FORMATION AGREEMENT

FORMATION AGREEMENT





BERTELSMANN AG, BOL.US ONLINE, INC.,



BARNES & NOBLE, INC.,



barnesandnoble.com inc.,



B&N.com Holding Corp. and B&N.com Member Corp



Effective As of 11:59 PM, October 31, 1998







FORMATION AGREEMENT



This FORMATION AGREEMENT is dated as of November 12, 1998 (the "Closing Date"), but effective as of 11:59 PM on October 31, 1998 (the "Effective Date"), by and among Bertelsmann AG, an Aktiengesellschaft organized and existing under the laws of Germany, with offices located at Carl-Bertelsmann-Strasse 270, 33311 Gutersloh, Germany ("BAG"), BOL.US Online, Inc., a Delaware corporation, with offices located at 1540 Broadway, New York, New York 10036 ("USO"), Barnes & Noble, Inc., a Delaware corporation, with offices located at 122 Fifth Avenue, New York, New York 10011 ("BN"), barnesandnoble.com inc., a Delaware corporation, with offices located at 76 Ninth Avenue, New York, New York 10011 ("Transferor"), B&N.com Member Corp., a Delaware corporation, with offices located at 76 Ninth Avenue, New York, New York 10011 ("B&N.com Member") and B&N.com Holding Corp., a Delaware corporation, with offices located at 122 Fifth Avenue, New York, New York 10011 ("B&N.com Holding").



W I T N E S S E T H:



WHEREAS, BN is the sole shareholder of each of the Transferor and B&N.com Holding, and Transferor is the sole shareholder of B&N.com Member;



WHEREAS, the Transferor has, as of October 31, 1998: (i) formed barnesandnoble.com llc, a Delaware limited liability company (the "Company"); (ii) contributed all of its assets (except its interests in NuvoMedia, Inc. and B&N.com Member) and liabilities to the Company in exchange for a one hundred percent (100%) Membership Interest (as hereinafter defined); and (iii) transferred a one percent (1%) Membership Interest to B&N.com Member;



WHEREAS, USO intends, as of the Closing Date, to pay the Transferor Seventy-Five Million Dollars ($75 million) for a 21.42857% Membership Interest;



WHEREAS, USO intends, as of the Closing Date, to make a capital contribution to the Company in exchange for an additional 28.57143% Membership Interest, which, together with the 21.42857% Membership Interest referred to above, would give USO an aggregate fifty percent (50%) Membership Interest;



WHEREAS, immediately subsequent to the payments described above, but immediately prior to the execution of the Limited Liability Company Agreement (as hereinafter defined), each of Transferor and B&N.com Member Corp. intend to assign all of their Membership Interests (which together will aggregate a fifty percent (50%) Membership Interest) to B&N.com Holding;



WHEREAS, as of the Closing Date, immediately subsequent to the assignment referred to above, BN, B&N.com Holding, BAG and USO intend to enter into the Limited Liability Company Agreement, in order to set forth the rights and obligations of the members of the Company; and



WHEREAS, the parties hereto desire to set forth, inter alia, the terms and conditions of their agreements and understanding concerning their respective undertakings to effectuate the payments and contributions to be made by USO in exchange for its fifty percent (50%) Membership Interest and the entering into of the Limited Liability Company Agreement.



NOW, THEREFORE, in consideration of the premises and of the







respective representations, warranties, covenants, agreements and conditions contained herein, the parties hereto hereby agree as follows:



ARTICLE I





The following terms shall, for the purposes of this Agreement, have the following meanings (terms defined in the singular or the plural include the plural or the singular, as the case may be):



Section 1.1 "Affiliate" shall mean, as to any Person, any other Person that, directly or indirectly, controls, is under common control with, or is controlled by, that Person. For purposes of this definition, "control" (including, with its correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. In the case of BOL, the term "Affiliates" shall include all Persons in which BOL directly or indirectly owns an equity interest to the extent such Person operates under the name BOL (or a derivative thereof) provided that no Restricted Transferee (as defined in the Limited Liability Company Agreement) owns an interest therein.



Section 1.2 "BN Contribution Schedule" shall mean the schedule of assets and liabilities that Transferor will contribute or cause to be contributed to the Company in the form annexed as Schedule 1.2 to the Disclosure Letter which shall describe specifically the contracts, software, leases and liabilities being contributed, as well as other assets and liabilities of Transferor in general terms, as included in the Financial Statements (as modified through the Closing Date).



Section 1.3 "BOL" shall mean BOL.Global, Inc., a corporation organized under the laws of Delaware.



Section 1.4 "Closing" shall mean the closing of the transactions contemplated by this Agreement.



Section 1.5 "Closing Date" shall have the meaning assigned to such term in the first paragraph of this Agreement.



Section 1.6 "Code" shall mean the Internal Revenue Code of 1986, as amended.



Section 1.7 "Code Affiliate" shall mean any Person which could be treated as a single employer along with the Transferor or the Company under Section 414(b) or (c) of the Code.



Section 1.8 "Disclosure Letter" shall mean that Disclosure Letter dated the date hereof prepared by Transferor to which the Schedules referred to herein are attached.



Section 1.9 "Employee Plan" shall have the meaning assigned to such term in Section 4.1(q)(i) of this Agreement.



Section 1.10 "Encumbrance" shall mean any mortgage, pledge, security interest, lien, restriction on use or transfer, other than those





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imposed by law, voting agreement, adverse claim or encumbrance or charge of any kind (including any agreement to give any of the foregoing), any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of, or any agreement to give, any financing statement under the Uniform Commercial Code or similar law of any jurisdiction.



Section 1.11 "Environment" shall mean soil, land surface or subsurface strata, surface waters (including navigable waters, ocean waters, streams, ponds, drainage basins, and wetlands), groundwaters, drinking water supply, stream sediments, ambient air (including indoor air), plant and animal life, and any other environmental medium or natural resource.



Section 1.12 "Environmental, Health, and Safety Liabilities" shall mean any cost, damages, expense, liability, obligation, or other responsibility arising from or under Environmental Law or Occupational Safety and Health Law and consisting of or relating to:



(a) any environmental, health, or safety matters or conditions (including on-site or off-site contamination, occupational safety and health, and regulation of chemical substances or products);



(b) fines, penalties, judgments, awards, settlements, legal or administrative proceedings, damages, losses, claims, demands and response, investigative, remedial, or inspection costs and expenses arising under Environmental Law or Occupational Safety and Health Law;



(c) financial responsibility under Environmental Law or Occupational Safety and Health Law for cleanup costs or corrective action, including any investigation, cleanup, removal, containment, or other remediation or response actions ("Cleanup") required by applicable Environmental Law or Occupational Safety and Health Law (whether or not such Cleanup has been required or requested by any Governmental Body or any other Person) and for any natural resource damages; or



(d) any other compliance, corrective, investigative, or remedial measures required under Environmental Law or Occupational Safety and Health Law. The terms "removal," "remedial," and "response action," include the types of activities covered by the United States Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq., as amended ("CERCLA").



Section 1.13 "Environmental Law" shall mean any legal requirement that requires or relates to:



(a) advising appropriate authorities, employees, and the public of intended or actual releases of pollutants or hazardous substances or materials, violations of discharge limits, or other prohibitions and of the commencements of activities, such as resource extraction or construction, that could have significant impact on the Environment;



(b) preventing or reducing to acceptable levels the release of pollutants or hazardous substances or materials into the Environment;



(c) reducing the quantities, preventing the release, or minimizing the hazardous characteristics of wastes that are generated;



(d) assuring that products are designed, formulated, packaged, and used so that they do not present unreasonable risks to human





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health or the Environment when used or disposed of;



(e) protecting resources, species, or ecological amenities;



(f) reducing to acceptable levels the risks inherent in the transportation of hazardous substances, pollutants, oil, or other potentially harmful substances;



(g) cleaning up pollutants that have been released, preventing the threat of release, or paying the costs of such clean up or prevention; or



(h) making responsible parties pay private parties, or groups of them, for damages done to their health or the Environment, or permitting self-appointed representatives of the public interest to recover for injuries done to public assets.



Section 1.14 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, or any successor law, and regulations and rules issued pursuant to that Act or any successor law.



Section 1.15 "Facilities" shall mean any real property, leaseholds, or other interests currently or formerly owned or operated by the Transferor or the Company and any buildings, plants, structures, or equipment (including motor vehicles, tank cars, and rolling stock) currently or formerly owned or operated by the Transferor or the Company.



Section 1.16 "Fulfillment Agreements" shall mean each of the Fulfillment Agreements between the Company and BOL (or its Affiliates), regarding the fulfillment by the Company and BOL (or its Affiliates) of certain customer product orders, each of which shall be negotiated in good faith after the Closing Date.



Section 1.17 "GAAP" shall mean United States generally accepted accounting principles as in effect from time to time, consistently applied.



Section 1.18 "Governmental Body" shall mean any domestic or foreign national, state or municipal or other local government or multinational body (including, but not limited to, the European Union), any subdivision, agency, commission or authority thereof, or any quasi-governmental or private body exercising any regulatory authority thereunder and any corporation, partnership or other entity directly or indirectly owned by or subject to the control of any of the foregoing.



Section 1.19 "Hazardous Materials" shall mean any waste or other substance that is listed, defined, designated, or classified as, or otherwise determined to be, hazardous, radioactive, or toxic or a pollutant or a contaminant under or pursuant to any Environmental Law, including any admixture or solution thereof, and specifically including petroleum and all derivatives thereof or synthetic substitutes therefor and asbestos or asbestos-containing materials.



Section 1.20 "Limited Liability Company Agreement" shall mean the Amended and Restated Limited Liability Company Agreement by and between B&N.com Holding, USO, BAG and BN, to be entered into at the Closing as the same may be amended or modified from time to time in accordance with the terms thereof.





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Section 1.21 "Members" shall mean B&N.com Holding, USO and all other Persons who become members of the Company in accordance with the terms of the Limited Liability Company Agreement, and the term "Member" shall mean any of them.



Section 1.22 "Membership Interest" shall mean a Member's entire interest in the Company, including, but not limited to, (i) the Percentage Interest now or hereafter owned by it; (ii) its share in any Net Income, Net Loss and any distributions of the Company; and (iii) its right to participate in the management of the Company or any other decision of the Members pursuant to the Limited Liability Company Agreement.



Section 1.23 "Name License Agreements" shall mean each of the agreements between the Company and BOL and between the Company and BN College (as defined in the Limited Liability Company Agreement) relating to the right to use the trade names, trademarks and domain names associated with BOL and "Barnes and Noble," respectively.



Section 1.24 "Net Profits" and "Net Losses" shall mean the income and loss of the Company as determined in accordance with the accounting methods followed by the Company for Federal income tax purposes including income exempt from tax and described in Code Section 705(a)(1)(B), treating as deductions items of expenditure described in, or under Treasury Regulations deemed described in, Code Section 705(a)(2)(B) and treating as an item of gain (or loss) the excess (deficit), if any, of the fair market value of distributed property over (under) its book value. Depreciation, depletion, amortization, income and gain (or loss) with respect to Company assets shall be computed with reference to their book value rather than to their adjusted basis in the Company.



Section 1.25 "Occupational Safety and Health Law" shall mean any legal requirement designed to provide safe and healthful working conditions and to reduce occupational safety and health hazards, and any program, whether governmental or private (including those promulgated or sponsored by industry associations and insurance companies), designed to provide safe and healthful working conditions.



Section 1.26 "Percentage Interest" shall mean a Member's aggregate economic percentage interest in the Company as set forth on Schedule I to the Limited Liability Company Agreement as each such percentage may be adjusted from time to time in accordance with the Limited Liability Company Agreement.



Section 1.27 "Permitted Encumbrances" shall mean:



(a) such matters as are set forth in Schedule 1.27 of the Disclosure Letter; and



(b) (i) Encumbrances reflected in the financial statements of the Company which have been delivered to USO pursuant to this Agreement (including, but not limited to, purchase money liens which are not overdue as of a particular date or which are being contested in good faith), (ii) Encumbrances arising out of contracts entered into in the ordinary course of the Business (as defined in the Limited Liability Company Agreement), (iii) mechanics', materialmen's or similar inchoate liens relating to liabilities not yet due and payable and (iv) liens for current taxes not yet delinquent, to the extent the validity thereof is being contested in good faith by





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appropriate proceedings, which proceedings have the effect of preventing foreclosure or enforcement of such liens and where adequate reserves are established and maintained in accordance with GAAP.



Section 1.28 "Person" shall mean an individual, sole proprietorship, corporation, partnership, limited liability company, joint venture, trust, unincorporated organization, mutual company, joint stock company, estate, union, employee organization, bank, trust company, land trust, business trust or other organization, whether or not a legal entity, or a Governmental Body.



Section 1.29 "Related Person" shall mean with respect to a particular individual:



(a) each other member of such individual's family;



(b) any Person that is directly or indirectly controlled by such individual or one or more members of such individual's family;



(c) any Person in which such individual or members of such individual's family hold (individually or in the aggregate) an interest equal to or in excess of twenty percent (20%); and



(d) any Person with respect to which such individual or one or more members of such individual's family serves as a manager, director, officer, partner, executor or trustee (or in a similar capacity).



Section 1.30 "Release" shall mean any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment, including, without limitation, the movement of Hazardous Materials through ambient air, soil, surface water, ground water, wetlands, land or subsurface strata.



Section 1.31 "Software Licenses" shall mean the Software License between the Company and BOL relating to the exploitation of software owned by the Company and the Software License between the Company and BOL relating to the exploitation of software owned by BOL.



Section 1.32 "Taxes" shall mean any federal, state, local or foreign income, receipts, sales, franchise, ad valorem, profits, license, lease, use, payroll, withholding, employment, property, excise, occupation, customs, duties or other tax, fee or assessment of any kind whatever, including penalties thereon.



Section 1.33 "Tax Return" shall mean any return (including any information return), report, statement, schedule, notice, form, or other document or information filed with or submitted to, or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection, or payment of any Tax or in connection with the administration, implementation, or enforcement of or compliance with any legal requirement relating to any Tax.



Section 1.34 "Threat of Release" shall mean a substantial likelihood of a Release that may require action in order to prevent or mitigate damage to the Environment that may result from such Release.



Section 1.35 "Transfer" shall mean any sale, assignment, conveyance, transfer, donation or any other means to dispose of, or pledge,





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hypothecate or otherwise encumber in any manner whatsoever, or permit or suffer any Encumbrance of any interest in the Company (whether profits, management or Percentage Interest).



ARTICLE II



FORMATION AND CONTRIBUTIONS



Section 2.1 Transferor Contribution. As of the Effective Date, Transferor has: (i) formed the Company; (ii) contributed to the Company all of Transferor's assets (except for its interests in NuvoMedia, Inc. and B&N.com Member) and liabilities in exchange for a one hundred percent (100%) Membership Interest; and (iii) transferred a one percent (1%) Membership Interest to B&N.com Member. The Company shall have assumed all of the liabilities of Transferor, subject to and consistent with the terms and conditions of this Agreement.



Section 2.2 USO Payment. On the Closing Date, USO agrees to pay Transferor (or its designee), in immediately available funds by wire transfer to an account designated by Transferor, Seventy-Five Million Dollars ($75 million) for a 21.42857% Membership Interest.



Section 2.3 Additional USO Payment to Transferor. Within twenty (20) days after receipt of notice from Transferor certifying the occurrence of the sale of stock to the public, on a nationally recognized stock exchange, pursuant to an initial public stock offering in a corporation which owns at least twenty percent (20%) (or such lesser percentage to which the parties hereto mutually agree) of the Membership Interest (or any other entity formed for purposes of taking the Business of the Company public), USO shall pay to BN the Additional Sum (as hereinafter defined) provided that such amount shall be payable only if the value of the Membership Interest owned beneficially by USO (as of and after giving effect to such offering) based on the value ascribed to the Company in such offering (on a fully diluted basis taking into consideration, inter alia, such stock offering) (the "Value") is in excess of the total investment of USO (as of the date of the consummation of the public offering) in the Company (i.e. $225 million plus all capital contributions, if any, made by USO pursuant to Section 5.3 of the Limited Liability Company Agreement) less all capital returned to USO as of or prior to such time, including capital returned out of the proceeds of the initial public offering (the "Investment"). The term "Additional Sum" shall mean the lesser of: (i) Twenty-Five Million Dollars ($25 million); or (ii) the amount of the Value less the Investment. The obligation of USO to make payment under this Section 2.3 shall expire if an initial public stock offering is not consummated prior to December 31, 2001 and USO shall not thereafter have any obligation to make payment by reason of this Section unless notice is given by Transferor (or its Affiliate), in accordance with the foregoing, prior to such date.



Section 2.4 USO Contribution.



(a) As of the Closing Date, USO agrees to contribute (or shall be deemed to have contributed) to the Company, in exchange for an additional 28.57143% Membership Interest (which, together with the 21.42857% Membership Interest described in Section 2.2, will give USO an aggregate fifty percent (50%) Membership Interest), One Hundred Fifty Million Dollars ($150 million) in cash, in immediately available funds, by wire transfer to accounts designated by the Company as set forth in Section 5.1(b) of the





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Limited Liability Company Agreement.



(b) Subject to the terms and conditions set forth in this Agreement, USO shall make contributions to the Company as set forth in Section 5.3 of the Limited Liability Company Agreement in accordance with the terms and conditions of the Limited Liability Company Agreement.



Section 2.5 Transferor Assignment. Immediately subsequent to the USO payments described in Sections 2.2 and 2.4, but immediately prior to the execution of the Limited Liability Company Agreement, each of Transferor and B&N.com Member shall assign all of their Membership Interests (which together shall aggregate a fifty percent (50%) Membership Interest) to B&N.com Holding.



Section 2.6 Closing Obligations. At the Closing:



(a) Transferor shall deliver or cause to be delivered to USO:



(i) evidence of the formation and good standing of the Company;



(ii) a certificate representing fifty percent (50%) of the Membership Interest, free and clear of Encumbrances, duly issued in the name of USO;



(iii) the Limited Liability Company Agreement, executed by Transferor; and



(iv) each of the Name License Agreement, Software Licenses, Amended and Restated Services Agreement with BN, Amended and Restated Services Agreement with Marboro, Amended and Restated Database and Software License Agreement, Contribution, Assignment and Assumption Agreement, and Supply Agreement to which BN (or any Affiliate) is a party, duly executed by BN (or its Affiliate which is a party thereto) and the Company.



(b) USO shall deliver or cause to be delivered to Transferor:



(i) the payment described in Section 2.2;



(ii) the capital contribution described in Section 2.4(a);



(iii) the Limited Liability Company Agreement, executed by USO; and



(iv) each of the Name License Agreement and Software Licenses to which USO (or any Affiliate) is a party, duly executed by USO (or its Affiliates) and the Company.



ARTICLE III





Section 3.1 Closing. The Closing of the transactions contemplated by this Agreement relating to the transfer of Membership Interests to USO shall take place on November 12, 1998 ("Closing Date"), at 1290 Avenue of the Americas, 31st Floor, New York, New York, or at such other





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time, date and place as the parties hereto may agree.



Section 3.2 Deliveries. At the Closing, each of USO and Transferor shall make (or cause to be made) the deliveries described in Section 2.6.



ARTICLE IV



REPRESENTATIONS AND WARRANTIES



Section 4.1 Representations and Warranties of Transferor. Transferor represents and warrants to USO that, as of the Effective Date and the Closing Date, with the exception of actions taken to consummate the transactions described in or contemplated by this Agreement, each of the following statements are true and correct:



(a) Organization and Existence. BN and the Transferor are each duly organized, validly existing and in good standing under the laws of the State of Delaware. Each of BN and the Transferor has full corporate power and authority to own and lease the properties and assets it now owns and leases and to carry on its business as and where such properties and assets are now owned or leased and such business is now conducted. Each of BN and the Transferor is in good standing and duly qualified to conduct its business as a foreign corporation in each of the jurisdictions in which the ownership or leasing of its properties or assets or the conduct of its business requires such qualification, except where any failure to be so qualified would not have a material adverse effect.



(b) Authority and Approval. Transferor has the requisite corporate power and authority to enter into this Agreement and each of BN and Transferor are authorized to perform their respective obligations hereunder. Transferor has, or on the Closing Date will have, the requisite corporate power and authority to enter into the Limited Liability Company Agreement and to perform its obligations thereunder. This Agreement is a valid and binding obligation of Transferor, enforceable against Transferor in accordance with its terms, subject to (a) applicable bankruptcy, insolvency or other sim ...