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, 1999
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 11, 2000: 1,248,513 SHARES
TOTAL NUMBER OF PAGES: 17
EXHIBIT INDEX: PAGE 17
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NBC ACQUISITION CORP.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
December 31, March 31, December 31,
1999 1999 1998
------------- ------------- --------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,668,018 $ 4,059,660 $ 4,591,918
Receivables 46,158,564 20,838,546 43,527,544
Inventories 74,273,357 49,878,561 62,312,841
Recoverable income tax - 4,902 -
Deferred income tax benefit 1,491,693 1,468,156 1,183,529
Prepaid expenses and other assets 729,521 376,748 183,081
------------- ------------- --------------
Total current assets 131,321,153 76,626,573 111,798,913
PROPERTY AND EQUIPMENT 35,267,482 31,212,534 30,838,815
Less accumulated depreciation (9,962,516) (8,024,049) (7,477,587)
------------- ------------- --------------
25,304,966 23,188,485 23,361,228
GOODWILL AND OTHER INTANGIBLES, net of amortization 49,116,923 38,778,577 40,018,377
OTHER ASSETS 4,698,052 4,313,208 3,623,478
------------- ------------- --------------
$ 210,441,094 $ 142,906,843 $ 178,801,996
============= ============= ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 18,679,830 $ 9,200,870 $ 16,093,138
Accrued employee compensation and benefits 4,126,569 3,825,893 3,183,263
Accrued interest 3,748,767 1,426,509 4,639,232
Accrued expenses 278,558 681,725 322,104
Income tax payable 183,248 - 108,978
Deferred revenue 121,706 376,556 169,860
Current maturities of long-term debt 4,143,327 5,644,838 2,641,467
Current maturities of capital lease obligations 88,236 - -
Revolving credit facility 39,300,000 - 25,000,000
------------- ------------- --------------
Total current liabilities 70,670,241 21,156,391 52,158,042
LONG-TERM DEBT, net of current maturities 217,718,243 214,259,143 216,413,218
CAPITAL LEASE OBLIGATIONS, net of current maturities 138,846 - -
OTHER LONG-TERM LIABILITIES 803,121 191,074 181,529
STOCKHOLDERS' DEFICIT:
Class A common stock, voting, authorized 5,000,000
shares of $.01 par value; issued and outstanding
1,245,892; 957,792 and 953,027 shares at
December 31 and March 31, 1999 and December 31, 1998,
respectively 12,459 9,578 9,530
Additional paid-in capital 64,387,987 49,275,087 49,025,135
Notes receivable from stockholders (482,630) (332,630) (177,080)
Retained deficit (142,807,173) (141,651,800) (138,808,378)
------------- ------------- --------------
Total stockholders' deficit (78,889,357) (92,699,765) (89,950,793)
------------- ------------- --------------
$ 210,441,094 $ 142,906,843 $ 178,801,996
============= ============= ==============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
NBC ACQUISITION CORP.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------
Three Months Ended December 31, Nine Months Ended December 31,
1999 1998 1999 1998
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES, net of returns $ 41,354,929 $ 34,859,413 $185,364,743 $159,535,861
COSTS OF SALES 25,154,491 20,912,167 114,013,888 97,658,523
------------ ------------ ------------- ------------
Gross profit 16,200,438 13,947,246 71,350,855 61,877,338
OPERATING EXPENSES:
Selling, general and administrative 16,298,202 12,581,377 46,220,232 37,637,803
Depreciation 782,436 587,016 1,988,563 1,646,467
Amortization 2,535,874 1,280,476 6,230,416 4,647,898
------------ ------------ ------------ ------------
19,616,512 14,448,869 54,439,211 43,932,168
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (3,416,074) (501,623) 16,911,644 17,945,170
OTHER EXPENSES (INCOME):
Interest expense 5,746,916 5,636,865 17,671,468 17,389,656
Interest income (131,195) (126,616) (230,730) (223,496)
Other income (383,358) (435,983) (914,330) (1,113,443)
------------ ------------ ------------ ------------
5,232,363 5,074,266 16,526,408 16,052,717
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (8,648,437) (5,575,889) 385,236 1,892,453
INCOME TAX EXPENSE (BENEFIT) (2,725,665) (1,920,429) 1,540,609 1,308,136
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (5,922,772)$ (3,655,460) $ (1,155,373) $ 584,317
============ ============ ============ ============
EARNINGS (LOSS) PER SHARE:
Basic $ (5.01)$ (3.84) $ (1.03) $ 0.61
============ ============ ============ ===========
Diluted $ (5.01)$ (3.84) $ (1.03) $ 0.61
============ ============ ============ ===========
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 1,182,818 953,027 1,120,677 953,027
============ ============ ============ ===========
Diluted 1,182,818 953,027 1,120,677 953,027
============ ============ ============ ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
NBC ACQUISITION CORP.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------
Notes
Additional Receivable
Common Paid-in From Retained
Stock Capital Stockholders Deficit Total
--------- ------------ ---------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
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)
========= ============ ========== =============== ===============
BALANCE, APRIL 1, 1999 $ 9,578 $49,275,087 $ (332,630) $ (141,651,800) $ (92,699,765)
Issuance of common stock 2,881 15,112,900 (150,000) - 14,965,781
Net loss - - - (1,155,373) (1,155,373)
--------- ------------ ---------- --------------- ---------------
BALANCE, DECEMBER 31, 1999 $12,459 $64,387,987 $ (482,630) $ (142,807,173) $ (78,889,357)
========= ============ ========== =============== ===============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
NBC ACQUISITION CORP.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- -----------------------------------------------------------------------------------------
Nine Months Ended December 31,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,155,373) $ 584,317
Adjustments to reconcile net income (loss)
to net cash flows from operating activities:
Depreciation 1,988,563 1,646,467
Amortization of intangibles 7,504,853 5,885,812
Original issue debt discount amortization 4,157,603 3,743,737
Loss on disposal of assets 16,580 25,526
Changes in operating assets and liabilities,
net of effect of acquisitions:
Receivables (25,099,815) (22,141,283)
Inventories (17,129,002) (12,497,627)
Recoverable income tax 319,630 4,374,048
Prepaid expenses and other assets (218,165) 14,807
Other assets (80,860) (822,459)
Accounts payable 7,852,885 1,674,295
Accrued employee compensation and benefits 56,919 (613,979)
Accrued interest 2,322,258 2,850,685
Accrued expenses (407,327) (176,636)
Income taxes payable 182,283 108,978
Deferred revenue (254,850) (294,057)
Other long-term liabilities 612,047 30,925
------------ ------------
Net cash flows from operating activities (19,331,771) (15,606,444)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,795,983) (2,146,364)
Bookstore acquisitions, net of cash acquired (26,020,901) (1,710,182)
Proceeds from sale of property and equipment 59,841 39,679
Software development costs (261,751) (162,172)
------------ ------------
Net cash flows from investing activities (28,018,794) (3,979,039)
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs (32,478) (377,966)
Principal payments on long-term debt (2,200,014) (886,243)
Principal payments on capital lease obligations (74,366) -
Proceeds from issuance of stock 14,965,781 -
Net increase in revolving credit facility 39,300,000 19,600,000
Proceeds from payment on notes receivable
from stockholders - 34,720
------------ ------------
Net cash flows from financing activities 51,958,923 18,370,511
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,608,358 (1,214,972)
CASH AND CASH EQUIVALENTS, Beginning of period 4,059,660 5,806,890
------------ ------------
CASH AND CASH EQUIVALENTS, End of period $ 8,668,018 $ 4,591,918
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid (refunded) during the period for:
Interest $ 9,917,170 $ 9,210,510
Income taxes 725,807 (3,174,890)
Noncash investing and financing activities:
Note receivable from shareholder recorded
upon issuance of common stock $ 150,000 $ -
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
NBC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
1. MANAGEMENT REPRESENTATIONS - The consolidated balance sheet of NBC
Acquisition Corp. (the "Company") and its wholly-owned subsidiary, Nebraska
Book Company, Inc. ("NBC") at March 31, 1999 was obtained from the
Company's audited consolidated balance sheet as of that date. All other
financial statements contained herein are unaudited and reflect all
adjustments which are, in the opinion of management, necessary to summarize
fairly the financial position of the Company 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, 1999 included in the Company's Annual Report
on Form 10-K.
2. ACQUISITIONS - Effective November 12, 1999, NBC acquired certain assets and
liabilities of Michigan College Book Company, Inc. and Ned's Berkeley Book
Company, Inc. (collectively referred to as "Ned's Bookstores"), an
independent college bookstore operation with 11 retail bookstores located
in Michigan and California, for approximately $10.2 million, net of cash
acquired. NBC accounted for this acquisition under the purchase method of
accounting. Excess cost over fair value of net assets acquired of
approximately $7.8 million has been recorded as goodwill and is being
amortized over a period of three years. Such amortization period was
assigned based upon the factors outlined in APB Opinion No. 17. The results
of operations for Ned's Bookstores have been included in the consolidated
results of the Company from the date of acquisition. The acquisition of
Ned's Bookstores was funded in part through a $4.6 million capital
contribution from the Company to NBC. The Company raised the $4.6 million
in capital through the sale of 87,922 shares of its Class A Common Stock to
certain shareholders, including HWH Capital Partners, L.P. and members of
senior management on December 6, 1999. The remaining funding was provided
through available cash funds.
Effective June 4, 1999, NBC acquired all of the outstanding common stock of
Triro, Inc., an independent college bookstore operation with 17 retail
bookstores located in Texas, New Mexico, and Arizona, for approximately
$15.0 million, net of cash acquired. NBC accounted for this acquisition
under the purchase method of accounting. Excess cost over fair value of net
assets acquired of approximately $9.1 million has been recorded as goodwill
and is being amortized over a period of three years. Such amortization
period was assigned based upon the factors outlined in APB Opinion No. 17.
The results of operations for Triro, Inc. have been included in the
consolidated results of the Company from the date of acquisition. The
acquisition of Triro, Inc. was funded in part through a $10.3 million
capital contribution from the Company to NBC. The Company raised the $10.3
million in capital through the sale of 197,001 shares of its Class A Common
Stock to certain shareholders, including HWH Capital Partners, L.P. and
members of senior management. The remaining funding was provided through
available cash funds and borrowings under NBC's revolving credit facility.
Also in conjunction with the acquisition of Triro, Inc., NBC established an
irrevocable standby letter of credit for $52,000 which expires June 2,
2000.
The following table summarizing unaudited pro forma financial information
assumes the acquisitions discussed above had occurred at the beginning of
each period presented. The unaudited pro forma financial information is not
necessarily indicative of what the actual results of operations would have
been had the acquisitions occurred at the beginning of each period
presented, nor does it purport to indicate the results of future
operations.
Nine Months Ended December 31,
1999 1998
------------- -------------
Pro Forma Information:
Revenues, net of returns $198,212,404 $185,891,857
Net loss (2,253,942) (2,417,245)
Earnings (loss) per share:
Basic (1.81) (1.95)
Diluted (1.81) (1.95)
6
<PAGE>
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. Options outstanding under the Company's
stock option plans have no impact on diluted earnings per share as the
exercise price of such options is no less than the estimated fair value of
the Class A Common Stock underlying the options as of the end of each
period presented.
4. INVENTORIES - Inventories are summarized as follows:
December 31, March 31, December 31,
1999 1999 1998
--------------------------------------------------------------------
Wholesale $20,680,758 $25,944,411 $22,091,557
College bookstores 48,494,953 21,400,003 37,357,295
Complementary services 5,097,646 2,534,147 2,863,989
--------------------------------------------------------------------
Inventories $74,273,357 $49,878,561 $62,312,841
====================================================================
5. LONG-TERM DEBT - The Company's indebtedness includes NBC's
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, up to
a maximum of $50.0 million. The borrowing base at December 31, 1999 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%. 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. The fiscal 1999 excess
cash flow payment due September 29, 1999 was waived by the lenders due to
NBC's acquisition activities. Additional indebtedness includes NBC's $110.0
million face amount of 8.75% senior subordinated notes due 2008 (the
"Senior Subordinated Notes") and $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 semi-annually until February 15, 2003, at which time interest
payments will begin.
6. SEGMENT INFORMATION - The following segment reporting information is
provided in accordance with SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION.
The Company's operating segments are determined based on the way that
management organizes the segments for making operating decisions and
assessing performance. Management has organized the Company's segments
based upon differences in products and services provided. The Company has
three reportable segments: wholesale operations, college bookstore
operations and complementary services. The wholesale operations segment
consists primarily of selling used textbooks to college bookstores, buying
them back from students or college bookstores at the end of each school
semester and then reselling them to college bookstores. The college
bookstore operations segment encompasses the operating activities of the
Company's 98 college bookstores located on or adjacent to college campuses.
The complementary services segment includes book-related services such as a
centralized buying service, distance education materials, and computer
hardware and software.
The Company accounts for intersegment sales as if the sales were to third
parties (at current market prices). With the exception of cash and cash
equivalents, certain receivables and other assets, and inventories, assets,
net interest expense, and taxes are not allocated between the Company's
segments; instead, such balances are accounted for in a corporate
administrative division. The following table provides selected information
about profit or loss on a segment basis for the quarter and nine months
ended December 31, 1999 and 1998.
7
<PAGE>
<TABLE>
<CAPTION>
Wholesale Bookstore Complementary
Operations Operations Services Total
------------- -------------------------- --------------
<S> <C> <C> <C> <C>
Quarter ended December 31, 1999:
External customer revenues $ 20,981,482 $ 16,359,151 $ 4,014,296 $ 41,354,929
Intersegment revenues 2,501,936 71,645 617,156 3,190,737
Depreciation and amortization expense 75,645 2,059,829 553,204 2,688,678
Income (loss) before interest
and taxes 4,451,493 (4,574,690) (741,916) (865,113)
Quarter ended December 31, 1998:
External customer revenues $ 20,426,652 $ 12,464,199 $ 1,968,562 $ 34,859,413
Intersegment revenues 1,467,670 - 91,722 1,559,392
Depreciation and amortization expense 82,710 772,130 434,359 1,289,199
Income (loss) before interest and taxes 6,181,543 (4,121,994) (700,899) 1,358,650
Nine months ended December 31, 1999:
External customer revenues $ 76,159,456 $ 97,619,237 $11,586,050 $185,364,743
Intersegment revenues 15,390,262 142,498 1,276,084 16,808,844
Depreciation and amortization expense 218,102 4,720,149 1,541,826 6,480,077
Income (loss) before interest and taxes 25,129,269 476,908 (2,058,840) 23,547,337
Nine months ended December 31, 1998:
External customer revenues $ 74,829,498 $ 77,370,093 $ 7,336,270 $159,535,861
Intersegment revenues 11,587,609 - 702,030 12,289,639
Depreciation and amortization expense 226,245 2,237,840 1,280,883 3,744,968
Income (loss) before interest and taxes 24,842,316 1,248,324 (1,934,994) 24,155,646
</TABLE>
The following table reconciles segment information presented above with
consolidated information as presented in the consolidated financial
statements for the quarter and nine months ended December 31, 1999 and
1998.
<TABLE>
<CAPTION>
Quarter Ended December 31, Nine Months Ended December 31,
1999 1998 1999 1998
-------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Total for reportable segments $ 44,545,666 $ 36,418,805 $ 202,173,587 $171,825,500
Elimination of intersegment revenues (3,190,737) (1,559,392) (16,808,844) (12,289,639)
-------------- -------------- --------------- -------------
Consolidated total $ 41,354,929 $ 34,859,413 $ 185,364,743 $159,535,861
============== ============== =============== =============
Depreciation and Amortization Expense:
Total for reportable segments $ 2,688,678 $ 1,289,199 $ 6,480,077 $ 3,744,968
Corporate administration 629,632 578,293 1,738,902 2,549,397
-------------- -------------- --------------- ------------
Consolidated total $ 3,318,310 $ 1,867,492 $ 8,218,979 $ 6,294,365
============== ============== =============== =============
Income (Loss) Before Interest and Taxes:
Total for reportable segments $ (865,113) $ 1,358,650 $ 23,547,337 $ 24,155,646
Unallocated corporate administrative costs (2,167,603) (1,424,290) (5,721,363) (5,097,033)
-------------- -------------- --------------- -------------
Consolidated income (loss) before interest (3,032,716) (65,640) 17,825,974 19,058,613
and taxes
Interest expense, net (5,615,721) (5,510,249) (17,440,738) (17,166,160)
-------------- -------------- --------------- -------------
Consolidated income (loss) before
income taxes $ (8,648,437) $ (5,575,889) $ 385,236 $ 1,892,453
============== ============== =============== =============
</TABLE>
The Company's revenues are attributed to countries based on the location of
the customer. Substantially all revenues generated are attributable to
customers located within the United States.
7. NEW ACCOUNTING STANDARDS - In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES, which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Statement
becomes effective, and will be adopted by the Company, in the first quarter
of fiscal 2002. The impact on the Company's financial position and results
of operations is not expected to be material.
On March 4, 1998 the American Institute of Certified Public Accountants
issued Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE, which provides guidance on
accounting for the costs of computer software developed or obtained for
internal use and is effective for fiscal years beginning after December 15,
1998. The Company's primary activities regarding the internal development
of software revolve around its proprietary college bookstore information
system (PRISM), which is utilized by the Company's retail bookstores and
8
<PAGE>
also marketed to the general public. As the PRISM software developed
internally is intended for both internal use and sale to external
customers, the Company adheres to the guidance in SFAS No. 86, ACCOUNTING
FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE
MARKETED as required by Statement of Position 98-1. As a result, there was
no significant impact on the Company's financial position and results of
operations from the early adoption of Statement of Position 98-1 in fiscal
1998.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED DECEMBER 31, 1999 COMPARED WITH QUARTER ENDED DECEMBER 31, 1998.
REVENUES. Revenues for the quarters ended December 31, 1999 and 1998 and the
corresponding increase (decrease) in revenues were as follows:
Increase (Decrease)
-----------------------
1999 1998 Amount Percentage
------------ ------------ ------------ ----------
Wholesale operations $23,483,418 $21,894,322 $1,589,096 7.3%
College bookstore operations 16,430,796 12,464,199 3,966,597 31.8%
Complementary services 4,631,452 2,060,284 2,571,168 124.8%
Intercompany eliminations (3,190,737) (1,559,392) (1,631,345) 104.6%
------------ ------------ ------------ ----------
$41,354,929 $34,859,413 $6,495,516 18.6%
============ ============ ============ ==========
The increase in wholesale revenues for the quarter ended December 31, 1999 was
due primarily to publisher price increases and also an increase in units
shipped. The increase in college bookstore revenues was attributable to the net
addition of 38 new college bookstores either through acquisition or startup
since October 1, 1998, including 28 new bookstores added through the Triro, Inc.
and Ned's Bookstores acquisitions, which occurred effective June 4, 1999 and
November 12, 1999, respectively. Of the $4.0 million increase in college
bookstore revenues, $2.7 million was attributable to new college bookstores with
the remainder accounted for by a 10.8% increase in same store revenues.
Complementary services revenues increased primarily due to growth in the
Company's distance education and system sales programs. As the Company's
wholesale and college bookstore operations have grown, the Company's
intercompany transactions have also increased.
GROSS PROFIT. Gross profit for the quarter ended December 31, 1999 increased
$2.3 million, or 16.2%, to $16.2 million from $13.9 million for the quarter
ended December 31, 1998. This increase was primarily due to higher revenues,
partially offset by a decrease in gross margin percent. Gross margin for the
quarter ended December 31, 1999 decreased to 39.2% from 40.0% for the quarter
ended December 31, 1998, in part due to an increasing proportion of sales coming
from college bookstore operations, which historically have had lower margins
than wholesale and complementary services operations. Additionally, wholesale
margins were lower than the quarter ended December 31, 1998, primarily due to
refinements made in the current fiscal year to the Company's methodology for
calculating estimated wholesale margins and returns for interim periods. These
refinements, which improve the matching of revenues and expenses, have resulted
in lower margins for the quarter ended December 31, 1999 and are expected to
yield higher margins for the quarter ended March 31, 2000 compared to the
corresponding periods of the prior year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the quarter ended December 31, 1999 increased $3.7
million, or 29.5%, to $16.3 million from $12.6 million for the quarter ended
December 31, 1998. Selling, general and administrative expenses as a percentage
of revenues were 39.4% and 36.1% for the quarters ended December 31, 1999 and
December 31, 1998, respectively. The increase in expenses resulted primarily
from the expected higher expense base associated with the Company's expansion of
its operations through bookstore acquisitions and startups. The Company has also
incurred higher corporate-level expense in the quarter ended December 31, 1999,
primarily due to additional personnel and other costs designed to help manage
its continued growth.
AMORTIZATION EXPENSE. Amortization expense for the quarter ended December 31,
1999, increased $1.2 million, or 98.0%, to $2.5 million from $1.3 million for
the quarter ended December 31, 1998. This increase was the result of additional
amortization of goodwill related to recent acquisitions, including Triro, Inc.
and Ned's Bookstores.
INCOME (LOSS) BEFORE INTEREST AND TAXES. Income (loss) before interest and taxes
for the quarters ended December 31, 1999 and 1998 and the corresponding increase
(decrease) in income (loss) before interest and taxes were as follows:
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Increase (Decrease)
-----------------------
1999 1998 Amount Percentage
------------- ------------ ------------ ----------
Wholesale operations $ 4,451,493 $ 6,181,543 $ (1,730,050) (28.0)%
College bookstore operations (4,574,690) (4,121,994) (452,696) (11.0)%
Complementary services (741,916) (700,899) (41,017) (5.9)%
Corporate administration (2,167,603) (1,424,290) (743,313) (52.2)%
------------- ------------ ------------
$(3,032,716)$ (65,640) $ (2,967,076)
============= ============ ============
The decrease in wholesale income before interest and taxes was due primarily to
lower gross margins resulting from the refinements in estimating margins and
returns, as described above. The loss before interest and taxes for college
bookstore operations increased as a result of incremental amortization expense
of $1.2 million related to goodwill resulting from acquisitions. As described
above, corporate administrative costs have increased primarily as a result of
costs incurred to help manage the Company's growth.
INCOME TAXES. The Company's effective tax rate for the quarter ended December
31, 1999 was 31.5% as compared to 34.4% for the quarter ended December 31, 1998.
This decrease in benefit was primarily the result of non-deductible amortization
on goodwill associated with the Triro, Inc. acquisition.
NINE MONTHS ENDED DECEMBER 31, 1999 COMPARED WITH NINE MONTHS ENDED DECEMBER 31,
1998.
REVENUES. Revenues for the nine months ended December 31, 1999 and 1998 and the
corresponding increase (decrease) in revenues were as follows:
Increase (Decrease)
----------------------
1999 1998 Amount Percentage
------------ ------------- ----------- ----------
Wholesale operations $ 91,549,718 $ 86,417,107 $ 5,132,611 5.9%
College bookstore operations 97,761,735 77,370,093 20,391,642 26.4%
Complementary services 12,862,134 8,038,300 4,823,834 60.0%
Intercompany eliminations (16,808,844) (12,289,639) (4,519,205) 36.8%
------------ ------------- ------------ --------
$185,364,743 $159,535,861 $25,828,882 16.2%
============ ============= ============ ========
The increase in wholesale revenues for the nine months ended December 31, 1999
was due primarily to publisher price increases and a three percent increase in
units shipped. The increase in college bookstore revenues was attributable to
the net addition of 39 new college bookstores either through acquisition or
startup since April 1, 1998, including 28 new bookstores added through the
Triro, Inc. and Ned's Bookstores acquisitions, which occurred effective June 4,
1999 and November 12, 1999, respectively. Of the $20.4 million increase in
college bookstore revenues, $18.5 million was attributable to new college
bookstores with the remainder accounted for by a 3.5% increase in same store
revenues. Complementary services revenues increased primarily due to growth in
the Company's distance education and system sales programs. As the Company's
wholesale and college bookstore operations have grown, the Company's
intercompany transactions have also increased.
GROSS PROFIT. Gross profit for the nine months ended December 31, 1999 increased
$9.5 million, or 15.3%, to $71.4 million from $61.9 million for the nine months
ended December 31, 1998. This increase was primarily due to higher revenues,
combined with relatively stable gross margins. Gross margin for the nine months
ended December 31, 1999 decreased slightly to 38.5% from 38.8% for the nine
months ended December 31, 1998. The Company was able to maintain stable margins
despite an increasing proportion of sales coming from college bookstore
operations, which historically have had lower margins than wholesale and
complementary services operations. As described above, gross margins for
wholesale operations were also lower for the nine months ended December 31,
1999, primarily due to refinements made in the current fiscal year to the
Company's methodology for calculating estimated wholesale margins and returns
for interim periods. These refinements, which improve the matching of revenues
and expenses, have resulted in slightly lower margins for the nine months ended
December 31, 1999 but are also expected to yield higher margins for the quarter
ended March 31, 2000 compared to the corresponding periods of the prior year.
Those impacts were offset primarily due to an increase in used textbook sales
through the Company's bookstores, which can generate a consolidated average
gross margin of approximately 55%-60% compared to average gross margins of
35%-40% for external wholesale sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the nine months ended December 31, 1999 increased
$8.6 million, or 22.8%, to $46.2 million from $37.6 million for the nine months
ended December 31, 1998. Selling, general and administrative expenses as a
percentage of revenues were 24.9% and 23.6% for the nine months ended December
31, 1999 and December 31, 1998, respectively. The increase in expenses resulted
primarily from the expected higher expense base associated with the Company's
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expansion of its operations through bookstore acquisitions and startups. The
Company has also incurred higher corporate-level expense in the nine months
ended December 31, 1999, primarily due to additional personnel and other costs
designed to help manage its continued growth. Finally, the Company incurred all
severance costs associated with the resignation of NBC's former chief financial
officer in June, 1999.
AMORTIZATION EXPENSE. Amortization expense for the nine months ended December
31, 1999 increased $1.6 million, or 34.0%, to $6.2 million from $4.6 million for
the nine months ended December 31, 1998. This increase was the result of
additional amortization of goodwill related to recent acquisitions, including
Triro, Inc. and Ned's Bookstores, and was partially offset by a non-compete
agreement becoming fully-amortized in August, 1998.
INCOME (LOSS) BEFORE INTEREST AND TAXES. Income (loss) before interest and taxes
for the nine months ended December 31, 1999 and 1998 and the corresponding
increase (decrease) in income (loss) before interest and taxes were as follows:
Increase (Decrease)
----------------------
1999 1998 Amount Percentage
------------- ------------ ----------- ----------
Wholesale operations $25,129,269 $24,842,316 $ 286,953 1.2 %
College bookstore operations 476,908 1,248,324 (771,416) (61.8)%
Complementary services (2,058,840) (1,934,994) (123,846) (6.4)%
Corporate administration (5,721,363) (5,097,033) (624,330) (12.2)%
------------ ------------- ------------- -------
$17,825,974 $19,058,613 $(1,232,639) (6.5)%
============ ============= ============= =======
The increase in wholesale income before interest and taxes was due to a $5.1
million increase in revenues that was partially offset primarily by lower
margins resulting from the refinements in estimating margins and returns, as
described above. Income before interest and taxes for college bookstore
operations declined as a result of incremental amortization expense of $2.5
million related to goodwill resulting from acquisitions. The loss before
interest and taxes increased for the complementary services segment as a result
of a reduction in the profitability of the Company's plastic bag program joint
venture. As described earlier, corporate administrative costs have increased
primarily as a result of costs incurred to help manage the Company's growth and
severance costs associated with the resignation of NBC's former chief financial
officer.
INCOME TAXES. Income tax expense for the nine months ended December 31, 1999
increased $0.2 million, or 17.8%, to $1.5 million from $1.3 million for the nine
months ended December 31, 1998. This increase, despite the decline in income
before income taxes, was primarily the result of non-deductible amortization on
goodwill associated with the Triro, Inc. acquisition.
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 NBC's credit facility. At December 31, 1999,
the Company's total indebtedness was approximately $261.4 million, consisting of
approximately $56.5 million in Term Loans, $110.0 million of Senior Subordinated
Notes, $54.8 million of Senior Discount Debentures, $0.8 million of other
indebtedness, including capital lease obligations, and $39.3 million under the
Revolving Credit Facility.
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 $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. Such scheduled principal payments are subject to change upon the annual
payment and application of excess cash flows (as defined in the Credit Agreement
underlying the Senior Credit Facility) towards Tranche A and B Loan principal
balances. The fiscal 1999 excess cash flow payment due September 29, 1999 was
waived by the lenders due to NBC's acquisition activities. Loans under the
Senior Credit Facility bear interest at floating rates based upon the interest
rate option selected by NBC. 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.
12
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The Company's capital expenditures were $1.8 million and $2.1 million for the
nine months ended December 31, 1999 and 1998, respectively. The Company
estimates that for fiscal 2000, approximately $2.5 million of capital
expenditures will be required, primarily for maintenance. Capital expenditures
consist primarily of leasehold improvements and furnishings for new bookstores,
bookstore renovations, computer upgrades and miscellaneous warehouse
improvements. The Company's ability to make capital expenditures is subject to
certain restrictions under the Senior Credit Facility.
Business acquisition expenditures were $26.0 million and $1.7 million for the
nine months ended December 31, 1999 and 1998, respectively. The fiscal 2000
expenditures include primarily the acquisitions of Triro, Inc. and Ned's
Bookstores for $15.0 million and $10.2 million, respectively, net of cash
acquired.
The Company's principal sources of cash to fund its normal 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, 1999 were $19.3 million, an increase of $3.7
million from $15.6 million for the nine months ended December 31, 1998. This
increase was primarily due to prior year income tax refunds received in the nine
months ended December 31, 1998. Future acquisitions, if any, may require
additional debt or equity financing.
Access to the Company's principal sources of cash is subject to various
restrictions. The availability of additional borrowings under the Revolving
Credit Facility is subject to the calculation of a borrowing base which at any
time is equal to a percentage of eligible accounts receivable and inventory, up
to a maximum of $50.0 million. The Senior Credit Facility restricts the
Company's ability to make loans or advances and pay dividends, except that,
among other things, NBC may pay dividends to the Company (i) 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, 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, 1999, NBC could borrow up to $50.0 million under the
Revolving Credit Facility. Of the amount available, $39.3 million was drawn by
NBC. Additionally, in conjunction with the Triro, Inc. acquisition, NBC
established an irrevocable standby letter of credit for $52,000 which expires in
June, 2000. 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 1999, approximately 45% of the Company's annual revenues
occurred in the second fiscal quarter (July-September), while approximately 25%
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
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<PAGE>
believes that the effects of inflation, if any, on its results of operations and
financial condition have not been material. However, there can be no assurance
that during a period of significant inflation, the Company's results of
operations 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
could have recognized a date using "00" as the year 1900 rather than the year
2000 (the "Year 2000 Issue"). This problem could have caused 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 completed an assessment of the impact of the Year 2000 Issue on its
operations, modifying and replacing portions of its software so that its
internal computer systems would function properly with respect to dates in the
year 2000 and thereafter. The Company addressed the Year 2000 Issue consistently
as part of its regular program of updating and rewriting its internal corporate
applications during the last eight years. As a result, all of the Company's own
applications, including those marketed and sold to independent college
bookstores, were modified and tested completely. Since Year 2000 Issue
modifications were integrated with regular operations, no significant additional
costs were incurred in conjunction with such modifications.
The Company identified and evaluated 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 did not believe that such Year 2000 Issue system
difficulties would adversely affect day-to-day operations at the Company's
retail locations. In a most likely worst case scenario, difficulties encountered
with the telecommunications and freight systems could have potentially hindered
the Company's ability to receive and ship wholesale orders. Contingency plans
were developed to minimize the effect of any such disruptions on day-to-day
operations.
The Company 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 took steps 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.
Subsequent to December 31, 1999, the Company did not experience, nor does it
expect to experience, system or vendor difficulties related to the Year 2000
Issue that have adversely affected, or are expected to adversely affect, the
Company's day-to-day operations on a material basis.
"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; the impact of the
Internet on the Company's operations; and other risks detailed in the Company's
Securities and Exchange Commission filings, in particular the Company's
Registration Statement on Form S-4 (No. 333-48225), 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
14
<PAGE>
obligation to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk exposure is, and is expected to continue to
be, fluctuation in LIBOR interest rates. Of the $261.4 million in long-term debt
and capital lease obligations outstanding at December 31, 1999, approximately
$95.8 million is subject to fluctuations in the LIBOR rate. As provided in NBC's
Senior Credit Facility, exposure to interest rate fluctuations is managed by
maintaining fixed interest rate debt (primarily the Senior Subordinated Notes
and Senior Discount Debentures) and by entering into interest rate swap
agreements to effectively convert certain variable rate debt into fixed rate
debt. NBC has separate five-year amortizing interest rate swap agreements with
two financial institutions whereby NBC's variable rate Tranche A and B Term
Loans have been effectively converted into debt with a fixed LIBOR rate of
5.815% plus an applicable margin (as defined in the Credit Agreement). The
notional amount under each agreement as of December 31, 1999 was approximately
$28.25 million. Such notional amounts are reduced periodically by amounts equal
to the scheduled principal payments on the Tranche A and B Term Loans. NBC is
exposed to credit loss in the event of nonperformance by the counterparties to
the interest rate swap agreements. NBC anticipates the counterparties will be
able to fully satisfy their obligations under the agreements.
Certain quantitative market risk disclosures have changed significantly since
March 31, 1999 as a result of an upward movement in interest rates. The
following table reflects significant changes in the risks disclosed at March 31,
1999. Weighted average variable rates are based on implied forward rates in the
yield curve as of the date specified.
December 31, March 31,
1999 1999
-------------- --------------
Fair Values:
Fixed rate debt $ 156,813,547 $ 162,522,662
Interest rate swaps 1,508,699 (564,380)
Overall Weighted Average Interest Rates:
Variable rate debt 9.12% 8.12%
Interest rate swap receive rate 6.50% 5.54%
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective November 12, 1999, NBC acquired certain assets and liabilities of
Michigan College Book Company, Inc. and Ned's Berkeley Book Company, Inc.
(collectively referred to as "Ned's Bookstores"), an independent college
bookstore operation with 11 retail bookstores located in Michigan and
California. The acquisition of Ned's Bookstores was funded in part through a
$4.6 million capital contribution from the Company to NBC. The Company raised
the $4.6 million in capital through the sale of 87,922 shares of its Class A
Common Stock to certain shareholders, including HWH Capital Partners, L.P. and
members of senior management on December 6, 1999.
Pursuant to the terms of an employment agreement dated July 1, 1999, NBC
appointed Mr. Alan G. Siemek as its new Chief Financial Officer. Effective July
1, 1999, under the terms of the employment agreement, Mr. Siemek was granted
options to purchase 6,353 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 effective July 1, 1999, the Company issued 3,177 shares of its Class A
Common Stock to Mr. Siemek at a price of $52.47 per share (founders price),
receiving $16,688 in cash and a $150,000 note maturing September, 2009 and
bearing interest at 5.25% per year.
Effective June 4, 1999, NBC acquired all of the outstanding common stock of
Triro, Inc., an independent college bookstore operation with 17 retail
bookstores located in Texas, New Mexico, and Arizona. The acquisition was funded
in part through a $10.3 million capital contribution from the Company to NBC.
The Company raised the $10.3 million in capital through the sale of 197,001
shares of its Class A Common Stock to certain shareholders, including HWH
Capital Partners, L.P. and members of senior management.
No underwriters were involved in any of these transactions, each of which were
exempt from registration under the Securities Act of 1933 pursuant to Section
4(2).
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Memorandum of Understanding, dated as of November 1, 1999 between
Nebraska Book Company, Inc. and Michael J. Kelly, Vice President of
eCommerce
27 Financial Data Schedule [EDGAR filing only]
(b) Reports On Form 8-K
Current Report on Form 8-K/A (Amendment No. 2) filed December 29, 1999
reporting the acquisition of Triro, Inc. and submitting audited financial
statements of Triro, Inc. for the years ended March 31, 1999 and 1998 and
unaudited pro forma financial information as of and for the year ended
March 31, 1999.
Current Report on Form 8-K filed November 12, 1999 reporting the
acquisition of Michigan College Book Company, Inc. and Ned's Berkeley Book
Company, Inc.
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 11, 2000.
NBC ACQUISITION CORP.
/s/ Mark W. Oppegard
-------------------------------
Mark W. Oppegard
President, Secretary and Director
/s/ Alan G. Siemek
-------------------------------
Alan G. Siemek
Vice President and Treasurer
(Principal Financial and Accounting Officer)
17
MEMORANDUM OF UNDERSTANDING
This MEMORANDUM OF UNDERSTANDING (this "Memorandum") dated as of
November 1, 1999, sets forth the mutual and binding understanding of Michael J.
Kelly (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 VP of e-Commerce 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 $150,000 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 $25,000.
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 2,621 shares of the Common Stock (the
"Purchased Shares") of NBC Acquisition Corp. ("NBC Acquisition") for
$137,516.58. The Executive shall pay for the Purchased Shares by
delivery of $13,751.66 to NBC Acquisition and a Note in the principal
amount of $123,764.93 in the form attached hereto as Appendix.
-1-
<PAGE>
o STOCK OPTIONS:
Executive shall be granted options (the "Original Options") to purchase
5,241 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 February 1, 2000, and shall be exercisable as to an
additional 25% of the shares covered thereby on each November 1st, 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.
-2-
<PAGE>
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. -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 /s/ Mark W. Oppegard
--------------------------------
Its: President
EXECUTIVE
/s/ Michael J. Kelly
--------------------------------
-3-
<PAGE>
Appendix A
SECURED PROMISSORY NOTE
$123,764.93 January ___, 2000
FOR VALUE RECEIVED, the undersigned, Michael J. Kelly, (the "Borrower"),
hereby promises to pay to NBC Acquisition Corp., a Delaware corporation (the
"Payee"), the principal sum of One Hundred Twenty-three Thousand Seven Hundred
Sixty-four Dollars and ninety-three cents ($123,764.93), 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 ___, 2010.
Payment of interest shall commence on December 31, 2000 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 o 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 2,621
shares of its common stock, $0.01 par value per share, $123,764.93 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
<PAGE>
payable or owing under the mutilated, defaced or apparently destroyed, lost or
stolen Note.
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
/s/ Michael J. Kelly
--------------------------------
Michael J. Kelly
<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 November 1,
1999 between Nebraska Book Company, Inc., and Michael J. Kelly (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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