Barnes and Noble 2013 Annual Report Download - page 56

of approximately $1,789,000 in exchange for preferred
membership interests representing a 5% equity stake in
NOOK Media. Following the closing of the transaction, the
Company owns approximately 78.2% of the NOOK Media
subsidiary and Microsoft, which also holds preferred
membership interests, owns approximately 16.8%. The
preferred membership interests have a liquidation prefer-
ence equal to the original investment. In addition, NOOK
Media granted warrants to Pearson to purchase up to an
additional 5% of NOOK Media under certain conditions at
a pre-money valuation of NOOK Media of approximately
$1,789,000. The fair value of the preferred membership
interests warrant liability was calculated using the Monte
Carlo simulation approach.
This methodology values financial instruments whose
value is dependent on an underlying total equity value
by sampling random paths for the total equity value. The
assumptions that are analyzed and incorporated into the
model include closing date, valuation date, sales price of
the preferred membership interests and warrants, warrant
expiration date, time to liquidity event, risk-free rate, vola-
tility, various correlations and the probability of meeting
the net sales target. Based on the Company’s analysis, the
total fair value of preferred membership interest warrants
as of the valuation date was $1,700 and was recorded as a
noncurrent asset and a long term liability. The noncurrent
asset is being amortized over the vesting period in line with
its net sales target.
At closing, NOOK Media and Pearson entered into a com-
mercial agreement with respect to distributing Pearson
content in connection with this strategic investment.
14. TIKATOK IMPAIRMENT CHARGE
During fiscal 2013, the Company decided to shut down
the operations of Tikatok. Tikatok was an online platform
where parents and their children and others can write,
illustrate and publish stories into hardcover and paperback
books. This decision resulted in an impairment charge of
$1,973, including the write-off of goodwill of $1,947 and
intangible assets of $26 during the second quarter of fiscal
2013. The effect of Tikatok operations is not material to the
overall results of the Company.
15. LIBERTY INVESTMENT
On August 18, 2011, the Company entered into an invest-
ment agreement between the Company and Liberty GIC,
Inc. (Liberty), a subsidiary of Liberty Media Corporation,
pursuant to which the Company issued and sold to
Liberty, and Liberty purchased, 204,000 shares of the
Company’s Series J Preferred Stock, par value $0.001
per share (Preferred Stock), for an aggregate purchase
price of $204,000, in a private placement exempt from
the registration requirements of the 1933 Act. The shares
of Preferred Stock will be convertible, at the option of
the holders, into shares of Common Stock representing
16.6% of the Common Stock outstanding as of August 29,
2011, (after giving pro forma effect to the issuance of the
Preferred Stock), based on the initial conversion rate. The
initial conversion rate reflects an initial conversion price
of $17.00 and is subject to adjustment in certain circum-
stances. The initial dividend rate for the Preferred Stock is
equal to 7.75% per annum of the initial liquidation prefer-
ence of the Preferred Stock, to be paid quarterly and subject
to adjustment in certain circumstances. The Preferred
Stock is mandatorily redeemable on August 18, 2021 and
may be redeemed at the discretion of the Company any-
time after August 17, 2016. Starting August 18, 2013, if the
closing price of the Common Stock exceeds 150% of the
then-applicable conversion price of the Preferred Stock
for 20 consecutive trading days, the Company may require
conversion of all the Preferred Stock to Common Stock.
The holders of the Preferred Stock have the same vot-
ing rights as holders of the Company Common Stock and
are entitled to elect one or two directors to the board of
directors of the Company as long as certain Preferred Share
ownership requirements are met.
The Preferred Stock does not meet the categories of
ASC 480-10, Distinguishing Liabilities from Equity, and is
therefore reported as temporary equity for classification
purposes. The related issuance costs, which include advi-
sory, legal and accounting fees, of $12,621 were recorded
in temporary equity as a reduction of the proceeds from
the Liberty investment. The Company will be required to
accrete these fees on a straight-line basis as dividends over
the ten year term. This is in line with ASC 480-10-S99 for
SEC registrants, which requires shares to be classified out-
side of permanent equity as temporary equity or mezzanine
equity when there are events not solely within the control
of the issuer that could trigger redemption. The Company
has determined that the various embedded options did not
require bifurcation from the Preferred Stock. Additionally,
the Company concluded that a beneficial conversion
feature did not exist as the effective conversion price was
greater than the Company’s share price on the commitment
date.
54 Barnes & Noble, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued