1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Amendment No. 2)
(Mark one)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1995, or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to ______________.
Commission file number 0-3839
BOOK CENTERS, INC.
(Exact Name of Registrant as Specified in its Charter)
Oregon 93-0508266
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
5600 N.E. Hassalo Street, Portland, Oregon 97213
- ------------------------------------------ ---------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (503) 287-6657
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange On Which Registered
- ------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
------------
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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 Parts III of this Form 10-K or any amendment to
this Form 10-K. _____
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
----- -----
The Registrant's voting stock is not actively traded and the aggregate market
value is therefore not available.
The number of shares of Registrant's common stock outstanding on June 30, 1995,
was 636,889.
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The Annual Report on Form 10-K for the Fiscal Year Ended June 30, 1995, filed
by Book Centers, Inc. (the "Company" or the "Registrant") on September 28,
1995, as amended by Amendment No. 1 to Annual Report on Form 10-K for this
Fiscal Year Ended June 30, 1995, filed by the Company on July 15, 1996
(collectively, the "1995 Form 10-K"), is amended as follows:
1. Item 7 captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of Part II of the 1995 Form 10-K is
amended in its entirety as follows:
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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(a) Results of Operations.
---------------------
1995 Compared to 1994
- ---------------------
The Company's sales increased in the fiscal year ended June 30, 1995, in the
amount of $1,498,433, from $21,496,122 to $22,994,555, a 6.5 percent increase.
The Company classifies its sales as either sales to customers in North America
or sales to customers outside of North America. Sales to customers in North
America in the fiscal year ended June 30, 1995, increased by $318,721 from
$13,151,297 to $13,470,018, an increase of 2.42 percent. Sales to customers
outside of North America in the fiscal year ended June 30, 1995, increased by
$1,179,712 from $8,344,825 to $9,524,537, a 14.14 percent increase. During the
fiscal year ended June 30, 1995, sales to customers in North America as a
percent of overall sales declined from 61.88 percent to 58.58 percent while
sales to customers outside of North America increased from 38.82 percent to
41.42 percent. These changes in sales to customers in North America and sales
to customers outside of North America as a percent of overall sales were caused
by increased sales activity outside of North America. Although the Company
does not keep specific data on sales to customers in North America by country,
i.e. the United States, Canada, and Mexico, management estimates that 90
percent of these sales are to customers in the United States and 10 percent are
to customers in Canada. The Company does not sell to customers in Mexico.
Management believes that sales to customers in the United States and Canada
increased in equal proportions. Thus, with respect to the increase in sales to
customers in North America during the fiscal year ended June 30, 1995, of
$318,721, it is estimated that approximately $286,849 was attributable to sales
to customers in the United States and $31,872 was attributable to sales to
customers in Canada.
Other Sales declined in the fiscal year ended June 30, 1995, by $36,350, a
decline of 54.44 percent. Other Sales for the fiscal year ended June 30, 1994,
included payments of $29,000 from publishers for cooperative advertising and
marketing campaigns that did not recur in the fiscal year ended June 30, 1995,
causing most of the change in Other Sales on a year-to-year basis.
These increases in sales are attributable to improvement in the Company's
ability to supply books in a timely, accurate, and cost effective manner. As
discussed herein, the Company has developed new software that provides to the
Company's customers access to the Company's databases and the ability to order,
claim, cancel, and query on specific titles ordered or desired by customers.
This improvement in a key feature of the Company's service is believed to be
deemed beneficial by its customers, thus, providing an additional reason to use
the Company's services. Sales to customers outside North America has increased
at a higher rate than sales to customers in North America, thus, making sales
to customers outside North America a higher percentage of overall sales than in
the past.
The Cost of Goods for the period ended June 30, 1995, increased by $1,450 from
$17,930,209 in the fiscal year ended June 30, 1994, to $19,380,974 in the
fiscal year ended June 30, 1995, or 8.09 percent. This was caused by a 6.5
percent increase in sales, as previously discussed, and the continuing erosion
of discounts from publishers and other suppliers. Operating and Administrative
Expenses for the period ended June 30, 1995, decreased by $25,895 from
$3,443,153 in the fiscal year ending June 30, 1995, to $3,417,258 in the fiscal
year ended June 30, 1995, or about 75/100 of one percent. Continuing efforts
to improve staff efficiency through training and education, increases in
efficiency because of new computer programs that give staff and customers
easier and faster access to the Company's databases, and ongoing efforts to
negotiate better terms for suppliers and services account for this change. The
new computer system gives employees access to a database of more than 1,000,000
bibliographic records. Employees can access this database for order input,
order clarification,
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customer service, and other functions rather than having to either reenter data
each time it is used or consult other printed and electronic databases when
researching problems. In addition, customers now control access to the
Company's proprietary databases containing both bibliographic and customer
order information. This access allows functional customer use of the databases
for normal library acquisitions functions eliminating the need for Company
employee interface when customers use these functions. Interest expense for
the fiscal year ended June 30, 1995, increased by $10,579 from $168,998 in the
fiscal year ended June 30, 1994, to $179,577 in the fiscal year ended June 30,
1995, or 6.3 percent. This is primarily attributable to an increase in the
weighted interest rate from 12.27 percent for the fiscal year ending June 30,
1994, to 14.33 percent for the fiscal year ending June 30, 1995. See Note 4 in
the Notes to Financial Statements.
Negative pressures on the Company include increased competition from large
competitors, information being produced in electronic formats, increased use of
library materials budgets to purchase journals, and budgetary constraints of
state-supported educational institutions.
1994 Compared to 1993
- ---------------------
The Company experienced a decline in sales in the fiscal year ended June 30,
1994, of $410,634 from $21,906,122 to $21,496,122, a decline of 1.87 percent.
There were two primary reasons for this overall reduction sales. One was the
lower sales to several commercial customers. The other was in 1993 the Company
sold about $125,000 worth of an expensive reference work to libraries. There
were no comparable sales in 1994. The cost of goods sold declined for the
first time, because of efforts to work with major suppliers to get better
terms, an ongoing process. The Company classifies its sales as either sales to
customers in North America or sales to customers outside of North America.
Sales to customers in North America in the fiscal year ended June 30, 1994,
decreased by $1,573,400 from $14,725,237 to $13,151,837, a decline of 10.69
percent. Sales to customers outside of North America in the fiscal year ended
June 30, 1994, increased by $1,163,306 from $7,181,519 to $8,344,825. During
the fiscal year ended June 30, 1994, sales to customers in North America as a
percent of overall sales declined from 67.22 percent to 61.88 percent, while
sales to customers outside of North America increased from 32.78 percent to
38.82 percent. These changes in sales to customers in and outside of North
America as a percent of overall sales were caused by sales to customers in
North America declining and by increased sales to customers outside of North
America. Although the Company does not keep specific data on sales to
customers in North America by country, i.e. the United States, Canada, and
Mexico, management estimates that 90 percent of these sales are to customers
in the United States and 10 percent are to customers in Canada. The Company
does not sell to customers in Mexico. Management believes that sales to
customers in the United States and Canada decreased in equal proportions.
Thus, with respect to the decrease in sales to customers in North America
during the fiscal year ended June 30, 1994, of $1,573,400, it is estimated that
approximately $1,416,060 was attributable to sales to customers in the United
States and $141,606 was attributable to sales to customers in Canada.
Other Sales declined in the fiscal year ended June 30, 1994, by $86,559, a
decline of 56.45 percent. This was caused because of the gain of approximately
$86,000 realized on the sale of Scholarly in the period ending June 30, 1993,
with no comparable activity in the period ending June 30, 1994.
The decrease in sales is attributable to the fact that the Company does not
presently provide its customers with on-line access to its databases and the
ability to perform meaningful actions on that database such as placing,
claiming, and canceling orders, and making electronic queries to appropriate
Company staff concerning the status of pending orders. Several of the
Company's competitors offer this feature and are attracting business away
from the Company.
Operating and administrative costs declined $58,734 from $3,501,887 for the
fiscal year ended June 30, 1993, to $3,443,153 for the fiscal year ended June
30, 1994, although as a percentage of sales they increased 3/100 of one
percent. The Company will continue efforts to improve the productivity of
employees and to negotiate better terms with suppliers of goods and services in
an effort to reduce operating and administrative costs. The Company introduced
new software for its Firm Order operations in June, 1994. Interest expense
slightly decreased in the fiscal year ended June 30, 1994, in the amount of
$4,380, from $173,378 to $168,998, or 2.53%.
As noted in previous years, there are several negative factors affecting the
Company. Libraries continue to spend larger portions of their budgets on non-
book materials such as journals, audio-visual material and data base access.
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During 1991, the Company closed its one hundred percent owned subsidiary
Scholarly, recording restructuring charges of $600,000. These charges included
loss on equipment disposal, employee severance liability, lease termination
costs, and other incremental costs associated with the closure of these
operations. The remaining accrual at June 30, 1993, and 1992, was for lease
termination costs. These leases substantially expired during the year ended
June 30, 1994, and the remaining restructuring accrual of $200,366 was reversed
against operating expenses.
1993 Compared to 1992
- ---------------------
The Company experienced a decline in sales in the fiscal year ended June 30,
1993, of $1,865,602 from $22,772,358 to $21,906,756, a decline of 7.85 percent.
The Company classifies its sales as sales either to customers in North America
or to customers outside of North America. Sales to customers in North America
in the fiscal year ended June 30, 1993, decreased by $2,981,266 from
$17,706,503 to $14,725,237, a decline of 16.84 percent. Sales to customers
outside of North America in the fiscal year ended June 30, 1993, increased by
$1,115,664 from $6,065,855 to $7,181,519, an increase of 18.39 percent. During
the fiscal year ended June 30, 1993, sales to customers in North America as a
percent of overall sales declined from 74.48 percent to 67.22 percent while
sales to customers outside of North America increased from 25.52 percent to
32.78 percent. These changes in sales to customers in and outside of North
America and as a percent of overall sales were caused by sales to customers in
North America declining because of the change in proximity, personnel, and
perception of the quality of service and by increased sales to customers
outside of North America. The cost of goods sold continued to increase for
several reasons. Publishers continue to lower discounts to the Company in
order to prevent the list price of their material from increasing. Publishers
also switch the mix of trade, technical, and text discounts such that their
overall discounts decline even though their price structure remains the same.
The Company is also actively soliciting orders from its customers for audio-
visual material that carries little, if any discount.
Operating and administrative expenses declined by $225,244 from $3,727,131 for
the fiscal year ended June 30, 1992, to $3,501,887 for the fiscal year ended
June 30, 1993, a decrease of 6.04 percent. They continue to decline for two
reasons: declining volume, thus decreasing the need for labor, supplies, and
shipping charges; and efforts to reduce expenditures by scrutinizing purchasing
procedures and better monitoring of the use of supplies and services purchased
by the Company.
Two negative factors facing the Company are the continued upward spiral in the
cost of serials (the library term for magazines) and the pressure on
governmental agencies and departments at all levels to decrease costs. Serials
are bought from the same materials budget that a library uses to buy books. As
serials absorb a larger portion of the budget, the number of books purchased by
many institutions declines. This trend will not be reversed until the national
economy improves.
The Company continues to work against these trends by reducing staff,
introducing labor-saving technologies, and working with the suppliers of its
goods and services to improve prices and the quality of service provided. The
Company will introduce a newly programmed Firm Order system in late 1993. It
is hoped that this will improve and enhance the quality of the services the
Company provides to its customers. It is impossible, at this point, to predict
the effect on increased sales or lower costs.
(b) Inflation, Market Trends, and Business Factors Beyond Company Control.
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Inflation is not considered to be a factor in the Company's business at this
time.
Negative pressures on the Company, as previously stated, include increased
competition from large competitors, information being produced in electronic
formats, increased use of library materials budgets to purchase journals, and
budgetary constraints of state-supported educational institutions.
(c) Liquidity and Capital Resources.
-------------------------------
The Company anticipates that cash flows from operating activities and financing
will be sufficient to meet the Company's liquidity need over the next 12 months
and thereafter. The Company's cash flows from operating activities during each
of the fiscal years ended June 30, 1995, and 1994, have equaled $310,260 and
$164,396, respectively, permitting the Company to decrease its bank overdraft
in such fiscal years by $522,300 and $284,052, respectively. The Company has
continued
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to reduce its operating and administrative expense, including implementing
where necessary cost cutting measures and deferring the payment of planned
increases in salaries for management and other employees. In June 1995, the
Company terminated its existing line of credit with a lending institution,
entered into two new lines of credit with a bank, and used the proceeds from
such new lines of credit to pay in full its old line of credit. The new lines
of credit are on more favorable terms than the old line of credit. First, the
old line of credit, which the Company entered into with a lending institution
in June, 1991, permitted the Company to borrow up to $1,250,000. The new lines
of credit permit the Company to borrow in the aggregate up to $1,400,000
(subject to certain limitations). Second, the new lines of credit reduced the
interest rates the Company pays to its lender. The old line of credit bore
interest at the rate of six percent above the prime rate (15 percent, 13.25
percent, and 12 percent at June 30, 1995, 1994, and 1993, respectively). The
weighted average interest rate under this line of credit in 1995 and 1994 was
14.33 and 12.27 percent, respectively. One of the new lines of credit, which
permits the Company to borrow up to $750,000 and which expires September 1,
1996, bears interest at three and one-half percent above the bank's reference
rate (the "Index"). The bank's reference rate equaled nine percent and the
interest rate under this line of credit equaled 12.5 percent at June 30, 1995.
Borrowings under this line of credit totaled $529,136 at June 30, 1995. The
other line of credit, which permits the Company to borrow up to $650,000 and
expires June 28, 1996, bears interest at the rate of two and one-half percent
above the prime rate. At June 30, 1995, the interest rate under this line of
credit equaled 10.75 percent. Borrowings under this line of credit totaled
$500,000 at June 30, 1995. The new lines of credit, like the old line of
credit, are secured by the Company's accounts receivable, inventory, and
equipment, and are guaranteed by the present officers of the Company who are
also stockholders. The new lines of credit, also like the old line of credit,
are used by the Company primarily for working capital purposes. At June 30,
1995, the Company's bank overdraft totaled $216,421 and its working capital
deficit totaled $935,163 (current assets less current liabilities).
The Company does not have any other unused sources of liquid assets. The
Company will continue to improve its working capital situation through
profitable operations.
The Company did not make any material capital expenditures during the fiscal
year ended June 30, 1995.
(d) General.
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Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for
the Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed
of, requires that, if the estimated fair value of any long lived assets,
certain identifiable intangibles, and goodwill related to those long lived
assets and identifiable intangibles is determined to be less than the carrying
value of such assets, intangibles, and goodwill, then an impairment of those
assets, intangibles, and goodwill is required to be reported as a component of
income from continuing operations before income tax. Effective July 1, 1996,
the Company will adopt SFAS No. 121. The Company does not expect that the
adoption of SFAS No. 121 will have any material effect on its financial
statements.
This report contains forward-looking statements which are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
The forward-looking statements, which are based on current expectations,
involve risks and uncertainties that could cause actual results to differ
materially from the forward-looking statements, including, without limitation,
variability in freight costs, price pressures from both suppliers and
customers, delays in collecting account receivables (particularly, from foreign
customers), trends in the library industry toward non-book materials,
cancellation of orders, and the risk factors and assumptions specifically
mentioned in this report and those listed from time to time in the Company's
SEC reports. The forward-looking statements should be considered in light of
these risks and uncertainties.
2. Item 8 captioned "Financial Statements and Supplementary Data" of Part
II of the 1995 Form 10-K is amended in its entirety as follows:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements and schedules listed on the Index to Consolidated
Financial Statements and Schedules on page F-1 are incorporated herein by
reference.
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3. Item 14 captioned "Exhibits, Financial Statement Schedules, and
Reports on Form 8-K" of Part IV of the 1995 Form 10-K is amended in its
entirety as follows (except that Exhibits 10.5 through 10.19 are not being
refiled herewith):
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) Financial Statements and Financial Statement Schedules.
------------------------------------------------------
The financial statements and schedules listed in the accompanying Index to
Consolidated Financial Statements and Schedules are filed as part of this
Report.
(b) Reports on Form 8-K.
-------------------
The Company did not file any Reports on Form 8-K during the last quarter of the
fiscal year ended June 30, 1995.
(c) Exhibits.
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2. Plan of Acquisition, Reorganization, Arrangement, Liquidation, or
Succession: None.
3. Articles of Incorporation and Bylaws:
(a) Restated Articles of Incorporation and Restated Bylaws
(incorporated herein by reference to Appendices I and II of the
Company's Proxy Statement filed May 24, 1988).
(b) Articles of Amendment to Restated Articles filed with the
Corporation Division of the State of Oregon on October 4, 1990
(incorporated herein by reference to Exhibit "I" to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1990).
4. Instruments defining the rights of security holders, including
indentures: None.
9. Voting trust agreements: None.
10. Material contracts:
10.1 Split Dollar Agreement dated May 1, 1993, between Daniel P. Halloran
and Book Centers, Inc. (incorporated herein by reference to Exhibit
10 to the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1993).
10.2 Amended and Restated Split Dollar Agreement dated May 1, 1993,
between Daniel P. Halloran and Book Centers, Inc. (incorporated by
reference to Exhibit 10.2 to the Company's Annual Report on Form 10-
K for the fiscal year ended June 30, 1994).
10.3 Second Amended and Restated Split Dollar Agreement dated May 1,
1994, between Daniel P. Halloran and Book Centers, Inc.(incorporated
by reference to Exhibit 10.3 to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1994).
10.4 Book Centers, Inc. Employee Stock Ownership Plan and Trust
(incorporated by reference to Exhibit 10.4 to the Company's
quarterly report on Form 10-Q for the quarter ended March 31, 1995).
10.5 Loan Agreement dated June 28, 1995, between Academic Book Center,
Inc. and Centennial Bank.
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10.6 Promissory Note dated June 28, 1995, in the principal amount of
$750,000, the maker of which is Academic Book Center, Inc. and the
payee of which is Centennial Bank.
10.7 Commercial Security Agreement dated June 28, 1995, between Academic
Book Center, Inc. and Centennial Bank.
10.8 Commercial Security Agreement dated June 28, 1995, among Book
Centers, Inc., Academic Book Center, Inc., and Centennial Bank.
10.9 Commercial Pledge Agreement dated June 28, 1995, between Academic
Book Center, Inc., Centennial Bank, and Daniel P. and Karen M.
Halloran.
10.10 Agreement to Provide Insurance dated June 28, 1995, between Academic
Book Center, Inc. and Centennial Bank.
10.11 Loan Agreement dated June 28, 1995, between Academic Book Center,
Inc. and Centennial Bank.
10.12 Note dated June 28, 1995, in the principal amount of $650,000 the
maker of which is Academic Book Center, Inc. and the payee of which
is Centennial Bank.
10.13 Commercial Security Agreement dated June 28, 1995, between Academic
Book Center, Inc. and Centennial Bank.
10.14 Commercial Security Agreement dated June 28, 1995, between Academic
Book Center, Inc. and Centennial Bank.
10.15 Small Business Administration (SBA) Guaranty dated June 28, 1995,
between Academic Book Center, Inc. and Centennial Bank.
10.16 Assignment of Life Insurance Policy as Collateral dated June 28,
1995, among Book Centers, Inc., Academic Book Center, Inc., and
Centennial Bank.
10.17 Commercial Guaranty dated June 28, 1995, among Book Centers, Inc.,
Academic Book Center, Inc., and Centennial Bank.
10.18 Commercial Guaranty dated June 28, 1995, between Academic Book
Center, Inc., Centennial Bank, and Daniel P. Halloran.
10.19 Landlord's Consent dated June 28, 1995, between Academic Book
Center, Inc. and Centennial Bank.
11. Statement regarding computation of per share earnings: Disclosed in
note 1 to the consolidated financial statements.
12. Statements regarding computation of ratios: Not applicable.
13. Annual report to security holders, Form 10-Q or quarterly report to
security holders: None.
16. Letter regarding change in certifying accountant: None.
18. Letter regarding change in accounting principles: None.
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21. Subsidiaries of the registrant: See note 1 to the Consolidated
Financial Statements.
22. Published report regarding matters submitted to vote of security
holders: None.
23. Consents of experts and counsel: None.
24. Power of attorney: None.
27. Financial Data Schedule (filed electronically only).
28. Information from reports to state insurance regulation authorities:
None.
99. Additional Exhibits: None.
(d) Schedules.
---------
The schedules listed in the accompanying Index to Consolidated Financial
Statements and Schedules are filed as part of this Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
BOOK CENTERS, INC.
Date: August 6, 1996 /s/ Daniel P. Halloran
-------------------------------------
Daniel P. Halloran, President
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page
Report of Independent Certified Public Accountants Relating to
the Consolidated Financial Statements and Notes thereto F-2
Financial Statements
Consolidated Balance Sheets as of June 30, 1995 and 1994 F-3
Consolidated Statements of Operations and Accumulated Deficit for
the years ended June 30, 1995, 1994, and 1993 F-4
Consolidated Statements of Cash Flows for the years ended June 30,
1995, 1994, and 1993 F-5
Notes to Financial Statements F-6
The schedules, other than those listed above, have been omitted since they are
either not required, not applicable, or the information has been included in
the aforementioned financial statements.
F-1
10
INDEPENDENT AUDITORS' REPORT
The Stockholders of Book Centers, Inc.
Portland, Oregon
We have audited the accompanying consolidated balance sheets of Book Centers,
Inc. and subsidiaries as of June 30, 1995 and 1994, and the related
consolidated statements of operations and accumulated deficit and of cash flows
for each of the three years in the period ended June 30, 1995. These
consolidated 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 audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Book Centers, Inc. and
subsidiaries at June 30, 1995 and 1994, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1995
in conformity with generally accepted accounting principles.
As discussed in Note 6 to the consolidated financial statements, Book Centers,
Inc. and subsidiaries changed their method of accounting for income taxes
effective July 1, 1993 to conform with Statement of Financial Accounting
Standards No. 109.
DELOITTE & TOUCHE LLP
Portland, Oregon
August 24, 1995
F-2
11
BOOK CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND 1994
- -------------------------------------------------------------------------------
1995 1994
----------- -----------
ASSETS
CURRENT ASSETS:
Accounts receivable (less allowance for
doubtful accounts of $24,525 and $12,155
in 1995 and 1994, respectively) $ 3,453,628 $ 3,151,717
Book inventories 1,083,856 1,233,136
Prepaid expenses and other 254,381 282,445
---------- ----------
Total current assets 4,791,865 4,667,298
OFFICE FURNISHINGS AND EQUIPMENT (Less
accumulated depreciation and amortization
of $650,667 and $583,515 in 1995 and 1994,
respectively) 157,370 186,570
---------- ----------
TOTAL $ 4,949,235 $ 4,853,868
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank overdraft $ 216,421 $ 738,721
Current portion of long-term debt (Note 5) 16,649 25,729
Accounts payable 3,073,561 3,089,979
Notes payable (Note 4) 1,029,136 752,567
Deferred revenue 1,129,164 725,201
Accrued expenses 262,097 329,135
---------- ----------
Total current liabilities 5,727,028 5,661,332
---------- ----------
LONG-TERM DEBT (Note 5) 43,201 60,698
---------- ----------
COMMITMENTS (Note 3) - -
STOCKHOLDERS' DEFICIT:
Common stock, no par value, 50,000,000
shares authorized, 636,889 shares issued 688,837 688,837
Paid-in capital 428,988 428,988
Accumulated deficit (1,938,819) (1,985,987)
---------- ----------
Total stockholders' deficit (820,994) (868,162)
---------- ----------
TOTAL $ 4,949,235 $ 4,853,868
========== ==========
<FN>
See notes to consolidated financial statements.
</FN>
F-3
12
BOOK CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
YEARS ENDED JUNE 30, 1995, 1994, AND 1993
- -------------------------------------------------------------------------------
1995 1994 1993
----------- ----------- -----------
REVENUES:
Sales $22,994,555 $21,496,122 $21,906,756
Other 30,422 66,772 153,331
---------- ---------- ----------
23,024,977 21,562,894 22,060,087
---------- ---------- ----------
OPERATING EXPENSES:
Cost of goods sold 19,380,974 17,930,209 18,475,858
Operating and administrative 3,417,258 3,443,153 3,501,887
Reversal of restructuring charge
accrual (Note 1) - (200,366) -
Interest 179,577 168,998 173,378
---------- ---------- ----------
22,977,809 21,341,994 22,151,123
---------- ---------- ----------
INCOME (LOSS) BEFORE TAXES 47,168 220,900 (91,036)
INCOME TAXES (Note 6) - - -
---------- ---------- ----------
NET INCOME (LOSS) 47,168 220,900 (91,036)
ACCUMULATED DEFICIT, BEGINNING
OF PERIOD (1,985,987) (2,206,887) (2,115,851)
---------- ---------- ----------
ACCUMULATED DEFICIT, END OF
PERIOD $(1,938,819) $(1,985,987) $(2,206,887)
========== ========== ==========
NET INCOME (LOSS) PER SHARE $ 0.07 $ 0.35 $ (0.14)
========== ========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING 636,889 636,889 636,889
========== ========== ==========
<FN>
See notes to consolidated financial statements.
</FN>
F-4
13
BOOK CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1995, 1994, AND 1993
- -------------------------------------------------------------------------------
1995 1994 1993
----------- ----------- -----------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 47,168 $ 220,900 $ (91,036)
Adjustments to reconcile net
income (loss) to net cash
used in operating activities:
Depreciation and amortization 67,152 78,370 81,186
Gain on sale of division - - (16,047)
Loss on disposal of property - 3,306 -
Restructuring charges - (200,366) -
Change in assets and
liabilities net of effects of
sale of division:
Accounts receivable (301,911) 221,912 777,944
Book inventories 149,280 (338,909) 80,406
Prepaid expenses and other 28,064 32,924 13,448
Other assets - - 15,000
Accounts payable (16,418) (108,127) (594,402)
Restructuring reserve - - (13,118)
Deferred revenue 403,963 210,874 (447,875)
Accrued expenses (67,038) 43,512 (9,649)
---------- ---------- ----------
Net cash provided by
(used in) operating
activities 310,260 164,396 (204,143)
---------- ---------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES -
Capital expenditures (37,952) (8,588) (41,369)
---------- ---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Bank overdraft (522,300) (284,052) 156,157
Net increase in notes payable 276,569 164,394 116,641
Long-term debt:
Borrowings - - 8,100
Repayments (26,577) (36,150) (35,746)
---------- ---------- ----------
Net cash provided by
(used in) financing
activities (272,308) (155,808) 245,512
----------- ----------- -----------
NET INCREASE IN CASH - - -
CASH AT BEGINNING OF YEAR - - -
---------- ---------- ----------
CASH AT END OF YEAR $ - - -
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF
NONCASH INVESTING ACTIVITIES:
Book value of assets sold $ - $ - $ 32,272
Liabilities assumed by buyer - - 48,319
Capital expenditures financed
by long-term debt - 73,263 -
<FN>
See notes to consolidated financial statements.
</FN>
F-5
14
BOOK CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995, 1994, AND 1993
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company - Book Centers, Inc. is an Oregon corporation organized in
1961. The Company engages in the business of marketing, warehousing and
distributing books worldwide to research and academic libraries.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its 100%-owned subsidiary, Academic Book
Center, Inc. ("Academic"). All significant intercompany accounts and
transactions have been eliminated upon consolidation.
Restructuring - During 1991, the Company closed its one hundred percent
owned subsidiary Scholarly Book Center, Inc. ("Scholarly"), recording
restructuring charges of $600,000. These charges included loss on
equipment disposal, employee severance liability, lease termination costs
and other incremental costs associated with the closure of these
operations. The remaining accrual at June 30, 1993 and 1992, was for lease
termination costs. These leases substantially expired during the year
ended June 30, 1994 and the remaining restructuring accrual of $200,366 was
reversed against operating expenses.
Statements of Cash Flows - For purposes of the statement of cash flows, the
Company considers interest bearing deposits with maturities of 90 days or
less to be cash. Cash paid for interest was $177,581, $169,711, and
$176,346 for the years ended June 30, 1995, 1994, and 1993, respectively.
Accounts Receivable - Trade receivables are recorded at estimated
collectible value.
Book Inventories - Inventories are valued at lower of cost or market value
using the specific identification method.
Income Taxes - Effective July 1, 1993, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income
Taxes, which requires the provision of deferred income taxes based upon an
asset and liability approach and represents the change in deferred income
tax accounts during the year, including the effect of enacted tax rate
changes. A consolidated federal income tax return is filed by the Company
for the consolidated group. Federal tax credits are accounted for, when
applicable, under the flow-through method whereby the credit is reflected
as a reduction of federal income tax expense in the year in which the
credit is used.
Deferred Revenue - The subsidiary companies receive advance payments from
certain customers. These amounts are recognized as revenue when the
related books are shipped.
Office Furnishings and Equipment and Depreciation - Office furnishings and
equipment are stated at cost. Maintenance and repairs are charged to
expenses as incurred, and improvements are capitalized. Depreciation is
computed on a straight-line method over the estimated useful lives
(generally three to ten years) of the related assets. Upon disposal of
property subject to depreciation, the accounts are relieved of the related
costs and accumulated depreciation and resulting gains and losses are
reflected in operations.
Net Income (Loss) Per Share - Net income (loss) per share of common stock
is computed based on the weighted average number of shares of common stock
outstanding during each year. The weighted average number of shares for
each of the three years ended June 30, 1995 was 636,889.
Reclassifications - Certain amounts from prior periods have been
reclassified in order to conform to the 1995 presentation.
F-6
15
2. EMPLOYEE STOCK OWNERSHIP PLAN
During 1985, the Company adopted a qualified Employee Stock Ownership Plan.
This Plan was initially funded with a $25,000 contribution and is available
to all eligible personnel who have been employed by the Company for a least
one year. As of June 30, 1995, 65,167 shares of the Company's outstanding
common stock had been acquired by the Plan. There were no contributions to
the Plan for the years ended June 30, 1995, 1994, and 1993.
The Company has a 401(k) plan for employees who have completed one year of
service with a minimum of 1,000 hours and who are at least 21 years of age.
Participants may contribute up to 15% of their annual compensation which
the Company may match at its discretion. Participants become vested in
employer contributions at 20% per year starting in year three. The Company
made contributions to the Plan of $28,884, $25,184, and $12,405 for the
years ended June 30, 1995, 1994, and 1993, respectively.
3. LEASE COMMITMENTS
The Company and one of its subsidiaries are lessees under noncancelable
real property leases through 1996. Other leases shown are for automobiles
and office equipment. In September 1992, the Company sold certain assets
related to an operating division of its wholly-owned subsidiary, Academic.
In addition to the purchase of assets, the buyer assumed responsibility for
certain liabilities, including the lease for the operating division's
primary facility. The sale agreement provided that the Company would
guarantee this lease until the expiration of its original term at
October 31, 1995.
Minimum future rentals under capital and operating leases having initial or
remaining terms of one year or more as of June 30, 1995 are as follows:
Capital Operating
Leases Leases
------- ---------
1996 $12,284 $37,556
1997 12,419 1,776
1998 12,419 888
1999 4,677 -
2000 - -
------ ------
Total 41,799 $40,220
======
Less amount representing interest 9,227
------
Present value of minimum lease payments $32,572
======
Total rent expense was $129,640, $116,210, and $114,830 for the years ended
June 30, 1995, 1994, and 1993, respectively.
4. NOTES PAYABLE
In June 1991, the Company entered into a new line of credit with a lending
institution. Beginning July 1, 1993, the line renewed annually unless the
Company elected to terminate the agreement. Under this agreement, the
Company could borrow up to a capacity of $1,250,000. The line bore
interest at 6% above the prime rate (15%, 13.25%, and 12% at June 30, 1995,
1994, and 1993, respectively), was secured by accounts receivable,
inventory and equipment and was personally guaranteed by present officers
who are stockholders of the Company. The weighted average interest rate in
1995 and 1994 was 14.33% and 12.27%, respectively.
F-7
16
In June, 1995, the Company paid off their line of credit with this lending
institution by using funds from two new lines of credit entered into with a
bank. The new lines are a $750,000 line expiring September 1, 1996, and
secured by domestic accounts receivable, bearing interest at 3.5% above the
bank's reference rate which was 9.0% at June 30, 1995. Borrowings under
this line totaled $529,136 at June 30, 1995. The other line is for
$650,000, expires June 28, 1996, and is secured by foreign accounts
receivable. This line bears interest at 2.5% above prime, which was 8.25%
at June 30, 1995. Borrowings under this line totaled $500,000 at June 30,
1995. These borrowings are secured by assets of the Company and are
guaranteed by stockholders of the Company who are also officers.
5. LONG-TERM DEBT
Long-term debt at June 30, 1995 and 1994 consisted of the following:
1995 1994
----------- -----------
Note payable to related parties at 12% interest,
payable monthly through June 1995
collateralized by computer equipment $ - $ 8,483
Note payable to related parties at 12% interest,
payable monthly through November 1998,
collateralized by computer equipment 22,138 27,079
Note payable to a bank, at 8.9% interest,
payable monthly through February 1997,
collateralized by an automobile 5,140 7,879
Capital lease obligations (Note 3) 32,572 42,986
---------- ----------
Total 59,850 86,427
Less current portion 16,649 25,729
---------- ----------
Total long-term debt $ 43,201 $ 60,698
========== ==========
Maturities of long-term debt, including minimum capital lease payments, net
of interest portion, at June 30, 1995 were as follows:
1996 $ 16,649
1997 17,738
1998 17,868
1999 7,595
2000 -
----------
Total $ 59,850
==========
The above notes payable to related parties are to individuals who are
present officers and stockholders of the Company.
6. INCOME TAXES
The Company adopted SFAS No. 109, Accounting for Income Taxes, effective
July 1, 1993. The statement requires the provision of deferred income
taxes based upon an asset and liability approach and represents the change
in deferred income tax accounts during the year, including the effect of
enacted tax rate changes. The statement also provides for the recognition
of net operating loss ("NOL") carryforwards as a deferred tax asset.
Income tax expenses attributable to operations consisted of the following:
F-8
17
June 30,
-----------------------------------------
1995 1994 1993
----------- ----------- -----------
Current:
Federal $ - $ - $ -
State - - -
Deferred:
Federal - - -
State - - -
---------- ---------- ----------
Total income tax expense $ - - -
========== ========== ==========
Reconciliation between the statutory federal income tax rate and the
effective tax is as follows:
June 30,
-----------------------------------------
1995 1994 1993
----------- ----------- -----------
Computed federal income taxes $ 16,000 $ 75,000 $ -
State taxes, net of federal
benefit 2,000 9,000 -
Nondeductible expenses 10,000 13,000 -
Operating loss carryforwards (28,000) (97,000) -
---------- ---------- ----------
Total income tax expense $ - $ - $ -
========== ========== ==========
The tax effect of temporary differences that give rise to significant
deferred tax assets and deferred tax liabilities at June 30, 1995 and 1994
are presented below:
June 30, June 30,
1995 1994
----------- -----------
Deferred tax assets:
Depreciation $ 70,000 $ 62,000
Accrued expenses 100,000 90,000
NOL carryforwards 254,000 297,000
Investment tax and jobs credit carryforward 21,000 51,000
---------- ----------
445,000 500,000
Valuation allowance (445,000) (500,000)
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
There were no deferred tax liabilities at June 30, 1995. Deferred tax
assets have been reduced by a valuation allowance as realization of some
portion of these future tax benefits is subject to significant
uncertainties. The net change in the valuation allowance for the year
ended June 30, 1995, was $55,000.
At June 30, 1995, the Company's net operating loss carryforwards totaled
approximately $1,220,000 for financial reporting purposes expiring through
2008. Net operating loss carryforwards totaled approximately $649,000 for
tax purposes and expire as follows:
F-9
18
Amount of
Year of Loss
Expiration Carryforward
---------- ------------
2002 $ 67,000
2003 224,000
2006 65,000
2007 238,000
2008 55,000
-------
Total $649,000
=======
Investment tax and new jobs credit carryovers approximate $21,000 at June
30, 1995 and expire at various dates through 2000.
7. BUSINESS SEGMENT INFORMATION
The Company's principal industry segment is book wholesaling. Other
segments and transfers between segments are immaterial. Export sales were
$9,524,537, $8,344,825, and $7,181,519 for the years ended June 30, 1995,
1994, and 1993, respectively, of which approximately 80% were made to
Pacific Rim countries. In addition, accounts receivable from export sales
were $1,726,442, $1,418,251, and $1,529,259 at June 30, 1995, 1994, and
1993, respectively. Foreign sales are transacted in U.S. dollars.
F-10