Barnes and Noble 2013 Annual Report Download - page 55

12. MICROSOFT INVESTMENT
On April 27, 2012, the Company entered into an investment
agreement between the Company, Morrison, and Microsoft
pursuant to which the Company would form a Delaware
limited liability company (NOOK Media), and transfer to
NOOK Media the Company’s digital device, digital content
and college bookstore businesses and NOOK Media would
sell to Morrison, and Morrison would purchase, 300,000
convertible preferred membership interests in NOOK
Media (Series A Preferred) for an aggregate purchase price
of $300,000.
Concurrently with its entry into this agreement, the
Company also entered into a commercial agreement with
Microsoft, pursuant to which, among other things, NOOK
Media would develop and distribute a Windows 8 applica-
tion for e-reading and digital content purchases, and an
intellectual property license and settlement agreement
with Microsoft and Microsoft Licensing GP.
The parties closed Morrison’s investment in NOOK Media
and the commercial agreement became effective on
October 4, 2012.
Investment Agreement
Pursuant to the agreement, Microsoft invested $300,000
in NOOK Media in exchange for 300,000 Series A
Preferred interests, representing approximately 17.6%
of the common membership interest in NOOK Media on
an as-converted basis as of closing. Following Microsoft’s
investment, the Company retained the common member-
ship interest in NOOK Media, representing approximately
82.4% of the common membership interests in NOOK
Media (after giving effect to the conversion of the Series A
Preferred interests into common membership interests)
as of closing. The investment agreement is classified as
temporary equity in the mezzanine section of the bal-
ance sheet between liabilities and permanent equity, net
of investment fees. The temporary equity designation is
due to a potential put feature after five years on the pre-
ferred membership interests. The preferred membership
interests have a liquidation preference equal to the original
investment.
Commercial Agreement
Under the commercial agreement, NOOK Media has
developed and will continue to develop certain applications
for Windows 8 for purchasing and consumption of digital
reading content. The commercial agreement also requires
NOOK Media to use its good faith efforts to undertake an
international expansion of the digital business.
As part of the commercial agreement, NOOK Media and
Microsoft share in the revenues, net of certain items, from
digital content purchased from NOOK Media by custom-
ers using the NOOK Media Windows 8 applications or
through certain Microsoft products and services that may
be developed in the future and are designed to interact with
the NOOK Media online bookstore. Microsoft has made
and will continue to make certain guaranteed advance
payments to NOOK Media in connection with such revenue
sharing. For each of the first three years after the launch of
such application for Windows 8, these advance payments
are equal to $60,000 per year. These advance payments are
subject to deferral under certain circumstances. Microsoft
also has paid and will continue to pay to NOOK Media
$25,000 each year for the first five years of the term for
purposes of assisting NOOK Media in acquiring local digital
reading content and technology development in the perfor-
mance of NOOK Media’s obligations under the commercial
agreement.
The guaranteed advance payments in connection with rev-
enue sharing as well as the amounts received for purposes
of assisting NOOK Media in acquiring local digital read-
ing content and technology development received from
Microsoft are treated as debt in accordance with ASC 470-
10-25-2, Sales of Future Revenues or Various Other Measures of
Income. The Company has estimated the cash flows associated
with the commercial agreement and is amortizing the discount
on the debt to interest expense over the term of the agreement
in accordance with ASC 835-30-35-2, The Interest Method.
Settlement and License Agreement
The patent agreement provides for Microsoft and its
subsidiaries to license to the Company and its affili-
ates certain intellectual property in exchange for royalty
payments based on sales of certain devices. Additionally,
the Company and Microsoft dismissed certain outstand-
ing patent litigation between the Company, Microsoft and
their respective affiliates in accordance with the settle-
ment and license agreement. The Company records the
royalty expense upon future NOOK sales in the statement of
operations in selling and administrative expenses with no
expense or liability for the sale of prior devices.
13. PEARSON
On December 21, 2012, NOOK Media entered into an
agreement with a subsidiary of Pearson to make a strategic
investment in NOOK Media. That transaction closed on
January 22, 2013, and Pearson invested approximately
$89,500 of cash in NOOK Media at a post-money valuation
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