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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
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 its charter)
KANSAS 47-0549819
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4700 SOUTH 19TH STREET
LINCOLN, NEBRASKA 68501-0529
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 421-7300
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.YES [ X] NO [ ]
TOTAL NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS
OF AUGUST 13, 2002: 100 SHARES
TOTAL NUMBER OF PAGES: 18
EXHIBIT INDEX: PAGE 18
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEBRASKA BOOK COMPANY, INC.
BALANCE SHEETS
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------
June 30, March 31, June 30,
2002 2002 2001
-------------- -------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,562,661 $ 11,419,277 $ 5,053,314
Receivables 31,607,933 29,384,249 34,207,014
Inventories 93,206,015 69,908,414 85,683,249
Recoverable income taxes 1,963,541 - 2,638,843
Deferred income taxes 3,419,325 3,557,325 2,230,166
Prepaid expenses and other assets 807,032 498,440 430,102
-------------- -------------- --------------
Total current assets 136,566,507 114,767,705 130,242,688
PROPERTY AND EQUIPMENT, net of depreciation & amortization 26,808,238 26,478,915 26,928,474
GOODWILL 30,075,623 29,791,335 29,514,525
IDENTIFIABLE INTANGIBLES, net of amortization 419,953 414,564 478,197
DEBT ISSUE COSTS, net of amortization 5,114,657 5,403,342 6,694,755
OTHER ASSETS 6,155,843 5,937,710 6,117,591
-------------- -------------- --------------
$ 205,140,821 $ 182,793,571 $ 199,976,230
============== ============== ==============
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 18,719,744 $ 15,084,077 $ 11,457,179
Accrued employee compensation and benefits 4,071,411 8,910,902 3,470,350
Accrued interest 4,187,579 1,547,199 4,364,257
Accrued incentives 5,663,081 3,595,628 2,508,496
Accrued expenses 889,705 1,060,969 830,554
Income tax payable - 3,684,439 -
Deferred revenue 1,004,170 432,790 809,667
Current maturities of long-term debt 5,370,383 4,476,156 6,821,518
Current maturities of capital lease obligations 107,491 111,015 109,583
Revolving credit facility 24,100,000 - 34,500,000
-------------- -------------- --------------
Total current liabilities 64,113,564 38,903,175 64,871,604
LONG-TERM DEBT, net of current maturities 139,520,072 140,936,989 153,707,543
CAPITAL LEASE OBLIGATIONS, net of current maturities 2,028,242 2,052,286 2,137,038
OTHER LONG-TERM LIABILITIES 2,064,551 1,892,250 1,317,849
DUE TO PARENT 10,418,500 9,594,899 7,820,739
COMMITMENTS (Note 3)
STOCKHOLDER'S DEFICIT:
Common stock, voting, authorized 50,000 shares of
$1.00 par value; issued and outstanding 100 shares 100 100 100
Additional paid-in capital 46,424,553 46,404,474 46,438,759
Accumulated deficit (58,718,982) (56,386,035) (75,676,412)
Accumulated other comprehensive loss (709,779) (604,567) (640,990)
-------------- -------------- --------------
Total stockholder's deficit (13,004,108) (10,586,028) (29,878,543)
-------------- -------------- --------------
$ 205,140,821 $ 182,793,571 $ 199,976,230
============== ============== ==============
See notes to financial statements.
2
NEBRASKA BOOK COMPANY, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
- ------------------------------------------------------------------------------
Three Months Ended June 30,
2002 2001
------------- -------------
REVENUES, net of returns $ 53,341,533 $ 44,883,887
COSTS OF SALES 32,539,357 27,589,230
------------- -------------
Gross profit 20,802,176 17,294,657
OPERATING EXPENSES:
Selling, general and administrative 19,719,391 17,694,482
Depreciation 736,352 641,270
Amortization 145,388 110,975
------------- -------------
20,601,131 18,446,727
------------- -------------
INCOME (LOSS) FROM OPERATIONS 201,045 (1,152,070)
OTHER EXPENSES (INCOME):
Interest expense 3,867,267 4,405,141
Interest income (10,605) (22,631)
Loss on derivative financial instruments 93,207 -
------------- -------------
3,949,869 4,382,510
------------- -------------
LOSS BEFORE INCOME TAXES (3,748,824) (5,534,580)
INCOME TAX BENEFIT (1,415,877) (2,080,510)
------------- -------------
NET LOSS $ (2,332,947) $ (3,454,070)
============= =============
See notes to financial statements.
3
NEBRASKA BOOK COMPANY, INC.
STATEMENTS OF STOCKHOLDER'S DEFICIT
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-in Accumulated Comprehensive Comprehensive
Stock Capital Deficit Loss Total Loss
------- ------------- -------------- ------------- ------------- -------------
BALANCE, April 1, 2001 $ 100 $ 46,435,726 $ (72,222,342) $ - $ (25,786,516) $ -
Contributed capital - 3,033 - - 3,033 -
Net loss - - (3,454,070) - (3,454,070) (3,454,070)
Other comprehensive loss, net of taxes:
Cumulative effect of adoption
of SFAS No. 133 - - - (602,640) (602,640) (602,640)
Unrealized losses on interest
rate swap agreements - - - (38,350) (38,350) (38,350)
------- ------------- -------------- ----------- -------------- -------------
BALANCE, June 30, 2001 $ 100 $ 46,438,759 $ (75,676,412) $ (640,990) $ (29,878,543) $ (4,095,060)
======= ============= ============== =========== ============== =============
BALANCE, April 1, 2002 $ 100 $ 46,404,474 $ (56,386,035) $ (604,567) $ (10,586,028) $ -
Contributed capital - 20,079 - - 20,079 -
Net loss - - (2,332,947) - (2,332,947) (2,332,947)
Other comprehensive loss, net of taxes:
Unrealized losses on interest
rate swap agreements - - - (105,212) (105,212) (105,212)
------- ------------- -------------- ----------- -------------- -------------
BALANCE, June 30, 2002 $ 100 $ 46,424,553 $ (58,718,982) $ (709,779) $ (13,004,108) $ (2,438,159)
======= ============= ============== =========== ============== =============
See notes to financial statements.
4
NEBRASKA BOOK COMPANY, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------
Three Months Ended June 30,
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,332,947) $ (3,454,070)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Provision for losses on accounts receivable 6,370 20,851
Depreciation 736,352 641,270
Amortization 466,519 453,062
Noncash interest expense from derivative financial instruments 24,580 -
Loss on derivative financial instruments 3,438 -
Gain on disposal of assets (165) (518,744)
Deferred income taxes 197,000 (75,000)
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals:
Receivables (2,240,917) (2,870,434)
Inventories (23,106,376) (22,245,545)
Recoverable income taxes (1,963,541) (1,932,435)
Prepaid expenses and other assets (308,592) (26,402)
Other assets (200,466) (28,834)
Accounts payable 3,635,667 (190,785)
Accrued employee compensation and benefits (4,839,491) (3,042,423)
Accrued interest 2,640,380 2,897,614
Accrued incentives 2,067,453 1,526,602
Accrued expenses (171,264) (134,227)
Income taxes payable (3,684,439) -
Deferred revenue 571,380 530,685
Other long-term liabilities 7,828 10,562
Due to parent 823,601 763,924
------------- -------------
Net cash flows from operating activities (27,667,630) (27,674,329)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (967,675) (249,928)
Bookstore acquisitions, net of cash acquired (643,513) (5,811,237)
Proceeds from sale of bookstores - 1,190,483
Proceeds from sale of property and equipment and other 165 5,779
Software development costs (126,201) (104,114)
------------- -------------
Net cash flows from investing activities (1,737,224) (4,969,017)
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs (32,446) -
Principal payments on long-term debt (522,690) (1,192,529)
Principal payments on capital lease obligations (27,568) (34,068)
Net increase in revolving credit facility 24,100,000 34,500,000
Capital contribution 30,942 13,752
------------- -------------
Net cash flows from financing activities 23,548,238 33,287,155
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,856,616) 643,809
CASH AND CASH EQUIVALENTS, Beginning of period 11,419,277 4,409,505
------------- -------------
CASH AND CASH EQUIVALENTS, End of period $ 5,562,661 $ 5,053,314
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid (refunded) during the period for:
Interest $ 970,945 $ 1,165,440
Income taxes 3,211,502 (836,999)
Noncash investing and financing activities:
Property acquired through capital lease $ - $ 2,228,972
Cumulative effect of adoption of SFAS No. 133, net of income taxes - (602,640)
Unrealized losses on interest rate swap agreements, net of income taxes (105,212) (38,350)
Deferred tax asset resulting from accumulated other comprehensive loss (31,243) (427,327)
See notes to financial statements.
5
NEBRASKA BOOK COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
1. MANAGEMENT REPRESENTATIONS - The balance sheet of Nebraska Book Company,
Inc. (the "Company") at March 31, 2002 was derived from the Company's
audited balance sheet as of that date. All other financial statements
contained herein are unaudited and reflect all adjustments which are, in the
opinion of management, necessary to summarize fairly the financial position
of the Company and the results of the Company's operations for the periods
presented. All of these adjustments are of a normal recurring nature.
Because of the seasonal nature of the Company's operations, results of
operations of any single reporting period should not be considered as
indicative of results for a full year. Certain reclassifications have been
made to prior period financial statements to conform with current year
presentation. These financial statements should be read in conjunction with
the Company's audited financial statements for the year ended March 31, 2002
included in the Company's Annual Report on Form 10-K.
2. INVENTORIES - Inventories are summarized as follows:
June 30, March 31, June 30,
2002 2002 2001
----------------------------------------------------------------------------
Wholesale operations $40,654,413 $30,256,654 $36,413,983
College bookstore operations 44,864,516 32,607,768 45,357,695
Complementary services 7,687,086 7,043,992 3,911,571
----------------------------------------------------------------------------
$93,206,015 $69,908,414 $85,683,249
============================================================================
3. LONG-TERM DEBT - The Company's indebtedness includes a bank-administered
senior credit facility (the "Senior Credit Facility") provided through a
syndicate of lenders. The facility is comprised of a $27.5 million term loan
(the "Tranche A Loan"), a $32.5 million term loan (the "Tranche B Loan") and
a $50.0 million revolving credit facility (the "Revolving Credit Facility").
The Revolving Credit Facility, outstanding indebtedness under which totaled
$24.1 million and $34.5 million at June 30, 2002 and 2001, respectively,
expires on March 31, 2004. Availability under the Revolving Credit Facility
is determined by the calculation of a borrowing base, which at any time is
equal to a percentage of eligible accounts receivable and inventory, up to a
maximum of $50.0 million. The calculated borrowing base at June 30, 2002 was
$50.0 million. The interest rate on the Senior Credit Facility is prime plus
an applicable margin of up to 1.50% or, on Eurodollar borrowings, the
Eurodollar rate plus an applicable margin of up to 2.50%. Additionally,
there is a 0.5% commitment fee for the average daily unused amount of the
Revolving Credit Facility. The interest rate on the Revolving Credit
Facility at June 30, 2002 was 6.00%. The Senior Credit Facility requires
excess cash flows as defined in the credit agreement dated February 13, 1998
(the "Credit Agreement"), as amended, to be applied initially towards
prepayment of the term loans and then utilized to permanently reduce
commitments under the Revolving Credit Facility. There was an excess cash
flow payment obligation at March 31, 2002 of $3.1 million that was
subsequently waived by the lenders in the first quarter of fiscal 2003.
Additional indebtedness includes $110.0 million face amount of 8.75% senior
subordinated notes due 2008 (the "Senior Subordinated Notes") and capital
leases.
4. DERIVATIVE FINANCIAL INSTRUMENTS - The Company utilizes derivative financial
instruments primarily to manage the risk that changes in interest rates will
affect the amount of its future interest payments on the Tranche A and
Tranche B Loans. The Company's primary market risk exposure is, and is
expected to continue to be, fluctuation in Eurodollar 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. The Company has separate five-year
amortizing interest rate swap agreements with two financial institutions
whereby the Company's variable rate Tranche A and Tranche B Loans have been
converted into debt with a fixed rate of 5.815% plus an applicable margin
(as defined in the Credit Agreement). Such agreements terminate on July 31,
2003. Notional amounts under the agreements are reduced periodically by
amounts equal to the originally-scheduled principal payments on the Tranche
A and Tranche B Loans. The Company is exposed to credit loss in the event of
nonperformance by the counterparties to the interest rate swap agreements.
6
The Company anticipates the counterparties will be able to fully satisfy
their obligations under the agreements. General information regarding the
Company's exposure to fluctuations in Eurodollar interest rates is presented
in the following table:
June 30, March 31, June 30,
2002 2002 2001
------------- ------------- -------------
Total indebtedness outstanding $171,126,188 $147,576,446 $197,275,682
Indebtedness subject to Eurodollar fluctuations 34,382,906 34,900,000 50,000,000
Notional amounts under swap agreements 43,200,000 44,900,000 50,000,000
The interest rate swap agreements qualify as cash flow hedge instruments if
the following criteria are met:
(1) Formal documentation of the hedging relationship and the
Company's risk management objective and strategy for undertaking
the hedge occur at the inception of the agreements.
(2) The interest rate swap agreements are expected to be highly
effective in offsetting the change in the value of the interest
payments attributable to the Company's Tranche A and Tranche B
Loans.
The Company estimates the effectiveness of the interest rate swap agreements
utilizing the hypothetical derivative method. Under this method, the fair
value of the actual interest rate swap agreements is compared to the fair
value of hypothetical swap agreements that have the same critical terms as
the Tranche A and Tranche B Loans, including notional amounts and repricing
dates. To the extent that the agreements are 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
agreements and any subsequent changes in such fair value are immediately
recognized in earnings as "gain or loss on derivative financial
instruments". To the extent that the agreements are 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 agreements are immediately recognized in
earnings as interest expense.
The interest rate swap agreements are reflected at fair value in the
Company's balance sheets (as "other long-term liabilities") and the related
gains or losses on these agreements are generally recorded in stockholders'
deficit, net of applicable income taxes (as "accumulated other comprehensive
loss"). The gains or losses recorded in accumulated other comprehensive 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. The net effect of this accounting on the Company's
results of operations is that interest expense on the Tranche A and Tranche
B Loans is generally being recorded based on fixed interest rates. The fair
value of the interest rate swap agreements reflected in other long-term
liabilities at June 30, 2002, March 31, 2002, and June 30, 2001 totaled $1.8
million, $1.6 million, and $1.1 million, respectively.
The initial adoption of SFAS No. 133 on April 1, 2001 resulted in a $1.0
million increase in other long-term liabilities, $0.4 million increase in
noncurrent deferred income tax assets, and $0.6 million increase in
accumulated other comprehensive loss to recognize the fair value of the
interest rate swap agreements, net of income taxes, as the cumulative effect
of a change in accounting principle.
As a result of a $10.0 million optional prepayment of Tranche A and Tranche
B Loans on March 29, 2002, notional amounts under the interest rate swap
agreements no longer correlate with remaining principal balances due under
the Tranche A and Tranche B Loans. The difference between the notional
amounts under the interest rate swap agreements and the remaining principal
balances due under the Tranche A and Tranche B Loans represents the portion
of the agreements that no longer qualify for hedge accounting. The fair
value of the interest rate swap agreements on March 29, 2002 was allocated
between the portion of the agreements that no longer qualify for hedge
accounting and the portion of the agreements that were redesignated as
hedging instruments on the remaining amounts due under the Tranche A and
Tranche B Loans. The fair value allocated to the portion of the interest
rate swap agreements that no longer qualify for hedge accounting was
immediately recognized in the Company's results of operations as a loss on
derivative financial instruments and totaled approximately $0.4 million.
Changes in the fair value of this portion of the interest rate swap
agreements, along with the proportionate share of actual net cash
7
settlements attributable to this portion of the agreements, are also
recognized as a loss on derivative financial instruments in the statements
of operations and totaled $0.1 million for the period ended June 30, 2002.
Information regarding the fair value of the portion of the interest rate
swap agreements designated as hedging instruments is presented in the
following table for the periods then ended:
June 30, March 31, June 30,
2002 2002 2001
---------- --------- ---------
Decrease in fair value of swap agreements designated as hedges $161,035 $253,552 $63,917
Interest expense recorded due to hedge ineffectiveness 24,580 250,340 -
Changes in the fair value of the interest rate swap agreements are reflected
in the statements of cash flows as either "noncash interest expense from
derivative financial instruments", "loss on derivative financial
instruments", or as noncash investing and financing activities.
5. 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: wholesale operations, college
bookstore operations and complementary services. The wholesale operations
segment consists primarily of selling used textbooks to college bookstores,
buying them back from students or college bookstores at the end of each
college semester and then reselling them to college bookstores. The college
bookstore operations segment encompasses the operating activities of the
Company's 108 college bookstores as of June 30, 2002 located on or adjacent
to college campuses. The complementary services segment includes
book-related services such as a centralized buying service, distance
education materials, and computer hardware and software.
The Company primarily accounts for intersegment sales as if the sales were
to third parties (at current market prices). Assets (excluding inventories
and certain cash and cash equivalents, receivables, intangibles, and other
assets), net interest expense and taxes are not allocated between the
Company's segments; instead, such balances are accounted for in a corporate
administrative division. The following table provides selected information
about profit or loss on a segment basis for the quarters ended June 30, 2002
and 2001, respectively:
College
Wholesale bookstore Complementary
operations operations services Total
----------- ----------- ------------- -----------
Quarter ended June 30, 2002:
External customer revenues $20,371,181 $21,592,986 $11,377,366 $53,341,533
Intersegment revenues 4,990,109 160,884 223,969 5,374,962
Depreciation and amortization expense 114,567 537,356 182,897 834,820
Income (loss) before interest and taxes 5,035,343 (2,145,972) 636,316 3,525,687
Quarter ended June 30, 2001:
External customer revenues $18,670,397 $18,160,075 $ 8,053,415 $44,883,887
Intersegment revenues 4,886,132 107,834 351,167 5,345,133
Depreciation and amortization expense 103,168 469,993 120,411 693,572
Income (loss) before interest and taxes 4,598,823 (2,836,597) 290,835 2,053,061
8
The following table reconciles segment information presented above with
information as presented in the financial statements for the quarters ended
June 30, 2002 and 2001, respectively:
Quarter Ended June 30,
2002 2001
------------- -------------
Revenues:
Total for reportable segments $58,716,495 $50,229,020
Elimination of intersegment revenues (5,374,962) (5,345,133)
------------- -------------
Financial statement total $53,341,533 $44,883,887
============= =============
Depreciation and Amortization Expense:
Total for reportable segments $ 834,820 $ 693,572
Corporate administration 46,920 58,673
------------- -------------
Financial statement total $ 881,740 $ 752,245
============= =============
Income (Loss) Before Income Taxes:
Total for reportable segments $ 3,525,687 $ 2,053,061
Corporate administrative costs (3,324,642) (3,205,131)
------------- -------------
201,045 (1,152,070)
Interest expense, net (3,856,662) (4,382,510)
Loss on derivative financial instruments (93,207) -
------------- -------------
Income (loss) before income taxes $(3,748,824) $(5,534,580)
============= =============
The following table presents the total carrying amount of goodwill, by
reportable segment, as of June 30, 2002, March 31, 2002, and June 30, 2001,
respectively. Goodwill assigned to corporate administration represents the
carrying value of goodwill arising from NBC Acquisition Corp.'s ("NBC")
acquisition of the Company on September 1, 1995. As is the case with a
significant portion of the Company's assets, such goodwill is not allocated
between the Company's 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.
June 30, March 31, June 30,
2002 2002 2001
------------- ------------- -------------
College bookstore operations $13,305,049 $13,020,761 $12,743,951
Corporate administration 16,770,574 16,770,574 16,770,574
------------- ------------- -------------
Total goodwill $30,075,623 $29,791,335 $29,514,525
============= ============= =============
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.
6. ACCOUNTING STANDARDS NOT YET ADOPTED - In July, 2002 the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards ("SFAS") No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR
DISPOSAL ACTIVITIES. This standard requires that a liability for all costs
associated with exit or disposal activities be recognized when the liability
is incurred. SFAS No. 146 is effective for exit or disposal activities
initiated after December 31, 2002. The Company does not expect its adoption
of this standard later in fiscal 2003 to have a significant impact on its
financial statements. In June, 2001 the Financial Accounting Standards Board
issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. This
standard addresses financial accounting and reporting for obligations
related to the retirement of tangible long-lived assets and the related
asset retirement costs. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. The Company does not expect its adoption of this
standard in fiscal 2004 to have a significant impact on its financial
statements.
7. STOCK OPTION PLANS - Effective June 20, 2002, NBC's board of directors
authorized the reallocation of 1,771 unissued options from the 1998 Stock
Option Plan to the 1998 Performance Stock Option Plan and concurrently
approved the granting of options to purchase 13,000 shares of NBC's Class A
Common Stock under the 1998 Performance Stock Option Plan and options to
purchase 2,135 shares of NBC's Class A Common Stock under the 1998 Stock
Option Plan to selected employees and officers of the Company. Twenty-five
percent of the options granted became exercisable immediately on June 20,
9
2002, with the remaining options becoming exercisable in 25% increments on
June 20, 2003, 2004 and 2005. Such options have an exercise price of $106
and expire on June 20, 2012.
8. SUBSEQUENT EVENTS - On August 2, 2002, HWH Capital Partners, L.P. and HWH
Cornhusker Partners, L.P., affiliates of Haas Wheat & Partners, L.P.
("HWP"), along with certain other stockholders of NBC (collectively with
HWP, the "Sellers"), sold approximately 33% of the issued and outstanding
shares of NBC to certain funds affiliated with Weston Presidio Capital
("WPC"). HWP retained a controlling interest in NBC after the sale. Under
the terms of a buy-sell agreement entered into in connection with this sale,
WPC may require that the Sellers repurchase WPC's shares of NBC at a price
as defined in the buy-sell agreement, unless a majority of the Sellers
elects, in the alternative, to sell to WPC their remaining shares of NBC at
a price as defined in the buy-sell agreement.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 2002 COMPARED WITH QUARTER ENDED JUNE 30, 2001.
REVENUES. Revenues for the quarters ended June 30, 2002 and 2001 and the
corresponding increase (decrease) in revenues were as follows:
Increase (Decrease)
-----------------------
2002 2001 Amount Percentage
------------- ------------- ------------ ----------
Wholesale operations $25,361,290 $23,556,529 $1,804,761 7.7 %
College bookstore operations 21,753,870 18,267,909 3,485,961 19.1 %
Complementary services 11,601,335 8,404,582 3,196,753 38.0 %
Intercompany eliminations (5,374,962) (5,345,133) (29,829) (0.6)%
------------- ------------- ------------ ----------
$53,341,533 $44,883,887 $8,457,646 18.8 %
============= ============= ============ ==========
The increase in wholesale operations revenues for the quarter ended June 30,
2002 was due in part to publisher price increases, complemented by an increase
in unit sales. The Company believes that this increase in unit sales is partly
the result of relatively new incentive programs designed to attract and retain
customers. The increase in college bookstore operations revenues was primarily
attributable to an increase in same store sales of 10.6%, or $1.9 million, and
to the acquisition of 11 new college bookstores (defined by the Company as
stores acquired since April 1, 2001 - 1 bookstore in fiscal 2003 and 10
bookstores in fiscal 2002). These new bookstores provided a $1.6 million
increase in revenues. The increase in same store sales is due in part to the
Company's bookstore serving the University of Maryland, which increased
clothing/insignia revenues by $1.0 million following the University of
Maryland's basketball championship. Complementary services revenues increased
primarily due to growth in the Company's distance education program. The
increased revenues in distance education resulted primarily from additional
services provided to the program's largest account and, in part, to services
provided to new accounts. As the Company's wholesale and college bookstore
operations have grown, the Company's intercompany transactions have also
increased.
GROSS PROFIT. Gross profit for the quarter ended June 30, 2002 increased
$3.5 million, or 20.3%, to $20.8 million from $17.3 million for the quarter
ended June 30, 2001. This increase was primarily due to higher revenues and an
increase in gross margin percent. Gross margin percent was 39.0% for the quarter
ended June 30, 2002 as compared to 38.5% for the quarter ended June 30, 2001,
driven primarily by strong margins in college bookstore operations, attributable
in part to the higher-margin clothing/insignia revenues at the Company's
bookstore serving the University of Maryland.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the quarter ended June 30, 2002 increased $2.0
million, or 11.4%, to $19.7 million from $17.7 million for the quarter ended
June 30, 2001. Selling, general and administrative expenses as a percentage of
revenues were 37.0% and 39.4% for the quarters ended June 30, 2002 and 2001,
respectively. The increase in expenses is primarily the result of the Company's
revenue and operational growth, as previously discussed. The decrease in
expenses as a percentage of revenues is primarily attributable to revenue growth
outpacing growth in certain expenses, particularly salaries and wages.
INCOME (LOSS) BEFORE INTEREST AND TAXES. Income (loss) before interest and
taxes for the quarters ended June 30, 2002 and 2001 and the corresponding change
in income (loss) before interest and taxes were as follows:
Change
------------------------
2002 2001 Amount Percentage
------------- ------------- ------------ ----------
Wholesale operations $ 5,035,343 $ 4,598,823 $ 436,520 9.5 %
College bookstore operations (2,145,972) (2,836,597) 690,625 24.3 %
Complementary services 636,316 290,835 345,481 118.8 %
Corporate administration (3,324,642) (3,205,131) (119,511) (3.7)%
------------- ------------- ------------ ----------
$ 201,045 $(1,152,070) $1,353,115 117.5 %
============= ============= ============ ==========
11
The increase in income before interest and taxes in wholesale operations was
attributable to increased revenues, steady used textbook margins, and a decline
in certain expenses as a percentage of revenues. The improvement in loss before
interest and taxes in college bookstore operations was primarily due to
increased revenues, improved margins, and a decline in certain expenses as a
percentage of revenues. The increase in income before interest and taxes in
complementary services was primarily due to increased revenues and a decline in
certain expenses as a percentage of revenues. Corporate administrative costs
have remained relatively stable between periods.
INTEREST EXPENSE, NET. Interest expense, net for the quarter ended June 30,
2002 decreased $0.5 million, or 12.0%, to $3.9 million from $4.4 million for the
quarter ended June 30, 2001, primarily due to reduced interest charges on the
Senior Credit Facility resulting from the $10.0 million optional prepayment of
Tranche A and Tranche B Loans on March 29, 2002 and reduced usage under the
Revolving Credit Facility. Additionally, a portion of interest expense
associated with the interest rate swap agreements previously classified as
interest expense is now included in the loss on derivative financial
instruments, as previously discussed in the footnotes to the financial
statements presented in Item 1.
LOSS ON DERIVATIVE FINANCIAL INSTRUMENTS. The $0.1 million loss incurred on
derivative financial instruments for the quarter ended June 30, 2002 is
attributable to the $10.0 million optional prepayment of Tranche A and Tranche B
Loans on March 29, 2002. As a result of the optional prepayment, notional
amounts under the interest rate swap agreements no longer correlate with
remaining principal balances due under the Tranche A and Tranche B Loans. This
loss represents the change in the fair value for the quarter ended June 30, 2002
of the portion of the interest rate swap agreements that no longer qualify as
hedging instruments, along with interest associated with that portion of the
interest rate swap agreements.
INCOME TAXES. Income tax benefit for the quarter ended June 30, 2002
decreased $0.7 million, or 31.9%, to $1.4 million from $2.1 million for the
quarter ended June 30, 2001. The Company's effective tax rate for the quarters
ended June 30, 2002 and 2001 was 37.8% and 37.6%, respectively. The Company's
effective tax rate differs from the statutory tax rate primarily as a result of
state income taxes.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Company 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 financial statements and the reported amounts of
revenues and expenses during the reporting period. On an on-going basis, the
Company evaluates its 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. The
Company bases its 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. The Company believes the following critical
accounting policies, among others, affect its more significant judgments and
estimates used in the preparation of its financial statements:
PRODUCT RETURNS. The Company recognizes revenue from wholesale sales at the
time of shipment. The Company has established a program which, under certain
conditions, enables its customers to return textbooks. The Company records
reductions to revenue and costs of sales for the estimated impact of textbooks
with return privileges which have yet to be returned to its wholesale
warehouses. Additional reductions to revenue and costs of sales may be required
if the actual rate of returns exceeds the estimated rate of returns. The
estimated rate of returns is determined utilizing actual historical return
experience.
BAD DEBTS. The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make required
payments. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
INVENTORY VALUATION. The Company's college bookstore operations value new
textbook and non-textbook inventories at the lower of cost or market using the
retail inventory method (first-in, first-out cost basis). 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
12
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. The Company accounts 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
the Company, inventory write-downs may be required.
GOODWILL AND INTANGIBLE ASSETS. The Company is required to make certain
assumptions and estimates when assigning an initial value to covenants not to
compete arising from bookstore acquisitions. The Company is also required to
make certain assumptions and estimates regarding the fair value of intangible
assets (namely goodwill, covenants not to compete, and software development
costs) when assessing such assets for impairment. Changes in the fact patterns
underlying such assumptions and estimates could ultimately result in the
recognition of impairment losses on intangible assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity requirements are for debt service under the
Senior Credit Facility, the Senior Subordinated Notes and other outstanding
indebtedness, for working capital, for capital expenditures and for certain
acquisitions. The Company has historically funded these requirements primarily
through internally generated cash flow and funds borrowed under the Company's
Revolving Credit Facility. At June 30, 2002, the Company's total indebtedness
was $171.1 million, consisting of $34.4 million in Term Loans, $110.0 million of
the Senior Subordinated Notes, $2.6 million of other indebtedness, including
capital lease obligations, and $24.1 million under the Revolving Credit
Facility. Additionally, NBC issued Senior Discount Debentures in fiscal 1998
which provided $41.6 million in net proceeds (face value of $76.0 million less
original issue discount of $31.0 million and deferred financing costs of $3.4
million).
Principal and interest payments under the Senior Credit Facility and the
Senior Subordinated Notes represent significant liquidity requirements for the
Company. Under the terms of the Tranche A and Tranche B Loans, after taking into
account a $10.0 million optional prepayment made on March 29, 2002, the Company
is scheduled to make principal payments totaling approximately $4.5 million in
fiscal 2003, $7.0 million in fiscal 2004, $8.8 million in fiscal 2005 and $14.6
million in fiscal 2006. Such scheduled principal payments are subject to change
upon the annual payment and application of excess cash flows (as defined in the
Credit Agreement underlying the Senior Credit Facility), if any, towards Tranche
A and Tranche B Loan principal balances. There was an excess cash flow payment
obligation at March 31, 2002 of approximately $3.1 million that was waived by
the lenders in the first quarter of fiscal 2003. Loans under the Senior Credit
Facility bear interest at floating rates based upon the borrowing option
selected by the Company. The Company has separate five-year amortizing interest
rate swap agreements with two financial institutions whereby the Company's
variable rate Tranche A and Tranche B Loans have been converted into debt with a
fixed rate of 5.815% plus an applicable margin (as defined in the Credit
Agreement). The Senior Subordinated Notes require semi-annual interest payments
at a fixed rate of 8.75% and mature on February 15, 2008. The Senior Discount
Debentures require semi-annual cash interest payments commencing August 15, 2003
at a fixed rate of 10.75% and mature on February 15, 2009.
The Company's capital expenditures were $1.0 million and $0.2 million for
the three months ended June 30, 2002 and 2001, respectively. Capital
expenditures consist primarily of leasehold improvements and furnishings for new
bookstores, bookstore renovations, computer upgrades and miscellaneous warehouse
improvements. The Company's ability to make capital expenditures is subject to
certain restrictions under the Senior Credit Facility.
Business acquisition expenditures were $0.6 million and $5.8 million for the
three months ended June 30, 2002 and 2001, respectively. For the three months
ended June 30, 2002, one bookstore location was acquired serving the University
of Northern Colorado. For the three months ended June 30, 2001, eight bookstore
locations were acquired serving Western Washington University, Chadron State
College, North Carolina State University, the University of Oklahoma, Radford
University, the University of Central Florida, and the University of Florida.
The Company's ability to make acquisition expenditures is subject to certain
restrictions under the Senior Credit Facility.
During the three months ended June 30, 2002, one bookstore serving the
University of California - Berkeley was closed upon anticipation of the lease
expiring in July, 2002 and a more suitable location having been obtained through
a March, 2002 acquisition. During the three months ended June 30, 2001, the
Company sold certain assets of two of its college bookstore locations serving
the University of Texas in Austin, Texas for approximately $1.2 million,
recognizing a gain on disposal of approximately $0.5 million. This gain is
presented as an offset to selling, general, and administrative expenses in the
13
Company's statements of operations. The sale was made to one of the Company's
largest wholesale customers, thereby strengthening the long-term relationship
with that customer.
The Company's principal sources of cash to fund its 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 the
Company's liquidity needs fluctuates throughout the year due to the Company's
distinct buying and selling periods, increasing substantially at the end of each
college semester (May and December). Net cash flows used in operating activities
for the three months ended June 30, 2002 were $27.7 million, unchanged from
$27.7 million for the three months ended June 30, 2001.
Access to the Company's principal sources of cash is subject to various
restrictions. The availability of additional borrowings under the Revolving
Credit Facility is subject to the calculation of a borrowing base, which at any
time is equal to a percentage of eligible accounts receivable and inventory, up
to a maximum of $50.0 million. The Senior Credit Facility restricts the
Company's ability to make loans or advances and pay dividends, except that,
among other things, the Company may pay dividends to NBC (i) on or after August
15, 2003 in an amount not to exceed the amount of interest required to be paid
on the Senior Discount Debentures and (ii) to pay corporate overhead expenses
not to exceed $250,000 per year and any taxes owed by NBC. The indenture
governing the Senior Discount Debentures (the "Indenture") restricts the ability
of NBC 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) NBC 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, NBC's consolidated
net income. The indenture governing the Senior Subordinated Notes contains
similar restrictions on 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. Such restrictions are not expected to affect the Company's ability
to meet its cash obligations for the foreseeable future.
As of June 30, 2002, the Company could borrow up to $50.0 million under the
Revolving Credit Facility. Outstanding indebtedness under the Revolving Credit
Facility was $24.1 million at June 30, 2002. 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.
The Company believes that funds generated from operations, existing cash,
and borrowings under the Revolving Credit Facility will be sufficient to finance
its current operations, any required excess cash flow payments, planned capital
expenditures and internal growth for the foreseeable future. Future
acquisitions, if any, may require additional debt financing or capital
contributions.
14
The following tables present aggregated information as of June 30, 2002
regarding the Company's contractual obligations and commercial commitments:
Payments Due by Period
--------------------------------------------------------------
Contractual Less Than 1-3 4-5 After 5
Obligations Total 1 Year Years Years Years
- ------------------ --------------- --------------- -------------- -------------- ----------------
Long-term debt $144,890,455 $ 5,370,383 $17,437,579 $11,724,971 $110,357,522
Capital lease
obligations 2,135,733 107,491 259,537 452,881 1,315,824
Borrowings under
line of credit 24,100,000 - 24,100,000 - -
Operating leases 37,806,000 7,895,000 12,184,000 8,847,000 8,880,000
--------------- --------------- -------------- -------------- ----------------
Total $208,932,188 $13,372,874 $53,981,116 $21,024,852 $120,553,346
=============== =============== ============== ============== ================
Amount of Commitment Expiration Per Period
Total --------------------------------------------------------------
Other Commercial Amounts Less Than 1-3 4-5 Over 5
Commitments Committed 1 Year Years Years Years
- ------------------ --------------- --------------- -------------- -------------- ----------------
Unused line of credit $ 25,900,000 $ - $25,900,000 $ - $ -
=============== =============== ============== ============== ================
TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES
In fiscal 2001, the Company entered into several agreements with a newly
created entity, TheCampusHub.com, Inc., which is partially owned by NBC's
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. Such
agreements included an equity option agreement, a management services agreement,
and a technology sale and license agreement. The equity option agreement
provides the Company the opportunity to acquire 25% of the initial common shares
outstanding of TheCampusHub.com, Inc. The option is being accounted for as a
cost method investment in accordance with APB Opinion No. 18, THE EQUITY METHOD
OF ACCOUNTING FOR INVESTMENTS IN COMMON STOCK. The management services
agreement, which is effective for a period of three years, reimburses the
Company for certain direct costs incurred on behalf of TheCampusHub.com, Inc.
Prior to its amendment as described below, the management services agreement
also required TheCampusHub.com, Inc. to pay the Company $0.5 million per year
for certain shared management and administrative support. Complementary services
revenue resulting from the management services agreement, including as amended,
is recognized as the services are performed. The technology sale and license
agreement provides for the Company to license its E-commerce software
capabilities to TheCampusHub.com, Inc. Prior to its amendment as described
below, the technology sale and license agreement required TheCampusHub.com, Inc.
to pay the Company $0.5 million per year over a period of three years. The
technology sale and license agreement also provides TheCampusHub.com, Inc. with
an option to purchase such software capabilities from the Company during that
three year period. The license fees were recognized as complementary services
revenue over the term of the agreement. For the three months ended June 30, 2002
and 2001, revenues attributable to the management services and technology sale
and license agreements totaled $0.1 million and $0.2 million, respectively, and
reimbursable direct costs incurred on behalf of TheCampusHub.com, Inc. totaled
$0.1 million and $0.2 million, respectively.
Revenues attributable to the management services and technology sale and
license agreements were recognized in fiscal 2002 under the anticipation that,
if necessary, TheCampusHub.com, Inc. would make a capital call to its
shareholders to provide the funding necessary to meet its obligations under the
aforementioned agreements. TheCampusHub.com, Inc. reached break-even on a cash
flow basis, excluding amounts under the management services and technology sale
and license agreements, during fiscal 2002. While it remains a viable business
and is funding its own operations, it is not currently generating sufficient
excess cash flow to fund its obligations under the aforementioned agreements and
the remaining capital available from its shareholders is being reserved to fund
strategic development opportunities and, if required, ongoing operations. As a
result, on March 31, 2002 the Company established a reserve of approximately
$1.0 million on net amounts due from TheCampusHub.com, Inc. and ultimately
wrote-off approximately $1.0 million of net amounts due during the three months
ended June 30, 2002. Net amounts due from TheCampusHub.com, Inc. at June 30,
2002 and 2001 totaled $0.2 million and $0.6 million, respectively. Effective
15
April 1, 2002, the management services and technology sale and license
agreements were amended, eliminating the annual licensing fee and reducing the
annual management services fee for certain shared management and administrative
support to $0.3 million. The Company continues to benefit from its relationship
with TheCampusHub.com, Inc., as the technology developed further enhances the
product/service offering of the Company to its wholesale customers.
On August 2, 2002, HWH Capital Partners, L.P. and HWH Cornhusker Partners,
L.P., affiliates of Haas Wheat & Partners, L.P. ("HWP"), along with certain
other stockholders of NBC (collectively with HWP, the "Sellers"), sold
approximately 33% of the issued and outstanding shares of NBC to certain funds
affiliated with Weston Presidio Capital ("WPC"). HWP retained a controlling
interest in NBC after the sale. Under the terms of a buy-sell agreement entered
into in connection with this sale, WPC may require that the Sellers repurchase
WPC's shares of NBC at a price as defined in the buy-sell agreement, unless a
majority of the Sellers elects, in the alternative, to sell to WPC their
remaining shares of NBC at a price as defined in the buy-sell agreement.
In April, 2001, NBC issued 2,621 shares of its Class A Common Stock to the
Senior Vice President of Retail Division at a price of $52.47 per share, in
exchange for $13,752 in cash and a promissory note in the principal amount of
$123,765. As of June 30, 2002 and 2001, notes receivable from stockholders and
the associated interest receivable totaled $0.8 million. Such notes, which were
amended and restated in July, 2002, mature between January, 2009 and January,
2010 and bear interest at 5.25%.
SEASONALITY
The Company's wholesale and bookstore operations experience two distinct
selling periods and the wholesale operations experience two distinct buying
periods. The peak selling periods for the wholesale operations occur prior to
the beginning of each college semester in August and December. The buying
periods for the wholesale operations occur at the end of each college semester
in late December and May. The primary selling periods for the bookstore
operations are in September and January. In fiscal 2002, approximately 43% of
the Company's annual revenues were earned in the second fiscal quarter
(July-September), while approximately 29% of the Company's annual revenues were
earned in the fourth fiscal quarter (January-March). Accordingly, the Company's
working capital requirements fluctuate throughout the year, increasing
substantially at the end of each college semester, in May and December, as a
result of the buying periods. The Company funds its working capital requirements
primarily through the Revolving Credit Facility, which historically has been
repaid with cash provided from operations.
IMPACT OF INFLATION
The Company's results of operations and financial condition are presented
based upon historical costs. While it is difficult to accurately measure the
impact of inflation due to the imprecise nature of the estimates required, the
Company believes that the effects of inflation, if any, on its results of
operations and financial condition have not been material. However, there can be
no assurance that during a period of significant inflation, the Company's
results of operations will not be adversely affected.
ACCOUNTING STANDARDS NOT YET ADOPTED
In July, 2002 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES. This standard requires that a liability for
all costs associated with exit or disposal activities be recognized when the
liability is incurred. SFAS No. 146 is effective for exit or disposal activities
initiated after December 31, 2002. The Company does not expect its adoption of
this standard later in fiscal 2003 to have a significant impact on its financial
statements. In June, 2001 the Financial Accounting Standards Board issued SFAS
No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. This standard addresses
financial accounting and reporting for obligations related to the retirement of
tangible long-lived assets and the related asset retirement costs. SFAS No. 143
is effective for fiscal years beginning after June 15, 2002. The Company does
not expect its adoption of this standard in fiscal 2004 to have a significant
impact on its financial statements.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Quarterly Report on Form 10-Q contains or incorporates by reference
certain statements that are not historical facts, including, most importantly,
information concerning possible or assumed future results of operations of the
Company and statements preceded by, followed by or that include the words "may,"
"believes," "expects," "anticipates," or the negation thereof, or similar
expressions, which constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). All
statements which address operating performance, events or developments that are
expected or anticipated to occur in the future, including statements relating to
volume and revenue growth, earnings per share growth or statements expressing
16
general optimism about future operating results, are forward-looking statements
within the meaning of the Reform Act. Such forward-looking statements involve
risks, uncertainties and other factors which may cause the actual performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. For those statements, the Company claims the protection of the safe
harbor for forward-looking statements contained in the Reform Act. Several
important factors could affect the future results of the Company and could cause
those results to differ materially from those expressed in the forward-looking
statements contained herein. The factors that could cause actual results to
differ materially include, but are not limited to, the following: increased
competition; ability to integrate recent acquisitions; loss or retirement of key
members of management; increases in the Company's cost of borrowing or inability
to raise or unavailability of additional debt or equity capital; inability to
purchase a sufficient supply of used textbooks; changes in pricing of new and/or
used textbooks; changes in general economic conditions and/or in the markets in
which the Company competes or may, from time to time, compete; the impact of the
Internet and E-books on the Company's operations; and other risks detailed in
the Company's Securities and Exchange Commission filings, in particular the
Company's Registration Statement on Form S-4 (No. 333-48221), all of which are
difficult or impossible to predict accurately and many of which are beyond the
control of the Company. The Company will not undertake and specifically declines
any obligation to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk exposure is, and is expected to continue
to be, fluctuation in Eurodollar interest rates. Of the $171.1 million in total
indebtedness outstanding at June 30, 2002, $34.4 million is subject to
fluctuations in the Eurodollar rate. 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 effectively convert certain variable rate debt into fixed rate debt. The
Company has separate five-year amortizing interest rate swap agreements with two
financial institutions whereby the Company's variable rate Tranche A and Tranche
B Loans have been effectively converted into debt with a fixed rate of 5.815%
plus an applicable margin (as defined in the Credit Agreement). Such agreements
terminate on July 31, 2003. The notional amount under each agreement as of June
30, 2002 was $21.6 million. Such notional amounts are reduced periodically by
amounts equal to the originally-scheduled principal payments on the Tranche A
and Tranche B Loans.
Certain quantitative market risk disclosures have changed since March 31,
2002 as a result of market fluctuations, movement in interest rates, and
principal payments. The following table presents summarized market risk
information as of June 30, 2002 and March 31, 2002, respectively (the
weighted-average variable rates are based on implied forward rates in the yield
curve as of the date presented):
June 30, March 31,
2002 2002
-------------- --------------
Fair Values:
Fixed rate debt $110,013,347 $109,443,478
Variable rate debt (excluding Revolving Credit Facility) 34,382,906 34,900,000
Interest rate swaps (1,782,869) (1,618,397)
Overall Weighted-Average Interest Rates:
Fixed rate debt 8.82% 8.82%
Variable rate debt (excluding Revolving Credit Facility) 5.99% 7.01%
Interest rate swaps receive rate 2.21% 3.19%
17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Fourth Amendment and Waiver, dated as of June 4, 2002, to and under
the Credit Agreement, dated as of February 13, 1998, among NBC
Acquisition Corp., Nebraska Book Company, Inc., JPMorgan Chase Bank,
and certain other financial institutions.
10.2 First Amendment, dated as of June 12, 2002, to the NBC Acquisition
Corp. 1998 Performance Stock Option Plan adopted June 30, 1998.
10.3 First Amendment, dated as of June 12, 2002, to the NBC Acquisition
Corp. 1998 Stock Option Plan adopted June 30, 1998.
10.4 Amended and Restated Secured Promissory Note dated July 9, 2002
between NBC Acquisition Corp. and Barry S. Major.
10.5 Amended and Restated Secured Promissory Note dated July 9, 2002
between NBC Acquisition Corp. and Alan Siemek.
10.6 Amended and Restated Secured Promissory Note dated July 9, 2002
between NBC Acquisition Corp. and Michael J. Kelly.
10.7 Amended and Restated Secured Promissory Note dated July 9, 2002
between NBC Acquisition Corp. and Robert Rupe.
99.1 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.
99.2 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.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
June 30, 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on August 13, 2002.
NEBRASKA BOOK COMPANY, INC.
/s/ Mark W. Oppegard /s/ Alan G. Siemek
- ---------------------- ------------------
Mark W. Oppegard Alan G. Siemek
Chief Executive Officer, President and Chief Financial Officer, Senior
Director Vice President of Finance and
Administration, Treasurer and
Assistant Secretary
18