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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________to_______________.
COMMISSION FILE NUMBER 333-48225
NBC ACQUISITION CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0793347
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4700 SOUTH 19TH STREET
LINCOLN, NE 68501-0529
(Address of Principal executive offices)
(402) 421-7300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] NO [X]
MARKET VALUE OF THE REGISTRANT'S VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT - NOT APPLICABLE AS REGISTRANT'S STOCK IS NOT PUBLICLY TRADED.
THERE WERE 1,264,546 SHARES OF CLASS A COMMON STOCK OUTSTANDING AS OF MAY
30, 2003.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Total Number of Pages: 84
Exhibit Index: PAGE 84
1
TABLE OF CONTENTS
PART I:
Item 1 Business..........................................................3
Item 2 Properties.......................................................13
Item 3 Legal Proceedings................................................15
Item 4 Submission of Matters to a Vote of Security Holders..............15
PART II:
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters........................................................16
Item 6 Selected Financial Data..........................................16
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................18
Item 7A Quantitative and Qualitative Disclosures about Market Risk.......28
Item 8 Financial Statements and Supplementary Data......................30
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...........................................56
PART III:
Item 10 Directors and Executive Officers of the Registrant................57
Item 11 Executive Compensation............................................59
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.................................64
Item 13 Certain Relationships and Related Transactions....................65
Item 14 Controls and Procedures...........................................67
PART IV:
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..68
Signatures....................................................................74
Certifications................................................................75
Supplemental Information to be Furnished......................................77
Financial Statement Schedule I - Condensed Financial Information
(Parent Company Only).......................................................78
Financial Statement Schedule II - Valuation and Qualifying Accounts...........83
Exhibit Index.................................................................84
2
PART I.
ITEM 1. BUSINESS.
RECAPITALIZATION AND PUBLIC REGISTRATION
Effective September 1, 1995, Nebraska Book Company, Inc. ("NBC") was
acquired in a leveraged buyout by NBC Acquisition Corp. (the "Company"), a
corporation owned by investment partnerships affiliated with Olympus Advisory
Partners, Inc. and certain other investors (the "1995 Transaction"). The 1995
Transaction was accounted for as a purchase business combination.
Pursuant to a merger agreement dated January 6, 1998 among the Company;
certain shareholders of the Company, including members of senior management; and
a newly created corporation controlled and owned by affiliates of Haas Wheat &
Partners, L.P. ("HWP"), the newly created corporation merged with and into NBC
Acquisition Corp. (the "Merger") with the Company as the surviving corporation.
Concurrently with the consummation of the Merger, NBC entered into a senior
secured credit agreement (the "Credit Agreement") with The Chase Manhattan Bank
("Chase"), as administrative agent, and other lenders providing for the
following facilities (the "Senior Credit Facility"): (i) a $50.0 million
revolving credit facility maturing on March 31, 2004, which was undrawn at
closing (the "Revolving Credit Facility"); (ii) a $27.5 million tranche A term
loan, maturing on March 31, 2004 (the "Tranche A Term Loan"); and (iii) a $32.5
million tranche B term loan, maturing on March 31, 2006 (the "Tranche B Term
Loan" and, together with the Tranche A Term Loan, the "Term Loans"). In
addition, NBC also raised approximately $103.6 million from the issuance of
senior subordinated notes (the "Senior Subordinated Notes") and the Company
raised a total of $91.6 million through: (i) the sale of approximately $45.6
million of NBC Acquisition Corp. Class A Common Stock to HWP affiliates (the
"Stock Sale"); (ii) the reinvestment of approximately $4.4 million in NBC
Acquisition Corp. Class A Common Stock by the Company's senior management (the
"Reinvestment"); and (iii) net proceeds of approximately $41.6 million from the
issuance of senior discount debentures (the "Senior Discount Debentures").
The Merger, the repayment of substantially all of NBC's outstanding
indebtedness, the Stock Sale, the Reinvestment, the issuance by NBC of the
Senior Subordinated Notes, the issuance by the Company of the Senior Discount
Debentures, NBC's borrowings under the Senior Credit Facility and the
application of all proceeds thereof are collectively referred to as the
"Recapitalization."
During fiscal 1999, the Company and NBC filed Registration Statements on
Form S-4 with the Securities and Exchange Commission for purposes of registering
debt securities to be issued in exchange for the Company's Senior Discount
Debentures and NBC's Senior Subordinated Notes. The Securities and Exchange
Commission declared such Registration Statements effective on July 14, 1998. All
notes were tendered in the offer to exchange that was completed on August 13,
1998.
On August 2, 2002, HWH Capital Partners, L.P. and HWH Cornhusker Partners,
L.P., affiliates of HWP, along with certain other stockholders of the Company
(collectively with HWP, the "Sellers"), sold approximately 33% of the issued and
outstanding shares of the Company to certain funds affiliated with Weston
Presidio (Weston Presidio Capital III, L.P., Weston Presidio Capital IV, L.P.,
WPC Entrepreneur Fund, L.P., and WPC Entrepreneur Fund II, L.P., collectively
the "Weston Presidio Funds"). HWP retained a controlling interest in the Company
after the sale. This sale is referred to as the "Weston Presidio Transaction".
Under the terms of a buy-sell agreement entered into in connection with this
sale, Weston Presidio may require that the Sellers repurchase Weston Presidio's
shares of the Company at a price as defined in the buy-sell agreement, unless a
majority of the Sellers elects, in the alternative, to sell to Weston Presidio
their remaining shares of the Company at a price as defined in the buy-sell
agreement.
The Company does not conduct significant activities apart from its
investment in NBC. Operational matters discussed in this report, including the
acquisition of college bookstores and other related businesses, refer to
operations of NBC. This report refers to "the Company" and "NBC" interchangeably
when discussing such operational matters.
3
GENERAL
The Company is one of the largest wholesale distributors of used college
textbooks in North America, offering over 95,000 textbook titles and selling
more than 7.7 million books annually, primarily to campuses located in the
United States. In addition, as of March 31, 2003, the Company owns or manages
109 bookstores on or adjacent to college campuses through which it sells a
variety of new and used textbooks and general merchandise. The Company is also a
leading provider of distance education materials to students in nontraditional
courses, which include correspondence and corporate education courses.
Furthermore, the Company provides the college bookstore industry with a variety
of services including in-store promotions, buying programs, marketing services
and proprietary information systems. With origins dating to 1915, the Company
has built a consistent reputation for excellence in order fulfillment, shipping
performance and customer service.
The Company entered the wholesale used textbook market following World War
II, when the supply of new textbooks could not meet the demand created by the
return of ex-GI students. In 1964, the Company became a national, rather than
regional, wholesaler of used textbooks as a result of its purchase of The
College Book Company of California. During the 1970's the Company continued its
focus on the wholesale business. However, realizing the synergies that exist
between wholesale operations and college bookstore operations, in the 1980's it
expanded its efforts in the college bookstore market under a revised strategy.
Under this strategy the Company operates bookstores on or near larger campuses,
typically where the institution-owned college bookstore is contract-managed by a
competitor or where the Company does not have a significant wholesale presence.
Today, the Company services the college bookstore industry through its Textbook,
Bookstore and Complementary Services Divisions.
TEXTBOOK DIVISION. The Company is one of the largest wholesale distributors
of used college textbooks in North America. Its Textbook Division consists
primarily of selling used textbooks to college bookstores, buying them back from
students or college bookstores at the end of each school semester and then
reselling them to college bookstores. The Company purchases used textbooks from
and resells them to college bookstores at many of the nation's largest college
campuses, including: University of Texas, University of Southern California,
Indiana University, San Diego State University, University of Washington, and
University of Minnesota. Historically, because the demand for used textbooks has
consistently outpaced supply, Textbook Division sales have been determined
primarily by the amount of used textbooks that it could purchase. The Company's
strong relationships with the management of non contract-managed college
bookstores nationwide have provided important access to valuable market
information regarding the campus-by-campus supply and demand of textbooks, as
well as an ability to procure large quantities of a wide variety of textbooks.
The Company provides an internally-developed BUYER'S GUIDE to its Textbook
Division customers, which lists over 45,000 textbook titles with such details as
author, new copy retail price, and the Company's repurchase price.
BOOKSTORE DIVISION. College bookstores are the primary outlets for sales of
new and used textbooks to students. As of March 31, 2003, the Company operated
109 college bookstores on or adjacent to college campuses, of which 14 are
operated on physical premises which are owned by and leased from the educational
institution (i.e., "contract-managed"). Its college bookstores are located at
some of the nation's largest college campuses including: University of Nebraska,
University of Michigan, University of Maryland, Arizona State University,
Pennsylvania State University, University of Kansas, Michigan State University,
University of California - Berkeley, Texas A&M University, University of
Florida, and University of Tennessee. In addition to generating profits, the
Company's Bookstore Division provides an exclusive source of used textbooks for
sale across the Company's wholesale distribution network.
COMPLEMENTARY SERVICES DIVISION. With its acquisition of Specialty Books,
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).
4
Other services offered to college bookstores include the sale of computer
hardware and software, such as the Company's turnkey bookstore management
software, and related maintenance contracts. The Company has an installed base
of over 250 college bookstore locations for its textbook management control
systems, and it has installed its proprietary total store management system at
almost 600 college bookstore locations. In total, including the Company's own
bookstores, almost 850 college bookstore locations utilize the Company's
software products. During fiscal 2001, the Company licensed certain software
related to E-commerce to an entity that is partially owned by the Company's
majority owner. These services generate revenue and assist the Company in
enhancing and developing customer relationships.
In January 1998, the Company acquired Connect 2 One (formerly Collegiate
Stores Corporation), a centralized buying service for over 570 college
bookstores across the United States. Through the enhanced purchasing power of
such a large group of bookstores, participating bookstores are able to purchase
certain general merchandise at lower prices than those that would be paid by the
stores individually. Bookstores participating in Connect 2 One's ("C2O")
programs also provide the Company with another potential source of used
textbooks.
The Company also provides a consulting and store design program to assist
college bookstores in store presentation and layout. During fiscal 2002, the
Company introduced a marketing services program to leverage the Company's
distribution channels. Marketing services offered by the Company enable national
vendors to reach college students through in-store kiosks, prepackaged freshman
mailers, coupon books, e-mail promotions and in-store displays.
INDUSTRY SEGMENT FINANCIAL INFORMATION
Revenue, operating profit or loss, and identifiable assets attributable to
each of the Company's industry segments are disclosed in the notes to the
consolidated financial statements presented in Item 8 of the Company's Form
10-K. The Company makes its periodic and current reports available, free of
charge, through www.nebook.com as soon as reasonably practicable after such
material is electronically filed with the Securities and Exchange Commission.
BUSINESS STRATEGY
The Company's objective is to strengthen its position as a leading provider
of products and services to the college bookstore market, thereby increasing
revenue and cash flow. In order to accomplish its goal, the Company intends to
pursue the following strategies:
ENHANCE GROWTH IN THE TEXTBOOK DIVISION. The Company expects the stable
growth of its Textbook Division to continue, primarily as a result of an
expected increase in college enrollments and increased utilization of used
textbooks, as well as through the expansion of its own Bookstore Division.
Additionally, the Company recently introduced an enhanced commission structure
that rewards customers who make a long-term commitment to supplying the Company
with a large portion of their textbooks. Finally, the Company is strengthening
its marketing campaign to increase student awareness of the benefits of buying
and selling used textbooks.
CAPITALIZE ON COLLEGE BOOKSTORE OPPORTUNITIES. The Company intends to
increase revenues for its Bookstore Division by acquiring or opening or
contract-managing additional bookstores at selected college campuses and
offering additional specialty products and services at its existing bookstores.
The Company also intends to increase same-store sales growth through a more
coordinated effort to implement best practices across the Company's entire
bookstore network. Finally, the Company believes there are opportunities to
improve cash flow at its college bookstores by reducing certain selling, general
and administrative expenses.
5
CONTINUED GROWTH IN DISTANCE EDUCATION PROGRAM. The distance education
market continues to grow due to the increased popularity of correspondence
courses, continuing and corporate education courses and courses offered through
electronic media such as the Internet. Through Specialty Books, the Company
believes that it is well positioned to take advantage of this growth trend.
INCREASED MARKET PENETRATION THROUGH TECHNOLOGY. The Company intends to
continue generating incremental revenue through the sale of its turnkey
bookstore management software. The installation of such software, along with
E-commerce technology offered through its affiliate (which is partially owned by
the Company's majority owner), TheCampusHub.com, Inc., also increases the
channels through which the Company can access the college and university market.
EXPANSION OF MARKETING SERVICES PROGRAM. It is very difficult for
traditional vendors to access the highly fragmented college and university
market in an efficient manner. The Company's marketing services program provides
vendors with efficient access to the college and university market through its
distribution channels. The Company intends to expand this program by
establishing arrangements with major national vendors.
INDUSTRY OVERVIEW
Based on recent industry trade data, the college bookstore industry remains
strong, with over 5,000 college stores generating annual sales of approximately
$11.1 billion to college students and other consumers in North America. Sales of
textbooks and other education materials used for classroom instruction comprise
approximately two-thirds of that amount. The Company expects this market will
continue to grow as a result of anticipated increases in enrollment at U.S.
colleges attributable to the children of the baby boom generation entering the
college population.
WHOLESALE TEXTBOOK MARKET. The Company believes that used textbooks will
continue to be attractive to both students and college bookstores. Used
textbooks provide students with a lower-cost alternative to new textbooks and
bookstores typically achieve higher margins through the sale of used rather than
new textbooks.
The pricing pattern of textbook publishing accounts for a large part of the
growth of the used book market. Because of copyright restrictions, each new
textbook is produced by only one publisher, which is free to set the new copy
retail price and discount terms to bookstores. Publishers generally offer new
textbooks at prices that enable college bookstores to achieve a gross margin of
23.0% to 25.0% on new textbooks. Historically, the high retail costs of new
textbooks and the higher margins achieved by bookstores on the sale of used
textbooks (approximately 33.0%) have encouraged the growth of the market for
used textbooks.
The used textbook cycle begins with new textbook publishers, who purposely
plan obsolescence into the publication of new textbooks. Generally, new editions
of textbooks are produced every two to four years. In the first year of a new
edition, there are few used copies of a new edition available. In the second and
third years, used textbooks become increasingly available. Simultaneously,
publishers begin to plan an updated edition. In years four and beyond, at the
end of the average life cycle of a particular edition, as publishers cut back on
original production, used textbooks generally represent a majority (in unit
terms) of the particular edition in use. While the length of the cycle varies by
title (and sometimes is indefinite, as certain titles are never updated), the
basic supply/demand progression remains fairly consistent.
College bookstores begin to place orders with used textbook wholesalers once
professors determine which books will be required for their upcoming courses,
usually by the end of May for the fall semester and the end of November for the
spring semester. Bookstore operators must first determine their allocation
between new and used copies for a particular title but, in most cases, they will
order an ample supply of used books because: (i) used book demand from students
is typically strong and consistent; (ii) many operators only have access to a
limited supply from wholesalers and believe that not having used book
alternatives could create considerable frustration among students and with the
college administration; (iii) bookstore operators earn higher margins on used
books than on new books; and (iv) both new and used books are sold with return
privileges, eliminating any overstock risk (excluding freight charges) to the
college bookstore.
6
New textbook ordering usually begins in June, at which time the store
operator augments its expected used book supply by ordering new books. By this
time, publishers typically will have just implemented their annual price
increases. These regular price increases, which historically have run 3.0% to
5.0%, allow the Company and its competitors to buy used textbooks based on old
list prices (in May) and to almost simultaneously sell them based on new higher
prices, thereby creating an immediate margin increase.
While price is an important factor in the store operator's purchasing
decision, available supply, as well as service, usually determine with which
used textbook wholesaler a college bookstore will develop a strong relationship.
Used textbook wholesalers that are able to significantly service a college
bookstore account typically receive preferential treatment from store operators,
both in selling and in buying used textbooks. Pure exclusive supply arrangements
in the Company's market are rare. However, in the past four to five years, the
Company has been marketing its exclusive supply program to the industry. This
program has grown to approximately 260 participating bookstores at the end of
fiscal 2003. The Company also introduced the NBC Advantage program in fiscal
2001. This program rewards customers who make a long-term commitment to
supplying the Company with a large portion of their books. At the end of fiscal
2003, approximately 470 bookstores were participating in this program,
approximately 250 of which are also participating in the exclusive program.
Since the Company is usually able to sell the vast majority of the used
textbooks it is able to purchase, its ability to obtain sufficient supply is a
critical factor in the Company's success.
COLLEGE BOOKSTORE MARKET. College stores generally fall into three
categories: (i) INSTITUTIONAL -- stores that are primarily owned and operated by
institutions of higher learning (represents approximately 57.0% of the U.S.
market); (ii) CONTRACT-MANAGED -- stores owned by institutions of higher
learning and managed by outside, private companies, typically found on-campus
(represents approximately 26.0% of the U.S. market); and (iii) INDEPENDENT
STORES -- privately owned and operated stores, generally located off campus
(represents approximately 17.0% of the U.S. market). In general, the "captive"
portion of the college bookstore market includes those contract-managed stores
that sell their used textbooks to affiliated companies, and institutional and
independent stores to the extent that such used textbooks are repurchased from
students and are retained by the bookstore for resale without involving a
wholesaler.
The Company believes that sales at its college bookstores will continue to
grow as a result of increased enrollment at colleges and due to the increasing
number of products and services offered in these bookstores, including
E-commerce capabilities provided through its affiliate, TheCampusHub.com, Inc.
PRODUCTS AND SERVICES
TEXTBOOK DIVISION. The Company's Textbook Division is engaged in the
procurement and redistribution of textbooks on college campuses primarily across
the United States.
The Company also publishes the BUYER'S GUIDE, which lists over 45,000
textbooks according to author, title, new copy retail price, and the Company's
repurchase price. The BUYER'S GUIDE is an important part of the Company's
inventory control and book procurement system. The Company updates and reprints
the BUYER'S GUIDE nine times each year and makes it available in both print and
various electronic formats, including on all of the Company's proprietary
information systems. A staff of dedicated professionals gathers information from
all over the country in order to make the BUYER'S GUIDE into what the Company
believes to be the most comprehensive and up-to-date pricing and buying aid for
college bookstores. The Company also maintains a database of almost 165,000
titles in order to better serve its customers.
BOOKSTORE DIVISION. As of March 31, 2003, the Company operated 109 college
bookstores on or adjacent to college campuses. These bookstores sell a wide
variety of used and new textbooks, general books and assorted general
merchandise, including apparel, sundries and gift items. Over the past three
years, revenues of the Company's bookstores from activities other than used and
new textbook sales have been between 21% and 24% of total revenues. The Company
has been, and intends to continue, selectively expanding its product offerings
at its bookstores in order to increase sales and profitability. The Company has
also installed software providing E-commerce capabilities in all of its own
bookstores, thereby allowing its bookstores to further expand product offerings
and compete with online-only textbook sellers.
7
COMPLEMENTARY SERVICES DIVISION. Through Specialty Books, the Company has
access to the market for distance education products and services. Currently,
the Company provides students at approximately 70 colleges with textbooks and
materials for use in distance education courses, and is a leading provider of
textbooks to nontraditional programs and students such as correspondence or
corporate education students. The Company believes the fragmented distance
education market represents an opportunity for the Company to leverage its
fulfillment and distribution expertise in a rapidly growing sector. Beyond
textbooks, the Company offers services and specialty course materials to
distance education students including videotape duplication and shipping;
shipping of specialty, non-textbook course materials; and a sales and ordering
function. Students can order distance education materials from the Company over
the Internet. Over the past three years, revenues of Specialty Books have been
between 72% and 84% of total Complementary Services Division revenues. The
Company believes it can continue to increase the service operations revenues
from distance education products over the next several years, although presently
the Company's primary objective is increased profitability through improved cost
containment.
Other services offered to college bookstores include services related to the
Company's turnkey bookstore management software and the sale of other software
and hardware, and related maintenance contracts. These services generate revenue
and assist the Company in gaining access to new sources of used textbooks. The
Company has an installed base of over 250 college bookstore locations for its
textbook management control systems, and it has installed its proprietary total
store management system at almost 600 college bookstore locations. In total,
including the Company's own bookstores, almost 850 college bookstore locations
utilize the Company's software products.
Through C2O, the Company is able to offer a variety of products and services
to participating college bookstores. C2O negotiates apparel and general
merchandise discounts and develops and executes marketing programs for its
membership. As a centralized buying service for over 570 participating college
bookstores including the Company's own bookstores, C2O has evolved into a buying
group with substantial purchasing power. C2O offers a shopping bag program to
college bookstores. This shopping bag program provides bookstores the
opportunity to purchase customized bags at a substantial discount from the
vendor, while the Company earns a monthly administrative fee from the vendor in
return for accepting billing and collection responsibilities for shopping bags
sold by the vendor. Other C2O marketing services include a freight savings
program, a check authorization program, and retail display allowances for
magazine displays. Additionally, a staff of experienced C2O professionals
consult with the management of bookstores. Services offered include strategic
planning, store review, merchandise planning and help with other operational
aspects of the business. While consulting has historically represented a
relatively small component of C2O's business, it is nonetheless strategically
important to the ongoing success of this aspect of the Company's business.
The Company also provides a consulting and store design program to assist
college bookstores in store presentation and layout. Through its
newly-introduced marketing services program, the Company is able to leverage its
distribution channels. Marketing services offered by the Company enable national
vendors to reach college students through in-store kiosks, prepackaged freshman
mailers, coupon books, e-mail promotions and in-store displays.
WHOLESALE PROCUREMENT AND DISTRIBUTION
Historically, because the demand for used textbooks has consistently
exceeded supply, the Company's sales have been primarily determined by the
amount of used textbooks that it can purchase. The Company believes that, on
average, it is able to fulfill approximately 20% to 25% of its demand. As a
result, the Company's success has depended primarily on its inventory
procurement, and the Company continues to focus its efforts on obtaining
inventory. In order to ensure its ability to both obtain and redistribute
inventory, the Company's Textbook Division strategy has emphasized establishing
and maintaining strong customer and supplier relationships with college
bookstores (primarily, independent and institutional college bookstores) through
its employee account representatives. These 36 account representatives (as of
8
March 31, 2003) are responsible for procuring used textbooks from students,
marketing the Company's services on campus, purchasing overstock textbooks from
bookstores and securing leads for sale of the Company's systems products. The
Company has been able to maintain a competitive edge by providing superior
service, made possible primarily through the development and maintenance of
ready access to inventory, information and supply. Other components of the
Textbook Division strategy and its implementation include: (i) selectively
paying a marginal premium relative to competitors to entice students to sell
back more books to the Company; (ii) gaining access to competitive campuses
(where the campus bookstore is contract-managed by a competitor) by opening
off-campus, Company-owned college bookstores; (iii) using technology to gain
efficiencies and to improve customer service; (iv) maintaining a knowledgeable
and experienced sales force that is customer-service oriented; (v) providing
working capital flexibility for bookstores making substantial purchases; and
(vi) establishing long-term supply arrangements by rewarding customers who make
a long-term commitment to supplying the Company with a large portion of their
books.
The two major used textbook purchasing seasons are at the end of each
academic semester, May/June and December/January. Although the Company makes
book purchases during other periods, the inventory purchased in May, before
publishers announce their price increases in June and July, allows the Company
to purchase inventory based on the lower retail prices of the previous year. The
combination of this purchasing cycle and the fact that the Company is able to
sell its inventory in relation to retail prices for the following year permits
the Company to realize additional gross profit. The Company advances cash to its
representatives during these two periods, and the representatives in turn buy
books directly from students, generally through the on-campus bookstore.
After the Company purchases the books, the Company arranges for shipment to
one of its two warehouses (Nebraska and California) via common carrier. At the
warehouse, the Company refurbishes damaged books and categorizes and shelves all
other books in a timely manner, and enters them into the Company's on-line
inventory system. These two locations function as one facility allowing
customers to access inventory at both locations.
Customers place orders by phone, mail, fax or other electronic method. Upon
receiving an order, the Company removes the books from available inventory and
holds them for future shipping. Customers may return books within 60 days after
the start of classes if a written request is enclosed. Returns currently average
approximately 20.5% of sales and generally are attributable to course
cancellations or overstocking. The majority of returns are textbooks that the
Company is able to resell for the next semester.
BOOKSTORE DIVISION
An important aspect of the Company's business strategy is a program designed
to reach new customers through the opening or acquisition of bookstores adjacent
to college campuses or the contract-management of stores on campus. In addition
to generating sales of new and used textbooks and general merchandise, these
outlets enhance the Company's Textbook Division by increasing the inventory of
used books purchased from the campus.
A desirable campus for a Company-operated college bookstore is one on which
the Company does not currently buy or sell used textbooks either because a
competitor of the Company contract-manages the college's bookstore or the
college bookstore does not have a strong relationship with the Company. The
Company generally will not open a location on a campus where it already has a
strong relationship with the college bookstore because some college bookstores
may view having a competing location as a conflict of interest.
The Company tailors each of its own bookstores to fit the needs and
lifestyles of the campus on which it is located. Individual bookstore managers
are given significant planning and managing responsibilities, including, hiring
employees, controlling cash and inventory, and purchasing and merchandising
product. The Company has staff specialists to assist individual bookstore
managers in such areas as store planning, merchandise layout and inventory
control.
9
As of March 31, 2003 the Company operated 109 college bookstores nationwide,
having expanded from 59 bookstores in 1998. During fiscal 2003 NBC purchased
four bookstores located in Greeley, Colorado; Bowling Green, Kentucky; and
Nacogdoches, Texas and closed stores in Berkeley, California; Big Rapids,
Michigan; and Richmond, Virginia when their leases expired.
The table below highlights certain information regarding the Company's
bookstores opened through March 31, 2003.
Bookstores Approximate
Open at Bookstores Bookstores Bookstores Total
Beginning Added Closed at End of Square
of Fiscal During During Fiscal Footage
Fiscal Year Year Fiscal Year Fiscal Year(1) Year (in thousands)
----------- --------- ----------- -------------- ---------- --------------
1999 59 8 2 65 537
2000 65 35 2 98 733
2001 98 4 0 102 740
2002 102 10 4 108 797
2003 108 4 3 109 798
- ------------
(1) In fiscal 1999, the property leases at two bookstore locations expired and
were not renewed by the Company. In fiscal 2000, the property lease at one
bookstore location expired and was not renewed by the Company and one Triro,
Inc. bookstore location which did not meet the Company's expansion criteria
described below was closed. In fiscal 2002, the property leases at two
bookstore locations expired and were not renewed by the Company and two
bookstore locations in Austin, Texas were sold to a large Textbook Division
customer. In fiscal 2003, the property leases at three bookstore locations
expired and were not renewed by the Company.
The Company plans to continue increasing the number of bookstores in
operation. The bookstore expansion plan will focus on campuses where the Company
does not already have a strong relationship with the on-campus bookstore. In
determining to open a bookstore, the Company looks at several criteria: (i) a
large enough market to justify the Company's efforts (typically this means a
campus of at least 8,000 students); (ii) a site in close proximity to campus
with adequate parking and accessibility; (iii) the potential of the bookstore to
have a broad product mix (larger bookstores are more attractive than smaller
bookstores because a full line of general merchandise can be offered in addition
to textbooks); (iv) the availability of top-quality management; and (v) certain
other factors, including leasehold improvement opportunities and personnel
costs. The Company also plans to be more active in reviewing opportunities to
contract-manage additional stores.
The Company's bookstores have an average size of 7,300 gross square feet but
range in size from 500 to 50,000 square feet. The Company estimates that
leasehold improvements, furniture and fixtures, and automation with the
Company's PRISM system, the Company's proprietary total-store management system,
for new bookstores cost approximately $100,000 per bookstore, after giving
effect to construction allowances.
MANAGEMENT INFORMATION SYSTEMS
The Company believes that it can enhance efficiency, profitability and
competitiveness through investments in technology. The Company's MIS operations
process order entry, control inventory, generate purchase orders and customer
invoices, generate various sales reports, and process and retrieve textbook
information. All the Company's bookstores operate with IBM RS/6000's. At the
center of its MIS operations are the Company's self-developed, proprietary
software programs such as PRISM, its whole store management system, and PC-Text,
its textbook management and inventory control system. This software is
maintained and continuously enhanced by the Company, which is staffed by an
experienced team of development and design professionals.
10
In addition, the Company and its consultants had been developing software
for E-commerce capabilities. These software products allow college bookstores to
launch their own E-commerce site and effectively compete against online-only
textbook sellers by offering textbooks and both traditional and non-traditional
store merchandise online. As previously discussed, the ongoing development of
this software was assumed in fiscal 2001 by an affiliated entity that is
partially owned by the Company's majority owner.
None of the Company's proprietary software programs are copyrighted,
although the Company does have registered trademarks for certain names. In
addition to using its software programs for its own management and inventory
control, the Company licenses the use of its software programs to bookstores.
Although none of the Company's software programs are material to its business,
they enhance the efficiency and cost-effectiveness of the Company's operations,
and their use by bookstores that are customers or suppliers of the Company tends
to solidify the relationship between the Company and such customers or
suppliers, resulting in increased sales or supplies for the Company.
MIS operations consist of three operating units: (i) the mainframe unit,
which develops and supports all systems utilized in the Company's warehouses and
corporate offices; (ii) a system sales unit, which markets the Company's college
store management systems to colleges; and (iii) the College Bookstore Management
Systems ("CBMS"), which develops and supports the systems that are sold to
bookstores.
The Company conducts training courses for all systems users at the Company's
headquarters in Lincoln, Nebraska. Classes are small and provide hands on
demonstrations of the various systems. Printed reference manuals and training
materials also accompany each system. The customer support unit of CBMS is
staffed with approximately 40 experienced personnel. Personnel are available 24
hours a day to answer questions on a toll-free number.
CUSTOMERS
The Company sells its products and services to college bookstores throughout
the United States, Canada and Puerto Rico for ultimate use by the students of
the respective colleges. The Company's 25 largest Textbook Division customers
accounted for approximately 5.8% of fiscal 2003 consolidated revenues. No single
Textbook Division customer accounted for more than 1.0% of the Company's fiscal
2003 consolidated revenues.
The Company's Textbook Division purchases from and resells used textbooks to
many of the nation's largest college campuses including: University of Texas,
University of Southern California, Indiana University, San Diego State
University, University of Washington, and University of Minnesota.
The Company's college bookstores are located on many of the nation's largest
college campuses including: University of Nebraska, University of Michigan,
University of Maryland, Arizona State University, Pennsylvania State University,
University of Kansas, Michigan State University, University of California -
Berkeley, Texas A&M University, University of Florida, and University of
Tennessee.
The Company's distance education program is, among other things, a primary
supplier of textbooks and educational material to students enrolled in on-line
courses offered through one institution. That institution accounts for greater
than 50.0% of total revenues in the distance education program.
No single customer accounted for more than 10.0% of the Company's fiscal
2003 consolidated revenues.
COMPETITION
The Company's Textbook Division competes in the used textbook wholesale
distribution market. This market includes the sale of all used textbooks
purchased from students by an independent third party which are then
redistributed through college bookstores; sales to contract-managed stores,
which obtain virtually all of their supply of used textbooks from within their
chain of stores under common management; and used textbooks retained by college
bookstores.
11
The Company's two major competitors in the college store industry and used
textbook business are Follett Campus Resources ("Follett") and MBS Textbook
Exchange ("MBS"), which contract-manage approximately 680 stores and 430 stores,
respectively. The Company believes that its market share of the used college
textbook wholesale distribution market is comparable to that of Follett and MBS,
individually. The remaining competitors are smaller regional companies,
including Budgetext, Texas Book Company and Southeastern Book Company. Most of
the leading companies in the industry also have an established retail presence,
either through direct store ownership/operation or through contract-management.
Many of Follett's college bookstores are located on smaller campuses. The
size of the campus and Follett's presence there have precluded potential
competitors such as the Company from entering these markets, which in turn
affects both the Company's ability to buy books and its ability to add new
accounts. However, because it is required to supply used texts to all of its own
stores, Follett must balance the demands of its own bookstores with those of its
other independent customers.
MBS is controlled by the same shareholder that controls Barnes & Noble.
Consequently, MBS supplies approximately 430 Barnes & Noble college stores. MBS
faces the same challenges that Follett faces in supplying existing institutional
accounts. MBS has a strong systems division that competes actively with the
Company for new customers and also fulfills all of the needs of the Barnes &
Noble stores.
The Company's Bookstore Division competes with other college campus
bookstores, including the on-campus bookstore in those locations where the
Company's bookstore is off-campus.
Both the Company's Textbook and Bookstore Divisions compete with a number of
entities that have entered the college marketplace, or enhanced their sales
channel to that marketplace, through E-commerce. These competitors typically use
the Internet to establish websites designed to sell textbooks and/or other
merchandise directly to students, by-passing the traditional college bookstore.
By contrast, the Company's software products, WebPRISM and CampusHub, are
designed to sell textbooks and other merchandise through a college bookstore
website, not around it. The Company also competes against the expansion of
electronic media as a source of textbook information, such as on-line resources,
E-Books, print-on-demand textbooks and CD-ROM, which may replace or modify the
need for students to purchase textbooks through the traditional college
bookstore. The Company does not believe that such competition has had a material
adverse impact on the Company's results of operations.
Presently, the Company believes that its largest competitor in the distance
education market is MBS.
There is only one centralized buying service that is similar to C2O, the
Independent College Bookstore Association ("ICBA"). Participation by college
bookstores in C2O's or ICBA's centralized buying service is voluntary, and
college bookstores may, and some do, belong to both buying associations.
GOVERNMENTAL REGULATION
The Company is subject to various federal, state and local environmental,
health and safety laws and regulations. Generally, these laws impose limitations
on the discharge of pollutants and the presence of hazardous substances in the
workplace and establish standards for vehicle and employee safety and for the
handling of solid and hazardous wastes. These laws include the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act, the Clean Air Act, the Hazardous Materials
Transportation Act and the Occupational Safety and Health Act. Future
developments, such as stricter environmental or employee health and safety laws
and regulations thereunder, could affect the Company's operations. The Company
does not currently anticipate that the cost of its compliance with, or of any
foreseeable liabilities under, environmental and employee health and safety laws
and regulations will have a material adverse affect on its business or financial
condition.
12
EMPLOYEES
As of March 31, 2003 the Company had a total of approximately 2,900
employees, of which approximately 1,000 were full-time, approximately 700 were
part-time and approximately 1,200 were temporary. The Company has no unionized
employees and believes that its relationship with its employees is satisfactory.
In view of the seasonal nature of its Textbook Division, the Company
utilizes seasonal labor to improve operating efficiency. The Company employs a
small number of "flex-pool" workers who are cross-trained in a variety of
warehouse functions. Recently, the Company has employed up to 50 flex-pool
workers in the Nebraska and California facilities, thereby enabling the Company
to lower Textbook Division operating expenses. Temporary employees augment the
flex-pool to meet periodic labor demands.
ITEM 2. PROPERTIES.
The Company owns its two Textbook Division warehouses (totaling 244,000
square feet) in Lincoln, Nebraska (one of which is also the location of its
headquarters), and leases its 60,000 square foot Textbook Division warehouse in
Cypress, California. The Cypress lease expires on August 31, 2007. The Company's
distance education program resides in a leased facility with 49,500 square feet
in Athens, Ohio. The lease expires on May 31, 2007 and has one five-year option
to renew.
Listed below, set forth as of March 31, 2003, are the Company's college
bookstores, their location, college served and the school's enrollment.
Institution Location Enrollment(1) Store Name
----------- -------- ------------- ----------
University of Alabama Tuscaloosa, AL 19,800 The College Store
University of Arkansas--Little Rock Little Rock, AR 12,300 Campus Bookstore
Northern Arizona University Flagstaff, AZ 16,800 The College Store
Northern Arizona University Flagstaff, AZ 16,800 University Text and Tools
Arizona State University Tempe, AZ 49,000 The College Store
Arizona State University Tempe, AZ 49,000 Rother's Bookstore
University of Arizona Tucson, AZ 34,300 Arizona Book Store
University of Arizona Tucson, AZ 34,300 Rother's University Bookstore
University of California - Berkeley Berkeley, CA 30,500 Ned's Bookstore
University of California - Berkeley Berkeley, CA 30,500 Ned's Bookstore II
University of California - Berkeley Berkeley, CA 30,500 Ned's Bookstore - Boalt Hall
California State University - Northridge Northridge, CA 32,500 The College Store
University of Northern Colorado Greeley, CO 13,000 The Book Stop
Daytona Beach Community College Daytona Beach, FL 20,000 College Book Rack
University of Florida, also serving: Gainesville, FL 48,200 Florida Book Store
Santa Fe Community College 13,900
University of Florida, also serving: Gainesville, FL 48,200 Florida Book Store, Volume II
Santa Fe Community College 13,900
Miami Dade Community College-Kendall Miami, FL 18,400 Lemox College Book & Supply
University of Central Florida, also serving: Orlando, FL 35,400 College Book & Supply
Seminole Community College 9,600
Valencia Community College 15,000
University of Central Florida Orlando, FL 35,400 Knight's Corner
Georgia State University Atlanta, GA 33,000 Georgia Book Store
Drake University Des Moines, IA 4,300 D-Shoppe (2)
Drake University, also serving: Des Moines, IA 4,300 University Book Store (3)
Mercy College of Health Sciences 400
Southern Illinois University Carbondale, IL 18,200 Saluki Bookstore
Ball Sate University Muncie, IN 20,300 Collegiate Book Exchange
Valparaiso University Valparaiso, IN 3,500 University Book Center (2)
University of Kansas Lawrence, KS 25,500 University Book Shop
Johnson County Community College Overland Park, KS 16,100 The College Store
Western Kentucky University Bowling Green, KY 17,000 Lemox-Bowling Green
Western Kentucky University Bowling Green, KY 17,000 Lemox II
University of Louisville Louisville, KY 21,100 College Book Warehouse
Eastern Kentucky University Richmond, KY 17,500 University Book & Supply
University of Maryland College Park, MD 46,500 Maryland Book Exchange
Prince George's Community College Largo, MD 13,000 Prince George's Community
College Bookstore (2)
13
Institution Location Enrollment(1) Store Name
----------- -------- ------------- ----------
Concordia University - Ann Arbor Ann Arbor, MI 600 Concordia College Bookstore (2)
University of Michigan Ann Arbor, MI 42,500 Michigan Book & Supply
University of Michigan Ann Arbor, MI 42,500 Ulrich's Bookstore
Oakland University Auburn Hills, MI 20,000 Textbook Outlet
Wayne County Community College Belleville, MI 24,000 Ned's Bookstore (2)
Wayne County Community College Detroit, MI 24,000 Ned's WCCC Downtown (2)
Wayne County Community College Detroit, MI 24,000 Ned's WCCC Eastern (2)
Wayne County Community College Detroit, MI 24,000 Ned's WCCC Northwest (2)
Wayne County Community College Taylor, MI 24,000 Ned's WCCC Downriver (2)
Michigan State University East Lansing, MI 43,300 The College Store
Michigan State University East Lansing, MI 43,300 Ned's Bookstore
Kettering University Flint, MI 3,300 The Campus Store (2)
Eastern Michigan University, also serving: Ypsilanti, MI 23,000 Campus Book & Supply
Washtenaw Community College 11,200
Washtenaw Technical Middle College 500
Eastern Michigan University Ypsilanti, MI 23,000 Ned's Bookstore
Eastern Michigan University Ypsilanti, MI 23,000 Ned's College of Business
Bookstore
Minnesota State University Mankato Mankato, MN 12,900 Maverick Bookstore (3)
North Carolina State University Raleigh, NC 29,000 Packbackers Student Bookstore
Chadron State College Chadron, NE 2,400 Chadron Book Shop
Chadron State College Chadron, NE 2,400 Eagle Pride Bookstore (2)
University of Nebraska-- Kearney Kearney, NE 7,100 The Antelope Bookstore (2)
University of Nebraska-- Lincoln Lincoln, NE 22,800 Big Red Shop
University of Nebraska-- Lincoln Lincoln, NE 22,800 Nebraska Bookstore (3)
Nebraska Wesleyan University Lincoln, NE 1,700 Prairie Wolves Bookstore (2)
Wayne State College Wayne, NE 3,900 Student Bookstore
University of Nevada Las Vegas Las Vegas, NV 20,700 Rebelbooks
State University of New York-- Buffalo, also Amherst, NY 24,000 The College Store
serving:
Erie Community College - North Campus 5,600
State University of New York - Binghamton Vestal, NY 12,800 The Bookbridge
University of Akron Akron, OH 21,700 The College Store
Ohio University Athens, OH 19,500 Specialty Books
Ohio State University Columbus, OH 47,900 College Town
Wright State University, also serving: Fairborn, OH 17,000 The College Store
Sinclair Community College 11,900
University of Oklahoma Norman, OK 20,000 Boomer Book Store
University of Oklahoma Norman, OK 20,000 Sooner Textbooks
Oklahoma State University Stillwater, OK 20,500 Cowboy Book
Indiana University of Pennsylvania Indiana, PA 14,000 The College Store
University of Pittsburgh Pittsburgh, PA 29,000 The College Store
Pennsylvania State University State College, PA 42,000 University Book Centre
College of Charleston Charleston, SC 9,900 University Book of Charleston
Columbia College Columbia, SC 1,500 C-Square Bookstore (2)
University of South Carolina Columbia, SC 23,700 Carolina Spirit Shop
University of South Carolina Columbia, SC 23,700 South Carolina Book Store
East Tennessee State University Johnson City, TN 12,100 The College Store
University of Tennessee Knoxville, TN 26,000 Rocky Top Books
University of Tennessee Knoxville, TN 26,000 Rocky Top East (3)
University of Texas - Arlington Arlington, TX 22,000 The College Store
Austin Community College Austin, TX 25,000 Bevo's ACC
Austin Community College Austin, TX 25,000 Bevo's Northridge
Blinn College Bryan, TX 7,600 Rother's Bookstore
Texas A&M University College Station, TX 42,900 Rother's Bookstore - College
Station
Texas A&M University College Station, TX 42,900 Rother's Bookstore - George
Bush
Texas A&M University College Station, TX 42,900 Rother's Bookstore - Woodstone
Southern Methodist University Dallas, TX 9,800 Varsity Book Store
University of North Texas, also serving: Denton, TX 30,100 Voertman's (3)
North Central Texas College 6,000
Texas Woman's University 7,900
University of Texas-- Pan American Edinburg, TX 18,000 South Texas Book & Supply
North Harris College Houston, TX 9,500 College Bookstore (3)
North Harris College Humble, TX 9,500 College Bookstore
University of Houston, also serving: Houston, TX 33,000 Rother's Bookstore
Texas Southern University School of Law 200
Texas Tech University Lubbock, TX 29,000 Double T Bookstore
Texas Tech University Lubbock, TX 29,000 Double T Bookstore II
Texas Tech University Lubbock, TX 29,000 Double T Bookstore III
Texas Tech University Lubbock, TX 29,000 Spirit Shop
South Texas Community College McAllen, TX 14,000 South Texas Book & Supply
Stephen F. Austin State University Nacogdoches, TX 10,500 Varsity Book Store
14
Institution Location Enrollment(1) Store Name
----------- -------- ------------- ----------
San Antonio College, also serving: San Antonio, TX 22,700 L&M Bookstore
Northwest Vista College 7,900
Palo Alto College 7,300
St. Philip's College 11,100
UTSA - Downtown 5,000
University of Texas-- San Antonio San Antonio, TX 20,500 L&M UTSA Bookstore
Southwest Texas State University San Marcos, TX 25,000 Colloquium Bookstore
Southwest Texas State University San Marcos, TX 25,000 Colloquium Too
Southwest Texas State University San Marcos, TX 25,000 Rother's Bookstore
Tarleton State University Stephenville, TX 7,700 Rother's Bookstore
Baylor University Waco, TX 13,200 Rother's Bookstore
Baylor University Waco, TX 13,200 University Bookstore and
Spirit Shop
Midwestern State University Wichita Falls, TX 5,800 Rother's Bookstore
Virginia Polytechnic Institute and State Blacksburg, VA 26,000 Tech Bookstore
University
Old Dominion University Norfolk, VA 19,000 Dominion Bookstore
Radford University Radford, VA 8,500 Radford Book Exchange
Western Washington University, also serving: Bellingham, WA 12,000 The College Store
Whatcom Community College 4,000
- ------------
(1) Source: National Association of College Stores. Includes part-time students.
(2) Denotes properties leased from the educational institution
("contract-managed" stores).
(3) Property is owned by the Company.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is subject to legal proceedings and other
claims arising in the ordinary course of its business. The Company believes that
currently it is not a party to any litigation the outcome of which would have a
material adverse affect on its financial condition or results of operations. The
Company maintains insurance coverage against claims in an amount which it
believes to be adequate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No items were submitted to a vote of security holders of the Company during
the fourth quarter of fiscal 2003.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
As of May 30, 2003, based upon the number of holders on record, there were
51 holders of the Company's Class A Common Stock and 71 holders of outstanding
stock options to purchase 81,825 shares of the Company's Class A Common Stock.
As discussed in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Item 8, "Financial Statements and
Supplementary Data", the payment of dividends is subject to various restrictions
under the Company's debt instruments. As a result, the Company has declared no
dividends on its Class A Common Stock during fiscal 2003 and 2002. There is no
established public trading market for the Company's Class A Common Stock.
During February, 2003 and in conjunction with his retirement, NBC's former
Vice President of Administration and Secretary exercised vested options to
purchase 750 shares of the Company's Class A Common Stock under the 1998
Performance Stock Option Plan at an exercise price of $52.47 per share and 125
shares of the Company's Class A Common Stock under the 1998 Performance Stock
Option Plan at an exercise price of $106 per share, forfeiting unvested options
to purchase 450 shares of the Company's Class A Common Stock under the 1998
Performance Stock Option Plan at an exercise price of $52.47 per share and 375
shares of the Company's Class A Common Stock under the 1998 Performance Stock
Option Plan at an exercise price of $106 per share. This transaction, which did
not involve any public offering, was exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2). Proceeds from this issuance
were utilized for general operating activities.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected historical consolidated financial
and other data of the Company as of and for the fiscal years ended March 31,
2003, 2002, 2001, 2000, and 1999, respectively. The selected historical
consolidated financial data was derived from the audited consolidated financial
statements of the Company.
16
The following table should be read in conjunction with Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of the Company and the related notes
thereto included in Item 8 herein.
Fiscal Years Ended March 31,
----------------------------------------------------------------
2003 2002 2001 2000 1999
------------- ------------ ------------ ----------- -----------
STATEMENT OF OPERATIONS DATA: (dollars in thousands)
Revenues $370,510 $338,917 $301,669 $267,069 $218,638
Costs of sales 224,488 206,976 187,099 164,984 137,989
------------- ------------ ------------ ----------- -----------
Gross profit 146,022 131,941 114,570 102,085 80,649
Operating expenses:
Selling, general, and administrative 90,391 84,871 74,100 65,820 51,289
Depreciation 2,988 3,087 2,956 3,096 2,393
Amortization (3) 644 505 10,446 9,320 6,149
------------- ------------ ------------ ----------- -----------
Income from operations 51,999 43,478 27,068 23,849 20,818
Other expenses (income):
Interest expense 22,192 24,408 24,008 23,398 22,854
Interest income (360) (400) (615) (356) (351)
Loss on derivative instruments 156 361 - - -
------------- ------------ ------------ ----------- -----------
Income (loss) before income taxes 30,011 19,109 3,675 807 (1,685)
Income tax expense 12,232 7,954 3,407 2,516 574
------------- ------------ ------------ ----------- -----------
Net income (loss) $ 17,779 $ 11,155 $ 268 $ (1,709) $ (2,259)
============= ============ ============ =========== ===========
Earnings (loss) per share:
Basic $ 14.07 $ 8.83 $ 0.21 $ (1.48) $ (2.37)
Diluted 13.88 8.83 0.21 (1.48) (2.37)
OTHER DATA:
EBITDA (1) $ 55,631 $ 47,070 $ 40,470 $ 36,265 $ 29,360
Net cash flows from operating activities 37,332 31,038 8,839 18,945 10,296
Net cash flows from investing activities (5,327) (7,616) (4,994) (30,244) (5,067)
Net cash flows from financing activities (4,018) (16,412) (3,887) 11,690 (6,976)
Capital expenditures 3,708 2,277 1,759 3,542 2,842
Business acquisition expenditures (2) 1,389 6,110 2,975 26,072 2,086
Number of bookstores open at end of the period 109 108 102 98 65
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents $ 39,405 $ 11,419 $ 4,410 $ 4,451 $ 4,060
Working capital 81,966 75,865 72,394 62,244 55,442
Total assets 210,379 185,033 167,701 168,991 142,879
Total debt, including current maturities 219,367 216,915 224,219 222,552 219,904
(1) EBITDA is defined as earnings before interest, taxes, depreciation, and
amortization. As the Company is highly-leveraged and as the Company's
equity is not publicly-traded, management believes that EBITDA is useful
in measuring its liquidity and provides additional information for
determining its ability to meet debt service requirements. The Senior
Subordinated Notes, Senior Discount Debentures, and Senior Credit
Facility also utilize EBITDA, as defined in those agreements, for
certain financial covenants. EBITDA does not represent and should not be
considered as an alternative to net cash flows from operating activities
as determined by accounting principles generally accepted in the United
States of America, and EBITDA does not necessarily indicate whether cash
flows will be sufficient for cash requirements. Items excluded from
EBITDA, such as interest, taxes, depreciation and amortization, are
significant components in understanding and assessing the Company's
financial performance. EBITDA measures presented may not be comparable
to similarly titled measures presented by other registrants.
17
The following presentation reconciles EBITDA with net cash flows from
operating activities as presented in the Consolidated Statements of Cash
Flows included in Item 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
Fiscal Year Ended March 31,
2003 2002 2001 2000 1999
------------ ----------- ----------- ----------- -----------
(dollars in thousands)
EBITDA $ 55,631 $ 47,070 $ 40,470 $ 36,265 $ 29,360
Adjustments to reconcile EBITDA to net cash
flows from operating activities:
Interest income 360 400 615 356 351
Provision for losses on accounts receivable 452 1,630 434 141 135
Cash paid for interest (13,549) (15,225) (16,001) (16,175) (16,528)
Cash refunded (paid) for income taxes (14,533) (4,063) (6,018) (2,424) 2,911
(Gain) Loss on disposal of assets 36 (483) 60 18 90
Other - - - 7 -
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals(4) 8,935 1,709 (10,721) 757 (6,023)
------------ ----------- ----------- ----------- -----------
Net Cash Flows from Operating Activities $ 37,332 $ 31,038 $ 8,839 $ 18,945 $ 10,296
============ =========== =========== =========== ===========
(2) Business acquisition expenditures represent established businesses
purchased by the Company.
(3) The Company adopted SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS,
on April 1, 2001. Under SFAS No. 142, goodwill and intangible assets
with indefinite useful lives are not amortized but rather tested for
impairment on a periodic basis.
(4) Changes in operating assets and liabilities, net of effect of
acquisitions/disposals includes the changes in the balances of
receivables, inventories, prepaid expenses and other assets, other
assets, accounts payable, accrued employee compensation and benefits,
accrued incentives, accrued expenses, deferred revenue, and other
long-term liabilities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FISCAL YEAR ENDED MARCH 31, 2003 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2002.
REVENUES. Revenues for the years ended March 31, 2003 and 2002 and the
corresponding change in revenues were as follows:
Change
2003 2002 Amount Percentage
--------------- --------------- -------------- ----------
Textbook Division $ 132,806,703 $ 122,893,781 $ 9,912,922 8.1 %
Bookstore Division 216,943,133 201,399,648 15,543,485 7.7 %
Complementary Services Division 44,004,856 38,093,091 5,911,765 15.5 %
Intercompany eliminations (23,244,843) (23,470,111) 225,268 (1.0)%
--------------- --------------- -------------- ----------
$ 370,509,849 $ 338,916,409 $ 31,593,440 9.3 %
=============== =============== ============== ==========
18
The increase in Textbook Division revenues for the year ended March 31, 2003
was due in part to publisher price increases, complemented by an increase in
unit sales. The increase in Bookstore Division revenues was primarily
attributable to an increase in same store sales of 4.9%, or $9.4 million, and to
the acquisition of new college bookstores (defined by the Company as stores
acquired since April 1, 2001). These new bookstores provided a $6.2 million
increase in revenues. Complementary Services Division revenues increased
primarily due to growth in the Company's distance education program, offset in
part by outsourcing the plastic bag program late in fiscal 2002 and a decline in
systems division revenues resulting from revisions made to certain agreements
with TheCampusHub.com, Inc. and a drop in system installations. The increased
revenues in distance education resulted primarily from additional services
provided to the program's largest account and, in part, to services provided to
new accounts. The Company's intercompany transactions decreased primarily due to
changes made to some of the Complementary Services Division programs.
GROSS PROFIT. Gross profit for fiscal 2003 increased $14.1 million, or
10.7%, to $146.0 million from $131.9 million for fiscal 2002. This increase was
primarily due to higher revenues and an increase in gross margin percent. Gross
margin percent was 39.4% for fiscal 2003 as compared to 38.9% for fiscal 2002.
Gross margin percent in the Textbook Division experienced a small decline
primarily as a result of the impact of the incentive programs, while gross
margin percentages in the Bookstore Division improved primarily due to certain
margin improvement efforts. Complementary Services Division experienced a small
decline due to the lower-margin distance education program continuing to grow as
a percentage of total Complementary Services Division revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal 2003 increased $5.5 million, or 6.5%, to
$90.4 million from $84.9 million for fiscal 2002. Selling, general and
administrative expenses as a percentage of revenues were 24.4% and 25.0% in
fiscal 2003 and fiscal 2002, respectively. The increase in expenses is primarily
the result of the Company's growth, as previously discussed. The decrease in
expenses as a percentage of revenues is primarily attributable to revenue growth
outpacing growth in certain expenses, particularly salaries and wages.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION (EBITDA).
EBITDA for fiscal 2003 and 2002 and the corresponding change in EBITDA were as
follows:
Change
2003 2002 Amount Percentage
-------------- -------------- ------------- ----------
Textbook Division $ 33,915,223 $ 31,290,952 $ 2,624,271 8.4 %
Bookstore Division 26,992,497 22,399,279 4,593,218 20.5 %
Complementary Services Division 2,041,093 696,335 1,344,758 193.1 %
Corporate administration (7,318,023) (7,316,701) (1,322) (0.0)%
-------------- -------------- ------------- ----------
$ 55,630,790 $ 47,069,865 $ 8,560,925 18.2 %
============== ============== ============= ==========
The increase in EBITDA in the Textbook Division was attributable to
increased revenues and a decline in certain expenses as a percentage of
revenues, offset in part by the aforementioned decline in gross margin percent.
The increase in EBITDA in the Bookstore Division was primarily due to increased
revenues, improved margins, and a decline in certain expenses as a percentage of
revenues. The increase in EBITDA in the Complementary Services Division was
primarily due to increased revenues and a decline in certain expenses as a
percentage of revenues, offset in part by a slightly lower gross margin percent
attributable to revenue mix. Corporate administrative costs have remained stable
between fiscal years.
INTEREST EXPENSE, NET. Interest expense, net for fiscal 2003 decreased $2.2
million, or 9.1%, to $21.8 million from $24.0 million for fiscal 2002, primarily
due to reduced interest charges on the Senior Credit Facility resulting from the
$10.0 million optional prepayment of Tranche A and Tranche B Loans on March 29,
2002 and reduced usage under the Revolving Credit Facility. Additionally, a
portion of interest expense associated with the interest rate swap agreements
previously classified as interest expense is now included in the loss on
derivative financial instruments, as discussed in the footnotes to the
consolidated financial statements presented in Item 8. These decreases were
partially offset by increasing original issue debt discount amortization and
accrued interest on the Company's Senior Discount Debentures, which became
fully-accreted on February 15, 2003.
19
LOSS ON DERIVATIVE FINANCIAL INSTRUMENTS. This loss is attributable to the
$10.0 million optional prepayment of Tranche A and Tranche B Loans on March 29,
2002. As a result of the optional prepayment, notional amounts under the
interest rate swap agreements no longer correlate with remaining principal
balances due under the Tranche A and Tranche B Loans. This loss represents the
change in the fair value of the portion of the interest rate swap agreements
that no longer qualify as hedging instruments, along with interest associated
with that portion of the interest rate swap agreements.
INCOME TAXES. Income tax expense for fiscal 2003 increased $4.2 million, or
53.8%, to $12.2 million from $8.0 million for fiscal 2002. The Company's
effective tax rate for fiscal years 2003 and 2002 was 40.8% and 41.6%,
respectively. The Company's effective tax rate differs from the statutory tax
rate primarily as a result of state income taxes.
FISCAL YEAR ENDED MARCH 31, 2002 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2001.
REVENUES. Revenues for the years ended March 31, 2002 and 2001 and the
corresponding change in revenues were as follows:
Change
2002 2001 Amount Percentage
--------------- --------------- -------------- ----------
Textbook Division $ 122,893,781 $ 113,006,804 $ 9,886,977 8.7%
Bookstore Division 201,399,648 182,856,000 18,543,648 10.1%
Complementary Services Division 38,093,091 26,647,451 11,445,640 43.0%
Intercompany eliminations (23,470,111) (20,841,402) (2,628,709) 12.6%
--------------- --------------- -------------- ----------
$ 338,916,409 $ 301,668,853 $ 37,247,556 12.3%
=============== =============== ============== ==========
The increase in Textbook Division revenues for the year ended March 31, 2002
was due in part to publisher price increases, complemented by an increase in
unit sales. The Company believes that this increase in unit sales is partly the
result of recent enhancements made to the Company's incentive programs. The
increase in Bookstore Division revenues was primarily attributable to an
increase in same store sales of 4.7% (excluding two stores that were sold since
April 1, 2000), or $8.2 million, and to the acquisition of 14 new college
bookstores (defined by the Company as stores acquired since April 1, 2000).
These new bookstores provided a $12.7 million increase in revenues.
Complementary Services Division revenues increased primarily due to growth in
the Company's distance education and system sales programs. The increased
revenues in distance education resulted primarily from additional services
provided to the program's largest account and, in part, to services provided to
new accounts. As the Company's Textbook and Bookstore Divisions have grown, the
Company's intercompany transactions have also increased.
GROSS PROFIT. Gross profit for fiscal 2002 increased $17.3 million, or
15.2%, to $131.9 million from $114.6 million for fiscal 2001. This increase was
primarily due to higher revenues and an increase in gross margin percent. Gross
margin percent was 38.9% for fiscal 2002 as compared to 38.0% for fiscal 2001,
driven primarily by strong used textbook margins in both the Textbook and
Bookstore Divisions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal 2002 increased $10.8 million, or 14.5%, to
$84.9 million from $74.1 million for fiscal 2001. Selling, general and
administrative expenses as a percentage of revenues were 25.0% and 24.6% in
fiscal 2002 and fiscal 2001, respectively. The increase in expenses is primarily
the result of the Company's revenue and operational growth, as previously
discussed. Expenses as a percentage of revenues increased to 25.0% primarily due
to $1.0 million in increased bad debt expense recognized in the Complementary
Services Division. Revenues attributable to the management services and
technology sale and license agreements with TheCampusHub.com, Inc., which is
partially owned by the Company's majority owner, were recognized in fiscal 2002
under the anticipation that, if necessary, TheCampusHub.com, Inc. would make a
capital call to its shareholders to provide the funding necessary to meet its
obligations under the aforementioned agreements. TheCampusHub.com, Inc. reached
break-even on a cash flow basis, excluding amounts under the management services
and technology sale and license agreements, during its most recent fiscal year.
20
While it remains a viable business and is funding its own operations, it is not
currently generating sufficient excess cash flow to fund its obligations under
the aforementioned agreements and the remaining capital available from its
shareholders is being reserved to fund strategic development opportunities and,
if required, ongoing operations. Accordingly, NBC has increased the allowance
for doubtful accounts for such potential uncollectible amounts due from
TheCampusHub.com, Inc.
AMORTIZATION EXPENSE. Amortization expense for fiscal 2002 decreased $9.9
million, to $0.5 million from $10.4 million for fiscal 2001. This decrease was
due to the Company's adoption of SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS, on April 1, 2001. Under SFAS No. 142, goodwill and intangible assets
with indefinite useful lives are not amortized but rather tested for impairment
on a periodic basis.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION (EBITDA).
EBITDA for fiscal 2002 and 2001 and the corresponding change in EBITDA were as
follows:
Change
2002 2001 Amount Percentage
-------------- ------------- ------------- ----------
Textbook Division $ 31,290,952 $ 27,534,524 $ 3,756,428 13.6 %
Bookstore Division 22,399,279 18,636,044 3,763,235 20.2 %
Complementary Services Division 696,335 73,248 623,087 850.7 %
Corporate administration (7,316,701) (5,774,175) (1,542,526) (26.7)%
-------------- ------------- ------------- ----------
$ 47,069,865 $ 40,469,641 $ 6,600,224 16.3 %
============== ============= ============= ==========
The increase in EBITDA in the Textbook Division was attributable to
increased revenues and strong used textbook margins. The increase in EBITDA in
the Bookstore Division was primarily due to increased revenues and strong used
textbook margins. The improvement in EBITDA in the Complementary Services
Division was primarily due to increased revenues. Corporate administrative costs
have increased between fiscal years, primarily due to increased personnel costs
attributable to the Company's continued growth and rising insurance costs.
INTEREST EXPENSE, NET. Interest expense, net for fiscal 2002 increased $0.6
million, or 2.6%, to $24.0 million from $23.4 million for fiscal 2001, primarily
as a result of increasing original issue debt discount amortization on the
Company's Senior Discount Debentures, which will continue to increase until the
Senior Discount Debentures are fully-accreted to face value of $76.0 million in
fiscal 2003.
LOSS ON DERIVATIVE FINANCIAL INSTRUMENTS. The $0.4 million loss incurred on
derivative financial instruments in fiscal 2002 is attributable to a $10.0
million optional prepayment of Tranche A and Tranche B Loans on March 29, 2002.
As a result of the optional prepayment, notional amounts under the interest rate
swap agreements no longer correlate with remaining principal balances due under
the Tranche A and Tranche B Loans. This loss represents the fair value on March
29, 2002 of the portion of the interest rate swap agreements that no longer
qualify as hedging instruments.
INCOME TAXES. Income tax expense for fiscal 2002 increased $4.6 million to
$8.0 million from $3.4 million for fiscal 2001. The Company's effective tax rate
for fiscal years 2002 and 2001 was 41.6% and 92.7%, respectively. The change in
the effective tax rate is attributable to the impact of non-deductible goodwill
amortization in fiscal 2001. The Company's effective tax rate for fiscal 2002
differs from the statutory tax rate primarily as a result of state income taxes.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires the Company to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
21
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
on-going basis, the Company evaluates its estimates and judgments, including
those related to product returns, bad debts, inventory valuation and
obsolescence, intangible assets, rebate programs, income taxes, and
contingencies and litigation. The Company bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The Company believes the
following critical accounting policies, among others, affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements:
PRODUCT RETURNS. The Company recognizes revenue from Textbook Division sales
at the time of shipment. The Company has established a program which, under
certain conditions, enables its customers to return textbooks. The Company
records reductions to revenue and costs of sales for the estimated impact of
textbooks with return privileges which have yet to be returned to the Textbook
Division. Additional reductions to revenue and costs of sales may be required if
the actual rate of product returns exceeds the estimated rate of product
returns. The estimated rate of product returns is determined utilizing actual
historical product return experience.
BAD DEBTS. The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make required
payments. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
INVENTORY VALUATION. The Company's Bookstore Division values new textbook
and non-textbook inventories at the lower of cost or market using the retail
inventory method (first-in, first-out cost basis). Under the retail inventory
method, the valuation of inventories at cost and the resulting gross margins are
calculated by applying a calculated cost-to-retail ratio to the retail value of
inventories. The retail inventory method is an averaging method that has been
widely used in the retail industry due to its practicality. Inherent in the
retail inventory method calculation are certain significant management judgments
and estimates which impact the ending inventory valuation at cost as well as the
resulting gross margins. Changes in the fact patterns underlying such management
judgments and estimates could ultimately result in adjusted inventory costs.
INVENTORY OBSOLESCENCE. The Company accounts for inventory obsolescence
based upon assumptions about future demand and market conditions. If actual
future demand or market conditions are less favorable than those projected by
the Company, inventory write-downs may be required.
GOODWILL AND INTANGIBLE ASSETS. The Company is required to make certain
assumptions and estimates when assigning an initial value to covenants not to
compete arising from bookstore acquisitions. The Company is also required to
make certain assumptions and estimates regarding the fair value of intangible
assets (namely goodwill, covenants not to compete, and software development
costs) when assessing such assets for impairment. Changes in the fact patterns
underlying such assumptions and estimates could ultimately result in the
recognition of impairment losses on intangible assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity requirements are for debt service under the
Senior Credit Facility, the Senior Subordinated Notes, the Senior Discount
Debentures, and other outstanding indebtedness, for working capital, for capital
expenditures and for certain acquisitions. The Company has historically funded
these requirements primarily through internally generated cash flow and funds
borrowed under NBC's Revolving Credit Facility. At March 31, 2003, the Company's
total indebtedness was approximately $219.4 million, consisting of approximately
$30.5 million in Term Loans, $110.0 million of the Senior Subordinated Notes,
$76.0 million of the Senior Discount Debentures and $2.9 million of other
indebtedness, including capital lease obligations.
22
Principal and interest payments under the Senior Credit Facility, the Senior
Subordinated Notes, and the Senior Discount Debentures represent significant
liquidity requirements for the Company. Under the terms of the Tranche A and
Tranche B Loans, after taking into account optional prepayments and excess cash
flow payments and obligations, NBC is scheduled to make principal payments
totaling approximately $19.2 million in fiscal 2004, $3.8 million in fiscal
2005, and $7.5 million in fiscal 2006. Such scheduled principal payments are
subject to change upon the annual payment and application of excess cash flows
(as defined in the Credit Agreement underlying the Senior Credit Facility), if
any, towards Tranche A and Tranche B Loan principal balances. There was an
excess cash flow payment obligation at March 31, 2003 of approximately $14.7
million that is due and payable in September, 2003. Loans under the Senior
Credit Facility bear interest at floating rates based upon the borrowing option
selected by NBC. NBC has separate five-year amortizing interest rate swap
agreements with two financial institutions whereby NBC's variable rate Tranche A
and Tranche B Loans have been converted into debt with a fixed rate of 5.815%
plus an applicable margin (as defined in the Credit Agreement). The Senior
Subordinated Notes require semi-annual interest payments at a fixed rate of
8.75% and mature on February 15, 2008. The Senior Discount Debentures require
semi-annual cash interest payments commencing August 15, 2003 at a fixed rate of
10.75% and mature on February 15, 2009.
The Company's capital expenditures were $3.7 million, $2.3 million, and $1.8
million for the fiscal years ended March 31, 2003, 2002, and 2001, respectively.
Capital expenditures consist primarily of leasehold improvements and furnishings
for new bookstores, bookstore renovations, computer upgrades and miscellaneous
warehouse improvements. The Company's ability to make capital expenditures is
subject to certain restrictions under the Senior Credit Facility.
Business acquisition expenditures were $1.4 million, $6.1 million, and $3.0
million for the fiscal years ended March 31, 2003, 2002, and 2001, respectively.
For the fiscal year ended March 31, 2003, four bookstore locations were acquired
serving Stephen F. Austin State University, the University of Northern Colorado
and Western Kentucky University. For the fiscal year ended March 31, 2002, ten
bookstore locations were acquired serving the University of California -
Berkeley, Western Washington University, Chadron State College, North Carolina
State University, the University of Oklahoma, Radford University, the University
of Central Florida, and the University of Florida. For the fiscal year ended
March 31, 2001, four bookstore locations were acquired serving Southern
Methodist University, Oakland University, the University of Tennessee, and the
University of Oklahoma. The Company's ability to make acquisition expenditures
is subject to certain restrictions under the Senior Credit Facility.
During fiscal 2003, bookstores serving Virginia Commonwealth University,
Ferris State University, and the University of California - Berkeley were closed
upon the expiration of the property leases. During fiscal 2002, NBC closed
bookstores serving Austin Community College and Coconino Community College upon
expiration of the property leases and sold certain assets of two of its college
bookstore locations serving the University of Texas in Austin, Texas for
approximately $1.1 million, recognizing a gain on disposal of approximately $0.5
million. This gain is presented as an offset to selling, general, and
administrative expenses in the Company's consolidated statements of operations.
Annual combined revenues for these two locations for the year ended March 31,
2001 were approximately $2.4 million. The sale was made to one of the Company's
largest Textbook Division customers.
During fiscal 2003, NBC's former Vice President of Administration and
Secretary exercised vested options to purchase 750 shares of the Company's Class
A Common Stock under the 1998 Performance Stock Option Plan at an exercise price
of $52.47 per share ("Founder's Price") and 125 shares of the Company's Class A
Common Stock under the 1998 Performance Stock Option Plan at an exercise price
of $106 per share. This transaction, which did not involve any public offering,
was exempt from registration under the Securities Act of 1933 pursuant to
Section 4(2). Proceeds from this issuance were utilized for general operating
activities. During fiscal 2002, the Company issued 2,621 shares of its Class A
Common Stock to NBC's Senior Vice President of the Bookstore Division at the
Founder's Price of $52.47 per share, in exchange for $13,752 in cash and a
promissory note in the principal amount of $123,765 maturing January, 2009 and
bearing interest at 5.25% per year. This transaction, which did not involve any
public offering, was exempt from registration under the Securities Act of 1933
pursuant to Section 4(2). Proceeds from this issuance were utilized for general
23
operating activities. During fiscal 2001, the Company issued 12,237 shares of
its Class A Common Stock to certain NBC employees. This issuance was exempt from
registration under the Securities Act of 1933, as amended, pursuant to Section
3(b) thereof and Rule 505 of Regulation D promulgated thereunder. Such shares
were issued at $52.47 per share. Proceeds from this issuance, which totaled
$642,039, were utilized for general operating activities.
The Company's principal sources of cash to fund its future operating
liquidity needs will be cash from operating activities and borrowings under the
Revolving Credit Facility. Usage of the Revolving Credit Facility to meet the
Company's liquidity needs fluctuates throughout the year due to the Company's
distinct buying and selling periods, increasing substantially at the end of each
college semester (May and December). For the year ended March 31, 2003,
weighted-average borrowings under the Revolving Credit Facility approximated
$9.8 million, with actual borrowings ranging from a low of no borrowings to a
high of $35.8 million. Net cash flows from operating activities for the year
ended March 31, 2003 were $37.3 million, an increase of $6.3 million from $31.0
million for the year ended March 31, 2002. This increase was primarily
attributable to improved operations.
Access to the Company's principal sources of cash is subject to various
restrictions. The availability of additional borrowings under the Revolving
Credit Facility is subject to the calculation of a borrowing base, which at any
time is equal to a percentage of eligible accounts receivable and inventory, up
to a maximum of $50.0 million. The Senior Credit Facility restricts the
Company's ability to make loans or advances and pay dividends, except that,
among other things, NBC may pay dividends to the Company (i) on or after August
15, 2003 in an amount not to exceed the amount of interest required to be paid
on the Senior Discount Debentures and (ii) to pay corporate overhead expenses
not to exceed $250,000 per year and any taxes owed by the Company. The indenture
governing the Senior Discount Debentures (the "Indenture") restricts the ability
of the Company and its Restricted Subsidiaries (as defined in the Indenture) to
pay dividends or make other Restricted Payments (as defined in the Indenture) to
their respective stockholders, subject to certain exceptions, unless certain
conditions are met, including that (i) no default under the Indenture shall have
occurred and be continuing, (ii) the Company shall be permitted by the Indenture
to incur additional indebtedness and (iii) the amount of the dividend or payment
may not exceed a certain amount based on, among other things, the Company's
consolidated net income. The indenture governing the Senior Subordinated Notes
contains similar restrictions on the ability of NBC and its Restricted
Subsidiaries (as defined in the indenture) to pay dividends or make other
Restricted Payments (as defined in the indenture) to their respective
stockholders. Such restrictions are not expected to affect the Company's ability
to meet its cash obligations for the foreseeable future.
As of March 31, 2003, NBC could borrow up to $41.0 million under the
Revolving Credit Facility. The Revolving Credit Facility was unused at March 31,
2003. Amounts available under the Revolving Credit Facility may be used for
working capital and general corporate purposes (including up to $10.0 million
for letters of credit), subject to certain limitations under the Senior Credit
Facility.
The Company believes that funds generated from operations, existing cash,
and borrowings under the Revolving Credit Facility will be sufficient to finance
its current operations, any required excess cash flow payments, planned capital
expenditures and internal growth for the foreseeable future. Future
acquisitions, if any, may require additional debt or equity financing.
24
The following tables present aggregated information as of March 31, 2003
regarding the Company's contractual obligations and commercial commitments:
Payments Due by Period
--------------------------------------------------------------
Contractual Less Than 1-3 4-5 After 5
Obligations Total 1 Year Years Years Years
- --------------------- --------------- -------------- -------------- --------------- --------------
Long-term debt $ 216,936,990 $ 19,181,277 $ 11,352,859 $ 110,075,590 $ 76,327,264
Capital lease
obligations 2,430,286 124,703 387,096 577,415 1,341,072
Operating leases 36,518,000 7,951,000 12,817,000 8,562,000 7,188,000
--------------- -------------- -------------- --------------- --------------
Total $ 255,885,276 $ 27,256,980 $ 24,556,955 $ 119,215,005 $ 84,856,336
=============== ============== ============== =============== ==============
Amount of Commitment Expiration Per Period
Total --------------------------------------------------------------
Other Commercial Amounts Less Than 1-3 4-5 Over 5
Commitments Committed 1 Year Years Years Years
- --------------------- --------------- -------------- -------------- --------------- --------------
Unused line of credit $ 50,000,000 $ 50,000,000 $ - $ - $ -
=============== ============== ============== =============== ==============
TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES
In fiscal 2001, NBC entered into several agreements with a newly created
entity, TheCampusHub.com, Inc., which is partially owned by the Company's
majority owner. TheCampusHub.com, Inc. was created to provide college bookstores
with a way to sell in-store inventory and virtual brand name merchandise over
the Internet utilizing technology originally developed by NBC. Such agreements
included an equity option agreement, a management services agreement, and a
technology sale and license agreement. The equity option agreement provides NBC
the opportunity to acquire 25% of the initial common shares outstanding of
TheCampusHub.com, Inc. The option is being accounted for as a cost method
investment in accordance with APB Opinion No. 18, THE EQUITY METHOD OF
ACCOUNTING FOR INVESTMENTS IN COMMON STOCK. The management services agreement,
which was extended for one year and expires on May 10, 2004, reimburses NBC for
certain direct costs incurred on behalf of TheCampusHub.com, Inc. Prior to its
amendment as described below, the management services agreement also required
TheCampusHub.com, Inc. to pay NBC $0.5 million per year for certain shared
management and administrative support. Complementary Services Division revenue
resulting from the management services agreement, including as amended, is
recognized as the services are performed. The technology sale and license
agreement provides for NBC to license its E-commerce software capabilities to
TheCampusHub.com, Inc. Prior to its amendment as described below, the technology
sale and license agreement required TheCampusHub.com, Inc. to pay NBC $0.5
million per year over a period of three years. The technology sale and license
agreement also provides TheCampusHub.com, Inc. with an option to purchase such
software capabilities from NBC during that three year period and was extended
for one year, expiring on May 10, 2004. The license fees were recognized as
Complementary Services Division revenue over the term of the agreement. For the
years ended March 31, 2003, 2002, and 2001, revenues attributable to the
management services and technology sale and license agreements totaled $0.3
million, $1.0 million, and $0.9 million, respectively, and reimbursable direct
costs incurred on behalf of TheCampusHub.com, Inc. totaled $0.6 million, $0.8
million, and $0.9 million, respectively.
Revenues attributable to the management services and technology sale and
license agreements were recognized in fiscal 2002 under the anticipation that,
if necessary, TheCampusHub.com, Inc. would make a capital call to its
shareholders to provide the funding necessary to meet its obligations under the
aforementioned agreements. TheCampusHub.com, Inc. reached break-even on a cash
flow basis, excluding amounts under the management services and technology sale
and license agreements, during fiscal 2002. While it remains a viable business
25
and is funding its own operations, it was not generating sufficient excess cash
flow to fund its obligations under the aforementioned agreements and the
remaining capital available from its shareholders was reserved to fund strategic
development opportunities and, if required, ongoing operations. As a result, on
March 31, 2002 NBC established a reserve of approximately $1.0 million on net
amounts due from TheCampusHub.com, Inc. and ultimately wrote-off approximately
$1.0 million of net amounts due during fiscal 2003. Net amounts due from
TheCampusHub.com, Inc. at March 31, 2003 and 2002 totaled $0.1 million and $0.2
million, respectively. Effective April 1, 2002, the management services and
technology sale and license agreements were amended, eliminating the annual
licensing fee and reducing the annual management services fee for certain shared
management and administrative support to $0.3 million. NBC continues to benefit
from its relationship with TheCampusHub.com, Inc., as the technology developed
further enhances the product/service offering of NBC to its Textbook Division
customers.
On August 2, 2002, HWH Capital Partners, L.P. and HWH Cornhusker Partners,
L.P., affiliates of HWP, along with certain other stockholders of the Company
(collectively with HWP, the "Sellers"), sold approximately 33% of the issued and
outstanding shares of the Company to certain funds affiliated with Weston
Presidio (Weston Presidio Capital III, L.P., Weston Presidio Capital IV, L.P.,
WPC Entrepreneur Fund, L.P., and WPC Entrepreneur Fund II, L.P., collectively
the "Weston Presidio Funds"). HWP retained a controlling interest in the Company
after the sale. This sale is referred to as the "Weston Presidio Transaction".
Under the terms of a buy-sell agreement entered into in connection with this
sale, Weston Presidio may require that the Sellers repurchase Weston Presidio's
shares of the Company at a price as defined in the buy-sell agreement, unless a
majority of the Sellers elects, in the alternative, to sell to Weston Presidio
their remaining shares of the Company at a price as defined in the buy-sell
agreement.
As of March 31, 2003 and 2002, notes receivable from stockholders totaled
$0.3 million and $0.7 million, respectively, and the associated interest
receivable totaled approximately $4,000 and $136,000, respectively. Such notes,
which were amended and restated in July, 2002, mature between January, 2009 and
January, 2010 and bear interest at 5.25%.
SEASONALITY
The Company's Textbook and Bookstore Divisions experience two distinct
selling periods and the Textbook Division experiences two distinct buying
periods. The peak selling periods for the Textbook Division occur prior to the
beginning of each college semester in August and December. The buying periods
for the Textbook Division occur at the end of each college semester in late
December and May. The primary selling periods for the Bookstore Division are in
September and January. In fiscal 2003, approximately 43% of the Company's annual
revenues were earned in the second fiscal quarter (July-September), while
approximately 29% of the Company's annual revenues were earned in the fourth
fiscal quarter (January-March). Accordingly, the Company's working capital
requirements fluctuate throughout the year, increasing substantially at the end
of each college semester, in May and December, as a result of the buying
periods. The Company funds its working capital requirements primarily through
the Revolving Credit Facility, which historically has been repaid with cash
provided from operations.
IMPACT OF INFLATION
The Company's results of operations and financial condition are presented
based upon historical costs. While it is difficult to accurately measure the
impact of inflation due to the imprecise nature of the estimates required, the
Company believes that the effects of inflation, if any, on its results of
operations and financial condition have not been material. However, there can be
no assurance that during a period of significant inflation, the Company's
results of operations will not be adversely affected.
ACCOUNTING STANDARDS NOT YET ADOPTED
In January, 2003 the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES (FIN 46). FIN
46 requires a variable interest entity to be consoli