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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to___________.
COMMISSION FILE NUMBER 333-48225
NBC ACQUISITION CORP.
(Exact name of registrant as specified in our charter)
DELAWARE 47-0793347
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4700 SOUTH 19TH STREET
LINCOLN, NE 68501-0529
(Address of Principal executive offices)
(402) 421-7300 (Registrant's telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] NO [X]
MARKET VALUE OF THE REGISTRANT'S VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT - NOT APPLICABLE AS REGISTRANT'S STOCK IS NOT PUBLICLY TRADED.
THERE WERE 549,254 SHARES OF CLASS A COMMON STOCK OUTSTANDING AS OF JUNE 25,
2004.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Total Number of Pages: 100
Exhibit Index: PAGE 94
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TABLE OF CONTENTS
PART I:
Item 1 Business..........................................................3
Item 2 Properties.......................................................12
Item 3 Legal Proceedings................................................14
Item 4 Submission of Matters to a Vote of Security Holders..............14
PART II:
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters........................................................15
Item 6 Selected Financial Data..........................................15
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................18
Item 7A Quantitative and Qualitative Disclosures about Market Risk.......33
Item 8 Financial Statements and Supplementary Data......................35
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...........................................67
Item 9A Controls and Procedures..........................................67
PART III:
Item 10 Directors and Executive Officers of the Registrant................68
Item 11 Executive Compensation............................................70
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.................................75
Item 13 Certain Relationships and Related Transactions....................76
Item 14 Principal Accountant Fees and Services............................77
PART IV:
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..78
Signatures....................................................................86
Supplemental Information to be Furnished......................................87
Financial Statement Schedule I - Condensed Financial Information
(Parent Company Only).......................................................88
Financial Statement Schedule II - Valuation and Qualifying Accounts...........93
Exhibit Index.................................................................94
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PART I.
ITEM 1. BUSINESS.
References in this Annual Report on Form 10-K to the "Company" refer to NBC
Acquisition Corp., the term "NBC" refers to Nebraska Book Company, Inc., a
wholly owned subsidiary of the Company, and the terms "we," "our," "ours," and
"us" refer collectively to the Company and its subsidiaries, including NBC,
except where otherwise indicated.
The Company was formed for the purpose of acquiring all of the outstanding
capital stock of NBC, effective September 1, 1995. The Company did not have
substantive operations prior to the acquisition of NBC and was acquired by
affiliates of Haas Wheat & Partners, L.P. ("HWP") in February, 1998.
On August 2, 2002, HWH Capital Partners, L.P. and HWH Cornhusker Partners,
L.P., affiliates of HWP, along with certain other stockholders of the Company
(collectively with HWP, the "Sellers"), sold approximately 33% of the issued and
outstanding shares of the Company to certain funds affiliated with Weston
Presidio (Weston Presidio Capital III, L.P., Weston Presidio Capital IV, L.P.,
WPC Entrepreneur Fund, L.P., and WPC Entrepreneur Fund II, L.P.). HWP retained a
controlling interest in the Company after the sale. This sale is referred to as
the "Weston Presidio Transaction." Under the terms of a buy-sell agreement
entered into in connection with this sale, Weston Presidio could have required
that the Sellers repurchase Weston Presidio's shares of the Company at a price
as defined in the buy-sell agreement, unless a majority of the Sellers elected,
in the alternative, to sell to Weston Presidio their remaining shares of the
Company at a price as defined in the buy-sell agreement.
On March 4, 2004, Weston Presidio gained controlling interest in the Company
through (i) the formation of two new corporations, NBC Holdings Corp. and New
NBC Acquisition Corp.; (ii) a $28.2 million equity investment by Weston Presidio
in NBC Holdings Corp., funds for which were ultimately paid to the Company in
the form of a capital contribution; (iii) Weston Presidio's purchase of 36,455
shares of the Company's common stock directly from its holders; (iv) the
cancellation of 870,285 shares of the Company's common stock upon payment by the
Company of merger consideration of $180.4 million to the shareholders of record
for such shares; (v) the exchange of 397,711 shares of the Company's common
stock for 512,799 shares of New NBC Acquisition Corp. capital stock in the
merger of the two entities with the Company as the surviving entity; and (vi)
the exchange of 512,799 shares of the Company's common stock by Weston Presidio
and current and former members of NBC management for a like number of shares of
NBC Holdings Corp. capital stock. Payment of the $180.4 million of merger
consideration was funded through proceeds from the $28.2 million capital
contribution, available cash, and proceeds from $405.0 million in new debt
financing, of which $261.0 million was utilized to retire certain debt
instruments outstanding at March 4, 2004 or to place funds in escrow for
untendered debt instruments called for redemption on March 4, 2004 and redeemed
on April 3, 2004. There were 549,254 shares of the Company's common stock
outstanding at March 31, 2004, of which 532,436 shares were owned by Weston
Presidio (495,981 shares through NBC Holdings Corp.) and the remainder were
owned by current and former members of management of NBC through NBC Holdings
Corp. For ease of presentation, financial information presented in the Annual
Report on Form 10-K reflects this transaction as if it had occurred on March 1,
2004. We have determined that no material transactions occurred during the
period from March 1, 2004 through March 4, 2004. As a result of this
transaction, financial information for periods ending prior to March 1, 2004 is
presented as the "Predecessor," while financial information for periods after
March 1, 2004 is presented as the "Successor." Throughout this Annual Report, we
generally refer to all of the steps comprising this transaction as the "March 4,
2004 Transaction."
On April 27, 2004, we filed Registration Statements on Form S-4 with the
Securities and Exchange Commission for purposes of registering debt securities
to be issued in exchange for the Senior Subordinated Notes and Senior Discount
Notes arising out of the March 4, 2004 Transaction. The Securities and Exchange
Commission declared such Registration Statements effective on May 7, 2004. All
notes were tendered in the offers to exchange that were completed on June 8,
2004.
The Company does not conduct significant activities apart from its
investment in NBC. Operational matters discussed in this report, including the
acquisition of college bookstores and other related businesses, refer to
operations of NBC.
GENERAL
We are one of the largest wholesale distributors of used college textbooks
in North America, offering over 100,000 textbook titles and selling more than
7.6 million books annually, primarily to campuses located in the United States.
In addition, as of March 31, 2004, we operate 113 bookstores on or adjacent to
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college campuses through which we sell a variety of new and used textbooks and
general merchandise. We are also a leading provider of distance education
materials to students in nontraditional courses, which include correspondence
and corporate education courses. Furthermore, we provide the college bookstore
industry with a variety of services including proprietary information systems,
in-store promotions, buying programs, and marketing services. With origins
dating to 1915 as a single bookstore operation, we have built a consistent
reputation for excellence in order fulfillment, shipping performance and
customer service.
We entered the wholesale used textbook market following World War II, when
the supply of new textbooks could not meet the demand created by the return of
ex-GI students. In 1964, we became a national, rather than regional, wholesaler
of used textbooks as a result of our purchase of The College Book Company of
California. During the 1970's we continued our focus on the wholesale business.
However, realizing the synergies that exist between wholesale operations and
college bookstore operations, in the 1980's we expanded our efforts in the
college bookstore market under a revised strategy. Under this strategy we
operate bookstores on or near larger campuses, typically where the
institution-owned college bookstore is contract-managed by a competitor or where
we do not have a significant wholesale presence. Today, we service the college
bookstore industry through our Textbook, Bookstore and Complementary Services
Divisions.
TEXTBOOK DIVISION. We are one of the largest wholesale distributors of used
college textbooks in North America. Our Textbook Division consists primarily of
selling used textbooks to college bookstores, buying them back from students or
college bookstores at the end of each school semester and then reselling them to
college bookstores. We purchase used textbooks from and resell them to college
bookstores at many of the nation's largest college campuses, including:
University of Texas; University of Southern California; Indiana University; San
Diego State University; University of Washington; and University of Minnesota.
Historically, Textbook Division sales have been determined primarily by the
amount of used textbooks that it can purchase. This occurs because the demand
for used textbooks has consistently outpaced supply. Our strong relationships
with the management of non contract-managed college bookstores nationwide have
provided important access to valuable market information regarding the
campus-by-campus supply and demand of textbooks, as well as an ability to
procure large quantities of a wide variety of textbooks. We provide an
internally-developed BUYER'S GUIDE to our Textbook Division customers. This
guide lists details such as author, new copy retail price, and our repurchase
price for over 47,000 textbook titles.
BOOKSTORE DIVISION. College bookstores are the primary outlets for sales of
new and used textbooks to students. As of March 31, 2004, we operated 113
college bookstores on or adjacent to college campuses. Of these 113 bookstores,
19 were leased from the educational institution that they served. Our college
bookstores are located at some of the nation's largest college campuses
including: University of Nebraska; University of Michigan; University of
Maryland; Arizona State University; Pennsylvania State University; University of
Kansas; Michigan State University; University of California - Berkeley; Texas
A&M University; University of Florida; and University of Tennessee. In addition
to generating profits, our Bookstore Division provides an exclusive source of
used textbooks for sale across our wholesale distribution network.
COMPLEMENTARY SERVICES DIVISION. With our acquisition of Specialty Books,
Inc. ("Specialty Books") in May 1997, we entered the distance education market,
which consists of providing education materials to students in nontraditional
college and other courses (such as correspondence courses, continuing and
corporate education courses and courses offered through electronic media such as
the Internet). We believe the fragmented distance education market represents an
opportunity for us to leverage our order fulfillment and distribution expertise
in a rapidly growing sector.
Other services offered to college bookstores include the sale of computer
hardware and software, such as our turnkey bookstore management software, and
related maintenance contracts. We have an installed base of over 220 college
bookstore locations for our textbook management control systems, and we have
installed our proprietary total store management system at almost 660 college
bookstore locations. In total, including our own bookstores, almost 880 college
bookstore locations utilize our software products. We have a leading E-commerce
platform for college bookstores with over 530 stores licensing the technology
via CampusHub. We also provide the college bookstore industry with buying
programs and marketing and store design services.
On July 1, 2003, we acquired all of the outstanding shares of common stock
of TheCampusHub.com, Inc. ("CampusHub"), an entity affiliated with us through
common ownership. CampusHub is no longer separately incorporated and is instead
accounted for as a division within our Complementary Services Division segment.
Each share of TheCampusHub.com, Inc. common stock issued and outstanding was
converted into shares of NBC Acquisition Corp. Class A Common Stock, resulting
in the issuance of 39,905 shares of NBC Acquisition Corp. Class A Common Stock.
CampusHub provides college bookstores with a way to sell in-store inventory and
virtual brand name merchandise over the Internet utilizing technology originally
developed by us.
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In January 1998, we acquired Connect 2 One (formerly Collegiate Stores
Corporation), a centralized buying service for 610 college bookstores across the
United States. Through the enhanced purchasing power of such a large group of
bookstores, participating bookstores are able to purchase certain general
merchandise at lower prices than those that would be paid by the stores
individually. Bookstores participating in Connect 2 One's ("C2O") programs also
provide us with another potential source of used textbooks.
We also provide a consulting and store design program to assist college
bookstores in store presentation and layout. During fiscal 2002, we introduced a
marketing services program to leverage our distribution channels. Marketing
services offered by us enable national vendors to reach college students through
in-store kiosks, prepackaged freshman mailers, coupon books, e-mail promotions
and in-store displays.
INDUSTRY SEGMENT FINANCIAL INFORMATION
Revenue, operating profit or loss, and identifiable assets attributable to
each of our industry segments are disclosed in the notes to the consolidated
financial statements presented in Item 8, "Financial Statements and
Supplementary Data" of our Annual Report on Form 10-K. We make our periodic and
current reports available, free of charge, through www.nebook.com as soon as
reasonably practicable after such material is electronically filed with the
Securities and Exchange Commission. Information contained on our web site is not
a part of this Annual Report on Form 10-K.
BUSINESS STRATEGY
Our objective is to strengthen our position as a leading provider of
products and services to the college bookstore market, thereby increasing
revenue and cash flow. In order to accomplish our goal, we intend to pursue the
following strategies:
ENHANCE GROWTH IN THE TEXTBOOK DIVISION. We expect the Textbook Division to
continue to be a primary contributor of revenues and cash flows, primarily as a
result of an expected increase in college enrollments and increased utilization
of used textbooks, as well as through the expansion of our own Bookstore
Division. Additionally, our enhanced commission structure rewards customers who
make a long-term commitment to supplying us with a large portion of their
textbooks. Finally, we are strengthening our marketing campaign to increase
student awareness of the benefits of buying and selling used textbooks.
CAPITALIZE ON COLLEGE BOOKSTORE OPPORTUNITIES. We intend to increase
revenues for our Bookstore Division by acquiring, opening or contract-managing
additional bookstores at selected college campuses and offering additional
specialty products and services at our existing bookstores. We have recently
created and filled the position of Vice President of Contract Management with
the intent of more actively pursuing contract-management relationships at
selected college campuses. We also intend to increase same-store sales growth
through a more coordinated effort to implement best practices across our entire
bookstore network. Finally, we believe there are opportunities to improve cash
flow at our college bookstores by reducing certain selling, general and
administrative expenses.
CONTINUE TO SERVICE THE DISTANCE EDUCATION MARKET. We have been informed by
Specialty Books' largest customer that it intends to discontinue the use of
Specialty Books' services for delivery of educational materials during fiscal
2005. However, we expect Specialty Books' revenues, after adjusting for the loss
of this customer, to continue to grow as the distance education market continues
to expand due to the increased popularity of correspondence courses, continuing
and corporate education courses and courses offered through electronic media
such as the Internet.
INCREASED MARKET PENETRATION THROUGH TECHNOLOGY. We intend to continue
generating incremental revenue through the sale of our turnkey bookstore
management software. The installation of such software, along with E-commerce
technology offered through CampusHub, a division within the Complementary
Services Division, also increases the channels through which we can access the
college and university market.
EXPANSION OF MARKETING SERVICES PROGRAM. It is very difficult for
traditional vendors to access the highly fragmented college and university
market in an efficient manner. Our marketing services program provides vendors
with efficient access to the college and university market through our
distribution channels. We intend to expand this program by establishing
arrangements with major national vendors.
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INDUSTRY OVERVIEW
Based on recent industry trade data from the National Association of College
Stores, the college bookstore industry remains strong, with over 5,000 college
stores generating annual sales of approximately $11.1 billion to college
students and other consumers in North America. Sales of textbooks and other
education materials used for classroom instruction comprise approximately
two-thirds of that amount. We expect this market will continue to grow as a
result of anticipated increases in enrollment at U.S. colleges attributable to
the children of the baby boom generation entering the college population.
WHOLESALE TEXTBOOK MARKET. We believe that used textbooks will continue to
be attractive to both students and college bookstores. Used textbooks provide
students with a lower-cost alternative to new textbooks and bookstores typically
achieve higher margins through the sale of used rather than new textbooks.
The pricing pattern of textbook publishing accounts for a large part of the
growth of the used book market. Because of copyright restrictions, each new
textbook is produced by only one publisher, which is free to set the new copy
retail price and discount terms to bookstores. Publishers generally offer new
textbooks at prices that enable college bookstores to achieve a gross margin of
23.0% to 25.0% on new textbooks. Historically, the high retail costs of new
textbooks and the higher margins achieved by bookstores on the sale of used
textbooks (approximately 33.0%) have encouraged the growth of the market for
used textbooks.
The used textbook cycle begins with new textbook publishers, who purposely
plan obsolescence into the publication of new textbooks. Generally, new editions
of textbooks are produced every two to four years. In the first year of a new
edition, there are few used copies of a new edition available. In the second and
third years, used textbooks become increasingly available. Simultaneously,
publishers begin to plan an updated edition. In years four and beyond, at the
end of the average life cycle of a particular edition, as publishers cut back on
original production, used textbooks generally represent a majority (in unit
terms) of the particular edition in use. While the length of the cycle varies by
title (and sometimes is indefinite, as certain titles are never updated), the
basic supply/demand progression remains fairly consistent.
College bookstores begin to place orders with used textbook wholesalers once
professors determine which books will be required for their upcoming courses,
usually by the end of May for the fall semester and the end of November for the
spring semester. Bookstore operators must first determine their allocation
between new and used copies for a particular title but, in most cases, they will
order an ample supply of used books because: (i) used book demand from students
is typically strong and consistent; (ii) many operators only have access to a
limited supply from wholesalers and believe that not having used book
alternatives could create considerable frustration among students and with the
college administration; (iii) bookstore operators earn higher margins on used
books than on new books; and (iv) both new and used books are sold with return
privileges, eliminating any overstock risk (excluding freight charges) to the
college bookstore.
New textbook ordering usually begins in June, at which time the store
operator augments its expected used book supply by ordering new books. By this
time, publishers typically will have just implemented their annual price
increases. These regular price increases allow us and our competitors to buy
used textbooks based on old list prices (in May) and to almost simultaneously
sell them based on new higher prices, thereby creating an immediate margin
increase.
While price is an important factor in the store operator's purchasing
decision, available supply, as well as service, usually determine with which
used textbook wholesaler a college bookstore will develop a strong relationship.
Used textbook wholesalers that are able to significantly service a college
bookstore account typically receive preferential treatment from store operators,
both in selling and in buying used textbooks. Pure exclusive supply arrangements
in our market are rare. However, in the past five to six years, we have been
marketing our exclusive supply program to the industry. This program has grown
to approximately 280 participating bookstores at the end of fiscal 2004. We also
introduced the NBC Advantage program in fiscal 2001. This program rewards
customers who make a long-term commitment to supplying us with a large portion
of their books. At the end of fiscal 2004, approximately 530 bookstores were
participating in this program, approximately 260 of which were also
participating in the exclusive program. Since we are usually able to sell the
vast majority of the used textbooks we are able to purchase, our ability to
obtain sufficient supply is a critical factor in our success.
COLLEGE BOOKSTORE MARKET. College stores generally fall into three
categories: (i) INSTITUTIONAL -- stores that are primarily owned and operated by
institutions of higher learning (represents approximately 56.0% of the U.S.
market according to the National Association of College Stores); (ii)
CONTRACT-MANAGED -- stores owned by institutions of higher learning and managed
by outside, private companies, typically found on-campus (represents
approximately 28.0% of the U.S. market according to the National Association of
College Stores); and (iii) INDEPENDENT STORES -- privately owned and operated
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stores, generally located off campus (represents approximately 16.0% of the U.S.
market according to the National Association of College Stores). In general, the
"captive" portion of the college bookstore market includes those
contract-managed stores that sell their used textbooks to affiliated companies,
and institutional and independent stores to the extent that such used textbooks
are repurchased from students and are retained by the bookstore for resale
without involving a wholesaler.
We believe that sales at our college bookstores will continue to grow as a
result of increased enrollment at colleges and due to the increasing number of
products and services offered in these bookstores, including E-commerce
capabilities provided through CampusHub, a division within our Complementary
Services Division.
PRODUCTS AND SERVICES
TEXTBOOK DIVISION. Our Textbook Division is engaged in the procurement and
redistribution of textbooks on college campuses primarily across the United
States.
We also publish the BUYER'S GUIDE, which lists over 47,000 textbooks
according to author, title, new copy retail price, and our repurchase price. The
BUYER'S GUIDE is an important part of our inventory control and book procurement
system. We update and reprint the BUYER'S GUIDE nine times each year and make it
available in both print and various electronic formats, including on all of our
proprietary information systems. A staff of dedicated professionals gathers
information from all over the country in order to make the BUYER'S GUIDE into
what we believe to be the most comprehensive and up-to-date pricing and buying
aid for college bookstores. We also maintain a database of almost 172,000 titles
in order to better serve our customers.
BOOKSTORE DIVISION. As of March 31, 2004, we operated 113 college bookstores
on or adjacent to college campuses. These bookstores sell a wide variety of used
and new textbooks, general books and assorted general merchandise, including
apparel, sundries and gift items. Over the past three years, revenues of our
bookstores from activities other than used and new textbook sales have been
between 20.6% and 23.4% of total revenues. We have been, and intend to continue,
selectively expanding our product offerings at our bookstores in order to
increase sales and profitability. We have also installed software providing
E-commerce capabilities in all of our own bookstores, thereby allowing our
bookstores to further expand product offerings and compete with other online
textbook sellers.
COMPLEMENTARY SERVICES DIVISION. Through Specialty Books, we have access to
the market for distance education products and services. Currently, we provide
students at approximately 60 colleges with textbooks and materials for use in
distance education courses, and we are a leading provider of textbooks to
nontraditional programs and students such as correspondence or corporate
education students. We believe the fragmented distance education market
represents an opportunity for us to leverage our fulfillment and distribution
expertise in a rapidly growing sector. Beyond textbooks, we offer services and
specialty course materials to distance education students including videotape
duplication and shipping; shipping of specialty, non-textbook course materials;
and a sales and ordering function. Students can order distance education
materials from us over the Internet. Over the past three years, revenues of
Specialty Books have been between 74.9% and 84.1% of total Complementary
Services Division revenues. However, we have been informed by Specialty Books'
largest customer, who accounted for more than 50.0% of Specialty Books' fiscal
2004 revenues, that it intends to discontinue the use of Specialty Books'
services for delivery of educational materials during fiscal 2005. After
adjusting for the expected reduction in revenues from this customer, we believe
we can continue to increase distance education revenues over the next several
years.
Other services offered to college bookstores include services related to our
turnkey bookstore management software, the sale of other software and hardware,
and the related maintenance contracts. These services generate revenue and
assist us in gaining access to new sources of used textbooks. We have an
installed base of over 220 college bookstore locations for our textbook
management control systems, and we have installed our proprietary total store
management system at almost 660 college bookstore locations. In total, including
our own bookstores, almost 880 college bookstore locations utilize our software
products. In addition, we have developed software for E-commerce capabilities.
These software products allow college bookstores to launch their own E-commerce
site and effectively compete against other online textbook sellers by offering
textbooks and both traditional and non-traditional store merchandise online.
Presently, there are over 530 stores licensing our E-commerce technology via
CampusHub.
Through C2O, we are able to offer a variety of products and services to
participating college bookstores. C2O negotiates apparel and general merchandise
discounts and develops and executes marketing programs for its membership. As a
centralized buying service for 610 participating college bookstores including
our own bookstores, C2O has evolved into a buying group with substantial
purchasing power. Other C2O marketing services include a freight savings
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program, a check authorization program, and retail display allowances for
magazine displays. Additionally, a staff of experienced C2O professionals
consult with the management of bookstores. Services offered include strategic
planning, store review, merchandise planning and help with other operational
aspects of the business. While consulting has historically represented a
relatively small component of C2O's business, it is nonetheless strategically
important to the ongoing success of this aspect of our business.
We also provide a consulting and store design program to assist college
bookstores in store presentation and layout. Through our newly-introduced
marketing services program, we are able to leverage our distribution channels.
Marketing services offered by us enable national vendors to reach college
students through in-store kiosks, prepackaged freshman mailers, coupon books,
e-mail promotions and in-store displays.
WHOLESALE PROCUREMENT AND DISTRIBUTION
Historically, because the demand for used textbooks has consistently
exceeded supply, our sales have been primarily determined by the amount of used
textbooks that we can purchase. We believe that, on average, we are able to
fulfill approximately 20% to 25% of our demand. As a result, our success has
depended primarily on our inventory procurement, and we continue to focus our
efforts on obtaining inventory. In order to ensure our ability to both obtain
and redistribute inventory, our Textbook Division strategy has emphasized
establishing and maintaining strong customer and supplier relationships with
college bookstores (primarily, independent and institutional college bookstores)
through our employee account representatives. These 33 account representatives
(as of March 31, 2004) are responsible for procuring used textbooks from
students, marketing our services on campus, purchasing overstock textbooks from
bookstores and securing leads for sale of our systems products. We have been
able to maintain a competitive edge by providing superior service, made possible
primarily through the development and maintenance of ready access to inventory,
information and supply. Other components of the Textbook Division strategy and
its implementation include: (i) selectively paying a marginal premium relative
to competitors to entice students to sell back more books to us; (ii) gaining
access to competitive campuses (where the campus bookstore is contract-managed
by a competitor) by opening off-campus, company-owned college bookstores; (iii)
using technology to gain efficiencies and to improve customer service; (iv)
maintaining a knowledgeable and experienced sales force that is customer-service
oriented; (v) providing working capital flexibility for bookstores making
substantial purchases; and (vi) establishing long-term supply arrangements by
rewarding customers who make a long-term commitment to supplying us with a large
portion of their books.
The two major used textbook purchasing seasons are at the end of each
academic semester, May and December. Although we make book purchases during
other periods, the inventory purchased in May, before publishers announce their
price increases in June and July, allows us to purchase inventory based on the
lower retail prices of the previous year. The combination of this purchasing
cycle and the fact that we are able to sell our inventory in relation to retail
prices for the following year permits us to realize additional gross profit. We
advance cash to our representatives during these two periods, and the
representatives in turn buy books directly from students, generally through the
on-campus bookstore.
After we purchase the books, we arrange for shipment to one of our two
warehouses (Nebraska and California) via common carrier. At the warehouse, we
refurbish damaged books and categorize and shelf all other books in a timely
manner, and enter them into our on-line inventory system. These two locations
function as one facility allowing customers to access inventory at both
locations.
Customers place orders by phone, mail, fax or other electronic method. Upon
receiving an order, we remove the books from available inventory and hold them
for future shipping. Customers may return books within 60 days after the start
of classes if a written request is enclosed. Returns currently average
approximately 20.9% of sales and generally are attributable to course
cancellations or overstocking. The majority of returns are textbooks that we are
able to resell for the next semester.
BOOKSTORE DIVISION
An important aspect of our business strategy is a program designed to reach
new customers through the opening or acquisition of bookstores adjacent to
college campuses or the contract-management of stores on campus. In addition to
generating sales of new and used textbooks and general merchandise, these
outlets enhance our Textbook Division by increasing the inventory of used books
purchased from the campus.
A desirable campus for a company-operated college bookstore is one on which
we do not currently buy or sell used textbooks either because a competitor
contract-manages the college's bookstore or the college bookstore does not have
8
a strong relationship with us. We generally will not open a location on a campus
where we already have a strong relationship with the college bookstore because
some college bookstores may view having a competing location as a conflict of
interest.
We tailor each of our own bookstores to fit the needs and lifestyles of the
campus on which it is located. Individual bookstore managers are given
significant planning and managing responsibilities, including, hiring employees,
controlling cash and inventory, and purchasing and merchandising product. We
have staff specialists to assist individual bookstore managers in such areas as
store planning, merchandise layout and inventory control.
As of March 31, 2004 we operated 113 college bookstores nationwide, having
expanded from 65 bookstores in fiscal 2000. During fiscal 2004 we purchased, or
entered into contracts to manage, nine bookstores located in Wayne, Nebraska;
Huntington, West Virginia; Mesa, Arizona; Phoenix, Arizona; Johnson City,
Tennessee; Toledo, Ohio; and three locations in East Lansing, Michigan. We
closed bookstores located in Chadron, Nebraska; Wayne, Nebraska; Columbia, South
Carolina; Northridge, California; and Tempe, Arizona during fiscal 2004.
The table below highlights certain information regarding our bookstores
added and closed through March 31, 2004.
Bookstores Approximate
Open at Bookstores Bookstores Bookstores Total
Beginning Added Closed at End of Square
of Fiscal During During Fiscal Footage
Fiscal Year Year Fiscal Year Fiscal Year(1) Year (in thousands)
----------- --------- ----------- -------------- ---- --------------
2000 65 35 2 98 733
2001 98 4 0 102 740
2002 102 10 4 108 797
2003 108 4 3 109 798
2004 109 9 5 113 847
- ------------
(1) In fiscal 2000, the property lease at one bookstore location expired and was
not renewed by us and one Triro, Inc. bookstore location which did not meet
our expansion criteria described below was closed. In fiscal 2002, the
property leases at two bookstore locations expired and were not renewed by
us and two bookstore locations in Austin, Texas were sold to a large
Textbook Division customer. In fiscal 2003, the property leases at three
bookstore locations expired and were not renewed by us. In fiscal 2004, five
bookstores were closed, as either the lease expired, the contract-managed
relationship was not renewed, or an agreement was reached with the landlord
to terminate the lease.
We plan to continue increasing the number of bookstores in operation. The
bookstore expansion plan will focus on campuses where we do not already have a
strong relationship with the on-campus bookstore. In determining to open a
bookstore, we look at several criteria: (i) a large enough market to justify our
efforts (typically this means a campus of at least 6,000 students); (ii) a site
in close proximity to campus with adequate parking and accessibility; (iii) the
potential of the bookstore to have a broad product mix (larger bookstores are
more attractive than smaller bookstores because a full line of general
merchandise can be offered in addition to textbooks); (iv) the availability of
top-quality management; and (v) certain other factors, including leasehold
improvement opportunities and personnel costs. We also plan to pursue
opportunities to contract-manage additional stores. In determining to pursue
opportunities to contract-manage a campus bookstore, we look at: (i) the size of
the market; (ii) the competitive status of the market; (iii) the availability of
top quality management; and (iv) certain other factors, including personnel
costs.
Our bookstores have an average size of 7,500 square feet but range in size
from 400 to 50,000 square feet. We estimate that new bookstore leasehold
improvements, furniture and fixtures, and automation with PRISM cost
approximately $100,000 per bookstore, after giving effect to construction
allowances.
MANAGEMENT INFORMATION SYSTEMS
We believe that we can enhance efficiency, profitability and competitiveness
through investments in technology. Our MIS operations process order entry,
control inventory, generate purchase orders and customer invoices, generate
various sales reports, and process and retrieve textbook information. All our
bookstores operate with IBM RS/6000's. At the center of our MIS operations are
our self-developed, proprietary software programs such as PRISM, our whole store
management system, and PC-Text, our textbook management and inventory control
system. This software is maintained and continuously enhanced by an experienced
team of development and design professionals.
9
In addition, we have developed software for E-commerce capabilities. These
software products allow college bookstores to launch their own E-commerce site
and effectively compete against other online textbook sellers by offering
textbooks and both traditional and non-traditional store merchandise online.
None of our proprietary software programs are copyrighted, although we do
have registered trademarks for certain names. In addition to using our software
programs for our own management and inventory control, we license the use of our
software programs to bookstores. Our software programs enhance the efficiency
and cost-effectiveness of our operations, and their use by bookstores that are
our customers or suppliers tends to solidify the relationship between us and
such customers or suppliers, resulting in increased sales or supplies for us.
MIS operations consist of four operating units: (i) the mainframe unit,
which develops and supports all systems utilized in our warehouses and corporate
offices; (ii) a system sales unit, which markets our college store management
systems to colleges; (iii) the College Bookstore Management Systems ("CBMS"),
which develops and supports the systems that are sold to bookstores; and (iv)
CampusHub, which develops and supports software for E-commerce.
We conduct training courses for all systems users at our headquarters in
Lincoln, Nebraska. Classes are small and provide hands on demonstrations of the
various systems. Printed reference manuals and training materials also accompany
each system. The customer support unit of CBMS is staffed with approximately 50
experienced personnel. Personnel are available 24 hours a day to answer
questions on a toll-free number.
CUSTOMERS
We sell our products and services to college bookstores throughout the
United States, Canada and Puerto Rico for ultimate use by the students of the
respective colleges. Our 25 largest Textbook Division customers accounted for
approximately 5.4% of our fiscal 2004 consolidated revenues. No single Textbook
Division customer accounted for more than 1.0% of our fiscal 2004 consolidated
revenues.
Our Textbook Division purchases from and resells used textbooks to many of
the nation's largest college campuses including: University of Texas; University
of Southern California; Indiana University; San Diego State University;
University of Washington; and University of Minnesota.
Our college bookstores are located on many of the nation's largest college
campuses including: University of Nebraska; University of Michigan; University
of Maryland; Arizona State University; Pennsylvania State University; University
of Kansas; Michigan State University; University of California - Berkeley; Texas
A&M University; University of Florida; and University of Tennessee.
Our distance education program is, among other things, a primary supplier of
textbooks and educational material to students enrolled in on-line courses
offered through one institution. That institution accounted for greater than
50.0% of total revenues in the distance education program. However, we have been
informed by this institution that it intends to discontinue the use of our
services for delivery of educational materials during fiscal 2005.
No single customer accounted for more than 10.0% of our fiscal 2004
consolidated revenues.
COMPETITION
Our Textbook Division competes in the used textbook wholesale distribution
market. This market includes the sale of all used textbooks purchased from
students by an independent third party which are then redistributed through
college bookstores; sales to contract-managed stores, which obtain virtually all
of their supply of used textbooks from within their chain of stores under common
management; and used textbooks retained by college bookstores.
Our two major competitors in the college store industry and used textbook
business are Follett Campus Resources ("Follett") and MBS Textbook Exchange
("MBS"), which contract-manage approximately 680 stores and 430 stores,
respectively. We believe that our market share of the used college textbook
wholesale distribution market is comparable to that of Follett and MBS,
individually. The remaining competitors are smaller regional companies,
10
including Budgetext, Texas Book Company and Southeastern Book Company. Most of
the leading companies in the industry also have an established retail presence,
either through direct store ownership/operation or through contract-management.
Many of Follett's college bookstores are located on smaller campuses. The
size of the campus and Follett's presence there have precluded potential
competitors such as us from entering these markets, which in turn affects both
our ability to buy books and our ability to add new accounts. However, because
it is required to supply used texts to all of its own stores, Follett must
balance the demands of its own bookstores with those of its other independent
customers.
MBS is controlled by the same shareholder that controls Barnes & Noble.
Consequently, MBS supplies approximately 430 Barnes & Noble college stores. MBS
faces the same challenges that Follett faces in supplying existing institutional
accounts. MBS has a strong systems division that competes actively with us for
new customers and also fulfills all of the needs of the Barnes & Noble stores.
Beyond MBS, we believe the market is fragmented.
Our Bookstore Division competes with other college campus bookstores,
including the on-campus bookstore in those locations where our bookstore is
off-campus.
Both our Textbook and Bookstore Divisions compete with a number of entities
that have entered the college marketplace, or enhanced their sales channel to
that marketplace, through E-commerce. These competitors typically use the
Internet to establish websites designed to sell textbooks and/or other
merchandise directly to students, bypassing the traditional college bookstore.
By contrast, E-commerce services provided through CampusHub are designed to sell
textbooks and other merchandise through college bookstore websites. We also
compete against the expansion of electronic media as a source of textbook
information, such as on-line resources, E-Books, print-on-demand textbooks and
CD-ROM, which may replace or modify the need for students to purchase textbooks
through the traditional college bookstore. We do not believe that such
competition has had a material adverse impact on our results of operations,
though we do believe electronic media to be a factor in the distance education
program's largest customer deciding to discontinue the use of our services for
delivery of distance education materials during fiscal 2005.
Presently, we believe that our largest competitor in textbook distribution
for the distance education market, and only other major competitor, is MBS.
There is only one centralized buying service that is similar to C2O, the
Independent College Bookstore Association ("ICBA"). Participation by college
bookstores in C2O's or ICBA's centralized buying service is voluntary, and
college bookstores may, and some do, belong to both buying associations.
GOVERNMENTAL REGULATION
We are subject to various federal, state and local environmental, health and
safety laws and regulations. Generally, these laws impose limitations on the
discharge of pollutants and the presence of hazardous substances in the
workplace and establish standards for vehicle and employee safety and for the
handling of solid and hazardous wastes. These laws include the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act, the Clean Air Act, the Hazardous Materials
Transportation Act and the Occupational Safety and Health Act. Future
developments, such as stricter environmental or employee health and safety laws
and regulations thereunder, could affect our operations. We do not currently
anticipate that the cost of our compliance with, or of any foreseeable
liabilities under, environmental and employee health and safety laws and
regulations will have a material adverse affect on our business or financial
condition.
11
EMPLOYEES
As of March 31, 2004 we had a total of approximately 2,500 employees, of
which approximately 1,000 were full-time, approximately 400 were part-time and
approximately 1,100 were temporary. We have no unionized employees and believe
that our relationship with our employees is satisfactory.
In view of the seasonal nature of our Textbook Division, we utilize seasonal
labor to improve operating efficiency. We employ a small number of "flex-pool"
workers who are cross-trained in a variety of warehouse functions. Recently, we
have employed up to 50 flex-pool workers in the Nebraska and California
facilities, thereby enabling us to lower Textbook Division operating expenses.
Temporary employees augment the flex-pool to meet periodic labor demands.
ITEM 2. PROPERTIES.
We own our two Textbook Division warehouses (totaling 244,000 square feet)
in Lincoln, Nebraska (one of which is also the location of our headquarters),
and lease our 60,000 square foot Textbook Division warehouse in Cypress,
California. The Cypress lease expires on August 31, 2007. Our distance education
program resides in a leased facility with 49,500 square feet in Athens, Ohio.
The lease expires on May 31, 2007 and has one five-year option to renew.
Listed below, set forth as of March 31, 2004, are our college bookstores,
their location, college served and the school's estimated enrollment.
Institution Location Enrollment Store Name
- ----------- -------- ---------- ----------
University of Alabama Tuscaloosa, AL 20,300 The College Store
University of Arkansas - Little Rock Little Rock, AR 11,400 Campus Bookstore
Northern Arizona University Flagstaff, AZ 19,900 The College Store
Northern Arizona University Flagstaff, AZ 19,900 University Text and Tools
Mesa County Community College, also serving: Mesa, AZ 25,000 The Textbook Company
Chandler Gilbert Community College - Pecos 7,500
Western International University Phoenix, AZ 3,300 Western International University
Bookstore (1)
Arizona State University Tempe, AZ 47,400 The College Store
University of Arizona Tucson, AZ 37,100 Arizona Book Store
University of Arizona Tucson, AZ 37,100 Arizona Book Store South
University of California - Berkeley Berkeley, CA 33,100 Ned's Bookstore
University of California - Berkeley Berkeley, CA 33,100 Ned's Bookstore
University of California - Berkeley Berkeley, CA 33,100 Ned's Bookstore
University of Northern Colorado Greeley, CO 11,400 The Book Stop
Daytona Beach Community College Daytona Beach, FL 18,200 College Book Rack
University of Florida, also serving: Gainesville, FL 47,900 Florida Book Store
Santa Fe Community College 13,800
University of Florida, also serving: Gainesville, FL 47,900 Florida Book Store, Volume II
Santa Fe Community College 13,800
Miami-Dade College Miami, FL 21,700 Lemox College Book & Supply
University of Central Florida, also serving: Orlando, FL 38,500 College Book & Supply
Seminole Community College 11,300
Valencia Community College 16,000
University of Central Florida Orlando, FL 38,500 Knight's Corner
Georgia State University Atlanta, GA 28,100 Georgia Bookstore
Drake University Des Moines, IA 5,100 D-Shoppe (1)
Drake University, also serving: Des Moines, IA 5,100 University Book Store (2)
Mercy College of Health Sciences 600
Southern Illinois University Carbondale, IL 21,400 Saluki Bookstore
Ball Sate University Muncie, IN 18,300 Collegiate Book Exchange
Valparaiso University Valparaiso, IN 3,900 University Book Center (1)
University of Kansas Lawrence, KS 26,800 University Book Shop
Johnson County Community College Overland Park, KS 17,600 The College Store
Western Kentucky University Bowling Green, KY 17,300 Lemox Book Company
Western Kentucky University Bowling Green, KY 17,300 Lemox II
University of Louisville Louisville, KY 21,500 College Book Warehouse
Eastern Kentucky University Richmond, KY 15,800 University Book & Supply
University of Maryland College Park, MD 34,800 Maryland Book Exchange
Prince George's Community College Largo, MD 12,600 Prince George's Community
College Bookstore (1)
12
Institution Location Enrollment Store Name
- ----------- -------- ---------- ----------
Concordia University - Ann Arbor Ann Arbor, MI 500 Concordia College Bookstore (1)
University of Michigan Ann Arbor, MI 39,000 Michigan Book & Supply
University of Michigan Ann Arbor, MI 39,000 Ulrich's Bookstore
Oakland University Auburn Hills, MI 16,600 Textbook Outlet
Wayne County Community College Belleville, MI 11,100 WCCCD Bookstore (1)
Wayne County Community College Detroit, MI 11,100 WCCCD Bookstore (1)
Wayne County Community College Detroit, MI 11,100 WCCCD Bookstore (1)
Wayne County Community College Detroit, MI 11,100 WCCCD Bookstore (1)
Wayne County Community College Taylor, MI 11,100 WCCCD Bookstore (1)
Michigan State University East Lansing, MI 44,500 The College Store
Michigan State University East Lansing, MI 44,500 Ned's Bookstore
Michigan State University East Lansing, MI 44,500 Spartan Art Store (1)
Michigan State University East Lansing, MI 44,500 Spartan Bookstore (1)
Michigan State University East Lansing, MI 44,500 Spartan Medical Store (1)
Kettering University Flint, MI 2,500 Kettering Campus Store (1)
Eastern Michigan University, also serving: Ypsilanti, MI 23,700 Campus Book & Supply
Washtenaw Community College 12,000
Washtenaw Technical Middle College 500
Eastern Michigan University Ypsilanti, MI 23,700 Ned's Bookstore
Eastern Michigan University Ypsilanti, MI 23,700 Ned's College of Business
Bookstore
Minnesota State University Mankato Mankato, MN 12,800 Maverick Bookstore (2)
North Carolina State University Raleigh, NC 29,900 Packbackers Student Bookstore
Chadron State College Chadron, NE 1,700 Eagle Pride Bookstore (1)
University of Nebraska - Kearney Kearney, NE 6,400 The Antelope Bookstore (1)
University of Nebraska - Lincoln Lincoln, NE 22,600 Big Red Shop
University of Nebraska - Lincoln Lincoln, NE 22,600 Nebraska Bookstore (2)
Nebraska Wesleyan University Lincoln, NE 1,500 Prairie Wolves Bookstore (1)
Wayne State College Wayne, NE 3,300 Wayne State College Bookstore (1)
University of Nevada Las Vegas Las Vegas, NV 24,200 Rebelbooks
State University of New York - Buffalo, also Amherst, NY 25,800 The College Store
serving:
Erie Community College - North Campus 11,500
State University of New York - Binghamton Vestal, NY 12,500 The Bookbridge
University of Akron Akron, OH 24,300 The College Store
Ohio University Athens, OH 16,900 Specialty Books
Ohio State University Columbus, OH 50,700 College Town
Wright State University, also serving: Fairborn, OH 15,700 The College Store
Sinclair Community College 19,400
University of Toledo Toledo, OH 19,000 Student Bookstore
University of Oklahoma Norman, OK 27,700 Boomer Book Company
University of Oklahoma Norman, OK 27,700 Sooner Textbooks
Oklahoma State University Stillwater, OK 21,100 Cowboy Book
Indiana University of Pennsylvania Indiana, PA 13,900 The College Store
University of Pittsburgh Pittsburgh, PA 27,000 GotUsed Bookstore
Pennsylvania State University State College, PA 41,800 University Book Centre
College of Charleston Charleston, SC 11,500 University Book of Charleston
University of South Carolina Columbia, SC 25,400 Carolina Spirit Shop
University of South Carolina Columbia, SC 25,400 South Carolina Book Store
East Tennessee State University Johnson City, TN 11,400 The College Store
East Tennessee State University Johnson City, TN 11,400 East Tennessee State University
Bookstore (1)
University of Tennessee Knoxville, TN 27,300 Rocky Top Books
University of Tennessee Knoxville, TN 27,300 Rocky Top East (2)
University of Texas - Arlington Arlington, TX 25,000 The College Store
Austin Community College Austin, TX 29,100 Bevo's
Austin Community College Austin, TX 29,100 Bevo's
Blinn College Bryan, TX 13,000 Traditions Bookstore
Texas A&M University College Station, TX 44,900 Traditions Bookstore
Texas A&M University College Station, TX 44,900 Traditions Bookstore
Texas A&M University College Station, TX 44,900 Traditions Bookstore
Southern Methodist University Dallas, TX 11,000 Varsity Bookstore
University of North Texas, also serving: Denton, TX 31,100 Voertman's (2)
North Central Texas College 6,100
Texas Woman's University 8,700
University of Texas - Pan American Edinburg, TX 15,300 South Texas Book & Supply
North Harris College Houston, TX 10,400 College Bookstore (2)
North Harris College Humble, TX 10,400 College Bookstore
University of Houston, also serving: Houston, TX 35,100 Rother's Bookstore
Texas Southern University School of Law 200
Texas Tech University Lubbock, TX 28,500 Double T Bookstore
Texas Tech University Lubbock, TX 28,500 Double T Bookstore
13
Institution Location Enrollment Store Name
- ----------- -------- ---------- ----------
Texas Tech University Lubbock, TX 28,500 Double T Bookstore
Texas Tech University Lubbock, TX 28,500 Spirit Shop
South Texas Community College McAllen, TX 13,700 South Texas Book & Supply
Stephen F. Austin State University Nacogdoches, TX 11,400 Varsity Book Store
San Antonio College, also serving: San Antonio, TX 22,100 L&M Bookstore
Northwest Vista College 6,800
Palo Alto College 6,500
St. Philip's College 9,000
UTSA - Downtown 6,000
University of Texas - San Antonio San Antonio, TX 24,700 L&M UTSA Bookstore
Southwest Texas State University - San Marcos San Marcos, TX 26,300 Colloquium Bookstore
Southwest Texas State University - San Marcos San Marcos, TX 26,300 Colloquium Bookstore
Southwest Texas State University - San Marcos San Marcos, TX 26,300 Colloquium Bookstore
Tarleton State University Stephenville, TX 8,800 The College Store
Baylor University Waco, TX 13,300 University Bookstore
Baylor University Waco, TX 13,300 University Bookstore and
Spirit Shop
Midwestern State University Wichita Falls, TX 6,500 The College Store
Virginia Polytechnic Institute and State Blacksburg, VA 28,000 Tech Bookstore
University
Old Dominion University Norfolk, VA 20,800 Dominion Bookstore
Radford University Radford, VA 9,200 Radford Book Exchange
Western Washington University, also serving: Bellingham, WA 11,800 The College Store
Whatcom Community College 4,200
Marshall University Huntington, WV 16,000 Stadium Bookstore
- ------------
(1) Denotes properties leased from the educational institution ("contract-
managed" stores).
(2) Property is owned by us.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we are subject to legal proceedings and other claims
arising in the ordinary course of our business. We believe that currently we are
not a party to any litigation the outcome of which would have a material adverse
affect on our financial condition or results of operations. We maintain
insurance coverage against claims in an amount which we believe to be adequate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On March 3, 2004, the holders of the issued and outstanding shares of the
Company adopted resolutions approving the merger transaction whereby the Company
became a wholly-owned subsidiary of NBC Holdings Corp. In addition, these
holders adopted resolutions (i) acknowledging their awareness that certain
payments made in connection with the merger could have subjected the Company to
the punitive provisions of Sections 280G and 4999 of the Internal Revenue Code
of 1986 (the "Code") and (ii) exempting these payments from the definitions of
"parachute payments" and "excess parachute payments" under Section 280G of the
Code.
Stockholders of the Company adopted these resolutions unanimously.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of June 25, 2004, based upon the number of holders on record, there were
5 holders of NBC Acquisition Corp. Class A Common Stock, those holders being
four funds affiliated with Weston Presidio (which held a total of 36,455 shares)
and NBC Holdings Corp., a new corporation formed by Weston Presidio as part of
the March 4, 2004 Transaction. As of June 25, 2004, NBC Holdings Corp.'s issued
and outstanding capital stock totaled 512,799 shares and correlated with the
512,799 shares of NBC Acquisitions Corp. Class A Common Stock it held. There are
28 holders on record of NBC Holdings Corp. capital stock, including the four
funds affiliated with Weston Presidio and current and former members of our
management group. As of June 25, 2004, there were also options granted and
outstanding under the 2004 Stock Option Plan, held by 26 members of our
management group, to purchase 49,778 shares of NBC Holdings Corp. capital stock.
As discussed in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Item 8, "Financial Statements and
Supplementary Data", the payment of dividends is subject to various restrictions
under our debt instruments. As a result, the Company has declared no dividends
on the NBC Acquisition Corp. Class A Common Stock during fiscal 2004 and 2003.
There is no established public trading market for the NBC Acquisition Corp.
Class A Common Stock.
Additional information regarding equity compensation plans can be found in
Item 12, "Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters."
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth our selected historical consolidated
financial and other data as of and for the one month ended March 31, 2004
(successor), the eleven months ended February 29, 2004 and the fiscal years
ended March 31, 2003, 2002, 2001, and 2000 (predecessor), respectively. The
selected historical consolidated financial data was derived from our audited
consolidated financial statements.
15
The following table should be read in conjunction with Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the related notes thereto included in
Item 8, "Financial Statements and Supplementary Data."
Successor (1) Predecessor (1)
-------------- -------------------------------------------------------------------
Fiscal Years Ended
1 Month Ended 11 Months Ended ---------------------------------------------------
March 31, February 29, March 31, March 31, March 31, March 31,
2004 2004 2003 2002 2001 2000
-------------- -------------- ----------- ------------ ------------- ------------
STATEMENT OF OPERATIONS DATA: (dollars in thousands)
Revenues $ 13,317 $ 385,364 $ 370,510 $ 338,917 $ 301,669 $ 267,069
Costs of sales 7,768 231,874 224,488 206,976 187,099 164,984
-------------- --------------- ----------- ------------ ------------- ------------
Gross profit 5,549 153,490 146,022 131,941 114,570 102,085
Operating expenses:
Selling, general, and administrative 8,540 91,878 90,391 84,871 74,100 65,820
Depreciation 343 2,977 2,988 3,087 2,956 3,096
Amortization (4) 649 1,162 644 505 10,446 9,320
Stock-based compensation - 7,264 - - - -
-------------- --------------- ----------- ------------ ------------- ------------
Income (loss) from operations (3,983) 50,209 51,999 43,478 27,068 23,849
Other expenses (income):
Interest expense 2,848 34,536 22,192 24,408 24,008 23,398
Interest income (97) (308) (360) (400) (615) (356)
(Gain) loss on derivative
instruments - (57) 156 361 - -
-------------- --------------- ----------- ------------ ------------- ------------
Income (loss) before income taxes (6,734) 16,038 30,011 19,109 3,675 807
Income tax expense (benefit) (2,502) 6,609 12,232 7,954 3,407 2,516
-------------- --------------- ----------- ------------ ------------- ------------
Net income (loss) $ (4,232) $ 9,429 $ 17,779 $ 11,155 $ 268 $ (1,709)
============== =============== =========== ============ ============= ============
Earnings (loss) per share:
Basic $ (7.70) $ 7.45 $ 14.07 $ 8.83 $ 0.21 $ (1.48)
Diluted (7.70) 7.30 13.88 8.83 0.21 (1.48)
OTHER DATA:
EBITDA (2) $ (2,991) $ 54,348 $ 55,631 $ 47,070 $ 40,470 $ 36,265
Net cash flows from operating activities (21,512) 38,605 37,332 31,038 8,839 18,945
Net cash flows from investing activities (183,836) (6,452) (5,327) (7,616) (4,994) (30,244)
Net cash flows from financing activities 158,962 8,104 (4,018) (16,412) (3,887) 11,690
Capital expenditures 720 3,965 3,708 2,277 1,759 3,542
Business acquisition expenditures (3) 1,849 2,355 1,389 6,110 2,975 26,072
Number of bookstores open at end of
the period 113 112 109 108 102 98
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents $ 33,276 $ 79,662 $ 39,405 $ 11,419 $ 4,410 $ 4,451
Working capital 106,259 134,150 81,966 75,865 72,394 62,244
Total assets 649,691 257,583 210,379 185,033 167,701 168,991
Total debt, including current maturities 434,098 263,782 219,367 216,915 224,219 222,552
(1) On March 4, 2004, Weston Presidio acquired the controlling interest in
the Company through a series of steps which resulted in Weston Presidio
owning a substantial majority of NBC Acquisition Corp.'s Class A Common
Stock. For ease of presentation, financial information presented in this
table reflects this transaction as if it had occurred on March 1, 2004.
We have determined that no material transactions occurred during the
period from March 1, 2004 through March 4, 2004. As a result of the
March 4, 2004 Transaction, financial information for periods ending
prior to March 1, 2004 is presented as the "Predecessor," while
financial information for periods ending after March 1, 2004 is
presented as the "Successor."
As a result of the March 4, 2004 Transaction, which included substantial
increases in long-term indebtedness through the issuance of new
indebtedness and amortizable identifiable intangibles through the
application of purchase accounting, the results of our operations
beginning with the one month ended March 31, 2004 include higher
interest and amortization expense. Additionally, the results of our
operations for the eleven months ended February 29, 2004 contain
non-recurring charges associated with (a) the write-off of $8.3 million
of debt issue costs in conjunction with the March 4, 2004 Transaction
and a debt refinancing which occurred on December 10, 2003; (b) call
premiums totaling $5.9 million related to the March 4, 2004 Transaction;
and (c) stock-based compensation totaling $7.3 million associated with
the March 4, 2004 Transaction and the December 10, 2003 debt
refinancing.
16
(2) EBITDA is defined as earnings before interest, taxes, depreciation, and
amortization. As we are highly-leveraged and as our equity is not
publicly-traded, management believes that EBITDA is useful in measuring
our liquidity and provides additional information for determining our
ability to meet debt service requirements. The Senior Subordinated
Notes, Senior Discount Notes, and Senior Credit Facility also utilize
EBITDA, as defined in those agreements, for certain financial covenants.
EBITDA does not represent and should not be considered as an alternative
to net cash flows from operating activities as determined by accounting
principles generally accepted in the United States of America, and
EBITDA does not necessarily indicate whether cash flows will be
sufficient for cash requirements. Items excluded from EBITDA, such as
interest, taxes, depreciation and amortization, are significant
components in understanding and assessing our financial performance.
EBITDA measures presented may not be comparable to similarly titled
measures presented by other registrants.
The following presentation reconciles EBITDA with net cash flows from
operating activities as presented in the Consolidated Statements of Cash
Flows included in Item 8, "Financial Statements and Supplementary Data":
Successor Predecessor
-------------- -------------------------------------------------------------------
Fiscal Year Ended
1 Month Ended 11 Months Ended ---------------------------------------------------
March 31, February 29, March 31, March 31, March 31, March 31,
2004 2004 2003 2002 2001 2000
-------------- -------------- ------------ ------------ ------------ -----------
(dollars in thousands)
EBITDA $ (2,991) $ 54,348 $ 55,631 $ 47,070 $ 40,470 $ 36,265
Adjustments to reconcile EBITDA to
net cash flows from operating
activities:
Interest income 97 308 360 400 615 356
Provision for losses on receivables 218 66 452 1,630 434 141
Cash paid for interest (6,892) (20,126) (13,549) (15,225) (16,001) (16,175)
Cash paid for income taxes (10) (6,467) (14,533) (4,063) (6,018) (2,424)
(Gain) loss on disposal of assets 14 408 36 (483) 60 18
Other - - - - - 7
Changes in operating assets and
liabilities, net of effect of
acquistions/disposals (5) (11,948) 10,068 8,935 1,709 (10,721) 757
-------------- -------------- ------------ ------------ ------------ -----------
Net Cash Flows from
Operating Activities $ (21,512) $ 38,605 $ 37,332 $ 31,038 $ 8,839 $ 18,945
============== ============== ============ ============ ============ ===========
(3) Business acquisition expenditures represent established businesses
purchased by us.
(4) We adopted SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, on April
1, 2001. Under SFAS No. 142, goodwill and intangible assets with
indefinite useful lives are not amortized but rather tested for
impairment on a periodic basis.
(5) Changes in operating assets and liabilities, net of effect of
acquisitions/disposals includes the changes in the balances of
receivables, inventories, prepaid expenses and other current assets,
other assets, accounts payable, accrued employee compensation and
benefits, accrued incentives, accrued expenses, deferred revenue, and
other long-term liabilities.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussions should be read in conjunction with our
consolidated financial statements and the related notes thereto included in Item
8, "Financial Statements and Supplementary Data," and other information in this
Annual Report on Form 10-K.
EXECUTIVE SUMMARY
FISCAL 2004 HIGHLIGHTS
This summary refers to our operations for the predecessor period from April
1, 2003 to February 29, 2004 and the successor period from March 1, 2004 to
March 31, 2004 on a "combined" basis. This basis assists us in comparing results
of operations between the current fiscal year with the previous year.
CHANGES IN CAPITALIZATION. We underwent two transactions during the fiscal
year that ultimately provided us with a revised capital structure, a new
controlling shareholder and revised debt service requirements. Those
transactions were a debt refinancing in December, 2003 and the recapitalization
transaction that we are referring to as the March 4, 2004 Transaction. New or
amended debt instruments arising out of the March 4, 2004 Transaction included
an amended and restated $230.0 million Senior Credit Facility and private
placements for $175.0 million of 8.625% Senior Subordinated Notes and $77.0
million of 11.0% Senior Discount Notes. We describe those transactions in more
detail later in Management's Discussion & Analysis.
REVENUE GROWTH. Our combined consolidated revenues grew 7.6% to $398.7
million, the highest level in our history. That increase was primarily due to
our continuing efforts to add college bookstores, either through acquisition or
contract-management, strong same store sales in our retail college bookstores
and strong revenue growth within our Complementary Services Division, primarily
in the systems divisions.
OPERATING DIVISION RESULTS. We achieved strong results in EBITDA from
several of our divisions. EBITDA is considered a non-GAAP measure by SEC
Regulation G and therefore you should refer to the more detailed explanation of
that measure that is provided later in Management's Discussion & Analysis.
EBITDA increased 13.8% in our Bookstore Division and 40.9% in our Complementary
Services Division. Those increases continue the trend of positive year over year
operating results for those divisions which have been driven by strong revenue
growth, steady or improving gross margins and expense control. Our Textbook
Division declined slightly due primarily to a decrease in the number of units
purchased in the major buyback periods in December of 2002 and May of 2003 which
supplied the peak selling periods for fiscal 2004. Our combined consolidated
EBITDA decreased approximately $4.3 million to $51.4 million primarily due to
the impact of the two transactions referred to in "Changes in capitalization"
above which included combined stock-based compensation charges of $7.3 million
and $0.3 million of other charges related to the debt refinancing.
THECAMPUSHUB.COM, INC. AND OTHER ACQUISITIONS. We completed a number of
acquisitions during fiscal 2004, including the acquisition of TheCampusHub.com,
Inc. CampusHub provides college bookstores with a way to sell in-store inventory
and virtual brand name merchandise over the Internet. The acquisition enables us
to complement our bookstore management systems, which we sell through the
Complementary Services Division, with Internet capabilities. We also continued
the expansion of our College Bookstore Division through acquisition or
contract-management of 9 new locations. Finally, we did close four bookstore
locations primarily due to poor performance and we lost the contract management
of one other bookstore location during the fiscal year.
LARGE DISTANCE EDUCATION CUSTOMER LOSS. Our largest customer in the
distance education business, which is included in the Complementary Services
Division, informed us in our fiscal fourth quarter that it intends to
discontinue the use of our services for delivery of educational materials during
the 2005 fiscal year. Revenue from that customer exceeded $22.0 million in
fiscal 2004. The distance education business is a low EBITDA contributor as a
percentage of revenue - typically 3-5%. We do expect revenues from the distance
education business, after adjusting for the loss of this customer, to continue
to grow.
CHALLENGES AND EXPECTATIONS
We expect that we will continue to face challenges and opportunities
similar to those that we have faced in the recent past. We have experienced, and
continue to experience, competition for the supply of used textbooks from other
18
textbook wholesalers, competition from alternative media as a source of textbook
information, competition for contract-management opportunities and other
challenges. We also believe that we will continue to face challenges and
opportunities related to acquisitions. Despite these challenges, we expect that
we will continue to grow revenue and EBITDA on a consolidated basis in fiscal
2005. We also expect that our capital spending will remain modest for a company
of our size.
FISCAL YEAR ENDED MARCH 31, 2004 COMPARED WITH
FISCAL YEAR ENDED MARCH 31, 2003.
Unless otherwise noted, for purposes of management's discussion and
analysis of results of operations for the fiscal year ended March 31, 2004,
which includes the predecessor period from April 1, 2003 to February 29, 2004
and the successor period from March 1, 2004 to March 31, 2004, results of
operations are presented on a "combined" basis, which combines the results of
operations for the predecessor and successor periods, to assist in comparing
results of operations between fiscal years.
REVENUES. Revenues for the one month ended March 31, 2004, the eleven
months ended February 29, 2004, and the year ended March 31, 2003 and the
corresponding change in revenues (based upon combined revenues for fiscal 2004)
were as follows:
Successor Predecessor
--------------- ----------------------------------
Change
1 Month Ended 11 Months Ended Year Ended -------------------------
March 31, 2004 February 29, 2004 March 31, 2003 Amount Percentage
--------------- ----------------- ---------------- ------------- -----------
Textbook Division $ 4,484,265 $ 125,746,000 $ 132,806,703 $ (2,576,438) (1.9)%
Bookstore Division 5,318,989 234,328,454 216,943,133 22,704,310 10.5 %
Complementary Services
Division 4,443,778 49,754,314 44,004,856 10,193,236 23.2 %
Intercompany eliminations (929,638) (24,465,094) (23,244,843) (2,149,889) 9.2 %
--------------- ----------------- ---------------- ------------- -----------
$ 13,317,394 $ 385,363,674 $ 370,509,849 $ 28,171,219 7.6 %
=============== ================= ================ ============= ===========
The decrease in Textbook Division revenues was due primarily to a decrease
in the number of units sold. We believe that unit sales are down for the year
primarily due to a decrease in the number of units purchased in the December of
2002 and May of 2003 student book buys, which supplied the peak selling periods
in fiscal 2004. Textbook Division revenues are limited by the supply of used
textbooks available to us. The increase in Bookstore Division revenues was
attributable to the addition of acquired bookstores (defined by us as stores
acquired since April 1, 2002) and increases in same store sales. The new
bookstores provided an additional $14.4 million of revenue in the year ended
March 31, 2004. This increase was offset, in part, by a $2.5 million decrease in
revenues attributable to stores closed since April 1, 2002. Same store sales
increased 5.1%, or $10.8 million. Complementary Services Division revenues
increased primarily due to increased installation and training activity in the
systems divisions, the acquisition of TheCampusHub.com, Inc. in July, 2003, and
growth in the distance education program. However, future revenue streams for
the distance education program will be impacted by certain developments as
described in Recent Developments. Corresponding to the overall growth in the
number of company-owned college bookstores and growth in services provided to
our college bookstores by the Complementary Services Division, our intercompany
transactions also increased.
GROSS PROFIT. Gross profit for the year ended March 31, 2004 increased
$13.0 million, or 8.9%, to $159.0 million from $146.0 million for the year ended
March 31, 2003. This increase was primarily due to higher revenues, along with a
slightly higher gross margin percent. Gross margin percent was 39.9% for the
year ended March 31, 2004 as compared to 39.4% for the year ended March 31,
2003, driven primarily by improved gross margin percents in the Bookstore and
Textbook Divisions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended March 31, 2004 increased $10.0
million, or 11.1%, to $100.4 million from $90.4 million for the year ended March
31, 2003. Selling, general and administrative expenses as a percentage of
revenues were 25.2% and 24.4% for the years ended March 31, 2004 and 2003,
respectively. The increase in selling, general and administrative expenses is
primarily attributable to our continued growth which prompted increases in
personnel costs, shipping costs, and rent, as well as an increased focus on
advertising. Additionally, $0.3 million in expenses were recorded in conjunction
with the debt refinancing on December 10, 2003 and $0.3 million in expenses were
recorded in conjunction with our new human resources system.
STOCK-BASED COMPENSATION. Stock-based compensation expense was incurred in
conjunction with the March 4, 2004 Transaction, whereby 40,668 options to
19
purchase shares of NBC Acquisition Corp. Class A Common Stock were converted
into the right to receive cash payments which totaled $7.1 million.
Additionally, in connection with the December 10, 2003 debt refinancing, 838
options to purchase shares of NBC Acquisition Corp. Class A Common Stock were
converted into the right to receive cash payments which totaled $0.2 million.
Such costs represent the difference between the fair value of the NBC
Acquisition Corp. Class A Common Stock underlying such options at the time the
options were converted into the right to receive cash payment and the exercise
price on such options.
EARNINGS (LOSS) BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION
(EBITDA). EBITDA for the one month ended March 31, 2004, the eleven months ended
February 29, 2004, and the year ended March 31, 2003 and the corresponding
change in EBITDA (based upon combined EBITDA for fiscal 2004) were as follows:
Successor Predecessor
--------------- ---------------------------------
Change
1 Month Ended 11 Months Ended Year Ended ------------------------
March 31, 2004 February 29, 2004 March 31, 2003 Amount Percentage
--------------- ----------------- -------------- ------------- ----------
Textbook Division $ (85,994) $ 33,544,806 $ 33,915,223 $ (456,411) (1.3)%
Bookstore Division (2,471,525) 33,190,998 26,992,497 3,726,976 13.8 %
Complementary Services
Division 251,371 2,624,520 2,041,093 834,798 40.9 %
Corporate administration (685,336) (15,012,469) (7,318,023) (8,379,782) 114.5 %
--------------- ---------------- -------------- ------------- ----------
$ (2,991,484) $ 54,347,855 $ 55,630,790 $(4,274,419) (7.7)%
=============== ================ ============== ============= ==========
The decrease in EBITDA in the Textbook Division is primarily attributable
to lower revenues. Bookstore Division EBITDA improved as a result of the
aforementioned increases in revenues and gross margin percent. Complementary
Services Division EBITDA improved as a result of increasing revenues and
controlling expenses. Corporate Administration EBITDA declined by $8.4 million,
primarily as a result of expenses of the March 4, 2004 Transaction, December 10,
2003 debt refinancing, and installation of the new human resources system.
EBITDA is defined as earnings before interest, taxes, depreciation, and
amortization. As we are highly-leveraged and as our equity is not
publicly-traded, management believes that EBITDA is useful in measuring our
liquidity and provides additional information for determining our ability to
meet debt service requirements. The Senior Subordinated Notes, Senior Discount
Notes, and Senior Credit Facility also utilize EBITDA, as defined in those
agreements, for certain financial covenants. EBITDA does not represent and
should not be considered as an alternative to net cash flows from operating
activities as determined by accounting principles generally accepted in the
United States of America, and EBITDA does not necessarily indicate whether cash
flows will be sufficient for cash requirements. Items excluded from EBITDA, such
as interest, taxes, depreciation and amortization, are significant components in
understanding and assessing our financial performance. EBITDA measures presented
may not be comparable to similarly titled measures presented by other
registrants.
The following presentation reconciles EBITDA with net cash flows from
operating activities and also sets forth net cash flows from investing and
financing activities as presented in the Consolidated Statements of Cash Flows
included in Item 8, "Financial Statements and Supplementary Data":
20
Successor Predecessor Predecessor
---------------- ---------------- -----------------
1 Month Ended 11 Months Ended Year Ended
March 31, 2004 February 29, 2004 March 31, 2003
---------------- ----------------- -----------------
EBITDA $ (2,991,484) $ 54,347,855 $ 55,630,790
Adjustments to reconcile EBITDA to net cash
flows from operating activities:
Interest income 97,587 307,680 360,448
Provision for losses on receivables 218,205 66,393 451,578
Cash paid for interest (6,891,827) (20,125,528) (13,549,099)
Cash paid for income taxes (9,991) (6,466,526) (14,533,352)
Loss on disposal of assets 13,582 408,095 35,428
Changes in operating assets and liabilities,
net of effect of acquistions/disposals (1) (11,947,584) 10,066,803 8,935,820
---------------- ---------------- ---------------
Net Cash Flows from Operating Activities $ (21,511,512) $ 38,604,772 $ 37,331,613
================ ================ ===============
Net Cash Flows from Investing Activities $ (183,836,223) $ (6,451,658) $ (5,327,072)
================ ================ ===============
Net Cash Flows from Financing Activities $ 158,961,630 $ 8,103,790 $ (4,018,436)
================ ================ ===============
(1) Changes in operating assets and liabilities, net of effect of
acquisitions/disposals, includes the changes in the balances of
receivables, inventories, prepaid expenses and other current assets,
other assets, accounts payable, accrued employee compensation and
benefits, accrued incentives, accrued expenses, deferred revenue, and
other long-term liabilities.
DEPRECIATION EXPENSE. Depreciation expense for the year ended March 31,
2004 increased $0.3 million, or 11.1% to $3.3 million from $3.0 million for the
year ended March 31, 2003, primarily due to growth and the step-up in basis of
property and equipment resulting from the March 4, 2004 Transaction.
AMORTIZATION EXPENSE. Amortization expense for the year ended March 31,
2004 increased $1.2 million to $1.8 million from $0.6 million for the year ended
March 31, 2003, primarily due to the March 4, 2004 Transaction, which
significantly increased the balance of amortizable intangibles, and amortization
of developed technology assets obtained through the acquisition of
TheCampusHub.com, Inc. in July, 2003.
INTEREST EXPENSE, NET. Interest expense, net for the year ended March 31,
2004 increased $15.2 million, or 69.4%, to $37.0 million from $21.8 million for
the year ended March 31, 2003, primarily due to interest costs arising from the
March 4, 2004 Transaction and the December 10, 2003 debt refinancing. As a
result of these two transactions, $8.3 million in debt issue costs associated
with retired debt were written-off to interest expense. Additionally, $5.9
million in call premiums were recorded to interest expense in connection with
the tendering or calling of the $110.0 million senior subordinated notes and
$76.0 million senior discount debentures in conjunction with the March 4, 2004
Transaction. Finally, interest expense increased as a result of our
higher-leveraged position, as total long-term indebtedness increased from $219.4
million at March 31, 2003 to $434.1 million at March 31, 2004, primarily
attributable to the March 4, 2004 Transaction.
(GAIN) LOSS ON DERIVATIVE FINANCIAL INSTRUMENTS. (Gain) loss on derivative
financial instruments for the year ended March 31, 2004 improved $0.2 million
compared to the year ended March 31, 2003 due to the increase in the fair market
value of the interest rate swap agreements that expired on July 31, 2003.
INCOME TAXES. Income tax expense for the year ended March 31, 2004
decreased $8.1 million, or 66.4%, to $4.1 million from $12.2 million for the
year ended March 31, 2003. Our effective tax rate was 44.1% and 40.8% for the
years ended March 31, 2004 and 2003, respectively. Our effective tax rate
differs from the statutory tax rate primarily as a result of state income taxes.
Effective state income tax rates increased in fiscal 2004, as the Company
incurred costs attributable to the March 4, 2004 Transaction which are not
useable in many state tax returns.
21
FISCAL YEAR ENDED MARCH 31, 2003 COMPARED WITH
FISCAL YEAR ENDED MARCH 31, 2002.
REVENUES. Revenues for the years ended March 31, 2003 and 2002 and the
corresponding change in revenues were as follows:
Predecessor Predecessor Change
--------------- --------------- --------------------------
2003 2002 Amount Percentage
--------------- --------------- -------------- -----------
Textbook Division $ 132,806,703 $ 122,893,781 $ 9,912,922 8.1 %
Bookstore Division 216,943,133 201,399,648 15,543,485 7.7 %
Complementary Services Division 44,004,856 38,093,091 5,911,765 15.5 %
Intercompany eliminations (23,244,843) (23,470,111) 225,268 (1.0)%
--------------- --------------- -------------- -----------
$ 370,509,849 $ 338,916,409 $ 31,593,440 9.3 %
=============== =============== ============== ===========
The increase in Textbook Division revenues for the year ended March 31,
2003 was due in part to publisher price increases, complemented by an increase
in unit sales. The increase in Bookstore Division revenues was primarily
attributable to an increase in same store sales of 4.9%, or $9.4 million, and to
the acquisition of new college bookstores (defined by us as stores acquired
since April 1, 2001). These new bookstores provided a $6.2 million increase in
revenues. Complementary Services Division revenues increased primarily due to
growth in our distance education program, offset in part by outsourcing the
plastic bag program late in fiscal 2002 and a decline in systems division
revenues resulting from revisions made to certain agreements with
TheCampusHub.com, Inc. and a drop in system installations. The increased
revenues in distance education resulted primarily from additional services
provided to the program's largest account and, in part, to services provided to
new accounts. Our intercompany transactions decreased primarily due to changes
made to some of the Complementary Services Division programs.
GROSS PROFIT. Gross profit for fiscal 2003 increased $14.1 million, or
10.7%, to $146.0 million from $131.9 million for fiscal 2002. This increase was
primarily due to higher revenues and an increase in gross margin percent. Gross
margin percent was 39.4% for fiscal 2003 as compared to 38.9% for fiscal 2002.
Gross margin percent in the Textbook Division experienced a small decline
primarily as a result of the impact of the incentive programs, while gross
margin percentages in the Bookstore Division improved primarily due to certain
margin improvement efforts. Complementary Services Division experienced a small
decline due to the lower-margin distance education program continuing to grow as
a percentage of total Complementary Services Division revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal 2003 increased $5.5 million, or 6.5%, to
$90.4 million from $84.9 million for fiscal 2002. Selling, general and
administrative expenses as a percentage of revenues were 24.4% and 25.0% in
fiscal 2003 and fiscal 2002, respectively. The increase in expenses is primarily
the result of our growth, as previously discussed. The decrease in expenses as a
percentage of revenues is primarily attributable to revenue growth outpacing
growth in certain expenses, particularly salaries and wages.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION (EBITDA).
EBITDA for fiscal 2003 and 2002 and the corresponding change in EBITDA were as
follows:
Predecessor Predecessor Change
--------------- --------------- -------------------------
2003 2002 Amount Percentage
--------------- --------------- -------------- ----------
Textbook Division $ 33,915,223 $ 31,290,952 $ 2,624,271 8.4 %
Bookstore Division 26,992,497 22,399,279 4,593,218 20.5 %
Complementary Services Division 2,041,093 696,335 1,344,758 193.1 %
Corporate administration (7,318,023) (7,316,701) (1,322) (0.0)%
--------------- --------------- -------------- ----------
$ 55,630,790 $ 47,069,865 $ 8,560,925 18.2 %
=============== =============== ============== ==========
The increase in EBITDA in the Textbook Division was attributable to
increased revenues and a decline in certain expenses as a percentage of
revenues, offset in part by the aforementioned decline in gross margin percent.
The increase in EBITDA in the Bookstore Division was primarily due to increased
revenues, improved margins, and a decline in certain expenses as a percentage of
revenues. The increase in EBITDA in the Complementary Services Division was
primarily due to increased revenues and a decline in certain expenses as a
percentage of revenues, offset in part by a slightly lower gross margin percent
attributable to revenue mix. Corporate administrative costs have remained stable
between fiscal years.
22
EBITDA is defined as earnings before interest, taxes, depreciation, and
amortization. As we are highly-leveraged and as our equity is not
publicly-traded, management believes that EBITDA is useful in measuring our
liquidity and provides additional information for determining our ability to
meet debt service requirements. The Senior Subordinated Notes, Senior Discount
Notes, and Senior Credit Facility also utilize EBITDA, as defined in those
agreements, for certain financial covenants. EBITDA does not represent and
should not be considered as an alternative to net cash flows from operating
activities as determined by accounting principles generally accepted in the
United States of America, and EBITDA does not necessarily indicate whether cash
flows will be sufficient for cash requirements. Items excluded from EBITDA, such
as interest, taxes, depreciation and amortization, are significant components in
understanding and assessing our financial performance. EBITDA measures presented
may not be comparable to similarly titled measures presented by other
registrants.
The following presentation reconciles EBITDA with net cash flows from
operating activities and also sets forth net cash flows from investing and
financing activities as presented in the Consolidated Statements of Cash Flows
included in Item 8, "Financial Statements and Supplementary Data":
Predecessor Predecessor
-------------- ---------------
Year Ended March 31,
2003 2002
-------------- --------------
EBITDA $ 55,630,790 $ 47,069,865
Adjustments to reconcile EBITDA to net cash
flows from operating activities:
Interest income 360,448 399,573
Provision for losses on receivables 451,578 1,629,704
Cash paid for interest (13,549,099) (15,224,920)
Cash paid for income taxes (14,533,352) (4,062,737)
(Gain) loss on disposal of assets 35,428 (482,810)
Changes in operating assets and liabilities,
net of effect of acquistions/disposal (1) 8,935,820 (1,709,245)
-------------- ---------------
Net Cash Flows from Operating Activities $ 37,331,613 $ 31,037,920
============== ===============
Net Cash Flows from Investing Activities $ (5,327,072) $ (7,616,067)
============== ===============
Net Cash Flows from Financing Activities $ (4,018,436) $ (16,412,081)
============== ===============
(1) Changes in operating assets and liabilities, net of effect of
acquisitions/disposals, includes the changes in the balances of receivables,
inventories, prepaid expenses and other current assets, other assets,
accounts payable, accrued employee compensation and benefits, accrued
incentives, accrued expenses, deferred revenue, and other long-term
liabilities.
INTEREST EXPENSE, NET. Interest expense, net for fiscal 2003 decreased $2.2
million, or 9.1%, to $21.8 million from $24.0 million for fiscal 2002, primarily
due to reduced interest charges on the Senior Credit Facility resulting from the
$10.0 million optional prepayment of Tranche A and Tranche B Loans on March 29,
2002 and reduced usage under the Revolving Credit Facility. Additionally, a
portion of interest expense associated with the interest rate swap agreements
previously classified as interest expense is now included in the loss on
derivative financial instruments, as discussed in the footnotes to the
consolidated financial statements presented in Item 8, "Financial Statements and
Supplementary Data." These decreases were partially offset by increasing
original issue debt discount amortization and accrued interest on the senior
discount debentures, which became fully-accreted on February 15, 2003.
LOSS ON DERIVATIVE FINANCIAL INSTRUMENTS. This loss is attributable to the
$10.0 million optional prepayment of Tranche A and Tranche B Loans on March 29,
2002. As a result of the optional prepayment, notional amounts under the
interest rate swap agreements no longer correlate with remaining principal
balances due under the Tranche A and Tranche B Loans. This loss represents the
change in the fair value of the portion of the interest rate swap agreements
that no longer qualify as hedging instruments, along with interest associated
with that portion of the interest rate swap agreements.
23
INCOME TAXES. Income tax expense for fiscal 2003 increased $4.2 million, or
53.8%, to $12.2 million from $8.0 million for fiscal 2002. Our effective tax
rate for fiscal years 2003 and 2002 was 40.8% and 41.6%, respectively. Our
effective tax rate differs from the statutory tax rate primarily as a result of
state income taxes.
RECENT DEVELOPMENTS
We have been informed by the distance education program's largest customer
that it intends to discontinue the use of our services for delivery of
educational materials during fiscal 2005. Revenues attributable to this customer
for the fiscal year ended March 31, 2004 exceeded $22.0 million. We estimate
that EBITDA as a percentage of revenue for this program is approximately 3-5%.
We expect revenues from the distance education program, after adjusting for the
loss of this customer, to continue to grow.
RISK FACTORS
The risks described below are not the only ones facing us. Additional risks
and uncertainties not currently known to us or that we currently deem to be
immaterial may also materially and adversely affect our business operations. Any
of the following risks could materially adversely affect our business, financial
condition or results of operations.
WE FACE COMPETITION IN OUR MARKETS. Our industry is highly competitive. A
large number of actual or potential competitors exist, some of which are larger
than us and have substantially greater resources than us. We cannot give
assurances that our business will not be adversely affected by increased
competition in the markets in which we currently operate or in markets in which
we will operate in the future, or that we will be able to improve or maintain
our profit margins. In recent years, an increasing number of institution-owned
college stores have decided to contract-manage their bookstore operations. As of
April 1, 2003, approximately 28% of NACS U.S. members, according to The National
Association of College Stores, were contract-managed. The leading managers of
these stores include two of our principal competitors in the wholesale textbook
distribution business. Contract-managed stores primarily purchase their used
textbook requirements from and sell their available supply of used textbooks to
their affiliated operations. A significant increase in the number of
contract-managed stores operated by our competitors, particularly at large
college campuses, could adversely affect our ability to acquire an adequate
supply of used textbooks.
We are also experiencing growing competition from alternative media as a
source of textbook information, such as on-line resources, e-books,
print-on-demand textbooks and CD-ROMs, and from the use of course packs, which
are collections of copyrighted materials and professors' original content which
are produced by college bookstores and sold to students, all of which have the
potential to reduce or replace the need for textbooks. A substantial increase in
the availability of these alternative media as a source of textbook information
could significantly reduce college students' use of traditional textbooks and
thus have a material adverse effect on our business and results of operations.
WE MAY NOT BE ABLE TO SUCCESSFULLY ACQUIRE BOOKSTORES OR INTEGRATE OUR
FUTURE ACQUISITIONS. Part of our business strategy is to expand sales for our
college bookstore operations by acquiring bookstores. We cannot give assurances
that we will be able to identify additional bookstores for acquisition or that
any anticipated benefits will be realized from any of these acquisitions. Due to
the seasonal nature of business in our bookstores, operations may be affected by
the time of year when a bookstore is acquired. The process may require financial
resources that would otherwise be available for our existing operations. We
cannot give assurances that the integration of our future acquisitions will be
successful or that the anticipated strategic benefits of our future acquisitions
will be realized or that they will be realized within time frames contemplated
by our management. Acquisitions may involve a number of special risks,
including, but not limited to, adverse short-term effects on our reported
operating results, diversion of management's attention, standardization of
accounting systems, dependence on retaining, hiring and training key personnel,
unanticipated problems or legal liabilities and actions of our competitors and
customers. If we are unable to successfully integrate our future acquisitions
for these or other reasons, our results from operations may be adversely
affected.
IF WE ARE UNABLE TO OBTAIN A SUFFICIENT SUPPLY OF USED TEXTBOOKS, OUR
BUSINESS MAY BE ADVERSELY AFFECTED. We are generally able to sell a substantial
majority of our available used textbooks and, therefore, our ability to purchase
a sufficient number of used textbooks largely determines our used textbook sales
for future periods. Successfully acquiring books requires a visible presence on
college campuses at the end of each semester, which requires hiring a
significant number of temporary personnel, and having access to sufficient funds
under our Revolving Credit Facility or other financing alternatives. Textbook
acquisition also depends upon college students' willingness to sell their used
textbooks at the end of each semester. The unavailability of sufficient
personnel or credit, or a shift in student preferences, could impair our ability
to acquire sufficient used textbooks to meet our sales objectives and adversely
affect our results of operations.
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WE ARE DEPENDENT ON KEY PERSONNEL, THE LOSS OF WHOM COULD MATERIALLY
ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL PERFORMANCE. Our future success
depends to a significant extent on the efforts and abilities of our management
team. As outlined in Item 10, "Directors and Executive Officers of the
Registrant", our management team has over 150 years of cumulative experience in
the college bookstore industry. The loss of the services of these individuals
could have a material adverse effect on our business, financial condition and
results of operations.
OUR OPERATIONS MAY BE ADVERSELY AFFECTED IF PUBLISHERS DO NOT CONTINUE TO
INCREASE PRICES OF TEXTBOOKS ANNUALLY. We generally buy used textbooks based on
publishers' prevailing prices for new textbooks just prior to the implementation
by publishers of their annual price increases (which historically have been 4%
to 5%) and resell these textbooks shortly thereafter based upon the new higher
prices, thereby creating an immediate margin increase. Our ability to increase
our used textbook prices each year depends on annual price increases on new
textbooks implemented by publishers. The failure of publishers to continue
annual increases could adversely affect our results of operations.
THE SEASONALITY OF OUR WHOLESALE AND BOOKSTORE OPERATIONS COULD NEGATIVELY
AFFECT OUR OPERATING RESULTS. Our wholesale and bookstore operations experience
two distinct selling periods and the wholesale operations experience two
distinct buying periods. The peak selling periods for the wholesale operations
occur prior to the beginning of each school semester in July/August and
November/December. The buying periods for the wholesale operations occur at the
end of each school semester in May and December. The primary selling periods for
the bookstore operations are in August/September and January. In fiscal 2004,
approximately 43% of our annual revenues occurred in the second fiscal quarter
(July-September), while approximately 29% of our annual revenues occurred in the
fourth fiscal quarter (January-March). Accordingly, our working capital
requirements fluctuate throughout the year, increasing substantially at the end
of each semester, in May and December, as a result of the buying periods. We
fund our working capital requirements primarily through the Revolving Credit
Facility, which historically has been repaid with cash provided from operations.
A significant reduction in sales during our peak selling periods could have a
material adverse effect on our financial condition or results of operations for
the year.
THE INDENTURES GOVERNING THE SENIOR SUBORDINATED NOTES AND SENIOR DISCOUNT
NOTES,