UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ______
Commission file number: 333-48225
NBC ACQUISITION CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0793347
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4700 South 19th Street
Lincoln, Nebraska 68501-0529
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 421-7300
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 [ ]
Total number of shares of Class A common stock outstanding as of February 8,
1999: 957,792 shares
Total Number of Pages: 14
Exhibit Index: Page 14
1
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PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NBC ACQUISITION CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------
December 31, March 31, December 31,
1998 1998 1997
ASSETS ------------- ------------ ------------
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents $ 4,591,918 $ 5,806,890 $ 5,256,414
Receivables 49,701,648 21,383,146 40,838,712
Inventories 58,772,841 48,810,714 52,362,287
Recoverable income tax - 4,374,048 218,460
Deferred income tax benefit 1,183,529 1,183,529 1,156,540
Prepaid expenses and other assets 183,081 189,950 39,134
----------- ----------- -----------
Total current assets 114,433,017 81,748,277 99,871,547
PROPERTY AND EQUIPMENT 30,838,815 28,716,839 27,842,384
Less accumulated depreciation (7,477,587) (5,984,932) (5,044,920)
----------- ----------- -----------
23,361,228 22,731,907 22,797,464
GOODWILL AND OTHER INTANGIBLES, net of amortization 39,824,718 44,866,800 32,155,540
OTHER ASSETS 2,818,990 2,798,270 1,525,693
----------- ----------- -----------
$180,437,953 $152,145,254 $156,350,244
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 15,612,699 $ 14,418,843 $ 10,842,751
Accrued employee compensation and benefits 3,183,263 3,797,242 2,657,472
Accrued interest 4,639,232 1,788,547 1,352,803
Accrued expenses 322,104 498,740 460,957
Income tax payable 108,978 - -
Deferred revenue 2,286,256 463,917 -
Current maturities of long-term debt 2,641,467 1,327,696 1,789,795
Revolving credit facility 25,000,000 5,400,000 24,800,000
----------- ----------- -----------
Total current liabilities 53,793,999 27,694,985 41,903,778
LONG-TERM DEBT, net of current maturities 216,413,218 214,869,495 77,773,780
OTHER LONG-TERM LIABILITIES 181,529 150,604 842,667
STOCKHOLDERS' EQUITY (DEFICIT):
Class A common stock, voting, authorized 5,000,000
shares at December 31, 1998 and March 31, 1998 and
4,500,000 shares at December 31, 1997 of $.01 par
value; issued and outstanding 953,027, 953,027 and
2,755,776 shares, respectively 9,530 9,530 27,558
Class B common stock, non-voting, none authorized
at December 31, 1998 and March 31, 1998, and 500,000
shares authorized at December 31, 1997 at $.01 par
value; issued and outstanding 48,148 shares at
December 31, 1997 - - 481
Additional paid-in capital 49,025,135 49,025,135 31,119,111
Notes receivable from stockholders (177,080) (211,800) (236,110)
Retained earnings (deficit) (138,808,378) (139,392,695) 4,918,979
----------- ----------- -----------
Total stockholders' equity (deficit) (89,950,793) (90,569,830) 35,830,019
----------- ----------- -----------
$180,437,953 $152,145,254 $156,350,244
=========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
2
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<TABLE>
<CAPTION>
NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------
Three Months Ended December 31, Nine Months Ended December 31,
1998 1997 1998 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
REVENUES, net of returns $ 36,222,769 $ 34,260,415 $163,353,786 $144,922,261
COSTS OF SALES 21,851,977 21,848,201 100,475,700 91,496,544
------------ ------------ ------------ -----------
Gross profit 14,370,792 12,412,214 62,878,086 53,425,717
OPERATING EXPENSES:
Selling, general and administrative 12,787,817 11,341,639 37,920,434 33,465,066
Depreciation 587,016 597,116 1,646,467 1,725,168
Amortization 1,280,476 1,536,209 4,647,898 3,829,490
Stock compensation costs - 86,030 - 322,500
------------ ------------ ------------ -----------
14,655,309 13,560,994 44,214,799 39,342,224
------------ ------------ ------------ -----------
INCOME (LOSS) FROM OPERATIONS (284,517) (1,148,780) 18,663,287 14,083,493
OTHER EXPENSES (INCOME):
Interest expense 5,553,009 2,509,392 17,316,770 7,979,479
Interest income (126,616) (126,445) (223,496) (227,008)
Other income (135,021) (56,606) (322,440) (311,795)
------------ ------------ ------------ -----------
5,291,372 2,326,341 16,770,834 7,440,676
------------ ------------ ------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES (5,575,889) (3,475,121) 1,892,453 6,642,817
INCOME TAX EXPENSE (BENEFIT) (1,920,429) (1,345,792) 1,308,136 2,657,127
------------ ------------ ------------ -----------
NET INCOME (LOSS) $ (3,655,460) $ (2,129,329) $ 584,317 $ 3,985,690
============ ============ ============ ===========
EARNINGS PER SHARE:
Basic $ (3.84) $ (0.76) $ 0.61 $ 1.42
============ ============ ============ ===========
Diluted $ (3.84) $ (0.76) $ 0.61 $ 1.32
============ ============ ============ ===========
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 953,027 2,803,924 953,027 2,801,962
============ ============ ============ ===========
Diluted 953,027 2,803,924 953,027 3,017,525
============ ============ ============ ===========
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------
Notes
Common Common Additional Receivable Retained
Stock Stock Paid-in From Earnings
A B Capital Stockholders (Deficit) Total
----------- -------- -------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, April 1, 1997 $ 27,519 $ 481 $30,972,000 $ (236,110) $ 933,289 $ 31,697,179
Proceeds from stock issued
Class A common 39 - 147,111 - - 147,150
Net income - - - - 3,985,690 3,985,690
---------- -------- ------------ ------------- ----------- ------------
BALANCE, December 31, 1997 $ 27,558 $ 481 $31,119,111 $ (236,110) $ 4,918,979 $ 35,830,019
=========== ======== ============ ============= ============ ============
BALANCE, April 1, 1998 $ 9,530 $ - $49,025,135 $ (211,800) $(139,392,695) $(90,569,830)
Payment on stockholder note - - - 34,720 - 34,720
Net income - - - - 584,317 584,317
----------- -------- ------------ ------------- ---------- -------------
BALANCE, December 31, 1998 $ 9,530 $ - $49,025,135 $ (177,080) $(138,808,378) $(89,950,793)
=========== ======== ============ ============= ============= =============
See notes to consolidated financial statements.
</TABLE>
4
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<TABLE>
<CAPTION>
NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------
Nine Months Ended December 31,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES: ---------- ----------
<S> <C> <C>
Net income $ 584,317 $ 3,985,690
Adjustment to reconcile net income to net cash flows
from operating activities:
Depreciation 1,646,467 1,725,168
Amortization of intangibles 5,885,812 4,335,767
Original issue discount amortization 3,743,737 225,000
Loss on disposal of assets 25,526 227,946
Changes in operating assets and liabilities,
net of effect of acquisitions:
Receivables (28,315,387) (25,498,171)
Inventories (8,957,627) (8,073,895)
Recoverable income tax 4,374,048 355,915
Prepaid expenses and other assets 14,807 273,123
Other assets 175,688 193,425
Accounts payable 1,193,856 331,629
Accrued employee compensation and benefits (613,979) (736,413)
Accrued interest 2,850,685 86,923
Accrued expenses (176,636) 182,127
Income taxes payable 108,978 -
Deferred revenue 1,822,339 -
Other liabilities 30,925 343,981
----------- -----------
Net cash flows from operating activities (15,606,444) (22,041,785)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,146,364) (2,887,479)
Bookstore acquisitions, net of cash acquired (1,710,182) (2,993,712)
Acquisition of other businesses - (1,451,928)
Proceeds from sale of property and equipment 39,679 39,457
Software development costs (162,172) -
----------- -----------
Net cash flows from investing activities (3,979,039) (7,293,662)
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs (377,966) -
Principal payments on long-term debt (886,243) (185,103)
Net proceeds from revolving credit facility 19,600,000 24,800,000
Proceeds from payment on stockholder note 34,720 -
----------- -----------
Net cash flows from financing activities 18,370,511 24,614,897
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,214,972) (4,720,550)
CASH AND CASH EQUIVALENTS, Beginning of period 5,806,890 9,976,964
----------- -----------
CASH AND CASH EQUIVALENTS, End of period $ 4,591,918 $ 5,256,414
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid (refunded) during the period for:
Interest $ 9,210,510 $ 6,957,160
=========== ===========
Income taxes $(3,174,890) $ 2,301,212
=========== ===========
Noncash investing and financing activities:
Common stock issued for business acquisitions $ - $ 147,150
=========== ===========
See notes to consolidated financial statements.
</TABLE>
5
<PAGE>
NBC ACQUISITION CORP.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
1. Management Representations - The accompanying unaudited consolidated
financial statements and notes thereto reflect all adjustments which are, in
the opinion of management, necessary to summarize fairly the financial
position of NBC Acquisition Corp. (the "Company") and its wholly-owned
subsidiary, Nebraska Book Company, Inc. ("NBC") and the results of the
Company's operations for the periods presented. All of these adjustments are
of a normal recurring nature. Because of the seasonal nature of the
Company's operations, results of operations of any single reporting period
should not be considered as indicative of results for a full year. Certain
reclassifications have been made to prior period financial statements to
conform with current year presentation. These statements should be read in
conjunction with the Company's audited consolidated financial statements for
the year ended March 31, 1998 included in the Company's Registration
Statement on Form S-4 (No. 333-48225).
2. Recapitalization - On February 13, 1998, the Company consummated a merger
among NBC Merger Corp. (a newly created, indirect wholly-owned subsidiary of
HWH Capital Partners, LP. ["HWH"]), the Company and certain shareholders of
the Company pursuant to which the Company's outstanding debt and stock were
restructured (the "Recapitalization"). As the new investor did not acquire
substantially all of the common stock of the Company, a new basis of
accounting was not established in connection with the Recapitalization.
Significant components of the Recapitalization, together with the applicable
accounting effects, were as follows:
(i) HWH contributed $45.6 million in capital to NBC Merger Corp., which was
then merged into the Company, with the Company being the surviving
corporation.
(ii)Existing management shareholders of the Company reinvested approximately
$4.4 million in the Company. HWH and management shareholders were
reissued surviving corporation shares of Class A Common Stock.
(iii)The Company obtained approximately $215.0 million in new debt
financing and retired substantially all of its existing debt. The early
extinguishment of debt resulted in an extraordinary loss on the
transaction.
(iv) The Company agreed to purchase management's outstanding options under
its 1995 Stock Incentive Plan, for a cash payment in lieu of the
options. This resulted in stock based compensation of approximately
$8.3 million for the year ended March 31, 1998. In addition, the
Company agreed to purchase all outstanding warrants for approximately
$16.7 million, which was charged to additional paid-in capital and
retained earnings.
(v) The Company reacquired the outstanding shares of Class A and Class B
Common Stock of certain shareholders for approximately $149.2 million.
This reacquisition of shares was accounted for as a treasury stock
transaction, and such reacquired shares were retired.
In connection with the Recapitalization, a transaction fee of $4.0 million
was paid to HWH. Additionally, the Company reimbursed HWH approximately $0.1
million for expenses incurred by HWH in conjunction with the
Recapitalization. Approximately $0.6 million of such costs was charged to
additional paid-in capital as non-deductible costs of the Recapitalization.
The remaining $3.5 million was recorded as debt issue costs and is being
amortized over the life of the related debt.
3. Earnings Per Share - Earnings per share are calculated in accordance with
Statement of Financial Accounting Standard (SFAS) No. 128, Earnings Per
Share. SFAS 128 requires dual presentation of Basic and Diluted Earnings Per
Share (EPS). Basic earnings per share data are based on the weighted-average
number of common shares outstanding during the period. Diluted earnings per
share data are based on the weighted-average number of common shares
outstanding and the dilutive effect of potential common shares including
stock options and warrants.
6
<PAGE>
4. Inventories - Inventories are summarized as follows:
December 31, March 31, December 31,
1998 1998 1997
----------------------------------------------------------------------------
Wholesale $18,593,688 $23,974,308 $16,088,562
College bookstores 37,357,295 21,889,631 34,835,353
Other 2,821,858 2,946,775 1,438,372
----------------------------------------------------------------------------
Inventories $58,772,841 $48,810,714 $52,362,287
============================================================================
5. Long-Term Debt - On February 13, 1998, the Company obtained new financing as
part of the Recapitalization. Such financing included a bank-administered
senior credit facility (the "Senior Credit Facility") provided through a
syndicate of lenders. The facility is comprised of a $27.5 million term loan
(the "Tranche A Loan"), a $32.5 million term loan (the "Tranche B Loan") and
a $50.0 million revolving credit facility (the "Revolving Credit Facility").
The Revolving Credit Facility expires on March 31, 2004. Availability under
the Revolving Credit Facility is determined by the calculation of a
borrowing base which at any time is equal to a percentage of eligible
accounts receivable and inventory. The borrowing base at December 31, 1998
was $50.0 million. The interest rate on the Senior Credit Facility is prime
plus an applicable margin of up to 1.50% or, on Eurodollar borrowings, LIBOR
plus an applicable margin of up to 2.50%. Effective for fiscal years ending
on or after March 31, 1999, the Senior Credit Facility requires excess cash
flows as defined in the credit agreement dated February 13, 1998 (the
"Credit Agreement") to be applied initially towards prepayment of the term
loans and then utilized to permanently reduce commitments under the
Revolving Credit Facility. Additional funding of the Recapitalization
included the proceeds of the issuance by NBC of $110.0 million face amount
of 8.75% senior subordinated notes due 2008 (the "Senior Subordinated
Notes") and the issuance by the Company of $76.0 million face amount of
10.75% senior discount debentures due 2009 (the "Senior Discount
Debentures"). The Senior Discount Debentures were issued at a discount in
the amount of approximately $31.0 million and will accrete in value at the
rate of 10.75% compounded semiannually until February 15, 2003, at which
time interest payments will begin.
During the quarter ended June 30, 1998, the Company and NBC filed
Registration Statements on Form S-4 with the Securities and Exchange
Commission for purposes of registering debt securities to be issued in
exchange for the Company's Senior Discount Debentures and NBC's Senior
Subordinated Notes. Such Registration Statements were declared effective by
the Securities and Exchange Commission on July 14, 1998. All notes were
tendered in the offer to exchange which was completed on August 13, 1998.
During the quarter ended September 30, 1998, the Company entered into
separate five-year amortizing interest rate swap agreements with two
financial institutions whereby the Company's variable rate Tranche A and B
Term Loans have been effectively converted into debt with a fixed LIBOR rate
of 5.815% plus the applicable margin. The current notional amount under each
agreement is approximately $29.6 million. Such notional amounts are reduced
periodically by amounts equal to the scheduled principal payments on the
Tranche A and B Term Loans. The Company is exposed to credit loss in the
event of nonperformance by the counterparties to the interest rate swap
agreements. The Company anticipates the counterparties will be able to fully
satisfy their obligations under the agreements.
6. New Accounting Pronouncement - In June 1997, the Financial Accounting
Standards Board adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS 131, effective for fiscal 1999,
redefines how operating segments are determined and requires disclosure of
certain financial and descriptive information about a company's operating
segments. The Statement does not need to be applied to interim financial
statements in the initial year of application. The required disclosure under
this Statement will be provided in the Company's fiscal 1999 Form 10-K
filing.
7. Stock Based Compensation - On June 30, 1998, the Company's Board of
Directors adopted the NBC Acquisition Corp. 1998 Performance Stock Option
Plan (the "Plan"). This Plan provides for the granting of options to
purchase 52,000 shares of the Company's Class A Common Stock to selected
members of senior management of the Company and its affiliates. All options
granted are intended to be nonqualified stock options, although the Plan
also provides for incentive stock options. The Company will grant a portion
of the available options in fiscal years 1999-2002 upon the attainment of
pre-established financial targets. Twenty-five percent of the options
granted become exercisable immediately upon granting, with the remaining
options becoming exercisable in 25% increments over the subsequent three
years on the anniversary of the date of grant. The options will have an
exercise price of not less than fair market value on the date the options
are granted and expire ten years from the date of grant. No options were
granted as of December 31, 1998.
7
<PAGE>
On June 30, 1998, the Company's Board of Directors adopted the NBC
Acquisition Corp. 1998 Stock Option Plan (the "Option Plan"). This Option
Plan provides for the granting of options to purchase 31,000 shares of the
Company's Class A Common Stock to selected employees, officers, and
directors of the Company and its affiliates. All options granted are
intended to be nonqualified stock options, although the Option Plan also
provides for incentive stock options. The Company will grant such options at
the discretion of a committee designated by the Board of Directors (the
"Committee"). Twenty-five percent of the options granted become exercisable
immediately upon granting, with the remaining options becoming exercisable
in 25% increments over the subsequent three years on the anniversary of the
date of grant. Incentive stock options will have an exercise price of not
less than fair market value on the date the options are granted, while the
Committee will determine the exercise price for nonqualified options, which
may be below fair market value, at the time of grant. All options expire ten
years from the date of grant. On December 11, 1998, nonqualified stock
options to purchase 13,200 shares of the Company's Class A Common Stock were
granted at an exercise price of $52.47 per share.
8. Subsequent Events - Pursuant to the terms of an employment agreement dated
December 22, 1998, Nebraska Book Company, Inc. established the position of
Chief Operating Officer (the "COO") and appointed Mr. Barry S. Major to this
position. In January, 1999, under the terms of the employment agreement, the
COO was granted options to purchase 9,530 shares of the Company's Class A
Common Stock under the 1998 Performance Stock Option Plan at an exercise
price of $52.47 per share. Also in January, 1999, the Company issued 4,765
shares of its Class A Common Stock to the COO at a price of $52.47 per share
(founders price), receiving $25,000 in cash and a $225,000 note maturing
January, 2009 and bearing interest at 5.25% per year. These transactions
were exempt from registration under the Securities Act of 1933 pursuant to
Section 4(2). No underwriters were involved in these transactions.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Quarter Ended December 31, 1998 Compared With Quarter Ended December 31, 1997.
Revenues. Revenues for the quarters ended December 31, 1998 and 1997 were as
follows:
1998 1997
-------------------------------
Wholesale operations $21,894,321 $20,926,443
College bookstore operations 12,464,199 12,636,053
Complementary services 3,423,642 2,225,215
Intercompany eliminations (1,559,393) (1,527,296)
--------------------------------
$36,222,769 $34,260,415
===============================
Revenues for the quarter ended December 31, 1998 increased $1.9 million, or
5.7%, to $36.2 million from $34.3 million for the quarter ended December 31,
1997. This increase was due to a $1.0 million, or 4.6%, increase in wholesale
sales, a $0.1 million, or 1.4%, decrease in college bookstore sales and a $1.2
million, or 53.9%, increase in revenues related to complementary services.
Wholesale sales for the quarter ended December 31, 1998 increased to $21.9
million from $20.9 million for the quarter ended December 31, 1997. This
increase in wholesale sales was due primarily to publisher price increases and
unit volume sales growth. College bookstore sales for the quarter ended December
31, 1998 decreased to $12.5 million from $12.6 million for the quarter ended
December 31, 1997. The decrease in college bookstore sales was primarily
attributable to decreased sales of clothing and insignia at the University of
Nebraska and University of Michigan bookstore locations. Same store sales for
college bookstore operations as a whole declined 4.1%, while same store sales
excluding the University of Nebraska and University of Michigan bookstore
locations increased 5.8% over the quarter ended December 31, 1997. These
universities had successful football seasons in fiscal 1998, sharing the
national championship, and thus experienced increased sales of clothing and
insignia during the football season, which runs from September through December.
Additionally, University of Nebraska football head coach Tom Osborne announced
his retirement in December, 1997, thus prompting an increase in sales of
clothing, insignia, and general books during the third quarter of fiscal 1998.
Such sales declines were substantially offset by increased sales attributable to
five bookstores opened or acquired during the last half of fiscal 1998 and four
bookstores opened or acquired during fiscal 1999. Complementary services sales
for the quarter ended December 31, 1998 increased to $3.4 million from $2.2
million for the quarter ended December 31, 1997 due to the acquisition of
Collegiate Stores Corporation on January 23, 1998. As the Company's wholesale
and college bookstore operations have grown, the Company's intercompany
transactions have also increased.
Gross profit. Gross profit for the quarter ended December 31, 1998 increased
$2.0 million, or 15.8%, to $14.4 million from $12.4 million for the quarter
ended December 31, 1997. This increase was primarily due to higher revenues,
combined with an increase in gross margin percent. Gross margin for the quarter
ended December 31, 1998 increased to 39.7% from 36.2% for the quarter ended
December 31, 1997. Factors contributing to the increase in gross profit margin
include a second increase in publisher prices during fiscal 1999 which occurred
in the Company's third quarter, allowing the Company to purchase used books
based on earlier list prices and yet sell such books based on new higher prices
resulting from the aforementioned publisher price increases, and a slight shift
in sales mix through increased used textbook sales at the Company's bookstores.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the quarter ended December 31, 1998 increased $1.5
million, or 12.8%, to $12.8 million from $11.3 million for the quarter ended
December 31, 1997. Selling, general and administrative expenses as a percentage
of revenues were 35.3% and 33.1% for the quarters ended December 31, 1998 and
December 31, 1997, respectively. The increase in expense resulted primarily from
the higher expense base associated with the Company's expansion of its
operations through bookstore and other business acquisitions.
Amortization expense. Amortization expense for the quarter ended December 31,
1998 decreased $0.2 million, or 16.6%, to $1.3 million from $1.5 million for the
quarter ended December 31, 1997. This decrease was the result of a non-compete
agreement becoming fully-amortized in August, 1998.
9
<PAGE>
Interest expense, net. Interest expense, net for the quarter ended December 31,
1998 increased by $3.0 million, or 127.7%, to $5.4 million from $2.4 million for
the quarter ended December 31, 1997 as a result of the additional debt incurred
relating to the Recapitalization which occurred on February 13, 1998.
Income taxes. Income taxes for the quarter ended December 31, 1998 were recorded
at an effective tax rate of 34.4% as compared with an effective tax rate of
38.7% for the quarter ended December 31, 1997. This decrease in benefit is
primarily the result of non-deductible amortization on goodwill associated with
the fiscal 1998 acquisitions.
Nine Months Ended December 31, 1998 Compared With Nine Months Ended December 31,
1997.
Revenues. Revenues for the nine months ended December 31, 1998 and 1997 were as
follows:
1998 1997
-------------------------------
Wholesale operations $86,417,106 $79,177,992
College bookstore operations 77,370,093 69,560,699
Complementary services 11,856,226 7,316,323
Intercompany eliminations (12,289,639) (11,132,753)
--------------------------------
$163,353,786 $144,922,261
================================
Revenues for the nine months ended December 31, 1998 increased $18.5 million, or
12.7%, to $163.4 million from $144.9 million for the nine months ended December
31, 1997. This increase was due to a $7.2 million, or 9.1%, increase in
wholesale sales, a $7.8 million, or 11.2%, increase in college bookstore sales
and a $4.6 million, or 62.1%, increase in revenues related to complementary
services. Wholesale sales for the nine months ended December 31, 1998 increased
to $86.4 million from $79.2 million for the nine months ended December 31, 1997.
This increase in wholesale sales was due primarily to publisher price increases
and unit volume sales growth. College bookstore sales for the nine months ended
December 31, 1998 increased to $77.4 million from $69.6 million for the nine
months ended December 31, 1997. The increase in college bookstore sales was
primarily the result of eight bookstores opened or acquired during fiscal 1998,
the opening/acquisition of four new stores during fiscal 1999 and same store
sales increases of 3.7%. Complementary services sales for the nine months ended
December 31, 1998 increased to $11.9 million from $7.3 million for the nine
months ended December 31, 1997 due to the acquisitions of Specialty Books, Inc.
on May 1, 1997 and Collegiate Stores Corporation on January 23, 1998. As the
Company's wholesale and college bookstore operations have grown, the Company's
intercompany transactions have also increased.
Gross profit. Gross profit for the nine months ended December 31, 1998 increased
$9.5 million, or 17.7%, to $62.9 million from $53.4 million for the nine months
ended December 31, 1997. This increase was primarily due to higher revenues,
combined with an increase in gross margin percent. Gross margin for the nine
months ended December 31, 1998 increased to 38.5% from 36.9% for the nine months
ended December 31, 1997. Factors contributing to the increase in gross profit
margin include a second increase in publisher prices during fiscal 1999 which
occurred in the Company's third quarter, allowing the Company to purchase used
books based on earlier list prices and yet sell such books based on new higher
prices resulting from the aforementioned publisher price increases, and a slight
shift in sales mix through increased used textbook sales at the Company's
bookstores.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the nine months ended December 31, 1998 increased
$4.4 million, or 13.3%, to $37.9 million from $33.5 million for the nine months
ended December 31, 1997. Selling, general and administrative expenses as a
percentage of revenues increased to 23.2% for the nine months ended December 31,
1998 from 23.1% for the nine months ended December 31, 1997. The increase in
expense resulted primarily from the higher expense base associated with the
Company's expansion of its operations through bookstore and other business
acquisitions.
Amortization expense. Amortization expense for the nine months ended December
31, 1998 increased $0.8 million, or 21.4%, to $4.6 million from $3.8 million for
the nine months ended December 31, 1997. This increase resulted primarily from a
full nine months of amortization on the goodwill associated with the fiscal 1998
acquisitions.
Stock Compensation Costs. There were no stock compensation costs for the nine
months ended December 31, 1998 as compared to $0.3 million in stock compensation
costs for the nine months ended December 31, 1997. This decrease is the result
of the options under the 1995 stock option plan being bought out in fiscal 1998
in connection with the Recapitalization. The
10
<PAGE>
options recently granted under the 1998 Stock Option Plan have an exercise price
equal to the fair value of the Company's Class A Common Stock on the date of
grant (measurement date).
Interest expense, net. Interest expense, net for the nine months ended December
31, 1998 increased by $9.3 million, or 120.5%, to $17.1 million from $7.8
million for the nine months ended December 31, 1997 as a result of the
additional debt incurred relating to the Recapitalization which occurred on
February 13, 1998.
Income taxes. Income taxes for the nine months ended December 31, 1998 were
recorded at an effective tax rate of 69.1% as compared with an effective tax
rate of 40.0% for the nine months ended December 31, 1997. This increase is
primarily the result of non-deductible amortization on goodwill associated with
the fiscal 1998 acquisitions.
Liquidity and Capital Resources
The Company's primary liquidity requirements are for debt service under
the Senior Credit Facility, the Senior Subordinated Notes and other outstanding
indebtedness, for working capital, and for capital expenditures. The Company has
historically funded these requirements primarily through internally generated
cash flow and funds borrowed under the Company's credit facility. At December
31, 1998, the Company's total indebtedness was approximately $244.1 million,
consisting of approximately $59.1 million in Term Loans, $110.0 million of the
Senior Subordinated Notes, $49.4 million of the Senior Discount Debentures,
$25.0 million under the Revolving Credit Facility and $0.6 million of other
indebtedness.
Principal and interest payments under the Senior Credit Facility and the
Senior Subordinated Notes represent significant liquidity requirements for the
Company. Under the terms of the Tranche A and B Loans, NBC is required to make
principal payments totaling approximately $1.3 million in fiscal 1999, $3.1
million in fiscal 2000, $4.4 million in fiscal 2001, $6.3 million in fiscal
2002, $6.8 million in fiscal 2003, $8.5 million in fiscal 2004, $11.2 million in
fiscal 2005 and $18.4 million in fiscal 2006. Loans under the Senior Credit
Facility bear interest at floating rates based upon the interest rate option
selected by the Company. The Senior Subordinated Notes require semi-annual
interest payments at a fixed rate of 8.75% and mature on February 15, 2008. The
Senior Discount Debentures require semi-annual interest payments commencing
August 15, 2003 at a fixed rate of 10.75% and mature on February 15, 2009.
The Company's capital expenditures were $2.1 million and $2.9 million
for the nine months ended December 31, 1998 and 1997, respectively. The Company
estimates that for fiscal 1999, approximately $2.5 million of capital
expenditures will be required, primarily for maintenance. Capital expenditures
consist primarily of bookstore opening costs, bookstore renovations and
miscellaneous maintenance requirements. The Company's ability to make capital
expenditures is subject to certain restrictions under the Senior Credit
Facility.
Business acquisition expenditures were $1.7 million and $4.4 million for
the nine months ended December 31, 1998 and 1997, respectively. The Company
estimates that for fiscal 1999, it will make approximately $2.0 million of
business acquisition expenditures.
The Company's principal sources of cash to fund its future liquidity
needs will be net cash from operating activities and borrowings under the
Revolving Credit Facility. Usage of the Revolving Credit Facility to meet the
Company's liquidity needs fluctuates throughout the year due to the Company's
distinct buying and selling periods, increasing substantially at the end of each
semester (May and December). Net cash flows used in operating activities for the
nine months ended December 31, 1998 were $15.6 million, a decrease of $6.4
million from $22.0 million for the nine months ended December 31, 1997. This
decrease was primarily due to higher uses of cash in the nine months ended
December 31, 1997 to fund estimated income tax liabilities.
Access to the Company's principal sources of cash is subject to various
restrictions. The availability of additional borrowings under the Revolving
Credit Facility is subject to the calculation of a borrowing base which at any
time is equal to a percentage of eligible accounts receivable and inventory. The
Senior Credit Facility restricts the Company's ability to make loans or advances
and pay dividends, except that, among other things, NBC may pay dividends to the
Company (i) after August 15, 2003 in an amount not to exceed the amount of
interest required to be paid on the Senior Discount Debentures and (ii) to pay
corporate overhead expenses not to exceed $250,000 per year and any taxes due by
the Company. The indenture governing the Senior Discount Debentures (the
"Indenture") restricts the ability of the Company and its Restricted
Subsidiaries (as defined in the Indenture) to pay dividends or make other
Restricted Payments (as defined in the Indenture) to their respective
stockholders,
11
<PAGE>
subject to certain exceptions, unless certain conditions are met, including that
(i) no default under the Indenture shall have occurred and be continuing, (ii)
the Company shall be permitted by the Indenture to incur additional indebtedness
and (iii) the amount of the dividend or payment may not exceed a certain amount
based on, among other things, the Company's consolidated net income. The
indenture governing the Senior Subordinated Notes contains similar restrictions
on the ability of NBC and its Restricted Subsidiaries to pay dividends or make
other Restricted Payments to their respective stockholders. Such restrictions
are not expected to affect the Company's ability to meet its cash obligations.
As of December 31, 1998, the Company could borrow up to $50.0 million
under the Revolving Credit Facility. Of the amount available, $25.0 million was
drawn by NBC. Additionally, in conjunction with one of the bookstores acquired
during the quarter ended December 31, 1998, NBC established an irrevocable
standby letter of credit for $90,000 which expires October 29, 1999. Amounts
available under the Revolving Credit Facility may be used for working capital
and general corporate purposes (including up to $10.0 million for letters of
credit), subject to certain limitations contained in the Senior Credit Facility.
Seasonality
The Company's wholesale and bookstore operations experience two distinct
selling periods and the wholesale operations experience two distinct buying
periods. The peak selling periods for the wholesale operations occur prior to
the beginning of each school semester in August and December. The buying periods
for the wholesale operations occur at the end of each school semester in late
December and May. In fiscal 1998, approximately 42% of the Company's annual
revenues occurred in the second fiscal quarter (July-September), while
approximately 27% of the Company's annual revenues occurred in the fourth fiscal
quarter (January-March). The primary selling periods for the bookstore
operations are in September and January. Accordingly, the Company's working
capital requirements fluctuate throughout the year, increasing substantially at
the end of each semester, in May and December, as a result of the buying
periods. The Company funds its working capital requirements primarily through a
revolving credit facility, which historically has been repaid with cash provided
from operations.
Impact of Inflation
The Company's results of operations and financial condition are
presented based upon historical costs. While it is difficult to accurately
measure the impact of inflation due to the imprecise nature of the estimates
required, the Company believes that the effects of inflation, if any, on its
results of operations and financial condition have been minor. However, there
can be no assurance that during a period of significant inflation, the Company's
results of operations would not be adversely affected.
Impact of Year 2000
Some of the Company's older computer programs were written using two
digits rather than four to define the applicable year. As a result, those
programs recognize a date using "00" as the year 1900 rather than the year 2000
(the "Year 2000 Issue"). This problem could cause a system failure or
miscalculations resulting in disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar routine business activities.
The Company has completed an assessment of the impact of the Year 2000
Issue on its operations, and has been modifying and will continue to modify and
replace portions of its software so that its internal computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company has been addressing the Year 2000 Issue consistently as part of its
regular program of updating and rewriting its internal corporate applications
during the last seven years. As a result, all of the Company's own retail
applications have been modified completely. The only internal corporate
application that remains to be addressed is the general ledger application,
which the Company is currently in the process of modifying internally. The
Company expects the cost to modify its current general ledger software will not
be significant. The Company plans to have such modifications in place during
1999.
The Company is currently in the process of identifying and evaluating
potential risks associated with the Year 2000 Issue on non-information
technology systems (i.e. telecommunications, heating and cooling, security,
electrical, and freight). Although potentially disruptive, management does not
believe that such Year 2000 Issue system difficulties will adversely affect
12
<PAGE>
day-to-day operations at the Company's retail locations. Difficulties
encountered with the telecommunications and freight systems could potentially
hinder the Company's ability to receive and ship wholesale orders. Contingency
plans are being developed to minimize the effect of any such disruptions on
day-to-day operations.
The Company has also distributed questionnaires to its vendors to
assess exposure to vendors failing to be Year 2000 compliant. Based upon
responses to such questionnaires, discussions with certain vendors, and
information provided in trade publications, the Company believes that its
vendors are taking steps to address the Year 2000 Issue and that there is not a
material risk to the Company relating to vendor failure to address the Year 2000
Issue. Nonetheless, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be corrected in a timely
manner.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995
This Quarterly Report on Form 10-Q contains or incorporates by reference
certain statements that are not historical facts, including, most importantly,
information concerning possible or assumed future results of operations of the
Company and statements preceded by, followed by or that include the words "may,"
"believes," "expects," "anticipates," or the negation thereof, or similar
expressions, which constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). All
statements which address operating performance, events or developments that are
expected or anticipated to occur in the future, including statements relating to
volume and revenue growth, earnings per share growth or statements expressing
general optimism about future operating results, are forward-looking statements
within the meaning of the Reform Act. Such forward-looking statements involve
risks, uncertainties and other factors which may cause the actual performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. For those statements, the Company claims the protection of the safe
harbor for forward-looking statements contained in the Reform Act. Several
important factors could affect the future results of the Company and could cause
those results to differ materially from those expressed in the forward-looking
statements contained herein. The factors that could cause actual results to
differ materially include, but are not limited to, the following: increased
competition; ability to integrate recent acquisitions; loss or retirement of key
members of management; increases in the Company's cost of borrowing or inability
or unavailability of additional debt or equity capital; inability to purchase a
sufficient supply of used textbooks; changes in pricing of new and/or used
textbooks; changes in general economic conditions and/or in the markets in which
the Company competes or may, from time to time, compete; and other risks
detailed in the Company's Securities and Exchange Commission filings, in
particular the Company's Registration Statement on Form S-4 (No. 333-48225), all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. The Company will not undertake and
specifically declines any obligation to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect events
or circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.
13
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS
(a) Exhibits
10.1 Memorandum of Understanding, dated as of December 22, 1998
between Nebraska Book Company, Inc. and Barry S. Major, Chief
Operating Officer [EDGAR filing only]
27 Financial Data Schedule [EDGAR filing only]
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized in the City of Lincoln, Nebraska, on
February 8, 1999.
NBC ACQUISITION CORP.
/s/ Mark W. Oppegard
----------------------------
Mark W. Oppegard
President, Secretary and Director
/s/ Bruce E. Nevius
--------------------------
Bruce E. Nevius
Vice President and Treasurer
(Principal Financial and Accounting Officer)
14
EXHIBIT 10.1
MEMORANDUM OF UNDERSTANDING
This MEMORANDUM OF UNDERSTANDING (this "Memorandum") dated as of
December 22, 1998, sets forth the mutual and binding understanding of Barry S.
Major (the "Executive") regarding the material terms of employment of Executive
by Nebraska Book Company, Inc. (the "Company"). For good and fair value and
consideration, the parties agree as follows:
o POSITION:
Executive shall be employed as Chief Operating Officer of the Company.
o TERM:
The term of Executive's employment hereunder (the "Term") shall be from
the date hereof to March 31, 2001, unless extended or earlier terminated
in accordance with this Memorandum or otherwise by agreement of the
parties. The Term shall be automatically extended for additional periods
of one year each unless either party gives at least 120 day prior
written notice to the other of the intention to terminate the
Executive's employment hereunder at the end of the then current Term.
o BASE SALARY:
Executive will be paid a base salary at the rate of $200,000 per annum.
Increases in base salary for Executive shall be determined by the Board
of Directors of the Company (the "Board") after due consideration of the
recommendation of the Chief Executive Officer of the Company (the
"CEO"). Increases in base salary thereafter shall be determined annually
in the same manner.
o SIGNING BONUS:
Executive shall receive a Signing Bonus of $60,000 within ten days of
the mutual execution of this Memorandum.
o INCENTIVE BONUSES:
Executive shall be afforded the opportunity to earn an Incentive Bonus
with respect to each of fiscal years 2000 and 2001 based upon the
attainment of financial objectives established by the Board (or a
committee thereof), following consideration of the recommendation of the
CEO.
o STOCK OWNERSHIP:
Executive shall purchase 4,765 shares of the Common Stock (the
"Purchased Shares") of NBC Acquisition Corp. ("NBC Acquisition") for
$250,000. The Executive shall pay for the Purchased Shares by delivery
of $25,000 to NBC Acquisition and a Note in the principal amount of
$225,000 in the form attached hereto as Appendix A.
<PAGE>
o STOCK OPTIONS:
Executive shall be granted options (the "Original Options") to purchase
9,530 shares of the Common Stock of NBC Acquisition. The Original
Options shall have an exercise price of $52.46722 per share. The
Original Options shall be exercisable as to 25% of the shares covered
thereby on March 31, 1999, and shall be exercisable as to an additional
25% of the shares covered thereby on each of March 31, 2000, 2001 and
2002, subject to Executive's continued employment with the Company on
such anniversary dates. Customary terms and conditions shall apply to
the Original Options.
For each of fiscal years 2000 and 2001, Executive shall be granted
additional options to acquire a number of shares of Common Stock of NBC
Acquisition to be determined by the Board, subject to the achievement by
the Company of annual performance targets to be established by the
Board. The additional options shall have an exercise price equal to the
fair market value per share as of the date of grant. Each additional
option shall be exercisable as to 25% of the shares covered thereby on
the date of grant and shall become exercisable as to an additional 25%
of the shares covered thereby on each of the first three anniversaries
of the date of grant of such option, subject to Executive's continued
employment with the Company on such anniversary dates. Customary terms
and conditions shall apply to such additional options.
o TAG-ALONG AND DRAG-ALONG RIGHTS:
In the event of a sale of the majority of the common stock of NBC
Acquisition, all shares of Common Stock of NBC Acquisition owned by
Executive (including shares hereafter acquired) shall be subject to
tag-along and drag-along rights, entitling and obligating Executive to
sell his shares ratably with, and on the same terms and conditions as,
other selling shareholders.
o NON-TRANSFERABILITY OF STOCK:
Other than the sale described above, Executive shall not sell, transfer,
pledge or convey any Common Stock or options of NBC Acquisition other
than (i) for estate planning purposes, to a family trust or family
partnership for the benefit of immediate members of the Executive's
family, (ii) upon Executive's death, to his estate, (iii) upon
Executive's disability or (iv) after an initial public offering of
Common Stock of NBC Acquisition, subject in each case (except iv) to the
tag-along and drag-along provisions of the immediately preceding
paragraph.
o TERMINATION OF EMPLOYMENT PRIOR TO THE EXPIRATION OF TERM:
-Termination by the Company without "cause": Executive entitled to (i)
continued payment of base salary for 12 months, (ii) payment of
Incentive Bonus when otherwise due in respect of year of termination,
prorated through date of termination, and (iii) continuation for 12
months of any health, life insurance and disability insurance benefits
provided to the Executive immediately before such termination.
-Death/Disability: Executive entitled to (i) payment of base salary
through the date of termination plus an additional six (6) months, and
(ii) payment of Incentive Bonus when otherwise due in respect of year of
termination, prorated through date of termination.
-2-
<PAGE>
-Executive voluntary resignation or termination by Company for "cause":
Executive entitled to payment of base salary through date of termination.
-Cause Defined: "Cause" shall mean the Executive willfully neglects his
duties hereunder, is convicted of any felony or misdemeanor involving
moral turpitude, is guilty of gross misconduct in connection with the
performance of his duties hereunder, or materially breaches affirmative
or negative covenants or undertakings hereunder (including under
Appendix A).
o NON-COMPETITION AND CONFIDENTIALITY AGREEMENTS:
Executive agrees to be bound by the terms of the Non-Competition and
Confidentiality Agreement attached as Appendix B, which is hereby
incorporated by reference.
o FRINGE BENEFITS AND EMPLOYEE BENEFITS:
Customary fringe benefit plans and entitlements as currently provided by
the Company to its senior executives.
o COUNTERPARTS AND ADDITIONAL DOCUMENTATION:
This Memorandum may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument, and the signature of any party
to any counterpart shall be deemed a signature to, and may be appended
to, any other counterpart.
NEBRASKA BOOK COMPANY, INC.
By______________________________
Its: Chairman
EXECUTIVE
--------------------------------
Barry S. Major
-3-
<PAGE>
Appendix A
SECURED PROMISSORY NOTE
$225,000 January ____, 1999
FOR VALUE RECEIVED, the undersigned, Barry S. Major, (the "Borrower"),
hereby promises to pay to NBC Acquisition Corp., a Delaware corporation (the
"Payee"), the principal sum of Two Hundred Twenty-Five Thousand Dollars
($225,000), together with interest on the unpaid balance of such principal
amount from the date hereof at a rate of interest equal to 5.25% per annum
payable on or before January ___, 2009. Payment of interest shall commence on
December 31, 1999 and shall be payable thereafter annually on December 31 of
each year.
Payments of principal and interest on this Note shall be paid to the
Payee at its principal office in Lincoln, Nebraska (or where otherwise specified
by the Payee), by certified or official bank check or personal check (subject to
collection) payable to the Payee . If the date set for any payment of principal
or interest on this Note is a Saturday, Sunday or legal holiday, such payment
shall be due on the next succeeding business day.
As of the date hereof, the Borrower has purchased from Payee 4,765
shares of its common stock, $0.01 par value per share, $225,000 of which was
paid in the form of this Note. This Note shall be secured by a pledge of the
Collateral (as defined in the Pledge and Security Agreement (as defined below) )
by the Borrower to Payee as provided in that certain Pledge and Security
Agreement (the "Security Agreement"), dated as of the date hereof, between the
Payee and the Borrower.
In the event that the Borrower fails to make complete payment of accrued
principal or interest when due under this Note, the Payee may accelerate this
Note and may, by written notice to the Borrower, declare the entire unpaid
principal amount and all such accrued and unpaid interest therein to be
immediately due and payable and, thereupon, the unpaid principal amount and all
such accrued and unpaid interest shall become and be forthwith due and payable,
without presentment, demand, protest or further notice of any kind, all of which
are expressly waived by the Borrower; provided, however, the Payee shall only
have recourse against the Borrower for payment of One Hundred Thousand Dollars
($100,000) of the principal owing under this Note.
In case this Note shall become mutilated, defaced or apparently
destroyed, lost or stolen, upon the written request of the Payee, the Borrower
shall issue and execute a new Note in exchange and substitution for the
mutilated or defaced Note or in lieu of and substitution for the Note so
apparently destroyed, lost or stolen. Thereafter, no amount shall be due and
payable or owing under the mutilated, defaced or apparently destroyed, lost or
stolen Note.
<PAGE>
This Note may be prepaid in whole or in part (principal amount to be
prepaid, plus accrued interest thereon through date of prepayment) at any time
without penalty.
This Note may be assigned by the Payee to any of his affiliates, members
of his immediate family or trusts, partnerships or limited liability companies
established for their benefit.
The provisions of this Note shall be governed by and construed in
accordance with the internal laws of the State of New York without regard to the
conflicts of law rules thereof.
IN WITNESS WHEREOF, this Note has been duly executed and delivered by
Borrower on the date first above written.
BORROWER
---------------------------------
Barry S. Major
-2-
<PAGE>
PLEDGE AND SECURITY AGREEMENT
SECURITY AGREEMENT (the "Agreement"), dated as of January ____, 1999,
among NBC Acquisition Corp., a Delaware corporation (the "Pledgee"), and Barry
S. Major (the "Pledgor").
WHEREAS, the Pledgee and the Pledgor are parties to a Memorandum of
Understanding (the "Memorandum") dated as of December ___, 1998, pursuant to
which the Pledgor is purchasing from the Pledgee 4,765 shares of its common
stock, $.01 par value per share (the "Stock"), for aggregate consideration of
$250,000, of which $225,000 was paid in the form of a Secured Promissory Note
(the "Note") of even date herewith;
NOW, THERFORE, in consideration of the foregoing and of mutual
undertakings set forth in this Agreement, the Pledgee and the Pledgor agree as
follows:
1. As collateral security for the full and timely payment, performance
and observance of all indebtedness (the "Indebtedness") of the
Pledgor to the Pledgee or any transferee under the Note, the Pledgor
shall grant and hereby grants to the Pledgee a perfected first
security interest in all of the Pledgor's right, title and interest
in the Stock (the "Collateral").
2. The Pledgee shall have no duty as to the collection or protection of
the Collateral or any income thereon or as to the preservation of any
rights pertaining thereto, including with respect to any maturities,
calls, conversations, exchanges, redemptions, offers, tenders or
similar matters relating to any of the Collateral.
3. This security interest shall continue until the Note has been paid in
full. Upon payment in full of the Note, the Pledgee shall promptly
return to the Pledgor all of the Collateral.
4. The Pledgor agrees to do such further acts and things, and to execute
and deliver such additional conveyances, assignments and instruments,
as the Pledgee may at any time reasonably request in connection with
the administration and enforcement of this Agreement or with respect
to the Collateral or any part thereof or in order better to assure
and confirm unto the Pledgee its rights and remedies hereunder,
including, without limitation, the execution of UCC-1 Financing
Statements to perfect the Pledgee's security interest in the
Collateral.
5. Any notice or demand upon the Pledgor shall be deemed to have been
sufficiently given for all purposes thereof if mailed, postage
prepaid, by registered or certified mail, return receipt requested,
or delivered, to the Pledgor at 13411 Cedar Street, Omaha, Nebraska
68144 or such other address as the Pledgor may therefore have
designated in writing and given in like manner to the Pledgee.
<PAGE>
6. This Agreement and the rights and obligations of the Pledgee and the
Pledgor hereunder shall be construed in accordance with and governed
by the laws of the State of New York, cannot be changed orally and
shall bind and inure into the benefit of the Pledgor and the Pledgee
and their respective successors and assigns, and all subsequent
holders of the Indebtedness.
7. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original and all of which taken together
shall constitute but one and the same instrument.
IN WITNESSES WHEREOF, the Pledgor and the Pledgee have duly executed
this Agreement as of the day and year first above written.
Pledgee: NBC ACQUISITION CORP.
By: _________________________________________
Its: Chairman
Pledgor:
---------------------------------------------
Barry S. Major
-2-
<PAGE>
Appendix B
Non-Competition and Confidentiality Agreement
Capitalized terms used herein without definition shall have the respective
meanings specified in the Memorandum of Understanding dated as of December ____,
1998 between Nebraska Book Company, Inc., and Barry S. Major (the "Memorandum of
Understanding").
I. Executive acknowledges that (i) the principal business of the Company
is the wholesale distribution of used college textbooks and the ownership (or
management) of college bookstores (the "Company Business"); (ii) he is one of
the limited number of persons who will develop such business; (iii) the business
of the Company is national and international in scope; and (iv) his work for the
Company will bring him into close contact with confidential information not
readily available to the public. Executive covenants and agrees that:
A. Non-Competition. During the term of Executive's employment by
the Company or any of its affiliates and for a period of three years following
the termination (whether for cause or otherwise) of Executive's employment with
the Company and all of its affiliates (the "Restricted Period"), Executive shall
not in the United States of America or in any foreign country, directly or
indirectly, (i) engage in the Company Business for his own account; (ii) enter
the employ of, or render any services to, any person engaged in such activities;
or (iii) become interested in any person engaged in the Company Business,
directly or indirectly, as an individual, partner, shareholder, officer,
director, principal, agent, employee, trustee, consultant or in any other
relationship or capacity; provided, however, that Executive may work for or own
a college bookstore, if the annual sales of the company that owns such bookstore
do not exceed $10,000,000, and Executive may own, directly or indirectly, solely
as an investment, securities of any person which are traded on any national
securities exchange if Executive (a) is not a controlling person of, or a member
of a group which controls, such person and (b) does not, directly or indirectly,
own 1% or more of any class of securities of such person.
B. Confidential Information. During the term of Executive's
employment by the Company or any of its affiliates and during the Restricted
Period, Executive shall keep secret and retain in strictest confidence, and
shall not use for the benefit of himself or others except in connection with the
business and affairs of the Company, all confidential matters of the Company and
its affiliates, including, without limitation, trade "know-how," secrets,
consultant contracts, customer lists, subscription lists, details of consultant
contracts, pricing policies, operational methods, marketing plans or strategies,
product development techniques or plans, business acquisition plans, new
personnel acquisition plans, methods of manufacture, technical processes,
designs and design projects, inventions and research projects and other business
affairs of the Company and its affiliates learned by Executive heretofore or
hereafter, and shall not disclose them to anyone outside of the Company and its
affiliates, either during or after employment by the Company or any of its
affiliates, except (i) as required in the course of performing duties hereunder,
(ii) with the Company's express written consent, (iii) if such information is or
becomes generally known by the public other than as a result of a breach hereof
or of a similar Non-Competition and Confidentiality Agreement, or (iv) as
required by law or judicial or administrative process.
-1-
<PAGE>
C. Property of the Company. All memoranda, notes, lists, records
and other documents (and all copies thereof) made or compiled by Executive or
made available to Executive concerning the business of the Company or any of its
affiliates shall be the Company's property and shall be delivered to the Company
promptly upon the termination of Executive's employment with the Company or any
of its affiliates or at any other time on request.
D. Employees of the Company. During the Restricted Period,
Executive shall not, directly or indirectly, hire, solicit or encourage to leave
the employment of the Company or any of its affiliates, any employee of the
Company or its affiliates or hire any such employee who has left the employment
of the Company or any of its affiliates within one year of the termination of
such employee's employment with the Company and all of its affiliates.
E. Consultants of the Company. During the Restricted Period,
Executive shall not, directly or indirectly, hire, solicit or encourage to cease
to work with the Company or any of its affiliates any consultant who provides
consulting services material to the operation of the Company Business, then
under contract with the Company or any of its affiliates.
II. Rights and Remedies Upon Breach. If Executive breaches, or threatens
to commit a breach of, any of the provisions of Paragraph I (the "Restrictive
Covenants"), the Company shall have the following rights and remedies, each of
which rights and remedies shall be independent of the other and severally
enforceable, and all of which rights and remedies shall be in addition to, and
not in lieu of, any other rights and remedies available to the Company under law
or in equity:
A. Specific Performance. The right and remedy to have the
Restrictive Covenants specifically enforced by any court having equity
jurisdiction, it being acknowledged and agreed that any such breach or
threatened breach will cause irreparable injury to the Company and that money
damages will not provide an adequate remedy to the Company.
B. Accounting. The right and remedy to require Executive to
account for and pay over to the Company all compensation, profits, monies,
accruals, increments or other benefits (collectively, "Benefits") derived or
received by Executive as the result of any transactions constituting a breach of
any of the Restrictive Covenants, and Executive shall account for and pay over
such Benefits to the Company.
C. Discontinuance of Payment. The right and remedy to discontinue
the payment of any amounts owing under the Memorandum of Understanding.
III. Severability of Covenants. If any court determines that any of the
Restrictive Covenants, or any part thereof, is invalid or unenforceable, the
remainder of the Restrictive Covenants shall not thereby be affected and shall
be given full effect, without regard to the invalid portions.
IV. Blue-Pencilling. If any court construes any of the Restrictive
Covenants, or any part thereof, to be unenforceable because of the duration of
such provision or the area covered thereby, such court shall have the power to
reduce the duration or area of such provision and, in its reduced form, such
provision shall then be enforceable and shall be enforced.
-2-
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<NAME> NBC ACQUISTION CORP.
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