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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
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 August 13, 2003: 1,304,451 shares
Total Number of Pages: 21
Exhibit Index: Page 21
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NBC ACQUISITION CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------
June 30, March 31, June 30,
2003 2003 2002
--------------- -------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,455,254 $ 39,405,382 $ 5,562,661
Receivables 30,656,956 29,085,329 31,607,933
Inventories 93,066,834 68,315,352 93,206,015
Recoverable income taxes 2,766,865 - 1,963,541
Deferred income taxes 4,600,252 3,861,932 3,419,325
Prepaid expenses and other assets 866,637 834,284 807,032
--------------- -------------- ---------------
Total current assets 138,412,798 141,502,279 136,566,507
PROPERTY AND EQUIPMENT, net of depreciation & amortization 27,627,058 27,666,370 26,808,238
GOODWILL 30,481,472 30,472,823 30,075,623
IDENTIFIABLE INTANGIBLES, net of amortization 184,239 239,014 419,953
DEBT ISSUE COSTS, net of amortization 5,650,223 6,055,751 7,272,333
OTHER ASSETS 3,856,938 4,442,780 6,155,843
--------------- -------------- ---------------
$ 206,212,728 $210,379,017 $ 207,298,497
=============== ============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 19,053,314 $ 19,857,301 $ 18,719,744
Accrued employee compensation and benefits 4,441,375 10,642,713 4,071,411
Accrued interest 6,952,236 2,505,772 4,187,579
Accrued incentives 7,303,837 5,518,883 5,663,081
Accrued expenses 1,036,658 1,077,844 889,705
Income taxes payable - 89,932 -
Deferred revenue 444,962 538,230 1,004,170
Current maturities of long-term debt 17,771,293 19,181,277 5,370,383
Current maturities of capital lease obligations 129,573 124,703 107,491
Revolving credit facility 2,300,000 - 24,100,000
--------------- -------------- ---------------
Total current liabilities 59,433,248 59,536,655 64,113,564
LONG-TERM DEBT, net of current maturities 197,748,779 197,755,713 210,708,474
CAPITAL LEASE OBLIGATIONS, net of current maturities 2,269,518 2,305,583 2,028,242
OTHER LONG-TERM LIABILITIES 305,068 300,823 2,064,551
COMMITMENTS (Note 4)
STOCKHOLDERS' DEFICIT:
Class A common stock, voting, authorized 5,000,000 shares
of $.01 par value; issued and outstanding 1,264,546;
1,264,246 and 1,263,371 shares at June 30, 2003;
March 31, 2003; and June 30, 2002, respectively 12,645 12,642 12,634
Additional paid-in capital 65,407,213 65,381,476 65,304,884
Notes receivable from stockholders (341,091) (336,681) (845,861)
Accumulated deficit (118,406,085) (114,158,563) (135,378,212)
Accumulated other comprehensive loss (216,567) (418,631) (709,779)
--------------- -------------- ---------------
Total stockholders' deficit (53,543,885) (49,519,757) (71,616,334)
--------------- -------------- ---------------
$ 206,212,728 $210,379,017 $ 207,298,497
=============== ============== ===============
See notes to consolidated financial statements.
2
NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- -------------------------------------------------------------------------------------
Three Months Ended June 30,
2003 2002
-------------- --------------
REVENUES, net of returns $ 54,761,183 $ 53,341,533
COSTS OF SALES 32,973,997 32,539,357
-------------- --------------
Gross profit 21,787,186 20,802,176
OPERATING EXPENSES:
Selling, general and administrative 22,157,134 19,719,391
Depreciation 754,294 736,352
Amortization 159,330 145,388
-------------- --------------
23,070,758 20,601,131
-------------- --------------
INCOME (LOSS) FROM OPERATIONS (1,283,572) 201,045
OTHER EXPENSES (INCOME):
Interest expense 5,642,817 5,798,322
Interest income (8,758) (10,605)
(Gain) Loss on derivative financial instruments (105) 93,207
-------------- --------------
5,633,954 5,880,924
-------------- --------------
LOSS BEFORE INCOME TAXES (6,917,526) (5,679,879)
INCOME TAX BENEFIT (2,670,004) (2,239,478)
-------------- --------------
NET LOSS $ (4,247,522) $ (3,440,401)
============== ==============
EARNINGS (LOSS) PER SHARE:
Basic $ (3.36) $ (2.72)
============== ==============
Diluted $ (3.36) $ (2.72)
============== ==============
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 1,264,401 1,263,371
============== ==============
Diluted 1,264,401 1,263,371
============== ==============
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 Comprehensive
Stock Capital Stockholders Deficit Loss Total Loss
-------- ----------- ------------ -------------- ------------- ------------- -------------
BALANCE, April 1, 2002 $ 12,634 $65,304,884 $ (865,940) $(131,937,811) $ (604,567) $(68,090,800) $ -
Payment on stockholder notes - - 30,942 - - 30,942 -
Interest accrued on
stockholder notes - - (10,863) - - (10,863) -
Net loss - - - (3,440,401) - (3,440,401) (3,440,401)
Other comprehensive loss,
net of taxes:
Unrealized losses on interest
rate swap agreements, net of
taxes of $31,243 - - - - (105,212) (105,212) (105,212)
-------- ------------ ------------ --------------- ------------ ------------- ------------
BALANCE, June 30, 2002 $ 12,634 $65,304,884 $ (845,861) $(135,378,212) $ (709,779) $(71,616,334) $(3,545,613)
======== ============ ============ =============== ============ ============= ============
BALANCE, April 1, 2003 $ 12,642 $65,381,476 $ (336,681) $(114,158,563) $ (418,631) $(49,519,757) $ -
Issuance of 300 shares of
common stock upon exercise
of stock options 3 25,737 - - - 25,740 -
Interest accrued on
stockholder notes - - (4,410) - - (4,410) -
Net loss - - - (4,247,522) - (4,247,522) (4,247,522)
Other comprehensive income,
net of taxes:
Unrealized gains on interest
rate swap agreements, net
of taxes of $123,636 - - - - 202,064 202,064 202,064
-------- ------------ ------------ --------------- ------------ ------------- ------------
BALANCE, June 30, 2003 $ 12,645 $65,407,213 $ (341,091) $ (118,406,085) $ (216,567) $(53,543,885) $(4,045,458)
======== ============ ============ =============== ============ ============= ============
See notes to consolidated financial statements.
4
NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------
Three Months Ended June 30,
2003 2002
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,247,522) $ (3,440,401)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Provision for losses on accounts receivable 7,067 6,370
Depreciation 754,294 736,352
Amortization 564,858 547,966
Original issue debt discount amortization - 1,849,608
Noncash interest (income) expense from
derivative financial instruments (15,305) 24,580
(Gain) Loss on derivative financial instruments (84,959) 3,438
(Gain) Loss on disposal of assets 6,239 (165)
Reduction of income taxes paid due to employee
exercise of stock options 10,000 -
Deferred income taxes (226,000) 197,000
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals:
Receivables (1,585,582) (2,240,917)
Inventories (23,616,258) (23,106,376)
Recoverable income taxes (2,766,865) (1,963,541)
Prepaid expenses and other assets (32,353) (308,592)
Other assets (106,370) (200,466)
Accounts payable (378,023) 3,635,667
Accrued employee compensation and benefits (6,201,338) (4,839,491)
Accrued interest 4,446,464 2,640,380
Accrued incentives 1,784,954 2,067,453
Accrued expenses 8,814 (171,264)
Income taxes payable (89,932) (3,684,439)
Deferred revenue (93,268) 571,380
Other long-term liabilities 4,245 7,828
--------------- --------------
Net cash flows from operating activities (31,856,840) (27,667,630)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (644,141) (967,675)
Bookstore acquisitions, net of cash acquired (1,271,395) (643,513)
Proceeds from sale of property and equipment and other 2,920 165
Software development costs (48,299) (126,201)
--------------- --------------
Net cash flows from investing activities (1,960,915) (1,737,224)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of financing costs - (32,446)
Principal payments on long-term debt (1,416,918) (522,690)
Principal payments on capital lease obligations (31,195) (27,568)
Proceeds from exercise of stock options 15,740 -
Net increase in revolving credit facility 2,300,000 24,100,000
Proceeds from payment on notes receivable from stockholders - 30,942
--------------- --------------
Net cash flows from financing activities 867,627 23,548,238
--------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (32,950,128) (5,856,616)
CASH AND CASH EQUIVALENTS, Beginning of period 39,405,382 11,419,277
--------------- --------------
CASH AND CASH EQUIVALENTS, End of period $ 6,455,254 $ 5,562,661
=============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest $ 890,984 $ 970,945
Income taxes 402,793 3,211,502
Noncash investing and financing activities:
Accumulated other comprehensive income (loss):
Unrealized gains (losses) on interest rate
swap agreements, net of income taxes 202,064 (105,212)
Deferred taxes resulting from accumulated
other comprehensive income(loss) 123,636 (31,243)
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, 2003 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, 2003 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 basic
and diluted earnings per share, weighted-average common shares outstanding
for the quarters ended June 30, 2003 and 2002 were as follows:
Quarter Ended June 30,
2003 2002
-------- --------
Basic Earnings Per Share:
Weighted-average common shares outstanding 1,264,401 1,263,371
Diluted Earnings Per Share:
Weighted-average common shares outstanding 1,264,401 1,263,371
Stock options outstanding 81,825 83,000
For purposes of calculating diluted earnings per share, weighted-average
common shares outstanding for the quarters ended June 30, 2003 and 2002
exclude 26,522 and 4,601 incremental shares, respectively, as to include
such shares would have been antidilutive for the periods presented.
3. INVENTORIES - Inventories are summarized as follows:
June 30, March 31, June 30,
2003 2003 2002
------------------------------------------------------------------------------
Textbook Division $39,716,411 $28,908,121 $40,654,413
Bookstore Division 45,229,422 31,986,260 44,613,223
Distance Education Division 7,166,819 6,833,989 7,431,079
Other Complementary Services Divisions 954,182 586,982 507,300
------------------------------------------------------------------------------
$93,066,834 $68,315,352 $93,206,015
==============================================================================
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 $2.3 million and $24.1 million at June 30,
2003 and 2002, expires on March 31, 2004. Availability under the Revolving
Credit Facility is determined by the calculation of a borrowing base, which
at any time is equal to a percentage of eligible accounts receivable and
inventory, up to a maximum of $50.0 million. The calculated borrowing base
at June 30, 2003 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
6
Eurodollar borrowings, the Eurodollar rate plus an applicable margin of up
to 2.50%. Additionally, there is a 0.3% commitment fee for the average
daily unused amount of the Revolving Credit Facility. The interest rate on
the Revolving Credit Facility at June 30, 2003 was 4.50%. 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
calculated annually based upon year-end results and to be applied initially
towards prepayment of the term loans and then utilized to permanently
reduce commitments under the Revolving Credit Facility. There is an excess
cash flow payment obligation for fiscal 2003 of $14.7 million that is
included in the current portion of long-term debt and is due and payable on
September 29, 2003. The Senior Credit Facility was amended in June, 2003,
to permit the merger of TheCampusHub.com, Inc. into NBC on July 1, 2003
(see Note 9).
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 accreted 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 Financial Accounting Standards Board
("FASB") has issued Statement of Financial Accounting Standards ("SFAS")
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as
amended by SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133, and
SFAS No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN
HEDGING ACTIVITIES, and SFAS No. 149, AMENDMENT OF STATEMENT 133 ON
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This standard requires that
all derivative instruments be recorded in the balance sheet at fair value.
Changes in the fair value of derivatives are recorded in earnings or other
comprehensive income (loss), based on whether the instrument is designated
as part of a hedge transaction and, if so, the type of hedge transaction.
The Company utilizes derivative financial instruments 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 and adopted
SFAS No. 133 effective April 1, 2001.
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:
June 30, March 31, June 30,
2003 2003 2002
--------------- -------------- ---------------
Total indebtedness outstanding $ 220,219,163 $219,367,276 $ 242,314,590
Indebtedness subject to Eurodollar fluctuations 29,036,472 30,447,160 34,382,906
Notional amounts under swap agreements 36,400,000 38,100,000 43,200,000
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.
7
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.
Under hedge accounting, the interest rate swap agreements are reflected at
fair value in the Company's consolidated balance sheets (as "accounts
payable" at June 30, 2003 and March 31, 2003 and "other long-term
liabilities" at June 30, 2002) 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 as a
liability at June 30, 2003, March 31, 2003, and June 30, 2002 totaled $0.4
million, $0.8 million, and $1.8 million, respectively.
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 loss on derivative financial instruments in the
consolidated statements of operations and totaled $0.1 million for the
quarter ended June 30, 2002. A minimal gain on derivative financial
instruments was recognized for the quarter ended June 30, 2003.
Information regarding the fair value of the portion of the interest rate
swap agreements designated as hedging instruments is presented in the
following table for the periods then ended:
June 30, March 31, June 30,
2003 2003 2002
------------ ----------- ------------
Increase (decrease) in fair value of swap agreements
designated as hedges $ 341,005 $ 582,146 $ (161,035)
Interest (income) expense recorded due to hedge
ineffectiveness (15,305) (249,310) 24,580
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. During
the quarter ended June 30, 2003, the Distance Education Division surpassed
the quantitative revenue threshold for a reportable segment. The segment
information has been reclassified to reflect this change for all periods
8
presented. The Company now has four reportable segments: Textbook Division,
Bookstore Division, Distance Education Division, and Other Complementary
Services Divisions. The Textbook Division segment consists primarily of
selling used textbooks to college bookstores, buying them back from
students or college bookstores at the end of each college semester and then
reselling them to college bookstores. The Bookstore Division segment
encompasses the operating activities of the Company's 111 college
bookstores as of June 30, 2003 located on or adjacent to college campuses.
The Distance Education Division provides students with textbooks and
materials for use in distance education courses, and is a provider of
textbooks to nontraditional programs and students such as correspondence or
corporate education students. Such services are provided by Specialty
Books, Inc., a wholly-owned subsidiary of NBC. The Other Complementary
Services Divisions segment includes book-related services such as computer
hardware and software and a centralized buying service.
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 ended June 30, 2003 and 2002, respectively:
Other
Distance Complementary
Textbook Bookstore Education Services
Division Division Division Divisions Total
-------------- -------------- -------------- -------------- -------------
Quarter ended June 30, 2003:
External customer revenues $19,682,118 $22,000,688 $10,316,603 $ 2,761,774 $54,761,183
Intersegment revenues 5,347,032 252,568 - 367,771 5,967,371
Depreciation and amortization expense 211,262 505,655 20,784 138,556 876,257
Earnings (loss) before interest, taxes,
depreciation and amortization (EBITDA) 4,651,715 (2,368,516) 551,019 565,386 3,399,604
Quarter ended June 30, 2002:
External customer revenues $20,371,181 $21,592,986 $ 9,472,224 $ 1,905,142 $53,341,533
Intersegment revenues 4,990,109 160,884 - 223,969 5,374,962
Depreciation and amortization expense 114,567 537,356 64,221 118,676 834,820
Earnings (loss) before interest, taxes,
depreciation and amortization (EBITDA) 5,149,910 (1,699,224) 724,653 185,167 4,360,506
The following table reconciles segment information presented above with
information as presented in the consolidated financial statements for the
quarters ended June 30, 2003 and 2002, respectively:
Quarter Ended June 30,
2003 2002
-------------- --------------
Revenues:
Total for reportable segments $ 60,728,554 $ 58,716,495
Elimination of intersegment revenues (5,967,371) (5,374,962)
-------------- --------------
Consolidated total $ 54,761,183 $ 53,341,533
============== ==============
Depreciation and Amortization Expense:
Total for reportable segments $ 876,257 $ 834,820
Corporate administration 37,367 46,920
-------------- --------------
Consolidated total $ 913,624 $ 881,740
============== ==============
Loss Before Income Taxes:
Total EBITDA for reportable segments $ 3,399,604 $ 4,360,506
Corporate administrative costs (3,769,552) (3,277,721)
-------------- --------------
(369,948) 1,082,785
Depreciation and amortization (913,624) (881,740)
-------------- --------------
Consolidated income (loss) from operations (1,283,572) 201,045
Interest and other expense, net (5,633,954) (5,880,924)
-------------- --------------
Consolidated loss before income taxes $ (6,917,526) $ (5,679,879)
============== ==============
9
EBITDA is defined as earnings before interest, taxes, depreciation, and
amortization. As the Company is highly-leveraged and as the Company's
equity is not publicly-traded, management believes that EBITDA is useful in
measuring its liquidity and provides additional information for determining
its ability to meet debt service requirements. The Senior Subordinated
Notes, Senior Discount Debentures, and Senior Credit Facility also utilize
EBITDA, as defined in those agreements, for certain financial covenants.
EBITDA does not represent and should not be considered as an alternative to
net cash flows from operating activities as determined by accounting
principles generally accepted in the United States of America, and EBITDA
does not necessarily indicate whether cash flows will be sufficient for
cash requirements. Items excluded from EBITDA, such as interest, taxes,
depreciation and amortization, are significant components in understanding
and assessing the Company's financial performance. EBITDA measures
presented may not be comparable to similarly titled measures presented by
other registrants.
The following presentation reconciles EBITDA with net cash flows from
operating activities as presented in the Consolidated Statements of Cash
Flows:
Quarter ended June 30,
2003 2002
-------------- --------------
EBITDA $ (369,948) $ 1,082,785
Adjustments to reconcile EBITDA to net cash flows
from operating activities:
Interest income 8,758 10,605
Provision for losses on accounts receivable 7,067 6,370
Cash paid for interest (890,984) (970,945)
Cash paid for income taxes (402,793) (3,211,502)
(Gain) Loss on disposal of assets 6,239 (165)
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals (1) (30,215,179) (24,584,778)
-------------- --------------
Net Cash Flows from Operating Activities $(31,856,840) $(27,667,630)
============== ==============
(1) Changes in operating assets and liabilities, net of effect of
acquisitions/disposals, includes the changes in the balances of
receivables, inventories, prepaid expenses and other assets, other
assets, accounts payable, accrued employee compensation and benefits,
accrued incentives, accrued expenses, deferred revenue, and other
long-term liabilities.
The following table presents the total carrying amount of goodwill, by
reportable segment, as of June 30, 2003, March 31, 2003, and June 30, 2002,
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 portion of the Company's assets,
such goodwill is not allocated between the Company's segments when
management makes operating decisions and assesses performance. Such
goodwill is allocated to the Company's reporting units for purposes of
testing goodwill for impairment and calculating any gain or loss on the
disposal of all or a portion of a reporting unit.
June 30, March 31, June 30,
2003 2003 2002
------------- -------------- -------------
Bookstore Division $13,710,898 $ 13,702,249 $13,305,049
Corporate administration 16,770,574 16,770,574 16,770,574
------------- -------------- -------------
Total goodwill $30,481,472 $ 30,472,823 $30,075,623
============= ============== =============
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. STOCK-BASED COMPENSATION - The Company accounts for its stock-based
compensation under provisions of Accounting Principles Board ("APB")
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and related
interpretations utilizing the intrinsic value method. Under this method,
10
compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, established accounting and
disclosure requirements using a fair-value-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123, the
Company has elected to continue to apply the intrinsic-value-based method
of accounting.
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE, AN AMENDMENT OF FASB STATEMENT
NO. 123. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements. The following table
illustrates the effect on net loss if the fair-value-based method had been
applied to all outstanding and unvested awards in each period:
Quarter Ended June 30,
2003 2002
------------- -------------
Net loss, as reported $(4,247,522) $(3,440,401)
Less: Stock-based compensation determined under fair
value based method, net of related income tax effects (11,327) (23,096)
------------- -------------
Pro forma net loss $(4,258,849) $(3,463,497)
============= =============
Basic and diluted earnings (loss) per share:
As reported $ (3.36) $ (2.72)
Pro forma (3.37) (2.74)
8. ACCOUNTING STANDARDS NOT YET ADOPTED - In May, 2003 the FASB issued SFAS
No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS
OF BOTH LIABILITIES AND EQUITY. This standard improves the accounting for
certain financial instruments that issuers previously accounted for as
equity, requiring such instruments to be classified as liabilities in
certain situations. SFAS No. 150 is effective for all financial instruments
entered into or modified after May 31, 2003 and for interim periods
beginning after June 15, 2003. The Company does not expect its adoption of
this standard in the second quarter of fiscal 2004 to have a significant
impact on its consolidated financial statements.
In January, 2003 the 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 the consolidation requirements attributable to
existing entities in the second quarter of fiscal 2004 is not expected to
have a significant impact on the Company's consolidated financial
statements.
9. SUBSEQUENT EVENT - On July 1, 2003, the Company and NBC entered into a
merger agreement with TheCampusHub.com, Inc. to merge TheCampusHub.com into
NBC, with NBC as the surviving entity. Each share of TheCampusHub.com
common stock issued and outstanding was converted into 0.0306945 shares of
Class A Common Stock of the Company, resulting in the issuance of 39,905
shares of NBC Acquisition Corp. Class A Common Stock.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 2003 COMPARED WITH QUARTER ENDED JUNE 30, 2002.
REVENUES. Revenues for the quarters ended June 30, 2003 and 2002 and the
corresponding change in revenues were as follows:
Change
-------------------------
2003 2002 Amount Percentage
-------------- -------------- ------------- -----------
Textbook Division $ 25,029,150 $ 25,361,290 $ (332,140) (1.3)%
Bookstore Division 22,253,256 21,753,870 499,386 2.3 %
Distance Education Division 10,316,603 9,472,224 844,379 8.9 %
Other Complementary Services Divisions 3,129,545 2,129,111 1,000,434 47.0 %
Intercompany eliminations (5,967,371) (5,374,962) (592,409) 11.0 %
-------------- -------------- ------------- -----------
$ 54,761,183 $ 53,341,533 $ 1,419,650 2.7 %
============== ============== ============= ===========
The decrease in Textbook Division revenues was due primarily to a slight
decrease in the number of units sold. The decrease in units sold was due
primarily to slightly lower inventories of used textbooks available for sale
during the quarter. The increase in Bookstore Division revenues was attributable
to the addition of acquired bookstores. These new bookstores provided an
additional $0.5 million of revenue in the quarter ended June 30, 2003. Same
store sales remained relatively unchanged with increases in revenues from a
number of stores being offset primarily by a decrease in revenues in the
Company's store serving the University of Maryland. That store realized the
benefit of a major intercollegiate championship at that university in the first
quarter of fiscal 2003. If the impact of insignia wear sales from that store was
excluded, same store sales were up 4.7%. Distance Education Division revenues
increased due to continued steady growth in its programs. Other Complementary
Services Divisions revenues increased primarily due to several large computer
system installations in the quarter ended June 30, 2003. Corresponding to the
overall growth in the number of company-owned college bookstores, the Company's
intercompany transactions also increased.
GROSS PROFIT. Gross profit for the quarter ended June 30, 2003 increased
$1.0 million, or 4.7%, to $21.8 million from $20.8 million for the quarter ended
June 30, 2002. This increase was primarily due to an increase in gross margin
percent, along with higher revenues. Gross margin percent was 39.8% for the
quarter ended June 30, 2003 as compared to 39.0% for the quarter ended June 30,
2002, driven primarily by improved gross margin percents in the Bookstore
Division and the Other Complementary Services Divisions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the quarter ended June 30, 2003 increased $2.5
million, or 12.4%, to $22.2 million from $19.7 million for the quarter ended
June 30, 2002. Selling, general and administrative expenses as a percentage of
revenues were 40.5% and 37.0% for the quarters ended June 30, 2003 and 2002,
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 in certain areas, including
advertising, salaries, shipping, and rent expense, in a quarter in which
revenues are historically low in comparison to other quarters of the fiscal
year.
12
EARNINGS (LOSS) BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION
(EBITDA). EBITDA for the quarters ended June 30, 2003 and 2002 and the
corresponding change in EBITDA were as follows:
Change
----------------------------
2003 2002 Amount Percentage
------------- ------------- -------------- ------------
Textbook Division $ 4,651,715 $ 5,149,910 $ (498,195) (9.7)%
Bookstore Division (2,368,516) (1,699,224) (669,292) (39.4)%
Distance Education Division 551,019 724,653 (173,634) (24.0)%
Other Complementary Services Divisions 565,386 185,167 380,219 205.3 %
Corporate administration (3,769,552) (3,277,721) (491,831) (15.0)%
------------- ------------- -------------- ------------
$ (369,948) $ 1,082,785 $ (1,452,733) (134.2)%
============= ============= ============== ============
The decrease in EBITDA in the Textbook Division was attributable to the
small decrease in revenues and a slight increase in selling, general, and
administrative expenses. The decrease in Bookstore Division EBITDA was primarily
due to the impact of the lower insignia wear sales at the store serving the
University of Maryland and to increases in selling, general, and administrative
costs, particularly advertising, salaries, and rent expense. The decrease in
EBITDA for the Distance Education Division was due to increases in commission
expense. The increase in EBITDA in the Other Complementary Services Divisions
was primarily due to increased revenues and gross margin percent, particularly
in the systems division. The increase in corporate administrative costs is
primarily attributable to an increase in salaries and other professional
services attributable to the Company's continued growth.
EBITDA is defined as earnings before interest, taxes, depreciation, and
amortization. As the Company is highly-leveraged and as the Company's equity is
not publicly-traded, management believes that EBITDA is useful in measuring its
liquidity and provides additional information for determining its ability to
meet debt service requirements. The Senior Subordinated Notes, Senior Discount
Debentures, and Senior Credit Facility also utilize EBITDA, as defined in those
agreements, for certain financial covenants. EBITDA does not represent and
should not be considered as an alternative to net cash flows from operating
activities as determined by accounting principles generally accepted in the
United States of America, and EBITDA does not necessarily indicate whether cash
flows will be sufficient for cash requirements. Items excluded from EBITDA, such
as interest, taxes, depreciation and amortization, are significant components in
understanding and assessing the Company's financial performance. EBITDA measures
presented may not be comparable to similarly titled measures presented by other
registrants.
The following presentation reconciles EBITDA with net cash flows from
operating activities as presented in the Consolidated Statements of Cash Flows:
Quarter ended June 30,
2003 2002
-------------- --------------
EBITDA $ (369,948) $ 1,082,785
Adjustments to reconcile EBITDA to net cash flows
from operating activities:
Interest income 8,758 10,605
Provision for losses on accounts receivable 7,067 6,370
Cash paid for interest (890,984) (970,945)
Cash paid for income taxes (402,793) (3,211,502)
(Gain) Loss on disposal of assets 6,239 (165)
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals (1) (30,215,179) (24,584,778)
-------------- --------------
Net Cash Flows from Operating Activities $(31,856,840) $(27,667,630)
============== ==============
(1) Changes in operating assets and liabilities, net of effect of
acquisitions/disposals, includes the changes in the balances of
receivables, inventories, prepaid expenses and other assets, other
assets, accounts payable, accrued employee compensation and benefits,
accrued incentives, accrued expenses, deferred revenue, and other
long-term liabilities.
13
INTEREST EXPENSE, NET. Interest expense, net for the quarter ended June 30,
2003 decreased $0.2 million, or 2.7%, to $5.6 million from $5.8 million for the
quarter ended June 30, 2002, primarily due to reduced usage under the Revolving
Credit Facility.
(GAIN) LOSS ON DERIVATIVE FINANCIAL INSTRUMENTS. (Gain) loss on derivative
financial instruments for the quarter ended June 30, 2003 improved $93,312
compared to the quarter ended June 30, 2002 due to the increase in the fair
market value of the interest rate swap agreements that expire on July 31, 2003.
INCOME TAXES. Income tax benefit for the quarter ended June 30, 2003
increased $0.5 million, or 19.2%, to $2.7 million from $2.2 million for the
quarter ended June 30, 2002. The Company's effective tax rate for the quarters
ended June 30, 2003 and 2002 was 38.6% and 39.4%, 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 Textbook Division
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 the Textbook
Division. 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 Bookstore Division values 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.
14
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, the Senior Discount
Debentures, 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 June 30, 2003, the Company's
total indebtedness was approximately $220.2 million, consisting of approximately
$29.0 million in Term Loans, $110.0 million of the Senior Subordinated Notes,
$76.0 million of the Senior Discount Debentures, $2.9 million of other
indebtedness, including capital lease obligations, and $2.3 million under the
Revolving Credit Facility.
Principal and interest payments under the Senior Credit Facility, the
Senior Subordinated Notes, and the Senior Discount Debentures represent
significant liquidity requirements for the Company. Under the terms of the
Tranche A and Tranche B Loans, after taking into account optional prepayments
and excess cash flow payments and obligations, NBC is scheduled to make
principal payments totaling approximately $19.2 million in fiscal 2004, $3.8
million in fiscal 2005, and $7.5 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 is an excess cash flow payment obligation for fiscal 2003 of
approximately $14.7 million that is due and payable in September, 2003 and has
been reflected accordingly in the aforementioned scheduled principal payments.
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 $0.6 million and $1.0 million for
the three months ended June 30, 2003 and 2002, 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 $1.3 million and $0.6 million for
the three months ended June 30, 2003 and 2002, respectively. For the three
months ended June 30, 2003, single bookstore locations were acquired serving
Marshall University and Wayne State College, and 3 bookstore locations were
acquired serving Michigan State University. For the three months ended June 30,
2002, one bookstore location was acquired serving the University of Northern
Colorado. The Company's ability to make acquisition expenditures is subject to
certain restrictions under the Senior Credit Facility.
During the three months ended June 30, 2003, three bookstores were either
closed or the contract managed lease was not renewed. During the three months
ended June 30, 2002, one bookstore serving the University of California -
Berkeley was closed upon anticipation of the lease expiring in July, 2002 and a
more suitable location having been obtained through a March, 2002 acquisition.
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 three months ended June 30, 2003 were $31.9 million, up from
$27.7 million for the three months ended June 30, 2002. This increase is
primarily attributable to timing of payments on accounts payable.
15
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.
As of June 30, 2003, NBC could borrow up to $50.0 million under the
Revolving Credit Facility. Outstanding indebtedness under the Revolving Credit
Facility was $2.3 million at June 30, 2003. 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 Senior Credit Facility
was amended in June, 2003, to permit the merger of TheCampusHub.com, Inc. into
NBC on July 1, 2003.
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 June 30, 2003
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 $ 215,520,072 $ 17,771,293 $ 11,354,514 $ 110,077,640 $ 76,316,625
Capital lease
obligations 2,399,091 129,573 413,237 597,825 1,258,456
Borrowings under
line of credit 2,300,000 2,300,000 - - -
Operating leases 43,421,000 9,100,000 15,415,000 10,863,000 8,043,000
--------------- -------------- -------------- --------------- --------------
Total $ 263,640,163 $ 29,300,866 $ 27,182,751 $ 121,538,465 $ 85,618,081
=============== ============== ============== =============== ==============
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 $ 47,700,000 $ 47,700,000 $ - $ - $ -
=============== ============== ============== =============== ==============
16
TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES
In fiscal 2001, NBC entered into several agreements with a newly created
entity, TheCampusHub.com, Inc., which was 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
(including an equity option agreement, a management services agreement, and a
technology sale and license agreement) terminated effective July 1, 2003 upon
the consummation of an agreement to merge TheCampusHub.com, Inc. into NBC, with
NBC as the surviving entity. Each share of TheCampusHub.com, Inc. common stock
issued and outstanding at the time of merger was converted into 0.0306945 shares
of NBC Acquisition Corp. Class A Common Stock. The management services agreement
reimbursed NBC for certain direct costs incurred on behalf of TheCampusHub.com,
Inc., as well as $0.3 million per year for certain shared management and
administrative support. Other Complementary Services Divisions revenue resulting
from the management services agreement was recognized as the services were
performed. For each of the three month periods ended June 30, 2003 and 2002,
revenues attributable to the management services agreement totaled $0.1 million
and reimbursable direct costs incurred on behalf of TheCampusHub.com, Inc.
totaled $0.1 million. Net amounts due from TheCampusHub.com, Inc. at June 30,
2003 and 2002 totaled $0.1 million and $0.2 million, respectively.
SEASONALITY
The Company's Textbook and Bookstore Divisions experience two distinct
selling periods and the Textbook Division experiences two distinct buying
periods. The peak selling periods for the Textbook Division occur prior to the
beginning of each college semester in August and December. The buying periods
for the Textbook Division occur at the end of each college semester in late
December and May. The primary selling periods for the Bookstore Division are in
September and January. In fiscal 2003, 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 May, 2003 the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. This standard
improves the accounting for certain financial instruments that issuers
previously accounted for as equity, requiring such instruments to be classified
as liabilities in certain situations. SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003 and for
interim periods beginning after June 15, 2003. The Company does not expect its
adoption of this standard in the second quarter of fiscal 2004 to have a
significant impact on its consolidated financial statements.
In January, 2003 the 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 the consolidation requirements
attributable to existing entities in the second quarter of fiscal 2004 is not
expected to have a significant impact on the Company's consolidated financial
statements.
17
"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 $220.2 million in total
indebtedness outstanding at June 30, 2003, $29.0 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 June
30, 2003 was $18.2 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,
2003 as a result of market fluctuations, movement in interest rates, and
principal payments. The following table presents summarized market risk
information as of June 30, 2003 and March 31, 2003, respectively (the
weighted-average variable rates are based on implied forward rates in the yield
curve as of the date presented):
June 30, March 31,
2003 2003
--------------- ---------------
Fair Values:
Fixed rate debt $ 197,675,208 $ 185,116,064
Variable rate debt (excluding Revolving Credit Facility) 29,036,472 30,447,160
Interest rate swaps (419,705) (845,669)
Overall Weighted-Average Interest Rates:
Fixed rate debt 9.68% 9.68%
Variable rate debt (excluding Revolving Credit Facility) 3.84% 4.24%
Interest rate swaps receive rate 1.20% 1.22%
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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. There have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of the Company's Chief Executive
Officer and Treasurer's evaluation.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During May, 2003 and in conjunction with his retirement, NBC's former
Executive Director of Connect2One (part of the Other Complementary Services
Divisions) exercised options to purchase 300 shares of the Company's Class A
Common Stock under the 1998 Stock Option Plan at an exercise price of $52.47 per
share. This transaction, which did not involve any public offering, was exempt
from registration under the Securities Act of 1933 pursuant to Section 4(2).
Proceeds from this issuance were utilized for general operating activities.
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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger, dated as of July 1, 2003, by and
among TheCampusHub.com, Inc., Nebraska Book Company, Inc., and
NBC Acquisition Corp.
4.1 Amended and Restated Stockholders Agreement, dated as of July 1,
2003, by and among NBC Acquisition Corp., HWH Capital Partners,
L.P., HWH Cornhusker Partners, L.P., Weston Presidio Capital III,
L.P., Weston Presidio Capital IV, L.P., WPC Entrepreneur Fund,
L.P., WPC Entrepreneur Fund II, L.P., MSD Ventures, L.P., and the
other stockholders party thereto.
4.2 Amended and Restated Registration Rights Agreement, dated as of
July 1, 2003, by and among HWH Capital Partners, L.P., HWH
Cornhusker Partners, L.P., Weston Presidio Capital III, L.P.,
Weston Presidio Capital IV, L.P., WPC Entrepreneur Fund, L.P.,
WPC Entrepreneur Fund II, L.P., MSD Ventures, L.P., and NBC
Acquisition Corp.
10.1 Fifth Amendment and Waiver, dated as of June 13, 2003, to and
under the Credit Agreement, dated as of February 13, 1998, among
NBC Acquisition Corp., Nebraska Book Company, Inc., JPMorgan
Chase Bank, and certain other financial institutions.
31.1 Certification of President/Chief Executive Officer pursuant to
Rules 13a-15(e) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of Principal Financial and Accounting Officer
pursuant to Rules 13a-15(e) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of 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.
32.2 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 June 30, 2003.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on August 13, 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)
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