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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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to___________.
COMMISSION FILE NUMBER 333-48225
NBC ACQUISITION CORP.
(Exact name of registrant as specified in our charter)
DELAWARE 47-0793347
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4700 SOUTH 19TH STREET
LINCOLN, NE 68501-0529
(Address of Principal executive offices)
(402) 421-7300 (Registrant's telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] No [ ]
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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] NO [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 549,254 SHARES OF CLASS A COMMON STOCK OUTSTANDING AS OF JUNE 25,
2004.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Total Number of Pages: 100
Exhibit Index: PAGE 94
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TABLE OF CONTENTS
PART I:
Item 1 Business..........................................................3
Item 2 Properties.......................................................12
Item 3 Legal Proceedings................................................14
Item 4 Submission of Matters to a Vote of Security Holders..............14
PART II:
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters........................................................15
Item 6 Selected Financial Data..........................................15
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................18
Item 7A Quantitative and Qualitative Disclosures about Market Risk.......33
Item 8 Financial Statements and Supplementary Data......................35
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...........................................67
Item 9A Controls and Procedures..........................................67
PART III:
Item 10 Directors and Executive Officers of the Registrant................68
Item 11 Executive Compensation............................................70
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.................................75
Item 13 Certain Relationships and Related Transactions....................76
Item 14 Principal Accountant Fees and Services............................77
PART IV:
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..78
Signatures....................................................................86
Supplemental Information to be Furnished......................................87
Financial Statement Schedule I - Condensed Financial Information
(Parent Company Only).......................................................88
Financial Statement Schedule II - Valuation and Qualifying Accounts...........93
Exhibit Index.................................................................94
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PART I.
ITEM 1. BUSINESS.
References in this Annual Report on Form 10-K to the "Company" refer to NBC
Acquisition Corp., the term "NBC" refers to Nebraska Book Company, Inc., a
wholly owned subsidiary of the Company, and the terms "we," "our," "ours," and
"us" refer collectively to the Company and its subsidiaries, including NBC,
except where otherwise indicated.
The Company was formed for the purpose of acquiring all of the outstanding
capital stock of NBC, effective September 1, 1995. The Company did not have
substantive operations prior to the acquisition of NBC and was acquired by
affiliates of Haas Wheat & Partners, L.P. ("HWP") in February, 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 the Company
(collectively with HWP, the "Sellers"), sold approximately 33% of the issued and
outstanding shares of the Company 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.). HWP retained a
controlling interest in the Company 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 could have required
that the Sellers repurchase Weston Presidio's shares of the Company at a price
as defined in the buy-sell agreement, unless a majority of the Sellers elected,
in the alternative, to sell to Weston Presidio their remaining shares of the
Company at a price as defined in the buy-sell agreement.
On March 4, 2004, Weston Presidio gained controlling interest in the Company
through (i) the formation of two new corporations, NBC Holdings Corp. and New
NBC Acquisition Corp.; (ii) a $28.2 million equity investment by Weston Presidio
in NBC Holdings Corp., funds for which were ultimately paid to the Company in
the form of a capital contribution; (iii) Weston Presidio's purchase of 36,455
shares of the Company's common stock directly from its holders; (iv) the
cancellation of 870,285 shares of the Company's common stock upon payment by the
Company of merger consideration of $180.4 million to the shareholders of record
for such shares; (v) the exchange of 397,711 shares of the Company's common
stock for 512,799 shares of New NBC Acquisition Corp. capital stock in the
merger of the two entities with the Company as the surviving entity; and (vi)
the exchange of 512,799 shares of the Company's common stock by Weston Presidio
and current and former members of NBC management for a like number of shares of
NBC Holdings Corp. capital stock. Payment of the $180.4 million of merger
consideration was funded through proceeds from the $28.2 million capital
contribution, available cash, and proceeds from $405.0 million in new debt
financing, of which $261.0 million was utilized to retire certain debt
instruments outstanding at March 4, 2004 or to place funds in escrow for
untendered debt instruments called for redemption on March 4, 2004 and redeemed
on April 3, 2004. There were 549,254 shares of the Company's common stock
outstanding at March 31, 2004, of which 532,436 shares were owned by Weston
Presidio (495,981 shares through NBC Holdings Corp.) and the remainder were
owned by current and former members of management of NBC through NBC Holdings
Corp. For ease of presentation, financial information presented in the Annual
Report on Form 10-K reflects this transaction as if it had occurred on March 1,
2004. We have determined that no material transactions occurred during the
period from March 1, 2004 through March 4, 2004. As a result of this
transaction, financial information for periods ending prior to March 1, 2004 is
presented as the "Predecessor," while financial information for periods after
March 1, 2004 is presented as the "Successor." Throughout this Annual Report, we
generally refer to all of the steps comprising this transaction as the "March 4,
2004 Transaction."
On April 27, 2004, we 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 Senior Subordinated Notes and Senior Discount
Notes arising out of the March 4, 2004 Transaction. The Securities and Exchange
Commission declared such Registration Statements effective on May 7, 2004. All
notes were tendered in the offers to exchange that were completed on June 8,
2004.
The Company does not conduct significant activities apart from its
investment in NBC. Operational matters discussed in this report, including the
acquisition of college bookstores and other related businesses, refer to
operations of NBC.
GENERAL
We are one of the largest wholesale distributors of used college textbooks
in North America, offering over 100,000 textbook titles and selling more than
7.6 million books annually, primarily to campuses located in the United States.
In addition, as of March 31, 2004, we operate 113 bookstores on or adjacent to
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college campuses through which we sell a variety of new and used textbooks and
general merchandise. We are also a leading provider of distance education
materials to students in nontraditional courses, which include correspondence
and corporate education courses. Furthermore, we provide the college bookstore
industry with a variety of services including proprietary information systems,
in-store promotions, buying programs, and marketing services. With origins
dating to 1915 as a single bookstore operation, we have built a consistent
reputation for excellence in order fulfillment, shipping performance and
customer service.
We 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, we became a national, rather than regional, wholesaler
of used textbooks as a result of our purchase of The College Book Company of
California. During the 1970's we continued our focus on the wholesale business.
However, realizing the synergies that exist between wholesale operations and
college bookstore operations, in the 1980's we expanded our efforts in the
college bookstore market under a revised strategy. Under this strategy we
operate bookstores on or near larger campuses, typically where the
institution-owned college bookstore is contract-managed by a competitor or where
we do not have a significant wholesale presence. Today, we service the college
bookstore industry through our Textbook, Bookstore and Complementary Services
Divisions.
TEXTBOOK DIVISION. We are one of the largest wholesale distributors of used
college textbooks in North America. Our 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. We purchase used textbooks from and resell 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, Textbook Division sales have been determined primarily by the
amount of used textbooks that it can purchase. This occurs because the demand
for used textbooks has consistently outpaced supply. Our 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. We provide an
internally-developed BUYER'S GUIDE to our Textbook Division customers. This
guide lists details such as author, new copy retail price, and our repurchase
price for over 47,000 textbook titles.
BOOKSTORE DIVISION. College bookstores are the primary outlets for sales of
new and used textbooks to students. As of March 31, 2004, we operated 113
college bookstores on or adjacent to college campuses. Of these 113 bookstores,
19 were leased from the educational institution that they served. Our 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, our Bookstore Division provides an exclusive source of
used textbooks for sale across our wholesale distribution network.
COMPLEMENTARY SERVICES DIVISION. With our acquisition of Specialty Books,
Inc. ("Specialty Books") in May 1997, we 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). We believe the fragmented distance education market represents an
opportunity for us to leverage our order fulfillment and distribution expertise
in a rapidly growing sector.
Other services offered to college bookstores include the sale of computer
hardware and software, such as our turnkey bookstore management software, and
related maintenance contracts. We have an installed base of over 220 college
bookstore locations for our textbook management control systems, and we have
installed our proprietary total store management system at almost 660 college
bookstore locations. In total, including our own bookstores, almost 880 college
bookstore locations utilize our software products. We have a leading E-commerce
platform for college bookstores with over 530 stores licensing the technology
via CampusHub. We also provide the college bookstore industry with buying
programs and marketing and store design services.
On July 1, 2003, we acquired all of the outstanding shares of common stock
of TheCampusHub.com, Inc. ("CampusHub"), an entity affiliated with us through
common ownership. CampusHub is no longer separately incorporated and is instead
accounted for as a division within our Complementary Services Division segment.
Each share of TheCampusHub.com, Inc. common stock issued and outstanding was
converted into shares of NBC Acquisition Corp. Class A Common Stock, resulting
in the issuance of 39,905 shares of NBC Acquisition Corp. Class A Common Stock.
CampusHub provides college bookstores with a way to sell in-store inventory and
virtual brand name merchandise over the Internet utilizing technology originally
developed by us.
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In January 1998, we acquired Connect 2 One (formerly Collegiate Stores
Corporation), a centralized buying service for 610 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 us with another potential source of used textbooks.
We also provide a consulting and store design program to assist college
bookstores in store presentation and layout. During fiscal 2002, we introduced a
marketing services program to leverage our distribution channels. Marketing
services offered by us 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 our industry segments are disclosed in the notes to the consolidated
financial statements presented in Item 8, "Financial Statements and
Supplementary Data" of our Annual Report on Form 10-K. We make our 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. Information contained on our web site is not
a part of this Annual Report on Form 10-K.
BUSINESS STRATEGY
Our objective is to strengthen our position as a leading provider of
products and services to the college bookstore market, thereby increasing
revenue and cash flow. In order to accomplish our goal, we intend to pursue the
following strategies:
ENHANCE GROWTH IN THE TEXTBOOK DIVISION. We expect the Textbook Division to
continue to be a primary contributor of revenues and cash flows, primarily as a
result of an expected increase in college enrollments and increased utilization
of used textbooks, as well as through the expansion of our own Bookstore
Division. Additionally, our enhanced commission structure rewards customers who
make a long-term commitment to supplying us with a large portion of their
textbooks. Finally, we are strengthening our marketing campaign to increase
student awareness of the benefits of buying and selling used textbooks.
CAPITALIZE ON COLLEGE BOOKSTORE OPPORTUNITIES. We intend to increase
revenues for our Bookstore Division by acquiring, opening or contract-managing
additional bookstores at selected college campuses and offering additional
specialty products and services at our existing bookstores. We have recently
created and filled the position of Vice President of Contract Management with
the intent of more actively pursuing contract-management relationships at
selected college campuses. We also intend to increase same-store sales growth
through a more coordinated effort to implement best practices across our entire
bookstore network. Finally, we believe there are opportunities to improve cash
flow at our college bookstores by reducing certain selling, general and
administrative expenses.
CONTINUE TO SERVICE THE DISTANCE EDUCATION MARKET. We have been informed by
Specialty Books' largest customer that it intends to discontinue the use of
Specialty Books' services for delivery of educational materials during fiscal
2005. However, we expect Specialty Books' revenues, after adjusting for the loss
of this customer, to continue to grow as the distance education market continues
to expand due to the increased popularity of correspondence courses, continuing
and corporate education courses and courses offered through electronic media
such as the Internet.
INCREASED MARKET PENETRATION THROUGH TECHNOLOGY. We intend to continue
generating incremental revenue through the sale of our turnkey bookstore
management software. The installation of such software, along with E-commerce
technology offered through CampusHub, a division within the Complementary
Services Division, also increases the channels through which we 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. Our marketing services program provides vendors
with efficient access to the college and university market through our
distribution channels. We intend to expand this program by establishing
arrangements with major national vendors.
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INDUSTRY OVERVIEW
Based on recent industry trade data from the National Association of College
Stores, 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. We expect 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. We believe that used textbooks will continue to
be attractive to both students and college bookstores. Used textbooks provide
students with a lower-cost alternative to new textbooks and bookstores typically
achieve higher margins through the sale of used rather than new textbooks.
The pricing pattern of textbook publishing accounts for a large part of the
growth of the used book market. Because of copyright restrictions, each new
textbook is produced by only one publisher, which is free to set the new copy
retail price and discount terms to bookstores. Publishers generally offer new
textbooks at prices that enable college bookstores to achieve a gross margin of
23.0% to 25.0% on new textbooks. Historically, the high retail costs of new
textbooks and the higher margins achieved by bookstores on the sale of used
textbooks (approximately 33.0%) have encouraged the growth of the market for
used textbooks.
The used textbook cycle begins with new textbook publishers, who purposely
plan obsolescence into the publication of new textbooks. Generally, new editions
of textbooks are produced every two to four years. In the first year of a new
edition, there are few used copies of a new edition available. In the second and
third years, used textbooks become increasingly available. Simultaneously,
publishers begin to plan an updated edition. In years four and beyond, at the
end of the average life cycle of a particular edition, as publishers cut back on
original production, used textbooks generally represent a majority (in unit
terms) of the particular edition in use. While the length of the cycle varies by
title (and sometimes is indefinite, as certain titles are never updated), the
basic supply/demand progression remains fairly consistent.
College bookstores begin to place orders with used textbook wholesalers once
professors determine which books will be required for their upcoming courses,
usually by the end of May for the fall semester and the end of November for the
spring semester. Bookstore operators must first determine their allocation
between new and used copies for a particular title but, in most cases, they will
order an ample supply of used books because: (i) used book demand from students
is typically strong and consistent; (ii) many operators only have access to a
limited supply from wholesalers and believe that not having used book
alternatives could create considerable frustration among students and with the
college administration; (iii) bookstore operators earn higher margins on used
books than on new books; and (iv) both new and used books are sold with return
privileges, eliminating any overstock risk (excluding freight charges) to the
college bookstore.
New textbook ordering usually begins in June, at which time the store
operator augments its expected used book supply by ordering new books. By this
time, publishers typically will have just implemented their annual price
increases. These regular price increases allow us and our 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 our market are rare. However, in the past five to six years, we have been
marketing our exclusive supply program to the industry. This program has grown
to approximately 280 participating bookstores at the end of fiscal 2004. We also
introduced the NBC Advantage program in fiscal 2001. This program rewards
customers who make a long-term commitment to supplying us with a large portion
of their books. At the end of fiscal 2004, approximately 530 bookstores were
participating in this program, approximately 260 of which were also
participating in the exclusive program. Since we are usually able to sell the
vast majority of the used textbooks we are able to purchase, our ability to
obtain sufficient supply is a critical factor in our 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 56.0% of the U.S.
market according to the National Association of College Stores); (ii)
CONTRACT-MANAGED -- stores owned by institutions of higher learning and managed
by outside, private companies, typically found on-campus (represents
approximately 28.0% of the U.S. market according to the National Association of
College Stores); and (iii) INDEPENDENT STORES -- privately owned and operated
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stores, generally located off campus (represents approximately 16.0% of the U.S.
market according to the National Association of College Stores). 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.
We believe that sales at our 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 CampusHub, a division within our Complementary
Services Division.
PRODUCTS AND SERVICES
TEXTBOOK DIVISION. Our Textbook Division is engaged in the procurement and
redistribution of textbooks on college campuses primarily across the United
States.
We also publish the BUYER'S GUIDE, which lists over 47,000 textbooks
according to author, title, new copy retail price, and our repurchase price. The
BUYER'S GUIDE is an important part of our inventory control and book procurement
system. We update and reprint the BUYER'S GUIDE nine times each year and make it
available in both print and various electronic formats, including on all of our
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 we believe to be the most comprehensive and up-to-date pricing and buying
aid for college bookstores. We also maintain a database of almost 172,000 titles
in order to better serve our customers.
BOOKSTORE DIVISION. As of March 31, 2004, we operated 113 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 our
bookstores from activities other than used and new textbook sales have been
between 20.6% and 23.4% of total revenues. We have been, and intend to continue,
selectively expanding our product offerings at our bookstores in order to
increase sales and profitability. We have also installed software providing
E-commerce capabilities in all of our own bookstores, thereby allowing our
bookstores to further expand product offerings and compete with other online
textbook sellers.
COMPLEMENTARY SERVICES DIVISION. Through Specialty Books, we have access to
the market for distance education products and services. Currently, we provide
students at approximately 60 colleges with textbooks and materials for use in
distance education courses, and we are a leading provider of textbooks to
nontraditional programs and students such as correspondence or corporate
education students. We believe the fragmented distance education market
represents an opportunity for us to leverage our fulfillment and distribution
expertise in a rapidly growing sector. Beyond textbooks, we offer 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 us over the Internet. Over the past three years, revenues of
Specialty Books have been between 74.9% and 84.1% of total Complementary
Services Division revenues. However, we have been informed by Specialty Books'
largest customer, who accounted for more than 50.0% of Specialty Books' fiscal
2004 revenues, that it intends to discontinue the use of Specialty Books'
services for delivery of educational materials during fiscal 2005. After
adjusting for the expected reduction in revenues from this customer, we believe
we can continue to increase distance education revenues over the next several
years.
Other services offered to college bookstores include services related to our
turnkey bookstore management software, the sale of other software and hardware,
and the related maintenance contracts. These services generate revenue and
assist us in gaining access to new sources of used textbooks. We have an
installed base of over 220 college bookstore locations for our textbook
management control systems, and we have installed our proprietary total store
management system at almost 660 college bookstore locations. In total, including
our own bookstores, almost 880 college bookstore locations utilize our software
products. In addition, we have developed software for E-commerce capabilities.
These software products allow college bookstores to launch their own E-commerce
site and effectively compete against other online textbook sellers by offering
textbooks and both traditional and non-traditional store merchandise online.
Presently, there are over 530 stores licensing our E-commerce technology via
CampusHub.
Through C2O, we are 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 610 participating college bookstores including
our own bookstores, C2O has evolved into a buying group with substantial
purchasing power. Other C2O marketing services include a freight savings
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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 our business.
We also provide a consulting and store design program to assist college
bookstores in store presentation and layout. Through our newly-introduced
marketing services program, we are able to leverage our distribution channels.
Marketing services offered by us 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, our sales have been primarily determined by the amount of used
textbooks that we can purchase. We believe that, on average, we are able to
fulfill approximately 20% to 25% of our demand. As a result, our success has
depended primarily on our inventory procurement, and we continue to focus our
efforts on obtaining inventory. In order to ensure our ability to both obtain
and redistribute inventory, our Textbook Division strategy has emphasized
establishing and maintaining strong customer and supplier relationships with
college bookstores (primarily, independent and institutional college bookstores)
through our employee account representatives. These 33 account representatives
(as of March 31, 2004) are responsible for procuring used textbooks from
students, marketing our services on campus, purchasing overstock textbooks from
bookstores and securing leads for sale of our systems products. We have 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 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 us; (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 us with a large
portion of their books.
The two major used textbook purchasing seasons are at the end of each
academic semester, May and December. Although we make book purchases during
other periods, the inventory purchased in May, before publishers announce their
price increases in June and July, allows us to purchase inventory based on the
lower retail prices of the previous year. The combination of this purchasing
cycle and the fact that we are able to sell our inventory in relation to retail
prices for the following year permits us to realize additional gross profit. We
advance cash to our representatives during these two periods, and the
representatives in turn buy books directly from students, generally through the
on-campus bookstore.
After we purchase the books, we arrange for shipment to one of our two
warehouses (Nebraska and California) via common carrier. At the warehouse, we
refurbish damaged books and categorize and shelf all other books in a timely
manner, and enter them into our 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, we remove the books from available inventory and hold 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 20.9% of sales and generally are attributable to course
cancellations or overstocking. The majority of returns are textbooks that we are
able to resell for the next semester.
BOOKSTORE DIVISION
An important aspect of our 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 our 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
we do not currently buy or sell used textbooks either because a competitor
contract-manages the college's bookstore or the college bookstore does not have
8
a strong relationship with us. We generally will not open a location on a campus
where we already have a strong relationship with the college bookstore because
some college bookstores may view having a competing location as a conflict of
interest.
We tailor each of our 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. We
have staff specialists to assist individual bookstore managers in such areas as
store planning, merchandise layout and inventory control.
As of March 31, 2004 we operated 113 college bookstores nationwide, having
expanded from 65 bookstores in fiscal 2000. During fiscal 2004 we purchased, or
entered into contracts to manage, nine bookstores located in Wayne, Nebraska;
Huntington, West Virginia; Mesa, Arizona; Phoenix, Arizona; Johnson City,
Tennessee; Toledo, Ohio; and three locations in East Lansing, Michigan. We
closed bookstores located in Chadron, Nebraska; Wayne, Nebraska; Columbia, South
Carolina; Northridge, California; and Tempe, Arizona during fiscal 2004.
The table below highlights certain information regarding our bookstores
added and closed through March 31, 2004.
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)
----------- --------- ----------- -------------- ---- --------------
2000 65 35 2 98 733
2001 98 4 0 102 740
2002 102 10 4 108 797
2003 108 4 3 109 798
2004 109 9 5 113 847
- ------------
(1) In fiscal 2000, the property lease at one bookstore location expired and was
not renewed by us and one Triro, Inc. bookstore location which did not meet
our expansion criteria described below was closed. In fiscal 2002, the
property leases at two bookstore locations expired and were not renewed by
us 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 us. In fiscal 2004, five
bookstores were closed, as either the lease expired, the contract-managed
relationship was not renewed, or an agreement was reached with the landlord
to terminate the lease.
We plan to continue increasing the number of bookstores in operation. The
bookstore expansion plan will focus on campuses where we do not already have a
strong relationship with the on-campus bookstore. In determining to open a
bookstore, we look at several criteria: (i) a large enough market to justify our
efforts (typically this means a campus of at least 6,000 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. We also plan to pursue
opportunities to contract-manage additional stores. In determining to pursue
opportunities to contract-manage a campus bookstore, we look at: (i) the size of
the market; (ii) the competitive status of the market; (iii) the availability of
top quality management; and (iv) certain other factors, including personnel
costs.
Our bookstores have an average size of 7,500 square feet but range in size
from 400 to 50,000 square feet. We estimate that new bookstore leasehold
improvements, furniture and fixtures, and automation with PRISM cost
approximately $100,000 per bookstore, after giving effect to construction
allowances.
MANAGEMENT INFORMATION SYSTEMS
We believe that we can enhance efficiency, profitability and competitiveness
through investments in technology. Our MIS operations process order entry,
control inventory, generate purchase orders and customer invoices, generate
various sales reports, and process and retrieve textbook information. All our
bookstores operate with IBM RS/6000's. At the center of our MIS operations are
our self-developed, proprietary software programs such as PRISM, our whole store
management system, and PC-Text, our textbook management and inventory control
system. This software is maintained and continuously enhanced by an experienced
team of development and design professionals.
9
In addition, we have developed software for E-commerce capabilities. These
software products allow college bookstores to launch their own E-commerce site
and effectively compete against other online textbook sellers by offering
textbooks and both traditional and non-traditional store merchandise online.
None of our proprietary software programs are copyrighted, although we do
have registered trademarks for certain names. In addition to using our software
programs for our own management and inventory control, we license the use of our
software programs to bookstores. Our software programs enhance the efficiency
and cost-effectiveness of our operations, and their use by bookstores that are
our customers or suppliers tends to solidify the relationship between us and
such customers or suppliers, resulting in increased sales or supplies for us.
MIS operations consist of four operating units: (i) the mainframe unit,
which develops and supports all systems utilized in our warehouses and corporate
offices; (ii) a system sales unit, which markets our college store management
systems to colleges; (iii) the College Bookstore Management Systems ("CBMS"),
which develops and supports the systems that are sold to bookstores; and (iv)
CampusHub, which develops and supports software for E-commerce.
We conduct training courses for all systems users at our 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 50
experienced personnel. Personnel are available 24 hours a day to answer
questions on a toll-free number.
CUSTOMERS
We sell our products and services to college bookstores throughout the
United States, Canada and Puerto Rico for ultimate use by the students of the
respective colleges. Our 25 largest Textbook Division customers accounted for
approximately 5.4% of our fiscal 2004 consolidated revenues. No single Textbook
Division customer accounted for more than 1.0% of our fiscal 2004 consolidated
revenues.
Our 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.
Our 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.
Our 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 accounted for greater than
50.0% of total revenues in the distance education program. However, we have been
informed by this institution that it intends to discontinue the use of our
services for delivery of educational materials during fiscal 2005.
No single customer accounted for more than 10.0% of our fiscal 2004
consolidated revenues.
COMPETITION
Our 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.
Our 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. We believe that our 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,
10
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 us from entering these markets, which in turn affects both
our ability to buy books and our 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 us for
new customers and also fulfills all of the needs of the Barnes & Noble stores.
Beyond MBS, we believe the market is fragmented.
Our Bookstore Division competes with other college campus bookstores,
including the on-campus bookstore in those locations where our bookstore is
off-campus.
Both our 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, bypassing the traditional college bookstore.
By contrast, E-commerce services provided through CampusHub are designed to sell
textbooks and other merchandise through college bookstore websites. We also
compete 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. We do not believe that such
competition has had a material adverse impact on our results of operations,
though we do believe electronic media to be a factor in the distance education
program's largest customer deciding to discontinue the use of our services for
delivery of distance education materials during fiscal 2005.
Presently, we believe that our largest competitor in textbook distribution
for the distance education market, and only other major competitor, 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
We are 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 our operations. We do not currently
anticipate that the cost of our compliance with, or of any foreseeable
liabilities under, environmental and employee health and safety laws and
regulations will have a material adverse affect on our business or financial
condition.
11
EMPLOYEES
As of March 31, 2004 we had a total of approximately 2,500 employees, of
which approximately 1,000 were full-time, approximately 400 were part-time and
approximately 1,100 were temporary. We have no unionized employees and believe
that our relationship with our employees is satisfactory.
In view of the seasonal nature of our Textbook Division, we utilize seasonal
labor to improve operating efficiency. We employ a small number of "flex-pool"
workers who are cross-trained in a variety of warehouse functions. Recently, we
have employed up to 50 flex-pool workers in the Nebraska and California
facilities, thereby enabling us to lower Textbook Division operating expenses.
Temporary employees augment the flex-pool to meet periodic labor demands.
ITEM 2. PROPERTIES.
We own our two Textbook Division warehouses (totaling 244,000 square feet)
in Lincoln, Nebraska (one of which is also the location of our headquarters),
and lease our 60,000 square foot Textbook Division warehouse in Cypress,
California. The Cypress lease expires on August 31, 2007. Our 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, 2004, are our college bookstores,
their location, college served and the school's estimated enrollment.
Institution Location Enrollment Store Name
- ----------- -------- ---------- ----------
University of Alabama Tuscaloosa, AL 20,300 The College Store
University of Arkansas - Little Rock Little Rock, AR 11,400 Campus Bookstore
Northern Arizona University Flagstaff, AZ 19,900 The College Store
Northern Arizona University Flagstaff, AZ 19,900 University Text and Tools
Mesa County Community College, also serving: Mesa, AZ 25,000 The Textbook Company
Chandler Gilbert Community College - Pecos 7,500
Western International University Phoenix, AZ 3,300 Western International University
Bookstore (1)
Arizona State University Tempe, AZ 47,400 The College Store
University of Arizona Tucson, AZ 37,100 Arizona Book Store
University of Arizona Tucson, AZ 37,100 Arizona Book Store South
University of California - Berkeley Berkeley, CA 33,100 Ned's Bookstore
University of California - Berkeley Berkeley, CA 33,100 Ned's Bookstore
University of California - Berkeley Berkeley, CA 33,100 Ned's Bookstore
University of Northern Colorado Greeley, CO 11,400 The Book Stop
Daytona Beach Community College Daytona Beach, FL 18,200 College Book Rack
University of Florida, also serving: Gainesville, FL 47,900 Florida Book Store
Santa Fe Community College 13,800
University of Florida, also serving: Gainesville, FL 47,900 Florida Book Store, Volume II
Santa Fe Community College 13,800
Miami-Dade College Miami, FL 21,700 Lemox College Book & Supply
University of Central Florida, also serving: Orlando, FL 38,500 College Book & Supply
Seminole Community College 11,300
Valencia Community College 16,000
University of Central Florida Orlando, FL 38,500 Knight's Corner
Georgia State University Atlanta, GA 28,100 Georgia Bookstore
Drake University Des Moines, IA 5,100 D-Shoppe (1)
Drake University, also serving: Des Moines, IA 5,100 University Book Store (2)
Mercy College of Health Sciences 600
Southern Illinois University Carbondale, IL 21,400 Saluki Bookstore
Ball Sate University Muncie, IN 18,300 Collegiate Book Exchange
Valparaiso University Valparaiso, IN 3,900 University Book Center (1)
University of Kansas Lawrence, KS 26,800 University Book Shop
Johnson County Community College Overland Park, KS 17,600 The College Store
Western Kentucky University Bowling Green, KY 17,300 Lemox Book Company
Western Kentucky University Bowling Green, KY 17,300 Lemox II
University of Louisville Louisville, KY 21,500 College Book Warehouse
Eastern Kentucky University Richmond, KY 15,800 University Book & Supply
University of Maryland College Park, MD 34,800 Maryland Book Exchange
Prince George's Community College Largo, MD 12,600 Prince George's Community
College Bookstore (1)
12
Institution Location Enrollment Store Name
- ----------- -------- ---------- ----------
Concordia University - Ann Arbor Ann Arbor, MI 500 Concordia College Bookstore (1)
University of Michigan Ann Arbor, MI 39,000 Michigan Book & Supply
University of Michigan Ann Arbor, MI 39,000 Ulrich's Bookstore
Oakland University Auburn Hills, MI 16,600 Textbook Outlet
Wayne County Community College Belleville, MI 11,100 WCCCD Bookstore (1)
Wayne County Community College Detroit, MI 11,100 WCCCD Bookstore (1)
Wayne County Community College Detroit, MI 11,100 WCCCD Bookstore (1)
Wayne County Community College Detroit, MI 11,100 WCCCD Bookstore (1)
Wayne County Community College Taylor, MI 11,100 WCCCD Bookstore (1)
Michigan State University East Lansing, MI 44,500 The College Store
Michigan State University East Lansing, MI 44,500 Ned's Bookstore
Michigan State University East Lansing, MI 44,500 Spartan Art Store (1)
Michigan State University East Lansing, MI 44,500 Spartan Bookstore (1)
Michigan State University East Lansing, MI 44,500 Spartan Medical Store (1)
Kettering University Flint, MI 2,500 Kettering Campus Store (1)
Eastern Michigan University, also serving: Ypsilanti, MI 23,700 Campus Book & Supply
Washtenaw Community College 12,000
Washtenaw Technical Middle College 500
Eastern Michigan University Ypsilanti, MI 23,700 Ned's Bookstore
Eastern Michigan University Ypsilanti, MI 23,700 Ned's College of Business
Bookstore
Minnesota State University Mankato Mankato, MN 12,800 Maverick Bookstore (2)
North Carolina State University Raleigh, NC 29,900 Packbackers Student Bookstore
Chadron State College Chadron, NE 1,700 Eagle Pride Bookstore (1)
University of Nebraska - Kearney Kearney, NE 6,400 The Antelope Bookstore (1)
University of Nebraska - Lincoln Lincoln, NE 22,600 Big Red Shop
University of Nebraska - Lincoln Lincoln, NE 22,600 Nebraska Bookstore (2)
Nebraska Wesleyan University Lincoln, NE 1,500 Prairie Wolves Bookstore (1)
Wayne State College Wayne, NE 3,300 Wayne State College Bookstore (1)
University of Nevada Las Vegas Las Vegas, NV 24,200 Rebelbooks
State University of New York - Buffalo, also Amherst, NY 25,800 The College Store
serving:
Erie Community College - North Campus 11,500
State University of New York - Binghamton Vestal, NY 12,500 The Bookbridge
University of Akron Akron, OH 24,300 The College Store
Ohio University Athens, OH 16,900 Specialty Books
Ohio State University Columbus, OH 50,700 College Town
Wright State University, also serving: Fairborn, OH 15,700 The College Store
Sinclair Community College 19,400
University of Toledo Toledo, OH 19,000 Student Bookstore
University of Oklahoma Norman, OK 27,700 Boomer Book Company
University of Oklahoma Norman, OK 27,700 Sooner Textbooks
Oklahoma State University Stillwater, OK 21,100 Cowboy Book
Indiana University of Pennsylvania Indiana, PA 13,900 The College Store
University of Pittsburgh Pittsburgh, PA 27,000 GotUsed Bookstore
Pennsylvania State University State College, PA 41,800 University Book Centre
College of Charleston Charleston, SC 11,500 University Book of Charleston
University of South Carolina Columbia, SC 25,400 Carolina Spirit Shop
University of South Carolina Columbia, SC 25,400 South Carolina Book Store
East Tennessee State University Johnson City, TN 11,400 The College Store
East Tennessee State University Johnson City, TN 11,400 East Tennessee State University
Bookstore (1)
University of Tennessee Knoxville, TN 27,300 Rocky Top Books
University of Tennessee Knoxville, TN 27,300 Rocky Top East (2)
University of Texas - Arlington Arlington, TX 25,000 The College Store
Austin Community College Austin, TX 29,100 Bevo's
Austin Community College Austin, TX 29,100 Bevo's
Blinn College Bryan, TX 13,000 Traditions Bookstore
Texas A&M University College Station, TX 44,900 Traditions Bookstore
Texas A&M University College Station, TX 44,900 Traditions Bookstore
Texas A&M University College Station, TX 44,900 Traditions Bookstore
Southern Methodist University Dallas, TX 11,000 Varsity Bookstore
University of North Texas, also serving: Denton, TX 31,100 Voertman's (2)
North Central Texas College 6,100
Texas Woman's University 8,700
University of Texas - Pan American Edinburg, TX 15,300 South Texas Book & Supply
North Harris College Houston, TX 10,400 College Bookstore (2)
North Harris College Humble, TX 10,400 College Bookstore
University of Houston, also serving: Houston, TX 35,100 Rother's Bookstore
Texas Southern University School of Law 200
Texas Tech University Lubbock, TX 28,500 Double T Bookstore
Texas Tech University Lubbock, TX 28,500 Double T Bookstore
13
Institution Location Enrollment Store Name
- ----------- -------- ---------- ----------
Texas Tech University Lubbock, TX 28,500 Double T Bookstore
Texas Tech University Lubbock, TX 28,500 Spirit Shop
South Texas Community College McAllen, TX 13,700 South Texas Book & Supply
Stephen F. Austin State University Nacogdoches, TX 11,400 Varsity Book Store
San Antonio College, also serving: San Antonio, TX 22,100 L&M Bookstore
Northwest Vista College 6,800
Palo Alto College 6,500
St. Philip's College 9,000
UTSA - Downtown 6,000
University of Texas - San Antonio San Antonio, TX 24,700 L&M UTSA Bookstore
Southwest Texas State University - San Marcos San Marcos, TX 26,300 Colloquium Bookstore
Southwest Texas State University - San Marcos San Marcos, TX 26,300 Colloquium Bookstore
Southwest Texas State University - San Marcos San Marcos, TX 26,300 Colloquium Bookstore
Tarleton State University Stephenville, TX 8,800 The College Store
Baylor University Waco, TX 13,300 University Bookstore
Baylor University Waco, TX 13,300 University Bookstore and
Spirit Shop
Midwestern State University Wichita Falls, TX 6,500 The College Store
Virginia Polytechnic Institute and State Blacksburg, VA 28,000 Tech Bookstore
University
Old Dominion University Norfolk, VA 20,800 Dominion Bookstore
Radford University Radford, VA 9,200 Radford Book Exchange
Western Washington University, also serving: Bellingham, WA 11,800 The College Store
Whatcom Community College 4,200
Marshall University Huntington, WV 16,000 Stadium Bookstore
- ------------
(1) Denotes properties leased from the educational institution ("contract-
managed" stores).
(2) Property is owned by us.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we are subject to legal proceedings and other claims
arising in the ordinary course of our business. We believe that currently we are
not a party to any litigation the outcome of which would have a material adverse
affect on our financial condition or results of operations. We maintain
insurance coverage against claims in an amount which we believe to be adequate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On March 3, 2004, the holders of the issued and outstanding shares of the
Company adopted resolutions approving the merger transaction whereby the Company
became a wholly-owned subsidiary of NBC Holdings Corp. In addition, these
holders adopted resolutions (i) acknowledging their awareness that certain
payments made in connection with the merger could have subjected the Company to
the punitive provisions of Sections 280G and 4999 of the Internal Revenue Code
of 1986 (the "Code") and (ii) exempting these payments from the definitions of
"parachute payments" and "excess parachute payments" under Section 280G of the
Code.
Stockholders of the Company adopted these resolutions unanimously.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of June 25, 2004, based upon the number of holders on record, there were
5 holders of NBC Acquisition Corp. Class A Common Stock, those holders being
four funds affiliated with Weston Presidio (which held a total of 36,455 shares)
and NBC Holdings Corp., a new corporation formed by Weston Presidio as part of
the March 4, 2004 Transaction. As of June 25, 2004, NBC Holdings Corp.'s issued
and outstanding capital stock totaled 512,799 shares and correlated with the
512,799 shares of NBC Acquisitions Corp. Class A Common Stock it held. There are
28 holders on record of NBC Holdings Corp. capital stock, including the four
funds affiliated with Weston Presidio and current and former members of our
management group. As of June 25, 2004, there were also options granted and
outstanding under the 2004 Stock Option Plan, held by 26 members of our
management group, to purchase 49,778 shares of NBC Holdings Corp. capital stock.
As discussed in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Item 8, "Financial Statements and
Supplementary Data", the payment of dividends is subject to various restrictions
under our debt instruments. As a result, the Company has declared no dividends
on the NBC Acquisition Corp. Class A Common Stock during fiscal 2004 and 2003.
There is no established public trading market for the NBC Acquisition Corp.
Class A Common Stock.
Additional information regarding equity compensation plans can be found in
Item 12, "Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters."
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth our selected historical consolidated
financial and other data as of and for the one month ended March 31, 2004
(successor), the eleven months ended February 29, 2004 and the fiscal years
ended March 31, 2003, 2002, 2001, and 2000 (predecessor), respectively. The
selected historical consolidated financial data was derived from our audited
consolidated financial statements.
15
The following table should be read in conjunction with Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the related notes thereto included in
Item 8, "Financial Statements and Supplementary Data."
Successor (1) Predecessor (1)
-------------- -------------------------------------------------------------------
Fiscal Years Ended
1 Month Ended 11 Months Ended ---------------------------------------------------
March 31, February 29, March 31, March 31, March 31, March 31,
2004 2004 2003 2002 2001 2000
-------------- -------------- ----------- ------------ ------------- ------------
STATEMENT OF OPERATIONS DATA: (dollars in thousands)
Revenues $ 13,317 $ 385,364 $ 370,510 $ 338,917 $ 301,669 $ 267,069
Costs of sales 7,768 231,874 224,488 206,976 187,099 164,984
-------------- --------------- ----------- ------------ ------------- ------------
Gross profit 5,549 153,490 146,022 131,941 114,570 102,085
Operating expenses:
Selling, general, and administrative 8,540 91,878 90,391 84,871 74,100 65,820
Depreciation 343 2,977 2,988 3,087 2,956 3,096
Amortization (4) 649 1,162 644 505 10,446 9,320
Stock-based compensation - 7,264 - - - -
-------------- --------------- ----------- ------------ ------------- ------------
Income (loss) from operations (3,983) 50,209 51,999 43,478 27,068 23,849
Other expenses (income):
Interest expense 2,848 34,536 22,192 24,408 24,008 23,398
Interest income (97) (308) (360) (400) (615) (356)
(Gain) loss on derivative
instruments - (57) 156 361 - -
-------------- --------------- ----------- ------------ ------------- ------------
Income (loss) before income taxes (6,734) 16,038 30,011 19,109 3,675 807
Income tax expense (benefit) (2,502) 6,609 12,232 7,954 3,407 2,516
-------------- --------------- ----------- ------------ ------------- ------------
Net income (loss) $ (4,232) $ 9,429 $ 17,779 $ 11,155 $ 268 $ (1,709)
============== =============== =========== ============ ============= ============
Earnings (loss) per share:
Basic $ (7.70) $ 7.45 $ 14.07 $ 8.83 $ 0.21 $ (1.48)
Diluted (7.70) 7.30 13.88 8.83 0.21 (1.48)
OTHER DATA:
EBITDA (2) $ (2,991) $ 54,348 $ 55,631 $ 47,070 $ 40,470 $ 36,265
Net cash flows from operating activities (21,512) 38,605 37,332 31,038 8,839 18,945
Net cash flows from investing activities (183,836) (6,452) (5,327) (7,616) (4,994) (30,244)
Net cash flows from financing activities 158,962 8,104 (4,018) (16,412) (3,887) 11,690
Capital expenditures 720 3,965 3,708 2,277 1,759 3,542
Business acquisition expenditures (3) 1,849 2,355 1,389 6,110 2,975 26,072
Number of bookstores open at end of
the period 113 112 109 108 102 98
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents $ 33,276 $ 79,662 $ 39,405 $ 11,419 $ 4,410 $ 4,451
Working capital 106,259 134,150 81,966 75,865 72,394 62,244
Total assets 649,691 257,583 210,379 185,033 167,701 168,991
Total debt, including current maturities 434,098 263,782 219,367 216,915 224,219 222,552
(1) On March 4, 2004, Weston Presidio acquired the controlling interest in
the Company through a series of steps which resulted in Weston Presidio
owning a substantial majority of NBC Acquisition Corp.'s Class A Common
Stock. For ease of presentation, financial information presented in this
table reflects this transaction as if it had occurred on March 1, 2004.
We have determined that no material transactions occurred during the
period from March 1, 2004 through March 4, 2004. As a result of the
March 4, 2004 Transaction, financial information for periods ending
prior to March 1, 2004 is presented as the "Predecessor," while
financial information for periods ending after March 1, 2004 is
presented as the "Successor."
As a result of the March 4, 2004 Transaction, which included substantial
increases in long-term indebtedness through the issuance of new
indebtedness and amortizable identifiable intangibles through the
application of purchase accounting, the results of our operations
beginning with the one month ended March 31, 2004 include higher
interest and amortization expense. Additionally, the results of our
operations for the eleven months ended February 29, 2004 contain
non-recurring charges associated with (a) the write-off of $8.3 million
of debt issue costs in conjunction with the March 4, 2004 Transaction
and a debt refinancing which occurred on December 10, 2003; (b) call
premiums totaling $5.9 million related to the March 4, 2004 Transaction;
and (c) stock-based compensation totaling $7.3 million associated with
the March 4, 2004 Transaction and the December 10, 2003 debt
refinancing.
16
(2) EBITDA is defined as earnings before interest, taxes, depreciation, and
amortization. As we are highly-leveraged and as our equity is not
publicly-traded, management believes that EBITDA is useful in measuring
our liquidity and provides additional information for determining our
ability to meet debt service requirements. The Senior Subordinated
Notes, Senior Discount 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 our 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":
Successor Predecessor
-------------- -------------------------------------------------------------------
Fiscal Year Ended
1 Month Ended 11 Months Ended ---------------------------------------------------
March 31, February 29, March 31, March 31, March 31, March 31,
2004 2004 2003 2002 2001 2000
-------------- -------------- ------------ ------------ ------------ -----------
(dollars in thousands)
EBITDA $ (2,991) $ 54,348 $ 55,631 $ 47,070 $ 40,470 $ 36,265
Adjustments to reconcile EBITDA to
net cash flows from operating
activities:
Interest income 97 308 360 400 615 356
Provision for losses on receivables 218 66 452 1,630 434 141
Cash paid for interest (6,892) (20,126) (13,549) (15,225) (16,001) (16,175)
Cash paid for income taxes (10) (6,467) (14,533) (4,063) (6,018) (2,424)
(Gain) loss on disposal of assets 14 408 36 (483) 60 18
Other - - - - - 7
Changes in operating assets and
liabilities, net of effect of
acquistions/disposals (5) (11,948) 10,068 8,935 1,709 (10,721) 757
-------------- -------------- ------------ ------------ ------------ -----------
Net Cash Flows from
Operating Activities $ (21,512) $ 38,605 $ 37,332 $ 31,038 $ 8,839 $ 18,945
============== ============== ============ ============ ============ ===========
(3) Business acquisition expenditures represent established businesses
purchased by us.
(4) We 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.
(5) 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 current assets,
other assets, accounts payable, accrued employee compensation and
benefits, accrued incentives, accrued expenses, deferred revenue, and
other long-term liabilities.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussions should be read in conjunction with our
consolidated financial statements and the related notes thereto included in Item
8, "Financial Statements and Supplementary Data," and other information in this
Annual Report on Form 10-K.
EXECUTIVE SUMMARY
FISCAL 2004 HIGHLIGHTS
This summary refers to our operations for the predecessor period from April
1, 2003 to February 29, 2004 and the successor period from March 1, 2004 to
March 31, 2004 on a "combined" basis. This basis assists us in comparing results
of operations between the current fiscal year with the previous year.
CHANGES IN CAPITALIZATION. We underwent two transactions during the fiscal
year that ultimately provided us with a revised capital structure, a new
controlling shareholder and revised debt service requirements. Those
transactions were a debt refinancing in December, 2003 and the recapitalization
transaction that we are referring to as the March 4, 2004 Transaction. New or
amended debt instruments arising out of the March 4, 2004 Transaction included
an amended and restated $230.0 million Senior Credit Facility and private
placements for $175.0 million of 8.625% Senior Subordinated Notes and $77.0
million of 11.0% Senior Discount Notes. We describe those transactions in more
detail later in Management's Discussion & Analysis.
REVENUE GROWTH. Our combined consolidated revenues grew 7.6% to $398.7
million, the highest level in our history. That increase was primarily due to
our continuing efforts to add college bookstores, either through acquisition or
contract-management, strong same store sales in our retail college bookstores
and strong revenue growth within our Complementary Services Division, primarily
in the systems divisions.
OPERATING DIVISION RESULTS. We achieved strong results in EBITDA from
several of our divisions. EBITDA is considered a non-GAAP measure by SEC
Regulation G and therefore you should refer to the more detailed explanation of
that measure that is provided later in Management's Discussion & Analysis.
EBITDA increased 13.8% in our Bookstore Division and 40.9% in our Complementary
Services Division. Those increases continue the trend of positive year over year
operating results for those divisions which have been driven by strong revenue
growth, steady or improving gross margins and expense control. Our Textbook
Division declined slightly due primarily to a decrease in the number of units
purchased in the major buyback periods in December of 2002 and May of 2003 which
supplied the peak selling periods for fiscal 2004. Our combined consolidated
EBITDA decreased approximately $4.3 million to $51.4 million primarily due to
the impact of the two transactions referred to in "Changes in capitalization"
above which included combined stock-based compensation charges of $7.3 million
and $0.3 million of other charges related to the debt refinancing.
THECAMPUSHUB.COM, INC. AND OTHER ACQUISITIONS. We completed a number of
acquisitions during fiscal 2004, including the acquisition of TheCampusHub.com,
Inc. CampusHub provides college bookstores with a way to sell in-store inventory
and virtual brand name merchandise over the Internet. The acquisition enables us
to complement our bookstore management systems, which we sell through the
Complementary Services Division, with Internet capabilities. We also continued
the expansion of our College Bookstore Division through acquisition or
contract-management of 9 new locations. Finally, we did close four bookstore
locations primarily due to poor performance and we lost the contract management
of one other bookstore location during the fiscal year.
LARGE DISTANCE EDUCATION CUSTOMER LOSS. Our largest customer in the
distance education business, which is included in the Complementary Services
Division, informed us in our fiscal fourth quarter that it intends to
discontinue the use of our services for delivery of educational materials during
the 2005 fiscal year. Revenue from that customer exceeded $22.0 million in
fiscal 2004. The distance education business is a low EBITDA contributor as a
percentage of revenue - typically 3-5%. We do expect revenues from the distance
education business, after adjusting for the loss of this customer, to continue
to grow.
CHALLENGES AND EXPECTATIONS
We expect that we will continue to face challenges and opportunities
similar to those that we have faced in the recent past. We have experienced, and
continue to experience, competition for the supply of used textbooks from other
18
textbook wholesalers, competition from alternative media as a source of textbook
information, competition for contract-management opportunities and other
challenges. We also believe that we will continue to face challenges and
opportunities related to acquisitions. Despite these challenges, we expect that
we will continue to grow revenue and EBITDA on a consolidated basis in fiscal
2005. We also expect that our capital spending will remain modest for a company
of our size.
FISCAL YEAR ENDED MARCH 31, 2004 COMPARED WITH
FISCAL YEAR ENDED MARCH 31, 2003.
Unless otherwise noted, for purposes of management's discussion and
analysis of results of operations for the fiscal year ended March 31, 2004,
which includes the predecessor period from April 1, 2003 to February 29, 2004
and the successor period from March 1, 2004 to March 31, 2004, results of
operations are presented on a "combined" basis, which combines the results of
operations for the predecessor and successor periods, to assist in comparing
results of operations between fiscal years.
REVENUES. Revenues for the one month ended March 31, 2004, the eleven
months ended February 29, 2004, and the year ended March 31, 2003 and the
corresponding change in revenues (based upon combined revenues for fiscal 2004)
were as follows:
Successor Predecessor
--------------- ----------------------------------
Change
1 Month Ended 11 Months Ended Year Ended -------------------------
March 31, 2004 February 29, 2004 March 31, 2003 Amount Percentage
--------------- ----------------- ---------------- ------------- -----------
Textbook Division $ 4,484,265 $ 125,746,000 $ 132,806,703 $ (2,576,438) (1.9)%
Bookstore Division 5,318,989 234,328,454 216,943,133 22,704,310 10.5 %
Complementary Services
Division 4,443,778 49,754,314 44,004,856 10,193,236 23.2 %
Intercompany eliminations (929,638) (24,465,094) (23,244,843) (2,149,889) 9.2 %
--------------- ----------------- ---------------- ------------- -----------
$ 13,317,394 $ 385,363,674 $ 370,509,849 $ 28,171,219 7.6 %
=============== ================= ================ ============= ===========
The decrease in Textbook Division revenues was due primarily to a decrease
in the number of units sold. We believe that unit sales are down for the year
primarily due to a decrease in the number of units purchased in the December of
2002 and May of 2003 student book buys, which supplied the peak selling periods
in fiscal 2004. Textbook Division revenues are limited by the supply of used
textbooks available to us. The increase in Bookstore Division revenues was
attributable to the addition of acquired bookstores (defined by us as stores
acquired since April 1, 2002) and increases in same store sales. The new
bookstores provided an additional $14.4 million of revenue in the year ended
March 31, 2004. This increase was offset, in part, by a $2.5 million decrease in
revenues attributable to stores closed since April 1, 2002. Same store sales
increased 5.1%, or $10.8 million. Complementary Services Division revenues
increased primarily due to increased installation and training activity in the
systems divisions, the acquisition of TheCampusHub.com, Inc. in July, 2003, and
growth in the distance education program. However, future revenue streams for
the distance education program will be impacted by certain developments as
described in Recent Developments. Corresponding to the overall growth in the
number of company-owned college bookstores and growth in services provided to
our college bookstores by the Complementary Services Division, our intercompany
transactions also increased.
GROSS PROFIT. Gross profit for the year ended March 31, 2004 increased
$13.0 million, or 8.9%, to $159.0 million from $146.0 million for the year ended
March 31, 2003. This increase was primarily due to higher revenues, along with a
slightly higher gross margin percent. Gross margin percent was 39.9% for the
year ended March 31, 2004 as compared to 39.4% for the year ended March 31,
2003, driven primarily by improved gross margin percents in the Bookstore and
Textbook Divisions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended March 31, 2004 increased $10.0
million, or 11.1%, to $100.4 million from $90.4 million for the year ended March
31, 2003. Selling, general and administrative expenses as a percentage of
revenues were 25.2% and 24.4% for the years ended March 31, 2004 and 2003,
respectively. The increase in selling, general and administrative expenses is
primarily attributable to our continued growth which prompted increases in
personnel costs, shipping costs, and rent, as well as an increased focus on
advertising. Additionally, $0.3 million in expenses were recorded in conjunction
with the debt refinancing on December 10, 2003 and $0.3 million in expenses were
recorded in conjunction with our new human resources system.
STOCK-BASED COMPENSATION. Stock-based compensation expense was incurred in
conjunction with the March 4, 2004 Transaction, whereby 40,668 options to
19
purchase shares of NBC Acquisition Corp. Class A Common Stock were converted
into the right to receive cash payments which totaled $7.1 million.
Additionally, in connection with the December 10, 2003 debt refinancing, 838
options to purchase shares of NBC Acquisition Corp. Class A Common Stock were
converted into the right to receive cash payments which totaled $0.2 million.
Such costs represent the difference between the fair value of the NBC
Acquisition Corp. Class A Common Stock underlying such options at the time the
options were converted into the right to receive cash payment and the exercise
price on such options.
EARNINGS (LOSS) BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION
(EBITDA). EBITDA for the one month ended March 31, 2004, the eleven months ended
February 29, 2004, and the year ended March 31, 2003 and the corresponding
change in EBITDA (based upon combined EBITDA for fiscal 2004) were as follows:
Successor Predecessor
--------------- ---------------------------------
Change
1 Month Ended 11 Months Ended Year Ended ------------------------
March 31, 2004 February 29, 2004 March 31, 2003 Amount Percentage
--------------- ----------------- -------------- ------------- ----------
Textbook Division $ (85,994) $ 33,544,806 $ 33,915,223 $ (456,411) (1.3)%
Bookstore Division (2,471,525) 33,190,998 26,992,497 3,726,976 13.8 %
Complementary Services
Division 251,371 2,624,520 2,041,093 834,798 40.9 %
Corporate administration (685,336) (15,012,469) (7,318,023) (8,379,782) 114.5 %
--------------- ---------------- -------------- ------------- ----------
$ (2,991,484) $ 54,347,855 $ 55,630,790 $(4,274,419) (7.7)%
=============== ================ ============== ============= ==========
The decrease in EBITDA in the Textbook Division is primarily attributable
to lower revenues. Bookstore Division EBITDA improved as a result of the
aforementioned increases in revenues and gross margin percent. Complementary
Services Division EBITDA improved as a result of increasing revenues and
controlling expenses. Corporate Administration EBITDA declined by $8.4 million,
primarily as a result of expenses of the March 4, 2004 Transaction, December 10,
2003 debt refinancing, and installation of the new human resources system.
EBITDA is defined as earnings before interest, taxes, depreciation, and
amortization. As we are highly-leveraged and as our equity is not
publicly-traded, management believes that EBITDA is useful in measuring our
liquidity and provides additional information for determining our ability to
meet debt service requirements. The Senior Subordinated Notes, Senior Discount
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 our 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 and also sets forth net cash flows from investing and
financing activities as presented in the Consolidated Statements of Cash Flows
included in Item 8, "Financial Statements and Supplementary Data":
20
Successor Predecessor Predecessor
---------------- ---------------- -----------------
1 Month Ended 11 Months Ended Year Ended
March 31, 2004 February 29, 2004 March 31, 2003
---------------- ----------------- -----------------
EBITDA $ (2,991,484) $ 54,347,855 $ 55,630,790
Adjustments to reconcile EBITDA to net cash
flows from operating activities:
Interest income 97,587 307,680 360,448
Provision for losses on receivables 218,205 66,393 451,578
Cash paid for interest (6,891,827) (20,125,528) (13,549,099)
Cash paid for income taxes (9,991) (6,466,526) (14,533,352)
Loss on disposal of assets 13,582 408,095 35,428
Changes in operating assets and liabilities,
net of effect of acquistions/disposals (1) (11,947,584) 10,066,803 8,935,820
---------------- ---------------- ---------------
Net Cash Flows from Operating Activities $ (21,511,512) $ 38,604,772 $ 37,331,613
================ ================ ===============
Net Cash Flows from Investing Activities $ (183,836,223) $ (6,451,658) $ (5,327,072)
================ ================ ===============
Net Cash Flows from Financing Activities $ 158,961,630 $ 8,103,790 $ (4,018,436)
================ ================ ===============
(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 current assets,
other assets, accounts payable, accrued employee compensation and
benefits, accrued incentives, accrued expenses, deferred revenue, and
other long-term liabilities.
DEPRECIATION EXPENSE. Depreciation expense for the year ended March 31,
2004 increased $0.3 million, or 11.1% to $3.3 million from $3.0 million for the
year ended March 31, 2003, primarily due to growth and the step-up in basis of
property and equipment resulting from the March 4, 2004 Transaction.
AMORTIZATION EXPENSE. Amortization expense for the year ended March 31,
2004 increased $1.2 million to $1.8 million from $0.6 million for the year ended
March 31, 2003, primarily due to the March 4, 2004 Transaction, which
significantly increased the balance of amortizable intangibles, and amortization
of developed technology assets obtained through the acquisition of
TheCampusHub.com, Inc. in July, 2003.
INTEREST EXPENSE, NET. Interest expense, net for the year ended March 31,
2004 increased $15.2 million, or 69.4%, to $37.0 million from $21.8 million for
the year ended March 31, 2003, primarily due to interest costs arising from the
March 4, 2004 Transaction and the December 10, 2003 debt refinancing. As a
result of these two transactions, $8.3 million in debt issue costs associated
with retired debt were written-off to interest expense. Additionally, $5.9
million in call premiums were recorded to interest expense in connection with
the tendering or calling of the $110.0 million senior subordinated notes and
$76.0 million senior discount debentures in conjunction with the March 4, 2004
Transaction. Finally, interest expense increased as a result of our
higher-leveraged position, as total long-term indebtedness increased from $219.4
million at March 31, 2003 to $434.1 million at March 31, 2004, primarily
attributable to the March 4, 2004 Transaction.
(GAIN) LOSS ON DERIVATIVE FINANCIAL INSTRUMENTS. (Gain) loss on derivative
financial instruments for the year ended March 31, 2004 improved $0.2 million
compared to the year ended March 31, 2003 due to the increase in the fair market
value of the interest rate swap agreements that expired on July 31, 2003.
INCOME TAXES. Income tax expense for the year ended March 31, 2004
decreased $8.1 million, or 66.4%, to $4.1 million from $12.2 million for the
year ended March 31, 2003. Our effective tax rate was 44.1% and 40.8% for the
years ended March 31, 2004 and 2003, respectively. Our effective tax rate
differs from the statutory tax rate primarily as a result of state income taxes.
Effective state income tax rates increased in fiscal 2004, as the Company
incurred costs attributable to the March 4, 2004 Transaction which are not
useable in many state tax returns.
21
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:
Predecessor Predecessor 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 us as stores acquired
since April 1, 2001). These new bookstores provided a $6.2 million increase in
revenues. Complementary Services Division revenues increased primarily due to
growth in our 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. Our 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 our 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:
Predecessor Predecessor 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.
22
EBITDA is defined as earnings before interest, taxes, depreciation, and
amortization. As we are highly-leveraged and as our equity is not
publicly-traded, management believes that EBITDA is useful in measuring our
liquidity and provides additional information for determining our ability to
meet debt service requirements. The Senior Subordinated Notes, Senior Discount
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 our 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 and also sets forth net cash flows from investing and
financing activities as presented in the Consolidated Statements of Cash Flows
included in Item 8, "Financial Statements and Supplementary Data":
Predecessor Predecessor
-------------- ---------------
Year Ended March 31,
2003 2002
-------------- --------------
EBITDA $ 55,630,790 $ 47,069,865
Adjustments to reconcile EBITDA to net cash
flows from operating activities:
Interest income 360,448 399,573
Provision for losses on receivables 451,578 1,629,704
Cash paid for interest (13,549,099) (15,224,920)
Cash paid for income taxes (14,533,352) (4,062,737)
(Gain) loss on disposal of assets 35,428 (482,810)
Changes in operating assets and liabilities,
net of effect of acquistions/disposal (1) 8,935,820 (1,709,245)
-------------- ---------------
Net Cash Flows from Operating Activities $ 37,331,613 $ 31,037,920
============== ===============
Net Cash Flows from Investing Activities $ (5,327,072) $ (7,616,067)
============== ===============
Net Cash Flows from Financing Activities $ (4,018,436) $ (16,412,081)
============== ===============
(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 current assets, other assets,
accounts payable, accrued employee compensation and benefits, accrued
incentives, accrued expenses, deferred revenue, and other long-term
liabilities.
INTEREST EXPENSE, NET. Interest expense, net for fiscal 2003 decreased $2.2
million, or 9.1%, to $21.8 million from $24.0 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, "Financial Statements and
Supplementary Data." These decreases were partially offset by increasing
original issue debt discount amortization and accrued interest on the senior
discount debentures, which became fully-accreted on February 15, 2003.
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.
23
INCOME TAXES. Income tax expense for fiscal 2003 increased $4.2 million, or
53.8%, to $12.2 million from $8.0 million for fiscal 2002. Our effective tax
rate for fiscal years 2003 and 2002 was 40.8% and 41.6%, respectively. Our
effective tax rate differs from the statutory tax rate primarily as a result of
state income taxes.
RECENT DEVELOPMENTS
We have been informed by the distance education program's largest customer
that it intends to discontinue the use of our services for delivery of
educational materials during fiscal 2005. Revenues attributable to this customer
for the fiscal year ended March 31, 2004 exceeded $22.0 million. We estimate
that EBITDA as a percentage of revenue for this program is approximately 3-5%.
We expect revenues from the distance education program, after adjusting for the
loss of this customer, to continue to grow.
RISK FACTORS
The risks described below are not the only ones facing us. Additional risks
and uncertainties not currently known to us or that we currently deem to be
immaterial may also materially and adversely affect our business operations. Any
of the following risks could materially adversely affect our business, financial
condition or results of operations.
WE FACE COMPETITION IN OUR MARKETS. Our industry is highly competitive. A
large number of actual or potential competitors exist, some of which are larger
than us and have substantially greater resources than us. We cannot give
assurances that our business will not be adversely affected by increased
competition in the markets in which we currently operate or in markets in which
we will operate in the future, or that we will be able to improve or maintain
our profit margins. In recent years, an increasing number of institution-owned
college stores have decided to contract-manage their bookstore operations. As of
April 1, 2003, approximately 28% of NACS U.S. members, according to The National
Association of College Stores, were contract-managed. The leading managers of
these stores include two of our principal competitors in the wholesale textbook
distribution business. Contract-managed stores primarily purchase their used
textbook requirements from and sell their available supply of used textbooks to
their affiliated operations. A significant increase in the number of
contract-managed stores operated by our competitors, particularly at large
college campuses, could adversely affect our ability to acquire an adequate
supply of used textbooks.
We are also experiencing growing competition from alternative media as a
source of textbook information, such as on-line resources, e-books,
print-on-demand textbooks and CD-ROMs, and from the use of course packs, which
are collections of copyrighted materials and professors' original content which
are produced by college bookstores and sold to students, all of which have the
potential to reduce or replace the need for textbooks. A substantial increase in
the availability of these alternative media as a source of textbook information
could significantly reduce college students' use of traditional textbooks and
thus have a material adverse effect on our business and results of operations.
WE MAY NOT BE ABLE TO SUCCESSFULLY ACQUIRE BOOKSTORES OR INTEGRATE OUR
FUTURE ACQUISITIONS. Part of our business strategy is to expand sales for our
college bookstore operations by acquiring bookstores. We cannot give assurances
that we will be able to identify additional bookstores for acquisition or that
any anticipated benefits will be realized from any of these acquisitions. Due to
the seasonal nature of business in our bookstores, operations may be affected by
the time of year when a bookstore is acquired. The process may require financial
resources that would otherwise be available for our existing operations. We
cannot give assurances that the integration of our future acquisitions will be
successful or that the anticipated strategic benefits of our future acquisitions
will be realized or that they will be realized within time frames contemplated
by our management. Acquisitions may involve a number of special risks,
including, but not limited to, adverse short-term effects on our reported
operating results, diversion of management's attention, standardization of
accounting systems, dependence on retaining, hiring and training key personnel,
unanticipated problems or legal liabilities and actions of our competitors and
customers. If we are unable to successfully integrate our future acquisitions
for these or other reasons, our results from operations may be adversely
affected.
IF WE ARE UNABLE TO OBTAIN A SUFFICIENT SUPPLY OF USED TEXTBOOKS, OUR
BUSINESS MAY BE ADVERSELY AFFECTED. We are generally able to sell a substantial
majority of our available used textbooks and, therefore, our ability to purchase
a sufficient number of used textbooks largely determines our used textbook sales
for future periods. Successfully acquiring books requires a visible presence on
college campuses at the end of each semester, which requires hiring a
significant number of temporary personnel, and having access to sufficient funds
under our Revolving Credit Facility or other financing alternatives. Textbook
acquisition also depends upon college students' willingness to sell their used
textbooks at the end of each semester. The unavailability of sufficient
personnel or credit, or a shift in student preferences, could impair our ability
to acquire sufficient used textbooks to meet our sales objectives and adversely
affect our results of operations.
24
WE ARE DEPENDENT ON KEY PERSONNEL, THE LOSS OF WHOM COULD MATERIALLY
ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL PERFORMANCE. Our future success
depends to a significant extent on the efforts and abilities of our management
team. As outlined in Item 10, "Directors and Executive Officers of the
Registrant", our management team has over 150 years of cumulative experience in
the college bookstore industry. The loss of the services of these individuals
could have a material adverse effect on our business, financial condition and
results of operations.
OUR OPERATIONS MAY BE ADVERSELY AFFECTED IF PUBLISHERS DO NOT CONTINUE TO
INCREASE PRICES OF TEXTBOOKS ANNUALLY. We generally buy used textbooks based on
publishers' prevailing prices for new textbooks just prior to the implementation
by publishers of their annual price increases (which historically have been 4%
to 5%) and resell these textbooks shortly thereafter based upon the new higher
prices, thereby creating an immediate margin increase. Our ability to increase
our used textbook prices each year depends on annual price increases on new
textbooks implemented by publishers. The failure of publishers to continue
annual increases could adversely affect our results of operations.
THE SEASONALITY OF OUR WHOLESALE AND BOOKSTORE OPERATIONS COULD NEGATIVELY
AFFECT OUR OPERATING RESULTS. Our wholesale and bookstore operations experience
two distinct selling periods and the wholesale operations experience two
distinct buying periods. The peak selling periods for the wholesale operations
occur prior to the beginning of each school semester in July/August and
November/December. The buying periods for the wholesale operations occur at the
end of each school semester in May and December. The primary selling periods for
the bookstore operations are in August/September and January. In fiscal 2004,
approximately 43% of our annual revenues occurred in the second fiscal quarter
(July-September), while approximately 29% of our annual revenues occurred in the
fourth fiscal quarter (January-March). Accordingly, our working capital
requirements fluctuate throughout the year, increasing substantially at the end
of each semester, in May and December, as a result of the buying periods. We
fund our working capital requirements primarily through the Revolving Credit
Facility, which historically has been repaid with cash provided from operations.
A significant reduction in sales during our peak selling periods could have a
material adverse effect on our financial condition or results of operations for
the year.
THE INDENTURES GOVERNING THE SENIOR SUBORDINATED NOTES AND SENIOR DISCOUNT
NOTES, AS WELL AS THE SENIOR CREDIT FACILITY, IMPOSE SIGNIFICANT OPERATING AND
FINANCIAL RESTRICTIONS, WHICH MAY PREVENT US FROM INCURRING ADDITIONAL
INDEBTEDNESS AND TAKING SOME ACTIONS. The indentures governing the Senior
Subordinated Notes and Senior Discount Notes restrict our ability to do the
following: incur additional indebtedness; pay dividends or make other restricted
payments; consummate certain asset sales, create liens on assets; enter into
transactions with affiliates; make investments, loans or advances; consolidate
or merge with or into any other person; and convey, transfer or lease all or
substantially all of our assets or change the business we conduct.
The Senior Credit Facility prohibits NBC from prepaying other indebtedness.
In addition, NBC is required to comply with and maintain specified financial
ratios and tests, including minimum interest coverage ratios, maximum leverage
ratios and a minimum fixed charge coverage ratio. NBC's ability to meet these
financial ratios and tests can be affected by events beyond our control, and we
cannot give assurances that NBC will satisfy these requirements in the future. A
breach of any of these covenants could result in a default under the Senior
Credit Facility or the indentures. Upon an event of default under the Senior
Credit Facility, the lenders could elect to declare all amounts and accrued
interest outstanding under the Senior Credit Facility to be due and payable and
could terminate their commitments to make further extensions of credit under the
Senior Credit Facility and the holders of the Senior Subordinated Notes and
Senior Discount Notes could elect to declare all amounts under such notes
immediately due and payable. If NBC were unable to repay its indebtedness under
the Senior Credit Facility, the lenders could proceed against the collateral
securing the indebtedness. If the indebtedness under the Senior Credit Facility
were accelerated, we cannot give assurances that the assets of NBC would be
sufficient to repay in full such indebtedness and other indebtedness, including
the Senior Subordinated Notes and Senior Discount Notes. Substantially all of
our assets are pledged as security under the Senior Credit Facility.
WE ARE CONTROLLED BY ONE PRINCIPAL EQUITY HOLDER, WHO HAS THE POWER TO TAKE
UNILATERAL ACTION. Following the March 4, 2004 Transaction, Weston Presidio
beneficially owns approximately 84.4% of the Company's issued and outstanding
common stock and options available under the 2004 Stock Option Plan. As a
result, Weston Presidio is able to control all matters, including the election
of a majority of our board of directors, the approval of amendments to NBC's and
our certificate of incorporation and fundamental corporate transactions such as
mergers and asset sales. The interests of Weston Presidio may not in all cases
be aligned with the interests of other affected parties. In addition, Weston
Presidio may have an interest in pursuing acquisitions, divestitures and other
transactions that, in their judgment, could enhance their equity investment,
even though such transactions might involve risks to other affected parties.
25
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our 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 us 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, we evaluate our 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. We base
our 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. We
believe the following critical accounting policies, among others, affect our
more significant judgments and estimates used in the preparation of our
consolidated financial statements:
PRODUCT RETURNS. We recognize revenue from Textbook Division sales at the
time of shipment. We have established a program which, under certain conditions,
enables our customers to return textbooks. We record 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. We maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments.
In determining the adequacy of the allowance, we analyze the aging of the
receivable, the customer's financial position, historical collection experience,
and other economic and industry factors. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
INVENTORY VALUATION. Our Bookstore Division values new textbook and
non-textbook inventories at the lower of cost or market using the retail
inventory method. 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. We account 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 us, inventory
write-downs may be required. In determining inventory adjustments, we consider
amounts of inventory on hand, projected demand, new editions, and industry and
other factors.
GOODWILL AND INTANGIBLE ASSETS. We evaluate the impairment of the carrying
value of our goodwill and identifiable intangibles in accordance with applicable
accounting standards, including Statements of Financial Accounting Standards No.
86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR
OTHERWISE MARKETED; No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS; and No. 144,
IMPAIRMENT OF LONG-LIVED ASSETS. In accordance with such standards, we evaluate
impairment on goodwill and certain identifiable intangibles annually and
evaluate impairment on all intangibles whenever events or changes in
circumstances indicate that the carrying amounts of such assets may not be
recoverable. Our evaluation of impairment is based on a combination of our
projection of estimated future cash flows and other valuation methodologies. We
are required to make certain assumptions and estimates when assigning an initial
value to covenants not to compete arising from bookstore acquisitions. We are
also required to make certain assumptions and estimates regarding the fair value
of intangible assets 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. The March 4, 2004
Transaction resulted in the application of purchase accounting to the Company's
balance sheet as of the transaction date. The fair values of the Company's
assets and liabilities were determined in part from a valuation by an
independent appraiser. In certain circumstances, company management performed
valuations where appropriate. The value of goodwill in the transaction was
determined by taking the difference between the purchase price and the fair
value of net assets acquired.
26
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITIES
Our primary liquidity requirements are for debt service under the Senior
Credit Facility, the Senior Subordinated Notes, the Senior Discount Notes, and
other outstanding indebtedness, for working capital, for capital expenditures
and for certain acquisitions. We have historically funded these requirements
primarily through internally generated cash flows and funds borrowed under NBC's
Revolving Credit Facility. At March 31, 2004, our total indebtedness was
approximately $434.1 million, consisting of an $180.0 million Term Loan, $175.0
million of Senior Subordinated Notes, $50.4 million of Senior Discount Notes,
$15.4 million of senior subordinated notes which were called for redemption on
March 4, 2004 and redeemed on April 3, 2004, $10.5 million of senior discount
debentures which were called for redemption on March 4, 2004 and redeemed on
April 3, 2004, and $2.8 million of other indebtedness, including capital lease
obligations.
On October 7, 2003, we filed Current Reports on Form 8-K announcing that we
were soliciting consents to amend certain of the covenants and other provisions
of the indentures governing the senior subordinated notes and senior discount
debentures. The amendments would have allowed, among other things, (i) for the
entry into either an amendment and restatement of the then-existing senior
credit facility or a new secured credit facility, (ii) for the refinancing or
repayment of the then-existing senior credit facility, and (iii) for the payment
of a dividend by NBC to the Company to be used by the Company to purchase or
redeem a defined number of shares of NBC Acquisition Corp. Class A Common Stock
and stock options underlying such stock. We did not receive the requisite
consents of holders of the senior subordinated notes and senior discount
debentures.
As announced on November 10, 2003 and January 8, 2004 in Current Reports on
Form 8-K's filed with the Securities and Exchange Commission, the Company
purchased 116,786 shares of NBC Acquisition Corp. Class A Common Stock and 838
options to purchase NBC Acquisition Corp. Class A Common Stock were converted
into the right to receive cash payment on December 10, 2003. The cost of the
treasury shares was $32.7 million and stock-based compensation expense resulting
from cancellation of the options was $0.2 million. A substantial portion of a
$34.5 million dividend from NBC was used to fund the purchase of the treasury
shares. In order to finance the dividend payment, the related transactions and
the fees and expenses relating thereto, NBC completed a debt refinancing in
which it amended and restated its then-existing senior credit facility,
providing for a $75.0 million Term Loan and a $50.0 million Revolving Credit
Facility.
After the dividend payment, payment of principal, interest, and other costs
associated with the then-existing senior credit facility, and payment of the
fees and expenses relating to the transactions, there were proceeds of $24.4
million remaining. We ultimately utilized such proceeds to assist in financing
the March 4, 2004 Transaction.
On March 4, 2004, Weston Presidio acquired the controlling interest in the
Company through a series of steps which resulted in Weston Presidio owning a
substantial majority of the NBC Acquisition Corp. Class A Common Stock. The
transaction was accomplished pursuant to, among other instruments, an Agreement
& Plan of Merger and a Stock Purchase Agreement dated February 18, 2004. The
series of related steps underlying this transaction included the following:
(1) NBC refinanced its existing $125.0 million senior credit facility with a
$230.0 million senior credit facility (the "Senior Credit Facility")
comprised of an $180.0 million term loan (the "Term Loan") which matures
on March 4, 2011 and was drawn in full in connection with the
consummation of the transaction, and a $50.0 million revolving credit
facility (the "Revolving Credit Facility") which matures on March 4,
2009 and was not drawn upon at the consummation of the transaction.
(2) NBC completed a private placement of $175.0 million principal amount of
8.625% senior subordinated notes (the "Senior Subordinated Notes") which
mature on March 15, 2012. On April 27, 2004, NBC filed a Form S-4
Registration Statement with the Securities and Exchange Commission for
the purpose of registering debt securities to be issued in exchange for
the Senior Subordinated Notes. Such Registration Statement was declared
effective by the Securities and Exchange Commission on May 7, 2004. All
notes were tendered in the offer to exchange that was completed on June
8, 2004. The terms of the securities issued in the exchange offer are
identical to those in effect at March 31, 2004.
(3) The Company completed a private placement of $77.0 million principal
amount of 11.0% senior discount notes (the "Senior Discount Notes")
which mature on March 15, 2013. The Senior Discount Notes were issued at
a discount of $27.0 million and will become fully-accreted on March 15,
2008, at which point semi-annual cash interest payments begin to accrue
and are payable beginning September 15, 2008. On April 27, 2004, the
Company filed a Form S-4 Registration Statement with the Securities and
Exchange Commission for the purpose of registering debt securities to be
issued in exchange for the Senior Discount Notes. Such Registration
Statement was declared effective by the Securities and Exchange
Commission on May 7, 2004. All notes were tendered in the offer to
27
exchange that was completed on June 8, 2004. The terms of the securities
issued in the exchange offer are identical to those in effect at March
31, 2004.
(4) NBC completed a cash tender offer for, and partial redemption of, its
$110.0 million principal amount of outstanding 8.75% senior subordinated
notes. Untendered notes which totaled $15.4 million were called for
redemption on March 4, 2004 and redeemed on April 3, 2004. Funds
totaling $16.1 million, including accrued interest and call premiums on
such indebtedness, were held in escrow as of March 31, 2004, pending the
April 3, 2004 redemption. Such escrowed funds are presented in
"restricted cash" in the Consolidated Balance Sheet included in Item 8,
"Financial Statements and Supplementary Data."
(5) The Company completed a cash tender offer for, and partial redemption
of, its $76.0 million principal amount of outstanding 10.75% senior
discount debentures. Untendered debentures which totaled $10.5 million
were called for redemption on March 4, 2004 and redeemed on April 3,
2004. Funds totaling $11.0 million, including accrued interest and call
premiums on such indebtedness, were held in escrow as of March 31, 2004,
pending the April 3, 2004 redemption. Such escrowed funds are presented
in "restricted cash" in the Consolidated Balance Sheet included in Item
8, "Financial Statements and Supplementary Data."
(6) Weston Presidio made an initial equity investment of $28.2 million in
NBC Holdings Corp., funds for which were ultimately paid to the Company
in the form of a capital contribution.
(7) Weston Presidio purchased 36,455 shares of NBC Acquisition Corp. Class A
Common Stock directly from its holders for $8.4 million.
(8) 870,285 shares of NBC Acquisition Corp. Class A Common Stock were
cancelled upon the payment of $180.4 million in merger consideration to
the holders of such shares.
(9) 397,711 shares of NBC Acquisition Corp. Class A Common Stock were
exchanged for 512,799 shares of capital stock of New NBC Acquisition
Corp., a new corporation formed by Weston Presidio, in the merger of the
two entities with the Company as the surviving entity.
(10) Weston Presidio and current and former members of NBC management
contributed 495,981 shares and 16,818 shares, respectively, of NBC
Acquisition Corp. Class A Common Stock to NBC Holdings Corp. in exchange
for a like number of shares of NBC Holdings Corp. capital stock.
(11) Options to acquire 49,778 shares of NBC Acquisition Corp. Class A
Common Stock held by members of NBC management were exchanged for
options to acquire a like number of shares of NBC Holdings Corp. capital
stock.
(12) NBC declared and paid dividends of $184.3 million to the Company to
help finance the transaction.
Principal and interest payments under the Senior Credit Facility, the
Senior Subordinated Notes, and the Senior Discount Notes represent significant
liquidity requirements for us. Under the terms of the Senior Credit Facility's
Term Loan, NBC is scheduled to make principal payments totaling approximately
$1.8 million in fiscals 2005-2010 and $169.2 million in fiscal 2011. 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 the Term Loan principal balances.
Loans under the Senior Credit Facility bear interest at floating rates based
upon the borrowing option selected by NBC. The Senior Subordinated Notes require
semi-annual interest payments at a fixed rate of 8.625% and mature on March 15,
2012. The Senior Discount Notes require semi-annual cash interest payments
commencing September 15, 2008 at a fixed rate of 11.0% and mature on March 15,
2013.
INVESTING CASH FLOWS
In conjunction with the March 4, 2004 Transaction described in detail above
under "Financing Activities," merger consideration of $180.4 million was paid to
certain of our shareholders and $0.9 million of other costs were incurred and
paid relative to this transaction.
28
Our capital expenditures were $4.7 million, $3.7 million, and $2.3 million
for the fiscal years ended March 31, 2004, 2003, and 2002, respectively. Capital
expenditures consist primarily of leasehold improvements and furnishings for new
bookstores, bookstore renovations, computer upgrades and miscellaneous warehouse
improvements. Our ability to make capital expenditures is subject to certain
restrictions under the Senior Credit Facility, including an annual limitation on
capital expenditures made in the ordinary course of business. Such annual
limitation for fiscal 2004 was $6.5 million.
Business acquisition expenditures were $4.2 million, $1.4 million, and $6.1
million for the fiscal years ended March 31, 2004, 2003, and 2002, respectively.
For the fiscal year ended March 31, 2004, single bookstore locations were
acquired serving Wayne State College, Mesa Community College, Western
International University, the University of Toledo, East Tennessee State
University, Marshall University; and 3 bookstore locations were acquired serving
Michigan State University. For the fiscal year ended March 31, 2003, single
bookstore locations were acquired serving Stephen F. Austin State University,
the University of Northern Colorado; and 2 bookstore locations were acquired
serving Western Kentucky University. For the fiscal year ended March 31, 2002,
single bookstore locations were acquired serving Western Washington University,
Chadron State College, North Carolina State University, the University of
Oklahoma, Radford University, the University of Central Florida; and 2 bookstore
locations each were acquired serving the University of Florida and the
University of California - Berkeley. Our ability to make acquisition
expenditures is subject to certain restrictions under the Senior Credit
Facility.
During fiscal 2004, bookstore locations serving Wayne State College,
Columbia College, California State University - Northridge, Chadron State
College, and Arizona State University were closed, as either the lease expired,
the contract-managed relationship was not renewed, or an agreement was reached
with the landlord to terminate the lease. 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, we closed bookstores serving Austin Community College and
Coconino Community College upon expiration of the property leases and sold
certain assets of two of our 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 our Consolidated Statements of
Operations included in Item 8, "Financial Statements and Supplementary Data."
On July 1, 2003, we acquired all of the outstanding shares of common stock
of TheCampusHub.com, Inc. CampusHub is no longer separately incorporated and is
instead accounted for as a division within our Complementary Services Division
segment. CampusHub provides college bookstores with a way to sell in-store
inventory and virtual brand name merchandise over the Internet utilizing
technology originally developed by us. This transaction, with a net purchase
price of $10.0 million, was financed primarily through the issuance of 39,905
shares of NBC Acquisition Corp. Class A Common Stock.
OPERATING CASH FLOWS
Our principal sources of cash to fund our 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 our liquidity
needs fluctuates throughout the year due to our distinct buying and selling
periods, increasing substantially at the end of each college semester (May and
December). For the year ended March 31, 2004, weighted-average borrowings under
the Revolving Credit Facility approximated $1.7 million, with actual borrowings
ranging from a low of no borrowings to a high of $14.5 million. Net cash flows
from operating activities for the year ended March 31, 2004 were $17.1 million,
a decrease of $20.2 million from $37.3 million for the year ended March 31,
2003. This decrease was primarily due to (a) $7.7 million in interest expense on
the senior discount debentures, which became fully-accreted in February, 2003
and began paying cash interest in August, 2003; (b) $5.9 million in call
premiums incurred in connection with the tendering and calling of the $110.0
million senior subordinated notes and $76.0 million senior discount debentures
in conjunction with the March 4, 2004 Transaction; and (c) $7.3 million of
stock-based compensation paid in conjunction with the March 4, 2004 Transaction
and the December 10, 2003 debt refinancing.
COVENANT RESTRICTIONS
Access to our 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 NBC's ability to make loans
or advances and pay dividends, except that, among other things, NBC may pay
dividends to the Company (i) in an amount not to exceed the amount of interest
required to be paid on the Senior Discount Notes and (ii) to pay corporate
overhead expenses not to exceed $250,000 per year and any taxes owed by the
29
Company. The indenture governing the Senior Discount 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. The indenture governing the Senior Subordinated Notes
contains similar restrictions on 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. Such restrictions are not expected to affect our ability to meet
our cash obligations for the foreseeable future. These covenant restrictions
were similar under the indebtedness retired as a result of the March 4, 2004
Transaction. In accordance with such covenants, NBC declared and paid dividends
to the Company of (a) $8.2 million for cash interest payments made on the senior
discount debentures due August 15, 2003 and February 15, 2004; (b) $32.8 million
to finance the purchase of treasury stock associated with the December 10, 2003
debt refinancing; and (c) $184.3 million to assist in financing the March 4,
2004 Transaction.
SOURCES OF AND NEEDS FOR CAPITAL
As of March 31, 2004, NBC could borrow up to $38.5 million under the
Revolving Credit Facility. The Revolving Credit Facility was unused at March 31,
2004. 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.
We believe that funds generated from operations, existing cash, and
borrowings under the Revolving Credit Facility will be sufficient to finance our
current operations, any required excess cash flow payments, increased cash
interest requirements resulting from the March 4, 2004 Transaction, planned
capital expenditures and internal growth for the foreseeable future. Future
acquisitions, if any, may require additional debt or equity financing.
30
The following tables present aggregated information as of March 31, 2004
regarding our contractual obligations and commercial commitments:
Payments Due by Period
------------------------------------------------------------
Contractual Less Than 2-3 4-5 After 5
Obligations Total 1 Year Years Years Years
- -------------------------------- ---------------- ------------- -------------- -------------- ---------------
Long-term debt $ 458,378,880 $ 27,743,881 $ 3,667,918 $ 3,684,129 $ 423,282,952
Interest on long-term debt (1) 240,671,227 24,547,540 51,007,460 63,864,200 101,252,027
Capital lease obligations 2,305,584 167,433 489,905 651,928 996,318
Interest on capital
lease obligations 1,161,936 257,356 442,435 309,858 152,287
Operating leases 49,436,000 9,762,000 17,694,000 11,274,000 10,706,000
Unconditional purchase obligations - - - - -
---------------- ------------- -------------- -------------- ---------------
Total $ 751,953,627 $ 62,478,210 $ 73,301,718 $ 79,784,115 $ 536,389,584
================ ============= ============== ============== ===============
Amount of Commitment Expiration Per Period
Total -----------------------------------------------------------
Other Commercial Amounts Less Than 2-3 4-5 Over 5
Commitments Committed 1 Year Years Years Years
- -------------------------------- ---------------- ------------- -------------- -------------- ---------------
Unused line of credit (2) $ 50,000,000 $ - $ - $ 50,000,000 $ -
================ ============= ============== ============== ===============
(1) Interest on the variable rate debt is estimated based upon implied
forward rates in the yield curve at March 31, 2004 and does not reflect
any potential management of interest rate fluctuations through interest
rate swap agreements or other similar instruments.
(2) Interest is not estimated on the line of credit due to uncertainty
surrounding the timing and extent of usage of the line of credit.
TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES
In fiscal 2001, we entered into several agreements with a newly created
entity, TheCampusHub.com, Inc., which was partially owned by HWP.
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 us. Such agreements (including an
equity option agreement, a management services agreement, and a technology sale
and license agreement) terminated effective July 1, 2003 upon our acquisition of
all of the outstanding shares of common stock of TheCampusHub.com, Inc. This
business combination was accounted for by us in accordance with Statement of
Financial Accounting Standards No. 141, BUSINESS COMBINATIONS. The total
purchase price, net of cash acquired, of such acquisition was $10.0 million, of
which $3.7 million was assigned to non-deductible goodwill. The management
services agreement reimbursed us for certain direct costs incurred on behalf of
TheCampusHub.com, Inc., as well as $0.3 million per year for certain shared
management and administrative support. Complementary Services Division revenue
resulting from the management services agreement was recognized as the services
were performed. For the years ended March 31, 2004, 2003, and 2002, revenues
attributable to the management services agreement totaled $0.1 million, $0.3
million, and $1.0 million, respectively, and reimbursable direct costs incurred
on behalf of TheCampusHub.com, Inc. totaled $0.1 million, $0.6 million, and $0.8
million, respectively. Net amounts due from TheCampusHub.com, Inc. at March 31,
2003 totaled $0.1 million.
31
IMPACT OF INFLATION
Our 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, we believe that
the effects of inflation, if any, on our results of operations and financial
condition have not been material. However, there can be no assurance that during
a period of significant inflation, our results of operations will not be
adversely affected.
ACCOUNTING STANDARDS NOT YET ADOPTED
In May, 2003 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 150, ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY ("SFAS
No. 150"), to establish standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument within its
scope as a liability (or an asset in some circumstances). SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for certain provisions that have been
deferred. Adoption of SFAS No. 150 had no impact and is not expected to have a
significant impact on our consolidated financial statements.
In January, 2003 the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES (FIN 46) and
later revised FIN 46 in December, 2003. 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
provisions of FIN 46 become effective on varying dates. As these provisions
become effective and are adopted, they have not had and are not expected to have
a significant impact on our 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 our operations 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 or EBITDA growth or statements expressing
general optimism about future operating results, are forward-looking statements
within the meaning of the Reform Act. Such forward-looking statements involve
risks, uncertainties and other factors which may cause our actual performance or
achievements to be materially different from any future results, performances or
achievements expressed or implied by such forward-looking statements. For those
statements, we claim the protection of the safe harbor for forward-looking
statements contained in the Reform Act. Several important factors could affect
our future results 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 from other companies that target our
markets and from alternative media as a source of textbook information; ability
to successfully acquire bookstores or to integrate future acquisitions;
inability to purchase a sufficient supply of used textbooks; changes in pricing
of new and/or used textbooks; loss or retirement of key members of management;
the impact of seasonality of the wholesale and bookstore operations; increases
in our cost of borrowing or inability to raise or unavailability of additional
debt or equity capital; changes in general economic conditions and/or in the
markets in which we compete or may, from time to time, compete; and other risks
detailed in our Securities and Exchange Commission filings, in particular this
Annual Report on Form 10-K, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. We will not undertake and
specifically decline 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.
32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our primary market risk exposure is, and is expected to continue to be,
fluctuation in variable interest rates. Of the $434.1 million in total
indebtedness outstanding at March 31, 2004, approximately $180.0 million is
subject to fluctuations in the Eurodollar rate. As provided in the Senior Credit
Facility, exposure to interest rate fluctuations is managed by maintaining fixed
interest rate debt (primarily the Senior Subordinated Notes and Senior Discount
Notes) and, in the past, by entering into interest rate swap agreements that
qualified as cash flow hedging instruments to convert certain variable rate debt
into fixed rate debt. NBC had separate five-year amortizing interest rate swap
agreements with two financial institutions whereby NBC's variable rate term debt
was converted into debt with a fixed rate of 5.815% plus an applicable margin
(as defined in the then-existing credit agreement). Such agreements expired on
July 31, 2003. Depending upon interest rate trends in the future, we may choose
to manage our risk to variable interest rate fluctuations by again entering into
interest rate swap agreements.
The following table presents quantitative information about our market risk
sensitive instruments (the weighted-average variable rates are based on implied
forward rates in the yield curve at March 31, 2004):
Fixed Rate Debt Variable Rate Debt
----------------------------- ----------------------------
Weighted- Weighted-
Average Average
Principal Interest Principal Interest
Cash Flows Rate Cash Flows (1) Rate
--------------- ------------ --------------- ------------
Fiscal Year Ended March 31:
2005 $ 26,111,314 9.22% $ 1,800,000 4.32%
2006 251,807 9.23% 1,800,000 5.40%
2007 306,016 9.27% 1,800,000 6.34%
2008 346,989 9.32% 1,800,000 7.02%
2009 389,068 9.36% 1,800,000 7.51%
Thereafter 253,279,270 9.51% 171,000,000 8.00%
--------------- ------------ --------------- ------------
Total $ 280,684,464 9.37% $ 180,000,000 6.63%
=============== ============ =============== ============
Fair Value $ 255,167,121 - $ 180,000,000 -
=============== ===============
(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), if any, to be applied toward principal balances.
33
Certain quantitative market risk disclosures have changed since March 31,
2003 as a result of market fluctuations, movement in interest rates, expiration
of the interest rate swap agreements, the December 10, 2003 debt refinancing,
the March 4, 2004 Transaction, and principal payments. The following table
presents summarized market risk information for the years ended March 31, 2004
and 2003 (the weighted-average variable rates are based on implied forward rates
in the yield curve as of the date presented):
March 31, March 31,
2004 2003
-------------- --------------
Fair Values:
Fixed rate debt $ 255,167,121 $ 185,116,064
Variable rate debt 180,000,000 30,447,160
Interest rate swaps - (845,669)
Overall Weighted-Average Interest Rates:
Fixed rate debt 9.37% 9.68%
Variable rate debt 6.63% 4.24%
Interest rate swaps receive rate - 1.22%
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF NBC ACQUISITION CORP.
Report of Independent Registered Public Accounting Firm 36
Consolidated Balance Sheets as of March 31, 2004 (Successor) and
March 31, 2003 (Predecessor) 37
Consolidated Statements of Operations for the One Month Ended March 31, 2004
(Successor), the Eleven Months ended February 29, 2004 (Predecessor), and the
Years Ended March 31, 2003 and 2002 (Predecessor) 38
Consolidated Statements of Stockholders' Equity (Deficit) for the One Month
Ended March 31, 2004 (Successor), the Eleven Months Ended February 29, 2004
(Predecessor), and the Years Ended March 31, 2003 and 2002 (Predecessor) 39
Consolidated Statements of Cash Flows for the One Month Ended March 31, 2004
(Successor), the Eleven Months ended February 29, 2004 (Predecessor), and the
Years Ended March 31, 2003 and 2002 (Predecessor) 41
Notes to Consolidated Financial Statements 42
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
NBC Acquisition Corp.
Lincoln, Nebraska
We have audited the accompanying consolidated balance sheets of NBC
Acquisition Corp. and subsidiary as of March 31, 2004 (Successor) and March 31,
2003 (Predecessor), and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the one month ended March 31,
2004 (Successor), the eleven months ended February 29, 2004 (Predecessor), and
the years ended March 31, 2003 and 2002 (Predecessor). 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 standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of NBC Acquisition Corp. and
subsidiary as of March 31, 2004 (Successor) and March 31, 2003 (Predecessor),
and the results of their operations and their cash flows for the one month ended
March 31, 2004 (Successor), the eleven months ended February 29, 2004
(Predecessor), and the years ended March 31, 2003 and 2002 (Predecessor) in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
Lincoln, Nebraska
June 25, 2004
36
NBC ACQUISITION CORP.
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
Successor Predecessor
------------ ------------
March 31, March 31,
2004 2003
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 33,276,181 $ 39,405,382
Restricted cash 27,065,000 -
Receivables 30,412,590 29,085,329
Inventories 70,139,222 68,315,352
Recoverable income taxes 5,351,480 -
Deferred income taxes 6,102,015 3,861,932
Prepaid expenses and other assets 873,167 834,284
------------ ------------
Total current assets 173,219,655 141,502,279
PROPERTY AND EQUIPMENT, net of depreciation &
amortization 36,133,256 27,666,370
GOODWILL 268,646,931 30,472,823
IDENTIFIABLE INTANGIBLES, net of amortization 157,505,632 1,350,660
DEBT ISSUE COSTS, net of amortization 11,968,909 6,055,751
OTHER ASSETS 2,216,565 3,331,134
------------ ------------
$649,690,948 $210,379,017
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 18,271,940 $ 19,857,301
Accrued employee compensation and benefits 9,118,730 10,642,713
Accrued interest 2,565,785 2,505,772
Accrued incentives 6,982,304 5,518,883
Accrued expenses 1,211,448 1,077,844
Income taxes payable - 89,932
Deferred revenue 898,658 538,230
Current maturities of long-term debt 27,743,881 19,181,277
Current maturities of capital lease obligations 167,433 124,703
------------ -------------
Total current liabilities 66,960,179 59,536,655
LONG-TERM DEBT, net of current maturities 404,048,043 197,755,713
CAPITAL LEASE OBLIGATIONS, net of current maturities 2,138,151 2,305,583
OTHER LONG-TERM LIABILITIES 317,287 300,823
DEFERRED INCOME TAXES 61,699,507 -
COMMITMENTS (Note I)
STOCKHOLDERS' EQUITY (DEFICIT):
Class A common stock, voting, authorized 5,000,000
shares of $.01 par value; issued and outstanding
549,254 and 1,264,246 shares at March 31, 2004 and
2003, respectively 5,493 12,642
Additional paid-in capital 110,963,897 65,381,476
Notes receivable from stockholders (92,689) (336,681)
Retained earnings (accumulated deficit) 3,651,080 (114,158,563)
Accumulated other comprehensive loss - (418,631)
------------ -------------
Total stockholders' equity (deficit) 114,527,781 (49,519,757)
------------ -------------
$649,690,948 $210,379,017
============= =============
See notes to consolidated financial statements.
37
NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------
Successor Predecessor
----------- -------------------------------------
1 Month 11 Months
Ended Ended Year Ended
March 31, February 29, March 31, March 31,
2004 2004 2003 2002
----------- ------------ ------------ ------------
REVENUES, net of returns $13,317,394 $385,363,674 $370,509,849 $338,916,409
COSTS OF SALES 7,768,616 231,874,108 224,488,201 206,975,716
----------- ------------ ------------- -----------
Gross profit 5,548,778 153,489,566 146,021,648 131,940,693
OPERATING EXPENSES:
Selling, general and administrative 8,540,262 91,877,771 90,390,858 84,870,828
Depreciation 342,992 2,977,309 2,987,947 3,087,234
Amortization 649,000 1,162,320 644,053 504,468
Stock-based compensation - 7,263,940 - -
----------- ------------ ------------ ------------
9,532,254 103,281,340 94,022,858 88,462,530
----------- ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (3,983,476) 50,208,226 51,998,790 43,478,163
----------- ------------ ------------ ------------
OTHER EXPENSES (INCOME):
Interest expense 2,848,447 34,535,902 22,192,314 24,408,403
Interest income (97,587) (307,680) (360,448) (399,573)
(Gain) Loss on derivative financial
instruments - (57,296) 155,831 360,445
----------- ------------ ------------ ------------
2,750,860 34,170,926 21,987,697 24,369,275
----------- ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (6,734,336) 16,037,300 30,011,093 19,108,888
INCOME TAX EXPENSE (BENEFIT) (2,502,688) 6,608,592 12,231,845 7,953,584
----------- ------------ ------------ ------------
NET INCOME (LOSS) $(4,231,648) $ 9,428,708 $ 17,779,248 $ 11,155,304
=========== =========== ============ ============
EARNINGS (LOSS) PER SHARE:
Basic $ (7.70) $ 7.45 $ 14.07 $ 8.83
=========== =========== ============ ============
Diluted $ (7.70) $ 7.30 $ 13.88 $ 8.83
=========== =========== ============ ============
See notes to consolidated financial statements.
38
NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- ---------------------------------------------------------------------------------------------------------------------------------
Notes Retained Accumulated
Additional Receivable Earnings Other
Common Paid-in From (Accumulated Comprehensive Treasury Comprehensive
Stock Capital Stockholders Deficit) Income (Loss) Stock Total Income (Loss)
--------- ----------- ------------- ------------- -------------- -------- ----------- -------------
BALANCE, April 1, 2001
(Predecessor) $ 12,607 $65,167,394 $ (697,171) $(143,093,115) $ - $ - $(78,610,285)
Issuance of 2,621 shares
of common stock 27 137,490 (123,765) - - - 13,752 $ -
Interest accrued on
stockholder notes - - (45,004) - - - (45,004) -
Net income - - - 11,155,304 - - 11,155,304 11,155,304
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
(Predecessor) 12,634 65,304,884 (865,940) (131,937,811) (604,567) - (68,090,800) $ 10,550,737
===========
Issuance of 875 shares of
common stock upon exercise
of stock options, including
tax benefit of $24,000 8 76,592 - - - - 76,600 $ -
Payment on stockholder notes - - 552,089 - - - 552,089 -
Interest accrued on
stockholder notes - - (22,830) - - - (22,830) -
Net income - - - 17,779,248 - - 17,779,248 17,779,248
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
(Predecessor) $ 12,642 $65,381,476 $ (336,681) $(114,158,563) $ (418,631) $ - $(49,519,757) $ 17,965,184
========= =========== ============ ============= ============= ======== ============= ============
See notes to consolidated financial statements.
39
NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------------------------------------------------------------------------------------------
Notes Retained Accumulated
Additional Receivable Earnings Other
Common Paid-in From (Accumulated Comprehensive Treasury Comprehensive
Stock Capital Stockholders Deficit) Income (Loss) Stock Total Income (Loss)
---------- ----------- ------------ ------------ ------------ ------------ ---------- --------------
BALANCE, April 1, 2003
(Predecessor) $ 12,642 $ 65,381,476 $(336,681) $(114,158,563) $ (418,631) $ - $ (49,519,757)
Issuance of 39,905 shares of
common stock 400 9,722,283 - - - - 9,722,683 $ -
Issuance of 300 shares of
common stock upon exercise
of stock options,
including tax benefit of
$10,000 3 25,737 - - - - 25,740 -
Payment on stockholder notes - - 208,089 - - - 208,089 -
Interest accrued on
stockholder notes - - (14,437) - - - (14,437) -
Net income - - - 9,428,708 - - 9,428,708 9,428,708
Reacquired 116,786 shares
of common stock - - - - - (32,696,577) (32,696,577) -
Other comprehensive income,
net of taxes:
Unrealized gains on
interest rate
swap agreements, net
of taxes of $256,145 - - - - 418,631 - 418,631 418,631
---------- ------------ ----------- -------------- ------------ ------------ ---------- -----------
BALANCE, February 29, 2004
(Predecessor) 13,045 75,129,496 (143,029) (104,729,855) - (32,696,577) (62,426,920)$ 9,847,339
===========
March 4, 2004 Transaction:
Record step-up in basis of
assets and liabilities - 334,216,997 - - - - 334,216,997 $ -
Capital contribution - 28,164,181 - - - - 28,164,181 -
Exchange of shares of common
stock (115,088 shares) 1,151 (1,151) - - - - - -
Cancellation of 870,285
shares of common stock (8,703) (180,357,483) - - - - (180,366,186) -
Reset equity accounts - (145,309,403) 243 112,612,583 - 32,696,577 - -
Costs of transaction - (878,740) - - - - (878,740) -
Payment on stockholder notes - - 50,471 - - - 50,471 -
Interest accrued on
stockholder notes - - (374) - - - (374) -
Net loss - - - (4,231,648) - - (4,231,648)(4,231,648)
---------- ------------ ---------- -------------- ------------ ------------ ------------ -----------
BALANCE, March 31, 2004
(Successor) $ 5,493 $110,963,897 $ (92,689) $ 3,651,080 $ - $ - $114,527,781 $(4,231,648)
========== ============ ========== ============== ============ ============ ============ ===========
See notes to consolidated financial statements.
40
NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------
Successor Predecessor
-------------- -----------------------------------------
1 Month Ended 11 Months Ended Year Ended
March 31, February 29, March 31, March 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 2004 2004 2003 2002
-------------- -------------- ------------- ------------
Net income (loss) $ (4,231,648) $ 9,428,708 $ 17,779,248 $ 11,155,304
Adjustments to reconcile net income (loss)
to net cash flows from operating activities:
Provision for losses on receivables 218,205 66,393 451,578 1,629,704
Depreciation 342,992 2,977,309 2,987,947 3,087,234
Amortization 779,638 11,048,406 2,263,213 2,463,756
Original issue debt discount amortization 403,854 - 6,661,206 6,893,299
Noncash interest (income) expense from
derivative financial instruments - (1,030) (249,310) 250,340
(Gain) loss on derivative financial instruments - (169,863) (190,583) 360,445
(Gain) loss on disposal of assets 13,582 408,095 35,428 (482,810)
Deferred income taxes (1,049,201) 4,110,000 1,269,000 (500,000)
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals:
Receivables (4,242,720) 3,658,110 (175,488) 309,193
Inventories 5,031,722 (4,791,883) 2,061,981 (6,554,490)
Recoverable income taxes (1,463,478) (3,853,002) - 706,408
Prepaid expenses and other assets (88,681) 83,487 (335,844) (94,740)
Other assets (363,805) (814,529) (346,736) (683,573)
Accounts payable (11,158,543) 10,418,017 3,927,555 3,436,113
Accrued employee compensation and benefits (1,005,513) (602,470) 1,731,811 2,398,129
Accrued interest (4,577,872) 4,637,885 958,573 80,556
Accrued incentives (213,186) 1,676,607 1,923,255 2,613,734
Accrued expenses (61,411) 192,125 16,875 96,188
Income taxes payable - (89,932) (3,570,507) 3,684,439
Deferred revenue 153,037 207,391 105,440 153,808
Other long-term liabilities 1,516 14,948 26,971 34,883
-------------- -------------- ------------- ------------
Net cash flows from operating activities (21,511,512) 38,604,772 37,331,613 31,037,920
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (719,844) (3,964,662) (3,707,733) (2,276,892)
Payment of March 4, 2004 Transaction
merger consideration (181,244,926) - - -
Acquisitions, net of cash acquired (1,848,798) (2,355,486) (1,389,338) (6,109,599)
Proceeds from sale of bookstores - - - 1,139,400
Proceeds from sale of property and equipment and other 2,095 9,676 19,643 49,487
Software development costs (24,750) (141,186) (249,644) (418,463)
-------------- -------------- ------------- ------------
Net cash flows from investing activities (183,836,223) (6,451,658) (5,327,072) (7,616,067)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 405,009,190 75,000,000 - -
Capital contribution 28,164,181 - - -
Proceeds from issuance of common stock - - - 13,752
Payment of financing costs (12,099,547) (3,830,335) (32,446) -
Principal payments on long-term debt (235,087,270) (30,470,840) (4,476,155) (16,308,445)
Principal payments on capital lease obligations (10,395) (122,287) (114,524) (117,388)
Proceeds from exercise of stock options - 15,740 52,600 -
Purchases of treasury stock - (32,696,577) - -
Increase in restricted cash (27,065,000) - - -
Proceeds from payment on notes
receivable from stockholders 50,471 208,089 552,089 -
-------------- -------------- ------------- ------------
Net cash flows from financing activities 158,961,630 8,103,790 (4,018,436) (16,412,081)
-------------- -------------- ------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (46,386,105) 40,256,904 27,986,105 7,009,772
CASH AND CASH EQUIVALENTS, Beginning of period 79,662,286 39,405,382 11,419,277 4,409,505
-------------- -------------- ------------- ------------
CASH AND CASH EQUIVALENTS, End of period $ 33,276,181 $ 79,662,286 $ 39,405,382 $ 11,419,277
============== ============== ============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest $ 6,891,827 $ 20,125,528 $ 13,549,099 $ 15,224,920
Income taxes 9,991 6,466,526 14,533,352 4,062,737
Noncash investing and financing activities:
Notes receivable from shareholders recorded
upon issuance of common stock $ - $ - $ - $ 123,765
Revaluation of assets and equity in
March 4, 2004 Transaction 334,216,997 - - -
Acquisition of TheCampusHub.com, Inc. through issuance
of common stock - 9,722,683 - -
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 - 418,631 185,936 (1,927)
Deferred taxes resulting from accumulated
other comprehensive income (loss) - 256,145 146,900 (403,045)
Tax benefit on exercise of stock options - 10,000 24,000 -
See notes to consolidated financial statements.
41
NBC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A. NATURE OF OPERATIONS
NBC Acquisition Corp. (the "Company") was formed for the purpose of
acquiring all of the outstanding capital stock of Nebraska Book Company, Inc.
("NBC"), effective September 1, 1995. The Company did not have substantive
operations prior to the acquisition of NBC and was acquired by affiliates of
Haas Wheat & Partners, L.P. ("HWP") in February, 1998.
The Company does not conduct significant activities apart from its
investment in NBC. Operational matters discussed in this report, including the
acquisition of college bookstores and other related businesses, refer to
operations of NBC. References to "the Company" and "NBC" are used
interchangeably when discussing such operational matters. NBC participates in
the college bookstore industry primarily by providing used textbooks to college
bookstore operators, by operating its own college bookstores, by providing
distance education products and services, and by providing proprietary college
bookstore information systems, consulting services, and other.
On August 2, 2002, HWH Capital Partners, L.P. and HWH Cornhusker
Partners, L.P., affiliates of HWP, along with certain other stockholders of the
Company (collectively with HWP, the "Sellers"), sold approximately 33% of the
issued and outstanding shares of the Company 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.). HWP
retained a controlling interest in the Company 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 could have
required that the Sellers repurchase Weston Presidio's shares of the Company at
a price as defined in the buy-sell agreement, unless a majority of the Sellers
elected, in the alternative, to sell to Weston Presidio their remaining shares
of the Company at a price as defined in the buy-sell agreement.
As further discussed in Note C, on March 4, 2004, Weston Presidio gained
controlling interest in the Company through (i) the formation of two new
corporations, NBC Holdings Corp. and New NBC Acquisition Corp.; (ii) a $28.2
million equity investment by Weston Presidio in NBC Holdings Corp., funds for
which were ultimately paid to the Company in the form of a capital contribution;
(iii) Weston Presidio's purchase of 36,455 shares of the Company's common stock
directly from its holders; (iv) the cancellation of 870,285 shares of the
Company's common stock upon payment by the Company of merger consideration of
$180.4 million to the shareholders of record for such shares; (v) the exchange
of 397,711 shares of the Company's common stock for 512,799 shares of New NBC
Acquisition Corp. capital stock in the merger of the two entities with the
Company as the surviving entity; and (vi) the exchange of 512,799 shares of the
Company's common stock by Weston Presidio and current and former members of NBC
management for a like number of shares of NBC Holdings Corp. capital stock.
Payment of the $180.4 million of merger consideration was funded through
proceeds from the $28.2 million capital contribution, available cash, and
proceeds from $405.0 million in new debt financing, of which $261.0 million was
utilized to retire certain debt instruments outstanding at March 4, 2004 or to
place funds in escrow for untendered debt instruments called for redemption on
March 4, 2004 and redeemed on April 3, 2004. There were 549,254 shares of the
Company's common stock outstanding at March 31, 2004, of which 532,436 shares
were owned by Weston Presidio (495,981 shares through NBC Holdings Corp.) and
the remainder were owned by current and former members of management of NBC
through NBC Holdings Corp. For ease of presentation, this transaction has been
reflected in the accompanying financial statements as if it had occurred on
March 1, 2004. Management has determined that no material transactions occurred
during the period from March 1, 2004 through March 4, 2004. As a result of this
transaction, the Company's results of operations, financial position and cash
flow's prior to March 1, 2004 are presented as the "Predecessor." The Company's
results of operations, financial position and cash flows thereafter are
presented as the "Successor."
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company and its subsidiary are
as follows:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and NBC. All significant intercompany accounts and
transactions are eliminated in consolidation.
Effective July 1, 2002, NBC's distance learning division was separately
incorporated under the laws of the State of Delaware as Specialty Books, Inc., a
wholly-owned subsidiary of NBC.
42
REVENUE RECOGNITION: The Company generally recognizes revenue from product
sales at the time of shipment, net of estimated product returns. 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 $0.4 million, $5.8 million, $5.4
million, and $4.4 million for the one month ended March 31, 2004, the eleven
months ended February 29, 2004, and the years ended March 31, 2003 and 2002,
respectively. Shipping and handling costs are included in operating expenses in
the consolidated statements of operations and approximated $0.7 million, $9.4
million, $9.0 million, and $8.0 million for the one month ended March 31, 2004,
the eleven months ended February 29, 2004, and the years ended March 31, 2003
and 2002, respectively.
ADVERTISING: Advertising costs are expensed as incurred and approximated
$0.2 million, $4.0 million, $3.2 million, and $2.7 million for the one month
ended March 31, 2004, the eleven months ended February 29, 2004, and the years
ended March 31, 2003and 2002, 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.
RESTRICTED CASH: Included in restricted cash at March 31, 2004 is $27.1
million representing amounts held in escrow to be utilized to fund the
redemption on April 3, 2004 of untendered principal balances and related accrued
interest and call premiums thereon under the $110.0 million senior subordinated
notes and $76.0 million senior discount debentures, as further discussed in Note
C.
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. 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 the straight-line method. The majority of
property and equipment have useful lives of one to seven years, with the
exception of buildings which are depreciated over 39 years and leasehold
improvements which are depreciated over the remaining life of the corresponding
lease.
GOODWILL: Goodwill as of March 31, 2004 arose as a result of the March 4,
2004 Transaction described in Note C and the acquisition of bookstore operations
subsequent thereto. Prior to March 4, 2004, goodwill was attributable to the
acquisition of 100% of the stock of NBC effective September 1, 1995 and the
acquisition of various bookstore operations and other businesses. Goodwill is
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. There were no impairment losses recognized
during fiscal 2004.
IDENTIFIABLE INTANGIBLES - CUSTOMER RELATIONSHIPS: The identifiable
intangible asset for customer relationships is attributable to the
non-contractual long-term relationships the Company has established over the
years with customers in its Textbook and Complementary Services Divisions. This
identifiable intangible is amortized on a straight-line basis over an estimated
useful life of 20 years. There were no impairment losses recognized during
fiscal 2004.
IDENTIFIABLE INTANGIBLES - TRADENAMES: The identifiable intangible asset
for tradenames relates to the trademark owned on the name "Nebraska Book
Company" and the corresponding logo. This identifiable intangible has an
indefinite useful life; and, thus, is not amortized but rather tested at least
annually for impairment. The test for impairment of identifiable intangibles
with indefinite useful lives consists of comparing the fair value of the
identifiable intangible with its carrying amount, recognizing any excess
carrying value as an impairment loss. There were no impairment losses recognized
during fiscal 2004.
43
IDENTIFIABLE INTANGIBLES - DEVELOPED TECHNOLOGY: The Company's primary
activities regarding the internal development of software revolve around its
proprietary college bookstore information systems (PRISM and WinPRISM) and
E-commerce technology (WebPRISM), which are utilized by the Company's Bookstore
Division and also marketed to the general public. As this 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 and E-commerce
technology are expensed as incurred until technological feasibility has been
established. After technological feasibility is established, additional
development costs are capitalized and amortized on a straight-line basis over
the lesser of six years or the economic life of the related product.
Recoverability of such capitalized costs is evaluated based upon estimates of
future undiscounted cash flows. There were no impairment losses recognized
during fiscal 2004. Amortization of the capitalized costs associated with such
functionalities totaled $0.2 million, $1.0 million, $0.4 million, and $0.3
million for the one month ended March 31, 2004, the eleven months ended February
29, 2004, and the years ended March 31, 2003 and 2002, respectively.
IDENTIFIABLE INTANGIBLES - COVENANTS NOT TO COMPETE: The identifiable
intangible asset for covenants not to compete represents the value assigned to
such agreements, which are typically entered into with the owners of college
bookstores acquired by the Company. This identifiable intangible is amortized on
a straight-line basis over the term of the agreement, which generally is 3
years.
DEBT ISSUE COSTS: The costs related to the issuance of debt are capitalized
and amortized to interest expense using the effective interest method over the
lives of the related debt. Accumulated amortization of such costs as of March
31, 2004 and 2003 was approximately $0.1 million and $8.8 million, respectively.
Debt issue costs related to retired debt were written off to interest expense in
connection with the December 10, 2003 debt refinancing and the March 4, 2004
Transaction and totaled $0.5 million and $7.8 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 a $10.0
million optional prepayment of the term loans as additional interest expense.
DERIVATIVE FINANCIAL INSTRUMENTS: Interest rate swap agreements were
utilized in the past by the Company to reduce exposure to fluctuations in the
interest rates on NBC's variable rate debt through July 31, 2003. Such
agreements were recorded in the consolidated balance sheet at fair value.
Changes in the fair value of the agreements were recorded in earnings or other
comprehensive income (loss), based on whether the agreements were designated as
part of the hedge transaction and whether the agreements were effective in
offsetting the change in the value of the interest payments attributable to
NBC`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, 2004 and 2003, because
of the relatively short maturity of these instruments. The fair value of
long-term debt, including the current maturities, was approximately $435.2
million and $215.6 million as of March 31, 2004 and 2003, respectively, as
determined by quoted market values and prevailing interest rates for similar
debt issues. The fair value of the interest rate swap agreements (see Note J)
approximated $(0.8) million as of March 31, 2003 using quotes from brokers and
represented the Company's loss on settlement if the existing agreements had been
settled on that date.
44
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. Under this method, compensation expense is
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based
Compensation, established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans. As allowed by SFAS No. 123, the Company has elected to continue to apply
the intrinsic-value-based method of accounting.
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO.
123. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements. The following table illustrates the
effect on net income if the fair-value-based method had been applied to all
outstanding and unvested awards in each period:
Successor Predecessor
--------------- -------------------------------------------
Fiscal
1 Month Ended 11 Months Ended Year Ended
March 31, February 29, March 31, March 31,
2004 2004 2003 2002
--------------- --------------- ------------- -------------
Net income (loss), as reported $ (4,231,648) $ 9,428,708 $17,779,248 $11,155,304
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects - 4,358,364 - -
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects - (4,455,453) (92,382) (51,344)
--------------- --------------- ------------- -------------
Pro forma net income (loss) $ (4,231,648) $ 9,331,619 $17,686,866 $11,103,960
=============== =============== ============= =============
Earnings (loss) per share:
Basic - as reported $ (7.70) $ 7.45 $ 14.07 $ 8.83
Basic - pro forma (7.70) 7.38 14.00 8.79
Diluted - as reported (7.70) 7.30 13.88 8.83
Diluted - pro forma (7.70) 7.14 13.70 8.79
INCOME TAXES: The Company provides for deferred income taxes based upon
temporary differences between financial statement and income tax bases of assets
and liabilities, and tax rates in effect for periods in which such temporary
differences are estimated to reverse.
EARNINGS PER SHARE: Basic earnings per share data are based on the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share data are based on the weighted-average number of common
shares outstanding and the dilutive effect of potential common shares including
stock options and warrants.
COMPREHENSIVE INCOME (LOSS): Comprehensive income (loss) includes net income
and other comprehensive income (losses). For the eleven months ended February
29, 2004, and the years ended March 31, 2003 and 2002, 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.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to
conform with the fiscal 2004 presentation.
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") and later revised FIN 46 in December,
2003. 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 provisions of FIN 46 become effective
on varying dates. As these provisions become effective and are adopted, they
have not and are not expected to have a significant impact on the Company's
consolidated financial statements.
45
In May, 2003 the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY, to establish
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument within its scope as a liability
(or an asset in some circumstances). SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003, except for certain provisions that have been deferred. Adoption of SFAS
No. 150 had no impact and is not expected to have a significant impact on the
Company's consolidated financial statements.
C. BUSINESS COMBINATION
On March 4, 2004, Weston Presidio acquired the controlling interest in the
Company through a series of steps which resulted in Weston Presidio owning a
substantial majority of the Company's common stock. The transaction was
accomplished pursuant to, among other instruments, an Agreement & Plan of Merger
and a Stock Purchase Agreement dated February 18, 2004. The series of related
steps underlying this transaction included the following:
(1) NBC refinanced its existing $125.0 million senior credit facility with a
$230.0 million senior credit facility (the "Senior Credit Facility")
comprised of an $180.0 million term loan (the "Term Loan") which matures
on March 4, 2011 and was drawn in full in connection with the
consummation of the transaction, and a $50.0 million revolving credit
facility (the "Revolving Credit Facility") which matures on March 4,
2009 and was not drawn upon at the consummation of the transaction.
(2) NBC completed a private placement of $175.0 million principal amount of
8.625% senior subordinated notes (the "Senior Subordinated Notes") which
mature on March 15, 2012. On April 27, 2004, NBC filed a Form S-4
Registration Statement with the Securities and Exchange Commission for
the purpose of registering debt securities to be issued in exchange for
the Senior Subordinated Notes. Such Registration Statement was declared
effective by the Securities and Exchange Commission on May 7, 2004. All
notes were tendered in the offer to exchange that was completed on June
8, 2004. The terms of the securities issued in the exchange offer are
identical to those in effect at March 31, 2004.
(3) The Company completed a private placement of $77.0 million principal
amount of 11.0% senior discount notes (the "Senior Discount Notes")
which mature on March 15, 2013. The Senior Discount Notes were issued at
a discount of $27.0 million and will become fully-accreted on March 15,
2008, at which point semi-annual cash interest payments begin to accrue
and are payable beginning September 15, 2008. On April 27, 2004, the
Company filed a Form S-4 Registration Statement with the Securities and
Exchange Commission for the purpose of registering debt securities to be
issued in exchange for the Senior Discount Notes. Such Registration
Statement was declared effective by the Securities and Exchange
Commission on May 7, 2004. All notes were tendered in the offer to
exchange that was completed on June 8, 2004. The terms of the securities
issued in the exchange offer are identical to those in effect at March
31, 2004.
(4) NBC completed a cash tender offer for, and partial redemption of, its
$110.0 million principal amount of outstanding 8.75% senior subordinated
notes. Untendered notes which totaled $15.4 million were called for
redemption on March 4, 2004 and redeemed on April 3, 2004. Funds
totaling $16.1 million, including accrued interest and call premiums on
such indebtedness, were held in escrow as of March 31, 2004, pending the
April 3, 2004 redemption. Such escrowed funds are included in
"restricted cash" in the consolidated balance sheet.
(5) The Company completed a cash tender offer for, and partial redemption
of, its $76.0 million principal amount of outstanding 10.75% senior
discount debentures. Untendered debentures which totaled $10.5 million
were called for redemption on March 4, 2004 and redeemed on April 3,
2004. Funds totaling $11.0 million, including accrued interest and call
premiums on such indebtedness, were held in escrow as of March 31, 2004,
pending the April 3, 2004 redemption. Such escrowed funds are included
in "restricted cash" in the consolidated balance sheet.
(6) Weston Presidio made an initial equity investment of $28.2 million in
NBC Holdings Corp., funds for which were ultimately paid to the Company
in the form of a capital contribution.
(7) Weston Presidio purchased 36,455 shares of the Company's common stock
directly from its holders for $8.4 million.
46
(8) 870,285 shares of the Company's common stock were cancelled upon the
Company's payment of $180.4 million in merger consideration to the
holders of such shares.
(9) 397,711 shares of NBC Acquisition Corp. Class A Common Stock were
exchanged for 512,799 shares of capital stock of New NBC Acquisition
Corp., a new corporation formed by Weston Presidio, in the merger of the
two entities with the Company as the surviving entity.
(10) Weston Presidio and current and former members of NBC management
contributed 495,981 shares and 16,818 shares, respectively, of the
Company's common stock to NBC Holdings Corp. in exchange for a like
number of shares of NBC Holdings Corp. capital stock.
(11) Options to acquire 49,778 shares of the Company's common stock held by
members of NBC management were exchanged for options to acquire a like
number of shares of NBC Holdings Corp. capital stock.
(12) NBC declared and paid dividends of $184.3 million to the Company to
help finance the transaction.
Throughout this Annual Report, we generally refer to all of the above steps
and transactions that comprise this entire transaction, collectively, as the
"March 4, 2004 Transaction". The March 4, 2004 Transaction was accounted for as
a purchase at NBC Holdings Corp. with the related purchase accounting
pushed-down to the Company and NBC as of the date of the transaction. The March
4, 2004 Transaction was accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No.141, BUSINESS COMBINATIONS and EITF 88-16,
BASIS IN LEVERAGED BUYOUT TRANSACTIONS. Accordingly, the Company was revalued at
the time of the March 4, 2004 Transaction to fair value to the extent of the
majority stockholder's (Weston Presidio's) 96.9% controlling interest in the
Company. The remaining 3.1% is accounted for at the continuing stockholders'
(current and former members of NBC management) carryover basis in the Company.
The excess of the purchase price over the historical basis of the net assets
acquired has been applied to adjust net assets to their fair values to the
extent of Weston Presidio's 96.9% ownership of outstanding common stock. Fair
value was determined in part using an independent third-party appraisal.
47
The following table summarizes the purchase price allocation of the March 4,
2004 Transaction:
Purchase Price:
Net debt issued in transaction $144,009,190
Contribution of existing equity:
Weston Presidio 74,484,204
Current and former members of management 653,610
Capital contribution from NBC Holdings Corp. 28,164,181
Purchase of 36,455 shares by Weston Presidio
directly from shareholders 8,435,958
Net cash paid by Company 8,192,816
Fair value of NBC Holdings Corp. options granted 7,850,118
--------------
Total Purchase Price $271,790,077
Net Book Value of Tangible Assets Acquired
and Liabilities Assumed 97,865,603
--------------
Excess Purchase Price $369,655,680
==============
Allocation of Excess Purchase Price:
Goodwill $267,114,671
Identifiable Intangibles:
Customer relationships $114,830,000
Tradename 31,320,000
Developed technology 11,449,000 157,599,000
--------------
Property and Equipment 7,098,009
Deferred Tax Liability (62,156,000)
--------------
$369,655,680
==============
The Company incurred $26.2 million in costs associated with the March 4,
2004 Transaction and wrote off $7.8 million of debt issue costs associated with
debt retired to interest expense. Of the $26.2 million of costs incurred, $12.1
million was capitalized as debt issue costs, $7.3 million of stock-based
compensation and related payroll taxes was recorded in conjunction with 40,668
options to purchase shares of NBC Acquisition Corp. Class A Common Stock which
were converted into the right to receive cash payment, $5.9 million of call
premiums paid on the debt retired was recorded as interest expense, and $0.9
million was recorded as an offset to additional paid-in capital.
The following unaudited pro forma financial information was prepared as if
the March 4, 2004 Transaction had occurred at the beginning of each of the
periods presented:
Successor Predecessor
--------------- ----------------------------------
One Eleven
Month Ended Months Ended Year Ended
March 31, 2004 February 29, 2004 March 31, 2003
--------------- ----------------- ----------------
Revenues, net of returns $ 13,317,394 $ 385,363,674 $ 370,509,849
Net income (loss) (4,033,559) 13,275,765 7,287,928
Earnings (loss) per share:
Basic (7.34) 24.17 13.27
Diluted (7.34) 23.66 12.99
48
These unaudited pro forma results have been prepared for comparative
purposes only and primarily include adjustments for depreciation and
amortization arising from the step-up in basis of assets in the March 4, 2004
Transaction, interest expense on debt issued in connection with the March 4,
2004 Transaction, and the related income tax adjustments. These adjustments were
tax effected using the Company's effective tax rates of 37.2%, 41.2%, and 40.8%
for the one month ended March 31, 2004, the eleven months ended February 29,
2004, and the year ended March 31, 2003, respectively. The pro forma information
is not necessarily indicative of the results that would have occurred had the
March 4, 2004 Transaction occurred at the beginning of the periods presented,
nor is it necessarily indicative of future results.
D. RECEIVABLES
Receivables are summarized as follows:
March 31,
----------------------------
2004 2003
------------ -----------
Trade receivables, less allowance for
doubtful accounts of $510,839 and
$442,942 at March 31, 2004 and 2003, $15,326,208 $13,792,759
respectively
Receivables from book publishers for 9,164,926 10,351,717
returns
Advances for book buy-backs 4,068,709 2,294,455
Computer finance agreements, current 655,649 445,393
portion
Related party receivables - 348,386
Other 1,197,098 1,852,619
----------- -----------
$30,412,590 $29,085,329
=========== ===========
Trade receivables include the effect of estimated product returns. The amount
of estimated product returns at March 31, 2004 and 2003 was approximately $5.3
million and $6.0 million, respectively.
E. INVENTORIES
Inventories are summarized as follows:
March 31,
----------------------------
2004 2003
----------- -----------
Textbook Division $31,247,606 $28,908,121
Bookstore Division 35,313,780 31,986,260
Complementary Services Division 3,577,836 7,420,971
----------- -----------
$70,139,222 $68,315,352
=========== ===========
Textbook Division inventories include the effect of estimated product
returns. The amount of estimated product returns at March 31, 2004 and 2003 was
approximately $2.5 million and $2.7 million, respectively.
General and administrative costs associated with the storage and handling of
inventory totaled approximately $7.3 million and $7.4 million for the years
ended March 31, 2004 and 2003 , respectively, of which approximately $2.0
million and $2.1 million was capitalized into inventory at March 31, 2004 and
2003, respectively.
49
F. PROPERTY AND EQUIPMENT
A summary of the cost of property and equipment follows:
March 31,
-------------------------------
2004 2003
--------------- --------------
Land $ 3,565,382 $ 2,408,999
Buildings and improvements 16,236,634 17,394,396
Leasehold improvements 6,687,660 7,134,396
Furniture and fixtures 4,684,992 7,060,829
Information systems 3,638,204 11,514,821
Automobiles and trucks 178,938 337,957
Machinery 298,422 564,468
Projects in process 1,185,860 483,246
--------------- --------------
36,476,092 46,899,112
Less: Accumulated
depreciation & amortization (342,836) (19,232,742)
--------------- --------------
$ 36,133,256 $ 27,666,370
=============== ==============
G. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLES
As discussed in detail in Note C, on March 4, 2004 Weston Presidio acquired
the controlling interest in the Company through a series of steps which resulted
in Weston Presidio owning a substantial majority of the Company's common stock.
The March 4, 2004 Transaction was accounted for as a purchase at NBC Holdings
Corp. with the related purchase accounting pushed-down to the Company and NBC as
of the date of the transaction. The excess of the purchase price over the
historical basis of the net assets acquired was applied to adjust net assets to
their fair values, as described in Note C and as determined in part using an
independent third-party appraisal. The allocation of the excess purchase price
included establishing identifiable intangibles for customer relationships of
$114.8 million and tradename of $31.3 million; adjusting the carrying value of
developed technology at March 4, 2004 to a fair value of $11.4 million; and
adjusting the carrying value of goodwill at March 4, 2004 to a fair value of
$267.1 million, of which $25.3 million is deductible for income tax purposes.
The weighted-average amortization period for identifiable intangibles subject to
amortization is 18.7 years, including 20 years for customer relationships and 6
years for developed technology.
During the fiscal year ended March 31, 2004, NBC acquired nine college
bookstore locations in seven separate transactions, none of which was material
to the Company's consolidated financial statements. In May of 2003, NBC acquired
certain assets of a privately owned bookstore serving Marshall University. Also
in May of 2003, NBC acquired certain assets of an institutional
("contract-managed") bookstore location serving Wayne State College. In June of
2003, NBC acquired certain assets of an institutional ("contract-managed")
bookstore with three locations serving Michigan State University. In July of
2003, NBC acquired certain assets of a privately owned bookstore serving Mesa
Community College. In September of 2003, NBC acquired certain assets of an
institutional ("contract-managed") bookstore location serving Western
International University. In November of 2003, NBC acquired certain assets of an
institutional ("contract-managed") bookstore location serving East Tennessee
State University. In March of 2004, NBC acquired certain assets of a privately
owned bookstore serving the University of Toledo. The total purchase price, net
of cash acquired, of such acquisitions was approximately $3.9 million, of which
approximately $0.2 million was assigned to a covenant not to compete with an
amortization period of three years and approximately $1.5 million was assigned
to tax-deductible goodwill.
On July 1, 2003, NBC acquired all of the outstanding shares of common stock
of TheCampusHub.com, Inc. ("Campus Hub"). CampusHub is no longer separately
incorporated and is instead accounted for as a division within the Complementary
Services Division segment. Each share of TheCampusHub.com, Inc. common stock
issued and outstanding was converted into shares of NBC Acquisition Corp. Class
A Common Stock, resulting in the issuance of 39,905 shares of NBC Acquisition
Corp. Class A Common Stock. CampusHub provides college bookstores with a way to
sell in-store inventory and virtual brand name merchandise over the Internet
utilizing technology originally developed by NBC. TheCampusHub.com, Inc. had
1,300,099 shares of issued and outstanding common stock at the time of
acquisition, of which 650,000 shares were owned by HWP, 650,000 shares were
owned by an unrelated third party, and 99 shares were owned by three NBC
employees. This business combination was accounted for by NBC in accordance with
Statement of Financial Accounting Standards No. 141, BUSINESS COMBINATIONS. The
total purchase price, net of cash acquired, of such acquisition was $10.0
million, of which $3.7 million was assigned to non-deductible goodwill.
50
The changes in the carrying amount of goodwill for the one month ended March
31, 2004, the eleven months ended February 29, 2004, and the year ended March
31, 2003, in total and by reportable segment, are as follows:
Complementary
Bookstore Services Corporate
Division Division Administration Total
--------------- -------------- --------------- --------------
Balance, April 1, 2002 $ 13,020,761 $ - $ 16,770,574 $ 29,791,335
Additions to goodwill:
Bookstore acquisitions 681,488 - - 681,488
--------------- --------------- -------------- -------------
Balance, March 31, 2003 13,702,249 - 16,770,574 30,472,823
Additions to goodwill:
Bookstore acquisitions 11,373 - - 11,373
Acquisition of
TheCampusHub.com, Inc. - 3,604,375 - 3,604,375
--------------- --------------- -------------- -------------
Balance, February 29, 2004 13,713,622 3,604,375 16,770,574 34,088,571
Additions to goodwill:
Purchase accounting adjustment -
TheCampusHub.com, Inc. - 100,856 - 100,856
March 4, 2004 Transaction (13,713,622) (3,705,231) 250,344,097 232,925,244
Bookstore acquisitions 1,532,260 - - 1,532,260
--------------- --------------- -------------- -------------
Balance, March 31, 2004 $ 1,532,260 $ - $267,114,671 $268,646,931
=============== =============== ============== =============
Goodwill assigned to corporate administration represents the goodwill
arising out of the March 4, 2004 Transaction, as all goodwill was assigned to
corporate administration. As is the case with a portion of the Company's assets,
such goodwill is not allocated between the Company's reportable 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.
The following table presents the gross carrying amount and accumulated
amortization of identifiable intangibles subject to amortization, in total and
by asset class, as of March 31, 2004 and 2003:
51
March 31, 2004
-----------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
--------------- --------------- ---------------
Customer relationships $ 114,830,000 $ (478,060) $ 114,351,940
Developed technology 11,473,750 (159,006) 11,314,744
Covenants not to compete 689,333 (170,385) 518,948
--------------- --------------- ---------------
$ 126,993,083 $ (807,451) $ 126,185,632
=============== =============== ===============
March 31, 2003
-----------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
--------------- --------------- ---------------
Developed technology $ 1,868,497 $ (756,851) $ 1,111,646
Covenants not to compete 847,333 (608,319) 239,014
--------------- --------------- ---------------
$ 2,715,830 $ (1,365,170) $ 1,350,660
=============== =============== ===============
Information regarding aggregate amortization expense for the one month
ended March 31, 2004, the eleven months ended February 29, 2004, and the years
ended March 31, 2003 and 2002 for identifiable intangibles subject to
amortization, along with estimated aggregate amortization expense for each of
the next five fiscal years, is presented in the following table:
Amortization
Expense
--------------
One month ended March 31, 2004 (Successor) $ 648,289
Eleven months ended February 29, 2004 (Predecessor) 1,154,502
Year ended March 31, 2003 (Predecessor) 635,524
Year ended March 31, 2002 (Predecessor) 495,939
Estimated amortization expense for the
fiscal years ending March 31:
2005 $ 7,801,747
2006 7,743,519
2007 7,729,246
2008 7,676,688
2009 7,676,688
Identifiable intangibles not subject to amortization consist solely of the
tradename asset arising out of the March 4, 2004 Transaction and total
$31,320,000.
52
H. LONG-TERM DEBT
Details regarding each of the instruments of indebtedness of the Company are
provided in the following table:
March 31,
---------------------------------
2004 2003
--------------- -----------------
Term Loan due March 4, 2011, principal and interest payments due quarterly,
interest accrues at a floating rate based on Eurodollar rate plus an applicable
margin percent (3.84% at March 31, 2004) $180,000,000 $ -
Senior Subordinated Notes, unsecured, principal due on March 15, 2012, interest
payments accrue at a fixed rate of 8.625% and are payable semi-annually on
March 15 and September 15 beginning September 15, 2004 175,000,000 -
Senior Discount Notes, unsecured, net of a discount of $26,586,956 at March 31,
2004, principal due on March 15, 2013, interest accretes at a rate of 11.0% to a
face amount of $77.0 million on March 15, 2008, interest payments accrue
beginning March 15, 2008 at a fixed rate of 11.0% and are payable semi-annually
on March 15 and September 15 beginning September 15, 2008 50,413,044 -
Senior subordinated notes, unsecured, principal due on February 15, 2008,
interest payments accrue at a fixed rate of 8.75% and are payable semi-annually
on February 15 and August 15, tendered or called for redemption on March 4, 2004 15,410,000 110,000,000
Senior discount debentures, unsecured, principal due on February 15, 2009,
interest payments accrue at a fixed rate of 10.75% and are payable semi-annually
on February 15 and August 15 beginning August 15, 2003, tendered or called for
redemption on March 4, 2004 10,505,000 76,000,000
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% 463,880 489,830
Tranche A loan, due March 31, 2004, principal and interest payments due
quarterly, interest accrues at a floating rate based on Eurodollar rate plus an
applicable margin percent (2.76% at March 31, 2003), refinanced on
December 10, 2003 - 6,642,873
Tranche B loan, due March 31, 2006, principal and interest payments due
quarterly, interest accrues at a floating rate based on Eurodollar rate plus an
applicable margin percent (3.76% at March 31, 2003), refinanced on
December 10, 2003 - 23,804,287
--------------- --------------
431,791,924 216,936,990
Less current maturities of long-term debt (27,743,881) (19,181,277)
--------------- --------------
Long-term debt $404,048,043 $197,755,713
=============== ==============
Indebtedness at March 31, 2004 includes an amended and restated
bank-administered senior credit facility (the "Senior Credit Facility") provided
to NBC through a syndicate of lenders, consisting of an $180.0 million term loan
(the "Term Loan") and a $50.0 million revolving credit facility (the "Revolving
Credit Facility"); $175.0 million of 8.625% senior subordinated notes (the
"Senior Subordinated Notes") issued by NBC; and $77.0 million of 11.0% senior
discount notes (the "Senior Discount Notes") issued at a discount of $27.0
million, all of which are dated March 4, 2004. The Revolving Credit Facility
expires on March 4, 2009. Availability under the Revolving Credit Facility is
53
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, 2004 was approximately
$38.5 million. The Revolving Credit Facility was unused at March 31, 2004.
The interest rate on the Senior Credit Facility is prime plus an applicable
margin of up to 1.75% or, on Eurodollar borrowings, the Eurodollar rate plus an
applicable margin of up to 2.75%. Additionally, there is a 0.5% commitment fee
for the average daily unused amount of the Revolving Credit Facility. The
average borrowings under the Revolving Credit Facility for the years ended March
31, 2003 and 2002 were approximately $1.7 million and $9.8 million at an average
rate of 4.8% and 5.5%, respectively.
The Senior Credit Facility is collateralized by substantially all of the
Company's assets. The Senior Credit Facility also stipulates that excess cash
flows as defined in the credit agreement dated February 13, 1998 (the "Credit
Agreement"), as most recently amended and restated on March 4, 2004, shall be
applied towards prepayment of the Term Loan. An excess cash flow payment of
$14.3 million was made in September, 2003 and applied towards the then-existing
Tranche A and B loans in accordance with the Credit Agreement. As a result of
the amendment and restatement of the Credit Agreement on March 4, 2004, the next
excess cash flow measurement date will be March 31, 2005.
The Senior Credit Facility requires NBC to maintain certain financial ratios
and contains a number of other covenants that among other things, restrict the
ability to incur additional indebtedness, dispose of assets, make capital
expenditures, make loans or advances and pay dividends, except that, among other
things, NBC may pay dividends to the Company (i) in an amount not to exceed the
amount of interest required to be paid on the Senior Discount Notes and (ii) to
pay corporate overhead expenses not to exceed $250,000 per year and any taxes
owed by the Company.
The Senior Subordinated Notes pay cash interest semi-annually and mature on
March 15, 2012. The Senior Discount Notes accrete in value at the rate of 11.0%
compounded semi-annually through March 15, 2008, with semi-annual cash interest
payments commencing September 15, 2008.
The indenture governing the Senior Discount 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. The indenture governing the Senior Subordinated Notes
contains similar restrictions on 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.
Two significant events occurred during fiscal 2004 which impacted long-term
indebtedness. On December 10, 2003, NBC's bank-administered senior credit
facility provided through a syndicate of lenders was amended and restated to
finance the Company's purchase of 116,786 shares of its common stock and 838
options outstanding to purchase shares of its common stock and to refinance the
remaining indebtedness under the then-existing senior credit facility. The
amended and restated senior credit facility consisted of a $75.0 million term
loan and a $50.0 million revolving credit facility. Tranche A and Tranche B
loans existing under the senior credit facility refinanced on December 10, 2003
totaled $13.4 million.
The second significant event was the March 4, 2004 Transaction (see Notes A
and C) which resulted in the retirement of indebtedness underlying the senior
credit facility and the issuance of an $180.0 million Term Loan described above;
the tendering or calling for redemption of the $110.0 million of senior
subordinated notes and the issuance of $175.0 million of Senior Subordinated
Notes described above; and the tendering or calling for redemption of the $76.0
million of senior discount debentures and the issuance of $77.0 million of
Senior Discount Notes (discounted to $50.0 million) described above. Of the
$110.0 million of senior subordinated notes and $76.0 million of senior discount
debentures outstanding at the time of the March 4, 2004 Transaction, $15.4
million and $10.5 million, respectively, were not tendered by the bondholders
and thus were not redeemed on March 4, 2004. Instead, the non-tendered notes
were called for redemption by NBC and the Company on March 4, 2004 and redeemed
on April 3, 2004, in accordance with the indentures. Restricted amounts held in
escrow at March 31, 2004 to fund the April 3, 2004 redemption totaled $27.1
million, including accrued interest and call premiums on such indebtedness, and
are included in "restricted cash" in the consolidated balance sheet.
54
On April 27, 2004, NBC and the Company filed Form S-4 Registration
Statements with the Securities and Exchange Commission for purposes of
registering debt securities to be issued in exchange for the Senior Subordinated
Notes and Senior Discount Notes. Such Registration Statements were declared
effective by the Securities and Exchange Commission on May 7, 2004. All notes
were tendered in the offers to exchange that were completed on June 8, 2004. The
terms of the securities issued in the exchange offers are identical to those in
effect at March 31, 2004.
At March 31, 2004, the aggregate maturities of long-term debt (including
principal amounts payable relating to indebtedness called for redemption on
March 4, 2004 and redeemed on April 3, 2004) for the next five years were as
follows:
Fiscal
Year
---------
2005 $ 27,743,881
2006 1,832,144
2007 1,835,774
2008 1,839,816
2009 1,844,313
I. LEASES AND OTHER COMMITMENTS
In conjunction with two bookstores acquired in June of 2001 and one
bookstore acquired in March of 2003, NBC 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
$1.9 million at March 31, 2004, net of accumulated depreciation.
The Company leases bookstore facilities and data processing equipment under
noncancelable operating leases expiring at various dates through fiscal 2016,
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
---- ----------- ------------
2005 $ 424,791 $ 9,762,000
2006 454,947 9,395,000
2007 477,392 8,299,000
2008 480,895 6,824,000
2009 480,891 4,450,000
Thereafter 1,148,604 10,706,000
------------ ------------
Total minimum lease payments 3,467,520 $49,436,000
Amount representing interest ============
at 11.5% (1,161,936)
------------
Present value of minimum lease
payments 2,305,584
Obligations due within one year (167,433)
------------
Long-term obligations $ 2,138,151
============
Total rent expense for the one month ended March 31, 2004, the eleven months
ended February 29, 2004 and the years ended March 31, 2003 and 2002 was
approximately $1.0 million, $12.9 million, $11.5 million, and $10.6 million,
respectively. Percentage rent expense for the one month ended March 31, 2004,
the eleven months ended February 29, 2004 and the years ended March 31, 2003 and
2002 was approximately $0.3 million, $3.5 million, $3.0 million, and $2.5
million, respectively.
J. DERIVATIVE FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board has issued SFAS No. 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended by SFAS No. 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE
EFFECTIVE DATE OF FASB STATEMENT NO. 133, 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
55
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. In the past, the Company has utilized derivative financial
instruments primarily to manage the risk that changes in interest rates will
affect the amount of its future interest payments on its variable rate debt 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 variable interest rates. As provided in NBC's Senior
Credit Facility, exposure to interest rate fluctuations is managed by
maintaining fixed interest rate debt (primarily the Senior Subordinated Notes
and Senior Discount 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. NBC had separate five-year amortizing interest rate
swap agreements with two financial institutions whereby NBC's variable rate term
debt was converted into debt with a fixed rate of 5.815% plus an applicable
margin (as defined in the then-existing credit agreement). Such agreements
expired on July 31, 2003. Notional amounts under the agreements were reduced
periodically by amounts equal to the originally-scheduled principal payments on
the term debt. General information regarding the Company's exposure to
fluctuations in variable interest rates is presented in the following table:
March 31,
2004 2003
------------- --------------
Total indebtedness outstanding $ 434,097,508 $ 219,367,276
Term debt subject to Eurodollar fluctuations 180,000,000 30,447,160
Notional amounts under swap agreements - 38,100,000
Fixed interest rate indebtedness 254,097,508 188,920,116
Variable interest rate, including applicable margin:
Term Debt - Term Loan 3.84% -
Term Debt - Tranche A Loans - 2.76%
Term Debt - Tranche B Loans - 3.76%
The interest rate swap agreements qualified as cash flow hedge instruments
if the following criteria were met:
(1) Formal documentation of the hedging relationship and NBC's risk
management objective and strategy for undertaking the hedge occurred at
the inception of the agreements.
(2) The interest rate swap agreements were expected to be highly effective
in offsetting the change in the value of the interest payments
attributable to NBC's term debt.
NBC estimated 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 was compared to the fair value of
hypothetical swap agreements that had the same critical terms as the term debt,
including notional amounts and repricing dates. To the extent that the
agreements were 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 were immediately recognized in earnings as "gain or loss on
derivative financial instruments". To the extent that the agreements were
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 were immediately
recognized in earnings as interest expense.
Under hedge accounting, the interest rate swap agreements were reflected at
fair value in the Company's consolidated balance sheet (as "accounts payable" in
fiscal 2003) and the related gains or losses on these agreements were generally
recorded in stockholders' equity, net of applicable income taxes (as
"accumulated other comprehensive loss"). The gains or losses recorded in
accumulated other comprehensive loss were reclassified into earnings as an
adjustment to interest expense in the same periods in which the related interest
payments being hedged were recognized in earnings. Except as described below,
the net effect of this accounting on the Company's consolidated results of
operations was that interest expense on the term debt was generally recorded
based on fixed interest rates until the interest rate swap agreements expired on
July 31, 2003. The fair value of the interest rate swap agreements reflected as
a liability at March 31, 2003 totaled $0.8 million.
56
As a result of a $10.0 million optional prepayment of term debt on March 29,
2002, notional amounts under the interest rate swap agreements no longer
correlated with remaining principal balances due under the term debt. The
difference between the notional amounts under the interest rate swap agreements
and the remaining principal balances due under the term debt represented the
portion of the agreements that no longer qualified 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 qualified for hedge
accounting and the portion of the agreements that were redesignated as hedging
instruments on the remaining amounts due under the term debt. The fair value
allocated to the portion of the interest rate swap agreements that no longer
qualified 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,
were also recognized as a gain (loss) on derivative financial instruments in the
consolidated statements of operations and totaled $0.1 million for the eleven
months ended February 29, 2004 and $(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 one month ended March 31, 2004, the eleven months ended February
29, 2004, and the years ended March 31, 2003 and 2002:
Successor Predecessor
------------- ------------------------------------------
1 Month Ended 11 Months Ended Year Ended Year Ended
March 31, February 29, March 31, March 31,
2004 2004 2003 2002
------------- --------------- ------------- ------------
Increase (decrease) in fair value of
swap agreements designated as hedges $ - $ 675,806 $ 582,146 $ (253,552)
Interest income (expense) recorded
due to hedge ineffectiveness - 1,030 249,310 (250,340)
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.
K. NOTES RECEIVABLE FROM STOCKHOLDERS
Notes receivable from stockholders reflected as a component of stockholders'
equity (deficit) pertain to notes obtained from certain NBC executive officers
in conjunction with certain issuances of the Company's common stock. All of
these notes except one were repaid during fiscal 2004. The remaining note
matures in January, 2009, is payable at maturity, and bears interest at 5.25%.
57
L. INCOME TAXES
The provision (benefit) for income taxes consists of:
Successor Predecessor
-------------- ---------------------------------------------
1 Month Ended 11 Months Ended Year Ended
March 31, February 29, March 31, March 31,
2004 2004 2003 2002
-------------- --------------- ------------- ---------------
Current:
Federal $ (1,170,353) $ 1,170,353 $ 8,801,085 $ 6,791,179
State (283,134) 1,328,239 2,161,760 1,662,405
Deferred (1,049,201) 4,110,000 1,269,000 (500,000)
-------------- --------------- ------------- ---------------
$ (2,502,688) $ 6,608,592 $12,231,845 $ 7,953,584
============== =============== ============= ===============
The following represents a reconciliation between the actual income tax
expense (benefit) and income taxes computed by applying the Federal income tax
rate to income (loss) before income taxes:
Successor Predecessor
------------- -------------------------------------
1 Month Ended 11 Months Ended Year Ended
March 31, February 29, March 31, March 31,
2004 2004 2003 2002
------------- --------------- ---------- ----------
Statutory rate (35.0)% 35.0% 35.0% 35.0%
State income tax effect (2.7) 5.4 5.1 5.5
Change in estimate of income
tax liabilities - - 0.3 0.5
Other 0.5 0.8 0.4 0.6
------- ------ ----- -----
(37.2)% 41.2% 40.8% 41.6%
======= ====== ===== =====
The components of the deferred tax assets (liabilities) consist of the
following:
March 31,
---------------------------
2004 2003
------------ -----------
Deferred income tax assets
(liabilities), current:
Vacation accruals $ 514,414 $ 495,160
Inventory 138,286 110,913
Allowance for doubtful accounts 193,914 168,141
Product returns 1,093,492 1,238,155
Incentive programs 2,457,369 1,991,821
NOL carryforward 1,882,419 -
Other (177,879) (142,258)
------------- -----------
6,102,015 3,861,932
------------- -----------
Deferred income tax assets
(liabilities), noncurrent:
Deferred compensation agreements 120,442 114,192
Interest on Senior Discount Note 150,237 -
Goodwill amortization (471,752) 692,739
Covenant not to compete 1,197,689 1,309,811
Unrealized losses on derivatives - 321,016
Identifiable intangibles (59,262,150) -
Fixed assets (3,433,973) (423,383)
------------- -----------
(61,699,507) 2,014,375
------------- -----------
$(55,597,492) $5,876,307
============= ===========
The non-current portion of deferred tax assets (liabilities) is classified
in other assets at March 31, 2003.
58
M. RETIREMENT PLAN
The Company's subsidiary participates in and sponsors a 401(k) compensation
deferral plan. The plan covers substantially all employees. The plan provisions
include employee contributions based on a percentage of compensation along with
a sponsor base contribution in addition to a limited matching feature. The
sponsor contributions for the one month ended March 31, 2004, the eleven months
ended February 29, 2004 and the years ended March 31, 2003 and 2002 were $1,417,
$1.0 million, $1.0 million, and $0.9 million, respectively.
N. 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, 2004 and
2003.
O. STOCK-BASED COMPENSATION
The Company had two stock-based compensation plans established to provide
for the granting of options to purchase NBC Acquisition Corp. Class A Common
Stock - the 1998 Performance Stock Option Plan and the 1998 Stock Option Plan.
Effective July 1, 2003, the Company established two new stock-based compensation
plans - the 2003 Performance Stock Option Plan and the 2003 Stock Option Plan.
In conjunction with the March 4, 2004 Transaction, the Company terminated the
existing stock-based compensation plans and NBC Holdings Corp. established the
2004 Stock Option Plan. Details regarding each of the plans are as follows:
1998 PERFORMANCE STOCK OPTION PLAN - This plan provided for the granting of
options to purchase 53,771 shares of the Company's common stock to selected
members of senior management of the Company and its affiliates. All options
granted were nonqualified stock options, although the plan also provided for
incentive stock options. The Company 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 had an exercise price of not less than fair
market value on the date the options were granted and were to expire ten years
from the date of grant. On March 4, 2004, options granted and outstanding under
this plan were either converted into the right to receive cash or cancelled and
the plan was terminated. The cancelled options were replaced with new options
granted under the 2004 Stock Option Plan. Such options were immediately
fully-vested and contained the same exercise prices as the options which were
cancelled.
1998 STOCK OPTION PLAN - This plan provided for the granting of options to
purchase 29,229 shares of the Company's common stock to selected employees,
officers, and directors of the Company and its affiliates. All options granted
were nonqualified stock options, although the plan also provided for incentive
stock options. The Company 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 would have had an exercise price of not less than fair market value on
the date the options were granted, while the Committee determined the exercise
price for nonqualified options at the time of grant. All options were to expire
ten years from the date of grant. On March 4, 2004, options granted and
outstanding under this plan were either converted into the right to receive cash
or cancelled and the plan was terminated. The cancelled options were replaced
with new options granted under the 2004 Stock Option Plan. Such options were
immediately fully-vested and contained the same exercise prices as the options
which were cancelled.
2003 PERFORMANCE STOCK OPTION PLAN - This plan provided for the granting of
options to purchase 43,000 shares of the Company's common stock to selected
employees, officers, employee directors, and members of senior management of the
Company and its affiliates. All options granted were intended to be nonqualified
stock options, although the plan also provided for incentive stock options. This
plan provided for the granting of up to 25% of the total number of shares of
stock available under such plan upon the attainment of established targets in
fiscal years 2003-2006. 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. Options granted under the this plan were to be
granted at an exercise price of not less than fair market value on the date the
options were granted. Options were to expire ten years from the date of grant.
59
On March 4, 2004, this plan was terminated and options granted and outstanding
under this plan were cancelled and replaced with new options granted under the
2004 Stock Option Plan. Such options were immediately fully-vested and contained
the same exercise prices as the options which were cancelled.
2003 STOCK OPTION PLAN - This plan provided for the granting of options to
purchase 28,000 shares of the Company's common stock to selected employees,
officers, employee directors, and members of senior management of the Company
and its affiliates. Had options been granted under this plan, they were intended
to be nonqualified stock options, although the plan also provided for incentive
stock options. This plan provided for the granting of options at the discretion
of a committee designated by the Company's Board of Directors. Generally,
twenty-five percent of any options granted would have become exercisable
immediately upon granting, with the remaining options becoming exercisable in
25% increments over the subsequent three years on the anniversary of the date of
grant. Incentive stock options granted under this plan would have been granted
at an exercise price of not less than fair market value on the date the options
were granted, while nonqualified options could have been granted at less than
fair market value. Options would have expired ten years from the date of grant.
On March 4, 2004, prior to any options being granted under this plan, the plan
was terminated.
2004 STOCK OPTION PLAN - This plan, established by NBC Holdings Corp. (see
Note C), provides for the granting of options to purchase 81,306 shares of NBC
Holdings Corp. capital stock to selected employees, officers, and employee
directors of the Company and its affiliates. Additional shares may be issued
upon changes in the capitalization of the Company and upon approval of a
committee designated by the Company's Board of Directors ("the Committee"). All
options granted are intended to be nonqualified stock options, although the plan
also provides for incentive stock options. This plan provides for the granting
of options at the discretion of the Committee. Vesting schedules of options may
vary and are determined at the time of grant by the Committee. Subject to
certain exceptions, stock options granted under this plan are to be granted at
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, 2004, there
were 31,528 options available for grant under this plan.
In conjunction with the March 4, 2004 Transaction, certain option holders
of 40,668 options granted and outstanding under the 1998 stock option plans
elected to convert such options into the right to receive cash. This election
resulted in the payout of $7.1 million which was recognized as stock-based
compensation expense during the period ended February 29, 2004.
Also in conjunction with the March 4, 2004 Transaction, certain option
holders of 49,778 options granted and outstanding under the 1998 and 2003 stock
option plans were cancelled and replaced with options granted under the 2004
Stock Option Plan. The new options were fully-vested at the time of grant and
therefore no stock-based compensation expense was recognized on such options.
The fair value of the options granted under the 2004 Stock Option Plan totaled
$7.9 million and was included as part of the purchase consideration of the March
4, 2004 Transaction, as further discussed in Note C.
In conjunction with the December 10, 2003 debt refinancing, the Company
purchased 116,786 shares of its common stock, and 838 options outstanding to
purchase shares of its common stock were converted into the right to receive
cash. The cost of the treasury shares was $32.7 million and stock-based
compensation expense resulting from the conversion of options into the right to
receive cash totaled $0.2 million. NBC funded the purchase of the treasury
shares by the Company through a dividend it declared to the Company in
conjunction with the debt refinancing.
No stock-based compensation expense was recognized at the time of grant for
the options granted to employees in the eleven months ended February 29, 2004
and the fiscal years ended March 31, 2003 and 2002, 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 Company's common
stock) of the Company's common stock on the date of grant. In fiscal 2002, the
estimated fair value was based upon an independent valuation of the Company's
common stock performed during fiscal 2002.
60
A summary of the Company's stock-based compensation activity related to
stock options for each of the plans for the one month ended March 31, 2004, the
eleven months ended February 29, 2004, and the years ended March 31, 2003 and
2002 is as follows:
Successor Predecessor
------------------- ------------------------------------------------------
1 Month Ended 11 Months Ended Year Ended
March 31, February 29, March 31, March 31,
2004 2004 2003 2002
------------------- ------------------ ------------------ ----------------
Weighted- Weighted- Weighted- Weighted-
Average Average Average Average
Exercise Exercise Exercise Exercise
Number Price Number Price Number Price Number Price
-------- ---------- -------- --------- --------- -------- ------- --------
1998 PERFORMANCE STOCK
OPTION PLAN:
Outstanding - beginning
of period 34,600 $ 70.18 52,896 $ 66.32 40,771 $ 52.47 22,530 $ 52.47
Granted - - - - 13,825 107.39 18,241 52.47
Expired/terminated (34,600) (70.18) - - (825) (76.80) - -
Exercised - - - - (875) (60.12) - -
Converted to right to
receive cash - - (18,296) (59.01) - - - -
-------- ---------- -------- --------- --------- -------- ------- --------
Outstanding - end of
period - $ - 34,600 $ 70.18 52,896 $ 66.32 40,771 $ 52.47
======== ========== ======== ========= ========= ======== ======= ========
1998 STOCK OPTION PLAN:
Outstanding - beginning
of period 4,428 $ 58.64 29,229 $ 56.38 27,094 $ 52.47 28,094 $ 52.47
Granted - - - - 2,135 106.00 - -
Expired/terminated (4,428) (58.64) (1,291) (56.62) - - (1,000) (52.47)
Exercised - - (300) (52.47) - - - -
Converted to right to
receive cash - - (23,210) (55.99) - - - -
-------- ---------- -------- --------- --------- -------- ------- --------
Outstanding - end of
period - $ - 4,428 $ 58.64 29,229 $ 56.38 27,094 $ 52.47
======== ========== ======== ========= ========= ======== ======= ========
2003 PERFORMANCE STOCK
OPTION PLAN:
Outstanding - beginning
of period 10,750 $ 146.00 - $ -
Granted - - 10,750 146.00
Expired/terminated (10,750) (146.00) - -
Exercised - - - -
-------- ---------- -------- ---------
Outstanding - end of
period - $ - 10,750 $146.00
======== ========== ======== =========
2004 STOCK OPTION PLAN:
Outstanding - beginning
of period - $ -
Granted 49,778 85.53
Expired/terminated - -
Exercised - -
-------- ----------
Outstanding - end
of period 49,778 $ 85.53
======== ==========
61
2004 Stock Option Plan
-------------------------
Weighted-
Average
Remaining
Contractual
Number Life (Yrs)
----------- -------------
Outstanding and exercisable - March 31, 2004:
Exercise price of $52.47 27,068 9.9
Exercise price of $106 11,960 9.9
Exercise price of $146 10,750 9.9
----------- -------------
49,778 9.9
=========== =============
1998 Performance Stock
Option Plan 1998 Stock Option Plan
-------------------------- ------------------------
Weighted- Weighted-
Average Average
Remaining Remaining
Contractual Contractual
Number Life (Yrs) Number Life (Yrs)
----------- -------------- --------- -------------
Outstanding - March 31, 2003:
Exercise price of $52.47 39,571 7.4 27,094 6.2
Exercise price of $106 12,500 9.3 2,135 9.3
Exercise price of $129.30 825 9.8 - -
----------- ------------- ---------- --------------
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
Exercise price of $106 3,127 9.3 534 9.3
Exercise price of $129.30 206 9.8 - -
----------- ------------- ---------- --------------
30,985 7.3 26,828 6.2
=========== ============= ========== ==============
Outstanding as of March 31, 2002:
Exercise price of $52.47 40,771 8.4 27,094 7.2
Exercisable as of March 31, 2002:
Exercise price of $52.47 20,592 7.8 22,596 7.1
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 per option granted
would be as follows:
Successor Predecessor
--------------- ------------------------------------------
1 Month Ended 11 Months Ended Year Ended
March 31, February 29, March 31, March 31,
2004 2004 2003 2002
--------------- ---------------- ------------ ------------
1998 Performance Stock Option Plan $ - $ - $ 14.35 $ 2.83
1998 Stock Option Plan - - 14.51 -
2003 Performance Stock Option Plan - 15.62 - -
2004 Stock Option Plan 157.70 - - -
62
The weighted-average grant-date fair value per option for options granted
under the 2004 Stock Option Plan, as determined using a Black-Scholes option
pricing model, is significantly higher than the weighted-average grant-date fair
value per option for options granted in other periods due to the stock price of
the Company's common stock, which is not publicly-traded, and was based upon the
value assigned to such options in the March 4, 2004 Transaction. 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:
Successor Predecessor
-------------- ----------------------------------------
1 Month Ended 11 Months Ended Year Ended
March 31, February 29, March 31, March 31,
2004 2004 2003 2002
-------------- --------------- ---------- ----------
Risk-free interest rate 3.02% 2.87% 3.68% 3.71%
Dividend yield - - - -
Expected volatility 1.00% 1.00% 1.00% 1.00%
Expected life (years) 5.0 4.0 4.0 1.5
P. 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 113 college bookstores as of March 31, 2004 located
on or adjacent to college campuses. The Complementary Services Division segment
includes book-related services such as distance education materials, computer
hardware and software, E-commerce technology, and a centralized buying service.
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.
63
The following table provides selected information about profit or loss and
assets on a segment basis for the one month ended March 31, 2004, the eleven
months ended February 29, 2004, and the years ended March 31, 2003 and 2002.
Complementary
Textbook Bookstore Services
Division Division Division Total
------------- ------------- --------------- -------------
One month ended March 31, 2004 (Successor):
External customer revenues $ 3,883,675 $ 5,309,747 $ 4,123,972 $ 13,317,394
Intersegment revenues 600,590 9,242 319,806 929,638
Depreciation and amortization expense 498,579 245,676 229,191 973,446
Earnings Before Interest, Taxes, Depreciation, and
Amortization (EBITDA) (85,994) (2,471,525) 251,371 (2,306,148)
Total assets 162,762,093 64,189,376 31,678,754 258,630,223
Eleven months ended February 29, 2004 (Predecessor):
External customer revenues $ 104,533,832 $ 233,170,224 $ 47,659,618 $ 385,363,674
Intersegment revenues 21,212,168 1,158,230 2,094,696 24,465,094
Depreciation and amortization expense 782,249 1,877,780 1,336,868 3,996,897
Earnings Before Interest, Taxes, Depreciation, and
Amortization (EBITDA) 33,544,806 33,190,998 2,624,520 69,360,324
Year ended March 31, 2003 (Predecessor):
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 (Predecessor):
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
64
The following table reconciles segment information presented above with
consolidated information as presented in the consolidated financial statements
for the one month ended March 31, 2004, the eleven months ended February 29,
2004, and the years ended March 31, 2003 and 2002.
Successor Predecessor
------------- -------------------------------------------
1 Month Ended 11 Months Ended Year Ended
March 31, February 29, March 31, March 31,
2004 2004 2003 2002
------------- -------------- ------------- -------------
Revenues:
Total for reportable segments $ 14,247,032 $ 409,828,768 $393,754,692 $362,386,520
Elimination of intersegment revenues (929,638) (24,465,094) (23,244,843) (23,470,111)
------------- -------------- ------------- --------------
Consolidated total $ 13,317,394 $ 385,363,674 $370,509,849 $338,916,409
============= ============== ============= ==============
Depreciation and Amortization Expense:
Total for reportable segments $ 973,446 $ 3,996,897 $ 3,459,459 $ 3,338,252
Corporate administration 18,546 142,732 172,541 253,450
------------- -------------- ------------- -------------
Consolidated total $ 991,992 $ 4,139,629 $ 3,632,000 $ 3,591,702
============= ============== ============= =============
Income (Loss) Before Income Taxes:
Total EBITDA for reportable segments $ (2,306,148) $ 69,360,324 $ 62,948,813 $ 54,386,566
Corporate administrative costs (685,336) (15,012,469) (7,318,023) (7,316,701)
------------- -------------- ------------- --------------
(2,991,484) 54,347,855 55,630,790 47,069,865
Depreciation and amortization (991,992) (4,139,629) (3,632,000) (3,591,702)
------------- -------------- ------------- --------------
Consolidated income (loss) from
operations (3,983,476) 50,208,226 51,998,790 43,478,163
Interest and other expense, net (2,750,860) (34,170,926) (21,987,697) (24,369,275)
------------- -------------- ------------- --------------
Consolidated income (loss) before
income taxes $ (6,734,336) $ 16,037,300 $ 30,011,093 $ 19,108,888
============= ============== ============= ==============
Year Ended March 31,
2004 2003 2002
------------- ------------ -------------
Total Assets:
Total for reportable segments $258,630,223 $ 130,868,312 $132,539,693
Assets not allocated to segments:
Cash and cash equivalents 28,468,747 34,276,049 6,798,602
Restricted cash 27,065,000 - -
Receivables 10,153,615 13,967,352 12,130,650
Recoverable income taxes 5,351,480 - -
Deferred income taxes 6,102,015 3,861,932 3,557,325
Property and equipment, net 596,060 534,598 507,927
Goodwill 267,114,671 16,770,574 16,770,574
Debt issue costs, net 11,968,909 6,055,751 7,642,465
Identifiable intangibles, net 31,320,000 - -
Other assets 2,051,467 3,241,143 4,591,241
Other 868,761 803,306 494,217
------------- -------------- -------------
Consolidated total $649,690,948 $ 210,379,017 $185,032,694
============= ============== =============
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, Senior Discount Debentures, 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.
65
The following presentation reconciles EBITDA with net cash flows from
operating activities as presented in the Consolidated Statements of Cash
Flows:
Successor Predecessor
---------------- ---------------------------------------------
1 Month Ended 11 Months Ended Year Ended
March 31, February 29, March 31, March 31,
2004 2004 2003 2002
---------------- ---------------- ------------- --------------
EBITDA $ (2,991,484) $ 54,347,855 $ 55,630,790 $ 47,069,865
Adjustments to reconcile EBITDA to net cash
flows from operating activities:
Interest income 97,587 307,680 360,448 399,573
Provision for losses on accounts receivable 218,205 66,393 451,578 1,629,704
Cash paid for interest (6,891,827) (20,125,528) (13,549,099) (15,224,920)
Cash paid for income taxes (9,991) (6,466,526) (14,533,352) (4,062,737)
(Gain) loss on disposal of assets 13,582 408,095 35,428 (482,810)
Changes in operating assets and liabilities,
net of effect of acquisition/disposals (1) (11,947,584) 10,066,803 8,935,820 1,709,245
---------------- ---------------- ------------- --------------
Net Cash Flows from Operating Activities $ (21,511,512) $ 38,604,772 $ 37,331,613 $ 31,037,920
================ ================ ============= ==============
Net Cash Flows from Investing Activities $(183,836,223) $ (6,451,658) $ (5,327,072) $ (7,616,067)
================ ================ ============= ==============
Net Cash Flows from Financing Activities $ 158,961,630 $ 8,103,790 $ (4,018,436) $(16,412,081)
================ ================ ============= ==============
(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 current 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.
Q. EARNINGS PER SHARE
Basic earnings per share data are based on the weighted-average number of
common shares outstanding during the period. Diluted earnings per share data are
based on the weighted-average number of common shares outstanding and the
dilutive effect of potential common shares including stock options, if any. For
the purpose of calculating basic and diluted earnings per share, weighted
average common shares outstanding were as follows:
Successor Predecessor
------------- ------------------------------------
1 Month Ended 11 Months Ended Year Ended
March 31, February 29, March 31, March 31,
2004 2004 2003 2002
------------- -------------- ---------- ----------
Basic Earnings Per Share:
Weighted-average common shares outstanding 549,254 1,264,985 1,263,457 1,263,256
Diluted Earnings Per Share:
Weighted-average common shares outstanding 549,254 1,291,499 1,281,262 1,263,256
Incremental shares attributable to stock options 11,805 26,514 17,805 -
Stock options outstanding 49,778 49,778 82,125 67,865
For purposes of calculating diluted earnings per share for the one month
ended March 31, 2004, weighted-average common shares outstanding exclude
incremental shares, as to include such shares would have been antidilutive for
the period presented. Stock options outstanding at March 31, 2002 had no impact
on diluted earnings per share as the exercise price of such options was greater
than the average estimated fair value (including a discount for the holder's
minority interest position and illiquidity of the Company's common stock) of the
66
Company's common stock underlying the options as of March 31, 2002. The
estimated fair value as of March 31, 2002 was based upon an independent
valuation of the Company's common stock performed during fiscal 2002.
R. RELATED PARTY TRANSACTIONS
In fiscal 2001, NBC entered into several agreements (including an equity
option agreement, a management services agreement, and a technology sale and
license agreement) with a newly created entity, TheCampusHub.com, Inc., which
was partially owned by HWP. 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.
The management services agreement reimbursed NBC for certain direct costs
incurred on behalf of TheCampusHub.com, Inc., as well as $0.3 million per year
for certain shared management and administrative support. Complementary Services
Division revenue resulting from the management services agreement was recognized
as the services were performed. For the eleven months ended February 29, 2004
and years ended March 31, 2003 and 2002, revenues attributable to the management
services agreement totaled $0.1 million, $0.3 million, and $1.0 million,
respectively, and reimbursable direct costs incurred on behalf of The
CampusHub.com, Inc. totaled $0.1 million, $0.6 million, and $0.8 million,
respectively. Net amounts due from TheCampusHub.com, Inc. at March 31, 2003
totaled $0.1 million. Such agreements terminated effective July 1, 2003.
On July 1, 2003, NBC acquired all of the outstanding shares of common stock
of TheCampusHub.com, Inc. CampusHub is no longer separately incorporated and is
instead accounted for as a division within NBC's Complementary Services Division
segment. Each share of TheCampusHub.com, Inc. common stock issued and
outstanding was converted into shares of NBC Acquisition Corp. Class A Common
Stock, resulting in the issuance of 39,905 shares of NBC Acquisition Corp. Class
A Common Stock. TheCampusHub.com, Inc. had 1,300,099 shares of issued and
outstanding common stock at the time of acquisition, of which 650,000 shares
were owned by HWP, 650,000 shares were owned by an unrelated third party, and 99
shares were owned by three NBC employees. This business combination was
accounted for by NBC in accordance with Statement of Financial Accounting
Standards No. 141, BUSINESS COMBINATIONS. The total purchase price, net of cash
acquired, of such acquisition was $10.0 million, of which $3.7 million was
assigned to non-deductible goodwill.
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, 2004.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our management, with
the participation of our chief executive officer and treasurer (our principal
executive officer and principal financial officer), evaluated the effectiveness
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of March 31, 2004. Based on this
evaluation, our chief executive officer and treasurer concluded that, as of
March 31, 2004, our disclosure controls and procedures were (1) designed to
ensure that material information relating to us, including our consolidated
subsidiaries, is made known to our chief executive officer and treasurer by
others within those entities, particularly during the period in which this
report was being prepared and (2) effective, in that they provide reasonable
assurance that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
(b) CHANGES IN INTERNAL CONTROLS. No change in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) occurred during the year ended March 31, 2004 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
67
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The members of our Board of Directors and executive officers and their ages
are as follows:
NAME AGE POSITION
---- --- --------
Michael F. Cronin 50 Director
Mark L. Bono 44 Director
R. Sean Honey 33 Director
Mark W. Oppegard 54 President/Chief Executive Officer, Secretary and
Director
Barry S. Major 47 Chief Operating Officer, NBC and Director
Alan G. Siemek 43 Vice President and Treasurer
William H. Allen 61 Senior Vice President of Textbook Division, NBC
Robert A. Rupe 56 Senior Vice President of Bookstore Division, NBC
Michael J. Kelly 46 Senior Vice President of Distance
Learning/Marketing Services and Other Complementary
Services, NBC
Thomas A. Hoff 56 Vice President of Retail Development, NBC
John A. Callahan 55 Vice President of Contract Management, NBC
Larry R. Rempe 56 Vice President of Information Systems, NBC
Kenneth F. Jirovsky 60 Vice President of Development, NBC
Cynthia L. Morris 47 Vice President of Administration and Secretary, NBC
The business experience, principal occupation and employment as well as the
periods of service of each of the directors and executive officers during the
last five years are set forth below.
MICHAEL F. CRONIN became a Director of ours 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 ours 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, Herald Media, and
Euro-Pro.
R. SEAN HONEY was named a Director of ours upon the consummation of the
March 4, 2004 Transaction. Mr. Honey joined Weston Presidio in 1999. Prior to
1999, Mr. Honey served in various positions at J.P. Morgan in both Mergers and
Acquisitions and Merchant Banking. Mr. Honey also serves as a Director of
Trimark Sportswear Group and Schurman Fine Papers.
MARK W. OPPEGARD has served in the college bookstore industry for 34 years
(all of which have been with us) and became the Company's President/Chief
Executive Officer, Secretary and Director and Chief Executive Officer of NBC on
February 13, 1998. Additionally, Mr. Oppegard has served as NBC's President
since 1992 and as a Director of NBC since 1995. Prior to 1998, Mr. Oppegard
served as the Company's Vice President, Secretary, Assistant Treasurer and
Director between 1995 and 1998. Prior to 1992, Mr. Oppegard served in a series
of positions at NBC, including Vice President of the Bookstore Division.
BARRY S. MAJOR was named Chief Operating Officer of NBC in January, 1999,
and upon consummation of the March 4, 2004 Transaction, was also named our
Director. Prior to joining us, 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.
68
ALAN G. SIEMEK was named Senior Vice President of Finance and Administration
of NBC in April, 2001. Mr. Siemek has also served as the Company's Vice
President and Treasurer and Chief Financial Officer, Treasurer and Assistant
Secretary of NBC since July, 1999. Prior to joining us, Mr. Siemek served as
Corporate Controller at SITEL. 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 39 years
(of which 30 have been with NBC). Mr. Allen was named the Senior Vice President
of the Textbook Division in April, 2001. Between 1994 and 2001, Mr. Allen served
as NBC's Vice President of Warehouse Operations. Between 1974 and 1994, Mr.
Allen served in a series of positions, including assistant manager of the
Textbook Division. Prior to joining us in 1974, Mr. Allen was employed by the
Missouri Store Company, a predecessor of MBS.
ROBERT A. RUPE was named Senior Vice President of NBC's Bookstore Division
in April, 2001. Prior to joining NBC 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 34 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 NBC's Senior Vice President of Distance
Learning/Marketing Services and Other Complementary Services in August, 2001,
having previously served as NBC's Vice President of E-commerce since November,
1999. Prior to joining NBC, Mr. Kelly served in various executive management
positions at SITEL. Joining SITEL in 1995 as a Business Unit Vice President of
Administration and Finance, Mr. Kelly was named a Business Unit President in
1997, assumed the role of Chief Information Officer for the North America Region
in March, 1998, and was named Chief Technology Officer for Global Operations in
August, 1998. Between 1981 and 1995, Mr. Kelly served as Director of Information
Technology for Father Flanagan's Boys Home, a non-profit organization offering
services to troubled children.
THOMAS A. HOFF has served in the college bookstore industry for 17 years
(all of which have been with NBC) and was named NBC's Vice President of Retail
Development in April, 2001. Between 1992 and 2001, Mr. Hoff served as Vice
President of NBC's Bookstore Division. Mr. Hoff served as an assistant to the
Vice President of the Bookstore Division between 1987 and 1992.
JOHN A. CALLAHAN was named NBC's Vice President of Contract Management in
December, 2003. Prior to this, Mr. Callahan was an Executive Director of GWP,
Inc. a publications company that publishes World Magazine, a weekly news
magazine. From 1986 until 2000, Mr. Callahan served in the college bookstore
industry as a field operations manager and the Director of Marketing and Sales
for Barnes & Noble College Bookstores, Inc.
LARRY R. REMPE has served in the college bookstore industry for 18 years
(all of which have been with NBC) and has been NBC's Vice President of
Information Systems since 1986. Between 1974 and 1986, Mr. Rempe served in
various positions for Lincoln Industries, Inc., a holding company that owned NBC
until 1995.
KENNETH F. JIROVSKY has served in the college bookstore industry for 43
years (all of which have been with NBC) and was named NBC's Vice President of
Development in April, 2001. Between 1986 and 2001, Mr. Jirovsky served as NBC's
Vice President of Sales and Marketing. Prior to 1986 Mr. Jirovsky served in a
series of positions, including assistant manager of the Textbook Division.
CYNTHIA L. MORRIS was named NBC's Vice President of Administration and
Secretary 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.
69
AUDIT COMMITTEE
Our audit committee currently consists of Mark L. Bono and R. Sean Honey.
Among other functions, our audit committee (a) makes recommendations to our
board of directors regarding the selection of independent auditors; (b) reviews
the results and scope of the audit and other services provided by our
independent auditors; (c) reviews our financial statements; and (d) reviews and
evaluates our internal control functions. The Board of Directors is satisfied
that the members of our audit committee have sufficient expertise and business
and financial experience necessary to effectively perform their duties as the
audit committee. In light of the fact that we have no public equity outstanding,
the Board of Directors has not determined whether either of our audit committee
members is an "audit committee financial expert" as defined in Item 401(h) of
Regulation S-K.
CODE OF ETHICS
We have adopted a written code of ethics for our principal executive officer
and senior financial officers as required by the United States Securities and
Exchange Commission, or SEC, under Section 406 of the Sarbanes-Oxley Act of
2002. The code sets forth written standards to deter wrongdoing and promote
honest and ethical conduct, accurate and timely disclosure in reports and
documents, compliance with applicable governmental laws and regulations, prompt
internal reporting of violations of the code, and accountability for adherence
to the code.
ITEM 11. EXECUTIVE COMPENSATION.
The following tables and paragraphs provide information concerning
compensation paid by us for the last three fiscal years to our President/Chief
Executive Officer and to the four other most highly compensated executive
officers earning in excess of $100,000 in annual salary and bonuses;
compensation paid to Directors; and employment contracts in place with executive
officers.
70
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 2004 $ 288,389 $ 147,000 10,825 $ 2,276
2003 276,923 280,000 2,675 2,573
2002 253,731 236,000 2,900 2,962
Barry S. Major - Chief Operating Officer
and Director 2004 257,383 140,000 9,330 1,791,595
2003 247,077 250,000 2,500 2,477
2002 235,539 215,000 2,600 2,430
Alan G. Siemek - Chief Financial Officer,
Senior Vice President of Finance and
Administration, Treasurer, and Assistant
Secretary 2004 189,251 100,000 7,478 1,004,192
2003 181,885 160,000 1,375 2,417
2002 173,923 120,000 2,100 2,430
Michael J. Kelly - Senior Vice President
of Distance Learning/Marketing Services
and Other Complementary Services 2004 183,324 70,000 4,661 871,276
2003 169,731 130,000 1,375 2,477
2002 - 120,000 1,150 -
Robert A. Rupe - Senior Vice President
of Bookstore Division 2004 148,618 111,000 3,800 694,304
2003 142,750 146,500 1,250 2,813
2002 128,704 135,000 5,241 2,312
(1) In connection with the March 4, 2004 Transaction, all existing options,
including those listed in this column for fiscal 2003 and 2002, vested
and were either converted into the right to receive cash payment (see
footnote 2) or were cancelled in exchange for new options granted under
the 2004 Stock Option Plan. Options granted under the 2004 Stock Option
Plan were fully vested, exercisable at prices consistent with the
options which were cancelled, and represent the right to purchase shares
of capital stock of NBC Holdings Corp. Options granted in fiscal 2004
prior to the March 4, 2004 Transaction were entirely cancelled in
exchange for new options granted under the 2004 Stock Option Plan and
thus, are reflected only once in the column.
(2) All other compensation consists of the following components: (a) In
fiscal 2004, as a result of the December 10, 2003 debt refinancing and
the March 4, 2004 Transaction, option holders were given the opportunity
to convert options into the right to receive cash payments. The cash
payments represented the difference between the exercise price and the
fair market value of the securities underlying such options and totaled
$1,789,415, $1,002,072, $869,096 and $691,788 for Messrs. Major, Siemek,
Kelly, and Rupe, respectively; (b) matching contributions to the NBC
Retirement Plan; (c) life insurance premiums paid by us on the
executive's behalf; and (d) for Mr. Oppegard, the dollar value, if any,
of above-market amounts earned on deferred compensation (such amounts
totaled $376 for fiscal 2002).
71
Presented below is information in tabular format regarding individual grants
of stock options to executive officers named in the Summary Compensation Table
for the year ended March 31, 2004:
OPTIONS GRANTED DURING THE YEAR ENDED MARCH 31, 2004
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 2004 Per Share Date (1) Value (2)
- ------------------------------------------- ----------- ----------- --------- ----------- -------------
Mark W. Oppegard - Chief Executive Officer,
President, and Director 5,950 22.0% $ 52.47 03/03/14 $ 1,107,831
2,675 22.4 106.00 03/03/14 374,661
2,200 20.5 146.00 03/03/14 232,298
----------- ------------
10,825 $ 1,714,790
=========== ============
Barry S. Major - Chief Operating Officer
and Direct 4,780 17.7 52.47 03/03/14 889,988
2,500 20.9 106.00 03/03/14 350,150
2,050 19.1 146.00 03/03/14 216,460
----------- ------------
9,330 $ 1,456,598
=========== ============
Alan G. Siemek - Chief Financial Officer,
Senior Vice President of Finance and
Administration, Treasurer, and Assistant
Secretary 4,728 17.5 52.47 03/03/14 880,306
1,375 11.5 106.00 03/03/14 192,583
1,375 12.8 146.00 03/03/14 145,186
----------- ------------
7,478 $ 1,218,075
=========== ============
Michael J. Kelly - Senior Vice President
of Distance Learning/Marketing Services and
Other Complementary Seervices 2,111 7.8 52.47 03/03/14 393,047
1,375 11.5 106.00 03/03/14 192,583
1,175 10.9 146.00 03/03/14 124,068
----------- ------------
4,661 $ 709,698
=========== ============
Robert A. Rupe - Senior Vice President
of Bookstore Division 1,375 5.1 52.47 03/03/14 256,011
1,250 10.5 106.00 03/03/14 175,075
1,175 10.9 146.00 03/03/14 124,068
----------- ------------
3,800 $ 555,154
=========== ============
(1) Options were granted on March 4, 2004 in conjunction with the March 4,
2004 Transaction. Such options represent options previously granted
under the 1998 and 2003 Stock Option Plans that were cancelled on March
4, 2004, with replacement options that were fully vested and had
exercise prices consistent with the cancelled options being granted out
of the 2004 Stock Option Plan on March 4, 2004. The grant date market
price of such options, as determined in conjunction with the March 4,
2004 Transaction, was $231.41 per option. The options with an exercise
price of $146.00 were previously granted under the 2003 Performance
Stock Option Plan on August 1, 2003. As these options granted under the
2003 Performance Stock Option Plan in fiscal 2004 were entirely
cancelled in exchange for new options granted under the 2004 Stock
Option Plan, they are reflected only once in this table.
(2) Grant date present value was determined using a Black-Scholes option
pricing model, assuming a 3.02% risk-free interest rate, 1.0% expected
volatility, and an expected life of approximately 5.0 years.
72
The following table provides information concerning each exercise of stock
options by executive officers named in the Summary Compensation Table during the
year ended March 31, 2004 as well as the value of unexercised options as of
March 31, 2004:
AGGREGATED OPTION EXERCISES DURING THE YEAR ENDED MARCH 31, 2004
and Option Value as of March 31, 2004
Number
of Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Options at Options at
March 31, 2004 March 31, 2004 (1)
--------------- -------------------
Shares
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- ------------------------------------------ ----------- --------- --------------- -------------------
Mark W. Oppegard - Chief Executive
Officer, President,and Director - $ - 10,825 / - $599,316 / -
Barry S. Major - Chief Operating Officer
and Director - - 9,330 / - 492,896 / -
Alan G. Siemek - Chief Financial Officer,
Senior Vice President of Finance and
Administration, Treasurer, and Assistant
Secretary - - 7,478 / - 451,791 / -
Michael J. Kelly - Senior Vice President
of Distance Learning/Marketing Services and
Other Complementary Services - - 4,661 / - 226,499 / -
Robert A. Rupe - Senior Vice President of
Bookstore Division - - 3,800 / - 159,069 / -
(1) Represents the excess of the March 31, 2004 estimated fair market value
of the Company's common stock underlying the stock options, which
includes a discount for the holder's minority interest position and
illiquidity of the common stock, over the exercise price of such
options. The estimated fair market value was based upon the March 4,
2004 Transaction, though on a discounted basis. All options were granted
on March 4, 2004 and were fully vested and exercisable at the time of
grant.
COMPENSATION OF DIRECTORS AND ADDITIONAL INFORMATION
Our Directors receive no compensation for services but are reimbursed for
out-of-pocket expenses.
EMPLOYMENT AGREEMENTS
We have employment agreements with Mark W. Oppegard and eight of our other
executive officers. As amended, 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
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, $293,000 per annum; Mr. Major, $262,000
per annum; Mr. Siemek, $193,000 per annum; Mr. Kelly, $186,500 per annum; and
Mr. Rupe, $151,500 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 us on such dates.
73
The Employment Agreements also provide for specified payments to the
Executive in the event of termination of employment with us 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
us of an initial public offering of NBC Acquisition Corp. Class A Common Stock,
the Executives will not sell, transfer, pledge or otherwise dispose of any
shares of NBC Acquisition Corp. Class A Common Stock, except for certain
transfers to immediate family members, in the event of disability and for estate
planning purposes.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We do not currently have a compensation committee. Mark W. Oppegard -
President/Chief Executive Officer, Secretary and Director participated in the
Board of Directors' deliberations concerning executive officer compensation
during the last fiscal year.
74
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 March 4, 2004 Transaction, shares of NBC Acquisition Corp. Class A Common
Stock issued and outstanding totaled 549,254 on June 25, 2004. Weston Presidio
owns 36,455 of the issued and outstanding shares directly, with the remaining
512,799 issued and outstanding shares being owned by NBC Holdings Corp, a
company newly formed by Weston Presidio which has 512,799 shares of capital
stock issued and outstanding that are owned either by Weston Presidio or current
and former members of NBC management. The securities underlying the 2004 Stock
Option Plan, of which 49,778 options have been granted as of June 25, 2004, are
shares of NBC Holdings Corp. capital stock. 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
treated as a group. The shares listed and percentages calculated thereon are
based upon NBC Acquisition Corp. Class A Common Stock outstanding as of June 25,
2004 and NBC Holdings Corp. capital stock underlying nonqualified stock options
that are exercisable within sixty days, pursuant to Rule 13d-3 of the Securities
Exchange Act of 1934. To our knowledge, 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 (3)
- ------------------------------------------------------------ ------------- ------------
Class A Common Stock:
Owning Greater Than 5% of Shares:
Weston Presidio Capital IV, L.P. (2) 365,449 66.5%
Weston Presidio Capital III, L.P. (2) 153,623 28.0%
WPC Entrepreneur Fund, L.P. (2) 7,579 1.4%
WPC Entrepreneur Fund II, L.P. (2) 5,785 1.1%
Ownership of Directors:
Michael F. Cronin (2) 532,436 96.9%
Mark L. Bono (2) - -
R. Sean Honey (2) - -
Ownership of Executive Officers Named in Item 11:
Mark W. Oppegard 14,825 2.6%
Barry S. Major 11,077 2.0%
Alan G. Siemek 7,478 1.3%
Michael J. Kelly 4,661 0.8%
Robert A. Rupe 3,800 0.7%
Ownership of Directors and All Executive Officers as a Group 586,927 98.5%
(1) Beneficial ownership is determined in accordance with the rules of the
SEC and includes voting and investment power with respect to the shares
of NBC Acquisition Corp. Class A Common Stock. Such shares include NBC
Holdings Corp. shares underlying nonqualified stock options exercisable
within sixty days, as follows: Mr. Oppegard - 10,825 shares; Mr. Major -
9,330 shares; Mr. Siemek - 7,478 shares; Mr. Kelly - 4,661 shares; Mr.
Rupe - 3,800 shares; and 46,744 shares for all directors and executive
officers as a group.
(2) 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, Bono, and Honey 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, Bono, and Honey is 200 Clarendon Street, 50th Floor,
Boston, Massachusetts 02116.
75
(3) The percentages are calculated based upon 549,254 shares of NBC
Acquisition Corp. Class A Common Stock outstanding as of June 25, 2004
and shares underlying nonqualified stock options exercisable within
sixty days as detailed in footnote (1).
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS - Through
the Company's parent, NBC Holdings Corp., we have a stock-based compensation
plan established to provide for the granting of options to purchase capital
stock of NBC Holdings Corp. Details regarding the plan 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, 2004 regarding the plan, which was 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
- ------------------------ ---------------- ------------ --------------
2004 Stock Option Plan 49,778 $ 85.53 31,528
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CERTAIN BUSINESS RELATIONSHIPS - In fiscal 2001, NBC entered into several
agreements with a newly created entity, TheCampusHub.com, Inc., which was
partially owned by HWP. 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 us.
Mr. Oppegard served as a Director of TheCampusHub.com, Inc. and Messrs. Major,
Siemek, and Kelly served as executive officers of TheCampusHub.com, Inc. As of
July 1, 2003, Messrs. Oppegard, Major, Siemek, and Kelly had 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, none of which were ever exercised. In total, such options represented
approximately 3.9% of TheCampusHub.com, Inc.'s outstanding shares and options at
July 1, 2003. Such agreements (including an equity option agreement, a
management services agreement, and a technology sale and license agreement)
terminated effective July 1, 2003 upon our acquisition of all of the outstanding
shares of common stock of TheCampusHub.com, Inc. This business combination was
accounted for by us in accordance with Statement of Financial Accounting
Standards No. 141, BUSINESS COMBINATIONS. The total purchase price, net of cash
acquired, of such acquisition was $10.0 million, of which $3.7 million was
assigned to non-deductible goodwill. The management services agreement
reimbursed us for certain direct costs incurred on behalf of TheCampusHub.com,
Inc., as well as $0.3 million per year for certain shared management and
administrative support. Complementary Services Division revenue resulting from
the management services agreement was recognized as the services were performed.
For the year ended March 31, 2004, revenues attributable to the management
services agreement totaled $0.1 million and reimbursable direct costs incurred
on behalf of TheCampusHub.com, Inc. totaled $0.1 million.
INDEBTEDNESS OF MANAGEMENT - As of March 31, 2004, notes receivable from
stockholders and the associated interest receivable totaled approximately $0.1
million and $1,214, respectively. The remaining balances of such notes
originated pursuant to the terms of an employment agreement with NBC's Chief
Operating Officer, Barry S. Major. In January, 1999, we issued 4,765 shares of
the Company's 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, 2004 was
approximately $170,000. This note was amended and restated in July, 2002 and
matures on January 19, 2009. A similar note, which was repaid in fiscal 2004,
originated pursuant to the terms of an employment agreement with NBC's Chief
Financial Officer, Alan G. Siemek. In July, 1999, we issued 3,177 shares of the
Company's 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 outstanding
under this note at any time during the year ended March 31, 2004 was
approximately $77,000.
76
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following table sets forth the aggregate fees billed to us during fiscal
years 2004 and 2003 by Deloitte & Touche LLP:
2004 2003
----------- -----------
Audit Fees $ 98,410 $ 91,510
Audit-Related Fees 155,262 21,999
Tax Fees 99,063 52,782
----------- -----------
Total $ 352,735 $ 166,291
=========== ===========
AUDITS FEES include professional services rendered for the audit of our
annual consolidated financial statements and for the reviews of the consolidated
interim financial statements included in our Quarterly Reports on Form 10-Q.
AUDIT-RELATED FEES consist of fees for assurance and related services that
are related to the performance of the audit or review of our consolidated
financial statements, including procedures performed in conjunction with various
merger and acquisition activities, as well as the audit of the 401(k)
compensation plan.
TAX FEES consist of fees for professional services for tax compliance, tax
advice, and tax planning. These services include assistance regarding federal
and state tax compliance, return preparation, and tax audits.
The audit committee pre-approves all audit and non-audit services performed
by our independent auditor.
77
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
(1) Consolidated Financial Statements of NBC Acquisition Corp.
Index to Consolidated Financial Statements.
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets as of March 31, 2004 (Successor) and
March 31, 2003 (Predecessor).
Consolidated Statements of Operations for the One Month Ended March
31, 2004 (Successor), the Eleven Months Ended February 29, 2004
(Predecessor), and the Years Ended March 31, 2003 and 2002
(Predecessor).
Consolidated Statements of Stockholders' Equity (Deficit) for the
One Month Ended March 31, 2004 (Successor), the Eleven Months
Ended February 29, 2004 (Predecessor), and the Years Ended March
31, 2003 and 2002 (Predecessor).
Consolidated Statements of Cash Flows for the One Month Ended March
31, 2004 (Successor), the Eleven Months Ended February 29, 2004
(Predecessor), and the Years Ended March 31, 2003 and 2002
(Predecessor).
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules.
Report on Schedules of Independent Registered Public Accounting
Firm.
Schedule I - Condensed Financial Information of NBC Acquisition
Corp. (Parent Company Only).
Schedule II - Valuation and Qualifying Accounts.
(3) Exhibits.
2.1 Agreement and Plan of Merger, dated as of February 18, 2004, by
and among NBC Holdings Corp., New NBC Acquisition Corp., NBC
Acquisition Corp., certain Selling Stockholders named therein,
and HWH Capital Partners, L.P., filed as Exhibit 2.1 to NBC
Acquisition Corp. Registration Statement on Form S-4 (No.
333-114889), is incorporated herein by reference.
2.2 Amendment No. 1 to the Agreement and Plan of Merger, dated as of
March 2, 2004, by and among NBC Holdings Corp., New NBC
Acquisition Corp., NBC Acquisitions Corp., certain Selling
Stockholders named therein, and HWH Capital Partners, L.P., filed
as Exhibit 2.2 to NBC Acquisition Corp. Registration Statement on
Form S-4 (No. 333-114889), is incorporated herein by reference.
2.3 Stock Purchase Agreement, dated as of February 18, 2004, by and
among Weston Presidio Capital III, L.P., Weston Presidio Capital
IV, L.P., WPC Entrepreneur Fund L.P., WPC Entrepreneur Fund II,
MSD Ventures, L.P., HWH Capital Partners, L.P., NBC Acquisition
Corp., and NBC Holdings Corp., filed as Exhibit 2.3 to NBC
Acquisition Corp. Registration Statement on Form S-4 (No.
333-114889), is incorporated herein by reference.
2.4 Agreement for Purchase and Sale of Stock, dated as of May 26,
1999 by and among Nebraska Book Company, Inc., Dennis Rother, and
Larry Rother, filed as Exhibit 2.1 to NBC Acquisition Corp. Form
8-K, as amended, dated June 4, 1999, is incorporated herein by
reference.
2.5 Agreement of Sale, dated as of September 30, 1999 by and among
Nebraska Book Company, Inc., Michigan College Book Company, Inc.,
Ned's Berkeley Book Company, Inc., Ned Shure, Fred Shure, and
Jack Barenfanger filed as Exhibit 2.1 to NBC Acquisition Corp.
Form 8-K, as amended, dated November 12, 1999, is incorporated
herein by reference.
78
2.6 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 NBC Acquisition Corp. Form 8-K dated May
11, 2001, is incorporated herein by reference.
2.7 Agreement and Plan of Merger, dated as of July 1, 2003, by and
among TheCampusHub.com, Inc., Nebraska Book Company, Inc., and
NBC Acquisition Corp., filed as Exhibit 2.1 to NBC Acquisition
Corp. Form 10-Q for the quarter ended June 30, 2003, is
incorporated herein by reference.
3.1 Certificate of Incorporation, as amended, of NBC Acquisition
Corp., filed as Exhibit 3.1 to NBC Acquisition Corp. Registration
Statement on Form S-4, as amended (File No. 333-48225), is
incorporated herein by reference.
3.2 By-laws of NBC Acquisition Corp., filed as Exhibit 3.2 to NBC
Acquisition Corp. Registration Statement on Form S-4, as amended
(File No. 333-48225), is incorporated herein by reference.
3.3 Amendment, dated as of August 2, 2002, to By-laws of NBC
Acquisition Corp., filed as Exhibit 3.2 to NBC Acquisition Corp.
Form 10-Q for the quarter ended December 31, 2002, is
incorporated herein by reference.
4.1 Indenture dated as of February 13, 1998 by and between NBC
Acquisition Corp. and United States Trust Company of New York, as
Trustee, filed as Exhibit 4.1 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
4.2 Supplemental Indenture, dated March 4, 2004, between NBC
Acquisition Corp. and The Bank of New York, as trustee filed as
Exhibit 4.2 to NBC Acquisition Corp. Registration Statement on
Form S-4 (File No. 333-114889), is incorporated herein by
reference.
4.3 Form of Initial Debenture of NBC Acquisition Corp. (included in
Exhibit 4.1 as Exhibit A), filed as Exhibit 4.3 to NBC
Acquisition Corp. Registration Statement on Form S-4, as amended
(File No. 333-48225), is incorporated herein by reference.
4.4 Form of Exchange Debenture of NBC Acquisition Corp. (included in
Exhibit 4.1 as Exhibit B), filed as Exhibit 4.4 to NBC
Acquisition Corp. Registration Statement on Form S-4, as amended
(File No. 333-48225), is incorporated herein by reference.
4.5 Indenture, dated March 4, 2004, by and among NBC Acquisition
Corp., the subsidiary guarantors parties thereto and BNY Midwest
Trust Company as Trustee, filed as Exhibit 4.5 to NBC Acquisition
Corp. Registration Statement on Form S-4 (File No. 333-114889),
is incorporated herein by reference.
4.6 Form of 11% Senior Discount Notes Due 2013 (included in Exhibit
4.5), filed as Exhibit 4.6 to NBC Acquisition Corp. Registration
Statement on Form S-4 (File No. 333-114889), is incorporated
herein by reference.
4.7 Form of Exchange Note of NBC Acquisition Corp. 11% Senior
Discount Notes Due 2013.
4.8 Indenture dated as of February 13, 1998 by and between Nebraska
Book Company, Inc. and United States Trust Company of New York,
as Trustee, filed as Exhibit 4.5 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
4.9 Supplemental Indenture, dated as of July 1, 2002, by and 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.
4.10 Second Supplemental Indenture, dated March 4, 2004, by and among
Nebraska Book Company, Inc., the subsidiary guarantor named
therein and The Bank of New York, as Trustee, filed as Exhibit
4.9 to NBC Acquisition Corp. Registration Statement on Form S-4
(File No. 333-114889), is incorporated herein by reference.
79
4.11 Form of Initial Note of Nebraska Book Company, Inc. (included in
4.8 as Exhibit A), filed as Exhibit 4.7 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
4.12 Form of Exchange Note of Nebraska Book Company, Inc. (included in
4.8 as Exhibit B), filed as Exhibit 4.8 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
4.13 Indenture, dated March 4, 2004, by and among Nebraska Book
Company, Inc., the subsidiary guarantors parties thereto and BNY
Midwest Trust Company as Trustee, filed as Exhibit 4.12 to NBC
Acquisition Corp. Registration Statement on Form S-4 (File No.
333-114889), is incorporated herein by reference.
4.14 Form of 8 5/8% Senior Subordinated Note Due 2012 (included in
Exhibit 4.13), filed as Exhibit 4.13 to NBC Acquisition Corp.
Registration Statement on Form S-4 (File No. 333-114889), is
incorporated herein by reference.
4.15 Form of Exchange Note of Nebraska Book Company, Inc. 8 5/8%
Senior Subordinated Note Due 2012.
10.1 Credit Agreement dated as of February 13, 1998 by and among NBC
Acquisition Corp., Nebraska Book Company, Inc., the Chase
Manhattan Bank and certain other financial institutions, filed as
Exhibit 10.1 to NBC Acquisition Corp. Registration Statement on
Form S-4, as amended (File No. 333-48225), is incorporated herein
by reference.
10.2 First Amendment, dated as of May 21, 1999, to the Credit
Agreement, dated as of February 13, 1998 by and among NBC
Acquisition Corp., Nebraska Book Company, Inc., the Chase
Manhattan Bank, and certain other financial institutions, filed
as Exhibit 10.1 to NBC Acquisition Corp. 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, by and among NBC
Acquisition Corp., Nebraska Book Company, Inc., the Chase
Manhattan Bank, and certain other financial institutions, filed
as Exhibit 10.1 to NBC Acquisition Corp. 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, by and among NBC
Acquisition Corp., Nebraska Book Company, Inc., J.P. Morgan Chase
Bank, and certain other financial institutions, filed as Exhibit
10.1 to NBC Acquisition Corp. 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, by and
among NBC Acquisition Corp., Nebraska Book Company, Inc.,
JPMorgan Chase Bank, and certain other financial institutions,
filed as Exhibit 10.1 to NBC Acquisition Corp. Form 10-Q for the
quarter ended June 30, 2002, is incorporated herein by reference.
10.6 Fifth Amendment and Waiver, dated as of June 13, 2003, to and
under the Credit Agreement, dated as of February 13, 1998, by and
among NBC Acquisition Corp., Nebraska Book Company, Inc.,
JPMorgan Chase Bank, and certain other financial institutions,
filed as Exhibit 10.1 to NBC Acquisition Corp. Form 10-Q for the
quarter ended June 30, 2003, is incorporated herein by reference.
10.7 Amended and Restated Credit Agreement, dated February 13, 1998,
as amended and restated as of December 10, 2003, by and among NBC
Acquisition Corp., Nebraska Book Company, Inc., and the other
parties thereto, filed as Exhibit 99.1 to NBC Acquisition Corp.
Current Report on Form 8-K dated December 10, 2003, is
incorporated herein by reference.
80
10.8 Amended and Restated Credit Agreement, dated as of March 4, 2004,
by and among NBC Holdings Corp., NBC Acquisition Corp., Nebraska
Book Company, Inc., the Several Lenders parties thereto, JPMorgan
Chase Bank as Administrative Agent and Collateral Agent,
Citigroup Global Markets Inc. as Syndication Agent, and Fleet
National Bank and Wells Fargo Bank N.A., as Co-Documentation
Agents, filed as Exhibit 10.8 to NBC Acquisition Corp.
Registration Statement on Form S-4 (File No. 333-114889), is
incorporated herein by reference.
10.9 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.
10.10 Guarantee and Collateral Agreement, dated as of February 13,
1998 made by NBC Acquisition Corp. and Nebraska Book Company,
Inc. in favor of the Chase Manhattan Bank, as administrative
agent, filed as Exhibit 10.2 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
10.11 Amended and Restated Guarantee and Collateral Agreement, dated
March 4, 2004, by and among NBC Holdings Corp., NBC Acquisition
Corp., Nebraska Book Company, Inc. and Specialty Books, Inc. in
favor of JPMorgan Chase Bank, as administrative agent, filed as
Exhibit 10.11 to NBC Acquisition Corp. Registration Statement on
Form S-4 (File No. 333-114889), is incorporated herein by
reference.
10.12 Purchase Agreement dated February 10, 1998 by and between NBC
Acquisition Corp. and Chase Securities Inc., filed as Exhibit
10.3 to NBC Acquisition Corp. Registration Statement on Form S-4,
as amended (File No. 333-48225), is incorporated herein by
reference.
10.13 Purchase Agreement, dated as of March 4, 2004, by and among NBC
Acquisition Corp. and J.P. Morgan Securities Inc., Citigroup
Global Markets Inc. and Fleet Securities, Inc., filed as Exhibit
10.13 to NBC Acquisition Corp. Registration Statement on Form S-4
(File No. 333-114889), is incorporated herein by reference.
10.14 Purchase Agreement dated February 10, 1998 between Nebraska Book
Company, Inc. and Chase Securities Inc., filed as Exhibit 10.4 to
NBC Acquisition Corp. Registration Statement on Form S-4, as
amended (File No. 333-48225), is incorporated herein by
reference.
10.15 Purchase Agreement, dated as of March 4, 2004, by and among
Nebraska Book Company, Inc. and J.P. Morgan Securities Inc.,
Citigroup Global Markets Inc. and Fleet Securities, Inc., filed
as Exhibit 10.15 to NBC Acquisition Corp. Registration Statement
on Form S-4 (File No. 333-114889), is incorporated herein by
reference.
10.16 Merger Agreement, dated January 6, 1998, by and among NBC Merger
Corp., NBC Acquisition Corp., and certain stockholders of NBC
Acquisition Corp. named therein, filed as Exhibit 10.9 to NBC
Acquisition Corp. Registration Statement on Form S-4, as amended
(File No. 333-48225), is incorporated herein by reference.
10.17 Stockholders Agreement, dated as of July 11, 2002, by and among
NBC Acquisition Corp., HWH Capital Partners, L.P., HWH Cornhusker
Partners, L.P., Weston Presidio Capital III, L.P., Weston
Presidio Capital IV, L.P., WPC Entrepreneur Fund, L.P., WPC
Entrepreneur Fund II, L.P., and the other stockholders party
thereto, filed as Exhibit 4.1 to NBC Acquisition Corp. Form 10-Q
for the quarter ended June 30, 2002, is incorporated herein by
reference.
10.18 Amended and Restated Stockholders Agreement, dated as of July 1,
2003, by and among NBC Acquisition Corp., HWH Capital Partners,
L.P., HWH Cornhusker Partners, L.P., Weston Presidio Capital III,
L.P., Weston Presidio Capital IV, L.P., WPC Entrepreneur Fund,
L.P., WPC Entrepreneur Fund II, L.P., MSD Ventures, L.P., and the
other stockholders party thereto, filed as Exhibit 4.1 to NBC
Acquisition Corp. Form 10-Q for the quarter ended June 30, 2003,
is incorporated herein by reference.
81
10.19 Registration Rights Agreement, dated as of July 11, 2002, by and
among HWH Capital Partners, L.P., HWH Cornhusker Partners, L.P.,
Weston Presidio Capital III, L.P., Weston Presidio Capital IV,
L.P., WPC Entrepreneur Fund, L.P., WPC Entrepreneur Fund II,
L.P., and NBC Acquisition Corp., filed as Exhibit 4.2 to NBC
Acquisition Corp. Form 10-Q for the quarter ended June 30, 2002,
is incorporated herein by reference.
10.20 Amended and Restated Registration Rights Agreement, dated as of
July 1, 2003, by and among HWH Capital Partners, L.P., HWH
Cornhusker Partners, L.P., Weston Presidio Capital III, L.P.,
Weston Presidio Capital IV, L.P., WPC Entrepreneur Fund, L.P.,
WPC Entrepreneur Fund II, L.P., MSD Ventures, L.P., and NBC
Acquisition Corp., filed as Exhibit 4.2 to NBC Acquisition Corp.
Form 10-Q for the quarter ended June 30, 2003, is incorporated
herein by reference.
10.21 Exchange and Registration Rights Agreement dated as of February
13, 1998 by and between NBC Acquisition Corp. and Chase
Securities Inc., filed as Exhibit 4.2 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
10.22 Registration Rights Agreement, dated as of March 4, 2004, by and
among NBC Acquisition Corp. and J.P. Morgan Securities Inc.,
Citigroup Global Markets Inc. and Fleet Securities, Inc., filed
as Exhibit 10.22 to NBC Acquisition Corp. Registration Statement
on Form S-4 (File No. 333-114889), is incorporated herein by
reference.
10.23 Exchange and Registration Rights Agreement dated as of February
13, 1998 by and between Nebraska Book Company, Inc. and Chase
Securities Inc., filed as Exhibit 4.6 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
10.24 Registration Rights Agreement, dated as of March 4, 2004, by and
among Nebraska Book Company, Inc. and J.P. Morgan Securities
Inc., Citigroup Global Markets Inc. and Fleet Securities, Inc.,
filed as Exhibit 10.24 to NBC Acquisition Corp. Registration
Statement on Form S-4 (File No. 333-114889), is incorporated
herein by reference.
10.25* Form of Memorandum of Understanding, dated as of February 13,
1998 by and between NBC Acquisition Corp. and each of Mark W.
Oppegard, Bruce E. Nevius, Larry R. Rempe, Kenneth F. Jirovsky,
William H. Allen, Thomas A. Hoff and Ardean A. Arndt, filed as
Exhibit 10.5 to NBC Acquisition Corp. Registration Statement on
Form S-4, as amended (File No. 333-48225), is incorporated herein
by reference.
10.26* Memorandum of Understanding, dated as of December 22, 1998 by
and between Nebraska Book Company, Inc. and Barry S. Major, Chief
Operating Officer, filed as Exhibit 10.1 to NBC Acquisition Corp.
Form 10-Q for the quarter ended December 31, 1998, is
incorporated herein by reference.
10.27* Addendum to the Memorandum of Understanding, dated as of
December 22, 1998 by and between Nebraska Book Company, Inc. and
Barry S. Major, dated March 29, 2002, filed as Exhibit 10.10 to
NBC Acquisition Corp. Form 10-K for the year ended March 31,
2002, is incorporated herein by reference.
10.28* Amended and Restated Secured Promissory Note dated July 9, 2002
by and between NBC Acquisition Corp. and Barry S. Major, filed as
Exhibit 10.4 to NBC Acquisition Corp. Form 10-Q for the quarter
ended June 30, 2002, is incorporated herein by reference.
10.29* Memorandum of Understanding, dated as of July 1, 1999 by and
between Nebraska Book Company, Inc. and Alan Siemek, Chief
Financial Officer, filed as Exhibit 10.1 to NBC Acquisition Corp.
Form 10-Q for the quarter ended September 30, 1999, is
incorporated herein by reference.
10.30* Addendum to the Memorandum of Understanding, dated as of July
1, 1999 by and between Nebraska Book Company, Inc. and Alan
Siemek, dated March 29, 2002, filed as Exhibit 10.12 to NBC
Acquisition Corp. Form 10-K for the year ended March 31, 2002, is
incorporated herein by reference.
10.31* Amended and Restated Secured Promissory Note dated July 9, 2002
by and between NBC Acquisition Corp. and Alan Siemek, filed as
Exhibit 10.5 to NBC Acquisition Corp. Form 10-Q for the quarter
ended June 30, 2002, is incorporated herein by reference.
82
10.32* Memorandum of Understanding, dated as of November 1, 1999 by
and between Nebraska Book Company, Inc. and Michael J. Kelly,
Vice President of E-commerce, filed as Exhibit 10.1 to NBC
Acquisition Corp. Form 10-Q for the quarter ended December 31,
1999, is incorporated herein by reference.
10.33* Amended and Restated Secured Promissory Note dated July 9, 2002
by and between NBC Acquisition Corp. and Michael J. Kelly, filed
as Exhibit 10.6 to NBC Acquisition Corp. Form 10-Q for the
quarter ended June 30, 2002, is incorporated herein by reference.
10.34* Memorandum of Understanding, dated as of April 17, 2001 by and
between Nebraska Book Company, Inc. and Robert Rupe, Senior Vice
President of the Bookstore Division, filed as Exhibit 10.1 to NBC
Acquisition Corp. Form 10-Q for the quarter ended June 30, 2001,
is incorporated herein by reference.
10.35* Amended and Restated Secured Promissory Note dated July 9, 2002
by and between NBC Acquisition Corp. and Robert Rupe, filed as
Exhibit 10.7 to NBC Acquisition Corp. Form 10-Q for the quarter
ended June 30, 2002, is incorporated herein by reference.
10.36* Amendment to the Memorandums of Understanding by and between
Nebraska Book Company, Inc. and each of Mark W. Oppegard, Larry
R. Rempe, Kenneth F. Jirovsky, William H. Allen, Thomas A. Hoff,
Barry S. Major, Alan Siemek, Michael J. Kelly, and Robert Rupe,
dated March 4, 2004.
10.37* NBC Acquisition Corp. 1995 Stock Incentive Plan adopted August
31, 1995, filed as Exhibit 10.6 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
10.38* NBC Acquisition Corp. 1998 Performance Stock Option Plan
adopted June 30, 1998, filed as Exhibit 10.1 to NBC Acquisition
Corp. Form 10-Q for the quarter ended June 30, 1998, is
incorporated herein by reference.
10.39* 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 NBC Acquisition Corp. Form
10-Q for the quarter ended June 30, 2002, is incorporated herein
by reference.
10.40* NBC Acquisition Corp. 1998 Stock Option Plan adopted June 30,
1998, filed as Exhibit 10.2 to NBC Acquisition Corp. Form 10-Q
for the quarter ended June 30, 1998, is incorporated herein by
reference.
10.41* 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 NBC Acquisition Corp. Form 10-Q for the
quarter ended June 30, 2002, is incorporated herein by reference.
10.42* NBC Acquisition Corp. 2003 Performance Stock Option Plan
adopted July 1, 2003, filed as Exhibit 10.1 to NBC Acquisition
Corp. Form 10-Q for the quarter ended September 30, 2003, is
incorporated herein by reference.
10.43* NBC Acquisition Corp. 2003 Stock Option Plan adopted July 1,
2003, filed as Exhibit 10.2 to NBC Acquisition Corp. Form 10-Q
for the quarter ended September 30, 2003, is incorporated herein
by reference.
10.44* NBC Holdings Corp. 2004 Stock Option Plan adopted March 4,
2004, filed as Exhibit 10.43 to NBC Acquisition Corp.
Registration Statement on Form S-4 (File No. 333-114889), is
incorporated herein by reference.
10.45* NBC Acquisition Corp. Senior Management Bonus Plan adopted June
30, 1998, filed as Exhibit 10.3 to NBC Acquisition Corp. Form
10-Q for the quarter ended June 30, 1998, is incorporated herein
by reference.
10.46* Form of Deferred Compensation Agreement by and among Nebraska
Book Company, Inc. and each of Mark W. Oppegard, Bruce E. Nevius,
Larry R. Rempe and Thomas A. Hoff, filed as Exhibit 10.7 to NBC
Acquisition Corp. Registration Statement on Form S-4, as amended
(File No. 333-48225), is incorporated herein by reference.
83
10.47* Amendment of Form of Deferred Compensation Agreement, dated
December 30, 2002, by and among Nebraska Book Company, Inc. and
each of Mark W. Oppegard, Larry R. Rempe and Thomas A. Hoff,
filed as Exhibit 10.1 to NBC Acquisition Corp. Form 10-Q for the
quarter ended December 31, 2002, is incorporated herein by
reference.
10.48* NBC Acquisition Corp. 401(k) Savings Plan, filed as Exhibit
10.8 to NBC Acquisition Corp. Registration Statement on Form S-4,
as amended (File No. 333-48225), is incorporated herein by
reference.
10.49 Agreement for Purchase and Sale of Stock dated January 9, 1998
by and among Nebraska Book Company, Inc. and Martin D. Levine,
the Lauren E. Levine Grantor Trust and the Jonathan L. Levine
Grantor Trust (the "Collegiate Stores Corporation Agreement"),
filed as Exhibit 10.10.1 to NBC Acquisition Corp. Registration
Statement on Form S-4, as amended (File No. 333-48225), is
incorporated herein by reference.
10.50 First Amendment dated January 23, 1998 to the Collegiate Stores
Corporation Agreement, filed as Exhibit 10.10.2 to NBC
Acquisition Corp. Registration Statement on Form S-4, as amended
(File No. 333-48225), is incorporated herein by reference.
10.51 Commercial Lease Agreement made and entered into March 8, 1989,
by and among Robert J. Chaney, Mary Charlotte Chaney and Robert
J. Chaney, as Trustee under the Last Will and Testament of James
A Chaney, and Nebraska Book Company, Inc., filed as Exhibit 10.11
to NBC Acquisition Corp. Registration Statement on Form S-4, as
amended (File No. 333-48225), is incorporated herein by
reference.
10.52 Lease Agreement entered into as of September 1, 1986, by and
among Odell Associates Limited Partnership and Nebraska Book
Company, Inc., filed as Exhibit 10.12 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
10.53 Lease Agreement entered into as of September 1, 1986, by and
among John B. DeVine, successor trustee of the Fred C. Ulrich
Trust, as amended, and Nebraska Book Company, Inc., filed as
Exhibit 10.13 to NBC Acquisition Corp. Registration Statement on
Form S-4, as amended (File No. 333-48225), is incorporated herein
by reference.
10.54 Lease Agreement entered into as of September 1, 1986 by and
among Odell Associates Limited Partnership and Nebraska Book
Company, Inc., filed as Exhibit 10.14 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
10.55 Lease Agreement made and entered into October 12, 1988 by and
among Hogarth Management and Nebraska Book Company, Inc., filed
as Exhibit 10.15 to NBC Acquisition Corp. Registration Statement
on Form S-4, as amended (File No. 333-48225), is incorporated
herein by reference.
10.56 Industrial Real Estate Lease dated June 22, 1987 by and among
Cyprus Land Company and Nebraska Book Company, Inc., filed as
Exhibit 10.16 to NBC Acquisition Corp. Registration Statement on
Form S-4, as amended (File No. 333-48225), is incorporated herein
by reference.
12.1 Statements regarding computation of ratios, filed as Exhibit 12.1
to NBC Acquisition Corp. Registration Statement on Form S-4 (File
No. 333-114889), is incorporated herein by reference.
14.1 Code of Business Conduct and Ethics and Code of Ethics for Our
Principal Executive Officer and Senior Financial Officers for
NBC Acquisition Corp.
21.1 Subsidiaries, filed as Exhibit 21.1 to NBC Acquisition Corp.
Registration Statement on Form S-4 (File No. 333-114889), is
incorporated herein by reference.
31.1 Certification of President/Chief Executive Officer pursuant to
Rules 13a-15(e) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
84
31.2 Certification of Principal Financial and Accounting Officer
pursuant to Rules 13a-15(e) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of President/Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial and Accounting Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
* - Management contracts or compensatory plans filed herewith or
incorporated by reference.
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are either not required
under the related instructions, are not applicable (and therefore have been
omitted), or the required disclosures are contained in the consolidated
financial statements included herein.
(b) REPORTS ON FORM 8-K.
Current Report on Form 8-K dated and filed on March 8, 2004
announcing the completion of the sale of the Company's 11% Senior
Discount Notes due 2013 and that the Company will redeem all of the
10.75% senior discount debentures that were not tendered on or
prior to the expiration of the consent solicitation initiated on
February 4, 2004.
Current Report on Form 8-K dated and filed on February 19, 2004
providing consolidated financial statements for the three years
ended March 31, 2003 with updated segment information, providing
certain financial information for the ten-month periods ended
January 31, 2004 and 2003 and the twelve-month period ended January
31, 2004, announcing a proposed debt offering, and discussing the
related tender offer and consent solicitation.
Current Report on Form 8-K dated and filed on February 5, 2004
announcing a tender offer and consent solicitation for the
Company's 10.75% senior discount debentures.
Current Report on Form 8-K dated December 10, 2003 and filed on
January 8, 2004 announcing the purchase of treasury stock and the
amendment and restatement of the senior credit facility.
85
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NBC ACQUISITION CORP.
/s/ Mark W. Oppegard
-----------------------------------------
Mark W. Oppegard
President/Chief Executive Officer,
Secretary, and Director
June 25, 2004
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/ Michael F. Cronin
- ------------------------------------ -----------------------------------------
Mark W. Oppegard Michael F. Cronin
President/Chief Executive Officer, Director
Secretary, June 25, 2004
and Director
June 25, 2004
/s/ Alan G. Siemek /s/ Mark L. Bono
- ------------------------------------ -----------------------------------------
Alan G. Siemek Mark L. Bono
Vice President and Treasurer Director
(Principal Financial and June 25, 2004
Accounting Officer)
June 25, 2004
/s/ Barry S. Major /s/ R. Sean Honey
- ------------------------------------ -----------------------------------------
Barry S. Major R. Sean Honey
Director Director
June 25, 2004 June 25, 2004
86
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 with respect to any annual or other
meeting of security holders for the fiscal year ended March 31, 2004 has been,
or will be, sent to security holders.
87
FINANCIAL STATEMENT SCHEDULES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
NBC Acquisition Corp.
Lincoln, Nebraska
We have audited the consolidated financial statements of NBC Acquisition
Corp. and subsidiary as of March 31, 2004 (Successor) and March 31, 2003
(Predecessor) and for the one month ended March 31, 2004 (Successor), the eleven
months ended February 29, 2004 (Predecessor), and the years ended March 31, 2003
and 2002 (Predecessor), and have issued our report thereon dated June 25, 2004;
such report is included elsewhere in this Form 10-K. Our audits also included
the financial statement schedules listed in Item 15(a)(2). These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Lincoln, Nebraska
June 25, 2004
88
NBC ACQUISITION CORP. (PARENT COMPANY ONLY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
- -----------------------------------------------------------------------------------
Successor Predecessor
-------------- --------------
March 31, March 31,
2004 2003
-------------- --------------
ASSETS
CURRENT ASSETS:
Due from subsidiary (Note A) $ 11,028,828 $ -
OTHER ASSETS:
Due from subsidiary (Note A) 16,836,358 12,371,846
Investment in subsidiary (Note A) 145,986,493 13,188,101
Debt issue costs, net of amortization 1,967,737 1,913,335
Deferred income taxes 150,237 -
-------------- --------------
$175,969,653 $ 27,473,282
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accrued interest $ 523,828 $ 993,039
Current maturities of long-term debt 10,505,000 -
-------------- --------------
Total current liabilities 11,028,828 993,039
LONG-TERM DEBT, net of current maturities 50,413,044 76,000,000
COMMITMENTS (Note B)
STOCKHOLDERS' EQUITY (DEFICIT):
Class A common stock, voting, authorized
5,000,000 shares of $.01 par value;
issued and outstanding 549,254 and 1,264,264
shares at March 31, 2004 and 2003,
respectively 5,493 12,642
Additional paid-in-capital 110,963,897 65,381,476
Notes receivable from stockholders (92,689) (336,681)
Retained earnings (accumulated deficit) 3,651,080 (114,158,563)
Accumulated other comprehensive loss of subsidiary - (418,631)
-------------- --------------
Total stockholders' equity (deficit) 114,527,781 (49,519,757)
-------------- --------------
$ 175,969,653 $ 27,473,282
============== ==============
See notes to condensed financial statements.
89
NBC ACQUISITION CORP. (PARENT COMPANY ONLY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION
STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------
Successor Predecessor
--------------- ----------------------------------------------
1 Month Ended 11 Months Ended Year Ended
March 31, February 29, March 31, March 31,
2004 2004 2003 2002
--------------- ---------------- -------------- --------------
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES $ - $ (137,927) $ - $ -
INTEREST EXPENSE (621,596) (12,127,607) (7,980,033) (7,219,087)
INCOME TAX BENEFIT 105,197 4,499,552 2,752,947 2,538,084
EQUITY (DEFICIT) IN EARNINGS OF SUBSIDIARY (3,715,249) 17,194,690 23,006,334 15,836,307
--------------- ---------------- -------------- --------------
NET INCOME (LOSS) $ (4,231,648) $ 9,428,708 $ 17,779,248 $ 11,155,304
=============== ================ ============== ==============
EARNINGS (LOSS) PER SHARE:
Basic $ (7.70) $ 7.45 $ 14.07 $ 8.83
=============== ================ ============== ==============
Diluted $ (7.70) $ 7.30 $ 13.88 $ 8.83
=============== ================ ============== ==============
See notes to condensed financial statements.
90
NBC ACQUISITION CORP. (PARENT COMPANY ONLY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION
STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------
Successor Predecessor
--------------- ------------------------------------------
1 Month Ended 11 Months Ended Year Ended
March 31, February 29, March 31, March 31,
2004 2004 2003 2002
--------------- ---------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash flows from operating activities $ (13,747,108) $ (8,307,927) $ - $ -
--------------- ---------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment of March 4, 2004 Transaction merger consideration (181,244,926) - - -
--------------- ---------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 50,009,190 - - -
Capital contribution 28,164,181 - - -
Proceeds from issuance of common stock - - - 13,752
Payment of financing costs (1,980,682) - - -
Principal payments on long-term debt (65,495,000) - - -
Proceeds from exercise of stock options - 15,740 52,600 -
Proceeds from payment on notes receivable from stockholders 50,471 208,089 552,089 -
Purchases of treasury stock - (32,696,577) - -
Dividend payments received from subsidiary 184,294,345 41,004,504 - -
Advances to subsidiary (50,471) (223,829) (604,689) (13,752)
--------------- ---------------- ------------ ------------
Net cash flows from financing activities 194,992,034 8,307,927 - -
--------------- ---------------- ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS - - - -
CASH AND CASH EQUIVALENTS, Beginning of year - - - -
--------------- ---------------- ------------ ------------
CASH AND CASH EQUIVALENTS, End of year $ - $ - $ - $ -
=============== ================ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Cash paid during the period for interest $ 2,718,280 $ 8,170,000 $ - $ -
Notes receivable from stockholders recorded upon issuance
of common stock - - - 123,765
Tax benefit on exercise of stock options - 10,000 24,000 -
Unpaid dividend declared by subsidiary - 2,723,080 - -
Accumulated other comprehensive income (loss) associated
with derivative financial instruments of subsidary - 418,631 185,936 (604,567)
See notes to condensed financial statements.
91
NBC ACQUISITION CORP. (PARENT COMPANY ONLY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DUE FROM SUBSIDIARY - NBC Acquisition Corp. (the "Company") files a
consolidated federal income tax return with its wholly-owned subsidiary,
Nebraska Book Company, Inc. ("NBC") and follows a policy of recording income
taxes equal to that which would have been incurred had the Company filed a
separate return. NBC is responsible for remitting tax payments and collecting
tax refunds for the consolidated group. The non-current amount due from
subsidiary represents the cumulative tax savings resulting from operating losses
generated by the Company from which NBC derives the benefit through reduced tax
payments on the consolidated return. The current portion of amounts due from
subsidiary represents amounts held in escrow by NBC on the Company's behalf to
be utilized to fund the redemption on April 3, 2004 of untendered principal
balances and related accrued interest and call premiums thereon under the $76.0
million senior discount debentures refinanced in the March 4, 2004 Transaction.
INVESTMENT IN SUBSIDIARY - The Company accounts for its investment in NBC
under the equity method of accounting. Advances to or from NBC are included
within the investment in subsidiary.
B. COMMITMENTS
The Company, along with NBC's wholly-owned subsidiary (Specialty Books,
Inc.), has jointly and severally, unconditionally and irrevocably, guaranteed
the prompt and complete payment and performance by NBC of NBC's obligations
underlying the Senior Credit Facility, which matures at various dates through
March 4, 2011. Such guarantee remains in full force and effect until all
obligations underlying the Senior Credit Facility, which became effective
February 13, 1998 and was most recently amended and restated on March 4, 2004,
have been satisfied. The maximum potential future amounts payable under the
guarantee at March 31, 2004 totaled $180.0 million in principal payments plus
interest, which is based on variable rates. As this guarantee represents a
parent's guarantee of its subsidiary's debt to a third party, such guarantee is
not carried as a liability in the "Parent Company Only" financial statements.
92
NBC ACQUISITION CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- ---------------------------------------------------------------------------------------------------------------------
Charged to Charged to
Beginning of Costs and Other Net End of Year
Year Balance Expenses Accounts Charge-Offs Balance
------------ ------------- ----------- ------------- -----------
ONE MONTH ENDED MARCH 31, 2004 (SUCCESSOR)
Allowance for doubtful accounts $ 510,839 $ 218,205 $ - $ (218,205) $ 510,839
ELEVEN MONTHS ENDED FEBRUARY 29, 2004 (PREDECESSOR)
Allowance for doubtful accounts 442,942 66,393 - 1,504 510,839
YEAR ENDED MARCH 31, 2003 (PREDECESSOR)
Allowance for doubtful accounts 1,429,803 451,578 - (1,438,439) 442,942
YEAR ENDED MARCH 31, 2002 (PREDECESSOR)
Allowance for doubtful accounts 407,033 1,629,704 - (606,934) 1,429,803
93
EXHIBIT INDEX
2.1 Agreement and Plan of Merger, dated as of February 18, 2004, by and
among NBC Holdings Corp., New NBC Acquisition Corp., NBC Acquisition
Corp., certain Selling Stockholders named therein, and HWH Capital
Partners, L.P., filed as Exhibit 2.1 to NBC Acquisition Corp.
Registration Statement on Form S-4 (No. 333-114889), is incorporated
herein by reference.
2.2 Amendment No. 1 to the Agreement and Plan of Merger, dated as of March
2, 2004, by and among NBC Holdings Corp., New NBC Acquisition Corp., NBC
Acquisitions Corp., certain Selling Stockholders named therein, and HWH
Capital Partners, L.P., filed as Exhibit 2.2 to NBC Acquisition Corp.
Registration Statement on Form S-4 (No. 333-114889), is incorporated
herein by reference.
2.3 Stock Purchase Agreement, dated as of February 18, 2004, by and among
Weston Presidio Capital III, L.P., Weston Presidio Capital IV, L.P., WPC
Entrepreneur Fund L.P., WPC Entrepreneur Fund II, MSD Ventures, L.P.,
HWH Capital Partners, L.P., NBC Acquisition Corp., and NBC Holdings
Corp., filed as Exhibit 2.3 to NBC Acquisition Corp. Registration
Statement on Form S-4 (No. 333-114889), is incorporated herein by
reference.
2.4 Agreement for Purchase and Sale of Stock, dated as of May 26, 1999 by
and among Nebraska Book Company, Inc., Dennis Rother, and Larry Rother,
filed as Exhibit 2.1 to NBC Acquisition Corp. Form 8-K, as amended,
dated June 4, 1999, is incorporated herein by reference.
2.5 Agreement of Sale, dated as of September 30, 1999 by and among Nebraska
Book Company, Inc., Michigan College Book Company, Inc., Ned's Berkeley
Book Company, Inc., Ned Shure, Fred Shure, and Jack Barenfanger filed as
Exhibit 2.1 to NBC Acquisition Corp. Form 8-K, as amended, dated
November 12, 1999, is incorporated herein by reference.
2.6 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 NBC Acquisition Corp. Form 8-K dated May 11, 2001, is
incorporated herein by reference.
2.7 Agreement and Plan of Merger, dated as of July 1, 2003, by and among
TheCampusHub.com, Inc., Nebraska Book Company, Inc., and NBC Acquisition
Corp., filed as Exhibit 2.1 to NBC Acquisition Corp. Form 10-Q for the
quarter ended June 30, 2003, is incorporated herein by reference.
3.1 Certificate of Incorporation, as amended, of NBC Acquisition Corp.,
filed as Exhibit 3.1 to NBC Acquisition Corp. Registration Statement on
Form S-4, as amended (File No. 333-48225), is incorporated herein by
reference.
3.2 By-laws of NBC Acquisition Corp., filed as Exhibit 3.2 to NBC
Acquisition Corp. Registration Statement on Form S-4, as amended (File
No. 333-48225), is incorporated herein by reference.
3.3 Amendment, dated as of August 2, 2002, to By-laws of NBC Acquisition
Corp., filed as Exhibit 3.2 to NBC Acquisition Corp. Form 10-Q for the
quarter ended December 31, 2002, is incorporated herein by reference.
4.1 Indenture dated as of February 13, 1998 by and between NBC Acquisition
Corp. and United States Trust Company of New York, as Trustee, filed as
Exhibit 4.1 to NBC Acquisition Corp. Registration Statement on Form S-4,
as amended (File No. 333-48225), is incorporated herein by reference.
4.2 Supplemental Indenture, dated March 4, 2004, between NBC Acquisition
Corp. and The Bank of New York, as trustee filed as Exhibit 4.2 to NBC
Acquisition Corp. Registration Statement on Form S-4 (File No.
333-114889), is incorporated herein by reference.
94
4.3 Form of Initial Debenture of NBC Acquisition Corp. (included in Exhibit
4.1 as Exhibit A), filed as Exhibit 4.3 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No. 333-48225), is
incorporated herein by reference.
4.4 Form of Exchange Debenture of NBC Acquisition Corp. (included in Exhibit
4.1 as Exhibit B), filed as Exhibit 4.4 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No. 333-48225), is
incorporated herein by reference.
4.5 Indenture, dated March 4, 2004, by and among NBC Acquisition Corp., the
subsidiary guarantors parties thereto and BNY Midwest Trust Company as
Trustee, filed as Exhibit 4.5 to NBC Acquisition Corp. Registration
Statement on Form S-4 (File No. 333-114889), is incorporated herein by
reference.
4.6 Form of 11% Senior Discount Notes Due 2013 (included in Exhibit 4.5),
filed as Exhibit 4.6 to NBC Acquisition Corp. Registration Statement on
Form S-4 (File No. 333-114889), is incorporated herein by reference.
4.7 Form of Exchange Note of NBC Acquisition Corp. 11% Senior Discount Notes
Due 2013.
4.8 Indenture dated as of February 13, 1998 by and between Nebraska Book
Company, Inc. and United States Trust Company of New York, as Trustee,
filed as Exhibit 4.5 to NBC Acquisition Corp. Registration Statement on
Form S-4, as amended (File No. 333-48225), is incorporated herein by
reference.
4.9 Supplemental Indenture, dated as of July 1, 2002, by and 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.
4.10 Second Supplemental Indenture, dated March 4, 2004, by and among
Nebraska Book Company, Inc., the subsidiary guarantor named therein and
The Bank of New York, as Trustee, filed as Exhibit 4.9 to NBC
Acquisition Corp. Registration Statement on Form S-4 (File No.
333-114889), is incorporated herein by reference.
4.11 Form of Initial Note of Nebraska Book Company, Inc. (included in 4.8 as
Exhibit A), filed as Exhibit 4.7 to NBC Acquisition Corp. Registration
Statement on Form S-4, as amended (File No. 333-48225), is incorporated
herein by reference.
4.12 Form of Exchange Note of Nebraska Book Company, Inc. (included in 4.8 as
Exhibit B), filed as Exhibit 4.8 to NBC Acquisition Corp. Registration
Statement on Form S-4, as amended (File No. 333-48225), is incorporated
herein by reference.
4.13 Indenture, dated March 4, 2004, by and among Nebraska Book Company,
Inc., the subsidiary guarantors parties thereto and BNY Midwest Trust
Company as Trustee, filed as Exhibit 4.12 to NBC Acquisition Corp.
Registration Statement on Form S-4 (File No. 333-114889), is
incorporated herein by reference.
4.14 Form of 8 5/8% Senior Subordinated Note Due 2012 (included in Exhibit
4.13), filed as Exhibit 4.13 to NBC Acquisition Corp. Registration
Statement on Form S-4 (File No. 333-114889), is incorporated herein by
reference.
4.15 Form of Exchange Note of Nebraska Book Company, Inc. 8 5/8% Senior
Subordinated Note Due 2012.
10.1 Credit Agreement dated as of February 13, 1998 by and among NBC
Acquisition Corp., Nebraska Book Company, Inc., the Chase Manhattan Bank
and certain other financial institutions, filed as Exhibit 10.1 to NBC
Acquisition Corp. Registration Statement on Form S-4, as amended (File
No. 333-48225), is incorporated herein by reference.
95
10.2 First Amendment, dated as of May 21, 1999, to the Credit Agreement,
dated as of February 13, 1998 by and among NBC Acquisition Corp.,
Nebraska Book Company, Inc., the Chase Manhattan Bank, and certain other
financial institutions, filed as Exhibit 10.1 to NBC Acquisition Corp.
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, by and among NBC Acquisition
Corp., Nebraska Book Company, Inc., the Chase Manhattan Bank, and
certain other financial institutions, filed as Exhibit 10.1 to NBC
Acquisition Corp. 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, by and among NBC Acquisition Corp.,
Nebraska Book Company, Inc., J.P. Morgan Chase Bank, and certain other
financial institutions, filed as Exhibit 10.1 to NBC Acquisition Corp.
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, by and among NBC
Acquisition Corp., Nebraska Book Company, Inc., JPMorgan Chase Bank, and
certain other financial institutions, filed as Exhibit 10.1 to NBC
Acquisition Corp. Form 10-Q for the quarter ended June 30, 2002, is
incorporated herein by reference.
10.6 Fifth Amendment and Waiver, dated as of June 13, 2003, to and under the
Credit Agreement, dated as of February 13, 1998, by and among NBC
Acquisition Corp., Nebraska Book Company, Inc., JPMorgan Chase Bank, and
certain other financial institutions, filed as Exhibit 10.1 to NBC
Acquisition Corp. Form 10-Q for the quarter ended June 30, 2003, is
incorporated herein by reference.
10.7 Amended and Restated Credit Agreement, dated February 13, 1998, as
amended and restated as of December 10, 2003, by and among NBC
Acquisition Corp., Nebraska Book Company, Inc., and the other parties
thereto, filed as Exhibit 99.1 to NBC Acquisition Corp. Current Report
on Form 8-K dated December 10, 2003, is incorporated herein by
reference.
10.8 Amended and Restated Credit Agreement, dated as of March 4, 2004, by and
among NBC Holdings Corp., NBC Acquisition Corp., Nebraska Book Company,
Inc., the Several Lenders parties thereto, JPMorgan Chase Bank as
Administrative Agent and Collateral Agent, Citigroup Global Markets Inc.
as Syndication Agent, and Fleet National Bank and Wells Fargo Bank N.A.,
as Co-Documentation Agents, filed as Exhibit 10.8 to NBC Acquisition
Corp. Registration Statement on Form S-4 (File No. 333-114889), is
incorporated herein by reference.
10.9 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.
10.10 Guarantee and Collateral Agreement, dated as of February 13, 1998 made
by NBC Acquisition Corp. and Nebraska Book Company, Inc. in favor of the
Chase Manhattan Bank, as administrative agent, filed as Exhibit 10.2 to
NBC Acquisition Corp. Registration Statement on Form S-4, as amended
(File No. 333-48225), is incorporated herein by reference.
10.11 Amended and Restated Guarantee and Collateral Agreement, dated March 4,
2004, by and among NBC Holdings Corp., NBC Acquisition Corp., Nebraska
Book Company, Inc. and Specialty Books, Inc. in favor of JPMorgan Chase
Bank, as administrative agent, filed as Exhibit 10.11 to NBC Acquisition
Corp. Registration Statement on Form S-4 (File No. 333-114889), is
incorporated herein by reference.
10.12 Purchase Agreement dated February 10, 1998 by and between NBC
Acquisition Corp. and Chase Securities Inc., filed as Exhibit 10.3 to
NBC Acquisition Corp. Registration Statement on Form S-4, as amended
(File No. 333-48225), is incorporated herein by reference.
96
10.13 Purchase Agreement, dated as of March 4, 2004, by and among NBC
Acquisition Corp. and J.P. Morgan Securities Inc., Citigroup Global
Markets Inc. and Fleet Securities, Inc., filed as Exhibit 10.13 to NBC
Acquisition Corp. Registration Statement on Form S-4 (File No.
333-114889), is incorporated herein by reference.
10.14 Purchase Agreement dated February 10, 1998 between Nebraska Book
Company, Inc. and Chase Securities Inc., filed as Exhibit 10.4 to NBC
Acquisition Corp. Registration Statement on Form S-4, as amended (File
No. 333-48225), is incorporated herein by reference.
10.15 Purchase Agreement, dated as of March 4, 2004, by and among Nebraska
Book Company, Inc. and J.P. Morgan Securities Inc., Citigroup Global
Markets Inc. and Fleet Securities, Inc., filed as Exhibit 10.15 to NBC
Acquisition Corp. Registration Statement on Form S-4 (File No.
333-114889), is incorporated herein by reference.
10.16 Merger Agreement, dated January 6, 1998, by and among NBC Merger Corp.,
NBC Acquisition Corp., and certain stockholders of NBC Acquisition Corp.
named therein, filed as Exhibit 10.9 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No. 333-48225), is
incorporated herein by reference.
10.17 Stockholders Agreement, dated as of July 11, 2002, by and among NBC
Acquisition Corp., HWH Capital Partners, L.P., HWH Cornhusker Partners,
L.P., Weston Presidio Capital III, L.P., Weston Presidio Capital IV,
L.P., WPC Entrepreneur Fund, L.P., WPC Entrepreneur Fund II, L.P., and
the other stockholders party thereto, filed as Exhibit 4.1 to NBC
Acquisition Corp. Form 10-Q for the quarter ended June 30, 2002, is
incorporated herein by reference.
10.18 Amended and Restated Stockholders Agreement, dated as of July 1, 2003,
by and among NBC Acquisition Corp., HWH Capital Partners, L.P., HWH
Cornhusker Partners, L.P., Weston Presidio Capital III, L.P., Weston
Presidio Capital IV, L.P., WPC Entrepreneur Fund, L.P., WPC Entrepreneur
Fund II, L.P., MSD Ventures, L.P., and the other stockholders party
thereto, filed as Exhibit 4.1 to NBC Acquisition Corp. Form 10-Q for the
quarter ended June 30, 2003, is incorporated herein by reference.
10.19 Registration Rights Agreement, dated as of July 11, 2002, by and among
HWH Capital Partners, L.P., HWH Cornhusker Partners, L.P., Weston
Presidio Capital III, L.P., Weston Presidio Capital IV, L.P., WPC
Entrepreneur Fund, L.P., WPC Entrepreneur Fund II, L.P., and NBC
Acquisition Corp., filed as Exhibit 4.2 to NBC Acquisition Corp. Form
10-Q for the quarter ended June 30, 2002, is incorporated herein by
reference.
10.20 Amended and Restated Registration Rights Agreement, dated as of July 1,
2003, by and among HWH Capital Partners, L.P., HWH Cornhusker Partners,
L.P., Weston Presidio Capital III, L.P., Weston Presidio Capital IV,
L.P., WPC Entrepreneur Fund, L.P., WPC Entrepreneur Fund II, L.P., MSD
Ventures, L.P., and NBC Acquisition Corp., filed as Exhibit 4.2 to NBC
Acquisition Corp. Form 10-Q for the quarter ended June 30, 2003, is
incorporated herein by reference.
10.21 Exchange and Registration Rights Agreement dated as of February 13, 1998
by and between NBC Acquisition Corp. and Chase Securities Inc., filed as
Exhibit 4.2 to NBC Acquisition Corp. Registration Statement on Form S-4,
as amended (File No. 333-48225), is incorporated herein by reference.
10.22 Registration Rights Agreement, dated as of March 4, 2004, by and among
NBC Acquisition Corp. and J.P. Morgan Securities Inc., Citigroup Global
Markets Inc. and Fleet Securities, Inc., filed as Exhibit 10.22 to NBC
Acquisition Corp. Registration Statement on Form S-4 (File No.
333-114889), is incorporated herein by reference.
10.23 Exchange and Registration Rights Agreement dated as of February 13, 1998
by and between Nebraska Book Company, Inc. and Chase Securities Inc.,
filed as Exhibit 4.6 to NBC Acquisition Corp. Registration Statement on
Form S-4, as amended (File No. 333-48225), is incorporated herein by
reference.
97
10.24 Registration Rights Agreement, dated as of March 4, 2004, by and among
Nebraska Book Company, Inc. and J.P. Morgan Securities Inc., Citigroup
Global Markets Inc. and Fleet Securities, Inc., filed as Exhibit 10.24
to NBC Acquisition Corp. Registration Statement on Form S-4 (File No.
333-114889), is incorporated herein by reference.
10.25* Form of Memorandum of Understanding, dated as of February 13, 1998 by
and between NBC Acquisition Corp. and each of Mark W. Oppegard, Bruce E.
Nevius, Larry R. Rempe, Kenneth F. Jirovsky, William H. Allen, Thomas A.
Hoff and Ardean A. Arndt, filed as Exhibit 10.5 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No. 333-48225), is
incorporated herein by reference.
10.26* Memorandum of Understanding, dated as of December 22, 1998 by and
between Nebraska Book Company, Inc. and Barry S. Major, Chief Operating
Officer, filed as Exhibit 10.1 to NBC Acquisition Corp. Form 10-Q for
the quarter ended December 31, 1998, is incorporated herein by
reference.
10.27* Addendum to the Memorandum of Understanding, dated as of December 22,
1998 by and between Nebraska Book Company, Inc. and Barry S. Major,
dated March 29, 2002, filed as Exhibit 10.10 to NBC Acquisition Corp.
Form 10-K for the year ended March 31, 2002, is incorporated herein by
reference.
10.28* Amended and Restated Secured Promissory Note dated July 9, 2002 by and
between NBC Acquisition Corp. and Barry S. Major, filed as Exhibit 10.4
to NBC Acquisition Corp. Form 10-Q for the quarter ended June 30, 2002,
is incorporated herein by reference.
10.29* Memorandum of Understanding, dated as of July 1, 1999 by and between
Nebraska Book Company, Inc. and Alan Siemek, Chief Financial Officer,
filed as Exhibit 10.1 to NBC Acquisition Corp. Form 10-Q for the quarter
ended September 30, 1999, is incorporated herein by reference.
10.30* Addendum to the Memorandum of Understanding, dated as of July 1, 1999 by
and between Nebraska Book Company, Inc. and Alan Siemek, dated March 29,
2002, filed as Exhibit 10.12 to NBC Acquisition Corp. Form 10-K for the
year ended March 31, 2002, is incorporated herein by reference.
10.31* Amended and Restated Secured Promissory Note dated July 9, 2002 by and
between NBC Acquisition Corp. and Alan Siemek, filed as Exhibit 10.5 to
NBC Acquisition Corp. Form 10-Q for the quarter ended June 30, 2002, is
incorporated herein by reference.
10.32* Memorandum of Understanding, dated as of November 1, 1999 by and between
Nebraska Book Company, Inc. and Michael J. Kelly, Vice President of
E-commerce, filed as Exhibit 10.1 to NBC Acquisition Corp. Form 10-Q for
the quarter ended December 31, 1999, is incorporated herein by
reference.
10.33* Amended and Restated Secured Promissory Note dated July 9, 2002 by and
between NBC Acquisition Corp. and Michael J. Kelly, filed as Exhibit
10.6 to NBC Acquisition Corp. Form 10-Q for the quarter ended June 30,
2002, is incorporated herein by reference.
10.34* Memorandum of Understanding, dated as of April 17, 2001 by and between
Nebraska Book Company, Inc. and Robert Rupe, Senior Vice President of
the Bookstore Division, filed as Exhibit 10.1 to NBC Acquisition Corp.
Form 10-Q for the quarter ended June 30, 2001, is incorporated herein by
reference.
10.35* Amended and Restated Secured Promissory Note dated July 9, 2002 by and
between NBC Acquisition Corp. and Robert Rupe, filed as Exhibit 10.7 to
NBC Acquisition Corp. Form 10-Q for the quarter ended June 30, 2002, is
incorporated herein by reference.
10.36* Amendment to the Memorandums of Understanding by and between Nebraska
Book Company, Inc. and each of Mark W. Oppegard, Larry R. Rempe, Kenneth
F. Jirovsky, William H. Allen, Thomas A. Hoff, Barry S. Major, Alan
Siemek, Michael J. Kelly, and Robert Rupe, dated March 4, 2004.
98
10.37* NBC Acquisition Corp. 1995 Stock Incentive Plan adopted August 31, 1995,
filed as Exhibit 10.6 to NBC Acquisition Corp. Registration Statement on
Form S-4, as amended (File No. 333-48225), is incorporated herein by
reference.
10.38* NBC Acquisition Corp. 1998 Performance Stock Option Plan adopted June
30, 1998, filed as Exhibit 10.1 to NBC Acquisition Corp. Form 10-Q for
the quarter ended June 30, 1998, is incorporated herein by reference.
10.39* 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 NBC Acquisition Corp. Form 10-Q for the quarter ended
June 30, 2002, is incorporated herein by reference.
10.40* NBC Acquisition Corp. 1998 Stock Option Plan adopted June 30, 1998,
filed as Exhibit 10.2 to NBC Acquisition Corp. Form 10-Q for the quarter
ended June 30, 1998, is incorporated herein by reference.
10.41* 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
NBC Acquisition Corp. Form 10-Q for the quarter ended June 30, 2002, is
incorporated herein by reference.
10.42* NBC Acquisition Corp. 2003 Performance Stock Option Plan adopted July 1,
2003, filed as Exhibit 10.1 to NBC Acquisition Corp. Form 10-Q for the
quarter ended September 30, 2003, is incorporated herein by reference.
10.43* NBC Acquisition Corp. 2003 Stock Option Plan adopted July 1, 2003, filed
as Exhibit 10.2 to NBC Acquisition Corp. Form 10-Q for the quarter ended
September 30, 2003, is incorporated herein by reference.
10.44* NBC Holdings Corp. 2004 Stock Option Plan adopted March 4, 2004, filed
as Exhibit 10.43 to NBC Acquisition Corp. Registration Statement on Form
S-4 (File No. 333-114889), is incorporated herein by reference.
10.45* NBC Acquisition Corp. Senior Management Bonus Plan adopted June 30,
1998, filed as Exhibit 10.3 to NBC Acquisition Corp. Form 10-Q for the
quarter ended June 30, 1998, is incorporated herein by reference.
10.46* Form of Deferred Compensation Agreement by and among Nebraska Book
Company, Inc. and each of Mark W. Oppegard, Bruce E. Nevius, Larry R.
Rempe and Thomas A. Hoff, filed as Exhibit 10.7 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No. 333-48225), is
incorporated herein by reference.
10.47* Amendment of Form of Deferred Compensation Agreement, dated December 30,
2002, by and among Nebraska Book Company, Inc. and each of Mark W.
Oppegard, Larry R. Rempe and Thomas A. Hoff, filed as Exhibit 10.1 to
NBC Acquisition Corp. Form 10-Q for the quarter ended December 31, 2002,
is incorporated herein by reference.
10.48* NBC Acquisition Corp. 401(k) Savings Plan, filed as Exhibit 10.8 to NBC
Acquisition Corp. Registration Statement on Form S-4, as amended (File
No. 333-48225), is incorporated herein by reference.
10.49 Agreement for Purchase and Sale of Stock dated January 9, 1998 by and
among Nebraska Book Company, Inc. and Martin D. Levine, the Lauren E.
Levine Grantor Trust and the Jonathan L. Levine Grantor Trust (the
"Collegiate Stores Corporation Agreement"), filed as Exhibit 10.10.1 to
NBC Acquisition Corp. Registration Statement on Form S-4, as amended
(File No. 333-48225), is incorporated herein by reference.
10.50 First Amendment dated January 23, 1998 to the Collegiate Stores
Corporation Agreement, filed as Exhibit 10.10.2 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No. 333-48225), is
incorporated herein by reference.
99
10.51 Commercial Lease Agreement made and entered into March 8, 1989, by and
among Robert J. Chaney, Mary Charlotte Chaney and Robert J. Chaney, as
Trustee under the Last Will and Testament of James A Chaney, and
Nebraska Book Company, Inc., filed as Exhibit 10.11 to NBC Acquisition
Corp. Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
10.52 Lease Agreement entered into as of September 1, 1986, by and among Odell
Associates Limited Partnership and Nebraska Book Company, Inc., filed as
Exhibit 10.12 to NBC Acquisition Corp. Registration Statement on Form
S-4, as amended (File No. 333-48225), is incorporated herein by
reference.
10.53 Lease Agreement entered into as of September 1, 1986, by and among John
B. DeVine, successor trustee of the Fred C. Ulrich Trust, as amended,
and Nebraska Book Company, Inc., filed as Exhibit 10.13 to NBC
Acquisition Corp. Registration Statement on Form S-4, as amended (File
No. 333-48225), is incorporated herein by reference.
10.54 Lease Agreement entered into as of September 1, 1986 by and among Odell
Associates Limited Partnership and Nebraska Book Company, Inc., filed as
Exhibit 10.14 to NBC Acquisition Corp. Registration Statement on Form
S-4, as amended (File No. 333-48225), is incorporated herein by
reference.
10.55 Lease Agreement made and entered into October 12, 1988 by and among
Hogarth Management and Nebraska Book Company, Inc., filed as Exhibit
10.15 to NBC Acquisition Corp. Registration Statement on Form S-4, as
amended (File No. 333-48225), is incorporated herein by reference.
10.56 Industrial Real Estate Lease dated June 22, 1987 by and among Cyprus
Land Company and Nebraska Book Company, Inc., filed as Exhibit 10.16 to
NBC Acquisition Corp. Registration Statement on Form S-4, as amended
(File No. 333-48225), is incorporated herein by reference.
12.1 Statements regarding computation of ratios, filed as Exhibit 12.1 to NBC
Acquisition Corp. Registration Statement on Form S-4 (File No.
333-114889), is incorporated herein by reference.
14.1 Code of Business Conduct and Ethics and Code of Ethics for Our
Principal Executive Officer and Senior Financial Officers for NBC
Acquisition Corp.
21.1 Subsidiaries, filed as Exhibit 21.1 to NBC Acquisition Corp.
Registration Statement on Form S-4 (File No. 333-114889), is
incorporated herein by reference.
31.1 Certification of President/Chief Executive Officer pursuant to Rules
13a-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial and Accounting Officer pursuant to
Rules 13a-15(e) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of President/Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of Principal Financial and Accounting Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* - Management contracts or compensatory plans filed herewith or
incorporated by reference.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are either not
required under the related instructions, are not applicable (and therefore have
been omitted), or the required disclosures are contained in the consolidated
financial statements included herein.
100