by executing the original of this instrument, or a counterpart thereof. The execution of counterparts shall have the same effect as if all Parties had signed the same instrument.

16. This Agreement shall inure to the benefit of, and be binding upon counsel and their party and all successors-in-interest, assigns, and affiliates of each party.

17. All Parties will exercise their utmost good faith and diligence, and cooperate with each other in carrying out the provisions of this Agreement.

18. This Agreement and all disputes or controversies arising out of or related to this Agreement shall be governed by, and construed in accordance with, the internal laws of the State of New York, without regard to the laws of any other jurisdiction that might be applied because of conflicts of laws principles of the State of New York.

19. The provisions of this agreement are severable. If any provision is held to be invalid or unenforceable, it shall not affect the validity or enforceability of any other provision.

20. Each signatory hereto represents and warrants that he, she or it has taken all steps necessary to obtain, and has in fact obtained, full authority to bind the party to the terms of this Agreement.

 

A-3


Each of the Parties whose signature appears below acknowledges that it has reviewed this Agreement and agrees to the terms embodied herein.

 

Date:             , 2015     [            ]
    By:  

/s/

    Name:  
    Title:  
Date:             , 2015     [            ]
    By:  

/s/

    Name:  
    Title:  
Date:             , 2015     [            ]
    By:  

/s/

    Name:  
    Title:  


SCHEDULE A

SCHEDULE A

LITIGATION

 

No.

 

Matter Name

 

Matter No.

  

Open Date

  

Case No.

  

Matter Type

            
            
            
            
            

Exhibit 31.1

CERTIFICATION BY THE

CHIEF EXECUTIVE OFFICER PURSUANT TO

17 CFR 240.13a-14(a)/15(d)-14(a),

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Max J. Roberts, certify that:

 

  1. I have reviewed this report on Form 10-Q for the quarterly period ended August 1, 2015 of Barnes & Noble Education, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 10, 2015

 

By:  

/s/ Max J. Roberts

  Max J. Roberts
  Chief Executive Officer
  Barnes & Noble Education, Inc.

 

1

Exhibit 31.2

CERTIFICATION BY THE

CHIEF FINANCIAL OFFICER PURSUANT TO

17 CFR 240.13a-14(a)/15(d)-14(a),

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Barry Brover, certify that:

 

  1. I have reviewed this report on Form 10-Q for the quarterly period ended August 1, 2015 of Barnes & Noble Education, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 10, 2015

 

By:  

/s/ Barry Brover

  Barry Brover
  Chief Financial Officer
  Barnes & Noble Education, Inc.

 

1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

RULE 13a-14(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934

AND 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Barnes & Noble Education, Inc. (the “Company”) on Form 10-Q for the period ended August 1, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Max J. Roberts, Chief Executive Officer of the Company, certify, to the best of my knowledge, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

  (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ Max J. Roberts

Max J. Roberts

Chief Executive Officer

Barnes & Noble Education, Inc.

September 10, 2015

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

 

1

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO

RULE 13a-14(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934

AND 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Barnes & Noble Education, Inc. (the “Company”) on Form 10-Q for the period ended August 1, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Barry Brover, Chief Financial Officer of the Company, certify, to the best of my knowledge, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

  (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ Barry Brover

Barry Brover

Chief Financial Officer

Barnes & Noble Education, Inc.

September 10, 2015

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

 

1