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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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 FEBRUARY 12, 2004: 100 SHARES
TOTAL NUMBER OF PAGES: 36
EXHIBIT INDEX: PAGE 36
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
December 31, March 31, December 31,
2003 2003 2002
--------------- --------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15,423,613 $ 39,405,382 $ 10,959,573
Receivables 58,657,326 29,085,329 56,410,263
Inventories 90,095,729 68,315,352 85,991,855
Recoverable income taxes 3,578,415 - 1,720,531
Deferred income taxes 5,429,743 3,861,932 4,416,325
Prepaid expenses and other assets 632,471 834,284 572,097
--------------- --------------- ---------------
Total current assets 173,817,297 141,502,279 160,070,644
PROPERTY AND EQUIPMENT,
net of depreciation & amortization 28,344,685 27,666,370 27,408,799
GOODWILL 34,079,919 30,472,823 30,077,527
IDENTIFIABLE INTANGIBLES, net of amortization 101,077 239,014 279,051
DEBT ISSUE COSTS, net of amortization 6,467,913 4,142,416 4,466,496
OTHER ASSETS 3,644,716 4,442,780 5,031,855
--------------- --------------- ---------------
$ 246,455,607 $ 208,465,682 $ 227,334,372
=============== =============== ===============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 25,769,228 $ 19,857,301 $ 22,656,852
Accrued employee compensation and benefits 7,364,052 10,642,713 6,950,991
Accrued interest 3,694,265 1,512,733 3,954,670
Accrued incentives 6,528,926 5,518,883 4,921,400
Accrued expenses 885,367 1,077,844 850,571
Income taxes payable - 89,932 -
Deferred revenue 886,349 538,230 735,250
Current maturities of long-term debt 778,119 19,181,277 5,610,893
Current maturities of capital lease obligations 154,507 124,703 101,846
Revolving credit facility - - 25,900,000
--------------- --------------- ---------------
Total current liabilities 46,060,813 58,543,616 71,682,473
LONG-TERM DEBT, net of current maturities 184,692,511 121,755,713 136,644,077
CAPITAL LEASE OBLIGATIONS, net of current maturities 2,184,125 2,305,583 1,979,327
OTHER LONG-TERM LIABILITIES 313,130 300,823 1,540,068
DUE TO PARENT 14,715,520 12,371,846 11,683,537
COMMITMENTS (Note 4)
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock, voting, authorized 50,000 shares
of $1.00 par value; issued and
outstanding 100 shares 100 100 100
Additional paid-in capital 56,919,950 46,986,333 46,919,386
Accumulated deficit (58,430,542) (33,379,701) (42,665,909)
Accumulated other comprehensive income (loss) - (418,631) (448,687)
--------------- --------------- ---------------
Total stockholder's equity (deficit) (1,510,492) 13,188,101 3,804,890
--------------- --------------- ---------------
$ 246,455,607 $ 208,465,682 $ 227,334,372
=============== =============== ===============
See notes to consolidated financial statements.
2
NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
December 31, December 31,
2003 2002 2003 2002
-------------- --------------- -------------- --------------
REVENUES, net of returns $ 56,783,112 $ 52,898,934 $ 284,237,399 $263,961,926
COSTS OF SALES 34,060,843 30,726,518 175,176,903 163,048,776
-------------- --------------- -------------- --------------
Gross profit 22,722,269 22,172,416 109,060,496 100,913,150
OPERATING EXPENSES:
Selling, general and administrative 23,568,218 20,787,744 72,979,802 64,538,639
Depreciation 824,136 689,326 2,389,054 2,214,472
Amortization 373,599 174,999 923,073 487,461
Stock-based compensation 186,057 - 186,057 -
-------------- --------------- -------------- --------------
24,952,010 21,652,069 76,477,986 67,240,572
-------------- --------------- -------------- --------------
INCOME (LOSS) FROM OPERATIONS (2,229,741) 520,347 32,582,510 33,672,578
OTHER EXPENSES (INCOME):
Interest expense 3,678,825 3,521,183 10,483,887 11,086,881
Interest income (81,651) (106,543) (193,372) (198,089)
(Gain) loss on derivative
financial instruments - 2,768 (57,296) 152,873
-------------- --------------- -------------- --------------
3,597,174 3,417,408 10,233,219 11,041,665
-------------- --------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES (5,826,915) (2,897,061) 22,349,291 22,630,913
INCOME TAX EXPENSE (BENEFIT) (2,220,524) (1,088,038) 8,815,132 8,910,787
-------------- --------------- -------------- --------------
NET INCOME (LOSS) $ (3,606,391) $ (1,809,023) $ 13,534,159 $ 13,720,126
============== =============== ============== ==============
See notes to consolidated financial statements.
3
NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(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 - 514,912 - - 514,912 -
Net income - - 13,720,126 - 13,720,126 13,720,126
Other comprehensive income,
net of taxes:
Unrealized gains on
interest rate swap agreements,
net of taxes of $128,510 - - - 155,880 155,880 155,880
-------- ------------- ------------- ----------- ------------- ------------
BALANCE, December 31, 2002 $ 100 $ 46,919,386 $(42,665,909) $ (448,687) $ 3,804,890 $13,876,006
======== ============= ============= =========== ============= ============
BALANCE, April 1, 2003 $ 100 $ 46,986,333 $(33,379,701) $ (418,631) $ 13,188,101 $ -
Contributed capital - 9,933,617 - - 9,933,617 -
Net income - - 13,534,159 - 13,534,159 13,534,159
Dividends declared - - (38,585,000) - (38,585,000) -
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, December 31, 2003 $ 100 $ 56,919,950 $(58,430,542) $ - $ (1,510,492) $13,952,790
======== ============= ============= =========== ============= ============
See notes to consolidated financial statements.
4
NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------------------
Nine Months Ended December 31,
2003 2002
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,534,159 $ 13,720,126
Adjustments to reconcile net income to net cash flows
from operating activities:
Provision for losses on receivables 34,429 125,789
Depreciation 2,389,054 2,214,472
Amortization 2,376,907 1,456,753
Noncash interest (income) expense from
derivative financial instruments (1,030) 18,439
Gain on derivative financial instruments (169,863) (109,287)
(Gain) loss on disposal of assets 266,861 (2,466)
Deferred income taxes 3,532,000 52,000
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals:
Receivables (28,577,261) (27,158,474)
Inventories (19,858,680) (15,739,616)
Recoverable income taxes (3,553,415) (1,720,531)
Prepaid expenses and other assets 235,502 (73,657)
Other assets (108,928) (191,428)
Accounts payable 5,075,762 7,572,775
Accrued employee compensation and benefits (3,362,661) (1,959,911)
Accrued interest 2,181,532 2,407,471
Accrued incentives 1,010,043 1,325,772
Accrued expenses (195,367) (210,398)
Income taxes payable (89,932) (3,684,439)
Deferred revenue 348,119 302,460
Other long-term liabilities 12,307 23,056
Due to parent 2,343,674 2,088,638
--------------- ---------------
Net cash flows from operating activities (22,576,788) (19,542,456)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,898,756) (3,020,852)
Acquisitions, net of cash acquired (2,355,487) (851,947)
Proceeds from sale of property and
equipment and other 8,774 15,192
Software development costs (134,016) (208,475)
--------------- ---------------
Net cash flows from investing activities (5,379,485) (4,066,082)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 75,000,000 -
Payment of financing costs (3,779,331) (32,446)
Principal payments on long-term debt (30,466,360) (3,158,175)
Principal payments on capital lease obligations (99,634) (82,128)
Net increase in revolving credit facility - 25,900,000
Dividends paid to parent (36,904,000) -
Capital contributions 223,829 521,583
--------------- ---------------
Net cash flows from financing activities 3,974,504 23,148,834
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (23,981,769) (459,704)
CASH AND CASH EQUIVALENTS, Beginning of period 39,405,382 11,419,277
--------------- ---------------
CASH AND CASH EQUIVALENTS, End of period $ 15,423,613 $ 10,959,573
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest $ 6,962,118 $ 7,953,839
Income taxes 6,607,805 12,175,119
Noncash investing and financing activities:
Acquisition of TheCampusHub.com, Inc.
through issuance of NBC Acquisition Corp.
Class A Common Stock $ 9,722,683 $ -
Dividend declared but unpaid 1,681,000 -
Unrealized gains on interest rate
swap agreements, net of income taxes 418,631 155,880
Deferred taxes resulting from
accumulated other comprehensive income (loss) 256,145 128,510
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. The Company is a
wholly-owned subsidiary of NBC Acquisition Corp. (NBC). 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. All intercompany
balances and transactions have been eliminated in consolidation. 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. 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 Nine Months Ended
December 31, December 31,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net income (loss), as reported $ (3,606,391) $ (1,809,023) $ 13,534,159 $ 13,720,126
Add: Stock-based compensation included in reported
net income, net of related income tax effects 111,634 - 111,634 -
Less: Stock-based compensation determined under
fair value based method, net of related income tax
effects (24,445) (23,096) (73,335) (69,287)
------------- ------------- ------------- -------------
Pro forma net income (loss) $ (3,519,202) $ (1,832,119) $ 13,572,458 $ 13,650,839
============= ============= ============= =============
In conjunction with the debt refinancing on December 10, 2003 discussed in
Note 4, NBC purchased 116,795 shares of its Class A Common Stock and 838
options outstanding to purchase shares of its Class A Common Stock. The
cost of the treasury shares was $32.7 million and stock-based compensation
expense resulting from the purchase of the options was $0.2 million. The
Company funded the purchase of the treasury shares and options by NBC
through a $34.5 million dividend, of which $1.7 million remained in
accounts payable at December 31, 2003.
6
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 become
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 December 31, 2003, there were 32,250 options and 28,000 options
available for grant under the Performance Plan and the Option Plan,
respectively.
3. INVENTORIES - Inventories are summarized as follows:
December 31, March 31, December 31,
2003 2003 2002
---------------------------------------------------------------------------------
Textbook Division $19,317,249 $28,908,121 $19,456,994
Bookstore Division 63,727,565 31,986,260 57,597,217
Distance Education Division 6,058,647 6,833,989 8,406,903
Other Complementary Services Divisions 992,268 586,982 530,741
---------------------------------------------------------------------------------
$90,095,729 $68,315,352 $85,991,855
=================================================================================
4. LONG-TERM DEBT - The Company's indebtedness includes $110.0 million face
amount of 8.75% senior subordinated notes due 2008 (the "Senior
Subordinated Notes"), capital leases, and a bank-administered senior
credit facility provided through a syndicate of lenders, which was amended
and restated on December 10, 2003 (as amended and restated, the "Senior
Credit Facility") to finance NBC's purchase of 116,795 shares of its Class
A Common Stock and 838 options outstanding to purchase shares of its Class
A Common Stock and to refinance the remaining indebtedness under the
existing credit facility. The Senior Credit Facility is comprised of a
$75.0 million term loan (the "Term Loan") and a $50.0 million revolving
credit facility (the "Revolving Credit Facility"). The Term Loan matures
on the earlier of December 31, 2010 or the early maturity date (the "Early
Maturity Date"), as defined in the amended and restated credit agreement
(as amended and restated, the "Credit Agreement"). In the event that the
Senior Subordinated Notes or the Senior Discount Debentures are not
refinanced or extended prior to June 30, 2007 to a date not earlier than
May 31, 2011, the Early Maturity Date is triggered and is defined as June
30, 2007; provided that, if the Senior Subordinated Notes and Senior
Discount Debentures have been refinanced or extended prior to June 30,
2007 to a date earlier than May 31, 2011, the Early Maturity Date shall be
the date which is six months prior to the maturity of the refinanced
Senior Subordinated Notes and Senior Discount Debentures. The Revolving
Credit Facility was unused except at December 31, 2002, outstanding
indebtedness under which totaled $25.9 million, and expires on the earlier
of December 31, 2008 or the Early Maturity Date, as defined in the Credit
Agreement. 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 December 31, 2003 was
$50.0 million.
The interest rate on the Senior Credit Facility is prime plus an
applicable margin of up to 1.75% or, on Eurodollar borrowings, the
Eurodollar rate plus an applicable margin of up to 2.75%. Additionally,
there is a 0.5% commitment fee for the average daily unused amount of the
Revolving Credit Facility. The Senior Credit Facility requires excess cash
flows, as defined in the Credit Agreement, to be calculated annually based
upon year-end results and to be applied initially towards prepayment of
the Term Loan 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 which was paid on September
29, 2003.
7
Aggregate maturities of long-term debt, excluding capital leases, for the
next five years, were as follows at December 31, 2003:
2004 $ 778,119
2005 781,294
2006 784,830
2007 72,788,765
2008 110,043,145
5. DERIVATIVE FINANCIAL INSTRUMENTS - The Financial Accounting Standards
Board ("FASB") has issued Statement of Financial Accounting Standards
("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, as amended by SFAS No. 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF
FASB STATEMENT NO. 133; 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 its variable rate debt and adopted SFAS No. 133
effective April 1, 2001.
The Company's primary market risk exposure is, and is expected to continue
to be, fluctuation in variable 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 term debt was converted
into debt with a fixed rate of 5.815% plus an applicable margin (as
defined in the then-existing credit agreement). Such agreements expired on
July 31, 2003. Notional amounts under the agreements were reduced
periodically by amounts equal to the originally-scheduled principal
payments on the term debt. General information regarding the Company's
exposure to fluctuations in variable interest rates is presented in the
following table:
December 31, March 31, December 31,
2003 2003 2002
--------------- --------------- ---------------
Total indebtedness outstanding $ 187,809,262 $ 143,367,276 $ 170,236,143
Term debt subject to Eurodollar fluctuations 75,000,000 30,447,160 31,759,075
Revolving credit facility subject
to Prime rate fluctuations - - 25,900,000
Notional amounts under swap agreements - 38,100,000 39,800,000
Fixed interest rate indebtedness 112,809,262 112,920,116 112,577,068
Variable interest rate, including applicable margin:
Term Debt - Term Loan 3.88% - -
Term Debt - Tranche A Loans - 2.76% 2.91%
Term Debt - Tranche B Loans - 3.76% 3.91%
Revolving Credit Facility - - 4.75%
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.
8
(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 term debt.
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 term debt, 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 December
31, 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 was that interest expense on the term debt 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 December
31, 2002 totaled $0.8 million and $1.2 million, respectively.
As a result of a $10.0 million optional prepayment of term debt on March
29, 2002, notional amounts under the interest rate swap agreements no
longer correlated with remaining principal balances due under the term
debt. The difference between the notional amounts under the interest rate
swap agreements and the remaining principal balances due under the term
debt 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 term debt 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 nine months ended December 31, 2003 and $(2,768) and
$(0.2) million for the quarter and nine months ended December 31, 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:
December 31, March 31, December 31,
2003 2003 2002
-------------- ------------ -------------
Increase in fair value of swap agreements
designated as hedges $ 675,806 $ 582,146 $ 265,953
Year-to-date interest income (expense)
recorded due to hedge ineffectiveness 1,030 (18,439)
Quarterly interest income recorded due
to hedge ineffectiveness - 17,987
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.
9
6. SEGMENT INFORMATION - The Company's operating segments are determined
based on the way that management organizes the segments for making
operating decisions and assessing performance. Management has organized
the Company's segments based upon differences in products and services
provided. During the quarter ended June 30, 2003, the Distance Education
Division surpassed the quantitative revenue threshold for a reportable
segment. The segment information has been reclassified to reflect this
change for all periods 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 113 college bookstores as of December 31, 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 CampusHub (formerly TheCampusHub.com, Inc.) and
other college bookstore-related services, such as computer hardware and
software and a centralized buying service. CampusHub 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.
The Company primarily accounts for intersegment sales as if the sales were
to third parties (at current market prices). Assets (excluding inventories
and certain cash and cash equivalents, receivables, property and
equipment, intangibles, and other assets), net interest expense and taxes
are not allocated between the Company's segments; instead, such balances
are accounted for in a corporate administrative division. The following
table provides selected information about profit or loss on a segment
basis for the quarters and nine months ended December 31, 2003 and 2002,
respectively:
Other
Distance Complementary
Textbook Bookstore Education Services
Division Division Division Divisions Total
------------- --------------- --------------- ---------------- --------------
Quarter ended December 31, 2003:
External customer revenues $25,373,656 $ 19,284,401 $10,012,872 $ 2,112,183 $ 56,783,112
Intersegment revenues 5,304,144 349,997 - 642,926 6,297,067
Depreciation and amortization expense 213,673 491,418 20,632 436,515 1,162,238
Earnings (loss) before interest, taxes,
depreciation and amortization (EBITDA) 5,206,119 (1,574,643) 175,023 77,707 3,884,206
Quarter ended December 31, 2002:
External customer revenues $26,006,081 $ 17,093,574 $ 8,235,520 $ 1,563,759 $ 52,898,934
Intersegment revenues 5,066,193 371,609 - 192,927 5,630,729
Depreciation and amortization expense 203,946 460,377 20,670 136,135 821,128
Earnings (loss) before interest, taxes,
depreciation and amortization (EBITDA) 5,784,535 (642,162) 370,232 (4,269) 5,508,336
Nine months ended December 31, 2003:
External customer revenues $92,962,816 $ 151,555,354 $31,032,191 $ 8,687,038 $ 284,237,399
Intersegment revenues 18,640,654 955,812 - 1,551,206 21,147,672
Depreciation and amortization expense 638,619 1,513,416 63,155 980,813 3,196,003
Earnings before interest, taxes,
depreciation and amortization (EBITDA) 28,338,901 14,192,399 1,278,473 1,286,243 45,096,016
Nine months ended December 31, 2002:
External customer revenues $94,800,965 $ 137,204,160 $26,704,764 $ 5,252,037 $ 263,961,926
Intersegment revenues 18,134,972 771,789 - 681,254 19,588,015
Depreciation and amortization expense 438,413 1,630,202 96,702 395,839 2,561,156
Earnings before interest, taxes,
depreciation and amortization (EBITDA) 29,368,753 13,256,859 1,590,315 106,620 44,322,547
10
The following table reconciles segment information presented above with
information as presented in the consolidated financial statements for the
quarters and nine months ended December 31, 2003 and 2002, respectively:
Quarter Ended December 31, Nine Months Ended December 31,
2003 2002 2003 2002
------------- -------------- -------------- --------------
Revenues:
Total for reportable segments $63,080,179 $58,529,663 $305,385,071 $283,549,941
Elimination of intersegment revenues (6,297,067) (5,630,729) (21,147,672) (19,588,015)
------------- -------------- -------------- --------------
Consolidated total $56,783,112 $52,898,934 $284,237,399 $263,961,926
============= ============== ============== ==============
Depreciation and Amortization Expense:
Total for reportable segments $ 1,162,238 $ 821,128 $ 3,196,003 $ 2,561,156
Corporate administration 35,497 43,197 116,124 140,777
------------- -------------- -------------- --------------
Consolidated total $ 1,197,735 $ 864,325 $ 3,312,127 $ 2,701,933
============= ============== ============== ==============
Income (Loss) Before Income Taxes:
Total EBITDA for reportable segments $ 3,884,206 $ 5,508,336 $ 45,096,016 $ 44,322,547
Corporate administrative costs (4,916,212) (4,123,664) (9,201,379) (7,948,036)
------------- -------------- -------------- --------------
(1,032,006) 1,384,672 35,894,637 36,374,511
Depreciation and amortization (1,197,735) (864,325) (3,312,127) (2,701,933)
------------- -------------- -------------- --------------
Consolidated income (loss) from operations (2,229,741) 520,347 32,582,510 33,672,578
Interest and other expenses, net (3,597,174) (3,417,408) (10,233,219) (11,041,665)
------------- -------------- -------------- --------------
Consolidated income (loss) before income
taxes $(5,826,915) $(2,897,061) $ 22,349,291 $ 22,630,913
============= ============== ============== ==============
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.
11
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 December 31, Nine Months ended December 31,
2003 2002 2003 2002
-------------- -------------- -------------- ---------------
EBITDA $ (1,032,006) $ 1,384,672 $ 35,894,637 $ 36,374,511
Adjustments to reconcile EBITDA to net
cash flows from operating activities:
Interest income 81,651 106,543 193,372 198,089
Provision for losses on receivables (19,806) 75,855 34,429 125,789
Cash paid for interest (397,801) (1,157,938) (6,962,118) (7,953,839)
Cash paid for income taxes (6,733,997) (8,668,896) (6,607,805) (12,175,119)
(Gain) loss on disposal of assets 1,929 2,405 266,861 (2,466)
Changes in operating assets and
liabilities, net of effect of
acquisitions/disposals (1) (68,352,497) (60,355,388) (45,396,164) (36,109,421)
-------------- -------------- -------------- ---------------
Net Cash Flows from Operating Activities $(76,452,527) $(68,612,747) $(22,576,788) $ (19,542,456)
============== ============== ============== ===============
Net Cash Flows from Investing Activities $ (1,333,656) $ (644,047) $ (5,379,485) $ (4,066,082)
============== ============== ============== ===============
Net Cash Flows from Financing Activities $ 24,562,918 $ 23,898,567 $ 3,974,504 $ 23,148,834
============== ============== ============== ===============
(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 current 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 December 31, 2003, March 31, 2003, and December
31, 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.
December 31, March 31, December 31,
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
============== ============== ==============
12
The changes in the carrying amount of goodwill for the Bookstore and Other
Complementary Services Divisions for the nine months ended December 31,
2003 and 2002 and the year ended March 31, 2003 are as follows:
December 31, March 31, December 31,
2003 2003 2002
-------------- -------------- --------------
Bookstore Division:
Balance, beginning of period $13,702,249 $ 13,020,761 $13,020,761
Goodwill acquired during the period 2,720 681,488 286,192
-------------- -------------- --------------
Balance, end of period $13,704,969 $ 13,702,249 $13,306,953
============== ============== ==============
Other Complementary Services Divisions:
Balance, beginning of period $ - $ - $ -
Goodwill acquired during the period 3,604,376 - -
-------------- -------------- --------------
Balance, end of period $ 3,604,376 $ - $ -
============== ============== ==============
The Company's revenues are attributed to countries based on the location
of the customer. Substantially all revenues generated are attributable to
customers located within the United States.
7. 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, Inc. 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.
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 in an
amount not to exceed the amount of interest required to be paid on NBC's
Senior Discount Debentures and may pay dividends to NBC in an aggregate
amount not to exceed $36.5 million to finance the aforementioned stock
purchase on December 10, 2003. 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 and
declared a $34.5 million dividend to NBC for the stock and option purchase
on December 10, 2003, of which $1.7 million remained in accounts payable
at December 31, 2003.
8. ACCOUNTING STANDARDS NOT YET ADOPTED - In May 2003, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS
WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY ("SFAS No. 150"), to
establish standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
It requires that an issuer classify a financial instrument within its
scope as a liability (or an asset in some circumstances). SFAS No. 150 is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for certain provisions that
have been deferred. Adoption of SFAS No. 150 had no impact and is not
expected to have a significant impact on the Company's consolidated
financial statements. In January, 2003 the FASB issued Interpretation No.
46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES ("FIN 46") and later
revised FIN 46 in December, 2003. FIN 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual
returns or both. FIN 46 also requires disclosures about variable interest
entities that a company is not required to consolidate but in which it has
a significant variable interest. The provisions of FIN 46 become effective
on varying dates. As these provisions become effective and are adopted,
they have not had and are not expected to have a significant impact on the
Company's consolidated financial statements.
13
9. SUBSEQUENT EVENT - The Company filed a Current Report on Form 8-K dated
February 5, 2004 announcing the commencement of tender offers and consent
solicitations for the Senior Subordinated Notes and Senior Discount
Debentures. The tender offers and consent solicitations are being
undertaken in connection with a recapitalization transaction, through
which funds affiliated with Weston Presidio Capital, which currently holds
approximately 32.1% of the outstanding Class A Common Stock of NBC, will
acquire control over substantially all of the rest of the outstanding
Class A Common Stock of NBC. This recapitalization transaction will
include the refinancing of the Senior Credit Facility and the incurrence
of other indebtedness and is expected to be accounted for utilizing
purchase accounting.
10. 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 6). 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 amended
and restated 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.
14
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2003
- -------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
------------- ----------- ------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15,356,479 $ 67,134 $ - $ 15,423,613
Receivables 63,476,777 3,971,475 (8,790,926) 58,657,326
Inventories 84,037,082 6,058,647 - 90,095,729
Recoverable income taxes 3,578,415 - - 3,578,415
Deferred income taxes 5,429,743 - - 5,429,743
Prepaid expenses and other assets 627,760 4,711 - 632,471
------------- ------------ ------------- -------------
Total current assets 172,506,256 10,101,967 (8,790,926) 173,817,297
PROPERTY AND EQUIPMENT, net 27,814,436 530,249 - 28,344,685
GOODWILL 34,079,919 - - 34,079,919
OTHER ASSETS 11,868,651 17,077 (1,672,022) 10,213,706
------------- ------------ ------------- -------------
$246,269,262 $10,649,293 $(10,462,948) $246,455,607
============= ============ ============= =============
LIABILITIES AND STOCKHOLDER'S
EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 25,769,228 $ 8,790,926 $ (8,790,926) $ 25,769,228
Accrued employee compensation and benefits 7,237,086 126,966 - 7,364,052
Accrued interest 3,694,265 - - 3,694,265
Accrued incentives 6,528,926 - - 6,528,926
Accrued expenses 825,988 59,379 - 885,367
Deferred revenue 886,349 - - 886,349
Current maturities of long-term debt 778,119 - - 778,119
Current maturities of capital
lease obligations 154,507 - - 154,507
------------- ------------ ------------- -------------
Total current liabilities 45,874,468 8,977,271 (8,790,926) 46,060,813
LONG-TERM DEBT, net of current maturities 184,692,511 - - 184,692,511
CAPITAL LEASE OBLIGATIONS,
net of current maturities 2,184,125 - - 2,184,125
OTHER LONG-TERM LIABILITIES 313,130 - - 313,130
DUE TO PARENT 14,715,520 - - 14,715,520
COMMITMENTS
STOCKHOLDER'S EQUITY (DEFICIT) (1,510,492) 1,672,022 (1,672,022) (1,510,492)
------------- ------------ ------------- -------------
$246,269,262 $10,649,293 $(10,462,948) $246,455,607
============= ============ ============= =============
15
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
============= ============ ============= =============
16
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
- -------------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
-------------- ------------ ------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,180,432 $ 779,141 $ - $ 10,959,573
Receivables 65,282,160 1,861,224 (10,733,121) 56,410,263
Inventories 77,584,952 8,406,903 - 85,991,855
Recoverable income taxes 1,720,531 - - 1,720,531
Deferred income taxes 4,416,325 - - 4,416,325
Prepaid expenses and other assets 561,756 10,341 - 572,097
------------- ------------ ------------- -------------
Total current assets 159,746,156 11,057,609 (10,733,121) 160,070,644
PROPERTY AND EQUIPMENT, net 26,837,763 571,036 - 27,408,799
GOODWILL 30,077,527 - - 30,077,527
OTHER ASSETS 10,561,773 17,077 (801,448) 9,777,402
------------- ------------ ------------- -------------
$227,223,219 $11,645,722 $(11,534,569) $227,334,372
============= ============ ============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 22,656,852 $10,733,121 $(10,733,121) $ 22,656,852
Accrued employee compensation and benefits 6,842,924 108,067 - 6,950,991
Accrued interest 3,954,670 - - 3,954,670
Accrued incentives 4,921,400 - - 4,921,400
Accrued expenses 847,485 3,086 - 850,571
Deferred revenue 735,250 - - 735,250
Current maturities of long-term debt 5,610,893 - - 5,610,893
Current maturities of capital lease obligations 101,846 - - 101,846
Revolving credit facility 25,900,000 - - 25,900,000
------------- ------------ ------------- -------------
Total current liabilities 71,571,320 10,844,274 (10,733,121) 71,682,473
LONG-TERM DEBT, net of current maturities 136,644,077 - - 136,644,077
CAPITAL LEASE OBLIGATIONS,
net of current maturities 1,979,327 - - 1,979,327
OTHER LONG-TERM LIABILITIES 1,540,068 - - 1,540,068
DUE TO PARENT 11,683,537 - - 11,683,537
COMMITMENTS
STOCKHOLDER'S EQUITY 3,804,890 801,448 (801,448) 3,804,890
------------- ------------ ------------- -------------
$227,223,219 $11,645,722 $(11,534,569) $227,334,372
============= ============ ============= =============
17
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED DECEMBER 31, 2003
- -----------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
------------- ------------- ------------ ------------
REVENUES, net of returns $ 46,776,937 $ 10,012,872 $ (6,697) $56,783,112
COSTS OF SALES 26,905,560 7,163,208 (7,925) 34,060,843
------------- ------------- ------------ ------------
Gross profit 19,871,377 2,849,664 1,228 22,722,269
OPERATING EXPENSES (INCOME):
Selling, general and administrative 20,892,349 2,674,641 1,228 23,568,218
Depreciation 803,504 20,632 - 824,136
Amortization 373,599 - - 373,599
Stock-based compensation 186,057 - - 186,057
Equity in earnings of subsidiary (92,635) - 92,635 -
------------- ------------- ------------ ------------
22,162,874 2,695,273 93,863 24,952,010
------------- ------------- ------------ ------------
INCOME (LOSS) FROM OPERATIONS (2,291,497) 154,391 (92,635) (2,229,741)
OTHER EXPENSES (INCOME):
Interest expense 3,678,825 - - 3,678,825
Interest income (81,651) - - (81,651)
------------- ------------- ------------ ------------
3,597,174 - - 3,597,174
------------- ------------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (5,888,671) 154,391 (92,635) (5,826,915)
INCOME TAX EXPENSE (BENEFIT) (2,282,280) 61,756 - (2,220,524)
------------- ------------- ------------ ------------
NET INCOME (LOSS) $ (3,606,391) $ 92,635 $ (92,635) $(3,606,391)
============= ============= ============ ============
18
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED DECEMBER 31, 2002
- ----------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
------------- ------------ ------------- -------------
REVENUES, net of returns $ 44,681,467 $ 8,235,520 $ (18,053) $52,898,934
COSTS OF SALES 25,120,878 5,629,197 (23,557) 30,726,518
------------- ------------- ------------- -------------
Gross profit 19,560,589 2,606,323 5,504 22,172,416
OPERATING EXPENSES (INCOME):
Selling, general and administrative 18,546,149 2,236,091 5,504 20,787,744
Depreciation 668,656 20,670 - 689,326
Amortization 174,999 - - 174,999
Equity in earnings of subsidiary (209,737) - 209,737 -
------------- ------------- ------------- -------------
19,180,067 2,256,761 215,241 21,652,069
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS 380,522 349,562 (209,737) 520,347
OTHER EXPENSES (INCOME):
Interest expense 3,521,183 - - 3,521,183
Interest income (106,543) - - (106,543)
Loss on derivative financial instruments 2,768 - - 2,768
------------- ------------- ------------- -------------
3,417,408 - - 3,417,408
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES (3,036,886) 349,562 (209,737) (2,897,061)
INCOME TAX EXPENSE (BENEFIT) (1,227,863) 139,825 - (1,088,038)
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ (1,809,023) $ 209,737 $ (209,737) $(1,809,023)
============= ============= ============= =============
19
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2003
- ------------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
------------- ------------ ------------- -------------
REVENUES, net of returns $253,276,479 $31,032,191 $ (71,271) $284,237,399
COSTS OF SALES 153,689,894 21,567,468 (80,459) 175,176,903
------------- ------------- ------------- -------------
Gross profit 99,586,585 9,464,723 9,188 109,060,496
OPERATING EXPENSES (INCOME):
Selling, general and administrative 64,784,364 8,186,250 9,188 72,979,802
Depreciation 2,325,899 63,155 - 2,389,054
Amortization 923,073 - - 923,073
Stock-based compensation 186,057 - - 186,057
Equity in earnings of subsidiary (729,191) - 729,191 -
------------- ------------- ------------- -------------
67,490,202 8,249,405 738,379 76,477,986
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS 32,096,383 1,215,318 (729,191) 32,582,510
OTHER EXPENSES (INCOME):
Interest expense 10,483,887 - - 10,483,887
Interest income (193,372) - - (193,372)
Gain on derivative financial instruments (57,296) - - (57,296)
------------- ------------- ------------- -------------
10,233,219 - - 10,233,219
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 21,863,164 1,215,318 (729,191) 22,349,291
INCOME TAX EXPENSE 8,329,005 486,127 - 8,815,132
------------- ------------- ------------- -------------
NET INCOME $ 13,534,159 $ 729,191 $ (729,191) $ 13,534,159
============= ============= ============= =============
20
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2002
- -----------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
--------------------------- ------------- -------------
REVENUES, net of returns $237,325,889 $ 26,704,764 $ (68,727) $263,961,926
COSTS OF SALES 144,919,809 18,214,755 (85,788) 163,048,776
------------- ------------- ------------- -------------
Gross profit 92,406,080 8,490,009 17,061 100,913,150
OPERATING EXPENSES (INCOME):
Selling, general and administrative 57,621,884 6,899,694 17,061 64,538,639
Depreciation 2,117,770 96,702 - 2,214,472
Amortization 487,461 - - 487,461
Equity in earnings of subsidiary (896,167) - 896,167 -
------------- ------------- ------------- -------------
59,330,948 6,996,396 913,228 67,240,572
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS 33,075,132 1,493,613 (896,167) 33,672,578
OTHER EXPENSES (INCOME):
Interest expense 11,086,881 - - 11,086,881
Interest income (198,089) - - (198,089)
Loss on derivative financial instruments 152,873 - - 152,873
------------- ------------- ------------- -------------
11,041,665 - - 11,041,665
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 22,033,467 1,493,613 (896,167) 22,630,913
INCOME TAX EXPENSE 8,313,341 597,446 - 8,910,787
------------- ------------- ------------- -------------
NET INCOME $ 13,720,126 $ 896,167 $ (896,167) $ 13,720,126
============= ============= ============= =============
21
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2003
- ---------------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
------------- ----------- ------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES $(22,548,126) $ (28,662) $ - $(22,576,788)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,858,555) (40,201) - (2,898,756)
Acquisitions, net of cash acquired (2,355,487) - - (2,355,487)
Proceeds from sale of property and equipment and other 8,774 - - 8,774
Software development costs (134,016) - - (134,016)
------------- ------------ ------------- -------------
Net cash flows from investing activities (5,339,284) (40,201) - (5,379,485)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 75,000,000 - - 75,000,000
Payment of financing costs (3,779,331) - - (3,779,331)
Principal payments on long-term debt (30,466,360) - - (30,466,360)
Principal payments on capital lease obligations (99,634) - - (99,634)
Dividends paid to parent (36,904,000) - - (36,904,000)
Capital contributions 223,829 - - 223,829
------------- ------------ ------------- -------------
Net cash flows from financing activities 3,974,504 - - 3,974,504
------------ ------------ ------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (23,912,906) (68,863) - (23,981,769)
CASH AND CASH EQUIVALENTS, Beginning of period 39,269,385 135,997 - 39,405,382
------------- ------------ ------------- -------------
CASH AND CASH EQUIVALENTS, End of period $ 15,356,479 $ 67,134 $ - $ 15,423,613
============= ============ ============= =============
22
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2002
- -----------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
-------------- ----------- ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES $(20,428,163) $ 885,707 $ - $(19,542,456)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,877,200) (143,652) - (3,020,852)
Acquisitions, net of cash acquired (851,947) - - (851,947)
Proceeds from sale of property and
equipment and other 14,234 958 - 15,192
Software development costs (208,475) - - (208,475)
------------- ------------ ------------ -------------
Net cash flows from investing activities (3,923,388) (142,694) - (4,066,082)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of financing costs (32,446) - - (32,446)
Principal payments on long-term debt (3,158,175) - - (3,158,175)
Principal payments on capital lease obligations (82,128) - - (82,128)
Net increase in revolving credit facility 25,900,000 - - 25,900,000
Capital contributions 521,583 - - 521,583
------------- ------------ ------------ -------------
Net cash flows from financing activities 23,148,834 - - 23,148,834
------------- ------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,202,717) 743,013 - (459,704)
CASH AND CASH EQUIVALENTS, Beginning of period 11,383,149 36,128 - 11,419,277
------------- ------------ ------------ -------------
CASH AND CASH EQUIVALENTS, End of period $ 10,180,432 $ 779,141 $ - $ 10,959,573
============= ============ ============ =============
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED DECEMBER 31, 2003 COMPARED WITH QUARTER ENDED DECEMBER 31, 2002.
REVENUES. Revenues for the quarters ended December 31, 2003 and 2002 and
the corresponding change in revenues were as follows:
Change
------------------------
2003 2002 Amount Percentage
-------------- -------------- ------------ ----------
Textbook Division $ 30,677,800 $ 31,072,274 $ (394,474) (1.3)%
Bookstore Division 19,634,398 17,465,183 2,169,215 12.4 %
Distance Education Division 10,012,872 8,235,520 1,777,352 21.6 %
Other Complementary Services Divisions 2,755,109 1,756,686 998,423 56.8 %
Intercompany eliminations (6,297,067) (5,630,729) (666,338) 11.8 %
-------------- -------------- ------------ ----------
$ 56,783,112 $ 52,898,934 $3,884,178 7.3 %
============== ============== ============ ==========
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 decrease in the number of units purchased in the
December of 2002 and May of 2003 student book buys. Textbook Division revenues
are limited by the supply of used textbooks available to the Company. The
increase in Bookstore Division revenues was attributable to the addition of
acquired bookstores and a slight increase in same store sales. The new
bookstores provided an additional $2.2 million of revenue in the quarter ended
December 31, 2003. Same store sales contributed slightly to the increase in
revenues, up 0.8% from the quarter ended December 31, 2002, but were offset by
revenue decreases attributable to bookstores closed since October 1, 2002.
Distance Education Division revenues increased due to continued steady growth in
its programs. However, future revenue streams for this segment will be impacted
by certain developments as described in Recent Developments. Other Complementary
Services Divisions revenues increased primarily due to increased installation
and training activity in the systems divisions and from 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 December 31, 2003
increased $0.5 million, or 2.5%, to $22.7 million from $22.2 million for the
quarter ended December 31, 2002. This increase was attributable to higher
revenues, offset in part by a drop in gross margin percent for the quarter.
Gross margin percent was 40.0% for the quarter ended December 31, 2003 as
compared to 41.9% for the quarter ended December 31, 2002, driven primarily by
small declines in gross margin percent in all reporting segments.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the quarter ended December 31, 2003 increased $2.8
million, or 13.4%, to $23.6 million from $20.8 million for the quarter ended
December 31, 2002. Selling, general and administrative expenses as a percentage
of revenues were 41.5% and 39.3% for the quarters ended December 31, 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 $0.2 million of costs
incurred in conjunction with the debt refinancing that ultimately resulted in
the amended and restated senior credit facility dated December 10, 2003 (as
amended and restated, the "Senior Credit Facility") and costs associated with
the Company's new human resources system. Additionally, expense growth continued
to outpace revenue growth in certain areas, including advertising, shipping, and
rent expense.
STOCK-BASED COMPENSATION. Stock-based compensation expense was incurred in
conjunction with NBC's December 10, 2003 purchase of 838 options outstanding to
purchase shares of its Class A Common Stock. Such costs represent the difference
between the purchase price and exercise price on the 838 unexercised options
purchased by NBC.
24
EARNINGS (LOSS) BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION
(EBITDA). EBITDA for the quarters ended December 31, 2003 and 2002 and the
corresponding change in EBITDA were as follows:
Change
--------------------------
2003 2002 Amount Percentage
-------------- ------------- --------------- ----------
Textbook Division $ 5,206,119 $ 5,784,535 $ (578,416) (10.0)%
Bookstore Division (1,574,643) (642,162) (932,481) (145.2)%
Distance Education Division 175,023 370,232 (195,209) (52.7)%
Other Complementary Services Divisions 77,707 (4,269) 81,976 1920.3 %
Corporate administration (4,916,212) (4,123,664) (792,548) (19.2)%
-------------- ------------- --------------- ----------
$ (1,032,006) $ 1,384,672 $ (2,416,678) (174.5)%
============== ============= =============== ==========
The decrease in EBITDA in the Textbook Division is primarily attributable
to small decreases in revenues and gross margin percent. The decrease in
Bookstore Division EBITDA was primarily due to increased expenses resulting from
growth in the number of college bookstores owned by the Company, compounded by
the fact that the third quarter is a seasonally-slow revenue quarter for the
Bookstore Division. The decrease in EBITDA for the Distance Education Division
was primarily due to the aforementioned 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. As previously mentioned, corporate administration costs
increased, primarily as a result of $0.4 million in expenses recorded in
conjunction with the stock purchase and debt refinancing on December 10, 2003
and $0.3 million in expenses recorded in conjunction with the new human
resources system.
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.
25
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 December 31,
2003 2002
-------------- --------------
EBITDA $ (1,032,006) $ 1,384,672
Adjustments to reconcile EBITDA to net
cash flows from operating activities:
Interest income 81,651 106,543
Provision for losses on receivables (19,806) 75,855
Cash paid for interest (397,801) (1,157,938)
Cash paid for income taxes (6,733,997) (8,668,896)
Loss on disposal of assets 1,929 2,405
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals (1) (68,352,497) (60,355,388)
-------------- --------------
Net Cash Flows from Operating Activities $(76,452,527) $(68,612,747)
============== ==============
Net Cash Flows from Investing Activities $ (1,333,656) $ (644,047)
============== ==============
Net Cash Flows from Financing Activities $ 24,562,918 $ 23,898,567
============== ==============
(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 current assets, other
assets, accounts payable, accrued employee compensation and benefits,
accrued incentives, accrued expenses, deferred revenue, and other
long-term liabilities.
AMORTIZATION EXPENSE. Amortization expense for the quarter ended December
31, 2003 increased $0.2 million to $0.4 million from $0.2 million for the
quarter ended December 31, 2002, primarily due to amortization of capitalized
software development costs arising from the acquisition of TheCampusHub.com,
Inc. in July, 2003.
INTEREST EXPENSE, NET. Interest expense, net for the quarter ended
December 31, 2003 increased $0.2 million, or 5.3%, to $3.6 million from $3.4
million for the quarter ended December 31, 2002, primarily due to the debt
refinancing on December 10, 2003 that resulted in the amended and restated
Senior Credit Facility. As a result of this refinancing, $75.0 million of term
debt replaced $13.4 million of term debt, $0.5 million in debt issue costs
associated with the then-existing senior credit facility were written off to
interest expense, and $3.8 million in debt issue costs associated with the
amended and restated Senior Credit Facility are being amortized to interest
expense through June 30, 2007 utilizing the effective interest method. Such
additional interest costs were partially offset by reduced usage under the
Revolving Credit Facility.
INCOME TAXES. Income tax benefit for the quarter ended December 31,
2003 increased $1.1 million to $2.2 million from $1.1 million for the quarter
ended December 31, 2002. The Company's effective tax rate for the quarters ended
December 31, 2003 and 2002 was 38.1% and 37.6%, respectively. The Company's
effective tax rate differs from the statutory tax rate primarily as a result of
state income taxes.
26
NINE MONTHS ENDED DECEMBER 31, 2003 COMPARED WITH NINE MONTHS ENDED DECEMBER 31,
2002.
REVENUES. Revenues for the nine months ended December 31, 2003 and 2002
and the corresponding change in revenues were as follows:
Change
-------------------------
2003 2002 Amount Percentage
--------------- --------------- -------------- ----------
Textbook Division $ 111,603,470 $ 112,935,937 $ (1,332,467) (1.2)%
Bookstore Division 152,511,166 137,975,949 14,535,217 10.5 %
Distance Education Division 31,032,191 26,704,764 4,327,427 16.2 %
Other Complementary Services Divisions 10,238,244 5,933,291 4,304,953 72.6 %
Intercompany eliminations (21,147,672) (19,588,015) (1,559,657) 8.0 %
--------------- --------------- -------------- ----------
$ 284,237,399 $ 263,961,926 $ 20,275,473 7.7 %
=============== =============== ============== ==========
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 decrease in the number of units purchased in the
December of 2002 and May of 2003 student book buys. Textbook Division revenues
are limited by the supply of used textbooks available to the Company. 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 $8.8 million of revenue in the nine months ended December
31, 2003. This increase was offset, in part, by a $1.4 million decrease in
revenues attributable to stores closed since April 1, 2002. Same store sales
increased 5.3%, or $7.2 million. Distance Education Division revenues increased
due to continued steady growth in its programs. However, future revenue streams
for this segment will be impacted by certain developments as described in Recent
Developments. 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 nine months ended December 31, 2003
increased $8.2 million, or 8.1%, to $109.1 million from $100.9 million for the
nine months ended December 31, 2002. This increase was primarily due to higher
revenues, along with a slightly higher gross margin percent. Gross margin
percent was 38.4% for the nine months ended December 31, 2003 as compared to
38.2% for the nine months ended December 31, 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 nine months ended December 31, 2003 increased
$8.5 million, or 13.1%, to $73.0 million from $64.5 million for the nine months
ended December 31, 2002. Selling, general and administrative expenses as a
percentage of revenues were 25.7% and 24.4% for the nine months ended December
31, 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 personnel costs, shipping costs, and rent, as
well as an increased focus on advertising. Additionally, $0.2 million in
expenses were recorded in conjunction with the Company's debt refinancing on
December 10, 2003 and $0.3 million in expenses were recorded in the third
quarter of fiscal 2004 in conjunction with the Company's new human resources
system.
STOCK-BASED COMPENSATION. Stock-based compensation expense was incurred in
conjunction with NBC's December 10, 2003 purchase of 838 options outstanding to
purchase shares of its Class A Common Stock. Such costs represent the difference
between the purchase price and exercise price on the 838 unexercised options
purchased by NBC.
27
EARNINGS (LOSS) BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION
(EBITDA). EBITDA for the nine months ended December 31, 2003 and 2002 and the
corresponding change in EBITDA were as follows:
Change
-------------------------
2003 2002 Amount Percentage
-------------- -------------- -------------- ----------
Textbook Division $ 28,338,901 $ 29,368,753 $ (1,029,852) (3.5)%
Bookstore Division 14,192,399 13,256,859 935,540 7.1 %
Distance Education Division 1,278,473 1,590,315 (311,842) (19.6)%
Other Complementary Services Divisions 1,286,243 106,620 1,179,623 1106.4 %
Corporate administration (9,201,379) (7,948,036) (1,253,343) (15.8)%
-------------- -------------- -------------- ----------
$ 35,894,637 $ 36,374,511 $ (479,874) (1.3)%
============== ============== ============== ==========
This decrease is partly attributable to lower revenues in the Textbook
Division. Corporate Administration EBITDA also declined by $1.3 million,
primarily as a result of Company growth, expenses of the stock purchase and debt
refinancing, and the installation of the new human resources system. The
decrease in EBITDA for the Distance Education Division was primarily due to a
decline in gross margin percent. These decreases are almost entirely offset by
improved EBITDA in the College Bookstore and Other Complementary Services
Divisions as a result of the aforementioned increases in revenues and gross
margin percents.
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:
Nine Months ended December 31,
2003 2002
--------------- ---------------
EBITDA $ 35,894,637 $ 36,374,511
Adjustments to reconcile EBITDA to net
cash flows from operating activities:
Interest income 193,372 198,089
Provision for losses on receivables 34,429 125,789
Cash paid for interest (6,962,118) (7,953,839)
Cash paid for income taxes (6,607,805) (12,175,119)
(Gain) loss on disposal of assets 266,861 (2,466)
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals (1) (45,396,164) (36,109,421)
--------------- ---------------
Net Cash Flows from Operating Activities $ (22,576,788) $ (19,542,456)
=============== ===============
Net Cash Flows from Investing Activities $ (5,379,485) $ (4,066,082)
=============== ===============
Net Cash Flows from Financing Activities $ 3,974,504 $ 23,148,834
=============== ===============
(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 current assets, other
assets, accounts payable, accrued employee compensation and benefits,
accrued incentives, accrued expenses, deferred revenue, and other
long-term liabilities.
28
AMORTIZATION EXPENSE. Amortization expense for the nine months ended
December 31, 2003 increased $0.4 million, or 89.4% to $0.9 million from $0.5
million for the quarter ended December 31, 2002, primarily due to amortization
of capitalized software development costs arising from the acquisition of
TheCampusHub.com, Inc. in July, 2003.
INTEREST EXPENSE, NET. Interest expense, net for the nine months ended
December 31, 2003 decreased $0.6 million, or 5.5%, to $10.3 million from $10.9
million for the nine months ended December 31, 2002, primarily due to reduced
usage under the Revolving Credit Facility and declining principal balances on
term debt through December 10, 2003. The resulting decreases in interest expense
were almost entirely offset as a result of interest costs arising from the debt
refinancing on December 10, 2003 that resulted in the amended and restated
Senior Credit Facility. As a result of this refinancing, $75.0 million of term
debt replaced $13.4 million of term debt, $0.5 million in debt issue costs
associated with the then-existing senior credit facility were written off to
interest expense, and $3.8 million in debt issue costs associated with the
amended and restated Senior Credit Facility are being amortized to interest
expense through June 30, 2007 utilizing the effective interest method.
(GAIN) LOSS ON DERIVATIVE FINANCIAL INSTRUMENTS. (Gain) loss on derivative
financial instruments for the nine months ended December 31, 2003 improved $0.2
million compared to the nine months ended December 31, 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 nine months ended December 31,
2003 decreased $0.1 million, or 1.1%, to $8.8 million from $8.9 million for the
nine months ended December 31, 2002. The Company's effective tax rate for both
the nine months ended December 31, 2003 and 2002 was 39.4%. The Company's
effective tax rate differs from the statutory tax rate primarily as a result of
state income taxes.
RECENT DEVELOPMENTS
The Company has been informed by the Distance Education Division's largest
customer that it intends to discontinue the use of the Company's services for
delivery of educational materials during the coming fiscal year. The Company
estimates that revenue for services for this customer during the fiscal year
ended March 31, 2004 will total approximately $23.0 million. The Company
estimates that EBITDA as a percentage of revenue for this program is
approximately 3-5%. The Company expects revenues from the Distance Education
Division, after adjusting for the loss of this customer, to continue to grow.
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.
29
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.
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 December 31, 2003, the Company's total
indebtedness was $187.8 million, consisting of a $75.0 million Term Loan, $110.0
million of the Senior Subordinated Notes, and $2.8 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).
The Company filed a Current Report on Form 8-K dated February 5, 2004
announcing the commencement of tender offers and consent solicitations for the
Senior Subordinated Notes and Senior Discount Debentures. The tender offers and
consent solicitations are being undertaken in connection with a recapitalization
transaction, through which funds affiliated with Weston Presidio Capital, which
currently holds approximately 32.1% of the outstanding Class A Common Stock of
NBC, will acquire control over substantially all of the rest of the outstanding
Class A Common Stock of NBC. This recapitalization transaction will include the
refinancing of the Senior Credit Facility and the incurrence of other
indebtedness and is expected to be accounted for utilizing purchase accounting.
FINANCING CASH FLOWS
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 have allowed, among other
things, (i) for the entry into either an amendment and restatement of the
then-existing senior credit facility or a new secured credit facility, for the
refinancing or repayment of the then-existing 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.
As announced on November 10, 2003 and January 8, 2004 in Current Reports
on Form 8-K filed with the Securities and Exchange Commission, NBC purchased
116,795 shares of its Class A Common Stock and 838 options to purchase its Class
A Common Stock on December 10, 2003. The cost of the treasury shares was $32.7
million and stock-based compensation expense resulting from the purchase of the
options was $0.2 million. The Company funded the purchase of the treasury shares
by NBC through a $34.5 million dividend, of which $1.7 million remained in
accounts payable at December 31, 2003. In order to finance the dividend payment,
the related transactions and the fees and expenses relating thereto, the Company
amended and restated its then-existing senior credit facility, providing for a
$75.0 million Term Loan and a $50.0 million Revolving Credit Facility.
30
Proceeds from the debt refinancing, which remained after the dividend
payment; payment of principal, interest, and other costs associated with the
then-existing senior credit facility; and payment of the fees and expenses
relating to the transactions underlying the debt refinancing, totaled $24.4
million. The Company ultimately plans to utilize such proceeds to finance future
acquisitions and capital expenditures. These proceeds were utilized in December,
on an interim basis, to finance the substantial portion of the December student
book buys, thereby allowing the Company to reduce borrowings under the Revolving
Credit Facility in December to finance such book buys.
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 Term
Loan arising out of the debt refinancing on December 10, 2003, the Company is
scheduled to make principal payments totaling $0.2 million in fiscal 2004, $0.7
million in fiscal 2005, $0.7 million in fiscal 2006, $0.8 million in fiscal
2007, and $72.6 million in fiscal 2008. 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 Term Loan principal balances. 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.
INVESTING CASH FLOWS
The Company's capital expenditures were $2.9 million and $3.0 million for
the nine months ended December 31, 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, including an annual
limitation on capital expenditures made in the ordinary course of business. Such
annual limitation for fiscal 2004 is $6.5 million.
Business acquisition expenditures were $2.4 million and $0.9 million for
the nine months ended December 31, 2003 and 2002, respectively. For the nine
months ended December 31, 2003, single bookstore locations were acquired serving
East Tennessee State University, Western International University, Mesa
Community College, Marshall University, and Wayne State College; and 3 bookstore
locations were acquired serving Michigan State University. For the nine months
ended December 31, 2002, single bookstore locations were acquired serving
Western Kentucky University and 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 nine months ended December 31, 2003, four bookstores were
either closed or the contract managed lease was not renewed. During the nine
months ended December 31, 2002, one bookstore serving the University of
California - Berkeley was closed upon anticipation of the lease expiring and a
more suitable location having been previously obtained through 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.
OPERATING CASH FLOWS
The Company's principal sources of cash to fund its future operating
liquidity needs will be cash from operating activities; borrowings under the
Revolving Credit Facility; and, on an interim basis, the aforementioned
remaining proceeds from the December 10, 2003 debt refinancing. Availability of
the remaining proceeds arising from the December 10, 2003 debt refinancing to
fund future operating liquidity needs is subject to future acquisition and
capital expenditure activity. Usage of the Revolving Credit Facility to meet the
Company's liquidity needs fluctuates throughout the year due to the Company's
distinct buying and selling periods, increasing substantially at the end of each
college semester (May and December). Net cash flows used for operating
activities for the nine months ended December 31, 2003 were $22.6 million, up
$3.1 million from $19.5 million for the nine months ended December 31, 2002.
This increase is primarily attributable to cash used to purchase inventory
increasing $4.1 million due to growth in the Bookstore Division.
31
COVENANT RESTRICTIONS
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) 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 and declared a $34.5 million dividend to the
Company in conjunction with the common stock and option purchase on December 10,
2003, of which $1.7 million remained in accounts payable at December 31, 2003.
SOURCES OF AND NEEDS FOR CAPITAL
As of December 31, 2003, the Company could borrow up to $50.0 million
under the Revolving Credit Facility, which was unused at December 31, 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 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.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following tables present aggregated information as of December 31,
2003 regarding the Company's contractual obligations and commercial commitments:
Payments Due by Period
-------------------------------------------------------------
Contractual Less Than 2-3 4-5 After 5
Obligations Total 1 Year Years Years Years
- ------------------------------------ -------------- -------------- --------------- --------------- --------------
Long-term debt $185,470,630 $ 778,119 $ 1,566,124 $ 182,831,910 $ 294,477
Capital lease obligations 2,338,632 154,507 463,795 633,636 1,086,694
Operating leases 46,626,000 9,319,000 16,829,000 11,101,000 9,377,000
-------------- -------------- --------------- --------------- --------------
Total $234,435,262 $10,251,626 $ 18,858,919 $ 194,566,546 $ 10,758,171
============== ============== =============== =============== ==============
Amount of Commitment Expiration Per Period
Total ------------------------------------------------------------
Other Commercial Amounts Less Than 2-3 4-5 Over 5
Commitments Committed 1 Year Years Years Years
- ------------------------------------ -------------- -------------- -------------- -------------- -------------
Unused line of credit $ 50,000,000 $ - $ - $ 50,000,000 $ -
============== ============== ============== ============== ==============
32
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 nine months
ended December 31, 2003 and $0.2 million and $0.5 million, respectively, for the
nine months ended December 31, 2002. Net amounts due from TheCampusHub.com, Inc.
at December 31, 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
existing cash and the Revolving Credit Facility, which historically has been
repaid with cash provided from operations.
IMPACT OF INFLATION
The Company's results of operations and financial condition are presented
based upon historical costs. While it is difficult to accurately measure the
impact of inflation due to the imprecise nature of the estimates required, the
Company believes that the effects of inflation, if any, on its results of
operations and financial condition have not been material. However, there can be
no assurance that during a period of significant inflation, the Company's
results of operations will not be adversely affected.
ACCOUNTING STANDARDS NOT YET ADOPTED
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 150, ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY ("SFAS
No. 150"), to establish standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument within its
scope as a liability (or an asset in some circumstances). SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for certain provisions that have been
deferred. Adoption of SFAS No. 150 had no impact and is not expected to have a
significant impact on the Company's consolidated financial statements. In
January, 2003 the FASB issued Interpretation No. 46, CONSOLIDATION OF VARIABLE
INTEREST Entities ("FIN 46") and later revised FIN 46 in December, 2003. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. FIN 46 also requires disclosures about variable interest
entities that a company is not required to consolidate but in which it has a
significant variable interest. The provisions of FIN 46 become effective on
varying dates. As these provisions become effective and are adopted, they have
not had and are not expected to have a significant impact on the Company's
consolidated financial statements.
33
"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 variable interest rates. Of the $187.8 million in total
indebtedness outstanding at December 31, 2003, $75.0 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 term debt was
converted into debt with a fixed rate of 5.815% plus an applicable margin (as
defined in the then-existing credit agreement). Such agreements expired 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, expiration
of the interest rate swap agreements, the December 10, 2003 debt refinancing,
and principal payments. The following table presents summarized market risk
information as of December 31, 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):
December 31, March 31,
2003 2003
-------------- --------------
Fair Values:
Fixed rate debt $ 116,800,527 $ 113,676,064
Variable rate debt (excluding Revolving Credit Facility) 75,000,000 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) 5.59% 4.24%
Interest rate swaps receive rate - 1.22%
34
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
December 31, 2003. Based on this evaluation, our chief executive officer and
chief financial officer concluded that, as of December 31, 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 December 31, 2003 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
35
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
4.1 Form of Supplemental Indenture to the Indenture dated as of
February 13, 1998, as amended, among Nebraska Book Company,
Inc., Specialty Books, Inc., as guarantor, and The Bank of New
York, as trustee, filed as Exhibit 99.2 to Nebraska Book
Company, Inc. Current Report on Form 8-K dated October 6,
2003, is incorporated herein by reference.
10.1 Amended and Restated Credit Agreement, dated February 13, 1998
as amended and restated as of December 10, 2003, among NBC
Acquisition Corp., Nebraska Book Company, Inc., and the other
parties thereto, filed as Exhibit 99.1 to Nebraska Book
Company, Inc. Current Report on Form 8-K dated December 10,
2003, is incorporated herein by reference.
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
Current Report on Form 8-K dated December 10, 2003 was filed on
January 8, 2004 announcing the amendment and restatement of the
Senior Credit Facility to refinance debt under the then-existing
credit facility and finance the purchase of a portion of NBC
Acquisition Corp.'s common stock and certain options to purchase NBC
Acquisition Corp. common stock.
Current Report on Form 8-K dated November 10, 2003 was filed on
November 10, 2003 announcing an offer by NBC Acquisition Corp. to
purchase a portion of NBC Acquisition Corp.'s common stock and
certain options to purchase NBC Acquisition Corp. common stock.
Current Report on Form 8-K dated October 6, 2003 was filed on
October 7, 2003 announcing the solicitation of consents to amend
certain of the covenants and other provisions of the Senior
Subordinated Notes and Senior Discount Debentures.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on February 12, 2004.
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
36