Back to GetFilings.com
UNITED STATES 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, 2002
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 333-48221
NEBRASKA BOOK COMPANY, INC.
(Exact name of registrant as specified in its charter)
KANSAS 47-0549819
(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 NO SHARES OF THE REGISTRANT'S VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT.
THERE WERE 100 SHARES OF COMMON STOCK OUTSTANDING AS OF JUNE 14, 2002.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Total Number of Pages: 67
Exhibit Index: PAGE 67
1
TABLE OF CONTENTS
PART I:
Item 1 Business..........................................................3
Item 2 Properties.......................................................13
Item 3 Legal Proceedings................................................15
Item 4 Submission of Matters to a Vote of Security Holders..............15
PART II:
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters...........................................16
Item 6 Selected Financial Data..........................................16
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................17
Item 7A Quantitative and Qualitative Disclosures about Market Risk.......25
Item 8 Financial Statements and Supplementary Data......................27
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................49
PART III:
Item 10 Directors and Executive Officers of the Registrant................50
Item 11 Executive Compensation............................................52
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters................................57
Item 13 Certain Relationships and Related Transactions....................58
PART IV:
Item 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K........................................................60
Signatures....................................................................64
Supplemental Information to be Furnished......................................64
Financial Statement Schedule II - Valuation and Qualifying Accounts...........65
Exhibit Index.................................................................67
2
PART I.
ITEM 1. BUSINESS.
RECAPITALIZATION AND PUBLIC REGISTRATION
Effective September 1, 1995, Nebraska Book Company, Inc. (the "Company") was
acquired in a leveraged buyout by NBC Acquisition Corp. ("NBC"), 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 NBC; certain
shareholders of NBC, including members of senior management; and a newly created
corporation controlled and owned by affiliates of Haas Wheat & Partners, L.P.
("HWP"), the newly created corporation merged with and into NBC (the "Merger")
with NBC as the surviving corporation.
Concurrently with the consummation of the Merger, the Company 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, the Company also raised approximately $103.6 million from the issuance
of senior subordinated notes (the "Senior Subordinated Notes") and NBC 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 HWP affiliates (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 the Company's outstanding
indebtedness, the Stock Sale, the Reinvestment, the issuance by the Company of
the Senior Subordinated Notes, the issuance by NBC of the Senior Discount
Debentures, the Company'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 Subordinated
Notes and NBC's Senior Discount Debentures. 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.
GENERAL
The Company is one of the largest wholesale distributors of used college
textbooks in North America, offering over 90,000 textbook titles and selling
more than 7.6 million books annually primarily to campuses located in the United
States. In addition, as of June 14, 2002, the Company owns or manages 108
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
3
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 non contract-managed 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 44,000 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 14, 2002, the Company operated
108 college bookstores on or adjacent to college campuses of which 14 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. 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
hardware and software, such as the Company's turnkey bookstore management
software, and related maintenance contracts. 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
almost 500 college bookstore locations. In total, including the Company's own
bookstores, over 800 college bookstore locations utilize the Company's software
products. During fiscal 2001, the Company licensed certain software related to
E-commerce to an entity that is partially owned by NBC's majority owner. These
services generate revenue and assist the Company in enhancing and developing
customer relationships.
In January 1998, the Company acquired Connect 2 One (formerly Collegiate
Stores Corporation), a centralized buying service for over 520 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.
4
The Company also provides a consulting and store design program to assist
college bookstores in store presentation and layout. During fiscal 2002, the
Company introduced a marketing services program to leverage the Company's
distribution channels. Marketing services offered by the Company enable national
vendors to reach college students through in-store kiosks, prepackaged freshman
mailers, coupon books, e-mail promotions and in-store displays.
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. Finally, the Company is
strengthening its marketing campaign to increase student awareness of the
benefits of buying and selling used 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 intends to
increase same-store sales growth through a more coordinated effort to implement
best practices across the Company's entire bookstore network. Finally, the
Company believes there are opportunities to improve cash flow at its college
bookstores by reducing certain selling, general and administrative expenses.
CONTINUED GROWTH IN DISTANCE EDUCATION PROGRAM. 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.
INCREASED MARKET PENETRATION THROUGH TECHNOLOGY. The Company intends to
continue generating incremental revenue through the sale of its turnkey
bookstore management software. The installation of such software, along with
E-commerce technology offered through its affiliate (which is partially owned by
NBC's majority owner), TheCampusHub.com, Inc., also increases the channels
through which the Company can access the college and university market.
EXPANSION OF MARKETING SERVICES PROGRAM. It is very difficult for
traditional vendors to access the highly fragmented college and university
market in an efficient manner. The Company's newly-formed marketing services
program provides vendors with efficient access to the college and university
market through its distribution channels. The Company intends to expand this
program by establishing arrangements with major national vendors.
INDUSTRY OVERVIEW
Based on recent industry trade data, the college bookstore industry remains
strong, with over 5,000 college stores generating annual sales of approximately
$10.7 billion to college students and other consumers in North America. Sales of
5
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.
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 250 participating bookstores at the end of
fiscal 2002. 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
2002, approximately 400 bookstores were participating in this program,
approximately 210 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.
6
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 57.0% of the U.S.
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 U.S. market); and (iii) INDEPENDENT
STORES -- privately owned and operated stores, generally located off campus
(represents approximately 17.0% of the U.S. 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 its affiliate, TheCampusHub.com, Inc.
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 44,000
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 166,000 titles
in order to better serve its customers.
COLLEGE BOOKSTORES. As of June 14, 2002, 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 23% and 26% 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
also installed software providing E-commerce capabilities in all of its own
bookstores, thereby allowing its bookstores to further expand product offerings
and compete with online-only textbook sellers.
COMPLEMENTARY SERVICES. Through Specialty Books, the Company has access to
the market for distance education products and services. Currently, the Company
provides students at approximately 70 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,
non-textbook course materials; and a sales and ordering function. Students can
order distance education materials from the Company over the Internet. Over the
past three years, revenues of Specialty Books have been between 59% and 77% of
total complementary services revenues. 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
7
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 almost 500 college bookstore locations. In total,
including the Company's own bookstores, over 800 college bookstore locations
utilize the Company's software products.
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 520 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 from the vendor, while the Company earns a monthly
administrative fee from the vendor in return for accepting billing and
collection responsibilities for shopping bags sold by the vendor. 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.
The Company also provides a consulting and store design program to assist
college bookstores in store presentation and layout. Through its
newly-introduced marketing services program, the Company is able to leverage its
distribution channels. Marketing services offered by the Company enable national
vendors to reach college students through in-store kiosks, prepackaged freshman
mailers, coupon books, e-mail promotions and in-store displays.
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% to 25% 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. These 36 account representatives (as of March
31, 2002) 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
8
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 20.3% 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.
As of June 14, 2002 the Company operated 108 college bookstores nationwide,
having expanded from 50 bookstores in 1997. During fiscal 2002 the Company
purchased ten bookstores located in Norman, Oklahoma; Raleigh, North Carolina;
Radford, Virginia; Orlando, Florida; Gainesville, Florida; Chadron, Nebraska;
Berkeley, California; and Bellingham, Washington; sold two bookstores located in
Austin, Texas; and closed stores in Austin, Texas and Flagstaff, Arizona when
their leases expired.
9
The table below highlights certain information regarding the Company's
bookstores opened through March 31, 2002.
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)
----------- ---------- ----------- -------------- -------- --------------
1998 50 9 0 59 474
1999 59 8 2 65 537
2000 65 35 2 98 733
2001 98 4 0 102 740
2002 102 10 4 108 797
- ------------
(1) 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. In fiscal 2002, the property leases at two
bookstore locations expired and were not renewed by the Company and two
bookstore locations in Austin, Texas were sold to a large wholesale
customer.
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 8,000 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 7,400 gross square feet but
range in size from 500 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.
In addition, the Company and its consultants had been developing software
for E-commerce capabilities. 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
this software was assumed in fiscal 2001 by an affiliated entity that is
partially owned by NBC's majority owner.
None of the Company's proprietary software programs are copyrighted,
10
although the Company does have registered trademarks for certain names. 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 approximately 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 6.0% of the Company's fiscal 2002 revenues. No one wholesale
customer accounted for more than 1.0% of the Company's fiscal 2002 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.
The Company's distance education program is the exclusive supplier of
textbooks and educational material to students enrolled in either on-line
courses or the College of Financial Planning at the University of Phoenix, which
accounts for approximately 69.6% of total revenues in the distance education
program.
No one customer accounted for more than 10.0% of the Company's fiscal 2002
revenues.
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 680 stores and 430 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 430 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.
Presently, the Company believes that its largest competitor in the distance
education market is MBS.
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.
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, 2002 the Company had a total of approximately 2,900
employees, of which approximately 1,000 were full-time, approximately 300 were
part-time and approximately 1,600 were 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. Recently, the Company has employed up to 50 flex-pool
workers in the Nebraska and California facilities, thereby enabling the Company
12
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 wholesale 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 wholesale warehouse in Cypress, California.
The Cypress lease expires on August 31, 2002 and has one five-year option to
renew. The Company's distance education program resides in a 15,000 square foot
warehouse owned by the Company in Athens, Ohio; however, the Company will be
relocating this operation to a leased facility with 49,500 square feet in
Athens, Ohio during fiscal 2003. The new lease is for a period of five years
with one five-year option to renew.
Listed below, set forth as of March 31, 2002, 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
Arizona State University Tempe, AZ 44,100 The College Store
Arizona State University Tempe, AZ 44,100 Rother's Bookstore
University of Arizona Tucson, AZ 34,500 Arizona Book Store
University of Arizona Tucson, AZ 34,500 Rother's University Bookstore
University of California - Berkeley Berkeley, CA 30,400 Ned's Bookstore
University of California - Berkeley Berkeley, CA 30,400 Ned's Bookstore II
University of California - Berkeley Berkeley, CA 30,400 Ned's Bookstore - Boalt Hall
University of California - Berkeley Berkeley, CA 30,400 Ned's Den
California State University - Northridge Northridge, CA 27,900 The College Store
Daytona Beach Community College Daytona Beach, FL 11,000 College Book Rack
University of Florida Gainesville, FL 46,100 Florida Book Store
University of Florida Gainesville, FL 46,100 Florida Book Store, Volume II
Miami Dade Community College-Kendall Miami, FL 48,700 Lemox College Book & Supply
University of Central Florida, also serving: Orlando, FL 28,000 College Book & Supply
Seminole Community College 9,200
Valencia Community College 4,800
University of Central Florida Orlando, FL 28,000 Knight's Corner
Georgia State University Atlanta, GA 23,700 Georgia Book Store
Drake University Des Moines, IA 5,100 D-Shoppe (2)
Drake University, also serving: Des Moines, IA 5,100 University Book Store (3)
Mercy College of Health Sciences 400
Southern Illinois University Carbondale, IL 22,600 Saluki Bookstore
Ball Sate University Muncie, IN 18,200 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 16,800 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 34,900 Maryland Book Exchange
Prince George's Community College Largo, MD 12,400 Prince George's Community
College Bookstore (2)
Concordia College Ann Arbor, MI 600 Concordia 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 20,000 Textbook Outlet
Wayne County Community College Belleville, MI 11,000 Ned's Bookstore (2)
Wayne County Community College Detroit, MI 11,000 Ned's WCCC Downtown (2)
Wayne County Community College Detroit, MI 11,000 Ned's WCCC Eastern (2)
Wayne County Community College Detroit, MI 11,000 Ned's WCCC Northwest (2)
Wayne County Community College Taylor, MI 11,000 Ned's WCCC Downriver (2)
Ferris State University Big Rapids, MI 9,700 The College Store
Michigan State University East Lansing, MI 43,500 The College Store
Michigan State University East Lansing, MI 43,500 Ned's Bookstore
Kettering University Flint, MI 3,300 The Campus Store (2)
Eastern Michigan University, also serving: Ypsilanti, MI 23,700 Campus Book & Supply
Washtenaw Community College 11,400
Eastern Michigan University Ypsilanti, MI 23,700 Ned's Bookstore
13
Institution Location Enrollment(1) Store Name
- ----------- -------- ------------ ----------
Eastern Michigan University Ypsilanti, MI 23,700 Ned's College of Business
Bookstore
Mankato State University Mankato, MN 13,000 Maverick Bookstore (3)
North Carolina State University Raleigh, NC 29,000 Packbackers Student Bookstore
Chadron State College Chadron, NE 2,700 Chadron Book Shop
Chadron State College Chadron, NE 2,700 Eagle Pride Bookstore (2)
University of Nebraska - Kearney Kearney, NE 6,800 The Antelope Bookstore (2)
University of Nebraska - Lincoln Lincoln, NE 23,000 Big Red Shop - Gateway Mall
University of Nebraska - Lincoln Lincoln, NE 23,000 Nebraska Bookstore (3)
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 24,800 The College Store
State University of New York - Binghamton Vestal, NY 12,300 The Bookbridge
University of Akron Akron, OH 24,000 The College Store
Ohio University Athens, OH 19,300 Specialty Books
Ohio State University Columbus, OH 50,000 College Town
Wright State University, also serving: Fairborn, OH 16,900 The College Store
Sinclair Community College 21,300
University of Oklahoma Norman, OK 21,600 Boomer Book Store
University of Oklahoma Norman, OK 21,600 Sooner Textbooks
Oklahoma State University Stillwater, OK 21,300 Cowboy Book
Indiana University of Pennsylvania Indiana, PA 13,400 The College Store
University of Pittsburgh Pittsburgh, PA 26,300 The College Store
Pennsylvania State University State College, PA 40,000 University Book Centre
College of Charleston Charleston, SC 11,100 University Book of Charleston
Columbia College Columbia, SC 1,500 C-Square Bookstore (2)
University of South Carolina Columbia, SC 23,700 Carolina's
University of South Carolina Columbia, SC 23,700 South Carolina Bookstore
East Tennessee State University Johnson City, TN 11,200 The College Store
University of Tennessee Knoxville, TN 28,000 Rocky Top Books
University of Tennessee Knoxville, TN 28,000 Rocky Top East (3)
University of Texas - Arlington Arlington, TX 20,400 The College Store
Austin Community College Austin, TX 27,000 Bevo's ACC
Austin Community College Austin, TX 27,000 Bevo's Northridge
Blinn College Bryan, TX 9,000 Rother's Bookstore
Texas A&M University College Station, TX 44,000 Rother's Bookstore
Texas A&M University College Station, TX 44,000 Rother's Bookstore (Northgate)
Texas A&M University College Station, TX 44,000 Rother's Bookstore (Woodstone)
Southern Methodist University Dallas, TX 9,900 Varsity Book Store
University of North Texas, also serving: Denton, TX 27,500 Voertman's (3)
North Central Texas College 5,800
Texas Woman's University 8,400
University of Texas - Pan American Edinburg, TX 12,700 South Texas Book & Supply
North Harris County Community College Houston, TX 9,400 College Bookstore (3)
North Harris County Community College Humble, TX 9,400 College Bookstore
University of Houston, also serving: Houston, TX 32,600 Rother's Bookstore
Houston Community College System 40,900
Texas Tech University Lubbock, TX 24,600 Double T Bookstore
Texas Tech University Lubbock, TX 24,600 Double T Bookstore II
Texas Tech University Lubbock, TX 24,600 Double T Bookstore III
Texas Tech University Lubbock, TX 24,600 Spirit Shop
South Texas Community College McAllen, TX 12,900 South Texas Book & Supply
San Antonio College, also serving: San Antonio, TX 22,000 L&M Bookstore
Northwest Vista College 4,600
Palo Alto College 6,900
St. Philip's College 8,800
UTSA - Downtown 3,000
University of Texas - San Antonio San Antonio, TX 20,800 L&M UTSA Bookstore
Southwest Texas State University San Marcos, TX 22,500 Colloquium Bookstore
Southwest Texas State University San Marcos, TX 22,500 Colloquium Too
Southwest Texas State University San Marcos, TX 22,500 Rother's Bookstore
Tarleton State University Stephenville, TX 7,900 Rother's Bookstore
Baylor University Waco, TX 13,700 Rother's Bookstore
Baylor University Waco, TX 13,700 University Bookstore
and Spirit Shop
14
Institution Location Enrollment(1) Store Name
- ----------- -------- ------------ ----------
Midwestern State University Wichita Falls, TX 5,800 Rother's Bookstore
Virginia Polytechnic Institute and State Blacksburg, VA 25,600 Tech Bookstore
University
Old Dominion University Norfolk, VA 19,200 Dominion Bookstore
Radford University Radford, VA 8,700 Radford Book Exchange
Virginia Commonwealth University Richmond, VA 26,100 The College Store
Western Washington University, also serving: Bellingham, WA 12,300 The College Store
Whatcom Community College 6,100
- ------------
(1) Source: National Association of College Stores. Includes part-time students.
(2) Denotes properties leased from the educational institution ("contract-managed" stores).
(3) Property is owned by the Company.
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 2002.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There were no equity securities of the registrant sold by the registrant
during fiscal 2002.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected historical financial and other data
of the Company as of and for the fiscal years ended March 31, 2002, 2001, 2000,
1999, and 1998, respectively. The selected historical financial data was derived
from the Company's audited financial statements. 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 financial statements of
the Company and the related notes thereto included in Item 8 herein.
Fiscal Years Ended March 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998 (1)
----------- ----------- ----------- ----------- ----------
Statement of Operations Data: (dollars in thousands)
Revenues $ 338,917 $ 301,669 $ 267,069 $ 218,638 $200,086
Costs of sales 206,976 187,099 164,984 137,989 125,632
----------- ----------- ----------- ----------- ----------
Gross profit 131,941 114,570 102,085 80,649 74,454
Operating expenses:
Selling, general, and administrative 84,871 74,100 65,820 51,289 47,911
Depreciation 3,087 2,956 3,096 2,393 2,531
Amortization (4) 505 10,446 9,320 6,149 5,626
Stock compensation costs - - - - 8,278
----------- ----------- ----------- ----------- ----------
Income from operations 43,478 27,068 23,849 20,818 10,108
Other expenses (income):
Interest expense 17,189 17,487 17,469 17,508 17,736
Interest income (400) (615) (356) (351) (328)
Loss on derivative instruments 361 - - - -
----------- ----------- ----------- ----------- ----------
Income (loss) before income taxes 26,328 10,196 6,736 3,661 (7,300)
Income tax expense 10,492 5,857 4,845 2,604 (2,154)
----------- ----------- ----------- ----------- ----------
Net income (loss) $ 15,836 $ 4,339 $ 1,891 $ 1,057 $ (5,146)
=========== =========== =========== =========== ==========
Other Data:
EBITDA (2) $ 47,070 $ 40,470 $ 36,265 $ 29,360 $ 26,572
Net cash flows from operating activities 31,038 8,839 18,945 10,296 (2,842)
Net cash flows from investing activities (7,616) (4,994) (30,244) (5,067) (11,548)
Net cash flows from financing activities (16,412) (3,887) 11,690 (6,976) 10,220
Capital expenditures 2,277 1,759 3,542 2,842 3,690
Business acquisition expenditures (3) 6,110 2,975 26,072 2,086 7,714
Number of bookstores open at end of the period 108 102 98 65 59
Balance Sheet Data (At End of Period):
Cash and cash equivalents $ 11,419 $ 4,410 $ 4,451 $ 4,060 $ 5,807
Working capital 75,865 72,394 62,244 55,442 54,018
Total assets 182,794 165,136 166,100 139,662 148,742
Total debt, including current maturities 147,576 161,773 166,302 169,257 175,985
(1) Effective February 13, 1998, NBC consummated a merger among a newly
created corporation controlled and owned by affiliates of HWP, NBC and
certain shareholders of NBC pursuant to which the Company's outstanding
debt and NBC's 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. Non-recurring charges of $6,481 associated
16
with the extinguishment of debt and the related tax benefit of $2,460
that were originally recorded as an extraordinary loss have been
reclassified in accordance with Statement of Financial Accounting
Standards No. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64,
AMENDMENT OF FASB STATEMENT NO. 13 AND TECHNICAL CORRECTIONS, which was
early-adopted by the Company in fiscal 2002.
(2) EBITDA is defined as income from operations plus depreciation,
amortization and non-cash charges relating to stock based compensation
expense in the amount of $8,278 for the year ended March 31, 1998. 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
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.
(4) The Company adopted SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS,
on April 1, 2001. Under SFAS No. 142, goodwill and intangible assets
with indefinite useful lives are not amortized but rather tested for
impairment on a periodic basis.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FISCAL YEAR ENDED MARCH 31, 2002 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2001.
REVENUES. Revenues for the years ended March 31, 2002 and 2001 and the
corresponding increase (decrease) in revenues were as follows:
Increase (Decrease)
2002 2001 Amount Percentage
-------------- -------------- ----------- ----------
Wholesale operations $ 122,893,781 $ 113,006,804 $ 9,886,977 8.7%
College bookstore operations 201,399,648 182,856,000 18,543,648 10.1%
Complementary services 38,093,091 26,647,451 11,445,640 43.0%
Intercompany eliminations (23,470,111) (20,841,402) (2,628,709) 12.6%
-------------- -------------- ------------ ---------
$ 338,916,409 $ 301,668,853 $37,247,556 12.3%
============== ============== ============ =========
The increase in wholesale operations revenues for the year ended March 31,
2002 was due in part to publisher price increases, complemented by an increase
in unit sales. The Company believes that this increase in unit sales is partly
the result of recent enhancements made to the Company's wholesale programs. The
increase in College Bookstores revenues was primarily attributable to an
increase in same store sales of 4.7% (excluding two stores that were sold since
April 1, 2000), or $8.2 million, and to the acquisition of 14 new college
bookstores (defined by the Company as stores acquired since April 1, 2000).
These new bookstores provided a $12.7 million increase in revenues.
Complementary services revenues increased primarily due to growth in the
Company's distance education and system sales programs. The increased revenues
in distance education resulted primarily from additional services provided to
the program's largest account and, in part, to services provided to new
accounts. As the Company's wholesale and college bookstore operations have
grown, the Company's intercompany transactions have also increased.
17
GROSS PROFIT. Gross profit for fiscal 2002 increased $17.3 million, or
15.2%, to $131.9 million from $114.6 million for fiscal 2001. This increase was
primarily due to higher revenues and an increase in gross margin percent. Gross
margin percent was 38.9% for fiscal 2002 as compared to 38.0% for fiscal 2001,
driven primarily by strong used textbook margins in both the wholesale and
college bookstore operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal 2002 increased $10.8 million, or 14.5%, to
$84.9 million from $74.1 million for fiscal 2001. Selling, general and
administrative expenses as a percentage of revenues were 25.0% and 24.6% in
fiscal 2002 and fiscal 2001, respectively. The increase in expenses is primarily
the result of the Company's revenue and operational growth, as previously
discussed. Expenses as a percentage of revenues increased to 25.0% primarily due
to $1.0 million in increased bad debt expense recognized in complementary
services. Revenues attributable to the management services and technology sale
and license agreements with TheCampusHub.com, Inc., which is partially owned by
NBC's majority owner, were recognized in fiscal 2002 under the anticipation
that, if necessary, TheCampusHub.com, Inc. would make a capital call to its
shareholders to provide the funding necessary to meet its obligations under the
aforementioned agreements. TheCampusHub.com, Inc. reached break-even on a cash
flow basis, excluding amounts under the management services and technology sale
and license agreements, during its most recent fiscal year. While it remains a
viable business and is funding its own operations, it is not currently
generating sufficient excess cash flow to fund its obligations under the
aforementioned agreements and the remaining capital available from its
shareholders is being reserved to fund strategic development opportunities and,
if required, ongoing operations. Accordingly, the Company has increased the
allowance for doubtful accounts for such potential uncollectible amounts due
from TheCampusHub.com, Inc.
AMORTIZATION EXPENSE. Amortization expense for fiscal 2002 decreased $9.9
million, to $0.5 million from $10.4 million for fiscal 2001. This decrease was
due to the Company's adoption of SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS, on April 1, 2001. Under SFAS No. 142, goodwill and intangible assets
with indefinite useful lives are not amortized but rather tested for impairment
on a periodic basis.
INCOME (LOSS) BEFORE INTEREST AND TAXES. Income (loss) before interest and
taxes for fiscal 2002 and 2001 and the corresponding change in income (loss)
before interest and taxes were as follows:
Change
2002 2001 Amount Percentage
------------- ------------- ------------- ----------
Wholesale operations $31,044,127 $27,241,116 $ 3,803,011 14.0 %
College bookstore operations 20,309,602 9,206,616 11,102,986 120.6 %
Complementary services 151,753 (1,402,666) 1,554,419 110.8 %
Corporate administration (8,027,319) (7,977,326) (49,993) (0.6)%
------------- ------------- ------------- ----------
$43,478,163 $27,067,740 $16,410,423 60.6 %
============= ============= ============= ==========
The increase in income before interest and taxes in wholesale operations was
attributable to increased revenues and strong used textbook margins. The
increase in income before interest and taxes in college bookstore operations was
primarily due to increased revenues, strong used textbook margins, and a $7.3
million decrease in amortization expense resulting from the adoption of the new
accounting standard previously discussed. The improvement in income (loss)
before interest and taxes in complementary services was primarily due to
increased revenues and a $0.9 million decrease in amortization expense resulting
from the adoption of the new accounting standard. Corporate administrative costs
have remained relatively stable between fiscal years, primarily due to increased
personnel costs attributable to the Company's continued growth and rising
insurance costs being offset by a $1.8 million decrease in amortization expense
resulting from the adoption of the new accounting standard.
LOSS ON DERIVATIVE FINANCIAL INSTRUMENTS. The $0.4 million loss incurred on
derivative financial instruments in fiscal 2002 is attributable to a $10.0
million optional prepayment of Tranche A and Tranche B Loans on March 29, 2002.
18
As a result of the optional prepayment, notional amounts under the interest rate
swap agreements no longer correlate with remaining principal balances due under
the Tranche A and Tranche B Loans. This loss represents the fair value on March
29, 2002 of the portion of the interest rate swap agreements that no longer
qualify as hedging instruments.
INCOME TAXES. Income tax expense for fiscal 2002 increased $4.6 million, or
79.1%, to $10.5 million from $5.9 million for fiscal 2001. The Company's
effective tax rate for fiscal years 2002 and 2001 was 39.8% and 57.4%,
respectively. The change in the effective tax rate is attributable to the impact
of non-deductible goodwill amortization in fiscal 2001. The Company's effective
tax rate for fiscal 2002 differs from the statutory tax rate primarily as a
result of state income taxes.
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 NBC'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,
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
19
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.
INCOME TAXES. Income tax expense for fiscal 2001 increased $1.1 million, or
20.9%, to $5.9 million from $4.8 million for fiscal 2000. This increase was
primarily the result of an increase in income before income taxes. The Company's
effective tax rates of 57.4% and 71.9% for the years ended March 31, 2001 and
2000, respectively, were 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Company to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the 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. On an on-going basis, the
Company evaluates its estimates and judgments, including those related to
product returns, bad debts, inventory valuation and obsolescence, intangible
assets, rebate programs, income taxes, and contingencies and litigation. The
Company bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The Company believes the following critical
accounting policies, among others, affect its more significant judgments and
estimates used in the preparation of its financial statements:
PRODUCT RETURNS. The Company recognizes revenue from wholesale sales at the
time of shipment. The Company has established a program which, under certain
conditions, enables its customers to return textbooks. The Company records
reductions to revenue and costs of sales for the estimated impact of textbooks
with return privileges which have yet to be returned to its wholesale
warehouses. Additional reductions to revenue and costs of sales may be required
if the actual rate of returns exceeds the estimated rate of returns. The
estimated rate of returns is determined utilizing actual historical return
experience.
BAD DEBTS. The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make required
payments. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
20
INVENTORY VALUATION. The Company's college bookstore operations value new
textbook and non-textbook inventories at the lower of cost or market using the
retail inventory method (first-in, first-out cost basis). Under the retail
inventory method, the valuation of inventories at cost and the resulting gross
margins are calculated by applying a calculated cost-to-retail ratio to the
retail value of inventories. The retail inventory method is an averaging method
that has been widely used in the retail industry due to its practicality.
Inherent in the retail inventory method calculation are certain significant
management judgments and estimates which impact the ending inventory valuation
at cost as well as the resulting gross margins. Changes in the fact patterns
underlying such management judgments and estimates could ultimately result in
adjusted inventory costs.
INVENTORY OBSOLESCENCE. The Company accounts for inventory obsolescence
based upon assumptions about future demand and market conditions. If actual
future demand or market conditions are less favorable than those projected by
the Company, inventory write-downs may be required.
GOODWILL AND INTANGIBLE ASSETS. The Company is required to make certain
assumptions and estimates when assigning an initial value to covenants not to
compete arising from bookstore acquisitions. The Company is also required to
make certain assumptions and estimates regarding the fair value of intangible
assets (namely goodwill, covenants not to compete, and software development
costs) when assessing such assets for impairment. Changes in the fact patterns
underlying such assumptions and estimates could ultimately result in the
recognition of impairment losses on intangible assets.
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 the Company's
Revolving Credit Facility. At March 31, 2002, the Company's total indebtedness
was approximately $147.6 million, consisting of approximately $34.9 million in
Term Loans, $110.0 million of the Senior Subordinated Notes and $2.7 million of
other indebtedness, including capital lease obligations. To provide additional
financing to fund the Recapitalization, NBC issued Senior Discount Debentures
which provided $41.6 million in net proceeds (face value of $76.0 million less
original issue discount of $31.0 million and deferred financing costs of $3.4
million).
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 Tranche B Loans, after taking into
account a $10.0 million optional prepayment made on March 29, 2002, the Company
is scheduled to make principal payments totaling approximately $4.5 million in
fiscal 2003, $7.0 million in fiscal 2004, $8.8 million in fiscal 2005 and $14.6
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), if any, towards Tranche
A and Tranche B Loan principal balances. There was an excess cash flow payment
obligation at March 31, 2002 of approximately $3.1 million that was subsequently
waived by the lenders. Loans under the Senior Credit Facility bear interest at
floating rates based upon the borrowing option selected by the Company. The
Company has separate five-year amortizing interest rate swap agreements with two
financial institutions whereby the Company's variable rate Tranche A and Tranche
B Loans have been converted into debt with a fixed rate of 5.815% plus an
applicable margin (as defined in the Credit Agreement). 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 $2.3 million, $1.8 million, and $3.5
million for the fiscal years ended March 31, 2002, 2001, and 2000, respectively.
Capital expenditures consist primarily of leasehold improvements and furnishings
21
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 $6.1 million, $3.0 million, and $26.1
million for the fiscal years ended March 31, 2002, 2001, and 2000, respectively.
Of the $26.1 million in business acquisition expenditures made for the fiscal
year ended March 31, 2000, approximately $25.2 million pertained to the
acquisitions of Triro, Inc. and Ned's Bookstores. Approximately $14.9 million of
capital raised by NBC in fiscal 2000 through the issuance of 284,923 shares of
NBC's Class A Common Stock to an HWP affiliate and members of senior management
was contributed to the Company to assist in financing the acquisitions of Triro,
Inc. and Ned's Bookstores.
In addition, during fiscal 2001, NBC issued 12,237 shares of its Class A
Common Stock to certain of the Company's 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 $52.47 per share ("Founder's Price"). Proceeds from this
issuance, which totaled $642,039, were utilized for general operating
activities.
The Company's ability to make acquisition expenditures is subject to
certain restrictions under the Senior Credit Facility. The Credit Agreement
underlying the Senior Credit Facility was amended on December 20, 2001,
effectively to allow up to $20.0 million in additional aggregate acquisition
expenditures over the remaining term of the Credit Agreement.
During fiscal 2002, the Company sold certain assets of two of its college
bookstore locations serving the University of Texas in Austin, Texas for
approximately $1.1 million, recognizing a gain on disposal of approximately $0.5
million. This gain is presented as an offset to selling, general, and
administrative expenses in the Company's statements of operations. 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, 2002,
weighted-average borrowings under the Revolving Credit Facility approximated
$14.0 million, with actual borrowings ranging from a low of no borrowings to a
high of $43.0 million. Net cash flows from operating activities for the year
ended March 31, 2002 were $31.0 million, an increase of $22.2 million from $8.8
million for the year ended March 31, 2001. This increase was primarily
attributable to the timing of payments made on accounts and income taxes payable
balances, decreases in accounts receivable, and improved operations.
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, the Company may pay dividends to NBC (i) on or 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 NBC. The indenture
governing the Senior Discount Debentures (the "Indenture") restricts the ability
of NBC 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) NBC 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, NBC's consolidated
net income. The indenture governing the Senior Subordinated Notes contains
similar restrictions on the ability of the Company and its Restricted
22
Subsidiaries (as defined in the indenture) to pay dividends or make other
Restricted Payments (as defined in the indenture) 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, 2002, the Company could borrow up to $42.5 million under the
Revolving Credit Facility. The Revolving Credit Facility was unused at March 31,
2002. 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 financing or capital
contributions.
The following tables present aggregated information as of March 31, 2002
regarding the Company's contractual obligations and commercial commitments:
Payments Due by Period
-----------------------------------------------------------
Contractual Less Than 1-3 4-5 After 5
Obligations Total 1 Year Years Years Years
- ------------------ --------------- -------------- -------------- ------------- ---------------
Long-term debt $ 145,413,145 $ 4,476,156 $ 15,932,978 $14,636,932 $ 110,367,079
Capital lease
obligations 2,163,301 111,015 241,406 429,815 1,381,065
Operating leases 34,388,000 7,300,000 10,773,000 7,271,000 9,044,000
--------------- -------------- -------------- ------------- ---------------
Total $ 181,964,446 $ 11,887,171 $ 26,947,384 $22,337,747 $ 120,792,144
=============== ============== ============== ============= ===============
Amount of Commitment Expiration Per Period
Total -----------------------------------------------------------
Other Commercial Amounts Less Than 1-3 4-5 Over 5
Commitments Committed 1 Year Years Years Years
- ------------------ --------------- -------------- -------------- ------------- ---------------
Lines of credit $ 50,000,000 $ - $ 50,000,000 $ - $ -
=============== ============== ============== ============= ===============
TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES
In fiscal 2001, the Company entered into several agreements with a newly
created entity, TheCampusHub.com, Inc., which is partially owned by NBC's
majority owner. TheCampusHub.com, Inc. was created to provide college bookstores
with a way to sell in-store inventory and virtual brand name merchandise over
the Internet utilizing technology originally developed by NBC. Such agreements
included an equity option agreement, a management services agreement, and a
technology sale and license agreement. The equity option agreement provides the
Company 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 the Company for
certain direct costs incurred on behalf of TheCampusHub.com, Inc. and also pays
the Company $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 the Company 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 the Company during that three
year period. The license fees are recognized as complementary services revenue
23
over the term of the agreement. For the year ended March 31, 2002, revenues
attributable to the management services and technology sale and license
agreements totaled $1.0 million, and reimbursable direct costs incurred on
behalf of TheCampusHub.com, Inc. totaled $0.8 million.
Revenues attributable to the management services and technology sale and
license agreements were recognized in fiscal 2002 under the anticipation that,
if necessary, TheCampusHub.com, Inc. would make a capital call to its
shareholders to provide the funding necessary to meet its obligations under the
aforementioned agreements. TheCampusHub.com, Inc. reached break-even on a cash
flow basis, excluding amounts under the management services and technology sale
and license agreements, during its most recent fiscal year. While it remains a
viable business and is funding its own operations, it is not currently
generating sufficient excess cash flow to fund its obligations under the
aforementioned agreements and the remaining capital available from its
shareholders is being reserved to fund strategic development opportunities and,
if required, ongoing operations. As a result, the Company has established a
reserve of approximately $1.0 million on net amounts due from TheCampusHub.com,
Inc., which approximated $1.2 million at March 31, 2002. Due to the uncertainty
of collecting amounts due from TheCampusHub.com, Inc., future revenues provided
for under the management services and technology sale and license agreements
will be recognized only upon receipt of payment. The Company continues to
benefit from its relationship with TheCampusHub.com, Inc., as the technology
developed further enhances the product/service offering of the Company to its
wholesale customers.
In April, 2001, NBC issued 2,621 shares of its Class A Common Stock to the
Senior Vice President of Retail Division 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. As of March 31, 2002, notes receivable from stockholders and the
associated interest receivable totaled approximately $730,000 and $136,000,
respectively. Such notes mature between August, 2002 and January, 2010 and bear
interest at rates ranging from 4.99% to 5.25%.
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 2002, approximately 43% of
the Company's annual revenues were earned in the second fiscal quarter
(July-September), while approximately 29% 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 college semester, in May and December, as a
result of the buying periods. The Company funds its working capital requirements
primarily through the 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
In June, 2001 the Financial Accounting Standards Board issued SFAS No. 143,
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. This standard addresses financial
accounting and reporting for obligations related to the retirement of tangible
long-lived assets and the related asset retirement costs. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002. The Company does not
expect its adoption of this standard in fiscal 2004 to have a significant impact
on its financial statements. In August, 2001 the Financial Accounting Standards
Board issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
24
LONG-LIVED ASSETS. This standard addresses financial accounting and reporting
for the impairment or disposal of certain long-lived assets. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The Company does
not expect its adoption of this standard in fiscal 2003 to have a significant
impact on its 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
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. 333-48221), 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 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 (loss), based on whether the instrument is designated
as part of a hedge transaction and, if so, the type of hedge transaction. The
Company utilizes derivative financial instruments solely to manage the risk that
changes in interest rates will affect the amount of its future interest payments
on the Tranche A and Tranche B Loans and adopted SFAS No. 133 effective April 1,
2001. See further discussion regarding SFAS No. 133 in Item 8, "Financial
Statements and Supplementary Data".
The Company's primary market risk exposure is, and is expected to continue
to be, fluctuation in Eurodollar interest rates. Of the $147.6 million in total
indebtedness outstanding at March 31, 2002, approximately $34.9 million is
subject to fluctuations in the Eurodollar rate. As provided in the Company's
Senior Credit Facility, exposure to interest rate fluctuations is managed by
maintaining fixed interest rate debt (primarily the Senior Subordinated Notes)
25
and by entering into interest rate swap agreements that qualify as cash flow
hedging instruments to convert certain variable rate debt into fixed rate debt.
The Company has separate five-year amortizing interest rate swap agreements with
two financial institutions whereby the Company's variable rate Tranche A and
Tranche B Loans have been converted into debt with a fixed rate of 5.815% plus
an applicable margin (as defined in the Credit Agreement). Such agreements
terminate on July 31, 2003. The notional amount under each agreement as of March
31, 2002 was approximately $22.4 million. Such notional amounts are reduced
periodically by amounts equal to the originally-scheduled principal payments on
the Tranche A and Tranche B Loans.
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, 2002):
Fixed Rate Debt Variable Rate Debt Variable to Fixed 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:
2003 $ 134,332 8.82% $ 4,452,839 5.21% $ 41,413,542 5.81% / 2.79%
2004 125,769 8.81% 7,037,966 7.32% 12,275,000 5.81% / 4.51%
2005 170,468 8.81% 8,840,181 8.24% - -
2006 223,258 8.81% 14,569,014 8.69% - -
2007 274,475 8.80% - - - -
Thereafter 111,748,144 8.88% - - - -
------------ ------- ------------ ------- ------------- -------------
Total $ 112,676,446 8.82% $ 34,900,000 7.01% $ 53,688,542 5.81% / 3.19%
============ ======= ============ ======= ============= =============
Fair Value $ 109,443,478 - $ 34,900,000 - $ (1,618,397) -
============ ============ =============
(1) Principal cash flows represent scheduled principal payments and are
adjusted for anticipated excess cash flow payments and optional
prepayments (as defined in the Credit Agreement underlying the Senior
Credit Facility) to be applied toward principal balances. The excess
cash flow payment obligation for fiscal 2002 was subsequently waived by
the lenders and therefore is not reflected in such principal cash flows.
Certain quantitative market risk disclosures have changed significantly
since March 31, 2001 as a result of market fluctuations, movement in interest
rates, principal payments, and new capital lease obligations. The following
table presents summarized market risk information for the years ended March 31,
2002 and 2001:
March 31, March 31,
2002 2001
--------------- ---------------
Fair Values:
Fixed rate debt $ 109,443,478 $ 95,285,793
Variable rate debt 34,900,000 51,187,500
Interest rate swaps (1,618,397) (1,004,400)
Overall Weighted-Average Interest Rates:
Fixed rate debt 8.82% 8.76%
Variable rate debt 7.01% 7.65%
Interest rate swaps receive rate 3.19% 4.77%
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS OF NEBRASKA BOOK COMPANY, INC. FOR THE
YEARS ENDED MARCH 31, 2002, 2001, AND 2000
Independent Auditors' Report................................................28
Balance Sheets..............................................................29
Statements of Operations....................................................30
Statements of Stockholder's Deficit.........................................31
Statements of Cash Flows....................................................32
Notes to Financial Statements...............................................33
27
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Nebraska Book Company, Inc.
Lincoln, Nebraska
We have audited the accompanying balance sheets of Nebraska Book Company,
Inc. (a wholly-owned subsidiary of NBC Acquisition Corp.) as of March 31, 2002
and 2001, and the related statements of operations, stockholder's deficit, and
cash flows for each of the three years in the period ended March 31, 2002. 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 financial statements present fairly, in all material
respects, the financial position of Nebraska Book Company, Inc. as of March 31,
2002 and 2001, and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Lincoln, Nebraska
May 24, 2002
28
NEBRASKA BOOK COMPANY, INC.
BALANCE SHEETS
- -----------------------------------------------------------------------------------------------
March 31,
2002 2001
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,419,277 $ 4,409,505
Receivables 29,384,249 31,368,150
Inventories 69,908,414 61,834,563
Recoverable income taxes - 706,408
Deferred income taxes 3,557,325 1,862,166
Prepaid expenses and other assets 498,440 403,700
------------- -------------
Total current assets 114,767,705 100,584,492
PROPERTY AND EQUIPMENT, net of depreciation & amortization 26,478,915 24,474,887
GOODWILL 29,791,335 26,659,797
IDENTIFIABLE INTANGIBLES, net of amortization 414,564 481,948
DEBT ISSUE COSTS, net of amortization 5,403,342 7,036,842
OTHER ASSETS 5,937,710 5,897,647
------------- -------------
$182,793,571 $165,135,613
============= =============
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 15,084,077 $ 11,647,964
Accrued employee compensation and benefits 8,910,902 6,512,773
Accrued interest 1,547,199 1,466,643
Accrued incentives 3,595,628 981,894
Accrued expenses 1,060,969 964,781
Income taxes payable 3,684,439 -
Deferred revenue 432,790 278,982
Current maturities of long-term debt 4,476,156 6,308,450
Current maturities of capital lease obligations 111,015 29,463
------------- -------------
Total current liabilities 38,903,175 28,190,950
LONG-TERM DEBT, net of current maturities 140,936,989 155,413,140
CAPITAL LEASE OBLIGATIONS, net of current maturities 2,052,286 22,254
OTHER LONG-TERM LIABILITIES 1,892,250 238,970
DUE TO PARENT 9,594,899 7,056,815
COMMITMENTS (Note I)
STOCKHOLDER'S DEFICIT:
Common stock, voting, authorized 50,000 shares of $1.00
par value; issued and outstanding 100 shares 100 100
Additional paid-in capital 46,404,474 46,435,726
Accumulated deficit (56,386,035) (72,222,342)
Accumulated other comprehensive loss (604,567) -
------------- -------------
Total stockholder's deficit (10,586,028) (25,786,516)
------------- -------------
$182,793,571 $165,135,613
============= =============
See notes to financial statements.
29
NEBRASKA BOOK COMPANY, INC.
STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------
Year Ended March 31,
2002 2001 2000
------------- ------------- -------------
REVENUES, net of returns $338,916,409 $301,668,853 $267,068,923
COSTS OF SALES 206,975,716 187,098,970 164,984,418
------------- ------------- -------------
Gross profit 131,940,693 114,569,883 102,084,505
OPERATING EXPENSES:
Selling, general and administrative 84,870,828 74,100,242 65,819,487
Depreciation 3,087,234 2,956,135 3,096,013
Amortization 504,468 10,445,766 9,319,993
------------- ------------- -------------
88,462,530 87,502,143 78,235,493
------------- ------------- -------------
INCOME FROM OPERATIONS 43,478,163 27,067,740 23,849,012
OTHER EXPENSES (INCOME):
Interest expense 17,189,316 17,486,737 17,469,487
Interest income (399,573) (615,430) (355,935)
Loss on derivative financial instruments 360,445 - -
------------- ------------- -------------
17,150,188 16,871,307 17,113,552
------------- ------------- -------------
INCOME BEFORE INCOME TAXES 26,327,975 10,196,433 6,735,460
INCOME TAX EXPENSE 10,491,668 5,857,596 4,844,744
------------- ------------- -------------
NET INCOME $ 15,836,307 $ 4,338,837 $ 1,890,716
============= ============= =============
See notes to financial statements.
30
NEBRASKA BOOK COMPANY, INC.
STATEMENTS OF STOCKHOLDER'S DEFICIT
- --------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-in Accumulated Comprehensive Comprehensive
Stock Capital Deficit Loss Total Income
------ ------------ ------------- ------------- ------------- -------------
BALANCE, April 1, 1999 $ 100 $30,876,942 $(78,451,895) $ - $(47,574,853) $ -
Contributed capital - 14,953,006 - - 14,953,006 -
Net income - - 1,890,716 - 1,890,716 1,890,716
------ ------------ ------------- ------------- ------------- -------------
BALANCE, March 31, 2000 100 45,829,948 (76,561,179) - (30,731,131) $ 1,890,716
=============
Contributed capital - 605,778 - - 605,778 -
Net income - - 4,338,837 - 4,338,837 4,338,837
------ ------------ ------------- ------------- ------------- -------------
BALANCE, March 31, 2001 100 46,435,726 (72,222,342) - (25,786,516) $ 4,338,837
=============
Contributed capital - (31,252) - - (31,252) -
Net income - - 15,836,307 - 15,836,307 15,836,307
Other comprehensive
loss, net of taxes:
Cumulative effect of
adoption of SFAS No.
133, net of taxes of
$401,760 - - - (602,640) (602,640) (602,640)
Unrealized losses on
interest rate swap
agreements, net of
taxes of $1,285 - - - (1,927) (1,927) (1,927)
------ ------------ ------------- ------------- ------------- -------------
BALANCE, March 31, 2002 $ 100 $46,404,474 $(56,386,035) $ (604,567) $(10,586,028) $ 15,231,740
====== ============ ============= ============= ============= =============
See notes to financial statements.
31
NEBRASKA BOOK COMPANY, INC.
STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------
Year Ended March 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 2002 2001 2000
------------ ------------ -------------
Net income $15,836,307 $ 4,338,837 $ 1,890,716
Adjustments to reconcile net income to net cash
flows from operating activities:
Provision for losses on accounts receivable 1,629,704 434,070 140,927
Depreciation 3,087,234 2,956,135 3,096,013
Amortization 2,137,968 11,814,114 10,692,176
Noncash interest expense from derivative
financial instruments 250,340 - -
Loss on derivative financial instruments 360,445 - -
(Gain) Loss on disposal of assets (482,810) 59,627 18,044
Deferred income taxes (500,000) (1,351,000) (773,000)
Changes in operating assets and liabilities, net of
effect of acquisitions/disposals:
Receivables 309,193 (7,618,872) (3,330,361)
Inventories (6,554,490) 354,360 (4,665,275)
Recoverable income taxes 706,408 (706,408) 319,630
Prepaid expenses and other assets (94,740) 23,602 84,054
Other assets (683,573) (85,526) 797,705
Accounts payable 3,436,113 (4,497,902) 5,318,621
Accrued employee compensation and benefits 2,398,129 211,662 2,231,461
Accrued interest 80,556 117,419 (77,285)
Accrued incentives 2,613,734 856,541 (64,075)
Accrued expenses 96,188 271,867 197,200
Income taxes payable 3,684,439 (553,893) 552,928
Deferred revenue 153,808 (273,269) 175,695
Other long-term liabilities 34,883 36,739 11,157
Due to parent 2,538,084 2,450,624 2,328,925
------------ ------------ -------------
Net cash flows from operating activities 31,037,920 8,838,727 18,945,256
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,276,892) (1,759,010) (3,542,471)
Bookstore acquisitions, net of cash acquired (6,109,599) (2,975,332) (26,072,155)
Proceeds from sale of bookstores 1,139,400 - -
Proceeds from sale of property and equipment and other 49,487 144,834 65,197
Software development costs (418,463) (403,996) (694,830)
------------ ------------ -------------
Net cash flows from investing activities (7,616,067) (4,993,504) (30,244,259)
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs - - (32,478)
Principal payments on long-term debt (16,308,445) (4,456,324) (3,079,413)
Principal payments on capital lease obligations (117,388) (72,320) (177,411)
Capital contributions 13,752 642,039 14,979,532
------------ ------------ -------------
Net cash flows from financing activities (16,412,081) (3,886,605) 11,690,230
------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,009,772 (41,382) 391,227
CASH AND CASH EQUIVALENTS, Beginning of year 4,409,505 4,450,887 4,059,660
------------ ------------ -------------
CASH AND CASH EQUIVALENTS, End of year $11,419,277 $ 4,409,505 $ 4,450,887
============ ============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest $15,224,920 $16,000,970 $ 16,174,589
Income taxes 4,062,737 6,018,273 2,424,436
Noncash investing and financing activities:
Property acquired through capital lease 2,228,972 - -
Accumulated other comprehensive loss:
Cumulative effect of adoption of SFAS No. 133,
net of income taxes (602,640) - -
Unrealized losses on interest rate swap
agreements, net of income taxes (1,927) - -
Deferred tax asset resulting from
accumulated other comprehensive loss (403,045) - -
See notes to financial statements.
32
NEBRASKA BOOK COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A. NATURE OF OPERATIONS
Nebraska Book Company, Inc. (the "Company") is a wholly-owned subsidiary of
NBC Acquisition Corp. NBC Acquisition Corp. ("NBC") was formed for the purpose
of acquiring all of the outstanding capital stock of the Company, effective
September 1, 1995. NBC did not have substantive operations prior to the
acquisition of the Company. The purchase price of the Company 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 participates in the college bookstore industry primarily by
providing used textbooks to college bookstore operators, by operating its own
college bookstores, by providing distance education products and services, and
by providing proprietary college bookstore information systems and consulting
services.
On February 13, 1998, NBC consummated a Merger Agreement among a newly
created corporation controlled and owned by affiliates of Haas Wheat & Partners,
L.P. ("HWP"), NBC and certain shareholders of NBC pursuant to which the
Company's outstanding debt and NBC's stock were restructured (the
"Recapitalization"). As the new investor did not acquire substantially all of
the common stock of NBC, a new basis of accounting was not established in
connection with the Recapitalization, resulting in a negative charge to retained
earnings of approximately $75.3 million. The Company obtained approximately
$170.0 million in new debt financing in conjunction with the Recapitalization
and capitalized debt issue costs of approximately $11.3 million associated with
such new debt financing.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company are as follows:
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 statements of
operations and approximated $4.4 million, $2.9 million, and $2.2 million for the
years ended March 31, 2002, 2001, and 2000, respectively. Shipping and handling
costs are included in operating expenses in the statements of operations and
approximated $8.0 million, $6.8 million, and $5.8 million for the years ended
March 31, 2002, 2001, and 2000, respectively.
ADVERTISING: Advertising costs are expensed as incurred and approximated
$2.7 million, $2.2 million, and $2.3 million for the years ended March 31, 2002,
2001, and 2000, 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.
33
INVENTORIES: Inventories are stated at the lower of cost or market.
Inventories for wholesale operations are determined on the weighted-average cost
method. The Company's college bookstore operations value new textbook and
non-textbook inventories using the retail inventory method (first-in, first-out
cost basis). 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 seven years, with the exception of buildings which are depreciated over
39 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 cash flows. Software costs capitalized
pertaining to WinPRISM, the Company's new Windows-based product, approximated
$1.2 million, $1.1 million, and $0.8 million at March 31, 2002, 2001, and 2000,
respectively. Certain WinPRISM functionalities have been completed and released
to the general public. Amortization of the capitalized costs associated with
such functionalities totaled $0.3 million and $0.1 million for the fiscal years
ended March 31, 2002 and 2001, respectively. 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 P to the financial statements).
GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS: Goodwill and other
identifiable intangible assets were acquired through the acquisition of 100% of
the stock of the Company effective September 1, 1995, and the acquisition of
various bookstore operations and other businesses. Goodwill and intangible
assets with indefinite useful lives are not amortized but rather tested at least
annually for impairment. The test for impairment of goodwill is a two-step
process that identifies potential impairment and then measures the amount of
such impairment to be recorded in the financial statements. The test for
impairment of intangible assets with indefinite useful lives consists of
comparing the fair value of the intangible asset with its carrying amount,
recognizing any excess carrying value as an impairment loss. Intangible assets
with finite useful lives continue to be amortized on a straight-line basis over
useful lives of 2-3 years. There were no impairment losses recognized during
fiscal 2002.
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. Accumulated amortization of such costs as of March 31, 2002 and
2001 was approximately $5.9 million and $4.3 million, respectively.
In April, 2002 the Financial Accounting Standards Board issued SFAS No. 145,
RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO.
13 AND TECHNICAL CORRECTIONS. In part, this standard rescinds SFAS No. 4, which
required all gains and losses from extinguishment of debt to be aggregated and,
if material, classified as an extraordinary item, net of income taxes. The
provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are effective
for fiscal years beginning after May 15, 2002. The Company early-adopted this
standard in fiscal 2002, recording the write-off of approximately $0.3 million
in unamortized debt issue costs related to the $10.0 million optional prepayment
of Tranche A and Tranche B Loans as additional amortization expense.
34
DERIVATIVE FINANCIAL INSTRUMENTS: Interest rate swap agreements are utilized
by the Company to reduce exposure to fluctuations in the interest rates on its
variable rate debt. Such agreements are recorded in the balance sheet at fair
value. Changes in the fair value of the agreements are recorded in earnings or
other comprehensive income (loss), based on whether the agreements are
designated as part of the hedge transaction and whether the agreements are
effective in offsetting the change in the value of the interest payments
attributable to the Company's variable rate debt.
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, 2002 and 2001, because
of the relatively short maturity of these instruments. The fair value of
long-term debt, including the current maturities, was approximately $144.3
million and $146.5 million as of March 31, 2002 and 2001, respectively, as
determined primarily by quoted market values. The fair value of the interest
rate swap agreements (see note J) approximated $(1.6) million and $(1.0) million
as of March 31, 2002 and 2001 using quotes from brokers and represents the
Company's 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 files a consolidated federal income tax return
with its parent and follows a policy of recording an amount equal to the income
tax expense which the Company would have incurred had it filed a separate
return. The Company is responsible for remitting tax payments and collecting tax
refunds for the consolidated group. The amount due to parent represents the
cumulative reduction in tax payments made by the Company as a result of the tax
benefit of operating losses generated by the Company's parent. 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.
COMPREHENSIVE INCOME: Comprehensive income includes net income and other
comprehensive losses. For the year ended March 31, 2002, other comprehensive
losses consisted of the cumulative effect of adoption of SFAS No. 133 and
unrealized losses on interest rate swap agreements, net of taxes.
ACCOUNTING STANDARDS NOT YET ADOPTED: In June, 2001 the Financial Accounting
Standards Board issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS. This standard addresses financial accounting and reporting for
obligations related to the retirement of tangible long-lived assets and the
related asset retirement costs. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. The Company does not expect its adoption of this
standard in fiscal 2004 to have a significant impact on the financial
statements. In August, 2001, the Financial Accounting Standards Board issued
SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS.
This standard addresses financial accounting and reporting for the impairment or
disposal of certain long-lived assets. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001. The Company does not expect its
adoption of this standard in fiscal 2003 to have a significant impact on the
financial statements.
RECLASSIFICATIONS: Certain items on the prior years' statements have been
reclassified to conform to the current year presentation.
C. ACQUISITIONS
On July 20, 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 141, BUSINESS COMBINATIONS. This
statement, which addresses financial accounting and reporting for business
combinations, mandates the use of the "purchase method" of accounting for all
business combinations. The purchase method involves allocating the total
purchase price to tangible and identifiable intangible assets acquired and
liabilities assumed based on their estimated fair values at date of acquisition.
Any excess of the purchase price over the net of amounts assigned to assets
acquired and liabilities assumed is recorded as goodwill. The statement also
35
provides specific criteria for separately identifying goodwill and other
intangible assets and expands the disclosure requirements for material business
combinations. SFAS No. 141 does not fundamentally change the guidance for
determining the cost of an acquired entity and allocating that cost to the fair
value of the assets acquired and liabilities assumed. This statement is
effective for all business combinations initiated after June 30, 2001. This does
not represent a significant change for the Company, as it has historically
accounted for business combinations under the purchase method.
Effective November 12, 1999, the Company 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. The Company
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. The results of operations for Ned's Bookstores have
been included in the 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 NBC to the Company. NBC raised the $4.6 million in
capital through the sale of 87,922 shares of its Class A Common Stock to certain
shareholders, including an affiliate of HWP and members of senior management on
December 6, 1999. The remaining funding was provided through available cash
funds.
Effective June 4, 1999, the Company 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. The Company 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. The
results of operations for Triro, Inc. have been included in the 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 NBC to the Company.
NBC raised the $10.3 million in capital through the sale of 197,001 shares of
its Class A Common Stock to certain shareholders, including an affiliate of HWP
and members of senior management. The remaining funding was provided through
available cash funds and borrowings under the Company'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 income 792,147
Additionally, the Company 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. In fiscal 2002 and 2001, the Company acquired ten and four
such bookstore operations, respectively.
36
D. RECEIVABLES
Receivables are summarized as follows:
March 31,
---------------------------
2002 2001
------------ ------------
Trade receivables, less allowance for
doubtful accounts of $429,803
and $407,033 at March 31, 2002 and
2001, respectively $15,096,134 $14,739,915
Receivables from book publishers
for returns 9,333,134 11,971,106
Advances for book buy-backs 2,162,439 1,784,687
Computer finance agreements,
current portion 352,286 128,544
Related party receivables, less
allowance for doubtful accounts
of $1.0 million at March 31, 2002 337,561 680,728
Other 2,102,695 2,063,170
----------- -----------
$29,384,249 $31,368,150
=========== ===========
Trade receivables include the effect of estimated product returns. The amount
of estimated product returns at March 31, 2002 and 2001 was approximately $6.0
million and $2.7 million, respectively.
E. INVENTORIES
Inventories are summarized as follows:
March 31,
-------------------------
2002 2001
----------- -----------
Wholesale $30,256,654 $26,150,304
College bookstores 32,607,768 31,348,415
Other 7,043,992 4,335,844
----------- -----------
$69,908,414 $61,834,563
=========== ===========
Wholesale inventories include the effect of estimated product returns. The
amount of estimated product returns at March 31, 2002 and 2001 was approximately
$2.7 million and $1.4 million, respectively.
General and administrative costs associated with the storage and handling of
inventory totaled approximately $6.5 million and $5.6 million for the years
ended March 31, 2002 and 2001, respectively, of which approximately $1.9 million
and $1.6 million was capitalized into inventory at March 31, 2002 and 2001,
respectively.
37
F. PROPERTY AND EQUIPMENT
A summary of the cost of property and equipment follows:
March 31,
------------------------------
2002 2001
-------------- --------------
Land $ 2,408,999 $ 2,412,818
Buildings and improvements 17,002,181 14,733,218
Leasehold improvements 6,526,231 6,100,691
Furniture and fixtures 5,361,476 4,737,487
Information systems 10,786,038 9,277,060
Automobiles and trucks 321,476 386,074
Machinery 450,510 465,878
Projects in process 204,521 40,929
-------------- --------------
43,061,432 38,154,155
Less: Accumulated depreciation &
amortization (16,582,517) (13,679,268)
-------------- --------------
$ 26,478,915 $ 24,474,887
============== ==============
G. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLES
On July 20, 2001, the Financial Accounting Standards Board issued SFAS No.
142, GOODWILL AND OTHER INTANGIBLE ASSETS. This statement addresses how goodwill
and other intangible assets should be accounted for in the financial statements
upon acquisition and subsequent thereto. The Company has elected early adoption
of the provisions of this statement beginning April 1, 2001.
During the fiscal year ended March 31, 2002, the Company acquired ten
college bookstore locations in three separate transactions, none of which was
material to the Company's financial statements. In May of 2001, the Company
acquired certain assets of a privately owned bookstore serving Western
Washington University. In June of 2001, the Company acquired certain assets of
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. In March of 2002, NBC acquired certain
assets of a privately owned bookstore serving the University of California -
Berkeley. The total purchase price, net of cash acquired, of such acquisitions
was approximately $6.1 million, of which approximately $0.2 million was assigned
to covenants not to compete with amortization periods ranging between two and
three years and approximately $3.3 million was assigned to tax-deductible
goodwill.
Also during the fiscal year ended March 31, 2002, the Company sold inventory
and certain property, plant and equipment located at two of its college
bookstore locations serving the University of Texas for approximately $1.1
million, recognizing a gain on disposal of approximately $0.5 million. Included
in the calculation of such gain was $0.2 million of goodwill associated with
these two bookstores. This gain is presented as an offset to selling, general,
and administrative expenses in the Company's statements of operations.
38
The following table presents certain financial information assuming that
amortization expense associated with goodwill was excluded for all periods
presented:
Year Ended March 31,
2002 2001 2000
-------------- -------------- -------------
Net Income:
Net income, as reported $ 15,836,307 $ 4,338,837 $ 1,890,716
Add: Goodwill amortization - 10,169,697 8,951,269
Deduct: Tax benefit of goodwill amortization - (2,364,766) (1,805,387)
-------------- -------------- -------------
Net income, as adjusted $ 15,836,307 $ 12,143,768 $ 9,036,598
============== ============== =============
The following table presents the total carrying amount of goodwill, by
reportable segment, as of March 31, 2002 and 2001, respectively. Goodwill
assigned to corporate administration represents the carrying value of goodwill
arising from NBC Acquisition Corp.'s ("NBC") acquisition of the Company on
September 1, 1995. As is the case with a significant portion of the Company's
assets, such goodwill is not allocated between the Company's segments when
management makes operating decisions and assesses performance. Such goodwill is
allocated to the Company's reporting units for purposes of testing goodwill for
impairment and calculating any gain or loss on the disposal of all or a portion
of a reporting unit.
March 31,
2002 2001
-------------- --------------
College bookstore operations $ 13,020,761 $ 9,889,223
Complementary services - -
-------------- --------------
Total for reportable segments 13,020,761 9,889,223
Corporate administration 16,770,574 16,770,574
-------------- --------------
Total goodwill $ 29,791,335 $ 26,659,797
============== ==============
Identifiable intangible assets, net of amortization expense of approximately
$0.2 million and $0.1 million as of March 31, 2002 and 2001, respectively, were
not material.
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 through a
syndicate of investors. The facility was 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, up to a maximum of $50.0 million. The calculated borrowing base
at March 31, 2002 was approximately $42.5 million. The Revolving Credit Facility
was unused at March 31, 2002.
The interest rate on the Senior Credit Facility is prime plus an applicable
margin of up to 1.50% or, on Eurodollar borrowings, the 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 Company's Revolving Credit Facility for the years
ended March 31, 2002 and 2001 were approximately $14.0 million and $15.3 million
at an average rate of 7.8% and 10.7%, respectively.
39
The Senior Credit Facility is collateralized by substantially all of the
assets of the Company and its parent, NBC. Additionally, NBC has guaranteed the
prompt and complete payment and performance of the Company's obligations under
the Senior Credit Facility. The Senior Credit Facility also stipulates that
excess cash flows as defined in the credit agreement dated February 13, 1998
(the "Credit Agreement"), as amended, shall be applied initially towards
prepayment of the term loans and then utilized to permanently reduce commitments
under the Revolving Credit Facility. An optional prepayment of $10.0 million was
made on March 29, 2002 and applied towards the Tranche A Loan and Tranche B Loan
in accordance with the Credit Agreement. There was also an excess cash flow
payment obligation at March 31, 2002 of approximately $3.1 million that was
subsequently waived by the lenders.
Additional funding of the Recapitalization included the proceeds of $110.0
million face amount of 8.75% senior subordinated notes due 2008 (the "Senior
Subordinated Notes") and the issuance by NBC of senior discount debentures (the
"Senior Discount Debentures").
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%
(4.24% and 7.20% at March
31, 2002 and 2001, respectively) $ 11,095,713 $ 20,062,500
Tranche B Loan, due March 31, 2006,
quarterly principal payments, plus
interest at a floating rate based
on Eurodollar rate plus 2.50%
(4.49% and 7.45% at March 31,
2002 and 2001, respectively) 23,804,287 31,125,000
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
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% 513,145 534,090
------------- ------------
145,413,145 161,721,590
Less current maturities (4,476,156) (6,308,450)
------------- -------------
$140,936,989 $155,413,140
============= =============
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, the Company may pay dividends to NBC (i) on or
after August 15, 2003 in an amount not to exceed the amount of interest required
to be paid on NBC's Senior Discount Debentures and (ii) to pay corporate
overhead expenses not to exceed $250,000 per year and any taxes owed by NBC.
The indenture governing the Senior Subordinated Notes 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.
40
At March 31, 2002, the aggregate maturities of long-term debt for the next
five years were as follows:
Fiscal Year
-----------
2003 $ 4,476,156
2004 7,063,916
2005 8,869,062
2006 14,601,158
2007 35,774
I. LEASE OBLIGATIONS
In conjunction with two bookstores acquired in June of 2001, the Company
entered into two bookstore facility leases that qualified as capital leases.
Such leases expire in fiscal 2012 and both contain two five-year options to
renew. Additionally, the Company is obligated under various capital leases for
certain equipment that expire at various dates through 2003. Capitalized leased
property and equipment included in property and equipment was approximately $2.0
million at March 31, 2002, net of accumulated depreciation.
The Company leases bookstore facilities and data processing equipment under
noncancelable operating leases expiring at various dates through fiscal 2015,
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 3.0% to 10.0%.
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
---- ------------ ------------
2003 $ 359,843 $ 7,300,000
2004 336,752 5,998,000
2005 364,814 4,775,000
2006 394,982 4,081,000
2007 417,432 3,190,000
Thereafter 1,753,917 9,044,000
------------ ------------
Total minimum lease payments 3,627,740 $34,388,000
============
Amount representing interest at
11.8% (1,464,439)
------------
Present value of minimum lease
payments $ 2,163,301
============
Total rent expense for the years ended March 31, 2002, 2001, and 2000 was
approximately $10.6 million, $9.6 million, and $8.2 million, respectively.
Percentage rent expense for the years ended March 31, 2002, 2001, and 2000 was
approximately $2.5 million, $2.0 million, and $1.8 million, respectively.
J. DERIVATIVE FINANCIAL INSTRUMENTS
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 (loss), based on whether the instrument is designated
as part of a hedge transaction and, if so, the type of hedge transaction. The
Company utilizes derivative financial instruments solely to manage the risk that
changes in interest rates will affect the amount of its future interest payments
on the Tranche A and Tranche B Loans and adopted SFAS No. 133 effective April 1,
2001.
41
The Company's primary market risk exposure is, and is expected to continue
to be, fluctuation in Eurodollar interest rates. Of the $147.6 million in total
indebtedness outstanding at March 31, 2002, $34.9 million is subject to
fluctuations in the Eurodollar interest rate. As provided in the Company's
Senior Credit Facility, exposure to interest rate fluctuations is managed by
maintaining fixed interest rate debt (primarily the Senior Subordinated Notes)
and by entering into interest rate swap agreements that qualify as cash flow
hedging instruments to convert certain variable rate debt into fixed rate debt.
The Company has separate five-year amortizing interest rate swap agreements with
two financial institutions whereby the Company's variable rate Tranche A and
Tranche B Loans have been converted into debt with a fixed rate of 5.815% plus
an applicable margin (as defined in the Credit Agreement). Such agreements
terminate on July 31, 2003. The notional amount under each agreement as of March
31, 2002 was approximately $22.4 million. Such notional amounts are reduced
periodically by amounts equal to the originally-scheduled principal payments on
the Tranche A and Tranche B Loans. The Company is exposed to credit loss in the
event of nonperformance by the counterparties to the interest rate swap
agreements. The Company anticipates the counterparties will be able to fully
satisfy their obligations under the agreements.
The interest rate swap agreements qualify as cash flow hedge instruments if
the following criteria are met:
(1) Formal documentation of the hedging relationship and the Company's
risk management objective and strategy for undertaking the hedge
occur at the inception of the agreements.
(2) The interest rate swap agreements are expected to be highly
effective in offsetting the change in the value of the interest
payments attributable to the Company's Tranche A and Tranche B
Loans.
The Company estimates the effectiveness of the interest rate swap agreements
utilizing the hypothetical derivative method. Under this method, the fair value
of the actual interest rate swap agreements is compared to the fair value of
hypothetical swap agreements that have the same critical terms as the Tranche A
and Tranche B Loans, including notional amounts and repricing dates. To the
extent that the agreements are not considered to be highly effective in
offsetting the change in the value of the interest payments being hedged, the
fair value relating to the ineffective portion of such agreements and any
subsequent changes in such fair value are immediately recognized in earnings as
"gain or loss on derivative financial instruments". To the extent that the
agreements are considered highly effective but not completely effective in
offsetting the change in the value of the interest payments being hedged, any
changes in fair value relating to the ineffective portion of such agreements are
immediately recognized in earnings as interest expense.
The interest rate swap agreements are reflected at fair value in the
Company's balance sheets (as "other long-term liabilities") and the related
gains or losses on these agreements are generally recorded in stockholders'
deficit, net of applicable income taxes (as "accumulated other comprehensive
loss"). The gains or losses recorded in accumulated other comprehensive loss are
reclassified into earnings as an adjustment to interest expense in the same
periods in which the related interest payments being hedged are recognized in
earnings. The net effect of this accounting on the Company's results of
operations is that interest expense on the Tranche A and Tranche B Loans is
generally being recorded based on fixed interest rates. The fair value of the
interest rate swap agreements reflected in other long-term liabilities at March
31, 2002 approximated $1.6 million.
The initial adoption of SFAS No. 133 on April 1, 2001 resulted in a $1.0
million increase in other long-term liabilities, $0.4 million increase in
noncurrent deferred income tax assets, and $0.6 million increase in accumulated
other comprehensive loss to recognize the fair value of the interest rate swap
agreements, net of income taxes, as the cumulative effect of a change in
accounting principle.
As a result of the aforementioned $10.0 million optional prepayment of
Tranche A and Tranche B Loans on March 29, 2002, notional amounts under the
interest rate swap agreements no longer correlate with remaining principal
balances due under the Tranche A and Tranche B Loans. The difference between the
notional amounts under the interest rate swap agreements and the remaining
principal balances due under the Tranche A and Tranche B Loans at March 31, 2002
represents the portion of the agreements that no longer qualify for hedge
42
accounting. The fair value of the interest rate swap agreements on March 29,
2002 was allocated between the portion of the agreements that no longer qualify
for hedge accounting and the portion of the agreements that were redesignated as
hedging instruments on the remaining amounts due under the Tranche A and Tranche
B Loans. The fair value allocated to the portion of the interest rate swap
agreements that no longer qualify for hedge accounting was immediately
recognized in the Company's results of operations as a loss on derivative
financial instruments and totaled approximately $0.4 million. Changes in the
fair value of this portion of the interest rate swap agreements, along with the
proportionate share of actual net cash settlements attributable to this portion
of the agreements, will also be recognized as a gain or loss on derivative
financial instruments in the statements of operations.
As of March 31, 2002, the fair value of the portion of the interest rate
swap agreements that were redesignated as hedging instruments on March 29, 2002
declined by approximately $0.2 million. The net loss resulting from
ineffectiveness attributable to this portion of the interest rate swap
agreements for the year ended March 31, 2002 recorded as interest expense was
approximately $0.2 million.
Changes in the fair value of the interest rate swap agreements are reflected
in the statements of cash flows as either "noncash interest expense from
derivative financial instruments", "loss on derivative financial instruments",
or as noncash investing and financing activities.
K. INCOME TAXES
The provision (benefit) for income taxes consists of:
Year Ended March 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Current:
Federal $ 9,311,719 $ 6,107,168 $ 4,524,517
State 1,679,949 1,101,428 1,093,227
Deferred (500,000) (1,351,000) (773,000)
----------- ----------- -----------
$10,491,668 $ 5,857,596 $ 4,844,744
=========== =========== ===========
The following represents a reconciliation between the actual income tax
expense and income taxes computed by applying the Federal income tax rate to
income before income taxes:
Year Ended March 31,
-------------------------------------
2002 2001 2000
--------- --------- --------
Statutory rate 35.0% 34.0% 34.0%
State income tax effect 4.0 5.7 9.5
Amortization of goodwill - 14.2 22.4
Change in estimate of income tax
liabilities 0.4 2.4 3.7
Other 0.4 1.1 2.3
--------- --------- --------
39.8% 57.4% 71.9%
========= ========= ========
43
The components of the deferred tax assets consist of the following:
March 31,
--------------------------
2002 2001
----------- -----------
Deferred income tax assets
(liabilities),
current:
Vacation accruals $ 532,816 $ 484,173
Inventory 69,490 544,378
Allowance for doubtful accounts 542,753 154,510
Product returns 1,237,730 480,069
Incentive programs 1,312,059 321,784
Other (137,523) (122,748)
----------- -----------
3,557,325 1,862,166
----------- -----------
Deferred income tax assets,
noncurrent:
Deferred compensation agreements 103,955 90,713
Book over tax goodwill
amortization 1,843,312 2,967,716
Covenant not to compete 1,384,571 1,468,568
Unrealized losses on derivatives 403,045 -
----------- -----------
3,734,883 4,526,997
----------- -----------
$7,292,208 $6,389,163
=========== ===========
The non-current portion of deferred tax assets is classified in other
assets.
L. RETIREMENT PLAN
The Company 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, 2002, 2001, and 2000 were
approximately $0.9 million, $0.8 million, and $0.8 million, respectively.
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 either death
or voluntary/involuntary resignation or termination. 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 and approximated $0.3 million and $0.2 million as of March
31, 2002 and 2001, respectively.
N. STOCK-BASED COMPENSATION
NBC has two stock-based compensation plans established to provide for the
granting of options to purchase NBC 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 NBC's Class A Common Stock to selected
members of senior management of NBC and its affiliates. All options granted are
intended to be nonqualified stock options, although the plan also provides for
incentive stock options. NBC 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,
2002, there were 11,229 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 NBC's Class A Common Stock to selected employees,
44
officers, and directors of NBC and its affiliates. All options granted are
intended to be nonqualified stock options, although the plan also provides for
incentive stock options. NBC 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, 2002,
there were 3,906 options available for grant under the plan.
No compensation cost was recognized for the options granted to employees in
fiscal 2002, 2001, and 2000 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. In fiscal 2002, the estimated fair value was based upon an
independent valuation of the Class A Common Stock performed during fiscal 2002.
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, 2002 is
as follows:
Year Ended March 31,
2002 2001 2000
----------------------- ---------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
----------- ----------- ----------- ---------- ---------- ----------
1998 Performance Stock Option Plan:
Outstanding - beginning of year 22,530 $52.47 9,530 $52.47 9,530 $52.47
Granted 18,241 52.47 13,000 52.47 - -
Expired/terminated - - - - - -
Exercised - - - - - -
----------- ----------- ----------- ---------- ---------- ----------
Outstanding - end of year 40,771 $52.47 22,530 $52.47 9,530 $52.47
=========== =========== =========== ========== ========== ==========
There were 20,592, 10,398, and 4,765 options exercisable at March 31, 2002,
2001, and 2000, respectively, with a weighted-average exercise price per option
of $52.47. All options outstanding at March 31, 2002 have an exercise price of
$52.47 per option and a weighted-average remaining contractual life of 8.4
years.
Year Ended March 31,
2002 2001 2000
----------------------- ---------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
----------- ----------- ----------- ---------- ---------- ----------
1998 Stock Option Plan:
Outstanding - beginning of year 28,094 $52.47 24,694 $52.47 13,200 $52.47
Granted - - 3,400 52.47 11,594 52.47
Expired/terminated (1,000) 52.47 - - (100) 52.47
Exercised - - - - - -
----------- ----------- ----------- ---------- ---------- ----------
Outstanding - end of year 27,094 $52.47 28,094 $52.47 24,694 $52.47
=========== =========== =========== ========== ========== ==========
There were 22,596, 16,472, and 9,448 options exercisable at March 31, 2002,
2001, and 2000, respectively, with a weighted-average exercise price per option
of $52.47. All options outstanding at March 31, 2002 have an exercise price of
$52.47 per option and a weighted-average remaining contractual life of 7.2
years.
45
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 fiscals 2002 and 2001 would have
been $2.83 and $7.37 per option, respectively. The weighted-average grant-date
fair value of options granted under the 1998 Stock Option Plan in fiscals 2001
and 2000 would have been $7.68 and $9.26 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, 2002 March 31, 2001 March 31, 2000
----------------- ---------------- ----------------
Risk-free interest rate 3.71% 6.26% 6.06%
Dividend yield - - -
Expected volatility 1.00% 1.00% 1.00%
Expected life (years) 1.5 3.0 3.0
The pro forma impact on net income of accounting for stock-based
compensation using the fair value method required by SFAS 123 is as follows:
Year Ended March 31,
2002 2001 2000
------------- ------------- ------------
Net income:
As reported $15,836,307 $ 4,338,837 $ 1,890,716
Pro forma 15,784,963 4,266,002 1,825,059
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 108 college bookstores as of March 31,
2002 located on or adjacent to college campuses. The complimentary 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 inventories and certain
cash and cash equivalents, receivables, intangibles, and other assets), 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, 2002.
46
College
Wholesale Bookstore Complimentary
Operations Operations Services Total
------------- ------------- ------------- -------------
Year ended March 31, 2002:
External customer revenues $ 101,596,353 $ 200,850,901 $ 36,469,155 $ 338,916,409
Intersegment revenues 21,297,428 548,747 1,623,936 23,470,111
Depreciation and amortization expense 246,825 2,089,677 544,582 2,881,084
Income before interest and taxes 31,044,127 20,309,602 151,753 51,505,482
Total assets 34,153,681 51,033,959 10,051,447 95,239,087
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 45,626,064 6,449,572 81,846,992
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 50,048,978 7,737,641 86,422,689
The following table reconciles segment information presented above with
information as presented in the Company's financial statements for the three
years ended March 31, 2002.
Year Ended March 31,
2002 2001 2000
------------- ------------- -------------
Revenues:
Total for reportable segments $362,386,520 $322,510,255 $286,869,183
Elimination of intersegment revenues (23,470,111) (20,841,402) (19,800,260)
------------- ------------- -------------
Financial statement total $338,916,409 $301,668,853 $267,068,923
============= ============= =============
Depreciation and Amortization Expense:
Total for reportable segments $ 2,881,084 $ 11,198,750 $ 10,047,247
Corporate administration 710,618 2,203,151 2,368,759
------------- ------------- -------------
Financial statement total $ 3,591,702 $ 13,401,901 $ 12,416,006
============= ============= =============
Income Before Income Taxes:
Total for reportable segments $ 51,505,482 $ 35,045,066 $ 31,972,142
Corporate administrative costs (8,027,319) (7,977,326) (8,123,130)
------------- ------------- -------------
43,478,163 27,067,740 23,849,012
Interest expense, net (16,789,743) (16,871,307) (17,113,552)
Loss on derivative financial
instruments (360,445) - -
------------- ------------- -------------
Income before income taxes $ 26,327,975 $ 10,196,433 $ 6,735,460
============= ============= =============
Total Assets:
Total for reportable segments $ 95,239,087 $ 81,846,992 $ 86,422,689
Assets not allocated to segments:
Cash and cash equivalents 6,798,602 1,177 224
Receivables 23,438,968 26,829,423 20,923,250
Recoverable income taxes - 706,408 -
Deferred income taxes 3,557,325 1,862,166 1,598,793
Property and equipment, net 26,478,915 24,474,887 25,760,825
Goodwill 16,770,574 16,770,574 18,567,418
Debt issue costs, net 5,403,342 7,036,842 8,405,190
Other assets 4,608,318 5,203,444 3,994,606
Other 498,440 403,700 427,302
------------- ------------- -------------
Financial statement total $182,793,571 $165,135,613 $166,100,297
============= ============= =============
47
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.
P. RELATED PARTY TRANSACTIONS
In fiscal 2001, the Company 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 NBC'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 the Company 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 the Company for certain direct costs incurred on behalf of
TheCampusHub.com, Inc. and also pays the Company $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
the Company 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 the Company during that three year period. The license fees are recognized
as complementary services revenue over the term of the agreement. For the year
ended March 31, 2002, revenues attributable to the management services and
technology sale and license agreements totaled $1.0 million, and reimbursable
direct costs incurred on behalf of TheCampusHub.com, Inc. totaled $0.8 million.
Revenues attributable to the management services and technology sale and
license agreements were recognized in fiscal 2002 under the anticipation that,
if necessary, TheCampusHub.com, Inc. would make a capital call to its
shareholders to provide the funding necessary to meet its obligations under the
aforementioned agreements. TheCampusHub.com, Inc. reached break-even on a cash
flow basis, excluding amounts under the management services and technology sale
and license agreements, during its most recent fiscal year. While it remains a
viable business and is funding its own operations, it is not currently
generating sufficient excess cash flow to fund its obligations under the
aforementioned agreements and the remaining capital available from its
shareholders is being reserved to fund strategic development opportunities and,
if required, ongoing operations. As a result, the Company has established a
reserve of approximately $1.0 million on net amounts due from TheCampusHub.com,
Inc., which approximated $1.2 million at March 31, 2002. Due to the uncertainty
of collecting amounts due from TheCampusHub.com, Inc., future revenues provided
for under the management services and technology sale and license agreements
will be recognized only upon receipt of payment. The Company continues to
benefit from its relationship with TheCampusHub.com, Inc., as the technology
developed further enhances the product/service offering of the Company to its
wholesale customers.
During fiscal 2002, NBC issued 2,621 shares of its Class A Common Stock to
the Company's Senior Vice President of Retail Division at the Founder's 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, 2009 and bearing interest at
5.25% per year. This transaction, which did not involve any public offering, was
exempt from registration under the Securities Act of 1933 pursuant to Section
4(2). During fiscal 2001, NBC issued 12,237 shares of its Class A Common Stock
to certain of the Company's 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, resulting in total
proceeds of $642,039. Proceeds from these issuances were utilized for general
operating activities.
48
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, 2002.
49
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 55 Chairman and Director
Douglas D. Wheat 52 Director
Mark W. Oppegard 52 Chief Executive Officer, President and Director
Barry S. Major 45 Chief Operating Officer
Alan G. Siemek 41 Chief Financial Officer, Senior Vice President of
Finance and Administration, Treasurer, and
Assistant Secretary
William H. Allen 59 Senior Vice President of Wholesale Division
Robert A. Rupe 54 Senior Vice President of Retail Division
Michael J. Kelly 44 Senior Vice President of Distance
Learning/Marketing Services and Other
Complementary Services
Thomas A. Hoff 54 Vice President of Retail Development
Larry R. Rempe 54 Vice President of Information Systems
Kenneth F. Jirovsky 58 Vice President of Development
Ardean A. Arndt 60 Vice President of Administration and Secretary
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 & Partners, L.P. since
1992 (a private investment firm specializing in leveraged acquisitions). Mr.
Haas is the Chairman of the Board of Playtex Products, Inc. (a consumer products
company) and AMN Healthcare Services, Inc. (a provider of staffing services to
the healthcare field).
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 & Partners, L.P. 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, AMN Healthcare Services, Inc.
and Playtex Products, Inc.
MARK W. OPPEGARD has served in the college bookstore industry for 32 years
(all of which have been with the Company) and became Chief Executive Officer of
the Company and President/Chief Executive Officer, Secretary and a Director of
NBC upon consummation of the Recapitalization on February 13, 1998.
Additionally, Mr. Oppegard has served as President of the Company since 1992 and
as a Director of the Company since 1995. Prior to the Recapitalization, Mr.
Oppegard served as Vice President, Secretary, Assistant Treasurer and a Director
of NBC between 1995 and 1998. Prior to 1992, Mr. Oppegard served in a series of
positions at the Company, including Vice President of the college bookstore
operations. Mr. Oppegard has also served as Chairman and a Director of
TheCampusHub.com, Inc. since May, 2000, having previously served as the
President and Chief Executive Officer of TheCampusHub.com, Inc. since its
inception in February, 2000. Additionally, he is currently a director of
NACSCORP, INC., a distribution company serving the college bookstore industry.
50
BARRY S. MAJOR was named Chief Operating Officer of the Company in January,
1999. Additionally, Mr. Major has served as Chief Executive Officer of
TheCampusHub.com, Inc. since May, 2000, having also served as President of
TheCampusHub.com, Inc. from May, 2000 to November, 2000 and as Chief Operating
Officer of TheCampusHub.com, Inc. from its inception in February, 2000 to May,
2000. Prior to joining the Company, Mr. Major served in various executive
management positions at SITEL Corporation (SITEL), a company listed on the New
York Stock Exchange that provides outsourced telephone and Internet-based sales
and customer service. 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.
ALAN G. SIEMEK was named Senior Vice President of Finance and Administration
of the Company in April, 2001. Mr. Siemek has also served as Chief Financial
Officer, Treasurer and Assistant Secretary of the Company and Vice President and
Treasurer 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, 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.
WILLIAM H. ALLEN has served in the college bookstore industry for 37 years
(of which 28 have been with the Company). The Company 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 the Company. Between
1974 and 1994, Mr. Allen served in a series of positions, including assistant
manager of the wholesale operations. Prior to joining the Company in 1974, Mr.
Allen was employed by the Missouri Store Company, a predecessor of MBS.
ROBERT A. RUPE was named Senior Vice President of Retail Division in April,
2001. Prior to joining the Company and a one-year period in which he was
self-employed as a management training consultant, Mr. Rupe served as Vice
President of Operations of Busybody, Inc., a specialty retailer with over 100
retail locations, from 1995 to 2000. Mr. Rupe has 32 years of retail experience,
including a variety of senior management positions at May Department Stores,
Marshall Field and Company, Phillips Van-Huesen and International Paper.
MICHAEL J. KELLY was named Senior Vice President of Distance
Learning/Marketing Services and Other Complementary Services in August, 2001,
having previously served as Vice President of E-commerce of the Company since
November, 1999. Additionally, Mr. Kelly has served as President and Chief
Operating Officer of TheCampusHub.com, Inc. since November, 2000 and May, 2000,
respectively, having previously served as Vice President of E-commerce of
TheCampusHub.com, Inc. from its inception in February, 2000 to May, 2000. Prior
to joining the Company, 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.
THOMAS A. HOFF has served in the college bookstore industry for 15 years
(all of which have been with the Company) and was named Vice President of Retail
Development for the Company in April, 2001. Between 1992 and 2001, Mr. Hoff
served as Vice President of Retail Division for the Company. Mr. Hoff served as
an assistant to the Vice President of College Bookstore Operations between 1987
and 1992.
51
LARRY R. REMPE has served in the college bookstore industry for 16 years
(all of which have been with the Company) and has been Vice President of
Information Systems for the Company 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 41
years (all of which have been with the Company) and was named Vice President of
Development for the Company in April, 2001. Between 1986 and 2001, Mr. Jirovsky
served as Vice President of Sales and Marketing for the Company. 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 17 years
(all of which have been with the Company) and has served as Vice President of
Administration and Secretary for the Company since 1985. Between 1981 and 1985,
Mr. Arndt was Vice President of Administration for Lincoln. Between 1966 and
1982, Mr. Arndt served in various positions for Lincoln.
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 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.
52
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 2002 $253,731 $236,000 2,900 $ 2,962
2001 246,731 138,000 3,050 4,928
2000 230,769 152,000 - 3,315
Barry S. Major - Chief Operating
Officer 2002 235,539 215,000 2,600 2,430
2001 219,231 118,000 2,650 2,120
2000 204,615 130,000 - 2,080
Alan G. Siemek - Chief Financial
Officer, Senior Vice President of
Finance and Administration,
Treasurer, and Assistant Secretary 2002 173,923 120,000 2,100 2,430
2001 161,923 97,000 1,875 2,120
2000 111,481 133,000 6,353 2,027
Larry R. Rempe - Vice President of
Information Systems 2002 155,000 91,000 800 2,679
2001 152,769 40,000 1,000 2,964
2000 122,385 50,000 - 2,564
Robert A. Rupe - Senior Vice
President of Retail Division 2002 128,704 135,000 5,241 2,312
2001 - - - -
2000 - - - -
(1) The stock options were granted at an exercise price of $52.47/share. The
estimated fair market value of NBC'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. The estimated fair market
value was based upon an independent valuation of the Class A Common
Stock performed during fiscal 2002.
(2) Consists of Company matching contributions to the NBC Retirement Plan
and life insurance premiums paid by the Company on the executive's
behalf. For Messrs. Oppegard and Rempe, balances also include the dollar
value of above-market amounts earned on deferred compensation. Such
amounts totaled $376, $2,652, and $1,135 for Mr. Oppegard and $93, $688,
and $288 for Mr. Rempe for fiscal 2002, 2001, and 2000, respectively.
53
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, 2002:
Options Granted During the Year Ended March 31, 2002
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 2002 Per Share Date (1) Value (2)
- ----------------------------------------- ----------- ----------- --------- ---------- ------------
Mark W. Oppegard - Chief Executive
Officer, President, and Director 2,900 15.9% $ 52.47 08/17/11 $ 7,308
Barry S. Major - Chief Operating Officer 2,600 14.3% 52.47 08/17/11 6,552
Alan G. Siemek - Chief Financial
Officer, Senior Vice President of
Finance and Administration,
Treasurer, and Assistant Secretary 2,100 11.5% 52.47 08/17/11 5,292
Larry R. Rempe - Vice President of
Information Systems 800 4.4% 52.47 08/17/11 2,016
Robert A. Rupe - Senior Vice President of
Retail Division 5,241 28.7% 52.47 04/23/11 18,868
(1) Twenty-five percent of the options granted to Messrs. Oppegard, Major,
Siemek, and Rempe were exercisable immediately upon granting on August
17, 2001, with the remaining options becoming exercisable in 25%
increments over the subsequent three years. Twenty-five percent of the
options granted to Mr. Rupe were exercisable on March 31, 2002, with the
remaining options becoming exercisable in 25% increments over the
subsequent three years.
(2) Grant date present value was determined using a Black-Scholes option
pricing model, assuming a 3.53% risk-free interest rate, 1.0% expected
volatility, and an expected life of approximately 1.5 years for the
options granted to Messrs. Oppegard, Major, Siemek, and Rempe and a
4.15% risk-free interest rate, 1.0 % expected volatility, and an
expected life of approximately 2 years for the options granted to Mr.
Rupe.
54
The following table provides information concerning each exercise of stock
options by certain executive officers of the Company during the year ended March
31, 2002 as well as the value of unexercised options as of March 31, 2002:
Aggregated Option Exercises During the Year Ended March 31, 2002
and Option Value as of March 31, 2002
Number
of Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Options at Options at
March 31, 2002 March 31, 2002 (1)
---------------- ---------------------
Shares
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- ------------------------------------ ------------ ---------- ---------------- ---------------------
Mark W. Oppegard - Chief Executive
Officer, President, and Director - $ - 2,250 / 3,700 $90 / $148
Barry S. Major - Chief Operating Officer - - 11,505 / 3,275 460 / 131
Alan G. Siemek - Chief Financial Officer,
Senior Vice President of Finance and
Administration, Teasurer, and Assistant
Secretary - - 6,228 / 4,100 249 / 164
Larry R. Rempe - Vice President of
Information Systems - - 700 / 1,100 28 / 44
Robert A. Rupe - Senior Vice President
of Retail Division - - 1,310 / 3,931 52 / 157
(1) Represents the excess of the March 31, 2002 estimated fair market value
of NBC'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. The estimated fair market value was based upon an
independent valuation of the Class A Common Stock performed during
fiscal 2002.
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 NBC'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 after considering the recommendation of the chief executive officer,
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, $271,000
per annum; Mr. Major, $242,000 per annum; Mr. Siemek, $178,500 per annum; Mr.
Rempe, $162,000 per annum; and Mr. Rupe, $140,000 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.
55
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
NBC 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 HWP) will be required, to sell their shares
ratably with, and on the same terms and conditions as, the other selling
shareholders.
56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - As a result
of the Recapitalization, all shares of common stock of the Company are owned by
NBC. 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 14, 2002 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 NBC, 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.
Amount and
Nature of
Beneficial Percent of
Title of Class/Name of Beneficial Owner Ownership (1) Class (4)
- ------------------------------------------------------------------- ------------- ----------
Class A Common Stock:
Owning Greater Than 5% of Shares:
HWH Capital Partners, L.P. (2) 793,497 62.8%
HWH Cornhusker Partners, L.P. (3) 343,071 27.2%
Ownership of Directors:
Robert B. Haas (2) (3) 1,136,568 90.0%
Douglas D. Wheat (2) (3) - -
Ownership of Executive Officers Named in Item 11:
Mark W. Oppegard 26,979 2.1%
Barry S. Major 22,651 1.8%
Alan G. Siemek 12,732 1.0%
Larry R. Rempe 17,198 1.4%
Robert A. Rupe 3,931 0.3%
Ownership of Directors and All Executive Officers as a Group 1,272,522 98.5%
(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 - 3,013 shares; Mr. Major - 12,168
shares; Mr. Siemek - 6,696 shares; Mr. Rempe - 950 shares; Mr. Rupe -
1,310 shares; and 32,538 shares for all directors and executive officers
as a group.
(2) The sole general partner of HWH Capital Partners, L.P. 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 and
officer of the corporation. The address of HWH Capital Partners, L.P.
and of Messrs. Haas and Wheat is 300 Crescent Court, Suite 1700, Dallas,
Texas 75201.
(3) The sole general partner of HWH Cornhusker Partners, L.P. 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 and
officer of the corporation. The address of HWH Cornhusker Partners, L.P.
and of Messrs. Haas and Wheat is 300 Crescent Court, Suite 1700, Dallas,
Texas 75201.
57
(4) The percentages are calculated based upon 1,263,371 shares of NBC
Acquisition Corp. Class A Common Stock outstanding as of June 14, 2002
and shares underlying nonqualified stock options exercisable within
sixty days as detailed in footnote (1).
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS - NBC has
two stock-based compensation plans established to provide for the granting of
options to purchase NBC Class A Common Stock. Details regarding each of the
plans in effect are presented in the footnotes to the financial statements found
in Item 8, Financial Statements and Supplementary Data. Specific information as
of March 31, 2002 regarding each of the plans, which were not subject to the
approval by security holders, is also presented in the following table.
Number of Weighted- Number of
Securities to Average Securities
be Issued Upon Exercise Remaining
Exercise of Price of Available for
Outstanding Outstanding Future
Plan Options Options Issuance
- ---------------------------------- ---------------- ------------- -------------
1998 Performance Stock Option Plan 40,771 $ 52.47 11,229
1998 Stock Option Plan 27,094 52.47 3,906
---------------- ------------- -------------
Total 67,865 $ 52.47 15,135
================ ============= =============
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CERTAIN BUSINESS RELATIONSHIPS - In fiscal 2001, the Company 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 NBC'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 the Company 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 years, reimburses the Company for certain direct costs
incurred on behalf of TheCampusHub.com, Inc. and also pays the Company $0.5
million per year for certain shared management and administrative support. The
technology sale and license agreement provides for the Company 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 the Company during that three
year period.
For the year ended March 31, 2002, revenues attributable to the management
services and technology sale and license agreements totaled $1.0 million, and
reimbursable direct costs incurred on behalf of TheCampusHub.com, Inc. totaled
$0.8 million. 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. As of March 31, 2002, Messrs. Oppegard,
Major, Siemek, Rempe, and Kelly have been granted 13,900, 13,900, 9,690, 1,155,
and 16,800 options, respectively, from TheCampusHub.com, Inc. as compensation
for services provided to TheCampusHub.com, Inc. since its inception. In total,
such options represent approximately 4.0% of TheCampusHub.com, Inc.'s
outstanding shares and options at March 31, 2002.
Revenues attributable to the management services and technology sale and
license agreements were recognized in fiscal 2002 under the anticipation that,
if necessary, TheCampusHub.com, Inc. would make a capital call to its
shareholders to provide the funding necessary to meet its obligations under the
58
aforementioned agreements. TheCampusHub.com, Inc. reached break-even on a cash
flow basis, excluding amounts under the management services and technology sale
and license agreements, during its most recent fiscal year. While it remains a
viable business and is funding its own operations, it is not currently
generating sufficient excess cash flow to fund its obligations under the
aforementioned agreements and the remaining capital available from its
shareholders is being reserved to fund strategic development opportunities and,
if required, ongoing operations. As a result, the Company has established a
reserve of approximately $1.0 million on net amounts due from TheCampusHub.com,
Inc., which approximated $1.2 million at March 31, 2002. Due to the uncertainty
of collecting amounts due from TheCampusHub.com, Inc., future revenues provided
for under the management services and technology sale and license agreements
will be recognized only upon receipt of payment. The Company continues to
benefit from its relationship with TheCampusHub.com, Inc., as the technology
developed further enhances the product/service offering of the Company to its
wholesale customers.
INDEBTEDNESS OF MANAGEMENT - As of March 31, 2002, NBC reported notes
receivable from stockholders and associated interest receivable of approximately
$730,000 and $136,000, respectively. Approximately $159,000 of such notes
originated during the leveraged buyout of the Company 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 NBC'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 the Company's Chief Operating Officer, Barry S.
Major; Chief Financial Officer, Alan G. Siemek; Senior Vice President of
Distance Learning/Marketing Services and Other Complementary Services, Michael
J. Kelly; and Senior Vice President of Retail Division, Robert A. Rupe. In
January, 1999, NBC 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, 2002 was approximately
$266,000. In July, 1999, NBC 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, 2002 was
approximately $171,000. In January, 2000, NBC 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, 2002 was approximately $140,000. In April, 2001, NBC issued 2,621
shares of its Class A Common Stock to Mr. Rupe 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, 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, 2002 was approximately $130,000.
59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, & REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
(1) Financial Statements of Nebraska Book Company, Inc.
Index to Financial Statements.
Independent Auditors' Report.
Balance Sheets as of March 31, 2002 and 2001.
Statements of Operations for the Years Ended March 31, 2002,
2001, and 2000.
Statements of Stockholder's Deficit for the Years Ended
March 31, 2002, 2001, and 2000.
Statements of Cash Flows for the Years Ended March 31, 2002,
2001, and 2000.
Notes to Financial Statements.
(2) Financial Statement Schedules.
Independent Auditors' Report on Schedule.
Schedule II - Valuation and Qualifying Accounts.
(3) Management Contract and Compensatory Plan Arrangement Exhibits.
Exhibits 10.7 through 10.19 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, 2002.
(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 Nebraska Book
Company, Inc. 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
Nebraska Book Company, Inc. Form 8-K, as amended, dated November
12, 1999, is incorporated herein by reference.
2.3 Agreement of Sale, as amended, dated as of May 11, 2001 between
Nebraska Book Company, Inc. and University Co-operative Society,
filed as Exhibit 2.1 to Nebraska Book Company, Inc. Form 8-K
dated May 11, 2001, is incorporated herein by reference.
3.1 Certificate of Incorporation, as amended, of Nebraska Book
Company, Inc., filed as Exhibit 3.1 to Nebraska Book Company,
Inc. Registration Statement on Form S-4, as amended (File No.
333-48221), is incorporated herein by reference.
3.2 By-laws of Nebraska Book Company, Inc., filed as Exhibit 3.2 to
Nebraska Book Company, Inc. Registration Statement on Form S-4,
as amended (File No. 333-48221), is incorporated herein by
reference.
60
4.1 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 4.1 to Nebraska Book Company, Inc.
Registration Statement on Form S-4, as amended (File No.
333-48221), is incorporated herein by reference.
4.2 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 4.2 to Nebraska Book Company,
Inc. Registration Statement on Form S-4, as amended (File No.
333-48221), is incorporated herein by reference.
4.3 Form of Initial Note of Nebraska Book Company, Inc. (included in
Exhibit 4.1 as Exhibit A), filed as Exhibit 4.3 to Nebraska Book
Company, Inc. Registration Statement on Form S-4, as amended
(File No. 333-48221), is incorporated herein by reference.
4.4 Form of Exchange Note of Nebraska Book Company, Inc. (included
in Exhibit 4.1 as Exhibit B), filed as Exhibit 4.4 to Nebraska
Book Company, Inc. Registration Statement on Form S-4, as
amended (File No. 333-48221), 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 Nebraska Book Company, Inc. Registration
Statement on Form S-4, as amended (File No. 333-48221), 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 Nebraska Book Company, Inc. 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 Nebraska Book Company, Inc. Form 10-Q for the
quarter ended June 30, 2000, is incorporated herein by
reference.
10.4 Third Amendment, dated as of December 20, 2001, to the Credit
Agreement, dated as of February 13, 1998, among NBC Acquisition
Corp., Nebraska Book Company, Inc., J.P. Morgan Chase Bank, and
certain other financial institutions, filed as Exhibit 10.1 to
Nebraska Book Company, Inc. Form 10-Q for the quarter ended
December 31, 2001, is incorporated herein by reference.
10.5 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 Nebraska Book Company, Inc.
Registration Statement on Form S-4, as amended (File No.
333-48221), 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 10.3
to Nebraska Book Company, Inc. Registration Statement on Form
S-4, as amended (File No. 333-48221), 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,
61
Bruce E. Nevius, Larry R. Rempe, Kenneth F. Jirovsky, William H.
Allen, Thomas A. Hoff and Ardean A. Arndt, filed as Exhibit 10.4
to Nebraska Book Company, Inc. Registration Statement on Form
S-4, as amended (File No. 333-48221), 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 Nebraska Book
Company, Inc. Form 10-Q for the quarter ended December 31, 1998,
is incorporated herein by reference.
10.9 Addendum to the Memorandum of Understanding, dated as of
December 22, 1998 between Nebraska Book Company, Inc. and Barry
S. Major, dated March 29, 2002.
10.10 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 Nebraska Book Company, Inc.
Form 10-Q for the quarter ended September 30, 1999, is
incorporated herein by reference.
10.11 Addendum to the Memorandum of Understanding, dated as of July 1,
1999 between Nebraska Book Company, Inc. and Alan Siemek, dated
March 29, 2002.
10.12 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 Nebraska Book
Company, Inc. Form 10-Q for the quarter ended December 31, 1999,
is incorporated herein by reference.
10.13 Memorandum of Understanding, dated as of April 17, 2001 between
Nebraska Book Company, Inc. and Robert Rupe, Senior Vice
President of Retail Division, filed as Exhibit 10.1 to Nebraska
Book Company, Inc. Form 10-Q for the quarter ended June 30,
2001, is incorporated herein by reference.
10.14 NBC Acquisition Corp. 1995 Stock Incentive Plan adopted August
31, 1995, filed as Exhibit 10.5 to Nebraska Book Company, Inc.
Registration Statement on Form S-4, as amended (File No.
333-48221), is incorporated herein by reference.
10.15 NBC Acquisition Corp. 1998 Performance Stock Option Plan adopted
June 30, 1998, filed as Exhibit 10.1 to Nebraska Book Company,
Inc. Form 10-Q for the quarter ended June 30, 1998, is
incorporated herein by reference.
10.16 NBC Acquisition Corp. 1998 Stock Option Plan adopted June 30,
1998, filed as Exhibit 10.2 to Nebraska Book Company, Inc. Form
10-Q for the quarter ended June 30, 1998, is incorporated herein
by reference.
10.17 NBC Acquisition Corp. Senior Management Bonus Plan adopted June
30, 1998, filed as Exhibit 10.3 to Nebraska Book Company, Inc.
Form 10-Q for the quarter ended June 30, 1998, is incorporated
herein by reference.
10.18 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 10.6
to Nebraska Book Company, Inc. Registration Statement on Form
S-4, as amended (File No. 333-48221), is incorporated herein by
reference.
10.19 NBC Acquisition Corp. 401(k) Savings Plan, filed as Exhibit 10.7
to Nebraska Book Company, Inc. Registration Statement on Form
S-4, as amended (File No. 333-48221), is incorporated herein by
reference.
62
10.20 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 10.8.1 to Nebraska Book Company,
Inc. Registration Statement on Form S-4, as amended (File No.
333-48221), is incorporated herein by reference.
10.21 First Amendment dated January 23, 1998 to the Collegiate Stores
Corporation Agreement, filed as Exhibit 10.8.2 to Nebraska Book
Company, Inc. Registration Statement on Form S-4, as amended
(File No. 333-48221), is incorporated herein by reference.
10.22 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 10.9 to Nebraska Book Company, Inc. Registration
Statement on Form S-4, as amended (File No. 333-48221), 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 10.10 to Nebraska Book Company,
Inc. Registration Statement on Form S-4, as amended (File No.
333-48221), is incorporated herein by reference.
10.24 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 10.11 to Nebraska Book Company, Inc. Registration
Statement on Form S-4, as amended (File No. 333-48221), is
incorporated herein by reference.
10.25 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 Nebraska Book Company,
Inc. Registration Statement on Form S-4, as amended (File No.
333-48221), is incorporated herein by reference.
10.26 Lease Agreement made and entered into October 12, 1988 by and
between Hogarth Management and Nebraska Book Company, Inc.,
filed as Exhibit 10.13 to Nebraska Book Company, Inc.
Registration Statement on Form S-4, as amended (File No.
333-48221), is incorporated herein by reference.
10.27 Industrial Real Estate Lease dated June 22, 1987 by and between
Cyprus Land Company and Nebraska Book Company, Inc., filed as
Exhibit 10.14 to Nebraska Book Company, Inc. Registration
Statement on Form S-4, as amended (File No. 333-48221), is
incorporated herein by reference.
12. Statements regarding computation of ratios, filed as Exhibit 12
to Nebraska Book Company, Inc. Registration Statement on Form
S-4, as amended (File No. 333-48221), is incorporated herein by
reference.
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.
63
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.
NEBRASKA BOOK COMPANY, INC.
/s/ Mark W. Oppegard
------------------------------------------------
Mark W. Oppegard
Chief Executive Officer, President, and Director
June 14, 2002
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
Chief Executive Officer, President, and Director
June 14, 2002
/s/ Alan G. Siemek
------------------------------------------------
Alan G. Siemek
Chief Financial Officer, Senior Vice President
of Finance and Administration,
Treasurer, and Assistant Secretary
June 14, 2002
/s/ Robert B. Haas
------------------------------------------------
Robert B. Haas
Chairman and Director
June 14, 2002
/s/ Douglas D. Wheat
------------------------------------------------
Douglas D. Wheat
Director
June 14, 2002
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, 2002
HAS BEEN, NOR WILL BE, SENT TO SECURITY HOLDERS.
64
FINANCIAL STATEMENT SCHEDULES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Nebraska Book Company, Inc.
Lincoln, Nebraska
We have audited the financial statements of Nebraska Book Company, Inc. (a
wholly-owned subsidiary of NBC Acquisition Corp.) as of March 31, 2002 and 2001
and for each of the three years in the period ended March 31, 2002, and have
issued our report thereon dated May 24, 2002; such report is included elsewhere
in this Form 10-K. Our audits also included the financial statement schedule
listed in Item 14(a)(2). This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Lincoln, Nebraska
May 24, 2002
65
NEBRASKA BOOK COMPANY, INC.
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, 2002
Allowance for doubtful accounts $ 407,033 $1,629,704 $ - $ (606,934) $ 1,429,803
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
66
EXHIBIT INDEX
10.9 Addendum to the Memorandum of Understanding, dated as of
December 22, 1998 between Nebraska Book Company, Inc. and Barry
S. Major, dated March 29, 2002.
10.11 Addendum to the Memorandum of Understanding, dated as of July 1,
1999 between Nebraska Book Company, Inc. and Alan Siemek, dated
March 29, 2002.
67