The increased loss is attributable substantially to significant one-time investments in distribution, technology and customer service to improve efficiencies and provide capacity for growth.

Barnes & Noble.com ended 2000 with the most comprehensive bookselling operation in the industry, with an unmatched in-stock selection of titles and a state-of-the-art fulfillment network. This competitive advantage contributed to further market share growth in the company’s core book business. Despite a softening of the retail environment in the second half of the year, the company further strengthened its position as a leader in e-commerce, ranking among the top five Web properties in the world and as the No. 1 site among bricks-and-mortar brands, according to industry sources.

Barnes & Noble.com achieved its strong sales growth in 2000 with reduced promotional discounting, minimal off-line advertising and more productive use of marketing dollars.

The company reported significant gross margin improvement. Gross margin for the fourth quarter of 2000 was 21.1 percent, compared with 14.1 percent in the corresponding period a year ago. Continuing the trend of sequential quarter-to-quarter gross margin expansion, which began in the first quarter of 2000, fourth quarter 2000 gross margin also increased from 20.1 percent in the third quarter.

Marketing expenses as a percentage of sales decreased to 22 percent for the full year, compared with 36 percent in 1999. Both the gross margin improvement and the decrease in marketing expenses as a percentage of sales reflect the company’s strategy of curtailing promotional discounting and marketing expenditures.

Although the improvements in the sales and marketing ratios were somewhat offset by increased spending in technology and infrastructure, the pro forma loss before interest, taxes, depreciation and amortization (EBITDA) as a percentage of sales narrowed to 46 percent in 2000 compared with 55 percent in 1999.

The company acquired more than one million new customers during the fourth quarter, bringing the cumulative customer count for 2000 to more than 7.3 million, an increase of over 80 percent from year-end 1999.

The company also announced a consolidation effort that will leverage its new, state-of-the-art distribution facilities in Memphis and Reno opened during 2000, incorporate the operations of Fatbrain.com, which was acquired by Barnes & Noble.com in the fourth quarter of 2000, and improve efficiencies across the board.

As part of the consolidation, the company will close one of its original processing centers in New Jersey and the Fatbrain.com book fulfillment operation in Kentucky, as well as streamlining shifts throughout its distribution center network. A reorganization of administrative operations around a more efficient realignment of resources will reduce the workforces at the Barnes & Noble.com headquarters in New York and the Fatbrain.com head office in Santa Clara, Calif. In all, the consolidation will eliminate approximately 350 full-time positions, representing about 16 percent of the workforce.

The company will take a charge of approximately $75 million in the fourth quarter of 2000 relating to the impairment of certain equity investments and assets; in addition, a charge of approximately $5 million will be recorded in the first half of 2001 to cover severance and other costs related to the closing of facilities.

While we sincerely regret the impact of this consolidation in human terms, we believe the changes are necessary to improve every part of our operation, said Steve Riggio, vice chairman of Barnes & Noble.com. During 2000 we made a number of one-time investments in distribution, technology and customer service to improve efficiencies and provide ample capacity for growth. With these investments behind us and a leaner organization, we expect to significantly curtail our spending while maintaining our high level of customer service.

We believe that by leveraging the many accomplishments of the last year, we are in a strong position for growth in 2001 and beyond, Mr. Riggio said. Our leadership in the eBook market and in educational content will continue to distinguish our site as a destination for rich content and leading edge e-commerce concepts. Through our acquisition of Fatbrain.com, we will extend the reach of the Barnes & Noble brand to the corporate marketplace. Our comprehensive integration program with Barnes & Noble stores give us access to a new universe of tens of millions of customers at low cost, and our new distribution centers in Memphis and Reno ensure that our entire network is supported with the most efficient service for our customers.

Guidance for 2001

First Quarter

Net sales are expected to range between $90 million and $100 million, with a gross margin of 21 percent to 22 percent of sales, resulting in a pro forma loss per share of ($0.19) to ($0.22). This compares with first quarter 2000 results (including Fatbrain.com) of $88.6 million in sales, gross margin of 15.8 percent and pro forma loss per share of ($0.23).

Full Year

The company expects net sales for the full year 2001 to be in the range of $420 million to $475 million, with pro forma loss per share of ($0.75) to ($0.85).

We anticipate narrower losses for 2001 as the effects of our consolidation program are realized and we gain leverage in our distribution network and infrastructure expenses, said Marie Toulantis, chief financial officer of Barnes & Noble.com. Our capital expenditures and investments for the coming year will range from $20 million to $25 million, a significant reduction from more than $170 million in capital spent, including investments, in 2000. Our balance sheet remains strong, with cash and marketable securities of more than $217 million and no debt. Although the company expects that it may need to consider a financing in the first half of 2002, management is committed to taking all measures necessary to defer such financing if possible.

2000 Highlights

The company opened its Barnes & Noble.com eBookStore featuring the Microsoft Reader. The store was one of many significant initiatives surrounding the company’s leadership role in the growing eBook market, including the launch of Steven King’s exclusive e-novella, Riding the Bullet, the launch of the Microsoft Reader featuring Michael Crichton’s Timeline, and culminating with the announcement in early 2001 of the creation of Barnes & Noble Digital, an electronic publishing imprint.