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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______________ to__________________ .
COMMISSION FILE NUMBER 333-48225
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 29,
2005.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Total Number of Pages: 104
Exhibit Index: PAGE 97
1
TABLE OF CONTENTS
PART I:
Item 1 Business..........................................................3
Item 2 Properties.......................................................12
Item 3 Legal Proceedings................................................14
Item 4 Submission of Matters to a Vote of Security Holders..............14
PART II:
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters......................................................15
Item 6 Selected Financial Data..........................................15
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................18
Item 7A Quantitative and Qualitative Disclosures about Market Risk.......34
Item 8 Financial Statements and Supplementary Data......................35
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.........................................69
Item 9A Controls and Procedures..........................................69
PART III:
Item 10 Directors and Executive Officers of the Registrant................70
Item 11 Executive Compensation............................................72
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters..............................77
Item 13 Certain Relationships and Related Transactions....................78
Item 14 Principal Accountant Fees and Services............................79
PART IV:
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..80
Signatures....................................................................88
Supplemental Information to be Furnished......................................89
Financial Statement Schedule I - Condensed Financial Information
(Parent Company Only).......................................................90
Financial Statement Schedule II - Valuation and Qualifying Accounts...........96
Exhibit Index.................................................................97
2
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 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.
On March 4, 2004, Weston Presidio (Weston Presidio Capital III, L.P., Weston
Presidio Capital IV, L.P., WPC Entrepreneur Fund, L.P., and WPC Entrepreneur
Fund II, L.P.) gained a controlling interest in 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. 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.
GENERAL
As of March 31, 2005, we operated 124 bookstores on or adjacent to college
campuses through which we sell a variety of new and used textbooks and general
merchandise. In addition, we are one of the largest wholesale distributors of
used college textbooks in North America, offering over 100,000 textbook titles
and selling more than 7.3 million books annually, primarily to campuses located
in the United States. We are also a leading provider of distance education
materials to students in nontraditional courses, which include correspondence
and corporate education courses. Furthermore, we provide the college bookstore
industry with a variety of services including proprietary information systems,
in-store promotions, buying programs, and marketing services. With origins
dating to 1915 as a single bookstore operation, we have built a consistent
reputation for excellence in order fulfillment, shipping performance and
customer service.
We entered the wholesale used textbook market following World War II, when
the supply of new textbooks could not meet the demand created by the return of
ex-GI students. In 1964, we became a national, rather than regional, wholesaler
of used textbooks as a result of our purchase of The College Book Company of
California. During the 1970's we continued our focus on the wholesale business.
However, realizing the synergies that exist between wholesale operations and
college bookstore operations, in the 1980's we expanded our efforts in the
college bookstore market under a revised strategy. Under this strategy we
operate bookstores on or near larger campuses, typically where the
institution-owned college bookstore is contract-managed by a competitor or where
we do not have a significant wholesale presence. Today, we service the college
bookstore industry through our Bookstore, Textbook, and Complementary Services
Divisions.
3
BOOKSTORE DIVISION. College bookstores are a primary outlet for sales of new
and used textbooks to students. In addition, we sell a variety of other
merchandise including apparel, general books, sundries, and gift items. As of
March 31, 2005, we operated 124 college bookstores on or adjacent to college
campuses. Of these 124 bookstores, 20 were leased from the educational
institution that they served. Our college bookstores are located at some of the
nation's largest college campuses including: University of Nebraska; University
of Michigan; University of Maryland; Arizona State University; Pennsylvania
State University; University of Kansas; Michigan State University; University of
California - Berkeley; Texas A&M University; University of Florida; and
University of Tennessee. In addition to generating profits, our Bookstore
Division provides an exclusive source of used textbooks for sale across our
wholesale distribution network.
TEXTBOOK DIVISION. We are one of the largest wholesale distributors of used
college textbooks in North America. Our Textbook Division consists primarily of
selling used textbooks to college bookstores, buying them back from students or
college bookstores at the end of each school semester and then reselling them to
college bookstores. We purchase used textbooks from and resell them to college
bookstores at many of the nation's largest college campuses, including:
University of Texas; University of Southern California; Indiana University; San
Diego State University; University of Washington; and University of Minnesota.
Historically, Textbook Division sales have been determined primarily by the
amount of used textbooks that we could purchase. This occurs because the demand
for used textbooks has consistently outpaced supply. Our strong relationships
with the management of non contract-managed college bookstores nationwide have
provided important access to valuable market information regarding the
campus-by-campus supply and demand of textbooks, as well as an ability to
procure large quantities of a wide variety of textbooks. We provide an
internally-developed BUYER'S GUIDE to our Textbook Division customers. This
guide lists details such as author, new copy retail price, and our repurchase
price for over 48,000 textbook titles.
COMPLEMENTARY SERVICES DIVISION. With our acquisition of Specialty Books,
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 200 college
bookstore locations for our textbook management control systems, and we have
installed our proprietary total store management system at approximately 660
college bookstore locations. In total, including our own bookstores, over 860
college bookstore locations utilize our software products. We also have a
leading E-commerce platform for college bookstores with 520 stores licensing the
technology via CampusHub. We also provide the college bookstore industry with
buying programs and marketing and store design services.
On July 1, 2003, we acquired all of the outstanding shares of common stock
of TheCampusHub.com, Inc. ("CampusHub"), an entity affiliated with us through
common ownership. CampusHub is no longer separately incorporated and is instead
accounted for as a division within our Complementary Services Division segment.
Each share of TheCampusHub.com, Inc. common stock issued and outstanding was
converted into shares of NBC Acquisition Corp. Class A Common Stock, resulting
in the issuance of 39,905 shares of NBC Acquisition Corp. Class A Common Stock.
CampusHub provides college bookstores with a way to sell in-store inventory and
virtual brand name merchandise over the Internet utilizing technology originally
developed by us.
In January 1998, we acquired Connect 2 One (formerly Collegiate Stores
Corporation), a centralized buying service for over 650 college bookstores
across the United States. Through the enhanced purchasing power of such a large
group of bookstores, participating bookstores are able to purchase certain
general merchandise at lower prices than those that would be paid by the stores
individually. Bookstores participating in Connect 2 One's ("C2O") programs also
provide us with another potential source of used textbooks.
We also provide a consulting and store design program to assist college
bookstores in store presentation and layout. During fiscal 2002, we introduced a
marketing services program to leverage our distribution channels. Marketing
services offered by us enable national vendors to reach college students through
in-store kiosks, prepackaged freshman mailers, coupon books, e-mail promotions
and in-store displays.
4
INDUSTRY SEGMENT FINANCIAL INFORMATION
Revenue, operating profit or loss, and identifiable assets attributable to
each of our industry segments are disclosed in the notes to the consolidated
financial statements presented in Item 8, "Financial Statements and
Supplementary Data" of our Annual Report on Form 10-K. We make our periodic and
current reports available, free of charge, through www.nebook.com as soon as
reasonably practicable after such material is electronically filed with the
Securities and Exchange Commission. Information contained on our web site is not
a part of this Annual Report on Form 10-K.
BUSINESS STRATEGY
Our objective is to strengthen our position as a leading provider of
products and services to the college bookstore market, thereby increasing
revenue and cash flow. In order to accomplish our goal, we intend to pursue the
following strategies:
CAPITALIZE ON COLLEGE BOOKSTORE OPPORTUNITIES. We intend to increase
revenues for our Bookstore Division by acquiring, opening or contract-managing
additional bookstores at selected college campuses and offering additional
specialty products and services at our existing bookstores. We have created and
filled the position of Vice President of Contract Management and we are actively
pursuing contract-management relationships at selected college campuses. We also
intend to increase same-store sales growth through a more coordinated effort to
implement best practices across our entire bookstore network. Finally, we
believe there are opportunities to improve cash flow at our college bookstores
by reducing certain selling, general and administrative expenses.
ENHANCE GROWTH IN THE TEXTBOOK DIVISION. We expect the Textbook Division to
continue to be a primary contributor of revenues and cash flows, primarily as a
result of an expected increase in college enrollments and continued utilization
of used textbooks, as well as through the expansion of our own Bookstore
Division. Additionally, our enhanced commission structure rewards customers who
make a long-term commitment to supplying us with a large portion of their
textbooks. Finally, we are strengthening our marketing campaign to increase
student awareness of the benefits of buying and selling used textbooks.
CONTINUE TO SERVICE THE DISTANCE EDUCATION MARKET. During fiscal year 2005,
Specialty Books' largest customer discontinued the use of Specialty Books'
services for delivery of educational materials. However, we expect Specialty
Books' revenues, after adjusting for the loss of this customer, to continue to
grow as the distance education market continues to expand due to the increased
popularity of correspondence courses, continuing and corporate education courses
and courses offered through electronic media such as the Internet.
INCREASED MARKET PENETRATION THROUGH TECHNOLOGY. We intend to continue
generating incremental revenue through the sale of our turnkey bookstore
management software. The installation of such software, along with E-commerce
technology offered through CampusHub, a division within the Complementary
Services Division, also increases the channels through which we can access the
college and university market.
EXPANSION OF MARKETING SERVICES PROGRAM. It is very difficult for
traditional vendors to access the highly fragmented college and university
market in an efficient manner. Our marketing services program provides vendors
with efficient access to the college and university market through our
distribution channels. We intend to expand this program by establishing
arrangements with major national vendors.
INDUSTRY OVERVIEW
Based on recent industry trade data from the National Association of College
Stores, the college bookstore industry remains strong, with over 4,800 college
stores generating annual sales of approximately $10.8 billion to college
students and other consumers in North America. Sales of textbooks and other
education materials used for classroom instruction comprise approximately
two-thirds of that amount. We expect this market will continue to grow as a
result of anticipated increases in enrollment at U.S. colleges attributable to
the children of the baby boom generation entering the college population.
COLLEGE BOOKSTORE MARKET. College stores generally fall into three
categories: (i) INSTITUTIONAL -- stores that are primarily owned and operated by
institutions of higher learning (represents approximately 52.0% of the U.S.
market according to the National Association of College Stores); (ii)
CONTRACT-MANAGED -- stores owned by institutions of higher learning and managed
by outside, private companies, typically found on-campus (represents
approximately 29.0% of the U.S. market according to the National Association of
College Stores); and (iii) INDEPENDENT STORES -- privately owned and operated
stores, generally located off campus (represents approximately 19.0% of the U.S.
market according to the National Association of College Stores).
5
WHOLESALE TEXTBOOK MARKET. We believe that used textbooks will continue to
be attractive to both students and college bookstores. Used textbooks provide
students with a lower-cost alternative to new textbooks and bookstores typically
achieve higher margins through the sale of used rather than new textbooks.
The pricing pattern of textbook publishing accounts for a large part of the
growth of the used book market. Because of copyright restrictions, each new
textbook is produced by only one publisher, which is free to set the new copy
retail price and discount terms to bookstores. Publishers generally offer new
textbooks at prices that enable college bookstores to achieve a gross margin of
23.0% to 25.0% on new textbooks. Historically, the high retail costs of new
textbooks and the higher margins achieved by bookstores on the sale of used
textbooks (approximately 33.0%) have encouraged the growth of the market for
used textbooks.
The used textbook cycle begins with new textbook publishers, who purposely
plan obsolescence into the publication of new textbooks. Generally, new editions
of textbooks are produced every two to four years. In the first year of a new
edition, there are few used copies of a new edition available. In the second and
third years, used textbooks become increasingly available. Simultaneously,
publishers begin to plan an updated edition. In years four and beyond, at the
end of the average life cycle of a particular edition, as publishers cut back on
original production, used textbooks generally represent a majority (in unit
terms) of the particular edition in use. While the length of the cycle varies by
title (and sometimes is indefinite, as certain titles are never updated), the
basic supply/demand progression remains fairly consistent.
College bookstores begin to place orders with used textbook wholesalers once
professors determine which books will be required for their upcoming courses,
usually by the end of May for the fall semester and the end of November for the
spring semester. Bookstore operators must first determine their allocation
between new and used copies for a particular title but, in most cases, they will
order an ample supply of used books because: (i) used book demand from students
is typically strong and consistent; (ii) many operators only have access to a
limited supply from wholesalers and believe that not having used book
alternatives could create considerable frustration among students and with the
college administration; (iii) bookstore operators earn higher margins on used
books than on new books; and (iv) both new and used books are sold with return
privileges, eliminating any overstock risk (excluding freight charges) to the
college bookstore.
New textbook ordering usually begins in June, at which time the store
operator augments its expected used book supply by ordering new books. By this
time, publishers typically will have just implemented their annual price
increases. These regular price increases allow us and our competitors to buy
used textbooks based on old list prices (in May) and to almost simultaneously
sell them based on new higher prices, thereby creating an immediate margin
increase.
While price is an important factor in the store operator's purchasing
decision, available supply, as well as service, usually determine with which
used textbook wholesaler a college bookstore will develop a strong relationship.
Used textbook wholesalers that are able to significantly service a college
bookstore account typically receive preferential treatment from store operators,
both in selling and in buying used textbooks. Pure exclusive supply arrangements
in our market are rare. However, in the past six to seven years, we have been
marketing our exclusive supply program to the industry. This program has grown
to approximately 280 participating bookstores at the end of fiscal 2005. We also
introduced the NBC Advantage program in fiscal 2001. This program rewards
customers who make a long-term commitment to supplying us with a large portion
of their books. At the end of fiscal 2005, approximately 550 bookstores were
participating in this program, approximately 270 of which were also
participating in the exclusive program. Since we are usually able to sell a
substantial majority of the used textbooks we are able to purchase, our ability
to obtain sufficient supply is a critical factor in our success.
PRODUCTS AND SERVICES
BOOKSTORE DIVISION. As of March 31, 2005, we operated 124 college bookstores
on or adjacent to college campuses. These bookstores sell a wide variety of used
and new textbooks, general books and assorted general merchandise, including
apparel, sundries and gift items. Over the past three years, revenues of our
bookstores from activities other than used and new textbook sales have been
between 19.6% and 21.4% of total revenues. We have been, and intend to continue,
selectively expanding our product offerings at our bookstores in order to
increase sales and profitability. We have also installed software providing
E-commerce capabilities in all of our own bookstores, thereby allowing our
bookstores to further expand product offerings and compete with other online
textbook sellers.
6
TEXTBOOK DIVISION. Our Textbook Division is engaged in the procurement and
redistribution of used textbooks on college campuses primarily across the United
States. The portion of the used textbook business that our division operates in
is limited to certain stores and certain books. In general, the portion of the
college bookstore market that our Textbook Division cannot access includes those
contract-managed stores that are not operated by us that sell their used
textbooks to affiliated companies, and institutional and independent stores, to
the extent that such used textbooks are repurchased from students and are
retained by the bookstore for resale without involving a wholesaler.
We publish the BUYER'S GUIDE, which lists over 48,000 textbooks according to
author, title, new copy retail price, and our repurchase price. The BUYER'S
GUIDE is an important part of our inventory control and book procurement system.
We update and reprint the BUYER'S GUIDE nine times each year and make it
available in both print and various electronic formats, including on all of our
proprietary information systems. A staff of dedicated professionals gathers
information from all over the country in order to make the BUYER'S GUIDE into
what we believe to be the most comprehensive and up-to-date pricing and buying
aid for college bookstores. We also maintain a database of approximately 178,000
titles in order to better serve our customers.
COMPLEMENTARY SERVICES DIVISION. Through Specialty Books, we have access to
the market for distance education products and services. Currently, we provide
students at approximately 50 colleges with textbooks and materials for use in
distance education courses, and we are a leading provider of textbooks to
nontraditional programs and students such as correspondence or corporate
education students. We believe the fragmented distance education market
represents an opportunity for us to leverage our fulfillment and distribution
expertise in a rapidly growing sector. Beyond textbooks, we offer services and
specialty course materials to distance education students including videotape
duplication and shipping; shipping of specialty, non-textbook course materials;
and a sales and ordering function. Students can order distance education
materials from us over the Internet. Over the past three years, revenues of
Specialty Books have been between 63.7% and 84.1% of total Complementary
Services Division revenues. However, Specialty Books' largest customer, which
accounted for more than 30.0% of Specialty Books' fiscal 2005 revenues and 50.0%
of fiscal 2004 revenues, has discontinued the use of Specialty Books' services
for delivery of educational materials during fiscal 2005. After adjusting for
the expected reduction in revenues from this customer, we believe we can
continue to increase distance education revenues over the next several years.
Other services offered to college bookstores include services related to our
turnkey bookstore management software, the sale of other software and hardware,
and the related maintenance contracts. These services generate revenue and
assist us in gaining access to new sources of used textbooks. We have an
installed base of over 200 college bookstore locations for our textbook
management control systems, and we have installed our proprietary total store
management system at approximately 660 college bookstore locations. In total,
including our own bookstores, over 860 college bookstore locations utilize our
software products. In addition, we have developed software for E-commerce
capabilities. These software products allow college bookstores to launch their
own E-commerce site and effectively compete against other online textbook
sellers by offering textbooks and both traditional and non-traditional store
merchandise online. Presently, there are 520 stores licensing our E-commerce
technology via CampusHub.
Through C2O, we are able to offer a variety of products and services to
participating college bookstores. C2O negotiates apparel, supplies, gifts, and
general merchandise discounts and develops and executes marketing programs for
its membership. C2O has evolved into a buying group with substantial purchasing
clout by aggregating the purchasing power of 650 participating stores, including
our own bookstores. Other C2O marketing services include a freight savings
program, a credit card processing program, a shopping bag program, and retail
display allowances for magazine displays. Additionally, the C2O staff of
experienced professionals consults with the management and buyers of member
bookstores. Consulting services offered include strategic planning, store
review, merchandise assortment planning, buyer training, and help with other
operational aspects of the business. While consulting has historically
represented a relatively small component of C2O's business, it is nonetheless
strategically important to the ongoing success of this aspect of our business.
We also provide a consulting and store design program to assist college
bookstores in store presentation and layout. Through our marketing services
program, we are able to leverage our distribution channels. Marketing services
offered by us enable national vendors to reach college students through in-store
kiosks, prepackaged freshman mailers, coupon books, e-mail promotions and
in-store displays.
7
BOOKSTORE DIVISION
An important aspect of our business strategy is a program designed to reach
new customers through the opening or acquisition of bookstores adjacent to
college campuses or the contract-management of stores on campus. In addition to
generating sales of new and used textbooks and general merchandise, these
outlets enhance our Textbook Division by increasing the inventory of used books
purchased from the campus.
A desirable campus for a company-operated college bookstore is one on which
we do not currently buy or sell used textbooks either because a competitor
contract-manages the college's bookstore or the college bookstore does not have
a strong relationship with us. We generally will not open a location on a campus
where we already have a strong relationship with the college bookstore because
some college bookstores may view having a competing location as a conflict of
interest.
We tailor each of our own bookstores to fit the needs and lifestyles of the
campus on which it is located. Individual bookstore managers are given
significant planning and managing responsibilities, including, hiring employees,
controlling cash and inventory, and purchasing and merchandising product. We
have staff specialists to assist individual bookstore managers in such areas as
store planning, merchandise layout and inventory control.
As of March 31, 2005 we operated 124 college bookstores nationwide, having
expanded from 98 bookstores in fiscal 2001. During fiscal 2005 we completed the
acquisition, initiated the contract-management, or established the start-up of
eleven bookstore locations: two locations each in Jacksonville and Tallahassee,
Florida; and single locations in Ypsilanti, Michigan; Alma, Michigan;
Starkville, Mississippi; Glendale, Arizona; Pullman, Washington; Normal,
Illinois; and Morehead, Kentucky.
The table below highlights certain information regarding our bookstores
added and closed through March 31, 2005.
Bookstores Approximate
Open at Bookstores Bookstores Bookstores Total
Beginning Added Closed at End of Square
of Fiscal During During Fiscal Footage
Fiscal Year Year Fiscal Year Fiscal Year(1) Year (in thousands)
----------- ---- ----------- -------------- ---- --------------
2001 98 4 - 102 740
2002 102 10 4 108 797
2003 108 4 3 109 798
2004 109 9 5 113 847
2005 113 11 - 124 916
- ------------
(1) In fiscal 2002, the property leases at two bookstore locations expired and
were not renewed by us and two bookstore locations in Austin, Texas were
sold to a large Textbook Division customer. In fiscal 2003, the property
leases at three bookstore locations expired and were not renewed by us. In
fiscal 2004, five bookstores were closed, as either the lease expired, the
contract-managed relationship was not renewed, or an agreement was reached
with the landlord to terminate the lease.
We plan to continue increasing the number of bookstores in operation. The
bookstore expansion plan will focus on campuses where we do not already have a
strong relationship with the on-campus bookstore. In determining to purchase an
existing store or open a new one, we look at several criteria: (i) a large
enough market to justify our efforts (typically this means a campus of at least
6,000 students); (ii) the competitive environment (how many stores currently
serve the campus); (iii) a site in close proximity to campus with adequate
parking and accessibility; (iv) the potential of the bookstore to have a broad
product mix (larger bookstores are more attractive than smaller bookstores
because a full line of general merchandise can be offered in addition to
textbooks); (v) the availability of top-quality management; and (vi) certain
other factors, including leasehold improvement opportunities and personnel
costs. We also plan to pursue opportunities to contract-manage additional
stores. In determining to pursue opportunities to contract-manage a campus
bookstore, we look at: (i) the size of the market; (ii) the competitive status
of the market; (iii) the availability of top quality management; and (iv)
certain other factors, including personnel costs.
8
Our bookstores have an average size of 7,400 square feet but range in size
from 400 to 50,000 square feet. We estimate that new bookstore leasehold
improvements, furniture and fixtures, and automation with PRISM cost
approximately $100,000 per bookstore, after giving effect to construction
allowances.
WHOLESALE PROCUREMENT AND DISTRIBUTION
Historically, because the demand for used textbooks has consistently
exceeded supply, our sales have been primarily determined by the amount of used
textbooks that we can purchase. We believe that, on average, we are able to
fulfill approximately 20% to 25% of our demand. As a result, our success has
depended primarily on our inventory procurement, and we continue to focus our
efforts on obtaining inventory. In order to ensure our ability to both obtain
and redistribute inventory, our Textbook Division strategy has emphasized
establishing and maintaining strong customer and supplier relationships with
college bookstores (primarily, independent and institutional college bookstores)
through our employee account representatives. These 37 account representatives
(as of March 31, 2005) are responsible for procuring used textbooks from
students, marketing our services on campus, purchasing overstock textbooks from
bookstores and securing leads for sale of our systems products. We have been
able to maintain a competitive edge by providing superior service, made possible
primarily through the development and maintenance of ready access to inventory,
information and supply. Other components of the Textbook Division strategy and
its implementation include: (i) selectively paying a marginal premium relative
to competitors to entice students to sell back more books to us; (ii) gaining
access to competitive campuses (where the campus bookstore is contract-managed
by a competitor) by opening off-campus, company-owned college bookstores; (iii)
using technology to gain efficiencies and to improve customer service; (iv)
maintaining a knowledgeable and experienced sales force that is customer-service
oriented; (v) providing working capital flexibility for bookstores making
substantial purchases; and (vi) establishing long-term supply arrangements by
rewarding customers who make a long-term commitment to supplying us with a large
portion of their books.
The two major used textbook purchasing seasons are at the end of each
academic semester, May and December. Although we make book purchases during
other periods, the inventory purchased in May, before publishers announce their
price increases in June and July, allows us to purchase inventory based on the
lower retail prices of the previous year. The combination of this purchasing
cycle and the fact that we are able to sell our inventory in relation to retail
prices for the following year permits us to realize additional gross profit. We
advance cash to our representatives during these two periods, and the
representatives in turn buy books directly from students, generally through the
on-campus bookstore.
After we purchase the books, we arrange for shipment to one of our two
warehouses (Nebraska and California) via common carrier. At the warehouse, we
refurbish damaged books and categorize and shelf all other books in a timely
manner, and enter them into our on-line inventory system. These two locations
function as one facility allowing customers to access inventory at both
locations.
Customers place orders by phone, mail, fax or other electronic method. Upon
receiving an order, we remove the books from available inventory and hold them
for future shipping. Customers may return books within 60 days after the start
of classes if a written request is enclosed. Returns currently average
approximately 21.0% of sales and generally are attributable to course
cancellations or overstocking. The majority of returns are textbooks that we are
able to resell for the next semester.
MANAGEMENT INFORMATION SYSTEMS
We believe that we can enhance efficiency, profitability and competitiveness
through investments in technology. Our MIS operations process order entry,
control inventory, generate purchase orders and customer invoices, generate
various sales reports, and process and retrieve textbook information. All our
bookstores operate with IBM RS/6000's. At the center of our MIS operations are
our self-developed, proprietary software programs such as PRISM, our whole store
management system, and PC-Text, our textbook management and inventory control
system. This software is maintained and continuously enhanced by an experienced
team of development and design professionals.
In addition, we have developed software for E-commerce capabilities. These
software products allow college bookstores to launch their own E-commerce site
and effectively compete against other online textbook sellers by offering
textbooks and both traditional and non-traditional store merchandise online.
None of our proprietary software programs are copyrighted, although we do
have registered trademarks for certain names. In addition to using our software
programs for our own management and inventory control, we license the use of our
software programs to bookstores. Our software programs enhance the efficiency
and cost-effectiveness of our operations, and their use by bookstores that are
our customers or suppliers tends to solidify the relationship between us and
such customers or suppliers, resulting in increased sales or supplies for us.
9
MIS operations consist of four operating units: (i) the mainframe unit,
which develops and supports all systems utilized in our warehouses and corporate
offices; (ii) a system sales unit, which markets our college store management
systems to colleges; (iii) the College Bookstore Management Systems ("CBMS"),
which develops and supports the systems that are sold to bookstores; and (iv)
CampusHub, which develops and supports software for E-commerce.
We conduct training courses for all systems users at our headquarters in
Lincoln, Nebraska. Classes are small and provide hands on demonstrations of the
various systems. Printed reference manuals and training materials also accompany
each system. The customer support unit of CBMS is staffed with approximately 50
experienced personnel. Personnel are available 24 hours a day to answer
questions via a toll-free number.
CUSTOMERS
Our college bookstores are located on many of the nation's largest college
campuses including: University of Nebraska; University of Michigan; University
of Maryland; Arizona State University; Pennsylvania State University; University
of Kansas; Michigan State University; University of California - Berkeley; Texas
A&M University; University of Florida; and University of Tennessee.
We sell our Textbook and certain Complementary Services Division products
and services to college bookstores throughout the United States, Canada and
Puerto Rico. Our Textbook Division purchases from and resells used textbooks to
many of the nation's largest college campuses including: University of Texas;
University of Southern California; Indiana University; San Diego State
University; University of Washington; and University of Minnesota. Our 25
largest Textbook Division customers accounted for approximately 5.1% of our
fiscal 2005 consolidated revenues. No single Textbook Division customer
accounted for more than 1.0% of our fiscal 2005 consolidated revenues.
Our distance education program is, among other things, a primary supplier of
textbooks and educational material to students enrolled in on-line courses
offered through one institution. That institution accounted for greater than
30.0% of total revenues in the distance education program in fiscal 2005.
However, this institution discontinued the use of our services for delivery of
educational materials during fiscal 2005.
No single customer accounted for more than 10.0% of our consolidated
revenues in fiscal year 2005, 2004, or 2003.
COMPETITION
Our Bookstore Division competes with other college campus bookstores,
including the on-campus bookstore in those locations where our bookstore is
off-campus.
Our Textbook Division competes in the used textbook wholesale distribution
market. This market includes the sale of all used textbooks purchased from
students by an independent third party which are then redistributed through
college bookstores; sales to contract-managed stores, which obtain virtually all
of their supply of used textbooks from within their chain of stores under common
management; and used textbooks retained by college bookstores.
Our two major competitors in the college store industry and used textbook
business are Follett Campus Resources ("Follett") and MBS Textbook Exchange
("MBS"), which contract-manage approximately 680 stores and 430 stores,
respectively. We believe that our market share of the used college textbook
wholesale distribution market is comparable to that of Follett and MBS,
individually. The remaining competitors are smaller regional companies,
including Budgetext, Texas Book Company and Southeastern Book Company. Most of
the leading companies in the industry also have an established retail presence,
either through direct store ownership/operation or through contract-management.
Many of Follett's college bookstores are located on smaller campuses. The
size of the campus and Follett's presence there have precluded potential
competitors such as us from entering these markets, which in turn affects both
our ability to buy books and our ability to add new accounts. However, because
it is required to supply used texts to all of its own stores, Follett must
balance the demands of its own bookstores with those of its other independent
customers.
10
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.
Both our Textbook and Bookstore Divisions compete with a number of entities
that have entered the college marketplace, or enhanced their sales channel to
that marketplace, through E-commerce. These competitors typically use the
Internet to establish websites designed to sell textbooks and/or other
merchandise directly to students, bypassing the traditional college bookstore.
By contrast, E-commerce services provided through CampusHub are designed to sell
textbooks and other merchandise through college bookstore websites. In addition,
both our Textbook and Bookstore Divisions compete with technology enabled
student to student transactions that take place over the Internet. This type of
transaction provides competition for both the purchase and the sale of the
textbook. We also compete against the expansion of electronic media as a source
of textbook information, such as on-line resources, E-Books, print-on-demand
textbooks and CD-ROM, which may replace or modify the need for students to
purchase textbooks through the traditional college bookstore.
Presently, we believe that our largest competitor in textbook distribution
for the distance education market, and only other major competitor, is MBS.
There is only one centralized buying service that is similar to C2O, the
Independent College Bookstore Association ("ICBA"). Participation by college
bookstores in C2O's or ICBA's centralized buying service is voluntary, and
college bookstores may, and some do, belong to both buying associations.
GOVERNMENTAL REGULATION
We are subject to various federal, state and local environmental, health and
safety laws and regulations. Generally, these laws impose limitations on the
discharge of pollutants and the presence of hazardous substances in the
workplace and establish standards for vehicle and employee safety and for the
handling of solid and hazardous wastes. These laws include the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act, the Clean Air Act, the Hazardous Materials
Transportation Act and the Occupational Safety and Health Act. Future
developments, such as stricter environmental or employee health and safety laws
and regulations thereunder, could affect our operations. We do not currently
anticipate that the cost of our compliance with, or of any foreseeable
liabilities under, environmental and employee health and safety laws and
regulations will have a material adverse affect on our business or financial
condition.
EMPLOYEES
As of March 31, 2005 we had a total of approximately 2,300 employees, of
which approximately 1,000 were full-time, approximately 500 were part-time and
approximately 800 were temporary. We have no unionized employees and believe
that our relationship with our employees is satisfactory.
In view of the seasonal nature of our Textbook Division, we utilize seasonal
labor to improve operating efficiency. We employ a small number of "flex-pool"
workers who are cross-trained in a variety of warehouse functions. Temporary
employees augment the flex-pool to meet periodic labor demands.
11
ITEM 2. PROPERTIES.
Listed below, set forth as of March 31, 2005, are our college bookstores,
their location, college served and the school's estimated enrollment.
Institution Location Enrollment Store Name
----------- -------- ---------- ----------
University of Alabama Tuscaloosa, AL 21,000 The College Store
University of Arkansas--Little Rock Little Rock, AR 11,800 Campus Bookstore
Northern Arizona University Flagstaff, AZ 18,800 The College Store
Northern Arizona University Flagstaff, AZ 18,800 University Text and Tools
Arizona State University - West Campus Glendale, AZ 7,300 The College Store West
Mesa County Community College, also serving: Mesa, AZ 27,800 The Textbook Company
Chandler Gilbert Community College - Pecos 8,000
Western International University Phoenix, AZ 4,100 Western International University
Bookstore (1)
Arizona State University Tempe, AZ 49,200 The College Store
University of Arizona Tucson, AZ 36,800 Arizona Book Store
University of Arizona Tucson, AZ 36,800 Arizona 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 11,900 The Book Stop
Daytona Beach Community College Daytona Beach, FL 12,300 College Book Rack
University of Florida, also serving: Gainesville, FL 48,000 Florida Book Store
Santa Fe Community College 13,900
University of Florida, also serving: Gainesville, FL 48,000 Florida Book Store, Volume II
Santa Fe Community College 13,900
University of North Florida Jacksonville, FL 14,700 College Book Rack Volume One
University of North Florida, also serving: Jacksonville, FL 14,700 College Book Rack Volume Two
Florida Community College at Jacksonville 25,700
Miami-Dade College Miami, FL 21,600 Lemox College Book & Supply
University of Central Florida, also serving: Orlando, FL 41,500 College Book & Supply
Seminole Community College 12,100
Valencia Community College 16,000
University of Central Florida Orlando, FL 41,500 Knight's Corner
Florida State University Tallahassee, FL 36,900 Bill's Bookstore
Florida State University Tallahassee, FL 36,900 Bill's Bookstore
Georgia State University Atlanta, GA 27,300 Georgia Bookstore
Drake University Des Moines, IA 5,200 D-Shoppe (1)
Drake University, also serving: Des Moines, IA 5,200 University Book Store (2)
Mercy College of Health Sciences 600
Southern Illinois University Carbondale, IL 21,600 Saluki Bookstore
Illinois State University - Normal Normal, IL 20,800 The Alamo II
Ball Sate University Muncie, IN 18,000 Collegiate Book Exchange
Valparaiso University Valparaiso, IN 4,000 University Book Center (1)
University of Kansas Lawrence, KS 27,000 University Book Shop
Johnson County Community College Overland Park, KS 18,600 The College Store
Western Kentucky University Bowling Green, KY 18,400 Lemox Book Company
Western Kentucky University Bowling Green, KY 18,400 Lemox II
University of Louisville Louisville, KY 21,700 College Book Warehouse
Morehead State University Morehead, KY 9,300 Varsity Eagle
Eastern Kentucky University Richmond, KY 16,200 University Book & Supply
University of Maryland College Park, MD 35,300 Maryland Book Exchange
Prince George's Community College Largo, MD 12,500 Prince George's Community
College Bookstore (1)
Alma College Alma, MI 1,300 Kiltie Korner Bookstore (1)
Concordia University - Ann Arbor Ann Arbor, MI 500 Concordia College Bookstore (1)
University of Michigan Ann Arbor, MI 39,500 Michigan Book & Supply
University of Michigan Ann Arbor, MI 39,500 Ulrich's Bookstore
Oakland University Auburn Hills, MI 16,900 Textbook Outlet
Wayne County Community College Belleville, MI 11,700 WCCCD Bookstore (1)
Wayne County Community College Detroit, MI 11,700 WCCCD Bookstore (1)
Wayne County Community College Detroit, MI 11,700 WCCCD Bookstore (1)
Wayne County Community College Detroit, MI 11,700 WCCCD Bookstore (1)
Wayne County Community College Taylor, MI 11,700 WCCCD Bookstore (1)
Michigan State University East Lansing, MI 45,000 The College Store
Michigan State University East Lansing, MI 45,000 Ned's Bookstore
Michigan State University East Lansing, MI 45,000 Spartan Art Store (1)
Michigan State University East Lansing, MI 45,000 Spartan Bookstore (1)
Michigan State University East Lansing, MI 45,000 Spartan Medical Store (1)
Kettering University Flint, MI 3,100 Kettering Campus Store (1)
12
Institution Location Enrollment Store Name
----------- -------- ---------- ----------
Eastern Michigan University, also serving: Ypsilanti, MI 24,300 Campus Book & Supply
Washtenaw Community College 12,100
Washtenaw Technical Middle College 500
Eastern Michigan University Ypsilanti, MI 24,300 Ned's Bookstore
Eastern Michigan University Ypsilanti, MI 24,300 Ned's College of Business
Bookstore
Eastern Michigan University Ypsilanti, MI 24,300 Mike's Bookstore
Minnesota State University Mankato Mankato, MN 14,100 Maverick Bookstore (2)
Mississippi State University Starkville, MS 16,200 Bully's Bookstore
North Carolina State University Raleigh, NC 30,000 Packbackers Student Bookstore
Chadron State College Chadron, NE 2,100 Eagle Pride Bookstore (1)
University of Nebraska -- Kearney Kearney, NE 6,400 The Antelope Bookstore (1)
University of Nebraska -- Lincoln Lincoln, NE 21,800 Big Red Shop
University of Nebraska -- Lincoln Lincoln, NE 21,800 Nebraska Bookstore (2)
Nebraska Wesleyan University Lincoln, NE 1,600 Prairie Wolves Bookstore (1)
Wayne State College Wayne, NE 3,400 Wayne State College Bookstore (1)
University of Nevada Las Vegas Las Vegas, NV 26,200 Rebelbooks
State University of New York -- Buffalo, also Amherst, NY 27,300 The College Store
serving:
Erie Community College - North Campus 12,300
State University of New York - Binghamton Vestal, NY 13,500 The Bookbridge
University of Akron Akron, OH 21,600 The College Store
Ohio University Athens, OH 19,700 Specialty Books
Ohio State University Columbus, OH 51,000 College Town
Wright State University, also serving: Fairborn, OH 16,000 The College Store
Sinclair Community College 19,900
University of Toledo Toledo, OH 19,500 Student Bookstore
University of Oklahoma Norman, OK 27,100 Boomer Book Company
University of Oklahoma Norman, OK 27,100 Sooner Textbooks
Oklahoma State University Stillwater, OK 21,600 Cowboy Book
Indiana University of Pennsylvania Indiana, PA 14,000 The College Store
University of Pittsburgh Pittsburgh, PA 27,000 GotUsed Bookstore
Pennsylvania State University State College, PA 41,300 University Book Centre
College of Charleston Charleston, SC 11,600 University Book of Charleston
University of South Carolina Columbia, SC 25,600 Carolina Spirit Shop
University of South Carolina Columbia, SC 25,600 South Carolina Book Store
East Tennessee State University Johnson City, TN 11,600 The College Store
East Tennessee State University Johnson City, TN 11,600 East Tennessee State University
Bookstore (1)
University of Tennessee Knoxville, TN 25,700 Rocky Top Books
University of Tennessee Knoxville, TN 25,700 Rocky Top East (2)
University of Texas - Arlington Arlington, TX 25,300 The College Store
Austin Community College Austin, TX 30,600 Bevo's
Austin Community College Austin, TX 30,600 Bevo's
Blinn College Bryan, TX 14,100 Traditions Bookstore
Texas A&M University College Station, TX 44,600 Traditions Bookstore
Texas A&M University College Station, TX 44,600 Traditions Bookstore
Texas A&M University College Station, TX 44,600 Traditions Bookstore
Southern Methodist University Dallas, TX 10,900 Varsity Bookstore
University of North Texas, also serving: Denton, TX 31,300 Voertman's (2)
North Central Texas College 6,300
Texas Woman's University 9,700
University of Texas -- Pan American Edinburg, TX 15,900 South Texas Book & Supply
North Harris College Houston, TX 10,100 College Bookstore (2)
North Harris College Humble, TX 10,100 College Bookstore
University of Houston, also serving: Houston, TX 35,200 Rother's Bookstore
Texas Southern University School of Law 600
Texas Tech University Lubbock, TX 28,300 Double T Bookstore
Texas Tech University Lubbock, TX 28,300 Double T Bookstore
Texas Tech University Lubbock, TX 28,300 Double T Bookstore
Texas Tech University Lubbock, TX 28,300 Spirit Shop
South Texas College McAllen, TX 15,300 South Texas Book & Supply
Stephen F. Austin State University Nacogdoches, TX 11,300 Varsity Book Store
San Antonio College, also serving: San Antonio, TX 20,800 L&M Bookstore
Northwest Vista College 7,600
Palo Alto College 7,400
St. Philip's College 9,500
UTSA - Downtown 6,000
University of Texas -- San Antonio San Antonio, TX 24,700 L&M UTSA Bookstore
Southwest Texas State University - San Marcos San Marcos, TX 26,800 Colloquium Bookstore
Southwest Texas State University - San Marcos San Marcos, TX 26,800 Colloquium Bookstore
13
Institution Location Enrollment Store Name
----------- -------- ---------- ----------
Southwest Texas State University - San Marcos San Marcos, TX 26,800 Colloquium Bookstore
Tarleton State University Stephenville, TX 9,000 The College Store
Baylor University Waco, TX 13,800 University Bookstore
Baylor University Waco, TX 13,800 University Bookstore and
Spirit Shop
Midwestern State University Wichita Falls, TX 6,300 The College Store
Virginia Polytechnic Institute and State Blacksburg, VA 27,800 Tech Bookstore
University
Old Dominion University Norfolk, VA 21,200 Dominion Bookstore
Radford University Radford, VA 9,300 Radford Book Exchange
Western Washington University, also serving: Bellingham, WA 12,900 The College Store
Whatcom Community College 4,200
Washington State University Pullman, WA 22,700 Crimson & Gray
Marshall University Huntington, WV 16,400 Stadium Bookstore
- ------------
(1) Denotes properties leased from the educational institution
("contract-managed" stores).
(2) Property is owned by us.
We own our two Textbook Division warehouses (totaling 271,000 square feet)
in Lincoln, Nebraska (one of which is also the location of our headquarters),
and lease our 60,000 square foot Textbook Division warehouse in Cypress,
California. The Cypress lease expires on August 31, 2007. Our distance education
program resides in a leased facility with 49,500 square feet in Athens, Ohio.
The lease expires on May 31, 2007 and has one five-year option to renew.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we are subject to legal proceedings and other claims
arising in the ordinary course of our business. We believe that currently we are
not a party to any litigation the outcome of which would have a material adverse
affect on our financial condition or results of operations. We maintain
insurance coverage against claims in an amount which we believe to be adequate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No items were submitted to a vote of security holders of the Company during
the fourth quarter of fiscal 2005.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of June 29, 2005, 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 29, 2005, 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 29, 2005, there were also options granted and
outstanding under the 2004 Stock Option Plan, held by 32 current and former
members of our management group, to purchase 62,389 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
2005 and 2004. 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 fiscal year ended March 31, 2005
(successor), the one month ended March 31, 2004 (successor), the eleven months
ended February 29, 2004 (predecessor), and the fiscal years ended March 31,
2003, 2002, and 2001 (predecessor), respectively. The selected historical
consolidated financial data was derived from our audited consolidated financial
statements.
15
The following table should be read in conjunction with Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the related notes thereto included in
Item 8, "Financial Statements and Supplementary Data."
Successor (1) Predecessor (1)
------------------------------ -----------------------------------------------------------
Fiscal Year 1 Month 11 Months Fiscal Years Ended
Ended Ended Ended -----------------------------------------
March 31, March 31, February 29, March 31, March 31, March 31,
2005 2004 (6) 2004 (6) 2003 (6) 2002 (6) 2001 (6)
-------------- --------------- ---------------- -------------- ------------- -------------
(as restated) (as restated) (as restated) (as restated) (as restated)
STATEMENT OF OPERATIONS DATA: (dollars in thousands)
Revenues $402,154 $ 13,317 $385,364 $370,510 $ 338,917 $301,669
Costs of sales 240,638 7,768 231,874 224,488 206,976 187,099
-------------- --------------- --------------- --------------- ------------- ------------
Gross profit 161,516 5,549 153,490 146,022 131,941 114,570
Operating expenses:
Selling, general, and administrative 100,513 8,540 91,878 90,391 84,871 74,100
Depreciation 4,908 350 3,396 3,469 3,501 3,469
Amortization (4) 8,258 649 1,162 644 505 10,446
Stock-based compensation - - 7,264 - - -
-------------- --------------- --------------- --------------- ------------- ------------
Income (loss) from operations 47,837 (3,990) 49,790 51,518 43,064 26,555
Other expenses (income):
Interest expense 31,725 2,848 34,536 22,192 24,408 24,008
Interest income (639) (97) (308) (360) (400) (615)
(Gain) loss on derivative instruments - - (57) 156 361 -
-------------- --------------- --------------- --------------- ------------- ------------
Income (loss) before income taxes 16,751 (6,741) 15,619 29,530 18,695 3,162
Income tax expense (benefit) 7,305 (2,505) 6,450 12,049 7,797 3,212
-------------- --------------- --------------- --------------- ------------- ------------
Net income (loss) $ 9,446 $ (4,236) $ 9,169 $ 17,481 $ 10,898 $ (50)
============== =============== =============== =============== ============= ============
Earnings (loss) per share:
Basic $ 17.20 $ (7.71) $ 7.25 $ 13.84 $ 8.63 $ (0.04)
Diluted 16.84 (7.71) 7.10 13.64 8.63 (0.04)
OTHER DATA:
EBITDA (2) $ 61,003 $ (2,991) $ 54,348 $ 55,631 $ 47,070 $ 40,470
Net cash flows from operating activities 27,187 (21,512) 38,605 37,332 31,038 8,839
Net cash flows from investing activities (748) (210,901) (6,452) (5,327) (7,616) (4,994)
Net cash flows from financing activities (28,491) 186,027 8,104 (4,018) (16,412) (3,887)
Capital expenditures 7,666 720 3,965 3,708 2,277 1,759
Business acquisition expenditures (3) 20,160 1,849 2,355 1,389 6,110 2,975
Number of bookstores open at end of
the period 124 113 112 109 108 102
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents $ 31,224 $ 33,276 $ 79,662 $ 39,405 $ 11,419 $ 4,410
Working capital 104,008 106,259 134,150 81,966 75,865 72,394
Total assets 629,166 648,233 254,184 207,399 182,533 165,615
Total debt, including current maturities 412,513 434,098 263,782 219,367 216,915 224,219
(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 a non-GAAP financial measure,
EBITDA, is useful in measuring our liquidity and provides additional
information for determining our ability to meet debt service
requirements. The Senior Subordinated Notes, 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 ("GAAP"), and EBITDA does not
necessarily indicate whether cash flows will be sufficient for cash
requirements. Items excluded from EBITDA, such as interest, taxes,
depreciation and amortization, are significant components in
understanding and assessing our financial performance. EBITDA measures
presented may not be comparable to similarly titled measures presented
by other registrants.
The following presentation reconciles EBITDA with net cash flows from
operating activities as presented in the Consolidated Statements of Cash
Flows included in Item 8, "Financial Statements and Supplementary Data":
Successor Predecessor
---------------------------- -------------------------------------------------
Fiscal Year 1 Month 11 Months Fiscal Year Ended
Ended Ended Ended -----------------------------------
March 31, March 31, February 29, March 31, March 31, March 31,
2005 2004 2004 2003 2002 2001
-------------- ------------- ------------- ----------- ----------- -----------
(dollars in thousands)
EBITDA $ 61,003 $ (2,991) $ 54,348 $ 55,631 $ 47,070 $ 40,470
Adjustments to reconcile EBITDA to net
cash flows from operating activities:
Interest income 639 97 308 360 400 615
Provision for losses on receivables 316 218 66 452 1,630 434
Cash paid for interest (26,320) (6,892) (20,126) (13,549) (15,225) (16,001)
Cash paid for income taxes (4,946) (10) (6,467) (14,533) (4,063) (6,018)
(Gain) loss on disposal of assets 68 14 408 36 (483) 60
Changes in operating assets and
liabilities, net effect of
acquisitions/disposals (5) (3,573) (11,948) 10,068 8,935 1,709 (10,721)
-------------- ------------- ------------- ----------- ----------- -----------
Net Cash Flows from Operating
Activities $ 27,187 $ (21,512) $ 38,605 $ 37,332 $ 31,038 $ 8,839
============== ============= ============= =========== =========== ===========
(3) Business acquisition expenditures represent established businesses
purchased by us.
(4) We adopted SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, on April
1, 2001. Under SFAS No. 142, goodwill and intangible assets with
indefinite useful lives are not amortized but rather tested for
impairment on a periodic basis.
(5) Changes in operating assets and liabilities, net of effect of
acquisitions/disposals includes the changes in the balances of
receivables, inventories, prepaid expenses and other current assets,
other assets, accounts payable, accrued employee compensation and
benefits, accrued incentives, accrued expenses, deferred revenue, and
other long-term liabilities.
(6) Certain items for the one month ended March 31, 2004, the eleven months
ended February 29, 2004, and the years ended March 31, 2003, 2002, and
2001 have been restated to reflect corrections that are further
discussed in Note S, Restatement of Consolidated Financial Statements,
of the Notes to Consolidated Financial Statements included in Item 8 of
this report.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following discussions should be read in conjunction with our
consolidated financial statements and the related notes thereto included in Item
8, "Financial Statements and Supplementary Data," and other information in this
Annual Report on Form 10-K. The accompanying Management's Discussion and
Analysis gives effect to the restatement of our consolidated financial
statements for fiscal years 2004 and 2003 to correct our accounting treatment
for leases and depreciation of related leasehold improvements and to reclassify
the activity related to restricted cash from financing cash flows to investing
cash flows, as described in Note S to the consolidated financial statements.
EXECUTIVE SUMMARY
FISCAL 2005 HIGHLIGHTS
This summary refers to our operations in fiscal 2004 for the predecessor
period from April 1, 2003 to February 29, 2004 and the successor period from
March 1, 2004 to March 31, 2004 on a "combined" basis. This basis assists us in
comparing results of operations between the current fiscal year with the
previous year.
CHANGES IN CAPITALIZATION. In fiscal year 2004, we underwent a
recapitalization transaction that we refer to as the March 4, 2004 Transaction.
Accounting for that transaction resulted in a significant increase to goodwill
and intangible assets that impacts the comparability of our financial statements
from period to period.
The March 4, 2004 Transaction was accounted for in accordance with
Statement of Financial Accounting Standards ("SFAS") No.141, Business
Combinations. Accordingly, the Company's assets and liabilities were revalued to
fair value to the extent of the majority stockholder's (Weston Presidio's) 96.9%
controlling interest in the Company. The excess of the purchase price over the
historical basis of the net assets acquired was applied to adjust net assets to
their fair values. The allocation of the excess purchase price included
establishing identifiable intangibles for customer relationships of $114.8
million and tradename of $31.3 million; adjusting the carrying value of
developed technology at March 4, 2004 to a fair value of $11.4 million; and
adjusting the carrying value of goodwill at March 4, 2004 to a fair value of
$269.1 million. As a result of these changes to intangible assets, and to
changes in the Company's outstanding debt that resulted from the March 4, 2004
Transaction, some expenses, such as amortization expense and interest expense,
may not be comparable with periods prior to that transaction. Our results of
operations, financial position and cash flow's prior to the March 4, 2004
Transaction are presented as the "Predecessor" and our results of operations,
financial position and cash flow's after the March 4, 2004 Transaction are
presented as the "Successor" in these financial statements.
ACQUISITIONS. We completed the acquisition, initiated the
contract-management, or established the start-up of eleven bookstore locations
in fiscal 2005: two locations each in Jacksonville and Tallahassee, Florida; and
single locations in Ypsilanti, Michigan; Alma, Michigan; Starkville,
Mississippi; Glendale, Arizona; Pullman, Washington; Normal, Illinois; and
Morehead, Kentucky. We believe that there continue to be attractive
opportunities for us to expand our chain of bookstores across the country.
REVENUE RESULTS. Consolidated revenues for the year ended March 31, 2005
increased $3.5 million, or 0.9% from the year ended March 31, 2004. This
increase was attributable to increases in both the College Bookstore and
Textbook Divisions which were largely offset by the loss of revenue from the
distance education program's largest customer and an increase in the
interdivision elimination for sales from the Textbook Division to the College
Bookstore Division.
EBITDA RESULTS. Consolidated EBITDA for the year ended March 31, 2005
increased $9.6 million, or 18.8% from the year ended March 31, 2004 with most of
that increase due to the impact of the expenses of certain transactions during
fiscal 2004. These expenses included combined stock-based compensation charges
totaling $7.3 million and other charges of $0.3 million. Within the operating
divisions, we achieved strong EBITDA growth from the Bookstore Division due
primarily to acquisitions, while we saw decreases in both the Textbook Division
due to lower gross margins and in the Complementary Services Division due to the
loss of a large customer and to lower systems sales. EBITDA is considered a
non-GAAP financial measure by the SEC, and therefore you should refer to the
more detailed explanation of that measure that is provided later in Management's
Discussion & Analysis.
18
CAPITAL EXPENDITURES. Capital expenditures for the year ended March 31,
2005 have increased over the year ended March 31, 2004 from $4.7 million to $7.7
million. This increase is attributable to a number of college bookstore
renovations which we have undertaken to repair, maintain, modernize, or
restructure certain bookstore locations; as well as a project to expand the
Textbook Division's Nebraska warehouse which added approximately 8,500 square
feet of space and partially mechanize the warehouse receiving process.
CHALLENGES AND EXPECTATIONS
We expect that we will continue to face challenges and opportunities
similar to those that we have faced in the recent past. We have experienced, and
continue to experience, competition for the supply of used textbooks from other
textbook wholesalers and from student to student transactions, competition from
alternative media and alternative sources of textbooks for students, competition
for contract-management opportunities and other challenges. We also believe that
we will continue to face challenges and opportunities related to acquisitions.
Despite these challenges, we expect that we will continue to grow revenue and
EBITDA on a consolidated basis in fiscal 2006. We also expect that our capital
spending will remain modest for a company of our size.
FISCAL YEAR ENDED MARCH 31, 2005 COMPARED WITH
FISCAL YEAR ENDED MARCH 31, 2004.
Unless otherwise noted, for purposes of management's discussion and
analysis of results of operations for the fiscal year ended March 31, 2004,
which includes the predecessor period from April 1, 2003 to February 29, 2004
and the successor period from March 1, 2004 to March 31, 2004, results of
operations are presented on a "combined" basis, which combines the results of
operations for the predecessor and successor periods, to assist in comparing
results of operations between fiscal years.
REVENUES. Revenues for the year ended March 31, 2005, the one month ended
March 31, 2004, and the eleven months ended February 29, 2004 and the
corresponding change in revenues (based upon combined revenues for fiscal 2004)
were as follows:
Successor Predecessor
----------------------------- ----------------- Change
Year Ended 1 Month Ended 11 Months Ended --------------------------
March 31, 2005 March 31, 2004 February 29, 2004 Amount Percentage
-------------- -------------- ----------------- -------------- -----------
Bookstore Division $ 263,667,751 $ 5,318,989 $ 234,328,454 $ 24,020,308 10.0 %
Textbook Division 133,938,475 4,484,265 125,746,000 3,708,210 2.8 %
Complementary Services 33,767,440 4,443,778 49,754,314 (20,430,652) (37.7)%
Intercompany
eliminations (29,219,326) (929,638) (24,465,094) (3,824,594) 15.1 %
-------------- -------------- ---------------- --------------- ----------
$ 402,154,340 $ 13,317,394 $ 385,363,674 $ 3,473,272 0.9 %
============== ============== ================ =============== ==========
The increase in Bookstore Division revenues was attributable to the
addition of acquired bookstores (defined by us as stores acquired since April 1,
2003) offset by slightly lower same-store sales. The new bookstores provided an
additional $26.0 million of revenue in the year ended March 31, 2005. The
Company defines same store sales for fiscal 2005 as sales from any store, even
if expanded or relocated, that has a full twelve months of sales in both fiscal
2005 and fiscal 2004. Same store sales decreased 0.9% primarily due to an
approximate 1% decrease in sales of new textbooks and an approximate 3% decline
in sales of clothing and insignia wear, which offset an approximate 1% increase
in sales of used textbooks. The increase in Textbook Division revenues was due
primarily to an approximate 5% increase in the average price per book sold,
offset partially by a decrease in the number of units sold. We believe that unit
sales are down for the year primarily due to a decrease in the number of units
purchased in the December of 2003 and May of 2004 student book buys, which
supplied the peak selling periods in fiscal 2005. Textbook Division revenues are
limited by the supply of used textbooks available to us. Complementary Services
Division revenues decreased primarily due to the decision by the distance
education program's largest customer to gradually discontinue the use of our
services for delivery of educations materials. Revenues from that customer
program declined approximately $18 million. In addition, revenues from
installation and training activity in the systems divisions decreased $1.7
million. Corresponding to the overall growth in the number of company owned
college bookstores, our intercompany transactions also increased which reduces
consolidated revenues.
19
GROSS PROFIT. Gross profit for the year ended March 31, 2005 increased $2.5
million, or 1.6%, to $161.5 million from $159.0 million for the year ended March
31, 2004. This increase was primarily due to higher revenues, along with a
slightly higher gross margin percent. Gross margin percent was 40.2% for the
year ended March 31, 2005 as compared to 39.9% for the year ended March 31,
2004, driven primarily by a slightly higher gross margin percent on new textbook
sales in the Bookstore Division and by higher gross margin percent in the
Complementary Service Division due to the decline in sales from the lower-margin
distance education program. The Textbook Division gross margins decreased due to
higher costs of acquiring used textbooks, including the cost of the Company's
enhanced customer programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended March 31, 2005 increased $0.1
million, or 0.1%, to $100.5 million from $100.4 million for the year ended March
31, 2004. Selling, general and administrative expenses as a percentage of
revenues were 25.0% and 25.2% for the years ended March 31, 2005 and 2004,
respectively.
STOCK-BASED COMPENSATION. Stock-based compensation expense was $0 in fiscal
2005 compared to $7.3 million in fiscal 2004. Stock-based compensation expense
in fiscal 2004 was incurred in conjunction with the March 4, 2004 Transaction,
whereby 40,668 options to purchase shares of NBC Acquisition Corp. Class A
Common Stock were converted into the right to receive cash payments which
totaled $7.1 million. Additionally, in connection with the December 10, 2003
debt refinancing, 838 options to purchase shares of NBC Acquisition Corp. Class
A Common Stock were converted into the right to receive cash payments which
totaled $0.2 million. Such costs represent the difference between the fair value
of the NBC Acquisition Corp. Class A Common Stock underlying such options at the
time the options were converted into the right to receive cash payment and the
exercise price on such options.
EARNINGS (LOSS) BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION
(EBITDA). EBITDA for the year ended March 31, 2005, the one month ended March
31, 2004, and the eleven months ended February 29, 2004 and the corresponding
change in EBITDA (based upon combined EBITDA for fiscal 2004) were as follows:
Successor Predecessor
------------------------------- ---------------- Change
Year Ended 1 Month Ended 11 Months Ended -------------------------
March 31, 2005 March 31, 2004 February 29, 2004 Amount Percentage
-------------- ---------------- ---------------- ------------- -----------
Bookstore Division $ 34,607,848 $ (2,471,525) $ 33,190,998 $ 3,888,375 12.7 %
Textbook Division 32,181,393 (85,994) 33,544,806 (1,277,419) (3.8)%
Complementary
Services Division 1,805,367 251,371 2,624,520 (1,070,524) (37.2)%
Corporate
administration (7,591,429) (685,336) (15,012,469) 8,106,376 (51.6)%
-------------- ---------------- ---------------- ------------- -----------
$ 61,003,179 $ (2,991,484) $ 54,347,855 $ 9,646,808 18.8 %
============== ================ ================ ============= ===========
Bookstore Division EBITDA improved as a result of the aforementioned
increases in revenues and gross margin percent. The decrease in EBITDA in the
Textbook Division is primarily attributable to lower gross margins.
Complementary Services Division EBITDA decreased as a result of the reduced
revenues in the distance education business combined with decreased revenues in
the systems sales business. Corporate Administration EBITDA increased by $8.1
million, primarily as a result of expenses of the March 4, 2004 Transaction and
the December 10, 2003 debt refinancing which are included in the results for the
eleven months ended February 29, 2004.
EBITDA is defined as earnings before interest, taxes, depreciation, and
amortization. As we are highly-leveraged and as our equity is not
publicly-traded, management believes that a non-GAAP financial measure, EBITDA,
is useful in measuring our liquidity and provides additional information for
determining our ability to meet debt service requirements. The Senior
Subordinated Notes, 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 GAAP, and EBITDA does not
necessarily indicate whether cash flows will be sufficient for cash
requirements. Items excluded from EBITDA, such as interest, taxes, depreciation
and amortization, are significant components in understanding and assessing our
financial performance. EBITDA measures presented may not be comparable to
similarly titled measures presented by other registrants.
20
The following presentation reconciles EBITDA with net cash flows from
operating activities and also sets forth net cash flows from investing and
financing activities as presented in the Consolidated Statements of Cash Flows
included in Item 8, "Financial Statements and Supplementary Data":
Successor Successor Predecessor
---------------- ---------------- ------------------
Year Ended 1 Month Ended 11 Months Ended
March 31, 2005 March 31, 2004 February 29, 2004
---------------- ---------------- ------------------
EBITDA $ 61,003,179 $ (2,991,484) $ 54,347,855
Adjustments to reconcile EBITDA to net cash
flows from operating activities:
Interest income 638,935 97,587 307,680
Provision for losses on receivables 315,958 218,205 66,393
Cash paid for interest (26,320,272) (6,891,827) (20,125,528)
Cash paid for income taxes (4,946,343) (9,991) (6,466,526)
Loss on disposal of assets 68,065 13,582 408,095
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals (1) (3,572,332) (11,947,584) 10,066,803
---------------- ---------------- ------------------
Net Cash Flows from Operating Activities $ 27,187,190 $ (21,511,512) $ 38,604,772
================ ================ ==================
Net Cash Flows from Investing Activities $ (747,555) $(210,901,223) $ (6,451,658)
================ ================ ==================
Net Cash Flows from Financing Activities $ (28,491,473) $ 186,026,630 $ 8,103,790
================ ================ ==================
(1) Changes in operating assets and liabilities, net of effect of
acquisitions/disposals, includes the changes in the balances of
receivables, inventories, prepaid expenses and other current assets,
other assets, accounts payable, accrued employee compensation and
benefits, accrued incentives, accrued expenses, deferred revenue, and
other long-term liabilities.
DEPRECIATION EXPENSE. Depreciation expense for the year ended March 31,
2005 increased $1.2 million, or 31.0% to $4.9 million from $3.7 million for the
year ended March 31, 2004, primarily due to growth and the step-up in basis of
property and equipment resulting from the March 4, 2004 Transaction.
AMORTIZATION EXPENSE. Amortization expense for the year ended March 31,
2005 increased $6.5 million to $8.3 million from $1.8 million for the year ended
March 31, 2004, primarily due to the March 4, 2004 Transaction, which
significantly increased the balance of amortizable intangibles.
INTEREST EXPENSE, NET. Interest expense, net for the year ended March
31, 2005 decreased $5.9 million, or 15.9%, to $31.1 million from $37.0 million
for the year ended March 31, 2004, primarily due to interest costs in fiscal
2004 arising from the March 4, 2004 Transaction and the December 10, 2003 debt
refinancing. As a result of these two transactions, $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. Interest expense net, excluding those two
charges in fiscal 2004, increased $8.3 million for the year ended March 31,
2005, due primarily to additional debt issued in connection with the March 4,
2004 Transaction that was outstanding for all of the 2005 fiscal year.
INCOME TAXES. Income tax expense for the year ended March 31, 2005
increased $3.4 million, or 85.2%, to $7.3 million from $3.9 million for the year
ended March 31, 2004. Our effective tax rate was 43.6% and 44.4% for the years
ended March 31, 2005 and 2004, respectively. Our effective tax rate differs from
the statutory tax rate primarily as a result of state income taxes. Effective
state income tax rates were higher in fiscal 2004, as the Company incurred costs
attributable to the March 4, 2004 Transaction which were not deductible in
certain state tax returns.
21
FISCAL YEAR ENDED MARCH 31, 2004 COMPARED WITH
FISCAL YEAR ENDED MARCH 31, 2003.
Unless otherwise noted, for purposes of management's discussion and analysis
of results of operations for the fiscal year ended March 31, 2004, which
includes the predecessor period from April 1, 2003 to February 29, 2004 and the
successor period from March 1, 2004 to March 31, 2004, results of operations are
presented on a "combined" basis, which combines the results of operations for
the predecessor and successor periods, to assist in comparing results of
operations between fiscal years.
REVENUES. Revenues for the one month ended March 31, 2004, the eleven months
ended February 29, 2004, and the year ended March 31, 2003 and the corresponding
change in revenues (based upon combined revenues for fiscal 2004) were as
follows:
Successor Predecessor
---------------- ------------------------------------- Change
1 Month Ended 11 Months Ended Year Ended --------------------------
March 31, 2004 February 29, 2004 March 31, 2003 Amount Percentage
---------------- ------------------- ---------------- -------------- -----------
Bookstore Division $ 5,318,989 $ 234,328,454 $ 216,943,133 $ 22,704,310 10.5 %
Textbook Division 4,484,265 125,746,000 132,806,703 (2,576,438) (1.9)%
Complementary
Services Division 4,443,778 49,754,314 44,004,856 10,193,236 23.2 %
Intercompany
eliminations (929,638) (24,465,094) (23,244,843) (2,149,889) 9.2 %
---------------- ------------------- ---------------- -------------- -----------
$ 13,317,394 $ 385,363,674 $ 370,509,849 $ 28,171,219 7.6 %
================ =================== ================ ============== ===========
The increase in Bookstore Division revenues was attributable to the addition
of acquired bookstores (defined by us as stores acquired since April 1, 2002)
and increases in same-store sales. The new bookstores provided an additional
$14.4 million of revenue in the year ended March 31, 2004, which was offset, in
part, by a $2.5 million decrease in revenues attributable to stores closed since
April 1, 2002. The Company defines same store sales for fiscal 2004 as sales
from any store, even if expanded or relocated, that has a full twelve months of
sales in both fiscal 2004 and fiscal 2003. Same store sales increased 5.1%, or
$10.8 million due primarily to an approximate 10% increase in sales of new
textbooks and a 4% increase in the sale of used textbooks, offset partially by
declines in other sales categories. The decrease in Textbook Division revenues
was due primarily to a decrease in the number of units sold, which entirely
offset an increase in the average price per book sold of approximately 3%. We
believe that unit sales are down for the year primarily due to a decrease in the
number of units purchased in the December of 2002 and May of 2003 student book
buys, which supplied the peak selling periods in fiscal 2004. Textbook Division
revenues are limited by the supply of used textbooks available to us.
Complementary Services Division revenues increased primarily due to a $4.1
million increase in revenues from installation and training activity in the
systems divisions, $1.8 million in revenue related to the acquisition of
TheCampusHub.com, Inc. in July, 2003, and $2.5 million of increased revenues
from the distance education program. Corresponding to the overall growth in the
number of company-owned college bookstores and growth in services provided to
our college bookstores by the Complementary Services Division, our intercompany
transactions also increased.
GROSS PROFIT. Gross profit for the year ended March 31, 2004 increased $13.0
million, or 8.9%, to $159.0 million from $146.0 million for the year ended March
31, 2003. This increase was primarily due to higher revenues, along with a
slightly higher gross margin percent. Gross margin percent was 39.9% for the
year ended March 31, 2004 as compared to 39.4% for the year ended March 31,
2003, driven primarily by improved gross margin percents in the Bookstore and
Textbook Divisions. The improved gross margin percents in both of these
divisions were primarily due to slightly lower costs of acquiring used
textbooks.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended March 31, 2004 increased $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 an increase of
$3.0 million in personnel costs, $1.2 million in shipping costs, and $2.3
million in rent. 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.
22
STOCK-BASED COMPENSATION. Stock-based compensation expense was incurred in
conjunction with the March 4, 2004 Transaction, whereby 40,668 options to
purchase shares of NBC Acquisition Corp. Class A Common Stock were converted
into the right to receive cash payments which totaled $7.1 million.
Additionally, in connection with the December 10, 2003 debt refinancing, 838
options to purchase shares of NBC Acquisition Corp. Class A Common Stock were
converted into the right to receive cash payments which totaled $0.2 million.
Such costs represent the difference between the fair value of the NBC
Acquisition Corp. Class A Common Stock underlying such options at the time the
options were converted into the right to receive cash payment and the exercise
price on such options.
EARNINGS (LOSS) BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION
(EBITDA). EBITDA for the one month ended March 31, 2004, the eleven months ended
February 29, 2004, and the year ended March 31, 2003 and the corresponding
change in EBITDA (based upon combined EBITDA for fiscal 2004) were as follows:
Successor Predecessor
---------------- ---------------------------------- Change
1 Month Ended 11 Months Ended Year Ended --------------------------
March 31, 2004 February 29, 2004 March 31, 2003 Amount Percentage
---------------- ------------------ --------------- -------------- -----------
Bookstore Division $ (2,471,525) $ 33,190,998 $ 26,992,497 $ 3,726,976 13.8 %
Textbook Division (85,994) 33,544,806 33,915,223 (456,411) (1.3)%
Complementary
Services Division 251,371 2,624,520 2,041,093 834,798 40.9 %
Corporate
administration (685,336) (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)%
================ ================== =============== ============== ===========
Bookstore Division EBITDA improved as a result of the aforementioned
increases in revenues and gross margin percent. The decrease in EBITDA in the
Textbook Division is primarily attributable to lower revenues. Complementary
Services Division EBITDA improved as a result of increasing revenues and
controlling expenses. Corporate Administration EBITDA declined by $8.4 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 a non-GAAP financial measure, EBITDA,
is useful in measuring our liquidity and provides additional information for
determining our ability to meet debt service requirements. The Senior
Subordinated Notes, 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 GAAP, and EBITDA does not
necessarily indicate whether cash flows will be sufficient for cash
requirements. Items excluded from EBITDA, such as interest, taxes, depreciation
and amortization, are significant components in understanding and assessing our
financial performance. EBITDA measures presented may not be comparable to
similarly titled measures presented by other registrants.
The following presentation reconciles EBITDA with net cash flows from
operating activities and also sets forth net cash flows from investing and
financing activities as presented in the Consolidated Statements of Cash Flows
included in Item 8, "Financial Statements and Supplementary Data":
23
Successor Predecessor Predecessor
------------------ ------------------ ----------------
1 Month Ended 11 Months Ended Year Ended
March 31, 2004 February 29, 2004 March 31, 2003
------------------ ------------------ ----------------
EBITDA $ (2,991,484) $ 54,347,855 $ 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 acquisitions/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 $ (210,901,223) $ (6,451,658) $ (5,327,072)
================== ================ ================
Net Cash Flows from Financing Activities $ 186,026,630 $ 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 $0.2 million, or 8.0% to $3.7 million from $3.5 million for the year
ended March 31, 2003, primarily due to growth and the step-up in basis of
property and equipment resulting from the March 4, 2004 Transaction.
AMORTIZATION EXPENSE. Amortization expense for the year ended March 31, 2004
increased $1.2 million to $1.8 million from $0.6 million for the year ended
March 31, 2003, primarily due to the March 4, 2004 Transaction, which
significantly increased the balance of amortizable intangibles, and amortization
of developed technology assets obtained through the acquisition of
TheCampusHub.com, Inc. in July, 2003.
INTEREST EXPENSE, NET. Interest expense, net for the year ended March 31,
2004 increased $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 67.3%, to $3.9 million from $12.0 million for the year ended
March 31, 2003. Our effective tax rate was 44.4% 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 were not deductible in
certain state tax returns.
24
RISK FACTORS
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of the Securities Litigation Reform Act of 1995 that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including those set forth in the following cautionary statements and
elsewhere in this Annual Report on Form 10-K. If any of the following risks were
to occur, our business, financial condition or results of operations would
likely suffer.
WE FACE COMPETITION IN OUR MARKETS. Our industry is highly competitive. A
large number of actual or potential competitors exist, some of which are larger
than us and have substantially greater resources than us. We cannot give
assurances that our business will not be adversely affected by increased
competition in the markets in which we currently operate or in markets in which
we will operate in the future, or that we will be able to improve or maintain
our profit margins. In recent years, an increasing number of institution-owned
college stores have decided to outsource or "contract-manage" the operation of
their bookstores. As of July 31, 2004, approximately 29% of the U.S. members of
The National Association of College Stores were contract-managed. The leading
managers of these stores include two of our principal competitors in the
wholesale textbook distribution business. Contract-managed stores primarily
purchase their used textbook requirements from and sell their available supply
of used textbooks to their affiliated operations. A significant increase in the
number of contract-managed stores operated by our competitors, particularly at
large college campuses, could adversely affect our ability to acquire an
adequate supply of used textbooks.
We are also experiencing growing competition from alternative media and
alternative sources of textbooks for students, such as websites designed to sell
textbooks and/or other merchandise directly to students, on-line resources,
e-books, print-on-demand textbooks and CD-ROMs, and from the use of course
packs, which are collections of copyrighted materials and professors' original
content which are produced by college bookstores and sold to students, all of
which have the potential to reduce or replace the need for textbooks sold
through the college bookstore. A substantial increase in the availability of