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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
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
AUGUST 11, 2004: 100 SHARES
TOTAL NUMBER OF PAGES: 35
EXHIBIT INDEX: PAGE 35
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------
Successor Predecessor
------------------------------- --------------
June 30, March 31, June 30,
2004 2004 2003
--------------- --------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,715,569 $ 33,276,181 $ 6,455,254
Restricted cash - 27,065,000 -
Receivables 29,046,169 30,412,590 30,656,956
Inventories 97,734,855 70,139,222 93,066,834
Recoverable income taxes 4,250,650 5,351,480 2,766,865
Deferred income taxes 6,969,015 6,102,015 4,600,252
Prepaid expenses and other assets 821,949 873,167 866,637
--------------- --------------- ---------------
Total current assets 144,538,207 173,219,655 138,412,798
PROPERTY AND EQUIPMENT, net of depreciation & amortization 38,095,507 36,133,256 27,627,058
GOODWILL 271,571,845 268,646,931 30,481,472
IDENTIFIABLE INTANGIBLES, net of amortization 156,229,368 157,505,632 1,241,761
DEBT ISSUE COSTS, net of amortization 9,824,223 10,001,172 3,818,335
OTHER ASSETS 1,895,247 2,216,565 2,799,416
--------------- --------------- ---------------
$ 622,154,397 $ 647,723,211 $ 204,380,840
=============== =============== ===============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 15,781,650 $ 29,300,768 $ 19,053,314
Accrued employee compensation and benefits 5,466,202 9,118,730 4,441,375
Accrued interest 5,047,078 2,041,957 3,905,413
Accrued incentives 9,178,586 6,982,304 7,303,837
Accrued expenses 1,187,694 1,211,448 1,036,658
Deferred revenue 845,288 898,658 444,962
Current maturities of long-term debt 1,829,664 17,238,881 17,771,293
Current maturities of capital lease obligations 193,264 167,433 129,573
Revolving credit facility 8,500,000 - 2,300,000
--------------- --------------- ---------------
Total current liabilities 48,029,426 66,960,179 56,386,425
LONG-TERM DEBT, net of current maturities 353,177,283 353,634,999 121,748,779
CAPITAL LEASE OBLIGATIONS, net of current maturities 2,714,774 2,138,151 2,269,518
OTHER LONG-TERM LIABILITIES 321,418 317,287 305,068
DEFERRED INCOME TAXES 61,437,744 61,849,744 -
DUE TO PARENT 16,997,831 16,836,358 13,298,794
COMMITMENTS (Note 4)
STOCKHOLDER'S EQUITY:
Common stock, voting, authorized 50,000 shares of
$1.00 par value; issued and outstanding 100 shares 100 100 100
Additional paid-in capital 137,956,503 137,957,716 46,997,663
Retained earnings (accumulated deficit) 1,519,318 8,028,677 (36,408,940)
Accumulated other comprehensive income (loss) - - (216,567)
--------------- --------------- ---------------
Total stockholder's equity 139,475,921 145,986,493 10,372,256
--------------- --------------- ---------------
$ 622,154,397 $ 647,723,211 $ 204,380,840
=============== =============== ===============
See notes to consolidated financial statements.
2
NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- -------------------------------------------------------------------------------
Successor Predecessor
-------------- --------------
Three Months Three Months
Ended Ended
June 30, 2004 June 30, 2003
-------------- --------------
REVENUES, net of returns $ 52,295,345 $ 54,761,183
COSTS OF SALES 31,488,424 32,973,997
-------------- --------------
Gross profit 20,806,921 21,787,186
OPERATING EXPENSES:
Selling, general and administrative 22,061,673 22,157,134
Depreciation 1,049,056 754,294
Amortization 2,006,396 159,330
-------------- --------------
25,117,125 23,070,758
-------------- --------------
LOSS FROM OPERATIONS (4,310,204) (1,283,572)
OTHER EXPENSES (INCOME):
Interest expense 6,159,358 3,507,586
Interest income - (8,758)
Gain on derivative financial instruments - (105)
-------------- --------------
6,159,358 3,498,723
-------------- --------------
LOSS BEFORE INCOME TAXES (10,469,562) (4,782,295)
INCOME TAX BENEFIT (4,080,988) (1,753,056)
-------------- --------------
NET LOSS $ (6,388,574) $ (3,029,239)
============== ==============
See notes to consolidated financial statements.
3
NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------
Retained Accumulated
Additional Earnings Other
Common Paid-in (Accumulated Comprehensive Comprehensive
Stock Capital Deficit) Income (Loss) Total Loss
-------- ------------- -------------- ------------- ------------- -------------
BALANCE, April 1, 2003 (Predecessor) $ 100 $ 46,986,333 $(33,379,701) $(418,631) $ 13,188,101
Contributed capital - 11,330 - - 11,330 $ -
Net loss - - (3,029,239) - (3,029,239) (3,029,239)
Other comprehensive income, net of taxes:
Unrealized gains on interest rate swap
agreements, net of taxes of $123,636 - - - 202,064 202,064 202,064
-------- ------------- -------------- ------------ -------------- -------------
BALANCE, June 30, 2003 (Predecessor) $ 100 $ 46,997,663 $(36,408,940) $(216,567) $ 10,372,256 $(2,827,175)
======== ============= ============== ============ ============== =============
BALANCE, April 1, 2004 (Successor) $ 100 $137,957,716 $ 8,028,677 $ - $145,986,493
Contributed capital - (1,213) - - (1,213) $ -
Net loss - - (6,388,574) - (6,388,574) (6,388,574)
Dividends declared - - (120,785) - (120,785) -
-------- ------------- -------------- ------------ -------------- -------------
BALANCE, June 30, 2004 (Successor) $ 100 $137,956,503 $ 1,519,318 $ - $139,475,921 $(6,388,574)
======== ============= ============== ============ ============== =============
See notes to consolidated financial statements.
4
NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
Successor Predecessor
--------------- ---------------
Three Months Three Months
Ended Ended
June 30, 2003 June 30, 2003
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,388,574) $ (3,029,239)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Provision for losses on receivables (16,505) 7,067
Depreciation 1,049,056 754,294
Amortization 2,368,087 483,411
Noncash interest income from derivative financial instruments - (15,305)
Gain on derivative financial instruments - (84,959)
Loss on disposal of assets - 6,239
Deferred income taxes (1,279,000) (226,000)
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals:
Receivables 1,383,013 (1,585,582)
Inventories (27,042,597) (23,616,258)
Recoverable income taxes 1,100,830 (2,766,865)
Prepaid expenses and other assets 51,218 (32,353)
Other assets 332,686 (106,370)
Accounts payable (13,519,118) (378,023)
Accrued employee compensation and benefits (3,652,528) (6,201,338)
Accrued interest 3,005,121 2,392,680
Accrued incentives 2,196,282 1,784,954
Accrued expenses (17,871) 8,814
Income taxes payable - (89,932)
Deferred revenue (53,370) (93,268)
Other long-term liabilities 4,131 4,245
Due to parent 161,473 926,948
--------------- ---------------
Net cash flows from operating activities (40,317,666) (31,856,840)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,198,589) (644,141)
Acquisitions, net of cash acquired (4,395,633) (1,271,395)
Proceeds from sale of property and equipment and other - 2,920
Software development costs - (48,299)
--------------- ---------------
Net cash flows from investing activities (6,594,222) (1,960,915)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of financing costs (184,742) -
Principal payments on long-term debt (15,866,933) (1,416,918)
Principal payments on capital lease obligations (41,264) (31,195)
Net increase in revolving credit facility 8,500,000 2,300,000
Dividends paid to parent (120,785) -
Decrease in restricted cash 27,065,000 -
Capital contributions - 15,740
--------------- ---------------
Net cash flows from financing activities 19,351,276 867,627
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (27,560,612) (32,950,128)
CASH AND CASH EQUIVALENTS, Beginning of period 33,276,181 39,405,382
--------------- ---------------
CASH AND CASH EQUIVALENTS, End of period $ 5,715,569 $ 6,455,254
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid (refunded) during the period for:
Interest $ 2,781,744 $ 890,984
Income taxes (4,064,291) 402,793
Noncash investing and financing activities:
Property acquired through capital lease $ 643,718 $ -
Unrealized gains on interest rate swap agreements,
net of income taxes - 202,064
Deferred taxes resulting from accumulated other
comprehensive income (loss) - 123,636
See notes to consolidated financial statements.
5
NEBRASKA BOOK COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- ------------------------------------------------------------------------------
1. BASIS OF PRESENTATION - The consolidated balance sheet of Nebraska Book
Company, Inc. (the "Company") and its wholly-owned subsidiary, Specialty
Books, Inc., at March 31, 2004 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, 2004 included in the Company's Annual Report on Form 10-K.
References in this Quarterly Report on Form 10-Q to the terms "we," "our,"
"ours," and "us" refer collectively to the Company and its subsidiaries,
except where otherwise indicated.
On March 4, 2004, Weston Presidio gained controlling interest in NBC through
(i) the formation of two new corporations, NBC Holdings Corp. and New NBC
Acquisition Corp.; (ii) a $28.2 million equity investment by Weston Presidio
in NBC Holdings Corp., funds for which were ultimately paid to NBC in the
form of a capital contribution; (iii) Weston Presidio's purchase of 36,455
shares of NBC's common stock directly from its holders; (iv) the
cancellation of 870,285 shares of NBC's common stock upon payment by NBC of
merger consideration of $180.4 million to the shareholders of record for
such shares; (v) the exchange of 397,711 shares of NBC's common stock for
512,799 shares of New NBC Acquisition Corp. capital stock in the merger of
the two entities with NBC as the surviving entity; and (vi) the exchange of
512,799 shares of NBC's common stock by Weston Presidio and current and
former members of management for a like number of shares of NBC Holdings
Corp. capital stock. Payment of the $180.4 million of merger consideration
was funded through proceeds from the $28.2 million capital contribution,
available cash, and proceeds from $405.0 million in new debt financing, of
which $261.0 million was utilized by NBC and the Company to retire certain
debt instruments outstanding at March 4, 2004 or to place funds in escrow
for untendered debt instruments called for redemption on March 4, 2004 and
redeemed on April 3, 2004. As a result of this transaction, the Company's
results of operations, financial position and cash flow's prior to the
transaction are presented as the "Predecessor." The Company's results of
operations, financial position and cash flows thereafter are presented as
the "Successor."
We generally refer to all of the above steps and transactions that comprise
this entire transaction, collectively, as the "March 4, 2004 Transaction."
The March 4, 2004 Transaction was accounted for as a purchase at NBC
Holdings Corp. with the related purchase accounting pushed-down to NBC and
the Company as of the date of the transaction. The March 4, 2004 Transaction
was accounted for as a purchase in accordance with Statement of Financial
Accounting Standards ("SFAS") No.141, BUSINESS COMBINATIONS and EITF 88-16,
BASIS IN LEVERAGED BUYOUT TRANSACTIONS. Accordingly, the Company was
revalued at the time of the March 4, 2004 Transaction to fair value to the
extent of the majority stockholder's (Weston Presidio's) 96.9% controlling
interest in NBC. The remaining 3.1% is accounted for at the continuing
stockholders' (current and former members of management) carryover basis in
NBC. The excess of the purchase price over the historical basis of the net
assets acquired has been applied to adjust net assets to their fair values
to the extent of Weston Presidio's 96.9% ownership of outstanding common
stock of NBC. Fair value was determined in part using an independent
third-party appraisal.
6
The following unaudited pro forma financial information for the three months
ended June 30, 2003 was prepared as if the March 4, 2004 Transaction had
occurred on April 1, 2003.
Predecessor
--------------
Quarter Ended
June 30,
2003
--------------
Revenues, net of returns $ 54,761,183
Net loss (6,156,026)
These unaudited pro forma results have been prepared for comparative
purposes only and primarily include adjustments for depreciation and
amortization arising from the step-up in basis of assets in the March 4,
2004 Transaction, interest expense on debt issued in connection with the
March 4, 2004 Transaction, and the related income tax adjustments. These
adjustments were tax effected using the Company's effective tax rate of
36.7% for the three months ended June 30, 2003. The pro forma information is
not necessarily indicative of the results that would have occurred had the
March 4, 2004 Transaction occurred at the beginning of the period presented,
nor is it necessarily indicative of future results.
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 (loss) if the fair-value-based method
had been applied to all outstanding and unvested awards in each period:
Successor Predecessor
------------ -------------
Quarter Ended June 30,
2004 2003
------------ -------------
Net loss, as reported $ (6,388,574) $(3,029,239)
Add: Stock-based employee compensation
expense included in reported net loss,
net of related tax effects - -
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects - (11,327)
------------- -------------
Pro forma net loss $ (6,388,574) $(3,040,566)
============= =============
Stock options outstanding at June 30, 2004, which were granted in
conjunction with the March 4, 2004 Transaction, were fully vested at the
date of grant.
7
3. INVENTORIES - Inventories are summarized as follows:
Successor Predecessor
--------------------------- ------------
June 30, March 31, June 30,
2004 2004 2003
------------- ------------ ------------
Textbook Division $43,127,140 $31,247,606 $39,716,411
Bookstore Division 51,305,702 35,313,780 45,229,422
Complementary Services Division 3,302,013 3,577,836 8,121,001
------------- ------------- ------------
$97,734,855 $70,139,222 $93,066,834
============= ============= ============
4. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLES - The following table presents
the changes in the carrying amount of goodwill, by reportable segment and in
total, for the three months ended June 30, 2004 and 2003 and the year ended
March 31, 2004. During the three months ended June 30, 2004, the Company
acquired three bookstores in two separate transactions which resulted in
additions to goodwill. Goodwill assigned to corporate administration
represents the goodwill arising out of the March 4, 2004 Transaction, as all
goodwill was assigned to corporate administration. As is the case with a
portion of the Company's assets, such goodwill is not allocated between the
Company's reportable 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.
Complementary
Bookstore Services Corporate
Division Division Administration Total
------------ --------------- -------------- -------------
Balance, April 1, 2003 (Predecessor) $13,702,249 $ - $ 16,770,574 $ 30,472,823
Additions to goodwill:
Bookstore acquisitions 8,649 - - 8,649
------------ --------------- -------------- -------------
Balance, June 30, 2003 (Predecessor) $13,710,898 $ - $ 16,770,574 $ 30,481,472
============ =============== ============== =============
Balance, April 1, 2003 (Predecessor) $13,702,249 $ - $ 16,770,574 $ 30,472,823
Additions to goodwill:
Bookstore acquisitions 11,373 - - 11,373
Acquisition of TheCampusHub.com, Inc. - 3,604,375 - 3,604,375
------------ --------------- -------------- -------------
Balance, February 29, 2004 (Predecessor) 13,713,622 3,604,375 16,770,574 34,088,571
Additions to goodwill:
Purchase accounting adjustment -
TheCampusHub.com, Inc. - 100,856 - 100,856
March 4, 2004 Transaction (13,713,622) (3,705,231) 250,344,097 232,925,244
Bookstore acquisitions 1,532,260 - - 1,532,260
------------ --------------- -------------- -------------
Balance, March 31, 2004 (Successor) 1,532,260 - 267,114,671 268,646,931
Additions to goodwill:
Purchase accounting adjustment -
March 4, 2004 Transaction - - (4,918) (4,918)
Bookstore acquisitions 2,929,832 - - 2,929,832
------------ --------------- -------------- -------------
Balance, June 30, 2004 (Successor) $ 4,462,092 $ - $267,109,753 $271,571,845
============ =============== ============== =============
8
The following table presents the gross carrying amount and accumulated
amortization of identifiable intangibles subject to amortization, in total
and by asset class, as of June 30, 2004, March 31, 2004, and June 30, 2003:
June 30, 2004 (Successor)
-----------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
--------------- --------------- ---------------
Customer relationships $ 114,830,000 $ (1,913,440) $ 112,916,560
Developed technology 11,473,750 (637,066) 10,836,684
Covenants not to compete 1,417,333 (261,209) 1,156,124
--------------- --------------- ---------------
$ 127,721,083 $ (2,811,715) $ 124,909,368
=============== =============== ===============
March 31, 2004 (Successor)
-----------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
--------------- --------------- ---------------
Customer relationships $ 114,830,000 $ (478,060) $ 114,351,940
Developed technology 11,473,750 (159,006) 11,314,744
Covenants not to compete 689,333 (170,385) 518,948
--------------- --------------- ---------------
$ 126,993,083 $ (807,451) $ 126,185,632
=============== =============== ===============
June 30, 2003 (Predecessor)
-----------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
--------------- --------------- ---------------
Developed technology $ 1,916,796 $ (859,274) $ 1,057,522
Covenants not to compete 647,333 (463,094) 184,239
--------------- --------------- ---------------
$ 2,564,129 $ (1,322,368) $ 1,241,761
=============== =============== ===============
Information regarding aggregate amortization expense for the three months
ended June 30, 2004 and 2003 for identifiable intangibles subject to
amortization, along with estimated aggregate amortization expense for each
of the next five fiscal years, is presented in the following table:
Amortization
Expense
--------------
Three months ended June 30, 2004 (Successor) $ 2,004,264
Three months ended June 30, 2003 (Predecessor) 157,198
Estimated amortization expense for the
fiscal years ending March 31:
2005 $ 8,038,000
2006 7,986,000
2007 7,972,000
2008 7,684,000
2009 7,677,000
Identifiable intangibles not subject to amortization consist solely of the
tradename asset arising out of the March 4, 2004 Transaction and total
$31,320,000.
9
5. LONG-TERM DEBT - Indebtedness at June 30, 2004 includes an amended and
restated bank-administered senior credit facility (the "Senior Credit
Facility") provided to the Company through a syndicate of lenders,
consisting of an $180.0 million term loan (the "Term Loan") and a $50.0
million revolving credit facility (the "Revolving Credit Facility"); $175.0
million of 8.625% senior subordinated notes (the "Senior Subordinated
Notes"), and capital leases. The Revolving Credit Facility expires on March
4, 2009. Availability under the Revolving Credit Facility is determined by
the calculation of a borrowing base, which at any time is equal to a
percentage of eligible accounts receivable and inventory, up to a maximum of
$50.0 million. The calculated borrowing base at June 30, 2004 was $50.0
million, of which $8.5 million has been drawn.
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 stipulates that excess cash flows as defined in
the credit agreement dated February 13, 1998 (the "Credit Agreement"), as
most recently amended and restated on March 4, 2004, shall be applied
towards prepayment of the Term Loan. As a result of the amendment and
restatement of the Credit Agreement on March 4, 2004, the next excess cash
flow measurement date will be March 31, 2005.
The Senior Subordinated Notes pay cash interest semi-annually and mature on
March 15, 2012.
In conjunction with the March 4, 2004 Transaction, certain of the notes
under our former 8.75% senior subordinated notes and NBC's former 10.75%
senior discount debentures were not tendered by the holders, but were
instead called for redemption on March 4, 2004 and redeemed on April 3,
2004. Such redemption was funded through $27.1 million of restricted cash
held in escrow, of which $16.1 million related to principal, accrued
interest, and call premiums on our remaining 8.75% senior subordinated notes
and $11.0 million related to principal, accrued interest, and call premiums
on NBC's remaining 10.75% senior discount debentures.
6. 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:
10
Successor Predecessor
----------------------------- --------------
June 30, March 31, June 30,
2004 2004 2003
-------------- -------------- --------------
Total indebtedness outstanding $ 366,414,985 $373,179,464 $ 144,219,163
Term debt subject to Eurodollar fluctuations 179,550,000 180,000,000 29,036,472
Revolving credit facility subject to Prime rate fluctuations 8,500,000 - 2,300,000
Notional amounts under swap agreements - - 36,400,000
Fixed interest rate indebtedness 178,364,985 193,179,464 112,882,691
Variable interest rate, including applicable margin:
Term Debt - Term Loan 3.91% 3.84% -
Term Debt - Tranche A Loans - - 2.59%
Term Debt - Tranche B Loans - - 3.59%
Revolving Credit Facility 6.00% - 4.50%
The interest rate swap agreements qualified as cash flow hedge instruments
as the following criteria were met:
(1) Formal documentation of the hedging relationship and the Company's
risk management objective and strategy for undertaking the hedge
occurred at the inception of the agreements.
(2) The interest rate swap agreements were expected to be highly
effective in offsetting the change in the value of the interest
payments attributable to the Company's 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 June 30, 2003) 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. Except as described below, 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 June 30, 2003 totaled $0.4 million.
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
11
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.
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 period ended June 30, 2003:
Predecessor
-----------
June 30,
2003
-----------
Increase in fair value of swap
agreements designated as hedges $ 341,005
Year-to-date interest income
recorded due to hedge ineffectiveness 15,305
Changes in the fair value of the interest rate swap agreements are reflected
in the consolidated statements of cash flows as either "noncash interest
income from derivative financial instruments", "gain on derivative financial
instruments", or as noncash investing and financing activities.
7. SEGMENT INFORMATION - The Company's operating segments are determined based
on the way that management organizes the segments for making operating
decisions and assessing performance. Management has organized the Company's
segments based upon differences in products and services provided. The
Company has three reportable segments: Textbook Division, Bookstore
Division, and Complementary Services Division. 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 117
college bookstores as of June 30, 2004 located on or adjacent to college
campuses. The Complementary Services Division segment includes book-related
services such as distance education materials, computer hardware and
software, E-commerce technology, and a centralized buying service.
The Company primarily accounts for intersegment sales as if the sales were
to third parties (at current market prices). Assets (excluding inventories
and certain cash and cash equivalents, receivables, property and equipment,
intangibles, and other assets), net interest expense and taxes are generally
not allocated between the Company's segments; instead, such balances are
generally accounted for in a corporate administrative division. The
following table provides selected information about profit or loss on a
segment basis for the quarters ended June 30, 2004 and 2003, respectively:
Complementary
Textbook Bookstore Services
Division Division Division Total
------------- -------------- ------------ -----------
Quarter ended June 30, 2004 (Successor):
External customer revenues $ 19,087,613 $ 23,922,776 $ 9,284,956 $ 52,295,345
Intersegment revenues 6,468,364 212,490 653,426 7,334,280
Depreciation and amortization expense 1,496,202 812,306 690,169 2,998,677
Earnings (loss) before interest, taxes,
depreciation and amortization (EBITDA) 4,689,497 (2,521,296) 769,685 2,937,886
Quarter ended June 30, 2003 (Predecessor):
External customer revenues $ 19,682,118 $ 22,000,688 $ 13,078,377 $ 54,761,183
Intersegment revenues 5,347,032 252,568 367,771 5,967,371
Depreciation and amortization expense 211,262 505,655 159,340 876,257
Earnings (loss) before interest, taxes,
depreciation and amortization (EBITDA) 4,651,715 (2,368,516) 1,116,405 3,399,604
12
The following table reconciles segment information presented above with
information as presented in the consolidated financial statements for the
quarters ended June 30, 2004 and 2003, respectively:
Successor Predecessor
-------------- --------------
Quarter Ended June 30,
2004 2003
-------------- --------------
Revenues:
Total for reportable segments $ 59,629,625 $ 60,728,554
Elimination of intersegment revenues (7,334,280) (5,967,371)
-------------- --------------
Consolidated total $ 52,295,345 $ 54,761,183
============== ==============
Depreciation and Amortization Expense:
Total for reportable segments $ 2,998,677 $ 876,257
Corporate administration 56,775 37,367
-------------- --------------
Consolidated total $ 3,055,452 $ 913,624
============== ==============
Loss Before Income Taxes:
Total EBITDA for reportable segments $ 2,937,886 $ 3,399,604
Corporate administrative costs (4,192,638) (3,769,552)
-------------- --------------
(1,254,752) (369,948)
Depreciation and amortization (3,055,452) (913,624)
-------------- --------------
Consolidated loss from operations (4,310,204) (1,283,572)
Interest and other expenses, net (6,159,358) (3,498,723)
-------------- --------------
Consolidated loss before income taxes $(10,469,562) $ (4,782,295)
============== ==============
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:
Successor Predecessor
-------------- --------------
Quarter ended June 30,
2004 2003
-------------- --------------
EBITDA $ (1,254,752) $ (369,948)
Adjustments to reconcile EBITDA to
net cash flows from operating activities:
Interest income - 8,758
Provision for losses on accounts receivable (16,505) 7,067
Cash paid for interest (2,781,744) (890,984)
Cash (paid) refunded for income taxes 4,064,291 (402,793)
Loss on disposal of assets - 6,239
Other (10,802) -
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals (1) (40,318,154) (30,215,179)
-------------- --------------
Net Cash Flows from Operating Activities $(40,317,666) $(31,856,840)
============== ==============
Net Cash Flows from Investing Activities $ (6,594,222) $ (1,960,915)
============== ==============
Net Cash Flows from Financing Activities $ 19,351,276 $ 867,627
============== ==============
13
(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 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.
8. RELATED PARTY TRANSACTIONS - In accordance with the Company's debt
covenants, the Company declared and paid $0.1 million in dividends to NBC
during the quarter ended June 30, 2004 for costs associated with the March
4, 2004 Transaction.
9. 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. In connection with its incorporation, Specialty
Books, Inc. has unconditionally guaranteed, on a joint and several basis,
full and prompt payment and performance of the Company's obligations,
liabilities, and indebtedness arising under, out of, or in connection with
the Senior Subordinated Notes. Specialty Books, Inc. is also a party to the
Guarantee and Collateral Agreement related to the Senior Credit Facility.
Condensed consolidating balance sheets, statements of operations, and
statements of cash flows are presented on the following pages which reflect
financial information for the parent company (Nebraska Book Company, Inc.),
subsidiary guarantor (Specialty Books, Inc.), consolidating eliminations,
and consolidated totals.
14
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2004 (SUCCESSOR)
- ------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
-------------- ------------ -------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,673,437 $ 42,132 $ - $ 5,715,569
Receivables 30,578,422 2,598,172 (4,130,425) 29,046,169
Inventories 95,476,861 2,257,994 - 97,734,855
Recoverable income taxes 4,250,650 - - 4,250,650
Deferred income taxes 6,969,015 - - 6,969,015
Prepaid expenses and other assets 816,965 4,984 - 821,949
-------------- -------------------------- --------------
Total current assets 143,765,350 4,903,282 (4,130,425) 144,538,207
PROPERTY AND EQUIPMENT, net 37,590,162 505,345 - 38,095,507
GOODWILL 271,571,845 - - 271,571,845
IDENTIFIABLE INTANGIBLES, NET 154,262,780 1,966,588 - 156,229,368
OTHER ASSETS 14,124,988 17,077 (2,422,595) 11,719,470
-------------- ------------- ------------- -------------
$621,315,125 $ 7,392,292 $(6,553,020) $622,154,397
============== ============= ============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 15,781,650 $ 4,130,425 $(4,130,425) $ 15,781,650
Accrued employee compensation and
benefits 5,397,958 68,244 - 5,466,202
Accrued interest 5,047,078 - - 5,047,078
Accrued incentives 9,178,586 - - 9,178,586
Accrued expenses 1,203,301 (15,607) - 1,187,694
Deferred revenue 845,288 - - 845,288
Current maturities of long-term debt 1,829,664 - - 1,829,664
Current maturities of capital
lease obligations 193,264 - - 193,264
Revolving credit facility 8,500,000 - - 8,500,000
-------------- ------------- ------------- -------------
Total current liabilities 47,976,789 4,183,062 (4,130,425) 48,029,426
LONG-TERM DEBT,
net of current maturities 353,177,283 - - 353,177,283
CAPITAL LEASE OBLIGATIONS,
net of current maturities 2,714,774 - - 2,714,774
-
OTHER LONG-TERM LIABILITIES 321,418 - - 321,418
DEFERRED INCOME TAXES 60,651,109 786,635 - 61,437,744
DUE TO PARENT 16,997,831 - - 16,997,831
COMMITMENTS
STOCKHOLDER'S EQUITY 139,475,921 2,422,595 (2,422,595) 139,475,921
-------------- ------------- ------------ --------------
$621,315,125 $ 7,392,292 $(6,553,020) $622,154,397
============== ============= ============ ==============
15
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2004 (SUCCESSOR)
- ----------------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
----------------- --------------- --------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 33,142,420 $ 133,761 $ - $ 33,276,181
Restricted cash 27,065,000 - - 27,065,000
Receivables 33,022,016 1,660,458 (4,269,884) 30,412,590
Inventories 67,142,492 2,996,730 - 70,139,222
Recoverable income taxes 5,351,480 - - 5,351,480
Deferred income taxes 6,102,015 - - 6,102,015
Prepaid expenses and other assets 868,761 4,406 - 873,167
----------------- --------------- --------------- -------------
Total current assets 172,694,184 4,795,355 (4,269,884) 173,219,655
PROPERTY AND EQUIPMENT, net 35,615,009 518,247 - 36,133,256
GOODWILL 268,646,931 - - 268,646,931
IDENTIFIABLE INTANGIBLES, NET 155,514,045 1,991,587 - 157,505,632
OTHER ASSETS 14,388,466 17,077 (2,187,806) 12,217,737
--------------- --------------- --------------- -------------
$ 646,858,635 $ 7,322,266 $ (6,457,690) $647,723,211
=============== =============== =============== =============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 29,300,768 $ 4,269,884 $ (4,269,884) $ 29,300,768
Accrued employee compensation and benefits 9,062,590 56,140 - 9,118,730
Accrued interest 2,041,957 - - 2,041,957
Accrued incentives 6,982,304 - - 6,982,304
Accrued expenses 1,199,647 11,801 - 1,211,448
Deferred revenue 898,658 - - 898,658
Current maturities of long-term debt 17,238,881 - - 17,238,881
Current maturities of capital lease obligations 167,433 - - 167,433
--------------- --------------- --------------- -------------
Total current liabilities 66,892,238 4,337,825 (4,269,884) 66,960,179
LONG-TERM DEBT, net of current maturities 353,634,999 - - 353,634,999
CAPITAL LEASE OBLIGATIONS,
net of current maturities 2,138,151 - - 2,138,151
OTHER LONG-TERM LIABILITIES 317,287 - - 317,287
DEFERRED INCOME TAXES 61,053,109 796,635 - 61,849,744
DUE TO PARENT 16,836,358 - - 16,836,358
COMMITMENTS
STOCKHOLDER'S EQUITY 145,986,493 2,187,806 (2,187,806) 145,986,493
--------------- --------------- --------------- -------------
$ 646,858,635 $ 7,322,266 $ (6,457,690) $647,723,211
=============== =============== =============== =============
16
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2003 (PREDECESSOR)
- -------------------------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
---------------- --------------- ---------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,338,478 $ 116,776 $ - $ 6,455,254
Receivables 37,139,595 3,058,734 (9,541,373) 30,656,956
Inventories 85,900,015 7,166,819 - 93,066,834
Recoverable income taxes 2,766,865 - - 2,766,865
Deferred income taxes 4,600,252 - - 4,600,252
Prepaid expenses and other assets 847,447 19,190 - 866,637
---------------- --------------- ---------------- ----------------
Total current assets 137,592,652 10,361,519 (9,541,373) 138,412,798
PROPERTY AND EQUIPMENT, net 27,091,872 535,186 - 27,627,058
GOODWILL 30,481,472 - - 30,481,472
OTHER ASSETS 9,103,407 17,077 (1,260,972) 7,859,512
---------------- --------------- ---------------- ----------------
$ 204,269,403 $ 10,913,782 $ (10,802,345) $ 204,380,840
================ =============== ================ ================
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 19,053,314 $ 9,541,373 $ (9,541,373) $ 19,053,314
Accrued employee compensation and benefits 4,361,156 80,219 - 4,441,375
Accrued interest 3,905,413 - - 3,905,413
Accrued incentives 7,303,837 - - 7,303,837
Accrued expenses 1,005,440 31,218 - 1,036,658
Deferred revenue 444,962 - - 444,962
Current maturities of long-term debt 17,771,293 - - 17,771,293
Current maturities of capital lease obligations 129,573 - - 129,573
Revolving credit facility 2,300,000 - - 2,300,000
---------------- --------------- ---------------- ----------------
Total current liabilities 56,274,988 9,652,810 (9,541,373) 56,386,425
LONG-TERM DEBT, net of current maturities 121,748,779 - - 121,748,779
CAPITAL LEASE OBLIGATIONS, net of current maturities 2,269,518 - - 2,269,518
OTHER LONG-TERM LIABILITIES 305,068 - - 305,068
DUE TO PARENT 13,298,794 - - 13,298,794
COMMITMENTS
STOCKHOLDER'S EQUITY 10,372,256 1,260,972 (1,260,972) 10,372,256
---------------- --------------- ---------------- ----------------
$ 204,269,403 $ 10,913,782 $ (10,802,345) $ 204,380,840
================ =============== ================ ================
17
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 2004 (SUCCESSOR)
- -----------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
--------------- -------------- -------------- ---------------
REVENUES, net of returns $ 45,584,247 $ 6,730,916 $ (19,818) $ 52,295,345
COSTS OF SALES 26,702,811 4,807,230 (21,617) 31,488,424
--------------- -------------- -------------- ---------------
Gross profit 18,881,436 1,923,686 1,799 20,806,921
OPERATING EXPENSES (INCOME):
Selling, general and administrative 20,568,184 1,491,690 1,799 22,061,673
Depreciation 1,033,374 15,682 - 1,049,056
Amortization 1,981,397 24,999 - 2,006,396
Equity in earnings of subsidiary (234,789) - 234,789 -
--------------- -------------- -------------- ---------------
23,348,166 1,532,371 236,588 25,117,125
--------------- -------------- -------------- ---------------
COME (LOSS) FROM OPERATIONS (4,466,730) 391,315 (234,789) (4,310,204)
OTHER EXPENSES:
Interest expense 6,159,358 - - 6,159,358
--------------- -------------- -------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES (10,626,088) 391,315 (234,789) (10,469,562)
INCOME TAX EXPENSE (BENEFIT) (4,237,514) 156,526 - (4,080,988)
--------------- -------------- -------------- ---------------
NET INCOME (LOSS) $ (6,388,574) $ 234,789 $ (234,789) $ (6,388,574)
=============== ============== ============== ===============
18
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 2003 (PREDECESSOR)
- -------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
------------- -------------- ------------- -------------
REVENUES, net of returns $ 44,491,917 $ 10,316,603 $ (47,337) $ 54,761,183
COSTS OF SALES 25,991,706 7,031,588 (49,297) 32,973,997
------------- -------------- ------------- -------------
Gross profit 18,500,211 3,285,015 1,960 21,787,186
OPERATING EXPENSES (INCOME):
Selling, general and administrative 19,421,178 2,733,996 1,960 22,157,134
Depreciation 733,510 20,784 - 754,294
Amortization 159,330 - - 159,330
Equity in earnings of subsidiary (318,141) - 318,141 -
------------- -------------- ------------- -------------
19,995,877 2,754,780 320,101 23,070,758
------------- -------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS (1,495,666) 530,235 (318,141) (1,283,572)
OTHER EXPENSES (INCOME):
Interest expense 3,507,586 - - 3,507,586
Interest income (8,758) - - (8,758)
Gain on derivative financial
instruments (105) - - (105)
------------- -------------- ------------- -------------
3,498,723 - - 3,498,723
------------- -------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES (4,994,389) 530,235 (318,141) (4,782,295)
INCOME TAX EXPENSE (BENEFIT) (1,965,150) 212,094 - (1,753,056)
------------- -------------- ------------- -------------
NET INCOME (LOSS) $ (3,029,239) $ 318,141 $ (318,141) $ (3,029,239)
============= ============== ============= =============
19
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED JUNE 30, 2004 (SUCCESSOR)
- ---------------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
--------------- ------------- -------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES $ (40,228,817) $ (88,849) $ - $ (40,317,666)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,195,809) (2,780) - (2,198,589)
Acquisitions, net of cash acquired (4,395,633) - - (4,395,633)
-------------- -------------- -------------- ----------------
Net cash flows from investing activities (6,591,442) (2,780) - (6,594,222)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of financing costs (184,742) - - (184,742)
Principal payments on long-term debt (15,866,933) - - (15,866,933)
Principal payments on capital lease obligations (41,264) - - (41,264)
Net increase in revolving credit facility 8,500,000 - - 8,500,000
Dividends paid to parent (120,785) - - (120,785)
Decrease in restricted cash 27,065,000 - - 27,065,000
-------------- -------------- -------------- ----------------
Net cash flows from financing activities 19,351,276 - - 19,351,276
-------------- -------------- -------------- ----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (27,468,983) (91,629) - (27,560,612)
CASH AND CASH EQUIVALENTS, Beginning of period 33,142,420 133,761 - 33,276,181
-------------- -------------- -------------- ----------------
CASH AND CASH EQUIVALENTS, End of period $ 5,673,437 $ 42,132 $ - $ 5,715,569
============== ============== ============== ================
20
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED JUNE 30, 2003 (PREDECESSOR)
- ---------------------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
--------------- -------------- ---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES $ (31,840,386) $ (16,454) $ - $ (31,856,840)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (641,374) (2,767) - (644,141)
Acquisitions, net of cash acquired (1,271,395) - - (1,271,395)
Proceeds from sale of property and
equipment and other 2,920 - - 2,920
Software development costs (48,299) - - (48,299)
--------------- -------------- ---------------- ----------------
Net cash flows from investing activities (1,958,148) (2,767) - (1,960,915)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (1,416,918) - - (1,416,918)
Principal payments on capital lease obligations (31,195) - - (31,195)
Net increase in revolving credit facility 2,300,000 - - 2,300,000
Capital contributions 15,740 - - 15,740
--------------- -------------- ---------------- ----------------
Net cash flows from financing activities 867,627 - - 867,627
--------------- -------------- ---------------- ----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (32,930,907) (19,221) - (32,950,128)
CASH AND CASH EQUIVALENTS, Beginning of period 39,269,385 135,997 - 39,405,382
--------------- -------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS, End of period $ 6,338,478 $ 116,776 $ - $ 6,455,254
=============== ============== ================ ================
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE SUMMARY
OVERVIEW
REVENUE GROWTH. Our two largest divisions, the Bookstore and Textbook
Divisions, grew revenue by approximately $2.4 million for the three months ended
June 30, 2004 compared to the same period a year ago. However, on a combined
consolidated basis revenues decreased $2.5 million or 4.5% for that period. The
revenue growth in our largest divisions was more than offset by a decrease in
revenue in the Complementary Services Division. That decrease related primarily
to the decline in services performed for the largest distance education customer
who is in the process of discontinuing the use of our services for delivery of
educational materials during the 2005 fiscal year. While we are still serving
this customer's program, we expect that revenues from this program will continue
to decrease until the contract expires in the second quarter of fiscal 2005.
Revenues from the Textbook Division have increased due to price increases, while
the Bookstore Division revenue has increased due to the acquisition or
contract-management of additional stores. Same store sales decreased
approximately 3.9% as some colleges and universities have cut back on summer
school offerings due, we believe, to budget considerations. Our first fiscal
quarter has historically been the lowest revenue quarter during our fiscal year.
EBITDA RESULTS. Our combined consolidated EBITDA decreased $0.9 million for
the quarter. EBITDA is considered a non-GAAP measure by SEC Regulation G and
therefore you should refer to the more detailed explanation of that measure that
is provided later in this Management's Discussion & Analysis. This decrease is
primarily due to the decrease in revenue from the distance education program
noted above and an increase in used textbook sales from our Textbook Division to
our Bookstore Division compared to same period in the prior year. Gross margins,
and therefore EBITDA, earned by the Textbook Division on sales to the Bookstore
Division are not recognized on a consolidated basis until the books are
ultimately sold to students primarily during back-to-school periods in August
and September or January.
ACQUISITIONS. We completed the acquisition or initiated the
contract-management of four bookstore locations in the first quarter: two
locations in Jacksonville, Florida; one location in Toledo, Ohio; and one
location in Alma, Michigan. We also acquired one small bookstore location in
late July. We believe that there continue to be attractive opportunities for us
to expand our chain of bookstores across the country.
CHALLENGES AND EXPECTATIONS
We expect that we will continue to face challenges and opportunities similar
to those which we have faced in the recent past. We have experienced, and
continue to experience, competition for the supply of used textbooks from other
textbook wholesalers, competition from alternative media as a source of textbook
information, competition for contract-management opportunities and other
challenges. We also believe that we will continue to face challenges and
opportunities related to acquisitions. Despite these challenges, we expect that
we will continue to grow revenue and EBITDA on a consolidated basis in fiscal
2005. We also expect that our capital spending will remain modest for a company
of our size.
22
QUARTER ENDED JUNE 30, 2004 COMPARED WITH QUARTER ENDED JUNE 30, 2003.
REVENUES. Revenues for the quarters ended June 30, 2004 and 2003 and the
corresponding change in revenues were as follows:
Successor Predecessor Change
-------------- -------------- -------------------------
2004 2003 Amount Percentage
-------------- -------------- ------------- ----------
Textbook Division $ 25,555,977 $ 25,029,150 $ 526,827 2.1 %
Bookstore Division 24,135,266 22,253,256 1,882,010 8.5 %
Complementary Services Division 9,938,382 13,446,148 (3,507,766) (26.1)%
Intercompany eliminations (7,334,280) (5,967,371) (1,366,909) 22.9 %
-------------- -------------- ------------- ----------
$ 52,295,345 $ 54,761,183 $ (2,465,838) (4.5)%
============== ============== ============= ==========
Textbook Division revenues were up slightly at 2.1% due to price increases,
offset partially by a slight decline in units sold for the quarter ended June
30, 2004 compared to June 30, 2003. We believe unit sales are directly related
to the number of units purchased in the December and May student book buys each
year as Textbook Division revenues are limited by the supply of used textbooks
available to us. The increase in Bookstore Division revenues was attributable to
the addition of acquired bookstores and was offset by a slight decrease in same
store sales. The new bookstores provided an additional $2.7 million of revenue
in the quarter ended June 30, 2004. Same store sales were down 3.9%, or $0.9
million, from the quarter ended June 30, 2003, which we believe is partially due
to fewer summer classes being offered by certain schools due to budget
considerations. Complementary Services Division revenues decreased primarily due
to the decision by the distance education program's largest customer to
discontinue the use of our services for delivery of education materials in
fiscal 2005. Corresponding to the overall growth in the number of company-owned
college bookstores, our intercompany transactions also increased.
GROSS PROFIT. Gross profit for the quarter ended June 30, 2004 decreased
$1.0 million, or 4.5%, to $20.8 million from $21.8 million for the quarter ended
June 30, 2003. This decrease was primarily attributable to the aforementioned
decline in revenues in the Complementary Services Division, increased costs
associated with the Textbook Division's incentive programs, and an increase in
the intercompany elimination of profit in inventory for textbooks sold by the
Textbook Division to the Bookstore Division that remained in inventory at the
end of the period. Gross profit earned by the Textbook Division on sales to the
Bookstore Division are not recognized on a consolidated basis until the books
are ultimately sold to students primarily during back-to-school periods in
August and September or January. Gross margin percent remained stable at 39.8%
for the quarters ended June 30, 2004 and 2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the quarter ended June 30, 2004 decreased $0.1
million, or 0.4%, to $22.1 million from $22.2 million for the quarter ended June
30, 2003. Selling, general and administrative expenses as a percentage of
revenues were 42.2% and 40.5% for the quarters ended June 30, 2004 and 2003,
respectively. The increase in expenses as a percentage of revenues was partly
attributable to an increase in the Bookstore Division's selling, general and
administrative expenses due to increased expenses associated with the growth of
this division in a quarter in which revenues are historically low in comparison
to other quarters of the year. The increase in expenses as a percentage of
revenues was also partly due to the decline in revenues outpacing the decline in
expenses in the Complementary Services Division. The decrease in total selling,
general and administrative expenses was primarily attributable to the overall
decline in revenues and to focused attention towards expense reductions in the
other divisions.
23
EARNINGS (LOSS) BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION
(EBITDA). EBITDA for the quarters ended June 30, 2004 and 2003 and the
corresponding change in EBITDA were as follows:
Successor Predecessor Change
--------------- -------------- -----------------------
2004 2003 Amount Percentage
--------------- -------------- ------------ ----------
Textbook Division $ 4,689,497 $ 4,651,715 $ 37,782 0.8 %
Bookstore Division (2,521,296) (2,368,516) (152,780) (6.5)%
Complementary Services Division 769,685 1,116,405 (346,720) (31.1)%
Corporate administration (4,192,638) (3,769,552) (423,086) (11.2)%
--------------- -------------- ------------ ----------
$ (1,254,752) $ (369,948) $ (884,804) (239.2)%
=============== ============== ============ ==========
The increase in EBITDA in the Textbook Division was primarily attributable
to decreased selling, general and administrative expenses due to focused
attention towards expense reductions. The decrease in Bookstore Division EBITDA
was primarily due to increased expenses resulting from growth in the number of
college bookstores owned by us, compounded by the fact that the first quarter is
a seasonally-slow revenue quarter for the Bookstore Division. The decrease in
EBITDA in the Complementary Services Division was primarily due to a decrease in
the distance education program revenues as previously discussed. The decrease in
corporate administration EBITDA was primarily due to an increase in the
intercompany elimination of profit in inventory for textbooks sold by the
Textbook Division to the Bookstore Division that remained in inventory at the
end of the period. The intercompany profit in inventory elimination will
fluctuate depending upon inventory levels at our college bookstores.
EBITDA is defined as earnings before interest, taxes, depreciation, and
amortization. As we are highly-leveraged and as our equity is not
publicly-traded, management believes that EBITDA is useful in measuring our
liquidity and provides additional information for determining our ability to
meet debt service requirements. The Senior Subordinated Notes and Senior Credit
Facility also utilize EBITDA, as defined in those agreements, to test 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 our financial performance. EBITDA measures presented may not be
comparable to similarly titled measures presented by other companies.
24
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:
Successor Predecessor
--------------- ---------------
Quarter ended June 30,
2004 2003
--------------- ---------------
EBITDA $ (1,254,752) $ (369,948)
Adjustments to reconcile EBITDA to net
cash flows from operating activities:
Interest income - 8,758
Provision for losses on accounts receivable (16,505) 7,067
Cash paid for interest (2,781,744) (890,984)
Cash (paid) refunded for income taxes 4,064,291 (402,793)
Loss on disposal of assets - 6,239
Other (10,802) -
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals (1) (40,318,154) (30,215,179)
--------------- ---------------
Net Cash Flows from Operating Activities $ (40,317,666) $ (31,856,840)
=============== ===============
Net Cash Flows from Investing Activities $ (6,594,222) $ (1,960,915)
=============== ===============
Net Cash Flows from Financing Activities $ 19,351,276 $ 867,627
=============== ===============
(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.
DEPRECIATION EXPENSE. Depreciation expense for the quarter ended June 30,
2004 increased $0.2 million, or 39.1%, to $1.0 million from $0.8 million for the
quarter ended June 30, 2003, primarily due to additional depreciation associated
with the step-up in basis of assets occurring in conjunction with the March 4,
2004 Transaction.
AMORTIZATION EXPENSE. Amortization expense for the quarter ended June 30,
2004 increased $1.8 million to $2.0 million from $0.2 million for the quarter
ended June 30, 2003, primarily due to additional amortization associated with
the step-up in basis of assets occurring in conjunction with the March 4, 2004
Transaction.
INTEREST EXPENSE, NET. Interest expense, net for the quarter ended June 30,
2004 increased $2.7 million, or 76.0%, to $6.2 million from $3.5 million for the
quarter ended June 30, 2003, primarily due to additional interest expense
related to long-term indebtedness arising out of the March 4, 2004 Transaction.
Total debt outstanding at June 30, 2004 was $366.4 million compared to $144.2
million at June 30, 2003.
INCOME TAXES. Income tax benefit for the quarter ended June 30, 2004
increased $2.3 million to $4.1 million from $1.8 million for the quarter ended
June 30, 2003. Our effective tax rate for the quarters ended June 30, 2004 and
2003 was 39.0% and 36.7%, respectively. The increase in the effective tax rate
is partly attributable to a slight increase in state income tax rates. Our
effective tax rate differs from the statutory tax rate primarily as a result of
state income taxes.
25
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our 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 us 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, we evaluate our 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. We base
our 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. We
believe the following critical accounting policies, among others, affect our
more significant judgments and estimates used in the preparation of our
consolidated financial statements:
PRODUCT RETURNS. We recognize revenue from Textbook Division sales at the
time of shipment. We have established a program which, under certain conditions,
enables our customers to return textbooks. We record 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 product returns. The estimated rate of product returns is
determined utilizing actual historical return experience.
BAD DEBTS. We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. In
determining the adequacy of the allowance, we analyze the aging of the
receivable, the customer's financial position, historical collection experience,
and other economic and industry factors. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
INVENTORY VALUATION. Our Bookstore Division values new textbook and
non-textbook inventories at the lower of cost or market using the retail
inventory method. 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. We account 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 us, inventory
write-downs may be required. In determining inventory adjustments, we consider
amounts of inventory on hand, projected demand, new editions, and industry and
other factors.
GOODWILL AND INTANGIBLE ASSETS. We evaluate the impairment of the carrying
value of our goodwill and identifiable intangibles in accordance with applicable
accounting standards, including Statements of Financial Accounting Standards No.
86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR
OTHERWISE MARKETED; No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS; and No. 144,
IMPAIRMENT OF LONG-LIVED ASSETS. In accordance with such standards, we evaluate
impairment on goodwill and certain identifiable intangibles annually and
evaluate impairment on all intangibles whenever events or changes in
circumstances indicate that the carrying amounts of such assets may not be
recoverable. Our evaluation of impairment is based on a combination of our
projection of estimated future cash flows and other valuation methodologies. We
are required to make certain assumptions and estimates regarding the fair value
of intangible assets when assessing such assets for impairment. We are also
required to make certain assumptions and estimates when assigning an initial
value to covenants not to compete arising from bookstore acquisitions. Changes
in the fact patterns underlying such assumptions and estimates could ultimately
result in the recognition of impairment losses on intangible assets. The March
4, 2004 Transaction resulted in the application of purchase accounting to our
balance sheet as of the transaction date. The fair values of our assets and
liabilities were determined in part from a valuation by an independent
appraiser. In certain circumstances, company management performed valuations
where appropriate. The goodwill in the transaction was determined by taking the
difference between the purchase price and the fair value of net assets acquired.
26
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITIES
Our 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. We have historically funded these requirements primarily through
internally generated cash flows and funds borrowed under our Revolving Credit
Facility. At June 30, 2004, our total indebtedness was $366.4 million,
consisting of an $179.6 million Term Loan, $175.0 million of Senior Subordinated
Notes, $8.5 million under the Revolving Credit Facility, and $3.3 million of
other indebtedness, including capital lease obligations. To provide additional
financing to fund the March 4, 2004 Transaction, NBC issued Senior Discount
Notes which provided $50.0 million in net proceeds (face value of $77.0 million
less original issue discount of $27.0 million).
Principal and interest payments under the Senior Credit Facility, the Senior
Subordinated Notes, and NBC's Senior Discount Notes represent significant
liquidity requirements for us. Under the terms of the Senior Credit Facility's
Term Loan, we are scheduled to make principal payments totaling $1.8 million in
each of fiscals 2005-2010 and $169.2 million in fiscal 2011. These 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 us. The Senior Subordinated Notes require semi-annual
interest payments at a fixed rate of 8.625% and mature on March 15, 2012. The
Senior Discount Notes require semi-annual cash interest payments commencing
September 15, 2008 at a fixed rate of 11.0% and mature on March 15, 2013.
In conjunction with the March 4, 2004 Transaction, certain of the notes
under our former 8.75% senior subordinated notes and NBC's former 10.75% senior
discount debentures were not tendered by the holders, but were instead called
for redemption on March 4, 2004 and redeemed on April 3, 2004. Such redemption
was funded through $27.1 million of restricted cash held in escrow, of which
$16.1 million related to principal, accrued interest, and call premiums on the
remaining 8.75% senior subordinated notes and $11.0 million related to
principal, accrued interest, and call premiums on NBC's remaining 10.75% senior
discount debentures.
INVESTING CASH FLOWS
Our capital expenditures were $2.2 million and $0.6 million for the three
months ended June 30, 2004 and 2003, respectively. Capital expenditures consist
primarily of leasehold improvements and furnishings for new bookstores,
bookstore renovations, computer upgrades and miscellaneous warehouse
improvements. Our 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 2005 is $10.3 million.
Business acquisition expenditures were $4.4 million and $1.3 million for the
three months ended June 30, 2004 and 2003, respectively. For the three months
ended June 30, 2004, single bookstore locations were acquired serving Eastern
Michigan University and Alma College; and 2 bookstore locations were acquired
serving the University of North Florida and Florida Community College at
Jacksonville. For the three months ended June 30, 2003, single bookstore
locations were acquired serving Marshall University and Wayne State College; and
3 bookstore locations were acquired serving Michigan State University. Our
ability to make acquisition expenditures is subject to certain restrictions
under the Senior Credit Facility.
During the three months ended June 30, 2004, no bookstore locations were
closed. During the three months ended June 30, 2003, three bookstores were
either closed or the contract-managed lease was not renewed.
OPERATING CASH FLOWS
Our principal sources of cash to fund our future operating liquidity needs
will be cash from operating activities and borrowings under the Revolving Credit
Facility. Usage of the Revolving Credit Facility to meet our liquidity needs
fluctuates throughout the year due to our distinct buying and selling periods,
increasing substantially at the end of each college semester (May and December).
Net cash flows used for operating activities for the three months ended June 30,
2004 were $40.3 million, up $8.4 million from $31.9 million for the three months
ended June 30, 2003. The increase in usage of cash was attributable, in part, to
an $11.0 million decline in accounts payable relating to the portion of the
restricted cash held in escrow that was utilized to redeem NBC's untendered
former senior discount debentures on April 3, 2004. This increase in the usage
of cash was partially offset by receipt of a $4.5 million refund of fiscal 2004
estimated tax payments.
27
COVENANT RESTRICTIONS
Access to our 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 our ability to make loans or
advances and pay dividends, except that, among other things, we may pay
dividends to NBC (i) in an amount not to exceed the amount of interest required
to be paid on the Senior Discount Notes 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 Subordinated Notes restricts the ability of the
Company and its Restricted Subsidiaries (as defined in the indenture) to pay
dividends or make other Restricted Payments (as defined in the indenture) to
their respective stockholders, subject to certain exceptions, unless certain
conditions are met, including that (i) no default under the indenture shall have
occurred and be continuing, (ii) the Company shall be permitted by the indenture
to incur additional indebtedness and (iii) the amount of the dividend or payment
may not exceed a certain amount based on, among other things, the Company's
consolidated net income. The indenture governing the Senior Discount Notes
contains similar restrictions on NBC's ability and the ability of 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. These restrictions are not expected to affect our ability to meet
our cash obligations for the foreseeable future.
In accordance with such covenant restrictions, we declared and paid $0.1
million in dividends to NBC during the quarter ended June 30, 2004 for costs
associated with the March 4, 2004 Transaction.
SOURCES OF AND NEEDS FOR CAPITAL
As of June 30, 2004, we could borrow up to $50.0 million under the Revolving
Credit Facility, of which $8.5 million was drawn. 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. Our 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 2005 is $10.3
million.
We believe that funds generated from operations, existing cash, and
borrowings under the Revolving Credit Facility will be sufficient to finance our
current operations, any required excess cash flow payments, increased cash
interest requirements resulting from the March 4, 2004 Transaction, planned
capital expenditures and internal growth for the foreseeable future. Future
acquisitions, if any, may require additional debt financing or capital
contributions.
28
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following tables present aggregated information as of June 30, 2004
regarding our 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 $ 355,006,947 $ 1,829,664 $ 3,669,760 $ 3,686,410 $ 345,821,113
Interest on long-term debt (1) 204,636,767 25,295,590 55,427,802 58,439,275 65,474,100
Capital lease obligations 2,908,038 193,264 572,869 760,874 1,381,031
Interest on capital lease obligations 1,483,625 311,577 540,592 389,705 241,751
Borrowings under line of credit (2) 8,500,000 - - 8,500,000 -
Operating leases 49,065,000 9,971,000 17,909,000 10,935,000 10,250,000
Unconditional purchase obligations - - - - -
--------------- -------------- -------------- ---------------- ---------------
Total $ 621,600,377 $ 37,601,095 $ 78,120,023 $ 82,711,264 $ 423,167,995
=============== ============== ============== ================ ===============
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 (2) $ 41,500,000 $ - $ - $ 41,500,000 $ -
=============== ============== ============== ================ ===============
(1) Interest on the variable rate debt is estimated based upon implied forward
rates in the yield curve at June 30, 2004 and does not reflect any
potential management of interest rate fluctuations through interest rate
swap agreements or other similar instruments.
(2) Interest is not estimated on the line of credit due to uncertainty
surrounding the timing and extent of usage of the line of credit.
TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES
In fiscal 2001, we entered into several agreements with a newly created
entity, TheCampusHub.com, Inc., which was partially owned by NBC's then-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 us. Such agreements
(including an equity option agreement, a management services agreement, and a
technology sale and license agreement) terminated effective July 1, 2003 upon
our acquisition of all of the outstanding shares of common stock of
TheCampusHub.com, Inc. This business combination was accounted for by us 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 $3.7 million was assigned to
non-deductible goodwill. The management services agreement reimbursed us 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.
Complementary Services Division revenue resulting from the management services
agreement was recognized as the services were performed. For the three months
ended June 30, 2003, revenues attributable to the management services agreement
totaled $0.1 million and reimbursable direct costs incurred on behalf of
TheCampusHub.com, Inc. totaled $0.1 million. Net amounts due from
TheCampusHub.com, Inc. at June 30, 2003 totaled $0.1 million.
In accordance with our debt covenants, we declared and paid $0.1 million in
dividends to NBC during the quarter ended June 30, 2004 for costs associated
with the March 4, 2004 Transaction.
29
IMPACT OF INFLATION
Our 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, we believe that
the effects of inflation, if any, on our results of operations and financial
condition have not been material. We cannot assure you, however, that during a
period of significant inflation our results of operations will not be adversely
affected.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Quarterly Report on Form 10-Q contains or incorporates by reference
certain statements that are not historical facts, including, most importantly,
information concerning possible or assumed future results of our operations 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 or EBITDA growth or statements expressing
general optimism 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 our actual performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. For those
statements, we claim the protection of the safe harbor for forward-looking
statements contained in the Reform Act. Several important factors could affect
our future results 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 from other companies that target our
markets and from alternative media as a source of textbook information; ability
to successfully acquire bookstores or to integrate future acquisitions;
inability to purchase a sufficient supply of used textbooks; changes in pricing
of new and/or used textbooks; loss or retirement of key members of management;
the impact of seasonality of the wholesale and bookstore operations; increases
in our cost of borrowing or inability to raise or unavailability of additional
debt or equity capital; changes in general economic conditions and/or in the
markets in which we compete or may, from time to time, compete; and other risks
detailed in our Securities and Exchange Commission filings, and in particular in
this Quarterly Report on Form 10-Q, all of which are difficult or impossible to
predict accurately and many of which are beyond our control. We will not
undertake and specifically decline 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.
RISK FACTORS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the Securities Litigation Reform Act of 1995 that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including those set forth in the following cautionary statements and
elsewhere in this Quarterly Report on Form 10-Q. If any of the following risks
were to occur, our business, financial condition or results of operations would
likely suffer.
WE FACE COMPETITION IN OUR MARKETS. Our industry is highly competitive. A
large number of actual or potential competitors exist, some of which are larger
than us and have substantially greater resources than us. We cannot give
assurances that our business will not be adversely affected by increased
competition in the markets in which we currently operate or in markets in which
we will operate in the future, or that we will be able to improve or maintain
our profit margins. In recent years, an increasing number of institution-owned
college stores have decided to outsource or "contract-manage" the operation of
their bookstores. As of April 1, 2003, approximately 28% of the U.S. members of
The National Association of College Stores were contract-managed. The leading
managers of these stores include two of our principal competitors in the
wholesale textbook distribution business. Contract-managed stores primarily
purchase their used textbook requirements from and sell their available supply
of used textbooks to their affiliated operations. A significant increase in the
number of contract-managed stores operated by our competitors, particularly at
large college campuses, could adversely affect our ability to acquire an
adequate supply of used textbooks.
30
We are also experiencing growing competition from alternative media as a
source of textbook information, such as on-line resources, e-books,
print-on-demand textbooks and CD-ROMs, and from the use of course packs, which
are collections of copyrighted materials and professors' original content which
are produced by college bookstores and sold to students, all of which have the
potential to reduce or replace the need for textbooks. A substantial increase in
the availability of these alternative media as a source of textbook information
could significantly reduce college students' use of traditional textbooks and
thus have a material adverse effect on our business and results of operations.
WE MAY NOT BE ABLE TO SUCCESSFULLY ACQUIRE BOOKSTORES OR INTEGRATE OUR
FUTURE ACQUISITIONS. Part of our business strategy is to expand sales for our
college bookstore operations by acquiring bookstores. We cannot give assurances
that we will be able to identify additional bookstores for acquisition or that
any anticipated benefits will be realized from any of these acquisitions. Due to
the seasonal nature of business in our bookstores, operations may be affected by
the time of year when a bookstore is acquired. The process may require financial
resources that would otherwise be available for our existing operations. We
cannot give assurances that the integration of our future acquisitions will be
successful or that the anticipated strategic benefits of our future acquisitions
will be realized or that they will be realized within time frames contemplated
by our management. Acquisitions may involve a number of special risks,
including, but not limited to, adverse short-term effects on our reported
operating results, diversion of management's attention, standardization of
accounting systems, dependence on retaining, hiring and training key personnel,
unanticipated problems or legal liabilities and actions of our competitors and
customers. If we are unable to successfully integrate our future acquisitions
for these or other reasons, our results of operations may be adversely affected.
IF WE ARE UNABLE TO OBTAIN A SUFFICIENT SUPPLY OF USED TEXTBOOKS, OUR
BUSINESS MAY BE ADVERSELY AFFECTED. We are generally able to sell a substantial
majority of our available used textbooks and, therefore, our ability to purchase
a sufficient number of used textbooks largely determines our used textbook sales
for future periods. Successfully acquiring books requires a visible presence on
college campuses at the end of each semester, which requires hiring a
significant number of temporary personnel, and having access to sufficient funds
under our Revolving Credit Facility or other financing alternatives. Textbook
acquisition also depends upon college students' willingness to sell their used
textbooks at the end of each semester. The unavailability of sufficient
personnel or credit, or a shift in student preferences, could impair our ability
to acquire sufficient used textbooks to meet our sales objectives and adversely
affect our results of operations.
WE ARE DEPENDENT ON KEY PERSONNEL, THE LOSS OF WHOM COULD MATERIALLY
ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL PERFORMANCE. Our future success
depends to a significant extent on the efforts and abilities of our senior
management team. Our senior management team has over 150 years of cumulative
experience in the college bookstore industry. The loss of the services of these
individuals could have a material adverse effect on our business, financial
condition and results of operations.
OUR OPERATIONS MAY BE ADVERSELY AFFECTED IF PUBLISHERS DO NOT CONTINUE TO
INCREASE PRICES OF TEXTBOOKS ANNUALLY. We generally buy used textbooks based on
publishers' prevailing prices for new textbooks just prior to the implementation
by publishers of their annual price increases (which historically have been 4%
to 5%) and resell these textbooks shortly thereafter based upon the new higher
prices, thereby creating an immediate margin increase. Our ability to increase
our used textbook prices each year depends on annual price increases on new
textbooks implemented by publishers. The failure of publishers to continue
annual increases could adversely affect our results of operations.
THE SEASONALITY OF OUR WHOLESALE AND BOOKSTORE OPERATIONS COULD NEGATIVELY
AFFECT OUR OPERATING RESULTS. Our wholesale and bookstore operations experience
two distinct selling periods and the wholesale operations experience two
distinct buying periods. The peak selling periods for the wholesale operations
occur prior to the beginning of each school semester in July/August and
November/December. The buying periods for the wholesale operations occur at the
end of each school semester in May and December. The primary selling periods for
the bookstore operations are in August/September and January. In fiscal 2004,
approximately 43% of our annual revenues occurred in the second fiscal quarter
(July-September), while approximately 29% of our annual revenues occurred in the
fourth fiscal quarter (January-March). Accordingly, our working capital
requirements fluctuate throughout the year, increasing substantially at the end
of each semester, in May and December, as a result of the buying periods. We
fund our working capital requirements primarily through the Revolving Credit
Facility, which historically has been repaid with cash provided from operations.
A significant reduction in sales during our peak selling periods could have a
material adverse effect on our financial condition or results of operations for
the year.
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THE INDENTURES GOVERNING THE SENIOR SUBORDINATED NOTES AND NBC'S SENIOR
DISCOUNT NOTES, AS WELL AS THE SENIOR CREDIT FACILITY, IMPOSE SIGNIFICANT
OPERATING AND FINANCIAL RESTRICTIONS, WHICH MAY PREVENT US FROM INCURRING
ADDITIONAL INDEBTEDNESS AND TAKING SOME ACTIONS. The indentures governing the
Senior Subordinated Notes and NBC's Senior Discount Notes restrict our ability
to do the following: incur additional indebtedness; pay dividends or make other
restricted payments; consummate certain asset sales; create liens on assets;
enter into transactions with affiliates; make investments, loans or advances;
consolidate or merge with or into any other person; and convey, transfer or
lease all or substantially all of our assets or change the business we conduct.
The Senior Credit Facility prohibits us from prepaying other indebtedness.
In addition, we are required to comply with and maintain specified financial
ratios and tests, including minimum interest coverage ratios, maximum leverage
ratios and a minimum fixed charge coverage ratio. Our ability to meet these
financial ratios and tests can be affected by events beyond our control, and we
cannot give assurances that we will satisfy these requirements in the future. A
breach of any of these covenants could result in a default under the Senior
Credit Facility or the indentures. Upon an event of default under the Senior
Credit Facility, the lenders could elect to declare all amounts and accrued
interest outstanding under the Senior Credit Facility to be due and payable and
could terminate their commitments to make further extensions of credit under the
Senior Credit Facility and the holders of the Senior Subordinated Notes and
NBC's Senior Discount Notes could elect to declare all amounts under such notes
immediately due and payable. If we were unable to repay our indebtedness under
the Senior Credit Facility, the lenders could proceed against the collateral
securing the indebtedness. If the indebtedness under the Senior Credit Facility
were accelerated, we cannot give assurances that our assets would be sufficient
to repay in full such indebtedness and other indebtedness, including the Senior
Subordinated Notes and NBC's Senior Discount Notes. Substantially all of our
assets are pledged as security under the Senior Credit Facility.
WE ARE CONTROLLED BY ONE PRINCIPAL EQUITY HOLDER, WHO HAS THE POWER TO TAKE
UNILATERAL ACTION. Following the March 4, 2004 Transaction, Weston Presidio
beneficially owns approximately 84.4% of our parent's (NBC's) issued and
outstanding common stock (taking into account for such percentage calculation
options outstanding and options available for future grant under the 2004 Stock
Option Plan). As a result, Weston Presidio is able to control all matters,
including the election of a majority of our board of directors, the approval of
amendments to NBC's and our certificates of incorporation and fundamental
corporate transactions such as mergers and asset sales. The interests of Weston
Presidio may not in all cases be aligned with the interests of other affected
parties. In addition, Weston Presidio may have an interest in pursuing
acquisitions, divestitures and other transactions that, in their judgment, could
enhance their equity investment, even though such transactions might involve
risks to other affected parties.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our primary market risk exposure is, and is expected to continue to be,
fluctuation in variable interest rates. Of the $366.4 million in total
indebtedness outstanding at June 30, 2004, $179.6 million is subject to
fluctuations in the Eurodollar rate and $8.5 million is subject to fluctuations
in the Prime rate. As provided in our 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 qualified as cash flow hedging instruments to
convert certain variable rate debt into fixed rate debt. We had separate
five-year amortizing interest rate swap agreements with two financial
institutions whereby our 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). These agreements expired on July 31, 2003. Depending upon
interest rate trends in the future, we may choose to manage our risk to variable
interest rate fluctuations by again entering into interest rate swap agreements
or other similar instruments.
Certain quantitative market risk disclosures have changed since March 31,
2004 as a result of market fluctuations, movement in interest rates, a new
capital lease obligation, and principal payments. The following table presents
summarized market risk information as of June 30, 2004 and March 31, 2004,
respectively (the weighted-average variable rates are based on implied forward
rates in the yield curve as of the date presented):
June 30, March 31,
2004 2004
-------------- --------------
Fair Values:
Fixed rate debt $ 174,956,879 $ 194,361,088
Variable rate debt (excluding Revolving
Credit Facili1y 179,550,000 180,000,000
Overall Weighted-Average Interest Rates:
Fixed rate debt 8.66% 8.65%
Variable rate debt (excluding Revolving
Credit Facility) 7.46% 6.63%
ITEM 4. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE 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 June 30, 2004. Based on
this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of June 30, 2004, 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 employees and 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.
CHANGES IN INTERNAL CONTROLS. 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 June 30, 2004 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
33
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Current Report on Form 8-K, furnished on June 17, 2004, pursuant to Item 7
and Item 9, containing a press release announcing consolidated financial
results of NBC Acquisition Corp. for the fiscal year ended March 31, 2004.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on August 11, 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
34
EXHIBIT INDEX
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.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
35