NBC ACQUISITION CORP - 10-Q Quarterly Report

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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 DECEMBER 31, 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
FEBRUARY 6, 2003: 1,263,371 SHARES

TOTAL NUMBER OF PAGES: 24

EXHIBIT INDEX: PAGE 22

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NBC ACQUISITION CORP.

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NBC ACQUISITION CORP.

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NBC ACQUISITION CORP.

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NBC ACQUISITION CORP.

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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 nine months ended December 31, 2002 and 2001 include
incremental shares attributable to stock options outstanding at December 31,
2002 and 2001, respectively, as follows:

Weighted-average common shares outstanding for the quarter ended December
31, 2002 exclude 23,264 incremental shares, as to include such shares would
have been antidilutive for the period presented. Stock options outstanding
at December 31, 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 nine months ended December 31,
2001. The estimated fair value was based upon an independent valuation of
the Class A Common Stock.

3. INVENTORIES - Inventories are summarized as follows:

December 31, March 31, December 31,
2002 2002 2001
----------------------------------------------------------------------
Wholesale operations $19,456,994 $30,256,654 $18,954,819
College bookstore operations 57,597,217 32,447,083 55,930,251
Complementary services 8,937,644 7,204,677 6,526,294
----------------------------------------------------------------------
$85,991,855 $69,908,414 $81,411,364
======================================================================

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, outstanding indebtedness under which totaled
$25.9 million and $29.3 million at December 31, 2002 and 2001, expires on
March 31, 2004. Availability under the Revolving Credit Facility is

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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 December 31, 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 December 31, 2002 was 4.75%. 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:

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.

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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 December 31,
2002, March 31, 2002, and December 31, 2001 totaled $1.2 million, $1.6
million, and $2.1 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 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 $(2,768) and $(0.2)
million for the quarter and nine months ended December 31, 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:

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 110 college bookstores as of December 31, 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.

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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 nine months ended December 31, 2002 and 2001, respectively:

9

The following table presents the total carrying amount of goodwill, by
reportable segment, as of December 31, 2002, March 31, 2002, and December
31, 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.

December 31, March 31, December 31,
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 (LOSS) - Comprehensive income (loss) includes net
income (loss) and other comprehensive income (loss). Comprehensive income
(loss) for the quarters and nine months ended December 31, 2002 and 2001 is
presented in the table below.

8. ACCOUNTING STANDARDS NOT YET ADOPTED - In January, 2003 the Financial
Accounting Standards Board (FASB) issued Interpretation No. 46,
CONSOLIDATION OF VARIABLE INTEREST ENTITIES (FIN 46). FIN 46 requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's
residual returns or both. FIN 46 also requires disclosures about variable
interest entities that a company is not required to consolidate but in which
it has a significant variable interest. The consolidation requirements of
FIN 46 apply immediately to variable interest entities created after January
31, 2003. The consolidation requirements apply to existing entities in the
first fiscal year or interim period beginning after June 15, 2003. Certain
of the disclosure requirements apply in all financial statements issued
after January 31, 2003, regardless of when the variable interest entity was
established. The adoption of this standard in fiscals 2003 and 2004 is not
expected to have a significant impact on the Company's consolidated
financial statements. In December, 2002 the FASB issued Statement of
Financial Accounting Standards ("SFAS") No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION-TRANSITION AND DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO.
123. This standard provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation and requires prominent disclosures in
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. Transition and annual disclosure provisions of SFAS No.
148 are effective for fiscal years ending after December 15, 2002, while
interim disclosure provisions of SFAS No. 148 are effective for interim
periods beginning after December 15, 2002. The Company does not plan to
adopt the voluntary change to the fair value based method of accounting for
stock-based compensation. The required disclosures will be included in the
Company's annual consolidated financial statements beginning March 31, 2003
and in the Company's quarterly consolidated financial statements beginning
June 30, 2003. In November, 2002 the FASB issued Interpretation No. 45,
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS (FIN 45). FIN 45 requires
guarantors to recognize, at the inception of certain guarantees issued or
modified after December 31, 2002, a liability for the fair value of the
obligation undertaken in issuing the guarantee. FIN 45 also elaborates on
the disclosures to be made by a guarantor about its obligations under
certain guarantees in its interim and annual financial statements for
periods ending after December 15, 2002. The Company does not expect its

10

adoption of the liability measurement and recognition provisions of this
standard later in fiscal 2003 to have a significant impact on its
consolidated financial statements. There was no impact on the Company's
consolidated financial statements for the quarter ended December 31, 2002
from the adoption of the disclosure provisions of this standard, as the only
guarantees in existence at December 31, 2002 relate to subsidiary guarantees
of the parent's debt to a third party, which are exempt from the disclosure
requirements as the debt underlying such guarantees is already reflected in
the consolidated financial statements. In July, 2002 the FASB issued 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 FASB 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.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

QUARTER ENDED DECEMBER 31, 2002 COMPARED WITH QUARTER ENDED DECEMBER 31, 2001.

REVENUES. Revenues for the quarters ended December 31, 2002 and 2001 and the
corresponding increase (decrease) in revenues were as follows:

The increase in wholesale operations revenues for the quarter ended December
31, 2002 was due primarily to publisher price increases. The decrease in college
bookstore operations revenues was primarily attributable to a decrease in same
store sales of 5.4%, or $0.9 million. The decrease in same store sales is due
primarily to relatively poor college football results at campuses with some of
the Company's larger stores including those at Nebraska, Michigan State, South
Carolina, and Maryland. Third quarter total revenue declined $1.9 million at
these stores, including a $1.7 million decline in clothing and insignia revenue,
from the same quarter in fiscal 2002. 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. Corresponding to the overall growth in revenues, the Company's
intercompany transactions also increased.

GROSS PROFIT. Gross profit for the quarter ended December 31, 2002 increased
$1.6 million, or 7.7%, to $22.2 million from $20.6 million for the quarter ended
December 31, 2001. This increase was primarily due to an increase in gross
margin percent, along with higher revenues. Gross margin percent was 41.9% for
the quarter ended December 31, 2002 as compared to 40.0% for the quarter ended
December 31, 2001, driven primarily by improved gross margin percent from
college bookstore operations which increased primarily due to certain margin
improvement efforts.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the quarter ended December 31, 2002 increased $1.1
million, or 5.7%, to $20.8 million from $19.7 million for the quarter ended
December 31, 2001. Selling, general and administrative expenses as a percentage
of revenues were 39.3% and 38.2% for the quarters ended December 31, 2002 and
2001, respectively. The increase in expenses is primarily the result of the
Company's growth, as previously discussed. The increase in expenses as a
percentage of revenues is primarily attributable to expense growth outpacing
revenue growth in certain areas, including advertising, shipping, and insurance.

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INCOME (LOSS) BEFORE INTEREST AND TAXES. Income (loss) before interest and
taxes for the quarters ended December 31, 2002 and 2001 and the corresponding
change in income (loss) before interest and taxes were as follows:

Change
----------------------
2002 2001 Amount Percentage
------------- ------------- ----------- ----------
Wholesale operations $ 5,580,589 $ 6,019,530 $ (438,941) (7.3)%
College bookstore operations (1,102,539) (2,245,898) 1,143,359 50.9 %
Complementary services 209,158 34,403 174,755 508.0 %
Corporate administration (4,166,861) (3,797,528) (369,333) (9.7)%
------------- ------------- ------------
$ 520,347 $ 10,507 $ 509,840
============= ============= ============

The decrease in income before interest and taxes in wholesale operations was
attributable to decreased used textbook margins due to the impact of the
incentive programs. The improvement in income before interest and taxes in
college bookstore operations was primarily due to improved gross margin
percentages. The increase in income before interest and taxes in complementary
services was primarily due to increased revenues and an adverse court judgment
in the third quarter of fiscal 2002 that resulted in a loss of $0.3 million. The
increase in corporate administrative costs is primarily attributable to an
increase in the interdivision profit in inventory elimination, which increased
due to an increase 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 December
31, 2002 decreased $0.4 million, or 6.1%, to $5.4 million from $5.8 million for
the quarter ended December 31, 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.

INCOME TAXES. Income tax benefit for the quarter ended December 31, 2002
decreased $(0.4) million, or 14.0%, to $(1.9) million from $(2.3) million for
the quarter ended December 31, 2001. The Company's effective tax rate for the
quarters ended December 31, 2002 and 2001 was 39.4% and 39.0%, respectively. The
Company's effective tax rate differs from the statutory tax rate primarily as a
result of state income taxes.

NINE MONTHS ENDED DECEMBER 31, 2002 COMPARED WITH NINE MONTHS ENDED DECEMBER 31,
2001.

REVENUES. Revenues for the nine months ended December 31, 2002 and 2001 and
the corresponding increase in revenues were as follows:

Increase
-----------------------
2002 2001 Amount Percentage
------------- ------------- ------------ ----------
Wholesale operations $112,935,937 $104,731,956 $ 8,203,981 7.8 %
College bookstore operations 137,975,949 128,843,329 9,132,620 7.1 %
Complementary services 32,638,055 27,037,764 5,600,291 20.7 %
Intercompany eliminations (19,588,015) (20,081,774) 493,759 2.5 %
------------- ------------- ------------ ----------
$263,961,926 $240,531,275 $23,430,651 9.7 %
============= ============= ============ ==========

The increase in wholesale operations revenues for the nine months ended
December 31, 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 4.3%, or $5.3
million, and to the acquisition of 13 new college bookstores (defined by the
Company as stores acquired since April 1, 2001 - 3 bookstores 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. 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 and a
decline in systems division revenues resulting from revisions made to certain
agreements with TheCampusHub.com, Inc. and a drop in system installations at
Company-owned bookstore locations. The increased revenues in distance education

13

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 nine months ended December 31, 2002
increased $9.5 million, or 10.4%, to $100.9 million from $91.4 million for the
nine months ended December 31, 2001. This increase was primarily due to higher
revenues and a relatively stable gross margin percent. Gross margin percent was
38.2% for the nine months ended December 31, 2002 as compared to 38.0% for the
nine months ended December 31, 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 percent in college bookstore
operations improved primarily due to certain margin improvement efforts.
Complementary services' gross margin percent was stable.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the nine months ended December 31, 2002 increased
$4.8 million, or 8.1%, to $64.5 million from $59.7 million for the nine months
ended December 31, 2001. Selling, general and administrative expenses as a
percentage of revenues were 24.4% and 24.8% for the nine months ended December
31, 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 nine months ended December 31, 2002 and 2001 and the corresponding
change in income (loss) before interest and taxes were as follows:

Change
-----------------------
2002 2001 Amount Percentage
------------ ------------ ----------- ----------
Wholesale operations $28,930,340 $27,862,855 $1,067,485 3.8 %
College bookstore operations 11,626,657 8,650,564 2,976,093 34.4 %
Complementary services 1,204,394 502,104 702,290 139.9 %
Corporate administration (8,088,813) (7,818,420) (270,393) (3.5)%
------------ ------------ ----------- ----------
$33,672,578 $29,197,103 $4,475,475 15.3 %
============ ============ =========== ==========

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, 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, 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 nine months ended
December 31, 2002 decreased $1.4 million, or 7.6%, to $16.8 million from $18.2
million for the nine months ended December 31, 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 $0.2 million loss incurred on
derivative financial instruments for the nine months ended December 31, 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 nine months ended December
31, 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 nine months ended December 31, 2002
increased $2.3 million, or 52.7%, to $6.8 million from $4.5 million for the nine

14

months ended December 31, 2001. The Company's effective tax rate for the nine
months ended December 31, 2002 and 2001 was 40.9% and 40.7%, 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.

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 December 31, 2002, the Company's total indebtedness was
$245.3 million, consisting of $31.8 million in Term Loans, $110.0 million of the
Senior Subordinated Notes, $75.1 million of the Senior Discount Debentures, $2.5
million of other indebtedness, including capital lease obligations, and $25.9
million under the Revolving Credit Facility.

Principal and interest payments under the Senior Credit Facility and the
Senior Subordinated Notes represent significant liquidity requirements for the
Company. Under the terms of the Tranche A and Tranche B Loans, after taking into

15

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 $3.0 million and $1.8 million for
the nine months ended December 31, 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 $0.9 million and $5.8 million for the
nine months ended December 31, 2002 and 2001, respectively. For the nine months
ended December 31, 2002, one bookstore location was acquired serving the
University of Northern Colorado and two bookstore locations were acquired
serving Western Kentucky University. For the nine months ended December 31,
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 nine months ended December 31, 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 nine months ended December 31, 2001, NBC
closed bookstores serving Austin Community College and Coconino Community
College upon expiration of the property leases 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 used for operating
activities for the nine months ended December 31, 2002 were $19.5 million, up
from $15.4 million for the nine months ended December 31, 2001. This increase is
primarily attributable to increased income tax payments, arising in part due to
timing of tax estimate payments and in part due to increased income.

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
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.

16

As of December 31, 2002, NBC could borrow up to $50.0 million under the
Revolving Credit Facility. Outstanding indebtedness under the Revolving Credit
Facility was $25.9 million at December 31, 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 December 31, 2002
regarding the Company's contractual obligations and commercial commitments:

(1) Balance includes $969,158 of remaining original issue discount
amortization on the Senior Discount Debentures at December 31, 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
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 nine
months ended December 31, 2002 and 2001, revenues attributable to the management

17

services and technology sale and license agreements totaled $0.2 million and
$0.7 million, respectively, and reimbursable direct costs incurred on behalf of
TheCampusHub.com, Inc. totaled $0.5 million and $0.6 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 was not generating sufficient excess cash
flow to fund its obligations under the aforementioned agreements and the
remaining capital available from its shareholders was 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 nine months ended December 31, 2002.
Net amounts due from TheCampusHub.com, Inc. at December 31, 2002 and 2001
totaled $0.1 million and $0.6 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 December 31, 2002 and 2001, notes receivable from
stockholders and the associated interest receivable totaled $0.4 million and
$0.9 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.

ACCOUNTING STANDARDS NOT YET ADOPTED

In January, 2003 the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES (FIN 46). FIN
46 requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest

18

entity's activities or entitled to receive a majority of the entity's residual
returns or both. FIN 46 also requires disclosures about variable interest
entities that a company is not required to consolidate but in which it has a
significant variable interest. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003. The
consolidation requirements apply to existing entities in the first fiscal year
or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The adoption of
this standard in fiscals 2003 and 2004 is not expected to have a significant
impact on the Company's consolidated financial statements. In December, 2002 the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards ("SFAS") No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION
AND DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO. 123. This standard provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation and requires
prominent disclosures in annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. Transition and annual disclosure provisions of
SFAS No. 148 are effective for fiscal years ending after December 15, 2002,
while interim disclosure provisions of SFAS No. 148 are effective for interim
periods beginning after December 15, 2002. The Company does not plan to adopt
the voluntary change to the fair value based method of accounting for
stock-based compensation. The required disclosures will be included in the
Company's annual consolidated financial statements beginning March 31, 2003 and
in the Company's quarterly consolidated financial statements beginning June 30,
2003. In November, 2002 the FASB issued Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS (FIN 45). FIN 45 requires guarantors to
recognize, at the inception of certain guarantees issued or modified after
December 31, 2002, a liability for the fair value of the obligation undertaken
in issuing the guarantee. FIN 45 also elaborates on the disclosures to be made
by a guarantor about its obligations under certain guarantees in its interim and
annual financial statements for periods ending after December 15, 2002. The
Company does not expect its adoption of the liability measurement and
recognition provisions of this standard later in fiscal 2003 to have a
significant impact on its consolidated financial statements. There was no impact
on the Company's consolidated financial statements for the quarter ended
December 31, 2002 from the adoption of the disclosure provisions of this
standard, as the only guarantees in existence at December 31, 2002 relate to
subsidiary guarantees of the parent's debt to a third party, which are exempt
from the disclosure requirements as the debt underlying such guarantees is
already reflected in the consolidated financial statements. In July, 2002 the
Financial Accounting Standards Board issued 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

19

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 $245.3 million in total
indebtedness outstanding at December 31, 2002, $31.8 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 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. The notional amount under each agreement as of
December 31, 2002 was $19.9 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 December 31, 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):

December 31, March 31,
2002 2002
-------------- --------------
Fair Values:
Fixed rate debt $ 180,093,510 $ 165,683,478
Variable rate debt (excluding Revolving
Credit Facilitity) 31,759,075 34,900,000
Interest rate swaps (1,243,159) (1,618,397)

Overall Weighted-Average Interest Rates:
Fixed rate debt 9.66% 9.66%
Variable rate debt (excluding Revolving
Credit Facility) 4.77% 7.01%
Interest rate swaps receive rate 1.69% 3.19%

20

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.

21

PART II. OTHER INFORMATION

ITEM 5. OTHER INFORMATION

The Company is not required to file reports with the Securities and
Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, but is filing this Quarterly Report on Form
10-Q on a voluntary basis.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

3.2 Amendment, dated as of August 2, 2002, to By-laws of NBC
Acquisition Corp.

10.1 Amendment of Form of Deferred Compensation Agreement, dated
December 30, 2002, by and between Nebraska Book Company, Inc. and
each of Mark W. Oppegard, Larry R. Rempe and Thomas A. Hoff.

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

No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 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 February 6, 2003.

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)

22

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.

February 6, 2003
/s/ Mark W. Oppegard
----------------------------------
Mark W. Oppegard
President/Chief Executive Officer,
Secretary and
Director

23

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.

February 6, 2003
/s/ Alan G. Siemek
-----------------------------------
Alan G. Siemek
Vice President and Treasurer
(Principal Financial and Accounting
Officer)

24