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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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: 333-48221
NEBRASKA BOOK COMPANY, INC.
(Exact name of registrant as specified in its charter)
KANSAS 47-0549819
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4700 SOUTH 19TH STREET
LINCOLN, NEBRASKA 68501-0529
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 421-7300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] No [ ]
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 COMMON STOCK OUTSTANDING AS OF
NOVEMBER 10, 2003: 100 SHARES
TOTAL NUMBER OF PAGES: 32
EXHIBIT INDEX: PAGE 32
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------
September 30, March 31, September 30,
2003 2003 2002
--------------- --------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 68,646,878 $ 39,405,382 $ 56,317,800
Receivables 41,285,682 29,085,329 41,802,834
Inventories 68,689,377 68,315,352 63,479,433
Deferred income taxes 6,096,743 3,861,932 5,227,325
Prepaid expenses and other assets 811,974 834,284 768,305
--------------- --------------- ---------------
Total current assets 185,530,654 141,502,279 167,595,697
PROPERTY AND EQUIPMENT, net of depreciation & amortization 28,117,488 27,666,370 27,671,030
GOODWILL 34,079,919 30,472,823 30,077,527
IDENTIFIABLE INTANGIBLES, net of amortization 131,547 239,014 349,494
DEBT ISSUE COSTS, net of amortization 3,494,255 4,142,416 4,790,577
OTHER ASSETS 4,236,988 4,442,780 5,754,216
--------------- --------------- ---------------
$ 255,590,851 $ 208,465,682 $ 236,238,541
=============== =============== ===============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 54,050,633 $ 19,857,301 $ 45,892,419
Accrued employee compensation and benefits 7,024,036 10,642,713 6,510,570
Accrued interest 1,218,914 1,512,733 1,812,791
Accrued incentives 6,512,308 5,518,883 5,032,200
Accrued expenses 1,087,108 1,077,844 1,180,371
Income taxes payable 7,311,587 89,932 10,239,708
Deferred revenue 1,097,268 538,230 1,044,130
Current maturities of long-term debt 2,338,535 19,181,277 5,480,217
Current maturities of capital lease obligations 143,884 124,703 104,678
--------------- --------------- ---------------
Total current liabilities 80,784,273 58,543,616 77,297,084
LONG-TERM DEBT, net of current maturities 122,146,237 121,755,713 138,748,531
CAPITAL LEASE OBLIGATIONS, net of current maturities 2,227,446 2,305,583 2,004,150
OTHER LONG-TERM LIABILITIES 309,019 300,823 1,934,483
DUE TO PARENT 13,732,039 12,371,846 10,835,232
COMMITMENTS (Note 3)
STOCKHOLDER'S EQUITY:
Common stock, voting, authorized 50,000 shares of
$1.00 par value; issued and outstanding 100 shares 100 100 100
Additional paid-in capital 56,715,888 46,986,333 46,912,165
Accumulated deficit (20,324,151) (33,379,701) (40,856,886)
Accumulated other comprehensive income (loss) - (418,631) (636,318)
--------------- --------------- ---------------
Total stockholder's equity 36,391,837 13,188,101 5,419,061
--------------- --------------- ---------------
$ 255,590,851 $ 208,465,682 $ 236,238,541
=============== =============== ===============
See notes to consolidated financial statements.
2
NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
September 30, September 30,
2003 2002 2003 2002
-------------- -------------- -------------- --------------
REVENUES, net of returns $ 172,693,104 $157,721,459 $ 227,454,287 $ 211,062,992
COSTS OF SALES 108,142,063 99,782,901 141,116,060 132,322,258
-------------- -------------- -------------- --------------
Gross profit 64,551,041 57,938,558 86,338,227 78,740,734
OPERATING EXPENSES:
Selling, general and administrative 27,254,450 24,031,504 49,411,584 43,750,895
Depreciation 810,624 788,794 1,564,918 1,525,146
Amortization 390,144 167,074 549,474 312,462
-------------- -------------- -------------- --------------
28,455,218 24,987,372 51,525,976 45,588,503
-------------- -------------- -------------- --------------
INCOME FROM OPERATIONS 36,095,823 32,951,186 34,812,251 33,152,231
OTHER EXPENSES (INCOME):
Interest expense 3,297,476 3,698,431 6,805,062 7,565,698
Interest income (102,963) (80,941) (111,721) (91,546)
(Gain) Loss on derivative financial instruments (57,191) 56,898 (57,296) 150,105
-------------- -------------- -------------- --------------
3,137,322 3,674,388 6,636,045 7,624,257
-------------- -------------- -------------- --------------
INCOME BEFORE INCOME TAXES 32,958,501 29,276,798 28,176,206 25,527,974
INCOME TAX EXPENSE 12,788,712 11,414,702 11,035,656 9,998,825
-------------- -------------- -------------- --------------
NET INCOME $ 20,169,789 $ 17,862,096 $ 17,140,550 $ 15,529,149
============== ============== ============== ==============
See notes to consolidated financial statements.
3
NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-in Accumulated Comprehensive Comprehensive
Stock Capital Deficit Income (Loss) Total Income
-------- -------------- ------------ -------------- ------------ -------------
BALANCE, April 1, 2002 $ 100 $ 46,404,474 $(56,386,035) $ (604,567) $(10,586,028) $ -
Contributed capital - 507,691 - - 507,691 -
Net income - - 15,529,149 - 15,529,149 15,529,149
Other comprehensive loss, net of taxes:
Unrealized losses on interest rate swap
agreements, net of taxes of $13,705 - - - (31,751) (31,751) (31,751)
-------- -------------- ------------ ------------ ------------- ------------
BALANCE, September 30, 2002 $ 100 $ 46,912,165 $(40,856,886) $ (636,318) $ 5,419,061 $ 15,497,398
======== ============== ============ ============ ============= ============
BALANCE, April 1, 2003 $ 100 $ 46,986,333 $(33,379,701) $ (418,631) $ 13,188,101 $ -
Contributed capital - 9,729,555 - - 9,729,555 -
Net income - - 17,140,550 - 17,140,550 17,140,550
Dividend declared and paid to
NBC Acquisition Corp.
for interest due on Senior
Discount Debentures - - (4,085,000) - (4,085,000) -
Other comprehensive income,
net of taxes:
Unrealized gains on interest
rate swap agreements,
net of taxes of $256,145 - - - 418,631 418,631 418,631
-------- -------------- ------------ ------------ ------------- ------------
BALANCE, September 30, 2003 $ 100 $ 56,715,888 $(20,324,151) $ - $ 36,391,837 $ 17,559,181
======== ============== ============ ============ ============= ============
See notes to consolidated financial statements.
4
NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------
Six Months Ended September 30,
2003 2002
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,140,550 $ 15,529,149
Adjustments to reconcile net income to net cash flows
from operating activities:
Provision for losses on accounts receivable 54,235 49,934
Depreciation 1,564,918 1,525,146
Amortization 1,197,635 957,673
Noncash interest (income) expense from
derivative financial instruments (1,030) 36,426
Gain on derivative financial instruments (169,863) (27,327)
(Gain) Loss on disposal of assets 264,932 (4,871)
Deferred income taxes 2,580,000 (1,303,000)
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals:
Receivables (11,221,396) (12,482,411)
Inventories 1,353,265 6,620,206
Recoverable income taxes 25,000 -
Prepaid expenses and other assets 55,999 (269,865)
Other assets (159,058) (212,375)
Accounts payable 35,038,167 30,808,342
Accrued employee compensation and benefits (3,702,677) (2,400,332)
Accrued interest (293,819) 265,592
Accrued incentives 993,425 1,436,572
Accrued expenses 6,374 119,402
Income taxes payable 7,221,655 6,555,269
Deferred revenue 559,038 611,340
Other long-term liabilities 8,196 15,088
Due to parent 1,360,193 1,240,333
--------------- ---------------
Net cash flows from operating activities 53,875,739 49,070,291
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,844,630) (2,628,130)
Acquisitions, net of cash acquired (2,161,080) (645,417)
Proceeds from sale of property and equipment and other 7,910 13,740
Software development costs (48,029) (162,228)
--------------- ---------------
Net cash flows from investing activities (4,045,829) (3,422,035)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of financing costs - (32,446)
Principal payments on long-term debt (16,452,218) (1,184,397)
Principal payments on capital lease obligations (66,936) (54,473)
Dividend paid to parent (4,085,000) -
Capital contribution 15,740 521,583
--------------- ---------------
Net cash flows from financing activities (20,588,414) (749,733)
--------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 29,241,496 44,898,523
CASH AND CASH EQUIVALENTS, Beginning of period 39,405,382 11,419,277
--------------- ---------------
CASH AND CASH EQUIVALENTS, End of period $ 68,646,878 $ 56,317,800
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid (refunded) during the period for:
Interest $ 6,564,317 $ 6,795,901
Income taxes (126,192) 3,506,223
Noncash investing and financing activities:
Acquisition of TheCampusHub.com, Inc.
through issuance of NBC Acquisition Corp.
Class A Common Stock 9,722,683 -
Unrealized gains (losses) on interest rate swap
agreements, net of income taxes 418,631 (31,751)
Deferred taxes resulting from accumulated
other comprehensive income (loss) 256,145 13,705
See notes to consolidated financial statements.
5
NEBRASKA BOOK COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
1. MANAGEMENT REPRESENTATIONS - The consolidated balance sheet of Nebraska Book
Company, Inc. (the "Company") and its wholly-owned subsidiary, Specialty
Books, Inc., 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. INVENTORIES - Inventories are summarized as follows:
September 30, March 31, September 30,
2003 2003 2002
-----------------------------------------------------------------------
Textbook Division $18,835,890 $28,908,121 $18,456,100
Bookstore Division 41,051,629 31,986,260 36,096,891
Distance Education Division 7,879,767 6,833,989 8,360,220
Other Complementary Services
Divisions 922,091 586,982 566,222
-----------------------------------------------------------------------
$68,689,377 $68,315,352 $63,479,433
=======================================================================
3. LONG-TERM DEBT - The Company's indebtedness includes a bank-administered
senior credit facility (the "Senior Credit Facility") provided through a
syndicate of lenders. The facility is comprised of a $27.5 million term loan
(the "Tranche A Loan"), a $32.5 million term loan (the "Tranche B Loan") and
a $50.0 million revolving credit facility (the "Revolving Credit Facility").
The Revolving Credit Facility, which was unused at September 30, 2003 and
2002 and March 31, 2003, expires on March 31, 2004. Availability under the
Revolving Credit Facility is determined by the calculation of a borrowing
base, which at any time is equal to a percentage of eligible accounts
receivable and inventory, up to a maximum of $50.0 million. The calculated
borrowing base at September 30, 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 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 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 was an excess cash
flow payment obligation for fiscal 2003 of $14.3 million that was paid on
September 29, 2003. The Senior Credit Facility was amended in June, 2003, to
permit the acquisition of TheCampusHub.com, Inc. on July 1, 2003 (see Note
7).
Additional indebtedness includes $110.0 million face amount of 8.75% senior
subordinated notes due 2008 (the "Senior Subordinated Notes") and capital
leases.
4. DERIVATIVE FINANCIAL INSTRUMENTS - The 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; 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. In
the past, the Company has utilized 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.
6
The Company's primary market risk exposure is, and is expected to continue
to be, fluctuation in Eurodollar interest rates. As provided in the
Company's Senior Credit Facility, exposure to interest rate fluctuations is
managed by maintaining fixed interest rate debt (primarily the Senior
Subordinated Notes) and, in the past, by entering into interest rate swap
agreements that qualify as cash flow hedging instruments to convert certain
variable rate debt into fixed rate debt. The Company had separate five-year
amortizing interest rate swap agreements with two financial institutions
whereby the Company's variable rate Tranche A and Tranche B Loans were
converted into debt with a fixed rate of 5.815% plus an applicable margin
(as defined in the Credit Agreement). Such agreements terminated on July 31,
2003. Notional amounts under the agreements were reduced periodically by
amounts equal to the originally-scheduled principal payments on the Tranche
A and Tranche B Loans. General information regarding the Company's exposure
to fluctuations in Eurodollar interest rates is presented in the following
table:
September 30, March 31, September 30,
2003 2003 2002
-------------- --------------- --------------
Total indebtedness outstanding $ 126,856,102 $ 143,367,276 $ 146,337,576
Indebtedness subject to Eurodollar fluctuations 14,007,570 30,447,160 33,726,948
Notional amounts under swap agreements - 38,100,000 42,287,500
Fixed interest rate indebtedness 112,848,532 112,920,116 112,610,628
Variable interest rate, including applicable margin:
Tranche A Loans 2.63% 2.76% 3.31%
Tranche B Loans 3.68% 3.76% 4.53%
The interest rate swap agreements qualified as cash flow hedge instruments
as the following criteria were met:
(1) Formal documentation of the hedging relationship and the Company's
risk management objective and strategy for undertaking the hedge
occurred at the inception of the agreements.
(2) The interest rate swap agreements were expected to be highly effective
in offsetting the change in the value of the interest payments
attributable to the Company's Tranche A and Tranche B Loans.
The Company estimated 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 was compared to the fair
value of hypothetical swap agreements that had the same critical terms as
the Tranche A and Tranche B Loans, including notional amounts and repricing
dates. To the extent that the agreements were 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 were immediately
recognized in earnings as "gain or loss on derivative financial
instruments". To the extent that the agreements were 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 were immediately recognized in
earnings as interest expense.
Under hedge accounting, the interest rate swap agreements were reflected at
fair value in the Company's consolidated balance sheets (as "accounts
payable" at March 31, 2003 and "other long-term liabilities" at September
30, 2002) and the related gains or losses on these agreements were generally
recorded in stockholders' equity, net of applicable income taxes (as
"accumulated other comprehensive loss"). The gains or losses recorded in
accumulated other comprehensive income (loss) were reclassified into
earnings as an adjustment to interest expense in the same periods in which
the related interest payments being hedged were 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 was
generally being recorded based on fixed interest rates until the interest
rate swap agreements expired on July 31, 2003. The fair value of the
interest rate swap agreements reflected as a liability at March 31, 2003 and
September 30, 2002 totaled $0.8 million and $1.6 million, respectively.
7
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 correlated 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 represented the portion
of the agreements that no longer qualified 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 qualified 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 qualified 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, were also
recognized as a gain (loss) on derivative financial instruments in the
consolidated statements of operations and totaled $0.1 million for the
quarter and six months ended September 30, 2003 and $(0.1) million and
$(0.2) million for the quarter and six months ended September 30, 2002,
respectively.
Information regarding the fair value of the portion of the interest rate
swap agreements designated as hedging instruments is presented in the
following table for the periods then ended:
September 30, March 31, September 30,
2003 2003 2002
-------------- ------------ --------------
Increase (decrease) in fair value of swap
agreements designated as hedges $ 675,806 $ 582,146 $ (54,469)
Year-to-date interest income (expense)
recorded due to hedge ineffectiveness 1,030 (36,426)
Quarterly interest expense recorded
due to hedge ineffectiveness (14,275) (11,846)
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.
5. SEGMENT INFORMATION - The Company's operating segments are determined based
on the way that management organizes the segments for making operating
decisions and assessing performance. Management has organized the Company's
segments based upon differences in products and services provided. 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
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 112 college bookstores as of September
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
the Company. The Other Complementary Services Divisions segment includes
college bookstore-related services such as computer hardware and software
and a centralized buying service.
8
The Company primarily accounts for intersegment sales as if the sales were
to third parties (at current market prices). Assets (excluding inventories
and certain cash and cash equivalents, receivables, property and equipment,
intangibles, and other assets), net interest expense and taxes are not
allocated between the Company's segments; instead, such balances are
accounted for in a corporate administrative division. The following table
provides selected information about profit or loss on a segment basis for
the quarters and six months ended September 30, 2003 and 2002, respectively:
Other
Distance Complementary
Textbook Bookstore Education Services
Division Division Division Divisions Total
------------ ------------- ------------ ------------ ------------
Quarter ended September 30, 2003:
External customer revenues $47,907,042 $110,270,265 $10,702,716 $3,813,081 $172,693,104
Intersegment revenues 7,989,478 353,247 - 540,509 8,883,234
Depreciation and amortization expense 213,684 516,343 21,739 405,742 1,157,508
Earnings before interest, taxes,
depreciation and amortization (EBITDA) 18,481,067 18,135,558 552,431 643,150 37,812,206
Quarter ended September 30, 2002:
External customer revenues $48,423,703 $ 98,517,600 $ 8,997,020 $1,783,136 $157,721,459
Intersegment revenues 8,078,670 239,296 - 264,358 8,582,324
Depreciation and amortization expense 119,900 632,469 11,811 141,028 905,208
Earnings (loss) before interest, taxes,
depreciation and amortization (EBITDA) 18,434,308 15,598,245 495,430 (74,278) 34,453,705
Six months ended September 30, 2003:
External customer revenues $67,589,160 $132,270,953 $21,019,319 $6,574,855 $227,454,287
Intersegment revenues 13,336,510 605,815 - 908,280 14,850,605
Depreciation and amortization expense 424,946 1,021,998 42,523 544,298 2,033,765
Earnings before interest, taxes,
depreciation and amortization (EBITDA) 23,132,782 15,767,042 1,103,450 1,208,536 41,211,810
Six months ended September 30, 2002:
External customer revenues $68,794,884 $120,110,586 $18,469,244 $3,688,278 $211,062,992
Intersegment revenues 13,068,779 400,180 - 488,327 13,957,286
Depreciation and amortization expense 234,467 1,169,825 76,032 259,704 1,740,028
Earnings before interest, taxes,
depreciation and amortization (EBITDA) 23,584,218 13,899,021 1,220,083 110,889 38,814,211
The following table reconciles segment information presented above with
information as presented in the consolidated financial statements for the
quarters and six months ended September 30, 2003 and 2002, respectively:
Quarter Ended September 30, Six Months Ended September 30,
2003 2002 2003 2002
------------- -------------- -------------- --------------
Revenues:
Total for reportable segments $181,576,338 $166,303,783 $242,304,892 $225,020,278
Elimination of intersegment revenues (8,883,234) (8,582,324) (14,850,605) (13,957,286)
------------- -------------- -------------- --------------
Consolidated total $172,693,104 $157,721,459 $227,454,287 $211,062,992
============= ============== ============== ==============
Depreciation and Amortization Expense:
Total for reportable segments $ 1,157,508 $ 905,208 $ 2,033,765 $ 1,740,028
Corporate administration 43,260 50,660 80,627 97,580
------------- -------------- -------------- --------------
Consolidated total $ 1,200,768 $ 955,868 $ 2,114,392 $ 1,837,608
============= ============== ============== ==============
Income Before Income Taxes:
Total EBITDA for reportable segments $ 37,812,206 $ 34,453,705 $ 41,211,810 $ 38,814,211
Corporate administrative costs (515,615) (546,651) (4,285,167) (3,824,372)
------------- -------------- -------------- --------------
37,296,591 33,907,054 36,926,643 34,989,839
Depreciation and amortization (1,200,768) (955,868) (2,114,392) (1,837,608)
------------- -------------- -------------- --------------
Consolidated income from operations 36,095,823 32,951,186 34,812,251 33,152,231
Interest and other expenses, net (3,137,322) (3,674,388) (6,636,045) (7,624,257)
------------- -------------- -------------- --------------
Consolidated income before income taxes $ 32,958,501 $ 29,276,798 $ 28,176,206 $ 25,527,974
============= ============== ============== ==============
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
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 and also sets forth net cash flows from investing and
financing activities as presented in the Consolidated Statements of Cash
Flows:
Quarter ended September 30, Six Months ended September 30,
2003 2002 2003 2002
--------------- --------------- -------------- ---------------
EBITDA $ 37,296,591 $ 33,907,054 $ 36,926,643 $34,989,839
Adjustments to reconcile EBITDA to
net cash flows from operating activities:
Interest income 102,963 80,941 111,721 91,546
Provision for losses on accounts receivable 47,168 43,564 54,235 49,934
Cash paid for interest (5,673,333) (5,824,956) (6,564,317) (6,795,901)
Cash (paid) received for income taxes 528,985 (294,721) 126,192 (3,506,223)
(Gain) Loss on disposal of assets 258,693 (4,706) 264,932 (4,871)
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals (1) 53,171,512 48,830,745 22,956,333 24,245,967
--------------- --------------- -------------- ---------------
Net Cash Flows from Operating Activities $ 85,732,579 $ 76,737,921 $ 53,875,739 $49,070,291
=============== =============== ============== ===============
Net Cash Flows from Investing Activities $ (2,084,914) $ (1,684,811) $ (4,045,829) $(3,422,035)
=============== =============== ============== ===============
Net Cash Flows from Financing Activities $(21,456,041) $(24,297,971) $(20,588,414) $ (749,733)
=============== =============== ============== ===============
(1) Changes in operating assets and liabilities, net of effect of
acquisitions/disposals, include 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 September 30, 2003, March 31, 2003, and September
30, 2002, respectively. Goodwill assigned to corporate administration
represents the carrying value of goodwill arising from NBC Acquisition
Corp.'s ("NBC") acquisition of the Company on September 1, 1995. As is the
case with a portion of the Company's assets, such goodwill is not allocated
between the Company's segments when management makes operating decisions and
assesses performance. Such goodwill is allocated to the Company's reporting
units for purposes of testing goodwill for impairment and calculating any
gain or loss on the disposal of all or a portion of a reporting unit.
September 30, March 31, September 30,
2003 2003 2002
------------- ------------ -------------
Bookstore Division $13,704,969 $13,702,249 $13,306,953
Other Complementary Services Divisions 3,604,376 - -
------------- ------------ -------------
Total for reportable segments 17,309,345 13,702,249 13,306,953
Corporate administration 16,770,574 16,770,574 16,770,574
------------- ------------ -------------
Total goodwill $34,079,919 $30,472,823 $30,077,527
============= ============ =============
10
The Company's revenues are attributed to countries based on the location of
the customer. Substantially all revenues generated are attributable to
customers located within the United States.
6. 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, 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 income if the fair-value-based method had been
applied to all outstanding and unvested awards in each period:
Quarter Ended September 30, Six Months Ended September 30,
2003 2002 2003 2002
------------- ------------ -------------- ---------------
Net income, as reported $ 20,169,789 $ 17,862,096 $ 17,140,550 $ 15,529,149
Less: Stock-based compensation determined under
fair value based method, net of related income tax
effects (37,563) (23,095) (48,890) (46,191)
------------ ------------ -------------- --------------
Pro forma net income $ 20,132,226 $ 17,839,001 $ 17,091,660 $ 15,482,958
============ ============ ============== ==============
Effective July 1, 2003, NBC established two new stock-based compensation
plans - the NBC Acquisition Corp. 2003 Performance Stock Option Plan (the
"Performance Plan") and the NBC Acquisition Corp. 2003 Stock Option Plan
(the "Option Plan"). These plans provide for the granting of options to
purchase 43,000 shares and 28,000 shares, respectively, of NBC's Class A
Common Stock to selected employees, officers, employee directors, and
members of senior management of NBC and its affiliates. All options granted
are intended to be nonqualified stock options, although the plans also
provide for incentive stock options. The Performance Plan provides for the
granting of up to 25% of the total number of shares of stock available under
such plan upon the attainment of established targets in fiscal years 2003
through 2006. The Option Plan provides for the granting of options at the
discretion of a committee designated by NBC's Board of Directors. Generally,
twenty-five percent of the options granted became exercisable immediately
upon granting, with the remaining options becoming exercisable in 25%
increments over the subsequent three years on the anniversary of the date of
grant. Options granted under the Performance Plan are to be granted at an
exercise price of not less than fair market value on the date the options
are granted. Incentive stock options granted under the Option Plan are to be
granted at an exercise price of not less than fair market value on the date
the options are granted, while nonqualified options may be granted at less
than fair market value. Options expire ten years from the date of grant.
Effective August 1, 2003, options to purchase 10,750 shares were granted
under the Performance Plan. At September 30, 2003, there were 32,250 options
and 28,000 options available for grant under the Performance Plan and the
Option Plan, respectively.
7. RELATED PARTY TRANSACTIONS - On July 1, 2003, the Company acquired all of
the outstanding shares of common stock of TheCampusHub.com, Inc.
TheCampusHub.com, Inc. is no longer separately incorporated and is instead
accounted for as a division within the Company's Other Complementary
Services Divisions segment. Each share of TheCampusHub.com common stock
issued and outstanding was converted into shares of Class A Common Stock of
NBC, resulting in the issuance of 39,905 shares of NBC Acquisition Corp.
Class A Common Stock. TheCampusHub.com, Inc. provides college bookstores
with a way to sell in-store inventory and virtual brand name merchandise
over the Internet utilizing technology originally developed by the Company
and had 1,300,099 shares of issued and outstanding common stock at the time
of acquisition, of which 650,000 shares were owned by NBC's majority
shareholder, 650,000 shares were owned by an unrelated third party, and 99
shares were owned by three of the Company's employees. This business
combination was accounted for by the Company in accordance with Statement
of Financial Accounting Standards No. 141, "Business Combinations." The
total purchase price, net of cash acquired, of such acquisition was $10.0
million, of which $3.6 million was assigned to non-deductible goodwill.
11
The Senior Credit Facility contains a number of covenants that, among other
things, restrict the ability of the Company to pay dividends, except that,
among other things, the Company may pay dividends to NBC on or after August
15, 2003 in an amount not to exceed the amount of interest required to be
paid on NBC's Senior Discount Debentures. In accordance with such covenants,
the Company declared and paid a $4.1 million dividend to NBC for interest
due and payable on the Senior Discount Debentures on August 15, 2003.
8. CONDENSED CONSOLIDATING FINANCIAL INFORMATION - Effective July 1, 2002, the
Company's distance education business was separately incorporated under the
laws of the State of Delaware as Specialty Books, Inc., a wholly-owned
subsidiary of the Company. This business is also now considered a separate
segment for reporting purposes (see Note 5). In connection with its
incorporation, Specialty Books, Inc. has unconditionally guaranteed, on a
joint and several basis, full and prompt payment and performance of the
Company's obligations, liabilities, and indebtedness arising under, out of,
or in connection with the Senior Subordinated Notes. Specialty Books, Inc.
is also a party to the Guarantee and Collateral Agreement related to the
Senior Credit Facility. Condensed consolidating balance sheets, statements
of operations, and statements of cash flows are presented on the following
pages which reflect financial information for the parent company (Nebraska
Book Company, Inc.), subsidiary guarantor (Specialty Books, Inc.),
consolidating eliminations, and consolidated totals. Activity in the
distance learning division prior to incorporation on July 1, 2002 has been
separately "carved out" and presented in the subsidiary guarantor column.
12
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2003
- ---------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
------------- ------------ ------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 68,598,373 $ 48,505 $ - $ 68,646,878
Receivables 48,029,630 2,029,351 (8,773,299) 41,285,682
Inventories 60,809,610 7,879,767 - 68,689,377
Deferred income taxes 6,096,743 - - 6,096,743
Prepaid expenses and other assets 793,640 18,334 - 811,974
------------- ------------ ------------- -------------
Total current assets 184,327,996 9,975,957 (8,773,299) 185,530,654
PROPERTY AND EQUIPMENT, net 27,579,051 538,437 - 28,117,488
GOODWILL 34,079,919 - - 34,079,919
OTHER ASSETS 9,425,100 17,077 (1,579,387) 7,862,790
------------- ------------ ------------- -------------
$255,412,066 $10,531,471 $(10,352,686) $255,590,851
============= ============ ============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 54,050,633 $ 8,773,299 $ (8,773,299) $ 54,050,633
Accrued employee compensation and benefits 6,889,786 134,250 - 7,024,036
Accrued interest 1,218,914 - - 1,218,914
Accrued incentives 6,512,308 - - 6,512,308
Accrued expenses 1,042,573 44,535 - 1,087,108
Income taxes payable 7,311,587 - - 7,311,587
Deferred revenue 1,097,268 - - 1,097,268
Current maturities of long-term debt 2,338,535 - - 2,338,535
Current maturities of capital
lease obligations 143,884 - - 143,884
------------- ------------ ------------- -------------
Total current liabilities 80,605,488 8,952,084 (8,773,299) 80,784,273
LONG-TERM DEBT, net of current maturities 122,146,237 - - 122,146,237
CAPITAL LEASE OBLIGATIONS,
net of current maturities 2,227,446 - - 2,227,446
OTHER LONG-TERM LIABILITIES 309,019 - - 309,019
DUE TO PARENT 13,732,039 - - 13,732,039
COMMITMENTS
STOCKHOLDER'S EQUITY 36,391,837 1,579,387 (1,579,387) 36,391,837
------------- ------------ ------------- -------------
$255,412,066 $10,531,471 $(10,352,686) $255,590,851
============= ============ ============= =============
13
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2003
- -----------------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
------------- ------------- ------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 39,269,385 $ 135,997 $ - $ 39,405,382
Receivables 35,523,170 1,234,423 (7,672,264) 29,085,329
Inventories 61,481,363 6,833,989 - 68,315,352
Deferred income taxes 3,861,932 - - 3,861,932
Prepaid expenses and other assets 803,306 30,978 - 834,284
------------- ------------ ------------- -------------
Total current assets 140,939,156 8,235,387 (7,672,264) 141,502,279
PROPERTY AND EQUIPMENT, net 27,113,167 553,203 - 27,666,370
GOODWILL 30,472,823 - - 30,472,823
OTHER ASSETS 9,749,964 17,077 (942,831) 8,824,210
------------- ------------ ------------- -------------
$208,275,110 $ 8,805,667 $ (8,615,095) $208,465,682
============= ============ ============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 19,857,301 $ 7,672,264 $ (7,672,264) $ 19,857,301
Accrued employee compensation and benefits 10,470,043 172,670 - 10,642,713
Accrued interest 1,512,733 - - 1,512,733
Accrued incentives 5,518,883 - - 5,518,883
Accrued expenses 1,059,942 17,902 - 1,077,844
Income taxes payable 89,932 - - 89,932
Deferred revenue 538,230 - - 538,230
Current maturities of long-term debt 19,181,277 - - 19,181,277
Current maturities of capital lease obligations 124,703 - - 124,703
------------- ------------ ------------- -------------
Total current liabilities 58,353,044 7,862,836 (7,672,264) 58,543,616
LONG-TERM DEBT, net of current maturities 121,755,713 - - 121,755,713
CAPITAL LEASE OBLIGATIONS,
net of current maturities 2,305,583 - - 2,305,583
OTHER LONG-TERM LIABILITIES 300,823 - - 300,823
DUE TO PARENT 12,371,846 - - 12,371,846
COMMITMENTS
STOCKHOLDER'S EQUITY 13,188,101 942,831 (942,831) 13,188,101
------------- ------------ ------------- -------------
$208,275,110 $ 8,805,667 $ (8,615,095) $208,465,682
============= ============ ============= =============
14
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2002
- ---------------------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
-------------- -------------- -------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 56,134,982 $ 182,818 $ - $ 56,317,800
Receivables 50,184,342 1,575,153 (9,956,661) 41,802,834
Inventories 55,119,213 8,360,220 - 63,479,433
Deferred income taxes 5,227,325 - - 5,227,325
Prepaid expenses and other assets 767,689 616 - 768,305
-------------- -------------- -------------- --------------
Total current assets 167,433,551 10,118,807 (9,956,661) 167,595,697
PROPERTY AND EQUIPMENT, net 27,098,678 572,352 - 27,671,030
GOODWILL 30,077,527 - - 30,077,527
OTHER ASSETS 11,468,921 17,077 (591,711) 10,894,287
-------------- -------------- -------------- --------------
$ 236,078,677 $ 10,708,236 $ (10,548,372) $ 236,238,541
============== ============== ============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 45,892,419 $ 9,956,661 $ (9,956,661) $ 45,892,419
Accrued employee compensation and benefits 6,393,142 117,428 - 6,510,570
Accrued interest 1,812,791 - - 1,812,791
Accrued incentives 5,032,200 - - 5,032,200
Accrued expenses 1,137,935 42,436 - 1,180,371
Income taxes payable 10,239,708 - - 10,239,708
Deferred revenue 1,044,130 - - 1,044,130
Current maturities of long-term debt 5,480,217 - - 5,480,217
Current maturities of capital lease obligations 104,678 - - 104,678
-------------- -------------- -------------- --------------
Total current liabilities 77,137,220 10,116,525 (9,956,661) 77,297,084
LONG-TERM DEBT, net of current maturities 138,748,531 - - 138,748,531
CAPITAL LEASE OBLIGATIONS,
net of current maturities 2,004,150 - - 2,004,150
OTHER LONG-TERM LIABILITIES 1,934,483 - - 1,934,483
DUE TO PARENT 10,835,232 - - 10,835,232
COMMITMENTS
STOCKHOLDER'S EQUITY 5,419,061 591,711 (591,711) 5,419,061
-------------- -------------- -------------- --------------
$ 236,078,677 $ 10,708,236 $ (10,548,372) $ 236,238,541
============== ============== ============== ==============
15
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
- --------------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
-------------- ------------- ------------- --------------
REVENUES, net of returns $162,007,625 $ 10,702,716 $ (17,237) $ 172,693,104
COSTS OF SALES 100,792,628 7,372,672 (23,237) 108,142,063
-------------- ------------- ------------- --------------
Gross profit 61,214,997 3,330,044 6,000 64,551,041
OPERATING EXPENSES (INCOME):
Selling, general and administrative 24,470,837 2,777,613 6,000 27,254,450
Depreciation 788,885 21,739 - 810,624
Amortization 390,144 - - 390,144
Equity in earnings of subsidiary (318,415) - 318,415 -
-------------- ------------- ------------- --------------
25,331,451 2,799,352 324,415 28,455,218
-------------- ------------- ------------- --------------
INCOME FROM OPERATIONS 35,883,546 530,692 (318,415) 36,095,823
OTHER EXPENSES (INCOME):
Interest expense 3,297,476 - - 3,297,476
Interest income (102,963) - - (102,963)
Gain on derivative financial instruments (57,191) - - (57,191)
-------------- ------------- ------------- --------------
3,137,322 - - 3,137,322
-------------- ------------- ------------- --------------
INCOME BEFORE INCOME TAXES 32,746,224 530,692 (318,415) 32,958,501
INCOME TAX EXPENSE 12,576,435 212,277 - 12,788,712
-------------- ------------- ------------- --------------
NET INCOME $ 20,169,789 $ 318,415 $ (318,415) $ 20,169,789
============== ============= ============= ==============
16
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
- -------------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
-------------- --------------- ------------- --------------
REVENUES, net of returns $148,746,430 $ 8,997,020 $ (21,991) $157,721,459
COSTS OF SALES 93,644,244 6,166,931 (28,274) 99,782,901
-------------- -------------- ------------- --------------
Gross profit 55,102,186 2,830,089 6,283 57,938,558
OPERATING EXPENSES (INCOME):
Selling, general and administrative 21,690,562 2,334,659 6,283 24,031,504
Depreciation 776,983 11,811 - 788,794
Amortization 167,074 - - 167,074
Equity in earnings of subsidiary (290,171) - 290,171 -
-------------- -------------- ------------- --------------
22,344,448 2,346,470 296,454 24,987,372
-------------- -------------- ------------- --------------
INCOME FROM OPERATIONS 32,757,738 483,619 (290,171) 32,951,186
OTHER EXPENSES (INCOME):
Interest expense 3,698,431 - - 3,698,431
Interest income (80,941) - - (80,941)
Loss on derivative financial instruments 56,898 - - 56,898
-------------- -------------- ------------- --------------
3,674,388 - - 3,674,388
-------------- -------------- ------------- --------------
INCOME BEFORE INCOME TAXES 29,083,350 483,619 (290,171) 29,276,798
INCOME TAX EXPENSE 11,221,254 193,448 - 11,414,702
-------------- -------------- ------------- --------------
NET INCOME $ 17,862,096 $ 290,171 $ (290,171) $ 17,862,096
============== ============== ============= ==============
17
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2003
- -------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
------------- ------------ ------------ -------------
REVENUES, net of returns $206,499,542 $ 21,019,319 $ (64,574) $227,454,287
COSTS OF SALES 126,784,334 14,404,260 (72,534) 141,116,060
------------- ------------- ------------ -------------
Gross profit 79,715,208 6,615,059 7,960 86,338,227
OPERATING EXPENSES (INCOME):
Selling, general and administrative 43,892,015 5,511,609 7,960 49,411,584
Depreciation 1,522,395 42,523 - 1,564,918
Amortization 549,474 - - 549,474
Equity in earnings of subsidiary (636,556) - 636,556 -
------------- ------------- ------------ -------------
45,327,328 5,554,132 644,516 51,525,976
------------- ------------- ------------ -------------
INCOME FROM OPERATIONS 34,387,880 1,060,927 (636,556) 34,812,251
OTHER EXPENSES (INCOME):
Interest expense 6,805,062 - - 6,805,062
Interest income (111,721) - - (111,721)
Gain on derivative financial instruments (57,296) - - (57,296)
------------- ------------- ------------ -------------
6,636,045 - - 6,636,045
------------- ------------- ------------ -------------
INCOME BEFORE INCOME TAXES 27,751,835 1,060,927 (636,556) 28,176,206
INCOME TAX EXPENSE 10,611,285 424,371 - 11,035,656
------------- ------------- ------------ -------------
NET INCOME $ 17,140,550 $ 636,556 $ (636,556) $ 17,140,550
============= ============= ============ =============
18
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2002
- -----------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
-------------- -------------- ------------ -------------
REVENUES, net of returns $192,644,422 $ 18,469,244 $ (50,674) $211,062,992
COSTS OF SALES 119,798,931 12,585,558 (62,231) 132,322,258
-------------- ------------- ------------ -------------
Gross profit 72,845,491 5,883,686 11,557 78,740,734
OPERATING EXPENSES (INCOME):
Selling, general and administrative 39,075,735 4,663,603 11,557 43,750,895
Depreciation 1,449,114 76,032 - 1,525,146
Amortization 312,462 - - 312,462
Equity in earnings of subsidiary (686,430) - 686,430 -
-------------- ------------- ------------ -------------
40,150,881 4,739,635 697,987 45,588,503
-------------- ------------- ------------ -------------
INCOME FROM OPERATIONS 32,694,610 1,144,051 (686,430) 33,152,231
OTHER EXPENSES (INCOME):
Interest expense 7,565,698 - - 7,565,698
Interest income (91,546) - - (91,546)
Loss on derivative financial instruments 150,105 - - 150,105
-------------- ------------- ------------ -------------
7,624,257 - - 7,624,257
-------------- ------------- ------------ -------------
INCOME BEFORE INCOME TAXES 25,070,353 1,144,051 (686,430) 25,527,974
INCOME TAX EXPENSE 9,541,204 457,621 - 9,998,825
-------------- ------------- ------------ -------------
NET INCOME $ 15,529,149 $ 686,430 $ (686,430) $ 15,529,149
============== ============= ============ =============
19
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2003
- ------------------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
------------- ------------- ------------ ---------------
CASH FLOWS FROM OPERATING ACTIVITIES $ 53,935,474 $ (59,735) $ - $ 53,875,739
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,816,873) (27,757) - (1,844,630)
Acquisitions, net of cash acquired (2,161,080) - - (2,161,080)
Proceeds from sale of property and equipment and other 7,910 - - 7,910
Software development costs (48,029) - - (48,029)
------------- ------------ ------------ -------------
Net cash flows from investing activities (4,018,072) (27,757) - (4,045,829)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (16,452,218) - - (16,452,218)
Principal payments on capital lease obligations (66,936) - - (66,936)
Dividend paid to parent (4,085,000) - - (4,085,000)
Capital contributions 15,740 - - 15,740
------------- ------------ ------------ -------------
Net cash flows from financing activities (20,588,414) - - (20,588,414)
------------- ------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 29,328,988 (87,492) - 29,241,496
CASH AND CASH EQUIVALENTS, Beginning of period 39,269,385 135,997 - 39,405,382
------------- ------------ ------------ -------------
CASH AND CASH EQUIVALENTS, End of period $ 68,598,373 $ 48,505 $ - $ 68,646,878
============= ============ ============ =============
20
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2002
- ------------------------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
-------------- -------------- ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES $ 48,800,261 $ 270,030 $ - $ 49,070,291
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,504,790) (123,340) - (2,628,130)
Acquisitions, net of cash acquired (645,417) - - (645,417)
Proceeds from sale of property and equipment and other 13,740 - - 13,740
Software development costs (162,228) - - (162,228)
------------- -------------- ------------- -------------
Net cash flows from investing activities (3,298,695) (123,340) - (3,422,035)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of financing costs (32,446) - - (32,446)
Principal payments on long-term debt (1,184,397) - - (1,184,397)
Principal payments on capital lease obligations (54,473) - - (54,473)
Capital contributions 521,583 - - 521,583
------------- -------------- ------------- -------------
Net cash flows from financing activities (749,733) - - (749,733)
------------- -------------- ------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 44,751,833 146,690 - 44,898,523
CASH AND CASH EQUIVALENTS, Beginning of period 11,383,149 36,128 - 11,419,277
------------- -------------- ------------- -------------
CASH AND CASH EQUIVALENTS, End of period $ 56,134,982 $ 182,818 $ - $ 56,317,800
============= ============== ============= =============
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2003 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 2002.
REVENUES. Revenues for the quarters ended September 30, 2003 and 2002 and
the corresponding change in revenues were as follows:
Change
------------------------
2003 2002 Amount Percentage
------------- ------------- ------------ ----------
Textbook Division $ 55,896,520 $ 56,502,373 $ (605,853) (1.1)%
Bookstore Division 110,623,512 98,756,896 11,866,616 12.0 %
Distance Education Division 10,702,716 8,997,020 1,705,696 19.0 %
Other Complementary Services Divisions 4,353,590 2,047,494 2,306,096 112.6 %
Intercompany eliminations (8,883,234) (8,582,324) (300,910) 3.5 %
------------- ------------- ------------ ----------
$172,693,104 $157,721,459 $14,971,645 9.5 %
============= ============= ============ ==========
The decrease in Textbook Division revenues was due primarily to a decrease
in the number of units sold. The Company believes that unit sales are down for
the quarter primarily due to a slowdown in units purchased in the last two main
used textbook buyback periods (December of 2002 and May of 2003). The increase
in Bookstore Division revenues was attributable to the addition of acquired
bookstores and increases in same store sales. The new bookstores provided an
additional $6.2 million of revenue in the quarter ended September 30, 2003. Same
store sales also contributed to the increase in revenues, up 7.3% from the
quarter ended September 30, 2002. Distance Education Division revenues increased
due to continued steady growth in its programs. Other Complementary Services
Divisions revenues increased primarily due to increased installation and
training activity in the systems divisions and the Company's acquisition of
TheCampusHub.com, Inc. in July, 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 September 30, 2003
increased $6.7 million, or 11.4%, to $64.6 million from $57.9 million for the
quarter ended September 30, 2002. This increase was primarily due to an increase
in gross margin percent, along with higher revenues. Gross margin percent was
37.4% for the quarter ended September 30, 2003 as compared to 36.7% for the
quarter ended September 30, 2002, driven primarily by improved gross margin
percents in the Textbook and Bookstore Divisions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the quarter ended September 30, 2003 increased $3.3
million, or 13.4%, to $27.3 million from $24.0 million for the quarter ended
September 30, 2002. Selling, general and administrative expenses as a percentage
of revenues were 15.8% and 15.2% for the quarters ended September 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 outpacing
revenue growth in certain areas, including advertising, shipping, and rent
expense.
22
EARNINGS (LOSS) BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION
(EBITDA). EBITDA for the quarters ended September 30, 2003 and 2002 and the
corresponding change in EBITDA were as follows:
Change
-----------------------
2003 2002 Amount Percentage
------------- ------------- ------------ ----------
Textbook Division $18,481,067 $18,434,308 $ 46,759 0.3 %
Bookstore Division 18,135,558 15,598,245 2,537,313 16.3 %
Distance Education Division 552,431 495,430 57,001 11.5 %
Other Complementary Services Divisions 643,150 (74,278) 717,428 965.9 %
Corporate administration (515,615) (546,651) 31,036 5.7 %
------------- ------------- ------------- ----------
$37,296,591 $33,907,054 $3,389,537 10.0 %
============= ============= ============= ==========
The increase in EBITDA in the Textbook Division, despite a small decrease in
revenues, was primarily attributable to the aforementioned increase in gross
margin percent. The increase in Bookstore Division EBITDA was primarily due to
increased revenues and gross margin percent, offset in part by a slight increase
in selling, general and administrative expenses as a percentage of revenues. The
increase in EBITDA for the Distance Education Division was due to the
aforementioned increase in revenues and partially offset by a slight decline in
gross margin percent. The increase in EBITDA in the Other Complementary Services
Divisions was primarily due to increased revenues and controlled growth of
selling, general, and administrative expenses.
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 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 and also sets forth net cash flows from investing and
financing activities:
Quarter ended September 30,
2003 2002
------------- -------------
EBITDA $ 37,296,591 $ 33,907,054
Adjustments to reconcile EBITDA to net cash
flows from operating activities:
Interest income 102,963 80,941
Provision for losses on accounts receivable 47,168 43,564
Cash paid for interest (5,673,333) (5,824,956)
Cash paid (received) for income taxes 528,985 (294,721)
(Gain) Loss on disposal of assets 258,693 (4,706)
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals (1) 53,171,512 48,830,745
------------- -------------
Net Cash Flows from Operating Activities $ 85,732,579 $ 76,737,921
============= =============
Net Cash Flows from Investing Activities $ (2,084,914) $ (1,684,811)
============= =============
Net Cash Flows from Financing Activities $(21,456,041) $(24,297,971)
============= =============
(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.
23
AMORTIZATION EXPENSE. Amortization expense for the quarter ended September
30, 2003 increased $0.2 million to $0.4 million from $0.2 million for the
quarter ended September 30, 2002, primarily due to amortization of capitalized
software development costs acquired in the acquisition of TheCampusHub.com, Inc.
in July, 2003.
INTEREST EXPENSE, NET. Interest expense, net for the quarter ended September
30, 2003 decreased $0.4 million, or 11.7%, to $3.2 million from $3.6 million for
the quarter ended September 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 September 30, 2003 improved $0.1
million compared to the quarter ended September 30, 2002 due to the increase in
the fair market value of the interest rate swap agreements that expired on July
31, 2003.
INCOME TAXES. Income tax expense for the quarter ended September 30, 2003
increased $1.4 million, or 12.0%, to $12.8 million from $11.4 million for the
quarter ended September 30, 2002. The Company's effective tax rate for the
quarters ended September 30, 2003 and 2002 was 38.8% and 39.0%, respectively.
The Company's effective tax rate differs from the statutory tax rate primarily
as a result of state income taxes.
SIX MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH SIX MONTHS ENDED SEPTEMBER 30,
2002.
REVENUES. Revenues for the six months ended September 30, 2003 and 2002 and
the corresponding change in revenues were as follows:
Change
-----------------------
2003 2002 Amount Percentage
------------- ------------- ------------ ----------
Textbook Division $ 80,925,670 $ 81,863,663 $ (937,993) (1.1)%
Bookstore Division 132,876,768 120,510,766 12,366,002 10.3 %
Distance Education Division 21,019,319 18,469,244 2,550,075 13.8 %
Other Complementary Services Divisions 7,483,135 4,176,605 3,306,530 79.2 %
Intercompany eliminations (14,850,605) (13,957,286) (893,319) 6.4 %
------------- ------------- ------------ ----------
$227,454,287 $211,062,992 $16,391,295 7.8 %
============= ============= ============ ==========
The decrease in Textbook Division revenues was due primarily to a decrease
in the number of units sold. The Company believes that unit sales are down for
the year primarily due to a slowdown in units purchased in the last two main
used textbook buyback periods (December of 2002 and May of 2003). The increase
in Bookstore Division revenues was attributable to the addition of acquired
bookstores and increases in same store sales. The new bookstores provided an
additional $6.7 million of revenue in the six months ended September 30, 2003.
This increase was offset, in part, by a $1.3 million decrease in revenues
attributable to stores closed since April 1, 2002. Same store sales increased
5.9%, or $7.0 million. Distance Education Division revenues increased due to
continued steady growth in its programs. Other Complementary Services Divisions
revenues increased primarily due to increased installation and training activity
in the systems divisions and the Company's acquisition of TheCampusHub.com, Inc.
in July, 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 six months ended September 30, 2003
increased $7.6 million, or 9.6%, to $86.3 million from $78.7 million for the six
months ended September 30, 2002. This increase was primarily due to an increase
in gross margin percent, along with higher revenues. Gross margin percent was
38.0% for the six months ended September 30, 2003 as compared to 37.3% for the
six months ended September 30, 2002, driven primarily by improved gross margin
percents in the Bookstore and Other Complementary Services Divisions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the six months ended September 30, 2003 increased
$5.6 million, or 12.9%, to $49.4 million from $43.8 million for the six months
ended September 30, 2002. Selling, general and administrative expenses as a
percentage of revenues were 21.7% and 20.7% for the six months ended September
30, 2003 and 2002, respectively. The increase in selling, general and
administrative expenses is primarily attributable to the Company's continued
growth which prompted increases in certain expenses, including personnel costs,
shipping costs, and rent.
24
EARNINGS (LOSS) BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION
(EBITDA). EBITDA for the six months ended September 30, 2003 and 2002 and the
corresponding change in EBITDA were as follows:
Change
------------------------
2003 2002 Amount Percentage
------------- ------------- ------------- ----------
Textbook Division $23,132,782 $23,584,218 $ (451,436) (1.9)%
Bookstore Division 15,767,042 13,899,021 1,868,021 13.4 %
Distance Education Division 1,103,450 1,220,083 (116,633) (9.6)%
Other Complementary Services Divisions 1,208,536 110,889 1,097,647 989.9 %
Corporate administration (4,285,167) (3,824,372) (460,795) (12.0)%
------------- ------------- ------------- ----------
$36,926,643 $34,989,839 $1,936,804 5.5 %
============= ============= ============= ==========
This increase is primarily attributable to the aforementioned increases in
Bookstore and Other Complementary Services Divisions revenues and gross margin
percents. Textbook Division EBITDA decreased $0.5 million primarily as a result
of decreased revenues. The decrease in EBITDA for the Distance Education
Division was due to a slightly lower gross margin percent and increases in
shipping and commission expenses. The increase in corporate administrative costs
is primarily 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 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 and also sets forth net cash flows from investing and
financing activities as presented in the Consolidated Statements of Cash Flows:
Six Months ended September 30,
2003 2002
--------------- --------------
EBITDA $ 36,926,643 $ 34,989,839
Adjustments to reconcile EBITDA to net
cash flows from operating activities:
Interest income 111,721 91,546
Provision for losses on accounts receivable 54,235 49,934
Cash paid for interest (6,564,317) (6,795,901)
Cash paid (received) for income taxes 126,192 (3,506,223)
(Gain) Loss on disposal of assets 264,932 (4,871)
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals (1) 22,956,333 24,245,967
--------------- --------------
Net Cash Flows from Operating Activities $ 53,875,739 $ 49,070,291
=============== ==============
Net Cash Flows from Investing Activities $ (4,045,829) $ (3,422,035)
=============== ==============
Net Cash Flows from Financing Activities $ (20,588,414) $ (749,733)
=============== ==============
(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.
25
AMORTIZATION EXPENSE. Amortization expense for the six months ended
September 30, 2003 increased $0.2 million, or 75.9% to $0.5 million from $0.3
million for the quarter ended September 30, 2002, primarily due to amortization
of capitalized software development costs acquired in the acquisition of
TheCampusHub.com, Inc. in July, 2003.
INTEREST EXPENSE, NET. Interest expense, net for the six months ended
September 30, 2003 decreased $0.8 million, or 10.4%, to $6.7 million from $7.5
million for the six months ended September 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 six months ended September 30, 2003
improved $0.2 million compared to the six months ended September 30, 2002 due to
the increase in the fair market value of the interest rate swap agreements that
expired on July 31, 2003.
INCOME TAXES. Income tax expense for the six months ended September 30, 2003
increased $1.0 million, or 10.4%, to $11.0 million from $10.0 million for the
six months ended September 30, 2002. The Company's effective tax rate for both
the six months ended September 30, 2003 and 2002 was 39.2%. 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.
26
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 flows and funds borrowed under the Company's
Revolving Credit Facility. At September 30, 2003, the Company's total
indebtedness was $126.9 million, consisting of $14.0 million in Term Loans,
$110.0 million of the Senior Subordinated Notes, and $2.9 million of other
indebtedness, including capital lease obligations. Additionally, NBC issued
Senior Discount Debentures in fiscal 1998 which provided $41.6 million in net
proceeds (face value of $76.0 million less original issue discount of $31.0
million and deferred financing costs of $3.4 million).
Principal and interest payments under the Senior Credit Facility, the Senior
Subordinated Notes, and NBC's 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, the Company is scheduled to make principal
payments totaling $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. Included in the aforementioned
fiscal 2004 principal payments was an excess cash flow payment obligation for
fiscal 2003 of $14.3 million that was paid on September 29, 2003. Loans under
the Senior Credit Facility bear interest at floating rates based upon the
borrowing option selected by the Company. 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 at a fixed rate of 10.75% and mature on February 15, 2009.
On October 7, 2003, the Company and NBC filed Current Reports on Form 8-K
announcing that they were soliciting consents to amend certain of the covenants
and other provisions of the indentures governing the Senior Subordinated Notes
and Senior Discount Debentures. The amendments would allow, among other things,
(i) for the entry into either an amendment and restatement of the Senior Credit
Facility or a new secured credit facility, for the refinancing or repayment of
the Senior Credit Facility, and (ii) for the payment of a dividend by the
Company to NBC to be used by NBC to purchase or redeem a defined number of
shares of NBC Acquisition Corp. Class A Common Stock and stock options
underlying NBC Acquisition Corp. Class A Common Stock. The Company and NBC did
not receive the requisite consents of holders of the Senior Subordinated Notes
and Senior Discount Debentures and therefore will not amend the provisions of
the indentures underlying such debt.
On November 10, 2003, NBC announced that it is making an offer (the
"Offer") to purchase a portion of its Class A Common Stock and certain options
to purchase its Class A Common Stock for an aggregate purchase price of $32.5
million. In order to finance the Offer and the fees and expenses related
thereto, the Company expects to pay a dividend to NBC in an amount not to exceed
$34.5 million. In order to finance the dividend payment, the related
transactions and the fees and expenses relating thereto, the Company expects to
refinance and/or repay its indebtedness under the Senior Credit Facility and
enter into a new credit facility and/or amend and restate the Senior Credit
Facility (the "New Credit Facility"), providing for loans or other extensions of
credit in an aggregate principal amount of up to $125.0 million. The New Credit
Facility will consist of a $75.0 million term loan and a $50.0 million revolving
credit facility.
The Company's capital expenditures were $1.8 million and $2.6 million for
the six months ended September 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.
27
Business acquisition expenditures were $2.2 million and $0.6 million for the
six months ended September 30, 2003 and 2002, respectively. For the six months
ended September 30, 2003, single bookstore locations were acquired serving
Western International University, Mesa Community College, Marshall University,
and Wayne State College; and 3 bookstore locations were acquired serving
Michigan State University. For the six months ended September 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 six months ended September 30, 2003, four bookstores were either
closed or the contract managed lease was not renewed. During the six months
ended September 30, 2002, one bookstore serving the University of California -
Berkeley was closed upon anticipation of the lease expiring in July, 2002 and a
more suitable location having been obtained through a March, 2002 acquisition.
On July 1, 2003, the Company acquired all of the outstanding shares of
common stock of TheCampusHub.com, Inc. TheCampusHub.com, Inc. is no longer
separately incorporated and is instead accounted for as a division within the
Company's Other Complementary Services Divisions segment. TheCampusHub.com, Inc.
provides college bookstores with a way to sell in-store inventory and virtual
brand name merchandise over the Internet utilizing technology originally
developed by the Company. This transaction, with a net purchase price of $10.0
million, was financed primarily through the issuance of 39,905 shares of NBC
Acquisition Corp. Class A Common Stock.
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 provided from operating
activities for the six months ended September 30, 2003 were $53.9 million, up
from $49.1 million for the six months ended September 30, 2002. This increase is
primarily attributable to increased net income and timing of certain cash
receipts and payments.
Access to the Company's principal sources of cash is subject to various
restrictions. The availability of additional borrowings under the Revolving
Credit Facility is subject to the calculation of a borrowing base, which at any
time is equal to a percentage of eligible accounts receivable and inventory, up
to a maximum of $50.0 million. The Senior Credit Facility restricts the
Company's ability to make loans or advances and pay dividends, except that,
among other things, the Company may pay dividends to NBC (i) on or after August
15, 2003 in an amount not to exceed the amount of interest required to be paid
on the Senior Discount Debentures and (ii) to pay corporate overhead expenses
not to exceed $250,000 per year and any taxes owed by NBC. The indenture
governing the Senior Discount Debentures (the "Indenture") restricts the ability
of NBC and its Restricted Subsidiaries (as defined in the Indenture) to pay
dividends or make other Restricted Payments (as defined in the Indenture) to
their respective stockholders, subject to certain exceptions, unless certain
conditions are met, including that (i) no default under the Indenture shall have
occurred and be continuing, (ii) NBC shall be permitted by the Indenture to
incur additional indebtedness and (iii) the amount of the dividend or payment
may not exceed a certain amount based on, among other things, NBC's consolidated
net income. The indenture governing the Senior Subordinated Notes contains
similar restrictions on the ability of the Company and its Restricted
Subsidiaries (as defined in the indenture) to pay dividends or make other
Restricted Payments (as defined in the indenture) to their respective
stockholders. Such restrictions are not expected to affect the Company's ability
to meet its cash obligations for the foreseeable future. In accordance with such
covenants, the Company declared and paid a $4.1 million dividend to NBC for
interest due and payable on the Senior Discount Debentures on August 15, 2003.
As of September 30, 2003, the Company could borrow up to $50.0 million under
the Revolving Credit Facility, which was unused at September 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 acquisition of
TheCampusHub.com, Inc. 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 financing or capital
contributions.
28
The following tables present aggregated information as of September 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 $124,484,772 $ 2,338,535 $11,760,789 $110,079,746 $ 305,702
Capital lease obligations 2,371,330 143,884 438,147 615,469 1,173,830
Operating leases 44,389,000 9,018,000 15,868,000 10,675,000 8,828,000
-------------- ------------- ------------- ------------- -------------
Total $171,245,102 $11,500,419 $28,066,936 $121,370,215 $10,307,532
============== ============= ============= ============= =============
Amount of Commitment Expiration Per Period
Total -------------------------------------------------------
Other Commercial Amounts Less Than 1-3 4-5 Over 5
Commitments Committed 1 Year Years Years Years
- ------------------------------ -------------- ------------- ------------- ------------- -------------
Unused line of credit $ 50,000,000 $50,000,000 $ - $ - $ -
============== ============= ============= ============= =============
TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES
In fiscal 2001, the Company entered into several agreements with a newly
created entity, TheCampusHub.com, Inc., which was partially owned by NBC's
majority owner. TheCampusHub.com, Inc. was created to provide college bookstores
with a way to sell in-store inventory and virtual brand name merchandise over
the Internet utilizing technology originally developed by the Company. Such
agreements (including an equity option agreement, a management services
agreement, and a technology sale and license agreement) terminated effective
July 1, 2003 upon the Company's acquisition of all of the outstanding shares of
common stock of TheCampusHub.com, Inc. This business combination was accounted
for by the Company in accordance with Statement of Financial Accounting
Standards No. 141, "Business Combinations." The total purchase price, net of
cash acquired, of such acquisition was $10.0 million, of which $3.6 million was
assigned to non-deductible goodwill. The management services agreement
reimbursed the Company 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. Revenues attributable to the management services
agreement and reimbursable direct costs incurred on behalf of TheCampusHub.com,
Inc. totaled $0.1 million and $0.1 million, respectively, for the six months
ended September 30, 2003 and $0.1 million and $0.3 million, respectively, for
the six months ended September 30, 2002. Net amounts due from TheCampusHub.com,
Inc. at September 30, 2002 totaled $0.1 million.
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.
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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.
"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. 333-48221), all of which are difficult or impossible
to predict accurately and many of which are beyond the control of the Company.
The Company will not undertake and specifically declines any obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk exposure is, and is expected to continue
to be, fluctuation in Eurodollar interest rates. Of the $126.9 million in total
indebtedness outstanding at September 30, 2003, $14.0 million is subject to
fluctuations in the Eurodollar rate. As provided in the Company's Senior Credit
Facility, exposure to interest rate fluctuations is managed by maintaining fixed
interest rate debt (primarily the Senior Subordinated Notes) and, in the past,
by entering into interest rate swap agreements that qualify as cash flow hedging
instruments to convert certain variable rate debt into fixed rate debt. The
Company had separate five-year amortizing interest rate swap agreements with two
financial institutions whereby the Company's variable rate Tranche A and Tranche
B Loans were converted into debt with a fixed rate of 5.815% plus an applicable
margin (as defined in the Credit Agreement). Such agreements terminated on July
31, 2003.
Certain quantitative market risk disclosures have changed since March 31,
2003 as a result of market fluctuations, movement in interest rates, termination
of the interest rate swap agreements, and principal payments. The following
table presents summarized market risk information as of September 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):
September 30, March 31,
2003 2003
-------------- --------------
Fair Values:
Fixed rate debt $ 116,326,844 $ 113,676,064
Variable rate debt (excluding Revolving Credit Facility) 14,007,570 30,447,160
Interest rate swaps - (845,669)
Overall Weighted-Average Interest Rates:
Fixed rate debt 8.83% 8.83%
Variable rate debt (excluding Revolving Credit Facility) 4.02% 4.24%
Interest rate swaps receive rate - 1.22%
30
ITEM 4. CONTROLS AND PROCEDURES.
Our management, with the participation of our chief executive officer and
chief financial officer (our principal executive officer and principal financial
officer), evaluated the effectiveness of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
September 30, 2003. Based on this evaluation, our chief executive officer and
chief financial officer concluded that, as of September 30, 2003, our disclosure
controls and procedures were (1) designed to ensure that material information
relating to us, including our consolidated subsidiaries, is made known to our
chief executive officer and chief financial officer by others within those
entities, particularly during the period in which this report was being prepared
and (2) effective, in that they provide reasonable assurance that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
No change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
quarter ended September 30, 2003 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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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 First Restated Bylaws of Nebraska Book Company, Inc.
10.1 NBC Acquisition Corp. 2003 Performance Stock Option Plan
adopted July 1, 2003.
10.2 NBC Acquisition Corp. 2003 Stock Option Plan adopted
July 1, 2003.
31.1 Certification of 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 Chief Financial 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.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended September 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 November 10, 2003.
NEBRASKA BOOK COMPANY, INC.
/s/ Mark W. Oppegard /s/ Alan G. Siemek
- ---------------------- ------------------
Mark W. Oppegard Alan G. Siemek
Chief Executive Officer, President and Chief Financial Officer,
Director Senior Vice President
of Finance and Administration,
Treasurer and Assistant Secretary
32