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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 SEPTEMBER 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: 333-48225
NBC ACQUISITION CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0793347
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4700 SOUTH 19TH STREET
LINCOLN, NEBRASKA 68501-0529
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 421-7300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] NO [X]
TOTAL NUMBER OF SHARES OF CLASS A COMMON STOCK OUTSTANDING
AS OF NOVEMBER 7, 2002: 1,263,371 SHARES
TOTAL NUMBER OF PAGES: 23
EXHIBIT INDEX: PAGE 21
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NBC ACQUISITION CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------
September 30, March 31, September 30,
2002 2002 2001
------------- ------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 56,317,800 $ 11,419,277 $ 38,081,653
Receivables 41,802,834 29,384,249 43,681,727
Inventories 63,479,433 69,908,414 64,225,355
Deferred income taxes 5,227,325 3,557,325 3,809,166
Prepaid expenses and other assets 768,305 498,440 459,964
------------- ------------- -------------
Total current assets 167,595,697 114,767,705 150,257,865
PROPERTY AND EQUIPMENT, net of depreciation & amortization 27,671,030 26,478,915 27,189,849
GOODWILL 30,077,527 29,791,335 29,780,449
IDENTIFIABLE INTANGIBLES, net of amortization 349,494 414,564 422,357
DEBT ISSUE COSTS, net of amortization 6,866,806 7,642,465 8,754,685
OTHER ASSETS 5,754,216 5,937,710 6,189,520
------------- ------------- -------------
$238,314,770 $185,032,694 $222,594,725
============= ============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 45,892,419 $ 15,084,077 $ 42,571,138
Accrued employee compensation and benefits 6,510,570 8,910,902 5,481,748
Accrued interest 1,812,791 1,547,199 1,894,794
Accrued incentives 5,032,200 3,595,628 2,451,726
Accrued expenses 1,180,371 1,060,969 1,041,735
Income taxes payable 10,239,708 3,684,439 8,074,617
Deferred revenue 1,044,130 432,790 730,261
Current maturities of long-term debt 5,480,217 4,476,156 6,822,101
Current maturities of capital lease obligations 104,678 111,015 110,146
------------- ------------- -------------
Total current liabilities 77,297,084 38,903,175 69,178,266
LONG-TERM DEBT, net of current maturities 211,841,058 210,275,783 218,615,350
CAPITAL LEASE OBLIGATIONS, net of current maturities 2,004,150 2,052,286 2,108,827
OTHER LONG-TERM LIABILITIES 1,934,483 1,892,250 2,416,559
COMMITMENTS (Note 4)
STOCKHOLDERS' DEFICIT:
Class A common stock, voting, authorized
5,000,000 shares of $.01 par value;
issued and outstanding 1,263,371 shares
at September 30, 2002; March 31, 2002;
and September 30, 2001, respectively 12,634 12,634 12,634
Additional paid-in capital 65,304,884 65,304,884 65,304,884
Notes receivable from stockholders (358,249) (865,940) (842,827)
Accumulated deficit (119,084,956) (131,937,811) (133,044,159)
Accumulated other comprehensive loss (636,318) (604,567) (1,154,809)
------------- ------------- -------------
Total stockholders' deficit (54,762,005) (68,090,800) (69,724,277)
------------- ------------- -------------
$238,314,770 $185,032,694 $222,594,725
============= ============= =============
See notes to consolidated financial statements.
2
NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
REVENUES, net of returns $157,721,459 $144,211,911 $211,062,992 $189,095,798
COSTS OF SALES 99,782,901 90,715,189 132,322,258 118,304,419
------------- ------------- ------------- -------------
Gross profit 57,938,558 53,496,722 78,740,734 70,791,379
OPERATING EXPENSES:
Selling, general and administrative 24,031,504 22,313,397 43,750,895 40,007,879
Depreciation 788,794 721,838 1,525,146 1,363,108
Amortization 167,074 122,821 312,462 233,796
------------- ------------- ------------- -------------
24,987,372 23,158,056 45,588,503 41,604,783
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS 32,951,186 30,338,666 33,152,231 29,186,596
OTHER EXPENSES (INCOME):
Interest expense 5,684,003 6,378,773 11,482,325 12,531,090
Interest income (80,941) (91,266) (91,546) (113,897)
Loss on derivative financial instruments 56,898 - 150,105 -
------------- ------------- ------------- -------------
5,659,960 6,287,507 11,540,884 12,417,193
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 27,291,226 24,051,159 21,611,347 16,769,403
INCOME TAX EXPENSE 10,997,970 9,564,881 8,758,492 6,720,447
------------- ------------- ------------- -------------
NET INCOME $ 16,293,256 $ 14,486,278 $ 12,852,855 $ 10,048,956
============= ============= ============= =============
EARNINGS PER SHARE:
Basic $ 12.90 $ 11.47 $ 10.17 $ 7.96
============= ============= ============= =============
Diluted $ 12.69 $ 11.47 $ 10.13 $ 7.96
============= ============= ============= =============
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 1,263,371 1,263,371 1,263,371 1,263,142
============= ============= ============= =============
Diluted 1,283,738 1,263,371 1,268,556 1,263,142
============= ============= ============= =============
See notes to consolidated financial statements.
3
NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------
Notes Accumulated
Additional Receivable Other
Common Paid-in From Accumulated Comprehensive
Stock Capital Stockholders Deficit Loss Total
-------- ---------- ------------ ----------- ------------- -----------
BALANCE, April 1, 2001 $12,607 $65,167,394 $(697,171) $(143,093,115) $ - $(78,610,285)
Issuance of common stock 27 137,490 (123,765) - - 13,752
Interest accrued on stockholder notes - - (21,891) - - (21,891)
Net income - - - 10,048,956 - 10,048,956
Other comprehensive loss, net of taxes:
Cumulative effect of adoption of
SFAS No. 133 - - - - (602,640) (602,640)
Unrealized losses on interest rate swap
agreements - - - - (552,169) (552,169)
------- ----------- ---------- -------------- ------------ -------------
BALANCE,September 30, 2001 $12,634 $65,304,884 $(842,827) $(133,044,159) $(1,154,809) $(69,724,277)
======= =========== ========== ============== ============ =============
BALANCE,April 1, 2002 $12,634 $65,304,884 $(865,940) $(131,937,811) $ (604,567) $(68,090,800)
Payment on stockholder notes - - 521,583 - - 521,583
Interest accrued on stockholder notes - - (13,892) - - (13,892)
Net income - - - 12,852,855 - 12,852,855
Other comprehensive loss, net of taxes:
Unrealized losses on interest rate swap
agreements - - - - (31,751) (31,751)
------- ----------- ---------- -------------- ------------ -------------
BALANCE,September 30, 2002 $12,634 $65,304,884 $(358,249) $(119,084,956) $ (636,318) $(54,762,005)
======= =========== ========== ============== ============ =============
See notes to consolidated financial statements.
4
NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- ----------------------------------------------------------------------------------------------
Six Months Ended
September 30,
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $12,852,855 $10,048,956
Adjustments to reconcile net income to net cash flows
from operating activities:
Provision for losses on accounts receivable 49,934 44,579
Depreciation 1,525,146 1,363,108
Amortization 1,120,567 1,080,864
Original issue debt discount amortization 3,753,733 3,380,556
Noncash interest expense from derivative financial instruments 36,426 234,016
Gain on derivative financial instruments (27,327) -
Gain on disposal of assets (4,871) (537,457)
Deferred income taxes (1,303,000) (1,353,000)
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals:
Receivables (12,482,411) (12,380,047)
Inventories 6,620,206 (1,036,298)
Recoverable income taxes - 706,408
Prepaid expenses and other assets (269,865) (56,264)
Other assets (212,375) (27,151)
Accounts payable 30,808,342 30,923,174
Accrued employee compensation and benefits (2,400,332) (1,031,025)
Accrued interest 265,592 428,151
Accrued incentives 1,436,572 1,469,832
Accrued expenses 119,402 76,954
Income taxes payable 6,555,269 8,074,617
Deferred revenue 611,340 451,279
Other long-term liabilities 15,088 18,892
------------ ------------
Net cash flows from operating activities 49,070,291 41,880,144
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,628,130) (1,239,089)
Bookstore acquisitions, net of cash acquired (645,417) (5,828,513)
Proceeds from sale of bookstores - 1,191,112
Proceeds from sale of property and equipment and other 13,740 27,811
Software development costs (162,228) (201,163)
------------ ------------
Net cash flows from investing activities (3,422,035) (6,049,842)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of financing costs (32,446) -
Principal payments on long-term debt (1,184,397) (2,110,190)
Principal payments on capital lease obligations (54,473) (61,716)
Proceeds from issuance of common stock - 13,752
Proceeds from payment on notes receivable from stockholders 521,583 -
------------ ------------
Net cash flows from financing activities (749,733) (2,158,154)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 44,898,523 33,672,148
CASH AND CASH EQUIVALENTS, Beginning of period 11,419,277 4,409,505
------------ ------------
CASH AND CASH EQUIVALENTS, End of period $56,317,800 $38,081,653
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid (refunded) during the period for:
Interest $ 6,795,901 $ 7,641,299
Income taxes 3,506,223 (707,578)
Noncash investing and financing activities:
Notes receivable from shareholders recorded upon
issuance of common stock $ - $ 123,765
Property acquired through capital lease - 2,228,972
Accumulated other comprehensive loss:
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 (31,751) (552,169)
Deferred taxes resulting from
accumulated other comprehensive loss 13,705 (769,872)
See notes to consolidated financial statements.
5
NBC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
1. MANAGEMENT REPRESENTATIONS - The consolidated balance sheet of NBC
Acquisition Corp. (the "Company") and its wholly-owned subsidiary, Nebraska
Book Company, Inc. ("NBC"), at March 31, 2002 was derived from the
Company's audited consolidated balance sheet as of that date. All other
consolidated 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 and cash flows 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
consolidated financial statements to conform with current year
presentation. These consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements
for the year ended March 31, 2002 included in the Company's Annual Report
on Form 10-K.
2. EARNINGS PER SHARE - Basic earnings per share data are based on the
weighted-average number of common shares outstanding during the period.
Diluted earnings per share data are based on the weighted-average number of
common shares outstanding and the dilutive effect of potential common
shares including stock options, if any. For purposes of calculating diluted
earnings per share, weighted-average common shares outstanding for the
quarters and six months ended September 30, 2002 and 2001 include
incremental shares attributable to stock options outstanding at September
30, 2002 and 2001, respectively, as follows:
Quarter Ended Six Months Ended
September 30, September 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Stock Options:
Options outstanding 83,000 68,165 83,000 68,165
Incremental shares included
in weighted-average
common shares outstanding 20,367 - 5,185 -
Stock options outstanding at September 30, 2001 had no impact on diluted
earnings per share as the exercise price of such options was greater than
the estimated fair value (including a discount for the holder's minority
interest position and illiquidity of the Class A Common Stock) of the Class
A Common Stock underlying the options for the quarter and six months ended
September 30, 2001. The estimated fair value was based upon an independent
valuation of the Class A Common Stock.
3. INVENTORIES - Inventories are summarized as follows:
September 30, March 31, September 30,
2002 2002 2001
----------------------------------------------------------------------
Wholesale operations $18,456,100 $30,256,654 $16,902,591
College bookstore operations 36,096,891 32,447,083 40,506,651
Complementary services 8,926,442 7,204,677 6,816,113
----------------------------------------------------------------------
$63,479,433 $69,908,414 $64,225,355
======================================================================
4. LONG-TERM DEBT - The Company's indebtedness includes NBC's
bank-administered senior credit facility (the "Senior Credit Facility")
provided through a syndicate of lenders. The facility is comprised of a
$27.5 million term loan (the "Tranche A Loan"), a $32.5 million term loan
(the "Tranche B Loan") and a $50.0 million revolving credit facility (the
"Revolving Credit Facility"). The Revolving Credit Facility, which was
unused at September 30, 2002 and 2001, 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 September 30, 2002 was $50.0
6
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 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 NBC's $110.0 million face amount of 8.75%
senior subordinated notes due 2008 (the "Senior Subordinated Notes"), $76.0
million face amount of 10.75% senior discount debentures due 2009 (the
"Senior Discount Debentures"), and capital leases. The Senior Discount
Debentures were issued at a discount of $31.0 million and will accrete in
value at the rate of 10.75% compounded semi-annually through February 15,
2003, with semi-annual interest payments commencing August 15, 2003.
5. 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 NBC's Senior Credit Facility, exposure to interest rate
fluctuations is managed by maintaining fixed interest rate debt (primarily
the Senior Subordinated Notes and Senior Discount Debentures) and by
entering into interest rate swap agreements that qualify as cash flow
hedging instruments to convert certain variable rate debt into fixed rate
debt. NBC has separate five-year amortizing interest rate swap agreements
with two financial institutions whereby NBC's variable rate Tranche A and
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. NBC is exposed to credit loss in the event of nonperformance by the
counterparties to the interest rate swap agreements. NBC anticipates the
counterparties will be able to fully satisfy their obligations under the
agreements. General information regarding the Company's exposure to
fluctuations in Eurodollar interest rates is presented in the following
table:
September 30, March 31, September 30,
2002 2002 2001
------------- -------------- ------------
Total indebtedness outstanding $219,430,103 $216,915,240 $227,656,424
Indebtedness subject to
Eurodollar fluctuations 33,726,948 34,900,000 49,100,000
Notional amounts under
swap agreements 42,287,500 44,900,000 49,100,000
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 NBC'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 NBC's Tranche A and Tranche B Loans.
NBC 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.
7
Under hedge accounting, the interest rate swap agreements are reflected at
fair value in the Company's consolidated 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 consolidated 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 September 30, 2002, March 31, 2002, and September 30, 2001 totaled $1.6
million, $1.6 million, and $2.2 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 consolidated 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
settlements attributable to this portion of the agreements, are also
recognized as a gain (loss) on derivative financial instruments in the
consolidated statements of operations and totaled $(0.1) million and $(0.2)
million for the quarter and six months ended September 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:
September 30, March 31, September 30,
2002 2002 2001
------------- ---------- --------------
Year-to-date decrease in fair value
of swap agreements designated as
hedges $54,469 $253,552 $1,154,297
Year-to-date interest expense
recorded due to hedge
ineffectiveness 36,426 234,016
Quarterly interest expense recorded
due to hedge ineffectiveness 11,846 234,016
Changes in the fair value of the interest rate swap agreements are
reflected in the consolidated statements of cash flows as either "noncash
interest expense from derivative financial instruments", "gain or loss on
derivative financial instruments", or as noncash investing and financing
activities.
6. 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 September 30, 2002 located on or
adjacent to college campuses. The complementary services segment includes
book-related services such as distance education materials, computer
hardware and software, and a centralized buying service.
8
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, property and equipment,
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 and six months ended September 30, 2002 and 2001,
respectively:
College
Wholesale bookstore Complementary
operations operations services Total
-------------- ------------ ------------- ------------
Quarter ended September 30, 2002:
External customer revenues $48,423,703 $ 98,517,600 $10,780,156 $157,721,459
Intersegment revenues 8,078,670 239,296 264,358 8,582,324
Depreciation and amortization expense 119,900 632,469 152,839 905,208
Income before interest and taxes 18,314,408 14,875,168 358,920 33,548,496
Quarter ended September 30, 2001:
External customer revenues $43,226,489 $ 92,032,991 $ 8,952,431 $144,211,911
Intersegment revenues 8,529,174 181,607 740,403 9,451,184
Depreciation and amortization expense 102,418 550,437 131,883 784,738
Income before interest and taxes 17,244,502 13,733,059 176,866 31,154,427
Six months ended September 30, 2002:
External customer revenues $68,794,884 $120,110,586 $22,157,522 $211,062,992
Intersegment revenues 13,068,779 400,180 488,327 13,957,286
Depreciation and amortization expense 234,467 1,169,825 335,736 1,740,028
Income before interest and taxes 23,349,751 12,729,196 995,236 37,074,183
Six months ended September 30, 2001:
External customer revenues $61,896,886 $110,193,066 $17,005,846 $189,095,798
Intersegment revenues 13,415,306 289,441 1,091,570 14,796,317
Depreciation and amortization expense 205,586 1,020,430 252,294 1,478,310
Income before interest and taxes 21,843,325 10,896,462 467,701 33,207,488
The following table reconciles segment information presented above with
information as presented in the consolidated financial statements for the
quarters and six months ended September 30, 2002 and 2001, respectively:
Quarter Ended September 30, Six Months Ended September 30,
2002 2001 2002 2001
-------------- -------------- --------------- -------------
Revenues:
Total for reportable segments $166,303,783 $153,663,095 $225,020,278 $203,892,115
Elimination of intersegment revenues (8,582,324) (9,451,184) (13,957,286) (14,796,317)
------------- ------------- ------------- -------------
Consolidated total $157,721,459 $144,211,911 $211,062,992 $189,095,798
============= ============= ============= =============
Depreciation and Amortization Expense:
Total for reportable segments $ 905,208 $ 784,738 $ 1,740,028 $ 1,478,310
Corporate administration 50,660 59,921 97,580 118,594
------------- ------------- ------------- -------------
Consolidated total $ 955,868 $ 844,659 $ 1,837,608 $ 1,596,904
============= ============= ============= =============
Income Before Income Taxes:
Total for reportable segments $ 33,548,496 $ 31,154,427 $ 37,074,183 $ 33,207,488
Corporate administrative costs (597,310) (815,761) (3,921,952) (4,020,892)
------------- ------------- ------------- -------------
32,951,186 30,338,666 33,152,231 29,186,596
Interest expense, net (5,603,062) (6,287,507) (11,390,779) (12,417,193)
Loss on derivative financial instruments (56,898) - (150,105) -
------------- ------------- ------------- -------------
Consolidated income before income taxes $ 27,291,226 $ 24,051,159 $ 21,611,347 $ 16,769,403
============= ============= ============= =============
9
The following table presents the total carrying amount of goodwill, by
reportable segment, as of September 30, 2002, March 31, 2002, and September
30, 2001, respectively. Goodwill assigned to corporate administration
represents the carrying value of goodwill arising from the Company's
acquisition of NBC 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.
September 30, March 31, September 30,
2002 2002 2001
------------ ------------ ------------
College bookstore operations $13,306,953 $13,020,761 $13,009,875
Corporate administration 16,770,574 16,770,574 16,770,574
------------ ------------ ------------
Total goodwill $30,077,527 $29,791,335 $29,780,449
============ ============ ============
The Company's revenues are attributed to countries based on the location of
the customer. Substantially all revenues generated are attributable to
customers located within the United States.
7. COMPREHENSIVE INCOME - Comprehensive income includes net income and other
comprehensive income (loss). Comprehensive income for the quarters and six
months ended September 30, 2002 and 2001 is presented in the table below.
Quarter Ended Six Months Ended
September 30, September 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Comprehensive Income:
Net income $16,293,256 $14,486,278 $12,852,855 $10,048,956
Other comprehensive income
(loss), net of taxes:
Cumulative effect of adoption
of SFAS No. 133 - - - (602,640)
Unrealized gains (losses) on
interest rate swap agreements 73,461 (513,819) (31,751) (552,169)
------------ ------------ ------------ ------------
$16,366,717 $13,972,459 $12,821,104 $ 8,894,147
============ ============ ============ ============
8. 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 consolidated 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 consolidated financial statements.
9. STOCK OPTION PLANS - Effective June 20, 2002, the Company'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
the Company's Class A Common Stock under the 1998 Performance Stock Option
Plan and options to purchase 2,135 shares of the Company's Class A Common
Stock under the 1998 Stock Option Plan to selected NBC employees and
officers. Twenty-five percent of the options granted became exercisable
immediately on June 20, 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.
10. STOCK TRANSACTION - 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 the Company (collectively
with HWP, the "Sellers"), sold approximately 33% of the issued and
outstanding shares of the Company to certain funds affiliated with Weston
Presidio Capital ("WPC"). HWP retained a controlling interest in the
Company 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 the Company 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 the Company 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 SEPTEMBER 30, 2002 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 2001.
REVENUES. Revenues for the quarters ended September 30, 2002 and 2001 and
the corresponding increase in revenues were as follows:
Increase
-----------------------
2002 2001 Amount Percentage
------------- ------------- ------------ ----------
Wholesale operations $ 56,502,373 $ 51,755,663 $ 4,746,710 9.2 %
College bookstore operations 98,756,896 92,214,598 6,542,298 7.1 %
Complementary services 11,044,514 9,692,834 1,351,680 13.9 %
Intercompany eliminations (8,582,324) (9,451,184) 868,860 9.2 %
------------- ------------- ------------ ----------
$157,721,459 $144,211,911 $13,509,548 9.4 %
============= ============= ============ ==========
The increase in wholesale operations revenues for the quarter ended
September 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 5.0%, or $4.3
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 $2.2 million
increase in revenues. The increase in same store sales is due primarily to
increases in sales of new and used textbooks. Complementary services revenues
increased primarily due to growth in the Company's distance education program,
offset in part by outsourcing the plastic bag program late in fiscal 2002. 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. The Company's intercompany transactions decreased, in
part due to a small shift in wholesale revenues from the Company-owned
bookstores to external customers and in part due to changes made to some of the
complementary services programs.
GROSS PROFIT. Gross profit for the quarter ended September 30, 2002
increased $4.4 million, or 8.3%, to $57.9 million from $53.5 million for the
quarter ended September 30, 2001. This increase was primarily due to higher
revenues, partly offset by a decrease in gross margin percent. Gross margin
percent was 36.7% for the quarter ended September 30, 2002 as compared to 37.1%
for the quarter ended September 30, 2001, driven primarily by the impact of the
incentive programs on wholesale operations and offset in part by improved gross
margin percent in complementary services due to revenue mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the quarter ended September 30, 2002 increased $1.7
million, or 7.7%, to $24.0 million from $22.3 million for the quarter ended
September 30, 2001. Selling, general and administrative expenses as a percentage
of revenues were 15.2% and 15.5% for the quarters ended September 30, 2002 and
2001, respectively. The increase in expenses is primarily the result of the
Company's 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.
11
INCOME (LOSS) BEFORE INTEREST AND TAXES. Income (loss) before interest and
taxes for the quarters ended September 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 $18,314,408 $17,244,502 $1,069,906 6.2 %
College bookstore operations 14,875,168 13,733,059 1,142,109 8.3 %
Complementary services 358,920 176,866 182,054 102.9 %
Corporate administration (597,310) (815,761) 218,451 26.8 %
------------ ------------ ----------- ----------
$32,951,186 $30,338,666 $2,612,520 8.6 %
============ ============ =========== ==========
The increase in income before interest and taxes in wholesale operations
was attributable to increased revenues, slightly-decreased used textbook margins
due to the impact of the incentive programs, and stable expenses as a percentage
of revenues. The improvement in income before interest and taxes in college
bookstore operations was primarily due to increased revenues 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, improved margins, and a decline in certain expenses as a percentage of
revenues. The decrease in corporate administrative costs is attributable, in
part, to a decline in the interdivision profit in inventory elimination, which
decreased due to a decline in the value of used textbooks held by college
bookstore operations that were purchased from the Company's wholesale
operations.
INTEREST EXPENSE, NET. Interest expense, net for the quarter ended
September 30, 2002 decreased $0.7 million, or 10.9%, to $5.6 million from $6.3
million for the quarter ended September 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
consolidated financial statements presented in Item 1. These decreases were
partially offset by increasing original issue debt discount amortization on the
Company's Senior Discount Debentures, which will continue to increase until the
Senior Discount Debentures are fully-accreted to face value of $76.0 million on
February 15, 2003.
LOSS ON DERIVATIVE FINANCIAL INSTRUMENTS. The $0.1 million loss incurred on
derivative financial instruments for the quarter ended September 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 September 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 expense for the quarter ended September 30, 2002
increased $1.4 million, or 15.0%, to $11.0 million from $9.6 million for the
quarter ended September 30, 2001. The Company's effective tax rate for the
quarters ended September 30, 2002 and 2001 was 40.3% and 39.8%, respectively.
The Company's effective tax rate differs from the statutory tax rate primarily
as a result of state income taxes.
SIX MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH SIX MONTHS ENDED SEPTEMBER 30,
2001.
REVENUES. Revenues for the six months ended September 30, 2002 and 2001 and
the corresponding increase in revenues were as follows:
Increase
-----------------------
2002 2001 Amount Percentage
------------- ------------- ------------ ----------
Wholesale operations $ 81,863,663 $ 75,312,192 $ 6,551,471 8.7 %
College bookstore operations 120,510,766 110,482,507 10,028,259 9.1 %
Complementary services 22,645,849 18,097,416 4,548,433 25.1 %
Intercompany eliminations (13,957,286) (14,796,317) 839,031 5.7 %
------------- ------------- ------------ ----------
$211,062,992 $189,095,798 $21,967,194 11.6 %
============= ============= ============ ==========
The increase in wholesale operations revenues for the six months ended
September 30, 2002 was due in part to publisher price increases, complemented by
12
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 5.9%, or $6.2
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 $3.8 million
increase in revenues. The increase in same store sales is due primarily to
increases in sales of new and used textbooks and clothing/insignia wear. The
increase in clothing/insignia wear revenues is due in part to the Company's
bookstore serving the University of Maryland, which increased clothing/insignia
wear revenues by $1.2 million following the University of Maryland's basketball
championship. Complementary services revenues increased primarily due to growth
in the Company's distance education program, offset in part by outsourcing the
plastic bag program late in fiscal 2002. 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. The
Company's intercompany transactions decreased, in part due to a small shift in
wholesale revenues from the Company-owned bookstores to external customers and
in part due to changes made to some of the complementary services programs.
GROSS PROFIT. Gross profit for the six months ended September 30, 2002
increased $7.9 million, or 11.2%, to $78.7 million from $70.8 million for the
six months ended September 30, 2001. This increase was primarily due to higher
revenues and a relatively stable gross margin percent. Gross margin percent was
37.3% for the six months ended September 30, 2002 as compared to 37.4% for the
six months ended September 30, 2001. Gross margin percent in wholesale
operations experienced a small decline primarily as a result of the impact of
the incentive programs, while gross margin percentages in college bookstore
operations and complementary services were relatively stable.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the six months ended September 30, 2002 increased
$3.8 million, or 9.4%, to $43.8 million from $40.0 million for the six months
ended September 30, 2001. Selling, general and administrative expenses as a
percentage of revenues were 20.7% and 21.2% for the six months ended September
30, 2002 and 2001, respectively. The increase in expenses is primarily the
result of the Company's 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 six months ended September 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 $23,349,751 $21,843,325 $1,506,426 6.9 %
College bookstore operations 12,729,196 10,896,462 1,832,734 16.8 %
Complementary services 995,236 467,701 527,535 112.8 %
Corporate administration (3,921,952) (4,020,892) 98,940 2.5 %
------------ ------------ ----------- ----------
$33,152,231 $29,186,596 $3,965,635 13.6 %
============ ============ =========== ==========
The increase in income before interest and taxes in wholesale operations
was attributable to increased revenues, offset in part by the aforementioned
decline in gross margin percent. The improvement in income before interest and
taxes in college bookstore operations was primarily due to increased revenues,
stable 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, stable margins, 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 six months ended
September 30, 2002 decreased $1.0 million, or 8.3%, to $11.4 million from $12.4
million for the six months ended September 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
consolidated financial statements presented in Item 1. These decreases were
partially offset by increasing original issue debt discount amortization on the
Company's Senior Discount Debentures, which will continue to increase until the
Senior Discount Debentures are fully-accreted to face value of $76.0 million on
February 15, 2003.
13
LOSS ON DERIVATIVE FINANCIAL INSTRUMENTS. The $0.2 million loss incurred on
derivative financial instruments for the six months ended September 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 six months ended September
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 expense for the six months ended September 30,
2002 increased $2.1 million, or 30.3%, to $8.8 million from $6.7 million for the
six months ended September 30, 2001. The Company's effective tax rate for the
six months ended September 30, 2002 and 2001 was 40.5% and 40.1%, 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 consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires 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 consolidated 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 consolidated
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
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.
14
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 NBC's Revolving
Credit Facility. At September 30, 2002, the Company's total indebtedness was
$219.4 million, consisting of $33.7 million in Term Loans, $110.0 million of the
Senior Subordinated Notes, $73.1 million of the Senior Discount Debentures, and
$2.6 million of other indebtedness, including capital lease obligations.
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, NBC 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 NBC. NBC has separate five-year amortizing interest rate swap
agreements with two financial institutions whereby NBC'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 $2.6 million and $1.2 million for
the six months ended September 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 six months ended September 30, 2002 and 2001, respectively. For the six
months ended September 30, 2002, one bookstore location was acquired serving the
University of Northern Colorado. For the six months ended September 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 six months ended September 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 six months ended September 30, 2001, NBC
closed one bookstore serving Austin Community College upon expiration of the
property lease and 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
Company's consolidated statements of operations. The sale was made to one of the
Company's largest wholesale customers.
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 from operating activities
for the six months ended September 30, 2002 were $49.1 million, up from $41.9
million for the six months ended September 30, 2001. This increase is primarily
attributable to increased net income and reduced inventory levels.
Access to the Company's principal sources of cash is subject to various
restrictions. The availability of additional borrowings under the Revolving
Credit Facility is subject to the calculation of a borrowing base, which at any
time is equal to a percentage of eligible accounts receivable and inventory, up
to a maximum of $50.0 million. The Senior Credit Facility restricts the
Company's ability to make loans or advances and pay dividends, except that,
among other things, NBC may pay dividends to the Company (i) 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 the Company. The indenture
governing the Senior Discount Debentures (the "Indenture") restricts the ability
15
of the Company and its Restricted Subsidiaries (as defined in the Indenture) to
pay dividends or make other Restricted Payments (as defined in the Indenture) to
their respective stockholders, subject to certain exceptions, unless certain
conditions are met, including that (i) no default under the Indenture shall have
occurred and be continuing, (ii) the Company shall be permitted by the Indenture
to incur additional indebtedness and (iii) the amount of the dividend or payment
may not exceed a certain amount based on, among other things, the Company's
consolidated net income. The indenture governing the Senior Subordinated Notes
contains similar restrictions on the ability of NBC and its Restricted
Subsidiaries (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 September 30, 2002, NBC could borrow up to $50.0 million under the
Revolving Credit Facility, which was unused at September 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 or equity financing.
The following tables present aggregated information as of September 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 (1) $220,228,748 $ 5,480,217 $18,130,864 $10,269,962 $186,347,705
Capital lease
obligations 2,108,828 104,678 283,272 471,800 1,249,078
Operating leases 36,595,000 7,764,000 12,187,000 8,537,000 8,107,000
------------- ------------- ------------- ------------ -------------
Total $258,932,576 $13,348,895 $30,601,136 $19,278,762 $195,703,783
============= ============= ============= ============ =============
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 $ 50,000,000 $ - $50,000,000 $ - $ -
============= ============= ============= ============ =============
(1) Balance includes $2,907,473 of remaining original issue discount
amortization on the Senior Discount Debentures at September 30, 2002.
TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES
In fiscal 2001, NBC entered into several agreements with a newly created
entity, TheCampusHub.com, Inc., which is partially owned by the Company'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 NBC. Such agreements
included an equity option agreement, a management services agreement, and a
technology sale and license agreement. The equity option agreement provides NBC
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 NBC 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 NBC $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
16
for NBC 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 NBC $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 NBC during that three year period. The license fees were recognized as
complementary services revenue over the term of the agreement. For the six
months ended September 30, 2002 and 2001, revenues attributable to the
management services and technology sale and license agreements totaled $0.1
million and $0.5 million, respectively, and reimbursable direct costs incurred
on behalf of TheCampusHub.com, Inc. totaled $0.3 million and $0.4 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 NBC 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 six months ended
September 30, 2002. Net amounts due from TheCampusHub.com, Inc. at September 30,
2002 and 2001 totaled $0.1 million and $0.7 million, respectively. Effective
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. NBC continues to benefit from its relationship with
TheCampusHub.com, Inc., as the technology developed further enhances the
product/service offering of NBC 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 the Company (collectively with HWP, the "Sellers"), sold
approximately 33% of the issued and outstanding shares of the Company to certain
funds affiliated with Weston Presidio Capital ("WPC"). HWP retained a
controlling interest in the Company 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 the Company 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 the Company at a price as
defined in the buy-sell agreement.
In April, 2001, the Company issued 2,621 shares of its Class A Common Stock
to NBC's 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 September 30, 2002 and 2001, notes receivable from
stockholders and the associated interest receivable totaled $0.4 million and
$0.8 million, respectively. 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.
17
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
consolidated 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 consolidated
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
general optimism or pessimism about future operating results, are
forward-looking statements within the meaning of the Reform Act. Such
forward-looking statements involve risks, uncertainties and other factors which
may cause 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. 333-48225), all of which are difficult or impossible
to predict accurately and many of which are beyond the control of the Company.
The Company will not undertake and specifically declines any obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
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 $219.4 million in total
indebtedness outstanding at September 30, 2002, $33.7 million is subject to
fluctuations in the Eurodollar rate. As provided in NBC's Senior Credit
Facility, exposure to interest rate fluctuations is managed by maintaining fixed
interest rate debt (primarily the Senior Subordinated Notes and Senior Discount
Debentures) and by entering into interest rate swap agreements that qualify as
cash flow hedging instruments to effectively convert certain variable rate debt
into fixed rate debt. NBC has separate five-year amortizing interest rate swap
agreements with two financial institutions whereby NBC's variable rate Tranche A
and 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 September 30, 2002 was $21.1 million. Such notional amounts are reduced
periodically by amounts equal to the originally-scheduled principal payments on
the Tranche A and Tranche B Loans.
18
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 September 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):
September 30, March 31,
2002 2002
------------- -------------
Fair Values:
Fixed rate debt $177,535,551 $165,683,478
Variable rate debt (excluding Revolving
Credit Facility) 33,726,948 34,900,000
Interest rate swaps (1,645,540) (1,618,397)
Overall Weighted-Average Interest Rates:
Fixed rate debt 9.66% 9.66%
Variable rate debt (excluding Revolving
Credit Facility) 4.84% 7.01%
Interest rate swaps receive rate 1.74% 3.19%
19
ITEM 4. CONTROLS AND PROCEDURES.
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's Chief
Executive Officer and Treasurer (its principal executive officer and principal
financial officer, respectively) have concluded, based on their evaluation as of
a date within 90 days prior to the date of filing of this quarterly report, that
the Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by it in reports filed or submitted by it
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and includes controls and procedures designed to ensure that information
required to be disclosed by it in such reports is accumulated and communicated
to the Company's management, including its Chief Executive Officer and
Treasurer, as appropriate to allow timely decisions regarding required
disclosure.
(b) CHANGES IN INTERNAL CONTROLS. Not applicable.
20
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of President/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 Principal Financial and Accounting 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
Current Report on Form 8-K dated August 2, 2002 was filed on August 5,
2002 reporting the issuance of a press release announcing the
completion of the previously reported transaction by certain
stockholders of NBC Acquisition Corp. to sell approximately 33% of the
issued and outstanding shares of NBC Acquisition Corp. to certain
funds affiliated with Weston Presidio Capital.
Current Report on Form 8-K dated July 23, 2002 was filed on July 24,
2002 reporting the execution of an agreement by certain stockholders
of NBC Acquisition Corp. to sell approximately 33% of the issued and
outstanding shares of NBC Acquisition Corp. to certain funds
affiliated with Weston Presidio Capital.
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 November 7, 2002.
NBC ACQUISITION CORP.
/s/ Mark W. Oppegard /s/ Alan G. Siemek
- --------------------- -------------------
Mark W. Oppegard Alan G. Siemek
President/Chief Executive Officer, Vice President and Treasurer
Secretary and Director (Principal Financial and Accounting
Officer)
21
CERTIFICATIONS
I, Mark W. Oppegard, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NBC Acquisition
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 7, 2002
/s/ Mark W. Oppegard
----------------------------------
Mark W. Oppegard
President/Chief Executive Officer,
Secretary and
Director
22
I, Alan G. Siemek, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NBC Acquisition
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 7, 2002
/s/ Alan G. Siemek
-----------------------------------
Alan G. Siemek
Vice President and Treasurer
(Principal Financial and Accounting
Officer)
23