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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________ to_____________.
COMMISSION FILE NUMBER 333-48225
NBC ACQUISITION CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0793347
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4700 SOUTH 19TH STREET
LINCOLN, NE 68501-0529
(Address of Principal executive offices)
(402) 421-7300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] YES [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (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]
THERE ARE 11,436 SHARES OF THE REGISTRANT'S VOTING STOCK VALUED AT $0.6
MILLION HELD BY NON-AFFILIATES OF THE REGISTRANT.
THERE WERE 1,260,750 SHARES OF CLASS A COMMON STOCK OUTSTANDING AS OF JUNE
20, 2000.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Total Number of Pages: 66
Exhibit Index: PAGE 66
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TABLE OF CONTENTS
PART I:
Item 1 Business..........................................................3
Item 2 Properties.......................................................13
Item 3 Legal Proceedings................................................15
Item 4 Submission of Matters to a Vote of Security Holders..............15
PART II:
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters..............................................16
Item 6 Selected Financial Data..........................................16
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................18
Item 7A Quantitative and Qualitative Disclosures about Market Risk.......25
Item 8 Financial Statements and Supplementary Data......................26
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................46
PART III:
Item 10 Directors and Executive Officers of the Registrant................47
Item 11 Executive Compensation............................................49
Item 12 Security Ownership of Certain Beneficial Owners and Management....51
Item 13 Certain Relationships and Related Transactions....................52
PART IV:
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..54
Signatures....................................................................59
Supplemental Information to be Furnished......................................59
Financial Statement Schedule I - Condensed Financial Information
(Parent Company Only).........................................................60
Financial Statement Schedule II - Valuation and Qualifying Accounts...........65
Exhibit Index.................................................................66
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PART I.
ITEM 1. BUSINESS.
RECAPITALIZATION AND PUBLIC REGISTRATION
Effective September 1, 1995, Nebraska Book Company, Inc. ("NBC") was
acquired in a leveraged buyout by NBC Acquisition Corp. (the "Company"), a
corporation owned by investment partnerships affiliated with Olympus Advisory
Partners, Inc. and certain other investors (the "1995 Transaction"). The 1995
Transaction was accounted for as a purchase business combination.
Pursuant to a merger agreement dated January 6, 1998 among the Company;
certain shareholders of the Company, including members of senior management; and
NBC Merger Corp., a newly created, indirect wholly-owned subsidiary of HWH
Capital Partners, L.P. ("HWH"), NBC Merger Corp. merged with and into NBC
Acquisition Corp. (the "Merger") with the Company as the surviving corporation.
As a result of the Merger, which occurred on February 13, 1998, certain
stockholders of the Company received a total of approximately $165.9 million. In
addition, upon the consummation of the Merger, NBC repaid approximately $82.0
million of outstanding indebtedness. As a result of the early extinguishment of
debt in fiscal 1998, the Company recognized a $4.0 million extraordinary loss,
net of taxes.
Concurrently with the consummation of the Merger, NBC entered into a senior
secured credit agreement (the "Credit Agreement") with The Chase Manhattan Bank
("Chase"), as administrative agent, and other lenders providing for the
following facilities (the "Senior Credit Facility"): (i) a $50.0 million
revolving credit facility maturing on March 31, 2004 which was undrawn at
closing (the "Revolving Credit Facility"); (ii) a $27.5 million tranche A term
loan, maturing on March 31, 2004 (the "Tranche A Term Loan"); and (iii) a $32.5
million tranche B term loan, maturing on March 31, 2006 (the "Tranche B Term
Loan" and, together with the Tranche A Term Loan, the "Term Loans"). In
addition, NBC also raised approximately $103.6 million from the issuance of
senior subordinated notes (the "Senior Subordinated Notes") and the Company
raised a total of $91.6 million through: (i) the sale of approximately $45.6
million of NBC Acquisition Corp. Class A Common Stock to HWH (the "Stock Sale");
(ii) the reinvestment of approximately $4.4 million in NBC Acquisition Corp.
Class A Common Stock by the Company's senior management (the "Reinvestment");
and (iii) net proceeds of approximately $41.6 million from the issuance of
senior discount debentures (the "Senior Discount Debentures").
The Merger, the repayment of substantially all of NBC's outstanding
indebtedness, the Stock Sale, the Reinvestment, the issuance by NBC of the
Senior Subordinated Notes, the issuance by the Company of the Senior Discount
Debentures, NBC's borrowings under the Senior Credit Facility and the
application of all proceeds thereof are collectively referred to as the
"Recapitalization."
During fiscal 1999, the Company and NBC filed Registration Statements on
Form S-4 with the Securities and Exchange Commission for purposes of registering
debt securities to be issued in exchange for the Company's Senior Discount
Debentures and NBC's Senior Subordinated Notes. The Securities and Exchange
Commission declared such Registration Statements effective on July 14, 1998. All
notes were tendered in the offer to exchange which was completed on August 13,
1998.
The Company does not conduct significant activities apart from its
investment in NBC. Operational matters discussed in this report, including the
acquisition of retail bookstores and other related businesses, refer to
operations of NBC. This report refers to "the Company" and "NBC" interchangeably
when discussing such operational matters.
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GENERAL
The Company is one of the largest wholesale distributors of used college
textbooks in North America, offering over 100,000 textbook titles and selling
more than 7.5 million books annually, primarily to campuses located in the
United States. In addition, as of June 20, 2000, the Company owns or manages 100
bookstores on or adjacent to college campuses through which it sells a variety
of new and used textbooks and general merchandise. The Company is also a leading
provider of distance education materials to students in nontraditional courses,
which include correspondence and corporate education courses. Furthermore, the
Company provides the college bookstore industry with a variety of services
including in-store promotions, buying programs, marketing services and
proprietary information systems. With origins dating to 1915, the Company has
built a consistent reputation for excellence in order fulfillment, shipping
performance and customer service.
The Company entered the wholesale used textbook market following World War
II, when the supply of new textbooks could not meet the demand created by the
return of ex-GI students. In 1964, the Company became a national, rather than
regional, wholesaler of used textbooks as a result of its purchase of The
College Book Company of California. During the 1970's the Company continued its
focus on the wholesale business. However, realizing the synergies that exist
between wholesale operations and college bookstore operations, in the 1980's it
expanded its efforts in the college bookstore market with a new strategy. Under
this new strategy the Company operates bookstores on or near larger campuses,
typically where the institution-owned college bookstore is contract-managed by a
competitor or where the Company does not have a significant wholesale presence.
Today, the Company services the college bookstore industry through its
wholesale, college bookstore and complementary services operations.
WHOLESALE. The Company is one of the largest wholesale distributors of used
college textbooks in North America. Its wholesale operations consist primarily
of selling used textbooks to college bookstores, buying them back from students
or college bookstores at the end of each school semester and then reselling them
to college bookstores. The Company purchases used textbooks from and resells
them to college bookstores at many of the nation's largest college campuses,
including: University of Texas, University of Southern California, Indiana
University, University of Arizona, Brigham Young University, University of
Washington and University of Minnesota. Historically, because the demand for
used textbooks has consistently outpaced supply, the Company's wholesale sales
have been determined primarily by the amount of used textbooks that it could
purchase. The Company's strong relationships with the management of
independently-owned college bookstores nationwide have provided important access
to valuable market information regarding the campus-by-campus supply and demand
of textbooks, as well as an ability to procure large quantities of a wide
variety of textbooks. The Company provides an internally-developed BUYER'S GUIDE
to its wholesale customers, which lists over 41,000 textbook titles with such
details as author, new copy retail price and the Company's repurchase price.
COLLEGE BOOKSTORES. College bookstores are the primary outlets for sales of
new and used textbooks to students. As of June 20, 2000, the Company operated
100 college bookstores on or adjacent to college campuses of which 14 are
operated on physical premises which are owned by and leased from the educational
institution (i.e., "contract-managed"). Its college bookstores are located at
some of the nation's largest college campuses including: University of Nebraska,
University of Michigan, University of Maryland, Arizona State University,
Pennsylvania State University, University of Kansas, Michigan State University,
University of California - Berkeley, Texas A&M University, University of
Tennessee and University of Texas. In addition to generating profits, the
Company's college bookstore operations provide an exclusive source of used
textbooks for sale across the Company's wholesale distribution network.
COMPLEMENTARY SERVICES. In fiscal 1998, the Company completed two
acquisitions representing new initiatives for it in the college bookstore
industry. In January 1998, the Company acquired Connect 2 One (formerly
Collegiate Stores Corporation), a centralized buying service for over 430
college bookstores across the United States. Through the enhanced purchasing
power of such a large group of bookstores, participating bookstores are able to
purchase certain general merchandise at lower prices than those that would be
paid by the stores individually. Bookstores participating in Connect 2 One's
("C2O") programs also provide the Company with another potential source of used
textbooks. With its acquisition of Specialty Books, Inc. ("Specialty Books") in
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May 1997, the Company entered the distance education market, which consists of
providing education materials to students in nontraditional college and other
courses (such as correspondence courses, continuing and corporate education
courses and courses offered through electronic media such as the Internet).
Other services offered to college bookstores include the sale of computer
hardware and software, such as the Company's turnkey bookstore management
software, and related maintenance contracts. During fiscal 2000, the Company
also began licensing certain software to college bookstores related to
E-commerce (see further discussion below under Business Strategy). These
services generate revenue and assist the Company in enhancing and developing
customer relationships.
INDUSTRY SEGMENT FINANCIAL INFORMATION
Revenue, operating profit or loss and identifiable assets attributable to
each of the Company's industry segments are disclosed in the notes to the
financial statements presented in Item 8 of the Company's Form 10-K.
BUSINESS STRATEGY
The Company's objective is to strengthen its position as a leading provider
of products and services to the college bookstore market, thereby increasing
revenue and cash flow. In order to accomplish its goal, the Company intends to
pursue the following strategies:
ENHANCE GROWTH IN WHOLESALE OPERATIONS. The Company expects the stable
growth of its wholesale operations to continue, primarily as a result of an
expected increase in college enrollments and increased utilization of used
textbooks, as well as through the expansion of its own college bookstore
network.
CAPITALIZE ON COLLEGE BOOKSTORE OPPORTUNITIES. The Company intends to
increase revenues for its college bookstore operations by acquiring and opening
bookstores at selected college campuses and offering additional specialty
products and services at its existing bookstores. The Company also believes
there are opportunities to improve cash flow at its college bookstores by
reducing certain selling, general and administrative expenses and by realizing
economies of scale through increased purchasing power for general merchandise as
a result of its ownership of C2O.
CAPITALIZE ON E-COMMERCE OPPORTUNITIES. The Company expects to enhance its
own bookstores' E-commerce capabilities through software products that the
Company has been developing. In addition, the Company also expects that it will
benefit from the marketing of these products to other bookstores through several
agreements related to these software products that it has entered into with
another entity.
During fiscal 2000, the Company began developing and marketing WebPRISM, an
innovative software solution that allows bookstores to launch their own
E-commerce site and effectively compete against online-only textbook sellers.
This software solution enables bookstores to offer textbooks and traditional
store merchandise on their websites. Additionally, the Company was developing
CampusHub, E-commerce technology that will enable bookstores to offer
non-traditional goods and services from brand name consumer companies on their
websites.
Subsequent to March 31, 2000, NBC entered into several agreements related to
these software products with a newly created entity, TheCampusHub.com, Inc.,
which is partially owned by the Company's majority owner. In connection with
these agreements, NBC has licensed these products to TheCampusHub.com, Inc. who
will assume the on-going marketing, operating and further development costs for
these products. The three-year license agreement requires the payment of
$500,000 per year from TheCampusHub.com, Inc. to NBC and also gives
TheCampusHub.com, Inc. the option to purchase the software products from NBC at
any time during the term of the agreement. The annual license payment is payable
even if the purchase option is exercised before the end of the three-year term.
NBC will also provide certain management services to TheCampusHub.com, Inc. for
three years in return for approximately $500,000 per year plus reimbursement of
certain other direct costs. In connection with these agreements, NBC also
acquired the option to purchase 25% of the initial common shares outstanding of
TheCampusHub.com, Inc.
5
The Company expects that it will benefit from such arrangements as it is
able to obtain advanced E-commerce technology for its own bookstores without
encumbering its core business with the capital investments and operating costs
necessary to complete the development and marketing of these products. In
addition, the Company expects that the license and management fees will provide
an additional source of cash flow for the Company. Lastly, the Company believes
that it will share, by virtue of its equity option in TheCampusHub.com, Inc., in
future economic value, if any, created by the on-going efforts related to the
software products.
PURSUE ADDITIONAL GROWTH OPPORTUNITIES. The Company intends to aggressively
pursue selected growth opportunities in several related markets, including:
o BUYING SERVICES. The Company believes that its ownership of C2O will
enhance the relationship with the Company's customers by leveraging its
capabilities as being a full-service provider within the college
bookstore industry. This will give the Company access to all of C2O's
marketing services and vendor programs.
o DISTANCE EDUCATION. The distance education market continues to grow due
to the increased popularity of correspondence courses, continuing and
corporate education courses and courses offered through electronic media
such as the Internet. Through Specialty Books, the Company believes that
it is well positioned to take advantage of this growth trend.
INDUSTRY OVERVIEW
Based on recent industry trade data, the college bookstore industry remains
strong, with approximately 5,000 college stores generating annual sales of
approximately $8.9 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 this amount. The Company
expects this market will continue to grow as a result of anticipated increases
in enrollment at U.S. colleges attributable to the children of the baby boom
generation entering the college population.
WHOLESALE TEXTBOOK MARKET. The Company believes that used textbooks will
continue to be attractive to both students and college bookstores. Used
textbooks provide students with a lower-cost alternative to new textbooks and
bookstores typically achieve higher margins through the sale of used rather than
new textbooks.
The pricing pattern of textbook publishing accounts for a large part of the
growth of the used book market. Because of copyright restrictions, each new
textbook is produced by only one publisher, which is free to set the new copy
retail price and discount terms to bookstores. Publishers generally offer new
textbooks at prices which 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
6
order an ample supply of used books because: (i) used book demand from students
is typically strong and consistent; (ii) many operators only have access to a
limited supply from wholesalers and believe that not having used book
alternatives could create considerable frustration among students and with the
college administration; (iii) bookstore operators earn higher margins on used
books than on new books; and (iv) both new and used books are sold with return
privileges, eliminating any overstock risk (excluding freight charges) to the
college bookstore.
New textbook ordering usually begins in June, at which time the store
operator augments its expected used book supply by ordering new books. By this
time, publishers typically will have just implemented their annual price
increases. These regular price increases, which historically have run 3.0% to
5.0%, allow the Company and its competitors to buy used textbooks based on old
list prices (in May) and to almost simultaneously sell them based on new higher
prices, thereby creating an immediate margin increase.
While price is an important factor in the store operator's purchasing
decision, available supply, as well as service, usually determine with which
used textbook wholesaler a college bookstore will develop a strong relationship.
Used textbook wholesalers that are able to significantly service a college
bookstore account typically receive preferential treatment from store operators,
both in selling and in buying used textbooks. Pure exclusive supply arrangements
in the Company's market are rare. However, in the past two to three years, the
Company introduced its exclusive supply program to the industry. This program
has grown from approximately 75 participating bookstores at the end of fiscal
1999 to approximately 200 participating bookstores at the end of fiscal 2000.
Since the Company is usually able to sell the vast majority of the used
textbooks it is able to purchase, its ability to obtain sufficient supply is the
critical factor for the Company's success.
COLLEGE BOOKSTORE MARKET. College stores generally fall into three
categories: (i) INSTITUTIONAL -- stores that are primarily owned and operated by
institutions of higher learning (represents approximately 60.0% of the market);
(ii) CONTRACT-MANAGED -- stores owned by institutions of higher learning and
managed by outside, private companies, typically found on-campus (represents
approximately 25.0% of the market); and (iii) INDEPENDENT STORES -- privately
owned and operated stores, generally located off campus (represents
approximately 15.0% of the market). In general, the "captive" portion of the
college bookstore market includes those contract-managed stores that sell their
used textbooks to affiliated companies, and institutional and independent stores
to the extent that such used textbooks are repurchased from students and are
retained by the bookstore for resale without involving a wholesaler.
The Company believes that sales at its college bookstores will continue to
grow as a result of increased enrollment at colleges and due to the increasing
number of products and services offered in these bookstores, including
E-commerce capabilities provided through the WebPRISM and CampusHub software
products described earlier. In addition, it believes that as a result of the
development and implementation of management information systems to improve
productivity and customer service, as well as to more easily and efficiently
track and manage inventory, the profitability of its college bookstores will
increase.
PRODUCTS AND SERVICES
WHOLESALE. The Company's wholesale operations are engaged in the
procurement and redistribution of textbooks on college campuses primarily across
the United States.
The Company also publishes the BUYER'S GUIDE, which lists over 41,000
textbooks according to author, title, new copy retail price and the Company's
repurchase price. The BUYER'S GUIDE is an important part of the Company's
inventory control and book procurement system. The Company updates and reprints
the BUYER'S GUIDE ten times each year and makes it available in both print and
various electronic formats, including on all of the Company's proprietary
information systems. A staff of dedicated professionals gathers information from
all over the country in order to make the BUYER'S GUIDE into what the Company
believes to be the most comprehensive and up-to-date pricing and buying aid for
college bookstores. The Company also maintains a database of over 169,000 titles
in order to better serve its customers.
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COLLEGE BOOKSTORES. As of June 20, 2000, the Company operated 100 college
bookstores on or adjacent to college campuses of which 14 are contract-managed
by the Company. These bookstores sell a wide variety of used and new textbooks,
general books and assorted general merchandise, including apparel, sundries and
gift items. Over the past three years, revenues of the Company's bookstores from
activities other than used and new textbook sales have been between 25.8% and
31.5% of total revenues. The Company has been, and intends to continue,
selectively expanding its product offerings at its bookstores in order to
increase sales and profitability. The Company also intends to install WebPRISM
and CampusHub in all of its own bookstores, thereby allowing its bookstores to
further expand product offerings and compete with online-only textbook sellers.
The college bookstore operations also provide consulting services to other
college bookstores. Using their industry experience, the Company's specialists
work with college bookstore managers to provide them with systems and support
services. The Company offers assistance in areas such as store planning, systems
and merchandise layouts.
COMPLEMENTARY SERVICES. As a result of the Company's acquisition of C2O in
January 1998, it is able to offer a variety of products and services to C2O's
participating college bookstores. C2O offers apparel and general merchandise
through discount programs, develops and executes marketing programs and hosts
trade shows at which vendor's showcase their products. As a centralized buying
service for over 430 participating college bookstores including the Company's
own bookstores, C2O has evolved into a buying group with substantial purchasing
power.
C2O offers a plastic bag program to college bookstores. This plastic bag
program provides bookstores the opportunity to purchase customized bags at a
substantial discount while the Company generates a profit due to receipt of
revenue from advertising inserts which are placed inside the bags. Other C2O
marketing services include a freight savings program, a check authorization
program, and retail display allowances for magazine displays.
C2O also provides an opportunity for interaction and exchange among buyers
and between buyers and vendors to the college bookstore market through an annual
trade show, which is held in February/March. Vendors pay C2O for the opportunity
to attend these trade shows.
Additionally, a staff of experienced C2O professionals consult with the
management of bookstores both by telephone and in person. Services offered
include strategic planning, store review, merchandise planning and help with
other operational aspects of the business. While consulting has historically
represented a relatively small component of C2O's business, it is nonetheless
strategically important to the ongoing success of this aspect of the Company's
business.
With its acquisition of Specialty Books in May 1997, the Company entered the
market for distance education products and services. Currently, the Company
provides students at over 60 colleges with textbooks and materials for use in
distance education courses, and is a leading provider of textbooks to
nontraditional programs and students such as correspondence or corporate
education students. The Company believes the fragmented distance education
market represents an opportunity for the Company to leverage its fulfillment and
distribution expertise in a rapidly growing sector. Beyond textbooks, the
Company offers services and specialty course materials to distance education
students including videotape duplication and shipping, shipping of specialty,
nontextbook course materials and a sales and ordering function. Students can
order distance education materials from the Company over the Internet. The
Company believes it can continue to significantly increase the service
operations revenues from distance education products over the next several
years.
Other services offered to college bookstores include services related to the
Company's turnkey bookstore management software and the sale of other software
and hardware, and related maintenance contracts. These services generate revenue
and assist the Company in gaining access to new sources of used textbooks. The
Company has an installed base of over 300 college bookstore locations for its
textbook management control systems, and it has installed its proprietary total
store management system at over 300 college bookstore locations. In total,
including the Company's own bookstores, over 600 college bookstore locations
utilize the Company's software products.
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WHOLESALE PROCUREMENT AND DISTRIBUTION
Historically, because the demand for used textbooks has consistently
exceeded supply, the Company's sales have been primarily determined by the
amount of used textbooks that it can purchase. The Company believes that, on
average, it is able to fulfill approximately 20% of its demand. As a result, the
Company's success has depended primarily on its inventory procurement, and the
Company continues to focus its efforts on obtaining inventory. In order to
ensure its ability to both obtain and redistribute inventory, the Company's
wholesale strategy has emphasized establishing and maintaining strong customer
and supplier relationships with college bookstores (primarily, independent and
institutional college bookstores) through its employee account representatives.
These 40 account representatives (as of March 31, 2000) are responsible for
procuring used textbooks from students, marketing the Company's services on
campus, purchasing overstock textbooks from bookstores and securing leads for
sale of the Company's systems products. The Company has been able to maintain a
competitive edge by providing superior service, made possible primarily through
the development and maintenance of ready access to inventory, information and
supply. Other components of the wholesale strategy and its implementation
include: (i) selectively paying a marginal premium relative to competitors to
entice students to sell back more books to the Company; (ii) gaining access to
competitive campuses (where the campus bookstore is contract-managed by a
competitor) by opening off-campus, Company-owned college bookstores; (iii) using
technology to gain efficiencies and to improve customer service; (iv)
maintaining a knowledgeable and experienced sales force that is customer-service
oriented; and (v) providing working capital flexibility for bookstores making
substantial purchases.
The two major used textbook purchasing seasons are at the end of each
academic semester, May/June and December/January. Although the Company makes
book purchases during other periods, the inventory purchased in May, before
publishers announce their price increases in June and July, allows the Company
to purchase inventory based on the lower retail prices of the previous year. The
combination of this purchasing cycle and the fact that the Company is able to
sell its inventory in relation to retail prices for the following year permits
the Company to realize additional gross profit. The Company advances cash to its
representatives during these two periods, and the representatives in turn buy
books directly from students, generally through the on-campus bookstore.
After the Company purchases the books, the Company arranges for shipment to
one of its two warehouses (Nebraska and California) via common carrier. At the
warehouse, the Company refurbishes damaged books and categorizes and shelves all
other books in a timely manner, and enters them into the Company's on-line
inventory system. These two locations function as one facility allowing
customers to access inventory at both locations.
Customers place orders by phone, mail, fax or other electronic method. Upon
receiving an order, the Company removes the books from available inventory and
holds them for future shipping. Customers may return books within 60 days after
the start of classes if a written request is enclosed. Returns currently average
approximately 20.3% of sales and generally are attributable to course
cancellations or overstocking. The majority of returns are textbooks that the
Company is able to resell for the next semester.
COLLEGE BOOKSTORE OPERATIONS
An important aspect of the Company's business strategy is a program designed
to reach new customers through the opening or acquisition of bookstores adjacent
to college campuses. In addition to generating sales of new and used textbooks
and general merchandise, these outlets enhance the Company's wholesale
operations by increasing the inventory of used books purchased from the campus.
A desirable campus for a Company-operated college bookstore is one on which
the Company does not currently buy or sell used textbooks either because a
competitor of the Company contract-manages the college's bookstore or the
college bookstore does not have a strong relationship with the Company. The
Company generally will not open a location on a campus where it already has a
strong relationship with the college bookstore because some college bookstores
may view having a competing location as a conflict of interest.
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The Company tailors each of its own bookstores to fit the needs and
lifestyles of the campus on which it is located. Individual bookstore managers
are given significant planning and managing responsibilities, including, hiring
employees, controlling cash and inventory, and purchasing and merchandising
product. The Company has staff specialists to assist individual bookstore
managers in such areas as store planning, merchandise layout and inventory
control.
As of June 20, 2000 the Company operated 100 college bookstores nationwide,
having expanded from 35 bookstores in 1995. During fiscal 2000 the Company
purchased/established 35 new bookstores located in Arizona, California, Florida,
Michigan, New Mexico, Ohio, Tennessee, and Texas, adding estimated combined
annual revenues in excess of $45.7 million. The fiscal 2000 acquisitions
included Triro, Inc., a chain of 17 college bookstores located in Arizona, New
Mexico, and Texas, and Ned's Bookstores, a chain of 11 college bookstores
located in California and Michigan. Subsequent to March 31, 2000, the Company
purchased bookstores located in Norman, Oklahoma and Knoxville, Tennessee.
The table below highlights certain information regarding the Company's
bookstores opened through March 31, 2000.
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)
----------- ---------- ----------- ------------- --------- ------------
1996 35 4 0 39 388
1997 39 12 1 50 438
1998 50 9 0 59 474
1999 59 8 2 65 537
2000 65 35 2 98 733
- ------------
(1) In fiscal 1997, the management contract was not renewed on a
contract-managed bookstore. In fiscal 1999, the property leases at two
bookstore locations expired and were not renewed by the Company. In fiscal
2000, the property lease at one bookstore location expired and was not
renewed by the Company and one Triro, Inc. bookstore location which did not
meet the Company's expansion criteria described below was closed.
The Company plans to continue increasing the number of bookstores in
operation. The bookstore expansion plan will focus on campuses where the Company
does not already have a strong relationship with the on-campus bookstore. In
determining to open a bookstore, the Company looks at several criteria: (i) a
large enough market to justify the Company's efforts (typically this means a
campus of at least 10,000 students); (ii) a site in close proximity to campus
with adequate parking and accessibility; (iii) the potential of the bookstore to
have a broad product mix (larger bookstores are more attractive than smaller
bookstores because a full line of general merchandise can be offered in addition
to textbooks); (iv) the availability of top-quality management; and (v) certain
other factors, including leasehold improvement opportunities and personnel
costs.
The Company's bookstores have an average size of 7,500 gross square feet but
range in size from 900 to 50,000 square feet. The Company estimates that
leasehold improvements, furniture and fixtures, and automation with the
Company's PRISM system, the Company's proprietary total-store management system,
for new bookstores cost approximately $100,000 per bookstore, after giving
effect to construction allowances.
10
MANAGEMENT INFORMATION SYSTEMS
The Company believes that it can enhance efficiency, profitability and
competitiveness through investments in technology. The Company's MIS operations
process order entry, control inventory, generate purchase orders and customer
invoices, generate various sales reports, and process and retrieve textbook
information. All the Company's bookstores operate with IBM RS/6000's. At the
center of its MIS operations are the Company's self-developed, proprietary
software programs such as PRISM, its whole store management system, and PC-Text,
its textbook management and inventory control system. This software is
maintained and continuously enhanced by the Company, which is staffed by an
experienced team of development and design professionals.
In addition, the Company and its consultants have been developing E-commerce
capabilities called WebPRISM and CampusHub. These software products will allow
college bookstores to launch their own E-commerce site and effectively compete
against online-only textbook sellers by offering textbooks and both traditional
and non-traditional store merchandise online. As previously discussed, the
ongoing development of WebPRISM and CampusHub was assumed subsequent to March
31, 2000 by an entity related to the Company through common ownership.
None of the Company's proprietary software programs are copyrighted,
although the Company does have registered trademarks for the names WebPRISM and
CampusHub. In addition to using its software programs for its own management and
inventory control, the Company licenses the use of its software programs to
bookstores. Although none of the Company's software programs are material to its
business, they enhance the efficiency and cost-effectiveness of the Company's
operations, and their use by bookstores that are customers or suppliers of the
Company tends to solidify the relationship between the Company and such
customers or suppliers, resulting in increased sales or supplies for the
Company.
MIS operations consist of three operating units: (i) the mainframe unit,
which develops and supports all systems utilized in the Company's warehouses and
corporate offices; (ii) a system sales unit, which markets the Company's college
store management systems to colleges; and (iii) the College Bookstore Management
Systems ("CBMS"), which develops and supports the systems that are sold to
bookstores.
The Company conducts training courses for all systems users at the Company's
headquarters in Lincoln, Nebraska. Classes are small and provide hands on
demonstrations of the various systems. Printed reference manuals and training
materials also accompany each system. The customer support unit of CBMS is
staffed with approximately 40 experienced personnel. Personnel are available 24
hours a day to answer questions on a toll-free number.
CUSTOMERS
The Company sells its products and services to college bookstores throughout
the United States, Canada and Puerto Rico for ultimate use by the students of
the respective colleges. The Company's 25 largest wholesale customers accounted
for approximately 6.4% of fiscal 2000 revenues. No one customer accounted for
more than 1.0% of the Company's fiscal 2000 revenues.
The Company's wholesale operations purchase from and resell used textbooks
to many of the nation's largest college campuses including: University of Texas,
University of Southern California, Indiana University, University of Arizona,
Brigham Young University, University of Washington and University of Minnesota.
The Company's college bookstores are located on many of the nation's largest
college campuses including: University of Nebraska, University of Michigan,
University of Maryland, Arizona State University, Pennsylvania State University,
University of Kansas, Michigan State University, University of California -
Berkeley, Texas A&M University, University of Tennessee and University of Texas.
11
COMPETITION
The Company's wholesale business competes in the used textbook wholesale
distribution market. This market includes the sale of all used textbooks
purchased from students by an independent third party which are then
redistributed through college bookstores; sales to contract-managed stores,
which obtain virtually all of their supply of used textbooks from within their
chain of stores under common management; and used textbooks retained by college
bookstores.
The Company's two major competitors in the college store industry and used
textbook business are Follett Campus Resources ("Follett") and MBS Textbook
Exchange ("MBS"), which contract-manage approximately 590 stores and 330 stores,
respectively. The Company believes that its market share of the used college
textbook wholesale distribution market is comparable to that of Follett and MBS,
individually. The remaining competitors are smaller regional companies,
including Wallace College Book Company, Budgetext, Texas Book Company and
Southeastern Book Company. Most of the leading companies in the industry also
have an established retail presence, either through direct store
ownership/operation or through contract-management.
Many of Follett's college bookstores are located on smaller campuses. The
size of the campus and Follett's presence there have precluded potential
competitors such as the Company from entering these markets, which in turn
affects both the Company's ability to buy books and its ability to add new
accounts. However, because it is required to supply used texts to all of its own
stores, Follett must balance the demands of its own bookstores with those of its
other independent customers.
MBS is controlled by the same shareholder that controls Barnes & Noble.
Consequently, MBS supplies approximately 330 Barnes & Noble college stores. MBS
faces the same challenges that Follett faces in supplying existing institutional
accounts. MBS has a strong systems division that competes actively with the
Company for new customers and also fulfills all of the needs of the Barnes &
Noble stores.
The Company's college bookstore operations, 14 of which are
contract-managed, compete with other college campus bookstores, including the
on-campus bookstore in those locations where the Company's bookstore is
off-campus.
Both the Company's wholesale business and bookstore operations compete with
a number of entities that have entered the college marketplace, or enhanced
their sales channel to that marketplace, through E-commerce. These competitors
typically use the Internet to establish websites designed to sell textbooks
and/or other merchandise directly to students, by-passing the traditional
college bookstore. By contrast, the Company's software products, WebPRISM and
CampusHub, are designed to sell textbooks and other merchandise through a
college bookstore website, not around it. The Company also competes against the
expansion of electronic media as a source of textbook information, such as
on-line resources, E-Books, print-on-demand textbooks and CD-ROM, which may
replace or modify the need for students to purchase textbooks through the
traditional college bookstore. The Company does not believe that such
competition has had a material adverse impact on the Company's results of
operations.
There is only one centralized buying service that is similar to C2O, the
Independent College Bookstore Association ("ICBA"). Participation by college
bookstores in C2O's or ICBA's centralized buying service is voluntary, and
college bookstores may, and some do, belong to both buying associations.
Presently, the Company believes that its largest competitors in the distance
education market are Follett and MBS.
12
GOVERNMENTAL REGULATION
The Company is subject to various federal, state and local environmental,
health and safety laws and regulations. Generally, these laws impose limitations
on the discharge of pollutants and the presence of hazardous substances in the
workplace and establish standards for vehicle and employee safety and for the
handling of solid and hazardous wastes. These laws include the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act, the Clean Air Act, the Hazardous Materials
Transportation Act and the Occupational Safety and Health Act. Future
developments, such as stricter environmental or employee health and safety laws
and regulations thereunder, could affect the Company's operations. The Company
does not currently anticipate that the cost of its compliance with, or of any
foreseeable liabilities under, environmental and employee health and safety laws
and regulations will have a material adverse affect on its business or financial
condition.
EMPLOYEES
As of March 31, 2000 the Company had a total of approximately 2,700
employees, of which 950 are full-time, 200 are part-time and 1,550 are
temporary. The Company has no unionized employees and believes that its
relationship with its employees is satisfactory.
In view of the seasonal nature of its wholesale business, the Company
utilizes seasonal labor to improve operating efficiency. The Company employs a
small number of "flex-pool" workers who are cross-trained in a variety of
warehouse functions. Over the past eight years, the Company has employed up to
50 flex-pool workers in the Nebraska and California facilities, thereby enabling
the Company to lower its wholesale operating expenses. Temporary employees
augment the flex-pool to meet periodic labor demands.
ITEM 2. PROPERTIES.
The Company owns its two warehouses (totaling 244,000 square feet) in
Lincoln, Nebraska (one of which is also the location of its headquarters), and
leases its 60,000 square foot warehouse in Cypress, California. The Cypress
lease expires on August 31, 2002 and has one five-year option to renew.
Listed below, set forth as of March 31, 2000, are the Company's college
bookstores, their location, college served and the school's enrollment.
INSTITUTION LOCATION ENROLLMENT(1) STORE NAME
----------- -------- ------------ ----------
University of Alabama Tuscaloosa, AL 18,600 The College Store
Northern Arizona University Flagstaff, AZ 19,900 The College Store
Northern Arizona University Flagstaff, AZ 19,900 University Text and Tools
Coconino Community College Flagstaff, AZ 3,600 Coconino Community College
Bookstore (2)
Arizona State University Tempe, AZ 43,700 The College Store
Arizona State University Tempe, AZ 43,700 Rother's Bookstore
University of Arizona Tucson, AZ 34,200 Arizona Book Store
University of Arizona Tucson, AZ 34,200 Rother's University Bookstore
University of Arkansas-- Little Rock, AR 10,500 Campus Bookstore
Little Rock
University of California Berkeley, CA 30,400 Ned's Berkeley Bookstore
(2 locations)
California State University - Northridge, CA 27,200 The College Store
Northridge
Daytona Beach Community College Daytona Beach, FL 9,500 & 4,700 College Book Rack
and Embry-Riddle Aeronautical
University
Miami Dade Community Miami, FL 18,000 Lemox College Book & Supply
College-Kendall
University of Central Florida Orlando, FL 28,000 Knight's Corner
Georgia State University Atlanta, GA 23,500 Georgia Book Store
Southern Illinois University Carbondale, IL 22,300 Saluki Bookstore
(2 locations)
Ball Sate University Muncie, IN 19,100 Collegiate Book Exchange
Valparaiso University Valparaiso, IN 3,600 University Book Center (2)
Drake University Des Moines, IA 5,300 University Book Store
(2 locations) (2)
University of Kansas Lawrence, KS 29,100 University Book Shop
Johnson County Community College Overland Park, KS 16,000 The College Store
University of Louisville Louisville, KY 21,100 College Book Warehouse
13
Eastern Kentucky University Richmond, KY 17,500 University Book & Supply
University of Maryland College Park, MD 32,700 Maryland Book Exchange
Prince Georges Community College Largo, MD 12,500 Prince Georges Community
College Bookstore (2)
University of Michigan Ann Arbor, MI 37,200 Michigan Book & Supply
University of Michigan Ann Arbor, MI 37,200 Ulrich's Bookstore
Wayne County Community College Belleville, MI 11,000 Ned's Bookstore
(5 locations) (2)
Ferris State University Big Rapids, MI 9,800 The College Store
Michigan State University East Lansing, MI 42,500 The College Store
Michigan State University East Lansing, MI 42,500 Ned's Bookstore
Kettering Engineering & Flint, MI 2,500 Kettering Campus Store (2)
Management Institute
Eastern Michigan University Ypsilanti, MI 23,300 Campus Book & Supply
Eastern Michigan University and Ypsilanti, & 23,300 & 600 Ned's Bookstore (3 locations) (2)
Concordia College Ann Arbor, MI
Mankato State University Mankato, MN 11,700 Maverick Bookstore
Chadron State College Chadron, NE 2,800 Eagle Book Shoppe
University of Nebraska-- Kearney Kearney, NE 7,200 The Antelope Bookstore (2)
University of Nebraska-- Lincoln Lincoln, NE 23,000 Nebraska Bookstore (2 locations)
Nebraska Wesleyan University Lincoln, NE 1,700 Plainsman Bookstore (2)
Wayne State College Wayne, NE 4,000 Student Bookstore
University of Nevada Las Vegas Las Vegas, NV 21,300 Rebelbooks
State University of New York-- Amherst, NY 22,000 The College Store
Buffalo
State University of New York - Vestal, NY 11,800 Bookbridge
Binghamton
University of Akron Akron, OH 23,500 The College Store
Ohio University Athens, OH 19,200 Specialty Books
Ohio State University Columbus, OH 48,300 Collegetown
Wright State University Fairborn, OH 16,800 The College Store
Oklahoma State University Stillwater, OK 20,500 Cowboy Book
Indiana University of Indiana, PA 14,000 The College Store
Pennsylvania
University of Pittsburgh Pittsburgh, PA 26,000 The College Store
Pennsylvania State University State College, PA 40,700 University Book Centre
College of Charleston Charleston, SC 12,000 University Books of Charleston
Columbia College Columbia, SC 1,200 C-Squared Bookstore (2)
University of South Carolina Columbia, SC 25,500 South Carolina Bookstore
(2 locations)
East Tennessee State University Johnson City, TN 11,500 The College Store
University of Tennessee Knoxville, TN 26,000 Campus Bookstore
University of Texas - Arlington Arlington, TX 18,700 The College Store
Austin Community College Austin, TX 27,000 Bevo's Northridge
Austin Community College Austin, TX 27,000 Bevo's ACC
Austin Community College Austin, TX 27,000 Rother's Bookstore
University of Texas Austin, TX 48,000 Bevo's West
University of Texas Austin, TX 48,000 Bevo's Bookstore (Dobie)
Blinn College Bryan, TX 9,500 Rother's Bookstore
Texas A&M University College Station, TX 44,000 Rother's Bookstore
Texas A&M University College Station, TX 44,000 Rother's Bookstore (Woodstone)
Texas A&M University College Station, TX 44,000 Rother's Bookstore (Northgate)
University of North Texas Denton, TX 25,500 Voertman's
University of Texas -- Pan Edinburg & 13,000 & 7,100 South Texas Book & Supply
American and South McAllen, TX (2 locations)
Texas Community College
North Harris County Community Houston, TX 9,200 College Bookstore
College
University of Houston Houston, TX 33,000 Rother's Bookstore
Texas Tech University Lubbock, TX 24,800 Spirit Shop
Texas Tech University Lubbock, TX 24,800 Double T Bookstores (3 locations)
San Antonio College, St. San Antonio, TX 22,000; L&M
Philip's College, and 21,200;
Palo Alto College & 6,400
University of Texas-- San Antonio San Antonio, TX 18,400 L&M-- UTSA
Southwest Texas State University San Marcos, TX 21,100 Colloquium Books (2 locations)
Southwest Texas State University San Marcos, TX 21,100 Rother's Bookstore
Tarleton State University Stephenville, TX 6,400 Rother's
Baylor University Waco, TX 13,000 University Bookstore
and Spirit Shop
Baylor University Waco, TX 13,000 Rother's Bookstore
Midwestern State University Wichita Falls, TX 5,700 Rother's Bookstore
Virginia Polytechnic and State Blacksburg, VA 25,000 Tech Bookstore
University
Old Dominion University Norfolk, VA 18,900 Dominion Bookstore
Virginia Commonwealth University Richmond, VA 23,200 The College Store
- ------------
(1) Source: National Association of College Stores. Includes part-time students.
(2) Denotes properties leased from the educational institution
("contract-managed" stores). One location at Drake University and one
location at Concordia College are contract-managed stores.
14
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is subject to legal proceedings and other
claims arising in the ordinary course of its business. The Company believes that
currently it is not a party to any litigation the outcome of which would have a
material adverse affect on its financial condition or results of operations. The
Company maintains insurance coverage against claims in an amount which it
believes to be adequate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No items were submitted to a vote of security holders of the Company during
the fourth quarter of fiscal 2000.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
On January 20, 2000, the Company granted options to purchase 5,241 shares of
the Company's Class A Common Stock at an exercise price of $52.47 per share.
Such options, available under the NBC Acquisition Corp. 1998 Stock Option Plan,
were granted to NBC's Vice President of E-commerce. The options become
exercisable in 25% increments on February 1, 2000 and November 1, 2000, 2001 and
2002.
On January 20, 2000, the Company issued 2,621 shares of its Class A Common
Stock to NBC's Vice President of E-commerce at a price of $52.47 per share, in
exchange for $13,752 in cash and a promissory note in the principal amount of
$123,765 maturing January, 2010 and bearing interest at 5.25% per year.
The aforementioned transactions were exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2). No underwriters were involved
in these transactions. As of June 20, 2000, based upon the number of holders on
record, there were 44 holders of the Company's Class A Common Stock and
outstanding stock options to purchase 34,224 shares of the Company's Class A
Common Stock. As discussed in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 8, "Financial Statements
and Supplementary Data", the payment of dividends is subject to various
restrictions under the Company's debt instruments. As a result, the Company has
declared no dividends on its Class A Common Stock during fiscal 1999 and 2000.
There is no established public trading market for the Company's Class A Common
Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected historical consolidated financial
and other data of the Company and its predecessor as of and for the fiscal years
ended March 31, 2000, 1999, 1998 and 1997, and the seven and five month periods
ended March 31, 1996 and August 31, 1995, respectively. The selected historical
consolidated financial data was derived from the audited consolidated financial
statements of the Company and its predecessor. The following table should be
read in conjunction with Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements of the Company and the related notes thereto included in Item 8
herein.
16
Successor (1) Predecessor
--------------------------------------------------- -----------
Seven Five
Months Months
Fiscal Years Ended March 31, Ended Ended
----------------------------------------- March 31, August 31,
2000 1999 1998 1997 1996 1995
---------- --------- --------- ---------- --------- -----------
Statement of Operations Data: (dollars in thousands)
Revenues $265,290 $217,516 $198,773 $172,600 $ 79,423 $83,328
Cost of sales 164,921 137,709 125,632 110,466 51,866 52,753
-------- -------- -------- -------- -------- -------
Gross profit 100,369 79,807 73,141 62,134 27,557 30,575
Operating expenses:
Selling, general, and
administrative 65,582 51,547 47,081 39,491 22,517 14,729
Depreciation 3,096 2,393 2,531 2,706 904 872
Amortization 9,320 6,149 5,626 4,072 2,259 -
Stock compensation costs - - 8,278 297 82 -
-------- -------- -------- -------- -------- -------
Income from operations 22,371 19,718 9,625 15,568 1,795 14,974
Other expenses (income):
Interest expense 23,398 22,854 11,938 10,760 6,035 952
Interest income (356) (351) (328) (561) (433) (51)
Other income (2) (1,478) (1,100) (512) (390) (339) (469)
-------- -------- -------- -------- -------- -------
Income (loss) before income taxes
and extraordinary item 807 (1,685) (1,473) 5,759 (3,468) 14,542
Income tax expense (benefit) 2,516 574 58 2,325 (967) 5,583
-------- -------- -------- -------- -------- -------
Income (loss) before
extraordinary item (1,709) (2,259) (1,531) 3,434 (2,501) 8,959
Extraordinary loss on
extinguishment of
debt, net of taxes - - (4,021) - - -
-------- -------- -------- -------- -------- -------
Net income (loss) $ (1,709) $ (2,259) $ (5,552) $ 3,434 $ (2,501) $ 8,959
======== ======== ======== ======== ======== =======
Earnings (loss) per share (3):
Basic:
Income (loss) before
extraordinary item $ (1.48) $ (2.37) $ (0.59) $ 1.23 $ (0.89)
Extraordinary loss on
extinguishment of debt - - (1.57) - -
-------- -------- -------- -------- --------
Net income (loss) $ (1.48) $ (2.37) $ (2.16) $ 1.23 $ (0.89)
======== ======== ======== ======== ========
Diluted:
Income (loss) before
extraordinary item $ (1.48) $ (2.37) $ (0.59) $ 1.16 $ (0.89)
Extraordinary loss on
extinguishment of debt - - (1.57) - -
-------- -------- -------- -------- --------
Net income (loss) $ (1.48) $ (2.37) $ (2.16) $ 1.16 $ (0.89)
======== ======== ======== ======== ========
Other Data:
EBITDA (4) $ 36,265 $ 29,360 $ 26,572 $ 23,033 $ 5,379 $16,315
Net cash flows from operating
activities 18,601 10,296 (2,842) 10,774 3,423 1,643
Net cash flows from financing
activities 11,690 (6,976) 10,220 (7,471) 116,063 437
Net cash flows from investing
activities (29,900) (5,067) (11,548) (3,427) (109,385) 371
Capital expenditures 3,542 2,842 3,690 2,243 838 801
Business acquisition
expenditures (5) 26,072 2,086 7,714 1,252 551 -
Number of bookstores open at
end of the period 98 65 59 50 39 36
Balance Sheet Data
(At End of Period):
Cash and cash equivalents $ 4,451 $ 4,060 $ 5,807 $ 9,977 $ 10,101 $ 4,741
Working capital 62,298 55,470 54,053 55,936 52,469 43,879
Total assets 169,046 142,907 152,145 127,169 129,023 92,505
Total debt, including current
maturies 222,551 219,904 221,597 79,524 86,712 9,376
(1) Effective February 13, 1998, the Company consummated a merger among NBC
Merger Corp., the Company and certain shareholders of the Company
pursuant to which the Company's outstanding debt and stock were
restructured. Following the Recapitalization, the results of operations
of the Company included higher interest costs due to the financing of
the Recapitalization, and in fiscal 1998, non-recurring charges
associated with the extinguishment of debt and buyout of stock options.
Effective September 1, 1995, the Company purchased all the outstanding
capital stock of Nebraska Book Company, Inc. in a transaction accounted
for as a purchase business combination. Following this transaction, the
consolidated results of operations of the Company contained higher
17
interest costs due to the financing of the acquisition and higher
amortization expense for goodwill and other intangibles created by the
acquisition.
(2) Other income primarily represents recurring income from ancillary
activities of the Company.
(3) Earnings (loss) per share has not been presented for the five months
ended August 31, 1995 as such presentation would not be meaningful.
(4) EBITDA is defined as income from operations plus other income,
depreciation, amortization and non-cash charges relating to stock based
compensation expense in the amounts of $8,278 and $297 for the years
ended March 31, 1998 and 1997, respectively, and $82 for the seven
months ended March 31, 1996. The Company believes that EBITDA provides
additional information for determining its ability to meet debt service
requirements. EBITDA does not represent and should not be considered as
an alternative to net income or cash flow from operations as determined
by accounting principles generally accepted in the United States of
America, and EBITDA does not necessarily indicate whether cash flow will
be sufficient for cash requirements. EBITDA should not be considered by
investors as an indicator of cash flows from operating activities,
investing activities and financing activities as determined in
accordance with accounting principles generally accepted in the United
States of America. Items excluded from EBITDA, such as depreciation and
amortization, are significant components in understanding and assessing
the Company's financial performance. EBITDA measures presented may not
be comparable to similarly titled measures presented by other
registrants.
(5) Business acquisition expenditures represent established businesses
purchased by the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FISCAL YEAR ENDED MARCH 31, 2000 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 1999.
REVENUES. Revenues for the years ended March 31, 2000 and 1999 and the
corresponding increase (decrease) in revenues were as follows:
Increase (Decrease)
---------------------
2000 1999 Amount Percentage
-------------- -------------- ---------- ----------
Wholesale operations $ 106,458,024 $ 97,430,134 $ 9,027,890 9.3%
College bookstore operations 157,928,601 120,745,188 37,183,413 30.8%
Complementary services 19,949,186 12,362,403 7,586,783 61.4%
Intercompany eliminations (19,045,581) (13,021,413) (6,024,168) 46.3%
------------- ------------- ------------ -----
$ 265,290,230 $ 217,516,312 $ 47,773,918 22.0%
============= ============= ============ =====
The increase in wholesale revenues was due primarily to publisher price
increases, coupled with an increase in units shipped and a decrease in returns
as a percent of sales. This increase was partially offset by the discontinuance
of the Company's new book program in the fourth quarter of fiscal 1999. That
program generated approximately $2.0 million of revenue in that fiscal year. The
increase in college bookstore revenues was due primarily to the net addition of
39 new college bookstores either through acquisition or startup since April 1,
1998, including 28 new bookstores added through the Triro, Inc. and Ned's
Bookstores acquisitions, which occurred effective June 4, 1999 and November 12,
1999, respectively. Of the $37.2 million increase in college bookstore revenues,
$34.9 million was attributable to new college bookstores with the remainder
accounted for by a 2.9% increase in revenues from stores open for the full year
for both the 1999 and 2000 fiscal years ("same stores"). Complementary services
revenues increased primarily due to growth in the Company's distance education
and system sales programs. As the Company's wholesale and college bookstore
operations have grown, the Company's intercompany transactions have also
increased.
18
GROSS PROFIT. Gross profit for fiscal 2000 increased $20.6 million, or
25.8%, to $100.4 million from $79.8 million for fiscal 1999. This increase was
primarily due to higher revenues, combined with an increase in gross margins.
Gross margin was 37.8% for fiscal 2000 as compared to 36.7% for fiscal 1999. The
increase in gross margin was primarily attributable to increased margins in the
Company's wholesale and college bookstore operations, including an increase in
used textbook sales through the Company's bookstores, which can generate an
average gross margin of approximately 55%-60% compared to average gross margins
of 35% - 40% for external wholesale sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal 2000 increased $14.1 million, or 27.2%, to
$65.6 million from $51.5 million for fiscal 1999. Selling, general and
administrative expenses as a percentage of revenues were 24.7% and 23.7% for
fiscal 2000 and fiscal 1999, respectively. The increase in expenses resulted
primarily from the expected higher expense base associated with the Company's
expansion of its operations through bookstore acquisitions and startups. The
Company has also incurred higher corporate-level expense in fiscal 2000,
primarily due to additional personnel and other costs designed to help manage
its continued growth.
DEPRECIATION EXPENSE. Depreciation expense for the fiscal year ended March
31, 2000 increased $0.7 million, or 29.4%, to $3.1 million from $2.4 million for
the fiscal year ended March 31, 1999. This increase was primarily the result of
additional depreciation related to recent acquisitions, including Triro, Inc.
and Ned's Bookstores.
AMORTIZATION EXPENSE. Amortization expense for the fiscal year ended March
31, 2000 increased $3.2 million, or 51.6%, to $9.3 million from $6.1 million for
the fiscal year ended March 31, 1999. This increase was the result of additional
amortization of goodwill related to recent acquisitions, including Triro, Inc.
and Ned's Bookstores, and was partially offset by a non-compete agreement
becoming fully amortized in August, 1998.
INTEREST EXPENSE, NET. Interest expense, net for fiscal 2000 increased $0.5
million, or 2.4%, to $23.0 million from $22.5 million for fiscal 1999 primarily
as a result of increasing original issue debt discount amortization on the
Company's Senior Discount Debentures.
OTHER INCOME. Other income for fiscal 2000 increased $0.4 million, or 34.4%,
to $1.5 million from $1.1 million for fiscal 1999 primarily due to the growth of
certain payments received related to reimbursement from customers for the costs
incurred to ship distance education materials to the customer. Such
reimbursement is recorded as other income. Other significant components of other
income include the equity in earnings associated with C2O's shopping bag joint
venture and ancillary items.
INCOME (LOSS) BEFORE INTEREST AND TAXES. Income (loss) before interest and
taxes for fiscal 2000 and 1999 and the corresponding increase (decrease) in
income (loss) before interest and taxes were as follows:
Increase (Decrease)
----------------------
2000 1999 Amount Percentage
-------------- -------------- ----------- ----------
Wholesale operations $ 26,335,614 $ 22,662,669 $ 3,672,945 16.2%
College bookstore operations 8,520,861 7,399,011 1,121,850 15.2%
Complementary services (2,884,333) (2,559,067) (325,266) (12.7)%
Corporate administration (8,123,130) (6,684,303) (1,438,827) (21.5)%
------------ ------------ ------------ --------
$ 23,849,012 $ 20,818,310 $ 3,030,702 14.6%
============ ============ ============ ========
The increase in wholesale income before interest and taxes was primarily due
to increased revenues. Income before interest and taxes for college bookstore
operations increased, despite incremental amortization expense of $3.7 million
related to goodwill resulting from acquisitions, as a result of increased
revenues and improved margins pertaining primarily to used textbook sales. The
loss before interest and taxes increased for the complementary services segment
primarily due to a reduction in the profitability of the Company's shopping bag
19
joint venture. As described earlier, corporate administrative costs have
increased primarily as a result of costs incurred to help manage the Company's
growth.
INCOME TAXES. Income tax expense for fiscal 2000 increased $1.9 million, or
337.9%, to $2.5 million from $0.6 million for fiscal 1999. This increase was
primarily the result of an increase in income before income taxes and
non-deductible amortization on goodwill associated with the Triro, Inc.
acquisition. The Company's effective tax rate was significantly higher than the
statutory tax rate primarily as a result of state income taxes and
non-deductible amortization on goodwill associated with recent acquisitions.
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 1998.
REVENUES. Revenues for the years ended March 31, 1999 and 1998 and the
corresponding increase (decrease) in revenues were as follows:
Increase (Decrease)
----------------------
1999 1998 Amount Percentage
-------------- -------------- ------------ ---------
Wholesale operations $ 97,430,134 $ 90,595,190 $ 6,834,944 7.5%
College bookstore operations 120,745,188 110,584,757 10,160,431 9.2%
Complementary services 12,362,403 9,597,812 2,764,591 28.8%
Intercompany eliminations (13,021,413) (12,004,821) (1,016,592) 8.5%
------------- -------------- ------------- --------
$ 217,516,312 $ 198,772,938 $ 18,743,374 9.4%
============= ============== ============= ========
The increase in wholesale sales was due primarily to publisher price
increases averaging 4% and product mix. The increase in college bookstore sales
was a result of same store sales increases of 2.6% combined with the nine
bookstores opened or acquired during fiscal 1998, and the eight bookstores
opened or acquired during fiscal 1999. Complementary services sales for fiscal
1999 increased due to the acquisitions of Specialty Books on May 1, 1997 and C2O
on January 23, 1998. As the Company's wholesale and college bookstore operations
have grown, the Company's intercompany transactions have also increased.
GROSS PROFIT. Gross profit for fiscal 1999 increased $6.7 million, or 9.1%,
to $79.8 million from $73.1 million for fiscal 1998. This increase was primarily
due to higher revenues. Gross margin remained relatively constant at 36.7% for
fiscal 1999 as compared to 36.8% for fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal 1999 increased $4.4 million, or 9.5%, to
$51.5 million from $47.1 million for fiscal 1998. Selling, general and
administrative expenses as a percentage of revenues remained stable at 23.7% for
fiscal 1999 and fiscal 1998. The increase in expenses resulted primarily from
the higher expense base associated with the Company's expansion of its college
bookstore operations in fiscal 1999 and the full year effect of the fiscal 1998
bookstore and complementary services expansions.
AMORTIZATION EXPENSE. Amortization expense for the fiscal year ended March
31, 1999 increased $0.5 million, or 9.3%, to $6.1 million from $5.6 million for
the fiscal year ended March 31, 1998. This increase resulted primarily from a
full year of amortization on the goodwill associated with the fiscal 1998
acquisitions and amortization on the goodwill associated with the bookstores
acquired in fiscal 1999.
STOCK COMPENSATION COSTS. There were no stock compensation costs for the
fiscal year ended March 31, 1999 as compared to $8.3 million in stock
compensation costs for the fiscal year ended March 31, 1998. This decrease is
primarily the result of the stock options bought out in fiscal 1998 in
connection with the Recapitalization, which is discussed in detail in Item 1,
"Business" and Item 8, "Financial Statements and Supplementary Data." There was
no compensation cost associated with the stock options granted in fiscal 1999 to
employees since the exercise price was greater than the estimated fair value of
the Company's Class A Common Stock on the date of grant. The fair value of
options granted to employees was estimated at the date of grant by management
and the Board of Directors after considering, among other things, EBITDA,
outstanding debt, minority interest and illiquidity.
20
INTEREST EXPENSE, NET. Interest expense, net for fiscal 1999 increased $10.9
million, or 93.8%, to $22.5 million from $11.6 million for fiscal 1998 as a
result of the impact of a full year of interest expense associated with the
additional debt incurred relating to the Recapitalization, which occurred on
February 13, 1998.
OTHER INCOME. Other income for fiscal 1999 increased $0.6 million, or
114.9%, to $1.1 million from $0.5 million for fiscal 1998 primarily as a result
of the full year effect of income from ancillary activities at Specialty Books
and C2O. Such ancillary activities consist primarily of certain payments
received that relate to reimbursement from customers for the costs incurred to
ship distance education materials to the customer and equity in earnings
associated with C2O's shopping bag joint venture.
EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT. During fiscal 1998, the
Company recorded an extraordinary loss of $6.5 million, which included $2.9
million of unamortized debt issue costs, $2.3 million of unaccreted discount
paid at time of Recapitalization, $0.8 million prepayment penalty, and $0.5
million buyout of interest rate swap agreement, and an associated tax benefit of
$2.5 million as a result of early extinguishment of substantially all of its
previously outstanding debt as part of the Recapitalization.
INCOME (LOSS) BEFORE INTEREST AND TAXES. Income (loss) before interest and
taxes for fiscal 1999 and 1998 and the corresponding increase (decrease) in
income (loss) before interest and taxes were as follows:
Increase (Decrease)
------------------------
1999 1998 Amount Percentage
------------- -------------- -------------- ---------
Wholesale operations $ 22,662,669 $ 20,873,859 $ 1,788,810 8.6 %
College bookstore operations 7,399,011 6,835,911 563,100 8.2 %
Complementary services (2,559,067) (1,468,199) (1,090,868) (74.3)%
Corporate administration (6,684,303) (16,105,058) 9,420,755 58.5 %
------------- ------------- ------------- ---------
$ 20,818,310 $ 10,136,513 $ 10,681,797 105.4 %
============= ============= ============= =========
The increase in wholesale income before interest and taxes was due to
increased revenues which were partially offset primarily by lower margins
resulting from the Company's new book program, which was obtained through the
C2O acquisition and discontinued in the fourth quarter of fiscal 1999. Income
before interest and taxes for college bookstore operations increased due to
increased revenues which were offset by the higher expense base associated with
recent acquisitions. The loss before interest and taxes increased for the
complementary services segment as a result of reflecting a full year of
operating activity for C2O and Specialty Books, including $1.1 million in
incremental amortization on goodwill associated with such acquisitions.
Corporate administrative costs have decreased primarily as a result of the $8.3
million in stock compensation costs incurred in fiscal 1998 in conjunction with
the Recapitalization and a non-compete agreement becoming fully amortized in
August, 1998.
INCOME TAXES. The effective tax rate for fiscal 1999 was 34.1% as compared
with 4.0% for fiscal 1998. In both fiscal years, the tax benefit generated by
the loss from operations was reduced as a result of non-deductible amortization
on goodwill associated with recent acquisitions and a change in estimate of
income tax liabilities. The change in estimate pertains to differences between
the prior year tax accrual and actual taxes owed per the tax returns filed.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity requirements are for debt service under the
Senior Credit Facility, the Senior Subordinated Notes and other outstanding
indebtedness, for working capital, for capital expenditures and for certain
acquisitions. The Company has historically funded these requirements primarily
through internally generated cash flow and funds borrowed under NBC's Revolving
Credit Facility. At March 31, 2000, the Company's total indebtedness was
approximately $222.6 million, consisting of approximately $55.6 million in Term
Loans, $110.0 million of the Senior Subordinated Notes, $56.2 million of the
Senior Discount Debentures and $0.8 million of other indebtedness, including
capital lease obligations.
21
Principal and interest payments under the Senior Credit Facility and the
Senior Subordinated Notes represent significant liquidity requirements for the
Company. Under the terms of the Tranche A and B Loans, NBC is scheduled to make
principal payments totaling approximately $4.4 million in fiscal 2001, $6.3
million in fiscal 2002, $6.8 million in fiscal 2003, $8.5 million in fiscal
2004, $11.2 million in fiscal 2005, and $18.4 million in fiscal 2006. Such
scheduled principal payments are subject to change upon the annual payment and
application of excess cash flows (as defined in the Credit Agreement underlying
the Senior Credit Facility) towards Tranche A and B Loan principal balances.
There was no excess cash flow payment obligation at March 31, 2000. Loans under
the Senior Credit Facility bear interest at floating rates based upon the
interest rate option selected by NBC. The Senior Subordinated Notes require
semi-annual interest payments at a fixed rate of 8.75% and mature on February
15, 2008. The Senior Discount Debentures require semi-annual interest payments
commencing August 15, 2003 at a fixed rate of 10.75% and mature on February 15,
2009.
The Company's capital expenditures were $3.5 million, $2.8 million, and $3.7
million for the fiscal years ended March 31, 2000, 1999 and 1998, respectively.
Capital expenditures consist primarily of leasehold improvements and furnishings
for new bookstores, bookstore renovations, computer upgrades and miscellaneous
warehouse improvements. The Company's ability to make capital expenditures is
subject to certain restrictions under the Senior Credit Facility.
Business acquisition expenditures were $26.1 million, $2.1 million, and $7.7
million for the fiscal years ended March 31, 2000, 1999 and 1998, respectively.
Of the $26.1 million in business acquisition expenditures made for the fiscal
year ended March 31, 2000, approximately $25.2 million pertains to the
acquisitions of Triro, Inc. and Ned's Bookstores. Approximately $14.9 million of
capital was raised in fiscal 2000 through the issuance of 284,923 shares of the
Company's Class A Common Stock to HWH and members of senior management to assist
in financing the acquisitions of Triro, Inc. and Ned's Bookstores Of the $7.7
million in business acquisition expenditures made for the fiscal year ended
March 31, 1998, approximately $6.2 million pertains to the acquisitions of C2O,
Specialty Books, and four South Carolina college bookstores. Future
acquisitions, if any, may require additional equity financing.
Subsequent to March 31, 2000, NBC entered into several agreements related to
its WebPRISM and CampusHub E-commerce software capabilities with a newly created
entity, TheCampusHub.com, Inc., which is partially owned by the Company's
majority owner. Such agreements included an equity option agreement providing
NBC the opportunity to acquire 25% of the initial common shares outstanding of
TheCampusHub.com, Inc.; a management services agreement effective for a period
of three years that reimburses NBC for certain direct costs incurred on behalf
of TheCampusHub.com, Inc. and for certain shared management and administrative
support; and a technology sale and license agreement that provides for NBC to
license its E-commerce software capabilities to TheCampusHub.com, Inc. over a
period of three years and provides TheCampusHub.com, Inc. with an option to
purchase such software capabilities from NBC during that three year period.
NBC's Senior Credit Facility was amended in April, 2000 to provide for these
transactions.
The Company's principal sources of cash to fund its future operating
liquidity needs will be net cash flows from operating activities and borrowings
under the Revolving Credit Facility. Usage of the Revolving Credit Facility to
meet the Company's liquidity needs fluctuates throughout the year due to the
Company's distinct buying and selling periods, increasing substantially at the
end of each semester (May and December). For the year ended March 31, 2000,
weighted-average borrowings under the Revolving Credit Facility approximated
$14.2 million, with actual borrowings ranging from a low of no borrowings to a
high of $42.0 million. Net cash flows provided from operating activities for the
year ended March 31, 2000 were $18.9 million, an increase of $8.6 million from
$10.3 million for the year ended March 31, 1999. This increase was primarily due
to the combination of increased revenues and improved profit margins.
Access to the Company's principal sources of cash is subject to various
restrictions. The availability of additional borrowings under the Revolving
Credit Facility is subject to the calculation of a borrowing base, which at any
time is equal to a percentage of eligible accounts receivable and inventory, up
to a maximum of $50.0 million. The Senior Credit Facility restricts the
22
Company's ability to make loans or advances and pay dividends, except that,
among other things, NBC may pay dividends to the Company (i) after August 15,
2003 in an amount not to exceed the amount of interest required to be paid on
the Senior Discount Debentures and (ii) to pay corporate overhead expenses not
to exceed $250,000 per year and any taxes due by the Company. The indenture
governing the Senior Discount Debentures (the "Indenture") restricts the ability
of the Company and its Restricted Subsidiaries (as defined in the Indenture) to
pay dividends or make other Restricted Payments (as defined in the Indenture) to
their respective stockholders, subject to certain exceptions, unless certain
conditions are met, including that (i) no default under the Indenture shall have
occurred and be continuing, (ii) the Company shall be permitted by the Indenture
to incur additional indebtedness and (iii) the amount of the dividend or payment
may not exceed a certain amount based on, among other things, the Company's
consolidated net income. The indenture governing the Senior Subordinated Notes
contains similar restrictions on the ability of NBC and its Restricted
Subsidiaries to pay dividends or make other Restricted Payments to their
respective stockholders. Such restrictions are not expected to affect the
Company's ability to meet its cash obligations.
As of March 31, 2000, NBC could borrow up to $38.5 million under the
Revolving Credit Facility. The Revolving Credit Facility was unused at March 31,
2000. Additionally, in conjunction with the Triro, Inc. acquisition, NBC
established an irrevocable standby letter of credit for $52,000 which expired
June 2, 2000. 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 contained in the
Senior Credit Facility.
The Company believes that funds generated from operations, existing cash,
and borrowings under the Revolving Credit Facility will be sufficient to finance
its current operations, planned capital expenditures and internal growth for the
foreseeable future. Future acquisitions, if any, may require additional debt or
equity financing.
SEASONALITY
The Company's wholesale and bookstore operations experience two distinct
selling periods and the wholesale operations experience two distinct buying
periods. The peak selling periods for the wholesale operations occur prior to
the beginning of each school semester in August and December. The buying periods
for the wholesale operations occur at the end of each school semester in late
December and May. The primary selling periods for the bookstore operations are
in September and January. In fiscal 2000, approximately 42% of the Company's
annual revenues occurred in the second fiscal quarter (July-September), while
approximately 30% of the Company's annual revenues occurred in the fourth fiscal
quarter (January-March). Accordingly, the Company's working capital requirements
fluctuate throughout the year, increasing substantially at the end of each
semester, in May and December, as a result of the buying periods. The Company
funds its working capital requirements primarily through a revolving credit
facility, which historically has been repaid with cash provided from operations.
IMPACT OF INFLATION
The Company's results of operations and financial condition are presented
based upon historical costs. While it is difficult to accurately measure the
impact of inflation due to the imprecise nature of the estimates required, the
Company believes that the effects of inflation, if any, on its results of
operations and financial condition have not been material. However, there can be
no assurance that during a period of significant inflation, the Company's
results of operations would not be adversely affected.
23
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Annual Report on Form 10-K contains or incorporates by reference
certain statements that are not historical facts, including, most importantly,
information concerning possible or assumed future results of operations of the
Company and statements preceded by, followed by or that include the words "may,"
"believes," "expects," "anticipates," or the negation thereof, or similar
expressions, which constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). All
statements which address operating performance, events or developments that are
expected or anticipated to occur in the future, including statements relating to
volume and revenue growth, earnings per share growth or statements expressing
general optimism about future operating results, are forward-looking statements
within the meaning of the Reform Act. Such forward-looking statements involve
risks, uncertainties and other factors which may cause the actual performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. For those statements, the Company claims the protection of the safe
harbor for forward-looking statements contained in the Reform Act. Several
important factors could affect the future results of the Company and could cause
those results to differ materially from those expressed in the forward-looking
statements contained herein. The factors that could cause actual results to
differ materially include, but are not limited to, the following: increased
competition; ability to integrate recent acquisitions; loss or retirement of key
members of management; increases in the Company's cost of borrowing or inability
or unavailability of additional debt or equity capital; inability to purchase a
sufficient supply of used textbooks; changes in pricing of new and/or used
textbooks; changes in general economic conditions and/or in the markets in which
the Company competes or may, from time to time, compete; the impact of the
internet and E-books on the Company's operations; and other risks detailed in
the Company's Securities and Exchange Commission filings, in particular the
Company's Registration Statement on Form S-4 (No. 333-48225), all of which are
difficult or impossible to predict accurately and many of which are beyond the
control of the Company. The Company will not undertake and specifically declines
any obligation to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk exposure is, and is expected to continue
to be, fluctuation in Eurodollar interest rates. Of the $222.6 million in
long-term debt and capital lease obligations outstanding at March 31, 2000,
approximately $55.6 million is subject to fluctuations in the Eurodollar rate.
As provided in NBC's Senior Credit Facility, exposure to interest rate
fluctuations is managed by maintaining fixed interest rate debt (primarily the
Senior Subordinated Notes and Senior Discount Debentures) and by entering into
interest rate swap agreements to effectively convert the Company's variable rate
debt into fixed rate debt. NBC has separate five-year amortizing interest rate
swap agreements with two financial institutions whereby NBC's variable rate
Tranche A and B Term Loans have been effectively converted into debt with a
fixed rate of 5.815% plus an applicable margin (as defined in the Senior Credit
Facility Agreement). The notional amount under each agreement as of March 31,
2000 was approximately $27.8 million. Such notional amounts are reduced
periodically by amounts equal to the scheduled principal payments on the Tranche
A and B Term Loans. NBC is exposed to credit loss in the event of nonperformance
by the counterparties to the interest rate swap agreements. NBC anticipates the
counterparties will be able to fully satisfy their obligations under the
agreements.
The following table presents quantitative information about the Company's
market risk sensitive instruments (the weighted average variable rates are based
on implied forward rates in the yield curve at March 31, 2000):
Variable to Fixed
Fixed Rate Debt Variable Rate Debt Interest Rate Swaps
---------------------- --------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Principal Interest Principal Interest Notional Pay/Receive
Cash Flows Rate Cash Flows(1) Rate Amounts Rates
------------ -------- ------------ ------- ------------- -----------
Fiscal Year Ended
March 31:
2001 $ 78,005 9.43% $ 4,437,500 9.07% $ 53,471,354 5.81% / 6.68%
2002 63,230 9.48% 6,287,500 9.52% 48,170,833 5.81% / 7.11%
2003 45,892 9.53% 6,800,000 9.52% 41,413,542 5.81% / 7.10%
2004 25,950 9.57% 8,475,000 9.55% 12,275,000 5.81% / 7.07%
2005 28,881 9.57% 11,187,500 9.68% - -
Thereafter 186,434,993 9.71% 18,437,500 9.75% - -
----------- ------- ------------ ------- ------------- -------------
Total $186,676,951 9.60% $55,625,000 9.46% $155,330,729 5.81% / 6.96%
=========== ======= ============ ======= ============= =============
Fair Value $124,703,075 - $55,625,000 - $ 1,735,657 -
============ ============ =============
(1) Principal cash flows represent scheduled principal payments and are
adjusted for anticipated excess cash flow payments (as defined in the
Credit Agreement underlying the Senior Credit Facility) to be applied
toward principal balances. For Fiscal 2000, there was no excess cash
flow payment obligation.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements of NBC Acquisition Corp.
for the Years Ended March 31, 2000, 1999 and 1998
Independent Auditors' Report..................................................27
Consolidated Balance Sheets...................................................28
Consolidated Statements of Operations.........................................29
Consolidated Statements of Stockholders' Equity (Deficit).....................30
Consolidated Statements of Cash Flows.........................................31
Notes to Consolidated Financial Statements....................................32
26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
NBC Acquisition Corp.
Lincoln, Nebraska
We have audited the accompanying consolidated balance sheets of NBC
Acquisition Corp. and subsidiary as of March 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended March 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of NBC Acquisition Corp. and
subsidiary as of March 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2000 in conformity with accounting principles generally accepted in the United
States of America.
DELOITTE & TOUCHE LLP
Lincoln, Nebraska
May 16, 2000
27
NBC ACQUISITION CORP.
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------
March 31,
2000 1999
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,450,887 $ 4,059,660
Receivables 24,248,183 20,838,546
Inventories 61,809,630 49,878,561
Recoverable income tax - 4,902
Deferred income taxes 1,598,793 1,468,156
Prepaid expenses and other assets 427,302 376,748
------------ -----------
Total current assets 92,534,795 76,626,573
PROPERTY AND EQUIPMENT 36,558,620 31,212,534
Less accumulated depreciation (10,797,795) (8,024,049)
------------ -----------
25,760,825 23,188,485
GOODWILL AND OTHER INTANGIBLES,
net of amortization 46,073,844 38,778,577
OTHER ASSETS 4,676,047 4,313,208
------------ -----------
$169,045,511 $142,906,843
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 16,145,566 $ 9,200,870
Accrued employee compensation and benefits 6,301,111 3,825,893
Accrued interest 1,349,224 1,426,509
Accrued expenses 819,010 681,725
Income tax payable 553,893 -
Deferred revenue 552,251 376,556
Current maturities of long-term debt 4,456,324 5,644,838
Current maturities of capital lease obligations 59,181 -
------------ ------------
Total current liabilities 30,236,560 21,156,391
LONG-TERM DEBT, net of current maturities 217,971,490 214,259,143
CAPITAL LEASE OBLIGATIONS, net of
current maturities 64,856 -
OTHER LONG-TERM LIABILITIES 202,231 191,074
COMMITMENTS (Note K)
STOCKHOLDERS' DEFICIT:
Class A common stock, voting,
authorized 5,000,000 shares of $.01 par value;
issued and outstanding 1,248,513 and 957,792
shares at March 31, 2000 and 1999,
respectively 12,485 9,578
Additional paid-in capital 64,525,477 49,275,087
Notes receivable from stockholders (606,395) (332,630)
Accumulated deficit (143,361,193) (141,651,800)
------------ ------------
Total stockholders' deficit (79,429,626) (92,699,765)
------------ ------------
$169,045,511 $142,906,843
============ ============
See notes to consolidated financial statements.
28
NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
Year Ended March 31,
2000 1999 1998
----------- ----------- -----------
REVENUES, net of returns $265,290,230 $217,516,312 $198,772,938
COSTS OF SALES 164,921,525 137,709,320 125,632,403
----------- ------------ -----------
Gross profit 100,368,705 79,806,992 73,140,535
OPERATING EXPENSES:
Selling, general and administrative 65,581,709 51,546,776 47,080,571
Depreciation 3,096,013 2,392,701 2,531,181
Amortization 9,319,993 6,148,971 5,626,334
Stock compensation costs - - 8,277,748
----------- ------------ -----------
77,997,715 60,088,448 63,515,834
----------- ------------ -----------
INCOME FROM OPERATIONS 22,370,990 19,718,544 9,624,701
OTHER EXPENSES (INCOME):
Interest expense 23,398,521 22,854,164 11,937,787
Interest income (355,935) (351,231) (328,750)
Other income (1,478,022) (1,099,766) (511,812)
----------- ------------ -----------
21,564,564 21,403,167 11,097,225
----------- ------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 806,426 (1,684,623) (1,472,524)
INCOME TAX EXPENSE 2,515,819 574,482 58,188
----------- ------------ -----------
LOSS BEFORE EXTRAORDINARY ITEM (1,709,393) (2,259,105) (1,530,712)
EXTRAORDINARY LOSS ON
EXTINGUISHMENT OF DEBT
(net of income tax benefit
of $2,460,238) - - (4,020,893)
----------- ------------ -----------
NET LOSS $ (1,709,393) $ (2,259,105) $ (5,551,605)
=========== ============ ===========
EARNINGS (LOSS) PER SHARE:
Basic:
Loss before extraordinary item $ (1.48) $ (2.37) $ (0.59)
Extraordinary loss on
extinguishment of debt - - (1.57)
----------- ------------ -----------
Net Loss $ (1.48) $ (2.37) $ (2.16)
=========== ============ ===========
Diluted:
Loss before extraordinary item $ (1.48) $ (2.37) $ (0.59)
Extraordinary loss on
extinguishment of debt - - (1.57)
----------- ------------ -----------
Net loss $ (1.48) $ (2.37) $ (2.16)
=========== ============ ===========
See notes to consolidated financial statements.
29
NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------------------------------------------------------------
Notes Retained
Common Common Additional Receivable Earnings
Stock Stock Paid-in From (Accumulated
A B Capital Stockholders Deficit) Total
-------- -------- ----------- ------------ ----------- -----------
BALANCE,
April 1, 1997 $ 27,519 $ 481 $30,972,000 $ (236,110) $ 933,289 $ 31,697,179
Issuance of Class A
Common Stock 39 - 147,111 - - 147,150
Repurchases of common
stock and warrants (27,558) (481) (31,119,111) - (134,774,379) (165,921,529)
Proceeds from
stock issued
in Recapitalization 9,530 - 49,993,150 - - 50,002,680
Costs of Recapitalization - - (968,015) - - (968,015)
Payment on stockholder note - - - 24,310 - 24,310
Net loss - - - - (5,551,605) (5,551,605)
-------- ------- ---------- --------- ------------- -----------
BALANCE, March 31, 1998 9,530 - 49,025,135 (211,800) (139,392,695) (90,569,830)
Issuance of Class A
Common Stock 48 - 249,952 (225,000) - 25,000
Payment on stockholder note - - - 104,170 - 104,170
Net loss - - - - (2,259,105) (2,259,105)
-------- ------- ---------- --------- ------------- -----------
BALANCE, March 31, 1999 9,578 - 49,275,087 (332,630) (141,651,800) (92,699,765)
Issuance of Class A
Common Stock 2,907 - 15,250,390 (273,765) - 14,979,532
Net loss - - - - (1,709,393) (1,709,393)
-------- ------- ---------- --------- ------------- -----------
BALANCE, March 31, 2000 $ 12,485 $ - $64,525,477 $ (606,395) $(143,361,193) $(79,429,626)
======== ======= ========== ========= ============= ===========
See notes to consolidated financial statements.
30
NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------
Year Ended March 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 2000 1999 1998
------------ ------------ -----------
Net loss $ (1,709,393) $ (2,259,105) $ (5,551,605)
Adjustments to reconcile net
loss to net cash flows from
operating activities:
Depreciation 3,096,013 2,392,701 2,531,181
Amortization of intangibles 11,017,964 7,802,928 9,336,363
Original issue debt discount
amortization 5,603,246 5,034,486 3,139,848
Loss on disposal of assets 18,044 89,800 264,285
Deferred income taxes (773,000) (883,200) (902,458)
Changes in operating assets and
liabilities, net of effect of
acquisitions:
Receivables (3,189,434) 368,840 (6,060,871)
Inventories (4,665,275) 18,827 (4,522,322)
Recoverable income tax 319,630 4,369,146 (3,799,673)
Prepaid expenses and other assets 84,054 (123,460) 140,573
Other assets 797,705 (1,019,776) 5,852
Accounts payable 5,318,621 (5,297,973) 955,350
Accrued employee compensation
and benefits 2,231,461 28,651 837,167
Accrued interest (77,285) (362,038) 522,667
Accrued expenses 133,125 182,985 145,798
Income taxes payable 552,928 - -
Deferred revenue 175,695 (87,361) 463,917
Other long-term liabilities 11,157 40,470 (348,082)
----------- ---------- ---------
Net cash flows from operating
activities 18,945,256 10,295,921 (2,842,010)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,542,471) (2,842,036) (3,689,571)
Bookstore acquisitions, net of
cash acquired (26,072,155) (2,085,881) (1,231,825)
Acquisition of other businesses - - (6,481,832)
Proceeds from sale of property
and equipment 65,197 97,586 64,754
Software development costs (694,830) (236,328) (209,535)
----------- ---------- ---------
Net cash flows from
investing activities (30,244,259) (5,066,659) (11,548,009)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt - - 214,997,320
Deferred financing costs (32,478) (377,966) (14,443,839)
Principal payments on long-term
debt (3,079,413) (1,327,696) (81,463,655)
Principal payments on capital lease
obligations (177,411) - -
Proceeds from issuance of
common stock 14,979,532 25,000 49,034,665
Net increase (decrease) in
revolving credit facility - (5,400,000) 5,400,000
Payment of merger consideration - - (163,328,856)
Proceeds from payment on notes
receivable from stockholders - 104,170 24,310
----------- ---------- ----------
Net cash flows from financing
activities 11,690,230 (6,976,492) 10,219,945
----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 391,227 (1,747,230) (4,170,074)
CASH AND CASH EQUIVALENTS,
Beginning of year 4,059,660 5,806,890 9,976,964
----------- ---------- ----------
CASH AND CASH EQUIVALENTS,
End of year $ 4,450,887 $ 4,059,660 $ 5,806,890
=========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOWS INFORMATION:
Cash paid (refunded) during
the year for:
Interest $ 16,174,589 $ 16,527,759 $ 13,518,646
Income taxes 2,424,436 (2,911,464) 2,300,081
Noncash investing and
financing activities:
Notes receivable from
shareholders recorded
upon issuance of common stock $ 273,765 $ 225,000 $ -
Stock repurchases accrued in
accounts payable - - 2,592,673
Common Stock issued for business
acquisitions - - 147,150
See notes to consolidated financial statements.
31
NBC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A. NATURE OF OPERATIONS
NBC Acquisition Corp. (the "Company") was formed for the purpose of
acquiring all of the outstanding capital stock of Nebraska Book Company, Inc.
("NBC"), effective September 1, 1995. The Company did not have substantive
operations prior to the acquisition of NBC. The purchase price of NBC was $106.0
million, which was funded primarily through the issuance of long-term debt. The
acquisition was accounted for by the purchase method of accounting and resulted
in excess of cost over fair value of net assets acquired ("goodwill") of
approximately $28.1 million.
The Company does not conduct significant activities apart from its
investment in NBC. Operational matters discussed in this report, including the
acquisition of retail bookstores and other related businesses, refer to
operations of NBC. References to "the Company" and "NBC" are used
interchangeably when discussing such operational matters. NBC participates in
the college bookstore industry by providing used textbooks to college bookstore
operators, by operating its own college bookstores and by providing proprietary
college bookstore information systems and consulting services.
RECAPITALIZATION: On February 13, 1998, the Company consummated a Merger
Agreement among NBC Merger Corp. (a newly created, indirect wholly-owned
subsidiary of HWH Capital Partners, LP. ["HWH"]), the Company and certain
shareholders of the Company pursuant to which the Company's outstanding debt and
stock were restructured (the "Recapitalization"). As the new investor did not
acquire substantially all of the common stock of the Company, a new basis of
accounting was not established in connection with the Recapitalization.
Significant components of the Recapitalization, together with the applicable
accounting effects, were as follows:
(i) HWH contributed $45.6 million in capital to NBC Merger Corp., which
was then merged into the Company, with the Company being the
surviving corporation.
(ii) Existing management shareholders of the Company reinvested
approximately $4.4 million in the Company. HWH and management
shareholders were reissued surviving corporation shares of Class A
Common Stock.
(iii) The Company and NBC obtained approximately $215.0 million in new
debt financing and retired substantially all of NBC's existing debt.
The early extinguishment of debt resulted in an extraordinary loss
on the transaction.
(iv) NBC agreed to purchase management's outstanding options under the
Company's 1995 Stock Incentive Plan for a cash payment in lieu of
the options. This resulted in stock based compensation of
approximately $8.3 million for the year ended March 31, 1998. In
addition, the Company agreed to purchase all outstanding warrants
for approximately $16.7 million, which was charged to additional
paid-in capital and retained earnings.
(v) The Company reacquired the outstanding shares of Class A and Class B
Common Stock of certain shareholders for approximately $149.2
million. This reacquisition of shares was accounted for as a
treasury stock transaction, and such reacquired shares were retired.
In connection with the Recapitalization, a transaction fee of $4.0 million
was paid to HWH. Additionally, HWH was reimbursed approximately $0.1 million for
expenses incurred by HWH in conjunction with the Recapitalization. Approximately
$0.6 million of such costs was charged by the Company to additional paid-in
capital as non-deductible costs of the Recapitalization. Of the remaining $3.5
million, the Company and NBC recorded $0.9 million and $2.6 million,
respectively, as debt issue costs and are amortizing such costs over the life of
the related debt.
32
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company and its subsidiary are as
follows:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and NBC. All significant intercompany accounts and
transactions are eliminated in consolidation.
REVENUE RECOGNITION: The Company recognizes revenue from product sales at
the time of shipment. The Company has established a program which, under certain
conditions, enables its customers to return product. The effect of this program
is estimated utilizing actual historical return experience and amounts are
adjusted accordingly. The Company recognizes revenues from the licensing of its
software products upon delivery or installation if the Company is contractually
obligated to install the software.
USE OF ESTIMATES: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from the estimates.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of cash on hand
and in the bank as well as short-term investments with maturities of three
months or less when purchased.
INVENTORIES: Inventories are stated at the lower of cost or market.
Inventories for wholesale operations are determined on the weighted average cost
method. Other inventories are determined on the first-in, first-out cost method.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Depreciation is determined using a combination of the straight-line and
accelerated methods. The majority of property and equipment have useful lives of
five to six years, with the exception of buildings which are depreciated over 30
years.
SOFTWARE DEVELOPMENT COSTS: On March 4, 1998 the American Institute of
Certified Public Accountants issued Statement of Position 98-1, ACCOUNTING FOR
THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE, which
provides guidance on accounting for the costs of computer software developed or
obtained for internal use and is effective for fiscal years beginning after
December 15, 1998. The Company's primary activities regarding the internal
development of software revolve around its proprietary college bookstore
information system (PRISM), which is utilized by the Company's retail bookstores
and also marketed to the general public. As the PRISM software developed
internally is intended for both internal use and sale to external customers, the
Company adheres to the guidance in 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. As a result, there was no significant impact on the
Company's financial position and results of operations from the early adoption
of Statement of Position 98-1 in fiscal 1998.
Development costs included in the research and development of new software
products and enhancements to existing software products associated with the
Company's proprietary college bookstore information systems are expensed as
incurred until technological feasibility has been established. After
technological feasibility is established, additional development costs are
capitalized and amortized over the lesser of five years or the economic life of
the related product. Recoverability of such capitalized costs is evaluated based
upon estimates of future undiscounted net revenues. Software costs capitalized
pertaining to WinPRISM, the Company's new Windows-based product which was
installed at four test sites in fiscal 2000 with three more sites slated for the
first quarter of fiscal 2001, approximated $0.4 million and $0.2 million for the
fiscal years ended March 31, 2000 and 1999, respectively. This product is
anticipated to be available for general release to the public in the third
quarter of fiscal 2001. During fiscal 2000, the Company also capitalized and
amortized certain costs associated with the development of WebPRISM, which was
licensed to TheCampusHub.com, Inc. subsequent to March 31, 2000 (see Note R to
the consolidated financial statements).
33
GOODWILL AND INTANGIBLE ASSETS: Intangible assets were acquired through the
acquisition of 100% of the stock of NBC effective September 1, 1995, and the
acquisition of various bookstore operations and other businesses. The Company
monitors events and changes in circumstances which may require a review of the
carrying value of goodwill at each consolidated balance sheet date to assess
recoverability based on estimated undiscounted future operating cash flows.
Impairments are recognized in operating results when a permanent diminution in
value occurs based on fair value. The assessment of the recoverability of
goodwill will be impacted if estimated future operating cash flows are not
achieved. Goodwill is amortized on a straight-line basis over periods ranging
from 3-15 years. Covenants not to compete are amortized on a straight-line basis
over the term of the agreements.
DEBT ISSUE COSTS: The costs related to the issuance of debt are capitalized
and amortized to interest expense on a straight-line basis over the lives of the
related debt.
DERIVATIVE FINANCIAL INSTRUMENTS: Interest rate swap agreements are utilized
by the Company to reduce the exposure to fluctuations in the interest rates on
its variable rate debt. The differential to be received or paid under such
agreements is recognized in income over the life of the agreements as
adjustments to interest expense.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of financial
instruments including cash and cash equivalents, accounts receivable, and
accounts payable approximate fair value as of March 31, 2000 and 1999, because
of the relatively short maturity of these instruments. The fair value of
long-term debt, including the current maturities and revolving credit facility,
was approximately $180.3 million and $203.1 million as of March 31, 2000 and
1999, respectively, as determined by quoted market value. The fair value of the
interest rate swap agreements (see note H) approximated $1.7 million and $(0.6)
million as of March 31, 2000 and 1999 using quotes from brokers and represents
the Company's gain (loss) on settlement if the existing agreements had been
settled on that date.
STOCK BASED COMPENSATION: The Company accounts for its stock-based
compensation under provisions of Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25").
INCOME TAXES: The Company provides for deferred income taxes based upon
temporary differences between financial statement and income tax bases of assets
and liabilities, and tax rates in effect for periods in which such temporary
differences are estimated to reverse.
EARNINGS PER SHARE: Basic earnings per share data are based on the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share data are based on the weighted-average number of common
shares outstanding and the dilutive effect of potential common shares including
stock options and warrants.
COMPREHENSIVE INCOME: The Company has no sources of other comprehensive
income. Therefore, comprehensive income consists solely of net income.
ACCOUNTING STANDARDS NOT ADOPTED: In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Statement becomes effective,
and will be adopted by the Company, in the first quarter of fiscal 2002. The
impact on the Company's financial position and results of operations is not
expected to be material.
RECLASSIFICATIONS: Certain items on the prior years' statements have been
reclassified to conform to the current year presentation.
34
C. ACQUISITIONS
Effective November 12, 1999, NBC acquired certain assets and liabilities of
Michigan College Book Company, Inc. and Ned's Berkeley Book Company, Inc.
(collectively referred to as "Ned's Bookstores"), an independent college
bookstore operation with 11 retail bookstores located in Michigan and
California, for approximately $10.2 million, net of cash acquired. NBC accounted
for this acquisition under the purchase method of accounting. Excess cost over
fair value of net assets acquired of approximately $7.8 million has been
recorded as goodwill and is being amortized over a period of three years. Such
amortization period was assigned based upon the factors outlined in APB Opinion
No. 17. The results of operations for Ned's Bookstores have been included in the
consolidated results of the Company from the date of acquisition. The
acquisition of Ned's Bookstores was funded in part through a $4.6 million
capital contribution from the Company to NBC. The Company raised the $4.6
million in capital through the sale of 87,922 shares of its Class A Common Stock
to certain shareholders, including HWH Capital Partners, L.P. and members of
senior management on December 6, 1999. The remaining funding was provided
through available cash funds.
Effective June 4, 1999, NBC acquired all of the outstanding common stock of
Triro, Inc., an independent college bookstore operation with 17 retail
bookstores located in Texas, New Mexico, and Arizona, for approximately $15.0
million, net of cash acquired. NBC accounted for this acquisition under the
purchase method of accounting. Excess cost over fair value of net assets
acquired of approximately $9.3 million has been recorded as goodwill and is
being amortized over a period of three years. Such amortization period was
assigned based upon the factors outlined in APB Opinion No. 17. The results of
operations for Triro, Inc. have been included in the consolidated results of the
Company from the date of acquisition. The acquisition of Triro, Inc. was funded
in part through a $10.3 million capital contribution from the Company to NBC.
The Company raised the $10.3 million in capital through the sale of 197,001
shares of its Class A Common Stock to certain shareholders, including HWH
Capital Partners, L.P. and members of senior management. The remaining funding
was provided through available cash funds and borrowings under NBC's revolving
credit facility.
The following table summarizing unaudited pro forma financial information
assumes the acquisitions discussed above had occurred at the beginning of each
period presented. The unaudited pro forma financial information is not
necessarily indicative of what the actual results of operations would have been
had the acquisitions occurred at the beginning of each period presented, nor
does it purport to indicate the results of future operations.
Year Ended March 31,
2000 1999
------------- --------------
Pro Forma Information:
Revenues, net of returns $ 278,137,891 $ 259,092,006
Net loss (2,807,962) (5,400,508)
Earnings (loss) per share:
Basic (2.25) (4.36)
Diluted (2.25) (4.36)
Additionally, NBC from time to time acquires bookstore operations which
generally are minimal in their impact to the Company. The purchase generally
involves paying cash for the inventory and fixed assets, as well as an amount
for goodwill. Goodwill recorded in such transactions is generally amortized on a
straight-line basis over a period of three years. In fiscal 2000 and 1999, NBC
acquired two and six such bookstore operations, respectively.
35
D. RECEIVABLES
Receivables are summarized as follows:
MARCH 31,
---------------------------
2000 1999
----------- -----------
Trade receivables, less allowance for
doubtful accounts of $175,899
and $165,899 at March 31, 2000
and 1999, respectively $12,935,801 $11,112,281
Receivables from book publishers for
returns 7,589,663 5,934,871
Advances for book buy-backs 1,738,587 1,721,953
Computer finance agreements, current
portion 145,910 95,999
Other 1,838,222 1,973,442
---------- ----------
$24,248,183 $20,838,546
========== ==========
Trade receivables include the effect of estimated product returns. The amount
of estimated product returns at both March 31, 2000 and 1999 was approximately
$3.3 million.
E. INVENTORIES
Inventories are summarized as follows:
MARCH 31,
---------------------------
2000 1999
----------- -----------
Wholesale $25,413,484 $25,889,722
College bookstores 31,137,643 21,400,003
Other 5,258,503 2,588,836
---------- ----------
$61,809,630 $49,878,561
========== ==========
Wholesale inventories include the effect of estimated product returns. The
amount of estimated product returns at both March 31, 2000 and 1999 was
approximately $1.6 million.
F. PROPERTY AND EQUIPMENT
A summary of the cost of property and equipment follows:
MARCH 31,
--------------------------
2000 1999
---------- ----------
Land $ 2,412,818 $ 2,385,293
Buildings and improvements 14,443,622 13,714,392
Leasehold improvements 5,912,012 4,756,844
Furniture and fixtures 4,571,529 3,710,158
Information systems 8,352,241 5,841,875
Automobiles and trucks 433,956 362,966
Machinery 425,295 344,531
Projects in process 7,147 96,475
---------- ----------
$36,558,620 $31,212,534
========== ==========
36
G. GOODWILL AND OTHER INTANGIBLES
Goodwill and intangible assets and related amortization are as follows:
MARCH 31,
--------------------------
2000 1999
---------- ----------
Goodwill $53,901,655 $37,624,132
Covenants not to compete 150,000 -
Debt issue costs 14,854,282 14,821,804
---------- ----------
68,905,937 52,445,936
Less: accumulated amortization 22,832,093 13,667,359
---------- ----------
$46,073,844 $38,778,577
========== ==========
H. LONG-TERM DEBT
On February 13, 1998, the Company obtained new financing as part of the
Recapitalization (See Note A). Substantially all of the Company's previous debt
facilities were paid off with the proceeds of the new financing. The early
retirement of the previous debt facilities resulted in an extraordinary loss for
the prepayment fees and unamortized discount on the subordinated notes as well
as the write-off of the debt issue costs on the retired debt. The new financing
included a bank-administered senior credit facility (the "Senior Credit
Facility") provided to NBC through a syndicate of investors. The facility is
comprised of a $27.5 million term loan (the "Tranche A Loan"), a $32.5 million
term loan (the "Tranche B Loan") and a $50.0 million revolving credit facility
(the "Revolving Credit Facility").
The Revolving Credit Facility expires on March 31, 2004. Availability under
the Revolving Credit Facility is determined by the calculation of a borrowing
base, which at any time is equal to a percentage of eligible accounts receivable
and inventory. The calculated borrowing base at March 31, 2000 was approximately
$38.5 million. The Revolving Credit Facility was unused at March 31, 2000.
The interest rate on the Senior Credit Facility is prime plus an applicable
margin of up to 1.50% or, on Eurodollar borrowings, Eurodollar rate plus an
applicable margin of up to 2.50%. Additionally, there is a 0.5% commitment fee
for the average daily unused amount of the Revolving Credit Facility. The
average borrowings under the Revolving Credit Facility for the years ended March
31, 2000 and 1999 were approximately $14.2 million and $12.0 million at an
average rate of 9.3% and 9.6%, respectively.
The Senior Credit Facility is collateralized by substantially all of the
Company's assets. The Senior Credit Facility also stipulates that excess cash
flows as defined in the credit agreement dated February 13, 1998 (the "Credit
Agreement") shall be applied initially towards prepayment of the term loans and
then utilized to permanently reduce commitments under the Revolving Credit
Facility. As of March 31, 2000, there was no excess cash flow payment due. The
fiscal 1999 excess cash flow payment of approximately $3.6 million due September
29, 1999 was waived by the lenders.
Additional funding of the Recapitalization included the proceeds of the
issuance by NBC of $110.0 million face amount of 8.75% senior subordinated notes
due 2008 (the "Senior Subordinated Notes") and the issuance by the Company of
$76.0 million face amount of 10.75% senior discount debentures due 2009 (the
"Senior Discount Debentures"). The proceeds of the Senior Discount Debentures
were discounted in the amount of approximately $31.0 million and will accrete in
value at the rate of 10.75% compounded semiannually until February 15, 2003, at
which time interest payments will begin.
37
Borrowings consist of the following:
MARCH 31,
--------------------------
2000 1999
----------- ----------
Tranche A Loan, due March 31, 2004,
quarterly principal payments, plus
interest at a floating rate based on
Eurodollar rate plus 2.25% (8.46% and
7.25% at March 31, 2000 and 1999,
respectively) $ 24,000,000 $ 26,562,500
Tranche B Loan, due March 31, 2006,
quarterly principal payments, plus
interest at a floating rate based on
Eurodollar rate plus 2.50% (8.71% and
7.50% at March 31, 2000 and 1999,
respectively) 31,625,000 32,125,000
Senior subordinated notes, unsecured,
due February 15, 2008, semi-annual
interest payments at a fixed rate
of 8.75% 110,000,000 110,000,000
Senior discount debentures, unsecured,
maturing February 15, 2009,
semi-annual interest payments at a
rate of 10.75%, commencing
August 15, 2003, net of a discount of
$19,750,100 and $25,353,346
at March 31, 2000 and 1999,
respectively 56,249,900 50,646,654
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% 552,914 569,827
------------ ------------
222,427,814 219,903,981
Less current maturities (4,456,324) (5,644,838)
------------ ------------
$217,971,490 $214,259,143
============ ============
The Senior Credit Facility requires the Company to maintain certain
financial ratios and contains a number of other covenants that among other
things, restrict the ability to incur additional indebtedness, dispose of
assets, make capital expenditures, make loans or advances and pay dividends,
except that, among other things, NBC may pay dividends to the Company (i) after
August 15, 2003 in an amount not to exceed the amount of interest required to be
paid on the Senior Discount Debentures and (ii) to pay corporate overhead
expenses not to exceed $250,000 per year and any taxes due by the Company.
The indenture governing the Senior Discount Debentures restricts the ability
of the Company and its Restricted Subsidiaries (as defined in the indenture) to
pay dividends or make other Restricted Payments (as defined in the indenture) to
their respective stockholders, subject to certain exceptions, unless certain
conditions are met, including that (i) no default under the indenture shall have
occurred and be continuing, (ii) the Company shall be permitted by the indenture
to incur additional indebtedness and (iii) the amount of the dividend or payment
may not exceed a certain amount based on, among other things, the Company's
consolidated net income. The indenture governing the Senior Subordinated Notes
contains similar restrictions on the ability of NBC and its Restricted
Subsidiaries to pay dividends or make other Restricted Payments to their
respective stockholders.
During fiscal 1999, NBC entered into separate five-year amortizing interest
rate swap agreements with two financial institutions whereby NBC's variable rate
Tranche A and B Term Loans have been effectively converted into debt with a
fixed rate of 5.815% plus the applicable margin. The notional amount under each
agreement was approximately $27.8 million at March 31, 2000. Such notional
amounts are reduced periodically by amounts equal to the scheduled principal
payments on the Tranche A and B Term Loans. NBC is exposed to credit loss in the
event of nonperformance by the counterparties to the interest rate swap
38
agreements. NBC anticipates the counterparties will be able to fully satisfy
their obligations under the agreements. NBC settled a previous interest rate
swap agreement in February, 1998 as part of the Recapitalization at a cost of
approximately $0.5 million. Such cost is reflected in the consolidated statement
of operations as part of the extraordinary loss on extinguishment of debt.
At March 31, 2000, the aggregate maturities of long-term debt for the next
five years were as follows:
FISCAL YEAR
-----------
2001 $4,456,324
2002 6,308,449
2003 6,823,317
2004 8,500,950
2005 11,216,381
I. NOTES RECEIVABLE FROM STOCKHOLDERS
Notes receivable from stockholders reflected as a component of stockholders'
deficit pertain to notes obtained from certain NBC executive officers in
conjunction with certain issuances of the Company's Class A Common Stock. Such
notes mature on various dates from August, 2002 to January, 2010, are payable at
maturity, and bear interest at various rates from 5.25% to 6.04%.
J. INCOME TAXES
The provision (benefit) for income taxes consists of:
YEAR ENDED MARCH 31,
-------------------------------------
2000 1999 1998
---------- --------- --------
Current:
Federal $2,669,915 $1,258,891 $848,562
State 618,904 198,791 112,084
Deferred (773,000) (883,200) (902,458)
---------- ---------- --------
$2,515,819 $ 574,482 $ 58,188
========== ========== ========
In fiscal 1998, the actual income tax benefit associated with the
extraordinary item differs from the benefit computed by applying the Federal
income tax rate as a result of the effect of state income tax benefits
associated with the extraordinary loss. The income tax benefit allocated to the
extraordinary item consisted of the following:
Current $2,460,238
Deferred -
----------
$2,460,238
==========
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 and extraordinary item:
YEAR ENDED MARCH 31,
-----------------------------------
2000 1999 1998
-------- -------- -------
Statutory rate 34.0% (34.0)% (34.0)%
State income tax effect 40.7 1.3 (4.0)
Amortization in excess of
purchase price over net assets
acquired 187.1 38.0 17.6
Change in estimate of income tax
liabilities 31.0 21.9 17.1
Other 19.2 6.9 7.3
------ ------ ------
312.0% 34.1% 4.0%
====== ====== ======
39
The components of the deferred tax assets consist of the following:
MARCH 31,
-----------------------
2000 1999
---------- ---------
Deferred income tax assets
(liabilities), current:
Vacation accruals $ 420,483 $ 372,749
Inventory 603,037 456,360
Allowance for doubtful accounts 66,771 62,975
Product returns 618,637 618,637
Other (110,135) (42,565)
---------- ----------
1,598,793 1,468,156
---------- ----------
Deferred income tax assets,
noncurrent:
Deferred compensation agreements 76,767 72,532
Book over tax goodwill
amortization 1,775,263 944,676
Covenant not to compete 1,587,340 1,733,511
---------- ----------
3,439,370 2,750,719
---------- ----------
$5,038,163 $4,218,875
========== ==========
The non-current portion of deferred tax assets is classified in other
assets.
K. LEASE OBLIGATIONS
The Company is obligated under various capital leases for certain equipment
that expire at various dates through 2003. Capitalized leased equipment included
in property and equipment was approximately $0.1 million at March 31, 2000, net
of accumulated amortization.
The Company leases bookstore facilities and data processing equipment under
noncancelable operating leases expiring at various dates through fiscal 2023.
Certain of the leases are based on a percentage of sales, ranging from 3.0% to
11.0%.
Aggregate minimum lease payments under noncancelable operating leases and
future minimum capital lease payments for the years ending March 31 are as
follows:
Capital Operating
Year Leases Leases
---- ----------- ---------
2001 $ 67,904 $ 6,649,000
2002 46,250 6,067,000
2003 23,880 5,073,000
2004 - 4,049,000
2005 - 2,984,000
Thereafter - 10,661,000
----------- -----------
Total minimum lease payments 138,034 $35,483,000
===========
Amount representing interest (13,997)
-----------
Present value of minimum lease
payments $ 124,037
===========
Total rent expense for the years ended March 31, 2000, 1999 and 1998 was
approximately $8.2 million, $6.2 million and $6.0 million, respectively.
Percentage rent expense for the years ended March 31, 2000, 1999, and 1998 was
approximately $1.8 million, $1.6 million and $1.5 million, respectively.
40
L. RETIREMENT PLAN
The Company's subsidiary participates in and sponsors a 401(k) compensation
deferral plan. The plan covers substantially all employees. The plan provisions
include employee contributions based on a percentage of compensation along with
a sponsor base contribution in addition to a limited matching feature. The
sponsor contributions for the years ended March 31, 2000, 1999, and 1998 were
approximately $0.8 million, $0.7 million and $0.7 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 death,
resignation or termination, voluntary or involuntary. Interest is accrued at the
prime rate adjusted semi-annually on January 1 and July 1 and is compounded as
of March 31. The liability for the deferred compensation is included in other
long-term liabilities.
N. STOCK-BASED COMPENSATION
The Company had three stock-based compensation plans established to provide
for the granting of options to purchase Class A Common Stock, two of which are
in effect at March 31, 2000. Details regarding each of the three plans are as
follows:
1995 STOCK INCENTIVE PLAN - This plan provided for granting of options to
purchase 200,000 shares of Class A Common Stock to designated employees,
officers and directors. The options were to be in the form of incentive stock
options or non-qualified stock options. The options granted were to vest with
respect to a certain percentage of the options through March 31, 2000, provided
that the Company's cumulative earnings before interest, income taxes,
depreciation and amortization met certain targeted amounts as defined in the
plan. The options generally were to expire ten years from the date of grant and
were granted at an exercise price of $10 per share. All of the options were
bought out as part of the Recapitalization on February 13, 1998 (see Note A) and
the plan was terminated.
1998 PERFORMANCE STOCK OPTION PLAN - This plan, which was adopted on June
30, 1998, provides for the granting of options to purchase 52,000 shares of the
Company's Class A Common Stock to selected members of senior management of the
Company and its affiliates. All options granted are intended to be nonqualified
stock options, although the plan also provides for incentive stock options. The
Company will grant a portion of the available options in fiscal years 1999-2002
upon the attainment of pre-established financial targets. Twenty-five percent of
the options granted become exercisable immediately upon granting, with the
remaining options becoming exercisable in 25% increments over the subsequent
three years on the anniversary of the date of grant. The options have an
exercise price of not less than fair market value on the date the options are
granted and expire ten years from the date of grant. At March 31, 2000, there
were 42,470 options available for grant under the plan.
1998 STOCK OPTION PLAN - This plan, which was also adopted on June 30, 1998,
provides for the granting of options to purchase 31,000 shares of the Company's
Class A Common Stock to selected employees, officers, and directors of the
Company and its affiliates. All options granted are intended to be nonqualified
stock options, although the plan also provides for incentive stock options. The
Company will grant such options at the discretion of a committee designated by
the Board of Directors (the Committee). Twenty-five percent of the options
granted become exercisable immediately upon granting, with the remaining options
becoming exercisable in 25% increments over the subsequent three years on the
anniversary of the date of grant. Incentive stock options have an exercise price
of not less than fair market value on the date the options are granted, while
the Committee determines the exercise price for nonqualified options, which may
be below fair market value, at the time of grant. All options expire ten years
from the date of grant. At March 31, 2000, there were 6,306 options available
for grant under the plan.
No compensation cost was recognized for the options granted to employees in
fiscal 2000 and 1999 as the exercise price was greater than the estimated fair
value (including a discount for the holder's minority interest position and
illiquidity of the Class A Common Stock) of the Company's Class A Common Stock
41
on the date of grant. Compensation cost related to stock-based compensation was
$8,277,748 for the year ended March 31, 1998.
A summary of the Company's stock-based compensation activity related to
stock options for each of the three plans for the three years ended March 31,
2000 is as follows:
Year Ended March 31,
1998
---------------------
Weighted-
Average
Exercise
Number Price
----------- --------
1995 Stock Incentive Plan:
Outstanding - beginning of year 170,000 $ 10.00
Granted 30,000 10.00
Expired/terminated (200,000) 10.00
Exercised - -
---------- --------
Outstanding - end of year - $ -
========== ========
There were no options exercisable at March 31, 1998.
Year Ended March 31,
2000 1999
------------------- --------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Number Price Number Price
--------- -------- ---------- ---------
1998 Performance Stock Option Plan:
Outstanding - beginning of year 9,530 $ 52.47 - $ -
Granted - - 9,530 52.47
Expired/terminated - - - -
Exercised - - - -
-------- -------- ---------- ---------
Outstanding - end of year 9,530 $ 52.47 9,530 $ 52.47
======== ======== ========== =========
There were 4,765 and 2,382 options exercisable at March 31, 2000 and 1999,
respectively, with a weighted-average exercise price per option of $52.47. All
options outstanding at March 31, 2000 have an exercise price of $52.47 per
option and a weighted-average remaining contractual life of 8.8 years.
Year Ended March 31,
2000 1999
------------------- --------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Number Price Number Price
--------- -------- ---------- ---------
1998 Stock Option Plan:
Outstanding - beginning of year 13,200 $ 52.47 - $ -
Granted 11,594 52.47 13,200 52.47
Expired/terminated (100) 52.47 - -
Exercised - - - -
-------- -------- -------- --------
Outstanding - end of year 24,694 $ 52.47 13,200 $ 52.47
======== ======== ======== ========
There were 9,448 and 3,300 options exercisable at March 31, 2000 and 1999,
respectively, with a weighted-average exercise price per option of $52.47. All
options outstanding at March 31, 2000 have an exercise price of $52.47 per
option and a weighted-average remaining contractual life of 9.1 years.
42
If the Company accounted for its stock-based compensation using the fair
value method prescribed by SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, the weighted-average grant-date fair value of options granted
under the 1998 Performance Stock Option Plan in fiscal 1999 would have been
$8.85 per option. The weighted-average grant-date fair value of options granted
under the 1998 Stock Option Plan in fiscal 2000 and 1999 would have been $9.26
and $8.64 per option, respectively. The fair value of options granted was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:
Year Ended Year Ended
March 31, 2000 March 31, 1999
-------------- ---------------
Risk-free interest rate 6.06% 4.50%
Dividend yield - -
Expected volatility 1.00% 1.00%
Expected life (years) 3 4
The weighted-average grant-date fair value of options granted under the 1995
Stock Incentive Plan in fiscal 1998 was $42.47 per option. The fair value was
determined based upon the buy-out price as part of the Recapitalization on
February 13, 1998.
The pro forma impact on net loss and diluted loss per share of accounting
for stock-based compensation using the fair value method required by SFAS 123 is
as follows:
Year Ended March 31,
2000 1999 1998
--------------- -------------- --------------
Net loss:
As reported $ (1,709,393) $ (2,259,105) $ (5,551,605)
Pro forma (1,775,050) (2,321,093) (1,692,220)
Diluted loss per share:
As reported $ (1.48) $ (2.37) $ (2.16)
Pro forma (1.54) (2.43) (0.66)
O. SEGMENT INFORMATION
The following segment reporting information is provided in accordance with
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION.
The Company's operating segments are determined based on the way that
management organizes the segments for making operating decisions and assessing
performance. Management has organized the Company's segments based upon
differences in products and services provided. The Company has three reportable
segments: wholesale operations, college bookstore operations and complementary
services. The wholesale operations segment consists primarily of selling used
textbooks to college bookstores, buying them back from students or college
bookstores at the end of each school semester and then reselling them to college
bookstores. The college bookstore operations segment encompasses the operating
activities of the Company's 98 college bookstores as of March 31, 2000 located
on or adjacent to college campuses. The complementary services segment includes
book-related services such as a centralized buying service, distance education
materials, and computer hardware and software.
43
The accounting policies of the Company's segments are the same as those
described in the summary of significant accounting policies in Note B. The
Company primarily accounts for intersegment sales as if the sales were to third
parties (at current market prices). With the exception of cash and cash
equivalents, certain receivables and other assets, and inventories, assets, net
interest expense, taxes, and extraordinary item are not allocated between the
Company's segments; instead, such balances are accounted for in a corporate
administrative division. The following table provides selected information about
profit or loss and assets on a segment basis for the three years ended March 31,
2000.
College
Wholesale Bookstore Complimentary
Operations Operations Services Total
------------ ------------ ------------ -------------
Year ended March 31, 2000:
External customer revenues $ 89,999,597 $157,748,537 $ 17,542,096 $ 265,290,230
Intersegment revenues 16,458,427 180,064 2,407,090 19,045,581
Depreciation and amortization
expense 321,936 7,444,799 2,280,512 10,047,247
Income (loss) before interest,
taxes and extraordinary item 26,335,614 8,520,861 (2,884,333) 31,972,142
Total assets 28,636,070 34,829,430 5,950,258 69,415,758
Year ended March 31, 1999:
External customer revenues $ 85,324,194 $120,745,188 $ 11,446,930 $ 217,516,312
Intersegment revenues 12,105,940 - 915,473 13,021,413
Depreciation and amortization
expense 319,702 3,171,027 1,894,323 5,385,052
Income (loss) before interest,
taxes and extraordinary item 22,662,669 7,399,011 (2,559,067) 27,502,613
Total assets 28,898,295 23,600,603 4,228,300 56,727,198
Year ended March 31, 1998:
External customer revenues $ 79,865,566 $110,584,757 $ 8,322,615 $ 198,772,938
Intersegment revenues 10,729,624 - 1,275,197 12,004,821
Depreciation and amortization
expense 404,384 2,618,451 822,056 3,844,891
Income (loss) before interest,
taxes and extraordinary item 20,873,859 6,835,911 (1,468,199) 26,241,571
Total assets 27,441,423 23,941,963 5,779,487 57,162,873
The following table reconciles segment information presented above with
consolidated information as presented in the consolidated financial statements
for the three years ended March 31, 2000.
44
Year Ended March 31,
2000 1999 1998
------------- ------------ -------------
Revenues:
Total for reportable segments $284,335,811 $230,537,725 $210,777,759
Elimination of intersegment revenues (19,045,581) (13,021,413) (12,004,821)
------------- ------------ -------------
Consolidated total $265,290,230 $217,516,312 $198,772,938
============= ============ =============
Depreciation and Amortization Expense:
Total for reportable segments $ 10,047,247 $ 5,385,052 $ 3,844,891
Corporate administration 2,368,759 3,156,620 4,312,624
------------- ------------ -------------
Consolidated total $ 12,416,006 8,541,672 $ 8,157,515
============= ============ =============
Income Before Interest, Taxes and
Extraordinary Item:
Total for reportable segments $ 31,972,142 $ 27,502,613 $26,241,571
Corporate administrative costs (8,123,130) (6,684,303) (16,105,058)
------------ ------------ -------------
23,849,012 20,818,310 10,136,513
Interest expense, net (23,042,586) (22,502,933) (11,609,037)
------------ ------------ -------------
Consolidated income (loss) before taxes
and extraordinary item $ 806,426 $ (1,684,623) $ (1,472,524)
============ ============ =============
Total Assets:
Total for reportable segments $ 69,415,758 $ 56,727,198 $ 57,162,873
Assets not allocated to segments:
Receivables 20,977,765 17,572,090 17,414,958
Recoverable income tax - 4,902 4,374,048
Deferred income taxes 1,598,793 1,468,156 1,183,529
Property and equipment, net 25,760,825 23,188,485 22,731,907
Goodwill and other intangibles, net 46,073,844 38,778,577 44,866,800
Other assets 4,791,000 3,653,180 2,798,270
Other 427,526 1,514,255 1,612,869
------------ ------------ -------------
Consolidated total $169,045,511 $142,906,843 $152,145,254
============ ============ =============
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. EARNINGS PER SHARE
Weighted-average shares outstanding for the years ended March 31, 2000, 1999
and 1998 were 1,152,325 shares, 954,059 shares and 2,565,267 shares,
respectively. Options outstanding under the Company's stock option plans have no
impact on diluted earnings per share as the exercise price of such options is
greater that the estimated fair value (including a discount for the holder's
minority interest position and illiquidity of the Class A Common Stock) of the
Class A Common Stock underlying the options as of March 31, 2000 and 1999. There
were no stock options or warrants outstanding for the year ended March 31, 1998.
Q. OTHER INCOME
Other income is summarized as follows:
Year Ended March 31,
2000 1999 1998
------------- ------------ -----------
Reimbursed freight out $ 916,875 $ 402,518 $ 253,523
Equity in earnings (loss) of
joint venture (101,709) 282,703 (7,616)
Rental income 224,723 122,975 210,942
Commission income 163,232 125,149 99,982
Other 274,901 166,421 (45,019)
------------ ------------ ----------
$ 1,478,022 $ 1,099,766 $ 511,812
============ ============ ==========
45
R. SUBSEQUENT EVENT
Subsequent to March 31, 2000, NBC entered into several agreements related to
its WebPRISM and CampusHub E-commerce software capabilities with a newly created
entity, TheCampusHub.com, Inc., which is partially owned by the Company's
majority owner. Such agreements included an equity option agreement providing
NBC the opportunity to acquire 25% of the initial common shares outstanding of
TheCampusHub.com, Inc.; a management services agreement effective for a period
of three years that reimburses NBC for certain direct costs incurred on behalf
of TheCampusHub.com, Inc. and also pays NBC $500,000 per year for certain shared
management and administrative support; and a technology sale and license
agreement that provides for NBC to license its E-commerce software capabilities
to TheCampusHub.com, Inc. for $500,000 per year over a period of three years and
provides TheCampusHub.com, Inc. with an option to purchase such software
capabilities from NBC during that three year period. NBC's Senior Credit
Facility was amended in April, 2000 to provide for these transactions.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
There were no changes in or disagreements with accountants on accounting and
financial disclosure for the fiscal year ended March 31, 2000.
46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers and members of the Board of Directors of the Company
and their ages are as follows:
NAME AGE POSITION
---- --- --------
Robert B. Haas 52 Chairman and Director
Douglas D. Wheat 49 Director
Mark W. Oppegard 50 President/Chief Executive Officer, Secretary and
Director
Alan G. Siemek 39 Vice President and Treasurer
Barry S. Major 43 Chief Operating Officer, NBC
William H. Allen 57 Vice President of Warehouse Operations, NBC
Thomas A. Hoff 52 Vice President of Retail Division, NBC
Michael J. Kelly 42 Vice President of E-commerce, NBC
Larry R. Rempe 52 Vice President of Information Systems, NBC
Kenneth F. Jirovsky 56 Vice President of Sales and Marketing, NBC
Ardean A. Arndt 58 Vice President of Administration and Secretary, NBC
The business experience, principal occupation and employment as well as the
periods of service of each of the directors and executive officers of the
Company during the last five years are set forth below.
ROBERT B. HAAS became Chairman and a Director of the Company upon the
consummation of the Recapitalization. Mr. Haas has been actively involved in
private investments since 1978. He has served as Chairman of the Board and Chief
Executive Officer of Haas Wheat since 1995; he has also been Chairman of the
Board and Chief Executive Officer of Haas Wheat Advisory Partners Incorporated
since 1992 and Chairman of the Board of Haas & Partners Incorporated since 1989
(each of which is a private investment firm specializing in leveraged
acquisitions). Mr. Haas serves as a director of Specialty Foods Acquisition
Corporation, Specialty Foods Corporation (a producer of specialty food
products), Sybron International Corporation, AMN Healthcare, Inc. and Walls
Holding Company, Inc. and is the Chairman of the Board of Playtex Products, Inc.
(a consumer products company).
DOUGLAS D. WHEAT became a Director of the Company upon the consummation of
the Recapitalization. Mr. Wheat has been President of Haas Wheat since 1995 and
President of Haas Wheat Advisory Partners Incorporated since 1992; he was
Co-Chairman of Grauer & Wheat, Inc. (a private investment firm) from 1989 to
1992 and Senior Vice President of Donaldson, Lufkin & Jenrette Securities
Corporation from 1985 to 1989. Mr. Wheat serves as a director of Specialty Foods
Acquisition Corporation, Specialty Foods Corporation, Smarte Carte Corporation,
Walls Holding Company, Inc., AMN Healthcare, Inc. and Playtex Products, Inc.
MARK W. OPPEGARD has served in the college bookstore industry for 30 years
(all of which have been with the Company (since its inception in 1995) and its
wholly-owned subsidiary, NBC) and became President/Chief Executive Officer,
Secretary and a Director of the Company and Chief Executive Officer of NBC upon
consummation of the Recapitalization on February 13, 1998. Additionally, Mr.
Oppegard has served as President of NBC since 1992 and as a Director of NBC
since 1995. Prior to the Recapitalization, Mr. Oppegard served as Vice
President, Secretary, Assistant Treasurer and a Director of the Company between
1995 and 1998. Prior to 1992, Mr. Oppegard served in a series of positions at
NBC, including Vice President of the college bookstore operations. He is
currently a director of NACSCORP, INC., a distribution company serving the
college bookstore industry.
47
ALAN G. SIEMEK was named Vice President and Treasurer of the Company and
Chief Financial Officer, Treasurer and Assistant Secretary of NBC in July, 1999.
Prior to joining the Company, Mr. Siemek served as Corporate Controller at SITEL
Corporation (SITEL), a company listed on the New York Stock Exchange that
provides outsourced telephone and internet-based sales and customer service,
starting in 1997. Between 1994 and 1997, Mr. Siemek served in the positions of
Director and Manager of SEC Reporting and Risk Management for MFS
Communications, a billion dollar telecommunications firm. Prior to joining MFS
Communications, Mr. Siemek spent eleven years in public accounting with Coopers
& Lybrand LLP in their Omaha and New York offices.
BARRY S. MAJOR was named Chief Operating Officer of NBC in January, 1999.
Prior to joining NBC, Mr. Major served in various executive management positions
at SITEL. Joining SITEL in 1995 as the Executive Vice President of Finance, Mr.
Major was named Chief Financial Officer in 1996 and assumed the role of
President of the North America Region in 1997. Between 1985 and 1995, Mr. Major
served in a series of positions, including President in 1995, Executive Vice
President, and Senior Vice President/Credit Manager, with American National
Corporation, a multi-bank holding company operating three banks throughout Omaha
and Southeast Nebraska.
WILLIAM H. ALLEN has served in the college bookstore industry for 35 years
(of which 26 have been with the Company (since its inception in 1995) and its
wholly-owned subsidiary, NBC) and has been Vice President of Warehouse
Operations for NBC since 1994. Between 1974 and 1994, Mr. Allen served in a
series of positions, including assistant manager of the wholesale operations.
Prior to joining NBC in 1974, Mr. Allen was employed by the Missouri Store
Company, a predecessor of MBS.
THOMAS A. HOFF has served in the college bookstore industry for 13 years
(all of which have been with the Company (since its inception in 1995) and its
wholly-owned subsidiary, NBC) and has been Vice President of Retail Division for
NBC since 1992. Mr. Hoff served as an assistant to the Vice President of College
Bookstore Operations between 1987 and 1992.
MICHAEL J. KELLY was named Vice President of E-commerce of NBC in November,
1999. Prior to joining NBC, Mr. Kelly served in various executive management
positions at SITEL. Joining SITEL in 1995 as a Business Unit Vice President of
Administration and Finance, Mr. Kelly was named a Business Unit President in
1997, assumed the role of Chief Information Officer for the North America Region
in March, 1998, and was named Chief Technology Officer for Global Operations in
August, 1998. Between 1981 and 1995, Mr. Kelly served as Director of Information
Technology for Father Flanagan's Boys Home, a non-profit organization offering
services to troubled children.
LARRY R. REMPE has served in the college bookstore industry for 14 years
(all of which have been with the Company (since its inception in 1995) and its
wholly-owned subsidiary, NBC) and has been Vice President of Information Systems
for NBC since 1986. Between 1974 and 1986, Mr. Rempe served in various positions
for Lincoln Industries, Inc. ("Lincoln"), a holding company that owned NBC until
1995.
KENNETH F. JIROVSKY has served in the college bookstore industry for 39
years (all of which have been with the Company (since its inception in 1995) and
its wholly-owned subsidiary, NBC) and has been Vice President of Sales and
Marketing for NBC since 1986. Prior to 1986 Mr. Jirovsky served in a series of
positions, including assistant manager of the wholesale operations.
ARDEAN A. ARNDT has served in the college bookstore industry for 15 years
(all of which have been with the Company (since its inception in 1995) and its
wholly-owned subsidiary, NBC) and has served as Vice President of Administration
and Secretary for NBC since 1985. Between 1981 and 1985, Mr. Arndt was Vice
President of Administration for Lincoln. Between 1966 and 1981, Mr. Arndt served
in various positions for Lincoln.
48
ITEM 11. EXECUTIVE COMPENSATION.
The following tables and paragraphs provide information concerning
compensation paid by the Company for the last three fiscal years to its
President/Chief Executive Officer and to the five other most highly compensated
executive officers earning in excess of $100,000 in annual salary and bonuses;
compensation paid to Directors; and employment contracts in place with executive
officers.
The table presented below summarizes annual and long-term compensation,
including stock compensation, to such persons for the last three fiscal years:
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
---------------------- ------------
Number
of Securities
Fiscal Underlying All Other
Name and Principal Position Year Salary Bonus Options (1) Compensation (2)
- ----------------------------------- ----- ----------- --------- ------------ --------------
Mark W. Oppegard - President, Chief
Executive Officer and Director, NBC 2000 $230,769 $152,000 $ - $ 2,180
1999 197,808 - - 2,985
1998 176,539 - - 3,017
Barry S. Major - Chief Operating
Officer, NBC 2000 204,615 130,000 - 2,080
1999 40,769 60,000 9,530 -
1998 - - - -
Alan G. Siemek - Chief Financial
Officer, Treasurer, and Assistant
Secretary, NBC 2000 111,481 133,000 6,353 2,027
1999 - - - -
1998 - - - -
Larry R. Rempe - Vice President of
Information Systems, NBC 2000 122,385 50,000 - 2,276
1999 106,846 - - 3,092
1998 102,846 - - 3,017
Kenneth F. Jirovsky - Vice President
of Sales and Marketing, NBC 2000 103,385 60,000 - 2,516
1999 100,923 - - 3,376
1998 98,923 - - 3,017
William H Allen - Vice President of
Warehouse Operations, NBC 2000 103,385 60,000 - 2,516
1999 100,923 - - 3,376
1998 85,923 - - 3,521
(1) The stock options were granted at an exercise price of $52.47/share
("Founder's Price"). The estimated fair market value of the Company's
Class A Common Stock underlying the stock options, which includes a
discount for the holder's minority interest position and illiquidity of
the Class A Common Stock, was less than the exercise price on the date
of grant.
(2) Consists of Company matching contributions to the NBC Retirement Plan
and life insurance premiums paid by the Company on the executive's
behalf.
49
Presented below is information in tabular format regarding individual grants
of stock options to certain executive officers of the Company for the year ended
March 31, 2000:
Options Granted During the Year Ended March 31, 2000
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 2000 Per Share Date Value (1)
- ------------------------------ --------- --------- --------- --------- --------
Alan G. Siemek - Chief Financial
Officer, Treasurer, and Assistant
Secretary, NBC 6,353 54.8% $ 52.47 07/01/09 $ 59,868
(1) Grant date present value was determined using a Black-Scholes option
pricing model, assuming a 5.68% risk-free interest rate, 1.0% expected
volatility, and an expected life of approximately 3.5 years.
The following table provides information concerning each exercise of stock
options by certain executive officers of the Company during the year ended March
31, 2000 as well as the value of unexercised options as of March 31, 2000:
Aggregated Option Exercises During the Year Ended March 31, 2000
and Option Value as of March 31, 2000
Number
of Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Options at Options at
March 31, 2000 March 31, 2000
------------- -------------
Shares
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- ------------------------------ --------- -------- ------------- -------------
Barry S. Major - Chief
Operating Officer, NBC - $ - 4,765/4,765 $ - / $ -
Alan G. Siemek - Chief
Financial Officer, Treasurer,
and Assistant Secretary, NBC - - 1,588/4,765 - /-
COMPENSATION OF DIRECTORS
Directors of the Company receive no compensation for services but are
reimbursed for out-of-pocket expenses.
50
EMPLOYMENT AGREEMENTS
The Company has employment agreements expiring March 31, 2001 with Mark W.
Oppegard and eight other senior executive officers of the Company. Such
agreements (the "Employment Agreements") with the aforementioned senior
executive officers (each, an "Executive") provide for an annual base salary as
determined by the Board of Directors, for incentive compensation based upon the
attainment of financial objectives to be established by the Board of Directors
(or a committee thereof) after considering the recommendation of the chief
executive officer, and for customary fringe benefits. The amounts of salaries
are as follows: Mr. Oppegard, $237,500 per annum; Mr. Major, $210,000 per annum;
Mr. Siemek, $155,000 per annum; Mr. Rempe, $150,000 per annum; Mr. Jirovsky,
$105,000 per annum; and Mr. Allen, $105,000 per annum. The Employment Agreements
provide that their term will be automatically extended from year to year after
March 31, 2001, unless terminated upon specified notice by either party.
The Employment Agreements also provide that each Executive will be granted a
number of options to acquire shares of NBC Acquisition Corp. Class A Common
Stock determined by the Board of Directors. Each such option has an exercise
price not to be less than the fair market value per share as of the date of
grant and is exercisable as to 25% of the shares covered thereby on the date of
grant and as to an additional 25% of the shares covered thereby on each of the
first three anniversaries of the date of grant, subject to the Executive's
continued employment by the Company on such dates.
The Employment Agreements also provide for specified payments to the
Executive in the event of termination of employment by the Company without
"cause" (as defined in the respective agreements) and in the event of death or
disability of the Executive during the term. The Employment Agreements also
contain customary confidentiality obligations and three year non-competition
agreements for each Executive.
Finally, the Employment Agreements provide that, prior to the consummation by
the Company of an initial public offering of NBC Acquisition Corp. Common Stock,
the Executives will not sell, transfer, pledge or otherwise dispose of any
shares of NBC Acquisition Corp. Common Stock, except for certain transfers to
immediate family members, in the event of disability and for estate planning
purposes. The Employment Agreements also provide that, in the event of the sale
of a majority of the outstanding NBC Acquisition Corp. Common Stock, the
Executives will have the option, and (at the option of HWH) will be required, to
sell their shares ratably with, and on the same terms and conditions as, the
other selling shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information in the following table sets forth the ownership of NBC
Acquisition Corp. Class A Common Stock by each person who beneficially owns more
than 5.0% of the outstanding shares of the Class A Common Stock, and each
director, executive officer, and all directors and executive officers of the
Company treated as a group who beneficially own shares of the Class A Common
Stock as of June 20, 2000. To the knowledge of the Company, each of such holders
of shares has sole voting and investment power as to the shares owned unless
otherwise noted. The address for each executive officer and director is 4700
South 19th Street, Lincoln, Nebraska 68501 unless otherwise noted.
51
Amount and
Nature of
Beneficial Percent of
Title of Class/Name of Beneficial Owner Ownership (1) Class
- ----------------------------------------------------- ------------ ---------
Class A Common Stock:
Owning Greater Than 5% of Shares:
HWH (2) 1,136,568 90.1%
========== ========
Ownership of Management:
Robert B. Haas (2) 1,136,568 90.1%
Mark W. Oppegard 23,966 1.9%
Larry R. Rempe 16,248 1.3%
Thomas A Hoff 11,964 1.0%
Kenneth F. Jirovsky 10,507 0.8%
Barry S. Major 10,483 0.8%
William H. Allen 9,530 0.8%
Ardean A. Arndt 9,154 0.7%
Alan G. Siemek 6,036 0.5%
Michael J. Kelly 2,907 0.2%
Douglas D. Wheat (2) - -
---------- --------
Total for Directors and Executive Officers
as a Group 1,237,363 98.1%
========== ========
(1) Beneficial ownership is determined in accordance with the rules of the
SEC and includes voting and investment power with respect to the shares
of NBC Acquisition Corp. Class A Common Stock.
(2) The sole general partner of HWH is a limited partnership, and the sole
general partner of the limited partnership is a corporation controlled
by Mr. Haas. Mr. Wheat is a stockholder, director and officer of the
corporation. The address of HWH and of Messrs. Haas and Wheat is 300
Crescent Court, Suite 1700, Dallas, Texas 75201.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Effective November 12, 1999, NBC acquired certain assets and liabilities of
Ned's Bookstores. The acquisition of Ned's Bookstores was funded in part through
a $4.6 million capital contribution from the Company to NBC. The Company raised
the $4.6 million in capital through the sale of 87,922 shares of its Class A
Common Stock at a price of $52.47 per share (based upon the buy-out price as
part of the Recapitalization on February 13, 1998) to certain shareholders,
including among others, 76,238 shares to HWH; 3,812 shares to NBC's Chief
Operating Officer, 2,859 shares to the Company's Vice President and Treasurer,
and 1,906 shares to NBC's Vice President of Warehouse Operations.
Effective June 4, 1999, NBC acquired all of the outstanding common stock of
Triro, Inc. The acquisition of Triro, Inc. was funded in part through a $10.3
million capital contribution from the Company to NBC. The Company raised the
$10.3 million in capital through the sale of 197,001 shares of its Class A
Common Stock at a price of $52.47 per share (based upon the buy-out price as
part of the Recapitalization on February 13, 1998) to certain shareholders,
including among others, 190,595 shares to HWH; 2,000 shares to the Company's
President/Chief Executive Officer and 1,906 shares to NBC's Chief Operating
Officer.
As of March 31, 2000, notes receivable from stockholders and the associated
interest receivable totaled approximately $606,000 and $55,000, respectively.
Approximately $141,000 of such notes originated during the leveraged buyout of
NBC by Olympus Advisory Partners, Inc. in 1995. In conjunction with the buyout,
52
the Company's executive officers were given the opportunity to acquire shares of
the Company's Class A Common Stock with a portion of the purchase price of such
shares being provided to the officers in the form of interest bearing notes.
Such notes are dated August 31, 1995, become due August 31, 2002, and bear
interest at the applicable Federal rate for mid-term loans.
The remaining balance of such notes originated pursuant to the terms of
employment agreements with NBC's Chief Operating Officer, Barry S. Major; Chief
Financial Officer, Alan G. Siemek; and Vice President of E-commerce, Michael J.
Kelly. In January, 1999, the Company issued 4,765 shares of its Class A Common
Stock to Mr. Major at a price of $52.47 per share, in exchange for $25,000 in
cash and a promissory note in the principal amount of $225,000 maturing January
19, 2009 and bearing interest at 5.25% per year. The largest aggregate amount
outstanding under this note at any time during the year ended March 31, 2000 was
approximately $239,000. In July, 1999, the Company issued 3,177 shares of its
Class A Common Stock to Mr. Siemek at a price of $52.47 per share, in exchange
for $16,688 in cash and a promissory note in the principal amount of $150,000
maturing September, 2009 and bearing interest at 5.25% per year. The largest
aggregate amount outstanding under this note at any time during the year ended
March 31, 2000 was approximately $154,000. In January, 2000, the Company issued
2,621 shares of its Class A Common Stock to Mr. Kelly at a price of $52.47 per
share, in exchange for $13,752 in cash and a promissory note in the principal
amount of $123,765 maturing January, 2010 and bearing interest at 5.25% per
year. The largest aggregate amount outstanding under this note at any time
during the year ended March 31, 2000 was approximately $126,000.
53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
(1) Consolidated Financial Statements of NBC Acquisition Corp.
Index to Consolidated Financial Statements.
Independent Auditors' Report.
Consolidated Balance Sheets as of March 31, 2000 and 1999.
Consolidated Statements of Operations for the Years Ended March 31,
2000, 1999 and 1998.
Consolidated Statements of Stockholders' Equity (Deficit) for
the Years Ended March 31, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows for the Years Ended March 31,
2000, 1999 and 1998.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules.
Independent Auditors' Report on Schedules.
Schedule I - Condensed Financial Information of NBC Acquisition
Corp. (Parent Company Only).
Schedule II - Valuation and Qualifying Accounts.
(3) Management Contract and Compensatory Plan Arrangement Exhibits.
Exhibits 10.6 through 10.15 are incorporated herein by reference.
(B) REPORTS ON FORM 8-K.
Current Report on Form 8-K/A filed January 25, 2000 reporting the
acquisition of Michigan College Book Company, Inc. and Ned's Berkeley
Book Company, Inc. (collectively referred to as "Ned's Bookstores")
and submitting audited financial statements of Ned's Bookstores for
the nine months ended September 30, 1999 and unaudited pro forma
financial information as of September 30, 1999 and for the six months
ended September 30, 1999 and year ended March 31, 1999.
(C) EXHIBITS.
2.1 Agreement for Purchase and Sale of Stock, dated as of May 26,
1999 between and among Nebraska Book Company, Inc., Dennis
Rother, and Larry Rother, filed as Exhibit 2.1 to NBC
Acquisition Corp. Form 8-K dated June 4, 1999, is incorporated
herein by reference.
2.2 Agreement of Sale, dated as of September 30, 1999 between and
among Nebraska Book Company, Inc., Michigan College Book
Company, Inc., Ned's Berkeley Book Company, Inc., Ned Shure,
Fred Shure, and Jack Barenfanger filed as Exhibit 2.1 to NBC
Acquisition Corp. Form 8-K dated November 12, 1999, is
incorporated herein by reference.
54
3.1 Certificate of Incorporation, as amended, of NBC Acquisition
Corp., filed as Exhibit 3.1 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
3.2 By-laws of NBC Acquisition Corp., filed as Exhibit 3.2 to NBC
Acquisition Corp. Registration Statement on Form S-4, as amended
(File No. 333-48225), is incorporated herein by reference.
4.1 Indenture dated as of February 13, 1998 by and between NBC
Acquisition Corp. and United States Trust Company of New York,
as Trustee, filed as Exhibit 4.1 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
4.2 Exchange and Registration Rights Agreement dated as of February
13, 1998 by and between NBC Acquisition Corp. and Chase
Securities Inc., filed as Exhibit 4.2 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
4.3 Form of Initial Debenture of NBC Acquisition Corp. (included in
Exhibit 4.1 as Exhibit A), filed as Exhibit 4.3 to NBC
Acquisition Corp. Registration Statement on Form S-4, as amended
(File No. 333-48225), is incorporated herein by reference.
4.4 Form of Exchange Debenture of NBC Acquisition Corp. (included in
Exhibit 4.1 as Exhibit B), filed as Exhibit 4.4 to NBC
Acquisition Corp. Registration Statement on Form S-4, as amended
(File No. 333-48225), is incorporated herein by reference.
4.5 Indenture dated as of February 13, 1998 by and between Nebraska
Book Company, Inc. and United States Trust Company of New York,
as Trustee, filed as Exhibit 4.5 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
4.6 Exchange and Registration Rights Agreement dated as of February
13, 1998 by and between Nebraska Book Company, Inc. and Chase
Securities Inc., filed as Exhibit 4.6 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
4.7 Form of Initial Note of Nebraska Book Company, Inc. (included in
4.5 as Exhibit A), filed as Exhibit 4.7 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
4.8 Form of Exchange Note of Nebraska Book Company, Inc. (included
in 4.5 as Exhibit B), filed as Exhibit 4.8 to NBC Acquisition
Corp. Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
10.1 Credit Agreement dated as of February 13, 1998 by and among NBC
Acquisition Corp., Nebraska Book Company, Inc., the Chase
Manhattan Bank and certain other financial institutions, filed
as Exhibit 10.1 to NBC Acquisition Corp. Registration Statement
on Form S-4, as amended (File No. 333-48225), is incorporated
herein by reference.
10.2 First Amendment, dated as of May 21, 1999, to the Credit
Agreement, dated as of February 13, 1998 among NBC Acquisition
Corp., Nebraska Book Company, Inc., the Chase Manhattan Bank,
and certain other financial institutions, filed as Exhibit 10.1
to NBC Acquisition Corp. Form 10-Q for the quarter ended June
30, 1999, is incorporated herein by reference.
55
10.3 Guarantee and Collateral Agreement, dated as of February 13,
1998 made by NBC Acquisition Corp. and Nebraska Book Company,
Inc. in favor of the Chase Manhattan Bank, as administrative
agent, filed as Exhibit 10.2 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
10.4 Purchase Agreement dated February 10, 1998 between NBC
Acquisition Corp. and Chase Securities Inc., filed as Exhibit
10.3 to NBC Acquisition Corp. Registration Statement on Form
S-4, as amended (File No. 333-48225), is incorporated herein by
reference.
10.5 Purchase Agreement dated February 10, 1998 between Nebraska Book
Company, Inc. and Chase Securities Inc., filed as Exhibit 10.4
to NBC Acquisition Corp. Registration Statement on Form S-4, as
amended (File No. 333-48225), is incorporated herein by
reference.
10.6 Form of Memorandum of Understanding, dated as of February 13,
1998 between NBC Acquisition Corp. and each of Mark W. Oppegard,
Bruce E. Nevius, Larry R. Rempe, Kenneth F. Jirovsky, William H.
Allen, Thomas A. Hoff and Ardean A. Arndt, filed as Exhibit 10.5
to NBC Acquisition Corp. Registration Statement on Form S-4, as
amended (File No. 333-48225), is incorporated herein by
reference.
10.7 Memorandum of Understanding, dated as of December 22, 1998
between Nebraska Book Company, Inc. and Barry S. Major, Chief
Operating Officer, filed as Exhibit 10.1 to NBC Acquisition
Corp. Form 10-Q for the quarter ended December 31, 1998, is
incorporated herein by reference.
10.8 Memorandum of Understanding, dated as of July 1, 1999 between
Nebraska Book Company, Inc. and Alan Siemek, Chief Financial
Officer, filed as Exhibit 10.1 to NBC Acquisition Corp. Form
10-Q for the quarter ended September 30, 1999, is incorporated
herein by reference.
10.9 Memorandum of Understanding, dated as of November 1, 1999
between Nebraska Book Company, Inc. and Michael J. Kelly, Vice
President of E-commerce, filed as Exhibit 10.1 to NBC
Acquisition Corp. Form 10-Q for the quarter ended December 31,
1999, is incorporated herein by reference.
10.10 NBC Acquisition Corp. 1995 Stock Incentive Plan adopted August
31, 1995, filed as Exhibit 10.6 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
10.11 NBC Acquisition Corp. 1998 Performance Stock Option Plan adopted
June 30, 1998, filed as Exhibit 10.1 to NBC Acquisition Corp.
Form 10-Q for the quarter ended June 30, 1998, is incorporated
herein by reference.
10.12 NBC Acquisition Corp. 1998 Stock Option Plan adopted June 30,
1998, filed as Exhibit 10.2 to NBC Acquisition Corp. Form 10-Q
for the quarter ended June 30, 1998, is incorporated herein by
reference.
10.13 NBC Acquisition Corp. Senior Management Bonus Plan adopted June
30, 1998, filed as Exhibit 10.3 to NBC Acquisition Corp. Form
10-Q for the quarter ended June 30, 1998, is incorporated herein
by reference.
56
10.14 Form of Deferred Compensation Agreement by and between Nebraska
Book Company, Inc. and each of Mark W. Oppegard, Bruce E.
Nevius, Larry R. Rempe and Thomas A. Hoff, filed as Exhibit 10.7
to NBC Acquisition Corp. Registration Statement on Form S-4, as
amended (File No. 333-48225), is incorporated herein by
reference.
10.15 NBC Acquisition Corp. 401(k) Savings Plan, filed as Exhibit 10.8
to NBC Acquisition Corp. Registration Statement on Form S-4, as
amended (File No. 333-48225), is incorporated herein by
reference.
10.16 Merger Agreement dated January 6, 1998 by and between NBC Merger
Corp., NBC Acquisition Corp. and certain stockholders of NBC
Acquisition Corp. named therein, filed as Exhibit 10.9 to NBC
Acquisition Corp. Registration Statement on Form S-4, as amended
(File No. 333-48225), is incorporated herein by reference.
10.17 Agreement for Purchase and Sale of Stock made January 9, 1998
between and among Nebraska Book Company, Inc. and Martin D.
Levine, the Lauren E. Levine Grantor Trust and the Jonathan L.
Levine Grantor Trust (the "Collegiate Stores Corporation
Agreement"), filed as Exhibit 10.10.1 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
10.18 First Amendment dated January 23, 1998 to the Collegiate Stores
Corporation Agreement, filed as Exhibit 10.10.2 to NBC
Acquisition Corp. Registration Statement on Form S-4, as amended
(File No. 333-48225), is incorporated herein by reference.
10.19 Commercial Lease Agreement made and entered into March 8, 1989,
by and between Robert J. Chaney, Mary Charlotte Chaney and
Robert J. Chaney, as Trustee under the Last Will and Testament
of James A Chaney, and Nebraska Book Company, Inc., filed as
Exhibit 10.11 to NBC Acquisition Corp. Registration Statement on
Form S-4, as amended (File No. 333-48225), is incorporated
herein by reference.
10.20 Lease Agreement entered into as of September 1, 1986, by and
between Odell Associates Limited Partnership and Nebraska Book
Company, Inc., filed as Exhibit 10.12 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
10.21 Lease Agreement entered into as of September 1, 1986, by and
between John B. DeVine, successor trustee of the Fred C. Ulrich
Trust, as amended, and Nebraska Book Company, Inc., filed as
Exhibit 10.13 to NBC Acquisition Corp. Registration Statement on
Form S-4, as amended (File No. 333-48225), is incorporated
herein by reference.
10.22 Lease Agreement entered into as of September 1, 1986 by and
between Odell Associates Limited Partnership and Nebraska Book
Company, Inc., filed as Exhibit 10.14 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
10.23 Lease Agreement made and entered into October 12, 1988 by and
between Hogarth Management and Nebraska Book Company, Inc.,
filed as Exhibit 10.15 to NBC Acquisition Corp. Registration
Statement on Form S-4, as amended (File No. 333-48225), is
incorporated herein by reference.
57
10.24 Industrial Real Estate Lease dated June 22, 1987 by and between
Cyprus Land Company and Nebraska Book Company, Inc., filed as
Exhibit 10.16 to NBC Acquisition Corp. Registration Statement on
Form S-4, as amended (File No. 333-48225), is incorporated
herein by reference.
12. Statements regarding computation of ratios, filed as Exhibit 12
to NBC Acquisition Corp. Registration Statement on Form S-4, as
amended (File No. 333-48225), is incorporated herein by
reference.
21. Subsidiaries, filed as Exhibit 21 to NBC Acquisition Corp.
Registration Statement on Form S-4, as amended (File No.
333-48225), is incorporated herein by reference.
24. Powers of Attorney (included on signature page).
27. Financial Data Schedule for the Year Ended March 31, 2000 [EDGAR
filing only].
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are either not required
under the related instructions, are not applicable (and therefore have been
omitted), or the required disclosures are contained in the financial statements
included herein.
58
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NBC ACQUISITION CORP.
/s/ Mark W. Oppegard
------------------------
Mark W. Oppegard
President/Chief Executive Officer, Secretary
and Director
June 20, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Mark W. Oppegard
------------------------
Mark W. Oppegard
President/Chief Executive Officer, Secretary
and Director
June 20, 2000
*
------------------------
Alan G. Siemek
Vice President and Treasurer
(Principal Financial and Accounting Officer)
June 20, 2000
*
------------------------
Robert B. Haas
Chairman and Director
June 20, 2000
*
------------------------
Douglas D. Wheat
Director
June 20, 2000
*By: /s/ Mark W. Oppegard
------------------------
Mark W. Oppegard
Attorney-In-Fact
June 20, 2000
Supplemental Information to Be Furnished With Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Securities
Pursuant to Section 12 of the Act:
NO ANNUAL REPORT OR PROXY MATERIAL FOR THE FISCAL YEAR ENDED MARCH 31, 2000
HAS BEEN, NOR WILL BE, SENT TO SECURITY HOLDERS.
59
FINANCIAL STATEMENT SCHEDULES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
NBC Acquisition Corp.
Lincoln, Nebraska
We have audited the consolidated financial statements of NBC Acquisition
Corp. and subsidiary as of March 31, 2000 and 1999 and for each of the three
years in the period ended March 31, 2000, and have issued our report thereon
dated May 16, 2000; such report is included elsewhere in this Form 10-K. Our
audits also included the financial statement schedules listed in Item 14(a)(2).
These financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Lincoln, Nebraska
May 16, 2000
60
NBC ACQUISITION CORP. (PARENT COMPANY ONLY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
- -------------------------------------------------------------------------------
March 31,
2000 1999
------------- ------------
ASSETS
OTHER ASSETS:
Due from subsidiary (Note A) $ 4,606,191 $ 2,277,266
Prepaid transaction/loan costs 2,890,699 3,216,487
------------ ------------
$ 7,496,890 $ 5,493,753
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
INVESTMENT IN AND ADVANCES FROM SUBSIDIARY (Note A) $ 30,676,616 $ 47,546,864
SENIOR DISCOUNT DEBENTURES 56,249,900 50,646,654
COMMITMENTS AND CONTINGENCIES (Note B)
STOCKHOLDERS' DEFICIT:
Class A common stock, voting, authorized
5,000,000 shares of $.01 par
value; issued and outstanding 1,248,513
and 957,792 shares at March 31, 2000 and
1999, respectively 12,485 9,578
Additional paid-in-capital 64,525,477 49,275,087
Notes receivable from stockholders (606,395) (332,630)
Accumulated deficit (143,361,193) (141,651,800)
------------ ------------
Total stockholders' deficit (79,429,626) (92,699,765)
------------ ------------
$ 7,496,890 $ 5,493,753
============ ============
See notes to condensed financial statements.
61
NBC ACQUISITION CORP. (PARENT COMPANY ONLY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION
STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
Year Ended March 31,
2000 1999 1998
------------- ------------ ------------
INTEREST EXPENSE $(5,929,034) $(5,345,563) $ (653,558)
INCOME TAX BENEFIT 2,328,925 2,029,175 248,091
EQUITY IN EARNINGS (LOSS) OF SUBSIDIARY 1,890,716 1,057,283 (5,146,138)
------------ ------------ -----------
NET LOSS $(1,709,393) $(2,259,105) $(5,551,605)
============= ============ ===========
See notes to condensed financial statements.
62
NBC ACQUISITION CORP. (PARENT COMPANY ONLY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION
STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------
Year Ended March 31,
2000 1999 1998
------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash flows from operating activities $ - $ - $ -
------------- ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - - 44,997,320
Deferred financing costs - (159,489) (3,406,785)
Proceeds from issuance of common stock 14,979,532 25,000 49,034,665
Payment of merger consideration - - (163,328,856)
Merger consideration contributed by
Nebraska Book Company - - 72,703,656
Advances (to) from subsidiary (14,979,532) 30,319 (24,310)
Proceeds from payment on notes receivable
from stockholders - 104,170 24,310
----------- ------------ -------------
Net cash flows from financing activities - - -
----------- ------------ -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS - - -
CASH AND CASH EQUIVALENTS, Beginning of year - - -
------------ ------------ -------------
CASH AND CASH EQUIVALENTS, End of year $ - $ - $ -
============ ============ =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Notes receivable from stockholders recorded
upon issuance of common stock $ 273,765 $ 225,000 $ -
Stock repurchases accrued by Nebraska Book Company - - 2,592,673
Common stock contributed to Nebraska Book Company - - 147,150
See notes to condensed financial statements.
63
NBC ACQUISITION CORP. (PARENT COMPANY ONLY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DUE FROM SUBSIDIARY - NBC Acquisition Corp. (the "Company") files a
consolidated federal income tax return with its wholly-owned subsidiary,
Nebraska Book Company, Inc. ("NBC") and follows a policy of recording income
taxes equal to that which would have been incurred had the Company filed a
separate return. NBC is responsible for remitting tax payments and collecting
tax refunds for the consolidated group. The amount due from subsidiary
represents the cumulative tax savings resulting from operating losses generated
by the Company from which NBC derives the benefit through reduced tax payments
on the consolidated return.
INVESTMENT IN AND ADVANCES FROM SUBSIDIARY - The Company accounts for its
investment in NBC under the equity method of accounting. Advances from NBC are
included within the investment in subsidiaries.
B. COMMITMENTS AND CONTINGENCIES
The Company has guaranteed repayment of indebtedness under the Senior Credit
Facility held by NBC. Such indebtedness totaled $55.6 million at March 31, 2000.
64
NBC ACQUISITION CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- -----------------------------------------------------------------------------------------------
Charged to Charged to
Beginning of Costs and Other Net End of Year
Year Balance Expenses Accounts Charge-Offs Balance
------------ ----------- ---------- ------------ -----------
YEAR ENDED MARCH 31, 2000
Allowance for doubtful accounts $ 165,899 $ 140,927 $ - $ (130,927) $ 175,899
YEAR ENDED MARCH 31, 1999
Allowance for doubtful accounts 164,829 134,661 - (133,591) 165,899
YEAR ENDED MARCH 31, 1998
Allowance for doubtful accounts 239,296 180,491 - (254,958) 164,829
65
EXHIBIT INDEX
24. Powers of Attorney (included on signature page).
27. Financial Data Schedule for the Year Ended March 31, 2000 [EDGAR
filing only].
66