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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, 2003
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. YES [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] NO [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.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]
MARKET VALUE OF THE REGISTRANT'S VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT - NOT APPLICABLE AS REGISTRANT'S STOCK IS NOT PUBLICLY TRADED.
THERE WERE 100 SHARES OF COMMON STOCK OUTSTANDING AS OF MAY 30, 2003.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Total Number of Pages: 84
Exhibit Index: PAGE 84
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.......26
Item 8 Financial Statements and Supplementary Data......................28
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................60
PART III:
Item 10 Directors and Executive Officers of the Registrant................61
Item 11 Executive Compensation............................................63
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.................................68
Item 13 Certain Relationships and Related Transactions....................69
Item 14 Controls and Procedures...........................................71
PART IV:
Item 15 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K..........................................................72
Signatures....................................................................78
Certifications................................................................79
Supplemental Information to be Furnished......................................81
Financial Statement Schedule II - Valuation and Qualifying Accounts...........82
Exhibit Index.................................................................84
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.
On August 2, 2002, HWH Capital Partners, L.P. and HWH Cornhusker Partners,
L.P., affiliates of HWP, along with certain other stockholders of NBC
(collectively with HWP, the "Sellers"), sold approximately 33% of the issued and
outstanding shares of NBC to certain funds affiliated with Weston Presidio
(Weston Presidio Capital III, L.P., Weston Presidio Capital IV, L.P., WPC
Entrepreneur Fund, L.P., and WPC Entrepreneur Fund II, L.P., collectively the
"Weston Presidio Funds"). HWP retained a controlling interest in NBC after the
sale. This sale is referred to as the "Weston Presidio Transaction". Under the
terms of a buy-sell agreement entered into in connection with this sale, Weston
Presidio may require that the Sellers repurchase Weston Presidio's shares of NBC
at a price as defined in the buy-sell agreement, unless a majority of the
Sellers elects, in the alternative, to sell to Weston Presidio their remaining
shares of NBC at a price as defined in the buy-sell agreement.
Effective July 1, 2002, the Company's distance learning division was
separately incorporated under the laws of the State of Delaware as Specialty
Books, Inc., a wholly-owned subsidiary of the Company ("Specialty Books").
3
GENERAL
The Company is one of the largest wholesale distributors of used college
textbooks in North America, offering over 95,000 textbook titles and selling
more than 7.7 million books annually primarily to campuses located in the United
States. In addition, as of March 31, 2003, the Company owns or manages 109
bookstores on or adjacent to college campuses through which it sells a variety
of new and used textbooks and general merchandise. The Company is also a leading
provider of distance education materials to students in nontraditional courses,
which include correspondence and corporate education courses. Furthermore, the
Company provides the college bookstore industry with a variety of services
including in-store promotions, buying programs, marketing services and
proprietary information systems. With origins dating to 1915, the Company has
built a consistent reputation for excellence in order fulfillment, shipping
performance and customer service.
The Company entered the wholesale used textbook market following World War
II, when the supply of new textbooks could not meet the demand created by the
return of ex-GI students. In 1964, the Company became a national, rather than
regional, wholesaler of used textbooks as a result of its purchase of The
College Book Company of California. During the 1970's the Company continued its
focus on the wholesale business. However, realizing the synergies that exist
between wholesale operations and college bookstore operations, in the 1980's it
expanded its efforts in the college bookstore market under a revised strategy.
Under this strategy the Company operates bookstores on or near larger campuses,
typically where the institution-owned college bookstore is contract-managed by a
competitor or where the Company does not have a significant wholesale presence.
Today, the Company services the college bookstore industry through its Textbook,
Bookstore and Complementary Services Divisions.
TEXTBOOK DIVISION. The Company is one of the largest wholesale distributors
of used college textbooks in North America. Its Textbook Division consists
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, San Diego State University, University of Washington, and
University of Minnesota. Historically, because the demand for used textbooks has
consistently outpaced supply, Textbook Division 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 Textbook
Division customers, which lists over 45,000 textbook titles with such details as
author, new copy retail price, and the Company's repurchase price.
BOOKSTORE DIVISION. College bookstores are the primary outlets for sales of
new and used textbooks to students. As of March 31, 2003, the Company operated
109 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 Bookstore Division provides an exclusive source of used textbooks for
sale across the Company's wholesale distribution network.
COMPLEMENTARY SERVICES DIVISION. With its acquisition of 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).
4
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 250 college bookstore locations for its textbook management control
systems, and it has installed its proprietary total store management system at
almost 600 college bookstore locations. In total, including the Company's own
bookstores, almost 850 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 570 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.
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
consolidated financial statements presented in Item 8 of the Company's Form
10-K. The Company makes its periodic and current reports available, free of
charge, through www.nebook.com as soon as reasonably practicable after such
material is electronically filed with the Securities and Exchange Commission.
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 THE TEXTBOOK DIVISION. The Company expects the stable
growth of its Textbook Division 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 Bookstore Division.
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 Bookstore Division by acquiring or opening or
contract-managing additional 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.
5
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 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
$11.1 billion to college students and other consumers in North America. Sales of
textbooks and other education materials used for classroom instruction comprise
approximately two-thirds of that amount. The Company expects this market will
continue to grow as a result of anticipated increases in enrollment at U.S.
colleges attributable to the children of the baby boom generation entering the
college population.
WHOLESALE TEXTBOOK MARKET. The Company believes that used textbooks will
continue to be attractive to both students and college bookstores. Used
textbooks provide students with a lower-cost alternative to new textbooks and
bookstores typically achieve higher margins through the sale of used rather than
new textbooks.
The pricing pattern of textbook publishing accounts for a large part of the
growth of the used book market. Because of copyright restrictions, each new
textbook is produced by only one publisher, which is free to set the new copy
retail price and discount terms to bookstores. Publishers generally offer new
textbooks at prices that enable college bookstores to achieve a gross margin of
23.0% to 25.0% on new textbooks. Historically, the high retail costs of new
textbooks and the higher margins achieved by bookstores on the sale of used
textbooks (approximately 33.0%) have encouraged the growth of the market for
used textbooks.
The used textbook cycle begins with new textbook publishers, who purposely
plan obsolescence into the publication of new textbooks. Generally, new editions
of textbooks are produced every two to four years. In the first year of a new
edition, there are few used copies of a new edition available. In the second and
third years, used textbooks become increasingly available. Simultaneously,
publishers begin to plan an updated edition. In years four and beyond, at the
end of the average life cycle of a particular edition, as publishers cut back on
original production, used textbooks generally represent a majority (in unit
terms) of the particular edition in use. While the length of the cycle varies by
title (and sometimes is indefinite, as certain titles are never updated), the
basic supply/demand progression remains fairly consistent.
College bookstores begin to place orders with used textbook wholesalers once
professors determine which books will be required for their upcoming courses,
usually by the end of May for the fall semester and the end of November for the
spring semester. Bookstore operators must first determine their allocation
between new and used copies for a particular title but, in most cases, they will
order an ample supply of used books because: (i) used book demand from students
is typically strong and consistent; (ii) many operators only have access to a
limited supply from wholesalers and believe that not having used book
alternatives could create considerable frustration among students and with the
college administration; (iii) bookstore operators earn higher margins on used
books than on new books; and (iv) both new and used books are sold with return
privileges, eliminating any overstock risk (excluding freight charges) to the
college bookstore.
6
New textbook ordering usually begins in June, at which time the store
operator augments its expected used book supply by ordering new books. By this
time, publishers typically will have just implemented their annual price
increases. These regular price increases, which historically have run 3.0% to
5.0%, allow the Company and its competitors to buy used textbooks based on old
list prices (in May) and to almost simultaneously sell them based on new higher
prices, thereby creating an immediate margin increase.
While price is an important factor in the store operator's purchasing
decision, available supply, as well as service, usually determine with which
used textbook wholesaler a college bookstore will develop a strong relationship.
Used textbook wholesalers that are able to significantly service a college
bookstore account typically receive preferential treatment from store operators,
both in selling and in buying used textbooks. Pure exclusive supply arrangements
in the Company's market are rare. However, in the past four to five years, the
Company has been marketing its exclusive supply program to the industry. This
program has grown to approximately 260 participating bookstores at the end of
fiscal 2003. 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
2003, approximately 470 bookstores were participating in this program,
approximately 250 of which are also participating in the exclusive program.
Since the Company is usually able to sell the vast majority of the used
textbooks it is able to purchase, its ability to obtain sufficient supply is a
critical factor in the Company's success.
COLLEGE BOOKSTORE MARKET. College stores generally fall into three
categories: (i) INSTITUTIONAL -- stores that are primarily owned and operated by
institutions of higher learning (represents approximately 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
TEXTBOOK DIVISION. The Company's Textbook Division is 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 45,000
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 almost 165,000
titles in order to better serve its customers.
BOOKSTORE DIVISION. As of March 31, 2003, the Company operated 109 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 21% and 24% 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.
7
COMPLEMENTARY SERVICES DIVISION. 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 72% and 84% of total Complementary Services Division revenues. The
Company believes it can continue to increase the service operations revenues
from distance education products over the next several years, although presently
the Company's primary objective is increased profitability through improved cost
containment.
Other services offered to college bookstores include services related to the
Company's turnkey bookstore management software and the sale of other software
and hardware, and related maintenance contracts. These services generate revenue
and assist the Company in gaining access to new sources of used textbooks. The
Company has an installed base of over 250 college bookstore locations for its
textbook management control systems, and it has installed its proprietary total
store management system at almost 600 college bookstore locations. In total,
including the Company's own bookstores, almost 850 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 570 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 Textbook Division 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, 2003) 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
8
Textbook Division strategy and its implementation include: (i) selectively
paying a marginal premium relative to competitors to entice students to sell
back more books to the Company; (ii) gaining access to competitive campuses
(where the campus bookstore is contract-managed by a competitor) by opening
off-campus, Company-owned college bookstores; (iii) using technology to gain
efficiencies and to improve customer service; (iv) maintaining a knowledgeable
and experienced sales force that is customer-service oriented; (v) providing
working capital flexibility for bookstores making substantial purchases; and
(vi) establishing long-term supply arrangements by rewarding customers who make
a long-term commitment to supplying the Company with a large portion of their
books.
The two major used textbook purchasing seasons are at the end of each
academic semester, May/June and December/January. Although the Company makes
book purchases during other periods, the inventory purchased in May, before
publishers announce their price increases in June and July, allows the Company
to purchase inventory based on the lower retail prices of the previous year. The
combination of this purchasing cycle and the fact that the Company is able to
sell its inventory in relation to retail prices for the following year permits
the Company to realize additional gross profit. The Company advances cash to its
representatives during these two periods, and the representatives in turn buy
books directly from students, generally through the on-campus bookstore.
After the Company purchases the books, the Company arranges for shipment to
one of its two warehouses (Nebraska and California) via common carrier. At the
warehouse, the Company refurbishes damaged books and categorizes and shelves all
other books in a timely manner, and enters them into the Company's on-line
inventory system. These two locations function as one facility allowing
customers to access inventory at both locations.
Customers place orders by phone, mail, fax or other electronic method. Upon
receiving an order, the Company removes the books from available inventory and
holds them for future shipping. Customers may return books within 60 days after
the start of classes if a written request is enclosed. Returns currently average
approximately 20.5% of sales and generally are attributable to course
cancellations or overstocking. The majority of returns are textbooks that the
Company is able to resell for the next semester.
BOOKSTORE DIVISION
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 or the contract-management of stores on campus. In addition
to generating sales of new and used textbooks and general merchandise, these
outlets enhance the Company's Textbook Division 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 March 31, 2003 the Company operated 109 college bookstores nationwide,
having expanded from 59 bookstores in 1998. During fiscal 2003 the Company
purchased four bookstores located in Greeley, Colorado; Bowling Green, Kentucky;
and Nacogdoches, Texas and closed stores in Berkeley, California; Big Rapids,
Michigan; and Richmond, Virginia when their leases expired.
9
The table below highlights certain information regarding the Company's
bookstores opened through March 31, 2003.
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)
----------- --------- ----------- -------------- --------- --------------
1999 59 8 2 65 537
2000 65 35 2 98 733
2001 98 4 0 102 740
2002 102 10 4 108 797
2003 108 4 3 109 798
- ------------
(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 Textbook Division
customer. In fiscal 2003, the property leases at three bookstore locations
expired and were not renewed by the Company.
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 also plans to be more active in reviewing opportunities to
contract-manage additional stores.
The Company's bookstores have an average size of 7,300 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.
10
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,
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 Textbook Division customers
accounted for approximately 5.8% of the Company's fiscal 2003 consolidated
revenues. No single Textbook Division customer accounted for more than 1.0% of
the Company's fiscal 2003 consolidated revenues.
The Company's Textbook Division purchases from and resells used textbooks to
many of the nation's largest college campuses including: University of Texas,
University of Southern California, Indiana University, San Diego State
University, 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, among other things, a primary
supplier of textbooks and educational material to students enrolled in on-line
courses offered through one institution. That institution accounts for greater
than 50.0% of total revenues in the distance education program.
No single customer accounted for more than 10.0% of the Company's fiscal
2003 consolidated revenues.
COMPETITION
The Company's Textbook Division 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.
11
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.
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 Bookstore Division competes 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 Textbook and Bookstore Divisions 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, 2003 the Company had a total of approximately 2,900
employees, of which approximately 1,000 were full-time, approximately 700 were
part-time and approximately 1,200 were temporary. The Company has no unionized
employees and believes that its relationship with its employees is satisfactory.
12
In view of the seasonal nature of its Textbook Division, 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
to lower Textbook Division operating expenses. Temporary employees augment the
flex-pool to meet periodic labor demands.
ITEM 2. PROPERTIES.
The Company owns its two Textbook Division 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 Textbook Division warehouse in
Cypress, California. The Cypress lease expires on August 31, 2007. The Company's
distance education program resides in a leased facility with 49,500 square feet
in Athens, Ohio. The lease expires on May 31, 2007 and has one five-year option
to renew.
Listed below, set forth as of March 31, 2003, 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 19,800 The College Store
University of Arkansas--Little Rock Little Rock, AR 12,300 Campus Bookstore
Northern Arizona University Flagstaff, AZ 16,800 The College Store
Northern Arizona University Flagstaff, AZ 16,800 University Text and Tools
Arizona State University Tempe, AZ 49,000 The College Store
Arizona State University Tempe, AZ 49,000 Rother's Bookstore
University of Arizona Tucson, AZ 34,300 Arizona Book Store
University of Arizona Tucson, AZ 34,300 Rother's University Bookstore
University of California - Berkeley Berkeley, CA 30,500 Ned's Bookstore
University of California - Berkeley Berkeley, CA 30,500 Ned's Bookstore II
University of California - Berkeley Berkeley, CA 30,500 Ned's Bookstore - Boalt Hall
California State University - Northridge Northridge, CA 32,500 The College Store
University of Northern Colorado Greeley, CO 13,000 The Book Stop
Daytona Beach Community College Daytona Beach, FL 20,000 College Book Rack
University of Florida, also serving: Gainesville, FL 48,200 Florida Book Store
Santa Fe Community College 13,900
University of Florida, also serving: Gainesville, FL 48,200 Florida Book Store, Volume II
Santa Fe Community College 13,900
Miami Dade Community College-Kendall Miami, FL 18,400 Lemox College Book & Supply
University of Central Florida, also serving: Orlando, FL 35,400 College Book & Supply
Seminole Community College 9,600
Valencia Community College 15,000
University of Central Florida Orlando, FL 35,400 Knight's Corner
Georgia State University Atlanta, GA 33,000 Georgia Book Store
Drake University Des Moines, IA 4,300 D-Shoppe (2)
Drake University, also serving: Des Moines, IA 4,300 University Book Store (3)
Mercy College of Health Sciences 400
Southern Illinois University Carbondale, IL 18,200 Saluki Bookstore
Ball Sate University Muncie, IN 20,300 Collegiate Book Exchange
Valparaiso University Valparaiso, IN 3,500 University Book Center (2)
University of Kansas Lawrence, KS 25,500 University Book Shop
Johnson County Community College Overland Park, KS 16,100 The College Store
Western Kentucky University Bowling Green, KY 17,000 Lemox-Bowling Green
Western Kentucky University Bowling Green, KY 17,000 Lemox II
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 46,500 Maryland Book Exchange
Prince George's Community College Largo, MD 13,000 Prince George's Community
College Bookstore (2)
Concordia University - Ann Arbor Ann Arbor, MI 600 Concordia College Bookstore (2)
University of Michigan Ann Arbor, MI 42,500 Michigan Book & Supply
University of Michigan Ann Arbor, MI 42,500 Ulrich's Bookstore
Oakland University Auburn Hills, MI 20,000 Textbook Outlet
Wayne County Community College Belleville, MI 24,000 Ned's Bookstore (2)
Wayne County Community College Detroit, MI 24,000 Ned's WCCC Downtown (2)
Wayne County Community College Detroit, MI 24,000 Ned's WCCC Eastern (2)
13
Institution Location Enrollment(1) Store Name
----------- -------- ------------- ----------
Wayne County Community College Detroit, MI 24,000 Ned's WCCC Northwest (2)
Wayne County Community College Taylor, MI 24,000 Ned's WCCC Downriver (2)
Michigan State University East Lansing, MI 43,300 The College Store
Michigan State University East Lansing, MI 43,300 Ned's Bookstore
Kettering University Flint, MI 3,300 The Campus Store (2)
Eastern Michigan University, also serving: Ypsilanti, MI 23,000 Campus Book & Supply
Washtenaw Community College 11,200
Washtenaw Technical Middle College 500
Eastern Michigan University Ypsilanti, MI 23,000 Ned's Bookstore
Eastern Michigan University Ypsilanti, MI 23,000 Ned's College of Business
Bookstore
Minnesota State University Mankato Mankato, MN 12,900 Maverick Bookstore (3)
North Carolina State University Raleigh, NC 29,000 Packbackers Student Bookstore
Chadron State College Chadron, NE 2,400 Chadron Book Shop
Chadron State College Chadron, NE 2,400 Eagle Pride Bookstore (2)
University of Nebraska-- Kearney Kearney, NE 7,100 The Antelope Bookstore (2)
University of Nebraska-- Lincoln Lincoln, NE 22,800 Big Red Shop
University of Nebraska-- Lincoln Lincoln, NE 22,800 Nebraska Bookstore (3)
Nebraska Wesleyan University Lincoln, NE 1,700 Prairie Wolves Bookstore (2)
Wayne State College Wayne, NE 3,900 Student Bookstore
University of Nevada Las Vegas Las Vegas, NV 20,700 Rebelbooks
State University of New York-- Buffalo, also Amherst, NY 24,000 The College Store
serving:
Erie Community College - North Campus 5,600
State University of New York - Binghamton Vestal, NY 12,800 The Bookbridge
University of Akron Akron, OH 21,700 The College Store
Ohio University Athens, OH 19,500 Specialty Books
Ohio State University Columbus, OH 47,900 College Town
Wright State University, also serving: Fairborn, OH 17,000 The College Store
Sinclair Community College 11,900
University of Oklahoma Norman, OK 20,000 Boomer Book Store
University of Oklahoma Norman, OK 20,000 Sooner Textbooks
Oklahoma State University Stillwater, OK 20,500 Cowboy Book
Indiana University of Pennsylvania Indiana, PA 14,000 The College Store
University of Pittsburgh Pittsburgh, PA 29,000 The College Store
Pennsylvania State University State College, PA 42,000 University Book Centre
College of Charleston Charleston, SC 9,900 University Book of Charleston
Columbia College Columbia, SC 1,500 C-Square Bookstore (2)
University of South Carolina Columbia, SC 23,700 Carolina Spirit Shop
University of South Carolina Columbia, SC 23,700 South Carolina Book Store
East Tennessee State University Johnson City, TN 12,100 The College Store
University of Tennessee Knoxville, TN 26,000 Rocky Top Books
University of Tennessee Knoxville, TN 26,000 Rocky Top East (3)
University of Texas - Arlington Arlington, TX 22,000 The College Store
Austin Community College Austin, TX 25,000 Bevo's ACC
Austin Community College Austin, TX 25,000 Bevo's Northridge
Blinn College Bryan, TX 7,600 Rother's Bookstore
Texas A&M University College Station, TX 42,900 Rother's Bookstore - College
Station
Texas A&M University College Station, TX 42,900 Rother's Bookstore - George
Bush
Texas A&M University College Station, TX 42,900 Rother's Bookstore - Woodstone
Southern Methodist University Dallas, TX 9,800 Varsity Book Store
University of North Texas, also serving: Denton, TX 30,100 Voertman's (3)
North Central Texas College 6,000
Texas Woman's University 7,900
University of Texas-- Pan American Edinburg, TX 18,000 South Texas Book & Supply
North Harris College Houston, TX 9,500 College Bookstore (3)
North Harris College Humble, TX 9,500 College Bookstore
University of Houston, also serving: Houston, TX 33,000 Rother's Bookstore
Texas Southern University School of Law 200
Texas Tech University Lubbock, TX 29,000 Double T Bookstore
Texas Tech University Lubbock, TX 29,000 Double T Bookstore II
Texas Tech University Lubbock, TX 29,000 Double T Bookstore III
Texas Tech University Lubbock, TX 29,000 Spirit Shop
South Texas Community College McAllen, TX 14,000 South Texas Book & Supply
Stephen F. Austin State University Nacogdoches, TX 10,500 Varsity Book Store
San Antonio College, also serving: San Antonio, TX 22,700 L&M Bookstore
Northwest Vista College 7,900
Palo Alto College 7,300
St. Philip's College 11,100
UTSA - Downtown 5,000
University of Texas-- San Antonio San Antonio, TX 20,500 L&M UTSA Bookstore
Southwest Texas State University San Marcos, TX 25,000 Colloquium Bookstore
14
Institution Location Enrollment(1) Store Name
----------- -------- ------------- ----------
Southwest Texas State University San Marcos, TX 25,000 Colloquium Too
Southwest Texas State University San Marcos, TX 25,000 Rother's Bookstore
Tarleton State University Stephenville, TX 7,700 Rother's Bookstore
Baylor University Waco, TX 13,200 Rother's Bookstore
Baylor University Waco, TX 13,200 University Bookstore and
Spirit Shop
Midwestern State University Wichita Falls, TX 5,800 Rother's Bookstore
Virginia Polytechnic Institute and State Blacksburg, VA 26,000 Tech Bookstore
University
Old Dominion University Norfolk, VA 19,000 Dominion Bookstore
Radford University Radford, VA 8,500 Radford Book Exchange
Western Washington University, also serving: Bellingham, WA 12,000 The College Store
Whatcom Community College 4,000
- ---------
(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 2003.
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 2003.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected historical consolidated financial
and other data of the Company as of and for the fiscal years ended March 31,
2003, 2002, 2001, 2000, and 1999, respectively. The selected historical
consolidated financial data was derived from the Company's audited consolidated
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 consolidated financial statements of the Company and the
related notes thereto included in Item 8 herein.
Fiscal Years Ended March 31,
-----------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ---------- -----------
Statement of Operations Data: (dollars in thousands)
Revenues $ 370,510 $ 338,917 $ 301,669 $ 267,069 $ 218,638
Costs of sales 224,488 206,976 187,099 164,984 137,989
----------- ----------- ----------- ---------- -----------
Gross profit 146,022 131,941 114,570 102,085 80,649
Operating expenses:
Selling, general, and administrative 90,391 84,871 74,100 65,820 51,289
Depreciation 2,988 3,087 2,956 3,096 2,393
Amortization (3) 644 505 10,446 9,320 6,149
----------- ----------- ----------- ---------- -----------
Income from operations 51,999 43,478 27,068 23,849 20,818
Other expenses (income):
Interest expense 14,212 17,189 17,487 17,469 17,508
Interest income (360) (400) (615) (356) (351)
Loss on derivative instruments 156 361 - - -
----------- ----------- ----------- ---------- -----------
Income before income taxes 37,991 26,328 10,196 6,736 3,661
Income tax expense 14,985 10,492 5,857 4,845 2,604
----------- ----------- ----------- ---------- -----------
Net income $ 23,006 $ 15,836 $ 4,339 $ 1,891 $ 1,057
=========== =========== =========== ========== ===========
Other Data:
EBITDA (1) $ 55,631 $ 47,070 $ 40,470 $ 36,265 $ 29,360
Net cash flows from operating activities 37,332 31,038 8,839 18,945 10,296
Net cash flows from investing activities (5,327) (7,616) (4,994) (30,244) (5,067)
Net cash flows from financing activities (4,018) (16,412) (3,887) 11,690 (6,976)
Capital expenditures 3,708 2,277 1,759 3,542 2,842
Business acquisition expenditures (2) 1,389 6,110 2,975 26,072 2,086
Number of bookstores open at end of the period 109 108 102 98 65
Balance Sheet Data (At End of Period):
Cash and cash equivalents $ 39,405 $ 11,419 $ 4,410 $ 4,451 $ 4,060
Working capital 82,959 75,865 72,394 62,244 55,442
Total assets 208,466 182,794 165,136 166,100 139,662
Total debt, including current maturities 143,367 147,576 161,773 166,302 169,257
(1) EBITDA is defined as earnings before interest, taxes, depreciation, and
amortization. As the Company is highly-leveraged and as the Company's
equity is not publicly-traded, management believes that EBITDA is useful
in measuring its liquidity and provides additional information for
determining its ability to meet debt service requirements. The Senior
Subordinated Notes and Senior Credit Facility also utilize EBITDA, as
defined in those agreements, for certain financial covenants. EBITDA
does not represent and should not be considered as an alternative to net
cash flows from operating activities as determined by accounting
principles generally accepted in the United States of America, and
EBITDA does not necessarily indicate whether cash flows will be
sufficient for cash requirements. Items excluded from EBITDA, such as
interest, taxes, depreciation and amortization, are significant
16
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. The following
presentation reconciles EBITDA with net cash flows from operating
activities as presented in the Consolidated Statements of Cash Flows
included in Item 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
Fiscal Year Ended March 31,
2003 2002 2001 2000 1999
------------ ----------- ----------- ---------- ----------
(dollars in thousands)
EBITDA $ 55,631 $ 47,070 $ 40,470 $ 36,265 $ 29,360
Adjustments to reconcile EBITDA to net cash flows
from operating activities:
Interest income 360 400 615 356 351
Provision for losses on accounts receivable 452 1,630 434 141 135
Cash paid for interest (13,549) (15,225) (16,001) (16,175) (16,528)
Cash refunded (paid) for income taxes (14,533) (4,063) (6,018) (2,424) 2,911
(Gain) Loss on disposal of assets 36 (483) 60 18 90
Other - - - 7 -
Changes in operating assets and liabilities,
net of effect of acquistions/disposals (4) 8,935 1,709 (10,721) 757 (6,023)
------------ ----------- ----------- ---------- ----------
Net Cash Flows from Operating Activities $ 37,332 $ 31,038 $ 8,839 $ 18,945 $ 10,296
============ =========== =========== ========== ==========
(2) Business acquisition expenditures represent established businesses
purchased by the Company.
(3) 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.
(4) Changes in operating assets and liabilities, net of effect of
acquisitions/disposals includes the changes in the balances of
receivables, inventories, prepaid expenses and other assets, other
assets, accounts payable, accrued employee compensation and benefits,
accrued incentives, accrued expenses, deferred revenue, and other
long-term liabilities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FISCAL YEAR ENDED MARCH 31, 2003 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2002.
REVENUES. Revenues for the years ended March 31, 2003 and 2002 and the
corresponding change in revenues were as follows:
Change
2003 2002 Amount Percentage
--------------- --------------- -------------- ------------
Textbook Division $ 132,806,703 $ 122,893,781 $ 9,912,922 8.1 %
Bookstore Division 216,943,133 201,399,648 15,543,485 7.7 %
Complementary Services Division 44,004,856 38,093,091 5,911,765 15.5 %
Intercompany eliminations (23,244,843) (23,470,111) 225,268 (1.0)%
--------------- --------------- -------------- ------------
$ 370,509,849 $ 338,916,409 $31,593,440 9.3 %
=============== =============== ============== ============
The increase in Textbook Division revenues for the year ended March 31, 2003
was due in part to publisher price increases, complemented by an increase in
unit sales. The increase in Bookstore Division revenues was primarily
attributable to an increase in same store sales of 4.9%, or $9.4 million, and to
the acquisition of new college bookstores (defined by the Company as stores
acquired since April 1, 2001). These new bookstores provided a $6.2 million
17
increase in revenues. Complementary Services Division revenues increased
primarily due to growth in the Company's distance education program, offset in
part by outsourcing the plastic bag program late in fiscal 2002 and a decline in
systems division revenues resulting from revisions made to certain agreements
with TheCampusHub.com, Inc. and a drop in system installations. 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. The Company's intercompany transactions decreased primarily due to
changes made to some of the Complementary Services Division programs.
GROSS PROFIT. Gross profit for fiscal 2003 increased $14.1 million, or
10.7%, to $146.0 million from $131.9 million for fiscal 2002. This increase was
primarily due to higher revenues and an increase in gross margin percent. Gross
margin percent was 39.4% for fiscal 2003 as compared to 38.9% for fiscal 2002.
Gross margin percent in the Textbook Division experienced a small decline
primarily as a result of the impact of the incentive programs, while gross
margin percentages in the Bookstore Division improved primarily due to certain
margin improvement efforts. Complementary Services Division experienced a small
decline due to the lower-margin distance education program continuing to grow as
a percentage of total Complementary Services Division revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal 2003 increased $5.5 million, or 6.5%, to
$90.4 million from $84.9 million for fiscal 2002. Selling, general and
administrative expenses as a percentage of revenues were 24.4% and 25.0% in
fiscal 2003 and fiscal 2002, respectively. The increase in expenses is primarily
the result of the Company's growth, as previously discussed. The decrease in
expenses as a percentage of revenues is primarily attributable to revenue growth
outpacing growth in certain expenses, particularly salaries and wages.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION (EBITDA).
EBITDA for fiscal 2003 and 2002 and the corresponding change in EBITDA were as
follows:
Change
2003 2002 Amount Percentage
-------------- -------------- ------------- ----------
Textbook Division $ 33,915,223 $ 31,290,952 $ 2,624,271 8.4 %
Bookstore Division 26,992,497 22,399,279 4,593,218 20.5 %
Complementary Services Division 2,041,093 696,335 1,344,758 193.1 %
Corporate administration (7,318,023) (7,316,701) (1,322) (0.0)%
-------------- -------------- ------------- ----------
$ 55,630,790 $ 47,069,865 $ 8,560,925 18.2 %
============== ============== ============= ==========
The increase in EBITDA in the Textbook Division was attributable to
increased revenues and a decline in certain expenses as a percentage of
revenues, offset in part by the aforementioned decline in gross margin percent.
The increase in EBITDA in the Bookstore Division was primarily due to increased
revenues, improved margins, and a decline in certain expenses as a percentage of
revenues. The increase in EBITDA in the Complementary Services Division was
primarily due to increased revenues and a decline in certain expenses as a
percentage of revenues, offset in part by a slightly lower gross margin percent
attributable to revenue mix. Corporate administrative costs have remained stable
between fiscal years.
INTEREST EXPENSE, NET. Interest expense, net for fiscal 2003 decreased $2.9
million, or 17.5%, to $13.9 million from $16.8 million for fiscal 2002,
primarily due to reduced interest charges on the Senior Credit Facility
resulting from the $10.0 million optional prepayment of Tranche A and Tranche B
Loans on March 29, 2002 and reduced usage under the Revolving Credit Facility.
Additionally, a portion of interest expense associated with the interest rate
swap agreements previously classified as interest expense is now included in the
loss on derivative financial instruments, as discussed in the footnotes to the
consolidated financial statements presented in Item 8.
18
LOSS ON DERIVATIVE FINANCIAL INSTRUMENTS. This loss is attributable to the
$10.0 million optional prepayment of Tranche A and Tranche B Loans on March 29,
2002. 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
change in the fair value of the portion of the interest rate swap agreements
that no longer qualify as hedging instruments, along with interest associated
with that portion of the interest rate swap agreements.
INCOME TAXES. Income tax expense for fiscal 2003 increased $4.5 million, or
42.8%, to $15.0 million from $10.5 million for fiscal 2002. The Company's
effective tax rate for fiscal years 2003 and 2002 was 39.4% and 39.8%,
respectively. The Company's effective tax rate differs from the statutory tax
rate primarily as a result of state income taxes.
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 change in revenues were as follows:
Change
2002 2001 Amount Percentage
--------------- --------------- -------------- ----------
Textbook Division $ 122,893,781 $ 113,006,804 $ 9,886,977 8.7%
Bookstore Division 201,399,648 182,856,000 18,543,648 10.1%
Complementary Services Division 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 Textbook Division 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 incentive programs. The
increase in Bookstore Division 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 Division 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 Textbook and Bookstore Divisions have grown, the
Company's intercompany transactions have also increased.
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 Textbook and
Bookstore Divisions.
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 the Complementary
Services Division. 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.
19
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.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION (EBITDA).
EBITDA for fiscal 2002 and 2001 and the corresponding change in EBITDA were as
follows:
Change
2002 2001 Amount Percentage
-------------- -------------- -------------- ----------
Textbook Division $ 31,290,952 $ 27,534,524 $ 3,756,428 13.6 %
Bookstore Division 22,399,279 18,636,044 3,763,235 20.2 %
Complementary Services Division 696,335 73,248 623,087 850.7 %
Corporate administration (7,316,701) (5,774,175) (1,542,526) (26.7)%
-------------- -------------- -------------- ----------
$ 47,069,865 $ 40,469,641 $ 6,600,224 16.3 %
============== ============== ============== ==========
The increase in EBITDA in the Textbook Division was attributable to
increased revenues and strong used textbook margins. The increase in EBITDA in
the Bookstore Division was primarily due to increased revenues and strong used
textbook margins. The improvement in EBITDA in the Complementary Services
Division was primarily due to increased revenues. Corporate administrative costs
have increased between fiscal years, primarily due to increased personnel costs
attributable to the Company's continued growth and rising insurance costs.
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.
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated 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 consolidated 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 consolidated
financial statements:
20
PRODUCT RETURNS. The Company recognizes revenue from Textbook Division 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 the Textbook
Division. Additional reductions to revenue and costs of sales may be required if
the actual rate of product returns exceeds the estimated rate of product
returns. The estimated rate of product returns is determined utilizing actual
historical product 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.
INVENTORY VALUATION. The Company's Bookstore Division values 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, 2003, the Company's total indebtedness
was approximately $143.4 million, consisting of approximately $30.5 million in
Term Loans, $110.0 million of the Senior Subordinated Notes and $2.9 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, the Senior
Subordinated Notes, and NBC's Senior Discount Debentures represent significant
liquidity requirements for the Company. Under the terms of the Tranche A and
Tranche B Loans, after taking into account optional prepayments and excess cash
flow payments and obligations, the Company is scheduled to make principal
payments totaling approximately $19.2 million in fiscal 2004, $3.8 million in
fiscal 2005 and $7.5 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, 2003 of
21
approximately $14.7 million that is due and payable in September, 2003. 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 $3.7 million, $2.3 million, and $1.8
million for the fiscal years ended March 31, 2003, 2002, and 2001, respectively.
Capital expenditures consist primarily of leasehold improvements and furnishings
for new bookstores, bookstore renovations, computer upgrades and miscellaneous
warehouse improvements. The Company's ability to make capital expenditures is
subject to certain restrictions under the Senior Credit Facility.
Business acquisition expenditures were $1.4 million, $6.1 million, and $3.0
million for the fiscal years ended March 31, 2003, 2002, and 2001, respectively.
For the fiscal year ended March 31, 2003, four bookstore locations were acquired
serving Stephen F. Austin State University, the University of Northern Colorado
and Western Kentucky University. For the fiscal year ended March 31, 2002, ten
bookstore locations were acquired serving the University of California -
Berkeley, Western Washington University, Chadron State College, North Carolina
State University, the University of Oklahoma, Radford University, the University
of Central Florida, and the University of Florida. For the fiscal year ended
March 31, 2001, four bookstore locations were acquired serving Southern
Methodist University, Oakland University, the University of Tennessee, and the
University of Oklahoma. The Company's ability to make acquisition expenditures
is subject to certain restrictions under the Senior Credit Facility.
During fiscal 2003, bookstores serving Virginia Commonwealth University,
Ferris State University, and the University of California - Berkeley were closed
upon the expiration of the property leases. During fiscal 2002, the Company
closed bookstores serving Austin Community College and Coconino Community
College upon expiration of the property leases and 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 consolidated 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 Textbook Division customers.
During fiscal 2003, the Company's former Vice President of Administration
and Secretary exercised vested options to purchase 750 shares of NBC's Class A
Common Stock under the 1998 Performance Stock Option Plan at an exercise price
of $52.47 per share ("Founder's Price") and 125 shares of NBC's Class A Common
Stock under the 1998 Performance Stock Option Plan at an exercise price of $106
per share. This transaction, which did not involve any public offering, was
exempt from registration under the Securities Act of 1933 pursuant to Section
4(2). Proceeds from this issuance were utilized for general operating
activities. During fiscal 2002, NBC issued 2,621 shares of its Class A Common
Stock to the Company's Senior Vice President of the Bookstore 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). Proceeds from this issuance were utilized for general
operating activities. 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. Proceeds from this issuance, which
totaled $642,039, were utilized for general operating activities.
22
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, 2003,
weighted-average borrowings under the Revolving Credit Facility approximated
$9.8 million, with actual borrowings ranging from a low of no borrowings to a
high of $35.8 million. Net cash flows from operating activities for the year
ended March 31, 2003 were $37.3 million, an increase of $6.3 million from $31.0
million for the year ended March 31, 2002. This increase was primarily
attributable to 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
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, 2003, the Company could borrow up to $41.0 million under the
Revolving Credit Facility. The Revolving Credit Facility was unused at March 31,
2003. 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.
23
The following tables present aggregated information as of March 31, 2003
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 $140,936,990 $19,181,277 $11,352,859 $ 110,075,590 $ 327,264
Capital lease obligations 2,430,286 124,703 387,096 577,415 1,341,072
Operating leases 36,518,000 7,951,000 12,817,000 8,562,000 7,188,000
-------------- ------------- ------------- --------------- -------------
Total $179,885,276 $27,256,980 $24,556,955 $ 119,215,005 $ 8,856,336
============== ============= ============= =============== =============
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
- ------------------------- -------------- ------------- ------------- --------------- -------------
Unused line 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 was extended for one year and expires on May 10, 2004, reimburses the
Company for certain direct costs incurred on behalf of TheCampusHub.com, Inc.
Prior to its amendment as described below, the management services agreement
also required TheCampusHub.com, Inc. to pay the Company $0.5 million per year
for certain shared management and administrative support. Complementary Services
Division revenue resulting from the management services agreement, including as
amended, 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. Prior to its amendment as described
below, the technology sale and license agreement required TheCampusHub.com, Inc.
to pay the Company $0.5 million per year over a period of three years. The
technology sale and license agreement also provides TheCampusHub.com, Inc. with
an option to purchase such software capabilities from the Company during that
three year period and was extended for one year, expiring on May 10, 2004. The
license fees were recognized as Complementary Services Division revenue over the
term of the agreement. For the years ended March 31, 2003, 2002, and 2001,
revenues attributable to the management services and technology sale and license
agreements totaled $0.3 million, $1.0 million, and $0.9 million, respectively,
and reimbursable direct costs incurred on behalf of TheCampusHub.com, Inc.
totaled $0.6 million, $0.8 million, and $0.9 million, respectively.
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 fiscal 2002. While it remains a viable business
24
and is funding its own operations, it was not generating sufficient excess cash
flow to fund its obligations under the aforementioned agreements and the
remaining capital available from its shareholders was reserved to fund strategic
development opportunities and, if required, ongoing operations. As a result, on
March 31, 2002 the Company established a reserve of approximately $1.0 million
on net amounts due from TheCampusHub.com, Inc. and ultimately wrote-off
approximately $1.0 million of net amounts due during fiscal 2003. Net amounts
due from TheCampusHub.com, Inc. at March 31, 2003 and 2002 totaled $0.1 million
and $0.2 million, respectively. Effective April 1, 2002, the management services
and technology sale and license agreements were amended, eliminating the annual
licensing fee and reducing the annual management services fee for certain shared
management and administrative support to $0.3 million. 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
Textbook Division customers.
On August 2, 2002, HWH Capital Partners, L.P. and HWH Cornhusker Partners,
L.P., affiliates of HWP, along with certain other stockholders of NBC
(collectively with HWP, the "Sellers"), sold approximately 33% of the issued and
outstanding shares of NBC to certain funds affiliated with Weston Presidio
(Weston Presidio Capital III, L.P., Weston Presidio Capital IV, L.P., WPC
Entrepreneur Fund, L.P., and WPC Entrepreneur Fund II, L.P., collectively the
"Weston Presidio Funds"). HWP retained a controlling interest in NBC after the
sale. This sale is referred to as the "Weston Presidio Transaction". Under the
terms of a buy-sell agreement entered into in connection with this sale, Weston
Presidio may require that the Sellers repurchase Weston Presidio's shares of NBC
at a price as defined in the buy-sell agreement, unless a majority of the
Sellers elects, in the alternative, to sell to Weston Presidio their remaining
shares of NBC at a price as defined in the buy-sell agreement.
SEASONALITY
The Company's Textbook and Bookstore Divisions experience two distinct
selling periods and the Textbook Division experiences two distinct buying
periods. The peak selling periods for the Textbook Division occur prior to the
beginning of each college semester in August and December. The buying periods
for the Textbook Division occur at the end of each college semester in late
December and May. The primary selling periods for the Bookstore Division are in
September and January. In fiscal 2003, 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 January, 2003 the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES (FIN 46). FIN
46 requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
25
returns or both. FIN 46 also requires disclosures about variable interest
entities that a company is not required to consolidate but in which it has a
significant variable interest. The consolidation requirements apply to existing
entities in the first fiscal year or interim period beginning after June 15,
2003. The adoption of the consolidation requirements attributable to existing
entities in fiscal 2004 is not expected to have a significant impact on the
Company's consolidated financial statements. 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 consolidated
financial statements. In May, 2003 the Financial Accounting Standards Board
issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH
CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. This standard improves the
accounting for certain financial instruments that issuers previously accounted
for as equity, requiring such instruments to be classified as liabilities in
certain situations. SFAS No. 150 is effective for all financial instruments
entered into or modified after May 31, 2003 and for interim periods beginning
after June 15, 2003. The Company does not expect its adoption of this standard
in fiscal 2004 to have a significant impact on its consolidated financial
statements.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Annual Report on Form 10-K contains or incorporates by reference
certain statements that are not historical facts, including, most importantly,
information concerning possible or assumed future results of operations of the
Company and statements preceded by, followed by or that include the words "may,"
"believes," "expects," "anticipates," or the negation thereof, or similar
expressions, which constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). All
statements which address operating performance, events or developments that are
expected or anticipated to occur in the future, including statements relating to
volume and revenue growth, earnings per share growth or statements expressing
general optimism or pessimism 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 Company's primary market risk exposure is, and is expected to continue
to be, fluctuation in Eurodollar interest rates. Of the $143.4 million in total
indebtedness outstanding at March 31, 2003, approximately $30.5 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
26
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, 2003 was approximately $19.0 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, 2003):
Variable to Fixed
Fixed Rate Debt Variable Rate Debt Interest Rate Swaps
---------------------------- --------------------------- -------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Principal Interest Principal Interest Notional Pay/Receive
Cash Flows Rate Cash Flows (1) Rate Amounts Rates
--------------- ----------- -------------- ----------- -------------- ---------------
Fiscal Year Ended
March 31:
2004 $ 150,654 8.82% $19,155,326 3.57% $ 12,275,000 5.81% / 1.22%
2005 196,314 8.81% 3,763,945 4.83% - -
2006 251,807 8.81% 7,527,889 6.08% - -
2007 306,016 8.80% - - - -
2008 110,346,989 8.80% - - - -
Thereafter 1,668,336 11.21% - - - -
--------------- ----------- -------------- ----------- -------------- ---------------
Total $ 112,920,116 8.83% $30,447,160 4.24% $ 12,275,000 5.81% / 1.22%
=============== =========== ============== =========== ============== ===============
Fair Value $ 113,676,064 - $30,447,160 - $ (845,669) -
=============== ============== ==============
(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 2003 is reflected in such
principal cash flows.
Certain quantitative market risk disclosures have changed since March 31,
2002 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, 2003 and 2002:
March 31, March 31,
2003 2002
--------------- ---------------
Fair Values:
Fixed rate debt $ 113,676,064 $ 109,443,478
Variable rate debt 30,447,160 34,900,000
Interest rate swaps (845,669) (1,618,397)
Overall Weighted-Average Interest Rates:
Fixed rate debt 8.83% 8.82%
Variable rate debt 4.24% 7.01%
Interest rate swaps receive rate 1.22% 3.19%
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF NEBRASKA BOOK COMPANY, INC.
FOR THE YEARS ENDED MARCH 31, 2003, 2002, AND 2001
Independent Auditors' Report................................................29
Consolidated Balance Sheets.................................................30
Consolidated Statements of Operations.......................................31
Consolidated Statements of Stockholder's Equity (Deficit)...................32
Consolidated Statements of Cash Flows.......................................33
Notes to Consolidated Financial Statements..................................34
28
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Nebraska Book Company, Inc.
Lincoln, Nebraska
We have audited the accompanying consolidated balance sheets of Nebraska
Book Company, Inc. (a wholly-owned subsidiary of NBC Acquisition Corp.) and
subsidiary as of March 31, 2003 and 2002, and the related consolidated
statements of operations, stockholder's equity (deficit), and cash flows for
each of the three years in the period ended March 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Nebraska Book Company, Inc. and
subsidiary as of March 31, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2003 in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Lincoln, Nebraska
May 27, 2003
29
NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------
March 31,
2003 2002
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 39,405,382 $ 11,419,277
Receivables 29,085,329 29,384,249
Inventories 68,315,352 69,908,414
Deferred income taxes 3,861,932 3,557,325
Prepaid expenses and other assets 834,284 498,440
-------------- --------------
Total current assets 141,502,279 114,767,705
PROPERTY AND EQUIPMENT, net of depreciation & amortization 27,666,370 26,478,915
GOODWILL 30,472,823 29,791,335
IDENTIFIABLE INTANGIBLES, net of amortization 239,014 414,564
DEBT ISSUE COSTS, net of amortization 4,142,416 5,403,342
OTHER ASSETS 4,442,780 5,937,710
-------------- --------------
$ 208,465,682 $ 182,793,571
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 19,857,301 $ 15,084,077
Accrued employee compensation and benefits 10,642,713 8,910,902
Accrued interest 1,512,733 1,547,199
Accrued incentives 5,518,883 3,595,628
Accrued expenses 1,077,844 1,060,969
Income taxes payable 89,932 3,684,439
Deferred revenue 538,230 432,790
Current maturities of long-term debt 19,181,277 4,476,156
Current maturities of capital lease obligations 124,703 111,015
-------------- --------------
Total current liabilities 58,543,616 38,903,175
LONG-TERM DEBT, net of current maturities 121,755,713 140,936,989
CAPITAL LEASE OBLIGATIONS, net of current maturities 2,305,583 2,052,286
OTHER LONG-TERM LIABILITIES 300,823 1,892,250
DUE TO PARENT 12,371,846 9,594,899
COMMITMENTS (Note H)
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock, voting, authorized 50,000 shares
of $1.00 par value; issued and outstanding 100 shares 100 100
Additional paid-in capital 46,986,333 46,404,474
Accumulated deficit (33,379,701) (56,386,035)
Accumulated other comprehensive loss (418,631) (604,567)
-------------- --------------
Total stockholder's equity (deficit) 13,188,101 (10,586,028)
-------------- --------------
$ 208,465,682 $ 182,793,571
============== ==============
See notes to consolidated financial statements.
30
NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------
Year Ended March 31,
2003 2002 2001
------------ ------------ ------------
REVENUES, net of returns $370,509,849 $338,916,409 $301,668,853
COSTS OF SALES 224,488,201 206,975,716 187,098,970
------------- ------------- ------------
Gross profit 146,021,648 131,940,693 114,569,883
OPERATING EXPENSES:
Selling, general and administrative 90,390,858 84,870,828 74,100,242
Depreciation 2,987,947 3,087,234 2,956,135
Amortization 644,053 504,468 10,445,766
------------- ------------- ------------
94,022,858 88,462,530 87,502,143
------------- ------------- ------------
INCOME FROM OPERATIONS 51,998,790 43,478,163 27,067,740
OTHER EXPENSES (INCOME):
Interest expense 14,212,281 17,189,316 17,486,737
Interest income (360,448) (399,573) (615,430)
Loss on derivative financial instruments 155,831 360,445 -
------------- ------------- ------------
14,007,664 17,150,188 16,871,307
------------- ------------- ------------
INCOME BEFORE INCOME TAXES 37,991,126 26,327,975 10,196,433
INCOME TAX EXPENSE 14,984,792 10,491,668 5,857,596
------------- ------------- ------------
NET INCOME $ 23,006,334 $ 15,836,307 $ 4,338,837
============= ============= ============
See notes to consolidated financial statements.
31
NEBRASKA BOOK COMPANY, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
- ---------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-in Accumulated Comprehensive Comprehensive
Stock Capital Deficit Loss Total Income
------- ------------ ----------- -------------- ----------- -------------
BALANCE, April 1, 2000 $ 100 $ 45,829,948 $ (76,561,179) $ - $(30,731,131)
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
============
Contributed capital - 581,859 - - 581,859 $ -
Net income - - 23,006,334 - 23,006,334 23,006,334
Other comprehensive
income, net of taxes:
Unrealized gains on
interest rate swap
agreements, net of
taxes of $146,900 - - - 185,936 185,936 185,936
------- ------------ -------------- ----------- ------------- ------------
BALANCE, March 31, 2003 $ 100 $ 46,986,333 $ (33,379,701) $ (418,631) $ 13,188,101 $23,192,270
======= ============ ============== =========== ============= ============
See notes to consolidated financial statements.
32
NEBRASKA BOOK COMPANY, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------
Year Ended March 31,
2003 2002 2001
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $23,006,334 $15,836,307 $ 4,338,837
Adjustments to reconcile net income to
net cash flows from operating activities:
Provision for losses on accounts receivable 451,578 1,629,704 434,070
Depreciation 2,987,947 3,087,234 2,956,135
Amortization 1,937,425 2,137,968 11,814,114
Noncash interest (income) expense from derivative
financial instruments (249,310) 250,340 -
(Gain) Loss on derivative financial instruments (190,583) 360,445 -
(Gain) Loss on disposal of assets 35,428 (482,810) 59,627
Deferred income taxes 1,269,000 (500,000) (1,351,000)
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals:
Receivables (175,488) 309,193 (7,618,872)
Inventories 2,061,981 (6,554,490) 354,360
Recoverable income taxes - 706,408 (706,408)
Prepaid expenses and other assets (335,844) (94,740) 23,602
Other assets (346,736) (683,573) (85,526)
Accounts payable 3,927,555 3,436,113 (4,497,902)
Accrued employee compensation and benefits 1,731,811 2,398,129 211,662
Accrued interest (34,466) 80,556 117,419
Accrued incentives 1,923,255 2,613,734 856,541
Accrued expenses 16,875 96,188 271,867
Income taxes payable (3,594,507) 3,684,439 (553,893)
Deferred revenue 105,440 153,808 (273,269)
Other long-term liabilities 26,971 34,883 36,739
Due to parent 2,776,947 2,538,084 2,450,624
------------ ------------ ------------
Net cash flows from operating activities 37,331,613 31,037,920 8,838,727
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,707,733) (2,276,892) (1,759,010)
Bookstore acquisitions, net of cash acquired (1,389,338) (6,109,599) (2,975,332)
Proceeds from sale of bookstores - 1,139,400 -
Proceeds from sale of property and equipment and other 19,643 49,487 144,834
Software development costs (249,644) (418,463) (403,996)
------------ ------------ ------------
Net cash flows from investing activities (5,327,072) (7,616,067) (4,993,504)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of financing costs (32,446) - -
Principal payments on long-term debt (4,476,155) (16,308,445) (4,456,324)
Principal payments on capital lease obligations (114,524) (117,388) (72,320)
Capital contributions 604,689 13,752 642,039
------------ ------------ ------------
Net cash flows from financing activities (4,018,436) (16,412,081) (3,886,605)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 27,986,105 7,009,772 (41,382)
CASH AND CASH EQUIVALENTS, Beginning of year 11,419,277 4,409,505 4,450,887
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, End of year $39,405,382 $11,419,277 $ 4,409,505
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest $13,549,099 $15,224,920 $16,000,970
Income taxes 14,533,352 4,062,737 6,018,273
Noncash investing and financing activities:
Property acquired through capital lease 381,509 2,228,972 -
Accumulated other comprehensive income (loss):
Cumulative effect of adoption of SFAS No. 133,
net of income taxes - (602,640) -
Unrealized gains (losses) on interest
rate swap agreements, net of income taxes 185,936 (1,927) -
Deferred taxes resulting from accumulated
other comprehensive income (loss) 146,900 (403,045) -
See notes to consolidated financial statements.
33
NEBRASKA BOOK COMPANY, INC.
NOTES TO CONSOLIDATED 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.
On August 2, 2002, HWH Capital Partners, L.P. and HWH Cornhusker Partners,
L.P., affiliates of HWP, along with certain other stockholders of NBC
(collectively with HWP, the "Sellers"), sold approximately 33% of the issued and
outstanding shares of NBC to certain funds affiliated with Weston Presidio
(Weston Presidio Capital III, L.P., Weston Presidio Capital IV, L.P., WPC
Entrepreneur Fund, L.P., and WPC Entrepreneur Fund II, L.P., collectively the
"Weston Presidio Funds"). HWP retained a controlling interest in NBC after the
sale. This sale is referred to as the "Weston Presidio Transaction". Under the
terms of a buy-sell agreement entered into in connection with this sale, Weston
Presidio may require that the Sellers repurchase Weston Presidio's shares of NBC
at a price as defined in the buy-sell agreement, unless a majority of the
Sellers elects, in the alternative, to sell to Weston Presidio their remaining
shares of NBC at a price as defined in the buy-sell agreement.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company are as follows:
PRINCIPLES OF CONSOLIDATION: Effective July 1, 2002, the Company's distance
learning division was separately incorporated under the laws of the State of
Delaware as Specialty Books, Inc., a wholly-owned subsidiary of the Company.
Subsequent to the date of incorporation, the Company's financial statements have
been presented on a consolidated basis to include all of the accounts of
Specialty Books, Inc., after elimination of all significant intercompany
accounts and transactions. In connection with its incorporation, Specialty
Books, Inc. has guaranteed payment and performance of obligations, liabilities,
and indebtedness arising under, out of, or in connection with the Senior
Subordinated Notes and Credit Agreement.
34
REVENUE RECOGNITION: The Company recognizes revenue from product sales at
the time of shipment. The Company has established a program which, under certain
conditions, enables its customers to return product. The effect of this program
is estimated utilizing actual historical return experience and amounts are
adjusted accordingly. The Company recognizes revenues from the licensing of its
software products upon delivery or installation if the Company is contractually
obligated to install the software.
SHIPPING AND HANDLING FEES AND COSTS: Amounts billed to a customer for
shipping and handling have been classified as revenues in the consolidated
statements of operations and approximated $5.4 million, $4.4 million, and $2.9
million for the years ended March 31, 2003, 2002, and 2001, respectively.
Shipping and handling costs are included in operating expenses in the
consolidated statements of operations and approximated $9.0 million, $8.0
million, and $6.8 million for the years ended March 31, 2003, 2002, and 2001,
respectively.
ADVERTISING: Advertising costs are expensed as incurred and approximated
$3.2 million, $2.7 million, and $2.2 million for the years ended March 31, 2003,
2002, and 2001, respectively.
USE OF ESTIMATES: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from the estimates.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of cash on hand
and in the bank as well as short-term investments with maturities of three
months or less when purchased.
INVENTORIES: Inventories are stated at the lower of cost or market.
Inventories for the Textbook Division are determined on the weighted-average
cost method. The Company's Bookstore Division values 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
Bookstore Division 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. Capitalized software costs
approximated $1.1 million and $1.2 million at March 31, 2003 and 2002,
respectively. Certain functionalities have been completed and released to the
general public. Amortization of the capitalized costs associated with such
functionalities totaled $0.4 million, $0.3 million and $0.1 million for the
fiscal years ended March 31, 2003, 2002, and 2001, respectively.
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 consolidated financial statements. The
35
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 2003.
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, 2003 and
2002 was approximately $7.2 million and $5.9 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.
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 consolidated 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, 2003 and 2002, because
of the relatively short maturity of these instruments. The fair value of
long-term debt, including the current maturities, was approximately $144.1
million and $144.3 million as of March 31, 2003 and 2002, respectively, as
determined primarily by quoted market values. The fair value of the interest
rate swap agreements (see note I) approximated $(0.8) million and $(1.6) million
as of March 31, 2003 and 2002 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
utilizing the intrinsic value method. Certain information regarding stock-based
compensation is presented in the following tabular format:
Fiscal Year Ended March 31,
2003 2002 2001
------------- ------------- -------------
Net income, as reported $23,006,334 $15,836,307 $ 4,338,837
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects - - -
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (92,382) (51,344) (72,835)
------------- ------------- -------------
Pro forma net income $22,913,952 $15,784,963 $ 4,266,002
============= ============= =============
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
36
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 income (losses). For the years ended March 31, 2003, 2002, and
2001, other comprehensive income (losses) consisted of the cumulative effect of
adoption of SFAS No. 133 and unrealized gains (losses) on interest rate swap
agreements, net of taxes.
ACCOUNTING STANDARDS NOT YET ADOPTED: In January, 2003 the Financial
Accounting Standards Board (FASB) issued Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES (FIN 46). FIN 46 requires a variable interest entity
to be consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. FIN 46 also
requires disclosures about variable interest entities that a company is not
required to consolidate but in which it has a significant variable interest. The
consolidation requirements apply to existing entities in the first fiscal year
or interim period beginning after June 15, 2003. The adoption of the
consolidation requirements attributable to existing entities in fiscal 2004 is
not expected to have a significant impact on the Company's consolidated
financial statements. 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 consolidated financial statements. In May, 2003 the
Financial Accounting Standards Board issued SFAS No. 150, ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. This
standard improves the accounting for certain financial instruments that issuers
previously accounted for as equity, requiring such instruments to be classified
as liabilities in certain situations. SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003 and for
interim periods beginning after June 15, 2003. The Company does not expect its
adoption of this standard in fiscal 2004 to have a significant impact on its
consolidated financial statements.
C. RECEIVABLES
Receivables are summarized as follows:
March 31,
2003 2002
---------- ----------
Trade receivables, less allowance for
doubtful accounts of $442,942 and
$429,803 at March 31, 2003 and 2002,
respectively $13,792,759 $15,096,134
Receivables from book publishers for
returns 10,351,717 9,333,134
Advances for book buy-backs 2,294,455 2,162,439
Computer finance agreements, current
portion 445,393 352,286
Related party receivables, less
allowance for doubtful accounts
of $1.0 million at March 31, 2002 348,386 337,561
Other 1,852,619 2,102,695
----------- -----------
$29,085,329 $29,384,249
=========== ===========
Trade receivables include the effect of estimated product returns. The amount
of estimated product returns at March 31, 2003 and 2002 was approximately $6.0
million.
37
D. INVENTORIES
Inventories are summarized as follows:
March 31,
2003 2002
----------- -----------
Textbook Division $28,908,121 $30,256,654
Bookstore Division 31,986,260 32,447,083
Complementary Services Division 7,420,971 7,204,677
----------- -----------
$68,315,352 $69,908,414
=========== ===========
Textbook Division inventories include the effect of estimated product
returns. The amount of estimated product returns at March 31, 2003 and 2002 was
approximately $2.7 million.
General and administrative costs associated with the storage and handling of
inventory totaled approximately $7.4 million and $6.5 million for the years
ended March 31, 2003 and 2002, respectively, of which approximately $2.1 million
and $1.9 million was capitalized into inventory at March 31, 2003 and 2002,
respectively.
E. PROPERTY AND EQUIPMENT
A summary of the cost of property and equipment follows:
March 31,
------------------------------
2003 2002
-------------- --------------
Land $ 2,408,999 $ 2,408,999
Buildings and improvements 17,394,396 17,002,181
Leasehold improvements 7,134,396 6,526,231
Furniture and fixtures 7,060,829 5,361,476
Information systems 11,514,821 10,786,038
Automobiles and trucks 337,957 321,476
Machinery 564,468 450,510
Projects in process 483,246 204,521
-------------- --------------
46,899,112 43,061,432
Less: Accumulated depreciation
& amortization (19,232,742) (16,582,517)
-------------- --------------
$ 27,666,370 $ 26,478,915
============== ==============
F. 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.
During the fiscal year ended March 31, 2003, the Company acquired four
college bookstore locations in three separate transactions, none of which was
material to the Company's consolidated financial statements. In June of 2002,
the Company acquired certain assets of a privately owned bookstore serving the
University of Northern Colorado. In November of 2002, the Company acquired
certain assets of two privately owned bookstore locations serving Western
Kentucky University. In March of 2003, NBC acquired certain assets of a
privately owned bookstore serving Stephen F. Austin University. The total
purchase price, net of cash acquired, of such acquisitions was approximately
$1.4 million, of which approximately $0.1 million was assigned to covenants not
to compete with amortization periods of three years and approximately $0.7
million was assigned to tax-deductible goodwill.
38
The changes in the carrying amount of goodwill for the years ended March 31,
2003 and 2002 are as follows:
Year Ended March 31,
2003 2002
------------- -------------
Balance, beginning of year $29,791,335 $26,659,797
Goodwill acquired during the year 681,488 3,327,249
Goodwill included in gain on disposal of assets - (195,711)
------------- -------------
Balance, end of year $30,472,823 $29,791,335
============= =============
The following table presents certain financial information assuming that
amortization expense associated with goodwill was excluded for all periods
presented:
Year Ended March 31,
2003 2002 2001
-------------- -------------- -------------
Net Income:
Net income, as reported $ 23,006,334 $ 15,836,307 $ 4,338,837
Add: Goodwill amortization - - 10,169,697
Deduct: Tax benefit of goodwill
amortization - - (2,364,766)
-------------- -------------- -------------
Net income, as adjusted $ 23,006,334 $ 15,836,307 $12,143,768
============== ============== =============
The following table presents the total carrying amount of goodwill, by
reportable segment, as of March 31, 2003 and 2002, 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 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,
2003 2002
-------------- --------------
Bookstore Division $ 13,702,249 $ 13,020,761
Complementary Services Division - -
-------------- --------------
Total for reportable segments 13,702,249 13,020,761
Corporate administration 16,770,574 16,770,574
-------------- --------------
Total goodwill $ 30,472,823 $ 29,791,335
============== ==============
Identifiable intangible assets, net of amortization expense of approximately
$0.3 million and $0.2 million as of March 31, 2003 and 2002, respectively, were
not material.
G. 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").
39
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, 2003 was approximately $41.0 million. The Revolving Credit Facility
was unused at March 31, 2003.
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 0.3% 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, 2003 and 2002 were approximately $9.8 million and $14.0 million
at an average rate of 5.5% and 7.8%, respectively.
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 is also an excess cash flow
payment obligation at March 31, 2003 of approximately $14.7 million that is
included in the current portion of long-term debt and is due and payable on
September 29, 2003.
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,
2003 2002
------------- -------------
Tranche A Loan, due March 31, 2004,
quarterly principal payments, plus
interest at a floating rate based
on Eurodollar rate plus applicable
margin % (2.76% and 4.24% at
March 31, 2003 and 2002, respectively) $ 6,642,873 $ 11,095,713
Tranche B Loan, due March 31, 2006,
quarterly principal payments, plus
interest at a floating rate based
on Eurodollar rate plus applicable
margin % (3.76% and 4.49% at
March 31, 2003 and 2002, respectively) 23,804,287 23,804,287
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% 489,830 513,145
------------- ------------
140,936,990 145,413,145
Less current maturities (19,181,277) (4,476,156)
------------- -------------
$121,755,713 $140,936,989
============= ============
40
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.
At March 31, 2003, the aggregate maturities of long-term debt for the next
five years were as follows:
Fiscal Year
-----------
2004 $ 19,181,277
2005 3,792,826
2006 7,560,033
2007 35,774
2008 110,039,816
H. LEASES AND OTHER COMMITMENTS
In conjunction with two bookstores acquired in June of 2001 and one
bookstore acquired in March of 2003, the Company entered into bookstore facility
leases that qualified as capital leases. Such leases expire at various dates
through fiscal 2013 and contain options to renew for periods of up to ten years.
Capitalized leased property included in property and equipment was approximately
$2.2 million at March 31, 2003, 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
---- ----------- -----------
2004 $ 398,225 $ 7,951,000
2005 424,791 6,788,000
2006 454,947 6,029,000
2007 477,392 4,954,000
2008 480,895 3,608,000
Thereafter 1,629,495 7,188,000
----------- -----------
Total minimum lease payments 3,865,745 $36,518,000
Amount representing interest at ===========
11.5% (1,435,459)
------------
Present value of minimum lease
payments 2,430,286
Obligations due within one year (124,703)
-------------
Long-term obligations $ 2,305,583
=============
41
Total rent expense for the years ended March 31, 2003, 2002, and 2001 was
approximately $11.5 million, $10.6 million, and $9.6 million, respectively.
Percentage rent expense for the years ended March 31, 2003, 2002, and 2001 was
approximately $3.0 million, $2.5 million, and $2.0 million, respectively.
I. 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, SFAS No. 138, ACCOUNTING FOR CERTAIN
DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, and SFAS No. 149,
AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND 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
primarily 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.
The Company's primary market risk exposure is, and is expected to continue
to be, fluctuation in Eurodollar interest rates. Of the $143.4 million in total
indebtedness outstanding at March 31, 2003, $30.5 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. Notional amounts under the agreements 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. General information regarding
the Company's exposure to fluctuations in Eurodollar interest rates is presented
in the following table:
March 31,
2003 2002
------------- --------------
Total indebtedness outstanding $ 143,367,276 $ 147,576,446
Indebtedness subject to Eurodollar fluctuations 30,447,160 34,900,000
Notional amounts under swap agreements 38,100,000 44,900,000
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.
42
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.
Under hedge accounting, the interest rate swap agreements are reflected at
fair value in the Company's consolidated balance sheets (as "accounts payable"
in fiscal 2003 and "other long-term liabilities" in fiscal 2002) 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 consolidated
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 as a liability at March 31, 2003
and 2002 totaled $0.8 million and $1.6 million, respectively.
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 a $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 represents the portion of the agreements that
no longer qualify for hedge 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 consolidated 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, are also recognized as a gain
(loss) on derivative financial instruments in the consolidated statements of
operations and totaled $(0.2) million for the year ended March 31, 2003.
Information regarding the fair value of the portion of the interest rate swap
agreements designated as hedging instruments is presented in the following table
for the years ended March 31, 2003 and 2002:
Year Ended March 31,
2003 2002
------------ ------------
Year-to-date increase (decrease) in
fair value of swap agreements designated as hedges $ 582,146 $ (253,552)
Year-to-date interest (income) expense recorded
due to hedge ineffectiveness (249,310) 250,340
43
Changes in the fair value of the interest rate swap agreements are reflected
in the consolidated statements of cash flows as either "noncash interest expense
from derivative financial instruments", "gain or loss on derivative financial
instruments", or as noncash investing and financing activities.
J. INCOME TAXES
The provision (benefit) for income taxes consists of:
Year Ended March 31,
2003 2002 2001
---------- ----------- ----------
Current:
Federal $11,615,670 $ 9,311,719 $ 6,107,168
State 2,100,122 1,679,949 1,101,428
Deferred 1,269,000 (500,000) (1,351,000)
----------- ------------ ------------
$14,984,792 $10,491,668 $ 5,857,596
=========== ============ ============
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,
2003 2002 2001
------- -------- -------
Statutory rate 35.0% 35.0% 34.0%
State income tax effect 3.8 4.0 5.7
Amortization of goodwill - - 14.2
Change in estimate of income tax
liabilities 0.3 0.4 2.4
Other 0.3 0.4 1.1
------- ------- -------
39.4% 39.8% 57.4%
======= ======= =======
The components of the deferred tax assets consist of the following:
March 31,
2003 2002
----------- -----------
Deferred income tax assets
(liabilities), current:
Vacation accruals $ 495,160 $ 532,816
Inventory 110,913 69,490
Allowance for doubtful accounts 168,141 542,753
Product returns 1,238,155 1,237,730
Incentive programs 1,991,821 1,312,059
Other (142,258) (137,523)
----------- -----------
3,861,932 3,557,325
----------- -----------
Deferred income tax assets
(liabilities), noncurrent:
Deferred compensation agreements 114,192 103,955
Goodwill amortization 692,739 1,843,312
Covenant not to compete 1,309,811 1,384,571
Fixed assets (423,383) -
Unrealized losses on derivatives 321,016 403,045
---------- ----------
2,014,375 3,734,883
---------- ----------
$5,876,307 $7,292,208
========== ==========
The non-current portion of deferred tax assets (liabilities) is classified
in other assets (liabilities).
44
K. 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, 2003, 2002, and 2001 were
approximately $1.0 million, $0.9 million, and $0.8 million, respectively.
L. 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 as of March 31, 2003 and
2002.
M. 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 53,771 shares of NBC's Class A Common Stock to selected
members of senior management of NBC and its affiliates. All options granted were
nonqualified stock options, although the plan also provides for incentive stock
options. NBC granted a portion of the available options in fiscal years
2001-2003 upon the attainment of pre-established financial targets. Generally,
twenty-five percent of the options granted became 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,
2003, there were no options available for grant under the plan.
1998 STOCK OPTION PLAN - This plan provides for the granting of options to
purchase 29,229 shares of NBC's Class A Common Stock to selected employees,
officers, and directors of NBC and its affiliates. All options granted were
nonqualified stock options, although the plan also provides for incentive stock
options. NBC granted such options at the discretion of a committee designated by
the Board of Directors (the Committee). Generally, twenty-five percent of the
options granted became 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, 2003, there were no
options available for grant under the plan.
No compensation cost was recognized for the options granted to employees in
fiscal 2003, 2002, and 2001 as the exercise price was greater than or equal to
the estimated fair value (including a discount for the holder's minority
interest position and illiquidity of the Class A Common Stock) of NBC'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.
45
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, 2003 is
as follows:
Year Ended March 31,
2003 2002 2001
------------------ ----------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
-------- --------- -------- -------- --------- ---------
1998 Performance Stock
Option Plan:
Outstanding - beginning of
year 40,771 $ 52.47 22,530 $52.47 9,530 $52.47
Granted 13,825 107.39 18,241 52.47 13,000 52.47
Expired/terminated (825) (76.80) - - - -
Exercised (875) (60.12) - - - -
--------- -------- -------- -------- --------- --------
Outstanding - end of year 52,896 $ 66.32 40,771 $52.47 22,530 $52.47
========= ======== ======== ======== ========= ========
1998 Stock Option Plan:
Outstanding - beginning of
year 27,094 $ 52.47 28,094 $52.47 24,694 $52.47
Granted 2,135 106.00 - - 3,400 52.47
Expired/terminated - - (1,000) (52.47) - -
Exercised - - - - - -
--------- -------- -------- -------- --------- --------
Outstanding - end of year 29,229 $ 56.38 27,094 $52.47 28,094 $52.47
========= ======== ======== ======== ========= ========
1998 Performance
Stock Option Plan 1998 Stock Option Plan
------------------- ----------------------------
Weighted- Weighted-
Average Average
Remaining Remaining
Contractual Contractual Exercise
Number Life (Yrs) Number Life (Yrs) Price
------------------ -------- ---------- ---------
Outstanding - March 31, 2003:
Exercise price of $52.47 39,571 7.4 27,094 6.2 $ 52.47
Exercise price of $106 12,500 9.3 2,135 9.3 106.00
Exercise price of $129.30 825 9.8 - - 129.30
--------- -------- -------- --------
Weighted-average 52,896 7.9 29,229 6.4
========= ======== ======== ========
Exercisable - March 31, 2003:
Exercise price of $52.47 27,652 7.1 26,294 6.2 $ 52.47
Exercise price of $106 3,127 9.3 534 9.3 106.00
Exercise price of $129.30 206 9.8 - - 129.30
--------- -------- -------- --------
Weighted-average 30,985 7.3 26,828 6.2
========= ======== ======== ========
Outstanding as of March 31:
2002 40,771 8.4 27,094 7.2 $ 52.47
2001 22,530 8.7 28,094 8.2 52.47
Exercisable as of March 31:
2002 20,592 7.8 22,596 7.1 $ 52.47
2001 10,398 8.2 16,472 8.0 52.47
46
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 2003, 2002, and 2001
would have been $14.35, $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 2003 and 2001 would have been $14.51 and $7.68 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, 2003 March 31, 2002 March 31, 2001
-------------- -------------- --------------
Risk-free interest rate 3.68% 3.71% 6.26%
Dividend yield - - -
Expected volatility 1.00% 1.00% 1.00%
Expected life (years) 4.0 1.5 3.0
N. 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: Textbook Division, Bookstore Division and Complementary Services
Division. The Textbook Division 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 Bookstore Division segment encompasses the operating
activities of the Company's 109 college bookstores as of March 31, 2003 located
on or adjacent to college campuses. The Complimentary Services Division segment
includes book-related services such as distance education materials, computer
hardware and software, and a centralized buying service.
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, property and equipment, 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.
47
The following table provides selected information about profit or loss and
assets on a segment basis for the three years ended March 31, 2003.
Complementary
Textbook Bookstore Services
Division Division Division Total
------------- ------------- ------------ -------------
Year ended March 31, 2003:
External customer revenues $ 111,365,802 $ 216,026,871 $ 43,117,176 $ 370,509,849
Intersegment revenues 21,440,901 916,262 887,680 23,244,843
Depreciation and amortization
expense 671,628 2,141,544 646,287 3,459,459
Earnings Before Interest,
Taxes, Depreciation, and
Amortization (EBITDA) 33,915,223 26,992,497 2,041,093 62,948,813
Total assets 49,444,007 67,572,172 13,852,133 130,868,312
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 462,448 2,241,941 633,863 3,338,252
Earnings Before Interest, Taxes,
Depreciation, and Amortization
(EBITDA) 31,290,952 22,399,279 696,335 54,386,566
Total assets 51,431,071 67,387,725 13,720,897 132,539,693
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 509,541 9,577,941 1,489,371 11,576,853
Earnings Before Interest, Taxes,
Depreciation, and Amortization
(EBITDA) 27,534,524 18,636,044 73,248 46,243,816
Total assets 46,879,332 60,818,814 9,680,805 117,378,951
48
The following table reconciles segment information presented above with
consolidated information as presented in the Company's consolidated financial
statements for the three years ended March 31, 2003.
Year Ended March 31,
2003 2002 2001
------------ ------------- -------------
Revenues:
Total for reportable segments $393,754,692 $362,386,520 $322,510,255
Elimination of intersegment revenues (23,244,843) (23,470,111) (20,841,402)
------------- ------------- -------------
Consolidated total $370,509,849 $338,916,409 $301,668,853
============= ============= =============
Depreciation and Amortization Expense:
Total for reportable segments $ 3,459,459 $ 3,338,252 $ 11,576,853
Corporate administration 172,541 253,450 1,825,048
------------- ------------- -------------
Consolidated total $ 3,632,000 $ 3,591,702 $ 13,401,901
============= ============= =============
Income Before Income Taxes:
Total EBITDA for reportable segments $ 62,948,813 $ 54,386,566 $ 46,243,816
Corporate administrative costs (7,318,023) (7,316,701) (5,774,175)
------------- ------------- -------------
55,630,790 47,069,865 40,469,641
Depreciation and amortization (3,632,000) (3,591,702) (13,401,901)
------------ ------------- -------------
Consolidated income from operations 51,998,790 43,478,163 27,067,740
Interest and other expense, net (14,007,664) (17,150,188) (16,871,307)
------------ ------------- -------------
Consolidated income before
income taxes $ 37,991,126 $ 26,327,975 $ 10,196,433
============ ============= =============
Total Assets:
Total for reportable segments $130,868,312 $132,539,693 $117,378,951
Assets not allocated to segments:
Cash and cash equivalents 34,276,049 6,798,602 1,170
Receivables 13,967,352 12,130,650 15,389,112
Recoverable income taxes - - 706,408
Deferred income taxes 3,861,932 3,557,325 1,862,166
Property and equipment, net 534,598 507,927 473,845
Goodwill 16,770,574 16,770,574 16,770,574
Debt issue costs, net 4,142,416 5,403,342 7,036,842
Other assets 3,241,143 4,591,241 5,115,312
Other 803,306 494,217 401,233
------------ ------------- -------------
Consolidated total $208,465,682 $182,793,571 $165,135,613
============ ============= =============
EBITDA is defined as earnings before interest, taxes, depreciation, and
amortization. As the Company is highly-leveraged and as the Company's equity
is not publicly-traded, management believes that EBITDA is useful in
measuring its liquidity and provides additional information for determining
its ability to meet debt service requirements. The Senior Subordinated Notes
and Senior Credit Facility also utilize EBITDA, as defined in those
agreements, for certain financial covenants. EBITDA does not represent and
should not be considered as an alternative to net cash flows from operating
activities as determined by accounting principles generally accepted in the
United States of America, and EBITDA does not necessarily indicate whether
cash flows will be sufficient for cash requirements. Items excluded from
EBITDA, such as interest, taxes, 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.
49
The following presentation reconciles EBITDA with net cash flows from
operating activities as presented in the Consolidated Statements of Cash
Flows:
Year Ended March 31,
2003 2002 2001
------------- ------------- -------------
EBITDA $55,630,790 $47,069,865 $40,469,641
Adjustments to reconcile EBITDA to
net cash flows from operating
activities:
Interest income 360,448 399,573 615,430
Provision for losses on
accounts receivable 451,578 1,629,704 434,070
Cash paid for interest (13,549,099) (15,224,920) (16,000,970)
Cash paid for income taxes (14,533,352) (4,062,737) (6,018,273)
(Gain) Loss on disposal of assets 35,428 (482,810) 59,627
Changes in operating assets and
liabilities,net of effect of
acquistions/disposals(1) 8,935,820 1,709,245 (10,720,798)
------------- ------------- -------------
Net Cash Flows from
Operating Activities $37,331,613 $31,037,920 $ 8,838,727
============= ============= =============
(1) Changes in operating assets and liabilities, net of effect of
acquisitions/disposals includes the changes in the balances of
receivables, inventories, prepaid expenses and other assets, other
assets, accounts payable, accrued employee compensation and benefits,
accrued incentives, accrued expenses, deferred revenue, and other
long-term liabilities.
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.
O. 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 was extended for one year and expires
on May 10, 2004, reimburses the Company for certain direct costs incurred on
behalf of TheCampusHub.com, Inc. Prior to its amendment as described below, the
management service agreement also required TheCampusHub.com, Inc. to pay the
Company $0.5 million per year for certain shared management and administrative
support. Complementary Services Division revenue resulting from the management
services agreement, including as amended, 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. Prior to
its amendment as described below, the technology sale and license agreement
required TheCampusHub.com, Inc to pay the Company $0.5 million per year over a
period of three years. The technology sale and license agreement also provides
TheCampusHub.com, Inc. with an option to purchase such software capabilities
from the Company during that three year period and was extended for one year,
expiring on May 10, 2004. The license fees were recognized as Complementary
Services Division revenue over the term of the agreement. For the years ended
March 31, 2003, 2002, and 2001, revenues attributable to the management services
and technology sale and license agreements totaled $0.3 million, $1.0 million,
and $0.9 million, respectively, and reimbursable direct costs incurred on behalf
of TheCampusHub.com, Inc. totaled $0.6 million, $0.8 million, and $0.9 million,
respectively.
50
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 fiscal 2002. While it remains a viable business
and is funding its own operations, it was not generating sufficient excess cash
flow to fund its obligations under the aforementioned agreements and the
remaining capital available from its shareholders was reserved to fund strategic
development opportunities and, if required, ongoing operations. As a result, on
March 31, 2002 the Company established a reserve of approximately $1.0 million
on net amounts due from TheCampusHub.com, Inc. and ultimately wrote-off
approximately $1.0 million of net amounts due during fiscal 2003. Net amounts
due from TheCampusHub.com, Inc. at March 31, 2003 and 2002 totaled $0.1 million
and $0.2 million, respectively. Effective April 1, 2002, the management services
and technology sale and license agreements were amended, eliminating the annual
licensing fee and reducing the annual management services fee for certain shared
management and administrative support to $0.3 million. 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
Textbook Division customers.
During fiscal 2003, the Company's former Vice President of Administration
and Secretary exercised vested options to purchase 750 shares of NBC's Class A
Common Stock under the 1998 Performance Stock Option Plan at an exercise price
of $52.47 per share ("Founder's Price") and 125 shares of NBC's Class A Common
Stock under the 1998 Performance Stock Option Plan at an exercise price of $106
per share. 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 2002, NBC issued 2,621 shares of its Class A Common Stock to
the Company's Senior Vice President of the Bookstore 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.
P. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Effective July 1, 2002, the Company's distance learning division was
separately incorporated under the laws of the State of Delaware as Specialty
Books, Inc., a wholly-owned subsidiary of the Company. In connection with its
incorporation, Specialty Books, Inc. has unconditionally guaranteed, on a joint
and several basis, full and prompt payment and performance of the Company's
obligations, liabilities, and indebtedness arising under, out of, or in
connection with the Senior Subordinated Notes. Specialty Books, Inc. is also a
party to the Guarantee and Collateral Agreement related to the Senior Credit
Facility. Condensed consolidating balance sheets, statements of operations, and
statements of cash flows are presented on the following pages which reflect
financial information for the parent company (Nebraska Book Company, Inc.),
subsidiary guarantor (Specialty Books, Inc.), consolidating eliminations, and
consolidated totals. Activity in the distance learning division prior to
incorporation on July 1, 2002 has been separately "carved out" and presented in
the subsidiary guarantor column.
51
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2003
- ------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
------------- ------------ ------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 39,269,385 $ 135,997 $ - $ 39,405,382
Receivables 35,523,170 1,234,423 (7,672,264) 29,085,329
Inventories 61,481,363 6,833,989 - 68,315,352
Deferred income taxes 3,861,932 - - 3,861,932
Prepaid expenses and other assets 803,306 30,978 - 834,284
------------- ------------ ------------- -------------
Total current assets 140,939,156 8,235,387 (7,672,264) 141,502,279
PROPERTY AND EQUIPMENT, net 27,113,167 553,203 - 27,666,370
GOODWILL 30,472,823 - - 30,472,823
OTHER ASSETS 9,749,964 17,077 (942,831) 8,824,210
------------- ------------ ------------- -------------
$208,275,110 $ 8,805,667 $(8,615,095) $208,465,682
============= ============ ============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 19,857,301 $ 7,672,264 $(7,672,264) $ 19,857,301
Accrued employee compensation
and benefits 10,470,043 172,670 - 10,642,713
Accrued interest 1,512,733 - - 1,512,733
Accrued incentives 5,518,883 - - 5,518,883
Accrued expenses 1,059,942 17,902 - 1,077,844
Income taxes payable 89,932 - - 89,932
Deferred revenue 538,230 - - 538,230
Current maturities of long-term debt 19,181,277 - - 19,181,277
Current maturities of capital lease
obligations 124,703 - - 124,703
------------- ------------ ------------- -------------
Total current liabilities 58,353,044 7,862,836 (7,672,264) 58,543,616
LONG-TERM DEBT, net of current
maturities 121,755,713 - - 121,755,713
CAPITAL LEASE OBLIGATIONS,
net of current maturities 2,305,583 - - 2,305,583
OTHER LONG-TERM LIABILITIES 300,823 - - 300,823
DUE TO PARENT 12,371,846 - - 12,371,846
COMMITMENTS
STOCKHOLDER'S EQUITY 13,188,101 942,831 (942,831) 13,188,101
------------- ------------ ------------- -------------
$208,275,110 $ 8,805,667 $(8,615,095) $208,465,682
============= ============ ============= =============
52
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2002
- -----------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
-------------- ------------ ------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,383,149 $ 36,128 $ - $ 11,419,277
Receivables 36,621,617 1,389,735 (8,627,103) 29,384,249
Inventories 63,234,722 6,673,692 - 69,908,414
Deferred income taxes 3,557,325 - - 3,557,325
Prepaid expenses and other assets 494,217 4,223 - 498,440
------------- ------------ ------------- -------------
Total current assets 115,291,030 8,103,778 (8,627,103) 114,767,705
PROPERTY AND EQUIPMENT, net 25,953,871 525,044 - 26,478,915
GOODWILL 29,791,335 - - 29,791,335
OTHER ASSETS 11,643,820 17,077 94,719 11,755,616
------------- ------------ ------------- -------------
$182,680,056 $ 8,645,899 $(8,532,384) $182,793,571
============= ============ ============= =============
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 15,084,077 $ 8,627,103 $(8,627,103) $ 15,084,077
Accrued employee compensation and benefits 8,810,618 100,284 - 8,910,902
Accrued interest 1,547,199 - - 1,547,199
Accrued incentives 3,595,628 - - 3,595,628
Accrued expenses 1,047,738 13,231 - 1,060,969
Income taxes payable 3,684,439 - - 3,684,439
Deferred revenue 432,790 - - 432,790
Current maturities of long-term debt 4,476,156 - - 4,476,156
Current maturities of capital
lease obligations 111,015 - - 111,015
------------- ------------ ------------- -------------
Total current liabilities 38,789,660 8,740,618 (8,627,103) 38,903,175
LONG-TERM DEBT, net of current maturities 140,936,989 - - 140,936,989
CAPITAL LEASE OBLIGATIONS, net of
current maturities 2,052,286 - - 2,052,286
OTHER LONG-TERM LIABILITIES 1,892,250 - - 1,892,250
DUE TO PARENT 9,594,899 - - 9,594,899
COMMITMENTS
STOCKHOLDER'S DEFICIT (10,586,028) (94,719) 94,719 (10,586,028)
------------- ------------ ------------- -------------
$182,680,056 $ 8,645,899 $(8,532,384) $182,793,571
============= ============ ============= =============
53
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 2003
- ---------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
------------- ------------- ------------- -------------
REVENUES, net of returns $334,348,074 $36,263,160 $ (101,385) $370,509,849
COSTS OF SALES 199,552,780 25,060,555 (125,134) 224,488,201
------------- ------------- ------------- -------------
Gross profit 134,795,294 11,202,605 23,749 146,021,648
OPERATING EXPENSES (INCOME):
Selling, general and administrative 81,008,670 9,358,439 23,749 90,390,858
Depreciation 2,873,032 114,915 - 2,987,947
Amortization 644,053 - - 644,053
Equity in earnings of subsidiary (1,037,550) - 1,037,550 -
------------- ------------- ------------- -------------
83,488,205 9,473,354 1,061,299 94,022,858
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS 51,307,089 1,729,251 (1,037,550) 51,998,790
OTHER EXPENSES (INCOME):
Interest expense 14,212,281 - - 14,212,281
Interest income (360,448) - - (360,448)
Loss on derivative financial instruments 155,831 - - 155,831
------------- ------------- ------------- -------------
14,007,664 - - 14,007,664
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 37,299,425 1,729,251 (1,037,550) 37,991,126
INCOME TAX EXPENSE 14,293,091 691,701 - 14,984,792
------------- ------------- ------------- -------------
NET INCOME $ 23,006,334 $ 1,037,550 $(1,037,550) $ 23,006,334
============= ============= ============= =============
54
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 2002
- --------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
------------- ------------- ------------ ------------
REVENUES, net of returns $310,790,246 $28,232,663 $ (106,500) $338,916,409
COSTS OF SALES 187,614,539 19,483,995 (122,818) 206,975,716
------------- ------------ ------------ ------------
Gross profit 123,175,707 8,748,668 16,318 131,940,693
OPERATING EXPENSES (INCOME):
Selling, general and administrative 77,394,546 7,459,964 16,318 84,870,828
Depreciation 2,938,438 148,796 - 3,087,234
Amortization 504,468 - - 504,468
Equity in earnings of subsidiary (683,945) - 683,945 -
------------- ------------ ------------ ------------
80,153,507 7,608,760 700,263 88,462,530
------------- ------------ ------------ ------------
INCOME FROM OPERATIONS 43,022,200 1,139,908 (683,945) 43,478,163
OTHER EXPENSES (INCOME):
Interest expense 17,189,316 - - 17,189,316
Interest income (399,573) - - (399,573)
Loss on derivative financial instruments 360,445 - - 360,445
------------- ------------ ------------ ------------
17,150,188 - - 17,150,188
------------- ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 25,872,012 1,139,908 (683,945) 26,327,975
INCOME TAX EXPENSE 10,035,705 455,963 - 10,491,668
------------- ------------ ------------ ------------
NET INCOME $ 15,836,307 $ 683,945 $ (683,945) $ 15,836,307
============= ============ ============ ============
55
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 2001
- -------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
------------- ------------ ------------ ------------
REVENUES, net of returns $283,631,518 $ 18,123,092 $ (85,757) $301,668,853
COSTS OF SALES 174,262,683 12,929,179 (92,892) 187,098,970
------------ ------------ ------------ ------------
Gross profit 109,368,835 5,193,913 7,135 114,569,883
OPERATING EXPENSES (INCOME):
Selling, general and administrative 68,671,336 5,421,771 7,135 74,100,242
Depreciation 2,884,975 71,160 - 2,956,135
Amortization 10,401,348 44,418 - 10,445,766
Equity in loss of subsidiary 223,829 - (223,829) -
------------ ------------ ------------ ------------
82,181,488 5,537,349 (216,694) 87,502,143
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 27,187,347 (343,436) 223,829 27,067,740
OTHER EXPENSES (INCOME):
Interest expense 17,486,737 - - 17,486,737
Interest income (615,430) - - (615,430)
------------ ------------ ------------ ------------
16,871,307 - - 16,871,307
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 10,316,040 (343,436) 223,829 10,196,433
INCOME TAX EXPENSE (BENEFIT) 5,977,203 (119,607) - 5,857,596
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 4,338,837 $ (223,829) $ 223,829 $ 4,338,837
============ ============ ============ ============
56
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 2003
- -----------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
------------- ----------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES $37,088,670 $ 242,943 $ - $37,331,613
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,563,701) (144,032) - (3,707,733)
Bookstore acquisitions, net of cash acquired (1,389,338) - - (1,389,338)
Proceeds from sale of property and
equipment and other 18,685 958 - 19,643
Software development costs (249,644) - - (249,644)
------------ ------------ ------------- -------------
Net cash flows from investing activities (5,183,998) (143,074) - (5,327,072)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of financing costs (32,446) - - (32,446)
Principal payments on long-term debt (4,476,155) - - (4,476,155)
Principal payments on capital
lease obligations (114,524) - - (114,524)
Capital contributions 604,689 - - 604,689
------------ ------------ ------------- -------------
Net cash flows from financing activities (4,018,436) - - (4,018,436)
------------ ------------ ------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 27,886,236 99,869 - 27,986,105
CASH AND CASH EQUIVALENTS, Beginning of year 11,383,149 36,128 - 11,419,277
------------ ------------ ------------- -------------
CASH AND CASH EQUIVALENTS, End of year $39,269,385 $ 135,997 $ - $39,405,382
============ ============ ============= =============
57
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 2002
- ------------------------------------------------ ------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
-------------- ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES $30,966,168 $ 71,752 $ - $ 31,037,920
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,222,115) (54,777) - (2,276,892)
Bookstore acquisitions, net of cash acquired (6,109,599) - - (6,109,599)
Proceeds from sale of bookstores 1,139,400 - - 1,139,400
Proceeds from sale of property and
equipment and other 49,487 - - 49,487
Software development costs (418,463) - - (418,463)
------------ ------------ ------------ -------------
Net cash flows from investing activities (7,561,290) (54,777) - (7,616,067)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (16,308,445) - - (16,308,445)
Principal payments on capital lease obligations (117,388) - - (117,388)
Capital contributions 13,752 - - 13,752
------------ ------------ ------------ -------------
Net cash flows from financing activities (16,412,081) - - (16,412,081)
------------ ------------ ------------ -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,992,797 16,975 - 7,009,772
CASH AND CASH EQUIVALENTS, Beginning of year 4,390,352 19,153 - 4,409,505
------------ ------------ ------------ -------------
CASH AND CASH EQUIVALENTS, End of year $11,383,149 $ 36,128 $ - $ 11,419,277
============ ============ ============ =============
58
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 2001
- ----------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
------------- ------------ ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES $ 8,868,850 $ (30,123) $ - $ 8,838,727
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,730,647) (28,363) - (1,759,010)
Bookstore acquisitions, net of cash acquired (2,975,332) - - (2,975,332)
Proceeds from sale of property and
equipment and other 144,834 - - 144,834
Software development costs (403,996) - - (403,996)
------------ ------------ ------------- -------------
Net cash flows from investing activities (4,965,141) (28,363) - (4,993,504)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (4,456,324) - - (4,456,324)
Principal payments on capital lease obligations (72,320) - - (72,320)
Capital contributions 642,039 - - 642,039
------------ ------------ ------------- -------------
Net cash flows from financing activities (3,886,605) - - (3,886,605)
------------ ------------ ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,104 (58,486) - (41,382)
CASH AND CASH EQUIVALENTS, Beginning of year 4,373,248 77,639 - 4,450,887
------------ ------------ ------------- -------------
CASH AND CASH EQUIVALENTS, End of year $ 4,390,352 $ 19,153 $ - $ 4,409,505
============ ============ ============= =============
59
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, 2003.
60
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
Wyche H. Walton 37 Director
Todd D. Robichaux 38 Director
Michael F. Cronin 49 Director
Mark L. Bono 43 Director
Mark W. Oppegard 53 Chief Executive Officer, President and Director
Barry S. Major 46 Chief Operating Officer
Alan G. Siemek 42 Chief Financial Officer, Senior Vice President of
Finance and Administration, Treasurer, and
Assistant Secretary
William H. Allen 60 Senior Vice President of Textbook Division
Robert A. Rupe 55 Senior Vice President of Bookstore Division
Michael J. Kelly 45 Senior Vice President of Distance
Learning/Marketing Services and Other
Complementary Services
Thomas A. Hoff 55 Vice President of Retail Development
Larry R. Rempe 55 Vice President of Information Systems
Kenneth F. Jirovsky 59 Vice President of Development
Cynthia L. Morris 46 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 AMN Healthcare Services, Inc. and Playtex Products, Inc.
WYCHE H. WALTON became a Director of the Company and NBC upon the
consummation of the Weston Presidio Transaction in fiscal 2003. Mr. Walton has
been Senior Vice President of Haas Wheat & Partners, L.P. (a private investment
firm specializing in leveraged transactions) since 1995. Previously, Mr. Walton
was a Vice President of McGarr Capital Management (a private investment firm)
from 1994 to 1995. Mr. Walton also currently serves as a director of Playtex
Products, Inc.
61
TODD D. ROBICHAUX became a Director of the Company and NBC upon the
consummation of the Weston Presidio Transaction in fiscal 2003. Mr. Robichaux
has been Senior Vice President of Haas Wheat & Partners, L.P. since 1998; and
with Wells Fargo Bank from 1988 to 1998 where he most recently served as a vice
president of structured finance.
MICHAEL F. CRONIN became a Director of the Company and NBC upon the
consummation of the Weston Presidio Transaction in fiscal 2003. Mr. Cronin
co-founded Weston Presidio, a private equity firm, in 1991 and is a managing
member of the general partners of the Weston Funds. Mr. Cronin also serves as a
Director of Tekni-Plex, Inc. and Tweeter Home Entertainment, Inc. as well as a
number of the Weston Funds' portfolio companies.
MARK L. BONO became a Director of the Company and NBC upon the consummation
of the Weston Presidio Transaction in fiscal 2003. Mr. Bono joined Weston
Presidio in 1999 and is a member of the general partners of the Weston Funds.
Prior to 1999, Mr. Bono served in various positions at Tucker Anthony, an
investment banking firm, including Managing Director and Co-Head of Mergers and
Acquisitions. Mr. Bono also serves as a Director of Trimark Sportswear Group and
Herald Media.
MARK W. OPPEGARD has served in the college bookstore industry for 33 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 Bookstore Division.
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.
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 38 years
(of which 29 have been with the Company). The Company named Mr. Allen the Senior
Vice President of the Textbook 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 Textbook Division. Prior to joining the Company in
1974, Mr. Allen was employed by the Missouri Store Company, a predecessor of
MBS.
62
ROBERT A. RUPE was named Senior Vice President of the Bookstore 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 33 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 16 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 the Bookstore Division for the Company. Mr. Hoff
served as an assistant to the Vice President of the Bookstore Division between
1987 and 1992.
LARRY R. REMPE has served in the college bookstore industry for 17 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 42
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
Textbook Division.
CYNTHIA L. MORRIS was named Vice President of Administration and Secretary
of the Company in January, 2003 after having served as the Executive Director
and the Director of Finance of TheCampusHub.com, Inc. since November 2002 and
January 2001, respectively. Prior to joining TheCampusHub.com, Inc., Ms. Morris
served as the Director of Finance and Accounting of the Dental Division of
InfoCure Inc., a national provider of practice management software applications,
from November 1999 to October 2000, and as the Corporate Treasurer and Corporate
Controller of Cohesive Technology Solutions, Inc., a national computer service
integration and consulting corporation, from April 1997 to October 1999. Prior
to 1997, Ms. Morris was self-employed as a financial consultant, served as the
Controller and Treasurer of HealthCare Communications, Inc., a developer of
office management software, and also spent twelve years in public accounting
with KPMG Peat Marwick LLP in their Lincoln, Nebraska office.
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
63
Executive Officer and to the four other most highly compensated executive
officers earning in excess of $100,000 in annual salary and bonuses;
compensation paid to Directors; and employment contracts in place with executive
officers.
The table presented below summarizes annual and long-term compensation,
including stock compensation, to such persons for the last three fiscal years:
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
---------------------- -----------
Number
of Securities
Fiscal Underlying All Other
Name and Principal Position Year Salary Bonus Options (1) Compensation (2)
- ---------------------------- ----- ---------- ---------- ----------- ---------------
Mark W. Oppegard - Chief
Executive Officer, President,
and Director 2003 $ 276,923 $ 280,000 2,675 $ 2,573
2002 253,731 236,000 2,900 2,962
2001 246,731 138,000 3,050 4,928
Barry S. Major - Chief
Operating Officer 2003 247,077 250,000 2,500 2,477
2002 235,539 215,000 2,600 2,430
2001 219,231 118,000 2,650 2,120
Alan G. Siemek - Chief
Financial Officer, Senior
Vice President of Finance
and Administration,
Treasurer, and Assistant
Secretary 2003 181,885 160,000 1,375 2,417
2002 173,923 120,000 2,100 2,430
2001 161,923 97,000 1,875 2,120
Michael J. Kelly - Senior
Vice President of Distance
Learning/Marketing Services
and Other Complementary
Services 2003 169,731 130,000 1,375 2,477
2002 - 120,000 1,150 -
2001 5,769 - 525 -
Robert A. Rupe - Senior Vice
President of Bookstore
Division 2003 142,750 146,500 1,250 2,813
2002 128,704 135,000 5,241 2,312
2001 - - - -
(1) The fiscal 2003 stock options were granted at an exercise price of
$106/share, while fiscal 2002 and 2001 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 or equal to the exercise price
on the date of grant. The estimated fair market value for stock options
granted in fiscal 2003 was based upon the Weston Presidio Transaction
and the estimated fair market value for stock options granted in fiscal
2002 was based upon an independent valuation of the Class A Common Stock
performed during fiscal 2002.
64
(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 Mr. Oppegard, balances also include the dollar value, if
any, of above-market amounts earned on deferred compensation. Such
amounts totaled $376 and $2,652 for 2002 and 2001, respectively.
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, 2003:
Options Granted During the Year Ended March 31, 2003
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 2003 Per Share Date (1) Value (2)
- ------------------------------ --------- --------- -------- --------- ---------
Mark W. Oppegard - Chief
Executive Officer, President,
and Director 2,675 16.8% $ 106.00 06/20/12 $ 38,814
Barry S. Major - Chief
Operating Officer 2,500 15.7% $ 106.00 06/20/12 36,275
Alan G. Siemek - Chief
Financial Officer, Senior
Vice President of Finance
and Administration,
Treasurer, and Assistant
Secretary 1,375 8.6% $ 106.00 06/20/12 19,951
Michael J. Kelly - Senior
Vice President of Distance
Learning/Marketing Services
and Other Complementary
Services 1,375 8.6% $ 106.00 06/20/12 19,951
Robert A. Rupe - Senior Vice
President of Bookstore
Division 1,250 7.8% $ 106.00 06/20/12 18,138
(1) Twenty-five percent of the options granted were exercisable immediately
upon granting on June 20, 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 3.75% risk-free interest rate, 1.0% expected
volatility, and an expected life of approximately 4.0 years.
65
The following table provides information concerning each exercise of stock
options by certain executive officers of the Company during the year ended March
31, 2003 as well as the value of unexercised options as of March 31, 2003:
Aggregated Option Exercises During the Year Ended March 31, 2003
and Option Value as of March 31, 2003
Number
of Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Options at Options at
March 31, 2003 March 31, 2003 (1)
------------- -----------------
Shares
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- ------------------------------ ----------- -------- ------------- -----------------
Mark W. Oppegard - Chief
Executive Officer, President,
and Director - $ - 4,407/4,218 $328,321/$241,143
Barry S. Major - Chief
Operating Officer - $ - 13,443/3,837 1,077,322/ 216,675
Alan G. Siemek - Chief
Financial Officer, Senior
Vice President of Finance
and Administration,
Treasurer, and Assistant
Secretary - $ - 9,153/2,550 737,915/ 155,524
Michael J. Kelly - Senior
Vice President of Distance
Learning/Marketing Services
and Other Complementary
Services - $ - 6,554/1,737 523,140/ 88,344
Robert A. Rupe - Senior Vice
President of Bookstore
Division - $ - 2,934/3,557 225,683/ 243,761
(1) Represents the excess of the March 31, 2003 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 weighted-average
exercise price, which ranged from $54.48/share to $60.60/share for
exercisable options and $66.57/share to $84.24/share for unexercisable
options. The estimated fair market value was based upon the Weston
Presidio Transaction in fiscal 2003.
COMPENSATION OF DIRECTORS AND ADDITIONAL INFORMATION
Directors of the Company receive no compensation for services but are
reimbursed for out-of-pocket expenses. Certain of 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 eight other
executive officers of the Company. Such agreements (the "Employment Agreements")
with the aforementioned 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
66
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, $285,000 per annum; Mr. Major, $254,000
per annum; Mr. Siemek, $186,500 per annum; Mr. Kelly, $181,000 per annum; and
Mr. Rupe, $146,500 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.
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.
67
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 May 30, 2003 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 (5)
- ----------------------------------------------------- ------------ ---------
Class A Common Stock:
Owning Greater Than 5% of Shares:
HWH Capital Partners, L.P. (2) 534,117 42.2%
HWH Cornhusker Partners, L.P. (3) 230,927 18.3%
Weston Presidio Capital IV, L.P. (4) 286,156 22.6%
Weston Presidio Capital III, L.P. (4) 120,291 9.5%
WPC Entrepreneur Fund, L.P. (4) 5,935 0.5%
WPC Entrepreneur Fund II, L.P. (4) 4,530 0.4%
Ownership of Directors:
Robert B. Haas (2) (3) 765,044 60.5%
Douglas D. Wheat (2) (3) - -
Wyche H. Walton (2) (3) - -
Todd D. Robichaux (2) - -
Michael F. Cronin (4) 416,912 33.0%
Mark L. Bono (4) - -
Ownership of Executive Officers Named in Item 11:
Mark W. Oppegard 20,254 1.6%
Barry S. Major 17,159 1.3%
Alan G. Siemek 10,893 0.9%
Michael J. Kelly 7,278 0.6%
Robert A. Rupe 4,052 0.3%
Ownership of Directors and All Executive Officers
as a Group 1,286,563 98.2%
(1) Beneficial ownership is determined in accordance with the rules of the
SEC and includes voting and investment power with respect to the shares
of NBC Acquisition Corp. Class A Common Stock. Such shares include
shares underlying nonqualified stock options exercisable within sixty
days, as follows: Mr. Oppegard - 5,076 shares; Mr. Major - 14,068
shares; Mr. Siemek - 9,497 shares; Mr. Kelly - 6,898 shares; Mr. Rupe -
3,246 shares; and 45,704 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
68
a corporation controlled by Mr. Haas. Mr. Wheat is a stockholder and
officer of the corporation. Messrs. Walton and Robichaux are officers of
the corporation. The address of HWH Capital Partners, L.P. and of
Messrs. Haas, Wheat, Walton, and Robichaux 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. Mr. Walton is an officer of the corporation.
The address of HWH Cornhusker Partners, L.P. and of Messrs. Haas, Wheat,
and Walton is 300 Crescent Court, Suite 1700, Dallas, Texas 75201.
(4) The sole general partner of Weston Presidio Capital IV, L.P., Weston
Presidio Capital III, L.P., WPC Entrepreneur Fund, L.P., and WPC
Entrepreneur Fund II, L.P. (the "Weston Presidio Funds") is a limited
partnership whose sole general partner is a limited liability company of
which Mr. Cronin is a managing member and Mr. Bono is a member. Messrs.
Cronin and Bono disclaim beneficial ownership of the shares held by the
Weston Presidio Funds, except to the extent of their respective
pecuniary interests therein. The address of the Weston Presidio Funds,
and Messrs. Cronin and Bono is 200 Clarendon Street, 50th Floor, Boston,
Massachusetts 02116.
(5) The percentages are calculated based upon 1,264,546 shares of NBC
Acquisition Corp. Class A Common Stock outstanding as of May 30, 2003
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 consolidated financial
statements found in Item 8, Financial Statements and Supplementary Data.
Specific information as of March 31, 2003 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 52,896 $ 66.32 -
1998 Stock Option Plan 29,229 56.38 -
---------------- ------------ -------------
Total 82,125 $ 62.78 -
================ ============ =============
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 was extended for
one year and expires on May 10, 2004, reimburses the Company for certain direct
costs incurred on behalf of TheCampusHub.com, Inc. Prior to its amendment as
described below, the management service agreement also required
TheCampusHub.com, Inc. to pay the Company $0.5 million per year for certain
shared management and administrative support. The technology sale and license
69
agreement provides for the Company to license its E-commerce software
capabilities to TheCampusHub.com, Inc. Prior to its amendment as described
below, the technology sale and license agreement required TheCampusHub.com, Inc.
to pay the Company $0.5 million per year over a period of three years. The
technology sale and license agreement also provides TheCampusHub.com, Inc. with
an option to purchase such software capabilities from the Company during that
three year period and was extended for one year, expiring on May 10, 2004.
For the year ended March 31, 2003, revenues attributable to the management
services and technology sale and license agreements totaled $0.3 million, and
reimbursable direct costs incurred on behalf of TheCampusHub.com, Inc. totaled
$0.6 million. Additionally, Messrs. Haas, Wheat, and Oppegard serve as Directors
of TheCampusHub.com, Inc. and Messrs. Major, Siemek, and Kelly serve as
executive officers of TheCampusHub.com, Inc. As of March 31, 2003, Messrs.
Oppegard, Major, Siemek, and Kelly have been granted 13,900, 13,900, 9,690, 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 3.9% of TheCampusHub.com, Inc.'s outstanding
shares and options at March 31, 2003.
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 fiscal 2002. While it remains a viable business
and is funding its own operations, it was not generating sufficient excess cash
flow to fund its obligations under the aforementioned agreements and the
remaining capital available from its shareholders was reserved to fund strategic
development opportunities and, if required, ongoing operations. As a result, on
March 31, 2002 the Company established a reserve of approximately $1.0 million
on net amounts due from TheCampusHub.com, Inc. and ultimately wrote-off
approximately $1.0 million of net amounts due during fiscal 2003. Net amounts
due from TheCampusHub.com, Inc. at March 31, 2003 totaled $0.1 million.
Effective April 1, 2002, the management services and technology sale and license
agreements were amended, eliminating the annual licensing fee and reducing the
annual management services fee for certain shared management and administrative
support to $0.3 million. 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 Textbook Division customers.
INDEBTEDNESS OF MANAGEMENT - As of March 31, 2003, NBC reported notes
receivable from stockholders and associated interest receivable of approximately
$0.3 million and $4,000, respectively. Approximately $35,000 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, which were amended
and restated in July, 2002, mature in January, 2009 and bear interest at 5.25%.
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 the Bookstore 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 bearing interest at 5.25%
per year. The largest aggregate amount outstanding under this note at any time
during the year ended March 31, 2003 was approximately $270,000 and totaled
approximately $165,000 at March 31, 2003. 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 bearing interest at 5.25% per year. The largest aggregate amount
70
outstanding under this note at any time during the year ended March 31, 2003 was
approximately $174,000 and totaled approximately $74,000 at March 31, 2003. 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 bearing interest at 5.25% per year. The
largest aggregate amount outstanding under this note at any time during the year
ended March 31, 2003 was approximately $142,000 and totaled approximately
$20,000 at March 31, 2003. 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
bearing interest at 5.25% per year. The largest aggregate amount outstanding
under this note at any time during the year ended March 31, 2003 was
approximately $132,000 and totaled approximately $43,000 at March 31, 2003.
These notes were amended and restated in July, 2002 and mature between January,
2009 and January, 2010.
ITEM 14. CONTROLS AND PROCEDURES.
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's Chief
Executive Officer and Chief Financial Officer (its principal executive officer
and principal financial officer, respectively) have concluded, based on their
evaluation as of a date within 90 days prior to the date of filing of this
annual report, that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by it in reports
filed or submitted by it under the Securities Exchange Act of 1934, as amended,
is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and includes controls and procedures
designed to ensure that information required to be disclosed by it in such
reports is accumulated and communicated to the Company's management, including
its Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
(B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of the Company's Chief Executive
Officer and Chief Financial Officer's evaluation.
71
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, & REPORTS ON FORM 8-K.
(A) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
(1) Consolidated Financial Statements of Nebraska Book Company, Inc.
Index to Consolidated Financial Statements.
Independent Auditors' Report.
Consolidated Balance Sheets as of March 31, 2003 and 2002.
Consolidated Statements of Operations for the Years Ended March 31,
2003, 2002, and 2001.
Consolidated Statements of Stockholder's Equity (Deficit)
for the Years Ended March 31, 2003, 2002, and 2001.
Consolidated Statements of Cash Flows for the Years Ended March 31,
2003, 2002, and 2001.
Notes to Consolidated 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 10.10 through 10.29 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, 2003.
(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.
72
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.
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 Fourth Amendment and Waiver, dated as of June 4, 2002, to and
under the Credit Agreement, dated as of February 13, 1998, among
NBC Acquisition Corp., Nebraska Book Company, Inc., JPMorgan
Chase 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, 2002, is incorporated herein by
reference.
10.6 Supplemental Indenture, dated as of July 1, 2002, among
Specialty Books, Inc., Nebraska Book Company, Inc., and The Bank
of New York, as Trustee, filed as Exhibit 10.1 to Nebraska Book
Company, Inc. Form 10-Q for the quarter ended September 30,
2002, is incorporated herein by reference.
73
10.7 Assumption Agreement, dated as of July 1, 2002 between Specialty
Books, Inc. and JPMorgan Chase Bank, as Administrative Agent,
filed as Exhibit 10.2 to Nebraska Book Company, Inc. Form 10-Q
for the quarter ended September 30, 2002, is incorporated herein
by reference.
10.8 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.
10.9 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.
10.10 Form of Memorandum of Understanding, dated as of February 13,
1998 between NBC Acquisition Corp. and each of Mark W. Oppegard,
Bruce E. Nevius, Larry R. Rempe, Kenneth F. Jirovsky, William H.
Allen, Thomas A. Hoff and Ardean A. Arndt, filed as Exhibit 10.4
to Nebraska Book Company, Inc. Registration Statement on Form
S-4, as amended (File No. 333-48221), is incorporated herein by
reference.
10.11 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.
10.12 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, filed as Exhibit 10.9 to
Nebraska Book Company, Inc. Form 10-K for the year ended March
31, 2002, is incorporated herein by reference.
10.13 Amended and Restated Secured Promissory Note dated July 9, 2002
between NBC Acquisition Corp. and Barry S. Major, filed as
Exhibit 10.4 to Nebraska Book Company, Inc. Form 10-Q for the
quarter ended June 30, 2002, is incorporated herein by
reference.
10.14 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.
10.15 Addendum to the Memorandum of Understanding, dated as of July 1,
1999 between Nebraska Book Company, Inc. and Alan Siemek, dated
March 29, 2002, filed as Exhibit 10.11 to Nebraska Book Company,
Inc. Form 10-K for the year ended March 31, 2002, is
incorporated herein by reference.
10.16 Amended and Restated Secured Promissory Note dated July 9, 2002
between NBC Acquisition Corp. and Alan Siemek, filed as Exhibit
10.5 to Nebraska Book Company, Inc. Form 10-Q for the quarter
ended June 30, 2002, is incorporated herein by reference.
10.17 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.
74
10.18 Amended and Restated Secured Promissory Note dated July 9, 2002
between NBC Acquisition Corp. and Michael J. Kelly, filed as
Exhibit 10.6 to Nebraska Book Company, Inc. Form 10-Q for the
quarter ended June 30, 2002, is incorporated herein by
reference.
10.19 Memorandum of Understanding, dated as of April 17, 2001 between
Nebraska Book Company, Inc. and Robert Rupe, Senior Vice
President of the Bookstore 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.
10.20 Amended and Restated Secured Promissory Note dated July 9, 2002
between NBC Acquisition Corp. and Robert Rupe, filed as Exhibit
10.7 to Nebraska Book Company, Inc. Form 10-Q for the quarter
ended June 30, 2002, is incorporated herein by reference.
10.21 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.
10.22 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.
10.23 First Amendment, dated as of June 12, 2002, to the NBC
Acquisition Corp. 1998 Performance 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, 2002, is
incorporated herein by reference.
10.24 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.
10.25 First Amendment, dated as of June 12, 2002, to the NBC
Acquisition Corp. 1998 Stock Option Plan adopted June 30, 1998,
filed as Exhibit 10.3 to Nebraska Book Company, Inc. Form 10-Q
for the quarter ended June 30, 2002, is incorporated herein by
reference.
10.26 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.
10.27 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.
10.28 Amendment of Form of Deferred Compensation Agreement, dated
December 30, 2002, by and between Nebraska Book Company, Inc.
and each of Mark W. Oppegard, Larry R. Rempe and Thomas A. Hoff,
filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q
for the quarter ended December 31, 2002, is incorporated herein
by reference.
10.29 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.
75
10.30 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.
10.31 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.
10.32 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.
10.33 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.
10.34 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.
10.35 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.
10.36 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.
10.37 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.
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
76
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 consolidated
financial statements included herein.
The Company is not required to file reports with the Securities and Exchange
Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, but is filing this Annual Report on Form 10-K on a voluntary
basis.
77
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
May 30, 2003
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 /s/ Wyche H. Walton
- -------------------------------------------- -----------------------------
Mark W. Oppegard Wyche H. Walton
Chief Executive Officer, President, Director
and Director May 30, 2003
May 30, 2003
/s/ Alan G. Siemek /s/ Todd D. Robichaux
- -------------------------------------------- -----------------------------
Alan G. Siemek Todd D. Robichaux
Chief Financial Officer, Senior Vice President Director
of Finance and Administration, May 30, 2003
Treasurer, and Assistant Secretary
May 30, 2003
/s/ Robert B. Haas /s/ Michael F. Cronin
- -------------------------------------------- -----------------------------
Robert B. Haas Michael F. Cronin
Chairman and Director Director
May 30, 2003 May 30, 2003
/s/ Douglas D. Wheat /s/ Mark L. Bono
- -------------------------------------------- -----------------------------
Douglas D. Wheat Mark L. Bono
Director Director
May 30, 2003 May 30, 2003
78
CERTIFICATIONS
I, Mark W. Oppegard, certify that:
1. I have reviewed this annual report on Form 10-K of Nebraska Book Company,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
May 30, 2003
/s/ Mark W. Oppegard
--------------------------------------
Mark W. Oppegard
Chief Executive Officer, President and
Director
79
I, Alan G. Siemek, certify that:
1. I have reviewed this annual report on Form 10-K of Nebraska Book Company,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
May 30, 2003
/s/ Alan G. Siemek
----------------------------------------------
Alan G. Siemek
Chief Financial Officer, Senior Vice President
of Finance and Administration, Treasurer and
Assistant Secretary
80
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, 2003
has been, or will be, sent to security holders.
81
FINANCIAL STATEMENT SCHEDULES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Nebraska Book Company, Inc.
Lincoln, Nebraska
We have audited the consolidated financial statements of Nebraska Book
Company, Inc. (a wholly-owned subsidiary of NBC Acquisition Corp.) and
subsidiary as of March 31, 2003 and 2002 and for each of the three years in the
period ended March 31, 2003, and have issued our report thereon dated May 27,
2003; 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
consolidated 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 27, 2003
82
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, 2003
Allowance for doubtful accounts $ 1,429,803 $ 451,578 $ - $(1,438,439) $ 442,942
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
83
EXHIBIT INDEX
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
84