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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, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________ to__________________.
COMMISSION FILE NUMBER 333-48221
NEBRASKA BOOK COMPANY, INC.
(Exact name of registrant as specified in its charter)
KANSAS 47-0549819
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4700 SOUTH 19TH STREET
LINCOLN, NE 68501-0529
(Address of Principal executive offices)
(402) 421-7300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] YES [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
THERE ARE NO SHARES OF THE REGISTRANT'S VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT.
THERE WERE 100 SHARES OF COMMON STOCK OUTSTANDING AS OF JUNE 26, 2001.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Total Number of Pages: 59
Exhibit Index: PAGE 59
1
TABLE OF CONTENTS
PART I:
Item 1 Business.........................................................3
Item 2 Properties.......................................................13
Item 3 Legal Proceedings................................................14
Item 4 Submission of Matters to a Vote of Security Holders..............14
PART II:
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters..............................................15
Item 6 Selected Financial Data..........................................15
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................16
Item 7A Quantitative and Qualitative Disclosures about Market Risk.......22
Item 8 Financial Statements and Supplementary Data......................24
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................43
PART III:
Item 10 Directors and Executive Officers of the Registrant................44
Item 11 Executive Compensation............................................46
Item 12 Security Ownership of Certain Beneficial Owners and Management....49
Item 13 Certain Relationships and Related Transactions....................50
PART IV:
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..52
Signatures....................................................................56
Supplemental Information to be Furnished......................................56
Financial Statement Schedule II - Valuation and Qualifying Accounts...........57
Exhibit Index.................................................................59
2
PART I.
ITEM 1. BUSINESS.
RECAPITALIZATION AND PUBLIC REGISTRATION
Effective September 1, 1995, Nebraska Book Company, Inc. (the "Company") was
acquired in a leveraged buyout by NBC Acquisition Corp. ("NBC"), a corporation
owned by investment partnerships affiliated with Olympus Advisory Partners, Inc.
and certain other investors (the "1995 Transaction"). The 1995 Transaction was
accounted for as a purchase business combination.
Pursuant to a merger agreement dated January 6, 1998 among NBC; certain
shareholders of NBC, including members of senior management; and 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 (the "Merger")
with NBC as the surviving corporation. As a result of the Merger, which occurred
on February 13, 1998, certain NBC stockholders received a total of approximately
$165.9 million. In addition, upon the consummation of the Merger, the Company
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, the Company entered into a
senior secured credit agreement (the "Credit Agreement") with The Chase
Manhattan Bank ("Chase"), as administrative agent, and other lenders providing
for the following facilities (the "Senior Credit Facility"): (i) a $50.0 million
revolving credit facility maturing on March 31, 2004 which was undrawn at
closing (the "Revolving Credit Facility"); (ii) a $27.5 million tranche A term
loan, maturing on March 31, 2004 (the "Tranche A Term Loan"); and (iii) a $32.5
million tranche B term loan, maturing on March 31, 2006 (the "Tranche B Term
Loan" and, together with the Tranche A Term Loan, the "Term Loans"). In
addition, the Company also raised approximately $103.6 million from the issuance
of senior subordinated notes (the "Senior Subordinated Notes") and NBC raised a
total of $91.6 million through (i) the sale of approximately $45.6 million of
NBC Acquisition Corp. Class A Common Stock to 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 the Company's outstanding
indebtedness, the Stock Sale, the Reinvestment, the issuance by the Company of
the Senior Subordinated Notes, the issuance by NBC of the Senior Discount
Debentures, the Company's borrowings under the Senior Credit Facility and the
application of all proceeds thereof are collectively referred to as the
"Recapitalization."
During fiscal 1999, the Company and NBC filed Registration Statements on
Form S-4 with the Securities and Exchange Commission for purposes of registering
debt securities to be issued in exchange for the Company's Senior Subordinated
Notes and NBC's Senior Discount Debentures. The Securities and Exchange
Commission declared such Registration Statements effective on July 14, 1998. All
notes were tendered in the offer to exchange that was completed on August 13,
1998.
GENERAL
The Company is one of the largest wholesale distributors of used college
textbooks in North America, offering over 100,000 textbook titles and selling
more than 7 million books annually primarily to campuses located in the United
States. In addition, as of June 26, 2001, the Company owns or manages 108
bookstores on or adjacent to college campuses through which it sells a variety
of new and used textbooks and general merchandise. The Company is also a leading
provider of distance education materials to students in nontraditional courses,
which include correspondence and corporate education courses. Furthermore, the
Company provides the college bookstore industry with a variety of services
including in-store promotions, buying programs, marketing services and
proprietary information systems. With origins dating to 1915, the Company has
built a consistent reputation for excellence in order fulfillment, shipping
performance and customer service.
3
The Company entered the wholesale used textbook market following World War
II, when the supply of new textbooks could not meet the demand created by the
return of ex-GI students. In 1964, the Company became a national, rather than
regional, wholesaler of used textbooks as a result of its purchase of The
College Book Company of California. During the 1970's the Company continued its
focus on the wholesale business. However, realizing the synergies that exist
between wholesale operations and college bookstore operations, in the 1980's it
expanded its efforts in the college bookstore market under a revised strategy.
Under this strategy the Company operates bookstores on or near larger campuses,
typically where the institution-owned college bookstore is contract-managed by a
competitor or where the Company does not have a significant wholesale presence.
Today, the Company services the college bookstore industry through its
wholesale, college bookstore and complementary services operations.
WHOLESALE. The Company is one of the largest wholesale distributors of used
college textbooks in North America. Its wholesale operations consist primarily
of selling used textbooks to college bookstores, buying them back from students
or college bookstores at the end of each school semester and then reselling them
to college bookstores. The Company purchases used textbooks from and resells
them to college bookstores at many of the nation's largest college campuses,
including: University of Texas, University of Southern California, Indiana
University, University of Arizona, University of Washington, and University of
Minnesota. Historically, because the demand for used textbooks has consistently
outpaced supply, the Company's wholesale sales have been determined primarily by
the amount of used textbooks that it could purchase. The Company's strong
relationships with the management of 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 42,000 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 26, 2001, the Company operated
108 college bookstores on or adjacent to college campuses of which 15 are
operated on physical premises which are owned by and leased from the educational
institution (i.e., "contract-managed"). Its college bookstores are located at
some of the nation's largest college campuses including: University of Nebraska,
University of Michigan, University of Maryland, Arizona State University,
Pennsylvania State University, University of Kansas, Michigan State University,
University of California - Berkeley, Texas A&M University, University of
Florida, and University of Tennessee. In addition to generating profits, the
Company's college bookstore operations provide an exclusive source of used
textbooks for sale across the Company's wholesale distribution network.
COMPLEMENTARY SERVICES. 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 440
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
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 2001, the Company
licensed certain software related to E-commerce to an entity that is partially
owned by NBC's majority owner (see further discussion below under Business
Strategy). These services generate revenue and assist the Company in enhancing
and developing customer relationships.
4
INDUSTRY SEGMENT FINANCIAL INFORMATION
Revenue, operating profit or loss, and identifiable assets attributable to
each of the Company's industry segments are disclosed in the notes to the
financial statements presented in Item 8 of the Company's Form 10-K.
BUSINESS STRATEGY
The Company's objective is to strengthen its position as a leading provider
of products and services to the college bookstore market, thereby increasing
revenue and cash flow. In order to accomplish its goal, the Company intends to
pursue the following strategies:
ENHANCE GROWTH IN WHOLESALE OPERATIONS. The Company expects the stable
growth of its wholesale operations to continue, primarily as a result of an
expected increase in college enrollments and increased utilization of used
textbooks, as well as through the expansion of its own college bookstore
network. Additionally, the Company recently introduced an enhanced commission
structure that rewards customers who make a long-term commitment to supplying
the Company with a large portion of their textbooks.
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. 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
enables bookstores to offer non-traditional goods and services from brand name
consumer companies on their websites.
In fiscal 2001, the Company entered into several agreements related to
these software products with a newly created entity, TheCampusHub.com, Inc.,
which is partially owned by NBC's majority owner. In connection with these
agreements, the Company has licensed these products to TheCampusHub.com, Inc.
who assumed the on-going marketing, operating and further development costs for
these products. The three-year license agreement requires the payment of $0.5
million per year from TheCampusHub.com, Inc. to the Company and also gives
TheCampusHub.com, Inc. the option to purchase the software products from the
Company 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. The Company is also providing certain management services to
TheCampusHub.com, Inc. for three years in return for approximately $0.5 million
per year plus reimbursement of certain other direct costs. In connection with
these agreements, the Company also acquired the option to purchase 25% of the
initial common shares outstanding of TheCampusHub.com, Inc.
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:
5
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 over 4,800 college stores generating annual sales of approximately
$10.1 billion to college students and other consumers in North America. Sales of
textbooks and other education materials used for classroom instruction comprise
approximately two-thirds of that amount. The Company expects this market will
continue to grow as a result of anticipated increases in enrollment at U.S.
colleges attributable to the children of the baby boom generation entering the
college population.
WHOLESALE TEXTBOOK MARKET. The Company believes that used textbooks will
continue to be attractive to both students and college bookstores. Used
textbooks provide students with a lower-cost alternative to new textbooks and
bookstores typically achieve higher margins through the sale of used rather than
new textbooks.
The pricing pattern of textbook publishing accounts for a large part of the
growth of the used book market. Because of copyright restrictions, each new
textbook is produced by only one publisher, which is free to set the new copy
retail price and discount terms to bookstores. Publishers generally offer new
textbooks at prices that enable college bookstores to achieve a gross margin of
23.0% to 25.0% on new textbooks. Historically, the high retail costs of new
textbooks and the higher margins achieved by bookstores on the sale of used
textbooks (approximately 33.0%) have encouraged the growth of the market for
used textbooks.
The used textbook cycle begins with new textbook publishers, who purposely
plan obsolescence into the publication of new textbooks. Generally, new editions
of textbooks are produced every two to four years. In the first year of a new
edition, there are few used copies of a new edition available. In the second and
third years, used textbooks become increasingly available. Simultaneously,
publishers begin to plan an updated edition. In years four and beyond, at the
end of the average life cycle of a particular edition, as publishers cut back on
original production, used textbooks generally represent a majority (in unit
terms) of the particular edition in use. While the length of the cycle varies by
title (and sometimes is indefinite, as certain titles are never updated), the
basic supply/demand progression remains fairly consistent.
College bookstores begin to place orders with used textbook wholesalers once
professors determine which books will be required for their upcoming courses,
usually by the end of May for the fall semester and the end of November for the
spring semester. Bookstore operators must first determine their allocation
between new and used copies for a particular title but, in most cases, they will
order an ample supply of used books because: (i) used book demand from students
is typically strong and consistent; (ii) many operators only have access to a
limited supply from wholesalers and believe that not having used book
alternatives could create considerable frustration among students and with the
college administration; (iii) bookstore operators earn higher margins on used
books than on new books; and (iv) both new and used books are sold with return
privileges, eliminating any overstock risk (excluding freight charges) to the
college bookstore.
6
New textbook ordering usually begins in June, at which time the store
operator augments its expected used book supply by ordering new books. By this
time, publishers typically will have just implemented their annual price
increases. These regular price increases, which historically have run 3.0% to
5.0%, allow the Company and its competitors to buy used textbooks based on old
list prices (in May) and to almost simultaneously sell them based on new higher
prices, thereby creating an immediate margin increase.
While price is an important factor in the store operator's purchasing
decision, available supply, as well as service, usually determine with which
used textbook wholesaler a college bookstore will develop a strong relationship.
Used textbook wholesalers that are able to significantly service a college
bookstore account typically receive preferential treatment from store operators,
both in selling and in buying used textbooks. Pure exclusive supply arrangements
in the Company's market are rare. However, in the past three to four years, the
Company has been marketing its exclusive supply program to the industry. This
program has grown to approximately 230 participating bookstores at the end of
fiscal 2001. The Company also introduced the NBC Advantage program in fiscal
2001. This program rewards customers who make a long-term commitment to
supplying the Company with a large portion of their books. At the end of fiscal
2001, approximately 220 bookstores were participating in this program,
approximately 130 of which are also participating in the exclusive program.
Since the Company is usually able to sell the vast majority of the used
textbooks it is able to purchase, its ability to obtain sufficient supply is a
critical factor in the Company's success.
COLLEGE BOOKSTORE MARKET. College stores generally fall into three
categories: (i) INSTITUTIONAL -- stores that are primarily owned and operated by
institutions of higher learning (represents approximately 59.0% 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 26.0% 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.
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 42,000
textbooks according to author, title, new copy retail price, and the Company's
repurchase price. The BUYER'S GUIDE is an important part of the Company's
inventory control and book procurement system. The Company updates and reprints
the BUYER'S GUIDE nine times each year and makes it available in both print and
various electronic formats, including on all of the Company's proprietary
information systems. A staff of dedicated professionals gathers information from
all over the country in order to make the BUYER'S GUIDE into what the Company
believes to be the most comprehensive and up-to-date pricing and buying aid for
college bookstores. The Company also maintains a database of over 174,000 titles
in order to better serve its customers.
COLLEGE BOOKSTORES. As of June 26, 2001,the Company operated 108 college
bookstores on or adjacent to college campuses. These bookstores sell a wide
variety of used and new textbooks, general books and assorted general
merchandise, including apparel, sundries and gift items. Over the past three
years, revenues of the Company's bookstores from activities other than used and
new textbook sales have been between 24% and 28% of total revenues. The Company
has been, and intends to continue, selectively expanding its product offerings
at its bookstores in order to increase sales and profitability. The Company has
also installed 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.
7
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. Through C2O, the Company is able to offer a variety
of products and services to participating college bookstores. C2O negotiates
apparel and general merchandise discounts and develops and executes marketing
programs for its membership. As a centralized buying service for over 440
participating college bookstores including the Company's own bookstores, C2O has
evolved into a buying group with substantial purchasing power.
C2O offers a shopping bag program to college bookstores. This shopping bag
program provides bookstores the opportunity to purchase customized bags at a
substantial discount 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.
Additionally, a staff of experienced C2O professionals consult with the
management of bookstores. Services offered include strategic planning, store
review, merchandise planning and help with other operational aspects of the
business. While consulting has historically represented a relatively small
component of C2O's business, it is nonetheless strategically important to the
ongoing success of this aspect of the Company's business.
Through Specialty Books, the Company has access to the market for distance
education products and services. Currently, the Company provides students at
approximately 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, although presently the
Company's primary objective is increased profitability through improved cost
containment.
Other services offered to college bookstores include services related to the
Company's turnkey bookstore management software and the sale of other software
and hardware, and related maintenance contracts. These services generate revenue
and assist the Company in gaining access to new sources of used textbooks. The
Company has an installed base of over 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.
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 37 account representatives (as of March 31, 2001) are responsible for
procuring used textbooks from students, marketing the Company's services on
campus, purchasing overstock textbooks from bookstores and securing leads for
8
sale of the Company's systems products. The Company has been able to maintain a
competitive edge by providing superior service, made possible primarily through
the development and maintenance of ready access to inventory, information and
supply. Other components of the wholesale strategy and its implementation
include: (i) selectively paying a marginal premium relative to competitors to
entice students to sell back more books to the Company; (ii) gaining access to
competitive campuses (where the campus bookstore is contract-managed by a
competitor) by opening off-campus, Company-owned college bookstores; (iii) using
technology to gain efficiencies and to improve customer service; (iv)
maintaining a knowledgeable and experienced sales force that is customer-service
oriented; (v) providing working capital flexibility for bookstores making
substantial purchases; and (vi) establishing long-term supply arrangements by
rewarding customers who make a long-term commitment to supplying the Company
with a large portion of their books.
The two major used textbook purchasing seasons are at the end of each
academic semester, May/June and December/January. Although the Company makes
book purchases during other periods, the inventory purchased in May, before
publishers announce their price increases in June and July, allows the Company
to purchase inventory based on the lower retail prices of the previous year. The
combination of this purchasing cycle and the fact that the Company is able to
sell its inventory in relation to retail prices for the following year permits
the Company to realize additional gross profit. The Company advances cash to its
representatives during these two periods, and the representatives in turn buy
books directly from students, generally through the on-campus bookstore.
After the Company purchases the books, the Company arranges for shipment to
one of its two warehouses (Nebraska and California) via common carrier. At the
warehouse, the Company refurbishes damaged books and categorizes and shelves all
other books in a timely manner, and enters them into the Company's on-line
inventory system. These two locations function as one facility allowing
customers to access inventory at both locations.
Customers place orders by phone, mail, fax or other electronic method. Upon
receiving an order, the Company removes the books from available inventory and
holds them for future shipping. Customers may return books within 60 days after
the start of classes if a written request is enclosed. Returns currently average
approximately 20.5% of sales and generally are attributable to course
cancellations or overstocking. The majority of returns are textbooks that the
Company is able to resell for the next semester.
COLLEGE BOOKSTORE OPERATIONS
An important aspect of the Company's business strategy is a program designed
to reach new customers through the opening or acquisition of bookstores adjacent
to college campuses. In addition to generating sales of new and used textbooks
and general merchandise, these outlets enhance the Company's wholesale
operations by increasing the inventory of used books purchased from the campus.
A desirable campus for a Company-operated college bookstore is one on which
the Company does not currently buy or sell used textbooks either because a
competitor of the Company contract-manages the college's bookstore or the
college bookstore does not have a strong relationship with the Company. The
Company generally will not open a location on a campus where it already has a
strong relationship with the college bookstore because some college bookstores
may view having a competing location as a conflict of interest.
The Company tailors each of its own bookstores to fit the needs and
lifestyles of the campus on which it is located. Individual bookstore managers
are given significant planning and managing responsibilities, including, hiring
employees, controlling cash and inventory, and purchasing and merchandising
product. The Company has staff specialists to assist individual bookstore
managers in such areas as store planning, merchandise layout and inventory
control.
As of June 26, 2001 the Company operated 108 college bookstores nationwide,
having expanded from 39 bookstores in 1996. During fiscal 2001 the Company
purchased 4 new bookstores located in Michigan, Oklahoma, Tennessee, and Texas,
adding estimated combined annual revenues in excess of $6.2 million. Subsequent
9
to March 31, 2001, the Company acquired eight bookstores located in Norman,
Oklahoma; Raleigh, North Carolina; Radford, Virginia; Orlando, Florida;
Gainesville, Florida; Chadron, Nebraska; and Bellingham, Washington and sold two
bookstores located in Austin, Texas.
The table below highlights certain information regarding the Company's
bookstores opened through March 31, 2001.
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)
----------- ---------- ----------- -------------- ---------- --------------
1997 39 12 1 50 438
1998 50 9 0 59 474
1999 59 8 2 65 537
2000 65 35 2 98 733
2001 98 4 0 102 740
- ------------
(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 7,300 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.
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 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 in fiscal 2001 by an
entity that is partially owned by NBC's majority owner.
10
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 over 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 5.6% of fiscal 2001 revenues. No one customer accounted for
more than 1.0% of the Company's fiscal 2001 revenues.
The Company's wholesale operations purchase from and resell used textbooks
to many of the nation's largest college campuses including: University of Texas,
University of Southern California, Indiana University, University of Arizona,
University of Washington, and University of Minnesota.
The Company's college bookstores are located on many of the nation's largest
college campuses including: University of Nebraska, University of Michigan,
University of Maryland, Arizona State University, Pennsylvania State University,
University of Kansas, Michigan State University, University of California -
Berkeley, Texas A&M University, University of Florida, and University of
Tennessee.
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 640 stores and 380 stores,
respectively. The Company believes that its market share of the used college
textbook wholesale distribution market is comparable to that of Follett and MBS,
individually. The remaining competitors are smaller regional companies,
including Budgetext, Texas Book Company and Southeastern Book Company. Most of
the leading companies in the industry also have an established retail presence,
either through direct store ownership/operation or through contract-management.
11
Many of Follett's college bookstores are located on smaller campuses. The
size of the campus and Follett's presence there have precluded potential
competitors such as the Company from entering these markets, which in turn
affects both the Company's ability to buy books and its ability to add new
accounts. However, because it is required to supply used texts to all of its own
stores, Follett must balance the demands of its own bookstores with those of its
other independent customers.
MBS is controlled by the same shareholder that controls Barnes & Noble.
Consequently, MBS supplies approximately 380 Barnes & Noble college stores. MBS
faces the same challenges that Follett faces in supplying existing institutional
accounts. MBS has a strong systems division that competes actively with the
Company for new customers and also fulfills all of the needs of the Barnes &
Noble stores.
The Company's college bookstore operations compete with other college campus
bookstores, including the on-campus bookstore in those locations where the
Company's bookstore is off-campus.
Both the Company's wholesale business and bookstore operations compete with
a number of entities that have entered the college marketplace, or enhanced
their sales channel to that marketplace, through E-commerce. These competitors
typically use the Internet to establish websites designed to sell textbooks
and/or other merchandise directly to students, by-passing the traditional
college bookstore. By contrast, the Company's software products, WebPRISM and
CampusHub, are designed to sell textbooks and other merchandise through a
college bookstore website, not around it. The Company also competes against the
expansion of electronic media as a source of textbook information, such as
on-line resources, E-Books, print-on-demand textbooks and CD-ROM, which may
replace or modify the need for students to purchase textbooks through the
traditional college bookstore. The Company does not believe that such
competition has had a material adverse impact on the Company's results of
operations.
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 competitor in the distance
education market is MBS.
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, 2001 the Company had a total of approximately 2,700
employees, of which approximately 1,000 are full-time, approximately 200 are
part-time and approximately 1,500 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.
12
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, 2001, are the Company's college
bookstores, their location, college served and the school's enrollment.
Institution Location Enrollment(1) Store Name
----------- -------- ------------- ----------
University of Alabama Tuscaloosa, AL 19,000 The College Store
University of Arkansas - Little Rock Little Rock, AR 10,500 Campus Bookstore
Northern Arizona University Flagstaff, AZ 20,000 The College Store
Northern Arizona University Flagstaff, AZ 20,000 University Text and Tools
Coconino Community College Flagstaff, AZ 3,700 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 34,300 Arizona Book Store
University of Arizona Tucson, AZ 34,300 Rother's University Bookstore
University of California - Berkeley Berkeley, CA 30,400 Ned's Bookstore (2 locations)
California State University - Northridge Northridge, CA 27,900 The College Store
Daytona Beach Community College Daytona Beach, FL 11,000 & 4,900 College Book Rack
and Embry-Riddle Aeronautical University
Miami Dade Community College-Kendall Miami, FL 18,800 Lemox College Book & Supply
University of Central Florida Orlando, FL 28,000 Knight's Corner
Georgia State University Atlanta, GA 24,000 Georgia Book Store
Drake University Des Moines, IA 5,300 University Book Store (2 locations) (2)
Southern Illinois University Carbondale, IL 22,400 Saluki Bookstores (2 locations)
Ball Sate University Muncie, IN 18,100 Collegiate Book Exchange
Valparaiso University Valparaiso, IN 3,600 University Book Center (2)
University of Kansas Lawrence, KS 29,100 University Book Shop
Johnson County Community College Overland Park, KS 16,000 The College Store
University of Louisville Louisville, KY 21,100 College Book Warehouse
Eastern Kentucky University Richmond, KY 17,500 University Book & Supply
University of Maryland College Park, MD 32,700 Maryland Book Exchange
Prince George's Community College Largo, MD 12,300 Prince George's 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
Oakland University Auburn Hills, MI 15,100 Textbook Outlet
Wayne County Community College Belleville, Detroit & 11,000 Ned's Bookstore (5 locations) (2)
Taylor, MI
Ferris State University Big Rapids, MI 9,700 The College Store
Michigan State University East Lansing, MI 43,000 The College Store
Michigan State University East Lansing, MI 43,000 Ned's Bookstore
Kettering Engineering & Flint, MI 3,200 The 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 Chadron Book Shop
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 Prairie Wolves Bookstore (2)
Wayne State College Wayne, NE 3,600 Student Bookstore
University of Nevada Las Vegas Las Vegas, NV 24,900 Rebelbooks
State University of New York - Buffalo Amherst, NY 24,300 The College Store
State University of New York - Binghamton Vestal, NY 12,300 The Bookbridge
University of Akron Akron, OH 23,200 The College Store
Ohio University Athens, OH 19,200 Specialty Books
Ohio State University Columbus, OH 50,000 College Town
Wright State University Fairborn, OH 16,800 The College Store
University of Oklahoma Norman, OK 21,300 Boomer Book Store
Oklahoma State University Stillwater, OK 21,100 Cowboy Book
Indiana University of Pennsylvania Indiana, PA 13,400 The College Store
University of Pittsburgh Pittsburgh, PA 26,200 The College Store
Pennsylvania State University State College, PA 40,000 University Book Centre
College of Charleston Charleston, SC 11,600 University Book of Charleston
13
Columbia College Columbia, SC 1,300 C-Square Bookstore (2)
University of South Carolina Columbia, SC 25,500 South Carolina Bookstore
(2 locations)
East Tennessee State University Johnson City, TN 11,200 The College Store
University of Tennessee Knoxville, TN 26,000 Rocky Top East
University of Tennessee Knoxville, TN 26,000 Rocky Top Books
University of Texas - Arlington Arlington, TX 19,100 The College Store
Austin Community College Austin, TX 27,000 Bevo's Northridge
Austin Community College Austin, TX 27,000 Bevo's ACC (2 locations)
University of Texas Austin, TX 48,000 Bevo's West (2 locations)
Blinn College Bryan, TX 7,800 Rother's Bookstore
Texas A&M University College Station, TX 43,400 Rother's Bookstore
Texas A&M University College Station, TX 43,400 Rother's Bookstore (Woodstone)
Texas A&M University College Station, TX 43,400 Rother's Bookstore (Northgate)
Southern Methodist University Dallas, TX 10,000 Varsity Book Store
University of North Texas Denton, TX 26,500 Voertman's
University of Texas - Pan Edinburg & 12,700 & South Texas Book & Supply
American and South McAllen, TX 12,900 (2 locations)
Texas Community College
North Harris County Community College Houston, TX 9,400 College Bookstore
University of Houston Houston, TX 33,200 Rother's Bookstore
Texas Tech University Lubbock, TX 24,200 Spirit Shop
Texas Tech University Lubbock, TX 24,200 Double T Bookstore (3 locations)
San Antonio College, St. Philip's San Antonio, TX 22,000; 21,200; L&M Bookstore
College, and Palo Alto College & 6,900
University of Texas - San Antonio San Antonio, TX 18,800 L&M UTSA Bookstore
Southwest Texas State University San Marcos, TX 21,100 Colloquium Bookstore (2 locations)
Southwest Texas State University San Marcos, TX 21,100 Rother's Bookstore
Tarleton State University Stephenville, TX 6,400 Rother's Bookstore
Baylor University Waco, TX 13,400 University Bookstore and Spirit Shop
Baylor University Waco, TX 13,400 Rother's Bookstore
Midwestern State University Wichita Falls, TX 5,700 Rother's Bookstore
Virginia Polytechnic and State University Blacksburg, VA 25,000 Tech Bookstore
Old Dominion University Norfolk, VA 19,100 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.
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 2001.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There were no equity securities of the registrant sold by the registrant
during fiscal 2001.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected historical financial and other data
of the Company as of and for the fiscal years ended March 31, 2001, 2000, 1999,
1998, and 1997, respectively. The selected historical financial data was derived
from the Company's audited financial statements. Consistent with the Company's
audited financial statements, certain prior year amounts have been reclassified
to conform to the current year presentation. The following table should be read
in conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements of the Company
and the related notes thereto included in Item 8 herein.
Fiscal Years Ended March 31,
------------------------------------------------------
2001 2000 1999 1998(1) 1997
----------- --------- --------- ---------- -----------
STATEMENT OF OPERATIONS DATA: (dollars in thousands)
Revenues $ 301,669 $267,069 $218,638 $ 200,086 $ 173,730
Costs of sales 187,099 164,984 137,989 125,632 110,466
----------- --------- --------- ---------- -----------
Gross profit 114,570 102,085 80,649 74,454 63,264
Operating expenses:
Selling, general, and administrative 74,100 65,820 51,289 47,882 40,231
Depreciation 2,956 3,096 2,393 2,531 2,706
Amortization 10,446 9,320 6,149 5,626 4,072
Stock compensation costs - - - 8,278 297
----------- --------- --------- ---------- -----------
Income from operations 27,068 23,849 20,818 10,137 15,958
Other expenses (income):
Interest expense 17,487 17,469 17,508 11,284 10,760
Interest income (615) (356) (351) (328) (561)
----------- --------- --------- ---------- -----------
Income (loss) before income
taxes and extraordinary item 10,196 6,736 3,661 (819) 5,759
Income tax expense 5,857 4,845 2,604 306 2,325
----------- --------- --------- ---------- -----------
Income (loss) before extraordinary item 4,339 1,891 1,057 (1,125) 3,434
Extraordinary loss on extinguishment of
debt, net of taxes - - - (4,021) -
----------- --------- --------- ---------- -----------
Net income (loss) $ 4,339 $ 1,891 $ 1,057 $ (5,146) $ 3,434
=========== ========= ========= ========== ===========
OTHER DATA:
EBITDA (2) $ 40,470 $ 36,265 $ 29,360 $ 26,572 $ 23,033
Net cash flows from operating activities 8,839 18,945 10,296 (2,842) 10,774
Net cash flows from investing activities (4,994) (30,244) (5,067) (11,548) (3,427)
Net cash flows from financing activities (3,887) 11,690 (6,976) 10,220 (7,471)
Capital expenditures 1,759 3,542 2,842 3,690 2,243
Business acquisition expenditures (3) 2,975 26,072 2,086 7,714 1,252
Number of bookstores open at end of the
period 102 98 65 59 50
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents $ 4,410 $ 4,451 $ 4,060 $ 5,807 $ 9,977
Working capital 72,394 62,244 55,442 54,018 55,913
Total assets 165,136 166,100 139,662 148,742 127,146
Total debt, including current maturities 161,773 166,302 169,257 175,985 79,524
15
(1) Effective February 13, 1998, NBC consummated a merger among NBC Merger
Corp., NBC and certain shareholders of NBC pursuant to which the
Company's outstanding debt and NBC's stock were restructured.
Following the Recapitalization, the results of operations of the
Company included higher interest costs due to the financing of the
Recapitalization, and in fiscal 1998, non-recurring charges associated
with the extinguishment of debt and buyout of stock options.
(2) EBITDA is defined as income from operations plus 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. The Company believes that EBITDA
provides additional information for determining its ability to meet
debt service requirements. EBITDA does not represent and should not be
considered as an alternative to net income or cash flow from
operations as determined by accounting principles generally accepted
in the United States of America, and EBITDA does not necessarily
indicate whether cash flow will be sufficient for cash requirements.
EBITDA should not be considered by investors as an indicator of cash
flows from operating activities, investing activities and financing
activities as determined in accordance with accounting principles
generally accepted in the United States of America. Items excluded
from EBITDA, such as depreciation and amortization, are significant
components in understanding and assessing the Company's financial
performance. EBITDA measures presented may not be comparable to
similarly titled measures presented by other registrants.
(3) Business acquisition expenditures represent established businesses
purchased by the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FISCAL YEAR ENDED MARCH 31, 2001 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2000.
REVENUES. Revenues for the years ended March 31, 2001 and 2000 and the
corresponding increase (decrease) in revenues were as follows:
Increase (Decrease)
2001 2000 Amount Percentage
-------------- --------------- ------------- ----------
Wholesale operations $ 113,006,804 $ 108,074,521 $ 4,932,283 4.6%
College bookstore operations 182,856,000 158,076,869 24,779,131 15.7%
Complementary services 26,647,451 20,717,793 5,929,658 28.6%
Intercompany eliminations (20,841,402) (19,800,260) (1,041,142) 5.3%
-------------- --------------- ------------- ----------
$ 301,668,853 $ 267,068,923 $34,599,930 13.0%
============== =============== ============= ==========
The increase in wholesale revenues was due primarily to publisher price
increases. The increase in college bookstore revenues was due primarily to the
net addition of 37 new college bookstores either through acquisition or startup
since April 1, 1999. Of the $24.8 million increase in college bookstore
revenues, $19.2 million was attributable to new college bookstores with the
remainder accounted for by a 4.6% increase in revenues from stores open for the
full year for both the 2000 and 2001 fiscal years ("same stores"). Complementary
services revenues increased primarily due to an increase in the Company's
distance education program revenues and $0.9 million attributable to the
adoption of management services and licensing agreements in fiscal 2001 with
TheCampusHub.com, Inc., an entity that is partially owned by NBC's majority
owner. Such growth was partially offset by a decrease in revenues from the
Company's system sales program. As the Company's wholesale and college bookstore
operations have grown, the Company's intercompany transactions have also
increased.
16
GROSS PROFIT. Gross profit for fiscal 2001 increased $12.5 million, or
12.2%, to $114.6 million from $102.1 million for fiscal 2000. This increase was
primarily due to higher revenues, partially offset by a decrease in gross margin
percent. Gross margin percent was 38.0% for fiscal 2001 as compared to 38.2% for
fiscal 2000. The decrease in gross margin percent was primarily attributable to
revenue mix, with the lower-margin revenues from the college bookstore
operations and complementary services comprising 65.0% of total revenues (before
intercompany eliminations) in fiscal 2001 as compared to 62.3% in fiscal 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal 2001 increased $8.3 million, or 12.6%, to
$74.1 million from $65.8 million for fiscal 2000. Selling, general and
administrative expenses as a percentage of revenues were 24.6% in both fiscal
years. Approximately $4.9 million of the increase in expenses resulted primarily
from the expected higher expense base associated with the Company's expansion of
its operations through bookstore acquisitions and startups. Additionally,
expenses increased $2.6 million in the Company's distance education program as a
result of the revenue growth previously discussed.
AMORTIZATION EXPENSE. Amortization expense for fiscal 2001 increased $1.1
million, or 12.1%, to $10.4 million from $9.3 million for fiscal 2000. This
increase was the result of additional amortization of goodwill related to recent
acquisitions, offset in part by goodwill associated with acquisitions that is
becoming fully amortized.
INCOME (LOSS) BEFORE INTEREST AND TAXES. Income (loss) before interest and
taxes for fiscal 2001 and 2000 and the corresponding increase (decrease) in
income (loss) before interest and taxes were as follows:
Increase (Decrease)
2001 2000 Amount Percentage
-------------- -------------- ------------- ----------
Wholesale operations $27,241,116 $24,832,679 $ 2,408,437 9.7 %
College bookstore operations 9,206,616 9,588,784 (382,168) (4.0)%
Complementary services (1,402,666) (2,449,321) 1,046,655 42.7 %
Corporate administration (7,977,326) (8,123,130) 145,804 1.8 %
-------------- -------------- ------------- ----------
$27,067,740 $23,849,012 $ 3,218,728 13.5 %
============== ============== ============= ==========
The increase in wholesale income before interest and taxes was primarily due
to increased revenues. Income before interest and taxes for college bookstore
operations decreased, despite increased revenues, as a result of additional
amortization of goodwill related to recent acquisitions. The loss before
interest and taxes decreased for the complementary services segment primarily
due to revenues attributable to the aforementioned management services and
licensing agreements with TheCampusHub.com, Inc. Despite the Company's growth,
corporate administrative costs have remained relatively stable between fiscal
years.
INCOME TAXES. Income tax expense for fiscal 2001 increased $1.1 million, or
20.9%, to $5.9 million from $4.8 million for fiscal 2000. This increase was
primarily the result of an increase in income before income taxes. The Company's
effective tax rates of 57.4% and 71.9% for the years ended March 31, 2001 and
2000, respectively, were significantly higher than the statutory tax rate
primarily as a result of state income taxes and non-deductible amortization on
goodwill associated with recent acquisitions.
17
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 $ 108,074,521 $ 98,751,112 $ 9,323,409 9.4%
College bookstore operations 158,076,869 120,872,556 37,204,313 30.8%
Complementary services 20,717,793 12,637,553 8,080,240 63.9%
Intercompany eliminations (19,800,260) (13,623,650) (6,176,610) 45.3%
-------------- --------------- -------------- ----------
$ 267,068,923 $ 218,637,571 $48,431,352 22.2%
============== =============== ============== ==========
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.
GROSS PROFIT. Gross profit for fiscal 2000 increased $21.5 million, or
26.6%, to $102.1 million from $80.6 million for fiscal 1999. This increase was
primarily due to higher revenues, combined with an increase in gross margins.
Gross margin was 38.2% for fiscal 2000 as compared to 36.9% 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 $14.5 million, or 28.3%, to
$65.8 million from $51.3 million for fiscal 1999. Selling, general and
administrative expenses as a percentage of revenues were 24.6% and 23.5% 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.
18
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 $24,832,679 $21,590,426 $ 3,242,253 15.0 %
College bookstore operations 9,588,784 8,339,047 1,249,737 15.0 %
Complementary services (2,449,321) (2,442,717) (6,604) (0.3)%
Corporate administration (8,123,130) (6,668,446) (1,454,684) (21.8)%
-------------- -------------- -------------- ----------
$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
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 $2.2 million, or
86.1%, to $4.8 million from $2.6 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity requirements are for debt service under the
Senior Credit Facility, the Senior Subordinated Notes and other outstanding
indebtedness, for working capital, for capital expenditures and for certain
acquisitions. The Company has historically funded these requirements primarily
through internally generated cash flow and funds borrowed under the Company's
Revolving Credit Facility. At March 31, 2001, the Company's total indebtedness
was approximately $161.8 million, consisting of approximately $51.2 million in
Term Loans, $110.0 million of the Senior Subordinated Notes and $0.6 million of
other indebtedness, including capital lease obligations. To provide additional
financing to fund the Recapitalization, NBC issued Senior Discount Debentures
which provided $41.6 million in net proceeds (face value of $76.0 million less
original issue discount of $31.0 million and deferred financing costs of $3.4
million).
Principal and interest payments under the Senior Credit Facility and the
Senior Subordinated Notes represent significant liquidity requirements for the
Company. Under the terms of the Tranche A and B Loans, the Company is scheduled
to make principal payments totaling approximately $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, 2001. Loans under the Senior Credit Facility
bear interest at floating rates based upon the interest rate option selected by
the Company. The Senior Subordinated Notes require semi-annual interest payments
at a fixed rate of 8.75% and mature on February 15, 2008. The Senior Discount
Debentures require semi-annual cash interest payments commencing August 15, 2003
at a fixed rate of 10.75% and mature on February 15, 2009.
The Company's capital expenditures were $1.8 million, $3.5 million, and $2.8
million for the fiscal years ended March 31, 2001, 2000, and 1999, respectively.
Capital expenditures consist primarily of leasehold improvements and furnishings
for new bookstores, bookstore renovations, computer upgrades and miscellaneous
19
warehouse improvements. The Company's ability to make capital expenditures is
subject to certain restrictions under the Senior Credit Facility.
Business acquisition expenditures were $3.0 million, $26.1 million, and $2.1
million for the fiscal years ended March 31, 2001, 2000, and 1999, 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 raised by NBC in fiscal 2000 through the issuance of 284,923 shares of
NBC's Class A Common Stock to HWH and members of senior management was
contributed to the Company to assist in financing the acquisitions of Triro,
Inc. and Ned's Bookstores.
In addition, during fiscal 2001, NBC issued 12,237 shares of its Class A
Common Stock to certain of the Company's employees. This issuance was exempt
from registration under the Securities Act of 1933, as amended, pursuant to
Section 3(b) thereof and Rule 505 of Regulation D promulgated thereunder. Such
shares were issued at the Founder's Price of $52.47 per share. Proceeds from
this issuance, which totaled $642,039, were utilized for general operating
activities.
Subsequent to March 31, 2001, the Company acquired certain assets of a
privately owned college bookstore serving Western Washington University and
seven Wallace's Bookstores, Inc. bookstores serving the University of Florida,
the University of Oklahoma, North Carolina State University, the University of
Central Florida, Radford University, and Chadron State College for a total of
approximately $5.8 million. Such acquisitions were estimated to have
approximately $14 million in annual revenues and were funded through internally
generated cash flows. Future acquisitions, if any, may require additional
capital contributions.
Also subsequent to March 31, 2001, the Company sold certain assets of two of
its college bookstore locations serving the University of Texas in Austin, Texas
for approximately $1.2 million. Annual combined revenues for these two locations
for the year ended March 31, 2001 were approximately $2.4 million. The sale was
made to one of the Company's largest wholesale customers, thereby strengthening
the long-term relationship with that customer.
The Company's principal sources of cash to fund its future operating
liquidity needs will be cash from operating activities and borrowings under the
Revolving Credit Facility. Usage of the Revolving Credit Facility to meet the
Company's liquidity needs fluctuates throughout the year due to the Company's
distinct buying and selling periods, increasing substantially at the end of each
college semester (May and December). For the year ended March 31, 2001,
weighted-average borrowings under the Revolving Credit Facility approximated
$15.3 million, with actual borrowings ranging from a low of no borrowings to a
high of $46.1 million. Net cash flows from operating activities for the year
ended March 31, 2001 were $8.8 million, a decrease of $10.1 million from $18.9
million for the year ended March 31, 2000. This decrease was primarily due to
the timing of payments made on accounts payable balances and increases in
accounts receivable.
Access to the Company's principal sources of cash is subject to various
restrictions. The availability of additional borrowings under the Revolving
Credit Facility is subject to the calculation of a borrowing base, which at any
time is equal to a percentage of eligible accounts receivable and inventory, up
to a maximum of $50.0 million. The Senior Credit Facility restricts the
Company's ability to make loans or advances and pay dividends, except that,
among other things, the Company may pay dividends to NBC (i) after August 15,
2003 in an amount not to exceed the amount of interest required to be paid on
the Senior Discount Debentures and (ii) to pay corporate overhead expenses not
to exceed $250,000 per year and any taxes owed by NBC. The indenture governing
the Senior Discount Debentures (the "Indenture") restricts the ability of NBC
and its Restricted Subsidiaries (as defined in the Indenture) to pay dividends
or make other Restricted Payments (as defined in the Indenture) to their
respective stockholders, subject to certain exceptions, unless certain
conditions are met, including that (i) no default under the Indenture shall have
occurred and be continuing, (ii) NBC shall be permitted by the Indenture to
incur additional indebtedness and (iii) the amount of the dividend or payment
may not exceed a certain amount based on, among other things, NBC's consolidated
20
net income. The indenture governing the Senior Subordinated Notes contains
similar restrictions on the ability of the Company 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 for the foreseeable future.
As of March 31, 2001, the Company could borrow up to $38.6 million under the
Revolving Credit Facility. The Revolving Credit Facility was unused at March 31,
2001. Amounts available under the Revolving Credit Facility may be used for
working capital and general corporate purposes (including up to $10.0 million
for letters of credit), subject to certain limitations under the Senior Credit
Facility.
The Company believes that funds generated from operations, existing cash,
and borrowings under the Revolving Credit Facility will be sufficient to finance
its current operations, any required excess cash flow payments, planned capital
expenditures and internal growth for the foreseeable future. Future
acquisitions, if any, may require additional debt financing or capital
contributions.
SEASONALITY
The Company's wholesale and bookstore operations experience two distinct
selling periods and the wholesale operations experience two distinct buying
periods. The peak selling periods for the wholesale operations occur prior to
the beginning of each college semester in August and December. The buying
periods for the wholesale operations occur at the end of each college semester
in late December and May. The primary selling periods for the bookstore
operations are in September and January. In fiscal 2001, approximately 43% of
the Company's annual revenues were earned in the second fiscal quarter
(July-September), while approximately 30% of the Company's annual revenues were
earned in the fourth fiscal quarter (January-March). Accordingly, the Company's
working capital requirements fluctuate throughout the year, increasing
substantially at the end of each 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 will not be adversely affected.
ACCOUNTING STANDARDS NOT YET ADOPTED
The Financial Accounting Standards Board has issued SFAS No. 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended by SFAS No. 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE
EFFECTIVE DATE OF FASB STATEMENT NO. 133, and SFAS No. 138, ACCOUNTING FOR
CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES. This standard
requires that all derivative instruments be recorded in the balance sheet at
fair value. Changes in the fair value of derivatives are recorded in earnings or
other comprehensive income, based on whether the instrument is designated as
part of a hedge transaction and, if so, the type of hedge transaction. The
initial adoption of SFAS No. 133, which occurred on April 1, 2001, had no
material impact on the Company's financial statements.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Annual Report on Form 10-K contains or incorporates by reference
certain statements that are not historical facts, including, most importantly,
information concerning possible or assumed future results of operations of the
Company and statements preceded by, followed by or that include the words "may,"
"believes," "expects," "anticipates," or the negation thereof, or similar
expressions, which constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). All
statements which address operating performance, events or developments that are
21
expected or anticipated to occur in the future, including statements relating to
volume and revenue growth, earnings per share growth or statements expressing
general optimism about future operating results, are forward-looking statements
within the meaning of the Reform Act. Such forward-looking statements involve
risks, uncertainties and other factors which may cause the actual performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. For those statements, the Company claims the protection of the safe
harbor for forward-looking statements contained in the Reform Act. Several
important factors could affect the future results of the Company and could cause
those results to differ materially from those expressed in the forward-looking
statements contained herein. The factors that could cause actual results to
differ materially include, but are not limited to, the following: increased
competition; ability to integrate recent acquisitions; loss or retirement of key
members of management; increases in the Company's cost of borrowing or inability
to raise or unavailability of additional debt or equity capital; inability to
purchase a sufficient supply of used textbooks; changes in pricing of new and/or
used textbooks; changes in general economic conditions and/or in the markets in
which the Company competes or may, from time to time, compete; the impact of the
Internet and E-books on the Company's operations; and other risks detailed in
the Company's Securities and Exchange Commission filings, in particular the
Company's Registration Statement on Form S-4 (No. 333-48221), all of which are
difficult or impossible to predict accurately and many of which are beyond the
control of the Company. The Company will not undertake and specifically declines
any obligation to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk exposure is, and is expected to continue
to be, fluctuation in Eurodollar interest rates. Of the $161.8 million in
long-term debt and capital lease obligations outstanding at March 31, 2001,
approximately $51.2 million is subject to fluctuations in the Eurodollar rate.
As provided in the Company's Senior Credit Facility, exposure to interest rate
fluctuations is managed by maintaining fixed interest rate debt (primarily the
Senior Subordinated Notes) and by entering into interest rate swap agreements to
effectively convert certain variable rate debt into fixed rate debt. The Company
has separate five-year amortizing interest rate swap agreements with two
financial institutions whereby the Company's variable rate Tranche A and B Term
Loans have been effectively converted into debt with a fixed rate of 5.815% plus
an applicable margin (as defined in the Credit Agreement). The notional amount
under each agreement as of March 31, 2001 was approximately $25.6 million. Such
notional amounts are reduced periodically by amounts equal to the scheduled
principal payments on the Tranche A and B Term Loans. The Company is exposed to
credit loss in the event of nonperformance by the counterparties to the interest
rate swap agreements. The Company anticipates the counterparties will be able to
fully satisfy their obligations under the agreements.
22
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, 2001):
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:
2002 $ 50,412 8.76% $ 6,287,500 6.90% $ 48,170,833 5.81% / 4.50%
2003 45,571 8.76% 6,800,000 7.31% 41,413,542 5.81% / 4.89%
2004 25,950 8.76% 8,475,000 8.00% 12,275,000 5.81% / 5.44%
2005 28,881 8.76% 11,187,500 8.39% - -
2006 32,144 8.76% 18,437,500 8.64% - -
Thereafter 110,402,849 8.77% - - - -
------------- ------- ------------ ------- ------------- -------------
Total $110,585,807 8.76% $51,187,500 7.65% $101,859,375 5.81% / 4.77%
============= ======= ============ ======= ============= =============
Fair Value $ 95,285,793 - $51,187,500 - $ (1,004,400) -
============= ============ =============
(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 2001, there was no excess cash flow payment
obligation.
Certain quantitative market risk disclosures have changed significantly
since March 31, 2000 as a result of market fluctuations, movement in interest
rates, and principal payments. The following table presents summarized market
risk information for the years ended March 31, 2001 and 2000:
March 31, March 31,
2001 2000
--------------- -------------
Fair Values:
Fixed rate debt $ 95,285,793 $ 88,223,075
Variable rate debt 51,187,500 55,625,000
Interest rate swaps (1,004,400) 1,735,657
Overall Weighted-Average Interest Rates:
Fixed rate debt 8.76% 8.76%
Variable rate debt 7.65% 9.46%
Interest rate swaps receive rate 4.77% 6.96%
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS OF NEBRASKA BOOK COMPANY, INC. FOR THE YEARS
ENDED MARCH 31, 2001, 2000, AND 1999
Independent Auditors' Report...............................................25
Balance Sheets.............................................................26
Statements of Operations...................................................27
Statements of Stockholder's Deficit........................................28
Statements of Cash Flows...................................................29
Notes to Financial Statements..............................................30
24
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Nebraska Book Company, Inc.
Lincoln, Nebraska
We have audited the accompanying balance sheets of Nebraska Book Company,
Inc. (a wholly-owned subsidiary of NBC Acquisition Corp.) as of March 31, 2001
and 2000, and the related statements of operations, stockholder's deficit, and
cash flows for each of the three years in the period ended March 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Nebraska Book Company, Inc. as of March 31,
2001 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Lincoln, Nebraska
May 23, 2001
25
NEBRASKA BOOK COMPANY, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
March 31,
2001 2000
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,409,505 $ 4,450,887
Receivables 31,368,150 24,193,668
Inventories 61,834,563 61,809,630
Recoverable income taxes 706,408 -
Deferred income taxes 1,862,166 1,598,793
Prepaid expenses and other assets 403,700 427,302
------------- -------------
Total current assets 100,584,492 92,480,280
PROPERTY AND EQUIPMENT, net of depreciation
& amortization 24,474,887 25,760,825
GOODWILL AND OTHER INTANGIBLES, net of amortization 34,178,587 43,183,145
OTHER ASSETS 5,897,647 4,676,047
------------- -------------
$165,135,613 $166,100,297
============= =============
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 11,647,964 $ 16,145,566
Accrued employee compensation and benefits 6,512,773 6,301,111
Accrued interest 1,466,643 1,349,224
Accrued expenses 1,946,675 819,010
Income taxes payable - 553,893
Deferred revenue 278,982 552,251
Current maturities of long-term debt 6,308,450 4,456,324
Current maturities of capital lease obligations 29,463 59,181
------------- -------------
Total current liabilities 28,190,950 30,236,560
LONG-TERM DEBT, net of current maturities 155,413,140 161,721,590
CAPITAL LEASE OBLIGATIONS, net of current maturities 22,254 64,856
OTHER LONG-TERM LIABILITIES 238,970 202,231
DUE TO PARENT 7,056,815 4,606,191
COMMITMENTS (Note J)
STOCKHOLDER'S DEFICIT:
Common stock, voting, authorized 50,000
shares of $1.00 par value; issued and
outstanding 100 shares 100 100
Additional paid-in capital 46,435,726 45,829,948
Accumulated deficit (72,222,342) (76,561,179)
------------- -------------
Total stockholder's deficit (25,786,516) (30,731,131)
------------- -------------
$165,135,613 $166,100,297
============= =============
See notes to financial statements.
26
NEBRASKA BOOK COMPANY, INC.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Year Ended March 31,
2001 2000 1999
------------- ------------- -------------
REVENUES, net of returns $301,668,853 $267,068,923 $218,637,571
COSTS OF SALES 187,098,970 164,984,418 137,988,909
------------- ------------- -------------
Gross profit 114,569,883 102,084,505 80,648,662
OPERATING EXPENSES:
Selling, general and administrative 74,100,242 65,819,487 51,288,680
Depreciation 2,956,135 3,096,013 2,392,701
Amortization 10,445,766 9,319,993 6,148,971
------------- ------------- -------------
87,502,143 78,235,493 59,830,352
------------- ------------- -------------
INCOME FROM OPERATIONS 27,067,740 23,849,012 20,818,310
OTHER EXPENSES (INCOME):
Interest expense 17,486,737 17,469,487 17,508,601
Interest income (615,430) (355,935) (351,231)
------------- ------------- -------------
16,871,307 17,113,552 17,157,370
------------- ------------- -------------
INCOME BEFORE INCOME TAXES 10,196,433 6,735,460 3,660,940
INCOME TAX EXPENSE 5,857,596 4,844,744 2,603,657
------------- ------------- -------------
NET INCOME $ 4,338,837 $ 1,890,716 $ 1,057,283
============= ============= =============
See notes to financial statements.
27
NEBRASKA BOOK COMPANY, INC.
STATEMENTS OF STOCKHOLDER'S DEFICIT
- --------------------------------------------------------------------------------
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
--------- ------------ ------------- -------------
BALANCE, April 1, 1998 $ 100 $30,899,952 $(79,509,178) $(48,609,126)
Contributed capital - (23,010) - (23,010)
Net income - - 1,057,283 1,057,283
--------- ------------ ------------- -------------
BALANCE, March 31, 1999 100 30,876,942 (78,451,895) (47,574,853)
Contributed capital - 14,953,006 - 14,953,006
Net income - - 1,890,716 1,890,716
--------- ------------ ------------- -------------
BALANCE, March 31, 2000 100 45,829,948 (76,561,179) (30,731,131)
Contributed capital - 605,778 - 605,778
Net income - - 4,338,837 4,338,837
--------- ------------ ------------- -------------
BALANCE, March 31, 2001 $ 100 $46,435,726 $(72,222,342) $(25,786,516)
========= ============ ============= =============
See notes to financial statements.
28
NEBRASKA BOOK COMPANY, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------
Year Ended March 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 2001 2000 1999
------------ ------------ ------------
Net income $ 4,338,837 $ 1,890,716 $ 1,057,283
Adjustments to reconcile net income
to net cash flows from operating activities:
Depreciation 2,956,135 3,096,013 2,392,701
Amortization of intangibles 11,814,114 10,692,176 7,491,851
Loss on disposal of assets 59,627 18,044 89,800
Deferred income taxes (1,351,000) (773,000) (883,200)
Changes in operating assets and
liabilities, net of effect of acquisitions:
Receivables (7,184,802) (3,189,434) 368,840
Inventories 354,360 (4,665,275) 18,827
Recoverable income taxes (706,408) 319,630 4,369,146
Prepaid expenses and other assets 23,602 84,054 (123,460)
Other assets (85,526) 797,705 (1,019,776)
Accounts payable (4,497,902) 5,318,621 (5,297,973)
Accrued employee compensation and
benefits 211,662 2,231,461 28,651
Accrued interest 117,419 (77,285) (362,038)
Accrued expenses 1,128,408 133,125 182,985
Income taxes payable (553,893) 552,928 -
Deferred revenue (273,269) 175,695 (87,361)
Other long-term liabilities 36,739 11,157 40,470
Due to parent 2,450,624 2,328,925 2,029,175
------------ ------------ ------------
Net cash flows from operating
activities 8,838,727 18,945,256 10,295,921
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,759,010) (3,542,471) (2,842,036)
Bookstore acquisitions, net of cash acquired (2,975,332) (26,072,155) (2,085,881)
Proceeds from sale of property and equipment
and other 144,834 65,197 97,586
Software development costs (403,996) (694,830) (236,328)
------------ ------------ ------------
Net cash flows from investing
activities (4,993,504) (30,244,259) (5,066,659)
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs - (32,478) (218,477)
Principal payments on long-term debt (4,456,324) (3,079,413) (1,327,696)
Principal payments on capital
lease obligations (72,320) (177,411) -
Net decrease in revolving credit facility - - (5,400,000)
Capital contribution 642,039 14,979,532 (30,319)
------------ ------------ ------------
Net cash flows from financing
activities (3,886,605) 11,690,230 (6,976,492)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (41,382) 391,227 (1,747,230)
CASH AND CASH EQUIVALENTS, Beginning of year 4,450,887 4,059,660 5,806,890
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, End of year $ 4,409,505 $ 4,450,887 $ 4,059,660
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION:
Cash paid (refunded) during the year for:
Interest $16,000,970 $16,174,589 $16,527,759
Income taxes 6,018,273 2,424,436 (2,911,464)
See notes to financial statements.
29
NEBRASKA BOOK COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A. NATURE OF OPERATIONS
Nebraska Book Company, Inc. (the "Company") is a wholly-owned subsidiary of
NBC Acquisition Corp. NBC Acquisition Corp. ("NBC") was formed for the purpose
of acquiring all of the outstanding capital stock of the Company, effective
September 1, 1995. NBC did not have substantive operations prior to the
acquisition of the Company. The purchase price of the Company was $106.0
million, which was funded primarily through the issuance of long-term debt. The
acquisition was accounted for by the purchase method of accounting and resulted
in excess of cost over fair value of net assets acquired ("goodwill") of
approximately $26.9 million.
The Company participates in the college bookstore industry primarily by
providing used textbooks to college bookstore operators, by operating its own
college bookstores and by providing proprietary college bookstore information
systems and consulting services.
RECAPITALIZATION: On February 13, 1998, NBC consummated a Merger Agreement
among NBC Merger Corp. (a newly created, indirect wholly-owned subsidiary of HWH
Capital Partners, LP. ["HWH"]), NBC and certain shareholders of NBC pursuant to
which the Company's outstanding debt and NBC's stock were restructured (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 NBC, with NBC being the surviving corporation.
(ii) Existing management shareholders of NBC reinvested approximately $4.4
million in NBC. HWH and management shareholders were reissued
surviving corporation shares of NBC Class A Common Stock.
(iii) The Company obtained approximately $170.0 million in new debt
financing and retired substantially all of its existing debt. The
early extinguishment of debt resulted in an extraordinary loss on the
transaction.
(iv) NBC obtained approximately $45.0 million in debt financing through the
issuance of senior discount debentures (the "Senior Discount
Debentures").
(v) The Company paid a dividend of approximately $72.7 million to NBC to
be utilized in the repurchase of NBC Common Stock and accrued
approximately $2.6 million for additional costs of the
Recapitalization.
(vi) The Company agreed to purchase management's outstanding options under
NBC'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, NBC
agreed to purchase all outstanding warrants for approximately $16.7
million.
(vii) NBC reacquired its outstanding shares of Class A and Class B Common
Stock of certain shareholders for approximately $149.2 million. NBC
accounted for this reacquisition of shares as a treasury stock
transaction, and such reacquired shares were retired. As the new
investor did not acquire substantially all of the common stock of
NBC, a new basis of accounting was not established in connection