10-K 1 book.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2006 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 333-48221 NEBRASKA BOOK COMPANY, INC. (Exact name of registrant as specified in our charter) KANSAS 47-0549819 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4700 SOUTH 19TH STREET LINCOLN, NE 68501-0529 (Address of Principal executive offices) (402) 421-7300 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] NO [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES [X] No [ ] 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 [ ] NO [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (see definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act). Large Accelerated Filer [ ] Accelerated Filer [ ] NON-ACCELERATED FILER [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] NO [X] MARKET VALUE OF THE REGISTRANT'S VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT - NOT APPLICABLE AS REGISTRANT'S STOCK IS NOT PUBLICLY TRADED. THERE WERE 100 SHARES OF COMMON STOCK OUTSTANDING AS OF JUNE 29, 2006. DOCUMENTS INCORPORATED BY REFERENCE: NONE Total Number of Pages: 106 Exhibit Index: PAGE 99 1 TABLE OF CONTENTS PART I: Item 1 Business..........................................................3 Item 1A Risk Factors.....................................................12 Item 1B Unresolved Staff Comments........................................14 Item 2 Properties.......................................................15 Item 3 Legal Proceedings................................................17 Item 4 Submission of Matters to a Vote of Security Holders..............17 PART II: Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities............18 Item 6 Selected Financial Data..........................................18 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations....................................21 Item 7A Quantitative and Qualitative Disclosures about Market Risk.......35 Item 8 Financial Statements and Supplementary Data......................37 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Discloure......................................79 Item 9A Controls and Procedures..........................................79 Item 9B Other Information................................................79 PART III: Item 10 Directors and Executive Officers of the Registrant................80 Item 11 Executive Compensation............................................81 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.....................86 Item 13 Certain Relationships and Related Transactions....................87 Item 14 Principal Accountant Fees and Services............................87 PART IV: Item 15 Exhibits and Financial Statement Schedules........................88 Signatures....................................................................96 Supplemental Information to be Furnished......................................96 Financial Statement Schedule II - Valuation and Qualifying Accounts...........97 Exhibit Index.................................................................99 2 PART I. ITEM 1. BUSINESS. References in this Annual Report on Form 10-K to the "Company" refer to Nebraska Book Company, Inc., the term "NBC" refers to our parent company, NBC Acquisition Corp., and the terms "we," "our," "ours," and "us" refer collectively to the Company and its subsidiaries, except where otherwise indicated. The Company is a wholly-owned subsidiary of NBC. NBC does not conduct significant activities apart from its investment in the Company. Effective July 1, 2002, our distance learning division was separately incorporated under the laws of the State of Delaware as Specialty Books, Inc., a wholly-owned subsidiary of ours ("Specialty Books"). Effective January 1, 2005, our textbook division was separately incorporated under the laws of the State of Delaware as NBC Textbooks LLC, a wholly-owned subsidiary of ours ("Textbook Division"). On May 1, 2006, we added another wholly-owned subsidiary through the acquisition of all of the outstanding stock of College Book Stores of America, Inc. ("CBA"), an entity separately incorporated under the laws of the State of Illinois. On March 4, 2004, Weston Presidio (Weston Presidio Capital III, L.P., Weston Presidio Capital IV, L.P., WPC Entrepreneur Fund, L.P., and WPC Entrepreneur Fund II, L.P.) gained a controlling interest in NBC, and hence in us, through (i) the formation of two new corporations, NBC Holdings Corp. and New NBC Acquisition Corp.; (ii) a $28.2 million equity investment by Weston Presidio in NBC Holdings Corp., funds for which were ultimately paid to NBC in the form of a capital contribution; (iii) Weston Presidio's purchase of 36,455 shares of NBC's common stock directly from its holders; (iv) the cancellation of 870,285 shares of NBC's common stock upon payment by NBC of merger consideration of $180.4 million to the shareholders of record for such shares; (v) the exchange of 397,711 shares of NBC's common stock for 512,799 shares of New NBC Acquisition Corp. capital stock in the merger of the two entities with NBC as the surviving entity; and (vi) the exchange of 512,799 shares of NBC's common stock by Weston Presidio and current and former members of management for a like number of shares of NBC Holdings Corp. capital stock. Payment of the $180.4 million of merger consideration was funded through proceeds from the $28.2 million capital contribution, available cash, and proceeds from $405.0 million in new debt financing, of which $261.0 million was utilized by NBC and the Company to retire certain debt instruments outstanding at March 4, 2004 or to place funds in escrow for untendered debt instruments called for redemption on March 4, 2004 and redeemed on April 3, 2004. We declared and paid dividends to NBC of $184.3 million to help finance this transaction. For ease of presentation, financial information presented in the Annual Report on Form 10-K reflects this transaction as if it had occurred on March 1, 2004. We have determined that no material transactions occurred during the period from March 1, 2004 through March 4, 2004. As a result of this transaction, financial information for periods ending prior to March 1, 2004 is presented as the "Predecessor," while financial information for periods after March 1, 2004 is presented as the "Successor." Throughout this Annual Report, we generally refer to all of the steps comprising this transaction as the "March 4, 2004 Transaction." On April 27, 2004, we filed a Registration Statement on Form S-4 with the Securities and Exchange Commission for purposes of registering debt securities to be issued in exchange for the Senior Subordinated Notes arising out of the March 4, 2004 Transaction. The Securities and Exchange Commission declared such Registration Statement effective on May 7, 2004. All notes were tendered in the offer to exchange that was completed on June 8, 2004. GENERAL As of March 31, 2006, we operated 139 bookstores on or adjacent to college campuses through which we sell a variety of new and used textbooks and general merchandise. In addition, we are one of the largest wholesale distributors of used college textbooks in North America, offering over 100,000 textbook titles and selling more than 7.2 million books annually, primarily to campuses located in the United States. We are also a leading provider of distance education materials to students in nontraditional courses, which include correspondence and corporate education courses. Furthermore, we provide the college bookstore industry with a variety of services including proprietary information and E-commerce systems, in-store promotions, buying programs, and marketing services. With origins dating to 1915 as a single bookstore operation, we have built a consistent reputation for excellence in order fulfillment, shipping performance and customer service. We entered the wholesale used textbook market following World War II, when the supply of new textbooks could not meet the demand created by the return of ex-GI students. In 1964, we became a national, rather than regional, wholesaler of used textbooks as a result of our purchase of The College Book Company of California. During the 1970's we continued our focus on the wholesale business. However, realizing the synergies that exist between wholesale operations and college bookstore operations, in the 1980's we expanded our efforts in the college bookstore market to primarily operate bookstores on or near larger 3 campuses, typically where the institution-owned college bookstore was contract-managed by a competitor or where we did not have a significant wholesale presence. In the last several years we have revised our college bookstore strategy to expand our efforts in the contract-management of institutional bookstores - primarily those that have already been served by another company offering contract-management services. Today, we service the college bookstore industry through our Bookstore, Textbook, and Complementary Services Divisions. BOOKSTORE DIVISION. College bookstores are a primary outlet for sales of new and used textbooks to students. In addition, we sell a variety of other merchandise including apparel, general books, sundries, and gift items. As of March 31, 2006, we operated 139 college bookstores on or adjacent to college campuses. Of these 139 bookstores, 26 were leased from the educational institution that they served (also referred to as contract-managed). On May 1, 2006, we acquired over 100 college bookstore locations, most of which are contract-managed, through the acquisition of all of the outstanding stock of CBA. CBA began providing contract-management services to small to medium-sized colleges and universities nationwide in 1984, and prior to the acquisition had and now continues to maintain one of the longest tenured management teams in the college bookstore industry. Our college bookstores are located at some of the nation's largest college campuses including: University of Nebraska; University of Michigan; University of Maryland; Arizona State University; Pennsylvania State University; University of Kansas; Michigan State University; University of California - Berkeley; Texas A&M University; University of Florida; and University of Tennessee. In addition to generating profits, our Bookstore Division provides an exclusive source of used textbooks for sale across our wholesale distribution network. TEXTBOOK DIVISION. We are one of the largest wholesale distributors of used college textbooks in North America. Our Textbook Division consists primarily of selling used textbooks to college bookstores, buying them back from students or college bookstores at the end of each school semester and then reselling them to college bookstores. We purchase used textbooks from and resell them to college bookstores at many of the nation's largest college campuses, including: University of Texas; University of Southern California; Indiana University; San Diego State University; University of Washington; and University of Minnesota. Historically, Textbook Division sales have been determined primarily by the amount of used textbooks that we could purchase. This occurs because the demand for used textbooks has consistently outpaced supply. Our strong relationships with the management of college bookstores nationwide have provided important access to valuable market information regarding the campus-by-campus supply and demand of textbooks, as well as an ability to procure large quantities of a wide variety of textbooks. We provide an internally-developed BUYER'S GUIDE to our Textbook Division customers. This guide lists details such as author, new copy retail price, and our repurchase price for over 51,000 textbook titles. COMPLEMENTARY SERVICES DIVISION. With our acquisition of Specialty Books in May 1997, we entered the distance education market, which consists of providing education materials to students in high school, nontraditional college and other courses (such as correspondence courses, continuing and corporate education courses and courses offered through electronic media such as the Internet). We believe the fragmented distance education market represents an opportunity for us to leverage our order fulfillment and distribution expertise in a rapidly growing sector. Other services offered to college bookstores include the sale of computer hardware and software, such as our turnkey bookstore management software, and related maintenance contracts. We have installed our proprietary total store management system at approximately 670 college bookstore locations, and we have an installed base of approximately 200 college bookstore locations for our textbook management control systems. In total, including our own bookstores, almost 870 college bookstore locations utilize our software products. We also have a leading E-commerce platform for college bookstores with over 490 stores licensing the technology via CampusHub. We also provide the college bookstore industry with buying programs and marketing and store design services. On July 1, 2003, we acquired all of the outstanding shares of common stock of TheCampusHub.com, Inc. ("CampusHub"), an entity affiliated with us through common ownership. CampusHub is no longer separately incorporated and is instead accounted for as a division within our Complementary Services Division segment. CampusHub provides college bookstores with a way to sell in-store inventory and virtual brand name merchandise over the Internet utilizing technology originally developed by us. In January 1998, we acquired Connect 2 One (formerly Collegiate Stores Corporation), a centralized buying service for 680 college bookstores across the United States. Through the enhanced purchasing power of such a large group of bookstores, participating bookstores are able to purchase certain general merchandise at lower prices than those that would be paid by the stores individually. Bookstores participating in Connect 2 One's ("C2O") programs also provide us with another potential source of used textbooks. 4 We also provide a consulting and store design program to assist college bookstores in store presentation and layout. During fiscal 2002, we introduced a marketing services program to leverage our distribution channels. Marketing services offered by us enable national vendors to reach college students through in-store kiosks, prepackaged freshman mailers, coupon books, e-mail promotions and in-store displays. INDUSTRY SEGMENT FINANCIAL INFORMATION Revenue, operating profit or loss, and identifiable assets attributable to each of our industry segments are disclosed in the notes to the consolidated financial statements presented in Item 8, "Financial Statements and Supplementary Data" of our Annual Report on Form 10-K. We make our periodic and current reports available, free of charge, through www.nebook.com as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. Information contained on our web site is not a part of this Annual Report on Form 10-K. BUSINESS STRATEGY Our objective is to strengthen our position as a leading provider of products and services to the college bookstore market, thereby increasing revenue and cash flow. In order to accomplish our goal, we intend to pursue the following strategies: CAPITALIZE ON COLLEGE BOOKSTORE OPPORTUNITIES. We intend to increase revenues for our Bookstore Division by acquiring, opening or contract-managing additional bookstores at selected college campuses and offering additional specialty products and services at our existing bookstores. As mentioned previously, on May 1, 2006 we acquired over 100 college bookstore locations, most of which are contract-managed, through the acquisition of all of the outstanding stock of CBA. We believe that this acquisition will enhance our ability to serve the contract-managed part of the college bookstore market. We also intend to increase same-store sales growth through a more coordinated effort to implement best practices across our entire bookstore network. Finally, we believe there are opportunities to improve cash flow at our college bookstores by reducing certain selling, general and administrative expenses. ENHANCE GROWTH IN THE TEXTBOOK DIVISION. We expect the Textbook Division to continue to be a primary contributor of revenues and cash flows, primarily as a result of an expected increase in college enrollments and continued utilization of used textbooks, as well as through the expansion of our own Bookstore Division. Additionally, our commission structure rewards customers who make a long-term commitment to supplying us with a large portion of their textbooks, and we continue to change and enhance our marketing campaign to increase student awareness of the benefits of buying and selling used textbooks. Finally, we believe that there are opportunities to improve long-term cash flow in the Textbook Division by reducing certain selling, general and administrative expenses. CONTINUE TO SERVICE THE DISTANCE EDUCATION MARKET. During fiscal year 2005, Specialty Books' largest customer discontinued the use of Specialty Books' services for delivery of educational materials. However, we expect Specialty Books' revenues, after adjusting for the loss of this customer, to grow as the distance education market continues to expand due to the increased popularity of correspondence courses, continuing and corporate education courses and courses offered through electronic media such as the Internet. INCREASED MARKET PENETRATION THROUGH TECHNOLOGY. We intend to continue generating incremental revenue through the sale of our turnkey bookstore management software. The installation of such software, along with E-commerce technology offered through CampusHub, a division within the Complementary Services Division, also increases the channels through which we can access the college and university market. EXPANSION OF OTHER SERVICES PROGRAMS. We intend to continue to develop and provide other services that enhance the college bookstore business, such as our centralized buying group, marketing services, and store design consulting. INDUSTRY OVERVIEW Based on recent industry trade data from the National Association of College Stores, the college bookstore industry remains strong, with over 4,800 college stores generating annual sales of approximately $10.9 billion to college students and other consumers in North America. Sales of textbooks and other education materials used for classroom instruction comprise approximately two-thirds of that amount. We expect this market will continue to grow as a result of anticipated increases in enrollment at U.S. colleges attributable to the children of the baby boom generation entering the college population. 5 COLLEGE BOOKSTORE MARKET. College stores generally fall into three categories: (i) INSTITUTIONAL -- stores that are primarily owned and operated by institutions of higher learning (represents approximately 52.0% of the U.S. market according to the National Association of College Stores); (ii) CONTRACT-MANAGED -- stores owned by institutions of higher learning and managed by outside, private companies, typically found on-campus (represents approximately 29.0% of the U.S. market according to the National Association of College Stores); and (iii) INDEPENDENT STORES -- privately owned and operated stores, generally located off campus (represents approximately 19.0% of the U.S. market according to the National Association of College Stores). WHOLESALE TEXTBOOK MARKET. We believe that used textbooks will continue to be attractive to both students and college bookstores. Used textbooks provide students with a lower-cost alternative to new textbooks and bookstores typically achieve higher margins through the sale of used rather than new textbooks. The pricing pattern of textbook publishing accounts for a large part of the growth of the used book market. Because of copyright restrictions, each new textbook is produced by only one publisher, which is free to set the new copy retail price and discount terms to bookstores. Publishers generally offer new textbooks at prices that enable college bookstores to achieve a gross margin of 23.0% to 25.0% on new textbooks. Historically, the high retail costs of new textbooks and the higher margins achieved by bookstores on the sale of used textbooks (approximately 33.0%) have encouraged the growth of the market for used textbooks. The used textbook cycle begins with new textbook publishers, who purposely plan obsolescence into the publication of new textbooks. Generally, new editions of textbooks are produced every two to four years. In the first year of a new edition, there are few used copies of a new edition available. In the second and third years, used textbooks become increasingly available. Simultaneously, publishers begin to plan an updated edition. In years four and beyond, at the end of the average life cycle of a particular edition, as publishers cut back on original production, used textbooks generally represent a majority (in unit terms) of the particular edition in use. While the length of the cycle varies by title (and sometimes is indefinite, as certain titles are never updated), the basic supply/demand progression remains fairly consistent. College bookstores begin to place orders with used textbook wholesalers once professors determine which books will be required for their upcoming courses, usually by the end of May for the fall semester and the end of November for the spring semester. Bookstore operators must first determine their allocation between new and used copies for a particular title but, in most cases, they will order an ample supply of used books because: (i) used book demand from students is typically strong and consistent; (ii) many operators only have access to a limited supply from wholesalers and believe that not having used book alternatives could create considerable frustration among students and with the college administration; (iii) bookstore operators earn higher margins on used books than on new books; and (iv) both new and used books are sold with return privileges, eliminating any overstock risk (excluding freight charges) to the college bookstore. New textbook ordering usually begins in June, at which time the store operator augments its expected used book supply by ordering new books. By this time, publishers typically will have just implemented their annual price increases. These regular price increases allow us and our competitors to buy used textbooks based on old list prices (in May) and to almost simultaneously sell them based on new higher prices, thereby creating an immediate margin increase. While price is an important factor in the store operator's purchasing decision, available supply, as well as service, usually determine with which used textbook wholesaler a college bookstore will develop a strong relationship. Used textbook wholesalers that are able to significantly service a college bookstore account typically receive preferential treatment from store operators, both in selling and in buying used textbooks. Pure exclusive supply arrangements in our market are rare. However, in the past seven to eight years, we have been marketing our exclusive supply program to the industry. This program has grown to 300 participating bookstores at the end of fiscal 2006. We also introduced the NBC Advantage program in fiscal 2001. This program rewards customers who make a long-term commitment to supplying us with a large portion of their books. At the end of fiscal 2006, approximately 560 bookstores were participating in this program, approximately 260 of which were also participating in the exclusive program. Since we are usually able to sell a substantial majority of the used textbooks we are able to purchase, our ability to obtain sufficient supply is a critical factor in our success. 6 PRODUCTS AND SERVICES BOOKSTORE DIVISION. As of March 31, 2006, we operated 139 college bookstores on or adjacent to college campuses. These bookstores sell a wide variety of used and new textbooks, general books and assorted general merchandise, including apparel, sundries and gift items. Over the past three years, revenues of our bookstores from activities other than used and new textbook sales have been between 18.7% and 20.6% of total revenues. We have been, and intend to continue, selectively expanding our product offerings at our bookstores in order to increase sales and profitability. We have also installed software providing E-commerce capabilities in all of our own bookstores, thereby allowing our bookstores to further expand product offerings and compete with other online textbook sellers. TEXTBOOK DIVISION. Our Textbook Division is engaged in the procurement and redistribution of used textbooks on college campuses primarily across the United States. The portion of the used textbook business that our division operates in is limited to certain stores and certain books. In general, the portion of the college bookstore market that our Textbook Division cannot access includes those contract-managed stores that are not operated by us that sell their used textbooks to affiliated companies, and institutional and independent stores, to the extent that such used textbooks are repurchased from students and are retained by the bookstore for resale without involving a wholesaler. We publish the BUYER'S GUIDE, which lists over 51,000 textbooks according to author, title, new copy retail price, and our repurchase price. The BUYER'S GUIDE is an important part of our inventory control and book procurement system. We update and reprint the BUYER'S GUIDE nine times each year and make it available in both print and various electronic formats, including on all of our proprietary information systems. A staff of dedicated professionals gathers information from all over the country in order to make the BUYER'S GUIDE into what we believe to be the most comprehensive and up-to-date pricing and buying aid for college bookstores. We also maintain a database of approximately 175,000 titles in order to better serve our customers. COMPLEMENTARY SERVICES DIVISION. Through Specialty Books, we have access to the market for distance education products and services. Currently, we provide students at approximately 40 colleges and high schools with textbooks and materials for use in distance education and other education courses, and we are a leading provider of textbooks to nontraditional programs and students such as correspondence or corporate education students. We believe the fragmented distance education market represents an opportunity for us to leverage our fulfillment and distribution expertise in a rapidly growing sector. Beyond textbooks, we offer services and specialty course materials to distance education students including videotape duplication and shipping; shipping of specialty, non-textbook course materials; and a sales and ordering function. Students can order education materials from us over the Internet. Over the past three years, revenues of Specialty Books have been between 48.2% and 74.9% of total Complementary Services Division revenues. Specialty Books' largest customer, who accounted for more than 30.0% of Specialty Books' fiscal 2005 revenues and 50.0% of fiscal 2004 revenues, discontinued the use of Specialty Books' services for delivery of educational materials during fiscal 2005. Other services offered to college bookstores include services related to our turnkey bookstore management software, the sale of other software and hardware, and the related maintenance contracts. These services generate revenue and assist us in gaining access to new sources of used textbooks. We have installed our proprietary total store management system at approximately 670 college bookstore locations, and we have an installed base of approximately 200 college bookstore locations for our textbook management control systems. In total, including our own bookstores, almost 870 college bookstore locations utilize our software products. In addition, we have developed software for E-commerce capabilities. These software products allow college bookstores to launch their own E-commerce site and effectively compete against other online textbook sellers by offering textbooks and both traditional and non-traditional store merchandise online. Presently there are over 490 stores licensing our E-commerce technology via CampusHub. Additionally, on February 27, 2006, we announced the introduction of our digital delivery solution which will allow a college bookstore to offer students the option of purchasing E-books via download in addition to new and used textbooks. Through C2O, we are able to offer a variety of products and services to participating college bookstores. C2O negotiates apparel, supplies, gifts, and general merchandise discounts and develops and executes marketing programs for its membership. C2O has evolved into a buying group with substantial purchasing clout by aggregating the purchasing power of 680 participating stores, including our own bookstores. Other C2O marketing services include a freight savings program, a credit card processing program, a shopping bag program, and retail display allowances for magazine displays. Additionally, the C2O staff of experienced professionals consults with the management and buyers of member bookstores. Consulting services offered include strategic planning, store review, merchandise assortment planning, buyer training, and help with other operational aspects of the business. While consulting has historically represented a relatively small component of C2O's business, it is nonetheless strategically important to the ongoing success of this aspect of our business. 7 We also provide a consulting and store design program to assist college bookstores in store presentation and layout. Through our marketing services program, we are able to leverage our distribution channels. Marketing services offered by us enable national vendors to reach college students through in-store kiosks, prepackaged freshman mailers, coupon books, e-mail promotions and in-store displays. BOOKSTORE DIVISION An important aspect of our business strategy is a program designed to reach new customers through the opening or acquisition of bookstores adjacent to college campuses or the contract-management of stores on campus. In addition to generating sales of new and used textbooks and general merchandise, these outlets enhance our Textbook Division by increasing the inventory of used books purchased from the campus. A desirable campus for a company-operated, off-campus college bookstore is one on which we do not currently buy or sell used textbooks either because a competitor contract-manages the college's bookstore or the college bookstore does not have a strong relationship with us. We generally will not open a location on a campus where we already have a strong relationship with the college bookstore because some college bookstores may view having a competing location as a conflict of interest. A desirable campus for contract-management is one where the current contract-management service is being provided by a competitor of ours and the contact is expiring. We tailor each of our own bookstores to fit the needs and lifestyles of the campus on which it is located. Individual bookstore managers are given significant planning and managing responsibilities, including, hiring employees, controlling cash and inventory, and purchasing and merchandising product. We have staff specialists to assist individual bookstore managers in such areas as store planning, merchandise layout and inventory control. As of March 31, 2006 we operated 139 college bookstores nationwide, having expanded from 102 bookstores in fiscal 2002. During fiscal 2006 we completed the acquisition, initiated the contract-management, or established the start-up of 17 bookstore locations: three locations in Bolivar, Missouri; and single locations in Erie, Pennsylvania; Waco, Texas; Port Huron, Michigan; Grand Forks, North Dakota; Dayton, Ohio; Newark, Delaware; Auburn, Alabama; Lake Mary, Florida; Tallahassee, Florida; Chattanooga, Tennessee; Taylorsville, Utah; Plano, Texas; Fremont, Nebraska; and Topeka, Kansas. The table below highlights certain information regarding our bookstores added and closed through March 31, 2006. Bookstores Approximate Open at Bookstores Bookstores Bookstores Total Beginning Added Closed at End of Square of Fiscal During During Fiscal Footage Fiscal Year Year Fiscal Year Fiscal Year(1) Year (in thousands) ----------- ---- ----------- --------------- ---- -------------- 2002 102 10 4 108 797 2003 108 4 3 109 798 2004 109 9 5 113 847 2005 113 11 - 124 916 2006 124 17 2 139 999 --------- (1) In fiscal 2002, the property leases at two bookstore locations expired and were not renewed by us and two bookstore locations in Austin, Texas were sold to a large Textbook Division customer. In fiscal 2003, the property leases at three bookstore locations expired and were not renewed by us. In fiscal 2004, five bookstores were closed, as either the lease expired, the contract-managed relationship was not renewed, or an agreement was reached with the landlord to terminate the lease. In fiscal 2006, two bookstores were closed and the leases were not renewed. We plan to continue increasing the number of bookstores in operation. The private bookstore expansion plan will focus on campuses where we do not already have a strong relationship with the on-campus bookstore. In determining to purchase an existing store or open a new one, we look at several criteria: (i) a large enough market to justify our efforts (typically this means a campus of at least 5,000 students); (ii) the competitive environment (how many stores currently serve the campus); (iii) a site in close proximity to campus with adequate parking and accessibility; (iv) the potential of the bookstore to have a broad product mix (larger bookstores are more attractive than smaller bookstores because a full line of general merchandise can be offered in addition to textbooks); (v) the availability of top-quality management; and (vi) certain other factors, including leasehold improvement opportunities and personnel costs. We also plan to pursue opportunities to contract-manage additional institutional stores. In determining to pursue opportunities to contract-manage a campus bookstore, we look at: (i) the size of the market; (ii) the competitive status of the market; (iii) the availability of top quality management; and (iv) certain other factors, including personnel costs. As mentioned previously, on May 1, 2006 we acquired over 100 college bookstore locations, most of which are contract-managed, through the acquisition of all of the outstanding stock of CBA. 8 Our current bookstores have an average size of 7,200 square feet but range in size from 400 to 50,000 square feet. We estimate that new bookstore leasehold improvements, furniture and fixtures, and automation with PRISM cost approximately $100,000 per bookstore. WHOLESALE PROCUREMENT AND DISTRIBUTION Historically, because the demand for used textbooks has consistently exceeded supply, our sales have been primarily determined by the amount of used textbooks that we can purchase. We believe that, on average, we are able to fulfill approximately 20% to 25% of our demand. As a result, our success has depended primarily on our inventory procurement, and we continue to focus our efforts on obtaining inventory. In order to ensure our ability to both obtain and redistribute inventory, our Textbook Division strategy has emphasized establishing and maintaining strong customer and supplier relationships with college bookstores (primarily, independent and institutional college bookstores) through our employee account representatives. These 33 account representatives (as of March 31, 2006) are responsible for procuring used textbooks from students, marketing our services on campus, purchasing overstock textbooks from bookstores and securing leads for sale of our systems products. We have been able to maintain a competitive edge by providing superior service, made possible primarily through the development and maintenance of ready access to inventory, information and supply. Other components of the Textbook Division strategy and its implementation include: (i) selectively paying a marginal premium relative to competitors to entice students to sell back more books to us; (ii) gaining access to competitive campuses (where the campus bookstore is contract-managed by a competitor) by opening off-campus, company-owned college bookstores; (iii) using technology to gain efficiencies and to improve customer service; (iv) maintaining a knowledgeable and experienced sales force that is customer-service oriented; (v) providing working capital flexibility for bookstores making substantial purchases; and (vi) establishing long-term supply arrangements by rewarding customers who make a long-term commitment to supplying us with a large portion of their books. The two major used textbook purchasing seasons are at the end of each academic semester, May and December. Although we make book purchases during other periods, the inventory purchased in May, before publishers announce their price increases in June and July, allows us to purchase inventory based on the lower retail prices of the previous year. The combination of this purchasing cycle and the fact that we are able to sell our inventory in relation to retail prices for the following year permits us to realize additional gross profit. We advance cash to our representatives during these two periods, and the representatives in turn buy books directly from students, generally through the on-campus bookstore. After we purchase the books, we arrange for shipment to one of our two warehouses (Nebraska and California) via common carrier. At the warehouse, we refurbish damaged books and categorize and shelf all other books in a timely manner, and enter them into our on-line inventory system. These two locations function as one facility allowing customers to access inventory at both locations. Customers place orders by phone, mail, fax or other electronic method. Upon receiving an order, we remove the books from available inventory and hold them for future shipping. Customers may return books within 60 days after the start of classes (90 days for customers participating in the exclusive supply or NBC Partnership programs) if a written request is enclosed. Returns over the past three years have averaged approximately 21.8% of sales and generally are attributable to course cancellations or overstocking. The majority of returns are textbooks that we are able to resell for the next semester. MANAGEMENT INFORMATION SYSTEMS We believe that we can enhance efficiency, profitability and competitiveness through investments in technology. Our MIS operations process order entry, control inventory, generate purchase orders and customer invoices, generate various sales reports, and process and retrieve textbook information. Our bookstores operate on either IBM RS-6000's running AIX ("Unix") or Microsoft Windows-based servers. At the center of our MIS operations are our self-developed, proprietary software programs such as PRISM, our whole store management system, and PC-Text, our textbook management and inventory control system. This software is maintained and continuously enhanced by an experienced team of development and design professionals. 9 In addition, we have developed software for E-commerce capabilities. These software products allow college bookstores to launch their own E-commerce site and effectively compete against other online textbook sellers by offering textbooks and both traditional and non-traditional store merchandise online. None of our proprietary software programs are copyrighted, although we do have registered trademarks for certain names. In addition to using our software programs for our own management and inventory control, we license the use of our software programs to bookstores. Our software programs enhance the efficiency and cost-effectiveness of our operations, and their use by bookstores that are our customers or suppliers tends to solidify the relationship between us and such customers or suppliers, resulting in increased sales or inventory for us. MIS operations consist of four operating units: (i) the mainframe unit, which develops and supports all systems utilized in our warehouses and corporate offices; (ii) a system sales unit, which markets our college store management systems to colleges; (iii) the College Bookstore Management Systems ("CBMS"), which develops and supports the systems that are sold to bookstores; and (iv) CampusHub, which develops and supports software for E-commerce. We conduct training courses for all systems users at our headquarters in Lincoln, Nebraska. Classes are small and provide hands on demonstrations of the various systems. Printed reference manuals and training materials also accompany each system. The customer support unit of CBMS is staffed with approximately 50 experienced personnel. Support is offered via web site, E-mail, and toll free phone numbers. Support hours vary per product and time of year. After-hours pager support is available for mission-critical systems. CUSTOMERS Our college bookstores are located on many of the nation's largest college campuses including: University of Nebraska; University of Michigan; University of Maryland; Arizona State University; Pennsylvania State University; University of Kansas; Michigan State University; University of California - Berkeley; Texas A&M University; University of Florida; and University of Tennessee. We sell our Textbook and certain Complementary Services Division products and services to college bookstores throughout the United States, Canada and Puerto Rico. Our Textbook Division purchases from and resells used textbooks to many of the nation's largest college campuses including: University of Texas; University of Southern California; Indiana University; San Diego State University; University of Washington; and University of Minnesota. Our 25 largest Textbook Division customers accounted for approximately 4.6% of our fiscal 2006 consolidated revenues. No single Textbook Division customer accounted for more than 1.0% of our fiscal 2006 consolidated revenues. Our distance education program is, among other things, a primary supplier of textbooks and educational material to students enrolled in on-line courses offered through approximately 40 colleges and high schools. Although historically one institution accounted for a substantial portion of total revenues in the distance education program, this institution discontinued the use of our services for delivery of educational materials during fiscal 2005. For the fiscal year ended March 31, 2006, two institutions accounted for approximately 53% of distance education program revenues. No single customer accounted for more than 10.0% of our consolidated revenues in fiscal year 2006, 2005, or 2004. COMPETITION We compete with a variety of other companies and also individuals, all of whom seek to provided products and/or services to the college marketplace. Our main corporate competitors are Follett Campus Resources ("Follett") and MBS Textbook Exchange/Barnes & Noble college stores ("MBS"). MBS Textbook Exchange and Barnes & Noble are sister companies controlled by the same shareholder. Our College Bookstore Division competes with: o Follett, MBS and a number of smaller companies for the opportunity to contract-manage institutional college bookstores (Follett and MBS contract-manage approximately 710 and 510 stores respectively), o other college bookstores located at colleges and universities that we serve, o a number of entities that sell textbooks and other merchandise directly to students through E-commerce bypassing the traditional college bookstore, 10 o student to student transactions that take place on campus and over the internet, and o course packs and electronic media as a source of textbook information, such as on-line resources, E-Books, print-on-demand textbooks and CD-ROMs which may replace or modify the need for students to purchase textbooks through the traditional college bookstore. Our Textbook Division competes in the used textbook market, which includes the purchase and resale of used textbooks. We compete with: o college bookstores who normally repurchase books from students to be reused on that campus the following semester or term, o student to student transactions that take place on campus and over the internet, and o other wholesalers who purchase used textbooks from students and then resell them to other college bookstores. Our Textbook Division competes in the wholesale business with Follett and MBS, and certain smaller regional companies including Budgetext, Texas Book Company, Tichenor College Textbook Company, and Southeastern Book Company. We believe that our market share of the independent and non contract-managed institutional stores is comparable to that of Follett and MBS individually. Many of Follett's and some of MBS's college bookstores are located on smaller campuses. The size of the campus and their presence there have precluded us from entering these markets, which in turn affects both our ability to buy books and our ability to add new accounts. Our Complementary Services Division also competes with: o MBS in the sale and installation of college bookstore information systems o MBS in the distance education textbook distribution market, o college bookstores that provide their own E-commerce solution in competition with CampusHub, o the Independent College Bookstore Association ("ICBA") in the centralized buying service business (participation by college bookstores in C2O's or ICBA's centralized buying service is voluntary, and college bookstores may, and some do, belong to both buying associations) and o a variety of smaller organizations and individuals involved in these businesses and others like marketing services and consulting services. GOVERNMENTAL REGULATION We are subject to various federal, state and local environmental, health and safety laws and regulations. Generally, these laws impose limitations on the discharge of pollutants and the presence of hazardous substances in the workplace and establish standards for vehicle and employee safety and for the handling of solid and hazardous wastes. These laws include the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Clean Air Act, the Hazardous Materials Transportation Act and the Occupational Safety and Health Act. Future developments, such as stricter environmental or employee health and safety laws and regulations thereunder, could affect our operations. We do not currently anticipate that the cost of our compliance with, or of any foreseeable liabilities under, environmental and employee health and safety laws and regulations will have a material adverse affect on our business or financial condition. EMPLOYEES As of March 31, 2006 we had a total of approximately 2,900 employees, of which approximately 1,100 were full-time, approximately 500 were part-time and approximately 1,300 were temporary. We have no unionized employees and believe that our relationship with our employees is satisfactory. In view of the seasonal nature of our Textbook Division, we utilize seasonal labor to improve operating efficiency. We employ a small number of "flex-pool" workers who are cross-trained in a variety of warehouse functions. Temporary employees augment the flex-pool to meet periodic labor demands. 11 ITEM 1A. RISK FACTORS. This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth in the following cautionary statements and elsewhere in this Annual Report on Form 10-K. If any of the following risks were to occur, our business, financial condition or results of operations would likely suffer. WE FACE COMPETITION IN OUR MARKETS. Our industry is highly competitive. A large number of actual or potential competitors exist, some of which are larger than us and have substantially greater resources than us. We cannot give assurances that our business will not be adversely affected by increased competition in the markets in which we currently operate or in markets in which we will operate in the future, or that we will be able to improve or maintain our profit margins. In recent years, an increasing number of institution-owned college stores have decided to outsource or "contract-manage" the operation of their bookstores. As of June 1, 2005, approximately 29% of the U.S. members of The National Association of College Stores were contract-managed. The leading managers of these stores include two of our principal competitors in the wholesale textbook distribution business. Contract-managed stores primarily purchase their used textbook requirements from and sell their available supply of used textbooks to their affiliated operations. A significant increase in the number of contract-managed stores operated by our competitors, particularly at large college campuses, could adversely affect our ability to acquire an adequate supply of used textbooks. We are also experiencing growing competition from alternative media and alternative sources of textbooks for students, such as websites designed to sell textbooks, E-books and digital content, and/or other merchandise directly to students; on-line resources; print-on-demand textbooks; and CD-ROMs, and from the use of course packs, which are collections of copyrighted materials and professors' original content which are produced by college bookstores and sold to students, all of which have the potential to reduce or replace the need for textbooks sold through the college bookstore. A substantial increase in the availability or the acceptance of these alternatives as a source of textbooks and textbook information could significantly reduce college students' use of the college bookstore and/or the use of traditional textbooks and thus have a material adverse effect on our business and results of operations. We are experiencing growing competition from technology-enabled student to student transactions that take place over the Internet. These transactions, whereby a student enters into a transaction directly with another student for the sale and purchase of a textbook, provide competition by reducing the supply of textbooks available to us for purchase and by reducing the sale of textbooks through the college bookstore. While such transactions have occurred for many years, prior to the Internet such transactions were limited by geography, a lack of information related to pricing and demand, and other factors. A significant increase in the number of these transactions could have a material adverse effect on our business and results of operations. WE MAY NOT BE ABLE TO SUCCESSFULLY ACQUIRE OR CONTRACT-MANAGE ADDITIONAL BOOKSTORES OR INTEGRATE THOSE ADDITIONAL STORES. Part of our business strategy is to expand sales for our college bookstore operations by either acquiring privately owned bookstores or being awarded additional contracts to manage institutional bookstores. We cannot give assurances that we will be able to identify additional private bookstores for acquisition or that we will be successful in competing for contracts to manage additional institutional stores. We also cannot give assurances that any anticipated benefits will be realized from any of these additional bookstores. Due to the seasonal nature of business in our bookstores, operations may be affected by the time of year when a bookstore is acquired or contracted by us. The process may require financial resources that would otherwise be available for our existing operations. We cannot give assurances that the integration of these future bookstores will be successful or that the anticipated strategic benefits of these future bookstores will be realized or that they will be realized within time frames contemplated by our management. Acquisitions and additional contracted stores may involve a number of special risks, including, but not limited to, adverse short-term effects on our reported operating results, diversion of management's attention, standardization of accounting systems, dependence on retaining, hiring and training key personnel, unanticipated problems or legal liabilities and actions of our competitors and customers. If we are unable to successfully integrate our future acquisitions or contracted stores for these or other reasons, our results of operations may be adversely affected. WE MAY NOT BE ABLE TO SUCCESSFULLY RENEW OUR CONTRACT-MANAGED BOOKSTORES AT PROFITABLE TERMS. As we expand our operations in contract-management of institutional bookstores, we will increasingly be competing for the renewal of those stores as the current contracts expire. Contracts in the industry are typically for 3 to 5 years, with various renewal and cancellation clauses. We cannot give assurances that we will be able to be successful in being awarded renewals of our current contracts or that those renewals will be on terms that provide us the opportunity to improve or maintain the profitability of managing the store. If we are unable to successfully renew our contracts on profitable terms, our results of operations may be adversely affected. 12 IF WE ARE UNABLE TO OBTAIN A SUFFICIENT SUPPLY OF USED TEXTBOOKS, OUR BUSINESS MAY BE ADVERSELY AFFECTED. We are generally able to sell a substantial majority of our available used textbooks and, therefore, our ability to purchase a sufficient number of used textbooks largely determines our used textbook sales for future periods. Successfully acquiring books requires a visible presence on college campuses at the end of each semester, which requires hiring a significant number of temporary personnel, and having access to sufficient funds under our Revolving Credit Facility or other financing alternatives. Textbook acquisition also depends upon college students' willingness to sell their used textbooks at the end of each semester. The unavailability of sufficient personnel or credit, or a shift in student preferences, could impair our ability to acquire sufficient used textbooks to meet our sales objectives and adversely affect our results of operations. OUR OPERATIONS MAY BE ADVERSELY AFFECTED IF PUBLISHERS DO NOT CONTINUE TO INCREASE PRICES OF TEXTBOOKS ANNUALLY. We generally buy used textbooks based on publishers' prevailing prices for new textbooks just prior to the implementation by publishers of their annual price increases (which historically have been 4% to 5%) and resell these textbooks shortly thereafter based upon the new higher prices, thereby creating an immediate margin increase. Our ability to increase our used textbook prices each year depends on annual price increases on new textbooks implemented by publishers. The failure of publishers to continue annual increases could adversely affect our results of operations. CHANGES IN PUBLISHER ACTIVITIES RELATED TO NEW EDITIONS AND MATERIALS PACKAGED WITH NEW TEXTBOOKS COULD NEGATIVELY AFFECT OUR OPERATING RESULTS. Publishers have historically produced new editions of textbooks every two to four years. Changes in the business models of publishers to accelerate the new edition cycle or to significantly increase the number of textbooks with other materials packaged or bundled with it (which makes it more difficult to repurchase and resell the entire package of materials) could reduce the supply of used textbooks available to us and negatively affect our operating results. WE ARE DEPENDENT ON KEY PERSONNEL, THE LOSS OF WHOM COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL PERFORMANCE. Our future success depends to a significant extent on the efforts and abilities of our senior management team. Our senior management team has over 80 years of cumulative experience in the college bookstore industry. The loss of the services of these individuals could have a material adverse effect on our business, financial condition and results of operations. THE SEASONALITY OF OUR WHOLESALE AND BOOKSTORE OPERATIONS COULD NEGATIVELY AFFECT OUR OPERATING RESULTS. Our wholesale and bookstore operations experience two distinct selling periods and the wholesale operations experience two distinct buying periods. The peak selling periods for the wholesale operations occur prior to the beginning of each school semester in July/August and November/December. The buying periods for the wholesale operations occur at the end of each school semester in May and December. The primary selling periods for the bookstore operations are in August/September and January. In fiscal 2006, approximately 44% of our annual revenues occurred in the second fiscal quarter (July-September), while approximately 30% of our annual revenues occurred in the fourth fiscal quarter (January-March). Accordingly, our working capital requirements fluctuate throughout the year, increasing substantially at the end of each semester, in May and December, as a result of the buying periods. We fund our working capital requirements primarily through the Revolving Credit Facility, which historically has been repaid with cash provided from operations. A significant reduction in sales during our peak selling periods could have a material adverse effect on our financial condition or results of operations for the year. THE INDENTURES GOVERNING THE SENIOR SUBORDINATED NOTES AND NBC'S SENIOR DISCOUNT NOTES, AS WELL AS THE SENIOR CREDIT FACILITY, IMPOSE SIGNIFICANT OPERATING AND FINANCIAL RESTRICTIONS, WHICH MAY PREVENT US FROM INCURRING ADDITIONAL INDEBTEDNESS AND TAKING SOME ACTIONS. The indentures governing the Senior Subordinated Notes and NBC's Senior Discount Notes restrict our ability to do the following: incur additional indebtedness; pay dividends or make other restricted payments; consummate certain asset sales; create liens on assets; enter into transactions with affiliates; make investments, loans or advances; consolidate or merge with or into any other person; convey, transfer or lease all or substantially all of our assets; or change the business we conduct. The Senior Credit Facility prohibits us from prepaying other indebtedness. In addition, we are required to comply with and maintain specified financial ratios and tests, including minimum interest coverage ratios, maximum leverage ratios and minimum fixed charge coverage ratios. Our ability to meet these financial ratios and tests can be affected by events beyond our control, and we cannot give assurances that we will satisfy these requirements in the future. A breach of any of these covenants could result in a default under the Senior Credit Facility or the indentures. Upon an event of default under the Senior Credit Facility, the lenders could elect to declare all amounts and accrued interest outstanding under the Senior Credit Facility to be due and payable and could terminate their commitments to make further extensions of credit under the Senior Credit Facility and the holders of the Senior Subordinated Notes and NBC's Senior Discount Notes could elect to declare all amounts under such notes immediately due and payable. If we were unable to repay our indebtedness under the Senior Credit Facility, the lenders could proceed against the collateral securing the indebtedness. If the indebtedness under the Senior Credit Facility were accelerated, we cannot give assurances that our assets would be sufficient to repay in full such indebtedness and other indebtedness, including the Senior Subordinated Notes and NBC's Senior Discount Notes. Substantially all of our assets are pledged as security under the Senior Credit Facility. 13 WE ARE CONTROLLED BY ONE PRINCIPAL EQUITY HOLDER, WHO HAS THE POWER TO TAKE UNILATERAL ACTION. Weston Presidio beneficially owns approximately 83.9% of NBC's issued and outstanding common stock (taking into account for such percentage calculation options outstanding and options available for future grant under the 2004 Stock Option Plan). As a result, Weston Presidio is able to control all matters, including the election of a majority of our board of directors, the approval of amendments to NBC's and our certificates of incorporation and fundamental corporate transactions such as mergers and asset sales. The interests of Weston Presidio may not in all cases be aligned with the interests of other affected parties. In addition, Weston Presidio may have an interest in pursuing acquisitions, divestitures and other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risks to other affected parties. OUR SUBSTANTIAL LEVEL OF INDEBTEDNESS COULD LIMIT CASH FLOW AVAILABLE FOR OUR OPERATIONS AND COULD ADVERSELY AFFECT OUR ABILITY TO SERVICE OUR DEBT OR OBTAIN ADDITIONAL FINANCING. We have $354.3 million of outstanding indebtedness at March 31, 2006. NBC has additional outstanding indebtedness of $62.5 million as of March 31, 2006 under the Senior Discount Notes. The degree to which we are leveraged could have important consequences, including the following: o our ability to obtain additional financing for working capital, capital expenditures, acquisitions, or general corporate purposes may be impaired; o a substantial portion of our cash flow from operations must be dedicated to the payment of interest on outstanding indebtedness, thereby reducing the funds available to us for other purposes, such as capital expenditures and acquisitions; o all of the indebtedness outstanding under the Senior Credit Facility is secured by substantially all of our assets, and will mature prior to the Senior Subordinated Notes and the Senior Discount Notes; o we believe we are substantially more leveraged than certain of our competitors, which might place us at a competitive disadvantage; o we may be hindered in our ability to adjust rapidly to changing market conditions; o we may be more vulnerable in the event of a downturn in general economic conditions or in our industry or business; and o our indebtedness may make it more difficult for us to satisfy our financial obligations. ITEM 1B. UNRESOLVED STAFF COMMENTS. As previously noted, we are neither an accelerated filer nor a well-known seasoned issuer, as those terms are defined by the United States Securities and Exchange Commission. However, we are not aware of any unresolved written comments received from the United States Securities and Exchange Commission. 14 ITEM 2. PROPERTIES. Listed below, set forth as of March 31, 2006, are our college bookstores, their location, college served and the school's estimated enrollment.
Institution Location Enrollment Store Name ----------- -------- ---------- ---------- Auburn University Auburn, AL 22,900 Anders Bookstore University of Alabama Tuscaloosa, AL 21,800 The College Store University of Arkansas--Little Rock Little Rock, AR 12,100 Campus Bookstore Northern Arizona University Flagstaff, AZ 19,100 The College Store Northern Arizona University Flagstaff, AZ 19,100 University Text and Tools Arizona State University - West Campus Glendale, AZ 7,700 The College Store West Mesa County Community College, also serving: Mesa, AZ 27,500 The Textbook Company Chandler Gilbert Community College - Pecos 8,700 Western International University Phoenix, AZ 5,800 Western International University Bookstore (1) Arizona State University Tempe, AZ 49,200 The College Store University of Arizona Tucson, AZ 36,900 Arizona Book Store University of Arizona Tucson, AZ 36,900 Arizona Book Store South University of California - Berkeley, also Berkeley, CA 33,500 Ned's Bookstore serving: Vista Community College 4,500 University of California - Berkeley Berkeley, CA 33,500 Ned's Bookstore University of California - Berkeley Berkeley, CA 33,500 Ned's Bookstore University of Northern Colorado Greeley, CO 12,100 The Book Stop University of Delaware Newark, DE 21,200 Delaware Book Exchange Daytona Beach Community College Daytona Beach, FL 12,100 College Book Rack University of Florida, also serving: Gainesville, FL 49,600 Florida Book Store Santa Fe Community College 13,900 University of Florida, also serving: Gainesville, FL 49,600 Florida Book Store, Volume II Santa Fe Community College 13,900 University of North Florida, also serving: Jacksonville, FL 15,400 College Book Rack Volume One Florida Coastal School of Law 900 Florida Community College at Jacksonville 24,800 Florida Community College at Jacksonville Jacksonville, FL 24,800 College Book Rack Volume Two Seminole Community College Lake Mary, FL 12,200 Raider Books Miami-Dade College Miami, FL 20,600 Lemox College Book & Supply University of Central Florida, also serving: Orlando, FL 45,400 College Book & Supply Seminole Community College 12,200 Valencia Community College 29,600 University of Central Florida Orlando, FL 45,400 Knight's Corner Florida State University Tallahassee, FL 38,400 Bill's Bookstore Florida State University Tallahassee, FL 38,400 Bill's Bookstore Florida State University, also serving: Tallahassee, FL 38,400 Bill's Bookstore Tallahassee Community College 12,800 Georgia State University Atlanta, GA 27,300 Georgia Bookstore Drake University Des Moines, IA 5,300 D-Shoppe (1) Drake University, also serving: Des Moines, IA 5,300 University Book Store (2) Mercy College of Health Sciences 700 Southern Illinois University Carbondale, IL 21,400 Saluki Bookstore Illinois State University - Normal Normal, IL 20,300 The Alamo II Ball Sate University Muncie, IN 18,600 Collegiate Book Exchange Valparaiso University Valparaiso, IN 3,900 University Book Center (1) University of Kansas Lawrence, KS 26,900 University Book Shop Johnson County Community College Overland Park, KS 18,700 The College Store Washburn University Topeka, KS 7,300 Textbook Team Western Kentucky University Bowling Green, KY 18,600 Lemox Book Company University of Louisville Louisville, KY 20,700 College Book Warehouse Morehead State University Morehead, KY 9,100 Varsity Eagle Eastern Kentucky University Richmond, KY 16,200 University Book & Supply University of Maryland College Park, MD 34,900 Maryland Book Exchange Prince George's Community College Largo, MD 12,500 Prince George's Community College Bookstore (1) Alma College Alma, MI 1,300 Kiltie Korner Bookstore (1) Concordia University - Ann Arbor Ann Arbor, MI 600 Concordia College Bookstore (1) University of Michigan Ann Arbor, MI 40,000 Michigan Book & Supply University of Michigan Ann Arbor, MI 40,000 Ulrich's Bookstore Oakland University Auburn Hills, MI 16,900 Textbook Outlet Wayne County Community College Belleville, MI 11,900 WCCCD Bookstore (1) Wayne County Community College Detroit, MI 11,900 WCCCD Bookstore (1) Wayne County Community College Detroit, MI 11,900 WCCCD Bookstore (1) Wayne County Community College Detroit, MI 11,900 WCCCD Bookstore (1) Wayne County Community College Taylor, MI 11,900 WCCCD Bookstore (1) 15 Institution Location Enrollment Store Name ----------- -------- ---------- ---------- Michigan State University East Lansing, MI 45,200 The College Store Michigan State University East Lansing, MI 45,200 Ned's Bookstore Michigan State University East Lansing, MI 45,200 Spartan Art Store (1) Michigan State University East Lansing, MI 45,200 Spartan Bookstore (1) Michigan State University East Lansing, MI 45,200 Spartan Medical Store (1) Kettering University Flint, MI 3,100 Kettering Campus Store (1) St. Clair County Community College Port Huron, MI 4,200 St. Clair County CC Bookstore (1) Eastern Michigan University, also serving: Ypsilanti, MI 23,900 Campus Book & Supply Washtenaw Community College 12,000 Washtenaw Technical Middle College 300 Eastern Michigan University Ypsilanti, MI 23,900 Ned's Bookstore Eastern Michigan University Ypsilanti, MI 23,900 Ned's College of Business Bookstore Eastern Michigan University Ypsilanti, MI 23,900 Mike's Bookstore Minnesota State University at Mankato Mankato, MN 14,200 Maverick Bookstore (2) Southwest Baptist University Bolivar, MO 3,400 Southwest Baptist University Bookstore (1) Southwest Baptist University Bolivar, MO 3,400 SBU - St. John's Center Bookstore (1) Southwest Baptist University Bolivar, MO 3,400 Southwest Baptist University - Salem Bookstore (1) Mississippi State University Starkville, MS 16,100 Bully's Textbook Exchange North Carolina State University Raleigh, NC 30,100 Packbackers Student Bookstore University of North Dakota - Grand Forks Grand Forks, ND 13,200 Dakota Textbook Co. Chadron State College Chadron, NE 2,500 Eagle Pride Bookstore (1) Midland Lutheran College Fremont, NE 900 Warrior Bookstore (1) University of Nebraska -- Kearney Kearney, NE 6,400 The Antelope Bookstore (1) University of Nebraska -- Lincoln Lincoln, NE 21,200 Big Red Shop University of Nebraska -- Lincoln Lincoln, NE 21,200 Nebraska Bookstore (2) Nebraska Wesleyan University Lincoln, NE 2,000 Prairie Wolves Bookstore (1) Wayne State College Wayne, NE 3,400 Wayne State College Bookstore (1) University of Nevada Las Vegas Las Vegas, NV 28,000 Rebelbooks State University of New York -- Buffalo, also Amherst, NY 27,200 The College Store serving: Erie Community College - North Campus 12,800 State University of New York - Binghamton Vestal, NY 13,500 The Bookbridge University of Akron Akron, OH 21,600 The College Store Ohio University Athens, OH 19,600 Specialty Books Ohio State University Columbus, OH 51,000 College Town Sinclair Community College Dayton, OH 19,600 The College Store Wright State University, also serving: Fairborn, OH 16,200 The College Store Sinclair Community College 19,600 University of Toledo Toledo, OH 19,200 The Student Bookstore University of Oklahoma Norman, OK 27,500 Boomer Book Company University of Oklahoma Norman, OK 27,500 Sooner Textbooks Oklahoma State University Stillwater, OK 23,800 Cowboy Book Gannon University Erie, PA 3,400 Gannon University Bookstore (1) Indiana University of Pennsylvania Indiana, PA 14,100 The College Store University of Pittsburgh Pittsburgh, PA 26,700 GotUsed Bookstore Pennsylvania State University State College, PA 40,700 GotUsed Bookstore College of Charleston Charleston, SC 10,900 University Book of Charleston University of South Carolina Columbia, SC 25,600 Carolina Spirit Shop University of South Carolina Columbia, SC 25,600 South Carolina Book Store University of Tennessee - Chattanooga Chattanooga, TN 8,700 Chattanooga Books East Tennessee State University Johnson City, TN 12,100 The College Store East Tennessee State University Johnson City, TN 12,100 East Tennessee State University Bookstore (1) University of Tennessee Knoxville, TN 28,500 Rocky Top Books University of Tennessee Knoxville, TN 28,500 Rocky Top East (2) University of Texas - Arlington, also serving: Arlington, TX 25,300 The College Store Tarrant County College District 34,100 Austin Community College Austin, TX 31,900 Bevo's Austin Community College Austin, TX 31,900 Bevo's Blinn College Bryan, TX 14,000 Traditions Bookstore Texas A&M University College Station, TX 45,100 Traditions Bookstore Texas A&M University College Station, TX 45,100 Traditions Bookstore Texas A&M University College Station, TX 45,100 Traditions Bookstore Southern Methodist University Dallas, TX 11,200 Varsity Bookstore University of North Texas, also serving: Denton, TX 32,200 Voertman's (2) North Central Texas College 6,500 Texas Woman's University 10,700 University of Texas -- Pan American Edinburg, TX 17,000 South Texas Book & Supply North Harris College Houston, TX 9,900 College Bookstore (2) University of Houston, also serving: Houston, TX 35,200 The College Store Texas Southern University School of Law 600 Texas Tech University Lubbock, TX 28,000 Double T Bookstore 16 Institution Location Enrollment Store Name ----------- -------- ---------- ---------- Texas Tech University Lubbock, TX 28,000 Double T Bookstore Texas Tech University Lubbock, TX 28,000 Double T Bookstore Texas Tech University Lubbock, TX 28,000 Spirit Shop South Texas College McAllen, TX 17,100 South Texas Book & Supply Stephen F. Austin State University Nacogdoches, TX 11,400 Varsity Book Store Collin County Community College, also serving: Plano, TX 17,700 PJ's Campus Bookstore University of Texas at Dallas 14,100 San Antonio College, also serving: San Antonio, TX 22,000 L&M Bookstore Northwest Vista College 8,500 Palo Alto College 7,600 St. Philip's College 10,200 UTSA - Downtown 6,000 University of Texas -- San Antonio, also San Antonio, TX 26,200 L&M UTSA Bookstore serving: Northwest Vista College 8,500 Texas State University - San Marcos San Marcos, TX 27,200 Colloquium Bookstore Texas State University - San Marcos San Marcos, TX 27,200 Colloquium Bookstore Texas State University - San Marcos San Marcos, TX 27,200 Colloquium Bookstore Tarleton State University Stephenville, TX 9,100 The College Store Baylor University Waco, TX 14,000 University Bookstore Baylor University Waco, TX 14,000 University Bookstore and Spirit Shop McLennan Community College, also serving: Waco, TX 7,500 Highlander Student Bookstore Texas State Technical College - Waco 4,400 Midwestern State University Wichita Falls, TX 6,400 The College Store Salt Lake City Community College Taylorsville, UT 24,700 PJ's College Books Virginia Polytechnic Institute and State Blacksburg, VA 27,600 Tech Bookstore University Old Dominion University Norfolk, VA 20,800 Dominion Bookstore Radford University Radford, VA 9,600 Radford Book Exchange Western Washington University, also serving: Bellingham, WA 13,100 The College Store Whatcom Community College 4,000 Washington State University Pullman, WA 23,200 Crimson & Gray Marshall University Huntington, WV 13,900 Stadium Bookstore
------------ (1) Denotes properties leased from the educational institution ("contract-managed" stores). (2) Property is owned by us. We own our two Textbook Division warehouses (totaling 253,000 square feet) in Lincoln, Nebraska (one of which is also the location of our headquarters), and lease our 60,000 square foot Textbook Division warehouse in Cypress, California. The Cypress lease expires on August 31, 2007. Our distance education program resides in a leased facility with 49,500 square feet in Athens, Ohio. The lease expires on May 31, 2007 and has one five-year option to renew. ITEM 3. LEGAL PROCEEDINGS. From time to time, we are subject to legal proceedings and other claims arising in the ordinary course of our business. We believe that currently we are not a party to any litigation the outcome of which would have a material adverse affect on our financial condition or results of operations. We maintain insurance coverage against claims in an amount which we believe to be adequate. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No items were submitted to a vote by our security holders during the fourth quarter of fiscal 2006. 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. There were no equity securities issued by us during fiscal 2006. There is no established public trading market for our common stock and all of our common stock is owned by NBC. As discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8, "Financial Statements and Supplementary Data", the payment of dividends is subject to various restrictions under our debt instruments. In accordance with such covenants, in fiscal 2005 we declared and paid $0.1 million in dividends to NBC for costs associated with the March 4, 2004 Transaction. Additional information regarding equity compensation plans can be found in Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters." ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth our selected historical consolidated financial and other data as of and for the fiscal years ended March 31, 2006 and 2005 (successor), the one month ended March 31, 2004 (successor), the eleven months ended February 29, 2004 (predecessor), and the fiscal years ended March 31, 2003 and 2002 (predecessor), respectively. The selected historical consolidated financial data was derived from our audited consolidated financial statements. 18 The following table should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes thereto included in Item 8, "Financial Statements and Supplementary Data."
Successor (1) Predecessor (1) ----------------------------------------- ----------------------------------------- Fiscal Year Ended Fiscal Years Ended --------------------------- 1 Month Ended 11 Months Ended ------------------------- March 31, March 31, March 31, February 29, March 31, March 31, 2006 2005 2004 2004 2003 2002 ------------- ------------- ------------- -------------- ------------ ------------ STATEMENT OF OPERATIONS DATA: (dollars in thousands) Revenues $ 420,108 $ 402,154 $ 13,317 $ 385,364 $ 370,510 $ 338,917 Costs of sales 250,914 240,638 7,768 231,874 224,488 206,976 ------------- ------------- ------------- -------------- ------------ ------------ Gross profit 169,194 161,516 5,549 153,490 146,022 131,941 Operating expenses: Selling, general, and administrative 107,991 100,513 8,540 91,740 90,391 84,871 Depreciation 4,913 4,908 350 3,396 3,469 3,501 Amortization 8,762 8,258 649 1,162 644 505 Stock-based compensation - - - 7,264 - - ------------- ------------- ------------- -------------- ------------ ------------ Income (loss) from operations 47,528 47,837 (3,990) 49,928 51,518 43,064 Other expenses (income): Interest expense 29,395 25,854 2,226 22,409 14,212 17,189 Interest income (1,275) (639) (97) (308) (360) (400) (Gain) loss on derivative instruments (525) - - (57) 156 361 ------------- ------------- ------------- -------------- ------------ ------------ Income (loss) before income taxes 19,933 22,622 (6,119) 27,884 37,510 25,914 Income tax expense (benefit) 7,691 9,162 (2,400) 10,949 14,802 10,334 ------------- ------------- ------------- -------------- ------------ ------------ Net income (loss) $ 12,242 $ 13,460 $ (3,719) $ 16,935 $ 22,708 $ 15,580 ============= ============= ============= ============== ============ ============ OTHER DATA: EBITDA (2) $ 61,203 $ 61,003 $ (2,991) $ 54,486 $ 55,631 $ 47,070 Net cash flows from operating activities 22,421 16,682 (7,764) 46,913 37,332 31,038 Net cash flows from investing activities (17,970) (748) (29,656) (6,452) (5,327) (7,616) Net cash flows from financing activities (2,293) (17,986) (8,965) (204) (4,018) (16,412) Capital expenditures 7,312 7,666 720 3,965 3,708 2,277 Business acquisition expenditures (3) 10,696 20,160 1,849 2,355 1,389 6,110 Number of bookstores open at end of the period 139 124 113 112 109 108 BALANCE SHEET DATA (AT END OF PERIOD): Cash and cash equivalents $ 33,383 $ 31,224 $ 33,276 $ 79,662 $ 39,405 $ 11,419 Working capital 111,066 104,008 106,259 132,729 82,959 75,865 Total assets 645,346 627,239 646,265 252,449 205,485 180,294 Total debt, including current maturities 354,309 356,402 373,179 187,782 143,367 147,576
(1) On March 4, 2004, Weston Presidio acquired the controlling interest in NBC, and hence in us, through a series of steps which resulted in Weston Presidio owning a substantial majority of NBC's common stock. For ease of presentation, financial information presented in this table reflects this transaction as if it had occurred on March 1, 2004. We have determined that no material transactions occurred during the period from March 1, 2004 through March 4, 2004. As a result of the March 4, 2004 Transaction, financial information for periods ending prior to March 1, 2004 is presented as the "Predecessor," while financial information for periods ending after March 1, 2004 is presented as the "Successor." As a result of the March 4, 2004 Transaction, which included substantial increases in long-term indebtedness through the issuance of new indebtedness and amortizable identifiable intangibles through the application of purchase accounting, the results of our operations beginning with the one month ended March 31, 2004 include higher interest and amortization expense. Additionally, the results of our operations for the eleven months ended February 29, 2004 contain non-recurring charges associated with (a) the write-off of $6.7 million of debt issue costs in conjunction with the March 4, 2004 Transaction and a debt refinancing which occurred on December 10, 2003; (b) call premiums totaling $3.2 million related to the March 4, 2004 Transaction; and (c) stock-based compensation totaling $7.3 million associated with the March 4, 2004 Transaction and the December 10, 2003 debt refinancing. 19 (2) EBITDA is defined as earnings before interest, taxes, depreciation, and amortization. As we are highly-leveraged and as our equity is not publicly-traded, management believes that a non-GAAP financial measure, EBITDA, is useful in measuring our liquidity and provides additional information for determining our ability to meet debt service requirements. The Senior Subordinated Notes and Senior Credit Facility also utilize EBITDA, as defined in those agreements, for certain financial covenants. EBITDA does not represent and should not be considered as an alternative to net cash flows from operating activities as determined by accounting principles generally accepted in the United States of America ("GAAP"), and EBITDA does not necessarily indicate whether cash flows will be sufficient for cash requirements. Items excluded from EBITDA, such as interest, taxes, depreciation and amortization, are significant components in understanding and assessing our financial performance. EBITDA measures presented may not be comparable to similarly titled measures presented by other registrants. The following presentation reconciles EBITDA with net cash flows from operating activities as presented in the Consolidated Statements of Cash Flows included in Item 8, "Financial Statements and Supplementary Data":
Successor Predecessor ----------------------------------------- ------------------------------------ Fiscal Year Ended Fiscal Year Ended -------------------------- 1 Month Ended 11 Months Ended --------------------- March 31, March 31, March 31, February 29, March 31, March 31, 2006 2005 2004 2004 2003 2002 ------------- ------------ ------------- -------------- ---------- ---------- (dollars in thousands) EBITDA $ 61,203 $ 61,003 $ (2,991) $ 54,486 $ 55,631 $ 47,070 Adjustments to reconcile EBITDA to net cash flows from operating activities: Interest income 1,275 639 97 308 360 400 Provision for losses on receivables 231 316 218 66 452 1,630 Cash paid for interest (27,875) (25,796) (4,174) (11,956) (13,549) (15,225) Cash paid for income taxes (9,589) (4,946) (10) (6,467) (14,533) (4,063) (Gain) loss on disposal of assets 90 68 14 408 36 (483) Changes in operating assets and liabilities, net of effect of acquisitions/disposals (4) (2,914) (14,602) (918) 10,068 8,935 1,709 ------------- ------------- ------------- -------------- ---------- ---------- Net Cash Flows from Operating Activities $ 22,421 $ 16,682 $ (7,764) $ 46,913 $ 37,332 $ 31,038 ============= ============= ============= ============== ========== ==========
(3) Business acquisition expenditures represent established businesses purchased by us. (4) Changes in operating assets and liabilities, net of effect of acquisitions/disposals includes the changes in the balances of receivables, inventories, prepaid expenses and other current assets, other assets, accounts payable, accrued employee compensation and benefits, accrued incentives, accrued expenses, deferred revenue, and other long-term liabilities. 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussions should be read in conjunction with our consolidated financial statements and the related notes thereto included in Item 8, "Financial Statements and Supplementary Data," and other information in this Annual Report on Form 10-K. EXECUTIVE SUMMARY OVERVIEW ACQUISITIONS. We completed the acquisition, initiated the contract-management, or established the start-up of 17 bookstore locations in fiscal 2006: three locations in Bolivar, Missouri; and single locations in Erie, Pennsylvania; Waco, Texas; Port Huron, Michigan; Grand Forks, North Dakota; Dayton, Ohio; Newark, Delaware; Auburn, Alabama; Lake Mary, Florida; Tallahassee, Florida; Chattanooga, Tennessee; Taylorsville, Utah; Plano, Texas; Fremont, Nebraska; and Topeka, Kansas. We believe that there continue to be attractive opportunities for us to expand our chain of bookstores across the country. REVENUE RESULTS. Consolidated revenues for the year ended March 31, 2006 increased $18.0 million, or 4.5% from the year ended March 31, 2005. This increase was attributable to increased Bookstore Division revenues resulting from new bookstore locations, which were in part offset by declines in Textbook and Complementary Services Division revenues. The decline in Complementary Services Division revenues was primarily due to the decision by the distance education program's largest customer to gradually discontinue the use of our services for delivery of education materials during fiscal 2005. EBITDA RESULTS. Consolidated EBITDA for the year ended March 31, 2006 increased $0.2 million, or 0.3% from the year ended March 31, 2005. We achieved moderate EBITDA growth from the College Bookstore Division due to acquisitions, while we saw decreases in both the Textbook Division due to slightly higher selling, general and administrative expenses and in the Complementary Services Division due to lower results in the distance education program. EBITDA is considered a non-GAAP financial measure by the SEC, and therefore you should refer to the more detailed explanation of that measure that is provided later in Management's Discussion & Analysis. SUBSEQUENT EVENT. On May 1, 2006, we acquired over 100 college bookstore locations, most of which are contract-managed, through the acquisition of all of the outstanding stock of College Book Stores of America, Inc. ("CBA"). CBA began providing contract-management services to small to medium-sized colleges and universities nationwide in 1984, and prior to the acquisition had and now continues to maintain one of the longest tenured management teams in the college bookstore industry. In addition to the acquired revenue and EBITDA, we believe this acquisition will enhance our competitive position for future contract-management opportunities. Certain amendments were made to the Credit Agreement underlying the Senior Credit Facility to allow for this acquisition, including adding an additional $24.0 million of borrowings under the Term Loan, increasing the Revolving Credit Facility by $15.0 million, and amending certain restrictions and financial covenants. CHALLENGES AND EXPECTATIONS We expect that we will continue to face challenges and opportunities similar to those that we have faced in the recent past. We have experienced, and continue to experience, competition for the supply of used textbooks from other textbook wholesalers and from student to student transactions, competition from alternative media and alternative sources of textbooks for students, competition for contract-management opportunities and other challenges. We also believe that we will continue to face challenges and opportunities related to acquisitions. Despite these challenges, we expect that we will continue to grow revenue and EBITDA on a consolidated basis in fiscal 2007. We also expect that our capital expenditures will remain modest for a company of our size. 21 FISCAL YEAR ENDED MARCH 31, 2006 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2005. REVENUES. Revenues for the years ended March 31, 2006 and 2005 and the corresponding change in revenues were as follows:
Change Year Ended Year Ended ------------------------- March 31, 2006 March 31, 2005 Amount Percentage -------------- -------------- -------------- ---------- Bookstore Division $ 292,110,080 $ 263,667,751 $ 28,442,329 10.8 % Textbook Division 132,555,940 133,938,475 (1,382,535) (1.0)% Complementary Services Division 26,681,864 33,767,440 (7,085,576) (21.0)% Intercompany eliminations (31,239,985) (29,219,326) (2,020,659) 6.9 % -------------- -------------- -------------- ---------- $ 420,107,899 $ 402,154,340 $ 17,953,559 4.5 % ============== ============== ============== ==========
The increase in Bookstore Division revenues was attributable to the addition of acquired bookstores (defined by us as stores acquired since April 1, 2004). The new bookstores provided an additional $28.4 million of revenue in the year ended March 31, 2006. The Company defines same store sales for fiscal 2006 as sales from any store, even if expanded or relocated, that has a full twelve months of sales in both fiscal 2006 and fiscal 2005. Same store sales were unchanged from the prior year with relatively small changes in all significant revenue categories, including textbooks and clothing and insignia wear. The decrease in Textbook Division revenues was due primarily to an increase in sales returns along with a 1.8% decrease in units sold, which were partially offset by a 3.7% increase in the average price per book sold. We believe that unit sales are down for the year primarily due to a decrease in the number of units purchased in the December of 2004 and May of 2005 student book buys, which supplied the peak selling periods in fiscal 2006. Complementary Services Division revenues decreased primarily due to the decision by the distance education program's largest customer to gradually discontinue the use of our services for delivery of education materials. Revenues from that customer program declined $6.0 million, while overall revenues from the distance education program declined $8.5 million. The decrease in distance education program revenues was partially offset by an increase of $1.4 million in revenues in our systems and consulting services businesses. Corresponding to the overall growth in the number of company owned college bookstores, our intercompany transactions also increased which reduces consolidated revenues. GROSS PROFIT. Gross profit for the year ended March 31, 2006 increased $7.7 million, or 4.8%, to $169.2 million from $161.5 million for the year ended March 31, 2005. This increase was primarily due to higher revenues, along with a slightly higher gross margin percent. Gross margin percent was 40.3 % for the year ended March 31, 2006 as compared to 40.2% for the year ended March 31, 2005, as a slight decline in the Bookstore Division was offset by small increases in the Textbook and Complementary Services Divisions. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the year ended March 31, 2006 increased $7.5 million, or 7.4%, to $108.0 million from $100.5 million for the year ended March 31, 2005. Selling, general and administrative expenses as a percentage of revenues were 25.7% and 25.0% for the years ended March 31, 2006 and 2005, respectively. The increase in selling, general and administrative expenses is primarily attributable to our continued growth which prompted an increase of $3.4 million in personnel costs, $1.4 million in advertising expense, and $2.0 million in rent. 22 EARNINGS (LOSS) BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION (EBITDA). EBITDA for the years ended March 31, 2006 and 2005 and the corresponding change in EBITDA were as follows:
Change Year Ended Year Ended ------------------------ March 31, 2006 March 31, 2005 Amount Percentage --------------- ---------------- ------------------------ Bookstore Division $ 36,056,380 $ 34,607,848 $ 1,448,532 4.2 % Textbook Division 31,938,743 32,181,393 (242,650) (0.8)% Complementary Services Division 1,220,529 1,805,367 (584,838) (32.4)% Corporate administration (8,012,619) (7,591,429) (421,190) 5.5 % ------------------------------- ------------------------ $ 61,203,033 $ 61,003,179 $ 199,854 0.3 % =============================== ========================
Bookstore Division EBITDA improved primarily as a result of the aforementioned increase in revenues, offset in part by a slight decline in gross margin percentage and a slight increase in selling, general and administrative expenses as a percentage of revenues. The decrease in EBITDA in the Textbook Division is primarily attributable to the decline in revenues and a slight increase in selling, general and administrative expenses as a percentage of revenues, offset in part by a slight increase in gross margin percentage. Complementary Services Division EBITDA decreased primarily due to the reduced revenues in the distance education program, resulting in an EBITDA decline in that division of $0.8 million, which was partially offset by a $0.4 million improvement in EBITDA results in the systems business. Corporate Administration EBITDA decreased by $0.4 million, primarily as a result of the bonus to be paid to Restricted Stock Plan participants as reimbursement for federal, state and local taxes related to the March 31, 2006 issuance of 4,200 shares of NBC Holdings Corp. capital stock under the Restricted Stock Plan and this cash bonus. EBITDA is defined as earnings before interest, taxes, depreciation, and amortization. As we are highly-leveraged and as our equity is not publicly-traded, management believes that a non-GAAP financial measure, EBITDA, is useful in measuring our liquidity and provides additional information for determining our ability to meet debt service requirements. The Senior Subordinated Notes and Senior Credit Facility also utilize EBITDA, as defined in those agreements, for certain financial covenants. EBITDA does not represent and should not be considered as an alternative to net cash flows from operating activities as determined by GAAP, and EBITDA does not necessarily indicate whether cash flows will be sufficient for cash requirements. Items excluded from EBITDA, such as interest, taxes, depreciation and amortization, are significant components in understanding and assessing our financial performance. EBITDA measures presented may not be comparable to similarly titled measures presented by other registrants. 23 The following presentation reconciles EBITDA with net cash flows from operating activities and also sets forth net cash flows from investing and financing activities as presented in the Consolidated Statements of Cash Flows included in Item 8, "Financial Statements and Supplementary Data": Year Ended Year Ended March 31, 2006 March 31, 2005 -------------- -------------- EBITDA $ 61,203,033 $ 61,003,179 Adjustments to reconcile EBITDA to net cash flows from operating activities: Interest income 1,274,836 638,935 Provision for losses on receivables 231,497 315,958 Cash paid for interest (27,874,705) (25,796,444) Cash paid for income taxes (9,589,439) (4,946,343) Loss on disposal of assets 90,263 68,065 Changes in operating assets and liabilities, net of effect of acquisitions/disposals (1) (2,914,479) (14,601,160) --------------- --------------- Net Cash Flows from Operating Activities $ 22,421,006 $ 16,682,190 =============== =============== Net Cash Flows from Investing Activities $(17,969,948) $ (747,555) =============== =============== Net Cash Flows from Financing Activities $ (2,292,679) $ (17,986,473) =============== =============== (1) Changes in operating assets and liabilities, net of effect of acquisitions/disposals, includes the changes in the balances of receivables, inventories, prepaid expenses and other current assets, other assets, accounts payable, accrued employee compensation and benefits, accrued incentives, accrued expenses, deferred revenue, and other long-term liabilities. AMORTIZATION EXPENSE. Amortization expense for the year ended March 31, 2006 increased $0.5 million, or 6.1%, to $8.8 million from $8.3 million for the year ended March 31, 2005, primarily due to amortization on non-compete agreements arising from acquisitions occurring in fiscal 2005 and 2006. INTEREST EXPENSE, NET. Interest expense, net for the year ended March 31, 2006 increased $2.4 million, or 9.4%, to $27.6 million from $25.2 million for the year ended March 31, 2005, primarily due to an approximate 2.0% increase in the average interest rate on the Term Loan, offset by higher interest income and a $0.5 million gain on the interest rate swap agreement. INCOME TAXES. Income tax expense for the year ended March 31, 2006 decreased $1.5 million, or 16.1%, to $7.7 million from $9.2 million for the year ended March 31, 2005. Our effective tax rate was 38.6% and 40.5% for the years ended March 31, 2006 and 2005, respectively. Our effective tax rate differs from the statutory tax rate primarily as a result of state income taxes. Effective state income tax rates were lower in fiscal 2006, in part due to state income tax savings resulting from the separate incorporation of NBC Textbooks LLC on January 1, 2005. 24 FISCAL YEAR ENDED MARCH 31, 2005 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2004. Unless otherwise noted, for purposes of management's discussion and analysis of results of operations for the fiscal year ended March 31, 2004, which includes the predecessor period from April 1, 2003 to February 29, 2004 and the successor period from March 1, 2004 to March 31, 2004, results of operations are presented on a "combined" basis, which combines the results of operations for the predecessor and successor periods, to assist in comparing results of operations between fiscal years. REVENUES. Revenues for the year ended March 31, 2005, the one month ended March 31, 2004, and the eleven months ended February 29, 2004 and the corresponding change in revenues (based upon combined revenues for fiscal 2004) were as follows:
Successor Predecessor ----------------------------- ---------------- Change Year Ended 1 Month Ended 11 Months Ended ------------------------- March 31, 2005 March 31, 2004 February 29, 2004 Amount Percentage -------------- -------------- ---------------- ------------- ----------- Bookstore Division $ 263,667,751 $ 5,318,989 $ 234,328,454 $ 24,020,308 10.0 % Textbook Division 133,938,475 4,484,265 125,746,000 3,708,210 2.8 % Complementary Services Division 33,767,440 4,443,778 49,754,314 (20,430,652) (37.7)% Intercompany eliminations (29,219,326) (929,638) (24,465,094) (3,824,594) 15.1 % -------------- -------------- ---------------- ------------- ----------- $ 402,154,340 $ 13,317,394 $ 385,363,674 $ 3,473,272 0.9 % ============== ============== ================ ============= ===========
The increase in Bookstore Division revenues was attributable to the addition of acquired bookstores (defined by us as stores acquired since April 1, 2003) offset by slightly lower same-store sales. The new bookstores provided an additional $26.0 million of revenue in the year ended March 31, 2005. The Company defines same store sales for fiscal 2005 as sales from any store, even if expanded or relocated, that has a full twelve months of sales in both fiscal 2005 and fiscal 2004. Same store sales decreased 0.9% primarily due to an approximate 1% decrease in sales of new textbooks and an approximate 3% decline in sales of clothing and insignia wear, which offset an approximate 1% increase in sales of used textbooks. The increase in Textbook Division revenues was due primarily to an approximate 5% increase in the average price per book sold, offset partially by a decrease in the number of units sold. We believe that unit sales are down for the year primarily due to a decrease in the number of units purchased in the December of 2003 and May of 2004 student book buys, which supplied the peak selling periods in fiscal 2005. Textbook Division revenues are limited by the supply of used textbooks available to us. Complementary Services Division revenues decreased primarily due to the decision by the distance education program's largest customer to gradually discontinue the use of our services for delivery of education materials. Revenues from that customer program declined approximately $18 million. In addition, revenues from installation and training activity in the systems business decreased $1.7 million. Corresponding to the overall growth in the number of company owned college bookstores, our intercompany transactions also increased which reduces consolidated revenues. GROSS PROFIT. Gross profit for the year ended March 31, 2005 increased $2.5 million, or 1.6%, to $161.5 million from $159.0 million for the year ended March 31, 2004. This increase was primarily due to higher revenues, along with a slightly higher gross margin percent. Gross margin percent was 40.2% for the year ended March 31, 2005 as compared to 39.9% for the year ended March 31, 2004, driven primarily by a slightly higher gross margin percent on new textbook sales in the Bookstore Division and by higher gross margin percent in the Complementary Service Division due to the decline in sales from the lower-margin distance education program. The Textbook Division gross margins decreased due to higher costs of acquiring used textbooks, including the cost of the Company's enhanced customer programs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the year ended March 31, 2005 increased $0.2 million, or 0.2%, to $100.5 million from $100.3 million for the year ended March 31, 2004. Selling, general and administrative expenses as a percentage of revenues were 25.0% and 25.2% for the years ended March 31, 2005 and 2004, respectively. 25 STOCK-BASED COMPENSATION. Stock-based compensation expense was $0 in fiscal 2005 compared to $7.3 million in fiscal 2004. Stock-based compensation expense in fiscal 2004 was incurred in conjunction with the March 4, 2004 Transaction, whereby 40,668 options to purchase shares of NBC Acquisition Corp. common stock were converted into the right to receive cash payments which totaled $7.1 million. Additionally, in connection with the December 10, 2003 debt refinancing, 838 options to purchase shares of NBC Acquisition Corp. common stock were converted into the right to receive cash payments which totaled $0.2 million. Such costs represent the difference between the fair value of the NBC Acquisition Corp. common stock underlying such options at the time the options were converted into the right to receive cash payment and the exercise price on such options. EARNINGS (LOSS) BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION (EBITDA). EBITDA for the year ended March 31, 2005, the one month ended March 31, 2004, and the eleven months ended February 29, 2004 and the corresponding change in EBITDA (based upon combined EBITDA for fiscal 2004) were as follows:
Successor Predecessor ----------------------------- ---------------- Change Year Ended 1 Month Ended 11 Months Ended ------------------------ March 31, 2005 March 31, 2004 February 29, 2004 Amount Percentage -------------- -------------- ---------------- ------------- ---------- Bookstore Division $ 34,607,848 $ (2,471,525) $ 33,190,998 $ 3,888,375 12.7 % Textbook Division 32,181,393 (85,994) 33,544,806 (1,277,419) (3.8)% Complementary Services Division 1,805,367 251,371 2,624,520 (1,070,524) (37.2)% Corporate administration (7,591,429) (685,336) (14,874,542) 7,968,449 (51.2)% -------------- -------------- ---------------- ------------- ---------- $ 61,003,179 $ (2,991,484) $ 54,485,782 $ 9,508,881 18.5 % ============== ============== ================ ============= ==========
Bookstore Division EBITDA improved as a result of the aforementioned increases in revenues and gross margin percent. The decrease in EBITDA in the Textbook Division is primarily attributable to lower gross margins. Complementary Services Division EBITDA decreased as a result of the reduced revenues in the distance education business combined with decreased revenues in the systems sales business. Corporate Administration EBITDA increased by $8.0 million, primarily as a result of expenses of the March 4, 2004 Transaction and the December 10, 2003 debt refinancing which are included in the results for the eleven months ended February 29, 2004. EBITDA is defined as earnings before interest, taxes, depreciation, and amortization. As we are highly-leveraged and as our equity is not publicly-traded, management believes that a non-GAAP financial measure, EBITDA, is useful in measuring our liquidity and provides additional information for determining our ability to meet debt service requirements. The Senior Subordinated Notes and Senior Credit Facility also utilize EBITDA, as defined in those agreements, for certain financial covenants. EBITDA does not represent and should not be considered as an alternative to net cash flows from operating activities as determined by GAAP, and EBITDA does not necessarily indicate whether cash flows will be sufficient for cash requirements. Items excluded from EBITDA, such as interest, taxes, depreciation and amortization, are significant components in understanding and assessing our financial performance. EBITDA measures presented may not be comparable to similarly titled measures presented by other registrants. 26 The following presentation reconciles EBITDA with net cash flows from operating activities and also sets forth net cash flows from investing and financing activities as presented in the Consolidated Statements of Cash Flows included in Item 8, "Financial Statements and Supplementary Data":
Successor Successor Predecessor ---------------- ---------------- ------------------ Year Ended 1 Month Ended 11 Months Ended March 31, 2005 March 31, 2004 February 29, 2004 ---------------- ---------------- ------------------ EBITDA $ 61,003,179 $ (2,991,484) $ 54,485,782 Adjustments to reconcile EBITDA to net cash flows from operating activities: Interest income 638,935 97,587 307,680 Provision for losses on receivables 315,958 218,205 66,393 Cash paid for interest (25,796,444) (4,173,547) (11,955,528) Cash paid for income taxes (4,946,343) (9,991) (6,466,526) Loss on disposal of assets 68,065 13,582 408,095 Changes in operating assets and liabilities, net of effect of acquisitions/disposals (1) (14,601,160) (918,756) 10,066,803 ---------------- ---------------- ------------------ Net Cash Flows from Operating Activities $ 16,682,190 $ (7,764,404) $ 46,912,699 ================ ================ ================== Net Cash Flows from Investing Activities $ (747,555) $(29,656,297) $ (6,451,658) ================ ================ ================== Net Cash Flows from Financing Activities $(17,986,473) $ (8,965,404) $ (204,137) ================ ================ ==================
(1) Changes in operating assets and liabilities, net of effect of acquisitions/disposals, includes the changes in the balances of receivables, inventories, prepaid expenses and other current assets, other assets, accounts payable, accrued employee compensation and benefits, accrued incentives, accrued expenses, deferred revenue, and other long-term liabilities. DEPRECIATION EXPENSE. Depreciation expense for the year ended March 31, 2005 increased $1.2 million, or 31.0% to $4.9 million from $3.7 million for the year ended March 31, 2004, primarily due to growth and the step-up in basis of property and equipment resulting from the March 4, 2004 Transaction. AMORTIZATION EXPENSE. Amortization expense for the year ended March 31, 2005 increased $6.5 million to $8.3 million from $1.8 million for the year ended March 31, 2004, primarily due to the March 4, 2004 Transaction, which significantly increased the balance of amortizable intangibles. INTEREST EXPENSE, NET. Interest expense, net for the year ended March 31, 2005 increased $1.0 million, or 4.1%, to $25.2 million from $24.2 million for the year ended March 31, 2004, due primarily to additional debt issued in connection with the March 4, 2004 Transaction that was outstanding for all of the 2005 fiscal year. This increase in the interest expense net was offset partially by interest costs in fiscal 2004 arising from the March 4, 2004 Transaction and the December 10, 2003 debt refinancing. As a result of these two transactions, $6.7 million in debt issue costs associated with retired debt were written-off to interest expense. Additionally, $3.2 million in call premiums were recorded to interest expense in connection with the tendering or calling of the $110.0 million senior subordinated notes in conjunction with the March 4, 2004 Transaction. INCOME TAXES. Income tax expense for the year ended March 31, 2005 increased $0.7 million, or 7.2%, to $9.2 million from $8.5 million for the year ended March 31, 2004. Our effective tax rate was 40.5% and 39.3% for the years ended March 31, 2005 and 2004, respectively. Our effective tax rate differs from the statutory tax rate primarily as a result of state income taxes. 27 CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to product returns, bad debts, inventory valuation and obsolescence, intangible assets, rebate programs, income taxes, and contingencies and litigation. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: REVENUE RECOGNITION. We recognize revenue from Textbook Division sales at the time of shipment. We have established a program which, under certain conditions, enables our customers to return textbooks. We record reductions to revenue and costs of sales for the estimated impact of textbooks with return privileges which have yet to be returned to the Textbook Division. Additional reductions to revenue and costs of sales may be required if the actual rate of product returns exceeds the estimated rate of product returns. The estimated rate of product returns is determined utilizing actual historical product return experience. BAD DEBTS. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. In determining the adequacy of the allowance, we analyze the aging of the receivable, the customer's financial position, historical collection experience, and other economic and industry factors. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. INVENTORY VALUATION. Our Bookstore Division values new textbook and non-textbook inventories at the lower of cost or market using the retail inventory method. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated cost-to-retail ratio to the retail value of inventories. The retail inventory method is an averaging method that has been widely used in the retail industry due to its practicality. Inherent in the retail inventory method calculation are certain significant management judgments and estimates which impact the ending inventory valuation at cost as well as the resulting gross margins. Changes in the fact patterns underlying such management judgments and estimates could ultimately result in adjusted inventory costs. INVENTORY OBSOLESCENCE. We account for inventory obsolescence based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by us, inventory write-downs may be required. In determining inventory adjustments, we consider amounts of inventory on hand, projected demand, new editions, and industry factors. GOODWILL AND INTANGIBLE ASSETS. We evaluate the impairment of the carrying value of our goodwill and identifiable intangibles in accordance with applicable accounting standards, including Statements of Financial Accounting Standards No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED; No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS; and No. 144, IMPAIRMENT OF LONG-LIVED ASSETS. In accordance with such standards, we evaluate impairment on goodwill and certain identifiable intangibles annually and evaluate impairment on all intangibles whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. Our evaluation of impairment is based on a combination of our projection of estimated future cash flows and other valuation methodologies. We are required to make certain assumptions and estimates regarding the fair value of intangible assets when assessing such assets for impairment. We are also required to make certain assumptions and estimates when assigning an initial value to covenants not to compete arising from bookstore acquisitions. Changes in the fact patterns underlying such assumptions and estimates could ultimately result in the recognition of impairment losses on intangible assets. The March 4, 2004 Transaction resulted in the application of purchase accounting to our balance sheet as of the transaction date. The fair values of our assets and liabilities were determined in part from a valuation by an independent appraiser. In certain circumstances, Company management performed valuations where appropriate. The goodwill in the transaction was determined by taking the difference between the purchase price and the fair value of net assets acquired. 28 INCOME TAXES. We account for income taxes by recording taxes payable or refundable for the current year and deferred tax assets and liabilities for future tax consequences of events that have been recognized in our consolidated financial statements or the consolidated income tax returns. Significant judgment is required in determining the provision for income taxes and related accruals, deferred tax assets, and deferred tax liabilities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, the consolidated income tax returns are subject to audit by various tax authorities. Although we believe that our estimates are reasonable, actual results could differ from these estimates resulting in a final tax outcome that may be materially different from that which is reflected in the consolidated financial statements. DERIVATIVE FINANCIAL INSTRUMENTS. We utilize derivative financial instruments, from time to time, to manage the risk that changes in interest rates will affect the amount of our future interest payments on our variable rate debt. If written documentation designating the derivative financial instrument as a hedge is not in place at inception of the instrument or if the critical terms of the derivative financial instrument do not match the critical terms of the variable rate debt being hedged, we would be required to recognize changes in the fair value of the portion of the derivative financial instrument not qualifying for hedge accounting immediately in earnings. LIQUIDITY AND CAPITAL RESOURCES FINANCING ACTIVITIES Our primary liquidity requirements are for debt service under the Senior Credit Facility, the Senior Subordinated Notes and other outstanding indebtedness, for working capital, for capital expenditures and for certain acquisitions. We have historically funded these requirements primarily through internally generated cash flows and funds borrowed under our Revolving Credit Facility. At March 31, 2006, our total indebtedness was approximately $354.3 million, consisting of a $176.4 million Term Loan, $175.0 million of Senior Subordinated Notes, and $2.9 million of other indebtedness, including capital lease obligations. To provide additional financing to fund the March 4, 2004 Transaction, NBC issued Senior Discount Notes, the balance of which at March 31, 2006 was $62.5 million (face value of $77.0 million less $14.5 million discount). Principal and interest payments under the Senior Credit Facility, the Senior Subordinated Notes, and NBC's Senior Discount Notes represent significant liquidity requirements for us. Under the terms of the Senior Credit Facility's Term Loan, we are scheduled to make principal payments totaling approximately $1.8 million in fiscal years 2007-2010 and $169.2 million in fiscal 2011. These scheduled principal payments are subject to change upon the annual payment and application of excess cash flows (as defined in the Credit Agreement underlying the Senior Credit Facility), if any, towards the Term Loan principal balances. The estimated excess cash flow payment for fiscal 2006, which is approximately $1.8 million, is due and payable on September 29, 2006 and is included in "current maturities of long-term debt" in the consolidated balance sheets. Future principal payments, after application of the estimated excess cash flow payment, approximate $3.1 million in fiscal 2007 (including the $1.8 million excess cash flow payment), $1.8 million in fiscal years 2008-2010, and $167.9 million in fiscal 2011. Loans under the Senior Credit Facility bear interest at floating rates based upon the borrowing option selected by us. On July 15, 2005, we entered into an interest rate swap agreement to essentially convert a portion of the variable rate Term Loan into debt with a fixed rate of 6.844% (4.344% plus an applicable margin as defined in the Credit Agreement). This agreement was effective as of September 30, 2005. The Senior Subordinated Notes require semi-annual interest payments at a fixed rate of 8.625% and mature on March 15, 2012. The Senior Discount Notes require semi-annual cash interest payments commencing September 15, 2008 at a fixed rate of 11.0% and mature on March 15, 2013. Subsequent to year-end and in conjunction with the aforementioned acquisition of CBA on May 1, 2006, certain amendments were made to the Credit Agreement to allow for this acquisition, including adding an additional $24.0 million of borrowings under the Term Loan, increasing the Revolving Credit Facility by $15.0 million, and amending certain restrictions and financial covenants. The additional Term Loan borrowings, along with an estimated $4.0 million of our available cash, financed the purchase of all of CBA's outstanding stock and the repayment of all of CBA's outstanding long-term bank indebtedness at closing and will also provide funding for the payment of transaction costs and other liabilities associated with the acquisition. The increase in the Revolving Credit Facility provided the funding necessary to meet the working capital requirements of the acquired bookstores. Scheduled principal payments for such additional borrowings total approximately $0.2 million in fiscal years 2007-2010 and $23.1 million in fiscal 2011. In connection with the changes made to the Senior Credit Facility and in accordance with Emerging Issues Task Force Issue No. 96-19, "Debtor's Accounting for a Modification or Exchange of Debt Instruments," we expect to write off approximately $3.3 million in debt issue costs associated with that facility in place prior to modification. 29 Effective August 1, 2005, the Credit Agreement was amended to provide for, among other things, (i) a twelve-month deferral of a scheduled increase in the minimum consolidated interest coverage ratio covenant and (ii) a change in the definition of consolidated EBITDA to exclude up to $4.0 million in charges to be incurred under the NBC Holdings Corp. 2005 Restricted Stock Plan. Debt issue costs incurred in conjunction with this amendment of $0.2 million were capitalized. Additional debt issue costs of $0.4 million in fiscal 2005 pertained to an October 20, 2004 amendment to the Credit Agreement (to provide, among other things, for a temporary $10.0 million incremental revolving credit facility through June 30, 2005) and remaining financing costs associated with the March 4, 2004 Transaction. We funded the portion of the remaining financing costs associated with the March 4, 2004 Transaction relating to NBC's Senior Discount Notes through a $0.1 million dividend payment to NBC. On March 4, 2004, Weston Presidio acquired the controlling interest in NBC through a series of steps which resulted in Weston Presidio owning a substantial majority of NBC's common stock. The transaction was accomplished pursuant to, among other instruments, an Agreement & Plan of Merger and a Stock Purchase Agreement dated February 18, 2004. The series of related steps underlying this transaction included the following: (1) We refinanced our existing $125.0 million senior credit facility with a $230.0 million senior credit facility (the "Senior Credit Facility") comprised of an $180.0 million term loan (the "Term Loan") which matures on March 4, 2011 and was drawn in full in connection with the consummation of the transaction, and a $50.0 million revolving credit facility (the "Revolving Credit Facility") which matures on March 4, 2009 and was not drawn upon at the consummation of the transaction. (2) We completed a private placement of $175.0 million principal amount of 8.625% senior subordinated notes (the "Senior Subordinated Notes") which mature on March 15, 2012. On April 27, 2004, we filed a Form S-4 Registration Statement with the Securities and Exchange Commission for the purpose of registering debt securities to be issued in exchange for the Senior Subordinated Notes. Such Registration Statement was declared effective by the Securities and Exchange Commission on May 7, 2004. All notes were tendered in the offer to exchange that was completed on June 8, 2004. The terms of the securities issued in the exchange offer are identical to those in effect at March 31, 2004. (3) NBC completed a private placement of $77.0 million principal amount of 11.0% senior discount notes (the "Senior Discount Notes") which mature on March 15, 2013. The Senior Discount Notes were issued at a discount of $27.0 million and will become fully-accreted on March 15, 2008, at which point semi-annual cash interest payments begin to accrue and are payable beginning September 15, 2008. On April 27, 2004, NBC filed a Form S-4 Registration Statement with the Securities and Exchange Commission for the purpose of registering debt securities to be issued in exchange for the Senior Discount Notes. Such Registration Statement was declared effective by the Securities and Exchange Commission on May 7, 2004. All notes were tendered in the offer to exchange that was completed on June 8, 2004. The terms of the securities issued in the exchange offer are identical to those in effect at March 31, 2004. (4) We completed a cash tender offer for, and partial redemption of, our $110.0 million principal amount of outstanding 8.75% senior subordinated notes. Untendered notes which totaled $15.4 million were called for redemption on March 4, 2004 and redeemed on April 3, 2004. Funds totaling $16.1 million, including accrued interest and call premiums on such indebtedness, were held in escrow ("restricted cash") as of March 31, 2004, pending the April 3, 2004 redemption. (5) NBC completed a cash tender offer for, and partial redemption of, its $76.0 million principal amount of outstanding 10.75% senior discount debentures. Untendered debentures which totaled $10.5 million were called for redemption on March 4, 2004 and redeemed on April 3, 2004. Funds totaling $11.0 million, including accrued interest and call premiums on such indebtedness, were held in escrow ("restricted cash") as of March 31, 2004, pending the April 3, 2004 redemption. (6) Weston Presidio made an initial equity investment of $28.2 million in NBC Holdings Corp., funds for which were ultimately paid to NBC in the form of a capital contribution. (7) Weston Presidio purchased 36,455 shares of NBC's common stock directly from its holders for $8.4 million. (8) 870,285 shares of NBC's common stock were cancelled upon NBC's payment of $180.4 million in merger consideration to the holders of such shares. (9) 397,711 shares of NBC common stock were exchanged for 512,799 shares of capital stock of New NBC Acquisition Corp., a new corporation formed by Weston Presidio, in the merger of the two entities with NBC as the surviving entity. (10) Weston Presidio and current and former members of management contributed 495,981 shares and 16,818 shares, respectively, of NBC's common stock to NBC Holdings Corp. in exchange for a like number of shares of NBC Holdings Corp. capital stock. 30 (11) Options to acquire 49,778 shares of NBC's common stock held by members of management were exchanged for options to acquire a like number of shares of NBC Holdings Corp. capital stock. (12) We declared and paid dividends of $184.3 million to NBC to help finance the transaction. INVESTING CASH FLOWS Our capital expenditures were $7.3 million, $7.7 million, and $4.7 million for the fiscal years ended March 31, 2006, 2005, and 2004, respectively. Capital expenditures consist primarily of leasehold improvements and furnishings for new bookstores, bookstore renovations, computer upgrades and miscellaneous warehouse improvements. Our ability to make capital expenditures is subject to certain restrictions under the Senior Credit Facility, including an annual limitation on capital expenditures made in the ordinary course of business. Such annual limitation for fiscal 2006 was $10.5 million. Business acquisition expenditures were $10.7 million, $20.2 million, and $4.2 million for the fiscal years ended March 31, 2006, 2005, and 2004, respectively. For the fiscal year ended March 31, 2006, three locations were acquired serving Southwest Baptist University; single locations were acquired serving Gannon University, McLennan Community College/Texas State Technical College - Waco, St. Clair County Community College, the University of Delaware, Auburn University, the University of Tennessee - Chattanooga, Salt Lake City Community College, Collin County Community College/the University of Texas at Dallas, Midland Lutheran College, and Washburn University; and single bookstore location start-ups serving the University of North Dakota - Grand Forks, Sinclair Community College, Seminole Community College, and Florida State University/Tallahassee Community College were established. For the fiscal year ended March 31, 2005, single bookstore locations were acquired serving Eastern Michigan University, Alma College, Mississippi State University, Illinois State University, and Morehead State University; two bookstore locations were acquired serving the University of North Florida and Florida Community College at Jacksonville and two bookstore locations were acquired serving Florida State University; and single bookstore location start-ups serving Washington State University and Arizona State University-West Campus were established. For the fiscal year ended March 31, 2004, single bookstore locations were acquired serving Wayne State College, Mesa Community College, Western International University, the University of Toledo, East Tennessee State University, Marshall University; and 3 bookstore locations were acquired serving Michigan State University. Our ability to make acquisition expenditures is subject to certain restrictions under the Senior Credit Facility. As discussed previously, on May 1, 2006 we completed the purchase of all of the outstanding stock of CBA for $21.3 million and, at closing, paid off all of CBA's outstanding debt (including CBA's operating line of credit) of approximately $15.2 million. During fiscal 2006, bookstore locations serving North Harris College and Western Kentucky University were closed and the leases were not renewed. During fiscal 2005, no bookstores locations were closed. During fiscal 2004, bookstore locations serving Wayne State College, Columbia College, California State University - Northridge, Chadron State College, and Arizona State University were closed, as either the lease expired, the contract-managed relationship was not renewed, or an agreement was reached with the landlord to terminate the lease. In conjunction with the March 4, 2004 Transaction, certain of the notes under our former 8.75% senior subordinated notes and NBC's former 10.75% senior discount debentures were not tendered by the holders, but were instead called for redemption on March 4, 2004 and redeemed on April 3, 2004. Such redemption was funded through $27.1 million of restricted cash held in escrow, of which $16.1 million related to principal, accrued interest, and call premiums on the remaining 8.75% senior subordinated notes and $11.0 million related to principal, accrued interest, and call premiums on NBC's remaining 10.75% senior discount debentures. On July 1, 2003, we acquired all of the outstanding shares of common stock of TheCampusHub.com, Inc. CampusHub is no longer separately incorporated and is instead accounted for as a division within our Complementary Services Division segment. CampusHub provides college bookstores with a way to sell in-store inventory and virtual brand name merchandise over the Internet utilizing technology originally developed by us. This transaction, with a net purchase price of $10.0 million, was financed primarily through the issuance of 39,905 shares of NBC Acquisition Corp. common stock. OPERATING CASH FLOWS Our principal sources of cash to fund our future operating liquidity needs will be cash from operating activities and borrowings under the Revolving Credit Facility. Usage of the Revolving Credit Facility to meet our liquidity needs 31 fluctuates throughout the year due to our distinct buying and selling periods, increasing substantially at the end of each college semester (May and December). For the year ended March 31, 2006, weighted-average borrowings under the Revolving Credit Facility approximated $7.0 million, with actual borrowings ranging from a low of no borrowings to a high of $33.0 million. Net cash flows from operating activities for the year ended March 31, 2006 were $22.4 million, an increase of $5.7 million from $16.7 million for the year ended March 31, 2005. This increase was attributable, in large part, to an $11.0 million decrease in accounts payable in fiscal 2005 relating to the portion of the restricted cash held in escrow that was utilized to redeem NBC's untendered former senior discount debentures on April 3, 2004. This decrease was partially offset by receipt of a $4.5 million refund of fiscal 2004 estimated tax payments received in fiscal 2005 which related mainly to expenses incurred in connection with the March 4, 2004 Transaction. Net cash flows from operating activities for the year ended March 31, 2005 were $16.7 million, a decrease of $22.4 million from $39.1 million for the year ended March 31, 2004. This decrease was attributable, in large part, to an $11.0 million increase in accounts payable in fiscal 2004 related to restricted cash placed in escrow on behalf of NBC, combined with an $11.0 million decrease in accounts payable in fiscal 2005 which reflects the utilization of the cash in escrow to redeem NBC's untendered former senior discount debentures on April 3, 2004. COVENANT RESTRICTIONS Access to our principal sources of cash is subject to various restrictions and compliance with specified financial ratios and tests, including minimum interest coverage ratios, maximum leverage ratios, and minimum fixed charge coverage ratios. 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 our ability to make loans or advances and pay dividends, except that, among other things, we may pay dividends to NBC (i) in an amount not to exceed the amount of interest required to be paid on the Senior Discount Notes and (ii) to pay corporate overhead expenses not to exceed $250,000 per year and any taxes owed by NBC. On May 1, 2006, the Credit Agreement was amended to, among other things, increase the maximum borrowing base to $65.0 million and permit us to pay dividends of up to $4.0 million in connection with the NBC Holdings Corp. 2005 Restricted Stock Plan. The indenture governing the Senior Subordinated Notes 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 Discount Notes contains similar restrictions on NBC's ability and the ability of its Restricted Subsidiaries (as defined in the indenture) to pay dividends or make other Restricted Payments (as defined in the indenture) to their respective stockholders. Such restrictions are not expected to affect our ability to meet our cash obligations for the foreseeable future. In accordance with such covenant restrictions, we declared and paid $0.1 million in dividends to NBC during fiscal year 2005 for costs associated with the March 4, 2004 Transaction. During fiscal year 2004, we declared and paid dividends to NBC of (a) $8.2 million for cash interest payments made on the senior discount debentures due August 15, 2003 and February 15, 2004; (b) $32.8 million to finance the purchase of treasury stock associated with the December 10, 2003 debt refinancing; and (c) $184.3 million to assist in financing the March 4, 2004 Transaction. SOURCES OF AND NEEDS FOR CAPITAL As of March 31, 2006, we could borrow up to $41.0 million under the Revolving Credit Facility. The Revolving Credit Facility was unused at March 31, 2006. Amounts available under the Revolving Credit Facility may be used for working capital and general corporate purposes (including up to $10.0 million for letters of credit), subject to certain limitations under the Senior Credit Facility, including an annual limitation on capital expenditures made in the ordinary course of business. After taking into consideration the amendments made on May 1, 2006 in connection with the acquisition of CBA, we believe that funds generated from operations, existing cash, and borrowings under the Revolving Credit Facility will be sufficient to finance our current operations, any required excess cash flow payments, cash interest requirements , planned capital expenditures and internal growth for the foreseeable future. Future acquisitions, if any, may require additional debt financing or capital contributions. 32 The following tables present aggregated information as of March 31, 2006 regarding our contractual obligations and commercial commitments:
Payments Due by Period ------------------------------------------------------------ Contractual Less Than 2-3 4-5 After 5 Obligations Total 1 Year Years Years Years ------------------------------------- ---------------- -------------- --------------- -------------- -------------- Long-term debt $ 351,802,857 $ 3,206,582 $ 3,655,056 $169,757,674 $175,183,545 Interest on long-term debt (1) 148,977,051 27,253,999 54,980,747 51,620,903 15,121,402 Capital lease obligations 2,506,288 281,604 735,347 966,912 522,425 Interest on capital lease obligations 931,213 239,641 410,790 220,880 59,902 Unconditional purchase obligations - - - - - Operating leases 48,291,000 12,380,000 18,129,000 9,377,000 8,405,000 ---------------- -------------- --------------- -------------- -------------- Total $ 552,508,409 $ 43,361,826 $ 77,910,940 $231,943,369 $199,292,274 ================ ============== =============== ============== ============== Amount of Commitment Expiration Per Period Total ------------------------------------------------------------ Other Commercial Amounts Less Than 2-3 4-5 Over 5 Commitments Committed 1 Year Years Years Years ------------------------------------- ---------------- -------------- --------------- -------------- -------------- Unused line of credit (2) $ 50,000,000 $ - $ 50,000,000 $ - $ - ================ ============== =============== ============== ==============
(1) Interest on the variable rate debt is estimated based upon implied forward rates in the yield curve at March 31, 2006, as adjusted for the impact of the interest rate swap agreement in place as of March 31, 2006. (2) Interest is not estimated on the line of credit due to uncertainty surrounding the timing and extent of usage of the line of credit. TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES In fiscal 2001, we entered into several agreements with a newly created entity, TheCampusHub.com, Inc., which was partially owned by NBC's then-majority owner. TheCampusHub.com, Inc. was created to provide college bookstores with a way to sell in-store inventory and virtual brand name merchandise over the Internet utilizing technology originally developed by us. Such agreements (including an equity option agreement, a management services agreement, and a technology sale and license agreement) terminated effective July 1, 2003 upon our acquisition of all of the outstanding shares of common stock of TheCampusHub.com, Inc. This business combination was accounted for by us in accordance with Statement of Financial Accounting Standards No. 141, BUSINESS COMBINATIONS. The total purchase price, net of cash acquired, of such acquisition was $10.0 million, of which $3.7 million was assigned to non-deductible goodwill. The management services agreement reimbursed us for certain direct costs incurred on behalf of TheCampusHub.com, Inc., as well as $0.3 million per year for certain shared management and administrative support. Complementary Services Division revenue resulting from the management services agreement was recognized as the services were performed. For the year ended March 31, 2004, revenues attributable to the management services agreement totaled $0.1 million and reimbursable direct costs incurred on behalf of TheCampusHub.com, Inc. totaled $0.1 million. In accordance with our debt covenants, we declared and paid $0.1 million in dividends to NBC in fiscal 2005 for costs associated with the March 4, 2004 Transaction. In fiscal 2004, we declared and paid $8.2 million in dividends to NBC for interest due and payable on the senior discount debentures; declared and paid $32.8 million in dividends to NBC for the purchase of treasury stock associated with the December 10, 2003 debt refinancing; and declared and paid $184.3 million in dividends in connection with the March 4, 2004 Transaction. 33 IMPACT OF INFLATION Our 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, we believe that the effects of inflation, if any, on our results of operations and financial condition have not been material. However, there can be no assurance that during a period of significant inflation, our results of operations will not be adversely affected. ACCOUNTING STANDARDS NOT YET ADOPTED In November 2004, the FASB issued SFAS No. 151, INVENTORY COSTS, which amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, INVENTORY PRICING to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). The Statement becomes effective for the Company in fiscal 2007 and is not expected to have a significant impact on the Company's consolidated financial statements. In December 2004, the FASB issued SFAS No. 123 (revised 2004), SHARE-BASED PAYMENT. SFAS No. 123 (revised 2004) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions and requires an entity to, in most cases, measure the cost of such services based on the grant-date fair value of the award. This Statement is a revision of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION and supersedes APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, thereby eliminating the intrinsic value method of accounting for stock-based compensation currently utilized by the Company. SFAS No. 123 (revised 2004) is effective for the Company in fiscal 2007, applying to all awards granted or modified after April 1, 2006. In December 2004, the FASB issued SFAS No. 153, EXCHANGES OF NONMONETARY ASSETS--AN AMENDMENT OF APB OPINION NO. 29. This statement amends APB Opinion No. 29 and is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary exchanges which occur beginning in fiscal 2007. The adoption of this statement is not expected to have a significant impact on the Company's consolidated financial statements. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Annual Report on Form 10-K contains or incorporates by reference certain statements that are not historical facts, including, most importantly, information concerning possible or assumed future results of our operations 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 or EBITDA growth or statements expressing general optimism or pessimism 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 our actual performance or achievements to be materially different from any future results, performances or achievements expressed or implied by such forward-looking statements. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Reform Act. Several important factors could affect our future results 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 from other companies that target our markets and from alternative media and alternative sources of textbooks for students; digital content sold directly to students; increased competition for the purchase and sale of used textbooks from student to student transactions; inability to successfully acquire or contract-manage additional bookstores or to integrate those additional stores; inability to cost-effectively maintain or increase the number of contract-managed stores; inability to purchase a sufficient supply of used textbooks; changes in pricing of new and/or used textbooks; loss or retirement of key members of management; the impact of seasonality of the wholesale and bookstore operations; increases in our cost of borrowing or inability to raise or unavailability of additional debt or equity capital; changes in general economic conditions and/or in the markets in which we compete or may, from time to time, compete; and other risks detailed in our Securities and Exchange Commission filings, in particular this Annual Report on Form 10-K, all of which are difficult or impossible to predict accurately and many of which are beyond our control. We will not undertake and specifically decline 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. 34 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our primary market risk exposure is, and is expected to continue to be, fluctuation in variable interest rates. Of the $354.3 million in total indebtedness outstanding at March 31, 2006, approximately $176.4 million is subject to fluctuations in the Eurodollar interest rate. As provided in our Senior Credit Facility, exposure to interest rate fluctuations is managed by maintaining fixed interest rate debt (primarily the Senior Subordinated Notes) and by entering into interest rate swap agreements that qualified as cash flow hedging instruments to convert certain variable rate debt into fixed rate debt. On July 15, 2005, we entered into an interest rate swap agreement, which became effective on September 30, 2005. The notional amount under the interest rate swap agreement at March 31, 2006 was $165.0 million and will decrease periodically to $130.0 million, expiring on September 30, 2008. The following table presents quantitative information about our market risk sensitive instruments (the weighted-average variable rates are based on implied forward rates in the yield curve at March 31, 2006):
Fixed Rate Debt Variable Rate Debt -------------------------- -------------------------- Weighted- Weighted- Average Average Principal Interest Principal Interest Cash Flows Rate Cash Flows (1) Rate -------------- ---------- -------------- ---------- Fiscal Year Ended March 31: 2007 $ 314,249 8.66% $ 3,173,937 7.68% 2008 384,175 8.66% 1,785,836 7.68% 2009 434,556 8.65% 1,785,836 7.70% 2010 500,438 8.65% 1,785,836 7.78% 2011 569,757 8.64% 167,868,555 7.84% Thereafter 175,705,970 8.63% - - -------------- ---------- -------------- ---------- Total $ 177,909,145 8.65% $ 176,400,000 7.73% ============== ========== ============== ========== Fair Value $ 163,963,430 - $ 176,400,000 - ============== ============== Interest Rate Swap ------------------------------------------ Weighted- Weighted- Average Average Average Notional Receive Pay Amounts Rate Rate -------------- ---------- -------------- Fiscal Year Ended March 31: 2007 $ 157,500,000 5.18% 4.34% 2008 135,000,000 5.18% 4.34% 2009 65,000,000 5.18% 4.34% ---------- -------------- 5.18% 4.34% ========= ============== Fair Value ("in the money") $ 2,833,000 - - ==============
(1) Principal cash flows represent scheduled principal payments and are adjusted for anticipated excess cash flow payments and optional prepayments (as defined in the Credit Agreement underlying the Senior Credit Facility), if any, to be applied toward principal balances. 35 Certain quantitative market risk disclosures have changed since March 31, 2005 as a result of market fluctuations, movement in interest rates, a new interest rate swap agreement, and principal payments. The following table presents summarized market risk information for the years ended March 31, 2006 and 2005, respectively (the weighted-average variable rates are based on implied forward rates in the yield curve as of the date presented): March 31, March 31, 2006 2005 --------------- -------------- Fair Values: Fixed rate debt $ 163,963,430 $ 172,617,616 Variable rate debt 176,400,000 178,200,000 Interest rate swap ("in-the-money") 2,833,000 - Overall Weighted-Average Interest Rates: Fixed rate debt 8.65% 8.65% Variable rate debt 7.73% 7.21% Interest rate swap receive rate 5.18% - Interest rate swap pay rate 4.34% - 36 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Index to Consolidated Financial Statements of Nebraska Book Company, Inc. Report of Independent Registered Public Accounting Firm 38 Consolidated Balance Sheets as of March 31, 2006 and March 31, 2005 39 Consolidated Statements of Operations for the Years Ended March 31, 2006 and 2005 (Successor), the One Month Ended March 31, 2004 (Successor), and the Eleven Months Ended February 29, 2004 (Predecessor) 40 Consolidated Statements of Stockholder's Equity (Deficit) for the Years Ended March 31, 2006 and 2005 (Successor), the One Month Ended March 31, 2004 (Successor), and the Eleven Months Ended February 29, 2004 (Predecessor) 41 Consolidated Statements of Cash Flows for the Years Ended March 31, 2006 and 2005 (Successor), the One Month Ended March 31, 2004 (Successor), and the Eleven Months Ended February 29, 2004 (Predecessor) 42 Notes to Consolidated Financial Statements 43 37 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholder of Nebraska Book Company, Inc. Lincoln, Nebraska We have audited the accompanying consolidated balance sheets of Nebraska Book Company, Inc. (a wholly-owned subsidiary of NBC Acquisition Corp.) and subsidiaries as of March 31, 2006 and 2005, and the related consolidated statements of operations, stockholder's equity (deficit), and cash flows for the years ended March 31, 2006 and 2005 (Successor), the one month ended March 31, 2004 (Successor), and the eleven months ended February 29, 2004 (Predecessor). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Nebraska Book Company, Inc. and subsidiaries as of March 31, 2006 and 2005, and the results of their operations and their cash flows for the years ended March 31, 2006 and 2005 (Successor), the one month ended March 31, 2004 (Successor), and the eleven months ended February 29, 2004 (Predecessor) in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Lincoln, Nebraska June 28, 2006 38 NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED BALANCE SHEETS ------------------------------------------------------------------------------------------- March 31, March 31, 2006 2005 -------------- -------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 33,382,722 $ 31,224,343 Receivables 37,760,786 30,953,133 Inventories 74,878,442 72,559,962 Recoverable income taxes 1,438,819 - Deferred income taxes 5,183,002 5,536,182 Prepaid expenses and other assets 1,634,483 586,981 -------------- -------------- Total current assets 154,278,254 140,860,601 PROPERTY AND EQUIPMENT, net of depreciation & amortization 39,962,913 37,512,387 GOODWILL 293,049,842 284,898,526 IDENTIFIABLE INTANGIBLES, net of amortization 145,292,628 152,650,661 DEBT ISSUE COSTS, net of amortization 7,697,227 8,968,851 OTHER ASSETS 5,065,466 2,348,256 -------------- -------------- $645,346,330 $627,239,282 ============== ============== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable $ 19,810,267 $ 15,724,221 Accrued employee compensation and benefits 10,014,671 7,934,817 Accrued interest 628,906 628,906 Accrued incentives 7,559,496 7,761,296 Accrued expenses 996,200 1,146,388 Income taxes payable - 544,578 Deferred revenue 714,423 1,042,660 Current maturities of long-term debt 3,206,582 1,832,144 Current maturities of capital lease obligations 281,604 237,955 -------------- -------------- Total current liabilities 43,212,149 36,852,965 LONG-TERM DEBT, net of current maturities 348,596,275 351,802,856 CAPITAL LEASE OBLIGATIONS, net of current maturities 2,224,684 2,529,253 OTHER LONG-TERM LIABILITIES 1,528,533 1,316,835 DEFERRED INCOME TAXES 60,266,727 59,014,379 DUE TO PARENT 16,649,682 16,574,575 COMMITMENTS (Note I) STOCKHOLDER'S EQUITY: Common stock, voting, authorized 50,000 shares of $1.00 par value; issued and outstanding 100 shares 100 100 Additional paid-in capital 138,022,098 137,957,730 Retained earnings 33,432,082 21,190,589 Accumulated other comprehensive income 1,414,000 - -------------- -------------- Total stockholder's equity 172,868,280 159,148,419 -------------- -------------- $645,346,330 $627,239,282 ============== ==============
See notes to consolidated financial statements. 39 NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS ----------------------------------------------------------------------------------------------------- Successor Predecessor --------------------------------------- ---------------- Year Ended Year Ended 1 Month Ended 11 Months Ended March 31, March 31, March 31, February 29, 2006 2005 2004 2004 ------------ ------------ ------------- ---------------- REVENUES, net of returns $420,107,899 $402,154,340 $ 13,317,394 $385,363,674 COSTS OF SALES (exclusive of depreciation shown below) 250,914,049 240,638,133 7,768,616 231,874,108 ------------- ------------- ------------- ------------- Gross profit 169,193,850 161,516,207 5,548,778 153,489,566 OPERATING EXPENSES: Selling, general and administrative 107,990,817 100,513,028 8,540,262 91,739,844 Depreciation 4,912,731 4,907,843 349,501 3,396,106 Amortization 8,762,398 8,258,500 649,000 1,162,320 Stock-based compensation - - - 7,263,940 ------------- ------------- ------------- ------------- 121,665,946 113,679,371 9,538,763 103,562,210 ------------- ------------- ------------- ------------- INCOME (LOSS) FROM OPERATIONS 47,527,904 47,836,836 (3,989,985) 49,927,356 ------------- ------------- ------------- ------------- OTHER EXPENSES (INCOME): Interest expense 29,395,142 25,853,629 2,226,851 22,408,295 Interest income (1,274,836) (638,935) (97,587) (307,680) Gain on derivative financial instruments (525,000) - - (57,296) ------------- ------------- ------------- ------------- 27,595,306 25,214,694 2,129,264 22,043,319 ------------- ------------- ------------- ------------- INCOME (LOSS) BEFORE INCOME TAXES 19,932,598 22,622,142 (6,119,249) 27,884,037 INCOME TAX EXPENSE (BENEFIT) 7,691,105 9,162,118 (2,399,962) 10,949,169 ------------- ------------- ------------- ------------- NET INCOME (LOSS) $ 12,241,493 $ 13,460,024 $ (3,719,287) $ 16,934,868 ============= ============= ============= =============
See notes to consolidated financial statements. 40 NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT) ----------------------------------------------------------------------------------------------------------------------------- Retained Accumulated Additional Earnings Other Common Paid-in (Accumulated Comprehensive Comprehensive Stock Capital Deficit) Income (Loss) Total Income (Loss) ---------- --------------- ------------- -------------- ------------ -------------- BALANCE, April 1, 2003 (Predecessor) $ 100 $ 46,986,333 $(35,228,691) $ (418,631) $ 11,339,111 Contributed capital - 9,932,075 - - 9,932,075 $ - Net income - - 16,934,868 - 16,934,868 16,934,868 Dividends declared - - (43,727,584) - (43,727,584) - Other comprehensive income, net of taxes: Unrealized gains on interest rate swap agreements, net of taxes of $256,145 - - - 418,631 418,631 418,631 --------- --------------- -------------- ------------- ------------ ------------ BALANCE, February 29, 2004 (Predecessor) 100 56,918,408 (62,021,407) - (5,102,899) $17,353,499 ============ March 4, 2004 Transaction: Record step-up in basis of assets and liabilities - 336,164,201 - - 336,164,201 $ - Dividends declared to parent to finance transaction - - (181,571,265) - (181,571,265) - Repayments received on management notes to parent - 50,471 - - 50,471 - Reset retained earnings - (255,174,990) 255,174,990 - - - --------- --------------- -------------- ------------- ------------ ------------ BALANCE, March 1, 2004 (Successor) 100 137,958,090 11,582,318 - 149,540,508 - Contributed capital - (374) - - (374) - Net loss - - (3,719,287) - (3,719,287) (3,719,287) --------- --------------- -------------- ------------- ------------ ------------ BALANCE, March 31, 2004 (Successor) 100 137,957,716 7,863,031 - 145,820,847 $(3,719,287) ============ Contributed capital - 14 - - 14 $ - Net income - - 13,460,024 - 13,460,024 13,460,024 Dividends declared - - (132,466) - (132,466) - --------- --------------- -------------- ------------- ------------ ------------ BALANCE, March 31, 2005 (Successor) 100 137,957,730 21,190,589 - 159,148,419 $13,460,024 ============ Contributed capital - 44,368 - - 44,368 $ - Net income - - 12,241,493 - 12,241,493 12,241,493 Tax benefit arising from exercise of 640 stock options - 20,000 - - 20,000 - Other comprehensive income, net of taxes: Unrealized gain on interest rate swap agreement, net of taxes of $894,000 - - - 1,414,000 1,414,000 1,414,000 --------- --------------- -------------- ------------- ------------ ------------ BALANCE, March 31, 2006 (Successor) $ 100 $ 138,022,098 $ 33,432,082 $ 1,414,000 $172,868,280 $13,655,493 ========= =============== ============== ============= ============ ============ See notes to consolidated financial statements.
41 NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS --------------------------------------------------------------------------------------------------------------------------- Successor Predecessor --------------------------------------- ---------------- Year Ended Year Ended 1 Month Ended 11 Months Ended March 31, March 31, March 31, February 29, 2006 2005 2004 2004 ------------- ------------- ------------ --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 12,241,493 $ 13,460,024 $ (3,719,287) $ 16,934,868 Adjustments to reconcile net income (loss) to net cash flows from operating activities: Provision for losses on receivables 231,497 315,958 218,205 66,393 Depreciation 4,912,731 4,907,843 349,501 3,396,106 Amortization 10,282,835 9,728,736 766,693 9,135,071 Noncash interest income from derivative financial instruments - - - (1,030) Gain on derivative financial instruments (525,000) - - (169,863) Loss on disposal of assets 90,263 68,065 13,582 408,095 Deferred income taxes 3,539 (1,133,757) (901,435) 3,951,025 Changes in operating assets and liabilities, net of effect of acquisitions/disposals: Receivables (7,012,834) (714,820) (4,242,720) 3,658,110 Inventories 99,541 192,149 5,031,722 (4,791,883) Recoverable income taxes (1,438,819) 5,351,480 (3,198,588) (2,127,892) Prepaid expenses and other assets (1,017,502) 300,768 (88,681) 83,487 Other assets 244,343 (379,720) (363,805) (814,529) Accounts payable 3,351,602 (13,824,098) (129,715) 10,418,017 Accrued employee compensation and benefits 1,895,832 (1,267,618) (1,005,513) (602,470) Accrued interest - (1,413,051) (2,064,389) 2,593,613 Accrued incentives (201,800) 778,992 (213,186) 1,676,607 Accrued expenses (157,122) (91,363) (61,411) 192,125 Income taxes payable (538,161) 259,835 - (89,932) Deferred revenue (328,237) 144,002 153,037 207,391 Other long-term liabilities 211,698 260,548 1,516 14,948 Due to parent 75,107 (261,783) 1,690,070 2,774,442 ------------- ------------- ------------ ------------- Net cash flows from operating activities 22,421,006 16,682,190 (7,764,404) 46,912,699 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (7,311,694) (7,665,675) (719,844) (3,964,662) Acquisitions, net of cash acquired (10,696,283) (20,160,079) (1,848,798) (2,355,486) (Increase) decrease in restricted cash - 27,065,000 (27,065,000) - Proceeds from sale of property and equipment and other 38,029 13,199 2,095 9,676 Software development costs - - (24,750) (141,186) ------------- ------------- ------------ ------------- Net cash flows from investing activities (17,969,948) (747,555) (29,656,297) (6,451,658) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt - - 355,000,000 75,000,000 Payment of financing costs (248,813) (437,915) (10,118,865) (3,830,335) Principal payments on long-term debt (1,832,143) (17,238,880)(169,592,270) (30,470,840) Principal payments on capital lease obligations (260,920) (182,094) (10,395) (122,287) Dividends paid to parent - (132,466)(184,294,345) (41,004,504) Capital contributions 49,197 4,882 50,471 223,829 ------------- ------------- ------------ ------------- Net cash flows from financing activities (2,292,679) (17,986,473) (8,965,404) (204,137) ------------- ------------- ------------ ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,158,379 (2,051,838) (46,386,105) 40,256,904 CASH AND CASH EQUIVALENTS, Beginning of period 31,224,343 33,276,181 79,662,286 39,405,382 ------------- ------------- ------------ ------------- CASH AND CASH EQUIVALENTS, End of period $ 33,382,722 $ 31,224,343 $ 33,276,181 $ 79,662,286 ============= ============= ============ ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: Cash paid during the period for: Interest $ 27,874,705 $ 25,796,444 $ 4,173,547 $ 11,955,528 Income taxes 9,589,439 4,946,343 9,991 6,466,526 Noncash investing and financing activities: Revaluation of assets and equity in March 4, 2004 Transaction $ - $ - $336,164,201 $ - Acquisition of TheCampusHub.com, Inc. through issuance of NBC Acquisition Corp. common stock - - - 9,722,683 Property acquired through capital lease - 643,718 - - Accumulated other comprehensive income: Unrealized gains on interest rate swap agreements, net of income taxes 1,414,000 - - 418,631 Deferred taxes resulting from accumulated other comprehensive income (loss) 894,000 - - 256,145 Tax benefit on exercise of stock options 20,000 - - - Dividend declared but unpaid - - - 2,723,080
See notes to consolidated financial statements. 42 NEBRASKA BOOK COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- A. NATURE OF OPERATIONS Nebraska Book Company, Inc. (the "Company") is a wholly-owned subsidiary of NBC Acquisition Corp. The Company participates in the college bookstore industry primarily by operating its own college bookstores, by providing used textbooks to college bookstore operators, by providing distance education products and services, and by providing proprietary college bookstore information and E-commerce systems, consulting services, and other services. As further discussed in Note C, on March 4, 2004, Weston Presidio (Weston Presidio Capital III, L.P., Weston Presidio Capital IV, L.P., WPC Entrepreneur Fund, L.P., and WPC Entrepreneur Fund II, L.P.) gained controlling interest in NBC through (i) the formation of two new corporations, NBC Holdings Corp. and New NBC Acquisition Corp.; (ii) a $28.2 million equity investment by Weston Presidio in NBC Holdings Corp., funds for which were ultimately paid to NBC in the form of a capital contribution; (iii) Weston Presidio's purchase of 36,455 shares of NBC's common stock directly from its holders; (iv) the cancellation of 870,285 shares of NBC's common stock upon payment by NBC of merger consideration of $180.4 million to the shareholders of record for such shares; (v) the exchange of 397,711 shares of NBC's common stock for 512,799 shares of New NBC Acquisition Corp. capital stock in the merger of the two entities with NBC as the surviving entity; and (vi) the exchange of 512,799 shares of NBC's common stock by Weston Presidio and current and former members of management for a like number of shares of NBC Holdings Corp. capital stock. Payment of the $180.4 million of merger consideration was funded through proceeds from the $28.2 million capital contribution, available cash, and proceeds from $405.0 million in new debt financing, of which $261.0 million was utilized by NBC and the Company to retire certain debt instruments outstanding at March 4, 2004 or to place funds in escrow for untendered debt instruments called for redemption on March 4, 2004 and redeemed on April 3, 2004. For ease of presentation, this transaction has been reflected in the accompanying financial statements as if it had occurred on March 1, 2004. Management has determined that no material transactions occurred during the period from March 1, 2004 through March 4, 2004. As a result of this transaction, the Company's results of operations, financial position and cash flow's prior to March 1, 2004 are presented as the "Predecessor." The Company's results of operations, financial position and cash flows thereafter are presented as the "Successor." B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies of the Company are as follows: PRINCIPLES OF CONSOLIDATION: Effective July 1, 2002, the Company's distance learning division was separately incorporated under the laws of the State of Delaware as Specialty Books, Inc., a wholly-owned subsidiary of the Company. Effective January 1, 2005, the Company's textbook division was separately incorporated under the laws of the State of Delaware as NBC Textbooks LLC, a wholly-owned subsidiary of the Company. Subsequent to the date of incorporation, the Company's financial statements have been presented on a consolidated basis to include all of the accounts of Specialty Books, Inc. and NBC Textbooks LLC, after elimination of all significant intercompany accounts and transactions. In connection with their incorporation, Specialty Books, Inc. and NBC Textbooks LLC have guaranteed payment and performance of obligations, liabilities, and indebtedness arising under, out of, or in connection with the Senior Subordinated Notes and Senior Credit Facility. REVENUE RECOGNITION: The Company generally recognizes revenue from product sales at the time of shipment, net of estimated product returns. The Company has established a program which, under certain conditions, enables its customers to return product. The effect of this program is estimated utilizing actual historical return experience and amounts are adjusted accordingly. SHIPPING AND HANDLING FEES AND COSTS: Amounts billed to a customer for shipping and handling have been classified as revenues in the consolidated statements of operations and approximated $3.2 million, $4.0 million, $0.4 million, and $5.8 million for the years ended March 31, 2006 and 2005, the one month ended March 31, 2004, and the eleven months ended February 29, 2004, respectively. Shipping and handling costs are included in operating expenses in the consolidated statements of operations and approximated $7.4 million, $8.4 million, $0.7 million, and $9.4 million for the years ended March 31, 2006 and 2005, the one month ended March 31, 2004, and the eleven months ended February 29, 2004, respectively. 43 SALES TAX COLLECTIONS: Sales tax collected from customers and remitted to the applicable taxing authorities is accounted for by the Company on a net basis, with no impact on revenues and any differences between amount collected and amount remitted being recorded in selling, general and administrative expenses. ADVERTISING: Advertising costs are expensed as incurred and approximated $5.9 million, $4.5 million, $0.2 million, and $4.0 million for the years ended March 31, 2006 and 2005, the one month ended March 31, 2004, and the eleven months ended February 29, 2004, respectively. USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates. CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of cash on hand and in the bank as well as short-term investments with maturities of three months or less when purchased. INVENTORIES: Inventories are stated at the lower of cost or market. Inventories for the Textbook Division are determined on the weighted-average cost method. The Company's Bookstore Division values new textbook and non-textbook inventories using the retail inventory method. Other inventories are determined on the first-in, first-out cost method. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Depreciation is determined using the straight-line method. The majority of property and equipment have useful lives of one to seven years, with the exception of buildings which are depreciated over 39 years and leasehold improvements which are depreciated over the remaining life of the corresponding lease, or the useful life, if shorter. The Company does not consider renewal options for the determination of the amortization period for leasehold improvements unless renewal is considered reasonably assured at the inception of the lease. GOODWILL: Goodwill arose as a result of the March 4, 2004 Transaction described in Note C and the acquisition of bookstore operations subsequent thereto. Goodwill is not amortized but rather tested at least annually for impairment. The test for impairment of goodwill is a two-step process that identifies potential impairment and then measures the amount of such impairment to be recorded in the consolidated financial statements. There were no impairment losses recognized during the periods presented. IDENTIFIABLE INTANGIBLES - CUSTOMER RELATIONSHIPS: The identifiable intangible asset for customer relationships is attributable to the non-contractual long-term relationships the Company has established over the years with customers in its Textbook and Complementary Services Divisions. This identifiable intangible is amortized on a straight-line basis over an estimated useful life of 20 years. There were no impairment losses recognized during the periods presented. IDENTIFIABLE INTANGIBLES - TRADENAMES: The identifiable intangible asset for tradenames relates to the trademark owned on the name "Nebraska Book Company" and the corresponding logo. This identifiable intangible has an indefinite useful life; and, thus, is not amortized but rather tested at least annually for impairment. The test for impairment of identifiable intangibles with indefinite useful lives consists of comparing the fair value of the identifiable intangible with its carrying amount, recognizing any excess carrying value as an impairment loss. There were no impairment losses recognized during the periods presented. IDENTIFIABLE INTANGIBLES - DEVELOPED TECHNOLOGY: The Company's primary activities regarding the internal development of software revolve around its proprietary college bookstore information systems (PRISM and WinPRISM) and E-commerce technology (WebPRISM), which are utilized by the Company's Bookstore Division and also marketed to the general public. As this software developed internally is intended for both internal use and sale to external customers, the Company adheres to the guidance in Statement of Financial Accounting Standards ("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, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. Development costs included in the research and development of new software products and enhancements to existing software products associated with the Company's proprietary college bookstore information systems and E-commerce technology are expensed as incurred until technological feasibility has been established. After technological feasibility is established, additional development costs are capitalized and amortized on a straight-line basis over the lesser of six years or the economic life of the related product. Recoverability of such capitalized costs is evaluated based upon estimates of future undiscounted cash flows. There were no impairment losses recognized during the periods presented. Amortization of the capitalized costs associated with such functionalities totaled $1.9 million, $1.9 million, $0.2 million, and $1.0 million for the years ended March 31, 2006 and 2005, the one month ended March 31, 2004, and the eleven months ended February 29, 2004, respectively. 44 IDENTIFIABLE INTANGIBLES - COVENANTS NOT TO COMPETE: The identifiable intangible asset for covenants not to compete represents the value assigned to such agreements, which are typically entered into with the owners of college bookstores acquired by the Company. This identifiable intangible is amortized on a straight-line basis over the term of the agreement, which ranges from 3 to 5 years. DEBT ISSUE COSTS: The costs related to the issuance of debt are capitalized and amortized to interest expense using the effective interest method over the lives of the related debt. Accumulated amortization of such costs as of March 31, 2006 and 2005 was approximately $3.1 million and $1.6 million, respectively. Debt issue costs related to retired debt were written-off to interest expense in connection with the December 10, 2003 debt refinancing and the March 4, 2004 Transaction and totaled $0.5 million and $6.2 million, respectively. DERIVATIVE FINANCIAL INSTRUMENTS: Interest rate swap agreements are utilized by the Company to reduce exposure to fluctuations in the interest rates on its variable rate debt. Such agreements are recorded in the consolidated balance sheet at fair value. Changes in the fair value of the agreements are recorded in earnings or other comprehensive income (loss), based on whether the agreements are designated as part of the hedge transaction and whether the agreements are effective in offsetting the change in the value of the interest payments attributable to the Company's variable rate debt. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable, and accounts payable approximate fair value as of March 31, 2006 and 2005, because of the relatively short maturity of these instruments. The fair value of long-term debt, including the current maturities, was approximately $340.4 million and $350.8 million as of March 31, 2006 and 2005, respectively, as determined by quoted market values and prevailing interest rates for similar debt issues. STOCK-BASED COMPENSATION: The Company accounts for its stock-based compensation under provisions of Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and related interpretations utilizing the intrinsic value method. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting. 45 In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO. 123. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements. The following table illustrates the effect on net income (loss) if the fair-value-based method had been applied to all outstanding and unvested awards in each period:
Successor Predecessor ------------------------------------------------ --------------- Year Ended Year Ended 1 Month Ended 11 Months Ended March 31, March 31, March 31, February 29, 2006 2005 2004 2004 --------------- -------------- --------------- --------------- Net income (loss), as reported $ 12,241,493 $ 13,460,024 $ (3,719,287) $ 16,934,868 Add: Stock-based compensation expense included in reported net income, net of related income tax effects - - - 4,358,364 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (78,859) (71,410) - (4,455,453) -------------- --------------- -------------- -------------- Pro forma net income (loss) $ 12,162,634 $ 13,388,614 $ (3,719,287) $ 16,837,779 ============== =============== ============== ==============
RESTRICTED STOCK: Under the NBC Holdings Corp. 2005 Restricted Stock Plan, 4,200 shares of NBC Holdings Corp. capital stock may be and were issued on March 31, 2006 for $0.01 per share to certain officers and directors of the Company. Certain restrictions limit the sale or transfer of these shares (as more fully described in Note N to the consolidated financial statements). Such shares are subject to both call rights on behalf of NBC Holdings Corp. and put rights on behalf of the officers and directors once vested (as more fully described in Note N to the consolidated financial statements). The shares vest on September 30, 2010 (the "vesting date"). Due to the existence of the put rights, stock-based compensation will be accrued from March 31, 2006 until the vesting date and recorded as "other long-term liabilities" in the consolidated balance sheets. INCOME TAXES: The Company files a consolidated federal income tax return with its parent and follows a policy of recording an amount equal to the income tax expense which the Company would have incurred had it filed a separate return. The Company is responsible for remitting tax payments and collecting tax refunds for the consolidated group. The amount due to parent (i.e., NBC) represents the cumulative reduction in tax payments made by the Company as a result of the tax benefit of operating losses generated by the Company's parent. The Company provides for deferred income taxes based upon temporary differences between financial statement and income tax bases of assets and liabilities, and tax rates in effect for periods in which such temporary differences are estimated to reverse. COMPREHENSIVE INCOME (LOSS): Comprehensive income (loss) includes net income and other comprehensive income (losses). Other comprehensive income (losses) consists of unrealized gains (losses) on interest rate swap agreements, net of taxes. ACCOUNTING STANDARDS NOT YET ADOPTED: In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151, INVENTORY COSTS, which amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, INVENTORY PRICING to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). The Statement becomes effective for the Company in fiscal 2007 and is not expected to have a significant impact on the Company's consolidated financial statements. In December 2004, the FASB issued SFAS No. 123 (revised 2004), SHARE-BASED PAYMENT. SFAS No. 123 (revised 2004) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions and requires an entity to, in most cases, measure the cost of such services based on the grant-date fair value of the award. This Statement is a revision of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION and supersedes APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, thereby eliminating the intrinsic value method of accounting for stock-based compensation currently utilized by the Company. SFAS No. 123 (revised 2004) is effective for the Company in fiscal 2007, applying to all awards granted or modified after April 1, 2006. 46 In December 2004, the FASB issued SFAS No. 153, EXCHANGES OF NONMONETARY ASSETS--AN AMENDMENT OF APB OPINION NO. 29. This statement amends APB Opinion No. 29 and is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. SFAS 153 is effective for nonmonetary exchanges occurring in fiscal 2007. The adoption of this statement is not expected to have a significant impact on the Company's consolidated financial statements. C. BUSINESS COMBINATION On March 4, 2004, Weston Presidio acquired the controlling interest in NBC through a series of steps which resulted in Weston Presidio owning a substantial majority of NBC's common stock. The transaction was accomplished pursuant to, among other instruments, an Agreement & Plan of Merger and a Stock Purchase Agreement dated February 18, 2004. The series of related steps underlying this transaction included the following: (1) The Company refinanced its existing $125.0 million senior credit facility with a $230.0 million senior credit facility (the "Senior Credit Facility") comprised of an $180.0 million term loan (the "Term Loan") which matures on March 4, 2011 and was drawn in full in connection with the consummation of the transaction, and a $50.0 million revolving credit facility (the "Revolving Credit Facility") which matures on March 4, 2009 and was not drawn upon at the consummation of the transaction. (2) The Company completed a private placement of $175.0 million principal amount of 8.625% senior subordinated notes (the "Senior Subordinated Notes") which mature on March 15, 2012. On April 27, 2004, the Company filed a Form S-4 Registration Statement with the Securities and Exchange Commission for the purpose of registering debt securities to be issued in exchange for the Senior Subordinated Notes. Such Registration Statement was declared effective by the Securities and Exchange Commission on May 7, 2004. All notes were tendered in the offer to exchange that was completed on June 8, 2004. The terms of the securities issued in the exchange offer are identical to those in effect at March 31, 2004. (3) NBC completed a private placement of $77.0 million principal amount of 11.0% senior discount notes (the "Senior Discount Notes") which mature on March 15, 2013. The Senior Discount Notes were issued at a discount of $27.0 million and will become fully-accreted on March 15, 2008, at which point semi-annual cash interest payments begin to accrue and are payable beginning September 15, 2008. On April 27, 2004, NBC filed a Form S-4 Registration Statement with the Securities and Exchange Commission for the purpose of registering debt securities to be issued in exchange for the Senior Discount Notes. Such Registration Statement was declared effective by the Securities and Exchange Commission on May 7, 2004. All notes were tendered in the offer to exchange that was completed on June 8, 2004. The terms of the securities issued in the exchange offer are identical to those in effect at March 31, 2004. (4) The Company completed a cash tender offer for, and partial redemption of, its $110.0 million principal amount of outstanding 8.75% senior subordinated notes. Untendered notes which totaled $15.4 million were called for redemption on March 4, 2004 and redeemed on April 3, 2004. Funds totaling $16.1 million, including accrued interest and call premiums on such indebtedness, were held in escrow ("restricted cash") as of March 31, 2004, pending the April 3, 2004 redemption. (5) NBC completed a cash tender offer for, and partial redemption of, its $76.0 million principal amount of outstanding 10.75% senior discount debentures. Untendered debentures which totaled $10.5 million were called for redemption on March 4, 2004 and redeemed on April 3, 2004. Funds totaling $11.0 million, including accrued interest and call premiums on such indebtedness, were held in escrow ("restricted cash") as of March 31, 2004, pending the April 3, 2004 redemption. (6) Weston Presidio made an initial equity investment of $28.2 million in NBC Holdings Corp., funds for which were ultimately paid to NBC in the form of a capital contribution. (7) Weston Presidio purchased 36,455 shares of NBC's common stock directly from its holders for $8.4 million. (8) 870,285 shares of NBC's common stock were cancelled upon NBC's payment of $180.4 million in merger consideration to the holders of such shares. 47 (9) 397,711 shares of NBC common stock were exchanged for 512,799 shares of capital stock of New NBC Acquisition Corp., a new corporation formed by Weston Presidio, in the merger of the two entities with NBC as the surviving entity. (10) Weston Presidio and current and former members of management contributed 495,981 shares and 16,818 shares, respectively, of NBC's common stock to NBC Holdings Corp. in exchange for a like number of shares of NBC Holdings Corp. capital stock. (11) Options to acquire 49,778 shares of NBC's common stock held by members of management were exchanged for options to acquire a like number of shares of NBC Holdings Corp. capital stock. (12) The Company declared and paid dividends of $184.3 million to NBC to help finance the transaction. Throughout this Annual Report, we generally refer to all of the above steps and transactions that comprise this entire transaction, collectively, as the "March 4, 2004 Transaction." The March 4, 2004 Transaction was accounted for as a purchase at NBC Holdings Corp. with the related purchase accounting pushed-down to NBC and the Company as of the date of the transaction. The March 4, 2004 Transaction was accounted for as a purchase in accordance with Statement of Financial Accounting Standards ("SFAS") No.141, BUSINESS COMBINATIONS. Accordingly, the Company was revalued at the time of the March 4, 2004 Transaction to fair value to the extent of the majority stockholder's (Weston Presidio's) 96.9% controlling interest in NBC. The remaining 3.1% is accounted for at the continuing stockholders' (current and former members of management) carryover basis in NBC. The excess of the purchase price over the historical basis of the net assets acquired has been applied to adjust net assets to their fair values to the extent of Weston Presidio's 96.9% ownership of outstanding common stock of NBC. Fair value was determined in part using an independent third-party appraisal. 48 The following table summarizes the purchase price allocation of the March 4, 2004 Transaction: Purchase Price: Net debt issued in transaction $ 170,000,000 Contribution of existing equity: Weston Presidio 77,826,460 Current and former members of management 1,010,701 Capital contribution to NBC from NBC Holdings Corp. 28,164,181 Purchase of 36,455 NBC shares by Weston Presidio directly from shareholders 8,435,958 Net cash paid by Company 8,192,816 Fair value of NBC Holdings Corp. options granted 7,850,118 ------------ Total Purchase Price $ 301,480,234 Net Book Value of Tangible Assets Acquired and Liabilities Assumed 40,541,582 Allocation of NBC Purchase Accounting Adjustments 29,581,068 --------------- Excess Purchase Price $ 371,602,884 =============== Allocation of Excess Purchase Price: Goodwill $ 269,061,875 Identifiable Intangibles: Customer relationships $ 114,830,000 Tradename 31,320,000 Developed technology 11,449,000 157,599,000 ------------- Property and Equipment 7,098,009 Deferred Tax Liability (62,156,000) --------------- $ 371,602,884 =============== The Company incurred $20.8 million in costs associated with the March 4, 2004 Transaction and wrote off $6.2 million of debt issue costs associated with debt retired to interest expense. Of the $20.8 million of costs incurred, $10.3 million was capitalized as debt issue costs, $7.3 million of stock-based compensation and related payroll taxes was recorded in conjunction with 40,668 options to purchase shares of NBC Acquisition Corp. common stock which were converted into the right to receive cash payment, and $3.2 million of call premiums paid on the debt retired was recorded as interest expense. The following unaudited pro forma financial information was prepared as if the March 4, 2004 Transaction had occurred at the beginning of each of the periods presented: Successor Predecessor --------------- ------------------- One Eleven Month Ended Months Ended March 31, 2004 February 29, 2004 --------------- ------------------ Revenues, net of returns $ 13,317,394 $ 385,363,674 Net income (loss) (3,610,245) 16,790,669 These unaudited pro forma results have been prepared for comparative purposes only and primarily include adjustments for depreciation and amortization arising from the step-up in basis of assets in the March 4, 2004 Transaction, interest expense on debt issued in connection with the March 4, 2004 Transaction, and the related income tax adjustments. These adjustments were tax effected using the Company's effective tax rates of 39.2% and 39.3% for the one month ended March 31, 2004 and the eleven months ended February 29, 2004, respectively. The pro forma information is not necessarily indicative of the results that would have occurred had the March 4, 2004 Transaction occurred at the beginning of the periods presented, nor is it necessarily indicative of future results. 49 D. RECEIVABLES Receivables are summarized as follows: March 31, ---------------------------- 2006 2005 ------------- ------------- Trade receivables, less allowance for doubtful accounts of $510,839 at March 31, 2006 and 2005 $ 18,384,821 $ 15,167,497 Receivables from book publishers for returns 13,082,537 9,765,214 Advances for book buy-backs 4,563,572 4,576,363 Computer finance agreements, current portion 290,000 253,000 Other 1,439,856 1,191,059 ------------- ------------- $ 37,760,786 $ 30,953,133 ============= ============= Trade receivables include the effect of estimated product returns. The amount of estimated product returns at March 31, 2006 and 2005 was approximately $4.9 million and $6.6 million, respectively. E. INVENTORIES Inventories are summarized as follows: March 31, ------------------------------- 2006 2005 -------------- ---------------- Bookstore Division $ 43,922,080 $ 40,084,363 Textbook Division 28,775,512 30,113,141 Complementary Services Division 2,180,850 2,362,458 -------------- ---------------- $ 74,878,442 $ 72,559,962 ============== ================ Textbook Division inventories include the effect of estimated product returns. The amount of estimated product returns at March 31, 2006 and 2005 was approximately $2.3 million and $3.0 million, respectively. General and administrative costs associated with the storage and handling of inventory totaled approximately $8.5 million and $7.6 million for the years ended March 31, 2006 and 2005, respectively, of which approximately $2.2 million and $2.0 million was capitalized into inventory at March 31, 2006 and 2005. 50 F. PROPERTY AND EQUIPMENT A summary of the cost of property and equipment follows: March 31, ------------------------------ 2006 2005 -------------- -------------- Land $ 3,565,382 $ 3,565,382 Buildings and improvements 20,167,524 19,323,431 Leasehold improvements 7,085,846 5,057,273 Furniture and fixtures 10,359,449 8,703,700 Information systems 7,014,081 5,153,788 Automobiles and trucks 220,529 215,270 Machinery 344,452 334,249 Projects in process 1,298,304 407,117 -------------- -------------- 50,055,567 42,760,210 Less: Accumulated depreciation & amortization (10,092,654) (5,247,823) -------------- -------------- $ 39,962,913 $ 37,512,387 ============== ============== G. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLES As discussed in detail in Note C, on March 4, 2004 Weston Presidio acquired the controlling interest in NBC through a series of steps which resulted in Weston Presidio owning a substantial majority of NBC's common stock. The March 4, 2004 Transaction was accounted for as a purchase at NBC Holdings Corp. with the related purchase accounting pushed-down to NBC and the Company as of the date of the transaction. The excess of the purchase price over the historical basis of the net assets acquired was applied to adjust net assets to their fair values, as described in Note C and as determined in part using an independent third-party appraisal. The allocation of the excess purchase price included establishing identifiable intangibles for customer relationships of $114.8 million and tradename of $31.3 million; adjusting the carrying value of developed technology at March 4, 2004 to a fair value of $11.4 million; and adjusting the carrying value of goodwill at March 4, 2004 to a fair value of $269.1 million, of which $25.3 million is deductible for income tax purposes. The weighted-average amortization period for identifiable intangibles subject to amortization is 18.7 years, including 20 years for customer relationships and 6 years for developed technology. During the fiscal year ended March 31, 2006, the Company acquired thirteen college bookstore locations in ten separate transactions, none of which was material to the Company's consolidated financial statements. In April of 2005, the Company acquired certain assets of an institutional ("contract-managed") bookstore location serving Gannon University. Also in April of 2005, the Company acquired certain assets of a privately owned bookstore serving McLennan Community College and Texas State Technical College - Waco. In June of 2005, the Company acquired certain assets of a contract-managed bookstore location serving St. Clair County Community College. In July of 2005, the Company acquired certain assets of a privately owned bookstore serving the University of Delaware. In August of 2005, the Company acquired the stock of a privately owned bookstore serving Auburn University. In October of 2005, the Company acquired certain assets of a privately owned bookstore serving the University of Tennessee - Chattanooga. A second transaction occurred in October of 2005 to acquire certain assets of a contract-managed bookstore with three locations serving Southwest Baptist University. In November of 2005, the Company acquired certain assets of two privately owned bookstores, one serving Salt Lake City Community College and one serving Collin County Community College and the University of Texas at Dallas. In March of 2006, the Company acquired certain assets of a contract-managed bookstore location serving Midland Lutheran College. Also in March of 2006, the Company acquired certain assets of a privately owned bookstore serving Washburn University. The total purchase price, net of cash acquired, of such acquisitions was approximately $10.7 million, of which approximately $1.4 million was assigned to covenants not to compete with amortization periods of three years, approximately $5.2 million was assigned to tax-deductible goodwill, and approximately $2.4 million was assigned to non tax-deductible goodwill. On May 1, 2006, the Company acquired College Book Stores of America, Inc. ("CBA"), as more fully described in Note Q to the consolidated financial statements. 51 The changes in the carrying amount of goodwill for the years ended March 31, 2006 and 2005, in total and by reportable segment, are as follows: Bookstore Corporate Division Administration Total ------------- --------------- --------------- Balance, April 1, 2004 $ 1,532,260 $ 269,061,875 $ 270,594,135 Additions to goodwill: Bookstore acquisitions 14,304,391 - 14,304,391 ------------- --------------- --------------- Balance, March 31, 2005 15,836,651 269,061,875 284,898,526 Additions to goodwill: Bookstore acquisitions 7,524,419 - 7,524,419 Purchase accounting adjustments 626,897 - 626,897 ------------- --------------- --------------- Balance, March 31, 2006 $ 23,987,967 $ 269,061,875 $ 293,049,842 ============= =============== =============== Goodwill assigned to corporate administration represents goodwill arising out of the March 4, 2004 Transaction, as all goodwill was assigned to corporate administration. As is the case with a portion of the Company's assets, such goodwill is not allocated between the Company's reportable segments when management makes operating decisions and assesses performance. Such goodwill is allocated to the Company's reporting units for purposes of testing goodwill for impairment and calculating any gain or loss on the disposal of all or a portion of a reporting unit. The following table presents the gross carrying amount and accumulated amortization of identifiable intangibles subject to amortization, in total and by asset class, as of March 31, 2006 and 2005: March 31, 2006 ---------------------------------------------- Gross Net Carrying Accumulated Carrying Amount Amortization Amount -------------- --------------- --------------- Customer relationships $ 114,830,000 $ (11,961,100) $ 102,868,900 Developed technology 11,473,750 (3,983,689) 7,490,061 Covenants not to compete 5,221,000 (1,607,333) 3,613,667 -------------- --------------- --------------- $ 131,524,750 $ (17,552,122) $ 113,972,628 ============== =============== =============== March 31, 2005 ---------------------------------------------- Gross Net Carrying Accumulated Carrying Amount Amortization Amount -------------- --------------- --------------- Customer relationships $ 114,830,000 $ (6,219,580) $ 108,610,420 Developed technology 11,473,750 (2,071,333) 9,402,417 Covenants not to compete 4,084,333 (766,509) 3,317,824 -------------- --------------- --------------- $ 130,388,083 $ (9,057,422) $ 121,330,661 ============== =============== =============== 52 Information regarding aggregate amortization expense for the years ended March 31, 2006 and 2005, the one month ended March 31, 2004, and the eleven months ended February 29, 2004 for identifiable intangibles subject to amortization, along with estimated aggregate amortization expense for each of the next five fiscal years, is presented in the following table: Amortization Expense -------------- Year ended March 31, 2006 (Successor) $ 8,742,033 Year ended March 31, 2005 (Successor) 8,249,971 One month ended March 31, 2004 (Successor) 648,289 Eleven months ended February 29, 2004 (Predecessor) 1,154,502 Estimated amortization expense for the fiscal years ending March 31: 2007 $ 8,970,000 2008 8,683,000 2009 8,457,000 2010 7,847,000 2011 5,769,000 Identifiable intangibles not subject to amortization consist solely of the tradename asset arising out of the March 4, 2004 Transaction and total $31,320,000. H. LONG-TERM DEBT Details regarding each of the instruments of indebtedness of the Company are provided in the following table:
March 31, ------------------------------- 2006 2005 --------------- --------------- Term Loan due March 4, 2011, principal and interest payments due quarterly, interest accrues at a floating rate based on Eurodollar rate plus an applicable margin percent (6.70% and 4.67% at March 31, 2006 and 2005, respectively) $ 176,400,000 $ 178,200,000 Senior Subordinated Notes, unsecured, principal due on March 15, 2012, interest payments accrue at a fixed rate of 8.625% and are payable semi-annually on March 15 and September 15 beginning September 15, 2004 175,000,000 175,000,000 Mortgage note payable with an insurance company assumed with the acquisition of a bookstore facility, due December 1, 2013, monthly payments of $6,446 including interest at 10.75% 402,857 435,000 --------------- --------------- 351,802,857 353,635,000 Less current maturities of long-term debt (3,206,582) (1,832,144) --------------- --------------- Long-term debt $ 348,596,275 $ 351,802,856 =============== ===============
Indebtedness at March 31, 2006 includes an amended and restated bank-administered senior credit facility (the "Senior Credit Facility") provided to the Company through a syndicate of lenders, consisting of an $180.0 million term loan (the "Term Loan") and a $50.0 million revolving credit facility (the "Revolving Credit Facility"); $175.0 million of 8.625% senior subordinated notes (the "Senior Subordinated Notes"), and capital leases. The Revolving Credit Facility expires on March 4, 2009. 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 calculated borrowing base at March 31, 2006 was approximately $41.0 million. The Revolving Credit Facility was unused at March 31, 2006. 53 The interest rate on the Senior Credit Facility Term Loan is prime plus an applicable margin of up to 1.5% or, on Eurodollar borrowings, the Eurodollar interest rate plus an applicable margin of up to 2.5%. The Revolving Credit Facility interest rate is prime plus an applicable margin of up to 1.75% or, on Eurodollar borrowings, the Eurodollar interest rate plus an applicable margin of up to 2.75%. Additionally, there is a 0.5% commitment fee for the average daily unused amount of the Revolving Credit Facility. The average borrowings under the Revolving Credit Facility for the years ended March 31, 2006 and 2005 were approximately $7.0 million and $5.7 million at an average rate of 7.8% and 6.4%, respectively. The Senior Credit Facility is collateralized by substantially all of the assets of the Company and NBC. Additionally, NBC has guaranteed the prompt and complete payment and performance of the Company's obligations under the Senior Credit Facility. The Senior Credit Facility also stipulates that excess cash flows as defined in the credit agreement dated February 13, 1998 (the "Credit Agreement"), as most recently amended on April 26, 2006 and most recently restated on March 4, 2004, shall be applied towards prepayment of the Term Loan. The estimated excess cash flow payment for fiscal 2006, which is approximately $1.8 million, is due and payable on September 29, 2006 and is included in "current maturities of long-term debt" in the consolidated balance sheets. The Senior Credit Facility requires the Company to maintain certain financial ratios and contains a number of other covenants that among other things, restrict the ability to incur additional indebtedness, dispose of assets, make capital expenditures, make loans or advances and pay dividends, except that, among other things, the Company may pay dividends to NBC (i) in an amount not to exceed the amount of interest required to be paid on the Senior Discount Notes and (ii) to pay corporate overhead expenses not to exceed $250,000 per year and any taxes owed by NBC. The Company was compliant with such covenants at March 31, 2006. The Senior Subordinated Notes pay cash interest semi-annually and mature on March 15, 2012. The indenture governing the Senior Subordinated Notes 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. Effective August 1, 2005, the Credit Agreement was amended to provide for, among other things, (i) a twelve-month deferral of a scheduled increase in the minimum consolidated interest coverage ratio covenant and (ii) a change in the definition of consolidated EBITDA to exclude up to $4.0 million in charges to be incurred under the NBC Holdings Corp. 2005 Restricted Stock Plan. At March 31, 2006, the aggregate maturities of long-term debt for the next five years were as follows: Fiscal Year --------- 2007 $ 3,206,582 2008 1,825,299 2009 1,829,757 2010 1,834,717 2011 167,922,957 On May 1, 2006, the Company amended the Credit Agreement in connection with the acquisition of CBA as more fully described in Note Q to the consolidated financial statements. I. LEASES AND OTHER COMMITMENTS In conjunction with two bookstores acquired in June of 2001, one bookstore acquired in March of 2003, and one bookstore acquired in April of 2004, the Company entered into bookstore facility leases that qualified as capital leases. Such leases expire at various dates through fiscal 2014 and contain options to renew for periods of up to ten years. Capitalized leased property included in property and equipment was approximately $1.9 million at March 31, 2006, net of accumulated depreciation. 54 The Company leases bookstore facilities and data processing equipment under noncancelable operating leases expiring at various dates through fiscal 2016, many of which contain options to renew for periods of up to ten years. Certain of the leases are based on a percentage of sales, ranging from 3.0% to 13.0%. Future minimum capital lease payments and aggregate minimum lease payments under noncancelable operating leases for the years ending March 31 are as follows: Year Capital Operating ---- Leases Leases ------------ ------------- 2007 $ 521,245 $ 12,380,000 2008 570,751 10,642,000 2009 575,386 7,487,000 2010 588,877 5,488,000 2011 598,915 3,889,000 Thereafter 582,327 8,405,000 ------------ ------------- Total minimum lease payments 3,437,501 $ 48,291,000 ============= Amount representing interest at 11.0% (931,213) ------------ Present value of minimum lease payments 2,506,288 Obligations due within one year (281,604) ------------ Long-term obligations $ 2,224,684 ============ Total rent expense for the years ended March 31, 2006 and 2005, the one month ended March 31, 2004, and the eleven months ended February 29, 2004 was approximately $17.1 million, $15.2 million, $1.0 million, and $12.9 million, respectively. Percentage rent expense for the years ended March 31, 2006 and 2005, the one month ended March 31, 2004, and the eleven months ended February 29, 2004 was approximately $4.6 million, $4.0 million, $0.3 million, and $3.5 million, respectively. J. DERIVATIVE FINANCIAL INSTRUMENTS SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended, requires that all derivative instruments be recorded in the balance sheet at fair value. Changes in the fair value of derivatives are recorded in earnings or other comprehensive income (loss), based on whether the instrument is designated as part of a hedge transaction and, if so, the type of hedge transaction. The Company utilizes derivative financial instruments to manage the risk that changes in interest rates will affect the amount of its future interest payments on its variable rate debt. 55 The Company's primary market risk exposure is, and is expected to continue to be, fluctuation in variable interest rates. As provided in the Company's Senior Credit Facility, exposure to interest rate fluctuations is managed by maintaining fixed interest rate debt (primarily the Senior Subordinated Notes) and by entering into interest rate swap agreements that qualify as cash flow hedging instruments to convert certain variable rate debt into fixed rate debt. On July 15, 2005, the Company entered into a three-year amortizing interest rate swap agreement whereby a portion of the Company's variable rate Term Loan is converted into debt with a fixed rate of 6.844% (4.344% plus an applicable margin as defined in the Credit Agreement). This agreement expires on September 30, 2008. Notional amounts under the agreement are reduced periodically. Previously, the Company had separate five-year amortizing interest rate swap agreements with two financial institutions whereby the Company's variable rate term debt was converted into debt with a fixed rate of 5.815% plus an applicable margin (as defined in the then-existing credit agreement). Such agreements expired on July 31, 2003. General information regarding the Company's exposure to fluctuations in variable interest rates is presented in the following table: March 31, 2006 2005 ------------- ------------- Total indebtedness outstanding $ 354,309,145 $ 356,402,208 Term Loan subject to Eurodollar fluctuations 176,400,000 178,200,000 Notional amount under swap agreement 165,000,000 - Fixed interest rate indebtedness 177,909,145 178,202,208 Variable interest rate, including applicable margin: Term Loan 6.70% 4.67% Effective September 30, 2005, the interest rate swap agreement qualified as a cash flow hedge instrument as the following criteria were met: (1) Formal documentation of the hedging relationship and the Company's risk management objective and strategy for undertaking the hedge were in place. (2) The interest rate swap agreement is expected to be highly effective in offsetting the change in the value of the hedged portion of the interest payments attributable to the Company's Term Loan. The Company estimates the effectiveness of the interest rate swap agreement utilizing the hypothetical derivative method. Under this method, the fair value of the actual interest rate swap agreement is compared to the fair value of a hypothetical swap agreement that has the same critical terms as the portion of the Term Loan being hedged. The critical terms of the interest rate swap agreement are identical to the portion of the Term Loan being hedged as of March 31, 2006 and for the period from July 15, 2005 (inception) to March 31, 2006. To the extent that the agreement is not considered to be highly effective in offsetting the change in the value of the interest payments being hedged, the fair value relating to the ineffective portion of such agreement and any subsequent changes in such fair value will be immediately recognized in earnings as "gain or loss on derivative financial instruments". To the extent that the agreement is considered highly effective but not completely effective in offsetting the change in the value of the interest payments being hedged, any changes in fair value relating to the ineffective portion of such agreement will be immediately recognized in earnings as "interest expense". Under hedge accounting, interest rate swap agreements are reflected at fair value in the balance sheet and the related gains or losses on these agreements are generally recorded in stockholders' equity, net of applicable income taxes (as "accumulated other comprehensive income (loss)"). Gains or losses recorded in accumulated other comprehensive income (loss) are reclassified into earnings as an adjustment to interest expense in the same periods in which the related interest payments being hedged are recognized in earnings. Except as described below, the net effect of this accounting on the Company's consolidated results of operations will be that interest expense on a portion of the Term Loan is generally being recorded based on fixed interest rates until the interest rate swap agreement expires on September 30, 2008. 56 In accordance with the Company's Risk Management Policy, the current interest rate swap agreement was intended as a hedge against certain future interest payments under the Term Loan from the agreement's inception on July 15, 2005. However, formal documentation designating the interest rate swap agreement as a hedge against certain future interest payments under the Term Loan was not put in place until September 30, 2005 (the effective date of the interest rate swap agreement). As a result, the interest rate swap agreement did not qualify as a cash flow hedge until September 30, 2005. Accordingly, the $0.7 million increase in the fair value of the interest rate swap agreement from inception to September 30, 2005 was recognized in earnings as a "gain on derivative financial instruments". Changes in the fair value of this portion of the interest rate swap agreement are also recognized as a "gain (loss) on derivative financial instruments" in the consolidated statements of operations. Subsequent to September 30, 2005, the change in fair value of a September 30, 2005 hypothetical swap is recorded, net of income taxes, in "accumulated other comprehensive income" in the consolidated balance sheets. Changes in the fair value of the interest rate swap agreement are reflected in the consolidated statements of cash flows as either "gain (loss) on derivative financial instruments" or as "noncash investing and financing activities". Information regarding the fair value of the interest rate swap agreements designated as hedging instruments is presented in the following table:
Successor Predecessor ----------------------------------------- --------------- Year Ended Year Ended 1 Month Ended 11 Months Ended March 31, March 31, March 31, February 29, 2006 2005 2004 2004 ------------- ------------ -------------- --------------- Balance Sheet Components: Other assets - fair value of swap agreement $ 2,833,000 $ - Deferred income taxes (1,097,433) - ------------- ------------ $ 1,735,567 $ - ============= ============ Portion of Agreement Subsequent to September 30, 2005 Hedge Designation: Increase in fair value of swap agreement $ 2,308,000 $ - $ - $ - Portion of Agreement Prior to September 30, 2005 Hedge Designation: Increase in fair value of swap agreement 525,000 - - - Swap Agreements Expiring July 31, 2003: Increase in fair value of portion of swap agreements designated as hedges - - - 675,806 Interest income recorded due to hedge ineffectiveness - - - 1,030
K. INCOME TAXES The provision (benefit) for income taxes consists of: Successor Predecessor -------------------------------------------- ---------------- Year Ended Year Ended 1 Month Ended 11 Months Ended March 31, March 31, March 31, February 29, 2006 2005 2004 2004 -------------- ------------- --------------- ---------------- Current: Federal $ 7,715,245 $ 8,211,213 $ (1,151,169) $ 5,320,504 State (27,679) 2,084,662 (347,358) 1,677,640 Deferred 3,539 (1,133,757) (901,435) 3,951,025 -------------- ------------- --------------- ---------------- $ 7,691,105 $ 9,162,118 $ (2,399,962) $ 10,949,169 ============== ============= =============== ================ The state income tax benefit for the year ended March 31, 2006 is attributable to lower state income taxes due in part to the results of the incorporation of NBC Textbooks LLC on January 1, 2005 and refunds of prior year taxes paid arising out of certain amended state income tax returns. 57 The following represents a reconciliation between the actual income tax expense (benefit) and income taxes computed by applying the Federal income tax rate to income (loss) before income taxes: Successor Predecessor -------------------------------------- --------------- Year Ended Year Ended 1 Month Ended 11 Months Ended March 31, March 31, March 31, February 29, 2006 2005 2004 2004 ----------- ------------ ------------- --------------- Statutory rate 35.0% 35.0% (35.0)% 35.0% State income tax effect 3.8 4.6 (3.5) 3.8 Meals and entertainment 0.8 0.6 0.2 0.5 Other (1.0) 0.3 (0.9) - ----------- ------------ ------------- --------------- 38.6% 40.5% (39.2)% 39.3% =========== ============ ============= =============== The components of the deferred tax assets (liabilities) consist of the following: March 31, 2006 2005 ------------- ------------- Deferred income tax assets (liabilities), current: Vacation accruals $ 668,424 $ 588,968 Inventories 702,364 540,083 Allowance for doubtful accounts 197,886 193,914 Product returns 990,620 1,498,065 Incentive programs 2,900,511 2,910,764 Other (276,803) (195,612) ------------- ------------- 5,183,002 5,536,182 ------------- ------------- Deferred income tax assets (liabilities), noncurrent: Deferred compensation agreements 121,831 119,506 Goodwill amortization (3,335,240) (1,806,429) Covenants not to compete 637,317 1,196,228 Identifiable intangibles (54,651,214) (56,653,924) Property and equipment (2,144,115) (2,042,760) Interest rate swap agreement (1,097,433) - Other 202,127 173,000 ------------- ------------- (60,266,727) (59,014,379) ------------- ------------- $(55,083,725) $(53,478,197) ============= ============= L. RETIREMENT PLAN The Company participates in and sponsors a 401(k) compensation deferral plan. The plan covers substantially all employees. The plan provisions include employee contributions based on a percentage of compensation along with a Company contribution in addition to a limited matching feature. The Company's contributions for the years ended March 31, 2006 and 2005, the one month ended March 31, 2004, and the eleven months ended February 29, 2004 were $1.4 million, $1.2 million, $1,417, and $1.0 million, respectively. M. DEFERRED COMPENSATION The Company has a non-qualified deferred compensation plan for selected employees. This plan allows participants to voluntarily elect to defer portions of their current compensation. The amounts can be distributed upon either death or voluntary/involuntary resignation or termination. Interest is accrued at the prime rate adjusted semi-annually on January 1 and July 1 and is compounded as of March 31. The liability for the deferred compensation is included in other long-term liabilities and approximated $0.3 million as of March 31, 2006 and 2005. 58 N. STOCK-BASED COMPENSATION NBC had two stock-based compensation plans established to provide for the granting of options to purchase NBC Acquisition Corp. common stock - the 1998 Performance Stock Option Plan and the 1998 Stock Option Plan. Effective July 1, 2003, NBC established two new stock-based compensation plans - the 2003 Performance Stock Option Plan and the 2003 Stock Option Plan. In conjunction with the March 4, 2004 Transaction, NBC terminated the existing stock-based compensation plans and NBC Holdings Corp. established the 2004 Stock Option Plan. On September 29, 2005 NBC Holdings Corp. adopted the NBC Holdings Corp. 2005 Restricted Stock Plan to provide for the sale of NBC Holdings Corp. capital stock to certain officers and directors of the Company. Details regarding each of the plans are as follows: 1998 PERFORMANCE STOCK OPTION PLAN - This plan provided for the granting of options to purchase 53,771 shares of NBC's common stock to selected members of senior management of NBC and its affiliates. All options granted were nonqualified stock options, although the plan also provided for incentive stock options. NBC granted a portion of the available options in fiscal years 2001-2003 upon the attainment of pre-established financial targets. Generally, twenty-five percent of the options granted became 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 had an exercise price of not less than fair market value on the date the options were granted and were to expire ten years from the date of grant. On March 4, 2004, options granted and outstanding under this plan were either converted into the right to receive cash or cancelled and the plan was terminated. The cancelled options were replaced with new options granted under the 2004 Stock Option Plan. Such options were immediately fully-vested and contained the same exercise prices as the options which were cancelled. 1998 STOCK OPTION PLAN - This plan provided for the granting of options to purchase 29,229 shares of NBC's common stock to selected employees, officers, and directors of NBC and its affiliates. All options granted were nonqualified stock options, although the plan also provided for incentive stock options. NBC granted such options at the discretion of a committee designated by the Board of Directors (the Committee). Generally, twenty-five percent of the options granted became 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 would have had an exercise price of not less than fair market value on the date the options were granted, while the Committee determined the exercise price for nonqualified options at the time of grant. All options were to expire ten years from the date of grant. On March 4, 2004, options granted and outstanding under this plan were either converted into the right to receive cash or cancelled and the plan was terminated. The cancelled options were replaced with new options granted under the 2004 Stock Option Plan. Such options were immediately fully-vested and contained the same exercise prices as the options which were cancelled. 2003 PERFORMANCE STOCK OPTION PLAN - This plan provided for the granting of options to purchase 43,000 shares of NBC's common stock to selected employees, officers, employee directors, and members of senior management of NBC and its affiliates. All options granted were intended to be nonqualified stock options, although the plan also provided for incentive stock options. This plan provided for the granting of up to 25% of the total number of shares of stock available under such plan upon the attainment of established targets in fiscal years 2003-2006. Generally, twenty-five percent of the options granted became 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. Options granted under the this plan were to be granted at an exercise price of not less than fair market value on the date the options were granted. Options were to expire ten years from the date of grant. On March 4, 2004, this plan was terminated and options granted and outstanding under this plan were cancelled and replaced with new options granted under the 2004 Stock Option Plan. Such options were immediately fully-vested and contained the same exercise prices as the options which were cancelled. 2003 STOCK OPTION PLAN - This plan provided for the granting of options to purchase 28,000 shares of NBC's common stock to selected employees, officers, employee directors, and members of senior management of NBC and its affiliates. Had options been granted under this plan, they were intended to be nonqualified stock options, although the plan also provided for incentive stock options. This plan provided for the granting of options at the discretion of a committee designated by NBC's Board of Directors. Generally, twenty-five percent of any options granted would have 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 granted under this plan would have been granted at an exercise price of not less than fair market value on the date the options were granted, while nonqualified options could have been granted at less than fair market value. Options would have expired ten years from the date of grant. On March 4, 2004, prior to any options being granted under this plan, the plan was terminated. 59 2004 STOCK OPTION PLAN - This plan, established by NBC Holdings Corp. (see Note C), provides for the granting of options to purchase 81,306 shares of NBC Holdings Corp. capital stock to selected employees, officers, and employee directors of NBC and its affiliates. Additional shares may be issued upon changes in the capitalization of NBC and upon approval of a committee designated by NBC's Board of Directors ("the Committee"). All options granted are intended to be nonqualified stock options, although the plan also provides for incentive stock options. This plan provides for the granting of options at the discretion of the Committee. Vesting schedules of options may vary and are determined at the time of grant by the Committee. Subject to certain exceptions, stock options granted under this plan are to be granted at 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. At March 31, 2006, there were 4,917 options available for grant under this plan. In conjunction with the March 4, 2004 Transaction, certain option holders of 40,668 options granted and outstanding under the 1998 stock option plans elected to convert such options into the right to receive cash. This election resulted in the payout of $7.1 million which was recognized as stock-based compensation expense during the period ended February 29, 2004. Also in conjunction with the March 4, 2004 Transaction, certain option holders of 49,778 options granted and outstanding under the 1998 and 2003 stock option plans were cancelled and replaced with options granted under the 2004 Stock Option Plan. The new options were fully-vested at the time of grant and therefore no stock-based compensation expense was recognized on such options. The fair value of the options granted under the 2004 Stock Option Plan totaled $7.9 million and was included as part of the purchase consideration of the March 4, 2004 Transaction, as further discussed in Note C. In conjunction with the December 10, 2003 debt refinancing, NBC purchased 116,786 shares of its common stock, and 838 options outstanding to purchase shares of its common stock were converted into the right to receive cash. The cost of the treasury shares was $32.7 million and stock-based compensation expense resulting from the conversion of options into the right to receive cash totaled $0.2 million. The Company funded the purchase of the treasury shares by NBC through a dividend it declared to NBC in conjunction with the debt refinancing. No stock-based compensation expense was recognized at the time of grant for the options granted to employees in the years ended March 31, 2006 and 2005 and the eleven months ended February 29, 2004, as the exercise price was greater than or equal to the estimated fair value (including a discount for the holder's minority interest position and illiquidity of NBC Holdings Corp.'s capital stock) of NBC Holdings Corp.'s capital stock on the date of grant. 60 A summary of the Company's stock-based compensation activity related to stock options for each of the plans for the years ended March 31, 2006 and 2005, the one month ended March 31, 2004, and the eleven months ended February 29, 2004 is as follows:
Successor Predecessor ------------------------------------------------------------------- ------------------ Year Ended Year Ended 1 Month Ended 11 Months Ended March 31, March 31, March 31, February 29, 2006 2005 2004 2004 ------------------------ ----------------------- ------------------ ------------------ Weighted- Weighted- Weighted- Weighted- Average Average Average Average Exercise Exercise Exercise Exercise Number Price Number Price Number Price Number Price ---------- ------------- ----------------------- -------- --------- -------- -------- 1998 PERFORMANCE STOCK OPTION PLAN: Outstanding - beginning of period - $ - - $ - 34,600 $ 70.18 52,896 $ 66.32 Granted - - - - - - - - Expired/terminated - - - - (34,600) (70.18) - - Exercised - - - - - - - - Converted to right to receive cash - - - - - - (18,296) (59.01) ---------- ------------- ----------- ------------ -------- --------- -------- -------- Outstanding - end of period - $ - - $ - - $ - 34,600 $ 70.18 ========== ============= =========== ============ ======== ========= ======== ======== 1998 STOCK OPTION PLAN: Outstanding - beginning of period - $ - - $ - 4,428 $ 58.64 29,229 $ 56.38 Granted - - - - - - - - Expired/terminated - - - - (4,428) (58.64) (1,291) (56.62) Exercised - - - - - - (300) (52.47) Converted to right to receive cash - - - - - - (23,210) (55.99) ---------- ------------- ----------- ------------ -------- --------- -------- -------- Outstanding - end of period - $ - - $ - - $ - 4,428 $ 58.64 ========== ============= =========== ============ ======== ========= ======== ======== 2003 PERFORMANCE STOCK OPTION PLAN: Outstanding - beginning of period - $ - - $ - 10,750 $146.00 - $ - Granted - - - - - - 10,750 146.00 Expired/terminated - - - - (10,750) (146.00) - - Exercised - - - - - - - - ---------- ------------- ----------- ------------ -------- --------- -------- -------- Outstanding - end of period - $ - - $ - - $ - 10,750 $146.00 ========== ============= =========== ============ ======== ========= ======== ======== 2004 STOCK OPTION PLAN: Outstanding - beginning of period 62,389 $ 100.58 49,778 $ 85.53 - $ - Granted 14,000 160.00 12,611 160.00 49,778 85.53 Expired/terminated - - - - - - Exercised (640) (69.19) - - - - ---------- ------------- ----------- ------------ -------- --------- Outstanding - end of period 75,749 $ 111.83 62,389 $ 100.58 49,778 $ 85.53 ========== ============= =========== ============ ======== =========
61 2004 Stock Option Plan ---------------------- Weighted- Average Remaining Contractual Number Life (Yrs) ---------- ----------- Outstanding - March 31, 2006: Exercise price of $52.47 26,628 7.9 Exercise price of $106 11,760 7.9 Exercise price of $146 10,750 7.9 Exercise price of $160 26,611 9.1 ---------- ----------- 75,749 8.3 ========== =========== Exercisable - March 31, 2006: Exercise price of $52.47 26,628 7.9 Exercise price of $106 11,760 7.9 Exercise price of $146 10,750 7.9 Exercise price of $160 9,805 9.0 ---------- ----------- 58,943 8.1 ========== =========== Outstanding - March 31, 2005: Exercise price of $52.47 27,068 8.9 Exercise price of $106 11,960 8.9 Exercise price of $146 10,750 8.9 Exercise price of $160 12,611 9.6 ---------- ----------- 62,389 9.0 ========== =========== Exercisable - March 31, 2005: Exercise price of $52.47 27,068 8.9 Exercise price of $106 11,960 8.9 Exercise price of $146 10,750 8.9 Exercise price of $160 3,151 9.6 ---------- ----------- 52,929 8.9 ========== =========== Outstanding and exercisable - March 31, 2004: Exercise price of $52.47 27,068 9.9 Exercise price of $106 11,960 9.9 Exercise price of $146 10,750 9.9 ---------- ----------- 49,778 9.9 ========== =========== If the Company accounted for its stock-based compensation using the fair value method prescribed by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the weighted-average grant-date fair value per option granted would be as follows:
Successor Predecessor --------------------------------------------- ----------------- Year Ended Year Ended 1 Month Ended 11 Months Ended March 31, March 31, March 31, February 29, 2006 2005 2004 2004 -------------- -------------- -------------- ----------------- 2003 Performance Stock Option Plan $ - $ - $ - $ 15.62 2004 Stock Option Plan 9.54 18.12 157.70 -
The weighted-average grant-date fair value per option for options granted in fiscal 2004 under the 2004 Stock Option Plan, as determined using a Black-Scholes option pricing model, is significantly higher than the weighted-average grant-date fair value per option for options granted in other periods due to the stock price of NBC Holdings Corp.'s capital stock, which is not publicly-traded, and was based upon the value assigned to such options in the March 4, 2004 Transaction. The fair value of options granted was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: 62 Successor Predecessor ---------------------------------------- --------------- Year Ended Year Ended 1 Month Ended 11 Months Ended March 31, March 31, March 31, February 29, 2006 2005 2004 2004 ----------- ------------ -------------- --------------- Risk-free interest rate 4.34% 3.05% 3.02% 2.87% Dividend yield - - - - Expected volatility 1.00% 1.00% 1.00% 1.00% Expected life (years) 4.0 4.0 5.0 4.0 2005 RESTRICTED STOCK PLAN - This plan provides for the issuance of shares of restricted stock for consideration as determined by NBC Holdings Corp.'s Board of Directors. Any shares issued under this plan are subject to restrictions on transferability and a right of NBC Holdings Corp. to reacquire the shares at less than their then fair market value under certain conditions. On March 31, 2006, 4,200 shares of NBC Holdings Corp. capital stock were issued for $0.01 per share to certain officers and directors of the Company (the "Officers") pursuant to a Restricted Stock Purchase Agreement (the "RSPA"). The Officers are party to the Stockholders Agreement, dated March 4, 2004, by and among NBC Holdings Corp. and the Stockholders of NBC Holdings Corp. named therein, the provisions of which restrict the transfer of such shares and provide for certain other rights as detailed therein. The shares granted to the Officers are also each subject to a Stock Repurchase Agreement (the "SRA") that, among other things, provides for vesting provisions, certain call rights on behalf of NBC Holdings Corp., and certain put rights on behalf of the applicable Officer. The vesting provisions in each SRA provide that if the Officer is still employed by NBC Holdings Corp., the shares granted vest on September 30, 2010 (the "Vesting Date"). If the Officer is not employed by NBC Holdings Corp. on that date the shares do not vest except under certain conditions related to termination of his employment without "cause" (as defined in the SRA) or due to his death or disability. If the Officer is terminated without cause prior to the Vesting Date, the shares vest based upon a formula determined by the number of days from March 31, 2006 to the date of termination as a percentage of the number of days from March 31, 2006 to the Vesting Date. If a termination without cause before the Vesting Date follows a Change of Control (as defined in the SRA), all of the Officer's shares become immediately vested. The call rights provide NBC Holdings Corp. the right to reacquire each Officer's unvested shares upon the occurrence of certain events, including events under its control, for an aggregate purchase price of $1.00. If the Officer remains employed by the Company until the Vesting Date or is terminated without cause prior to such date, NBC Holdings Corp. has the right but not the obligation to call the vested shares at fair market value (minus any dividends or distributions paid in respect of such shares) subject to certain adjustments and any restrictions or limitations in the Company's debt covenants and the Company's Credit Agreement. The put rights enable the Officer to require NBC Holdings Corp. to repurchase all vested shares following the Vesting Date at the lesser of fair market value or effectively $1.0 million for such Officer's 1,400 shares, subject to certain adjustments and any restrictions or limitations in the Company's debt covenants and the Company's Credit Agreement. The put rights expire 90 days after the Vesting Date. The SRA also provides that NBC Holdings Corp. will pay a cash bonus to the Officer related to any vested shares that are repurchased in connection with the put. This bonus is intended to reimburse the Officer for any federal, state and local taxes related to the repurchase and to this cash bonus itself. The bonus will not be paid if such payment is restricted or limited by the Company's debt covenants or the Company's Credit Agreement. In connection with the NBC Holdings Corp. 2005 Restricted Stock Plan, the Company also entered into a Restricted Stock Special Bonus Agreement (the "SBA") with each Officer. Each SBA provides for the payment of a cash bonus to the Officer within 30 days following the Vesting Date based upon certain criteria (the "Special Bonus"). If the Officer is still employed by the Company on that date, or has been terminated without "cause" (as defined in the SBA) following a Change of Control (as defined in the SBA) prior to that date, the amount is calculated as effectively $1.0 million less the fair market value of his restricted stock, subject to certain adjustments. If, prior to the Vesting Date, the Officer has been terminated without cause prior to a Change in Control, the amount of the Special Bonus is adjusted based on the number of days from March 31, 2006 to the date of termination as a percentage of the number of days from 63 March 31, 2006 to the Vesting Date, subject to certain adjustments. In either case, the Special Bonus will not be paid if such payment is restricted or limited by the Company's debt covenants or the Company's Credit Agreement. The SBA also provides that in the event of payment of the Special Bonus, the Company will pay an additional cash bonus to the Officer in an amount sufficient to reimburse the Officer for any federal, state and local taxes related to the Special Bonus and this additional bonus itself. Due to the put rights on behalf of the Officers, stock based compensation and estimated cash bonuses will be accrued from the date of issuance of the restricted stock until the Vesting Date and recorded as "other long-term liabilities" in the consolidated balance sheets. The combination of the NBC Holdings Corp. 2005 Restricted Stock Plan, the RSPA, the SRA and the SBA is intended to provide a minimum compensation benefit to the Officers assuming that they remain employed with NBC Holdings Corp. through September 30, 2010 - all subject to certain adjustments and conditions related to the Company's debt covenants and the Company's Credit Agreement - as described above. During fiscal 2006, the Company also accrued $0.5 million for bonuses intended to reimburse the Officers for the federal, state and local taxes related to the issuance of the 4,200 shares at $0.01 per share and this cash bonus. O. SEGMENT 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: Bookstore Division, Textbook Division, and Complementary Services Division. The Bookstore Division segment encompasses the operating activities of the Company's 139 college bookstores as of March 31, 2006 located on or adjacent to college campuses. The Textbook Division segment consists primarily of selling used textbooks to college bookstores, buying them back from students or college bookstores at the end of each college semester and then reselling them to college bookstores. The Complementary Services Division segment includes book-related services such as distance education materials, computer hardware and software, E-commerce technology, and a centralized buying service. The Company primarily accounts for intersegment sales as if the sales were to third parties (at current market prices). Certain assets, net interest expense and taxes (excluding taxes incurred by the Company's wholly-owned subsidiaries, NBC Textbooks LLC and Specialty Books, Inc.) are not allocated between the Company's segments; instead, such balances are accounted for in a corporate administrative division. 64 The following table provides selected information about profit or loss (excluding the impact of the Company's interdivisional administrative fee - see Note R, Condensed Consolidating Financial Information, to the Consolidated Financial Statements) and assets on a segment basis for the years ended March 31, 2006 and 2005, the one month ended March 31, 2004, and the eleven months ended February 29, 2004, respectively:
Complementary Bookstore Textbook Services Division Division Division Total ------------ ------------ -------------- ------------ Year ended March 31, 2006 (Successor): External customer revenues $290,690,410 $106,368,601 $ 23,048,888 $420,107,899 Intersegment revenues 1,419,670 26,187,339 3,632,976 31,239,985 Depreciation and amortization expense 4,549,556 6,059,222 2,629,303 13,238,081 Earnings before interest, taxes, depreciation, and amortization (EBITDA) 36,056,380 31,938,743 1,220,529 69,215,652 Total assets 102,688,796 151,703,016 22,991,336 277,383,148 Year ended March 31, 2005 (Successor): External customer revenues $262,282,432 $109,084,564 $ 30,787,344 $402,154,340 Intersegment revenues 1,385,319 24,853,911 2,980,096 29,219,326 Depreciation and amortization expense 4,115,988 5,813,681 2,746,146 12,675,815 Earnings before interest, taxes, depreciation, and amortization (EBITDA) 34,607,848 32,181,393 1,805,367 68,594,608 Total assets 86,754,851 155,867,124 26,120,562 268,742,537 One month ended March 31, 2004 (Successor): External customer revenues $ 5,309,747 $ 3,883,675 $ 4,123,972 $ 13,317,394 Intersegment revenues 9,242 600,590 319,806 929,638 Depreciation and amortization expense 251,599 476,935 229,803 958,337 Earnings before interest, taxes, depreciation, and amortization (EBITDA) (2,471,525) (85,994) 251,371 (2,306,148) Total assets 60,791,084 158,221,680 31,742,840 250,755,604 Eleven months ended February 29, 2004 (Predecessor): External customer revenues $233,170,224 $104,533,832 $ 47,659,618 $385,363,674 Intersegment revenues 1,158,230 21,212,168 2,094,696 24,465,094 Depreciation and amortization expense 2,289,830 577,899 1,343,615 4,211,344 Earnings before interest, taxes, depreciation, and amortization (EBITDA) 33,190,998 33,544,806 2,624,520 69,360,324
65 The following table reconciles segment information presented above with consolidated information as presented in the Company's consolidated financial statements for the years ended March 31, 2006 and 2005, the one month ended March 31, 2004, and the eleven months ended February 29, 2004, respectively:
Successor Predecessor --------------------------------------------- -------------- Year Ended Year Ended 1 Month Ended 11 Months Ended March 31, March 31, March 31, February 29, 2006 2005 2004 2004 --------------- -------------- -------------- -------------- Revenues: Total for reportable segments $ 451,347,884 $ 431,373,666 $ 14,247,032 $ 409,828,768 Elimination of intersegment revenues (31,239,985) (29,219,326) (929,638) (24,465,094) --------------- -------------- -------------- -------------- Consolidated total $ 420,107,899 $ 402,154,340 $ 13,317,394 $ 385,363,674 =============== ============== ============== ============== Depreciation and Amortization Expense: Total for reportable segments $ 13,238,081 $ 12,675,815 $ 958,337 $ 4,211,344 Corporate administration 437,048 490,528 40,164 347,082 --------------- -------------- -------------- -------------- Consolidated total $ 13,675,129 $ 13,166,343 $ 998,501 $ 4,558,426 =============== ============== ============== ============== Income (Loss) Before Income Taxes: Total EBITDA for reportable segments $ 69,215,652 $ 68,594,608 $ (2,306,148) $ 69,360,324 Corporate administrative costs (8,012,619) (7,591,429) (685,336) (14,874,542) --------------- -------------- -------------- -------------- 61,203,033 61,003,179 (2,991,484) 54,485,782 Depreciation and amortization (13,675,129) (13,166,343) (998,501) (4,558,426) --------------- -------------- -------------- -------------- Consolidated income (loss) from operations 47,527,904 47,836,836 (3,989,985) 49,927,356 Interest and other expense, net (27,595,306) (25,214,694) (2,129,264) (22,043,319) --------------- -------------- -------------- -------------- Consolidated income (loss) before income taxes $ 19,932,598 $ 22,622,142 $ (6,119,249) $ 27,884,037 =============== ============== ============== ============== Year Ended March 31, 2006 2005 2004 --------------- -------------- -------------- Total Assets: Total for reportable segments $ 277,383,148 $ 268,742,537 $ 250,755,604 Assets not allocated to segments: Cash and cash equivalents 26,806,386 25,529,299 28,468,747 Restricted cash - - 27,065,000 Receivables 13,868,221 10,133,799 9,497,966 Recoverable income taxes 1,438,819 - 5,351,480 Deferred income taxes 1,102,002 1,013,182 2,796,015 Prepaid expenses and other assets 1,559,788 585,409 868,401 Property and equipment, net 11,664,269 11,394,329 10,669,788 Goodwill 269,061,875 269,061,875 269,061,875 Debt issue costs, net 7,697,227 8,968,851 10,001,172 Identifiable intangibles, net 31,320,000 31,320,000 31,320,000 Other assets 3,444,595 490,001 408,742 --------------- -------------- -------------- Consolidated total $ 645,346,330 $ 627,239,282 $ 646,264,790 =============== ============== ==============
EBITDA is defined as earnings before interest, taxes, depreciation, and amortization. As the Company is highly-leveraged and as the Company's equity is not publicly-traded, management believes that a non-GAAP financial measure, EBITDA, is useful in measuring its liquidity and provides additional information for determining its ability to meet debt service requirements. The Senior Subordinated Notes and Senior Credit Facility also utilize EBITDA, as defined in those agreements, for certain financial covenants. EBITDA does not represent and should not be considered as an alternative to net cash flows from operating activities as determined by GAAP, and EBITDA does not necessarily indicate whether cash flows will be sufficient for cash requirements. Items excluded from EBITDA, such as interest, taxes, depreciation and amortization, are significant components in understanding and assessing the Company's financial performance. EBITDA measures presented may not be comparable to similarly titled measures presented by other registrants. 66 The following presentation reconciles EBITDA with net cash flows from operating activities as presented in the Consolidated Statements of Cash Flows:
Successor Predecessor ----------------------------------------------- --------------- Year Ended Year Ended 1 Month Ended 11 Months Ended March 31, March 31, March 31, February 29, 2006 2005 2004 2004 --------------- --------------- --------------- --------------- EBITDA $ 61,203,033 $ 61,003,179 $ (2,991,484) $ 54,485,782 Adjustments to reconcile EBITDA to net cash flows from operating activities: Interest income 1,274,836 638,935 97,587 307,680 Provision for losses on receivables 231,497 315,958 218,205 66,393 Cash paid for interest (27,874,705) (25,796,444) (4,173,547) (11,955,528) Cash paid for income taxes (9,589,439) (4,946,343) (9,991) (6,466,526) Loss on disposal of assets 90,263 68,065 13,582 408,095 Changes in operating assets and liabilities, net of effect of acquisitions/disposals (1) (2,914,479) (14,601,160) (918,756) 10,066,803 --------------- --------------- --------------- --------------- Net Cash Flows from Operating Activities $ 22,421,006 $ 16,682,190 $ (7,764,404) $ 46,912,699 =============== =============== =============== =============== Net Cash Flows from Investing Activities $(17,969,948) $ (747,555) $(29,656,297) $ (6,451,658) =============== =============== =============== =============== Net Cash Flows from Financing Activities $ (2,292,679) $(17,986,473) $ (8,965,404) $ (204,137) =============== =============== =============== ===============
(1) Changes in operating assets and liabilities, net of effect of acquisitions/disposals includes the changes in the balances of receivables, inventories, prepaid expenses and other current assets, other assets, accounts payable, accrued employee compensation and benefits, accrued incentives, accrued expenses, deferred revenue, and other long-term liabilities. 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. P. RELATED PARTY TRANSACTIONS In fiscal 2001, the Company entered into several agreements (including an equity option agreement, a management services agreement, and a technology sale and license agreement) with a newly created entity, TheCampusHub.com, Inc., which was partially owned by NBC's then-majority owner. TheCampusHub.com, Inc. was created to provide college bookstores with a way to sell in-store inventory and virtual brand name merchandise over the Internet utilizing technology originally developed by the Company. The management services agreement reimbursed the Company for certain direct costs incurred on behalf of TheCampusHub.com, Inc., as well as $0.3 million per year for certain shared management and administrative support. Complementary Services Division revenue resulting from the management services agreement was recognized as the services were performed. For the eleven months ended February 29, 2004, revenues attributable to the management services agreement totaled $0.1 million and reimbursable direct costs incurred on behalf of TheCampusHub.com, Inc. totaled $0.1 million. Such agreements terminated effective July 1, 2003. On July 1, 2003, the Company acquired all of the outstanding shares of common stock of TheCampusHub.com, Inc. CampusHub is no longer separately incorporated and is instead accounted for as a division within the Company's Complementary Services Division segment. Each share of TheCampusHub.com, Inc. common stock issued and outstanding was converted into shares of NBC Acquisition Corp. common stock, resulting in the issuance of 39,905 shares of NBC Acquisition Corp. common stock. TheCampusHub.com, Inc. had 1,300,099 shares of issued and outstanding common stock at the time of acquisition, of which 650,000 shares were owned by NBC's then-majority owner, 650,000 shares were owned by an unrelated third party, and 99 shares were owned by three of the Company's employees. This business combination was accounted for by the Company in accordance with Statement of Financial Accounting Standards No. 141, BUSINESS COMBINATIONS. The total purchase price, net of cash acquired, of such acquisition was $10.0 million, of which $3.7 million was assigned to non-deductible goodwill. 67 In accordance with the Company's debt covenants, in fiscal 2005, the Company declared and paid $0.1 million in dividends to NBC for costs associated with the March 4, 2004 Transaction. In fiscal 2004, the Company declared and paid $8.2 million in dividends to NBC for interest due and payable on the senior discount debentures; declared and paid $32.8 million in dividends to NBC for the purchase of treasury stock associated with the December 10, 2003 debt refinancing; and declared and paid dividends to NBC totaling $184.3 million related to the March 4, 2004 Transaction. Q. SUBSEQUENT EVENTS On May 1, 2006, the Company acquired over 100 college bookstore locations, most of which are contract-managed, through the acquisition of all of the outstanding stock of CBA for approximately $21.3 million in cash and the repayment at closing of all of CBA's outstanding debt, which totaled approximately $15.2 million. CBA is incorporated under the laws of the State of Illinois and will be accounted for as a wholly-owned subsidiary of the Company. CBA began providing contract-management services to small to medium-sized colleges and universities nationwide in 1984, and prior to the acquisition had and now continues to maintain one of the longest tenured management teams in the college bookstore industry. In addition to the acquired revenue and EBITDA, the Company believes this acquisition will enhance its competitive position for future contract-management opportunities. Certain amendments were made to the Credit Agreement underlying the Senior Credit Facility to allow for this acquisition, including adding an additional $24.0 million of borrowings under the Term Loan, increasing the Revolving Credit Facility by $15.0 million, and amending certain restrictions and financial covenants. CBA has unconditionally guaranteed, on a joint and several basis, full and prompt payment and performance of the Company's obligations, liabilities, and indebtedness arising under, out of, or in connection with the Senior Subordinated Notes and is also a party to the Guarantee and Collateral Agreement related to the Senior Credit Facility. The additional Term Loan borrowings, along with an estimated $4.0 million of the Company's available cash, financed the purchase of all of CBA's outstanding stock and the repayment of all of CBA's outstanding long-term bank indebtedness at closing and will also provide funding for the payment of transaction costs and other liabilities associated with the acquisition. The increase in the Revolving Credit Facility provided the funding necessary to meet the working capital requirements of the acquired bookstores. Scheduled principal payments for such additional borrowings total approximately $0.2 million in fiscal years 2007-2010 and $23.1 million in fiscal 2011. In connection with the changes made to the Senior Credit Facility and in accordance with Emerging Issues Task Force Issue No. 96-19, "Debtor's Accounting for a Modification or Exchange of Debt Instruments," the Company expects to write off approximately $3.3 million in debt issue costs associated with that facility in place prior to modification. R. CONDENSED CONSOLIDATING FINANCIAL INFORMATION Effective July 1, 2002, the Company's distance learning division was separately incorporated under the laws of the State of Delaware as Specialty Books, Inc., a wholly-owned subsidiary of the Company. Effective January 1, 2005, the Company's textbook division was separately incorporated under the laws of the State of Delaware as NBC Textbooks LLC, a wholly-owned subsidiary of the Company. In connection with their incorporation, Specialty Books, Inc. and NBC Textbooks LLC have unconditionally guaranteed, on a joint and several basis, full and prompt payment and performance of the Company's obligations, liabilities, and indebtedness arising under, out of, or in connection with the Senior Subordinated Notes. Specialty Books, Inc. and NBC Textbooks LLC are also a party to the Guarantee and Collateral Agreement related to the Senior Credit Facility. Condensed consolidating balance sheets, statements of operations, and statements of cash flows are presented on the following pages which reflect financial information for the parent company (Nebraska Book Company, Inc.), subsidiary guarantors (Specialty Books, Inc. and NBC Textbooks LLC), consolidating eliminations, and consolidated totals. Activity in the textbook division prior to incorporation on January 1, 2005 has been separately "carved out" and presented in the subsidiary guarantor column. Beginning January 1, 2005, an administrative fee is now assessed to the Company's operating divisions, including Specialty Books, Inc. and NBC Textbooks LLC, for administrative costs incurred on behalf of the operating divisions by the corporate administrative divisions. There were no such fee assessments between April 1, 2003 and December 31, 2004. 68 NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET MARCH 31, 2006 -------------------------------------------------------------------------------------------------------- Nebraska Book Subsidiary Consolidated Company, Inc. Guarantors Eliminations Totals ------------- -------------- -------------- -------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 29,955,367 $ 3,427,355 $ - $ 33,382,722 Receivables 53,512,094 17,338,425 (33,089,733) 37,760,786 Inventories 44,500,121 30,378,321 - 74,878,442 Recoverable income taxes 1,438,819 - - 1,438,819 Deferred income taxes 1,102,002 4,081,000 - 5,183,002 Prepaid expenses and other assets 1,559,788 74,695 - 1,634,483 -------------- -------------- -------------- ------------- Total current assets 132,068,191 55,299,796 (33,089,733) 154,278,254 PROPERTY AND EQUIPMENT, net 35,394,913 4,568,000 - 39,962,913 GOODWILL 293,049,842 - - 293,049,842 IDENTIFIABLE INTANGIBLES, NET 47,979,113 97,313,515 - 145,292,628 OTHER ASSETS 89,722,781 23,210 (76,983,298) 12,762,693 -------------- -------------- -------------- ------------- $ 598,214,840 $ 157,204,521 $(110,073,031) $645,346,330 ============== ============== ============== ============= LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable $ 19,810,267 $ 33,089,733 $ (33,089,733) $ 19,810,267 Accrued employee compensation and benefits 8,591,317 1,423,354 - 10,014,671 Accrued interest 628,906 - - 628,906 Accrued incentives 71,891 7,487,605 - 7,559,496 Accrued expenses 971,669 24,531 - 996,200 Deferred revenue 714,423 - - 714,423 Current maturities of long-term debt 3,206,582 - - 3,206,582 Current maturities of capital lease obligations 281,604 - - 281,604 -------------- -------------- -------------- ------------- Total current liabilities 34,276,659 42,025,223 (33,089,733) 43,212,149 LONG-TERM DEBT, net of current maturities 348,596,275 - - 348,596,275 CAPITAL LEASE OBLIGATIONS, net of current maturities 2,224,684 - - 2,224,684 OTHER LONG-TERM LIABILITIES 1,528,533 - - 1,528,533 DEFERRED INCOME TAXES 22,070,727 38,196,000 - 60,266,727 DUE TO PARENT 16,649,682 - - 16,649,682 COMMITMENTS STOCKHOLDER'S EQUITY 172,868,280 76,983,298 (76,983,298) 172,868,280 -------------- -------------- -------------- ------------- $ 598,214,840 $ 157,204,521 $(110,073,031) $645,346,330 ============== ============== ============== =============
69 NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET MARCH 31, 2005 -------------------------------------------------------------------------------------------------------------- Nebraska Book Subsidiary Consolidated Company, Inc. Guarantors Eliminations Totals ----------------------------- --------------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 28,762,182 $ 2,462,161 $ - $ 31,224,343 Receivables 65,549,416 14,990,509 (49,586,792) 30,953,133 Inventories 40,679,066 31,880,896 - 72,559,962 Deferred income taxes 1,013,182 4,523,000 - 5,536,182 Prepaid expenses and other assets 585,409 1,572 - 586,981 -------------- -------------- --------------- ------------- Total current assets 136,589,255 53,858,138 (49,586,792) 140,860,601 PROPERTY AND EQUIPMENT, net 32,822,702 4,689,685 - 37,512,387 GOODWILL 284,898,526 - - 284,898,526 IDENTIFIABLE INTANGIBLES, NET 49,905,694 102,744,967 - 152,650,661 OTHER ASSETS 74,928,225 21,077 (63,632,195) 11,317,107 -------------- -------------- --------------- ------------- $ 579,144,402 $ 161,313,867 $ (113,218,987) $627,239,282 ============== ============== =============== ============= LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable $ 15,724,221 $ 49,586,792 $ (49,586,792) $ 15,724,221 Accrued employee compensation and benefits 7,091,507 843,310 - 7,934,817 Accrued interest 628,906 - - 628,906 Accrued incentives 93,320 7,667,976 - 7,761,296 Accrued expenses 1,114,430 31,958 - 1,146,388 Income taxes payable 544,578 - - 544,578 Deferred revenue 1,042,660 - - 1,042,660 Current maturities of long-term debt 1,832,144 - - 1,832,144 Current maturities of capital lease obligations 237,955 - - 237,955 -------------- -------------- --------------- ------------- Total current liabilities 28,309,721 58,130,036 (49,586,792) 36,852,965 LONG-TERM DEBT, net of current maturities 351,802,856 - - 351,802,856 CAPITAL LEASE OBLIGATIONS, net of current maturities 2,529,253 - - 2,529,253 OTHER LONG-TERM LIABILITIES 1,316,835 - - 1,316,835 DEFERRED INCOME TAXES 19,462,743 39,551,636 - 59,014,379 DUE TO PARENT 16,574,575 - - 16,574,575 COMMITMENTS STOCKHOLDER'S EQUITY 159,148,419 63,632,195 (63,632,195) 159,148,419 -------------- -------------- --------------- ------------- $ 579,144,402 $ 161,313,867 $ (113,218,987) $627,239,282 ============== ============== =============== =============
70 NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 2006 (SUCCESSOR) ----------------------------------------------------------------------------------------------------- Nebraska Book Subsidiary Consolidated Company, Inc. Guarantors Eliminations Totals ------------------------------ --------------- ------------ REVENUES, net of returns $ 302,622,642 $ 143,672,596 $ (26,187,339) $420,107,899 COSTS OF SALES (exclusive of depreciation shown below) 190,955,283 88,281,774 (28,323,008) 250,914,049 --------------- -------------- --------------- ------------- Gross profit 111,667,359 55,390,822 2,135,669 169,193,850 OPERATING EXPENSES (INCOME): Selling, general and administrative 82,044,955 23,810,193 2,135,669 107,990,817 Depreciation 4,123,221 789,510 - 4,912,731 Amortization 3,330,946 5,431,452 - 8,762,398 Intercompany administrative fee (3,697,200) 3,697,200 - - Equity in earnings of subsidiary (13,351,103) - 13,351,103 - --------------- -------------- --------------- ------------- 72,450,819 33,728,355 15,486,772 121,665,946 --------------- -------------- --------------- ------------- INCOME FROM OPERATIONS 39,216,540 21,662,467 (13,351,103) 47,527,904 --------------- -------------- --------------- ------------- OTHER EXPENSES (INCOME): Interest expense 29,395,142 - - 29,395,142 Interest income (1,274,836) - - (1,274,836) Gain on derivative financial instruments (525,000) - - (525,000) --------------- -------------- --------------- ------------- 27,595,306 - - 27,595,306 --------------- -------------- --------------- ------------- INCOME BEFORE INCOME TAXES 11,621,234 21,662,467 (13,351,103) 19,932,598 INCOME TAX EXPENSE (BENEFIT) (620,259) 8,311,364 - 7,691,105 --------------- -------------- --------------- ------------- NET INCOME $ 12,241,493 $ 13,351,103 $ (13,351,103) $ 12,241,493 =============== ============== =============== =============
71 NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 2005 (SUCCESSOR) ---------------------------------------------------------------------------------------------------- Nebraska Book Subsidiary Consolidated Company, Inc. Guarantors Eliminations Totals --------------- --------------- -------------- ------------- REVENUES, net of returns $273,459,283 $ 153,548,968 $ (24,853,911) $402,154,340 COSTS OF SALES (exclusive of depreciation shown below) 171,662,429 95,786,052 (26,810,348) 240,638,133 --------------- --------------- -------------- ------------- Gross profit 101,796,854 57,762,916 1,956,437 161,516,207 OPERATING EXPENSES (INCOME): Selling, general and administrative 73,377,545 25,179,046 1,956,437 100,513,028 Depreciation 4,362,114 545,729 - 4,907,843 Amortization 2,827,048 5,431,452 - 8,258,500 Intercompany administrative fee (969,900) 969,900 - - Equity in earnings of subsidiary (15,266,457) - 15,266,457 - --------------- --------------- -------------- ------------- 64,330,350 32,126,127 17,222,894 113,679,371 --------------- --------------- -------------- ------------- INCOME FROM OPERATIONS 37,466,504 25,636,789 (15,266,457) 47,836,836 --------------- --------------- -------------- ------------- OTHER EXPENSES (INCOME): Interest expense 25,853,629 - - 25,853,629 Interest income (638,935) - - (638,935) --------------- --------------- -------------- ------------- 25,214,694 - - 25,214,694 --------------- --------------- -------------- ------------- INCOME BEFORE INCOME TAXES 12,251,810 25,636,789 (15,266,457) 22,622,142 INCOME TAX EXPENSE (BENEFIT) (1,208,214) 10,370,332 - 9,162,118 --------------- --------------- -------------- ------------- NET INCOME $ 13,460,024 $ 15,266,457 $ (15,266,457) $ 13,460,024 =============== =============== ============== =============
72 NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE ONE MONTH ENDED MARCH 31, 2004 (SUCCESSOR) --------------------------------------------------------------------------------------------------- Nebraska Book Subsidiary Consolidated Company, Inc. Guarantors Eliminations Totals --------------- --------------- -------------- ------------- REVENUES, net of returns $ 6,480,661 $7,437,323 $(600,590) $ 13,317,394 COSTS OF SALES (exclusive of depreciation shown below) 3,749,278 4,812,278 (792,940) 7,768,616 --------------- --------------- -------------- ------------- Gross profit 2,731,383 2,625,045 192,350 5,548,778 OPERATING EXPENSES (INCOME): Selling, general and administrative 5,822,395 2,525,517 192,350 8,540,262 Depreciation 310,911 38,590 - 349,501 Amortization 196,419 452,581 - 649,000 Equity in loss of subsidiary 242,170 - (242,170) - --------------- --------------- -------------- ------------- 6,571,895 3,016,688 (49,820) 9,538,763 --------------- --------------- -------------- ------------- LOSS FROM OPERATIONS (3,840,512) (391,643) 242,170 (3,989,985) --------------- --------------- -------------- ------------- OTHER EXPENSES (INCOME): Interest expense 2,226,851 - - 2,226,851 Interest income (97,587) - - (97,587) --------------- --------------- -------------- ------------- 2,129,264 - - 2,129,264 --------------- --------------- -------------- ------------- LOSS BEFORE INCOME TAXES (5,969,776) (391,643) 242,170 (6,119,249) INCOME TAX BENEFIT (2,250,489) (149,473) - (2,399,962) --------------- --------------- -------------- ------------- NET LOSS $ (3,719,287) $ (242,170) $ 242,170 $ (3,719,287) =============== =============== ============== =============
73 NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE ELEVEN MONTHS ENDED FEBRUARY 29, 2004 (PREDECESSOR) ------------------------------------------------------------------------------------------------------- Nebraska Book Subsidiary Consolidated Company, Inc. Guarantors Eliminations Totals ------------------------------ -------------- ------------- REVENUES, net of returns $245,003,238 $ 161,572,604 $ (21,212,168) $385,363,674 COSTS OF SALES (exclusive of depreciation shown below) 154,151,862 100,350,899 (22,628,653) 231,874,108 --------------- -------------- -------------- ------------- Gross profit 90,851,376 61,221,705 1,416,485 153,489,566 OPERATING EXPENSES (INCOME): Selling, general and administrative 62,626,597 27,696,762 1,416,485 91,739,844 Depreciation 2,734,371 661,735 - 3,396,106 Amortization 1,162,320 - - 1,162,320 Stock-based compensation 7,263,940 - - 7,263,940 Equity in earnings of subsidiary (19,614,545) - 19,614,545 - --------------- -------------- -------------- ------------- 54,172,683 28,358,497 21,031,030 103,562,210 --------------- -------------- -------------- ------------- INCOME FROM OPERATIONS 36,678,693 32,863,208 (19,614,545) 49,927,356 --------------- -------------- -------------- ------------- OTHER EXPENSES (INCOME): Interest expense 22,408,295 - - 22,408,295 Interest income (307,680) - - (307,680) Gain on derivative financial instruments (57,296) - - (57,296) --------------- -------------- -------------- ------------- 22,043,319 - - 22,043,319 --------------- -------------- -------------- ------------- INCOME BEFORE INCOME TAXES 14,635,374 32,863,208 (19,614,545) 27,884,037 INCOME TAX EXPENSE (BENEFIT) (2,299,494) 13,248,663 - 10,949,169 --------------- -------------- -------------- ------------- NET INCOME $ 16,934,868 $ 19,614,545 $ (19,614,545) $ 16,934,868 =============== ============== ============== =============
74 NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED MARCH 31, 2006 (SUCCESSOR) ----------------------------------------------------------------------------------------------------------- Nebraska Book Subsidiary Consolidated Company, Inc. Guarantors Eliminations Totals --------------- -------------- -------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES $ 20,787,108 $ 1,633,898 $ - $ 22,421,006 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (6,642,990) (668,704) - (7,311,694) Acquisitions, net of cash acquired (10,696,283) - - (10,696,283) Proceeds from sale of property and equipment and other 38,029 - - 38,029 --------------- -------------- -------------- ------------- Net cash flows from investing activities (17,301,244) (668,704) - (17,969,948) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of financing costs (248,813) - - (248,813) Principal payments on long-term debt (1,832,143) - - (1,832,143) Principal payments on capital lease obligations (260,920) - - (260,920) Capital contributions 49,197 - - 49,197 --------------- -------------- -------------- ------------- Net cash flows from financing activities (2,292,679) - - (2,292,679) --------------- -------------- -------------- ------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 1,193,185 965,194 - 2,158,379 CASH AND CASH EQUIVALENTS, Beginning of period 28,762,182 2,462,161 - 31,224,343 --------------- -------------- -------------- ------------- CASH AND CASH EQUIVALENTS, End of period $ 29,955,367 $ 3,427,355 $ - $ 33,382,722 =============== ============== ============== =============
75 NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED MARCH 31, 2005 (SUCCESSOR) ------------------------------------------------------------------------------------------------------------------- Nebraska Book Subsidiary Consolidated Company, Inc. Guarantors Eliminations Totals --------------- -------------- -------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES $ 14,436,611 $ 2,245,579 $ - $ 16,682,190 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (5,463,733) (2,201,942) - (7,665,675) Acquisitions, net of cash acquired (20,160,079) - - (20,160,079) Decrease in restricted cash 27,065,000 - - 27,065,000 Proceeds from sale of property and equipment and other 10,469 2,730 - 13,199 --------------- -------------- -------------- ------------- Net cash flows from investing activities 1,451,657 (2,199,212) - (747,555) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of financing costs (437,915) - - (437,915) Principal payments on long-term debt (17,238,880) - - (17,238,880) Principal payments on capital lease obligations (182,094) - - (182,094) Dividends paid to parent (132,466) - - (132,466) Capital contributions 4,882 - - 4,882 --------------- -------------- -------------- ------------- Net cash flows from financing activities (17,986,473) - - (17,986,473) --------------- -------------- -------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,098,205) 46,367 - (2,051,838) CASH AND CASH EQUIVALENTS, Beginning of period 30,860,387 2,415,794 - 33,276,181 --------------- -------------- -------------- ------------- $ 28,762,182 $ 2,462,161 $ - $ 31,224,343 CASH AND CASH EQUIVALENTS, End of period =============== ============== ============== =============
76 NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE ONE MONTH ENDED MARCH 31, 2004 (SUCCESSOR) ------------------------------------------------------------------------------------------------------------------ Nebraska Book Subsidiary Consolidated Company, Inc. Guarantors Eliminations Totals -------------- ---------------- -------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES $ (7,969,959) $ 205,555 $ - $ (7,764,404) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (697,825) (22,019) - (719,844) Acquisitions, net of cash acquired (1,848,798) - - (1,848,798) Increase in restricted cash (27,065,000) - - (27,065,000) Proceeds from sale of property and equipment and other 2,095 - - 2,095 Software development costs (24,750) - - (24,750) -------------- --------------- ------------- ------------- Net cash flows from investing activities (29,634,278) (22,019) - (29,656,297) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 355,000,000 - - 355,000,000 Payment of financing costs (10,118,865) - - (10,118,865) Principal payments on long-term debt (169,592,270) - - (169,592,270) Principal payments on capital lease obligations (10,395) - - (10,395) Dividends paid to parent (184,294,345) - - (184,294,345) Capital contributions 50,471 - - 50,471 -------------- --------------- ------------- ------------- Net cash flows from financing activities (8,965,404) - - (8,965,404) -------------- --------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (46,569,641) 183,536 - (46,386,105) CASH AND CASH EQUIVALENTS, Beginning of period 77,430,028 2,232,258 - 79,662,286 -------------- --------------- ------------- ------------- CASH AND CASH EQUIVALENTS, End of period $ 30,860,387 $ 2,415,794 $ - $ 33,276,181 ============== =============== ============= =============
77 NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE ELEVEN MONTHS ENDED FEBRUARY 29, 2004 (PREDECESSOR) ---------------------------------------------------------------------------------------------------------------------- Nebraska Book Subsidiary Consolidated Company, Inc. Guarantors Eliminations Totals -------------- --------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES $ 46,679,034 $ 233,665 $ - $ 46,912,699 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (3,276,264) (688,398) - (3,964,662) Acquisitions, net of cash acquired (2,355,486) - - (2,355,486) Proceeds from sale of property and equipment and other 8,297 1,379 - 9,676 Software development costs (141,186) - - (141,186) -------------- --------------- ------------- ------------- Net cash flows from investing activities (5,764,639) (687,019) - (6,451,658) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 75,000,000 - - 75,000,000 Payment of financing costs (3,830,335) - - (3,830,335) Principal payments on long-term debt (30,470,840) - - (30,470,840) Principal payments on capital lease obligations (122,287) - - (122,287) Dividends paid to parent (41,004,504) - - (41,004,504) Capital contributions 223,829 - - 223,829 -------------- --------------- ------------- ------------- Net cash flows from financing activities (204,137) - - (204,137) -------------- --------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 40,710,258 (453,354) - 40,256,904 CASH AND CASH EQUIVALENTS, Beginning of period 36,719,770 2,685,612 - 39,405,382 -------------- --------------- ------------- ------------- CASH AND CASH EQUIVALENTS, End of period $ 77,430,028 $ 2,232,258 $ - $ 79,662,286 ============== =============== ============= =============
78 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. ITEM 9A. CONTROLS AND PROCEDURES. (A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our management, with the participation of our chief executive officer and chief financial officer (our principal executive officer and principal financial officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2006. This evaluation was performed to determine if our disclosure controls and procedures were effective, in that they are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, including ensuring that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of March 31, 2006, our disclosure controls and procedures were effective. (B) CHANGES IN INTERNAL CONTROLS. There were no significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) which occurred during the year ended March 31, 2006 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION. Not applicable. 79 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The members of our Board of Directors and senior executive officers and their ages are as follows: NAME AGE POSITION ---- --- -------- Mark L. Bono 46 Director R. Sean Honey 35 Director Mark W. Oppegard 56 Chief Executive Officer, President and Director Barry S. Major 49 Chief Operating Officer and Director Alan G. Siemek 45 Chief Financial Officer, Senior Vice President of Finance and Administration, Treasurer, and Assistant Secretary Robert A. Rupe 58 Senior Vice President - College Bookstore Division Michael J. Kelly 48 Senior Vice President - Textbook Division Larry R. Rempe 58 Senior Vice President - Complementary Services The business experience, principal occupation and employment as well as the periods of service of each of our directors and senior executive officers during the last five years are set forth below. MARK L. BONO became a Director of ours and NBC upon the consummation of the Weston Presidio Transaction in fiscal 2003. Mr. Bono joined Weston Presidio in 1999 and is a member of the general partners of the Weston Funds. Prior to 1999, Mr. Bono served in various positions at Tucker Anthony, an investment banking firm, including Managing Director and Co-Head of Mergers and Acquisitions. Mr. Bono also serves as a Director of Trimark Sportswear Group, Herald Media, Rockwood, and Euro-Pro. R. SEAN HONEY was named a Director of ours and NBC upon the consummation of the March 4, 2004 Transaction. Mr. Honey joined Weston Presidio in 1999 and is a member of the general partners of the Weston Funds. Prior to 1999, Mr. Honey served in various positions at J.P. Morgan in both Mergers and Acquisitions and Merchant Banking. Mr. Honey also serves as a Director of Apple American Group, Schurman Fine Papers, and Purcell Systems. MARK W. OPPEGARD has served in the college bookstore industry for 36 years (all of which have been with us) and became our Chief Executive Officer and President/Chief Executive Officer, Secretary and a Director of NBC on February 13, 1998. Additionally, Mr. Oppegard has served as our President since 1992 and as our Director since 1995. Prior to 1998, Mr. Oppegard served as Vice President, Secretary, Assistant Treasurer and a Director of NBC between 1995 and 1998. Prior to 1992, Mr. Oppegard served in a series of positions with us, including Vice President of the Bookstore Division. BARRY S. MAJOR, who has served in the college bookstore industry for 7 years (all of which have been with us), was named our Chief Operating Officer in January, 1999, and upon consummation of the March 4, 2004 Transaction, was also named our Director and NBC's Director. Prior to joining us, Mr. Major served in various executive management positions at SITEL Corporation (SITEL), a company listed on the New York Stock Exchange that provides outsourced telephone and Internet-based sales and customer service. Joining SITEL in 1995 as the Executive Vice President of Finance, Mr. Major was named Chief Financial Officer in 1996 and assumed the role of President of the North America Region in 1997. Between 1985 and 1995, Mr. Major served in a series of positions, including President in 1995, Executive Vice President, and Senior Vice President/Credit Manager, with American National Corporation, a multi-bank holding company operating three banks throughout Omaha and Southeast Nebraska. ALAN G. SIEMEK, who has served in the college bookstore industry for 7 years (all of which have been with us), was named our Senior Vice President of Finance and Administration in April, 2001. Mr. Siemek has also served as our Chief Financial Officer, Treasurer and Assistant Secretary and Vice President and Treasurer of NBC since July, 1999. Prior to joining us, Mr. Siemek served as Corporate Controller at SITEL, starting in 1997. Between 1994 and 1997, Mr. Siemek served in the positions of Director and Manager of SEC Reporting and Risk Management for MFS Communications, a billion dollar telecommunications firm. Prior to joining MFS Communications, Mr. Siemek spent eleven years in public accounting with Coopers & Lybrand LLP in their Omaha and New York offices. 80 ROBERT A. RUPE, who has served in the college bookstore industry for 5 years (all of which have been with us), was named Senior Vice President of the College Bookstore Division in April, 2001. Prior to joining us and a one-year period in which he was self-employed as a management training consultant, Mr. Rupe served as Vice President of Operations of Busybody, Inc., a specialty retailer with over 100 retail locations, from 1995 to 2000. Mr. Rupe has 36 years of retail experience, including a variety of senior management positions at May Department Stores, Marshall Field and Company, Phillips Van-Huesen and International Paper. MICHAEL J. KELLY, who has served in the college bookstore industry for 6 years (all of which have been with us), was named Senior Vice President of the Textbook Division in April, 2005. Prior to April, 2005, Mr. Kelly served as Senior Vice President of Distance Learning/Marketing Services and Other Complementary Services from August, 2001 to March, 2005 and as Vice President of E-commerce from November, 1999 to July, 2001. Prior to joining us, Mr. Kelly served in various executive management positions at SITEL. Joining SITEL in 1995 as a Business Unit Vice President of Administration and Finance, Mr. Kelly was named a Business Unit President in 1997, assumed the role of Chief Information Officer for the North America Region in March, 1998, and was named Chief Technology Officer for Global Operations in August, 1998. Between 1981 and 1995, Mr. Kelly served as Director of Information Technology for Father Flanagan's Boys Home, a non-profit organization offering services to troubled children. LARRY R. REMPE has served in the college bookstore industry for 20 years (all of which have been with us) and was named Senior Vice President of Complementary Services in April, 2005. Prior to April, 2005, Mr. Rempe served as Vice President of Information Systems since 1986. Between 1974 and 1986, Mr. Rempe served in various positions for Lincoln Industries, Inc., a holding company that owned us until 1995. AUDIT COMMITTEE Our audit committee currently consists of Mark L. Bono and R. Sean Honey. Among other functions, our audit committee (a) makes recommendations to our board of directors regarding the selection of independent auditors; (b) reviews the results and scope of the audit and other services provided by our independent auditors; (c) reviews our financial statements; and (d) reviews and evaluates our internal control functions. The Board of Directors has determined that the audit committee does not have an "audit committee financial expert" as that term is defined by the applicable rules and regulations of the Securities and Exchange Commission. However, the Board of Directors is satisfied that the members of our audit committee have sufficient expertise and business and financial experience necessary to effectively perform their duties as the audit committee. CODE OF ETHICS We have adopted a written code of ethics for our principal executive officer and senior financial officers as required by the United States Securities and Exchange Commission, or SEC, under Section 406 of the Sarbanes-Oxley Act of 2002. The code sets forth written standards to deter wrongdoing and promote honest and ethical conduct, accurate and timely disclosure in reports and documents, compliance with applicable governmental laws and regulations, prompt internal reporting of violations of the code, and accountability for adherence to the code. ITEM 11. EXECUTIVE COMPENSATION. The following tables and paragraphs provide information concerning compensation paid by us for the last three fiscal years to our Chief Executive Officer and to the four other most highly compensated senior executive officers earning in excess of $100,000 in annual salary and bonuses; compensation paid to Directors; and employment contracts in place with executive officers. 81 The table presented below summarizes annual and long-term compensation, including stock compensation, to such persons for the last three fiscal years:
SUMMARY COMPENSATION TABLE Long-Term Compensation Annual Compensation Awards -------------------------------------- ------------------------- Number Other Restricted of Securities Fiscal Annual Stock Underlying All Other Name and Principal Position Year Salary Bonus Compensation (3) Awards (4) Options (1) Compensation (2) -------------------------------------- ------ --------- ----------- ---------------- ------------ ------------ ----------------- Mark W. Oppegard - Chief Executive Officer, President, and Director 2006 $ 295,007 $ - $ 160,000 $ 223,986 - $ 12,462 2005 293,778 45,000 - - 1,963 10,526 2004 288,389 147,000 - - 10,825 2,276 Barry S. Major - Chief Operating Officer and Director 2006 267,775 - 160,000 223,986 - 10,680 2005 263,533 43,000 - - 1,963 10,430 2004 257,383 140,000 - - 9,330 1,791,595 Alan G. Siemek - Chief Financial Officer, Senior Vice President of Finance and Administration, Treasurer, and Assistant Secretary 2006 197,773 - 160,000 223,986 - 10,680 2005 194,155 30,000 - - 1,885 10,370 2004 189,251 100,000 - - 7,478 1,004,192 Michael J. Kelly - Senior Vice President - Textbook Division 2006 190,784 - - - 3,580 10,680 2005 187,461 23,000 - - 1,600 10,430 2004 183,324 70,000 - - 4,661 871,276 Robert A. Rupe - Senior Vice President - College Bookstore Division 2006 174,445 30,000 - - 3,580 11,016 2005 158,619 40,000 - - 1,700 10,766 2004 148,618 111,000 - - 3,800 694,304
(1) In connection with the March 4, 2004 Transaction, all existing options at March 4, 2004 vested and were either converted into the right to receive cash payment (see footnote 2) or were cancelled in exchange for new options granted under the 2004 Stock Option Plan. Options granted in fiscal 2004 under the 2004 Stock Option Plan were fully vested, exercisable at prices consistent with the options which were cancelled, and represent the right to purchase shares of capital stock of NBC Holdings Corp. Options granted in fiscal 2004 prior to the March 4, 2004 Transaction were entirely cancelled in exchange for new options granted under the 2004 Stock Option Plan and thus, are reflected only once in the column. (2) All other compensation consists of the following components: (a) In fiscal 2004, as a result of the December 10, 2003 debt refinancing and the March 4, 2004 Transaction, option holders were given the opportunity to convert options into the right to receive cash payments. The cash payments represented the difference between the exercise price and the fair market value of the securities underlying such options and totaled $1,789,415, $1,002,072, $869,096 and $691,788 for Messrs. Major, Siemek, Kelly, and Rupe, respectively; (b) matching contributions to the NBC Retirement Plan; (c) life insurance premiums paid by us on the senior executive's behalf; and (d) for Mr. Oppegard, the dollar value, if any, of above-market amounts earned on deferred compensation. 82 (3) Represents bonuses intended to reimburse Messrs. Oppegard, Major, and Siemek for the federal, state and local taxes related to the March 31, 2006 issuance of restricted stock and this cash bonus. (4) Represents the dollar value on date of issuance (March 31, 2006) of 1,400 shares of restricted stock each to Messrs. Oppegard, Major, and Siemek, calculated based upon the estimated fair market value of NBC Holdings Corp.'s capital stock, which includes a discount for the holder's minority interest position and illiquidity of the capital stock, net of $14 paid by each of Messrs. Oppegard, Major, and Siemek for such shares of restricted stock. The estimated fair market value methodology was based upon the March 4, 2004 Transaction, though on a discounted basis. The shares and estimated value of aggregate restricted stock holdings at March 31, 2006 were 1,400 shares and $0.2 million for each of Messrs. Oppegard, Major, and Siemek. All of such shares of restricted stock are subject to Stock Repurchase Agreements that, among other things, provide for certain put rights on behalf of Messrs. Oppegard, Major, and Siemek. Subject to the terms of the Stock Repurchase Agreement, such put rights vest as further described in Note N to the consolidated financial statements presented in Item 8, "Financial Statements and Supplementary Data". The payment of dividends on the restricted stock is subject to various restrictions under our debt instruments. Presented below is information in tabular format regarding individual grants of stock options to senior executive officers named in the Summary Compensation Table for the year ended March 31, 2006:
OPTIONS GRANTED DURING THE YEAR ENDED MARCH 31, 2006 Individual Grants Grant Date Value ----------------------------------------------------------------------------------- --------------------- Number % of Total of Options Securities Granted to Grant Underlying Employees Exercise Date Options in Fiscal Price Expiration Present Name Granted 2006 Per Share Date (1) Value (2) ------------------------------------------- ------------ ------------- ----------- ----------- ---------- Mark W. Oppegard - Chief Executive Officer, President, and Director - - $ - - $ - Barry S. Major - Chief Operating Officer and Director - - - - - Alan G. Siemek - Chief Financial Officer, Senior Vice President of Finance and Administration, Treasurer, and Assistant Secretary - - - - - Michael J. Kelly - Senior Vice President - Textbook Division 2,400 17.1% 160.00 08/28/15 23,856 1,180 8.4% 160.00 03/29/16 10,372 Robert A. Rupe - Senior Vice President - College Bookstore Division 2,400 17.1% 160.00 08/28/15 23,856 1,180 8.4% 160.00 03/29/16 10,372
(1) Twenty-five percent of the options granted were exercisable immediately upon granting on August 29, 2005 and March 30, 2006, with the remaining options becoming exercisable in 25% increments over the subsequent three years. (2) Grant date present value was determined using a Black-Scholes option pricing model, assuming a 4.08% risk-free interest rate, 1.0% expected volatility, and an expected life of approximately 4.0 years for the options granted August 29, 2005 and assuming a 4.84% risk-free interest rate, 1.0% expected volatility, and an expected life of approximately 4.0 years for the options granted March 30, 2006. 83 The following table provides information concerning each exercise of stock options by senior executive officers named in the Summary Compensation Table during the year ended March 31, 2006 as well as the value of unexercised options as of March 31, 2006:
AGGREGATED OPTION EXERCISES DURING THE YEAR ENDED MARCH 31, 2006 AND OPTION VALUE AS OF MARCH 31, 2006 Number of Securities Value of Underlying Unexercised Unexercised in-the-Money Options at Options at March 31, 2006 March 31, 2006 (1) -------------- ------------------ Shares Acquired Value Exercisable/ Exercisable/ Name on Exercise Realized Unexercisable Unexercisable ------------------------------------ ------------ ---------- --------------- ----------------- Mark W. Oppegard - Chief Executive Officer, President, and Director - $ - 11,807 / 981 $622,362 / - Barry S. Major - Chief Operating Officer and Director - - 10,312 / 981 512,348 / - Alan G. Siemek - Chief Financial Officer, Senior Vice President of Finance and Administration, Treasurer, and Assistant Secretary - - 8,421 / 942 468,098 / - Michael J. Kelly - Senior Vice President - Textbook Division - - 6,356 / 3,485 235,813 / - Robert A. Rupe - Senior Vice President - College Bookstore Division - - 5,545 / 3,535 166,083 / -
(1) Represents the excess of the March 31, 2006 estimated fair market value of NBC Holdings Corp.'s capital stock underlying the stock options, which includes a discount for the holder's minority interest position and illiquidity of the capital stock, over the exercise price of such options. The estimated fair market value methodology was based upon the March 4, 2004 Transaction, though on a discounted basis. COMPENSATION OF DIRECTORS AND ADDITIONAL INFORMATION Our Directors receive no compensation for services but are reimbursed for out-of-pocket expenses. EMPLOYMENT AGREEMENTS We have employment agreements with Mark W. Oppegard and each of the senior executive officers named in the Summary Compensation Table. As amended, such agreements (the "Employment Agreements") with the aforementioned senior executive officers (each, an "Executive") provide for (1) an annual base salary as determined by the Board of Directors after considering the recommendation of the chief executive officer, (2) for incentive compensation based upon the attainment of financial objectives to be established by the Board of Directors (or a committee thereof) after considering the recommendation of the chief executive officer, and (3) for customary fringe benefits. The salaries of the senior executive officers listed above are as follows: Mr. Oppegard, $295,000 per annum; Mr. Major, $270,000 per annum; Mr. Siemek, $200,000 per annum; Mr. Kelly, $193,000 per annum; and Mr. Rupe, $180,000 per annum. The Employment Agreements provide that their term will be automatically extended from year to year, unless terminated upon specified notice by either party. The Employment Agreements also provide that each Executive will be granted a number of options annually under the stock option plans described in Note N to the consolidated financial statements presented in Item 8, "Financial Statements and Supplementary Data", the size of such grant to be determined by the Board of Directors. Each such option has an exercise price not to be less than the fair market value per share as of the date of grant and is exercisable as to 25% of the shares covered thereby on the date of grant and as to an additional 25% of the shares covered thereby on each of the first three anniversaries of the date of grant, subject to the Executive's continued employment with us on such dates. 84 The Employment Agreements also provide for specified payments to the Executive in the event of termination of employment with us without "cause" (as defined in the respective agreements) and also in the event of death or disability of the Executive during the term. The Employment Agreements also contain customary confidentiality obligations and three-year non-competition agreements for each Executive. Finally, the Employment Agreements provide that, prior to the consummation by NBC of an initial public offering of NBC common stock, the Executives will not sell, transfer, pledge or otherwise dispose of any shares of NBC common stock, except for certain transfers to immediate family members, in the event of disability and for estate planning purposes. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION We do not currently have a compensation committee. Mark W. Oppegard, Chief Executive Officer, President, and Director, participated in the Board of Directors' deliberations concerning executive officer compensation during the last fiscal year. 85 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - All shares of our common stock are owned by NBC; therefore, the following table sets forth information on security ownership of NBC common stock beneficially owned by each person who owns more than 5.0% of such shares; each director; each senior executive officer named in Item 11; and all of our directors and senior executive officers treated as a group. Shares of NBC common stock issued and outstanding totaled 554,094 on June 29, 2006. Weston Presidio owns 36,455 of the issued and outstanding shares directly, with the remaining 517,639 issued and outstanding shares being owned by NBC Holdings Corp, a company which has 517,639 shares of capital stock issued and outstanding that are owned either by Weston Presidio or current and former members of management. The securities underlying the 2004 Stock Option Plan, of which 75,749 options are outstanding as of June 29, 2006, are shares of NBC Holdings Corp. capital stock. The shares listed and percentages calculated thereon are based upon NBC common stock outstanding as of June 29, 2006 and NBC Holdings Corp. capital stock underlying nonqualified stock options that are exercisable within sixty days, pursuant to Rule 13d-3 of the Securities Exchange Act of 1934. To the knowledge of NBC, each of such holders of shares has sole voting and investment power as to the shares owned unless otherwise noted. The address for each senior executive officer and director is 4700 South 19th Street, Lincoln, Nebraska 68501 unless otherwise noted.
Amount and Nature of Beneficial Percent of Title of Class/Name of Beneficial Owner Ownership (1) Class (3) -------------------------------------------------------- -------------- ----------- Class A Common Stock: Owning Greater Than 5% of Shares: Weston Presidio Capital IV, L.P. (2) 365,449 66.0% Weston Presidio Capital III, L.P. (2) 153,623 27.7% WPC Entrepreneur Fund, L.P. (2) 7,579 1.4% WPC Entrepreneur Fund II, L.P. (2) 5,785 1.0% Ownership of Directors: Mark L. Bono (2) 532,436 96.1% R. Sean Honey (2) - - Ownership of Senior Executive Officers Named in Item 11: Mark W. Oppegard 17,207 3.0% Barry S. Major 13,459 2.4% Alan G. Siemek 9,821 1.7% Michael J. Kelly 6,356 1.1% Robert A. Rupe 5,545 1.0% Ownership of Directors and All Senior Executive Officers as a Group 591,025 98.4%
(1) Beneficial ownership is determined in accordance with the rules of the SEC and includes voting and investment power with respect to the shares of NBC common stock. Such shares include NBC Holdings Corp. shares underlying nonqualified stock options exercisable within sixty days, as follows: Mr. Oppegard - 11,807 shares; Mr. Major - 10,312 shares; Mr. Siemek - 8,421 shares; Mr. Kelly - 6,356 shares; Mr. Rupe - 5,545 shares; and 46,642 shares for all directors and senior executive officers as a group. (2) The sole general partner of Weston Presidio Capital IV, L.P., Weston Presidio Capital III, L.P., WPC Entrepreneur Fund, L.P., and WPC Entrepreneur Fund II, L.P. (the "Weston Presidio Funds") is a limited liability company of which Messrs. Bono and Honey are members. Messrs. Bono and Honey disclaim beneficial ownership of the shares held by the Weston Presidio Funds, except to the extent of their respective pecuniary interests therein. The address of the Weston Presidio Funds, and Messrs. Bono and Honey is 200 Clarendon Street, 50th Floor, Boston, Massachusetts 02116. (3) The percentages are calculated based upon 554,094 shares of NBC common stock outstanding as of June 29, 2006 and shares underlying nonqualified stock options exercisable within sixty days as detailed in footnote (1). 86 SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS - Through NBC's parent, NBC Holdings Corp., NBC has a stock-based compensation plan established to provide for the granting of options to purchase capital stock of NBC Holdings Corp. NBC also has a restricted stock plan established through NBC Holdings Corp. to provide for the sale of 4,200 shares of NBC Holdings Corp. capital stock to certain officers and directors of the Company. Details regarding these plans are presented in the footnotes to the consolidated financial statements found in Item 8, "Financial Statements and Supplementary Data." Specific information as of March 31, 2006 regarding the plans, which were not approved by security holders, is also presented in the following table. Number of Weighted- Number of Securities to Average Securities be Issued Upon Exercise Remaining Exercise of Price of Available for Outstanding Outstanding Future Plan Options Options Issuance ----------------------------- ---------------- --------------- -------------- 2004 Stock Option Plan 75,749 $ 111.83 4,917 2005 Restricted Stock Plan - - - ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. INDEBTEDNESS OF MANAGEMENT - As of March 31, 2006, NBC reported notes receivable from stockholders and associated interest receivable of approximately $0.1 million and $1,161, respectively. The remaining balances originated pursuant to the terms of an employment agreement with our Chief Operating Officer, Barry S. Major. In January, 1999, NBC issued 4,765 shares of its common stock to Mr. Major at a price of $52.47 per share, in exchange for $25,000 in cash and a promissory note in the principal amount of $225,000 bearing interest at 5.25% per year. The largest aggregate amount outstanding under this note at any time during the year ended March 31, 2006 was approximately $96,000. This note was amended and restated in July, 2002 and matures on January 19, 2009. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The following table sets forth the aggregate fees billed to us during fiscal years 2006 and 2005 by Deloitte & Touche LLP: Year Ended March 31, 2006 2005 ----------- ------------- Audit Fees $ 142,389 $ 128,904 Audit-Related Fees 41,240 69,813 Tax Fees 76,355 311,791 Other Fees - - ----------- ------------- Total $ 259,984 $ 510,508 =========== ============= AUDITS FEES include professional services rendered for the audit of our annual consolidated financial statements and for the reviews of the consolidated interim financial statements included in our Quarterly Reports on Form 10-Q. AUDIT-RELATED FEES consist of fees for assurance and related services that are related to the performance of the audit or review of our consolidated financial statements, including services provided in conjunction with a Securities and Exchange Commission comment letter dated March 7, 2005, as well as the audit of the 401(k) compensation plan. TAX FEES consist of fees for professional services for tax compliance, tax advice, and tax planning. These services include assistance regarding federal and state tax compliance, return preparation, tax audits, and planning for incorporation of NBC Textbooks LLC. The audit committee pre-approves all audit and non-audit services performed by our independent registered public accounting firm. 87 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (A) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND EXHIBITS. (1) Consolidated Financial Statements of Nebraska Book Company, Inc. Index to Consolidated Financial Statements. Report of Independent Registered Public Accounting Firm. Consolidated Balance Sheets as of March 31, 2006 and 2005. Consolidated Statements of Operations for the Years Ended March 31, 2006 and 2005 (Successor), the One Month Ended March 31, 2004 (Successor), and the Eleven Months Ended February 29, 2004 (Predecessor). Consolidated Statements of Stockholder's Equity (Deficit) for the Years Ended March 31, 2006 and 2005 (Successor), the One Month Ended March 31, 2004 (Successor), and the Eleven Months Ended February 29, 2004 (Predecessor). Consolidated Statements of Cash Flows for the Years Ended March 31, 2006 and 2005 (Successor), the One Month Ended March 31, 2004 (Successor), and the Eleven Months Ended February 29, 2004 (Predecessor). Notes to Consolidated Financial Statements. (2) Financial Statement Schedules. Report of Independent Registered Public Accounting Firm on Schedule. Schedule II - Valuation and Qualifying Accounts. (3) Exhibits. 2.1 Agreement for Purchase and Sale of Stock, dated as of May 26, 1999 by and among Nebraska Book Company, Inc., Dennis Rother, and Larry Rother, filed as Exhibit 2.1 to Nebraska Book Company, Inc. Form 8-K, as amended, dated June 4, 1999, is incorporated herein by reference. 2.2 Agreement of Sale, dated as of September 30, 1999 by and among Nebraska Book Company, Inc., Michigan College Book Company, Inc., Ned's Berkeley Book Company, Inc., Ned Shure, Fred Shure, and Jack Barenfanger filed as Exhibit 2.1 to Nebraska Book Company, Inc. Form 8-K, as amended, dated November 12, 1999, is incorporated herein by reference. 2.3 Agreement of Sale, as amended, dated as of May 11, 2001 between Nebraska Book Company, Inc. and University Co-operative Society, filed as Exhibit 2.1 to Nebraska Book Company, Inc. Form 8-K dated May 11, 2001, is incorporated herein by reference. 2.4 Agreement and Plan of Merger, dated as of July 1, 2003, by and among TheCampusHub.com, Inc., Nebraska Book Company, Inc. and NBC Acquisition Corp., filed as Exhibit 2.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. 2.5 Share Purchase Agreement, dated as of April 2, 2006, by and among Nebraska Book, CBA and the Sellers referenced therein, filed as Exhibit 2.1 to Nebraska Book Company, Inc. Current Report on Form 8-K dated April 6, 2006, is incorporated herein by reference. 2.6 Second Amendment to Share Purchase Agreement, dated as of April 30, 2006, by and among Nebraska Book, CBA and the Sellers referenced therein, filed as Exhibit 2.1 to Nebraska Book Company, Inc. Current Report on Form 8-K dated May 4, 2006, is incorporated herein by reference. 88 3.1 Certificate of Incorporation, as amended, of Nebraska Book Company, Inc., filed as Exhibit 3.1 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 3.2 First Restated By-laws of Nebraska Book Company, Inc., filed as Exhibit 3.2 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended September 30, 2003, is incorporated herein by reference. 4.1 Indenture, dated as of February 13, 1998 by and between Nebraska Book Company, Inc. and United States Trust Company of New York, as Trustee, filed as Exhibit 4.1 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 4.2 Supplemental Indenture, dated as of July 1, 2002, by and among Specialty Books, Inc., Nebraska Book Company, Inc., and The Bank of New York, as Trustee, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended September 30, 2002, is incorporated herein by reference. 4.3 Second Supplemental Indenture, dated March 4, 2004, by and among Nebraska Book Company, Inc., the subsidiary guarantor named therein and The Bank of New York, as Trustee, filed as Exhibit 4.3 to Nebraska Book Company, Inc. Registration Statement on Form S-4 (File No. 333-114891), is incorporated herein by reference. 4.4 Supplemental Indenture, dated as of December 31, 2004, by and among NBC Textbooks LLC, Nebraska Book Company, Inc., each other then existing Subsidiary Guarantor under the Indenture, and the Trustee, filed as Exhibit 10.1 to Nebraska Book Company. Inc. Current Report on Form 8-K dated and filed on January 6, 2005, is incorporated herein by reference. 4.5 Supplemental Indenture, dated as of May 1, 2006, by and among CBA, Nebraska Book, each other then existing Subsidiary Guarantor under the Indenture, and the Trustee, filed as Exhibit 10.2 to Nebraska Book Company, Inc. Current Report on Form 8-K dated May 4, 2006, is incorporated herein by reference. 4.6 Form of Initial Note of Nebraska Book Company, Inc. (included in Exhibit 4.1 as Exhibit A), filed as Exhibit 4.3 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 4.7 Form of Exchange Note of Nebraska Book Company, Inc. (included in Exhibit 4.1 as Exhibit B), filed as Exhibit 4.4 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 4.8 Indenture, dated March 4, 2004, by and among Nebraska Book Company, Inc., the subsidiary guarantors parties thereto and BNY Midwest Trust Company as Trustee, filed as Exhibit 4.6 to Nebraska Book Company, Inc. Registration Statement on Form S-4 (File No. 333-114891), is incorporated herein by reference. 4.9 Form of 8 5/8% Senior Subordinated Note Due 2012 (included in Exhibit 4.6), filed as Exhibit 4.7 to Nebraska Book Company, Inc. Registration Statement on Form S-4 (File No. 333-114891), is incorporated herein by reference. 4.10 Form of Exchange Note of Nebraska Book Company, Inc. 8 5/8% Senior Subordinated Note Due 2012, filed as Exhibit 4.8 to Nebraska Book Company, Inc. Form 10-K for the year ended March 31, 2004, is incorporated herein by reference. 10.1 Credit Agreement dated as of February 13, 1998 by and among NBC Acquisition Corp., Nebraska Book Company, Inc., the Chase Manhattan Bank and certain other financial institutions, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.2 First Amendment, dated as of May 21, 1999, to the Credit Agreement, dated as of February 13, 1998 by and among NBC Acquisition Corp., Nebraska Book Company, Inc., the Chase Manhattan Bank, and certain other financial institutions, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 1999, is incorporated herein by reference. 89 10.3 Second Amendment and Waiver, dated as of April 27, 2000, to the Credit Agreement, dated as of February 13, 1998, by and among NBC Acquisition Corp., Nebraska Book Company, Inc., the Chase Manhattan Bank, and certain other financial institutions, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2000, is incorporated herein by reference. 10.4 Third Amendment, dated as of December 20, 2001, to the Credit Agreement, dated as of February 13, 1998, by and among NBC Acquisition Corp., Nebraska Book Company, Inc., J.P. Morgan Chase Bank, and certain other financial institutions, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended December 31, 2001, is incorporated herein by reference. 10.5 Fourth Amendment and Waiver, dated as of June 4, 2002, to and under the Credit Agreement, dated as of February 13, 1998, by and among NBC Acquisition Corp., Nebraska Book Company, Inc., JPMorgan Chase Bank, and certain other financial institutions, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2002, is incorporated herein by reference. 10.6 Fifth Amendment and Waiver, dated as of June 13, 2003, to and under the Credit Agreement, dated as of February 13, 1998, by and among NBC Acquisition Corp., Nebraska Book Company, Inc., JPMorgan Chase Bank, and certain other financial institutions, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. 10.7 Amended and Restated Credit Agreement, dated February 13, 1998, as amended and restated as of December 10, 2003, by and among NBC Acquisition Corp., Nebraska Book Company, Inc., and the other parties thereto, filed as Exhibit 99.1 to Nebraska Book Company, Inc. Current Report on Form 8-K dated December 10, 2003, is incorporated herein by reference. 10.8 Amended and Restated Credit Agreement, dated as of March 4, 2004, by and among NBC Holdings Corp., NBC Acquisition Corp., Nebraska Book Company, Inc., the Several Lenders parties thereto, JPMorgan Chase Bank as Administrative Agent and Collateral Agent, Citigroup Global Markets Inc. as Syndication Agent, and Fleet National Bank and Wells Fargo Bank N.A., as Co-Documentation Agents, filed as Exhibit 10.8 to Nebraska Book Company, Inc. Registration Statement on Form S-4 (File No. 333-114891), is incorporated herein by reference. 10.9 Second Amendment, dated as of October 20, 2004, to the Amended and Restated Credit Agreement, dated as of March 4, 2004, by and among NBC Holdings Corp., NBC Acquisition Corp., Nebraska Book Company, Inc., the Several Lenders parties thereto, JPMorgan Chase Bank as Administrative Agent and Collateral Agent, Citigroup Global Markets Inc. as Syndication Agent, and Fleet National Bank and Wells Fargo Bank N.A., as Co-Documentation Agents, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Current Report on Form 8-K dated and filed on October 26, 2004, is incorporated herein by reference. 10.10 Third Amendment, dated as of August 1, 2005, to the Amended and Restated Credit Agreement, dated as of March 4, 2004, by and among NBC Holdings Corp., NBC Acquisition Corp., Nebraska Book Company, Inc., the Several Lenders parties thereto, JPMorgan Chase Bank, N.A. as Administrative Agent and Collateral Agent, Citigroup Global Markets Inc. as Syndication Agent, and Bank of America, N.A. and Wells Fargo Bank N.A., as Co-Documentation Agents, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2005, is incorporated herein by reference. 10.11 Fourth Amendment, dated as of April 26, 2006, to the Amended and Restated Credit Agreement, dated as of March 4, 2004, and as amended by the First Amendment thereto, dated as of August 6, 2004, the Second Amendment thereto, dated as of October 20, 2004 and the Third Amendment thereto, dated as of August 1, 2005, among Nebraska Book, NBC Holdings Corp., NBC Acquisition Corp., the lenders party from time to time thereto, JPMorgan Chase Bank, N.A. (formerly known as JPMorgan Chase Bank),as administrative agent and collateral agent, Citigroup Global Markets Inc. as syndication agent, and Bank of America, N.A. (as successor by merger to Fleet National Bank) and Wells Fargo Bank N.A., as co-documentation agents, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Current Report on Form 8-K dated May 4, 2006, is incorporated herein by reference. 90 10.12 Assumption Agreement, dated as of July 1, 2002 between Specialty Books, Inc. and JPMorgan Chase Bank, as Administrative Agent, filed as Exhibit 10.2 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended September 30, 2002, is incorporated herein by reference. 10.13 Assumption Agreement, dated as of December 31, 2004, made by NBC Textbooks LLC, in favor of JPMorgan Chase Bank, N.A., as administrative agent for the banks and other financial institutions parties to the Credit Agreement, filed as Exhibit 10.2 to Nebraska Book Company, Inc. Current Report on Form 8-K dated and filed on January 6, 2005, is incorporated herein by reference. 10.14 Assumption Agreement, dated as of May 1, 2006, made by CBA, in favor of JPMorgan Chase Bank, N.A., as administrative agent for the banks and other financial institutions parties to the Credit Agreement, filed as Exhibit 10.3 to Nebraska Book Company, Inc. Current Report on Form 8-K dated May 4, 2006, is incorporated herein by reference. 10.15 Guarantee and Collateral Agreement, dated as of February 13, 1998 made by NBC Acquisition Corp. and Nebraska Book Company, Inc. in favor of the Chase Manhattan Bank, as administrative agent, filed as Exhibit 10.2 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.16 Amended and Restated Guarantee and Collateral Agreement, dated March 4, 2004, by and among NBC Holdings Corp., NBC Acquisition Corp., Nebraska Book Company, Inc. and Specialty Books, Inc. in favor of JPMorgan Chase Bank, as administrative agent, filed as Exhibit 10.11 to Nebraska Book Company, Inc. Registration Statement on Form S-4 (File No. 333-114891), is incorporated herein by reference. 10.17 Purchase Agreement dated February 10, 1998 by and between Nebraska Book Company, Inc. and Chase Securities Inc., filed as Exhibit 10.3 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.18 Purchase Agreement, dated as of March 4, 2004, by and among Nebraska Book Company, Inc. and J.P. Morgan Securities Inc., Citigroup Global Markets Inc. and Fleet Securities, Inc., filed as Exhibit 10.13 to Nebraska Book Company, Inc. Registration Statement on Form S-4 (File No. 333-114891), is incorporated herein by reference. 10.19 Exchange and Registration Rights Agreement, dated as of February 13, 1998 by and among Nebraska Book Company, Inc. and Chase Securities Inc., filed as Exhibit 4.2 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.20 Registration Rights Agreement, dated as of March 4, 2004, by and among Nebraska Book Company, Inc. and J.P. Morgan Securities Inc., Citigroup Global Markets Inc. and Fleet Securities, Inc., filed as Exhibit 10.15 to Nebraska Book Company, Inc. Registration Statement on Form S-4 (File No. 333-114891), is incorporated herein by reference. 10.21* Form of Memorandum of Understanding, dated as of February 13, 1998 by and between NBC Acquisition Corp. and each of Mark W. Oppegard, Bruce E. Nevius, Larry R. Rempe, Kenneth F. Jirovsky, William H. Allen, Thomas A. Hoff and Ardean A. Arndt, filed as Exhibit 10.4 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.22* Memorandum of Understanding, dated as of December 22, 1998 by and between Nebraska Book Company, Inc. and Barry S. Major, Chief Operating Officer, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended December 31, 1998, is incorporated herein by reference. 10.23* Addendum to the Memorandum of Understanding, dated as of December 22, 1998 by and between Nebraska Book Company, Inc. and Barry S. Major, dated March 29, 2002, filed as Exhibit 10.9 to Nebraska Book Company, Inc. Form 10-K for the year ended March 31, 2002, is incorporated herein by reference. 91 10.24* Amended and Restated Secured Promissory Note dated July 9, 2002 by and between NBC Acquisition Corp. and Barry S. Major, filed as Exhibit 10.4 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2002, is incorporated herein by reference. 10.25* Memorandum of Understanding, dated as of July 1, 1999 by and between Nebraska Book Company, Inc. and Alan Siemek, Chief Financial Officer, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended September 30, 1999, is incorporated herein by reference. 10.26* Addendum to the Memorandum of Understanding, dated as of July 1, 1999 by and between Nebraska Book Company, Inc. and Alan Siemek, dated March 29, 2002, filed as Exhibit 10.11 to Nebraska Book Company, Inc. Form 10-K for the year ended March 31, 2002, is incorporated herein by reference. 10.27* Amended and Restated Secured Promissory Note dated July 9, 2002 by and between NBC Acquisition Corp. and Alan Siemek, filed as Exhibit 10.5 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2002, is incorporated herein by reference. 10.28* Memorandum of Understanding, dated as of November 1, 1999 by and between Nebraska Book Company, Inc. and Michael J. Kelly, Vice President of E-commerce, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended December 31, 1999, is incorporated herein by reference. 10.29* Amended and Restated Secured Promissory Note dated July 9, 2002 by and between NBC Acquisition Corp. and Michael J. Kelly, filed as Exhibit 10.6 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2002, is incorporated herein by reference. 10.30* Memorandum of Understanding, dated as of April 17, 2001 by and between Nebraska Book Company, Inc. and Robert Rupe, Senior Vice President of the Bookstore Division, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2001, is incorporated herein by reference. 10.31* Amended and Restated Secured Promissory Note dated July 9, 2002 by and between NBC Acquisition Corp. and Robert Rupe, filed as Exhibit 10.7 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2002, is incorporated herein by reference. 10.32* Amendment to the Memorandums of Understanding by and between Nebraska Book Company, Inc. and each of Mark W. Oppegard, Larry R. Rempe, Kenneth F. Jirovsky, William H. Allen, Thomas A. Hoff, Barry S. Major, Alan Siemek, Michael J. Kelly, and Robert Rupe, dated March 4, 2004, filed as Exhibit 10.27 to Nebraska Book Company, Inc. Form 10-K for the year ended March 31, 2004, is incorporated herein by reference. 10.33* NBC Acquisition Corp. 1995 Stock Incentive Plan adopted August 31, 1995, filed as Exhibit 10.5 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.34* NBC Acquisition Corp. 1998 Performance Stock Option Plan adopted June 30, 1998, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference. 10.35* First Amendment, dated as of June 12, 2002, to the NBC Acquisition Corp. 1998 Performance Stock Option Plan adopted June 30, 1998, filed as Exhibit 10.2 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2002, is incorporated herein by reference. 10.36* NBC Acquisition Corp. 1998 Stock Option Plan adopted June 30, 1998, filed as Exhibit 10.2 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference. 10.37* First Amendment, dated as of June 12, 2002, to the NBC Acquisition Corp. 1998 Stock Option Plan adopted June 30, 1998, filed as Exhibit 10.3 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2002, is incorporated herein by reference. 92 10.38* NBC Acquisition Corp. 2003 Performance Stock Option Plan adopted July 1, 2003, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended September 30, 2003, is incorporated herein by reference. 10.39* NBC Acquisition Corp. 2003 Stock Option Plan adopted July 1, 2003, filed as Exhibit 10.2 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended September 30, 2003, is incorporated herein by reference. 10.40* NBC Holdings Corp. 2004 Stock Option Plan adopted March 4, 2004, filed as Exhibit 10.34 to Nebraska Book Company, Inc. Registration Statement on Form S-4 (File No. 333-114891), is incorporated herein by reference. 10.41* NBC Holdings Corp. 2005 Restricted Stock Plan adopted September 29, 2005, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended September 30, 2005, is incorporated herein by reference. 10.42* Restricted Stock Purchase Agreement, dated as of March 31, 2006, between Holdings and Oppegard, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Current Report on Form 8-K dated April 6, 2006, is incorporated herein by reference. 10.43* Restricted Stock Purchase Agreement, dated as of March 31, 2006, between Holdings and Major, filed as Exhibit 10.2 to Nebraska Book Company, Inc. Current Report on Form 8-K dated April 6, 2006, is incorporated herein by reference. 10.44* Restricted Stock Purchase Agreement, dated as of March 31, 2006, between Holdings and Siemek, filed as Exhibit 10.3 to Nebraska Book Company, Inc. Current Report on Form 8-K dated April 6, 2006, is incorporated herein by reference. 10.45* Stock Repurchase Agreement, dated as of March 31, 2006, between Holdings and Oppegard, filed as Exhibit 10.4 to Nebraska Book Company, Inc. Current Report on Form 8-K dated April 6, 2006, is incorporated herein by reference. 10.46* Stock Repurchase Agreement, dated as of March 31, 2006, between Holdings and Major, filed as Exhibit 10.5 to Nebraska Book Company, Inc. Current Report on Form 8-K dated April 6, 2006, is incorporated herein by reference. 10.47* Stock Repurchase Agreement, dated as of March 31, 2006, between Holdings and Siemek, filed as Exhibit 10.6 to Nebraska Book Company, Inc. Current Report on Form 8-K dated April 6, 2006, is incorporated herein by reference. 10.48* Restricted Stock Plan Special Bonus Agreement, dated as of March 31, 2006, between Nebraska Book and Oppegard, filed as Exhibit 10.7 to Nebraska Book Company, Inc. Current Report on Form 8-K dated April 6, 2006, is incorporated herein by reference. 10.49* Restricted Stock Plan Special Bonus Agreement, dated as of March 31, 2006, between Nebraska Book and Major, filed as Exhibit 10.8 to Nebraska Book Company, Inc. Current Report on Form 8-K dated April 6, 2006, is incorporated herein by reference. 10.50* Restricted Stock Plan Special Bonus Agreement, dated as of March 31, 2006, between Nebraska Book and Siemek, filed as Exhibit 10.9 to Nebraska Book Company, Inc. Current Report on Form 8-K dated April 6, 2006, is incorporated herein by reference. 10.51* NBC Acquisition Corp. Senior Management Bonus Plan adopted June 30, 1998, filed as Exhibit 10.3 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference. 10.52* Form of Deferred Compensation Agreement by and among Nebraska Book Company, Inc. and each of Mark W. Oppegard, Bruce E. Nevius, Larry R. Rempe and Thomas A. Hoff, filed as Exhibit 10.6 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 93 10.53* Amendment of Form of Deferred Compensation Agreement, dated December 30, 2002, by and among Nebraska Book Company, Inc. and each of Mark W. Oppegard, Larry R. Rempe and Thomas A. Hoff, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended December 31, 2002, is incorporated herein by reference. 10.54* NBC Acquisition Corp. 401(k) Savings Plan, filed as Exhibit 10.7 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.55 Agreement for Purchase and Sale of Stock dated January 9, 1998 by and among Nebraska Book Company, Inc. and Martin D. Levine, the Lauren E. Levine Grantor Trust and the Jonathan L. Levine Grantor Trust (the "Collegiate Stores Corporation Agreement"), filed as Exhibit 10.8.1 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.56 First Amendment dated January 23, 1998 to the Collegiate Stores Corporation Agreement, filed as Exhibit 10.8.2 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.57 Commercial Lease Agreement made and entered into March 8, 1989, by and among Robert J. Chaney, Mary Charlotte Chaney and Robert J. Chaney, as Trustee under the Last Will and Testament of James A Chaney, and Nebraska Book Company, Inc., filed as Exhibit 10.9 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.58 Lease Agreement entered into as of September 1, 1986, by and among Odell Associates Limited Partnership and Nebraska Book Company, Inc., filed as Exhibit 10.10 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.59 Lease Agreement entered into as of September 1, 1986, by and among John B. DeVine, successor trustee of the Fred C. Ulrich Trust, as amended, and Nebraska Book Company, Inc., filed as Exhibit 10.11 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.60 Lease Agreement entered into as of September 1, 1986 by and among Odell Associates Limited Partnership and Nebraska Book Company, Inc., filed as Exhibit 10.12 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.61 Lease Agreement made and entered into October 12, 1988 by and among Hogarth Management and Nebraska Book Company, Inc., filed as Exhibit 10.13 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.62 Industrial Real Estate Lease dated June 22, 1987 by and among Cyprus Land Company and Nebraska Book Company, Inc., filed as Exhibit 10.14 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 12.1 Statements regarding computation of ratios, filed as Exhibit 12.1 to Nebraska Book Company, Inc. Registration Statement on Form S-4 (File No. 333-114891), is incorporated herein by reference. 14.1 Code of Business Conduct and Ethics and Code of Ethics for Our Principal Executive Officer and Senior Financial Officers for Nebraska Book Company, Inc., filed as Exhibit 14.1 to Nebraska Book Company, Inc. Form 10-K for the year ended March 31, 2004, is incorporated herein by reference. 21.1 Subsidiaries of Nebraska Book Company, Inc. filed as Exhibit 21.1 to Nebraska Book Company, Inc. Form 10-K for the year ended March 31, 2005, is incorporated herein by reference. 31.1 Certification of Chief Executive Officer pursuant to Rules 13a-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 94 31.2 Certification of Chief Financial Officer pursuant to Rules 13a-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 Mirror Option Agreement between NBC Acquisition Corp. and NBC Holdings Corp., dated September 30, 2005, filed as Exhibit 99.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended September 30, 2005, is incorporated herein by reference. 99.2 Mirror Restricted Stock Agreement between NBC Acquisition Corp. and NBC Holdings Corp., dated March 31, 2006. * - Management contracts or compensatory plans filed herewith or incorporated by reference. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are either not required under the related instructions, are not applicable (and therefore have been omitted), or the required disclosures are contained in the consolidated financial statements included herein. 95 Pursuant to the requirements of Section 13 or 15(d) 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. NEBRASKA BOOK COMPANY, INC. /s/ Mark W. Oppegard ------------------------------------------------- Mark W. Oppegard Chief Executive Officer, President, and Director June 29, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Mark W. Oppegard /s/ Mark L. Bono ---------------------------------------- ------------------------------ Mark W. Oppegard Mark L. Bono Chief Executive Officer, President Director and Director June 29, 2006 June 29, 2006 /s/ Alan G. Siemek /s/ R. Sean Honey ---------------------------------------- ------------------------------ Alan G. Siemek R. Sean Honey Chief Financial Officer, Senior Vice Director President of Finance June 29, 2006 and Administration, Treasurer, and Assistant Secretary June 29, 2006 /s/ Barry S. Major ---------------------------------------- Barry S. Major Director June 29, 2006 SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT: No annual report or proxy material with respect to any annual or other meeting of security holders for the fiscal year ended March 31, 2006 has been, or will be, sent to security holders. 96 106 FINANCIAL STATEMENT SCHEDULES REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholder of Nebraska Book Company, Inc. Lincoln, Nebraska We have audited the consolidated financial statements of Nebraska Book Company, Inc. (a wholly-owned subsidiary of NBC Acquisition Corp.) and subsidiaries as of March 31, 2006 and 2005 and for the years ended March 31, 2006 and 2005 (Successor), the one month ended March 31, 2004 (Successor), and the eleven months ended February 29, 2004 (Predecessor), and have issued our report thereon dated June 28, 2006; such report is included elsewhere in this Form 10-K. Our audits also included the financial statement schedule listed in Item 15(a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Lincoln, Nebraska June 28, 2006 97 NEBRASKA BOOK COMPANY, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ----------------------------------------------------------------------------------------------------------------------- Charged to Charged to Other Beginning of Costs and Accounts Net End of Year Year Balance Expenses (Revenue) Charge-Offs Balance ------------- ------------ -------------- ------------ ----------- YEAR ENDED MARCH 31, 2006 (SUCCESSOR) Allowance for doubtful accounts $ 510,839 $ 231,497 $ - $ (231,497) $ 510,839 Allowance for sales returns 6,630,962 - 31,251,607 (33,008,053) 4,874,516 YEAR ENDED MARCH 31, 2005 (SUCCESSOR) Allowance for doubtful accounts 510,839 315,958 - (315,958) 510,839 Allowance for sales returns 5,269,177 - 28,285,698 (26,923,913) 6,630,962 ONE MONTH ENDED MARCH 31, 2004 (SUCCESSOR) Allowance for doubtful accounts 510,839 218,205 - (218,205) 510,839 Allowance for sales returns 9,079,248 - 1,053,143 (4,863,214) 5,269,177 ELEVEN MONTHS ENDED FEBRUARY 29, 2004 (PREDECESSOR) Allowance for doubtful accounts 442,942 66,393 - 1,504 510,839 Allowance for sales returns 3,227,700 - 28,489,548 (22,638,000) 9,079,248
98 EXHIBIT INDEX 2.1 Agreement for Purchase and Sale of Stock, dated as of May 26, 1999 by and among Nebraska Book Company, Inc., Dennis Rother, and Larry Rother, filed as Exhibit 2.1 to Nebraska Book Company, Inc. Form 8-K, as amended, dated June 4, 1999, is incorporated herein by reference. 2.2 Agreement of Sale, dated as of September 30, 1999 by and among Nebraska Book Company, Inc., Michigan College Book Company, Inc., Ned's Berkeley Book Company, Inc., Ned Shure, Fred Shure, and Jack Barenfanger filed as Exhibit 2.1 to Nebraska Book Company, Inc. Form 8-K, as amended, dated November 12, 1999, is incorporated herein by reference. 2.3 Agreement of Sale, as amended, dated as of May 11, 2001 between Nebraska Book Company, Inc. and University Co-operative Society, filed as Exhibit 2.1 to Nebraska Book Company, Inc. Form 8-K dated May 11, 2001, is incorporated herein by reference. 2.4 Agreement and Plan of Merger, dated as of July 1, 2003, by and among TheCampusHub.com, Inc., Nebraska Book Company, Inc. and NBC Acquisition Corp., filed as Exhibit 2.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. 2.5 Share Purchase Agreement, dated as of April 2, 2006, by and among Nebraska Book, CBA and the Sellers referenced therein, filed as Exhibit 2.1 to Nebraska Book Company, Inc. Current Report on Form 8-K dated April 6, 2006, is incorporated herein by reference. 2.6 Second Amendment to Share Purchase Agreement, dated as of April 30, 2006, by and among Nebraska Book, CBA and the Sellers referenced therein, filed as Exhibit 2.1 to Nebraska Book Company, Inc. Current Report on Form 8-K dated May 4, 2006, is incorporated herein by reference. 3.1 Certificate of Incorporation, as amended, of Nebraska Book Company, Inc., filed as Exhibit 3.1 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 3.2 First Restated By-laws of Nebraska Book Company, Inc., filed as Exhibit 3.2 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended September 30, 2003, is incorporated herein by reference. 4.1 Indenture, dated as of February 13, 1998 by and between Nebraska Book Company, Inc. and United States Trust Company of New York, as Trustee, filed as Exhibit 4.1 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 4.2 Supplemental Indenture, dated as of July 1, 2002, by and among Specialty Books, Inc., Nebraska Book Company, Inc., and The Bank of New York, as Trustee, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended September 30, 2002, is incorporated herein by reference. 4.3 Second Supplemental Indenture, dated March 4, 2004, by and among Nebraska Book Company, Inc., the subsidiary guarantor named therein and The Bank of New York, as Trustee, filed as Exhibit 4.3 to Nebraska Book Company, Inc. Registration Statement on Form S-4 (File No. 333-114891), is incorporated herein by reference. 4.4 Supplemental Indenture, dated as of December 31, 2004, by and among NBC Textbooks LLC, Nebraska Book Company, Inc., each other then existing Subsidiary Guarantor under the Indenture, and the Trustee, filed as Exhibit 10.1 to Nebraska Book Company. Inc. Current Report on Form 8-K dated and filed on January 6, 2005, is incorporated herein by reference. 4.5 Supplemental Indenture, dated as of May 1, 2006, by and among CBA, Nebraska Book, each other then existing Subsidiary Guarantor under the Indenture, and the Trustee, filed as Exhibit 10.2 to Nebraska Book Company, Inc. Current Report on Form 8-K dated May 4, 2006, is incorporated herein by reference. 99 4.6 Form of Initial Note of Nebraska Book Company, Inc. (included in Exhibit 4.1 as Exhibit A), filed as Exhibit 4.3 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 4.7 Form of Exchange Note of Nebraska Book Company, Inc. (included in Exhibit 4.1 as Exhibit B), filed as Exhibit 4.4 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 4.8 Indenture, dated March 4, 2004, by and among Nebraska Book Company, Inc., the subsidiary guarantors parties thereto and BNY Midwest Trust Company as Trustee, filed as Exhibit 4.6 to Nebraska Book Company, Inc. Registration Statement on Form S-4 (File No. 333-114891), is incorporated herein by reference. 4.9 Form of 8 5/8% Senior Subordinated Note Due 2012 (included in Exhibit 4.6), filed as Exhibit 4.7 to Nebraska Book Company, Inc. Registration Statement on Form S-4 (File No. 333-114891), is incorporated herein by reference. 4.10 Form of Exchange Note of Nebraska Book Company, Inc. 8 5/8% Senior Subordinated Note Due 2012, filed as Exhibit 4.8 to Nebraska Book Company, Inc. Form 10-K for the year ended March 31, 2004, is incorporated herein by reference. 10.1 Credit Agreement dated as of February 13, 1998 by and among NBC Acquisition Corp., Nebraska Book Company, Inc., the Chase Manhattan Bank and certain other financial institutions, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.2 First Amendment, dated as of May 21, 1999, to the Credit Agreement, dated as of February 13, 1998 by and among NBC Acquisition Corp., Nebraska Book Company, Inc., the Chase Manhattan Bank, and certain other financial institutions, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 1999, is incorporated herein by reference. 10.3 Second Amendment and Waiver, dated as of April 27, 2000, to the Credit Agreement, dated as of February 13, 1998, by and among NBC Acquisition Corp., Nebraska Book Company, Inc., the Chase Manhattan Bank, and certain other financial institutions, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2000, is incorporated herein by reference. 10.4 Third Amendment, dated as of December 20, 2001, to the Credit Agreement, dated as of February 13, 1998, by and among NBC Acquisition Corp., Nebraska Book Company, Inc., J.P. Morgan Chase Bank, and certain other financial institutions, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended December 31, 2001, is incorporated herein by reference. 10.5 Fourth Amendment and Waiver, dated as of June 4, 2002, to and under the Credit Agreement, dated as of February 13, 1998, by and among NBC Acquisition Corp., Nebraska Book Company, Inc., JPMorgan Chase Bank, and certain other financial institutions, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2002, is incorporated herein by reference. 10.6 Fifth Amendment and Waiver, dated as of June 13, 2003, to and under the Credit Agreement, dated as of February 13, 1998, by and among NBC Acquisition Corp., Nebraska Book Company, Inc., JPMorgan Chase Bank, and certain other financial institutions, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. 10.7 Amended and Restated Credit Agreement, dated February 13, 1998, as amended and restated as of December 10, 2003, by and among NBC Acquisition Corp., Nebraska Book Company, Inc., and the other parties thereto, filed as Exhibit 99.1 to Nebraska Book Company, Inc. Current Report on Form 8-K dated December 10, 2003, is incorporated herein by reference. 100 10.8 Amended and Restated Credit Agreement, dated as of March 4, 2004, by and among NBC Holdings Corp., NBC Acquisition Corp., Nebraska Book Company, Inc., the Several Lenders parties thereto, JPMorgan Chase Bank as Administrative Agent and Collateral Agent, Citigroup Global Markets Inc. as Syndication Agent, and Fleet National Bank and Wells Fargo Bank N.A., as Co-Documentation Agents, filed as Exhibit 10.8 to Nebraska Book Company, Inc. Registration Statement on Form S-4 (File No. 333-114891), is incorporated herein by reference. 10.9 Second Amendment, dated as of October 20, 2004, to the Amended and Restated Credit Agreement, dated as of March 4, 2004, by and among NBC Holdings Corp., NBC Acquisition Corp., Nebraska Book Company, Inc., the Several Lenders parties thereto, JPMorgan Chase Bank as Administrative Agent and Collateral Agent, Citigroup Global Markets Inc. as Syndication Agent, and Fleet National Bank and Wells Fargo Bank N.A., as Co-Documentation Agents, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Current Report on Form 8-K dated and filed on October 26, 2004, is incorporated herein by reference. 10.10 Third Amendment, dated as of August 1, 2005, to the Amended and Restated Credit Agreement, dated as of March 4, 2004, by and among NBC Holdings Corp., NBC Acquisition Corp., Nebraska Book Company, Inc., the Several Lenders parties thereto, JPMorgan Chase Bank, N.A. as Administrative Agent and Collateral Agent, Citigroup Global Markets Inc. as Syndication Agent, and Bank of America, N.A. and Wells Fargo Bank N.A., as Co-Documentation Agents, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2005, is incorporated herein by reference. 10.11 Fourth Amendment, dated as of April 26, 2006, to the Amended and Restated Credit Agreement, dated as of March 4, 2004, and as amended by the First Amendment thereto, dated as of August 6, 2004, the Second Amendment thereto, dated as of October 20, 2004 and the Third Amendment thereto, dated as of August 1, 2005, among Nebraska Book, NBC Holdings Corp., NBC Acquisition Corp., the lenders party from time to time thereto, JPMorgan Chase Bank, N.A. (formerly known as JPMorgan Chase Bank),as administrative agent and collateral agent, Citigroup Global Markets Inc. as syndication agent, and Bank of America, N.A. (as successor by merger to Fleet National Bank) and Wells Fargo Bank N.A., as co-documentation agents, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Current Report on Form 8-K dated May 4, 2006, is incorporated herein by reference. 10.12 Assumption Agreement, dated as of July 1, 2002 between Specialty Books, Inc. and JPMorgan Chase Bank, as Administrative Agent, filed as Exhibit 10.2 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended September 30, 2002, is incorporated herein by reference. 10.13 Assumption Agreement, dated as of December 31, 2004, made by NBC Textbooks LLC, in favor of JPMorgan Chase Bank, N.A., as administrative agent for the banks and other financial institutions parties to the Credit Agreement, filed as Exhibit 10.2 to Nebraska Book Company, Inc. Current Report on Form 8-K dated and filed on January 6, 2005, is incorporated herein by reference. 10.14 Assumption Agreement, dated as of May 1, 2006, made by CBA, in favor of JPMorgan Chase Bank, N.A., as administrative agent for the banks and other financial institutions parties to the Credit Agreement, filed as Exhibit 10.3 to Nebraska Book Company, Inc. Current Report on Form 8-K dated May 4, 2006, is incorporated herein by reference. 10.15 Guarantee and Collateral Agreement, dated as of February 13, 1998 made by NBC Acquisition Corp. and Nebraska Book Company, Inc. in favor of the Chase Manhattan Bank, as administrative agent, filed as Exhibit 10.2 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.16 Amended and Restated Guarantee and Collateral Agreement, dated March 4, 2004, by and among NBC Holdings Corp., NBC Acquisition Corp., Nebraska Book Company, Inc. and Specialty Books, Inc. in favor of JPMorgan Chase Bank, as administrative agent, filed as Exhibit 10.11 to Nebraska Book Company, Inc. Registration Statement on Form S-4 (File No. 333-114891), is incorporated herein by reference. 101 10.17 Purchase Agreement dated February 10, 1998 by and between Nebraska Book Company, Inc. and Chase Securities Inc., filed as Exhibit 10.3 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.18 Purchase Agreement, dated as of March 4, 2004, by and among Nebraska Book Company, Inc. and J.P. Morgan Securities Inc., Citigroup Global Markets Inc. and Fleet Securities, Inc., filed as Exhibit 10.13 to Nebraska Book Company, Inc. Registration Statement on Form S-4 (File No. 333-114891), is incorporated herein by reference. 10.19 Exchange and Registration Rights Agreement, dated as of February 13, 1998 by and among Nebraska Book Company, Inc. and Chase Securities Inc., filed as Exhibit 4.2 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.20 Registration Rights Agreement, dated as of March 4, 2004, by and among Nebraska Book Company, Inc. and J.P. Morgan Securities Inc., Citigroup Global Markets Inc. and Fleet Securities, Inc., filed as Exhibit 10.15 to Nebraska Book Company, Inc. Registration Statement on Form S-4 (File No. 333-114891), is incorporated herein by reference. 10.21* Form of Memorandum of Understanding, dated as of February 13, 1998 by and between NBC Acquisition Corp. and each of Mark W. Oppegard, Bruce E. Nevius, Larry R. Rempe, Kenneth F. Jirovsky, William H. Allen, Thomas A. Hoff and Ardean A. Arndt, filed as Exhibit 10.4 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.22* Memorandum of Understanding, dated as of December 22, 1998 by and between Nebraska Book Company, Inc. and Barry S. Major, Chief Operating Officer, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended December 31, 1998, is incorporated herein by reference. 10.23* Addendum to the Memorandum of Understanding, dated as of December 22, 1998 by and between Nebraska Book Company, Inc. and Barry S. Major, dated March 29, 2002, filed as Exhibit 10.9 to Nebraska Book Company, Inc. Form 10-K for the year ended March 31, 2002, is incorporated herein by reference. 10.24* Amended and Restated Secured Promissory Note dated July 9, 2002 by and between NBC Acquisition Corp. and Barry S. Major, filed as Exhibit 10.4 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2002, is incorporated herein by reference. 10.25* Memorandum of Understanding, dated as of July 1, 1999 by and between Nebraska Book Company, Inc. and Alan Siemek, Chief Financial Officer, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended September 30, 1999, is incorporated herein by reference. 10.26* Addendum to the Memorandum of Understanding, dated as of July 1, 1999 by and between Nebraska Book Company, Inc. and Alan Siemek, dated March 29, 2002, filed as Exhibit 10.11 to Nebraska Book Company, Inc. Form 10-K for the year ended March 31, 2002, is incorporated herein by reference. 10.27* Amended and Restated Secured Promissory Note dated July 9, 2002 by and between NBC Acquisition Corp. and Alan Siemek, filed as Exhibit 10.5 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2002, is incorporated herein by reference. 10.28* Memorandum of Understanding, dated as of November 1, 1999 by and between Nebraska Book Company, Inc. and Michael J. Kelly, Vice President of E-commerce, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended December 31, 1999, is incorporated herein by reference. 10.29* Amended and Restated Secured Promissory Note dated July 9, 2002 by and between NBC Acquisition Corp. and Michael J. Kelly, filed as Exhibit 10.6 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2002, is incorporated herein by reference. 102 10.30* Memorandum of Understanding, dated as of April 17, 2001 by and between Nebraska Book Company, Inc. and Robert Rupe, Senior Vice President of the Bookstore Division, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2001, is incorporated herein by reference. 10.31* Amended and Restated Secured Promissory Note dated July 9, 2002 by and between NBC Acquisition Corp. and Robert Rupe, filed as Exhibit 10.7 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2002, is incorporated herein by reference. 10.32* Amendment to the Memorandums of Understanding by and between Nebraska Book Company, Inc. and each of Mark W. Oppegard, Larry R. Rempe, Kenneth F. Jirovsky, William H. Allen, Thomas A. Hoff, Barry S. Major, Alan Siemek, Michael J. Kelly, and Robert Rupe, dated March 4, 2004, filed as Exhibit 10.27 to Nebraska Book Company, Inc. Form 10-K for the year ended March 31, 2004, is incorporated herein by reference. 10.33* NBC Acquisition Corp. 1995 Stock Incentive Plan adopted August 31, 1995, filed as Exhibit 10.5 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.34* NBC Acquisition Corp. 1998 Performance Stock Option Plan adopted June 30, 1998, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference. 10.35* First Amendment, dated as of June 12, 2002, to the NBC Acquisition Corp. 1998 Performance Stock Option Plan adopted June 30, 1998, filed as Exhibit 10.2 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2002, is incorporated herein by reference. 10.36* NBC Acquisition Corp. 1998 Stock Option Plan adopted June 30, 1998, filed as Exhibit 10.2 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference. 10.37* First Amendment, dated as of June 12, 2002, to the NBC Acquisition Corp. 1998 Stock Option Plan adopted June 30, 1998, filed as Exhibit 10.3 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 2002, is incorporated herein by reference. 10.38* NBC Acquisition Corp. 2003 Performance Stock Option Plan adopted July 1, 2003, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended September 30, 2003, is incorporated herein by reference. 10.39* NBC Acquisition Corp. 2003 Stock Option Plan adopted July 1, 2003, filed as Exhibit 10.2 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended September 30, 2003, is incorporated herein by reference. 10.40* NBC Holdings Corp. 2004 Stock Option Plan adopted March 4, 2004, filed as Exhibit 10.34 to Nebraska Book Company, Inc. Registration Statement on Form S-4 (File No. 333-114891), is incorporated herein by reference. 10.41* NBC Holdings Corp. 2005 Restricted Stock Plan adopted September 29, 2005, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended September 30, 2005, is incorporated herein by reference. 10.42* Restricted Stock Purchase Agreement, dated as of March 31, 2006, between Holdings and Oppegard, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Current Report on Form 8-K dated April 6, 2006, is incorporated herein by reference. 10.43* Restricted Stock Purchase Agreement, dated as of March 31, 2006, between Holdings and Major, filed as Exhibit 10.2 to Nebraska Book Company, Inc. Current Report on Form 8-K dated April 6, 2006, is incorporated herein by reference. 103 10.44* Restricted Stock Purchase Agreement, dated as of March 31, 2006, between Holdings and Siemek, filed as Exhibit 10.3 to Nebraska Book Company, Inc. Current Report on Form 8-K dated April 6, 2006, is incorporated herein by reference. 10.45* Stock Repurchase Agreement, dated as of March 31, 2006, between Holdings and Oppegard, filed as Exhibit 10.4 to Nebraska Book Company, Inc. Current Report on Form 8-K dated April 6, 2006, is incorporated herein by reference. 10.46* Stock Repurchase Agreement, dated as of March 31, 2006, between Holdings and Major, filed as Exhibit 10.5 to Nebraska Book Company, Inc. Current Report on Form 8-K dated April 6, 2006, is incorporated herein by reference. 10.47* Stock Repurchase Agreement, dated as of March 31, 2006, between Holdings and Siemek, filed as Exhibit 10.6 to Nebraska Book Company, Inc. Current Report on Form 8-K dated April 6, 2006, is incorporated herein by reference. 10.48* Restricted Stock Plan Special Bonus Agreement, dated as of March 31, 2006, between Nebraska Book and Oppegard, filed as Exhibit 10.7 to Nebraska Book Company, Inc. Current Report on Form 8-K dated April 6, 2006, is incorporated herein by reference. 10.49* Restricted Stock Plan Special Bonus Agreement, dated as of March 31, 2006, between Nebraska Book and Major, filed as Exhibit 10.8 to Nebraska Book Company, Inc. Current Report on Form 8-K dated April 6, 2006, is incorporated herein by reference. 10.50* Restricted Stock Plan Special Bonus Agreement, dated as of March 31, 2006, between Nebraska Book and Siemek, filed as Exhibit 10.9 to Nebraska Book Company, Inc. Current Report on Form 8-K dated April 6, 2006, is incorporated herein by reference. 10.51* NBC Acquisition Corp. Senior Management Bonus Plan adopted June 30, 1998, filed as Exhibit 10.3 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference. 10.52* Form of Deferred Compensation Agreement by and among Nebraska Book Company, Inc. and each of Mark W. Oppegard, Bruce E. Nevius, Larry R. Rempe and Thomas A. Hoff, filed as Exhibit 10.6 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.53* Amendment of Form of Deferred Compensation Agreement, dated December 30, 2002, by and among Nebraska Book Company, Inc. and each of Mark W. Oppegard, Larry R. Rempe and Thomas A. Hoff, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended December 31, 2002, is incorporated herein by reference. 10.54* NBC Acquisition Corp. 401(k) Savings Plan, filed as Exhibit 10.7 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.55 Agreement for Purchase and Sale of Stock dated January 9, 1998 by and among Nebraska Book Company, Inc. and Martin D. Levine, the Lauren E. Levine Grantor Trust and the Jonathan L. Levine Grantor Trust (the "Collegiate Stores Corporation Agreement"), filed as Exhibit 10.8.1 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.56 First Amendment dated January 23, 1998 to the Collegiate Stores Corporation Agreement, filed as Exhibit 10.8.2 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 104 10.57 Commercial Lease Agreement made and entered into March 8, 1989, by and among Robert J. Chaney, Mary Charlotte Chaney and Robert J. Chaney, as Trustee under the Last Will and Testament of James A Chaney, and Nebraska Book Company, Inc., filed as Exhibit 10.9 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.58 Lease Agreement entered into as of September 1, 1986, by and among Odell Associates Limited Partnership and Nebraska Book Company, Inc., filed as Exhibit 10.10 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.59 Lease Agreement entered into as of September 1, 1986, by and among John B. DeVine, successor trustee of the Fred C. Ulrich Trust, as amended, and Nebraska Book Company, Inc., filed as Exhibit 10.11 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.60 Lease Agreement entered into as of September 1, 1986 by and among Odell Associates Limited Partnership and Nebraska Book Company, Inc., filed as Exhibit 10.12 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.61 Lease Agreement made and entered into October 12, 1988 by and among Hogarth Management and Nebraska Book Company, Inc., filed as Exhibit 10.13 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 10.62 Industrial Real Estate Lease dated June 22, 1987 by and among Cyprus Land Company and Nebraska Book Company, Inc., filed as Exhibit 10.14 to Nebraska Book Company, Inc. Registration Statement on Form S-4, as amended (File No. 333-48221), is incorporated herein by reference. 12.1 Statements regarding computation of ratios, filed as Exhibit 12.1 to Nebraska Book Company, Inc. Registration Statement on Form S-4 (File No. 333-114891), is incorporated herein by reference. 14.1 Code of Business Conduct and Ethics and Code of Ethics for Our Principal Executive Officer and Senior Financial Officers for Nebraska Book Company, Inc., filed as Exhibit 14.1 to Nebraska Book Company, Inc. Form 10-K for the year ended March 31, 2004, is incorporated herein by reference. 21.1 Subsidiaries of Nebraska Book Company, Inc. filed as Exhibit 21.1 to Nebraska Book Company, Inc. Form 10-K for the year ended March 31, 2005, is incorporated herein by reference. 31.1 Certification of Chief Executive Officer pursuant to Rules 13a-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Rules 13a-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 105 99.1 Mirror Option Agreement between NBC Acquisition Corp. and NBC Holdings Corp., dated September 30, 2005, filed as Exhibit 99.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended September 30, 2005, is incorporated herein by reference. 99.2 Mirror Restricted Stock Agreement between NBC Acquisition Corp. and NBC Holdings Corp., dated March 31, 2006. * - Management contracts or compensatory plans filed herewith or incorporated by reference. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are either not required under the related instructions, are not applicable (and therefore have been omitted), or the required disclosures are contained in the consolidated financial statements included herein. 106