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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, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to __________.
COMMISSION FILE NUMBER 333-48221
NEBRASKA BOOK COMPANY, INC.
(Exact name of registrant as specified in our charter)
KANSAS 47-0549819
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4700 SOUTH 19TH STREET
LINCOLN, NE 68501-0529
(Address of Principal executive offices)
(402) 421-7300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] No [ ]
Indicate by check mark 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 100 SHARES OF COMMON STOCK OUTSTANDING AS OF JUNE 29, 2005.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Total Number of Pages: 104
Exhibit Index: PAGE 99
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.......34
Item 8 Financial Statements and Supplementary Data......................35
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.........................................77
Item 9A Controls and Procedures..........................................77
PART III:
Item 10 Directors and Executive Officers of the Registrant................78
Item 11 Executive Compensation............................................80
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters..............................85
Item 13 Certain Relationships and Related Transactions....................86
Item 14 Principal Accountant Fees and Services............................87
PART IV:
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..88
Signatures....................................................................95
Supplemental Information to be Furnished......................................96
Financial Statement Schedule II - Valuation and Qualifying Accounts...........97
Exhibit Index.................................................................99
2
PART I.
ITEM 1. BUSINESS.
References in this Annual Report on Form 10-K to the "Company" refer to
Nebraska Book Company, Inc., the term "NBC" refers to our parent company, NBC
Acquisition Corp., and the terms "we," "our," "ours," and "us" refer
collectively to the Company and its subsidiaries, except where otherwise
indicated.
The Company is a wholly-owned subsidiary of NBC. NBC does not conduct
significant activities apart from its investment in the Company. Effective July
1, 2002, our distance learning division was separately incorporated under the
laws of the State of Delaware as Specialty Books, Inc., a wholly-owned
subsidiary of ours ("Specialty Books"). Effective January 1, 2005, our textbook
division was separately incorporated under the laws of the State of Delaware as
NBC Textbooks LLC, a wholly-owned subsidiary of ours ("Textbook Division").
On March 4, 2004, 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.) gained a controlling interest in NBC, and hence in us, 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 NBC in the form of a
capital contribution; (iii) Weston Presidio's purchase of 36,455 shares of NBC's
common stock directly from its holders; (iv) the cancellation of 870,285 shares
of NBC's common stock upon payment by NBC of merger consideration of $180.4
million to the shareholders of record for such shares; (v) the exchange of
397,711 shares of NBC's common stock for 512,799 shares of New NBC Acquisition
Corp. capital stock in the merger of the two entities with NBC as the surviving
entity; and (vi) the exchange of 512,799 shares of NBC's common stock by Weston
Presidio and current and former members of 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 by NBC and the Company 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. We declared and paid dividends to NBC of $184.3
million to help finance this transaction. 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 a Registration Statement 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 arising out of the
March 4, 2004 Transaction. The Securities and Exchange Commission declared such
Registration Statement effective on May 7, 2004. All notes were tendered in the
offer to exchange that was completed on June 8, 2004.
GENERAL
As of March 31, 2005, we operated 124 bookstores on or adjacent to college
campuses through which we sell a variety of new and used textbooks and general
merchandise. In addition, 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 7.3 million books annually, primarily to campuses located
in the United States. 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 Bookstore, Textbook, and Complementary Services
Divisions.
3
BOOKSTORE DIVISION. College bookstores are a primary outlet for sales of new
and used textbooks to students. In addition, we sell a variety of other
merchandise including apparel, general books, sundries, and gift items. As of
March 31, 2005, we operated 124 college bookstores on or adjacent to college
campuses. Of these 124 bookstores, 20 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.
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 we could 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 48,000 textbook titles.
COMPLEMENTARY SERVICES DIVISION. With our acquisition of 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 200 college
bookstore locations for our textbook management control systems, and we have
installed our proprietary total store management system at approximately 660
college bookstore locations. In total, including our own bookstores, over 860
college bookstore locations utilize our software products. We also have a
leading E-commerce platform for college bookstores with 520 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.
In January 1998, we acquired Connect 2 One (formerly Collegiate Stores
Corporation), a centralized buying service for over 650 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.
4
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:
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 created and
filled the position of Vice President of Contract Management and we are 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.
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 continued 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.
CONTINUE TO SERVICE THE DISTANCE EDUCATION MARKET. During fiscal year 2005,
Specialty Books' largest customer discontinued the use of Specialty Books'
services for delivery of educational materials. 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.
INDUSTRY OVERVIEW
Based on recent industry trade data from the National Association of College
Stores, the college bookstore industry remains strong, with over 4,800 college
stores generating annual sales of approximately $10.8 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.
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 52.0% 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 29.0% of the U.S. market according to the National Association of
College Stores); and (iii) INDEPENDENT STORES -- privately owned and operated
stores, generally located off campus (represents approximately 19.0% of the U.S.
market according to the National Association of College Stores).
5
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 six to seven 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 2005. 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 2005, approximately 550 bookstores were
participating in this program, approximately 270 of which were also
participating in the exclusive program. Since we are usually able to sell a
substantial majority of the used textbooks we are able to purchase, our ability
to obtain sufficient supply is a critical factor in our success.
PRODUCTS AND SERVICES
BOOKSTORE DIVISION. As of March 31, 2005, we operated 124 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 19.6% and 21.4% 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.
6
TEXTBOOK DIVISION. Our Textbook Division is engaged in the procurement and
redistribution of used textbooks on college campuses primarily across the United
States. The portion of the used textbook business that our division operates in
is limited to certain stores and certain books. In general, the portion of the
college bookstore market that our Textbook Division cannot access includes those
contract-managed stores that are not operated by us 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 publish the BUYER'S GUIDE, which lists over 48,000 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 approximately 178,000
titles in order to better serve our customers.
COMPLEMENTARY SERVICES DIVISION. Through Specialty Books, we have access to
the market for distance education products and services. Currently, we provide
students at approximately 50 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 63.7% and 84.1% of total Complementary
Services Division revenues. However, Specialty Books' largest customer, which
accounted for more than 30.0% of Specialty Books' fiscal 2005 revenues and 50.0%
of fiscal 2004 revenues, has discontinued 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 200 college bookstore locations for our textbook
management control systems, and we have installed our proprietary total store
management system at approximately 660 college bookstore locations. In total,
including our own bookstores, over 860 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 520 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, supplies, gifts, and
general merchandise discounts and develops and executes marketing programs for
its membership. C2O has evolved into a buying group with substantial purchasing
clout by aggregating the purchasing power of 650 participating stores, including
our own bookstores. Other C2O marketing services include a freight savings
program, a credit card processing program, a shopping bag program, and retail
display allowances for magazine displays. Additionally, the C2O staff of
experienced professionals consults with the management and buyers of member
bookstores. Consulting services offered include strategic planning, store
review, merchandise assortment planning, buyer training, 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 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.
7
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
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, 2005 we operated 124 college bookstores nationwide, having
expanded from 98 bookstores in fiscal 2001. During fiscal 2005 we completed the
acquisition, initiated the contract-management, or established the start-up of
eleven bookstore locations: two locations each in Jacksonville and Tallahassee,
Florida; and single locations in Ypsilanti, Michigan; Alma, Michigan;
Starkville, Mississippi; Glendale, Arizona; Pullman, Washington; Normal,
Illinois; and Morehead, Kentucky.
The table below highlights certain information regarding our bookstores
added and closed through March 31, 2005.
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)
----------- ---- ----------- -------------- ---- --------------
2001 98 4 - 102 740
2002 102 10 4 108 797
2003 108 4 3 109 798
2004 109 9 5 113 847
2005 113 11 - 124 916
- ---------
(1) 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 purchase an
existing store or open a new one, 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) the competitive environment (how many stores currently
serve the campus); (iii) a site in close proximity to campus with adequate
parking and accessibility; (iv) 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); (v) the availability of top-quality management; and (vi) 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.
8
Our bookstores have an average size of 7,400 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.
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 37 account representatives
(as of March 31, 2005) 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 21.0% 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.
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.
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.
9
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 via a toll-free number.
CUSTOMERS
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.
We sell our Textbook and certain Complementary Services Division products
and services to college bookstores throughout the United States, Canada and
Puerto Rico. 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 25
largest Textbook Division customers accounted for approximately 5.1% of our
fiscal 2005 consolidated revenues. No single Textbook Division customer
accounted for more than 1.0% of our fiscal 2005 consolidated revenues.
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
30.0% of total revenues in the distance education program in fiscal year 2005.
However, this institution discontinued the use of our services for delivery of
educational materials during fiscal 2005.
No single customer accounted for more than 10.0% of our consolidated
revenues in fiscal year 2005, 2004, or 2003.
COMPETITION
Our Bookstore Division competes with other college campus bookstores,
including the on-campus bookstore in those locations where our bookstore is
off-campus.
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,
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.
10
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. In addition,
both our Textbook and Bookstore Divisions compete with technology enabled
student to student transactions that take place over the Internet. This type of
transaction provides competition for both the purchase and the sale of the
textbook. 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.
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.
EMPLOYEES
As of March 31, 2005 we had a total of approximately 2,300 employees, of
which approximately 1,000 were full-time, approximately 500 were part-time and
approximately 800 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. Temporary
employees augment the flex-pool to meet periodic labor demands.
11
ITEM 2. PROPERTIES.
Listed below, set forth as of March 31, 2005, are our college bookstores,
their location, college served and the school's estimated enrollment.
Institution Location Enrollment Store Name
----------- -------- ---------- ----------
University of Alabama Tuscaloosa, AL 21,000 The College Store
University of Arkansas--Little Rock Little Rock, AR 11,800 Campus Bookstore
Northern Arizona University Flagstaff, AZ 18,800 The College Store
Northern Arizona University Flagstaff, AZ 18,800 University Text and Tools
Arizona State University - West Campus Glendale, AZ 7,300 The College Store West
Mesa Community College, also serving: Mesa, AZ 27,800 The Textbook Company
Chandler Gilbert Community College - Pecos 8,000
Western International University Phoenix, AZ 4,100 Western International
University Bookstore (1)
Arizona State University Tempe, AZ 49,200 The College Store
University of Arizona Tucson, AZ 36,800 Arizona Book Store
University of Arizona Tucson, AZ 36,800 Arizona Bookstore 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 11,900 The Book Stop
Daytona Beach Community College Daytona Beach, FL 12,300 College Book Rack
University of Florida, also serving: Gainesville, FL 48,000 Florida Book Store
Santa Fe Community College 13,900
University of Florida, also serving: Gainesville, FL 48,000 Florida Book Store, Volume II
Santa Fe Community College 13,900
University of North Florida Jacksonville, FL 14,700 College Book Rack Volume One
University of North Florida, also serving: Jacksonville, FL 14,700 College Book Rack Volume Two
Florida Community College at Jacksonville 25,700
Miami-Dade College Miami, FL 21,600 Lemox College Book & Supply
University of Central Florida, also serving: Orlando, FL 41,500 College Book & Supply
Seminole Community College 12,100
Valencia Community College 16,000
University of Central Florida Orlando, FL 41,500 Knight's Corner
Florida State University Tallahassee, FL 36,900 Bill's Bookstore
Florida State University Tallahassee, FL 36,900 Bill's Bookstore
Georgia State University Atlanta, GA 27,300 Georgia Book Store
Drake University Des Moines, IA 5,200 D-Shoppe (1)
Drake University, also serving: Des Moines, IA 5,200 University Book Store (2)
Mercy College of Health Sciences 600
Southern Illinois University Carbondale, IL 21,600 Saluki Bookstore
Illinois State University - Normal Normal, IL 20,800 The Alamo II
Ball Sate University Muncie, IN 18,000 Collegiate Book Exchange
Valparaiso University Valparaiso, IN 4,000 University Book Center (1)
University of Kansas Lawrence, KS 27,000 University Book Shop
Johnson County Community College Overland Park, KS 18,600 The College Store
Western Kentucky University Bowling Green, KY 18,400 Lemox Book Company
Western Kentucky University Bowling Green, KY 18,400 Lemox II
University of Louisville Louisville, KY 21,700 College Book Warehouse
Morehead State University Morehead, KY 9,300 Varsity Eagle
Eastern Kentucky University Richmond, KY 16,200 University Book & Supply
University of Maryland College Park, MD 35,300 Maryland Book Exchange
Prince George's Community College Largo, MD 12,500 Prince George's Community
College Bookstore (1)
Alma College Alma, MI 1,300 Kiltie Korner Bookstore (1)
Concordia University - Ann Arbor Ann Arbor, MI 500 Concordia College Bookstore (1)
University of Michigan Ann Arbor, MI 39,500 Michigan Book & Supply
University of Michigan Ann Arbor, MI 39,500 Ulrich's Bookstore
Oakland University Auburn Hills, MI 16,900 Textbook Outlet
Wayne County Community College Belleville, MI 11,700 WCCCD Bookstore (1)
Wayne County Community College Detroit, MI 11,700 WCCCD Bookstore (1)
Wayne County Community College Detroit, MI 11,700 WCCCD Bookstore (1)
Wayne County Community College Detroit, MI 11,700 WCCCD Bookstore (1)
Wayne County Community College Taylor, MI 11,700 WCCCD Bookstore (1)
Michigan State University East Lansing, MI 45,000 The College Store
Michigan State University East Lansing, MI 45,000 Ned's Bookstore
Michigan State University East Lansing, MI 45,000 Spartan Art Store (1)
Michigan State University East Lansing, MI 45,000 Spartan Bookstore (1)
Michigan State University East Lansing, MI 45,000 Spartan Medical Store (1)
Kettering University Flint, MI 3,100 Kettering Campus Store (1)
12
Institution Location Enrollment Store Name
----------- -------- ---------- ----------
Eastern Michigan University, also serving: Ypsilanti, MI 24,300 Campus Book & Supply
Washtenaw Community College 12,100
Washtenaw Technical Middle College 500
Eastern Michigan University Ypsilanti, MI 24,300 Ned's Bookstore
Eastern Michigan University Ypsilanti, MI 24,300 Ned's College of Business
Bookstore
Eastern Michigan University Ypsilanti, MI 24,300 Mike's Bookstore
Minnesota State University Mankato Mankato, MN 14,100 Maverick Bookstore (2)
Mississippi State University Starkville, MS 16,200 Bully's Bookstore
North Carolina State University Raleigh, NC 30,000 Packbackers Student Bookstore
Chadron State College Chadron, NE 2,100 Eagle Pride Bookstore (1)
University of Nebraska -- Kearney Kearney, NE 6,400 The Antelope Bookstore (1)
University of Nebraska -- Lincoln Lincoln, NE 21,800 Big Red Shop
University of Nebraska -- Lincoln Lincoln, NE 21,800 Nebraska Bookstore (2)
Nebraska Wesleyan University Lincoln, NE 1,600 Prairie Wolves Bookstore (1)
Wayne State College Wayne, NE 3,400 Wayne State College Bookstore (1)
University of Nevada Las Vegas Las Vegas, NV 26,200 Rebelbooks
State University of New York -- Buffalo, also Amherst, NY 27,300 The College Store
serving:
Erie Community College - North Campus 12,300
State University of New York - Binghamton Vestal, NY 13,500 The Bookbridge
University of Akron Akron, OH 21,600 The College Store
Ohio University Athens, OH 19,700 Specialty Books
Ohio State University Columbus, OH 51,000 College Town
Wright State University, also serving: Fairborn, OH 16,000 The College Store
Sinclair Community College 19,900
University of Toledo Toledo, OH 19,500 Student Bookstore
University of Oklahoma Norman, OK 27,100 Boomer Book Company
University of Oklahoma Norman, OK 27,100 Sooner Textbooks
Oklahoma State University Stillwater, OK 21,600 Cowboy Book
Indiana University of Pennsylvania Indiana, PA 14,000 The College Store
University of Pittsburgh Pittsburgh, PA 27,000 GotUsed Bookstore
Pennsylvania State University State College, PA 41,300 University Book Centre
College of Charleston Charleston, SC 11,600 University Book of Charleston
University of South Carolina Columbia, SC 25,600 Carolina Spirit Shop
University of South Carolina Columbia, SC 25,600 South Carolina Book Store
East Tennessee State University Johnson City, TN 11,600 The College Store
East Tennessee State University Johnson City, TN 11,600 East Tennessee State University
Bookstore (1)
University of Tennessee Knoxville, TN 25,700 Rocky Top Books
University of Tennessee Knoxville, TN 25,700 Rocky Top East (2)
University of Texas - Arlington Arlington, TX 25,300 The College Store
Austin Community College Austin, TX 30,600 Bevo's
Austin Community College Austin, TX 30,600 Bevo's
Blinn College Bryan, TX 14,100 Traditions Bookstore
Texas A&M University College Station, TX 44,600 Traditions Bookstore
Texas A&M University College Station, TX 44,600 Traditions Bookstore
Texas A&M University College Station, TX 44,600 Traditions Bookstore
Southern Methodist University Dallas, TX 10,900 Varsity Bookstore
University of North Texas, also serving: Denton, TX 31,300 Voertman's (2)
North Central Texas College 6,300
Texas Woman's University 9,700
University of Texas -- Pan American Edinburg, TX 15,900 South Texas Book & Supply
North Harris College Houston, TX 10,100 College Bookstore (2)
North Harris College Humble, TX 10,100 College Bookstore
University of Houston, also serving: Houston, TX 35,200 Rother's Bookstore
Texas Southern University School of Law 600
Texas Tech University Lubbock, TX 28,300 Double T Bookstore
Texas Tech University Lubbock, TX 28,300 Double T Bookstore
Texas Tech University Lubbock, TX 28,300 Double T Bookstore
Texas Tech University Lubbock, TX 28,300 Spirit Shop
South Texas College McAllen, TX 15,300 South Texas Book & Supply
Stephen F. Austin State University Nacogdoches, TX 11,300 Varsity Book Store
San Antonio College, also serving: San Antonio, TX 20,800 L&M Bookstore
Northwest Vista College 7,600
Palo Alto College 7,400
St. Philip's College 9,500
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 26,800 Colloquium Bookstore
Southwest Texas State University - San Marcos San Marcos, TX 26,800 Colloquium Bookstore
13
Institution Location Enrollment Store Name
----------- -------- ---------- ----------
Southwest Texas State University - San Marcos San Marcos, TX 26,800 Colloquium Bookstore
Tarleton State University Stephenville, TX 9,000 The College Store
Baylor University Waco, TX 13,800 University Bookstore
Baylor University Waco, TX 13,800 University Bookstore and
Spirit Shop
Midwestern State University Wichita Falls, TX 6,300 The College Store
Virginia Polytechnic Institute and State Blacksburg, VA 27,800 Tech Bookstore
University
Old Dominion University Norfolk, VA 21,200 Dominion Bookstore
Radford University Radford, VA 9,300 Radford Book Exchange
Western Washington University, also serving: Bellingham, WA 12,900 The College Store
Whatcom Community College 4,200
Washington State University Pullman, WA 22,700 Crimson & Gray
Marshall University Huntington, WV 16,400 Stadium Bookstore
- ------------
(1) Denotes properties leased from the educational institution
("contract-managed" stores).
(2) Property is owned by us.
We own our two Textbook Division warehouses (totaling 271,000 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.
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.
No items were submitted to a vote by our security holders during the fourth
quarter of fiscal 2005.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There were no equity securities sold by us during fiscal 2005. There is no
established public trading market for our common stock and all of our common
stock is owned by NBC. 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. In accordance with
such covenants, in fiscal 2005 we declared and paid $0.1 million in dividends to
NBC for costs associated with the March 4, 2004 Transaction. In fiscal 2004 we
declared and paid $8.2 million in dividends to NBC for interest due and payable
on NBC's senior discount debentures, $32.8 million in dividends to NBC in
conjunction with the purchase of treasury stock associated with the December 10,
2003 debt refinancing, and $184.3 million in dividends to NBC in conjunction
with the March 4, 2004 Transaction.
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 fiscal year ended March 31, 2005
(successor), the one month ended March 31, 2004 (successor), the eleven months
ended February 29, 2004 (predecessor), and the fiscal years ended March 31,
2003, 2002, and 2001 (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 Year 1 Month 11 Months Fiscal Years Ended
Ended Ended Ended ------------------------------------------
March 31, March 31, February 29, March 31, March 31, March 31,
2005 2004 (6) 2004 (6) 2003 (6) 2002 (6) 2001 (6)
------------- -------------- --------------- ------------- ------------- -------------
(as restated) (as restated) ( as restated) (as restated) (as restated)
(dollars in thousands)
STATEMENT OF OPERATIONS DATA:
Revenues $ 402,154 $ 13,317 $ 385,364 $ 370,510 $ 338,917 $ 301,669
Costs of sales 240,638 7,768 231,874 224,488 206,976 187,099
------------- -------------- --------------- ------------- ------------- -------------
Gross profit 161,516 5,549 153,490 146,022 131,941 114,570
Operating expenses:
Selling, general, and administrative 100,513 8,540 91,740 90,391 84,871 74,100
Depreciation 4,908 350 3,396 3,469 3,501 3,469
Amortization (4) 8,258 649 1,162 644 505 10,446
Stock-based compensation - - 7,264 - - -
------------- -------------- --------------- ------------- ------------- -------------
Income (loss) from operations 47,837 (3,990) 49,928 51,518 43,064 26,555
Other expenses (income):
Interest expense 25,854 2,226 22,409 14,212 17,189 17,487
Interest income (639) (97) (308) (360) (400) (615)
(Gain) loss on derivative instruments - - (57) 156 361 -
------------- -------------- --------------- ------------- ------------- -------------
Income (loss) before income taxes 22,622 (6,119) 27,884 37,510 25,914 9,683
Income tax expense (benefit) 9,162 (2,400) 10,949 14,802 10,334 5,662
------------- -------------- --------------- ------------- ------------- -------------
Net income (loss) $ 13,460 $ (3,719) $ 16,935 $ 22,708 $ 15,580 $ 4,021
============= ============== =============== ============= ============= =============
OTHER DATA:
EBITDA (2) $ 61,003 $ (2,991) $ 54,486 $ 55,631 $ 47,070 $ 40,470
Net cash flows from operating activities 16,682 (7,764) 46,913 37,332 31,038 8,839
Net cash flows from investing activities (748) (29,656) (6,452) (5,327) (7,616) (4,994)
Net cash flows from financing activities (17,986) (8,965) (204) (4,018) (16,412) (3,887)
Capital expenditures 7,666 720 3,965 3,708 2,277 1,759
Business acquisition expenditures (3) 20,160 1,849 2,355 1,389 6,110 2,975
Number of bookstores open at
end of the period 124 113 112 109 108 102
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents $ 31,224 $ 33,276 $ 79,662 $ 39,405 $ 11,419 $ 4,410
Working capital 104,008 106,259 132,729 82,959 75,865 72,394
Total assets 627,239 646,265 252,449 205,485 180,294 163,050
Total debt, including current maturities 356,402 373,179 187,782 143,367 147,576 161,773
(1) On March 4, 2004, Weston Presidio acquired the controlling interest in
NBC, and hence in us, through a series of steps which resulted in Weston
Presidio owning a substantial majority of NBC's 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 $6.7 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 $3.2 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 a non-GAAP financial measure,
EBITDA, is useful in measuring our liquidity and provides additional
information for determining our ability to meet debt service
requirements. The Senior Subordinated Notes and Senior Credit Facility
also utilize EBITDA, as defined in those agreements, for certain
financial covenants. EBITDA does not represent and should not be
considered as an alternative to net cash flows from operating activities
as determined by accounting principles generally accepted in the United
States of America ("GAAP"), 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 1 Month 11 Months Fiscal Year Ended
Ended Ended Ended -------------------------------------
March 31, March 31, February 29, March 31, March 31, March 31,
2005 2004 2004 2003 2002 2001
------------ ------------ ----------- ----------- ----------- ----------
(dollars in thousands)
EBITDA $ 61,003 $ (2,991) $ 54,486 $ 55,631 $ 47,070 $ 40,470
Adjustments to reconcile EBITDA to net
cash flows from operating activities:
Interest income 639 97 308 360 400 615
Provision for losses on receivables 316 218 66 452 1,630 434
Cash paid for interest (25,796) (4,174) (11,956) (13,549) (15,225) (16,001)
Cash paid for income taxes (4,946) (10) (6,467) (14,533) (4,063) (6,018)
(Gain) loss on disposal of assets 68 14 408 36 (483) 60
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals (5) (14,602) (918) 10,068 8,935 1,709 (10,721)
------------ ------------ ----------- ----------- ----------- ----------
Net Cash Flows from Operating Activities $ 16,682 $ (7,764) $ 46,913 $ 37,332 $ 31,038 $ 8,839
============ ============ =========== =========== =========== ==========
(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 current other assets,
other assets, accounts payable, accrued employee compensation and
benefits, accrued incentives, accrued expenses, deferred revenue, and
other long-term liabilities.
(6) Certain items for the one month ended March 31, 2004, the eleven months
ended February 29, 2004, and the years ended March 31, 2003, 2002, and
2001 have been restated to reflect corrections that are further
discussed in Note Q, Restatement of Consolidated Financial Statements,
of the Notes to Consolidated Financial Statements included in Item 8 of
this report.
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. The accompanying Management's Discussion and
Analysis gives effect to the restatement of our consolidated financial
statements for fiscal years 2004 and 2003 to correct our accounting treatment
for leases and depreciation of related leasehold improvements and to reclassify
the activity related to restricted cash from financing cash flows to investing
cash flows, as described in Note Q to the consolidated financial statements.
EXECUTIVE SUMMARY
FISCAL 2005 HIGHLIGHTS
This summary refers to our operations in fiscal 2004 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. In fiscal 2004, we underwent a recapitalization
transaction that we refer to as the March 4, 2004 Transaction. Accounting for
that transaction resulted in a significant increase to goodwill and intangible
assets that impacts the comparability of our financial statements from period to
period.
The March 4, 2004 Transaction was accounted for in accordance with Statement
of Financial Accounting Standards ("SFAS") No.141, BUSINESS COMBINATIONS.
Accordingly, the Company's assets and liabilities were revalued to fair value to
the extent of the majority stockholder's (Weston Presidio's) 96.9% controlling
interest in the Company. 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. 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 $269.1 million. As a
result of these changes to intangible assets, and to changes in the Company's
outstanding debt that resulted from the March 4, 2004 Transaction, some
expenses, such as amortization expense and interest expense, may not be
comparable with periods prior to that transaction. Our results of operations,
financial position and cash flow's prior to the March 4, 2004 Transaction are
presented as the "Predecessor" and our results of operations, financial position
and cash flow's after the March 4, 2004 Transaction are presented as the
"Successor" in these financial statements.
ACQUISITIONS. We completed the acquisition, initiated the
contract-management, or established the start-up of eleven bookstore locations
in fiscal 2005: two locations each in Jacksonville and Tallahassee, Florida; and
single locations in Ypsilanti, Michigan; Alma, Michigan; Starkville,
Mississippi; Glendale, Arizona; Pullman, Washington; Normal, Illinois; and
Morehead, Kentucky. We believe that there continue to be attractive
opportunities for us to expand our chain of bookstores across the country.
REVENUE RESULTS. Consolidated revenues for the year ended March 31, 2005
increased $3.5 million, or 0.9% from the year ended March 31, 2004. This
increase was attributable to increases in both the College Bookstore and
Textbook Divisions which were largely offset by the loss of revenue from the
distance education program's largest customer and an increase in the
interdivision elimination for sales from the Textbook Division to the College
Bookstore Division.
EBITDA RESULTS. Consolidated EBITDA for the year ended March 31, 2005
increased $9.5 million, or 18.5% from the year ended March 31, 2004, with most
of that increase due to the impact of the expenses of certain transactions
during fiscal 2004. These expenses included combined stock-based compensation
charges totaling $7.3 million and other charges of $0.2 million. Within the
operating divisions, we achieved strong EBITDA growth from the College Bookstore
Division due primarily to acquisitions, while we saw decreases in both the
Textbook Division due to lower gross margins and in the Complementary Services
Division due to the loss of a large customer and to lower systems sales. EBITDA
is considered a non-GAAP financial measure by the SEC, and therefore you should
refer to the more detailed explanation of that measure that is provided later in
Management's Discussion & Analysis.
18
CAPITAL EXPENDITURES. Capital expenditures for the year ended March 31, 2005
have increased over the year ended March 31, 2004 from $4.7 million to $7.7
million. This increase is attributable to a number of college bookstore
renovations which we have undertaken to repair, maintain, modernize, or
restructure certain bookstore locations; as well as a project to expand the
Textbook Division's Nebraska warehouse which added approximately 8,500 square
feet of space and partially mechanize the warehouse receiving process.
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
textbook wholesalers and from student to student transactions, competition from
alternative media and alternative sources of textbooks for students, 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 2006. We also expect that our capital
spending will remain modest for a company of our size.
FISCAL YEAR ENDED MARCH 31, 2005 COMPARED WITH
FISCAL YEAR ENDED MARCH 31, 2004.
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 year ended March 31, 2005, the one month ended
March 31, 2004, and the eleven months ended February 29, 2004 and the
corresponding change in revenues (based upon combined revenues for fiscal 2004)
were as follows:
Successor Predecessor
------------------------------- -------------------
Year 1 Month 11 Months Change
Ended Ended Ended -------------------------
March 31, 2005 March 31, 2004 February 29, 2004 Amount Percentage
--------------- --------------- ------------------- ------------- ----------
Bookstore Division $ 263,667,751 $ 5,318,989 $ 234,328,454 $ 24,020,308 10.0 %
Textbook Division 133,938,475 4,484,265 125,746,000 3,708,210 2.8 %
Complementary Services Division 33,767,440 4,443,778 49,754,314 (20,430,652) (37.7)%
Intercompany eliminations (29,219,326) (929,638) (24,465,094) (3,824,594) 15.1 %
--------------- -------------- ------------------ ------------- ----------
$ 402,154,340 $ 13,317,394 $ 385,363,674 $ 3,473,272 0.9 %
=============== ============== ================== ============= ==========
The increase in Bookstore Division revenues was attributable to the addition
of acquired bookstores (defined by us as stores acquired since April 1, 2003)
offset by slightly lower same-store sales. The new bookstores provided an
additional $26.0 million of revenue in the year ended March 31, 2005. The
Company defines same store sales for fiscal 2005 as sales from any store, even
if expanded or relocated, that has a full twelve months of sales in both fiscal
2005 and fiscal 2004. Same store sales decreased 0.9% primarily due to an
approximate 1% decrease in sales of new textbooks and an approximate 3% decline
in sales of clothing and insignia wear, which offset an approximate 1% increase
in sales of used textbooks. The increase in Textbook Division revenues was due
primarily to an approximate 5% increase in the average price per book sold,
offset partially by 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 2003 and May of 2004 student book buys, which
supplied the peak selling periods in fiscal 2005. Textbook Division revenues are
limited by the supply of used textbooks available to us. Complementary Services
Division revenues decreased primarily due to the decision by the distance
education program's largest customer to gradually discontinue the use of our
services for delivery of educations materials. Revenues from that customer
program declined approximately $18 million. In addition, revenues from
installation and training activity in the systems divisions decreased $1.7
million. Corresponding to the overall growth in the number of company owned
college bookstores, our intercompany transactions also increased which reduces
consolidated revenues.
19
GROSS PROFIT. Gross profit for the year ended March 31, 2005 increased $2.5
million, or 1.6%, to $161.5 million from $159.0 million for the year ended March
31, 2004. This increase was primarily due to higher revenues, along with a
slightly higher gross margin percent. Gross margin percent was 40.2% for the
year ended March 31, 2005 as compared to 39.9% for the year ended March 31,
2004, driven primarily by a slightly higher gross margin percent on new textbook
sales in the Bookstore Division and by higher gross margin percent in the
Complementary Service Division due to the decline in sales from the lower-margin
distance education program. The Textbook Division gross margins decreased due to
higher costs of acquiring used textbooks, including the cost of the Company's
enhanced customer programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended March 31, 2005 increased $0.2
million, or 0.2%, to $100.5 million from $100.3 million for the year ended March
31, 2004. Selling, general and administrative expenses as a percentage of
revenues were 25.0% and 25.2% for the years ended March 31, 2005 and 2004,
respectively.
STOCK-BASED COMPENSATION. Stock-based compensation expense was $0 in fiscal
2005 compared to $7.3 million in fiscal 2004. Stock-based compensation expense
in fiscal 2004 was incurred in conjunction with the March 4, 2004 Transaction,
whereby 40,668 options to 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 year ended March 31, 2005, the one month ended March
31, 2004, and the eleven months ended February 29, 2004 and the corresponding
change in EBITDA (based upon combined EBITDA for fiscal 2004) were as follows:
Successor Predecessor
-------------------------------- ------------------
Year 1 Month 11 Months Change
Ended Ended Ended --------------------------
March 31, 2005 March 31, 2004 February 29, 2004 Amount Percentage
--------------- ---------------- ------------------ ------------- -----------
Bookstore Division $ 34,607,848 $ (2,471,525) $ 33,190,998 $ 3,888,375 12.7 %
Textbook Division 32,181,393 (85,994) 33,544,806 (1,277,419) (3.8)%
Complementary Services Division 1,805,367 251,371 2,624,520 (1,070,524) (37.2)%
Corporate administration (7,591,429) (685,336) (14,874,542) 7,968,449 (51.2)%
--------------- ---------------- ------------------ ------------- -----------
$ 61,003,179 $ (2,991,484) $ 54,485,782 $ 9,508,881 18.5 %
=============== ================ ================== ============= ===========
Bookstore Division EBITDA improved as a result of the aforementioned
increases in revenues and gross margin percent. The decrease in EBITDA in the
Textbook Division is primarily attributable to lower gross margins.
Complementary Services Division EBITDA decreased as a result of the reduced
revenues in the distance education business combined with decreased revenues in
the systems sales business. Corporate Administration EBITDA increased by $8.0
million, primarily as a result of expenses of the March 4, 2004 Transaction and
the December 10, 2003 debt refinancing which are included in the results for the
eleven months ended February 29, 2004.
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 a non-GAAP financial measure, EBITDA,
is useful in measuring our liquidity and provides additional information for
determining our ability to meet debt service requirements. The Senior
Subordinated Notes and Senior Credit Facility also utilize EBITDA, as defined in
those agreements, for certain financial covenants. EBITDA does not represent and
should not be considered as an alternative to net cash flows from operating
activities as determined by GAAP, 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.
20
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":
Successor Successor Predecessor
--------------- ---------------- ------------------
Year Ended 1 Month Ended 11 Months Ended
March 31, 2005 March 31, 2004 February 29, 2004
--------------- ---------------- ------------------
EBITDA $ 61,003,179 $ (2,991,484) $ 54,485,782
Adjustments to reconcile EBITDA to net
cash flows from operating activities:
Interest income 638,935 97,587 307,680
Provision for losses on receivables 315,958 218,205 66,393
Cash paid for interest (25,796,444) (4,173,547) (11,955,528)
Cash paid for income taxes (4,946,343) (9,991) (6,466,526)
Loss on disposal of assets 68,065 13,582 408,095
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals (1) (14,601,160) (918,756) 10,066,803
--------------- ---------------- ------------------
Net Cash Flows from Operating Activities $ 16,682,190 $ (7,764,404) $ 46,912,699
=============== ================ ==================
Net Cash Flows from Investing Activities $ (747,555) $ (29,656,297) $ (6,451,658)
=============== ================ ==================
Net Cash Flows from Financing Activities $ (17,986,473) $ (8,965,404) $ (204,137)
=============== ================ ==================
(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, 2005
increased $1.2 million, or 31.0% to $4.9 million from $3.7 million for the year
ended March 31, 2004, 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, 2005
increased $6.5 million to $8.3 million from $1.8 million for the year ended
March 31, 2004, primarily due to the March 4, 2004 Transaction, which
significantly increased the balance of amortizable intangibles.
INTEREST EXPENSE, NET. Interest expense, net for the year ended March 31,
2005 increased $1.0 million, or 4.1%, to $25.2 million from $24.2 million for
the year ended March 31, 2004, due primarily to additional debt issued in
connection with the March 4, 2004 Transaction that was outstanding for all of
the 2005 fiscal year. This increase in the interest expense net was offset
partially by interest costs in fiscal 2004 arising from the March 4, 2004
Transaction and the December 10, 2003 debt refinancing. As a result of these two
transactions, $6.7 million in debt issue costs associated with retired debt were
written-off to interest expense. Additionally, $3.2 million in call premiums
were recorded to interest expense in connection with the tendering or calling of
the $110.0 million senior subordinated notes in conjunction with the March 4,
2004 Transaction.
INCOME TAXES. Income tax expense for the year ended March 31, 2005 increased
$0.7 million, or 7.2%, to $9.2 million from $8.5 million for the year ended
March 31, 2004. Our effective tax rate was 40.5% and 39.3% for the years ended
March 31, 2005 and 2004, respectively. Our effective tax rate differs from the
statutory tax rate primarily as a result of state income taxes.
21
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
--------------- ------------------------------------
1 Month 11 Months Year Change
Ended Ended Ended --------------------------
March 31, 2004 February 29, 2004 March 31, 2003 Amount Percentage
--------------- ------------------ -------------- ------------- ------------
Bookstore Division $ 5,318,989 $ 234,328,454 $ 216,943,133 $ 22,704,310 10.5 %
Textbook Division 4,484,265 125,746,000 132,806,703 (2,576,438) (1.9)%
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 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, which was offset, in
part, by a $2.5 million decrease in revenues attributable to stores closed since
April 1, 2002. The Company defines same store sales for fiscal 2004 as sales
from any store, even if expanded or relocated, that has a full twelve months of
sales in both fiscal 2004 and fiscal 2003. Same store sales increased 5.1%, or
$10.8 million due primarily to an approximate 10% increase in sales of new
textbooks and a 4% increase in the sale of used textbooks, offset partially by
declines in other sales categories. The decrease in Textbook Division revenues
was due primarily to a decrease in the number of units sold, which entirely
offset an increase in the average price per book sold of approximately 3%. 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.
Complementary Services Division revenues increased primarily due to a $4.1
million increase in revenues from installation and training activity in the
systems divisions, $1.8 million in revenue related to the acquisition of
TheCampusHub.com, Inc. in July, 2003, and $2.5 million of increased revenues
from the distance education program. 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. The improved gross margin percents in both of these
divisions were primarily due to slightly lower costs of acquiring used
textbooks.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended March 31, 2004 increased $9.9
million, or 10.9%, to $100.3 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 an increase of
$3.0 million in personnel costs, $1.2 million in shipping costs, and $2.3
million in rent. Additionally, $0.2 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.
22
STOCK-BASED COMPENSATION. Stock-based compensation expense was incurred in
conjunction with the March 4, 2004 Transaction, whereby 40,668 options to
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
-------------- ----------------------------------
1 Month 11 Months Year Change
Ended Ended Ended -------------------------
March 31, 2004 February 29, 2004 March 31, 2003 Amount Percentage
-------------- ------------------ --------------- ------------- ----------
Bookstore Division $ (2,471,525) $ 33,190,998 $ 26,992,497 $ 3,726,976 13.8 %
Textbook Division (85,994) 33,544,806 33,915,223 (456,411) (1.3)%
Complementary Services Division 251,371 2,624,520 2,041,093 834,798 40.9 %
Corporate administration (685,336) (14,874,542) (7,318,023) (8,241,855) 112.6 %
--------------- ---------------------------------- ------------- ----------
$ (2,991,484) $ 54,485,782 $ 55,630,790 $ (4,136,492) (7.4)%
=============== ================================== ============= ==========
Bookstore Division EBITDA improved as a result of the aforementioned
increases in revenues and gross margin percent. The decrease in EBITDA in the
Textbook Division is primarily attributable to lower revenues. Complementary
Services Division EBITDA improved as a result of increasing revenues and
controlling expenses. Corporate Administration EBITDA declined by $8.2 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 a non-GAAP financial measure, EBITDA,
is useful in measuring our liquidity and provides additional information for
determining our ability to meet debt service requirements. The Senior
Subordinated Notes and Senior Credit Facility also utilize EBITDA, as defined in
those agreements, for certain financial covenants. EBITDA does not represent and
should not be considered as an alternative to net cash flows from operating
activities as determined by GAAP, 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":
23
Successor Predecessor Predecessor
-------------- -------------- ---------------
1 Month Ended 11 Months Ended Year Ended
March 31, 2004 February 29, 2004 March 31, 2003
-------------- ----------------- ---------------
EBITDA $ (2,991,484) $ 54,485,782 $ 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 (4,173,547) (11,955,528) (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 acquisitions/disposals (1) (918,756) 10,066,803 8,935,820
-------------- -------------- ---------------
Net Cash Flows from Operating Activities $ (7,764,404) $ 46,912,699 $ 37,331,613
============== ============== ===============
Net Cash Flows from Investing Activities $ (29,656,297) $ (6,451,658) $ (5,327,072)
============== ============== ===============
Net Cash Flows from Financing Activities $ (8,965,404) $ (204,137) $ (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 $0.2 million, or 8.0% to $3.7 million from $3.5 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 $10.3 million, or 74.9%, to $24.2 million from $13.9 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, $6.7 million in debt issue costs associated
with retired debt were written-off to interest expense. Additionally, $3.2
million in call premiums were recorded to interest expense in connection with
the tendering or calling of the $110.0 million senior subordinated notes 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 $143.4 million at March 31, 2003 to $373.2 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
$6.3 million, or 42.2%, to $8.5 million from $14.8 million for the year ended
March 31, 2003. Our effective tax rate was 39.3% and 39.5% 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.
24
RISK FACTORS
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of the Securities Litigation Reform Act of 1995 that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including those set forth in the following cautionary statements and
elsewhere in this Annual Report on Form 10-K. If any of the following risks were
to occur, our business, financial condition or results of operations would
likely suffer.
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 outsource or "contract-manage" the operation of
their bookstores. As of July 31, 2004, approximately 29% of the U.S. members of
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 and
alternative sources of textbooks for students, such as websites designed to sell
textbooks and/or other merchandise directly to students, 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 sold
through the college bookstore. A substantial increase in the availability of
these alternatives as a source of textbooks and textbook information could
significantly reduce college students' use of the college bookstore and/or the
use of traditional textbooks and thus have a material adverse effect on our
business and results of operations.
We are experiencing growing competition from technology-enabled student to
student transactions that take place over the Internet. These transactions,
whereby a student enters into a transaction directly with another student for
the sale and purchase of a textbook, provide competition by reducing the supply
of textbooks available to us for purchase and by reducing the sale of textbooks
through the college bookstore. While such transactions have occurred for many
years, prior to the Internet such transactions were limited by geography, a lack
of information related to pricing and demand, and other factors. A significant
increase in the number of these transactions could 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.
25
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 2005,
approximately 43% of our annual revenues occurred in the second fiscal quarter
(July-September), while approximately 30% 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 NBC'S 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 NBC's 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 us from prepaying other indebtedness.
In addition, we are 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. Our ability to meet these
financial ratios and tests can be affected by events beyond our control, and we
cannot give assurances that we 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
NBC's Senior Discount Notes could elect to declare all amounts under such notes
immediately due and payable. If we were unable to repay our 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 our assets would be sufficient
to repay in full such indebtedness and other indebtedness, including the Senior
Subordinated Notes and NBC's 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 our parent's (NBC's) issued and
outstanding common stock (taking into account for such percentage calculation
options outstanding and options available for future grant 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.
26
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:
REVENUE RECOGNITION. 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 regarding the fair value
of intangible assets when assessing such assets for impairment. We are also
required to make certain assumptions and estimates when assigning an initial
value to covenants not to compete arising from bookstore acquisitions. 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 our
balance sheet as of the transaction date. The fair values of our assets and
liabilities were determined in part from a valuation by an independent
appraiser. In certain circumstances, Company management performed valuations
where appropriate. The goodwill in the transaction was determined by taking the
difference between the purchase price and the fair value of net assets acquired.
27
INCOME TAXES. We account for income taxes by recording taxes payable or
refundable for the current year and deferred tax assets and liabilities for
future tax consequences of events that have been recognized in our consolidated
financial statements or the consolidated income tax returns. Significant
judgment is required in determining the provision for income taxes and related
accruals, deferred tax assets, and deferred tax liabilities. In the ordinary
course of business, there are transactions and calculations where the ultimate
tax outcome is uncertain. Additionally, the consolidated income tax returns are
subject to audit by various tax authorities. Although we believe that our
estimates are reasonable, actual results could differ from these estimates
resulting in a final tax outcome that may be materially different from that
which is reflected in the consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITIES
Our primary liquidity requirements are for debt service under the Senior
Credit Facility, the Senior Subordinated Notes and other outstanding
indebtedness, for working capital, for capital expenditures and for certain
acquisitions. We have historically funded these requirements primarily through
internally generated cash flows and funds borrowed under our Revolving Credit
Facility. At March 31, 2005, our total indebtedness was approximately $356.4
million, consisting of a $178.2 million Term Loan, $175.0 million of Senior
Subordinated Notes, and $3.2 million of other indebtedness, including capital
lease obligations. To provide additional financing to fund the March 4, 2004
Transaction, NBC issued Senior Discount Notes, the balance of which at March 31,
2005 was $56.1 million (face value of $77.0 million less $20.9 million
discount).
On March 4, 2004, Weston Presidio acquired the controlling interest in NBC
through a series of steps which resulted in Weston Presidio owning a substantial
majority of NBC'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) We refinanced our 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) We 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, we 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) NBC 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, 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 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) We completed a cash tender offer for, and partial redemption of, our
$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."
28
(5) NBC 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" with an offsetting amount due to parent included in
"accounts payable" 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 NBC in the
form of a capital contribution.
(7) Weston Presidio purchased 36,455 shares of NBC's common stock directly
from its holders for $8.4 million.
(8) 870,285 shares of NBC's common stock were cancelled upon NBC's payment
of $180.4 million in merger consideration to the holders of such shares.
(9) 397,711 shares of NBC 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 NBC as the
surviving entity.
(10) Weston Presidio and current and former members of management contributed
495,981 shares and 16,818 shares, respectively, of NBC'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 NBC's common stock held by members
of management were exchanged for options to acquire a like number of
shares of NBC Holdings Corp. capital stock.
(12) We declared and paid dividends of $184.3 million to NBC to help finance
the transaction.
Principal and interest payments under the Senior Credit Facility, the
Senior Subordinated Notes, and NBC's Senior Discount Notes represent significant
liquidity requirements for us. Under the terms of the Senior Credit Facility's
Term Loan, we are scheduled to make principal payments totaling approximately
$1.8 million in fiscals 2006-2010 and $169.2 million in fiscal 2011. These
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 us. 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
Our capital expenditures were $7.7 million, $4.7 million, and $3.7 million
for the fiscal years ended March 31, 2005, 2004, and 2003, 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 2005 was $10.3 million.
Business acquisition expenditures were $20.2 million, $4.2 million, and $1.4
million for the fiscal years ended March 31, 2005, 2004, and 2003, respectively.
For the fiscal year ended March 31, 2005, single bookstore locations were
acquired serving Eastern Michigan University, Alma College, Mississippi State
University, Illinois State University, and Morehead State University; two
bookstore locations were acquired serving the University of North Florida and
Florida Community College at Jacksonville and two bookstore locations were
acquired serving Florida State University; and single bookstore location
start-ups serving Washington State University and Arizona State University-West
Campus were established. 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. Our ability to make acquisition
expenditures is subject to certain restrictions under the Senior Credit
Facility.
29
During fiscal 2005, no bookstores locations were closed. 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.
Effective October 20, 2004, the Credit Agreement was amended, primarily to
provide for a temporary incremental revolving credit facility, to increase the
allowable aggregate principal amount of outstanding capital lease obligations to
$10.0 million, and to exclude certain acquisitions from the $15.0 million annual
acquisition limitation. The incremental revolving credit facility effectively
increases amounts available under the Revolving Credit Facility by $10.0 million
for the period from October 20, 2004 through June 30, 2005. These changes were
made in connection with the October, 2004 acquisitions of the bookstore
locations in Normal, Illinois and Tallahassee, Florida, whose combined annual
gross revenues exceeded $20 million.
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.
In conjunction with the March 4, 2004 Transaction, certain of the notes
under our former 8.75% senior subordinated notes and NBC's former 10.75% senior
discount debentures were not tendered by the holders, but were instead called
for redemption on March 4, 2004 and redeemed on April 3, 2004. Such redemption
was funded through $27.1 million of restricted cash held in escrow, of which
$16.1 million related to principal, accrued interest, and call premiums on the
remaining 8.75% senior subordinated notes and $11.0 million related to
principal, accrued interest, and call premiums on NBC's remaining 10.75% senior
discount debentures.
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, 2005, weighted-average borrowings under
the Revolving Credit Facility approximated $5.7 million, with actual borrowings
ranging from a low of no borrowings to a high of $40.7 million. Net cash flows
from operating activities for the year ended March 31, 2005 were $16.7 million,
a decrease of $22.4 million from $39.1 million for the year ended March 31,
2004. This decrease was attributable, in large part, to an $11.0 million
increase in accounts payable in fiscal 2004 related to restricted cash placed in
escrow on behalf of NBC, combined with an $11.0 million decrease in accounts
payable in fiscal 2005 which reflects the utilization of the cash in escrow to
redeem NBC's untendered former senior discount debentures on April 3, 2004.
COVENANT RESTRICTIONS
Access to our principal sources of cash is subject to various restrictions.
The availability of additional borrowings under the Revolving Credit Facility,
excluding the temporary incremental revolving credit facility described above,
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 our ability to make loans or
advances and pay dividends, except that, among other things, we may pay
dividends to NBC (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 NBC. The
indenture governing the Senior Subordinated Notes restricts the ability of the
Company and its Restricted Subsidiaries (as defined in the indenture) to pay
dividends or make other Restricted Payments (as defined in the indenture) to
their respective stockholders, subject to certain exceptions, unless certain
conditions are met, including that (i) no default under the indenture shall have
occurred and be continuing, (ii) the Company shall be permitted by the indenture
to incur additional indebtedness and (iii) the amount of the dividend or payment
may not exceed a certain amount based on, among other things, the Company's
consolidated net income. The indenture governing the Senior Discount Notes
contains similar restrictions on NBC's ability and the ability of 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.
30
In accordance with such covenant restrictions, we declared and paid $0.1
million in dividends to NBC during fiscal year 2005 for costs associated with
the March 4, 2004 Transaction. During fiscal year 2004, we declared and paid
dividends to NBC 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, 2005, we could borrow up to $50.8 million under the
Revolving Credit Facility, including $10.0 million available through June 30,
2005 under the temporary incremental revolving credit facility described 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. The
Revolving Credit Facility was unused at March 31, 2005. 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, including an
annual limitation on capital expenditures made in the ordinary course of
business.
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 financing or capital
contributions.
31
The following tables present aggregated information as of March 31, 2005
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 $ 353,635,000 $ 1,832,144 $ 3,675,591 $ 3,693,633 $344,433,632
Interest on long-term debt (1) 175,974,288 26,357,652 55,465,965 55,833,051 38,317,620
Capital lease obligations 2,767,208 237,955 649,282 842,191 1,037,780
Interest on capital lease obligations 1,247,882 293,493 488,855 322,072 143,462
Unconditional purchase obligations - - - - -
Operating leases 53,107,000 11,860,000 20,032,000 11,152,000 10,063,000
--------------- ------------- -------------- ------------- --------------
Total $ 586,731,378 $ 40,581,244 $ 80,311,693 $71,842,947 $393,995,494
=============== ============= ============== ============= ==============
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) $ 60,000,000 $ 10,000,000 $ - $50,000,000 $ -
=============== ============= ============== ============== ==============
(1) Interest on the variable rate debt is estimated based upon implied
forward rates in the yield curve at March 31, 2005 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 NBC's then-majority
owner. TheCampusHub.com, Inc. was created to provide college bookstores with a
way to sell in-store inventory and virtual brand name merchandise over the
Internet utilizing technology originally developed by 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 and 2003, revenues attributable to the management services
agreement totaled $0.1 million and $0.3 million, respectively, and reimbursable
direct costs incurred on behalf of TheCampusHub.com, Inc. totaled $0.1 million
and $0.6 million, respectively.
In accordance with our debt covenants, we declared and paid $0.1 million in
dividends to NBC in fiscal 2005 for costs associated with the March 4, 2004
Transaction. In fiscal 2004, we declared and paid $8.2 million in dividends to
NBC for interest due and payable on the senior discount debentures; declared and
paid $32.8 million in dividends to NBC for the purchase of treasury stock
associated with the December 10, 2003 debt refinancing; and declared and paid
$184.3 million in dividends in connection with the March 4, 2004 Transaction.
32
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 November 2004, the FASB issued SFAS No. 151, INVENTORY COSTS, which
amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, INVENTORY
PRICING to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). The Statement becomes
effective for the Company in fiscal 2007 and is not expected to have a
significant impact on the Company's consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), SHARE-BASED
PAYMENT. SFAS No. 123 (revised 2004) focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions and requires an entity to, in most cases, measure the cost of such
services based on the grant-date fair value of the award. This Statement is a
revision of SFAS No. 123, ACCOUNTING FOR STOCK-BASED Compensation and supersedes
APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, thereby
eliminating the intrinsic value method of accounting for stock-based
compensation currently utilized by the Company. SFAS No. 123 (revised 2004) will
become effective for the Company in fiscal 2007, applying to all awards granted
or modified after April 1, 2006.
In December 2004, the FASB issued SFAS No. 153, EXCHANGES OF NONMONETARY
ASSETS--AN AMENDMENT OF APB OPINION NO. 29. This statement amends APB Opinion
No.29 and is based on the principle that exchanges of nonmonetary assets should
be measured based on the fair value of the assets exchanged. SFAS 153 is
effective for nonmonetary exchanges occurring in fiscal 2007. The adoption of
this statement is not expected to have a significant impact on the Company's
consolidated financial statements.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
This Annual Report on Form 10-K contains or incorporates by reference
certain statements that are not historical facts, including, most importantly,
information concerning possible or assumed future results of 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 or pessimism about future operating results, are
forward-looking statements within the meaning of the Reform Act. Such
forward-looking statements involve risks, uncertainties and other factors which
may cause 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 and
alternative sources of textbooks for students; increased competition for the
purchase and sale of used textbooks from student to student transactions;
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.
33
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 $356.4 million in total
indebtedness outstanding at March 31, 2005, approximately $178.2 million is
subject to fluctuations in the Eurodollar interest rate. As provided in our
Senior Credit Facility, exposure to interest rate fluctuations is managed by
maintaining fixed interest rate debt (primarily the Senior Subordinated 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. 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 or other similar instruments.
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, 2005):
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:
2006 $ 270,099 8.67% $ 1,800,000 6.32%
2007 340,344 8.66% 1,800,000 7.15%
2008 384,529 8.66% 1,800,000 7.27%
2009 434,949 8.65% 1,800,000 7.41%
2010 500,875 8.65% 1,800,000 7.53%
Thereafter 176,271,412 8.64% 169,200,000 7.64%
--------------- ------------ --------------- -----------
Total $ 178,202,208 8.65% $ 178,200,000 7.21%
=============== ============ =============== ===========
Fair Value $ 172,617,616 - $ 178,200,000 -
=============== ===============
(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.
Certain quantitative market risk disclosures have changed since March 31,
2004 as a result of market fluctuations, movement in interest rates, a new
capital lease obligation, and principal payments. The following table presents
summarized market risk information for the years ended March 31, 2005 and 2004,
respectively (the weighted-average variable rates are based on implied forward
rates in the yield curve as of the date presented):
March 31, March 31,
2005 2004
-------------- --------------
Fair Values:
Fixed rate debt $ 172,617,616 $ 194,361,088
Variable rate debt 178,200,000 180,000,000
Overall Weighted-Average Interest Rates:
Fixed rate debt 8.65% 8.65%
Variable rate debt 7.21% 6.63%
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF NEBRASKA BOOK COMPANY, INC.
Report of Independent Registered Public Accounting Firm 36
Consolidated Balance Sheets as of March 31, 2005 and March 31, 2004 37
(as restated)
Consolidated Statements of Operations for the Year Ended March 31, 2005 38
(Successor), the One Month Ended March 31, 2004 (Successor) (as restated),
the Eleven Months Ended38ebruary 29, 2004 (Predecessor) (as restated), and
the Year Ended March 31, 2003 (Predecessor) (as restated)
Consolidated Statements of Stockholders' Equity (Deficit) for the Year Ended 39
March 31, 2005 (Successor), the One Month Ended March 31, 2004 (Successor)
(as restated), the39leven Months Ended February 29, 2004 (Predecessor) (as
restated), and the Year Ended March 31, 2003 (Predecessor) (as restated)
Consolidated Statements of Cash Flows for the Year Ended March 31, 2005 40
(Successor), the One Month Ended March 31, 2004 (Successor) (as restated),
the Eleven Months Ended40ebruary 29, 2004 (Predecessor) (as restated), and
the Year Ended March 31, 2003 (Predecessor) (as restated)
Notes to Consolidated Financial Statements 41
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Nebraska Book Company, Inc.
Lincoln, Nebraska
We have audited the accompanying consolidated balance sheets of Nebraska
Book Company, Inc. (a wholly-owned subsidiary of NBC Acquisition Corp.) and
subsidiaries as of March 31, 2005 and March 31, 2004, and the related
consolidated statements of operations, stockholder's equity (deficit), and cash
flows for the year ended March 31, 2005 (Successor), the one month ended March
31, 2004 (Successor), the eleven months ended February 29, 2004 (Predecessor),
and the year ended March 31, 2003 (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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not the purpose of expressing an opinion
on the effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Nebraska Book Company, Inc. and
subsidiaries as of March 31, 2005 and March 31, 2004, and the results of their
operations and their cash flows for the year ended March 31, 2005 (Successor),
the one month ended March 31, 2004 (Successor), the eleven months ended February
29, 2004 (Predecessor), and the year ended March 31, 2003 (Predecessor) in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note Q, the accompanying consolidated financial statements
have been restated.
/s/ Deloitte & Touche LLP
Lincoln, Nebraska
June 28, 2005
36
NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
March 31, March 31,
2005 2004
-------------- --------------
( as restated)
(see Note Q)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 31,224,343 $ 33,276,181
Restricted cash - 27,065,000
Receivables 30,953,133 30,412,590
Inventories 72,559,962 70,139,222
Recoverable income taxes - 5,351,480
Deferred income taxes 5,536,182 6,102,015
Prepaid expenses and other assets 586,981 873,167
-------------- --------------
Total current assets 140,860,601 173,219,655
PROPERTY AND EQUIPMENT, net of
depreciation & amortization 37,512,387 32,727,631
GOODWILL 284,898,526 270,594,135
IDENTIFIABLE INTANGIBLES, net of amortization 152,650,661 157,505,632
DEBT ISSUE COSTS, net of amortization 8,968,851 10,001,172
OTHER ASSETS 2,348,256 2,216,565
-------------- --------------
$ 627,239,282 $ 646,264,790
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 15,724,221 $ 29,300,768
Accrued employee compensation and benefits 7,934,817 9,118,730
Accrued interest 628,906 2,041,957
Accrued incentives 7,761,296 6,982,304
Accrued expenses 1,146,388 1,211,448
Income taxes payable 544,578 -
Deferred revenue 1,042,660 898,658
Current maturities of long-term debt 1,832,144 17,238,881
Current maturities of capital lease obligations 237,955 167,433
-------------- --------------
Total current liabilities 36,852,965 66,960,179
LONG-TERM DEBT, net of current maturities 351,802,856 353,634,999
CAPITAL LEASE OBLIGATIONS,
net of current maturities 2,529,253 2,138,151
OTHER LONG-TERM LIABILITIES 1,316,835 317,287
DEFERRED INCOME TAXES 59,014,379 60,556,969
DUE TO PARENT 16,574,575 16,836,358
COMMITMENTS (Note I)
STOCKHOLDER'S EQUITY:
Common stock, voting, authorized 50,000 shares
of $1.00 par value; issued and outstanding
100 shares 100 100
Additional paid-in capital 137,957,730 137,957,716
Retained earnings 21,190,589 7,863,031
-------------- --------------
Total stockholder's equity 159,148,419 145,820,847
-------------- --------------
$ 627,239,282 $ 646,264,790
============== ==============
See notes to consolidated financial statements.
37
NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------
Successor Predecessor
--------------------------- ----------------------------
Year Ended 1 Month Ended 11 Months Ended Year Ended
March 31, March 31, February 29, March 31,
2005 2004 2004 2003
------------ ------------- -------------- -------------
(as restated) (as restated) (as restated)
(see Note Q) (see Note Q) (see Note Q)
REVENUES, net of returns $402,154,340 $ 13,317,394 $385,363,674 $370,509,849
COSTS OF SALES (exclusive of
depreciation shown below) 240,638,133 7,768,616 231,874,108 224,488,201
------------- ------------- ------------- -------------
Gross profit 161,516,207 5,548,778 153,489,566 146,021,648
OPERATING EXPENSES:
Selling, general and administrative 100,513,028 8,540,262 91,739,844 90,390,858
Depreciation 4,907,843 349,501 3,396,106 3,468,821
Amortization 8,258,500 649,000 1,162,320 644,053
Stock-based compensation - - 7,263,940 -
------------- ------------- ------------- -------------
113,679,371 9,538,763 103,562,210 94,503,732
------------- ------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS 47,836,836 (3,989,985) 49,927,356 51,517,916
------------- ------------- ------------- -------------
OTHER EXPENSES (INCOME):
Interest expense 25,853,629 2,226,851 22,408,295 14,212,281
Interest income (638,935) (97,587) (307,680) (360,448)
(Gain) loss on derivative
financial instruments - - (57,296) 155,831
------------- ------------- ------------- -------------
25,214,694 2,129,264 22,043,319 14,007,664
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES 22,622,142 (6,119,249) 27,884,037 37,510,252
INCOME TAX EXPENSE (BENEFIT) 9,162,118 (2,399,962) 10,949,169 14,802,252
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ 13,460,024 $ (3,719,287) $ 16,934,868 $ 22,708,000
============= ============= ============= =============
See notes to consolidated financial statements.
38
NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
- -----------------------------------------------------------------------------------------------------------------
Retained Accumulated
Additional Earnings Other
Common Paid-in (Accumulated Comprehensive Comprehensive
Stock Capital Deficit) Income (Loss) Total Income (Loss)
------- ------------- ------------ --------------- ---------- -------------
BALANCE, April 1, 2002
(Predecessor) (as reported)
(see Note Q) $ 100 $ 46,404,474 $(56,386,035) $ (604,567) $(10,586,028)
Prior period adjustment (see Note Q) - - (1,550,656) - (1,550,656) $ -
------- ------------- ------------ -------------- ------------ ------------
BALANCE, April 1, 2002 (Predecessor)
(as restated) (see Note Q) 100 46,404,474 (57,936,691) (604,567) (12,136,684) $ -
============
Contributed capital - 581,859 - - 581,859 $ -
Net income (as restated) (see Note Q) - - 22,708,000 - 22,708,000 22,708,000
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)
(as restated) (see Note Q) 100 46,986,333 (35,228,691) (418,631) 11,339,111 $22,893,936
============
Contributed capital - 9,932,075 - - 9,932,075 $ -
Net income (as restated) (see Note Q) - - 16,934,868 - 16,934,868 16,934,868
Dividends declared - - (43,727,584) - (43,727,584) -
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) (as restated)
(see Note Q) 100 56,918,408 (62,021,407) - (5,102,899) $17,353,499
============
March 4, 2004 Transaction:
Record step-up in basis of
assets and liabilities
(as restated) (see Note Q) - 336,164,201 - - 336,164,201 $ -
Dividends declared to parent
to finance transaction - - (181,571,265) - (181,571,265) -
Repayments received on
management notes to parent - 50,471 - - 50,471 -
Reset retained earnings
(as restated) (see Note Q) - (255,174,990) 255,174,990 - - -
------- ------------- ------------ -------------- ----------- ------------
BALANCE, March 1, 2004
(Successor) (as restated)
(see Note Q) 100 137,958,090 11,582,318 - 149,540,508 -
Contributed capital - (374) - - (374) -
Net loss (as restated) (see Note Q) - - (3,719,287) - (3,719,287) (3,719,287)
------- ------------- ------------ -------------- ----------- ------------
BALANCE, March 31, 2004
(Successor) (as restated)
(see Note Q) 100 137,957,716 7,863,031 - 145,820,847 $(3,719,287)
=============
Contributed capital - 14 - - 14 $ -
Net income - - 13,460,024 - 13,460,024 13,460,024
Dividends declared - - (132,466) (132,466) -
------- ------------- ------------ ------------ ------------- -------------
BALANCE, March 31, 2005 (Successor) $ 100 $ 137,957,730 $ 21,190,589 $ - $159,148,419 $13,460,024
======= ============= ============ ============ ============= =============
See notes to consolidated financial statements.
39
NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------
Successor Predecessor
--------------------------- -------------------------
Year 1 Month 11 Months Year
Ended Ended Ended Ended
March 31, March 31, February 29, March 31,
2005 2004 2004 2003
------------- ------------- ------------ ------------
(as restated)(as restated) (as restated)
(see Note Q) (see Note Q) (see Note Q)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 13,460,024 $ (3,719,287)$16,934,868 $22,708,000
Adjustments to reconcile net income (loss)
to net cash flows from operating activities:
Provision for losses on receivables 315,958 218,205 66,393 451,578
Depreciation 4,907,843 349,501 3,396,106 3,468,821
Amortization 9,728,736 766,693 9,135,071 1,937,425
Noncash interest income from
derivative financial instruments - - (1,030) (249,310)
Gain on derivative financial instruments - - (169,863) (190,583)
Loss on disposal of assets 68,065 13,582 408,095 35,428
Deferred income taxes (1,133,757) (901,435) 3,951,025 1,086,460
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals:
Receivables (714,820) (4,242,720) 3,658,110 (175,488)
Inventories 192,149 5,031,722 (4,791,883) 2,061,981
Recoverable income taxes 5,351,480 (3,198,588) (2,127,892) -
Prepaid expenses and other assets 300,768 (88,681) 83,487 (335,844)
Other assets (379,720) (363,805) (814,529) (346,736)
Accounts payable (13,824,098) (129,715) 10,418,017 3,927,555
Accrued employee compensation and benefits (1,267,618) (1,005,513) (602,470) 1,731,811
Accrued interest (1,413,051) (2,064,389) 2,593,613 (34,466)
Accrued incentives 778,992 (213,186) 1,676,607 1,923,255
Accrued expenses (91,363) (61,411) 192,125 16,875
Income taxes payable 259,835 - (89,932) (3,594,507)
Deferred revenue 144,002 153,037 207,391 105,440
Other long-term liabilities 260,548 1,516 14,948 26,971
Due to parent (261,783) 1,690,070 2,774,442 2,776,947
------------- ------------------------- -----------
Net cash flows from operating activities 16,682,190 (7,764,404) 46,912,699 37,331,613
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (7,665,675) (719,844) (3,964,662) (3,707,733)
Acquisitions, net of cash acquired (20,160,079) (1,848,798) (2,355,486) (1,389,338)
(Increase) decrease in restricted cash 27,065,000 (27,065,000) - -
Proceeds from sale of property and
equipment and other 13,199 2,095 9,676 19,643
Software development costs - (24,750) (141,186) (249,644)
------------- ------------------------- -----------
Net cash flows from investing activities (747,555) (29,656,297) (6,451,658) (5,327,072)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - 355,000,000 75,000,000 -
Payment of financing costs (437,915) (10,118,865) (3,830,335) (32,446)
Principal payments on long-term debt (17,238,880) (169,592,270)(30,470,840) (4,476,155)
Principal payments on capital lease obligations (182,094) (10,395) (122,287) (114,524)
Dividends paid to parent (132,466) (184,294,345)(41,004,504) -
Capital contributions 4,882 50,471 223,829 604,689
------------- ------------------------- -----------
Net cash flows from financing activities (17,986,473) (8,965,404) (204,137) (4,018,436)
------------- ------------------------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,051,838) (46,386,105) 40,256,904 27,986,105
CASH AND CASH EQUIVALENTS, Beginning of period 33,276,181 79,662,286 39,405,382 11,419,277
------------- ------------------------- -----------
CASH AND CASH EQUIVALENTS, End of period $ 31,224,343 $ 33,276,181 $79,662,286 $39,405,382
============= ========================= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest $ 25,796,444 $ 4,173,547 $11,955,528 $13,549,099
Income taxes 4,946,343 9,991 6,466,526 14,533,352
Noncash investing and financing activities:
Revaluation of assets and equity in
March 4, 2004 Transaction $ - $336,164,201 $ - $ -
Acquisition of TheCampusHub.com, Inc.
through issuance of NBC Acquisition Corp.
Class A Common Stock - - 9,722,683 -
Property acquired through capital lease 643,718 - - 381,509
Accumulated other comprehensive income:
Unrealized gains on interest rate swap agreements,
net of income taxes - - 418,631 185,936
Deferred taxes resulting from accumulated
other comprehensive income (loss) - - 256,145 146,900
Dividend declared but unpaid - - 2,723,080 -
See notes to consolidated financial statements.
40
NEBRASKA BOOK COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A. NATURE OF OPERATIONS
Nebraska Book Company, Inc. (the "Company") is a wholly-owned subsidiary
of NBC Acquisition Corp.
The Company participates in the college bookstore industry primarily by
operating its own college bookstores, by providing used textbooks to college
bookstore operators, by providing distance education products and services, and
by providing proprietary college bookstore information systems, consulting
services, and other.
As further discussed in Note C, on March 4, 2004, 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.) gained controlling interest in
NBC 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 NBC in
the form of a capital contribution; (iii) Weston Presidio's purchase of 36,455
shares of NBC's common stock directly from its holders; (iv) the cancellation of
870,285 shares of NBC's common stock upon payment by NBC of merger consideration
of $180.4 million to the shareholders of record for such shares; (v) the
exchange of 397,711 shares of NBC's common stock for 512,799 shares of New NBC
Acquisition Corp. capital stock in the merger of the two entities with NBC as
the surviving entity; and (vi) the exchange of 512,799 shares of NBC's common
stock by Weston Presidio and current and former members of 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 by NBC and the
Company 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. 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 are as follows:
PRINCIPLES OF CONSOLIDATION: Effective July 1, 2002, the Company's distance
learning division was separately incorporated under the laws of the State of
Delaware as Specialty Books, Inc., a wholly-owned subsidiary of the Company.
Effective January 1, 2005, the Company's textbook division was separately
incorporated under the laws of the State of Delaware as NBC Textbooks LLC, a
wholly-owned subsidiary of the Company. Subsequent to the date of incorporation,
the Company's financial statements have been presented on a consolidated basis
to include all of the accounts of Specialty Books, Inc. and NBC Textbooks LLC,
after elimination of all significant intercompany accounts and transactions. In
connection with their incorporation, Specialty Books, Inc. and NBC Textbooks LLC
have guaranteed payment and performance of obligations, liabilities, and
indebtedness arising under, out of, or in connection with the Senior
Subordinated Notes and Senior Credit Facility.
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 $4.0 million, $0.4 million, $5.8
million, and $5.4 million, for the year ended March 31, 2005, the one month
ended March 31, 2004, the eleven months ended February 29, 2004, and the year
ended March 31, 2003, respectively. Shipping and handling costs are included in
operating expenses in the consolidated statements of operations and approximated
$8.4 million, $0.7 million, $9.4 million, and $9.0 million for the year ended
March 31, 2005, the one month ended March 31, 2004, the eleven months ended
February 29, 2004, and the year ended March 31, 2003, respectively.
41
ADVERTISING: Advertising costs are expensed as incurred and approximated
$4.5 million, $0.2 million, $4.0 million, and $3.2 million for the year ended
March 31, 2005, the one month ended March 31, 2004, the eleven months ended
February 29, 2004, and the year ended March 31, 2003, 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 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
NBC's $76.0 million senior discount debentures, as further discussed in Note C.
Of the $27.1 million held in escrow, $11.0 million are amounts held on behalf of
NBC related to the senior discount debentures to be redeemed on April 3, 2004
and have a corresponding amount due to parent included in "accounts payable" in
the consolidated balance sheet as of March 31, 2004.
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, or the useful life, if shorter. The Company does not consider renewal
options for the determination of the amortization period for leasehold
improvements unless renewal is considered reasonably assured at the inception of
the lease.
GOODWILL: Goodwill as of March 31, 2005 and 2004 arose as a result of the
March 4, 2004 Transaction described in Note C and the acquisition of bookstore
operations in the year ended March 31, 2005 and the one month ended March 31,
2004. 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 the periods presented.
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 the
periods presented.
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 the periods presented.
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.
42
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 the periods presented. Amortization of the capitalized costs associated
with such functionalities totaled $1.9 million, $0.2 million, $1.0 million, and
$0.4 million for the year ended March 31, 2005, the one month ended March 31,
2004, the eleven months ended February 29, 2004, and the year ended March 31,
2003, 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 range from 3 to 5
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, 2005 and 2004 was approximately $1.6 million and $0.1 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 $6.2 million, respectively.
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 its 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 the Company's
variable rate debt.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of financial
instruments including cash and cash equivalents, accounts receivable, and
accounts payable approximate fair value as of March 31, 2005 and 2004, because
of the relatively short maturity of these instruments. The fair value of
long-term debt, including the current maturities, was approximately $350.8
million and $374.4 million as of March 31, 2005 and 2004, respectively, as
determined by quoted market values and prevailing interest rates for similar
debt issues.
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 (loss) if the fair-value-based method had been applied to
all outstanding and unvested awards in each period:
43
Successor Predecessor
---------------------------- -----------------------------
Year Ended 1 Month Ended 11 Months Ended Year Ended
March 31, March 31, February 29, March 31,
2005 2004 2004 2003
------------- ------------- -------------- -------------
Net income (loss), as reported $ 13,460,024 $ (3,719,287) $ 16,934,868 $ 22,708,000
Add: Stock-based compensation
expense included in reported net income,
net of related income 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 (71,410) - (4,455,453) (92,382)
------------- ------------- -------------- -------------
Pro forma net income (loss) $ 13,388,614 $ (3,719,287) $ 16,837,779 $ 22,615,618
============= ============= ============== =============
INCOME TAXES: The Company files a consolidated federal income tax return
with its parent and follows a policy of recording an amount equal to the income
tax expense which the Company would have incurred had it filed a separate
return. The Company is responsible for remitting tax payments and collecting tax
refunds for the consolidated group. The amount due to parent (i.e., NBC)
represents the cumulative reduction in tax payments made by the Company as a
result of the tax benefit of operating losses generated by the Company's parent.
The Company provides for deferred income taxes based upon temporary differences
between financial statement and income tax bases of assets and liabilities, and
tax rates in effect for periods in which such temporary differences are
estimated to reverse.
COMPREHENSIVE INCOME (LOSS): Comprehensive income (loss) includes net income
and other comprehensive income (losses). For the eleven months ended February
29, 2004, and the year ended March 31, 2003, 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 2005 presentation.
ACCOUNTING STANDARDS NOT YET ADOPTED: In November 2004, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 151, INVENTORY COSTS, which
amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, INVENTORY
PRICING to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). The Statement becomes
effective for the Company in fiscal 2007 and is not expected to have a
significant impact on the Company's consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), SHARE-BASED
PAYMENT. SFAS No. 123 (revised 2004) focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions and requires an entity to, in most cases, measure the cost of such
services based on the grant-date fair value of the award. This Statement is a
revision of SFAS No. 123, ACCOUNTING FOR STOCK-BASED Compensation and supersedes
APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, thereby
eliminating the intrinsic value method of accounting for stock-based
compensation currently utilized by the Company. SFAS No. 123 (revised 2004) will
become effective for the Company in fiscal 2007, applying to all awards granted
or modified after April 1, 2006.
In December 2004, the FASB issued SFAS No. 153, EXCHANGES OF NONMONETARY
ASSETS--AN AMENDMENT OF APB OPINION NO. 29. This statement amends APB Opinion
No.29 and is based on the principle that exchanges of nonmonetary assets should
be measured based on the fair value of the assets exchanged. SFAS 153 is
effective for nonmonetary exchanges occurring in fiscal 2007. The adoption of
this statement is not expected to have a significant impact on the Company's
consolidated financial statements.
44
C. BUSINESS COMBINATION
On March 4, 2004, Weston Presidio acquired the controlling interest in NBC
through a series of steps which resulted in Weston Presidio owning a substantial
majority of NBC'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) The Company 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) The Company 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, 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 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) NBC 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, 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 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) The Company 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) NBC 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" with an offsetting amount due to parent included in
"accounts payable" 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 NBC in the
form of a capital contribution.
(7) Weston Presidio purchased 36,455 shares of NBC's common stock directly
from its holders for $8.4 million.
(8) 870,285 shares of NBC's common stock were cancelled upon NBC's payment
of $180.4 million in merger consideration to the holders of such shares.
(9) 397,711 shares of NBC 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 NBC as the
surviving entity.
(10) Weston Presidio and current and former members of management contributed
495,981 shares and 16,818 shares, respectively, of NBC's common stock to
NBC Holdings Corp. in exchange for a like number of shares of NBC
Holdings Corp. capital stock.
45
(11) Options to acquire 49,778 shares of NBC's common stock held by members
of management were exchanged for options to acquire a like number of
shares of NBC Holdings Corp. capital stock.
(12) The Company declared and paid dividends of $184.3 million to NBC 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 NBC and the Company as of the date of the transaction. The March
4, 2004 Transaction was accounted for as a purchase in accordance with Statement
of Financial Accounting Standards ("SFAS") No.141, BUSINESS COMBINATIONS.
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 NBC. The remaining 3.1% is accounted
for at the continuing stockholders' (current and former members of management)
carryover basis in NBC. 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 of NBC. Fair value was determined in part using an independent
third-party appraisal.
46
The following table summarizes the purchase price allocation of the March 4,
2004 Transaction:
Purchase Price:
Net debt issued in transaction $ 170,000,000
Contribution of existing equity:
Weston Presidio 77,826,460
Current and former members of management 1,010,701
Capital contribution to NBC from NBC Holdings Corp. 28,164,181
Purchase of 36,455 NBC 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 $ 301,480,234
Net Book Value of Tangible Assets Acquired and Liabilities Assumed 40,541,582
Allocation of NBC Purchase Accounting Adjustments 29,581,068
---------------
Excess Purchase Price $ 371,602,884
===============
Allocation of Excess Purchase Price:
Goodwill $ 269,061,875
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)
---------------
$ 371,602,884
===============
The Company incurred $20.8 million in costs associated with the March 4,
2004 Transaction and wrote off $6.2 million of debt issue costs associated with
debt retired to interest expense. Of the $20.8 million of costs incurred, $10.3
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, and $3.2 million of call
premiums paid on the debt retired was recorded as interest expense.
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) (3,610,245) 16,790,669 10,668,072
47
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 39.2%, 39.3%, and 39.5%
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,
-----------------------------
2005 2004
-------------- --------------
Trade receivables, less allowance for doubtful
accounts of $510,839 at March 31, 2005 and 2004 $ 15,167,497 $ 15,326,208
Receivables from book publishers for returns 9,765,214 9,164,926
Advances for book buy-backs 4,576,363 4,068,709
Computer finance agreements, current portion 253,000 655,649
Other 1,191,059 1,197,098
-------------- --------------
$ 30,953,133 $ 30,412,590
============== ==============
Trade receivables include the effect of estimated product returns. The amount
of estimated product returns at March 31, 2005 and 2004 was approximately $6.6
million and $5.3 million, respectively.
E. INVENTORIES
Inventories are summarized as follows:
March 31,
-------------------------------
2005 2004
-------------- --------------
Bookstore Division $ 40,084,363 $ 35,313,780
Textbook Division 30,113,141 31,247,606
Complementary Services Division 2,362,458 3,577,836
-------------- --------------
$ 72,559,962 $ 70,139,222
============== ==============
Textbook Division inventories include the effect of estimated product
returns. The amount of estimated product returns at March 31, 2005 and 2004 was
approximately $3.0 million and $2.4 million, respectively.
General and administrative costs associated with the storage and handling of
inventory totaled approximately $7.6 million and $7.3 million for the years
ended March 31, 2005 and 2004, respectively, of which approximately $2.0 million
was capitalized into inventory at March 31, 2005 and 2004.
48
F. PROPERTY AND EQUIPMENT
A summary of the cost of property and equipment follows:
March 31,
-----------------------------
2005 2004
-------------- --------------
Land $ 3,565,382 $ 3,565,382
Buildings and improvements 19,323,431 16,262,239
Leasehold improvements 5,057,273 3,263,007
Furniture and fixtures 8,703,700 4,684,992
Information systems 5,153,788 3,638,204
Automobiles and trucks 215,270 178,938
Machinery 334,249 298,422
Projects in process 407,117 1,185,860
-------------- --------------
42,760,210 33,077,044
Less: Accumulated depreciation & amortization (5,247,823) (349,413)
-------------- --------------
$ 37,512,387 $ 32,727,631
============== ==============
G. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLES
As discussed in detail in Note C, on March 4, 2004 Weston Presidio acquired
the controlling interest in NBC through a series of steps which resulted in
Weston Presidio owning a substantial majority of NBC'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 NBC and the Company 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
$269.1 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, 2005, the Company acquired nine
college bookstore locations in seven separate transactions, none of which was
material to the Company's consolidated financial statements. In April of 2004,
the Company acquired certain assets of a privately owned bookstore serving
Eastern Michigan University. Also in April of 2004, the Company acquired certain
assets of a privately owned bookstore with two locations serving University of
North Florida. In June of 2004, the Company acquired certain assets of an
institutional ("contract-managed") bookstore location serving Alma College. In
July of 2004, the Company acquired certain assets of a privately owned bookstore
serving Mississippi State University. In October of 2004, the Company acquired
certain assets of a privately owned bookstore serving Illinois State University
- - Normal. A second transaction was made in October of 2004 to acquire certain
assets of a privately owned bookstore location serving Morehead State
University. A third transaction was made in October of 2004 to acquire certain
assets of a privately owned bookstore with two locations serving Florida State
University. The total purchase price, net of cash acquired, of such acquisitions
was approximately $20.2 million, of which approximately $3.1 million was
assigned to covenants not to compete with amortization periods of three to five
years, approximately $8.1 million was assigned to tax-deductible goodwill, and
approximately $6.2 million was assigned to non tax-deductible goodwill.
The changes in the carrying amount of goodwill for the year ended March 31,
2005, the one month ended March 31, 2004, and the eleven months ended February
29, 2004, in total and by reportable segment, are as follows:
49
Complementary
Bookstore Services Corporate
Division Division Administration Total
-------------- --------------- ----------------- ---------------
Balance, April 1, 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) 252,291,301 234,872,448
Bookstore acquisitions 1,532,260 - - 1,532,260
-------------- --------------- ---------------- ---------------
Balance, March 31, 2004 1,532,260 - 269,061,875 270,594,135
Additions to goodwill:
Bookstore acquisitions 14,304,391 - - 14,304,391
-------------- --------------- ---------------- ---------------
Balance, March 31, 2005 $ 15,836,651 $ - $ 269,061,875 $ 284,898,526
============== =============== ================ ===============
Goodwill assigned to corporate administration represents 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, 2005 and 2004:
March 31, 2005
---------------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
---------------- ----------------- ----------------
Customer relationships $ 114,830,000 $ (6,219,580) $ 108,610,420
Developed technology 11,473,750 (2,071,333) 9,402,417
Covenants not to compete 4,084,333 (766,509) 3,317,824
---------------- ----------------- ----------------
$ 130,388,083 $ (9,057,422) $ 121,330,661
================ ================= ================
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
================ ================= ================
50
Information regarding aggregate amortization expense for the year ended
March 31, 2005, the one month ended March 31, 2004, the eleven months ended
February 29, 2004, and the year ended March 31, 2003 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
--------------
Year ended March 31, 2005 (Successor) $ 8,249,971
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
Estimated amortization expense for the
fiscal years ending March 31:
2006 $ 8,523,367
2007 8,509,094
2008 8,221,195
2009 8,214,280
2010 7,847,405
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.
51
H. LONG-TERM DEBT
Details regarding each of the instruments of indebtedness of the Company are
provided in the following table:
March 31,
---------------------------
2005 2004
------------- ------------
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 (4.67% and 3.84% at
March 31, 2005 and 2004, respectively) $178,200,000 $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 175,000,000 175,000,000
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
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% 435,000 463,880
------------- -------------
353,635,000 370,873,880
Less current maturities of long-term debt (1,832,144) (17,238,881)
------------- -------------
Long-term debt $351,802,856 $353,634,999
============= =============
Indebtedness at March 31, 2005 includes an amended and restated
bank-administered senior credit facility (the "Senior Credit Facility") provided
to the Company 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"), and capital leases. The Revolving Credit
Facility expires on March 4, 2009. Availability under the Revolving Credit
Facility is determined by the calculation of a borrowing base, which at any time
is equal to a percentage of eligible accounts receivable and inventory, up to a
maximum of $50.0 million. The calculated borrowing base at March 31, 2005 was
approximately $40.8 million. The Revolving Credit Facility was unused at March
31, 2005. Borrowings under the temporary incremental revolving credit facility
described below are not subject to the borrowing base restrictions.
The interest rate on the Senior Credit Facility Term Loan is prime plus an
applicable margin of up to 1.5% or, on Eurodollar borrowings, the Eurodollar
interest rate plus an applicable margin of up to 2.5%. The Revolving Credit
Facility interest rate is prime plus an applicable margin of up to 1.75% or, on
Eurodollar borrowings, the Eurodollar interest 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, 2005 and 2004 were
approximately $5.7 million and $1.7 million at an average rate of 6.4% and 4.8%,
respectively.
The Senior Credit Facility is collateralized by substantially all of the
assets of the Company and NBC. Additionally, NBC has guaranteed the prompt and
complete payment and performance of the Company's obligations under the Senior
Credit Facility. The Senior Credit Facility also stipulates that excess cash
flows as defined in the credit agreement dated February 13, 1998 (the "Credit
Agreement"), as most recently amended on October 20, 2004 and most recently
restated on March 4, 2004, shall be applied towards prepayment of the Term Loan.
There is no excess cash flow payment due as of March 31, 2005.
52
The Senior Credit Facility requires the Company to maintain certain
financial ratios and contains a number of other covenants that among other
things, restrict the ability to incur additional indebtedness, dispose of
assets, make capital expenditures, make loans or advances and pay dividends,
except that, among other things, the Company may pay dividends to NBC (i) 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 NBC. The Company was compliant with such
covenants at March 31, 2005.
The Senior Subordinated Notes pay cash interest semi-annually and mature on
March 15, 2012. The indenture governing the Senior Subordinated Notes restricts
the ability of the Company and its restricted subsidiaries (as defined in the
indenture) to pay dividends or make other restricted payments (as defined in the
indenture) to their respective stockholders, subject to certain exceptions,
unless certain conditions are met, including that (i) no default under the
indenture shall have occurred and be continuing, (ii) the Company shall be
permitted by the indenture to incur additional indebtedness and (iii) the amount
of the dividend or payment may not exceed a certain amount based on, among other
things, the Company's consolidated net income.
In conjunction with the March 4, 2004 Transaction, certain of the notes
under our former 8.75% senior subordinated notes and NBC's former 10.75% senior
discount debentures were not tendered by the holders, but were instead called
for redemption on March 4, 2004 and redeemed on April 3, 2004. Such redemption
was funded through $27.1 million of restricted cash held in escrow, of which
$16.1 million related to principal, accrued interest, and call premiums on our
remaining 8.75% senior subordinated notes and $11.0 million related to
principal, accrued interest, and call premiums on NBC's remaining 10.75% senior
discount debentures.
Effective October 20, 2004, the Credit Agreement was amended, primarily to
provide for a temporary incremental revolving credit facility, to increase the
allowable aggregate principal amount of outstanding capital lease obligations to
$10.0 million, and to exclude certain acquisitions from the $15.0 million annual
acquisition limitation. The incremental revolving credit facility effectively
increases amounts available under the Revolving Credit Facility by $10.0 million
for the period from October 20, 2004 through June 30, 2005. These changes were
made in connection with the October, 2004 acquisitions of bookstore locations in
Normal, Illinois and Tallahassee, Florida. The Credit Agreement was also
previously amended on August 6, 2004 to reduce the applicable margin, as defined
in the Credit Agreement, on the Term Loan by up to .50% depending on the ratings
assigned to the Term Loan by Standard & Poor's Ratings Group and Moody's
Investors Services.
At March 31, 2005, the aggregate maturities of long-term debt for the next
five years were as follows:
Fiscal
Year
-----------
2006 $ 1,832,144
2007 1,835,775
2008 1,839,816
2009 1,844,315
2010 1,849,318
I. LEASES AND OTHER COMMITMENTS
In conjunction with two bookstores acquired in June of 2001, one bookstore
acquired in March of 2003, and one bookstore acquired in April of 2004, the
Company entered into bookstore facility leases that qualified as capital leases.
Such leases expire at various dates through fiscal 2014 and contain options to
renew for periods of up to ten years. Capitalized leased property included in
property and equipment was approximately $2.3 million at March 31, 2005, 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 11.0%.
Future minimum capital lease payments and aggregate minimum lease payments
under noncancelable operating leases for the years ending March 31 are as
follows:
53
Year Capital Operating
- ---- Leases Leases
------------- --------------
2006 $ 531,444 $ 11,860,000
2007 567,387 10,802,000
2008 570,751 9,230,000
2009 575,386 6,530,000
2010 588,877 4,622,000
Thereafter 1,181,245 10,063,000
------------- --------------
Total minimum lease payments 4,015,090 $ 53,107,000
==============
Amount representing interest at 11.0% (1,247,882)
-------------
Present value of minimum lease payments 2,767,208
Obligations due within one year (237,955)
-------------
Long-term obligations $ 2,529,253
=============
Total rent expense for the year ended March 31, 2005, the one month ended
March 31, 2004, the eleven months ended February 29, 2004 and the year ended
March 31, 2003 was approximately $15.2 million, $1.0 million, $12.9 million, and
$11.5 million, respectively. Percentage rent expense for the year ended March
31, 2005, the one month ended March 31, 2004, the eleven months ended February
29, 2004 and the year ended March 31, 2003 was approximately $4.0 million, $0.3
million, $3.5 million, and $3.0 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
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 the Company's
Senior Credit Facility, exposure to interest rate fluctuations is managed by
maintaining fixed interest rate debt (primarily the Senior Subordinated Notes)
and, in the past, by entering into interest rate swap agreements that qualify as
cash flow hedging instruments to convert certain variable rate debt into fixed
rate debt. The Company had separate five-year amortizing interest rate swap
agreements with two financial institutions whereby the Company'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,
2005 2004
-------------- ---------------
Total indebtedness outstanding $ 356,402,208 $ 373,179,464
Term debt subject to Eurodollar
fluctuations 178,200,000 180,000,000
Fixed interest rate indebtedness 178,202,208 193,179,464
Variable interest rate, including
applicable margin:
Term Debt - Term Loan 4.67% 3.84%
54
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 the Company'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 the Company's term debt.
The Company 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 are reflected at
fair value in the Company's consolidated balance sheet and the related gains or
losses on these agreements are 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 are
reclassified into earnings as an adjustment to interest expense in the same
periods in which the related interest payments being hedged are recognized in
earnings. 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.
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. 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.
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 year ended March 31, 2005, one month ended March 31, 2004, the
eleven months ended February 29, 2004, and the year ended March 31, 2003:
Successor Predecessor
---------------------------- -------------------------------
Year Ended 1 Month Ended 11 Months Ended Year Ended
March 31, March 31, February 29, March 31,
2005 2004 2004 2003
------------ -------------- ---------------- --------------
Increase in fair value of swap agreements
designated as hedges $ - $ - $ 675,806 $ 582,146
Interest income recorded due to hedge
ineffectiveness - - 1,030 249,310
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.
55
K. INCOME TAXES
The provision (benefit) for income taxes consists of:
Successor Predecessor
-------------------------------- -------------------------------
Year Ended 1 Month Ended 11 Months Ended Year Ended
March 31, March 31, February 29, March 31,
2005 2004 2004 2003
---------------- --------------- ---------------- --------------
Current:
Federal $ 8,211,213 $ (1,151,169) $ 5,320,504 $ 11,615,670
State 2,084,662 (347,358) 1,677,640 2,100,122
Deferred (1,133,757) (901,435) 3,951,025 1,086,460
--------------- ---------------- ---------------- -------------
$ 9,162,118 $ (2,399,962) $ 10,949,169 $ 14,802,252
=============== ================ ================ =============
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
---------------------------- ----------------------------
Year Ended 1 Month Ended 11 Months Ended Year Ended
March 31, March 31, February 29, March 31,
2005 2004 2004 2003
------------ --------------- ---------------- -----------
Statutory rate 35.0% (35.0)% 35.0% 35.0%
State income tax effect 4.6 (3.5) 3.8 3.8
Meals and entertainment 0.6 0.2 0.5 0.3
Change in estimate of income tax liabilities - - - 0.3
Other 0.3 (0.9) - 0.1
----- ------- ----- -----
40.5% (39.2)% 39.3% 39.5%
===== ======= ===== =====
56
The components of the deferred tax assets (liabilities) consist of the
following:
March 31,
2005 2004
------------- --------------
Deferred income tax assets (liabilities),
current:
Vacation accruals $ 588,968 $ 514,414
Inventories 540,083 138,286
Allowance for doubtful accounts 193,914 193,914
Product returns 1,498,065 1,093,492
Incentive programs 2,910,764 2,457,369
NOL carryforward - 1,882,419
Other (195,612) (177,879)
------------- --------------
5,536,182 6,102,015
------------- --------------
Deferred income tax assets (liabilities),
noncurrent:
Deferred compensation agreements 119,506 120,442
Goodwill amortization (1,806,429) (471,752)
Covenants not to compete 1,196,228 1,197,689
Identifiable intangibles (56,653,924) (59,262,150)
Property and equipment (2,042,760) (2,141,198)
Other 173,000 -
------------- --------------
(59,014,379) (60,556,969)
------------- --------------
$(53,478,197) $(54,454,954)
============= ==============
L. RETIREMENT PLAN
The Company participates in and sponsors a 401(k) compensation deferral
plan. The plan covers substantially all employees. The plan provisions include
employee contributions based on a percentage of compensation along with a
Company contribution in addition to a limited matching feature. The Company's
contributions for the year ended March 31, 2005, the one month ended March 31,
2004, the eleven months ended February 29, 2004 and the year ended March 31,
2003 were $1.2 million, $1,417, $1.0 million, and $1.0 million, respectively.
M. DEFERRED COMPENSATION
The Company has a non-qualified deferred compensation plan for selected
employees. This plan allows participants to voluntarily elect to defer portions
of their current compensation. The amounts can be distributed upon either death
or voluntary/involuntary resignation or termination. Interest is accrued at the
prime rate adjusted semi-annually on January 1 and July 1 and is compounded as
of March 31. The liability for the deferred compensation is included in other
long-term liabilities and approximated $0.3 million as of March 31, 2005 and
2004.
N. STOCK-BASED COMPENSATION
NBC 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, NBC 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, NBC 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 NBC's common stock to selected members of
senior management of NBC and its affiliates. All options granted were
nonqualified stock options, although the plan also provided for incentive stock
options. NBC granted a portion of the available options in fiscal years
2001-2003 upon the attainment of pre-established financial targets. Generally,
twenty-five percent of the options granted became exercisable immediately upon
granting, with the remaining options becoming exercisable in 25% increments over
the subsequent three years on the anniversary of the date of grant. The options
57
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 NBC's common stock to selected employees, officers,
and directors of NBC and its affiliates. All options granted were nonqualified
stock options, although the plan also provided for incentive stock options. NBC
granted such options at the discretion of a committee designated by the Board of
Directors (the Committee). Generally, twenty-five percent of the options granted
became exercisable immediately upon granting, with the remaining options
becoming exercisable in 25% increments over the subsequent three years on the
anniversary of the date of grant. Incentive stock options 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 NBC's common stock to selected employees,
officers, employee directors, and members of senior management of NBC 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. 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 NBC's common stock to selected employees, officers,
employee directors, and members of senior management of NBC 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 NBC'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 NBC and its affiliates. Additional shares may be issued upon
changes in the capitalization of NBC and upon approval of a committee designated
by NBC'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, 2005, there were 18,917 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.
58
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, NBC 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. The Company funded the purchase of the treasury shares by
NBC through a dividend it declared to NBC 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 year ended March 31, 2005, the eleven
months ended February 29, 2004 and the fiscal year ended March 31, 2003, 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 NBC's
common stock) of NBC's common stock on the date of grant.
A summary of the Company's stock-based compensation activity related to
stock options for each of the plans for the year ended March 31, 2005, the one
month ended March 31, 2004, the eleven months ended February 29, 2004, and the
year ended March 31, 2003 is as follows:
Successor Predecessor
---------------------------------------------- ---------------------------------------------
Year Ended 1 Month Ended 11 Months Ended Year Ended
March 31, March 31, February 29, March 31,
2005 2004 2004 2003
---------------------- ---------------------- ---------------------- ----------------------
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
Granted - - - - - - 13,825 107.39
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
========== =========== ========== =========== ========== =========== =========== ==========
1998 STOCK OPTION PLAN:
Outstanding - beginning of period - $ - 4,428 $ 58.64 29,229 $ 56.38 27,094 $52.47
Granted - - - - - - 2,135 106.00
Expired/terminated - - (4,428) (58.64) (1,291) (56.62) - -
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
========== =========== ========== =========== ========== =========== =========== ==========
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 49,778 $ 85.53 - $ -
Granted 12,611 160.00 49,778 85.53
Expired/terminated - - - -
Exercised - - - -
---------- ----------- ---------- -----------
Outstanding - end of period 62,389 $ 100.58 49,778 $ 85.53
========== =========== ========== ===========
59
2004 Stock Option Plan
---------------------------
Weighted-
Average
Remaining
Contractual
Number Life (Yrs)
------------ --------------
Outstanding - March 31, 2005:
Exercise price of $52.47 27,068 8.9
Exercise price of $106 11,960 8.9
Exercise price of $146 10,750 8.9
Exercise price of $160 12,611 9.6
------------ --------------
62,389 9.0
============ ==============
Exercisable - March 31, 2005:
Exercise price of $52.47 27,068 8.9
Exercise price of $106 11,960 8.9
Exercise price of $146 10,750 8.9
Exercise price of $160 3,151 9.6
------------ --------------
52,929 8.9
============ ==============
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
============ ============== =========== ============
60
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
---------------------------- --------------------------------
Year Ended 1 Month Ended 11 Months Ended Year Ended
March 31, March 31, February 29, March 31,
2005 2004 2004 2003
------------ --------------- ------------------ -------------
1998 Performance Stock Option Plan $ - $ - $ - $ 14.35
1998 Stock Option Plan - - - 14.51
2003 Performance Stock Option Plan - - 15.62 -
2004 Stock Option Plan 18.12 157.70 - -
The weighted-average grant-date fair value per option for options granted in
fiscal 2004 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 NBC'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
-------------------------- ----------------------------
Year Ended 1 Month Ended 11 Months Ended Year Ended
March 31, March 31, February 29, March 31,
2005 2004 2004 2003
----------- -------------- ---------------- -----------
Risk-free interest rate 3.05% 3.02% 2.87% 3.68%
Dividend yield - - - -
Expected volatility 1.00% 1.00% 1.00% 1.00%
Expected life (years) 4.0 5.0 4.0 4.0
O. SEGMENT INFORMATION
The Company's operating segments are determined based on the way that
management organizes the segments for making operating decisions and assessing
performance. Management has organized the Company's segments based upon
differences in products and services provided. The Company has three reportable
segments: Bookstore Division, Textbook Division, and Complementary Services
Division. The Bookstore Division segment encompasses the operating activities of
the Company's 124 college bookstores as of March 31, 2005 located on or adjacent
to college campuses. 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 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, deferred income taxes, property
and equipment, intangibles, and other assets), net interest expense and taxes
(excluding taxes incurred by the Company's wholly-owned subsidiaries, NBC
Textbooks LLC and Specialty Books, Inc.) are not allocated between the Company's
segments; instead, such balances are accounted for in a corporate administrative
division.
61
The following table provides selected information about profit or loss
(excluding the impact of the Company's interdivisional administrative fee- see
Note R, Condensed Consolidating Financial Information, to the Consolidated
Financial Statements) and assets on a segment basis for the year ended March 31,
2005, the one month ended March 31, 2004, the eleven months ended February 29,
2004, and the year ended March 31, 2003, respectively:
Complementary
Bookstore Textbook Services
Division Division Division Total
--------------- --------------- -------------- ---------------
Year ended March 31, 2005 (Successor):
External customer revenues $ 262,282,432 $ 109,084,564 $ 30,787,344 $ 402,154,340
Intersegment revenues 1,385,319 24,853,911 2,980,096 29,219,326
Depreciation and amortization expense 4,115,988 5,813,681 2,746,146 12,675,815
Earnings before interest, taxes, depreciation,
and amortization (EBITDA) 34,607,848 32,181,393 1,805,367 68,594,608
Total assets 86,754,851 155,867,124 26,120,562 268,742,537
One month ended March 31, 2004 (Successor):
External customer revenues $ 5,309,747 $ 3,883,675 $ 4,123,972 $ 13,317,394
Intersegment revenues 9,242 600,590 319,806 929,638
Depreciation and amortization expense 251,599 476,935 229,803 958,337
Earnings before interest, taxes, depreciation, and
amortization (EBITDA) (2,471,525) (85,994) 251,371 (2,306,148)
Total assets 60,791,084 158,221,680 31,742,840 250,755,604
Eleven months ended February 29, 2004 (Predecessor):
External customer revenues $ 233,170,224 $ 104,533,832 $ 47,659,618 $ 385,363,674
Intersegment revenues 1,158,230 21,212,168 2,094,696 24,465,094
Depreciation and amortization expense 2,289,830 577,899 1,343,615 4,211,344
Earnings before interest, taxes, depreciation, and
amortization (EBITDA) 33,190,998 33,544,806 2,624,520 69,360,324
Year ended March 31, 2003 (Predecessor):
External customer revenues $ 216,026,871 $ 111,365,802 $ 43,117,176 $ 370,509,849
Intersegment revenues 916,262 21,440,901 887,680 23,244,843
Depreciation and amortization expense 2,622,418 455,772 646,287 3,724,477
Earnings before interest, taxes, depreciation, and
amortization (EBITDA) 26,992,497 33,915,223 2,041,093 62,948,813
Total assets 64,591,853 47,690,963 13,911,857 126,194,673
62
The following table reconciles segment information presented above with
consolidated information as presented in the Company's consolidated financial
statements for the year ended March 31, 2005, the one month ended March 31,
2004, the eleven months ended February 29, 2004, and the year ended March 31,
2003, respectively:
Successor Predecessor
-------------------------------- ----------------------------------
Year Ended 1 Month Ended 11 Months Ended Year Ended
March 31, March 31, February 29, March 31,
2005 2004 2004 2003
---------------- -------------- --------------- ----------------
Revenues:
Total for reportable segments $431,373,666 $ 14,247,032 $ 409,828,768 $ 393,754,692
Elimination of intersegment revenues (29,219,326) (929,638) (24,465,094) (23,244,843)
--------------- -------------- --------------- ----------------
Consolidated total $402,154,340 $ 13,317,394 $ 385,363,674 $ 370,509,849
=============== ============== =============== ================
Depreciation and Amortization Expense:
Total for reportable segments $ 12,675,815 $ 958,337 $ 4,211,344 $ 3,724,477
Corporate administration 490,528 40,164 347,082 388,397
--------------- -------------- --------------- ----------------
Consolidated total $ 13,166,343 $ 998,501 $ 4,558,426 $ 4,112,874
=============== ============== =============== ================
Income (Loss) Before Income Taxes:
Total EBITDA for reportable segments $ 68,594,608 $ (2,306,148) $ 69,360,324 $ 62,948,813
Corporate administrative costs (7,591,429) (685,336) (14,874,542) (7,318,023)
--------------- -------------- --------------- ----------------
61,003,179 (2,991,484) 54,485,782 55,630,790
Depreciation and amortization (13,166,343) (998,501) (4,558,426) (4,112,874)
--------------- -------------- --------------- ----------------
Consolidated income (loss) from operations 47,836,836 (3,989,985) 49,927,356 51,517,916
Interest and other expense, net (25,214,694) (2,129,264) (22,043,319) (14,007,664)
--------------- -------------- --------------- ----------------
Consolidated income (loss) before
income taxes $ 22,622,142 $ (6,119,249) $ 27,884,037 $ 37,510,252
=============== ============== =============== ================
Year Ended March 31,
2005 2004 2003
--------------- -------------- ---------------
Total Assets:
Total for reportable segments $268,742,537 $250,755,604 $126,194,673
Assets not allocated to segments:
Cash and cash equivalents 25,529,299 28,468,747 34,276,049
Restricted cash - 27,065,000 -
Receivables 10,133,799 9,497,966 11,518,223
Recoverable income taxes - 5,351,480 -
Deferred income taxes 1,013,182 2,796,015 848,932
Prepaid expenses and other assets 585,409 868,401 798,527
Property and equipment, net 11,394,329 10,669,788 8,481,846
Goodwill 269,061,875 269,061,875 16,770,574
Debt issue costs, net 8,968,851 10,001,172 4,142,416
Identifiable intangibles, net 31,320,000 31,320,000 -
Other assets 490,001 408,742 2,454,123
--------------- -------------- --------------
Consolidated total $627,239,282 $646,264,790 $205,485,363
=============== ============== ==============
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 a non-GAAP financial
measure, EBITDA, is useful in measuring its liquidity and provides
additional information for determining its ability to meet debt service
requirements. The Senior Subordinated Notes and Senior Credit Facility also
utilize EBITDA, as defined in those agreements, for certain financial
covenants. EBITDA does not represent and should not be considered as an
alternative to net cash flows from operating activities as determined by
GAAP, 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.
63
The following presentation reconciles EBITDA with net cash flows from
operating activities as presented in the Consolidated Statements of Cash
Flows:
Successor Predecessor
------------------------------- -------------------------------
Year Ended 1 Month Ended 11 Months Ended Year Ended
March 31, March 31, February 29, March 31,
2005 2004 2004 2003
-------------- ---------------- ---------------- --------------
EBITDA $ 61,003,179 $ (2,991,484) $ 54,485,782 $ 55,630,790
Adjustments to reconcile EBITDA to net
cash flows from operating activities:
Interest income 638,935 97,587 307,680 360,448
Provision for losses on receivables 315,958 218,205 66,393 451,578
Cash paid for interest (25,796,444) (4,173,547) (11,955,528) (13,549,099)
Cash paid for income taxes (4,946,343) (9,991) (6,466,526) (14,533,352)
Loss on disposal of assets 68,065 13,582 408,095 35,428
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals (1) (14,601,160) (918,756) 10,066,803 8,935,820
-------------- ---------------- ---------------- --------------
Net Cash Flows from Operating Activities $ 16,682,190 $ (7,764,404) $ 46,912,699 $ 37,331,613
============== ================ ================ ==============
Net Cash Flows from Investing Activities $ (747,555) $(29,656,297) $ (6,451,658) $ (5,327,072)
============== ================ ================ ==============
Net Cash Flows from Financing Activities $(17,986,473) $ (8,965,404) $ (204,137) $ (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.
The Company's revenues are attributed to countries based on the location of
the customer. Substantially all revenues generated are attributable to customers
located within the United States.
P. RELATED PARTY TRANSACTIONS
In fiscal 2001, the Company entered into several agreements (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 NBC's then-majority owner. TheCampusHub.com, Inc.
was created to provide college bookstores with a way to sell in-store inventory
and virtual brand name merchandise over the Internet utilizing technology
originally developed by the Company. The management services agreement
reimbursed the Company 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 year ended
March 31, 2003, revenues attributable to the management services agreement
totaled $0.1 million and $0.3 million, respectively, and reimbursable direct
costs incurred on behalf of TheCampusHub.com, Inc. totaled $0.1 million and $0.6
million, respectively. Such agreements terminated effective July 1, 2003.
On July 1, 2003, the Company 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 the Company'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 NBC's then-majority owner, 650,000 shares
were owned by an unrelated third party, and 99 shares were owned by three of the
Company's employees. This business combination was accounted for by the Company
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.
64
In accordance with the Company's debt covenants, in fiscal 2005, the Company
declared and paid $0.1 million in dividends to NBC for costs associated with the
March 4, 2004 Transaction. In fiscal 2004, the Company declared and paid $8.2
million in dividends to NBC for interest due and payable on the senior discount
debentures; declared and paid $32.8 million in dividends to NBC for the purchase
of treasury stock associated with the December 10, 2003 debt refinancing; and
declared and paid dividends to NBC totaling $184.3 million related to the March
4, 2004 Transaction.
Q. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
On February 7, 2005, the Chief Accountant of the U.S. Securities and
Exchange Commission ("SEC") released a letter expressing the SEC's views on
certain lease accounting matters. Upon reviewing the matters discussed and
clarified in this letter, the Company identified areas where its historical
accounting practices differed from GAAP. The Company has restated the historical
financial statements incorporated herein to correct these errors.
Specifically, the Company has reviewed its leasehold improvements to ensure
amortization is recorded over the initial non-cancelable lease term, unless
renewal is considered reasonably assured at the inception of the lease. The
cumulative effect of the resulting accounting corrections was a reduction to
retained earnings of $1.6 million in fiscal 2003 and incremental decreases to
retained earnings and net earnings of $4,038, $0.3 million, and $0.3 million for
the one month ending March 31, 2004, the eleven months ended February 29, 2004,
and the year ended March 31, 2003, respectively.
This accounting correction also affected the purchase price allocation for
the March 4, 2004 Transaction and an additional $1.9 million was recorded as
goodwill.
The Company has also restated its consolidated statement of cash flows
for the one month ended March 31, 2004 to reclassify the activity related to the
restricted cash held in escrow at March 31, 2004 to fund the April 3, 2004
redemption of untendered principal balances and related accrued interest and
call premiums thereon on the $110.0 million senior subordinated notes and NBC's
$76.0 million senior discount debentures from financing activities to investing
activities.
The restated amounts and line items impacted by these restatements are
provided below.
Consolidated Balance Sheet
---------------------------------------------
As Previously
Reported Adjustments As Restated
--------------- ------------- --------------
March 31, 2004
Property and equipment, $ 36,133,256 $ (3,405,625) $ 32,727,631
net of depreciation and amortization
Goodwill 268,646,931 1,947,204 270,594,135
Deferred income taxes - liability 61,849,744 (1,292,775) 60,556,969
Retained earnings 8,028,677 (165,646) 7,863,031
65
Consolidated Statements of Operations
------------------------------------------
As Previously
Reported Adjustments As Restated
------------- ------------- -------------
One Month Ended March 31, 2004
Depreciation expense $ 342,992 $ 6,509 $ 349,501
Income tax benefit (2,397,491) (2,471) (2,399,962)
Net loss (3,715,249) (4,038) (3,719,287)
Eleven Months Ended February 29, 2004
Depreciation expense $ 2,977,309 $ 418,797 $ 3,396,106
Income tax expense 11,108,144 (158,975) 10,949,169
Net income 17,194,690 (259,822) 16,934,868
Year Ended March 31, 2003
Depreciation expense $ 2,987,947 $ 480,874 $ 3,468,821
Income tax expense 14,984,792 (182,540) 14,802,252
Net income 23,006,334 (298,334) 22,708,000
Consolidated Statement of Cash Flows
---------------------------------------------
As Previously
Reported Adjustments As Restated
--------------- -------------- -------------
One Month Ended March 31, 2004
Net cash flows from investing activities $ (2,591,297) $ (27,065,000) $ (29,656,297)
Net cash flows from financing activities (36,030,404) 27,065,000 (8,965,404)
R. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Effective July 1, 2002, the Company's distance learning division was
separately incorporated under the laws of the State of Delaware as Specialty
Books, Inc., a wholly-owned subsidiary of the Company. Effective January 1,
2005, the Company's textbook division was separately incorporated under the laws
of the State of Delaware as NBC Textbooks LLC, a wholly-owned subsidiary of the
Company. In connection with their incorporation, Specialty Books, Inc. and NBC
Textbooks LLC have unconditionally guaranteed, on a joint and several basis,
full and prompt payment and performance of the Company's obligations,
liabilities, and indebtedness arising under, out of, or in connection with the
Senior Subordinated Notes. Specialty Books, Inc. and NBC Textbooks LLC are also
a party to the Guarantee and Collateral Agreement related to the Senior Credit
Facility. Condensed consolidating balance sheets, statements of operations, and
statements of cash flows are presented on the following pages which reflect
financial information for the parent company (Nebraska Book Company, Inc.),
subsidiary guarantors (Specialty Books, Inc. and NBC Textbooks LLC),
consolidating eliminations, and consolidated totals. Activity in the distance
learning division and textbook division prior to incorporation on July 1, 2002
and January 1, 2005, respectively, have been separately "carved out" and
presented in the subsidiary guarantor column. Beginning January 1, 2005, an
administrative fee is now assessed to the Company's operating divisions,
including Specialty Books, Inc. and NBC Textbooks LLC, for administrative costs
incurred on behalf of the operating divisions by the corporate administrative
divisions. There were no such fee assessments between April 1, 2002 and December
31, 2004. The following condensed consolidating financial information has been
restated to reflect the effects of the restatements described in Note Q.
66
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2005 (SUCCESSOR)
- ------------------------------------------------------------------------------------------------------
Nebraska
Book Subsidiary Consolidated
Company, Inc. Guarantors Eliminations Totals
-------------- -------------- ------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 28,762,182 $ 2,462,161 $ - $ 31,224,343
Receivables 65,549,416 14,990,509 (49,586,792) 30,953,133
Inventories 40,679,066 31,880,896 - 72,559,962
Deferred income taxes 1,013,182 4,523,000 - 5,536,182
Prepaid expenses and other assets 585,409 1,572 - 586,981
-------------- -------------- -------------- -------------
Total current assets 136,589,255 53,858,138 (49,586,792) 140,860,601
PROPERTY AND EQUIPMENT, net 32,822,702 4,689,685 - 37,512,387
GOODWILL 284,898,526 - - 284,898,526
IDENTIFIABLE INTANGIBLES, NET 49,905,694 102,744,967 - 152,650,661
OTHER ASSETS 74,928,225 21,077 (63,632,195) 11,317,107
-------------- -------------- -------------- -------------
$ 579,144,402 $ 161,313,867 $(113,218,987) $627,239,282
============== ============== ============== =============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 15,724,221 $ 49,586,792 $ (49,586,792) $ 15,724,221
Accrued employee compensation
and benefits 7,091,507 843,310 - 7,934,817
Accrued interest 628,906 - - 628,906
Accrued incentives 93,320 7,667,976 - 7,761,296
Accrued expenses 1,114,430 31,958 - 1,146,388
Income taxes payable 544,578 - - 544,578
Deferred revenue 1,042,660 - - 1,042,660
Current maturities of long-term debt 1,832,144 - - 1,832,144
Current maturities of capital
lease obligations 237,955 - - 237,955
-------------- -------------- -------------- -------------
Total current liabilities 28,309,721 58,130,036 (49,586,792) 36,852,965
LONG-TERM DEBT, net of
current maturities 351,802,856 - - 351,802,856
CAPITAL LEASE OBLIGATIONS,
net of current maturities 2,529,253 - - 2,529,253
OTHER LONG-TERM LIABILITIES 1,316,835 - - 1,316,835
DEFERRED INCOME TAXES 19,462,743 39,551,636 - 59,014,379
DUE TO PARENT 16,574,575 - - 16,574,575
COMMITMENTS
STOCKHOLDER'S EQUITY 159,148,419 63,632,195 (63,632,195) 159,148,419
-------------- -------------- -------------- -------------
$ 579,144,402 $ 161,313,867 $(113,218,987) $627,239,282
============== ============== ============== =============
67
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2004 (SUCCESSOR)
- ---------------------------------------------------------------------------------------------------------------
Nebraska
Book Subsidiary Consolidated
Company, Inc. Guarantors Eliminations Totals
-------------- --------------- --------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 30,860,387 $ 2,415,794 $ - $ 33,276,181
Restricted cash 27,065,000 - - 27,065,000
Receivables 83,709,670 14,308,616 (67,605,696) 30,412,590
Inventories 35,894,886 34,244,336 - 70,139,222
Recoverable income taxes 5,351,480 - - 5,351,480
Deferred income taxes 2,796,015 3,306,000 - 6,102,015
Prepaid expenses and other assets 868,401 4,766 - 873,167
------------- -------------- --------------- -------------
Total current assets 186,545,839 54,279,512 (67,605,696) 173,219,655
PROPERTY AND EQUIPMENT, net 29,668,052 3,059,579 - 32,727,631
GOODWILL 270,594,135 - - 270,594,135
IDENTIFIABLE INTANGIBLES, NET 49,329,213 108,176,419 - 157,505,632
OTHER ASSETS 60,562,398 21,077 (48,365,738) 12,217,737
------------- -------------- --------------- -------------
$596,699,637 $ 165,536,587 $ (115,971,434) $646,264,790
============= ============== =============== =============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 29,300,768 $ 67,605,696 $ (67,605,696) $ 29,300,768
Accrued employee compensation and benefits 8,026,056 1,092,674 - 9,118,730
Accrued interest 2,041,957 - - 2,041,957
Accrued incentives 115,779 6,866,525 - 6,982,304
Accrued expenses 1,175,346 36,102 - 1,211,448
Deferred revenue 898,658 - - 898,658
Current maturities of long-term debt 17,238,881 - - 17,238,881
Current maturities of capital
lease obligations 167,433 - - 167,433
------------- -------------- --------------- -------------
Total current liabilities 58,964,878 75,600,997 (67,605,696) 66,960,179
LONG-TERM DEBT, net of current maturities 353,634,999 - - 353,634,999
CAPITAL LEASE OBLIGATIONS,
net of current maturities 2,138,151 - - 2,138,151
OTHER LONG-TERM LIABILITIES 317,287 - - 317,287
DEFERRED INCOME TAXES 18,987,117 41,569,852 - 60,556,969
DUE TO PARENT 16,836,358 - - 16,836,358
COMMITMENTS
STOCKHOLDER'S EQUITY 145,820,847 48,365,738 (48,365,738) 145,820,847
------------- -------------- --------------- -------------
$596,699,637 $ 165,536,587 $ (115,971,434) $646,264,790
============= ============== =============== =============
68
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 2005 (SUCCESSOR)
- --------------------------------------------------------------------------------------------------
Nebraska
Book Subsidiary Consolidated
Company, Inc. Guarantors Eliminations Totals
------------- -------------- ------------- -------------
REVENUES, net of returns $273,459,283 $153,548,968 $(24,853,911) $402,154,340
COSTS OF SALES 171,662,429 95,786,052 (26,810,348) 240,638,133
------------- ------------- ------------- --------------
Gross profit 101,796,854 57,762,916 1,956,437 161,516,207
OPERATING EXPENSES (INCOME):
Selling, general and administrative 73,377,545 25,179,046 1,956,437 100,513,028
Depreciation 4,362,114 545,729 - 4,907,843
Amortization 2,827,048 5,431,452 - 8,258,500
Intercompany administrative fee (969,900) 969,900 - -
Equity in earnings of subsidiary (15,266,457) - 15,266,457 -
------------- ------------- ------------- --------------
64,330,350 32,126,127 17,222,894 113,679,371
------------- ------------- ------------- --------------
INCOME FROM OPERATIONS 37,466,504 25,636,789 (15,266,457) 47,836,836
------------- ------------- ------------- --------------
OTHER EXPENSES (INCOME):
Interest expense 25,853,629 - - 25,853,629
Interest income (638,935) - - (638,935)
------------- ------------- ------------- --------------
25,214,694 - - 25,214,694
------------- ------------- ------------- --------------
INCOME BEFORE INCOME TAXES 12,251,810 25,636,789 (15,266,457) 22,622,142
INCOME TAX EXPENSE (BENEFIT) (1,208,214) 10,370,332 - 9,162,118
------------- ------------- ------------- --------------
NET INCOME $ 13,460,024 $ 15,266,457 $(15,266,457) $ 13,460,024
============= ============= ============= ==============
69
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE ONE MONTH ENDED MARCH 31, 2004 (SUCCESSOR)
- -------------------------------------------------------------------------------------------------------
Nebraska
Book Subsidiary Consolidated
Company, Inc. Guarantors Eliminations Totals
-------------- ------------- ------------- -------------
REVENUES, net of returns $ 6,480,661 $ 7,437,323 $ (600,590) $ 13,317,394
COSTS OF SALES 3,749,278 4,812,278 (792,940) 7,768,616
------------- ------------ ------------- -------------
Gross profit 2,731,383 2,625,045 192,350 5,548,778
OPERATING EXPENSES (INCOME):
Selling, general and administrative 5,822,395 2,525,517 192,350 8,540,262
Depreciation 310,911 38,590 - 349,501
Amortization 196,419 452,581 - 649,000
Equity in earnings of subsidiary 242,170 - (242,170) -
------------- ------------ ------------- -------------
6,571,895 3,016,688 (49,820) 9,538,763
------------- ------------ ------------- -------------
LOSS FROM OPERATIONS (3,840,512) (391,643) 242,170 (3,989,985)
------------- ------------ ------------- -------------
OTHER EXPENSES (INCOME):
Interest expense 2,226,851 - - 2,226,851
Interest income (97,587) - - (97,587)
------------- ------------ ------------- -------------
2,129,264 - - 2,129,264
------------- ------------ ------------- -------------
LOSS BEFORE INCOME TAXES (5,969,776) (391,643) 242,170 (6,119,249)
INCOME TAX BENEFIT (2,250,489) (149,473) - (2,399,962)
------------- ------------ ------------- -------------
NET LOSS $(3,719,287) $ (242,170) $ 242,170 $ (3,719,287)
============= ============ ============= =============
70
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE ELEVEN MONTHS ENDED FEBRUARY 29, 2004 (PREDECESSOR)
- ---------------------------------------------------------------------------------------------------
Nebraska
Book Subsidiary Consolidated
Company, Inc. Guarantors Eliminations Totals
-------------- -------------- ------------- -------------
REVENUES, net of returns $245,003,238 $161,572,604 $(21,212,168) $385,363,674
COSTS OF SALES 154,151,862 100,350,899 (22,628,653) 231,874,108
------------- ------------- ------------- -------------
Gross profit 90,851,376 61,221,705 1,416,485 153,489,566
OPERATING EXPENSES (INCOME):
Selling, general and administrative 62,626,597 27,696,762 1,416,485 91,739,844
Depreciation 2,734,371 661,735 - 3,396,106
Amortization 1,162,320 - - 1,162,320
Stock-based compensation 7,263,940 - - 7,263,940
Equity in loss of subsidiary (19,614,545) - 19,614,545 -
------------- ------------- ------------- -------------
54,172,683 28,358,497 21,031,030 103,562,210
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS 36,678,693 32,863,208 (19,614,545) 49,927,356
------------- ------------- ------------- -------------
OTHER EXPENSES (INCOME):
Interest expense 22,408,295 - - 22,408,295
Interest income (307,680) - - (307,680)
Gain on derivative
financial instruments (57,296) - - (57,296)
------------- ------------- ------------- -------------
22,043,319 - - 22,043,319
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 14,635,374 32,863,208 (19,614,545) 27,884,037
INCOME TAX EXPENSE (BENEFIT) (2,299,494) 13,248,663 - 10,949,169
------------- ------------- ------------- -------------
NET INCOME $ 16,934,868 $ 19,614,545 $(19,614,545) $ 16,934,868
============= ============= ============= =============
71
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 2003 (PREDECESSOR)
- ----------------------------------------------------------------------------------------------------
Nebraska
Book Subsidiary Consolidated
Company, Inc. Guarantors Eliminations Totals
-------------- -------------- -------------- --------------
REVENUES, net of returns $222,880,887 $169,069,863 $ (21,440,901) $370,509,849
COSTS OF SALES 143,256,834 104,094,188 (22,862,821) 224,488,201
------------- ------------- -------------- --------------
Gross profit 79,624,053 64,975,675 1,421,920 146,021,648
OPERATING EXPENSES (INCOME):
Selling, general and administrative 59,752,530 29,216,408 1,421,920 90,390,858
Depreciation 2,898,134 570,687 - 3,468,821
Amortization 644,053 - - 644,053
Equity in earnings of subsidiary (21,006,879) - 21,006,879 -
------------- ------------- -------------- --------------
42,287,838 29,787,095 22,428,799 94,503,732
------------- ------------- -------------- --------------
INCOME FROM OPERATIONS 37,336,215 35,188,580 (21,006,879) 51,517,916
------------- ------------- -------------- --------------
OTHER EXPENSES (INCOME):
Interest expense 14,212,281 - - 14,212,281
Interest income (360,448) - - (360,448)
Loss on derivative
financial instruments 155,831 - - 155,831
------------- ------------- -------------- --------------
14,007,664 - - 14,007,664
------------- ------------- -------------- --------------
INCOME BEFORE INCOME TAXES 23,328,551 35,188,580 (21,006,879) 37,510,252
INCOME TAX EXPENSE 620,551 14,181,701 - 14,802,252
------------- ------------- -------------- --------------
NET INCOME $ 22,708,000 $ 21,006,879 $ (21,006,879) $ 22,708,000
============= ============= ============== ==============
72
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 2005 (SUCCESSOR)
- --------------------------------------------------------------------------------------------------------------
Nebraska
Book Subsidiary Consolidated
Company, Inc. Guarantors Eliminations Totals
------------- ------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES $14,436,611 $ 2,245,579 $ - $ 16,682,190
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (5,463,733) (2,201,942) - (7,665,675)
Acquisitions, net of cash acquired (20,160,079) - - (20,160,079)
Decrease in restricted cash 27,065,000 - - 27,065,000
Proceeds from sale of property and
equipment and other 10,469 2,730 - 13,199
------------ ------------ ------------ -------------
Net cash flows from investing activities 1,451,657 (2,199,212) - (747,555)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of financing costs (437,915) - - (437,915)
Principal payments on long-term debt (17,238,880) - - (17,238,880)
Principal payments on capital
lease obligations (182,094) - - (182,094)
Dividends paid to parent (132,466) - - (132,466)
Capital contributions 4,882 - - 4,882
------------ ------------ ------------ -------------
Net cash flows from financing activities (17,986,473) - - (17,986,473)
------------ ------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,098,205) 46,367 - (2,051,838)
CASH AND CASH EQUIVALENTS, Beginning of period 30,860,387 2,415,794 - 33,276,181
------------ ------------ ------------ -------------
CASH AND CASH EQUIVALENTS, End of period $28,762,182 $ 2,462,161 $ - $ 31,224,343
============ ============ ============ =============
73
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE ONE MONTH ENDED MARCH 31, 2004 (SUCCESSOR)
- -----------------------------------------------------------------------------------------------------------------
Nebraska
Book Subsidiary Consolidated
Company, Inc. Guarantors Eliminations Totals
------------- ------------- ------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES $ (7,969,959) $ 205,555 $ - $ (7,764,404)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (697,825) (22,019) - (719,844)
Acquisitions, net of cash acquired (1,848,798) - - (1,848,798)
Increase in restricted cash (27,065,000) - - (27,065,000)
Proceeds from sale of property and
equipment and other 2,095 - - 2,095
Software development costs (24,750) - - (24,750)
------------- ------------ ------------ -------------
Net cash flows from investing activities (29,634,278) (22,019) - (29,656,297)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 355,000,000 - - 355,000,000
Payment of financing costs (10,118,865) - - (10,118,865)
Principal payments on long-term debt (169,592,270) - - (169,592,270)
Principal payments on capital lease obligations (10,395) - - (10,395)
Dividends paid to parent (184,294,345) - - (184,294,345)
Capital contributions 50,471 - - 50,471
------------- ------------ ------------ -------------
Net cash flows from financing activities (8,965,404) - - (8,965,404)
------------- ------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (46,569,641) 183,536 - (46,386,105)
CASH AND CASH EQUIVALENTS, Beginning of period 77,430,028 2,232,258 - 79,662,286
------------- ------------ ------------ -------------
CASH AND CASH EQUIVALENTS, End of period $ 30,860,387 $ 2,415,794 $ - $ 33,276,181
============= ============ ============ =============
74
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE ELEVEN MONTHS ENDED FEBRUARY 29, 2004 (PREDECESSOR)
- ------------------------------------------------------------------------------------------------------------
Nebraska
Book Subsidiary Consolidated
Company, Inc. Guarantors Eliminations Totals
-------------- ------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES $46,679,034 $ 233,665 $ - $ 46,912,699
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,276,264) (688,398) - (3,964,662)
Acquisitions, net of cash acquired (2,355,486) - - (2,355,486)
Proceeds from sale of property and
equipment and other 8,297 1,379 - 9,676
Software development costs (141,186) - - (141,186)
------------ ------------ ----------- -------------
Net cash flows from investing activities (5,764,639) (687,019) - (6,451,658)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 75,000,000 - - 75,000,000
Payment of financing costs (3,830,335) - - (3,830,335)
Principal payments on long-term debt (30,470,840) - - (30,470,840)
Principal payments on capital lease obligations (122,287) - - (122,287)
Dividends paid to parent (41,004,504) - - (41,004,504)
Capital contributions 223,829 - - 223,829
------------ ------------ ----------- -------------
Net cash flows from financing activities (204,137) - - (204,137)
------------ ------------ ----------- -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 40,710,258 (453,354) - 40,256,904
CASH AND CASH EQUIVALENTS, Beginning of period 36,719,770 2,685,612 - 39,405,382
------------ ------------ ----------- -------------
CASH AND CASH EQUIVALENTS, End of period $77,430,028 $ 2,232,258 $ - $ 79,662,286
============ ============ =========== =============
75
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 2003 (PREDECESSOR)
- --------------------------------------------------------------------------------------------------------------
Nebraska
Book Subsidiary Consolidated
Company, Inc. Guarantors Eliminations Totals
-------------- ------------- -------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES $34,621,386 $ 2,710,227 $ - $ 37,331,613
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,895,691) (1,812,042) - (3,707,733)
Acquisitions, net of cash acquired (1,389,338) - - (1,389,338)
Proceeds from sale of property and
equipment and other 10,182 9,461 - 19,643
Software development costs (249,644) - - (249,644)
------------ ------------ ----------- --------------
Net cash flows from investing activities (3,524,491) (1,802,581) - (5,327,072)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of financing costs (32,446) - - (32,446)
Principal payments on long-term debt (4,476,155) - - (4,476,155)
Principal payments on capital lease obligations (114,524) - - (114,524)
Capital contributions 604,689 - - 604,689
------------ ------------ ----------- --------------
Net cash flows from financing activities (4,018,436) - - (4,018,436)
------------ ------------ ----------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 27,078,459 907,646 - 27,986,105
CASH AND CASH EQUIVALENTS, Beginning of year 9,641,311 1,777,966 - 11,419,277
------------ ------------ ----------- --------------
CASH AND CASH EQUIVALENTS, End of year $36,719,770 $ 2,685,612 $ - $ 39,405,382
============ ============ =========== ==============
76
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our management, with
the participation of our chief executive officer and chief financial officer
(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, 2005. This
evaluation, which included the effects of the restatements noted in Note Q to
the Consolidated Financial Statements for the fiscal year ended March 31, 2005,
was performed to determine if our disclosure controls and procedures were
effective, in that they are designed to ensure 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, including ensuring
that such information is accumulated and communicated to management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. Based on this evaluation, our
chief executive officer and chief financial officer concluded that, as of March
31, 2005, our disclosure controls and procedures were not effective, solely
because of the material weakness described below.
Subsequent to the issuance of our Form 10-K for the periods ended March 31,
2004, we determined that the Company's Consolidated Statement of Cash Flows for
the period ended March 31, 2004 should be restated to reclassify $27,065,000
from "net cash flows from financing activities" to "net cash flows from
investing activities," and accordingly, we restated our Consolidated Statement
of Cash Flows for the period ended March 31, 2004. This restatement was the
result of a material weakness in internal control over financial reporting as
the control over the proper classification in the Consolidated Statement of Cash
Flows of the cash transferred to restricted cash did not operate effectively.
(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, 2005 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. The Company's management is reviewing and evaluating
its internal control procedures and the design of those control procedures
relating to the preparation of the Consolidated Statement of Cash Flows. Once
this review and evaluation is complete, the Company intends to implement any
changes required to remediate any identified deficiencies.
77
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 51 Director
Mark L. Bono 45 Director
R. Sean Honey 34 Director
Mark W. Oppegard 55 Chief Executive Officer, President and Director
Barry S. Major 48 Chief Operating Officer and Director
Alan G. Siemek 44 Chief Financial Officer, Senior Vice President of
Finance and Administration, Treasurer, and
Assistant Secretary
William H. Allen 62 Senior Vice President of Textbook Division
Robert A. Rupe 57 Senior Vice President of Bookstore Division
Michael J. Kelly 47 Senior Vice President of Distance
Learning/Marketing Services and Other Complementary
Services
Larry R. Rempe 57 Vice President of Information Systems
John A. Callahan 56 Vice President of Contract Management
Kenneth F. Jirovsky 61 Vice President of Development
Cynthia L. Morris 48 Vice President of Administration and Secretary
The business experience, principal occupation and employment as well as the
periods of service of each of our directors and executive officers during the
last five years are set forth below.
MICHAEL F. CRONIN became a Director of ours and NBC upon the consummation of
the Weston Presidio Transaction in fiscal 2003. Mr. Cronin co-founded Weston
Presidio, a private equity firm, in 1991 and is a managing member of the general
partners of the Weston Funds. Mr. Cronin also serves as a Director of
Tekni-Plex, Inc. and Tweeter Home Entertainment, Inc. as well as a number of the
Weston Funds' portfolio companies.
MARK L. BONO became a Director of ours and NBC upon the consummation of the
Weston Presidio Transaction in fiscal 2003. Mr. Bono joined Weston Presidio in
1999 and is a member of the general partners of the Weston Funds. Prior to 1999,
Mr. Bono served in various positions at Tucker Anthony, an investment banking
firm, including Managing Director and Co-Head of Mergers and Acquisitions. Mr.
Bono also serves as a Director of Trimark Sportswear Group, Herald Media, and
Euro-Pro.
R. SEAN HONEY was named a Director of ours and NBC upon the consummation of
the March 4, 2004 Transaction. Mr. Honey joined Weston Presidio in 1999 and is a
member of the general partners of the Weston Funds. 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 Apple American Group
and Schurman Fine Papers.
MARK W. OPPEGARD has served in the college bookstore industry for 35 years
(all of which have been with us) and became our Chief Executive Officer and
President/Chief Executive Officer, Secretary and a Director of NBC on February
13, 1998. Additionally, Mr. Oppegard has served as our President since 1992 and
as our Director since 1995. Prior to 1998, Mr. Oppegard served as Vice
President, Secretary, Assistant Treasurer and a Director of NBC between 1995 and
1998. Prior to 1992, Mr. Oppegard served in a series of positions with us,
including Vice President of the Bookstore Division.
BARRY S. MAJOR was named our Chief Operating Officer in January, 1999, and
upon consummation of the March 4, 2004 Transaction, was also named our Director
and NBC's 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.
78
ALAN G. SIEMEK was named our Senior Vice President of Finance and
Administration in April, 2001. Mr. Siemek has also served as our Chief Financial
Officer, Treasurer and Assistant Secretary and Vice President and Treasurer of
NBC since July, 1999. Prior to joining us, Mr. Siemek served as Corporate
Controller at SITEL, starting in 1997. Between 1994 and 1997, Mr. Siemek served
in the positions of Director and Manager of SEC Reporting and Risk Management
for MFS Communications, a billion dollar telecommunications firm. Prior to
joining MFS Communications, Mr. Siemek spent eleven years in public accounting
with Coopers & Lybrand LLP in their Omaha and New York offices.
WILLIAM H. ALLEN has served in the college bookstore industry for 40 years
(of which 30 have been with us). Mr. Allen was named the Senior Vice President
of the Textbook Division in April, 2001. Between 1994 and 2001, Mr. Allen served
as our 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 the Bookstore Division in
April, 2001. Prior to joining us 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 35 years of retail experience,
including a variety of senior management positions at May Department Stores,
Marshall Field and Company, Phillips Van-Huesen and International Paper.
MICHAEL J. KELLY was named Senior Vice President of Distance
Learning/Marketing Services and Other Complementary Services in August, 2001,
having previously served as our Vice President of E-commerce since November,
1999. Prior to joining us, Mr. Kelly served in various executive management
positions at SITEL. Joining SITEL in 1995 as a Business Unit Vice President of
Administration and Finance, Mr. Kelly was named a Business Unit President in
1997, assumed the role of Chief Information Officer for the North America Region
in March, 1998, and was named Chief Technology Officer for Global Operations in
August, 1998. Between 1981 and 1995, Mr. Kelly served as Director of Information
Technology for Father Flanagan's Boys Home, a non-profit organization offering
services to troubled children.
LARRY R. REMPE has served in the college bookstore industry for 19 years
(all of which have been with us) and has been our 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 us until 1995.
JOHN A. CALLAHAN was named 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.
KENNETH F. JIROVSKY has served in the college bookstore industry for 44
years (all of which have been with us) and was named our Vice President of
Development in April, 2001. Between 1986 and 2001, Mr. Jirovsky served as our
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 our 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.
Effective April 1, 2005, Mr. Kelly assumed the role of Senior Vice President
of the Textbook Division upon the announcement of Mr. Allen's retirement. Mr.
Rempe assumed the role of Senior Vice President of Complementary Services
effective April 1, 2005.
79
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 has determined
that the audit committee does not have an "audit committee financial expert" as
that term is defined by the applicable rules and regulations of the Securities
and Exchange Commission. However, 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.
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 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.
80
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 2005 $ 293,778 $ 45,000 1,963 $ 10,526
2004 288,389 147,000 10,825 2,276
2003 276,923 280,000 2,675 2,573
Barry S. Major - Chief Operating Officer and
Director 2005 263,533 43,000 1,963 10,430
2004 257,383 140,000 9,330 1,791,595
2003 247,077 250,000 2,500 2,477
Alan G. Siemek - Chief Financial Officer,
Senior Vice President of Finance and Administration,
Treasurer, and Assistant Secretary 2005 194,155 30,000 1,885 10,370
2004 189,251 100,000 7,478 1,004,192
2003 181,885 160,000 1,375 2,417
Michael J. Kelly - Senior Vice President
of Distance Learning/Marketing Services and
Other Complementary Services 2005 187,461 23,000 1,600 10,430
2004 183,324 70,000 4,661 871,276
2003 169,731 130,000 1,375 2,477
Robert A. Rupe - Senior Vice President
of Bookstore Division 2005 158,619 40,000 1,700 10,766
2004 148,618 111,000 3,800 694,304
2003 142,750 146,500 1,250 2,813
(1) In connection with the March 4, 2004 Transaction, all existing options
at March 4, 2004, including those listed in this column for fiscal 2003,
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 in fiscal 2004 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.
81
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, 2005:
OPTIONS GRANTED DURING THE YEAR ENDED MARCH 31, 2005
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 2005 Per Share Date (1) Value (2)
- ----------------------------------------- ------------ ------------- ----------- ------------ ------------
Mark W. Oppegard - Chief Executive
Officer, President, and Director 1,963 15.6% $ 160.00 11/08/14 $ 35,570
Barry S. Major - Chief Operating
Officer and Director 1,963 15.6 160.00 11/08/14 35,570
Alan G. Siemek - Chief Financial
Officer, Senior Vice President of
Finance and Administration, Treasurer,
and Assisant Secretary 1,885 14.9 160.00 11/08/14 34,160
Michael J. Kelly - Senior Vice
President of Distance Learning/Marketing
Services and Other Complementary Services 1,600 12.7 160.00 11/08/14 28,992
Robert A. Rupe - Senior Vice
President of Bookstore Division 1,700 13.5 160.00 11/08/14 30,804
(1) Twenty-five percent of the options granted were exercisable immediately
upon granting on November 9, 2004, with the remaining options becoming
exercisable in 25% increments over the subsequent three years.
(2) Grant date present value was determined using a Black-Scholes option
pricing model, assuming a 3.05% risk-free interest rate, 1.0% expected
volatility, and an expected life of approximately 4.0 years.
82
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, 2005 as well as the value of unexercised options as of
March 31, 2005:
AGGREGATED OPTION EXERCISES DURING THE YEAR ENDED MARCH 31, 2005
AND OPTION VALUE AS OF MARCH 31, 2005
Number
of Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Options at Options at
March 31, 2005 March 31, 2005 (1)
---------------- ------------------
Shares
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- ------------------------------------------- ------------- ----------- ---------------- -------------
Mark W. Oppegard - Chief Executive
Officer, President, and Director - $ - 11,315 / 1,473 $741,568 / -
Barry S. Major - Chief Operating
Officer and Director - - 9,820 / 1,473 614,356 / -
Alan G. Siemek - Chief Financial
Officer, Senior Vice President of Finance
and Administration, Treasurer, and Assistant
Secretary - - 7,949 / 1,414 551,139 / -
Michael J. Kelly - Senior Vice
President of Distance Learning/Marketing
Services and Other Complementary Services - - 5,061 / 1,200 286,054 / -
Robert A. Rupe - Senior Vice President
of Bookstore Division - - 4,225 / 1,275 206,006 / -
(1) Represents the excess of the March 31, 2005 estimated fair market value
of NBC'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.
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 seven of our other
executive officers. As amended, such agreements (the "Employment Agreements")
with the aforementioned executive officers (each, an "Executive") provide for
(1) an annual base salary as determined by the Board of Directors after
considering the recommendation of the chief executive officer, (2) 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 (3) for customary fringe
benefits. The salaries of the executive officers listed above are as follows:
Mr. Oppegard, $295,000 per annum; Mr. Major, $266,000 per annum; Mr. Siemek,
$196,000 per annum; Mr. Kelly, $189,000 per annum; and Mr. Rupe, $170,000 per
annum. The Employment Agreements provide that their term will be automatically
extended from year to year, unless terminated upon specified notice by either
party.
The Employment Agreements also provide that each Executive will be granted a
number of options annually to acquire shares of NBC common stock, the size of
such grant to be 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 with us on such dates.
83
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 also in the event of death or
disability of the Executive during the term. The Employment Agreements also
contain customary confidentiality obligations and three-year non-competition
agreements for each Executive.
Finally, the Employment Agreements provide that, prior to the consummation by
NBC of an initial public offering of NBC common stock, the Executives will not
sell, transfer, pledge or otherwise dispose of any shares of NBC 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, Chief
Executive Officer, President, and Director, participated in the Board of
Directors' deliberations concerning executive officer compensation during the
last fiscal year.
84
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - All shares
of our common stock are owned by NBC; therefore, the following table sets forth
information on security ownership of NBC 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 of our directors and executive officers
treated as a group. The shares listed and percentages calculated thereon are
based upon NBC common stock outstanding as of June 29, 2005 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. As a result of the March 4, 2004 Transaction, shares of NBC common stock
issued and outstanding totaled 549,254 on June 29, 2005. 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 management. To the knowledge of NBC, each of such holders of shares
has sole voting and investment power as to the shares owned unless otherwise
noted. The address for each executive officer and director is 4700 South 19th
Street, Lincoln, Nebraska 68501 unless otherwise noted.
Amount and
Nature of
Beneficial Percent of
Title of Class/Name of Beneficial Owner Ownership (1) Class (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 15,315 2.7%
Barry S. Major 11,567 2.1%
Alan G. Siemek 7,949 1.4%
Michael J. Kelly 5,061 0.9%
Robert A. Rupe 4,225 0.8%
Ownership of Directors and All Executive
Officers as a Group 586,853 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 common stock. Such shares include NBC Holdings Corp. shares
underlying nonqualified stock options exercisable within sixty days, as
follows: Mr. Oppegard - 11,315 shares; Mr. Major - 9,820 shares; Mr.
Siemek - 7,949 shares; Mr. Kelly - 5,061 shares; Mr. Rupe - 4,225
shares; and 46,670 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
liability company of which Mr. Cronin is a managing member and Messrs.
Bono and Honey are members. 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.
85
(3) The percentages are calculated based upon 549,254 shares of NBC common
stock outstanding as of June 29, 2005 and shares underlying nonqualified
stock options exercisable within sixty days as detailed in footnote (1).
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS - Through
NBC's parent, NBC Holdings Corp., NBC has 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, 2005
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 62,389 $ 100.58 18,917
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
INDEBTEDNESS OF MANAGEMENT - As of March 31, 2005, NBC reported notes
receivable from stockholders and associated interest receivable of approximately
$0.1 million and $1,201, respectively. The remaining balances originated
pursuant to the terms of an employment agreement with our Chief Operating
Officer, Barry S. Major. In January, 1999, NBC issued 4,765 shares of its 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, 2005 was approximately $96,000. This
note was amended and restated in July, 2002 and matures on January 19, 2009.
86
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following table sets forth the aggregate fees billed to us during fiscal
years 2005 and 2004 by Deloitte & Touche LLP:
Year Ended March 31,
2005 2004
------------ ------------
Audit Fees $ 128,904 $ 98,410
Audit-Related Fees 69,813 155,262
Tax Fees 311,791 99,063
Other Fees - -
------------ ------------
Total $ 510,508 $ 352,735
============ ============
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, tax audits, and planning for
incorporation of NBC Textbooks LLC.
The audit committee pre-approves all audit and non-audit services performed
by our independent registered public accounting firm.
87
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, & REPORTS ON FORM 8-K.
(A) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
(1) Consolidated Financial Statements of Nebraska Book Company, Inc.
Index to Consolidated Financial Statements.
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets as of March 31, 2005 and March 31, 2004
(as restated).
Consolidated Statements of Operations for the Year Ended March 31,
2005 (Successor), the One Month Ended March 31, 2004 (Successor)
(as restated), the Eleven Months Ended February 29, 2004
(Predecessor) (as restated), and the Year Ended March 31, 2003
(Predecessor) (as restated).
Consolidated Statements of Stockholder's Equity (Deficit) for the
Year Ended March 31, 2005 (Successor), the One Month Ended March
31, 2004 (Successor) (as restated), the Eleven Months Ended
February 29, 2004 (Predecessor) (as restated), and the Year Ended
March 31, 2003 (Predecessor) (as restated).
Consolidated Statements of Cash Flows for the Year Ended March 31,
2005 (Successor), the One Month Ended March 31, 2004 (Successor)
(as restated), the Eleven Months Ended February 29, 2004
(Predecessor) (as restated), and the Year Ended March 31, 2003
(Predecessor) (as restated).
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules.
Report of Independent Registered Public Accounting Firm on
Schedule.
Schedule II - Valuation and Qualifying Accounts.
(3) Exhibits.
2.1 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 Nebraska Book Company, Inc. Form 8-K, as
amended, dated June 4, 1999, is incorporated herein by reference.
2.2 Agreement of Sale, dated as of September 30, 1999 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 Nebraska Book Company, Inc. Form 8-K, as amended, dated
November 12, 1999, is incorporated herein by reference.
2.3 Agreement of Sale, as amended, dated as of May 11, 2001 between Nebraska
Book Company, Inc. and University Co-operative Society, filed as Exhibit
2.1 to Nebraska Book Company, Inc. Form 8-K dated May 11, 2001, is
incorporated herein by reference.
2.4 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 Nebraska Book Company, Inc. Form 10-Q for
the quarter ended June 30, 2003, is incorporated herein by reference.
3.1 Certificate of Incorporation, as amended, of Nebraska Book Company,
Inc., filed as Exhibit 3.1 to Nebraska Book Company, Inc. Registration
Statement on Form S-4, as amended (File No. 333-48221), is incorporated
herein by reference.
88
3.2 First Restated By-laws of Nebraska Book Company, Inc., filed as Exhibit
3.2 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended
September 30, 2003, is incorporated herein by reference.
4.1 Indenture, dated as of February 13, 1998 by and between Nebraska Book
Company, Inc. and United States Trust Company of New York, as Trustee,
filed as Exhibit 4.1 to Nebraska Book Company, Inc. Registration
Statement on Form S-4, as amended (File No. 333-48221), is incorporated
herein by reference.
4.2 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.
4.3 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 4.3 to Nebraska Book
Company, Inc. Registration Statement on Form S-4 (File No. 333-114891),
is incorporated herein by reference.
4.4 Supplemental Indenture, dated as of December 31, 2004, by and among NBC
Textbooks LLC, Nebraska Book Company, Inc., each other then existing
Subsidiary Guarantor under the Indenture, and the Trustee, filed as
Exhibit 10.1 to Nebraska Book Company. Inc. Current Report on Form 8-K
dated and filed on January 6, 2005, is incorporated herein by reference.
4.5 Form of Initial Note of Nebraska Book Company, Inc. (included in Exhibit
4.1 as Exhibit A), filed as Exhibit 4.3 to Nebraska Book Company, Inc.
Registration Statement on Form S-4, as amended (File No. 333-48221), is
incorporated herein by reference.
4.6 Form of Exchange Note of Nebraska Book Company, Inc. (included in
Exhibit 4.1 as Exhibit B), filed as Exhibit 4.4 to Nebraska Book
Company, Inc. Registration Statement on Form S-4, as amended (File No.
333-48221), is incorporated herein by reference.
4.7 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 4.6 to Nebraska Book Company, Inc.
Registration Statement on Form S-4 (File No. 333-114891), is
incorporated herein by reference.
4.8 Form of 8 5/8% Senior Subordinated Note Due 2012 (included in Exhibit
4.6), filed as Exhibit 4.7 to Nebraska Book Company, Inc. Registration
Statement on Form S-4 (File No. 333-114891), is incorporated herein by
reference.
4.9 Form of Exchange Note of Nebraska Book Company, Inc. 8 5/8% Senior
Subordinated Note Due 2012, filed as Exhibit 4.8 to Nebraska Book
Company, Inc. Form 10-K for the year ended March 31, 2004, is
incorporated herein by reference.
10.1 Credit Agreement dated as of February 13, 1998 by and among NBC
Acquisition Corp., Nebraska Book Company, Inc., the Chase Manhattan Bank
and certain other financial institutions, filed as Exhibit 10.1 to
Nebraska Book Company, Inc. Registration Statement on Form S-4, as
amended (File No. 333-48221), is incorporated herein by reference.
10.2 First Amendment, dated as of May 21, 1999, to the Credit Agreement,
dated as of February 13, 1998 by and among NBC Acquisition Corp.,
Nebraska Book Company, Inc., the Chase Manhattan Bank, and certain other
financial institutions, filed as Exhibit 10.1 to Nebraska Book Company,
Inc. 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 Nebraska
Book Company, Inc. Form 10-Q for the quarter ended June 30, 2000, is
incorporated herein by reference.
89
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 Nebraska Book Company,
Inc. Form 10-Q for the quarter ended December 31, 2001, is incorporated
herein by reference.
10.5 Fourth Amendment and Waiver, dated as of June 4, 2002, to and under the
Credit Agreement, dated as of February 13, 1998, by and among NBC
Acquisition Corp., Nebraska Book Company, Inc., JPMorgan Chase Bank, and
certain other financial institutions, filed as Exhibit 10.1 to Nebraska
Book Company, Inc. Form 10-Q for the quarter ended June 30, 2002, is
incorporated herein by reference.
10.6 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 Nebraska
Book Company, Inc. 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 Nebraska Book Company, Inc. 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 Nebraska Book
Company, Inc. Registration Statement on Form S-4 (File No. 333-114891),
is incorporated herein by reference.
10.9 Second Amendment, dated as of October 20, 2004, to the 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 10.1 to Nebraska Book Company,
Inc. Current Report on Form 8-K dated and filed on October 26, 2004, is
incorporated herein by reference.
10.10 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.
10.11 Assumption Agreement, dated as of December 31, 2004, made by NBC
Textbooks LLC, in favor of JPMorgan Chase Bank, N.A., as administrative
agent for the banks and other financial institutions parties to the
Credit Agreement, filed as Exhibit 10.2 to Nebraska Book Company, Inc.
Current Report on Form 8-K dated and filed on January 6, 2005, is
incorporated herein by reference.
10.12 Guarantee and Collateral Agreement, dated as of February 13, 1998 made
by NBC Acquisition Corp. and Nebraska Book Company, Inc. in favor of the
Chase Manhattan Bank, as administrative agent, filed as Exhibit 10.2 to
Nebraska Book Company, Inc. Registration Statement on Form S-4, as
amended (File No. 333-48221), is incorporated herein by reference.
10.13 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 Nebraska Book
Company, Inc. Registration Statement on Form S-4 (File No. 333-114891),
is incorporated herein by reference.
10.14 Purchase Agreement dated February 10, 1998 by and between Nebraska Book
Company, Inc. and Chase Securities Inc., filed as Exhibit 10.3 to
Nebraska Book Company, Inc. Registration Statement on Form S-4, as
amended (File No. 333-48221), is incorporated herein by reference.
90
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 10.13 to
Nebraska Book Company, Inc. Registration Statement on Form S-4 (File No.
333-114891), is incorporated herein by reference.
10.16 Exchange and Registration Rights Agreement, dated as of February 13,
1998 by and among Nebraska Book Company, Inc. and Chase Securities Inc.,
filed as Exhibit 4.2 to Nebraska Book Company, Inc. Registration
Statement on Form S-4, as amended (File No. 333-48221), is incorporated
herein by reference.
10.17 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 10.15
to Nebraska Book Company, Inc. Registration Statement on Form S-4 (File
No. 333-114891), is incorporated herein by reference.
10.18* 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 10.4 to Nebraska Book
Company, Inc. Registration Statement on Form S-4, as amended (File No.
333-48221), is incorporated herein by reference.
10.19* 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 Nebraska Book Company, Inc. Form 10-Q
for the quarter ended December 31, 1998, is incorporated herein by
reference.
10.20* 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 10.9 to Nebraska Book Company,
Inc. Form 10-K for the year ended March 31, 2002, is incorporated herein
by reference.
10.21* 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 Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30,
2002, is incorporated herein by reference.
10.22* 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 Nebraska Book Company, Inc. Form 10-Q for the
quarter ended September 30, 1999, is incorporated herein by reference.
10.23* 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 10.11 to Nebraska Book Company, Inc. Form 10-K
for the year ended March 31, 2002, is incorporated herein by reference.
10.24* 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
Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30,
2002, is incorporated herein by reference.
10.25* 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 Nebraska Book Company, Inc. Form
10-Q for the quarter ended December 31, 1999, is incorporated herein by
reference.
10.26* 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 Nebraska Book Company, Inc. Form 10-Q for the quarter ended June
30, 2002, is incorporated herein by reference.
10.27* 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 Nebraska Book Company,
Inc. Form 10-Q for the quarter ended June 30, 2001, is incorporated
herein by reference.
91
10.28* 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
Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30,
2002, is incorporated herein by reference.
10.29* 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, filed as
Exhibit 10.27 to Nebraska Book Company, Inc. Form 10-K for the year
ended March 31, 2004, is incorporated herein by reference.
10.30* NBC Acquisition Corp. 1995 Stock Incentive Plan adopted August 31, 1995,
filed as Exhibit 10.5 to Nebraska Book Company, Inc. Registration
Statement on Form S-4, as amended (File No. 333-48221), is incorporated
herein by reference.
10.31* NBC Acquisition Corp. 1998 Performance Stock Option Plan adopted June
30, 1998, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q
for the quarter ended June 30, 1998, is incorporated herein by
reference.
10.32* First Amendment, dated as of June 12, 2002, to the NBC Acquisition Corp.
1998 Performance Stock Option Plan adopted June 30, 1998, filed as
Exhibit 10.2 to Nebraska Book Company, Inc. Form 10-Q for the quarter
ended June 30, 2002, is incorporated herein by reference.
10.33* NBC Acquisition Corp. 1998 Stock Option Plan adopted June 30, 1998,
filed as Exhibit 10.2 to Nebraska Book Company, Inc. Form 10-Q for the
quarter ended June 30, 1998, is incorporated herein by reference.
10.34* First Amendment, dated as of June 12, 2002, to the NBC Acquisition Corp.
1998 Stock Option Plan adopted June 30, 1998, filed as Exhibit 10.3 to
Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30,
2002, is incorporated herein by reference.
10.35* NBC Acquisition Corp. 2003 Performance Stock Option Plan adopted July 1,
2003, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for
the quarter ended September 30, 2003, is incorporated herein by
reference.
10.36* NBC Acquisition Corp. 2003 Stock Option Plan adopted July 1, 2003, filed
as Exhibit 10.2 to Nebraska Book Company, Inc. Form 10-Q for the quarter
ended September 30, 2003, is incorporated herein by reference.
10.37* NBC Holdings Corp. 2004 Stock Option Plan adopted March 4, 2004, filed
as Exhibit 10.34 to Nebraska Book Company, Inc. Registration Statement
on Form S-4 (File No. 333-114891), is incorporated herein by reference.
10.38* NBC Acquisition Corp. Senior Management Bonus Plan adopted June 30,
1998, filed as Exhibit 10.3 to Nebraska Book Company, Inc. Form 10-Q for
the quarter ended June 30, 1998, is incorporated herein by reference.
10.39* 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 10.6 to Nebraska Book
Company, Inc. Registration Statement on Form S-4, as amended (File No.
333-48221), is incorporated herein by reference.
10.40* 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
Nebraska Book Company, Inc. Form 10-Q for the quarter ended December 31,
2002, is incorporated herein by reference.
10.41* NBC Acquisition Corp. 401(k) Savings Plan, filed as Exhibit 10.7 to
Nebraska Book Company, Inc. Registration Statement on Form S-4, as
amended (File No. 333-48221), is incorporated herein by reference.
92
10.42 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 10.8.1 to
Nebraska Book Company, Inc. Registration Statement on Form S-4, as
amended (File No. 333-48221), is incorporated herein by reference.
10.43 First Amendment dated January 23, 1998 to the Collegiate Stores
Corporation Agreement, filed as Exhibit 10.8.2 to Nebraska Book Company,
Inc. Registration Statement on Form S-4, as amended (File No.
333-48221), is incorporated herein by reference.
10.44 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 10.9 to Nebraska Book
Company, Inc. Registration Statement on Form S-4, as amended (File No.
333-48221), is incorporated herein by reference.
10.45 Lease Agreement entered into as of September 1, 1986, by and among Odell
Associates Limited Partnership and Nebraska Book Company, Inc., filed as
Exhibit 10.10 to Nebraska Book Company, Inc. Registration Statement on
Form S-4, as amended (File No. 333-48221), is incorporated herein by
reference.
10.46 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 10.11 to Nebraska Book
Company, Inc. Registration Statement on Form S-4, as amended (File No.
333-48221), is incorporated herein by reference.
10.47 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 Nebraska Book Company, Inc. Registration Statement on
Form S-4, as amended (File No. 333-48221), is incorporated herein by
reference.
10.48 Lease Agreement made and entered into October 12, 1988 by and among
Hogarth Management and Nebraska Book Company, Inc., filed as Exhibit
10.13 to Nebraska Book Company, Inc. Registration Statement on Form S-4,
as amended (File No. 333-48221), is incorporated herein by reference.
10.49 Industrial Real Estate Lease dated June 22, 1987 by and among Cyprus
Land Company and Nebraska Book Company, Inc., filed as Exhibit 10.14 to
Nebraska Book Company, Inc. Registration Statement on Form S-4, as
amended (File No. 333-48221), is incorporated herein by reference.
12.1 Statements regarding computation of ratios, filed as Exhibit 12.1 to
Nebraska Book Company, Inc. Registration Statement on Form S-4 (File No.
333-114891), 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 Nebraska Book
Company, Inc., filed as Exhibit 14.1 to Nebraska Book Company, Inc. Form
10-K for the year ended March 31, 2004, is incorporated herein by
reference.
21.1 Subsidiaries of Nebraska Book Company, Inc.
31.1 Certification of 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 Chief Financial 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 Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
93
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
* - 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.
94
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NEBRASKA BOOK COMPANY, INC.
/s/ Mark W. Oppegard
-----------------------------------------
Mark W. Oppegard
Chief Executive Officer, President, and
Director
June 29, 2005
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
Chief Executive Officer, President Director
and Director June 29, 2005
June 29, 2005
/s/ Alan G. Siemek /s/ Mark L. Bono
- ---------------------------------------- ---------------------------------
Alan G. Siemek Mark L. Bono
Chief Financial Officer, Senior Vice Director
President of Finance June 29, 2005
and Administration, Treasurer, and
Assistant Secretary
June 29, 2005
/s/ Barry S. Major /s/ R. Sean Honey
- ---------------------------------------- -----------------------------
Barry S. Major R. Sean Honey
Director Director
June 29, 2005 June 29, 2005
95
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, 2005 has been,
or will be, sent to security holders.
96
FINANCIAL STATEMENT SCHEDULES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Nebraska Book Company, Inc.
Lincoln, Nebraska
We have audited the consolidated financial statements of Nebraska Book
Company, Inc. (a wholly-owned subsidiary of NBC Acquisition Corp.) and
subsidiaries as of March 31, 2005 and March 31, 2004 and for the year ended
March 31, 2005 (Successor), the one month ended March 31, 2004 (Successor), the
eleven months ended February 29, 2004 (Predecessor) and the year ended March 31,
2003 (Predecessor), and have issued our report thereon dated June 28, 2005; such
report, which includes an explanatory paragraph related to certain restatements,
is included elsewhere in this Form 10-K. Our audits also included the financial
statement schedule listed in Item 15(a)(2). This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Deloitte & Touche LLP
Lincoln, Nebraska
June 28, 2005
97
NEBRASKA BOOK COMPANY, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- -----------------------------------------------------------------------------------------------------------------------
Charged to
Charged to Other
Beginning of Costs and Accounts Net End of Year
Year Balance Expenses (Revenue) Charge-Offs Balance
-------------- ------------- ------------ ------------ -------------
YEAR ENDED MARCH 31, 2005 (SUCCESSOR)
Allowance for doubtful accounts $ 510,839 $ 315,958 $ - $ (315,958) $ 510,839
Allowance for sales returns 5,269,177 - 28,285,698 (26,923,913) 6,630,962
ONE MONTH ENDED MARCH 31, 2004 (SUCCESSOR)
Allowance for doubtful accounts 510,839 218,205 - (218,205) 510,839
Allowance for sales returns 9,079,248 - 1,053,143 (4,863,214) 5,269,177
ELEVEN MONTHS ENDED FEBRUARY 29, 2004 (PREDECESSOR)
Allowance for doubtful accounts 442,942 66,393 - 1,504 510,839
Allowance for sales returns 3,227,700 - 28,489,548 (22,638,000) 9,079,248
YEAR ENDED MARCH 31, 2003 (PREDECESSOR)
Allowance for doubtful accounts 1,429,803 451,578 - (1,438,439) 442,942
Allowance for sales returns 5,700,480 - 28,241,313 (30,714,093) 3,227,700
98
EXHIBIT INDEX
2.1 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 Nebraska Book Company, Inc. Form 8-K, as
amended, dated June 4, 1999, is incorporated herein by reference.
2.2 Agreement of Sale, dated as of September 30, 1999 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 Nebraska Book Company, Inc. Form 8-K, as amended, dated
November 12, 1999, is incorporated herein by reference.
2.3 Agreement of Sale, as amended, dated as of May 11, 2001 between Nebraska
Book Company, Inc. and University Co-operative Society, filed as Exhibit
2.1 to Nebraska Book Company, Inc. Form 8-K dated May 11, 2001, is
incorporated herein by reference.
2.4 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 Nebraska Book Company, Inc. Form 10-Q for
the quarter ended June 30, 2003, is incorporated herein by reference.
3.1 Certificate of Incorporation, as amended, of Nebraska Book Company,
Inc., filed as Exhibit 3.1 to Nebraska Book Company, Inc. Registration
Statement on Form S-4, as amended (File No. 333-48221), is incorporated
herein by reference.
3.2 First Restated By-laws of Nebraska Book Company, Inc., filed as Exhibit
3.2 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended
September 30, 2003, is incorporated herein by reference.
4.1 Indenture, dated as of February 13, 1998 by and between Nebraska Book
Company, Inc. and United States Trust Company of New York, as Trustee,
filed as Exhibit 4.1 to Nebraska Book Company, Inc. Registration
Statement on Form S-4, as amended (File No. 333-48221), is incorporated
herein by reference.
4.2 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.
4.3 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 4.3 to Nebraska Book
Company, Inc. Registration Statement on Form S-4 (File No. 333-114891),
is incorporated herein by reference.
4.4 Supplemental Indenture, dated as of December 31, 2004, by and among NBC
Textbooks LLC, Nebraska Book Company, Inc., each other then existing
Subsidiary Guarantor under the Indenture, and the Trustee, filed as
Exhibit 10.1 to Nebraska Book Company. Inc. Current Report on Form 8-K
dated and filed on January 6, 2005, is incorporated herein by reference.
4.5 Form of Initial Note of Nebraska Book Company, Inc. (included in Exhibit
4.1 as Exhibit A), filed as Exhibit 4.3 to Nebraska Book Company, Inc.
Registration Statement on Form S-4, as amended (File No. 333-48221), is
incorporated herein by reference.
4.6 Form of Exchange Note of Nebraska Book Company, Inc. (included in
Exhibit 4.1 as Exhibit B), filed as Exhibit 4.4 to Nebraska Book
Company, Inc. Registration Statement on Form S-4, as amended (File No.
333-48221), is incorporated herein by reference.
4.7 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 4.6 to Nebraska Book Company, Inc.
Registration Statement on Form S-4 (File No. 333-114891), is
incorporated herein by reference.
99
4.8 Form of 8 5/8% Senior Subordinated Note Due 2012 (included in Exhibit
4.6), filed as Exhibit 4.7 to Nebraska Book Company, Inc. Registration
Statement on Form S-4 (File No. 333-114891), is incorporated herein by
reference.
4.9 Form of Exchange Note of Nebraska Book Company, Inc. 8 5/8% Senior
Subordinated Note Due 2012, filed as Exhibit 4.8 to Nebraska Book
Company, Inc. Form 10-K for the year ended March 31, 2004, is
incorporated herein by reference.
10.1 Credit Agreement dated as of February 13, 1998 by and among NBC
Acquisition Corp., Nebraska Book Company, Inc., the Chase Manhattan Bank
and certain other financial institutions, filed as Exhibit 10.1 to
Nebraska Book Company, Inc. Registration Statement on Form S-4, as
amended (File No. 333-48221), is incorporated herein by reference.
10.2 First Amendment, dated as of May 21, 1999, to the Credit Agreement,
dated as of February 13, 1998 by and among NBC Acquisition Corp.,
Nebraska Book Company, Inc., the Chase Manhattan Bank, and certain other
financial institutions, filed as Exhibit 10.1 to Nebraska Book Company,
Inc. 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 Nebraska
Book Company, Inc. Form 10-Q for the quarter ended June 30, 2000, is
incorporated herein by reference.
10.4 Third Amendment, dated as of December 20, 2001, to the Credit Agreement,
dated as of February 13, 1998, 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 Nebraska Book Company,
Inc. Form 10-Q for the quarter ended December 31, 2001, is incorporated
herein by reference.
10.5 Fourth Amendment and Waiver, dated as of June 4, 2002, to and under the
Credit Agreement, dated as of February 13, 1998, by and among NBC
Acquisition Corp., Nebraska Book Company, Inc., JPMorgan Chase Bank, and
certain other financial institutions, filed as Exhibit 10.1 to Nebraska
Book Company, Inc. Form 10-Q for the quarter ended June 30, 2002, is
incorporated herein by reference.
10.6 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 Nebraska
Book Company, Inc. 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 Nebraska Book Company, Inc. 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 Nebraska Book
Company, Inc. Registration Statement on Form S-4 (File No. 333-114891),
is incorporated herein by reference.
100
10.9 Second Amendment, dated as of October 20, 2004, to the 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 10.1 to Nebraska Book Company,
Inc. Current Report on Form 8-K dated and filed on October 26, 2004, is
incorporated herein by reference.
10.10 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.
10.11 Assumption Agreement, dated as of December 31, 2004, made by NBC
Textbooks LLC, in favor of JPMorgan Chase Bank, N.A., as administrative
agent for the banks and other financial institutions parties to the
Credit Agreement, filed as Exhibit 10.2 to Nebraska Book Company, Inc.
Current Report on Form 8-K dated and filed on January 6, 2005, is
incorporated herein by reference.
10.12 Guarantee and Collateral Agreement, dated as of February 13, 1998 made
by NBC Acquisition Corp. and Nebraska Book Company, Inc. in favor of the
Chase Manhattan Bank, as administrative agent, filed as Exhibit 10.2 to
Nebraska Book Company, Inc. Registration Statement on Form S-4, as
amended (File No. 333-48221), is incorporated herein by reference.
10.13 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 Nebraska Book
Company, Inc. Registration Statement on Form S-4 (File No. 333-114891),
is incorporated herein by reference.
10.14 Purchase Agreement dated February 10, 1998 by and between Nebraska Book
Company, Inc. and Chase Securities Inc., filed as Exhibit 10.3 to
Nebraska Book Company, Inc. Registration Statement on Form S-4, as
amended (File No. 333-48221), is incorporated herein by reference.
10.15 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 10.13 to
Nebraska Book Company, Inc. Registration Statement on Form S-4 (File No.
333-114891), is incorporated herein by reference.
10.16 Exchange and Registration Rights Agreement, dated as of February 13,
1998 by and among Nebraska Book Company, Inc. and Chase Securities Inc.,
filed as Exhibit 4.2 to Nebraska Book Company, Inc. Registration
Statement on Form S-4, as amended (File No. 333-48221), is incorporated
herein by reference.
10.17 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 10.15
to Nebraska Book Company, Inc. Registration Statement on Form S-4 (File
No. 333-114891), is incorporated herein by reference.
10.18* 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 10.4 to Nebraska Book
Company, Inc. Registration Statement on Form S-4, as amended (File No.
333-48221), is incorporated herein by reference.
10.19* 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 Nebraska Book Company, Inc. Form 10-Q
for the quarter ended December 31, 1998, is incorporated herein by
reference.
101
10.20* 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 10.9 to Nebraska Book Company,
Inc. Form 10-K for the year ended March 31, 2002, is incorporated herein
by reference.
10.21* 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 Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30,
2002, is incorporated herein by reference.
10.22* 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 Nebraska Book Company, Inc. Form 10-Q for the
quarter ended September 30, 1999, is incorporated herein by reference.
10.23* 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 10.11 to Nebraska Book Company, Inc. Form 10-K
for the year ended March 31, 2002, is incorporated herein by reference.
10.24* 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
Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30,
2002, is incorporated herein by reference.
10.25* 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 Nebraska Book Company, Inc. Form
10-Q for the quarter ended December 31, 1999, is incorporated herein by
reference.
10.26* 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 Nebraska Book Company, Inc. Form 10-Q for the quarter ended June
30, 2002, is incorporated herein by reference.
10.27* 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 Nebraska Book Company,
Inc. Form 10-Q for the quarter ended June 30, 2001, is incorporated
herein by reference.
10.28* 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
Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30,
2002, is incorporated herein by reference.
10.29* 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, filed as
Exhibit 10.27 to Nebraska Book Company, Inc. Form 10-K for the year
ended March 31, 2004, is incorporated herein by reference.
10.30* NBC Acquisition Corp. 1995 Stock Incentive Plan adopted August 31, 1995,
filed as Exhibit 10.5 to Nebraska Book Company, Inc. Registration
Statement on Form S-4, as amended (File No. 333-48221), is incorporated
herein by reference.
10.31* NBC Acquisition Corp. 1998 Performance Stock Option Plan adopted June
30, 1998, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q
for the quarter ended June 30, 1998, is incorporated herein by
reference.
10.32* First Amendment, dated as of June 12, 2002, to the NBC Acquisition Corp.
1998 Performance Stock Option Plan adopted June 30, 1998, filed as
Exhibit 10.2 to Nebraska Book Company, Inc. Form 10-Q for the quarter
ended June 30, 2002, is incorporated herein by reference.
10.33* NBC Acquisition Corp. 1998 Stock Option Plan adopted June 30, 1998,
filed as Exhibit 10.2 to Nebraska Book Company, Inc. Form 10-Q for the
quarter ended June 30, 1998, is incorporated herein by reference.
102
10.34* First Amendment, dated as of June 12, 2002, to the NBC Acquisition Corp.
1998 Stock Option Plan adopted June 30, 1998, filed as Exhibit 10.3 to
Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30,
2002, is incorporated herein by reference.
10.35* NBC Acquisition Corp. 2003 Performance Stock Option Plan adopted July 1,
2003, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for
the quarter ended September 30, 2003, is incorporated herein by
reference.
10.36* NBC Acquisition Corp. 2003 Stock Option Plan adopted July 1, 2003, filed
as Exhibit 10.2 to Nebraska Book Company, Inc. Form 10-Q for the quarter
ended September 30, 2003, is incorporated herein by reference.
10.37* NBC Holdings Corp. 2004 Stock Option Plan adopted March 4, 2004, filed
as Exhibit 10.34 to Nebraska Book Company, Inc. Registration Statement
on Form S-4 (File No. 333-114891), is incorporated herein by reference.
10.38* NBC Acquisition Corp. Senior Management Bonus Plan adopted June 30,
1998, filed as Exhibit 10.3 to Nebraska Book Company, Inc. Form 10-Q for
the quarter ended June 30, 1998, is incorporated herein by reference.
10.39* 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 10.6 to Nebraska Book
Company, Inc. Registration Statement on Form S-4, as amended (File No.
333-48221), is incorporated herein by reference.
10.40* 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
Nebraska Book Company, Inc. Form 10-Q for the quarter ended December 31,
2002, is incorporated herein by reference.
10.41* NBC Acquisition Corp. 401(k) Savings Plan, filed as Exhibit 10.7 to
Nebraska Book Company, Inc. Registration Statement on Form S-4, as
amended (File No. 333-48221), is incorporated herein by reference.
10.42 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 10.8.1 to
Nebraska Book Company, Inc. Registration Statement on Form S-4, as
amended (File No. 333-48221), is incorporated herein by reference.
10.43 First Amendment dated January 23, 1998 to the Collegiate Stores
Corporation Agreement, filed as Exhibit 10.8.2 to Nebraska Book Company,
Inc. Registration Statement on Form S-4, as amended (File No.
333-48221), is incorporated herein by reference.
10.44 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 10.9 to Nebraska Book
Company, Inc. Registration Statement on Form S-4, as amended (File No.
333-48221), is incorporated herein by reference.
10.45 Lease Agreement entered into as of September 1, 1986, by and among Odell
Associates Limited Partnership and Nebraska Book Company, Inc., filed as
Exhibit 10.10 to Nebraska Book Company, Inc. Registration Statement on
Form S-4, as amended (File No. 333-48221), is incorporated herein by
reference.
10.46 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 10.11 to Nebraska Book
Company, Inc. Registration Statement on Form S-4, as amended (File No.
333-48221), is incorporated herein by reference.
103
10.47 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 Nebraska Book Company, Inc. Registration Statement on
Form S-4, as amended (File No. 333-48221), is incorporated herein by
reference.
10.48 Lease Agreement made and entered into October 12, 1988 by and among
Hogarth Management and Nebraska Book Company, Inc., filed as Exhibit
10.13 to Nebraska Book Company, Inc. Registration Statement on Form S-4,
as amended (File No. 333-48221), is incorporated herein by reference.
10.49 Industrial Real Estate Lease dated June 22, 1987 by and among Cyprus
Land Company and Nebraska Book Company, Inc., filed as Exhibit 10.14 to
Nebraska Book Company, Inc. Registration Statement on Form S-4, as
amended (File No. 333-48221), is incorporated herein by reference.
12.1 Statements regarding computation of ratios, filed as Exhibit 12.1 to
Nebraska Book Company, Inc. Registration Statement on Form S-4 (File No.
333-114891), 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 Nebraska Book
Company, Inc., filed as Exhibit 14.1 to Nebraska Book Company, Inc. Form
10-K for the year ended March 31, 2004, is incorporated herein by
reference.
21.1 Subsidiaries of Nebraska Book Company, Inc.
31.1 Certification of 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 Chief Financial 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 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 Chief Financial 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.
104