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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2001
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 333-48225
NBC ACQUISITION CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0793347
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4700 SOUTH 19TH STREET
LINCOLN, NE 68501-0529
(Address of Principal executive offices)
(402) 421-7300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
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. [X] YES [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
THERE ARE 11,893 SHARES OF THE REGISTRANT'S VOTING STOCK VALUED AT $0.6
MILLION HELD BY NON-AFFILIATES OF THE REGISTRANT.
THERE WERE 1,263,371 SHARES OF CLASS A COMMON STOCK OUTSTANDING AS OF JUNE
26, 2001.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Total Number of Pages: 66
Exhibit Index: PAGE 66
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TABLE OF CONTENTS
PART I:
Item 1 Business......................................................... 3
Item 2 Properties.......................................................13
Item 3 Legal Proceedings................................................14
Item 4 Submission of Matters to a Vote of Security Holders..............14
PART II:
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters......................................15
Item 6 Selected Financial Data..........................................15
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................17
Item 7A Quantitative and Qualitative Disclosures about Market Risk.......23
Item 8 Financial Statements and Supplementary Data......................25
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..............................45
PART III:
Item 10 Directors and Executive Officers of the Registrant................46
Item 11 Executive Compensation............................................48
Item 12 Security Ownership of Certain Beneficial Owners and Management....51
Item 13 Certain Relationships and Related Transactions....................52
PART IV:
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..54
Signatures....................................................................59
Supplemental Information to be Furnished......................................59
Financial Statement Schedule I - Condensed Financial Information
(Parent Company Only).........................................................60
Financial Statement Schedule II - Valuation and Qualifying Accounts...........65
Exhibit Index.................................................................66
2
PART I.
ITEM 1. BUSINESS.
RECAPITALIZATION AND PUBLIC REGISTRATION
Effective September 1, 1995, Nebraska Book Company, Inc. ("NBC") was
acquired in a leveraged buyout by NBC Acquisition Corp. (the "Company"), a
corporation owned by investment partnerships affiliated with Olympus Advisory
Partners, Inc. and certain other investors (the "1995 Transaction"). The 1995
Transaction was accounted for as a purchase business combination.
Pursuant to a merger agreement dated January 6, 1998 among the Company;
certain shareholders of the Company, including members of senior management; and
NBC Merger Corp., a newly created, indirect wholly-owned subsidiary of HWH
Capital Partners, L.P. ("HWH"), NBC Merger Corp. merged with and into NBC
Acquisition Corp. (the "Merger") with the Company as the surviving corporation.
As a result of the Merger, which occurred on February 13, 1998, certain
stockholders of the Company received a total of approximately $165.9 million. In
addition, upon the consummation of the Merger, NBC repaid approximately $82.0
million of outstanding indebtedness. As a result of the early extinguishment of
debt in fiscal 1998, the Company recognized a $4.0 million extraordinary loss,
net of taxes.
Concurrently with the consummation of the Merger, NBC entered into a senior
secured credit agreement (the "Credit Agreement") with The Chase Manhattan Bank
("Chase"), as administrative agent, and other lenders providing for the
following facilities (the "Senior Credit Facility"): (i) a $50.0 million
revolving credit facility maturing on March 31, 2004 which was undrawn at
closing (the "Revolving Credit Facility"); (ii) a $27.5 million tranche A term
loan, maturing on March 31, 2004 (the "Tranche A Term Loan"); and (iii) a $32.5
million tranche B term loan, maturing on March 31, 2006 (the "Tranche B Term
Loan" and, together with the Tranche A Term Loan, the "Term Loans"). In
addition, NBC also raised approximately $103.6 million from the issuance of
senior subordinated notes (the "Senior Subordinated Notes") and the Company
raised a total of $91.6 million through: (i) the sale of approximately $45.6
million of NBC Acquisition Corp. Class A Common Stock to HWH (the "Stock Sale");
(ii) the reinvestment of approximately $4.4 million in NBC Acquisition Corp.
Class A Common Stock by the Company's senior management (the "Reinvestment");
and (iii) net proceeds of approximately $41.6 million from the issuance of
senior discount debentures (the "Senior Discount Debentures").
The Merger, the repayment of substantially all of NBC's outstanding
indebtedness, the Stock Sale, the Reinvestment, the issuance by NBC of the
Senior Subordinated Notes, the issuance by the Company of the Senior Discount
Debentures, NBC's borrowings under the Senior Credit Facility and the
application of all proceeds thereof are collectively referred to as the
"Recapitalization."
During fiscal 1999, the Company and NBC filed Registration Statements on
Form S-4 with the Securities and Exchange Commission for purposes of registering
debt securities to be issued in exchange for the Company's Senior Discount
Debentures and NBC's Senior Subordinated Notes. The Securities and Exchange
Commission declared such Registration Statements effective on July 14, 1998. All
notes were tendered in the offer to exchange that was completed on August 13,
1998.
The Company does not conduct significant activities apart from its
investment in NBC. Operational matters discussed in this report, including the
acquisition of retail bookstores and other related businesses, refer to
operations of NBC. This report refers to "the Company" and "NBC" interchangeably
when discussing such operational matters.
GENERAL
The Company is one of the largest wholesale distributors of used college
textbooks in North America, offering over 100,000 textbook titles and selling
more than 7 million books annually, primarily to campuses located in the United
States. In addition, as of June 26, 2001, the Company owns or manages 108
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bookstores on or adjacent to college campuses through which it sells a variety
of new and used textbooks and general merchandise. The Company is also a leading
provider of distance education materials to students in nontraditional courses,
which include correspondence and corporate education courses. Furthermore, the
Company provides the college bookstore industry with a variety of services
including in-store promotions, buying programs, marketing services and
proprietary information systems. With origins dating to 1915, the Company has
built a consistent reputation for excellence in order fulfillment, shipping
performance and customer service.
The Company entered the wholesale used textbook market following World War
II, when the supply of new textbooks could not meet the demand created by the
return of ex-GI students. In 1964, the Company became a national, rather than
regional, wholesaler of used textbooks as a result of its purchase of The
College Book Company of California. During the 1970's the Company continued its
focus on the wholesale business. However, realizing the synergies that exist
between wholesale operations and college bookstore operations, in the 1980's it
expanded its efforts in the college bookstore market under a revised strategy.
Under this strategy the Company operates bookstores on or near larger campuses,
typically where the institution-owned college bookstore is contract-managed by a
competitor or where the Company does not have a significant wholesale presence.
Today, the Company services the college bookstore industry through its
wholesale, college bookstore and complementary services operations.
WHOLESALE. The Company is one of the largest wholesale distributors of used
college textbooks in North America. Its wholesale operations consist primarily
of selling used textbooks to college bookstores, buying them back from students
or college bookstores at the end of each school semester and then reselling them
to college bookstores. The Company purchases used textbooks from and resells
them to college bookstores at many of the nation's largest college campuses,
including: University of Texas, University of Southern California, Indiana
University, University of Arizona, University of Washington, and University of
Minnesota. Historically, because the demand for used textbooks has consistently
outpaced supply, the Company's wholesale sales have been determined primarily by
the amount of used textbooks that it could purchase. The Company's strong
relationships with the management of independently-owned college bookstores
nationwide have provided important access to valuable market information
regarding the campus-by-campus supply and demand of textbooks, as well as an
ability to procure large quantities of a wide variety of textbooks. The Company
provides an internally-developed BUYER'S GUIDE to its wholesale customers, which
lists over 42,000 textbook titles with such details as author, new copy retail
price, and the Company's repurchase price.
COLLEGE BOOKSTORES. College bookstores are the primary outlets for sales of
new and used textbooks to students. As of June 26, 2001, the Company operated
108 college bookstores on or adjacent to college campuses of which 15 are
operated on physical premises which are owned by and leased from the educational
institution (i.e., "contract-managed"). Its college bookstores are located at
some of the nation's largest college campuses including: University of Nebraska,
University of Michigan, University of Maryland, Arizona State University,
Pennsylvania State University, University of Kansas, Michigan State University,
University of California - Berkeley, Texas A&M University, University of
Florida, and University of Tennessee. In addition to generating profits, the
Company's college bookstore operations provide an exclusive source of used
textbooks for sale across the Company's wholesale distribution network.
COMPLEMENTARY SERVICES. In fiscal 1998, the Company completed two
acquisitions representing new initiatives for it in the college bookstore
industry. In January 1998, the Company acquired Connect 2 One (formerly
Collegiate Stores Corporation), a centralized buying service for over 440
college bookstores across the United States. Through the enhanced purchasing
power of such a large group of bookstores, participating bookstores are able to
purchase certain general merchandise at lower prices than those that would be
paid by the stores individually. Bookstores participating in Connect 2 One's
("C2O") programs also provide the Company with another potential source of used
textbooks. With its acquisition of Specialty Books, Inc. ("Specialty Books") in
May 1997, the Company entered the distance education market, which consists of
providing education materials to students in nontraditional college and other
courses (such as correspondence courses, continuing and corporate education
courses and courses offered through electronic media such as the Internet).
Other services offered to college bookstores include the sale of computer
4
hardware and software, such as the Company's turnkey bookstore management
software, and related maintenance contracts. During fiscal 2001, the Company
licensed certain software related to E-commerce to an entity that is partially
owned by the Company's majority owner (see further discussion below under
Business Strategy). These services generate revenue and assist the Company in
enhancing and developing customer relationships.
INDUSTRY SEGMENT FINANCIAL INFORMATION
Revenue, operating profit or loss, and identifiable assets attributable to
each of the Company's industry segments are disclosed in the notes to the
financial statements presented in Item 8 of the Company's Form 10-K.
BUSINESS STRATEGY
The Company's objective is to strengthen its position as a leading provider
of products and services to the college bookstore market, thereby increasing
revenue and cash flow. In order to accomplish its goal, the Company intends to
pursue the following strategies:
ENHANCE GROWTH IN WHOLESALE OPERATIONS. The Company expects the stable
growth of its wholesale operations to continue, primarily as a result of an
expected increase in college enrollments and increased utilization of used
textbooks, as well as through the expansion of its own college bookstore
network. Additionally, the Company recently introduced an enhanced commission
structure that rewards customers who make a long-term commitment to supplying
the Company with a large portion of their textbooks.
CAPITALIZE ON COLLEGE BOOKSTORE OPPORTUNITIES. The Company intends to
increase revenues for its college bookstore operations by acquiring and opening
bookstores at selected college campuses and offering additional specialty
products and services at its existing bookstores. The Company also believes
there are opportunities to improve cash flow at its college bookstores by
reducing certain selling, general and administrative expenses and by realizing
economies of scale through increased purchasing power for general merchandise as
a result of its ownership of C2O.
CAPITALIZE ON E-COMMERCE OPPORTUNITIES. During fiscal 2000, the Company
began developing and marketing WebPRISM, an innovative software solution that
allows bookstores to launch their own E-commerce site and effectively compete
against online-only textbook sellers. This software solution enables bookstores
to offer textbooks and traditional store merchandise on their websites.
Additionally, the Company was developing CampusHub, E-commerce technology that
enables bookstores to offer non-traditional goods and services from brand name
consumer companies on their websites.
In fiscal 2001, NBC entered into several agreements related to these
software products with a newly created entity, TheCampusHub.com, Inc., which is
partially owned by the Company's majority owner. In connection with these
agreements, NBC has licensed these products to TheCampusHub.com, Inc. who
assumed the on-going marketing, operating and further development costs for
these products. The three-year license agreement requires the payment of $0.5
million per year from TheCampusHub.com, Inc. to NBC and also gives
TheCampusHub.com, Inc. the option to purchase the software products from NBC at
any time during the term of the agreement. The annual license payment is payable
even if the purchase option is exercised before the end of the three-year term.
NBC is also providing certain management services to TheCampusHub.com, Inc. for
three years in return for approximately $0.5 million per year plus reimbursement
of certain other direct costs. In connection with these agreements, NBC also
acquired the option to purchase 25% of the initial common shares outstanding of
TheCampusHub.com, Inc.
The Company expects that it will benefit from such arrangements as it is
able to obtain advanced E-commerce technology for its own bookstores without
encumbering its core business with the capital investments and operating costs
necessary to complete the development and marketing of these products. In
addition, the Company expects that the license and management fees will provide
an additional source of cash flow for the Company. Lastly, the Company believes
that it will share, by virtue of its equity option in TheCampusHub.com, Inc., in
future economic value, if any, created by the on-going efforts related to the
software products.
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PURSUE ADDITIONAL GROWTH OPPORTUNITIES. The Company intends to aggressively
pursue selected growth opportunities in several related markets, including:
o BUYING SERVICES. The Company believes that its ownership of C2O will
enhance the relationship with the Company's customers by leveraging its
capabilities as being a full-service provider within the college
bookstore industry. This will give the Company access to all of C2O's
marketing services and vendor programs.
o DISTANCE EDUCATION. The distance education market continues to grow due
to the increased popularity of correspondence courses, continuing and
corporate education courses and courses offered through electronic media
such as the Internet. Through Specialty Books, the Company believes that
it is well positioned to take advantage of this growth trend.
INDUSTRY OVERVIEW
Based on recent industry trade data, the college bookstore industry remains
strong, with over 4,800 college stores generating annual sales of approximately
$10.1 billion to college students and other consumers in North America. Sales of
textbooks and other education materials used for classroom instruction comprise
approximately two-thirds of that amount. The Company expects this market will
continue to grow as a result of anticipated increases in enrollment at U.S.
colleges attributable to the children of the baby boom generation entering the
college population.
WHOLESALE TEXTBOOK MARKET. The Company believes that used textbooks will
continue to be attractive to both students and college bookstores. Used
textbooks provide students with a lower-cost alternative to new textbooks and
bookstores typically achieve higher margins through the sale of used rather than
new textbooks.
The pricing pattern of textbook publishing accounts for a large part of the
growth of the used book market. Because of copyright restrictions, each new
textbook is produced by only one publisher, which is free to set the new copy
retail price and discount terms to bookstores. Publishers generally offer new
textbooks at prices that enable college bookstores to achieve a gross margin of
23.0% to 25.0% on new textbooks. Historically, the high retail costs of new
textbooks and the higher margins achieved by bookstores on the sale of used
textbooks (approximately 33.0%) have encouraged the growth of the market for
used textbooks.
The used textbook cycle begins with new textbook publishers, who purposely
plan obsolescence into the publication of new textbooks. Generally, new editions
of textbooks are produced every two to four years. In the first year of a new
edition, there are few used copies of a new edition available. In the second and
third years, used textbooks become increasingly available. Simultaneously,
publishers begin to plan an updated edition. In years four and beyond, at the
end of the average life cycle of a particular edition, as publishers cut back on
original production, used textbooks generally represent a majority (in unit
terms) of the particular edition in use. While the length of the cycle varies by
title (and sometimes is indefinite, as certain titles are never updated), the
basic supply/demand progression remains fairly consistent.
College bookstores begin to place orders with used textbook wholesalers once
professors determine which books will be required for their upcoming courses,
usually by the end of May for the fall semester and the end of November for the
spring semester. Bookstore operators must first determine their allocation
between new and used copies for a particular title but, in most cases, they will
order an ample supply of used books because: (i) used book demand from students
is typically strong and consistent; (ii) many operators only have access to a
limited supply from wholesalers and believe that not having used book
alternatives could create considerable frustration among students and with the
college administration; (iii) bookstore operators earn higher margins on used
books than on new books; and (iv) both new and used books are sold with return
privileges, eliminating any overstock risk (excluding freight charges) to the
college bookstore.
6
New textbook ordering usually begins in June, at which time the store
operator augments its expected used book supply by ordering new books. By this
time, publishers typically will have just implemented their annual price
increases. These regular price increases, which historically have run 3.0% to
5.0%, allow the Company and its competitors to buy used textbooks based on old
list prices (in May) and to almost simultaneously sell them based on new higher
prices, thereby creating an immediate margin increase.
While price is an important factor in the store operator's purchasing
decision, available supply, as well as service, usually determine with which
used textbook wholesaler a college bookstore will develop a strong relationship.
Used textbook wholesalers that are able to significantly service a college
bookstore account typically receive preferential treatment from store operators,
both in selling and in buying used textbooks. Pure exclusive supply arrangements
in the Company's market are rare. However, in the past three to four years, the
Company has been marketing its exclusive supply program to the industry. This
program has grown to approximately 230 participating bookstores at the end of
fiscal 2001. The Company also introduced the NBC Advantage program in fiscal
2001. This program rewards customers who make a long-term commitment to
supplying the Company with a large portion of their books. At the end of fiscal
2001, approximately 220 bookstores were participating in this program,
approximately 130 of which are also participating in the exclusive program.
Since the Company is usually able to sell the vast majority of the used
textbooks it is able to purchase, its ability to obtain sufficient supply is a
critical factor in the Company's success.
COLLEGE BOOKSTORE MARKET. College stores generally fall into three
categories: (i) INSTITUTIONAL -- stores that are primarily owned and operated by
institutions of higher learning (represents approximately 59.0% of the market);
(ii) CONTRACT-MANAGED -- stores owned by institutions of higher learning and
managed by outside, private companies, typically found on-campus (represents
approximately 26.0% of the market); and (iii) INDEPENDENT STORES -- privately
owned and operated stores, generally located off campus (represents
approximately 15.0% of the market). In general, the "captive" portion of the
college bookstore market includes those contract-managed stores that sell their
used textbooks to affiliated companies, and institutional and independent stores
to the extent that such used textbooks are repurchased from students and are
retained by the bookstore for resale without involving a wholesaler.
The Company believes that sales at its college bookstores will continue to
grow as a result of increased enrollment at colleges and due to the increasing
number of products and services offered in these bookstores, including
E-commerce capabilities provided through the WebPRISM and CampusHub software
products described earlier.
PRODUCTS AND SERVICES
WHOLESALE. The Company's wholesale operations are engaged in the
procurement and redistribution of textbooks on college campuses primarily across
the United States.
The Company also publishes the BUYER'S GUIDE, which lists over 42,000
textbooks according to author, title, new copy retail price, and the Company's
repurchase price. The BUYER'S GUIDE is an important part of the Company's
inventory control and book procurement system. The Company updates and reprints
the BUYER'S GUIDE nine times each year and makes it available in both print and
various electronic formats, including on all of the Company's proprietary
information systems. A staff of dedicated professionals gathers information from
all over the country in order to make the BUYER'S GUIDE into what the Company
believes to be the most comprehensive and up-to-date pricing and buying aid for
college bookstores. The Company also maintains a database of over 174,000 titles
in order to better serve its customers.
COLLEGE BOOKSTORES. As of June 26, 2001, the Company operated 108 college
bookstores on or adjacent to college campuses. These bookstores sell a wide
variety of used and new textbooks, general books and assorted general
merchandise, including apparel, sundries and gift items. Over the past three
years, revenues of the Company's bookstores from activities other than used and
new textbook sales have been between 24% and 28% of total revenues. The Company
has been, and intends to continue, selectively expanding its product offerings
at its bookstores in order to increase sales and profitability. The Company has
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also installed WebPRISM and CampusHub in all of its own bookstores, thereby
allowing its bookstores to further expand product offerings and compete with
online-only textbook sellers.
The college bookstore operations also provide consulting services to other
college bookstores. Using their industry experience, the Company's specialists
work with college bookstore managers to provide them with systems and support
services. The Company offers assistance in areas such as store planning, systems
and merchandise layouts.
COMPLEMENTARY SERVICES. Through C2O, the Company is able to offer a variety
of products and services to participating college bookstores. C2O negotiates
apparel and general merchandise discounts and develops and executes marketing
programs for its membership. As a centralized buying service for over 440
participating college bookstores including the Company's own bookstores, C2O has
evolved into a buying group with substantial purchasing power.
C2O offers a shopping bag program to college bookstores. This shopping bag
program provides bookstores the opportunity to purchase customized bags at a
substantial discount while the Company generates a profit due to receipt of
revenue from advertising inserts which are placed inside the bags. Other C2O
marketing services include a freight savings program, a check authorization
program, and retail display allowances for magazine displays.
Additionally, a staff of experienced C2O professionals consult with the
management of bookstores. Services offered include strategic planning, store
review, merchandise planning and help with other operational aspects of the
business. While consulting has historically represented a relatively small
component of C2O's business, it is nonetheless strategically important to the
ongoing success of this aspect of the Company's business.
Through Specialty Books, the Company has access to the market for distance
education products and services. Currently, the Company provides students at
approximately 60 colleges with textbooks and materials for use in distance
education courses, and is a leading provider of textbooks to nontraditional
programs and students such as correspondence or corporate education students.
The Company believes the fragmented distance education market represents an
opportunity for the Company to leverage its fulfillment and distribution
expertise in a rapidly growing sector. Beyond textbooks, the Company offers
services and specialty course materials to distance education students including
videotape duplication and shipping, shipping of specialty, nontextbook course
materials and a sales and ordering function. Students can order distance
education materials from the Company over the Internet. The Company believes it
can continue to significantly increase the service operations revenues from
distance education products over the next several years, although presently the
Company's primary objective is increased profitability through improved cost
containment.
Other services offered to college bookstores include services related to the
Company's turnkey bookstore management software and the sale of other software
and hardware, and related maintenance contracts. These services generate revenue
and assist the Company in gaining access to new sources of used textbooks. The
Company has an installed base of over 300 college bookstore locations for its
textbook management control systems, and it has installed its proprietary total
store management system at over 300 college bookstore locations. In total,
including the Company's own bookstores, over 600 college bookstore locations
utilize the Company's software products.
WHOLESALE PROCUREMENT AND DISTRIBUTION
Historically, because the demand for used textbooks has consistently
exceeded supply, the Company's sales have been primarily determined by the
amount of used textbooks that it can purchase. The Company believes that, on
average, it is able to fulfill approximately 20% of its demand. As a result, the
Company's success has depended primarily on its inventory procurement, and the
Company continues to focus its efforts on obtaining inventory. In order to
ensure its ability to both obtain and redistribute inventory, the Company's
wholesale strategy has emphasized establishing and maintaining strong customer
and supplier relationships with college bookstores (primarily, independent and
institutional college bookstores) through its employee account representatives.
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These 37 account representatives (as of March 31, 2001) are responsible for
procuring used textbooks from students, marketing the Company's services on
campus, purchasing overstock textbooks from bookstores and securing leads for
sale of the Company's systems products. The Company has been able to maintain a
competitive edge by providing superior service, made possible primarily through
the development and maintenance of ready access to inventory, information and
supply. Other components of the wholesale strategy and its implementation
include: (i) selectively paying a marginal premium relative to competitors to
entice students to sell back more books to the Company; (ii) gaining access to
competitive campuses (where the campus bookstore is contract-managed by a
competitor) by opening off-campus, Company-owned college bookstores; (iii) using
technology to gain efficiencies and to improve customer service; (iv)
maintaining a knowledgeable and experienced sales force that is customer-service
oriented; (v) providing working capital flexibility for bookstores making
substantial purchases; and (vi) establishing long-term supply arrangements by
rewarding customers who make a long-term commitment to supplying the Company
with a large portion of their books.
The two major used textbook purchasing seasons are at the end of each
academic semester, May/June and December/January. Although the Company makes
book purchases during other periods, the inventory purchased in May, before
publishers announce their price increases in June and July, allows the Company
to purchase inventory based on the lower retail prices of the previous year. The
combination of this purchasing cycle and the fact that the Company is able to
sell its inventory in relation to retail prices for the following year permits
the Company to realize additional gross profit. The Company advances cash to its
representatives during these two periods, and the representatives in turn buy
books directly from students, generally through the on-campus bookstore.
After the Company purchases the books, the Company arranges for shipment to
one of its two warehouses (Nebraska and California) via common carrier. At the
warehouse, the Company refurbishes damaged books and categorizes and shelves all
other books in a timely manner, and enters them into the Company's on-line
inventory system. These two locations function as one facility allowing
customers to access inventory at both locations.
Customers place orders by phone, mail, fax or other electronic method. Upon
receiving an order, the Company removes the books from available inventory and
holds them for future shipping. Customers may return books within 60 days after
the start of classes if a written request is enclosed. Returns currently average
approximately 20.5% of sales and generally are attributable to course
cancellations or overstocking. The majority of returns are textbooks that the
Company is able to resell for the next semester.
COLLEGE BOOKSTORE OPERATIONS
An important aspect of the Company's business strategy is a program designed
to reach new customers through the opening or acquisition of bookstores adjacent
to college campuses. In addition to generating sales of new and used textbooks
and general merchandise, these outlets enhance the Company's wholesale
operations by increasing the inventory of used books purchased from the campus.
A desirable campus for a Company-operated college bookstore is one on which
the Company does not currently buy or sell used textbooks either because a
competitor of the Company contract-manages the college's bookstore or the
college bookstore does not have a strong relationship with the Company. The
Company generally will not open a location on a campus where it already has a
strong relationship with the college bookstore because some college bookstores
may view having a competing location as a conflict of interest.
The Company tailors each of its own bookstores to fit the needs and
lifestyles of the campus on which it is located. Individual bookstore managers
are given significant planning and managing responsibilities, including, hiring
employees, controlling cash and inventory, and purchasing and merchandising
product. The Company has staff specialists to assist individual bookstore
managers in such areas as store planning, merchandise layout and inventory
control.
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As of June 26, 2001 the Company operated 108 college bookstores nationwide,
having expanded from 39 bookstores in 1996. During fiscal 2001 NBC purchased 4
new bookstores located in Michigan, Oklahoma, Tennessee, and Texas, adding
estimated combined annual revenues in excess of $6.2 million. Subsequent to
March 31, 2001, NBC acquired eight bookstores located in Norman, Oklahoma;
Raleigh, North Carolina; Radford, Virginia; Orlando, Florida; Gainesville,
Florida; Chadron, Nebraska; and Bellingham, Washington and sold two bookstores
located in Austin, Texas.
The table below highlights certain information regarding the Company's
bookstores opened through March 31, 2001.
Bookstores Approximate
Open at Bookstores Bookstores Bookstores Total
Beginning Added Closed at End of Square
of Fiscal During During Fiscal Footage
Fiscal Year Year Fiscal Year Fiscal Year(1) Year (in thousands)
----------- ---------- ----------- -------------- -------- --------------
1997 39 12 1 50 438
1998 50 9 0 59 474
1999 59 8 2 65 537
2000 65 35 2 98 733
2001 98 4 0 102 740
- ------------
(1) In fiscal 1997, the management contract was not renewed on a
contract-managed bookstore. In fiscal 1999, the property leases at two
bookstore locations expired and were not renewed by the Company. In fiscal
2000, the property lease at one bookstore location expired and was not
renewed by the Company and one Triro, Inc. bookstore location which did not
meet the Company's expansion criteria described below was closed.
The Company plans to continue increasing the number of bookstores in
operation. The bookstore expansion plan will focus on campuses where the Company
does not already have a strong relationship with the on-campus bookstore. In
determining to open a bookstore, the Company looks at several criteria: (i) a
large enough market to justify the Company's efforts (typically this means a
campus of at least 10,000 students); (ii) a site in close proximity to campus
with adequate parking and accessibility; (iii) the potential of the bookstore to
have a broad product mix (larger bookstores are more attractive than smaller
bookstores because a full line of general merchandise can be offered in addition
to textbooks); (iv) the availability of top-quality management; and (v) certain
other factors, including leasehold improvement opportunities and personnel
costs.
The Company's bookstores have an average size of 7,300 gross square feet but
range in size from 900 to 50,000 square feet. The Company estimates that
leasehold improvements, furniture and fixtures, and automation with the
Company's PRISM system, the Company's proprietary total-store management system,
for new bookstores cost approximately $100,000 per bookstore, after giving
effect to construction allowances.
MANAGEMENT INFORMATION SYSTEMS
The Company believes that it can enhance efficiency, profitability and
competitiveness through investments in technology. The Company's MIS operations
process order entry, control inventory, generate purchase orders and customer
invoices, generate various sales reports, and process and retrieve textbook
information. All the Company's bookstores operate with IBM RS/6000's. At the
center of its MIS operations are the Company's self-developed, proprietary
software programs such as PRISM, its whole store management system, and PC-Text,
its textbook management and inventory control system. This software is
maintained and continuously enhanced by the Company, which is staffed by an
experienced team of development and design professionals.
10
In addition, the Company and its consultants have been developing E-commerce
capabilities called WebPRISM and CampusHub. These software products allow
college bookstores to launch their own E-commerce site and effectively compete
against online-only textbook sellers by offering textbooks and both traditional
and non-traditional store merchandise online. As previously discussed, the
ongoing development of WebPRISM and CampusHub was assumed in fiscal 2001 by an
entity that is partially owned by the Company's majority owner.
None of the Company's proprietary software programs are copyrighted,
although the Company does have registered trademarks for the names WebPRISM and
CampusHub. In addition to using its software programs for its own management and
inventory control, the Company licenses the use of its software programs to
bookstores. Although none of the Company's software programs are material to its
business, they enhance the efficiency and cost-effectiveness of the Company's
operations, and their use by bookstores that are customers or suppliers of the
Company tends to solidify the relationship between the Company and such
customers or suppliers, resulting in increased sales or supplies for the
Company.
MIS operations consist of three operating units: (i) the mainframe unit,
which develops and supports all systems utilized in the Company's warehouses and
corporate offices; (ii) a system sales unit, which markets the Company's college
store management systems to colleges; and (iii) the College Bookstore Management
Systems ("CBMS"), which develops and supports the systems that are sold to
bookstores.
The Company conducts training courses for all systems users at the Company's
headquarters in Lincoln, Nebraska. Classes are small and provide hands on
demonstrations of the various systems. Printed reference manuals and training
materials also accompany each system. The customer support unit of CBMS is
staffed with over 40 experienced personnel. Personnel are available 24 hours a
day to answer questions on a toll-free number.
CUSTOMERS
The Company sells its products and services to college bookstores throughout
the United States, Canada and Puerto Rico for ultimate use by the students of
the respective colleges. The Company's 25 largest wholesale customers accounted
for approximately 5.6% of fiscal 2001 revenues. No one customer accounted for
more than 1.0% of the Company's fiscal 2001 revenues.
The Company's wholesale operations purchase from and resell used textbooks
to many of the nation's largest college campuses including: University of Texas,
University of Southern California, Indiana University, University of Arizona,
University of Washington, and University of Minnesota.
The Company's college bookstores are located on many of the nation's largest
college campuses including: University of Nebraska, University of Michigan,
University of Maryland, Arizona State University, Pennsylvania State University,
University of Kansas, Michigan State University, University of California -
Berkeley, Texas A&M University, University of Florida, and University of
Tennessee.
COMPETITION
The Company's wholesale business competes in the used textbook wholesale
distribution market. This market includes the sale of all used textbooks
purchased from students by an independent third party which are then
redistributed through college bookstores; sales to contract-managed stores,
which obtain virtually all of their supply of used textbooks from within their
chain of stores under common management; and used textbooks retained by college
bookstores.
The Company's two major competitors in the college store industry and used
textbook business are Follett Campus Resources ("Follett") and MBS Textbook
Exchange ("MBS"), which contract-manage approximately 640 stores and 380 stores,
respectively. The Company believes that its market share of the used college
textbook wholesale distribution market is comparable to that of Follett and MBS,
individually. The remaining competitors are smaller regional companies,
including Budgetext, Texas Book Company and Southeastern Book Company. Most of
the leading companies in the industry also have an established retail presence,
either through direct store ownership/operation or through contract-management.
11
Many of Follett's college bookstores are located on smaller campuses. The
size of the campus and Follett's presence there have precluded potential
competitors such as the Company from entering these markets, which in turn
affects both the Company's ability to buy books and its ability to add new
accounts. However, because it is required to supply used texts to all of its own
stores, Follett must balance the demands of its own bookstores with those of its
other independent customers.
MBS is controlled by the same shareholder that controls Barnes & Noble.
Consequently, MBS supplies approximately 380 Barnes & Noble college stores. MBS
faces the same challenges that Follett faces in supplying existing institutional
accounts. MBS has a strong systems division that competes actively with the
Company for new customers and also fulfills all of the needs of the Barnes &
Noble stores.
The Company's college bookstore operations compete with other college campus
bookstores, including the on-campus bookstore in those locations where the
Company's bookstore is off-campus.
Both the Company's wholesale business and bookstore operations compete with
a number of entities that have entered the college marketplace, or enhanced
their sales channel to that marketplace, through E-commerce. These competitors
typically use the Internet to establish websites designed to sell textbooks
and/or other merchandise directly to students, by-passing the traditional
college bookstore. By contrast, the Company's software products, WebPRISM and
CampusHub, are designed to sell textbooks and other merchandise through a
college bookstore website, not around it. The Company also competes against the
expansion of electronic media as a source of textbook information, such as
on-line resources, E-Books, print-on-demand textbooks and CD-ROM, which may
replace or modify the need for students to purchase textbooks through the
traditional college bookstore. The Company does not believe that such
competition has had a material adverse impact on the Company's results of
operations.
There is only one centralized buying service that is similar to C2O, the
Independent College Bookstore Association ("ICBA"). Participation by college
bookstores in C2O's or ICBA's centralized buying service is voluntary, and
college bookstores may, and some do, belong to both buying associations.
Presently, the Company believes that its largest competitor in the distance
education market is MBS.
GOVERNMENTAL REGULATION
The Company is subject to various federal, state and local environmental,
health and safety laws and regulations. Generally, these laws impose limitations
on the discharge of pollutants and the presence of hazardous substances in the
workplace and establish standards for vehicle and employee safety and for the
handling of solid and hazardous wastes. These laws include the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act, the Clean Air Act, the Hazardous Materials
Transportation Act and the Occupational Safety and Health Act. Future
developments, such as stricter environmental or employee health and safety laws
and regulations thereunder, could affect the Company's operations. The Company
does not currently anticipate that the cost of its compliance with, or of any
foreseeable liabilities under, environmental and employee health and safety laws
and regulations will have a material adverse affect on its business or financial
condition.
EMPLOYEES
As of March 31, 2001 the Company had a total of approximately 2,700
employees, of which approximately 1,000 are full-time, approximately 200 are
part-time and approximately 1,500 are temporary. The Company has no unionized
employees and believes that its relationship with its employees is satisfactory.
In view of the seasonal nature of its wholesale business, the Company
utilizes seasonal labor to improve operating efficiency. The Company employs a
small number of "flex-pool" workers who are cross-trained in a variety of
warehouse functions. Over the past eight years, the Company has employed up to
12
50 flex-pool workers in the Nebraska and California facilities, thereby enabling
the Company to lower its wholesale operating expenses. Temporary employees
augment the flex-pool to meet periodic labor demands.
ITEM 2. PROPERTIES.
The Company owns its two warehouses (totaling 244,000 square feet) in
Lincoln, Nebraska (one of which is also the location of its headquarters), and
leases its 60,000 square foot warehouse in Cypress, California. The Cypress
lease expires on August 31, 2002 and has one five-year option to renew.
Listed below, set forth as of March 31, 2001, are the Company's college
bookstores, their location, college served and the school's enrollment.
Institution Location Enrollment(1) Store Name
----------- -------- ------------- ----------
University of Alabama Tuscaloosa, AL 19,000 The College Store
University of Arkansas - Little Rock Little Rock, AR 10,500 Campus Bookstore
Northern Arizona University Flagstaff, AZ 20,000 The College Store
Northern Arizona University Flagstaff, AZ 20,000 University Text and Tools
Coconino Community College Flagstaff, AZ 3,700 Coconino Community College
Bookstore (2)
Arizona State University Tempe, AZ 43,700 The College Store
Arizona State University Tempe, AZ 43,700 Rother's Bookstore
University of Arizona Tucson, AZ 34,300 Arizona Book Store
University of Arizona Tucson, AZ 34,300 Rother's University Bookstore
University of California - Berkeley Berkeley, CA 30,400 Ned's Bookstore (2 locations)
California State University - Northridge Northridge, CA 27,900 The College Store
Daytona Beach Community College Daytona Beach, FL 11,000 & 4,900 College Book Rack
and Embry-Riddle Aeronautical University
Miami Dade Community College-Kendall Miami, FL 18,800 Lemox College Book & Supply
University of Central Florida Orlando, FL 28,000 Knight's Corner
Georgia State University Atlanta, GA 24,000 Georgia Book Store
Drake University Des Moines, IA 5,300 University Book Store (2 locations) (2)
Southern Illinois University Carbondale, IL 22,400 Saluki Bookstores (2 locations)
Ball Sate University Muncie, IN 18,100 Collegiate Book Exchange
Valparaiso University Valparaiso, IN 3,600 University Book Center (2)
University of Kansas Lawrence, KS 29,100 University Book Shop
Johnson County Community College Overland Park, KS 16,000 The College Store
University of Louisville Louisville, KY 21,100 College Book Warehouse
Eastern Kentucky University Richmond, KY 17,500 University Book & Supply
University of Maryland College Park, MD 32,700 Maryland Book Exchange
Prince George's Community College Largo, MD 12,300 Prince George's Community
College Bookstore (2)
University of Michigan Ann Arbor, MI 37,200 Michigan Book & Supply
University of Michigan Ann Arbor, MI 37,200 Ulrich's Bookstore
Oakland University Auburn Hills, MI 15,100 Textbook Outlet
Wayne County Community College Belleville, Detroit & 11,000 Ned's Bookstore (5 locations) (2)
Taylor, MI
Ferris State University Big Rapids, MI 9,700 The College Store
Michigan State University East Lansing, MI 43,000 The College Store
Michigan State University East Lansing, MI 43,000 Ned's Bookstore
Kettering Engineering & Flint, MI 3,200 The Campus Store (2)
Management Institute
Eastern Michigan University Ypsilanti, MI 23,300 Campus Book & Supply
Eastern Michigan University and Ypsilanti & 23,300 & 600 Ned's Bookstore (3 locations)(2)
Concordia College Ann Arbor, MI
Mankato State University Mankato, MN 11,700 Maverick Bookstore
Chadron State College Chadron, NE 2,800 Chadron Book Shop
University of Nebraska - Kearney Kearney, NE 7,200 The Antelope Bookstore (2)
University of Nebraska - Lincoln Lincoln, NE 23,000 Nebraska Bookstore (2 locations)
Nebraska Wesleyan University Lincoln, NE 1,700 Prairie Wolves Bookstore (2)
Wayne State College Wayne, NE 3,600 Student Bookstore
University of Nevada Las Vegas Las Vegas, NV 24,900 Rebelbooks
State University of New York - Buffalo Amherst, NY 24,300 The College Store
State University of New York - Binghamton Vestal, NY 12,300 The Bookbridge
University of Akron Akron, OH 23,200 The College Store
Ohio University Athens, OH 19,200 Specialty Books
Ohio State University Columbus, OH 50,000 College Town
Wright State University Fairborn, OH 16,800 The College Store
University of Oklahoma Norman, OK 21,300 Boomer Book Store
13
Oklahoma State University Stillwater, OK 21,100 Cowboy Book
Indiana University of Pennsylvania Indiana, PA 13,400 The College Store
University of Pittsburgh Pittsburgh, PA 26,200 The College Store
Pennsylvania State University State College, PA 40,000 University Book Centre
College of Charleston Charleston, SC 11,600 University Book of Charleston
Columbia College Columbia, SC 1,300 C-Square Bookstore (2)
University of South Carolina Columbia, SC 25,500 South Carolina Bookstore
(2 locations)
East Tennessee State University Johnson City, TN 11,200 The College Store
University of Tennessee Knoxville, TN 26,000 Rocky Top East
University of Tennessee Knoxville, TN 26,000 Rocky Top Books
University of Texas - Arlington Arlington, TX 19,100 The College Store
Austin Community College Austin, TX 27,000 Bevo's Northridge
Austin Community College Austin, TX 27,000 Bevo's ACC (2 locations)
University of Texas Austin, TX 48,000 Bevo's West (2 locations)
Blinn College Bryan, TX 7,800 Rother's Bookstore
Texas A&M University College Station, TX 43,400 Rother's Bookstore
Texas A&M University College Station, TX 43,400 Rother's Bookstore (Woodstone)
Texas A&M University College Station, TX 43,400 Rother's Bookstore (Northgate)
Southern Methodist University Dallas, TX 10,000 Varsity Book Store
University of North Texas Denton, TX 26,500 Voertman's
University of Texas - Pan Edinburg & 12,700 & South Texas Book & Supply
American and South McAllen, TX 12,900 (2 locations)
Texas Community College
North Harris County Community College Houston, TX 9,400 College Bookstore
University of Houston Houston, TX 33,200 Rother's Bookstore
Texas Tech University Lubbock, TX 24,200 Spirit Shop
Texas Tech University Lubbock, TX 24,200 Double T Bookstore (3 locations)
San Antonio College, St. Philip's San Antonio, TX 22,000; 21,200; L&M Bookstore
College, and Palo Alto College & 6,900
University of Texas - San Antonio San Antonio, TX 18,800 L&M UTSA Bookstore
Southwest Texas State University San Marcos, TX 21,100 Colloquium Bookstore (2 locations)
Southwest Texas State University San Marcos, TX 21,100 Rother's Bookstore
Tarleton State University Stephenville, TX 6,400 Rother's Bookstore
Baylor University Waco, TX 13,400 University Bookstore and Spirit Shop
Baylor University Waco, TX 13,400 Rother's Bookstore
Midwestern State University Wichita Falls, TX 5,700 Rother's Bookstore
Virginia Polytechnic and State University Blacksburg, VA 25,000 Tech Bookstore
Old Dominion University Norfolk, VA 19,100 Dominion Bookstore
Virginia Commonwealth University Richmond, VA 23,200 The College Store
- ------------
(1) Source: National Association of College Stores. Includes part-time students.
(2) Denotes properties leased from the educational institution
("contract-managed" stores). One location at Drake University and one
location at Concordia College are contract-managed stores.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is subject to legal proceedings and other
claims arising in the ordinary course of its business. The Company believes that
currently it is not a party to any litigation the outcome of which would have a
material adverse affect on its financial condition or results of operations. The
Company maintains insurance coverage against claims in an amount which it
believes to be adequate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No items were submitted to a vote of security holders of the Company during
the fourth quarter of fiscal 2001.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of June 26, 2001, based upon the number of holders on record, there were
45 holders of the Company's Class A Common Stock and outstanding stock options
to purchase 55,865 shares of the Company's Class A Common Stock. As discussed in
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Item 8, "Financial Statements and Supplementary Data", the
payment of dividends is subject to various restrictions under the Company's debt
instruments. As a result, the Company has declared no dividends on its Class A
Common Stock during fiscal 2001 and 2000. There is no established public trading
market for the Company's Class A Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected historical consolidated financial
and other data of the Company as of and for the fiscal years ended March 31,
2001, 2000, 1999, 1998, and 1997, respectively. The selected historical
consolidated financial data was derived from the audited consolidated financial
statements of the Company. Consistent with the Company's audited consolidated
financial statements, certain prior year amounts have been reclassified to
conform to the current year presentation. The following table should be read in
conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
of the Company and the related notes thereto included in Item 8 herein.
15
Fiscal Years Ended March 31,
----------------------------------------------------
2001 2000 1999 1998 (1) 1997
---------- ---------- --------- ---------- ---------
Statement of Operations Data: (dollars in thousands)
Revenues $ 301,669 $ 267,069 $218,638 $ 200,086 $173,730
Costs of sales 187,099 164,984 137,989 125,632 110,466
---------- ---------- --------- ---------- ---------
Gross profit 114,570 102,085 80,649 74,454 63,264
Operating expenses:
Selling, general, and administrative 74,100 65,820 51,289 47,882 40,231
Depreciation 2,956 3,096 2,393 2,531 2,706
Amortization 10,446 9,320 6,149 5,626 4,072
Stock compensation costs - - - 8,278 297
---------- ---------- --------- ---------- ---------
Income from operations 27,068 23,849 20,818 10,137 15,958
Other expenses (income):
Interest expense 24,008 23,398 22,854 11,938 10,760
Interest income (615) (356) (351) (328) (561)
---------- ---------- --------- ---------- ---------
Income (loss) before income taxes
and extraordinary item 3,675 807 (1,685) (1,473) 5,759
Income tax expense 3,407 2,516 574 58 2,325
---------- ---------- --------- ---------- ---------
Income (loss) before
extraordinary item 268 (1,709) (2,259) (1,531) 3,434
Extraordinary loss on extinguishment
of debt, net of taxes - - - (4,021) -
---------- ---------- --------- ---------- ---------
Net income (loss) $ 268 $ (1,709) $( 2,259) $ (5,552) $ 3,434
========== ========== ========= ========== =========
Earnings (loss) per share:
Basic:
Income (loss) before extraordinary
item $ 0.21 $ (1.48) $ (2.37) $ (0.59) $ 1.23
Extraordinary loss on extinguishment
of debt - - - (1.57) -
---------- ---------- --------- ---------- ---------
Net income (loss) $ 0.21 $ (1.48) $ (2.37) $ (2.16) $ 1.23
========== ========== ========= ========== =========
Diluted:
Income (loss) before extraordinary
item $ 0.21 $ (1.48) $ (2.37) $ (0.59) $ 1.16
Extraordinary loss on extinguishment
of debt - - - (1.57) -
---------- ---------- --------- ---------- ---------
Net income (loss) $ 0.21 $ (1.48) $ (2.37) $ (2.16) $ 1.16
========== ========== ========= ========== =========
Other Data:
EBITDA (2) $ 40,470 $ 36,265 $ 29,360 $ 26,572 $ 23,033
Net cash flows from operating activities 8,839 18,945 10,296 (2,842) 10,774
Net cash flows from investing activities (4,994) (30,244) (5,067) (11,548) (3,427)
Net cash flows from financing activities (3,887) 11,690 (6,976) 10,220 (7,471)
Capital expenditures 1,759 3,542 2,842 3,690 2,243
Business acquisition expenditures (3) 2,975 26,072 2,086 7,714 1,252
Number of bookstores open at end of
the period 102 98 65 59 50
Balance Sheet Data (At End of Period):
Cash and cash equivalents $ 4,410 $ 4,451 $ 4,060 $ 5,807 $ 9,977
Working capital 72,394 62,244 55,442 54,018 55,913
Total assets 167,701 168,991 142,879 152,110 127,146
Total debt, including current maturities 224,219 222,552 219,904 221,597 79,524
(1) Effective February 13, 1998, the Company consummated a merger among NBC
Merger Corp., the Company and certain shareholders of the Company
pursuant to which the Company's outstanding debt and stock were
restructured. Following the Recapitalization, the results of operations
of the Company included higher interest costs due to the financing of
the Recapitalization, and in fiscal 1998, non-recurring charges
associated with the extinguishment of debt and buyout of stock options.
(2) EBITDA is defined as income from operations plus depreciation,
amortization and non-cash charges relating to stock based compensation
expense in the amounts of $8,278 and $297 for the years ended March 31,
1998 and 1997, respectively. The Company believes that EBITDA provides
additional information for determining its ability to meet debt service
requirements. EBITDA does not represent and should not be considered as
an alternative to net income or cash flow from operations as determined
by accounting principles generally accepted in the United States of
America, and EBITDA does not necessarily indicate whether cash flow will
be sufficient for cash requirements. EBITDA should not be considered by
16
investors as an indicator of cash flows from operating activities,
investing activities and financing activities as determined in
accordance with accounting principles generally accepted in the United
States of America. Items excluded from EBITDA, such as depreciation and
amortization, are significant components in understanding and assessing
the Company's financial performance. EBITDA measures presented may not
be comparable to similarly titled measures presented by other
registrants.
(3) Business acquisition expenditures represent established businesses
purchased by the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FISCAL YEAR ENDED MARCH 31, 2001 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2000.
REVENUES. Revenues for the years ended March 31, 2001 and 2000 and the
corresponding increase (decrease) in revenues were as follows:
Increase (Decrease)
2001 2000 Amount Percentage
-------------- --------------- ------------- -----------
Wholesale operations $ 113,006,804 $ 108,074,521 $ 4,932,283 4.6%
College bookstore operations 182,856,000 158,076,869 24,779,131 15.7%
Complementary services 26,647,451 20,717,793 5,929,658 28.6%
Intercompany eliminations (20,841,402) (19,800,260) (1,041,142) 5.3%
-------------- --------------- ------------- -----------
$ 301,668,853 $ 267,068,923 $ 34,599,930 13.0%
============== =============== ============= ===========
The increase in wholesale revenues was due primarily to publisher price
increases. The increase in college bookstore revenues was due primarily to the
net addition of 37 new college bookstores either through acquisition or startup
since April 1, 1999. Of the $24.8 million increase in college bookstore
revenues, $19.2 million was attributable to new college bookstores with the
remainder accounted for by a 4.6% increase in revenues from stores open for the
full year for both the 2000 and 2001 fiscal years ("same stores"). Complementary
services revenues increased primarily due to an increase in the Company's
distance education program revenues and $0.9 million attributable to the
adoption of management services and licensing agreements in fiscal 2001 with
TheCampusHub.com, Inc., an entity that is partially owned by the Company's
majority owner. Such growth was partially offset by a decrease in revenues from
the Company's system sales program. As the Company's wholesale and college
bookstore operations have grown, the Company's intercompany transactions have
also increased.
GROSS PROFIT. Gross profit for fiscal 2001 increased $12.5 million, or
12.2%, to $114.6 million from $102.1 million for fiscal 2000. This increase was
primarily due to higher revenues, partially offset by a decrease in gross margin
percent. Gross margin percent was 38.0% for fiscal 2001 as compared to 38.2% for
fiscal 2000. The decrease in gross margin percent was primarily attributable to
revenue mix, with the lower-margin revenues from the college bookstore
operations and complementary services comprising 65.0% of total revenues (before
intercompany eliminations) in fiscal 2001 as compared to 62.3% in fiscal 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal 2001 increased $8.3 million, or 12.6%, to
$74.1 million from $65.8 million for fiscal 2000. Selling, general and
administrative expenses as a percentage of revenues were 24.6% in both fiscal
years. Approximately $4.9 million of the increase in expenses resulted primarily
from the expected higher expense base associated with the Company's expansion of
its operations through bookstore acquisitions and startups. Additionally,
17
expenses increased $2.6 million in the Company's distance education program as a
result of the revenue growth previously discussed.
AMORTIZATION EXPENSE. Amortization expense for fiscal 2001 increased $1.1
million, or 12.1%, to $10.4 million from $9.3 million for fiscal 2000. This
increase was the result of additional amortization of goodwill related to recent
acquisitions, offset in part by goodwill associated with acquisitions that is
becoming fully amortized.
INCOME (LOSS) BEFORE INTEREST AND TAXES. Income (loss) before interest and
taxes for fiscal 2001 and 2000 and the corresponding increase (decrease) in
income (loss) before interest and taxes were as follows:
Increase (Decrease)
2001 2000 Amount Percentage
-------------- -------------- ------------- ----------
Wholesale operations $ 27,241,116 $ 24,832,679 $ 2,408,437 9.7 %
College bookstore operations 9,206,616 9,588,784 (382,168) (4.0)%
Complementary services (1,402,666) (2,449,321) 1,046,655 42.7 %
Corporate administration (7,977,326) (8,123,130) 145,804 1.8 %
-------------- -------------- ------------- ----------
$ 27,067,740 $ 23,849,012 $ 3,218,728 13.5 %
============== ============== ============= ==========
The increase in wholesale income before interest and taxes was primarily due
to increased revenues. Income before interest and taxes for college bookstore
operations decreased, despite increased revenues, as a result of additional
amortization of goodwill related to recent acquisitions. The loss before
interest and taxes decreased for the complementary services segment primarily
due to revenues attributable to the aforementioned management services and
licensing agreements with TheCampusHub.com, Inc. Despite the Company's growth,
corporate administrative costs have remained relatively stable between fiscal
years.
INTEREST EXPENSE, NET. Interest expense, net for fiscal 2001 increased $0.4
million, or 1.5%, to $23.4 million from $23.0 million for fiscal 2000 primarily
as a result of increasing original issue debt discount amortization on the
Company's Senior Discount Debentures, which will continue to increase until the
Senior Discount Debentures are fully-accreted to face value of $76.0 million in
fiscal 2003.
INCOME TAXES. Income tax expense for fiscal 2001 increased $0.9 million, or
35.4%, to $3.4 million from $2.5 million for fiscal 2000. This increase was
primarily the result of an increase in income before income taxes. The Company's
effective tax rate was significantly higher than the statutory tax rate
primarily as a result of state income taxes and non-deductible amortization on
goodwill associated with recent acquisitions.
FISCAL YEAR ENDED MARCH 31, 2000 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 1999.
REVENUES. Revenues for the years ended March 31, 2000 and 1999 and the
corresponding increase (decrease) in revenues were as follows:
Increase (Decrease)
2000 1999 Amount Percentage
-------------- --------------- ------------- -----------
Wholesale operations $ 108,074,521 $ 98,751,112 $ 9,323,409 9.4%
College bookstore operations 158,076,869 120,872,556 37,204,313 30.8%
Complementary services 20,717,793 12,637,553 8,080,240 63.9%
Intercompany eliminations (19,800,260) (13,623,650) (6,176,610) 45.3%
-------------- --------------- ------------- -----------
$ 267,068,923 $ 218,637,571 $ 48,431,352 22.2%
============== =============== ============= ===========
The increase in wholesale revenues was due primarily to publisher price
increases, coupled with an increase in units shipped and a decrease in returns
as a percent of sales. This increase was partially offset by the discontinuance
18
of the Company's new book program in the fourth quarter of fiscal 1999. That
program generated approximately $2.0 million of revenue in that fiscal year. The
increase in college bookstore revenues was due primarily to the net addition of
39 new college bookstores either through acquisition or startup since April 1,
1998, including 28 new bookstores added through the Triro, Inc. and Ned's
Bookstores acquisitions, which occurred effective June 4, 1999 and November 12,
1999, respectively. Of the $37.2 million increase in college bookstore revenues,
$34.9 million was attributable to new college bookstores with the remainder
accounted for by a 2.9% increase in revenues from stores open for the full year
for both the 1999 and 2000 fiscal years ("same stores"). Complementary services
revenues increased primarily due to growth in the Company's distance education
and system sales programs. As the Company's wholesale and college bookstore
operations have grown, the Company's intercompany transactions have also
increased.
GROSS PROFIT. Gross profit for fiscal 2000 increased $21.5 million, or
26.6%, to $102.1 million from $80.6 million for fiscal 1999. This increase was
primarily due to higher revenues, combined with an increase in gross margins.
Gross margin was 38.2% for fiscal 2000 as compared to 36.9% for fiscal 1999. The
increase in gross margin was primarily attributable to increased margins in the
Company's wholesale and college bookstore operations, including an increase in
used textbook sales through the Company's bookstores, which can generate an
average gross margin of approximately 55%-60% compared to average gross margins
of 35% - 40% for external wholesale sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal 2000 increased $14.5 million, or 28.3%, to
$65.8 million from $51.3 million for fiscal 1999. Selling, general and
administrative expenses as a percentage of revenues were 24.6% and 23.5% for
fiscal 2000 and fiscal 1999, respectively. The increase in expenses resulted
primarily from the expected higher expense base associated with the Company's
expansion of its operations through bookstore acquisitions and startups. The
Company has also incurred higher corporate-level expense in fiscal 2000,
primarily due to additional personnel and other costs designed to help manage
its continued growth.
DEPRECIATION EXPENSE. Depreciation expense for the fiscal year ended March
31, 2000 increased $0.7 million, or 29.4%, to $3.1 million from $2.4 million for
the fiscal year ended March 31, 1999. This increase was primarily the result of
additional depreciation related to recent acquisitions, including Triro, Inc.
and Ned's Bookstores.
AMORTIZATION EXPENSE. Amortization expense for the fiscal year ended March
31, 2000 increased $3.2 million, or 51.6%, to $9.3 million from $6.1 million for
the fiscal year ended March 31, 1999. This increase was the result of additional
amortization of goodwill related to recent acquisitions, including Triro, Inc.
and Ned's Bookstores, and was partially offset by a non-compete agreement
becoming fully amortized in August, 1998.
INCOME (LOSS) BEFORE INTEREST AND TAXES. Income (loss) before interest and
taxes for fiscal 2000 and 1999 and the corresponding increase (decrease) in
income (loss) before interest and taxes were as follows:
Increase (Decrease)
2000 1999 Amount Percentage
-------------- -------------- ------------- ----------
Wholesale operations $ 24,832,679 $ 21,590,426 $ 3,242,253 15.0 %
College bookstore operations 9,588,784 8,339,047 1,249,737 15.0 %
Complementary services (2,449,321) (2,442,717) (6,604) (0.3)%
Corporate administration (8,123,130) (6,668,446) (1,454,684) (21.8)%
-------------- -------------- ------------- ----------
$ 23,849,012 $ 20,818,310 $ 3,030,702 14.6 %
============== ============== ============= ==========
The increase in wholesale income before interest and taxes was primarily due
to increased revenues. Income before interest and taxes for college bookstore
operations increased, despite incremental amortization expense of $3.7 million
related to goodwill resulting from acquisitions, as a result of increased
revenues and improved margins pertaining primarily to used textbook sales. The
loss before interest and taxes increased for the complementary services segment
19
primarily due to a reduction in the profitability of the Company's shopping bag
joint venture. As described earlier, corporate administrative costs have
increased primarily as a result of costs incurred to help manage the Company's
growth.
INTEREST EXPENSE, NET. Interest expense, net for fiscal 2000 increased $0.5
million, or 2.4%, to $23.0 million from $22.5 million for fiscal 1999 primarily
as a result of increasing original issue debt discount amortization on the
Company's Senior Discount Debentures.
INCOME TAXES. Income tax expense for fiscal 2000 increased $1.9 million, or
337.9%, to $2.5 million from $0.6 million for fiscal 1999. This increase was
primarily the result of an increase in income before income taxes and
non-deductible amortization on goodwill associated with the Triro, Inc.
acquisition. The Company's effective tax rate was significantly higher than the
statutory tax rate primarily as a result of state income taxes and
non-deductible amortization on goodwill associated with recent acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity requirements are for debt service under the
Senior Credit Facility, the Senior Subordinated Notes and other outstanding
indebtedness, for working capital, for capital expenditures and for certain
acquisitions. The Company has historically funded these requirements primarily
through internally generated cash flow and funds borrowed under NBC's Revolving
Credit Facility. At March 31, 2001, the Company's total indebtedness was
approximately $224.2 million, consisting of approximately $51.2 million in Term
Loans, $110.0 million of the Senior Subordinated Notes, $62.4 million of the
Senior Discount Debentures and $0.6 million of other indebtedness, including
capital lease obligations.
Principal and interest payments under the Senior Credit Facility and the
Senior Subordinated Notes represent significant liquidity requirements for the
Company. Under the terms of the Tranche A and B Loans, NBC is scheduled to make
principal payments totaling approximately $6.3 million in fiscal 2002, $6.8
million in fiscal 2003, $8.5 million in fiscal 2004, $11.2 million in fiscal
2005, and $18.4 million in fiscal 2006. Such scheduled principal payments are
subject to change upon the annual payment and application of excess cash flows
(as defined in the Credit Agreement underlying the Senior Credit Facility)
towards Tranche A and B Loan principal balances. There was no excess cash flow
payment obligation at March 31, 2001. Loans under the Senior Credit Facility
bear interest at floating rates based upon the interest rate option selected by
NBC. The Senior Subordinated Notes require semi-annual interest payments at a
fixed rate of 8.75% and mature on February 15, 2008. The Senior Discount
Debentures require semi-annual cash interest payments commencing August 15, 2003
at a fixed rate of 10.75% and mature on February 15, 2009.
The Company's capital expenditures were $1.8 million, $3.5 million, and $2.8
million for the fiscal years ended March 31, 2001, 2000, and 1999, respectively.
Capital expenditures consist primarily of leasehold improvements and furnishings
for new bookstores, bookstore renovations, computer upgrades and miscellaneous
warehouse improvements. The Company's ability to make capital expenditures is
subject to certain restrictions under the Senior Credit Facility.
Business acquisition expenditures were $3.0 million, $26.1 million, and $2.1
million for the fiscal years ended March 31, 2001, 2000, and 1999, respectively.
Of the $26.1 million in business acquisition expenditures made for the fiscal
year ended March 31, 2000, approximately $25.2 million pertains to the
acquisitions of Triro, Inc. and Ned's Bookstores. Approximately $14.9 million of
capital was raised in fiscal 2000 through the issuance of 284,923 shares of the
Company's Class A Common Stock to HWH and members of senior management to assist
in financing the acquisitions of Triro, Inc. and Ned's Bookstores.
In addition, during fiscal 2001, the Company issued 12,237 shares of its
Class A Common Stock to certain NBC employees. This issuance was exempt from
registration under the Securities Act of 1933, as amended, pursuant to Section
3(b) thereof and Rule 505 of Regulation D promulgated thereunder. Such shares
were issued at the Founder's Price of $52.47 per share. Proceeds from this
issuance, which totaled $642,039, were utilized for general operating
activities.
20
Subsequent to March 31, 2001, NBC acquired certain assets of a privately
owned college bookstore serving Western Washington University and seven
Wallace's Bookstores, Inc. bookstores serving the University of Florida, the
University of Oklahoma, North Carolina State University, the University of
Central Florida, Radford University, and Chadron State College for a total of
approximately $5.8 million. Such acquisitions were estimated to have
approximately $14 million in annual revenues and were funded through internally
generated cash flows. Future acquisitions, if any, may require additional equity
financing.
Also subsequent to March 31, 2001, NBC sold certain assets of two of its
college bookstore locations serving the University of Texas in Austin, Texas for
approximately $1.2 million. Annual combined revenues for these two locations for
the year ended March 31, 2001 were approximately $2.4 million. The sale was made
to one of the Company's largest wholesale customers, thereby strengthening the
long-term relationship with that customer.
The Company's principal sources of cash to fund its future operating
liquidity needs will be cash from operating activities and borrowings under the
Revolving Credit Facility. Usage of the Revolving Credit Facility to meet the
Company's liquidity needs fluctuates throughout the year due to the Company's
distinct buying and selling periods, increasing substantially at the end of each
college semester (May and December). For the year ended March 31, 2001,
weighted-average borrowings under the Revolving Credit Facility approximated
$15.3 million, with actual borrowings ranging from a low of no borrowings to a
high of $46.1 million. Net cash flows from operating activities for the year
ended March 31, 2001 were $8.8 million, a decrease of $10.1 million from $18.9
million for the year ended March 31, 2000. This decrease was primarily due to
the timing of payments made on accounts payable balances and increases in
accounts receivable.
Access to the Company's principal sources of cash is subject to various
restrictions. The availability of additional borrowings under the Revolving
Credit Facility is subject to the calculation of a borrowing base, which at any
time is equal to a percentage of eligible accounts receivable and inventory, up
to a maximum of $50.0 million. The Senior Credit Facility restricts the
Company's ability to make loans or advances and pay dividends, except that,
among other things, NBC may pay dividends to the Company (i) after August 15,
2003 in an amount not to exceed the amount of interest required to be paid on
the Senior Discount Debentures and (ii) to pay corporate overhead expenses not
to exceed $250,000 per year and any taxes owed by the Company. The indenture
governing the Senior Discount Debentures (the "Indenture") restricts the ability
of the Company and its Restricted Subsidiaries (as defined in the Indenture) to
pay dividends or make other Restricted Payments (as defined in the Indenture) to
their respective stockholders, subject to certain exceptions, unless certain
conditions are met, including that (i) no default under the Indenture shall have
occurred and be continuing, (ii) the Company shall be permitted by the Indenture
to incur additional indebtedness and (iii) the amount of the dividend or payment
may not exceed a certain amount based on, among other things, the Company's
consolidated net income. The indenture governing the Senior Subordinated Notes
contains similar restrictions on the ability of NBC and its Restricted
Subsidiaries to pay dividends or make other Restricted Payments to their
respective stockholders. Such restrictions are not expected to affect the
Company's ability to meet its cash obligations for the foreseeable future.
As of March 31, 2001, NBC could borrow up to $38.6 million under the
Revolving Credit Facility. The Revolving Credit Facility was unused at March 31,
2001. Amounts available under the Revolving Credit Facility may be used for
working capital and general corporate purposes (including up to $10.0 million
for letters of credit), subject to certain limitations under the Senior Credit
Facility.
The Company believes that funds generated from operations, existing cash,
and borrowings under the Revolving Credit Facility will be sufficient to finance
its current operations, any required excess cash flow payments, planned capital
expenditures and internal growth for the foreseeable future. Future
acquisitions, if any, may require additional debt or equity financing.
21
SEASONALITY
The Company's wholesale and bookstore operations experience two distinct
selling periods and the wholesale operations experience two distinct buying
periods. The peak selling periods for the wholesale operations occur prior to
the beginning of each college semester in August and December. The buying
periods for the wholesale operations occur at the end of each college semester
in late December and May. The primary selling periods for the bookstore
operations are in September and January. In fiscal 2001, approximately 43% of
the Company's annual revenues were earned in the second fiscal quarter
(July-September), while approximately 30% of the Company's annual revenues were
earned in the fourth fiscal quarter (January-March). Accordingly, the Company's
working capital requirements fluctuate throughout the year, increasing
substantially at the end of each semester, in May and December, as a result of
the buying periods. The Company funds its working capital requirements primarily
through a revolving credit facility, which historically has been repaid with
cash provided from operations.
IMPACT OF INFLATION
The Company's results of operations and financial condition are presented
based upon historical costs. While it is difficult to accurately measure the
impact of inflation due to the imprecise nature of the estimates required, the
Company believes that the effects of inflation, if any, on its results of
operations and financial condition have not been material. However, there can be
no assurance that during a period of significant inflation, the Company's
results of operations will not be adversely affected.
ACCOUNTING STANDARDS NOT YET ADOPTED
The Financial Accounting Standards Board has issued SFAS No. 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended by SFAS No. 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE
EFFECTIVE DATE OF FASB STATEMENT NO. 133, and SFAS No. 138, ACCOUNTING FOR
CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES. This standard
requires that all derivative instruments be recorded in the balance sheet at
fair value. Changes in the fair value of derivatives are recorded in earnings or
other comprehensive income, based on whether the instrument is designated as
part of a hedge transaction and, if so, the type of hedge transaction. The
initial adoption of SFAS No. 133, which occurred on April 1, 2001, had no
material impact on the Company's consolidated financial statements.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Annual Report on Form 10-K contains or incorporates by reference
certain statements that are not historical facts, including, most importantly,
information concerning possible or assumed future results of operations of the
Company and statements preceded by, followed by or that include the words "may,"
"believes," "expects," "anticipates," or the negation thereof, or similar
expressions, which constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). All
statements which address operating performance, events or developments that are
expected or anticipated to occur in the future, including statements relating to
volume and revenue growth, earnings per share growth or statements expressing
general optimism about future operating results, are forward-looking statements
within the meaning of the Reform Act. Such forward-looking statements involve
risks, uncertainties and other factors which may cause the actual performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. For those statements, the Company claims the protection of the safe
harbor for forward-looking statements contained in the Reform Act. Several
important factors could affect the future results of the Company and could cause
those results to differ materially from those expressed in the forward-looking
statements contained herein. The factors that could cause actual results to
differ materially include, but are not limited to, the following: increased
competition; ability to integrate recent acquisitions; loss or retirement of key
members of management; increases in the Company's cost of borrowing or inability
to raise or unavailability of additional debt or equity capital; inability to
purchase a sufficient supply of used textbooks; changes in pricing of new and/or
used textbooks; changes in general economic conditions and/or in the markets in
which the Company competes or may, from time to time, compete; the impact of the
22
Internet and E-books on the Company's operations; and other risks detailed in
the Company's Securities and Exchange Commission filings, in particular the
Company's Registration Statement on Form S-4 (No. 333-48225), all of which are
difficult or impossible to predict accurately and many of which are beyond the
control of the Company. The Company will not undertake and specifically declines
any obligation to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk exposure is, and is expected to continue
to be, fluctuation in Eurodollar interest rates. Of the $224.2 million in
long-term debt and capital lease obligations outstanding at March 31, 2001,
approximately $51.2 million is subject to fluctuations in the Eurodollar rate.
As provided in NBC's Senior Credit Facility, exposure to interest rate
fluctuations is managed by maintaining fixed interest rate debt (primarily the
Senior Subordinated Notes and Senior Discount Debentures) and by entering into
interest rate swap agreements to effectively convert certain variable rate debt
into fixed rate debt. NBC has separate five-year amortizing interest rate swap
agreements with two financial institutions whereby NBC's variable rate Tranche A
and B Term Loans have been effectively converted into debt with a fixed rate of
5.815% plus an applicable margin (as defined in the Credit Agreement). The
notional amount under each agreement as of March 31, 2001 was approximately
$25.6 million. Such notional amounts are reduced periodically by amounts equal
to the scheduled principal payments on the Tranche A and B Term Loans. NBC is
exposed to credit loss in the event of nonperformance by the counterparties to
the interest rate swap agreements. NBC anticipates the counterparties will be
able to fully satisfy their obligations under the agreements.
The following table presents quantitative information about the Company's
market risk sensitive instruments (the weighted-average variable rates are based
on implied forward rates in the yield curve at March 31, 2001):
Variable to Fixed
Fixed Rate Debt Variable Rate Debt Interest Rate Swaps
-------------------------- -------------------------- --------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Principal Interest Principal Interest Notional Pay/Receive
Cash Flows Rate Cash Flows (1) Rate Amounts Rates
-------------- ---------- -------------- ---------- ---------------- ---------------
Fiscal Year
Ended March 31:
2002 $ 50,412 9.48% $ 6,287,500 6.90% $ 48,170,833 5.81% / 4.50%
2003 45,571 9.53% 6,800,000 7.31% 41,413,542 5.81% / 4.89%
2004 25,950 9.57% 8,475,000 8.00% 12,275,000 5.81% / 5.44%
2005 28,881 9.57% 11,187,500 8.39% - -
2006 32,144 9.57% 18,437,500 8.64% - -
Thereafter 186,402,849 9.77% - - - -
-------------- --------- ------------- --------- --------------- --------------
Total $ 186,585,807 9.62% $ 51,187,500 7.65% $ 101,859,375 5.81% / 4.77%
============== ========= ============= ========= =============== ==============
Fair Value $ 148,485,793 - $ 51,187,500 - $ (1,004,400) -
============== ============= ===============
(1) Principal cash flows represent scheduled principal payments and are
adjusted for anticipated excess cash flow payments (as defined in the
Credit Agreement underlying the Senior Credit Facility) to be applied
toward principal balances. For Fiscal 2001, there was no excess cash
flow payment obligation.
23
Certain quantitative market risk disclosures have changed significantly
since March 31, 2000 as a result of market fluctuations, movement in interest
rates, and principal payments. The following table presents summarized market
risk information for the years ended March 31, 2001 and 2000:
March 31, March 31,
2001 2000
------------- -------------
Fair Values:
Fixed rate debt $148,485,793 $124,703,075
Variable rate debt 51,187,500 55,625,000
Interest rate swaps (1,004,400) 1,735,657
Overall Weighted-Average Interest Rates:
Fixed rate debt 9.62% 9.60%
Variable rate debt 7.65% 9.46%
Interest rate swaps receive rate 4.77% 6.96%
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements of NBC Acquisition Corp. for the
Years Ended March 31, 2001, 2000, and 1999
Independent Auditors' Report................................................26
Consolidated Balance Sheets.................................................27
Consolidated Statements of Operations.......................................28
Consolidated Statements of Stockholders' Deficit............................29
Consolidated Statements of Cash Flows.......................................30
Notes to Consolidated Financial Statements..................................31
25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
NBC Acquisition Corp.
Lincoln, Nebraska
We have audited the accompanying consolidated balance sheets of NBC
Acquisition Corp. and subsidiary as of March 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the three years in the period ended March 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of NBC Acquisition Corp. and
subsidiary as of March 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2001 in conformity with accounting principles generally accepted in the United
States of America.
DELOITTE & TOUCHE LLP
Lincoln, Nebraska
May 23, 2001
26
NBC ACQUISITION CORP.
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
March 31,
2001 2000
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,409,505 $ 4,450,887
Receivables 31,368,150 24,193,668
Inventories 61,834,563 61,809,630
Recoverable income taxes 706,408 -
Deferred income taxes 1,862,166 1,598,793
Prepaid expenses and other assets 403,700 427,302
------------- -------------
Total current assets 100,584,492 92,480,280
PROPERTY AND EQUIPMENT, net of depreciation &
amortization 24,474,887 25,760,825
GOODWILL AND OTHER INTANGIBLES, net of amortization 36,743,498 46,073,844
OTHER ASSETS 5,897,647 4,676,047
------------- -------------
$167,700,524 $168,990,996
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 11,647,964 $ 16,145,566
Accrued employee compensation and benefits 6,512,773 6,301,111
Accrued interest 1,466,643 1,349,224
Accrued expenses 1,946,675 819,010
Income taxes payable - 553,893
Deferred revenue 278,982 552,251
Current maturities of long-term debt 6,308,450 4,456,324
Current maturities of capital lease obligations 29,463 59,181
------------- -------------
Total current liabilities 28,190,950 30,236,560
LONG-TERM DEBT, net of current maturities 217,858,635 217,971,490
CAPITAL LEASE OBLIGATIONS, net of current maturities 22,254 64,856
OTHER LONG-TERM LIABILITIES 238,970 202,231
COMMITMENTS (Note K)
STOCKHOLDERS' DEFICIT:
Class A common stock, voting, authorized
5,000,000 shares of $.01 par va1ue;
issued and outstanding 1,260,750 and 1,248,513
shares at March 31, 2001 and 2000, respectively 12,607 12,485
Additional paid-in capital 65,167,394 64,525,477
Notes receivable from stockholders (697,171) (660,910)
Accumulated deficit (143,093,115) (143,361,193)
------------- -------------
Total stockholders' deficit (78,610,285) (79,484,141)
------------- -------------
$167,700,524 $168,990,996
============= =============
See notes to consolidated financial statements.
27
NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Year Ended March 31,
2001 2000 1999
------------- ------------- -------------
REVENUES, net of returns $301,668,853 $267,068,923 $218,637,571
COSTS OF SALES 187,098,970 164,984,418 137,988,909
------------- ------------- -------------
Gross profit 114,569,883 102,084,505 80,648,662
OPERATING EXPENSES:
Selling, general and administrative 74,100,242 65,819,487 51,288,680
Depreciation 2,956,135 3,096,013 2,392,701
Amortization 10,445,766 9,319,993 6,148,971
------------- ------------- -------------
87,502,143 78,235,493 59,830,352
------------- ------------- -------------
INCOME FROM OPERATIONS 27,067,740 23,849,012 20,818,310
OTHER EXPENSES (INCOME):
Interest expense 24,008,120 23,398,521 22,854,164
Interest income (615,430) (355,935) (351,231)
------------- ------------- -------------
23,392,690 23,042,586 22,502,933
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES 3,675,050 806,426 (1,684,623)
INCOME TAX EXPENSE 3,406,972 2,515,819 574,482
------------- ------------- -------------
NET INCOME (LOSS) $ 268,078 $ (1,709,393) $ (2,259,105)
============= ============= =============
EARNINGS (LOSS) PER SHARE:
Basic $ 0.21 $ (1.48) $ (2.37)
============= ============= =============
Diluted $ 0.21 $ (1.48) $ (2.37)
============= ============= =============
See notes to consolidated financial statements.
28
NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
- --------------------------------------------------------------------------------------------
Notes
Additional Receivable
Common Paid-in From Accumulated
Stock Capital Stockholder Deficit Total
-------- ----------- ----------- -------------- -------------
BALANCE, April 1, 1998 $ 9,530 $49,025,135 $(247,098) $(139,392,695) $(90,605,128)
Issuance of Class A
Common Stock 48 249,952 (225,000) - 25,000
Payment on stockholder
note - - 125,737 - 125,737
Interest accrued on
stockholder notes - - (14,258) - (14,258)
Net loss - - - (2,259,105) (2,259,105)
------- ----------- ---------- -------------- -------------
BALANCE, March 31, 1999 9,578 49,275,087 (360,619) (141,651,800) (92,727,754)
Issuance of Class A
Common Stock 2,907 15,250,390 (273,765) - 14,979,532
Interest accrued on
stockholder notes - - (26,526) - (26,526)
Net loss - - - (1,709,393) (1,709,393)
------- ----------- ---------- -------------- -------------
BALANCE, March 31, 2000 12,485 64,525,477 (660,910) (143,361,193) (79,484,141)
Issuance of Class A
Common Stock 122 641,917 - - 642,039
Interest accrued on
stockholder notes - - (36,261) - (36,261)
Net income - - - 268,078 268,078
------- ----------- ---------- -------------- -------------
BALANCE, March 31, 2001 $12,607 $65,167,394 $(697,171) $(143,093,115) $(78,610,285)
======= =========== ========== ============== =============
See notes to consolidated financial statements.
29
NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------
Year Ended March 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 2001 2000 1999
------------ ------------ ------------
Net income (loss) $ 268,078 $(1,709,393) $(2,259,105)
Adjustments to reconcile net income
(loss) to net cash flows from
operating activities:
Depreciation 2,956,135 3,096,013 2,392,701
Amortization of intangibles 12,139,902 11,017,964 7,802,928
Original issue debt discount amortization 6,195,595 5,603,246 5,034,486
Loss on disposal of assets 59,627 18,044 89,800
Deferred income taxes (1,351,000) (773,000) (883,200)
Changes in operating assets and liabilities,
net of effect of acquisitions:
Receivables (7,184,802) (3,189,434) 368,840
Inventories 354,360 (4,665,275) 18,827
Recoverable income taxes (706,408) 319,630 4,369,146
Prepaid expenses and other assets 23,602 84,054 (123,460)
Other assets (85,526) 797,705 (1,019,776)
Accounts payable (4,497,902) 5,318,621 (5,297,973)
Accrued employee compensation and benefits 211,662 2,231,461 28,651
Accrued interest 117,419 (77,285) (362,038)
Accrued expenses 1,128,408 133,125 182,985
Income taxes payable (553,893) 552,928 -
Deferred revenue (273,269) 175,695 (87,361)
Other long-term liabilities 36,739 11,157 40,470
------------ ------------ ------------
Net cash flows from operating activities 8,838,727 18,945,256 10,295,921
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,759,010) (3,542,471) (2,842,036)
Bookstore acquisitions, net of cash acquired (2,975,332) (26,072,155) (2,085,881)
Proceeds from sale of property and
equipment and other 144,834 65,197 97,586
Software development costs (403,996) (694,830) (236,328)
------------ ------------ ------------
Net cash flows from investing
activities (4,993,504) (30,244,259) (5,066,659)
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs - (32,478) (377,966)
Principal payments on long-term debt (4,456,324) (3,079,413) (1,327,696)
Principal payments on capital
lease obligations (72,320) (177,411) -
Proceeds from issuance of common stock 642,039 14,979,532 25,000
Net decrease in revolving credit facility - - (5,400,000)
Proceeds from payment on notes receivable
from stockholders - - 104,170
------------ ------------ ------------
Net cash flows from financing activities (3,886,605) 11,690,230 (6,976,492)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (41,382) 391,227 (1,747,230)
CASH AND CASH EQUIVALENTS, Beginning of year 4,450,887 4,059,660 5,806,890
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, End of year $ 4,409,505 $ 4,450,887 $ 4,059,660
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOWS INFORMATION:
Cash paid (refunded) during the year for:
Interest $16,000,970 $16,174,589 $16,527,759
Income taxes 6,018,273 2,424,436 (2,911,464)
Noncash investing and financing activities:
Notes receivable from shareholders
recorded upon issuance of common stock $ - $ 273,765 $ 225,000
See notes to consolidated financial statements.
30
NBC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A. NATURE OF OPERATIONS
NBC Acquisition Corp. (the "Company") was formed for the purpose of
acquiring all of the outstanding capital stock of Nebraska Book Company, Inc.
("NBC"), effective September 1, 1995. The Company did not have substantive
operations prior to the acquisition of NBC. The purchase price of NBC was $106.0
million, which was funded primarily through the issuance of long-term debt. The
acquisition was accounted for by the purchase method of accounting and resulted
in excess of cost over fair value of net assets acquired ("goodwill") of
approximately $26.9 million.
The Company does not conduct significant activities apart from its
investment in NBC. Operational matters discussed in this report, including the
acquisition of retail bookstores and other related businesses, refer to
operations of NBC. References to "the Company" and "NBC" are used
interchangeably when discussing such operational matters. NBC participates in
the college bookstore industry primarily by providing used textbooks to college
bookstore operators, by operating its own college bookstores and by providing
proprietary college bookstore information systems and consulting services.
RECAPITALIZATION: On February 13, 1998, the Company consummated a Merger
Agreement among NBC Merger Corp. (a newly created, indirect wholly-owned
subsidiary of HWH Capital Partners, LP. ["HWH"]), the Company and certain
shareholders of the Company pursuant to which the Company's outstanding debt and
stock were restructured (the "Recapitalization"). As the new investor did not
acquire substantially all of the common stock of the Company, a new basis of
accounting was not established in connection with the Recapitalization.
Significant components of the Recapitalization, together with the applicable
accounting effects, were as follows:
(i) HWH contributed $45.6 million in capital to NBC Merger Corp., which
was then merged into the Company, with the Company being the surviving
corporation.
(ii) Existing management shareholders of the Company reinvested
approximately $4.4 million in the Company. HWH and management
shareholders were reissued surviving corporation shares of Class A
Common Stock.
(iii) The Company and NBC obtained approximately $215.0 million in new debt
financing and retired substantially all of NBC's existing debt. The
early extinguishment of debt resulted in an extraordinary loss on the
transaction.
(iv) NBC agreed to purchase management's outstanding options under the
Company's 1995 Stock Incentive Plan for a cash payment in lieu of the
options. This resulted in stock based compensation of approximately
$8.3 million for the year ended March 31, 1998. In addition, the
Company agreed to purchase all outstanding warrants for approximately
$16.7 million, which was charged to additional paid-in capital and
retained earnings.
(v) The Company reacquired the outstanding shares of Class A and Class B
Common Stock of certain shareholders for approximately $149.2 million.
This reacquisition of shares was accounted for as a treasury stock
transaction, and such reacquired shares were retired.
In connection with the Recapitalization, a transaction fee of $4.0 million
was paid to HWH. Additionally, HWH was reimbursed approximately $0.1 million for
expenses incurred by HWH in conjunction with the Recapitalization. Approximately
$0.6 million of such costs was charged by the Company to additional paid-in
capital as non-deductible costs of the Recapitalization. Of the remaining $3.5
million, the Company and NBC recorded $0.9 million and $2.6 million,
respectively, as debt issue costs and are amortizing such costs over the life of
the related debt.
31
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company and its subsidiary are as
follows:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and NBC. All significant intercompany accounts and
transactions are eliminated in consolidation.
REVENUE RECOGNITION: The Company recognizes revenue from product sales at
the time of shipment. The Company has established a program which, under certain
conditions, enables its customers to return product. The effect of this program
is estimated utilizing actual historical return experience and amounts are
adjusted accordingly. The Company recognizes revenues from the licensing of its
software products upon delivery or installation if the Company is contractually
obligated to install the software.
SHIPPING AND HANDLING FEES AND COSTS: Amounts billed to a customer for
shipping and handling have been classified as revenues in the consolidated
statements of operations and approximated $2.9 million, $2.2 million, and $1.5
million for the years ended March 31, 2001, 2000, and 1999, respectively.
Shipping and handling costs are included in operating expenses in the
consolidated statements of operations and approximated $6.8 million, $5.8
million, and $4.7 million for the years ended March 31, 2001, 2000, and 1999,
respectively.
ADVERTISING: Advertising costs are expensed as incurred and approximated
$2.2 million, $2.3 million, and $2.0 million for the years ended March 31, 2001,
2000, and 1999, respectively.
USE OF ESTIMATES: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from the estimates.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of cash on hand
and in the bank as well as short-term investments with maturities of three
months or less when purchased.
INVENTORIES: Inventories are stated at the lower of cost or market.
Inventories for wholesale operations are determined on the weighted-average cost
method. Other inventories are determined on the first-in, first-out cost method.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Depreciation is determined using a combination of the straight-line and
accelerated methods. The majority of property and equipment have useful lives of
five to six years, with the exception of buildings which are depreciated over 30
years.
SOFTWARE DEVELOPMENT COSTS: The Company's primary activities regarding the
internal development of software revolve around its proprietary college
bookstore information system (PRISM), which is utilized by the Company's retail
bookstores and also marketed to the general public. As the PRISM software
developed internally is intended for both internal use and sale to external
customers, the Company adheres to the guidance in Statement of Financial
Accounting Standards ("SFAS") No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED as required by Statement of
Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE.
Development costs included in the research and development of new software
products and enhancements to existing software products associated with the
Company's proprietary college bookstore information systems are expensed as
incurred until technological feasibility has been established. After
technological feasibility is established, additional development costs are
capitalized and amortized over the lesser of five years or the economic life of
the related product. Recoverability of such capitalized costs is evaluated based
upon estimates of future undiscounted net revenues. Software costs capitalized
pertaining to WinPRISM, the Company's new Windows-based product, approximated
$1.1 million and $0.8 million at March 31, 2001 and 2000, respectively. During
32
the fiscal year ended March 31, 2001, certain WinPRISM functionalities were
completed and released to the general public. Amortization of the capitalized
costs associated with such functionalities totaled $0.1 million for the fiscal
year ended March 31, 2001. During fiscal 2000, the Company also capitalized and
amortized approximately $0.3 million associated with the development of
WebPRISM, which was licensed to TheCampusHub.com, Inc. in fiscal 2001(see Note Q
to the consolidated financial statements).
GOODWILL AND INTANGIBLE ASSETS: Intangible assets were acquired through the
acquisition of 100% of the stock of NBC effective September 1, 1995, and the
acquisition of various bookstore operations and other businesses. The Company
monitors events and changes in circumstances which may require a review of the
carrying value of goodwill at each consolidated balance sheet date to assess
recoverability based on estimated undiscounted future operating cash flows.
Impairments are recognized in operating results when a permanent diminution in
value occurs based on fair value. The assessment of the recoverability of
goodwill will be impacted if estimated future operating cash flows are not
achieved. Goodwill is amortized on a straight-line basis over periods ranging
from 3-15 years. Covenants not to compete are amortized on a straight-line basis
over the term of the agreements.
DEBT ISSUE COSTS: The costs related to the issuance of debt are capitalized
and amortized to interest expense on a straight-line basis over the lives of the
related debt.
DERIVATIVE FINANCIAL INSTRUMENTS: Interest rate swap agreements are utilized
by the Company to reduce the exposure to fluctuations in the interest rates on
its variable rate debt. The differential to be received or paid under such
agreements is recognized in income over the life of the agreements as
adjustments to interest expense.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of financial
instruments including cash and cash equivalents, accounts receivable, and
accounts payable approximate fair value as of March 31, 2001 and 2000, because
of the relatively short maturity of these instruments. The fair value of
long-term debt, including the current maturities, was approximately $199.7
million and $180.3 million as of March 31, 2001 and 2000, respectively, as
determined primarily by quoted market values. The fair value of the interest
rate swap agreements (see note H) approximated $(1.0) million and $1.7 million
as of March 31, 2001 and 2000 using quotes from brokers and represents the
Company's gain (loss) on settlement if the existing agreements had been settled
on that date.
STOCK BASED COMPENSATION: The Company accounts for its stock-based
compensation under provisions of Accounting Principles Board ("APB") Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and related interpretations.
INCOME TAXES: The Company provides for deferred income taxes based upon
temporary differences between financial statement and income tax bases of assets
and liabilities, and tax rates in effect for periods in which such temporary
differences are estimated to reverse.
EARNINGS PER SHARE: Basic earnings per share data are based on the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share data are based on the weighted-average number of common
shares outstanding and the dilutive effect of potential common shares including
stock options and warrants.
COMPREHENSIVE INCOME: The Company has no sources of other comprehensive
income. Therefore, comprehensive income consists solely of net income.
ACCOUNTING STANDARDS NOT YET ADOPTED: The Financial Accounting Standards
Board has issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, as amended by SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO.
133, and SFAS No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN
HEDGING ACTIVITIES. This standard requires that all derivative instruments be
recorded in the balance sheet at fair value. Changes in the fair value of
derivatives are recorded in earnings or other comprehensive income, based on
33
whether the instrument is designated as part of a hedge transaction and, if so,
the type of hedge transaction. The initial adoption of SFAS No. 133, which
occurred on April 1, 2001, had no material impact on the Company's consolidated
financial statements.
RECLASSIFICATIONS: Certain items on the prior years' statements have been
reclassified to conform to the current year presentation.
C. ACQUISITIONS
Effective November 12, 1999, NBC acquired certain assets and liabilities of
Michigan College Book Company, Inc. and Ned's Berkeley Book Company, Inc.
(collectively referred to as "Ned's Bookstores"), an independent college
bookstore operation with 11 retail bookstores located in Michigan and
California, for approximately $10.2 million, net of cash acquired. NBC accounted
for this acquisition under the purchase method of accounting. Excess cost over
fair value of net assets acquired of approximately $7.8 million has been
recorded as goodwill and is being amortized over a period of three years. Such
amortization period was assigned based upon the factors outlined in APB Opinion
No. 17, INTANGIBLE ASSETS. The results of operations for Ned's Bookstores have
been included in the consolidated results of the Company from the date of
acquisition. The acquisition of Ned's Bookstores was funded in part through a
$4.6 million capital contribution from the Company to NBC. The Company raised
the $4.6 million in capital through the sale of 87,922 shares of its Class A
Common Stock to certain shareholders, including HWH Capital Partners, L.P. and
members of senior management on December 6, 1999. The remaining funding was
provided through available cash funds.
Effective June 4, 1999, NBC acquired all of the outstanding common stock of
Triro, Inc., an independent college bookstore operation with 17 retail
bookstores located in Texas, New Mexico, and Arizona, for approximately $15.0
million, net of cash acquired. NBC accounted for this acquisition under the
purchase method of accounting. Excess cost over fair value of net assets
acquired of approximately $9.3 million has been recorded as goodwill and is
being amortized over a period of three years. Such amortization period was
assigned based upon the factors outlined in APB Opinion No. 17. The results of
operations for Triro, Inc. have been included in the consolidated results of the
Company from the date of acquisition. The acquisition of Triro, Inc. was funded
in part through a $10.3 million capital contribution from the Company to NBC.
The Company raised the $10.3 million in capital through the sale of 197,001
shares of its Class A Common Stock to certain shareholders, including HWH
Capital Partners, L.P. and members of senior management. The remaining funding
was provided through available cash funds and borrowings under NBC's revolving
credit facility.
The following table summarizing unaudited pro forma financial information
assumes the acquisitions discussed above had occurred at the beginning of the
period presented. The unaudited pro forma financial information is not
necessarily indicative of what the actual results of operations would have been
had the acquisitions occurred at the beginning of the period presented, nor does
it purport to indicate the results of future operations.
Year Ended
March 31, 2000
------------------
Pro Forma Information:
Revenues, net of returns $ 278,137,891
Net loss (2,807,962)
Earnings (loss) per share:
Basic (2.25)
Diluted (2.25)
Additionally, NBC from time to time acquires bookstore operations which
generally are not material in their impact to the Company. The purchase
generally involves paying cash for the inventory and fixed assets, as well as an
amount for goodwill. Goodwill recorded in such transactions is generally
amortized on a straight-line basis over a period of three years. In fiscal 2001
and 2000, NBC acquired four and two such bookstore operations, respectively.
34
D. RECEIVABLES
Receivables are summarized as follows:
March 31,
-----------------------------
2001 2000
------------ -------------
Trade receivables, less allowance for
doubtful accounts of $407,033 and
$175,899 at March 31, 2001 and 2000,
respectively $ 14,739,915 $ 12,935,801
Receivables from book publishers
for returns 11,971,106 7,589,663
Advances for book buy-backs 1,784,687 1,738,587
Computer finance agreements,
current portion 128,544 145,910
Other 2,743,898 1,783,707
------------ ------------
$ 31,368,150 $ 24,193,668
============ ============
Trade receivables include the effect of estimated product returns. The amount
of estimated product returns at March 31, 2001 and 2000 was approximately $2.7
million and $3.3 million, respectively.
E. INVENTORIES
Inventories are summarized as follows:
March 31,
----------------------------
2001 2000
------------ ------------
Wholesale $ 26,150,304 $ 25,413,484
College bookstores 31,348,415 31,137,643
Other 4,335,844 5,258,503
------------ ------------
$ 61,834,563 $ 61,809,630
============ ============
Wholesale inventories include the effect of estimated product returns. The
amount of estimated product returns at March 31, 2001 and 2000 was approximately
$1.4 million and $1.6 million, respectively.
F. PROPERTY AND EQUIPMENT
A summary of the cost of property and equipment follows:
March 31,
------------------------------
2001 2000
-------------- --------------
Land $ 2,412,818 $ 2,412,818
Buildings and improvements 14,733,218 14,443,622
Leasehold improvements 6,100,691 5,912,012
Furniture and fixtures 4,737,487 4,571,529
Information systems 9,277,060 8,352,241
Automobiles and trucks 386,074 433,956
Machinery 465,878 425,295
Projects in process 40,929 7,147
-------------- --------------
38,154,155 36,558,620
Less: Accumulated depreciation &
amortization (13,679,268) (10,797,795)
-------------- --------------
$ 24,474,887 $ 25,760,825
============== ==============
35
G. GOODWILL AND OTHER INTANGIBLES
Goodwill and intangible assets and related amortization are as follows:
March 31,
---------------------------------
2001 2000
--------------- ---------------
Goodwill $ 47,883,906 $ 53,901,655
Covenants not to compete 610,000 150,000
Debt issue costs 14,854,282 14,854,282
--------------- ---------------
63,348,188 68,905,937
Less: Accumulated amortization (26,604,690) (22,832,093)
--------------- ---------------
$ 36,743,498 $ 46,073,844
=============== ===============
H. LONG-TERM DEBT
On February 13, 1998, the Company obtained new financing as part of the
Recapitalization (See Note A). The new financing included a bank-administered
senior credit facility (the "Senior Credit Facility") provided to NBC through a
syndicate of investors. The facility is comprised of a $27.5 million term loan
(the "Tranche A Loan"), a $32.5 million term loan (the "Tranche B Loan") and a
$50.0 million revolving credit facility (the "Revolving Credit Facility").
The Revolving Credit Facility expires on March 31, 2004. Availability under
the Revolving Credit Facility is determined by the calculation of a borrowing
base, which at any time is equal to a percentage of eligible accounts receivable
and inventory. The calculated borrowing base at March 31, 2001 was approximately
$38.6 million. The Revolving Credit Facility was unused at March 31, 2001.
The interest rate on the Senior Credit Facility is prime plus an applicable
margin of up to 1.50% or, on Eurodollar borrowings, Eurodollar rate plus an
applicable margin of up to 2.50%. Additionally, there is a 0.5% commitment fee
for the average daily unused amount of the Revolving Credit Facility. The
average borrowings under the Revolving Credit Facility for the years ended March
31, 2001 and 2000 were approximately $15.3 million and $14.2 million at an
average rate of 10.7% and 9.3%, respectively.
The Senior Credit Facility is collateralized by substantially all of the
Company's assets. The Senior Credit Facility also stipulates that excess cash
flows as defined in the credit agreement dated February 13, 1998 (the "Credit
Agreement") shall be applied initially towards prepayment of the term loans and
then utilized to permanently reduce commitments under the Revolving Credit
Facility. At March 31, 2001 and 2000, there was no excess cash flow payment due.
Additional funding of the Recapitalization included the proceeds of the
issuance by NBC of $110.0 million face amount of 8.75% senior subordinated notes
due 2008 (the "Senior Subordinated Notes") and the issuance by the Company of
$76.0 million face amount of 10.75% senior discount debentures due 2009 (the
"Senior Discount Debentures"). The proceeds of the Senior Discount Debentures
were discounted in the amount of approximately $31.0 million and will accrete in
value at the rate of 10.75% compounded semiannually until February 15, 2003, at
which time interest payments will begin.
36
Borrowings consist of the following:
March 31,
-----------------------------
2001 2000
------------- -------------
Tranche A Loan, due March 31, 2004,
quarterly principal payments, plus
interest at a floating rate based on
Eurodollar rate plus 2.25% (7.20%
and 8.46% at March 31, 2001 and 2000,
respectively) $ 20,062,500 $ 24,000,000
Tranche B Loan, due March 31, 2006,
quarterly principal payments, plus
interest at a floating rate based on
Eurodollar rate plus 2.50% (7.45% and
8.71% at March 31, 2001 and 2000,
respectively) 31,125,000 31,625,000
Senior subordinated notes, unsecured,
due February 15, 2008, semi-annual
interest payments at a fixed rate
of 8.75% 110,000,000 110,000,000
Senior discount debentures, unsecured,
maturing February 15, 2009, semi-annual
interest payments at a rate of 10.75%,
commencing August 15, 2003, net
of a discount of $13,554,505 and
$19,750,100 at March 31, 2001 and
2000, respectively 62,445,495 56,249,900
Mortgage note payable with an insurance
company assumed with the acquisition
of a bookstore facility, due
December 1, 2013, monthly payments of
$6,446 including interest at 10.75% 534,090 552,914
------------- -------------
224,167,085 222,427,814
Less current maturities (6,308,450) (4,456,324)
------------- -------------
$217,858,635 $217,971,490
============= =============
The Senior Credit Facility requires the Company to maintain certain
financial ratios and contains a number of other covenants that among other
things, restrict the ability to incur additional indebtedness, dispose of
assets, make capital expenditures, make loans or advances and pay dividends,
except that, among other things, NBC may pay dividends to the Company (i) after
August 15, 2003 in an amount not to exceed the amount of interest required to be
paid on the Senior Discount Debentures and (ii) to pay corporate overhead
expenses not to exceed $250,000 per year and any taxes due by the Company.
The indenture governing the Senior Discount Debentures restricts the ability
of the Company and its Restricted Subsidiaries (as defined in the indenture) to
pay dividends or make other Restricted Payments (as defined in the indenture) to
their respective stockholders, subject to certain exceptions, unless certain
conditions are met, including that (i) no default under the indenture shall have
occurred and be continuing, (ii) the Company shall be permitted by the indenture
to incur additional indebtedness and (iii) the amount of the dividend or payment
may not exceed a certain amount based on, among other things, the Company's
consolidated net income. The indenture governing the Senior Subordinated Notes
contains similar restrictions on the ability of NBC and its Restricted
Subsidiaries to pay dividends or make other Restricted Payments to their
respective stockholders.
NBC has separate five-year amortizing interest rate swap agreements with two
financial institutions whereby NBC's variable rate Tranche A and B Term Loans
have been effectively converted into debt with a fixed rate of 5.815% plus the
applicable margin. The notional amount under each agreement was approximately
$25.6 million at March 31, 2001. Such notional amounts are reduced periodically
by amounts equal to the scheduled principal payments on the Tranche A and B Term
Loans. NBC is exposed to credit loss in the event of nonperformance by the
counterparties to the interest rate swap agreements. NBC anticipates the
counterparties will be able to fully satisfy their obligations under the
agreements.
37
At March 31, 2001, the aggregate maturities of long-term debt for the next
five years were as follows:
Fiscal Year
2002 $ 6,308,450
2003 6,823,317
2004 8,500,950
2005 11,216,381
2006 18,469,644
I. NOTES RECEIVABLE FROM STOCKHOLDERS
Notes receivable from stockholders reflected as a component of stockholders'
deficit pertain to notes obtained from certain NBC executive officers in
conjunction with certain issuances of the Company's Class A Common Stock. Such
notes mature on various dates from August, 2002 to January, 2010, are payable at
maturity, and bear interest at various rates from 5.25% to 6.04%.
J. INCOME TAXES
The provision (benefit) for income taxes consists of:
Year Ended March 31,
-----------------------------------------
2001 2000 1999
------------ ----------- -----------
Current:
Federal $ 3,811,112 $2,669,915 $1,258,891
State 946,860 618,904 198,791
Deferred (1,351,000) (773,000) (883,200)
------------ ----------- -----------
$ 3,406,972 $2,515,819 $ 574,482
============ =========== ===========
The following represents a reconciliation between the actual income tax
expense (benefit) and income taxes computed by applying the Federal income tax
rate to income (loss) before income taxes:
Year Ended March 31,
-----------------------------------
2001 2000 1999
------ ------- --------
Statutory rate 34.0% 34.0% (34.0)%
State income tax effect 13.2 40.7 1.3
Amortization of goodwill 39.3 187.1 38.0
Change in estimate of income tax
liabilities 3.0 31.0 21.9
Other 3.2 19.2 6.9
------ ------- --------
92.7% 312.0% 34.1 %
====== ======= ========
38
The components of the deferred tax assets consist of the following:
March 31,
---------------------------
2001 2000
----------- ------------
Deferred income tax assets
(liabilities), current:
Vacation accruals $ 484,173 $ 420,483
Inventory 544,378 603,037
Allowance for doubtful accounts 154,510 66,771
Product returns 480,069 618,637
Other deferred tax assets 321,784 -
Other deferred tax liabilities (122,748) (110,135)
----------- -----------
1,862,166 1,598,793
Deferred income tax assets,
noncurrent:
Deferred compensation agreements 90,713 76,767
Book over tax goodwill
amortization 2,967,716 1,775,263
Covenant not to compete 1,468,568 1,587,340
----------- -----------
4,526,997 3,439,370
----------- -----------
$6,389,163 $5,038,163
=========== ===========
The non-current portion of deferred tax assets is classified in other
assets.
K. LEASE OBLIGATIONS
The Company is obligated under various capital leases for certain equipment
that expire at various dates through 2003. Capitalized leased equipment included
in property and equipment was approximately $27,000 at March 31, 2001, net of
accumulated amortization.
The Company leases bookstore facilities and data processing equipment under
noncancelable operating leases expiring at various dates through fiscal 2013,
many of which contain options to renew for periods of up to ten years. Certain
of the leases are based on a percentage of sales, ranging from 2.5% to 10.5%.
Future minimum capital lease payments and aggregate minimum lease payments
under noncancelable operating leases for the years ending March 31 are as
follows:
Capital Operating
Year Leases Leases
---- ----------- ------------
2002 $ 32,160 $ 6,627,000
2003 23,091 5,652,000
2004 - 4,513,000
2005 - 3,511,000
2006 - 2,872,000
Thereafter - 8,451,000
----------- -----------
Total minimum lease payments 55,251 $31,626,000
============
Amount representing interest (3,534)
-----------
Present value of minimum lease
payments $ 51,717
===========
Total rent expense for the years ended March 31, 2001, 2000, and 1999 was
approximately $9.6 million, $8.2 million, and $6.2 million, respectively.
Percentage rent expense for the years ended March 31, 2001, 2000, and 1999 was
approximately $2.0 million, $1.8 million, and $1.6 million, respectively.
L. RETIREMENT PLAN
The Company's subsidiary participates in and sponsors a 401(k) compensation
deferral plan. The plan covers substantially all employees. The plan provisions
include employee contributions based on a percentage of compensation along with
a sponsor base contribution in addition to a limited matching feature. The
sponsor contributions for the years ended March 31, 2001, 2000, and 1999 were
approximately $0.8 million, $0.8 million, and $0.7 million, respectively.
39
M. DEFERRED COMPENSATION
The Company has a non-qualified deferred compensation plan for selected
employees. This plan allows participants to voluntarily elect to defer portions
of their current compensation. The amounts can be distributed upon death,
resignation or termination, voluntary or involuntary. Interest is accrued at the
prime rate adjusted semi-annually on January 1 and July 1 and is compounded as
of March 31. The liability for the deferred compensation is included in other
long-term liabilities.
N. STOCK-BASED COMPENSATION
The Company has two stock-based compensation plans established to provide
for the granting of options to purchase Class A Common Stock. Details regarding
each of the plans in effect are as follows:
1998 PERFORMANCE STOCK OPTION PLAN - This plan provides for the granting of
options to purchase 52,000 shares of the Company's Class A Common Stock to
selected members of senior management of the Company and its affiliates. All
options granted are intended to be nonqualified stock options, although the plan
also provides for incentive stock options. The Company will grant a portion of
the available options in fiscal years 1999-2002 upon the attainment of
pre-established financial targets. Twenty-five percent of the options granted
become exercisable immediately upon granting, with the remaining options
becoming exercisable in 25% increments over the subsequent three years on the
anniversary of the date of grant. The options have an exercise price of not less
than fair market value on the date the options are granted and expire ten years
from the date of grant. At March 31, 2001, there were 29,470 options available
for grant under the plan.
1998 STOCK OPTION PLAN - This plan provides for the granting of options to
purchase 31,000 shares of the Company's Class A Common Stock to selected
employees, officers, and directors of the Company and its affiliates. All
options granted are intended to be nonqualified stock options, although the plan
also provides for incentive stock options. The Company will grant such options
at the discretion of a committee designated by the Board of Directors (the
Committee). Twenty-five percent of the options granted become exercisable
immediately upon granting, with the remaining options becoming exercisable in
25% increments over the subsequent three years on the anniversary of the date of
grant. Incentive stock options have an exercise price of not less than fair
market value on the date the options are granted, while the Committee determines
the exercise price for nonqualified options, which may be below fair market
value, at the time of grant. All options expire ten years from the date of
grant. At March 31, 2001, there were 2,906 options available for grant under the
plan.
No compensation cost was recognized for the options granted to employees in
fiscal 2001, 2000, and 1999 as the exercise price was greater than the estimated
fair value (including a discount for the holder's minority interest position and
illiquidity of the Class A Common Stock) of the Company's Class A Common Stock
on the date of grant.
40
A summary of the Company's stock-based compensation activity related to
stock options for each of the plans for the three years ended March 31, 2001 is
as follows:
Year Ended March 31,
2001 2000 1999
---------------------- ---------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
---------- ----------- ----------- ---------- ----------- ---------
1998 Performance Stock Option Plan:
Outstanding - beginning of year 9,530 $52.47 9,530 $52.47 - $ -
Granted 13,000 52.47 - - 9,530 52.47
Expired/terminated - - - - - -
Exercised - - - - - -
---------- ----------- ----------- ---------- ----------- ---------
Outstanding - end of year 22,530 $52.47 9,530 $52.47 9,530 $52.47
========== =========== =========== ========== =========== =========
There were 10,398, 4,765, and 2,382 options exercisable at March 31, 2001, 2000, and 1999,
respectively, with a weighted-average exercise price per option of $52.47. All options
outstanding at March 31, 2001 have an exercise price of $52.47 per option and a
weighted-average remaining contractual life of 8.7 years.
Year Ended March 31,
2001 2000 1999
----------------------- ---------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
----------- ----------- ----------- ---------- ----------- ---------
1998 Stock Option Plan:
Outstanding - beginning of year 24,694 $52.47 13,200 $52.47 - $ -
Granted 3,400 52.47 11,594 52.47 13,200 52.47
Expired/terminated - - (100) 52.47 - -
Exercised - - - - - -
----------- ----------- ----------- ---------- ----------- ---------
Outstanding - end of year 28,094 $52.47 24,694 $52.47 13,200 $52.47
=========== =========== =========== ========== =========== =========
There were 16,472, 9,448, and 3,300 options exercisable at March 31, 2001, 2000, and 1999,
respectively, with a weighted-average exercise price per option of $52.47. All options
outstanding at March 31, 2001 have an exercise price of $52.47 per option and a
weighted-average remaining contractual life of 8.2 years.
If the Company accounted for its stock-based compensation using the fair
value method prescribed by SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, the weighted-average grant-date fair value of options granted
under the 1998 Performance Stock Option Plan in fiscal 2001 and 1999 would have
been $7.37 and $8.85 per option, respectively. The weighted-average grant-date
fair value of options granted under the 1998 Stock Option Plan in fiscal 2001,
2000, and 1999 would have been $7.68, $9.26, and $8.64 per option, respectively.
The fair value of options granted was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:
Year Ended Year Ended Year Ended
March 31, 2001 March 31, 2000 March 31, 1999
----------------- ----------------- ---------------
Risk-free interest rate 6.26% 6.06% 4.50%
Dividend yield - - -
Expected volatility 1.00% 1.00% 1.00%
Expected life (years) 3 3 4
41
The pro forma impact on net income (loss), as well as basic and diluted
earnings (loss) per share, of accounting for stock-based compensation using the
fair value method required by SFAS 123 is as follows:
Year Ended March 31,
2001 2000 1999
---------- ------------ ------------
Net income (loss):
As reported $ 268,078 $(1,709,393) $(2,259,105)
Pro forma 195,243 (1,775,050) (2,321,093)
Basic earnings (loss) per share:
As reported $ 0.21 $ (1.48) $ (2.37)
Pro forma 0.15 (1.54) (2.43)
Diluted earnings (loss) per share:
As reported $ 0.21 $ (1.48) $ (2.37)
Pro forma 0.15 (1.54) (2.43)
O. SEGMENT INFORMATION
The Company's operating segments are determined based on the way that
management organizes the segments for making operating decisions and assessing
performance. Management has organized the Company's segments based upon
differences in products and services provided. The Company has three reportable
segments: wholesale operations, college bookstore operations and complementary
services. The wholesale operations segment consists primarily of selling used
textbooks to college bookstores, buying them back from students or college
bookstores at the end of each college semester and then reselling them to
college bookstores. The college bookstore operations segment encompasses the
operating activities of the Company's 102 college bookstores as of March 31,
2001 located on or adjacent to college campuses. The complementary services
segment includes book-related services such as a centralized buying service,
distance education materials, and computer hardware and software.
The accounting policies of the Company's segments are the same as those
described in the summary of significant accounting policies in Note B. The
Company primarily accounts for intersegment sales as if the sales were to third
parties (at current market prices). Assets (excluding cash and cash equivalents,
certain receivables and other assets, and inventories), net interest expense and
taxes are not allocated between the Company's segments; instead, such balances
are accounted for in a corporate administrative division. The following table
provides selected information about profit or loss and assets on a segment basis
for the three years ended March 31, 2001.
42
College
Wholesale Bookstore Complementary
Operations Operations Services Total
-------------- ---------------- --------------- --------------
Year ended March 31, 2001:
External customer revenues $ 93,922,712 $ 182,479,980 $ 25,266,161 $ 301,668,853
Intersegment revenues 19,084,092 376,020 1,381,290 20,841,402
Depreciation and amortization expense 293,408 9,429,428 1,475,914 11,198,750
Income (loss) before interest and taxes 27,241,116 9,206,616 (1,402,666) 35,045,066
Total assets 29,771,356 35,254,893 5,354,837 70,381,086
Year ended March 31, 2000:
External customer revenues $ 91,260,331 $ 157,896,805 $ 17,911,787 $ 267,068,923
Intersegment revenues 16,814,190 180,064 2,806,006 19,800,260
Depreciation and amortization expense 321,936 7,444,799 2,280,512 10,047,247
Income (loss) before interest and taxes 24,832,679 9,588,784 (2,449,321) 31,972,142
Total assets 28,636,070 34,829,430 5,950,258 69,415,758
Year ended March 31, 1999:
External customer revenues $ 86,386,611 $ 120,872,556 $ 11,378,404 $ 218,637,571
Intersegment revenues 12,364,501 - 1,259,149 13,623,650
Depreciation and amortization expense 319,702 3,171,027 1,894,323 5,385,052
Income (loss) before interest and taxes 21,590,426 8,339,047 (2,442,717) 27,486,756
Total assets 28,898,295 23,600,603 4,228,300 56,727,198
The following table reconciles segment information presented above with
consolidated information as presented in the consolidated financial statements
for the three years ended March 31, 2001.
Year Ended March 31,
2001 2000 1999
---------------- ---------------- ---------------
Revenues:
Total for reportable segments $ 322,510,255 $ 286,869,183 $ 232,261,221
Elimination of intersegment revenues (20,841,402) (19,800,260) (13,623,650)
---------------- ---------------- ---------------
Consolidated total $ 301,668,853 $ 267,068,923 $ 218,637,571
================ ================ ===============
Depreciation and Amortization Expense:
Total for reportable segments $ 11,198,750 $ 10,047,247 $ 5,385,052
Corporate administration 2,203,151 2,368,759 3,156,620
---------------- ---------------- ---------------
Consolidated total $ 13,401,901 $ 12,416,006 $ 8,541,672
================ ================ ===============
Income (Loss) Before Interest and Taxes:
Total for reportable segments $ 35,045,066 $ 31,972,142 $ 27,486,756
Corporate administrative costs (7,977,326) (8,123,130) (6,668,446)
---------------- ---------------- ---------------
27,067,740 23,849,012 20,818,310
Interest expense, net (23,392,690) (23,042,586) (22,502,933)
---------------- ---------------- ---------------
Consolidated income (loss) before taxes $ 3,675,050 $ 806,426 $ (1,684,623)
================ ================ ===============
Total Assets:
Total for reportable segments $ 70,381,086 $ 69,415,758 $ 56,727,198
Assets not allocated to segments:
Receivables 26,829,423 20,923,250 17,544,101
Recoverable income taxes 706,408 - 4,902
Deferred income taxes 1,862,166 1,598,793 1,468,156
Property and equipment, net 24,474,887 25,760,825 23,188,485
Goodwill and other intangibles, net 36,743,498 46,073,844 38,778,577
Other assets 6,298,179 4,791,000 3,653,180
Other 404,877 427,526 1,514,255
---------------- ---------------- ---------------
Consolidated total $ 167,700,524 $ 168,990,996 $ 142,878,854
================ ================ ===============
The Company's revenues are attributed to countries based on the location of
the customer. Substantially all revenues generated are attributable to customers
located within the United States.
43
P. EARNINGS PER SHARE
Basic earnings per share data are based on the weighted-average number of
common shares outstanding during the period. Weighted-average common shares
outstanding for the years ended March 31, 2001, 2000, and 1999 were 1,260,314
shares, 1,152,325 shares, and 954,059 shares, respectively. Diluted earnings per
share data are based on the weighted-average number of common shares outstanding
and the dilutive effect of potential common shares including stock options. For
purposes of calculating diluted earnings per share, weighted-average common
shares outstanding for the year ended March 31, 2001 include 3,232 incremental
shares attributable to the 50,624 stock options outstanding at March 31, 2001.
There were 34,224 and 22,730 stock options outstanding at March 31, 2000 and
1999, respectively, that had no impact on diluted earnings per share as the
exercise price of such options was greater than the estimated fair value
(including a discount for the holder's minority interest position and
illiquidity of the Class A Common Stock) of the Class A Common Stock underlying
the options as of March 31, 2000 and 1999.
Q. RELATED PARTY TRANSACTIONS
In fiscal 2001, NBC entered into several agreements related to its
WebPRISM and CampusHub E-commerce software capabilities with a newly created
entity, TheCampusHub.com, Inc., which is partially owned by the Company's
majority owner. Such agreements included an equity option agreement, a
management services agreement, and a technology sale and license agreement.
The equity option agreement provides NBC the opportunity to acquire 25% of
the initial common shares outstanding of TheCampusHub.com, Inc. The option is
being accounted for as a cost method investment in accordance with APB Opinion
No. 18, THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS IN COMMON STOCK. The
management services agreement, which is effective for a period of three years,
reimburses NBC for certain direct costs incurred on behalf of TheCampusHub.com,
Inc. and also pays NBC $0.5 million per year for certain shared management and
administrative support. Complementary services revenue resulting from the
management services agreement is recognized as the services are performed. The
technology sale and license agreement provides for NBC to license its E-commerce
software capabilities to TheCampusHub.com, Inc. for $0.5 million per year over a
period of three years and provides TheCampusHub.com, Inc. with an option to
purchase such software capabilities from NBC during that three year period. The
license fees are recognized as complementary services revenue over the term of
the agreement. NBC's Senior Credit Facility was amended in April, 2000 to
provide for these transactions. For the year ended March 31, 2001, revenues
attributable to the management services and technology sale and license
agreements totaled $0.9 million, and reimbursable direct costs incurred on
behalf of TheCampusHub.com, Inc. totaled $0.9 million.
During fiscal 2001, the Company issued 12,237 shares of its Class A Common
Stock to certain NBC employees. This issuance was exempt from registration under
the Securities Act of 1933, as amended, pursuant to Section 3(b) thereof and
Rule 505 of Regulation D promulgated thereunder. Such shares were issued at the
Founder's Price of $52.47 per share. Proceeds from this issuance, which totaled
$642,039, were utilized for general operating activities.
R. SUBSEQUENT EVENT
Subsequent to March 31, 2001, NBC entered into an Agreement of Sale with
the University Co-operative Society (the "Co-op") at the University of Texas in
Austin. Pursuant to the Agreement of Sale, NBC sold inventory and certain
property, plant and equipment located at two of its college bookstore locations
serving the University of Texas to the Co-op for approximately $1.2 million. NBC
also assigned an associated real estate operating lease to the Co-op.
Also subsequent to March 31, 2001, NBC acquired certain assets of a
privately owned college bookstore serving Western Washington University and
seven Wallace's Bookstores, Inc. bookstores serving the University of Florida,
the University of Oklahoma, North Carolina State University, the University of
Central Florida, Radford University, and Chadron State College for a total of
approximately $5.8 million. NBC will account for these acquisitions under the
purchase method of accounting with any excess cost over fair value of net assets
acquired being recorded as goodwill.
44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
There were no changes in or disagreements with accountants on accounting and
financial disclosure for the fiscal year ended March 31, 2001.
45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The members of the Board of Directors and executive officers of the Company
and their ages are as follows:
NAME AGE POSITION
---- --- --------
Robert B. Haas 54 Chairman and Director
Douglas D. Wheat 51 Director
Mark W. Oppegard 51 President/Chief Executive Officer, Secretary
and Director
Alan G. Siemek 40 Vice President and Treasurer
Barry S. Major 44 Chief Operating Officer, NBC
William H. Allen 58 Senior Vice President of Wholesale Division, NBC
Thomas A. Hoff 53 Vice President of Retail Development, NBC
Michael J. Kelly 43 Vice President of E-commerce, NBC
Larry R. Rempe 53 Vice President of Information Systems, NBC
Kenneth F. Jirovsky 57 Vice President of Development, NBC
Ardean A. Arndt 59 Vice President of Administration and
Secretary, NBC
The business experience, principal occupation and employment as well as the
periods of service of each of the directors and executive officers of the
Company during the last five years are set forth below.
ROBERT B. HAAS became Chairman and a Director of the Company and NBC upon
the consummation of the Recapitalization. Mr. Haas has also served as a Director
of TheCampusHub.com, Inc. since its inception in 2000. Mr. Haas has been
actively involved in private investments since 1978. He has served as Chairman
of the Board and Chief Executive Officer of Haas Wheat since 1995; he has also
been Chairman of the Board and Chief Executive Officer of Haas Wheat Advisory
Partners Incorporated since 1992 and Chairman of the Board of Haas & Partners
Incorporated since 1989 (each of which is a private investment firm specializing
in leveraged acquisitions). Mr. Haas serves as a director of Sybron
International Corporation, AMN Healthcare Services, Inc. and Walls Holding
Company, Inc. and is the Chairman of the Board of Playtex Products, Inc. (a
consumer products company).
DOUGLAS D. WHEAT became a Director of the Company and NBC upon the
consummation of the Recapitalization. Mr. Wheat has also served as a Director of
TheCampusHub.com, Inc. since its inception in 2000. Mr. Wheat has been President
of Haas Wheat since 1995 and President of Haas Wheat Advisory Partners
Incorporated since 1992; he was Co-Chairman of Grauer & Wheat, Inc. (a private
investment firm) from 1989 to 1992 and Senior Vice President of Donaldson,
Lufkin & Jenrette Securities Corporation from 1985 to 1989. Mr. Wheat serves as
a director of Smarte Carte Corporation, Walls Holding Company, Inc., AMN
Healthcare Services, Inc. and Playtex Products, Inc.
MARK W. OPPEGARD has served in the college bookstore industry for 31 years
(all of which have been with NBC) and became President/Chief Executive Officer,
Secretary and a Director of the Company and Chief Executive Officer of NBC upon
consummation of the Recapitalization on February 13, 1998. Additionally, Mr.
Oppegard has served as President of NBC since 1992 and as a Director of NBC
since 1995. Prior to the Recapitalization, Mr. Oppegard served as Vice
President, Secretary, Assistant Treasurer and a Director of the Company between
1995 and 1998. Prior to 1992, Mr. Oppegard served in a series of positions at
NBC, including Vice President of the college bookstore operations. Mr. Oppegard
has also served as Chairman and a Director of TheCampusHub.com, Inc. since its
inception in 2000. Additionally, he is currently a director of NACSCORP, INC., a
distribution company serving the college bookstore industry.
ALAN G. SIEMEK was named Senior Vice President of Finance and Administration
of NBC in April, 2001. Mr. Siemek has also served as Vice President and
Treasurer of the Company and Chief Financial Officer, Treasurer and Assistant
46
Secretary of NBC since July, 1999. Additionally, Mr. Siemek has served as Chief
Financial Officer, Treasurer, and Secretary of TheCampusHub.com, Inc. since its
inception in 2000. Prior to joining the Company, Mr. Siemek served as Corporate
Controller at SITEL Corporation (SITEL), a company listed on the New York Stock
Exchange that provides outsourced telephone and Internet-based sales and
customer service, starting in 1997. Between 1994 and 1997, Mr. Siemek served in
the positions of Director and Manager of SEC Reporting and Risk Management for
MFS Communications, a billion dollar telecommunications firm. Prior to joining
MFS Communications, Mr. Siemek spent eleven years in public accounting with
Coopers & Lybrand LLP in their Omaha and New York offices.
BARRY S. MAJOR was named Chief Operating Officer of NBC in January, 1999.
Additionally, Mr. Major served as President of TheCampusHub.com, Inc. from its
inception to November, 2000, at which time he was named Chief Executive Officer
of TheCampusHub.com, Inc. Prior to joining NBC, Mr. Major served in various
executive management positions at SITEL. Joining SITEL in 1995 as the Executive
Vice President of Finance, Mr. Major was named Chief Financial Officer in 1996
and assumed the role of President of the North America Region in 1997. Between
1985 and 1995, Mr. Major served in a series of positions, including President in
1995, Executive Vice President, and Senior Vice President/Credit Manager, with
American National Corporation, a multi-bank holding company operating three
banks throughout Omaha and Southeast Nebraska.
WILLIAM H. ALLEN has served in the college bookstore industry for 36 years
(of which 27 have been with NBC). NBC named Mr. Allen the Senior Vice President
of Wholesale Division in April, 2001. Between 1994 and 2001, Mr. Allen served as
Vice President of Warehouse Operations for NBC. Between 1974 and 1994, Mr. Allen
served in a series of positions, including assistant manager of the wholesale
operations. Prior to joining NBC in 1974, Mr. Allen was employed by the Missouri
Store Company, a predecessor of MBS.
THOMAS A. HOFF has served in the college bookstore industry for 14 years
(all of which have been with NBC) and was named Vice President of Retail
Development for NBC in April, 2001. Between 1992 and 2001, Mr. Hoff served as
Vice President of Retail Division for NBC. Mr. Hoff served as an assistant to
the Vice President of College Bookstore Operations between 1987 and 1992.
MICHAEL J. KELLY was named Vice President of E-commerce of NBC in November,
1999. Additionally, Mr. Kelly served as Chief Operating Officer of
TheCampusHub.com, Inc. from its inception to November, 2000, at which time he
was named President and Chief Operating Officer of TheCampusHub.com, Inc. Prior
to joining NBC, Mr. Kelly served in various executive management positions at
SITEL. Joining SITEL in 1995 as a Business Unit Vice President of Administration
and Finance, Mr. Kelly was named a Business Unit President in 1997, assumed the
role of Chief Information Officer for the North America Region in March, 1998,
and was named Chief Technology Officer for Global Operations in August, 1998.
Between 1981 and 1995, Mr. Kelly served as Director of Information Technology
for Father Flanagan's Boys Home, a non-profit organization offering services to
troubled children.
LARRY R. REMPE has served in the college bookstore industry for 15 years
(all of which have been with NBC) and has been Vice President of Information
Systems for NBC since 1986. Between 1974 and 1986, Mr. Rempe served in various
positions for Lincoln Industries, Inc. ("Lincoln"), a holding company that owned
NBC until 1995.
KENNETH F. JIROVSKY has served in the college bookstore industry for 40
years (all of which have been with NBC) and was named Vice President of
Development for NBC in April, 2001. Between 1986 and 2001, Mr. Jirovsky served
as Vice President of Sales and Marketing for NBC. Prior to 1986 Mr. Jirovsky
served in a series of positions, including assistant manager of the wholesale
operations.
ARDEAN A. ARNDT has served in the college bookstore industry for 16 years
(all of which have been with NBC) and has served as Vice President of
Administration and Secretary for NBC since 1985. Between 1981 and 1985, Mr.
Arndt was Vice President of Administration for Lincoln. Between 1966 and 1981,
Mr. Arndt served in various positions for Lincoln.
47
ITEM 11. EXECUTIVE COMPENSATION.
The following tables and paragraphs provide information concerning
compensation paid by the Company for the last three fiscal years to its
President/Chief Executive Officer and to the four other most highly compensated
executive officers earning in excess of $100,000 in annual salary and bonuses;
compensation paid to Directors; and employment contracts in place with executive
officers.
The table presented below summarizes annual and long-term compensation,
including stock compensation, to such persons for the last three fiscal years:
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
--------------------------- --------------
Number
of Securities
Fiscal Underlying All Other
Name and Principal Position Year Salary Bonus Options (1) Compensation (2)
- --------------------------------- ------ -------------- ----------- -------------- ------------------
Mark W. Oppegard - Chief Executive
Officer, President, and
Director, NBC 2001 $ 246,731 $ 138,000 3,050 $ 2,276
2000 230,769 152,000 - 2,180
1999 197,808 - - 2,985
Barry S. Major - Chief Operating
Officer, NBC 2001 219,231 118,000 2,650 2,120
2000 204,615 130,000 - 2,080
1999 40,769 60,000 9,530 -
Alan G. Siemek - Chief Financial
Officer, Senior Vice President of
Finance and Administration,
Treasurer, and Assistant
Secretary, NBC 2001 161,923 97,000 1,875 2,120
2000 111,481 133,000 6,353 2,027
1999 - - - -
Larry R. Rempe - Vice President
of Information Systems, NBC 2001 152,769 40,000 1,000 2,276
2000 122,385 50,000 - 2,276
1999 106,846 - - 3,092
William H. Allen - Senior Vice
President of Wholesale
Division, NBC 2001 106,846 50,000 1,200 2,516
2000 103,385 60,000 - 2,516
1999 100,923 - - 3,376
(1) The stock options were granted at an exercise price of $52.47/share
("Founder's Price"). The estimated fair market value of the Company's
Class A Common Stock underlying the stock options, which includes a
discount for the holder's minority interest position and illiquidity of
the Class A Common Stock, was less than the exercise price on the date
of grant.
(2) Consists of Company matching contributions to the NBC Retirement Plan
and life insurance premiums paid by the Company on the executive's
behalf.
48
Presented below is information in tabular format regarding individual grants
of stock options to certain executive officers of the Company for the year ended
March 31, 2001:
Options Granted During the Year Ended March 31, 2001
Individual Grants Grant Date Value
- --------------------------------------------------------------------------- ------------------------
Number % of Total
of Options
Securities Granted to Grant
Underlying Employees Exercise Date
Options in Fiscal Price Expiration Present
Name Granted 2001 Per Share Date Value (1)
- ------------------------------------ ------------ ----------- ---------- ----------- ----------
Mark W. Oppegard - Chief Executive
Officer, President, and
Director, NBC 3,050 18.6% $52.47 07/31/10 $22,479
Barry S. Major - Chief Operating
Officer, NBC 2,650 16.2% 52.47 07/31/10 19,531
Alan G. Siemek - Chief Financial
Officer, Senior Vice President of
Finance and Administration,
Treasurer, and Assistant
Secretary, NBC 1,875 11.4% 52.47 07/31/10 13,819
Larry R. Rempe - Vice President
of Information Systems, NBC 1,000 6.1% 52.47 07/31/10 7,370
William H. Allen - Senior Vice
President of Wholesale
Division, NBC 1,200 7.3% 52.47 07/31/10 8,844
(1) Grant date present value was determined using a Black-Scholes option
pricing model, assuming a 6.24% risk-free interest rate, 1.0% expected
volatility, and an expected life of approximately 2.5 years.
49
The following table provides information concerning each exercise of stock
options by certain executive officers of the Company during the year ended March
31, 2001 as well as the value of unexercised options as of March 31, 2001:
Aggregated Option Exercises During the Year Ended March 31, 2001
and Option Value as of March 31, 2001
Number
of Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Options at Options at
March 31, 2001 March 31, 2001 (1)
---------------- --------------------
Shares
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- ------------------------------------ ------------ ---------- ---------------- --------------------
Mark W. Oppegard - Chief Executive
Officer, President, and
Director, NBC - $ - 763/2,287 $10,400/$31,172
Barry S. Major - Chief Operating
Officer, NBC - - 7,811/4,369 106,464/59,549
Alan G. Siemek - Chief Financial
Officer, Senior Vice President of
Finance and Administration,
Treasurer, and Assistant
Secretary, NBC - - 3,646/4,582 49,695/62,453
Larry R. Rempe - Vice President
of Information Systems, NBC - - 250/750 3,407/10,222
William H. Allen - Senior Vice
President of Wholesale
Division, NBC - - 300/900 4,089/12,267
(1) Represents the excess of the March 31, 2001 estimated fair market value
of the Company's Class A Common Stock underlying the stock options,
which includes a discount for the holder's minority interest position
and illiquidity of the Class A Common Stock, over the exercise price of
$52.47/share.
COMPENSATION OF DIRECTORS AND ADDITIONAL INFORMATION
Directors of the Company receive no compensation for services but are
reimbursed for out-of-pocket expenses. The Company's Directors also serve as
Directors of TheCampusHub.com, Inc., an entity that is partially owned by the
Company's majority owner.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Mark W. Oppegard and the eight
other senior executive officers of the Company. Such agreements (the "Employment
Agreements") with the aforementioned senior executive officers (each, an
"Executive") provide for an annual base salary as determined by the Board of
Directors, for incentive compensation based upon the attainment of financial
objectives to be established by the Board of Directors (or a committee thereof)
after considering the recommendation of the chief executive officer, and for
customary fringe benefits. The amounts of salaries are as follows: Mr. Oppegard,
$257,500 per annum; Mr. Major, $230,000 per annum; Mr. Siemek, $170,000 per
annum; Mr. Rempe, $156,000 per annum; and Mr. Allen, $109,000 per annum. The
Employment Agreements provide that their term will be automatically extended
from year to year, unless terminated upon specified notice by either party.
50
The Employment Agreements also provide that each Executive will be granted a
number of options to acquire shares of NBC Acquisition Corp. Class A Common
Stock determined by the Board of Directors. Each such option has an exercise
price not to be less than the fair market value per share as of the date of
grant and is exercisable as to 25% of the shares covered thereby on the date of
grant and as to an additional 25% of the shares covered thereby on each of the
first three anniversaries of the date of grant, subject to the Executive's
continued employment by the Company on such dates.
The Employment Agreements also provide for specified payments to the
Executive in the event of termination of employment by the Company without
"cause" (as defined in the respective agreements) and in the event of death or
disability of the Executive during the term. The Employment Agreements also
contain customary confidentiality obligations and three year non-competition
agreements for each Executive.
Finally, the Employment Agreements provide that, prior to the consummation by
the Company of an initial public offering of NBC Acquisition Corp. Common Stock,
the Executives will not sell, transfer, pledge or otherwise dispose of any
shares of NBC Acquisition Corp. Common Stock, except for certain transfers to
immediate family members, in the event of disability and for estate planning
purposes. The Employment Agreements also provide that, in the event of the sale
of a majority of the outstanding NBC Acquisition Corp. Common Stock, the
Executives will have the option, and (at the option of HWH) will be required, to
sell their shares ratably with, and on the same terms and conditions as, the
other selling shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information in the following table sets forth NBC Acquisition Corp.
Class A Common Stock beneficially owned by each person who owns more than 5.0%
of such shares; each director; each executive officer named in Item 11; and all
directors and executive officers of the Company treated as a group. The shares
listed and percentages calculated thereon are based upon NBC Acquisition Corp.
Class A Common Stock outstanding as of June 26, 2001 and NBC Acquisition Corp.
Class A Common Stock underlying nonqualified stock options that are exercisable
within sixty days, pursuant to Rule 13d-3 of the Securities Exchange Act of
1934. To the knowledge of the Company, each of such holders of shares has sole
voting and investment power as to the shares owned unless otherwise noted. The
address for each executive officer and director is 4700 South 19th Street,
Lincoln, Nebraska 68501 unless otherwise noted.
51
Amount and
Nature of
Beneficial Percent of
Title of Class/Name of Beneficial Owner Ownership (1) Class (3)
- ----------------------------------------------------------------------- --------------- -----------
Class A Common Stock:
Owning Greater Than 5% of Shares:
HWH (2) 1,136,568 90.0%
Ownership of Directors:
Robert B. Haas (2) 1,136,568 90.0%
Douglas D. Wheat (2) - -
Ownership of Executive Officers Named in Item 11:
Mark W. Oppegard 25,491 2.0%
Barry S. Major 18,956 1.5%
Alan G. Siemek 10,151 0.8%
Larry R. Rempe 16,748 1.3%
William H. Allen 10,130 0.8%
Ownership of Directors and All Executive Officers as a Group 1,259,431 98.2%
(1) Beneficial ownership is determined in accordance with the rules of the
SEC and includes voting and investment power with respect to the shares
of NBC Acquisition Corp. Class A Common Stock. Such shares include
shares underlying nonqualified stock options exercisable within sixty
days, as follows: Mr. Oppegard - 1,525 shares; Mr. Major - 8,473 shares;
Mr. Siemek - 4,115 shares; Mr. Rempe - 500 shares; Mr. Allen - 600
shares; and 19,447 shares for all directors and executive officers as a
group.
(2) The sole general partner of HWH is a limited partnership, and the sole
general partner of the limited partnership is a corporation controlled
by Mr. Haas. Mr. Wheat is a stockholder, director and officer of the
corporation. The address of HWH and of Messrs. Haas and Wheat is 300
Crescent Court, Suite 1700, Dallas, Texas 75201.
(3) The percentages are calculated based upon 1,263,371 shares of NBC
Acquisition Corp. Class A Common Stock outstanding as of June 26, 2001
and shares underlying nonqualified stock options exercisable within
sixty days as detailed in footnote (1).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
TRANSACTIONS WITH MANAGEMENT AND OTHERS - Subsequent to year-end, pursuant
to the terms of an employment agreement dated April 17, 2001, NBC appointed Mr.
Rob Rupe to the position of Senior Vice President of Retail Division. Under the
terms of the employment agreement, the Company issued Mr. Rupe 2,621 shares of
the Company's Class A Common Stock at a price of $52.47 per share. In connection
with this issuance of stock, Mr. Rupe delivered a $123,765 note maturing
January, 2009 and bearing interest at 5.25% per year and will remit cash payment
on the remainder of $13,752.
CERTAIN BUSINESS RELATIONSHIPS - In fiscal 2001, NBC entered into several
agreements related to its WebPRISM and CampusHub E-commerce software
capabilities with a newly created entity, TheCampusHub.com, Inc., which is
partially owned by the Company's majority owner. Such agreements included an
equity option agreement, a management services agreement, and a technology sale
and license agreement. The equity option agreement provides NBC the opportunity
to acquire 25% of the initial common shares outstanding of TheCampusHub.com,
Inc. The management services agreement, which is effective for a period of three
52
years, reimburses NBC for certain direct costs incurred on behalf of
TheCampusHub.com, Inc. and also pays NBC $0.5 million per year for certain
shared management and administrative support. The technology sale and license
agreement provides for NBC to license its E-commerce software capabilities to
TheCampusHub.com, Inc. for $0.5 million per year over a period of three years
and provides TheCampusHub.com, Inc. with an option to purchase such software
capabilities from NBC during that three year period.
For the year ended March 31, 2001, revenues attributable to the management
services and technology sale and license agreements totaled $0.9 million, and
reimbursable direct costs incurred on behalf of TheCampusHub.com, Inc. totaled
$0.9 million. Included in the reimbursable direct costs incurred on behalf of
TheCampusHub.com, Inc. are annual and other compensation costs totaling $0.2
million for NBC's Vice President of E-commerce, who serves as President and
Chief Operating Officer of TheCampusHub.com, Inc. Additionally, Messrs. Haas,
Wheat, and Oppegard serve as Directors of TheCampusHub.com, Inc. and Messrs.
Major and Siemek serve as executive officers of TheCampusHub.com, Inc.
INDEBTEDNESS OF MANAGEMENT - As of March 31, 2001, notes receivable from
stockholders and the associated interest receivable totaled approximately
$606,000 and $91,000, respectively. Approximately $150,000 of such notes
originated during the leveraged buyout of NBC by Olympus Advisory Partners, Inc.
in 1995. In conjunction with the buyout, the Company's executive officers were
given the opportunity to acquire shares of the Company's Class A Common Stock
with a portion of the purchase price of such shares being provided to the
officers in the form of interest bearing notes. Such notes are dated August 31,
1995, become due August 31, 2002, and bear interest at the applicable Federal
rate for mid-term loans.
The remaining balance of such notes originated pursuant to the terms of
employment agreements with NBC's Chief Operating Officer, Barry S. Major; Chief
Financial Officer, Alan G. Siemek; and Vice President of E-commerce, Michael J.
Kelly. In January, 1999, the Company issued 4,765 shares of its Class A Common
Stock to Mr. Major at a price of $52.47 per share, in exchange for $25,000 in
cash and a promissory note in the principal amount of $225,000 maturing January
19, 2009 and bearing interest at 5.25% per year. The largest aggregate amount
outstanding under this note at any time during the year ended March 31, 2001 was
approximately $252,000. In July, 1999, the Company issued 3,177 shares of its
Class A Common Stock to Mr. Siemek at a price of $52.47 per share, in exchange
for $16,688 in cash and a promissory note in the principal amount of $150,000
maturing September, 2009 and bearing interest at 5.25% per year. The largest
aggregate amount outstanding under this note at any time during the year ended
March 31, 2001 was approximately $162,000. In January, 2000, the Company issued
2,621 shares of its Class A Common Stock to Mr. Kelly at a price of $52.47 per
share, in exchange for $13,752 in cash and a promissory note in the principal
amount of $123,765 maturing January, 2010 and bearing interest at 5.25% per
year. The largest aggregate amount outstanding under this note at any time
during the year ended March 31, 2001 was approximately $133,000.
53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
(1) Consolidated Financial Statements of NBC Acquisition Corp.
Index to Consolidated Financial Statements.
Independent Auditors' Report.
Consolidated Balance Sheets as of March 31, 2001 and 2000.
Consolidated Statements of Operations for the Years Ended March 31,
2001, 2000, and 1999.
Consolidated Statements of Stockholders' Deficit for the Years
Ended March 31, 2001, 2000, and 1999.
Consolidated Statements of Cash Flows for the Years Ended March 31,
2001, 2000, and 1999.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules.
Independent Auditors' Report on Schedules.
Schedule I - Condensed Financial Information of NBC Acquisition
Corp. (Parent Company Only).
Schedule II - Valuation and Qualifying Accounts.
(3) Management Contract and Compensatory Plan Arrangement Exhibits.
Exhibits 10.7 through 10.16 are incorporated herein by reference.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter ended
March 31, 2001.
(c) EXHIBITS.
2.1 Agreement for Purchase and Sale of Stock, dated as of May 26, 1999
between and among Nebraska Book Company, Inc., Dennis Rother, and
Larry Rother, filed as Exhibit 2.1 to NBC Acquisition Corp. Form
8-K, as amended, dated June 4, 1999, is incorporated herein by
reference.
2.2 Agreement of Sale, dated as of September 30, 1999 between and among
Nebraska Book Company, Inc., Michigan College Book Company, Inc.,
Ned's Berkeley Book Company, Inc., Ned Shure, Fred Shure, and Jack
Barenfanger filed as Exhibit 2.1 to NBC Acquisition Corp. Form 8-K,
as amended, dated November 12, 1999, is incorporated herein by
reference.
3.1 Certificate of Incorporation, as amended, of NBC Acquisition Corp.,
filed as Exhibit 3.1 to NBC Acquisition Corp. Registration Statement
on Form S-4, as amended (File No. 333-48225), is incorporated herein
by reference.
3.2 By-laws of NBC Acquisition Corp., filed as Exhibit 3.2 to NBC
Acquisition Corp. Registration Statement on Form S-4, as amended
(File No. 333-48225), is incorporated herein by reference.
54
4.1 Indenture dated as of February 13, 1998 by and between NBC
Acquisition Corp. and United States Trust Company of New York, as
Trustee, filed as Exhibit 4.1 to NBC Acquisition Corp. Registration
Statement on Form S-4, as amended (File No. 333-48225), is
incorporated herein by reference.
4.2 Exchange and Registration Rights Agreement dated as of February 13,
1998 by and between NBC Acquisition Corp. and Chase Securities Inc.,
filed as Exhibit 4.2 to NBC Acquisition Corp. Registration Statement
on Form S-4, as amended (File No. 333-48225), is incorporated herein
by reference.
4.3 Form of Initial Debenture of NBC Acquisition Corp. (included in
Exhibit 4.1 as Exhibit A), filed as Exhibit 4.3 to NBC Acquisition
Corp. Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
4.4 Form of Exchange Debenture of NBC Acquisition Corp. (included in
Exhibit 4.1 as Exhibit B), filed as Exhibit 4.4 to NBC Acquisition
Corp. Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
4.5 Indenture dated as of February 13, 1998 by and between Nebraska Book
Company, Inc. and United States Trust Company of New York, as
Trustee, filed as Exhibit 4.5 to NBC Acquisition Corp. Registration
Statement on Form S-4, as amended (File No. 333-48225), is
incorporated herein by reference.
4.6 Exchange and Registration Rights Agreement dated as of February 13,
1998 by and between Nebraska Book Company, Inc. and Chase Securities
Inc., filed as Exhibit 4.6 to NBC Acquisition Corp. Registration
Statement on Form S-4, as amended (File No. 333-48225), is
incorporated herein by reference.
4.7 Form of Initial Note of Nebraska Book Company, Inc. (included in 4.5
as Exhibit A), filed as Exhibit 4.7 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No. 333-48225),
is incorporated herein by reference.
4.8 Form of Exchange Note of Nebraska Book Company, Inc. (included in
4.5 as Exhibit B), filed as Exhibit 4.8 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No. 333-48225),
is incorporated herein by reference.
10.1 Credit Agreement dated as of February 13, 1998 by and among NBC
Acquisition Corp., Nebraska Book Company, Inc., the Chase Manhattan
Bank and certain other financial institutions, filed as Exhibit 10.1
to NBC Acquisition Corp. Registration Statement on Form S-4, as
amended (File No. 333-48225), is incorporated herein by reference.
10.2 First Amendment, dated as of May 21, 1999, to the Credit Agreement,
dated as of February 13, 1998 among NBC Acquisition Corp., Nebraska
Book Company, Inc., the Chase Manhattan Bank, and certain other
financial institutions, filed as Exhibit 10.1 to NBC Acquisition
Corp. Form 10-Q for the quarter ended June 30, 1999, is incorporated
herein by reference.
10.3 Second Amendment and Waiver, dated as of April 27, 2000, to the
Credit Agreement, dated as of February 13, 1998, among NBC
Acquisition Corp., Nebraska Book Company, Inc., the Chase Manhattan
Bank, and certain other financial institutions, filed as Exhibit
10.1 to NBC Acquisition Corp. Form 10-Q for the quarter ended June
30, 2000, is incorporated herein by reference.
10.4 Guarantee and Collateral Agreement, dated as of February 13, 1998
made by NBC Acquisition Corp. and Nebraska Book Company, Inc. in
favor of the Chase Manhattan Bank, as administrative agent, filed as
Exhibit 10.2 to NBC Acquisition Corp. Registration Statement on Form
S-4, as amended (File No. 333-48225), is incorporated herein by
reference.
55
10.5 Purchase Agreement dated February 10, 1998 between NBC Acquisition
Corp. and Chase Securities Inc., filed as Exhibit 10.3 to NBC
Acquisition Corp. Registration Statement on Form S-4, as amended
(File No. 333-48225), is incorporated herein by reference.
10.6 Purchase Agreement dated February 10, 1998 between Nebraska Book
Company, Inc. and Chase Securities Inc., filed as Exhibit 10.4 to
NBC Acquisition Corp. Registration Statement on Form S-4, as amended
(File No. 333-48225), is incorporated herein by reference.
10.7 Form of Memorandum of Understanding, dated as of February 13, 1998
between NBC Acquisition Corp. and each of Mark W. Oppegard, Bruce E.
Nevius, Larry R. Rempe, Kenneth F. Jirovsky, William H. Allen,
Thomas A. Hoff and Ardean A. Arndt, filed as Exhibit 10.5 to NBC
Acquisition Corp. Registration Statement on Form S-4, as amended
(File No. 333-48225), is incorporated herein by reference.
10.8 Memorandum of Understanding, dated as of December 22, 1998 between
Nebraska Book Company, Inc. and Barry S. Major, Chief Operating
Officer, filed as Exhibit 10.1 to NBC Acquisition Corp. Form 10-Q
for the quarter ended December 31, 1998, is incorporated herein by
reference.
10.9 Memorandum of Understanding, dated as of July 1, 1999 between
Nebraska Book Company, Inc. and Alan Siemek, Chief Financial
Officer, filed as Exhibit 10.1 to NBC Acquisition Corp. Form 10-Q
for the quarter ended September 30, 1999, is incorporated herein by
reference.
10.10 Memorandum of Understanding, dated as of November 1, 1999 between
Nebraska Book Company, Inc. and Michael J. Kelly, Vice President of
E-commerce, filed as Exhibit 10.1 to NBC Acquisition Corp. Form 10-Q
for the quarter ended December 31, 1999, is incorporated herein by
reference.
10.11 NBC Acquisition Corp. 1995 Stock Incentive Plan adopted August 31,
1995, filed as Exhibit 10.6 to NBC Acquisition Corp. Registration
Statement on Form S-4, as amended (File No. 333-48225), is
incorporated herein by reference.
10.12 NBC Acquisition Corp. 1998 Performance Stock Option Plan adopted
June 30, 1998, filed as Exhibit 10.1 to NBC Acquisition Corp. Form
10-Q for the quarter ended June 30, 1998, is incorporated herein by
reference.
10.13 NBC Acquisition Corp. 1998 Stock Option Plan adopted June 30,
1998, filed as Exhibit 10.2 to NBC Acquisition Corp. Form 10-Q for
the quarter ended June 30, 1998, is incorporated herein by
reference.
10.14 NBC Acquisition Corp. Senior Management Bonus Plan adopted June
30, 1998, filed as Exhibit 10.3 to NBC Acquisition Corp. Form 10-Q
for the quarter ended June 30, 1998, is incorporated herein by
reference.
10.15 Form of Deferred Compensation Agreement by and between Nebraska
Book Company, Inc. and each of Mark W. Oppegard, Bruce E. Nevius,
Larry R. Rempe and Thomas A. Hoff, filed as Exhibit 10.7 to NBC
Acquisition Corp. Registration Statement on Form S-4, as amended
(File No. 333-48225), is incorporated herein by reference.
56
10.16 NBC Acquisition Corp. 401(k) Savings Plan, filed as Exhibit 10.8
to NBC Acquisition Corp. Registration Statement on Form S-4, as
amended (File No. 333-48225), is incorporated herein by reference.
10.17 Merger Agreement dated January 6, 1998 by and between NBC Merger
Corp., NBC Acquisition Corp. and certain stockholders of NBC
Acquisition Corp. named therein, filed as Exhibit 10.9 to NBC
Acquisition Corp. Registration Statement on Form S-4, as amended
(File No. 333-48225), is incorporated herein by reference.
10.18 Agreement for Purchase and Sale of Stock made January 9, 1998
between and among Nebraska Book Company, Inc. and Martin D. Levine,
the Lauren E. Levine Grantor Trust and the Jonathan L. Levine
Grantor Trust (the "Collegiate Stores Corporation Agreement"), filed
as Exhibit 10.10.1 to NBC Acquisition Corp. Registration Statement
on Form S-4, as amended (File No. 333-48225), is incorporated herein
by reference.
10.19 First Amendment dated January 23, 1998 to the Collegiate Stores
Corporation Agreement, filed as Exhibit 10.10.2 to NBC Acquisition
Corp. Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
10.20 Commercial Lease Agreement made and entered into March 8, 1989, by
and between Robert J. Chaney, Mary Charlotte Chaney and Robert J.
Chaney, as Trustee under the Last Will and Testament of James A
Chaney, and Nebraska Book Company, Inc., filed as Exhibit 10.11 to
NBC Acquisition Corp. Registration Statement on Form S-4, as amended
(File No. 333-48225), is incorporated herein by reference.
10.21 Lease Agreement entered into as of September 1, 1986, by and
between Odell Associates Limited Partnership and Nebraska Book
Company, Inc., filed as Exhibit 10.12 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No. 333-48225),
is incorporated herein by reference.
10.22 Lease Agreement entered into as of September 1, 1986, by and
between John B. DeVine, successor trustee of the Fred C. Ulrich
Trust, as amended, and Nebraska Book Company, Inc., filed as Exhibit
10.13 to NBC Acquisition Corp. Registration Statement on Form S-4,
as amended (File No. 333-48225), is incorporated herein by
reference.
10.23 Lease Agreement entered into as of September 1, 1986 by and
between Odell Associates Limited Partnership and Nebraska Book
Company, Inc., filed as Exhibit 10.14 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No. 333-48225),
is incorporated herein by reference.
10.24 Lease Agreement made and entered into October 12, 1988 by and
between Hogarth Management and Nebraska Book Company, Inc., filed as
Exhibit 10.15 to NBC Acquisition Corp. Registration Statement on
Form S-4, as amended (File No. 333-48225), is incorporated herein by
reference.
10.25 Industrial Real Estate Lease dated June 22, 1987 by and between
Cyprus Land Company and Nebraska Book Company, Inc., filed as
Exhibit 10.16 to NBC Acquisition Corp. Registration Statement on
Form S-4, as amended (File No. 333-48225), is incorporated herein by
reference.
12. Statements regarding computation of ratios, filed as Exhibit 12 to
NBC Acquisition Corp. Registration Statement on Form S-4, as amended
(File No. 333-48225), is incorporated herein by reference.
57
21. Subsidiaries, filed as Exhibit 21 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No. 333-48225),
is incorporated herein by reference.
24. Powers of Attorney (included on signature page).
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are either not required
under the related instructions, are not applicable (and therefore have been
omitted), or the required disclosures are contained in the financial statements
included herein.
58
Pursuant to the requirements of Section 13 or 15(d) 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.
NBC ACQUISITION CORP.
/s/ Mark W. Oppegard
--------------------------------------------
Mark W. Oppegard
President/Chief Executive Officer, Secretary,
and Director
June 26, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Mark W. Oppegard
----------------------------------------------
Mark W. Oppegard
President/Chief Executive Officer, Secretary,
and Director
June 26, 2001
*
--------------------------------------------
Alan G. Siemek
Vice President and Treasurer
(Principal Financial and Accounting Officer)
June 26, 2001
*
--------------------------------------------
Robert B. Haas
Chairman and Director
June 26, 2001
*
--------------------------------------------
Douglas D. Wheat
Director
June 26, 2001
*By: /s/ Mark W. Oppegard
--------------------------------------------
Mark W. Oppegard
Attorney-In-Fact
June 26, 2001
Supplemental Information to Be Furnished With Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Securities
Pursuant to Section 12 of the Act:
NO ANNUAL REPORT OR PROXY MATERIAL FOR THE FISCAL YEAR ENDED MARCH 31, 2001
HAS BEEN, NOR WILL BE, SENT TO SECURITY HOLDERS.
59
FINANCIAL STATEMENT SCHEDULES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
NBC Acquisition Corp.
Lincoln, Nebraska
We have audited the consolidated financial statements of NBC Acquisition
Corp. and subsidiary as of March 31, 2001 and 2000 and for each of the three
years in the period ended March 31, 2001, and have issued our report thereon
dated May 23, 2001; such report is included elsewhere in this Form 10-K. Our
audits also included the financial statement schedules listed in Item 14(a)(2).
These financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Lincoln, Nebraska
May 23, 2001
60
NBC ACQUISITION CORP. (PARENT COMPANY ONLY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
- ------------------------------------------------------------------------------
March 31,
2001 2000
-------------- --------------
ASSETS
OTHER ASSETS:
Due from subsidiary (Note A) $ 7,056,815 $ 4,606,191
Prepaid transaction/loan costs 2,564,911 2,890,699
-------------- --------------
$ 9,621,726 $ 7,496,890
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
INVESTMENT IN SUBSIDIARY (Note A) $ 25,786,516 $ 30,731,131
SENIOR DISCOUNT DEBENTURES 62,445,495 56,249,900
COMMITMENTS AND CONTINGENCIES (Note B)
STOCKHOLDERS' DEFICIT:
Class A common stock, voting,
authorized 5,000,000
shares of $.01 par value;
issued and outstanding
1,260,750 and 1,248,513
shares at March 31, 2001
and 2000, respectively 12,607 12,485
Additional paid-in-capital 65,167,394 64,525,477
Notes receivable from stockholders (697,171) (660,910)
Accumulated deficit (143,093,115) (143,361,193)
-------------- --------------
Total stockholders' deficit (78,610,285) (79,484,141)
-------------- --------------
$ 9,621,726 $ 7,496,890
============== ==============
See notes to condensed financial statements.
61
NBC ACQUISITION CORP. (PARENT COMPANY ONLY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION
STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
Year Ended March 31,
2001 2000 1999
------------ ------------- -------------
INTEREST EXPENSE $(6,521,383) $ (5,929,034) $ (5,345,563)
INCOME TAX BENEFIT 2,450,624 2,328,925 2,029,175
EQUITY IN EARNINGS OF SUBSIDIARY 4,338,837 1,890,716 1,057,283
------------ ------------- -------------
NET INCOME (LOSS) $ 268,078 $ (1,709,393) $ (2,259,105)
============ ============= =============
EARNINGS (LOSS) PER SHARE:
Basic $ 0.21 $ (1.48) $ (2.37)
============ ============= =============
Diluted $ 0.21 $ (1.48) $ (2.37)
============ ============= =============
See notes to condensed financial statements.
62
NBC ACQUISITION CORP. (PARENT COMPANY ONLY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION
STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------
Year Ended March 31,
2001 2000 1999
----------- -------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash flows from operating activities $ - $ - $ -
----------- -------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs - - (159,489)
Proceeds from issuance of common stock 642,039 14,979,532 25,000
Advances (to) from subsidiary (642,039) (14,979,532) 30,319
Proceeds from payment on notes
receivable from stockholders - - 104,170
----------- -------------- -----------
Net cash flows from financing activities - - -
----------- -------------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS - - -
CASH AND CASH EQUIVALENTS, Beginning of year - - -
----------- -------------- -----------
CASH AND CASH EQUIVALENTS, End of year $ - $ - $ -
=========== ============== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Notes receivable from stockholders recorded upon
issuance of common stock $ - $ 273,765 $ 225,000
See notes to condensed financial statements.
63
NBC ACQUISITION CORP. (PARENT COMPANY ONLY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DUE FROM SUBSIDIARY - NBC Acquisition Corp. (the "Company") files a
consolidated federal income tax return with its wholly-owned subsidiary,
Nebraska Book Company, Inc. ("NBC") and follows a policy of recording income
taxes equal to that which would have been incurred had the Company filed a
separate return. NBC is responsible for remitting tax payments and collecting
tax refunds for the consolidated group. The amount due from subsidiary
represents the cumulative tax savings resulting from operating losses generated
by the Company from which NBC derives the benefit through reduced tax payments
on the consolidated return.
INVESTMENT IN SUBSIDIARY - The Company accounts for its investment in NBC
under the equity method of accounting. Advances to or from NBC are included
within the investment in subsidiary.
RECLASSIFICATIONS - Certain items on the prior years' statements have been
reclassified to conform to the current year presentation.
B. COMMITMENTS AND CONTINGENCIES
The Company has guaranteed repayment of indebtedness under the Senior Credit
Facility held by NBC. Such indebtedness totaled $51.2 million at March 31, 2001.
64
NBC ACQUISITION CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- ---------------------------------------------------------------------------------------------------------
Charged to Charged to
Beginning of Costs and Other Net End of Year
Year Balance Expenses Accounts Charge-Offs Balance
-------------- ------------- ------------ ------------- -------------
YEAR ENDED MARCH 31, 2001
Allowance for doubtful accounts $ 175,899 $ 434,070 $ - $ (202,936) $407,033
YEAR ENDED MARCH 31, 2000
Allowance for doubtful accounts 165,899 140,927 - (130,927) 175,899
YEAR ENDED MARCH 31, 1999
Allowance for doubtful accounts 164,829 134,661 - (133,591) 165,899
65
EXHIBIT INDEX
24. Powers of Attorney (included on signature page).
66