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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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: 333-48225
NBC ACQUISITION CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0793347
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4700 SOUTH 19TH STREET
LINCOLN, NEBRASKA 68501-0529
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 421-7300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] NO [X]
TOTAL NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS
OF NOVEMBER 10, 2004: 549,254 SHARES
TOTAL NUMBER OF PAGES: 30
EXHIBIT INDEX: PAGE 30
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NBC ACQUISITION CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------
Successor Predecessor
----------------------------- --------------
September 30, March 31, September 30,
2004 2004 2003
------------- --------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 73,628,174 $ 33,276,181 $ 68,646,878
Restricted cash - 27,065,000 -
Receivables 40,322,590 30,412,590 41,285,682
Inventories 73,898,257 70,139,222 68,689,377
Recoverable income taxes - 5,351,480 -
Deferred income taxes 6,752,015 6,102,015 6,096,743
Prepaid expenses and other assets 741,150 873,167 811,974
------------- --------------- --------------
Total current assets 195,342,186 173,219,655 185,530,654
PROPERTY AND EQUIPMENT, net of
depreciation & amortization 40,050,499 36,133,256 28,117,488
GOODWILL 271,632,544 268,646,931 34,079,919
IDENTIFIABLE INTANGIBLES, net of amortization 154,214,892 157,505,632 1,853,563
DEBT ISSUE COSTS, net of amortization 11,488,305 11,968,909 5,244,696
OTHER ASSETS 2,149,190 2,216,565 2,514,972
------------- --------------- --------------
$674,877,616 $ 649,690,948 $ 257,341,292
============= =============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 54,498,486 $ 18,271,940 $ 54,050,633
Accrued employee compensation and benefits 6,921,357 9,118,730 7,024,036
Accrued interest 667,800 2,565,785 2,240,164
Accrued incentives 8,196,334 6,982,304 6,512,308
Accrued expenses 1,230,458 1,211,448 1,087,108
Income taxes payable 7,491,452 - 7,311,587
Deferred revenue 1,474,583 898,658 1,097,268
Current maturities of long-term debt 1,830,469 27,743,881 2,338,535
Current maturities of capital lease obligations 206,307 167,433 143,884
------------- --------------- --------------
Total current liabilities 82,517,246 66,960,179 81,805,523
LONG-TERM DEBT, net of current maturities 405,893,233 404,048,043 198,146,237
CAPITAL LEASE OBLIGATIONS, net of current maturities 2,656,684 2,138,151 2,227,446
OTHER LONG-TERM LIABILITIES 325,955 317,287 309,019
DEFERRED INCOME TAXES 59,846,507 61,699,507 -
COMMITMENTS (Note 6)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, voting, authorized 5,000,000 shares
of $.01 par value; issued and outstanding
549,254 shares, 549,254 shares and 1,304,451 shares
at September 30, 2004, March 31, 2004, and
September 30, 2003, respectively 5,493 5,493 13,045
Additional paid-in capital 110,963,897 110,963,897 75,129,496
Notes receivable from stockholders (95,129) (92,689) (345,549)
Retained earnings (accumulated deficit) 12,763,730 3,651,080 (99,943,925)
------------- --------------- --------------
Total stockholders' equity (deficit) 123,637,991 114,527,781 (25,146,933)
------------- --------------- --------------
$674,877,616 $ 649,690,948 $ 257,341,292
============= =============== ==============
See notes to consolidated financial statements.
2
NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------
Successor Predecessor Successor Predecessor
-------------- -------------- -------------- --------------
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
REVENUES, net of returns $ 174,229,606 $ 172,693,104 $ 226,524,951 $ 227,454,287
COSTS OF SALES 109,131,893 108,142,063 140,620,317 141,116,060
-------------- -------------- -------------- --------------
Gross profit 65,097,713 64,551,041 85,904,634 86,338,227
OPERATING EXPENSES:
Selling, general and administrative 26,996,034 27,254,450 49,057,707 49,411,584
Depreciation 1,119,348 810,624 2,168,404 1,564,918
Amortization 2,016,608 390,144 4,023,004 549,474
-------------- -------------- -------------- --------------
30,131,990 28,455,218 55,249,115 51,525,976
-------------- -------------- -------------- --------------
INCOME FROM OPERATIONS 34,965,723 36,095,823 30,655,519 34,812,251
-------------- -------------- -------------- --------------
OTHER EXPENSES (INCOME):
Interest expense 7,732,958 5,438,350 15,297,855 11,081,167
Interest income (133,496) (102,963) (133,496) (111,721)
Gain on derivative financial
instruments - (57,191) - (57,296)
-------------- -------------- -------------- --------------
7,599,462 5,278,196 15,164,359 10,912,150
-------------- -------------- -------------- --------------
INCOME BEFORE INCOME TAXES 27,366,261 30,817,627 15,491,160 23,900,101
INCOME TAX EXPENSE 11,128,971 12,355,467 6,378,510 9,685,463
-------------- -------------- -------------- --------------
NET INCOME $ 16,237,290 $ 18,462,160 $ 9,112,650 $ 14,214,638
============== ============== ============== ==============
EARNINGS (LOSS) PER SHARE:
Basic $ 29.56 $ 14.15 $ 16.59 $ 11.07
============== ============== ============== ==============
Diluted $ 28.95 $ 13.89 $ 16.25 $ 10.85
============== ============== ============== ==============
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 549,254 1,304,451 549,254 1,284,535
============== ============== ============== ==============
Diluted 560,800 1,329,106 560,940 1,310,124
============== ============== ============== ==============
See notes to consolidated financial statements.
3
NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
Notes Retained Accumulated
Additional Receivable Earnings Other
Common Paid-in From (Accumulated Comprehensive Comprehensive
Stock Capital Stockholders Deficit) Income (Loss) Total Income
--------- ------------- ------------- -------------- ------------ --------------- --------------
BALANCE, April 1, 2003
(Predecessor) $ 12,642 $ 65,381,476 $ (336,681) $(114,158,563) $(418,631) $ (49,519,757)
Issuance of 39,905 shares of
common stock 400 9,722,283 - - - 9,722,683 $ -
Issuance of 300 shares of
common stock upon exercise
of stock options, including
tax benefit of $10,000 3 25,737 - - - 25,740 -
Interest accrued on stockholder
notes - - (8,868) - - (8,868) -
Net income - - - 14,214,638 - 14,214,638 14,214,638
Other comprehensive income,
net of taxes:
Unrealized gains on interest
rate swap agreements,
net of taxes of $256,145 - - - - 418,631 418,631 418,631
--------- ------------- ------------- -------------- ------------ --------------- --------------
BALANCE, September 30, 2003
(Predecessor) $ 13,045 $ 75,129,496 $ (345,549) $ (99,943,925) $ - $ (25,146,933) $ 14,633,269
========= ============= ============= ============== ============ =============== ==============
BALANCE, April 1, 2004
(Successor) $ 5,493 $110,963,897 $ (92,689) $ 3,651,080 $ - $ 114,527,781
Interest accrued on stockholder
note - - (2,440) - - (2,440) $ -
Net income - - - 9,112,650 - 9,112,650 9,112,650
--------- ------------- ------------- -------------- ------------ --------------- --------------
BALANCE, September 30, 2004
(Successor) $ 5,493 $110,963,897 $ (95,129) $ 12,763,730 $ - $ 123,637,991 $ 9,112,650
========= ============= ============= ============== ============ =============== ==============
See notes to consolidated financial statements.
4
NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------
Successor Predecessor
------------- -------------
Six Months Six Months
Ended Ended
September 30, September 30,
2004 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,112,650 $ 14,214,638
Adjustments to reconcile net income
to net cash flows from operating activities:
Provision for losses on receivables 14,674 54,235
Depreciation 2,168,404 1,564,918
Amortization 4,832,497 1,360,529
Original issue debt discount amortization 2,760,832 -
Noncash interest income from derivative financial instruments - (1,030)
Gain on derivative financial instruments - (169,863)
Loss on disposal of assets 15,546 264,932
Deferred income taxes (2,503,000) 2,580,000
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals:
Receivables (9,925,814) (11,221,396)
Inventories (3,040,178) 1,353,265
Recoverable income taxes 5,351,480 25,000
Prepaid expenses and other assets 132,017 55,999
Other assets 76,611 (159,058)
Accounts payable 36,226,546 35,038,167
Accrued employee compensation and benefits (2,197,373) (3,702,677)
Accrued interest (1,897,985) (265,608)
Accrued incentives 1,214,030 993,425
Accrued expenses 24,893 6,374
Income taxes payable 7,491,452 7,231,655
Deferred revenue 575,925 559,038
Other long-term liabilities 8,668 8,196
------------ ------------
Net cash flows from operating activities 50,441,875 49,790,739
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (5,252,130) (1,844,630)
Acquisitions, net of cash acquired (4,667,916) (2,161,080)
Proceeds from sale of property and equipment and other 9,418 7,910
Software development costs - (48,029)
------------ ------------
Net cash flows from investing activities (9,910,628) (4,045,829)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of financing costs (328,889) -
Principal payments on long-term debt (26,829,054) (16,452,218)
Principal payments on capital lease obligations (86,311) (66,936)
Proceeds from exercise of stock options - 15,740
Decrease in restricted cash 27,065,000 -
------------ ------------
Net cash flows from financing activities (179,254) (16,503,414)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 40,351,993 29,241,496
CASH AND CASH EQUIVALENTS, Beginning of period 33,276,181 39,405,382
------------ ------------
CASH AND CASH EQUIVALENTS, End of period $ 73,628,174 $ 68,646,878
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid (refunded) during the period for:
Interest $ 13,625,515 $ 10,649,317
Income taxes (3,961,422) (126,192)
Noncash investing and financing activities:
Acquisition of TheCampusHub.com, Inc.
through issuance of common stock $ - $ 9,722,683
Property acquired through capital lease 643,718 -
Accumulated other comprehensive income (loss):
Unrealized gains on interest rate swap agreements,
net of income taxes - 418,631
Deferred taxes resulting from accumulated
other comprehensive income (loss) - 256,145
Tax benefit on exercise of stock options - 10,000
See notes to consolidated financial statements.
5
NBC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- ------------------------------------------------------------------------------
1. BASIS OF PRESENTATION - The consolidated balance sheet of NBC Acquisition
Corp. (the "Company") and its wholly-owned subsidiary, Nebraska Book
Company, Inc. ("NBC"), at March 31, 2004 was derived from the Company's
audited consolidated balance sheet as of that date. All other consolidated
financial statements contained herein are unaudited and reflect all
adjustments which are, in the opinion of management, necessary to
summarize fairly the financial position of the Company and the results of
the Company's operations and cash flows for the periods presented. All of
these adjustments are of a normal recurring nature. 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, including NBC, except where otherwise indicated. The
Company does not conduct significant activities apart from its investment
in NBC. Operational matters discussed in this report, including the
acquisition of college bookstores and other related businesses, refer to
operations of NBC.
On March 4, 2004, Weston Presidio gained controlling interest in the
Company 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 the Company in the form of a capital contribution; (iii) Weston
Presidio's purchase of 36,455 shares of the Company's common stock directly
from its holders; (iv) the cancellation of 870,285 shares of the Company's
common stock upon payment by the Company of merger consideration of $180.4
million to the shareholders of record for such shares; (v) the exchange of
397,711 shares of the Company's common stock for 512,799 shares of New NBC
Acquisition Corp. capital stock in the merger of the two entities with the
Company as the surviving entity; and (vi) the exchange of 512,799 shares of
the Company's common stock by Weston Presidio and current and former
members of NBC 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 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 the
Company and NBC as of the date of the transaction. The March 4, 2004
Transaction was accounted for 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 the Company. The remaining 3.1% is accounted for at the
continuing stockholders' (current and former members of NBC management)
carryover basis in the Company. 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. Fair value was determined in part
using an independent third-party appraisal.
6
The following unaudited pro forma financial information for the quarter and
six months ended September 30, 2003 was prepared as if the March 4, 2004
Transaction had occurred on April 1, 2003.
Predecessor
-----------------------------------
Quarter Ended Six Months Ended
September 30, September 30,
2003 2003
---------------- ------------------
Revenues, net of returns $ 172,693,104 $ 227,454,287
Net income 16,163,789 9,299,711
Earnings (loss) per share:
Basic 29.43 16.93
Diluted 28.86 16.59
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. 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.
7
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 Successor Predecessor
-------------- -------------- ------------- --------------
Quarter Ended September 30, Six Months Ended September 30,
2004 2003 2004 2003
-------------- -------------- ------------- --------------
Net income, as reported $ 16,237,290 $ 18,462,160 $ 9,112,650 $ 14,214,638
Add: Stock-based employee compensation expense
included in reported net income, 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 - (37,563) - (48,890)
-------------- -------------- ------------- --------------
Pro forma net income $ 16,237,290 $ 18,424,597 $ 9,112,650 $ 14,165,748
============== ============== ============= ==============
Earnings (loss) per share:
Basic - as reported $ 29.56 $ 14.15 $ 16.59 $ 11.07
Basic - pro forma 29.56 14.12 16.59 11.03
Diluted - as reported 28.95 13.89 16.25 10.85
Diluted - pro forma 28.95 13.65 16.25 10.66
Stock options outstanding at September 30, 2004, which were granted in
conjunction with the March 4, 2004 Transaction, were fully vested at the
date of grant.
3. EARNINGS PER SHARE - Basic earnings per share data are based on the
weighted-average number of common shares outstanding during the period.
Diluted earnings per share data are based on the weighted-average number of
common shares outstanding and the dilutive effect of potential common
shares including stock options, if any. For purposes of calculating basic
and diluted earnings per share, weighted-average common shares outstanding
for the quarters and six months ended September 30, 2004 and 2003 were as
follows:
Successor Predecessor Successor Predecessor
-------------- -------------- ------------- ----------------
Quarter Ended September 30, Six Months Ended September 30,
2004 2003 2004 2003
-------------- -------------- ------------- ----------------
Basic Earnings Per Share:
Weighted-average common shares
outstanding 549,254 1,304,451 549,254 1,284,535
Diluted Earnings Per Share:
Weighted-average common shares
outstanding 560,800 1,329,106 560,940 1,310,124
Incremental shares attributable to
stock options 11,546 24,655 11,686 25,589
Stock options outstanding 49,778 92,575 49,778 92,575
8
4. INVENTORIES - Inventories are summarized as follows:
Successor Predecessor
----------------------------- --------------
September 30, March 31, September 30,
2004 2004 2003
-------------- -------------- --------------
Textbook Division $ 21,798,755 $ 31,247,606 $ 18,835,890
Bookstore Division 48,681,178 35,313,780 41,051,629
Complementary Services Division 3,418,324 3,577,836 8,801,858
-------------- -------------- --------------
$ 73,898,257 $ 70,139,222 $ 68,689,377
============== ============== ==============
5. 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 six months ended September 30, 2004 and 2003 and the year
ended March 31, 2004. 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 2,721 - - 2,721
Acquisition of TheCampusHub.com, Inc. - 3,604,375 - 3,604,375
-------------- -------------- --------------- --------------
Balance, September 30, 2003 (Predecessor) $ 13,704,970 $ 3,604,375 $ 16,770,574 $ 34,079,919
============== ============== =============== ==============
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 - - 15,355 15,355
Bookstore acquisitions 2,970,258 - - 2,970,258
-------------- -------------- --------------- --------------
Balance, September 30, 2004 (Successor) $ 4,502,518 $ - $ 267,130,026 $ 271,632,544
============== ============== =============== ==============
9
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 September 30, 2004, March 31, 2004, and September
30, 2003:
September 30, 2004 (Successor)
---------------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
----------------- ---------------- ----------------
Customer relationships $ 114,830,000 $ (3,348,820) $ 111,481,180
Developed technology 11,473,750 (1,115,155) 10,358,595
Covenants not to compete 1,417,333 (362,216) 1,055,117
----------------- ---------------- ----------------
$ 127,721,083 $ (4,826,191) $ 122,894,892
================= ================ ================
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
================= ================ ================
September 30, 2003 (Predecessor)
---------------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
----------------- ---------------- ----------------
Developed technology $ 2,916,610 $ (1,194,594) $ 1,722,016
Covenants not to compete 647,333 (515,786) 131,547
----------------- ---------------- ----------------
$ 3,563,943 $ (1,710,380) $ 1,853,563
================= ================ ================
Information regarding aggregate amortization expense for the quarter and
six months ended September 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
----------------
Quarter ended September 30, 2004 (Successor) $ 2,014,476
Quarter ended September 30, 2003 (Predecessor) 388,012
Six months ended September 30, 2004 (Successor) 4,018,740
Six months ended September 30, 2003 (Predecessor) 545,210
Estimated amortization expense for the
fiscal years ending March 31:
2005 $ 8,042,000
2006 7,990,000
2007 7,976,000
2008 7,688,000
2009 7,681,000
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.
10
6. LONG-TERM DEBT - Indebtedness at September 30, 2004 includes an amended
and restated bank-administered senior credit facility (the "Senior Credit
Facility") provided to NBC 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") issued by NBC; $77.0 million of 11.0% senior discount notes (the
"Senior Discount Notes") issued at a discount of $27.0 million, and
capital leases. The Revolving Credit Facility expires on March 4, 2009.
Availability under the Revolving Credit Facility, which was unused at
September 30, 2004 and 2003 and March 31, 2004, is determined by the
calculation of a borrowing base, which at any time is equal to a
percentage of eligible accounts receivable and inventory, up to a maximum
of $50.0 million. The calculated borrowing base at September 30, 2004 was
$50.0 million.
The interest rate on the Senior Credit Facility is Prime plus an applicable
margin of up to 1.75% or, on Eurodollar borrowings, the Eurodollar rate
plus an applicable margin of up to 2.75%. Additionally, there is a 0.5%
commitment fee for the average daily unused amount of the Revolving Credit
Facility.
The Senior Credit Facility stipulates that excess cash flows as defined in
the credit agreement dated February 13, 1998 (the "Credit Agreement"), as
most recently amended on October 20, 2004 and most recently 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. The Senior Discount Notes, which mature on March 15, 2013,
accrete in value at the rate of 11.0% compounded semi-annually through
March 15, 2008, with semi-annual cash interest payments commencing
September 15, 2008.
In conjunction with the March 4, 2004 Transaction, certain of the notes
under the former 8.75% senior subordinated notes and the 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, including payment of interest and call premiums, was
funded through $27.1 million of restricted cash held in escrow.
Effective October 20, 2004, the Credit Agreement was amended, primarily to
provide for a temporary incremental revolving credit facility, to increase
the allowable aggregate principal amount of outstanding capital lease
obligations to $10.0 million, and to exclude certain acquisitions from the
$15.0 million annual acquisition limitation. The incremental revolving
credit facility effectively increases amounts available under the Revolving
Credit Facility by $10.0 million for the period from October 20, 2004
through June 30, 2005. These changes were made in connection with the
October, 2004 acquisitions of bookstore locations in Normal, Illinois and
Tallahassee, Florida, whose combined annual gross revenues exceeded $20
million. The Credit Agreement was also previously amended on August 6, 2004
to reduce the applicable margin, as defined in the Credit Agreement, on the
Term Loan by up to .50% depending on the ratings assigned to the Term Loan
by Standard & Poor's Ratings Group and Moody's Investors Services.
7. 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 NBC's Senior
Credit Facility, exposure to interest rate fluctuations is managed by
maintaining fixed interest rate debt (primarily the Senior Subordinated
Notes and Senior Discount 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. NBC had
separate five-year amortizing interest rate swap agreements with two
11
financial institutions whereby NBC'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:
Successor Predecessor
----------------------------- ---------------
September 30, March 31, September 30,
2004 2004 2003
-------------- -------------- ---------------
Total indebtedness outstanding $ 410,586,693 $434,097,508 $ 202,856,102
Term debt subject to Eurodollar fluctuations 179,100,000 180,000,000 14,007,570
Fixed interest rate indebtedness 231,486,693 254,097,508 188,848,532
Variable interest rate, including applicable margin:
Term Debt - Term Loan 4.67% 3.84% -
Term Debt - Tranche A Loans - - 2.63%
Term Debt - Tranche B Loans - - 3.68%
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 NBC'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 NBC's term debt.
NBC 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, interest rate swap agreements are reflected at fair
value in the balance sheet and the related gains or losses on these
agreements are generally recorded in stockholders' equity, net of
applicable income taxes (as "accumulated other comprehensive income
(loss)"). Gains or losses recorded in accumulated other comprehensive
income (loss) are reclassified into earnings as an adjustment to interest
expense in the same periods in which the related interest payments being
hedged are recognized in earnings. 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.
As a result of a $10.0 million optional prepayment of term debt on March
29, 2002, notional amounts under the interest rate swap agreements no
longer correlated with remaining principal balances due under the term
debt. The difference between the notional amounts under the interest rate
swap agreements and the remaining principal balances due under the term
debt represented the portion of the agreements that no longer qualified for
hedge accounting. The fair value of the interest rate swap agreements on
March 29, 2002 was allocated between the portion of the agreements that no
longer qualified for hedge accounting and the portion of the agreements
that were redesignated as hedging instruments on the remaining amounts due
under the term debt. The fair value allocated to the portion of the
interest rate swap agreements that no longer qualified for hedge accounting
was immediately recognized in the Company's consolidated results of
operations as a loss on derivative financial instruments. Changes in the
12
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 periods then ended:
Predecessor
---------------
September 30,
2003
---------------
Increase in fair value of swap
agreements designated as hedges $ 675,806
Year-to-date interest income recorded
due to hedge ineffectiveness 1,030
Quarterly interest expense recorded
due to hedge ineffectiveness (14,275)
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.
8. 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 120 college bookstores as of September 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.
13
The following table provides selected information about profit or loss on a
segment basis for the quarters and six months ended September 30, 2004 and
2003, respectively:
Complementary
Textbook Bookstore Services
Division Division Division Total
------------ -------------- --------------- ---------------
Quarter ended September 30, 2004 (Successor):
External customer revenues $46,369,389 $118,563,442 $ 9,296,775 $174,229,606
Intersegment revenues 8,847,690 552,711 828,084 10,228,485
Depreciation and amortization expense 1,502,501 881,933 693,453 3,077,887
Earnings before interest, taxes,
depreciation and amortization (EBITDA) 17,295,349 20,515,051 580,080 38,390,480
Quarter ended September 30, 2003 (Predecessor):
External customer revenues $47,907,042 $110,270,265 $14,515,797 $172,693,104
Intersegment revenues 7,989,478 353,247 540,509 8,883,234
Depreciation and amortization expense 213,684 516,343 427,481 1,157,508
Earnings before interest, taxes,
depreciation and amortization (EBITDA) 18,481,067 18,135,558 1,195,581 37,812,206
Six months ended September 30, 2004 (Successor):
External customer revenues $65,457,002 $142,486,218 $18,581,731 $226,524,951
Intersegment revenues 15,316,054 765,201 1,481,510 17,562,765
Depreciation and amortization expense 2,998,703 1,694,239 1,383,622 6,076,564
Earnings before interest, taxes,
depreciation and amortization (EBITDA) 21,984,846 17,993,755 1,349,765 41,328,366
Six months ended September 30, 2003 (Predecessor):
External customer revenues $67,589,160 $132,270,953 $27,594,174 $227,454,287
Intersegment revenues 13,336,510 605,815 908,280 14,850,605
Depreciation and amortization expense 424,946 1,021,998 586,821 2,033,765
Earnings before interest, taxes,
depreciation and amortization (EBITDA) 23,132,782 15,767,042 2,311,986 41,211,810
The following table reconciles segment information presented above with
information as presented in the consolidated financial statements for the
quarters and six months ended September 30, 2004 and 2003, respectively:
Successor Predecessor Successor Predecessor
--------------- --------------- --------------- --------------
Quarter Ended September 30, Six Months Ended September 30,
2004 2003 2004 2003
--------------- --------------- --------------- --------------
Revenues:
Total for reportable segments $184,458,091 $181,576,338 $244,087,716 $242,304,892
Elimination of intersegment revenues (10,228,485) (8,883,234) (17,562,765) (14,850,605)
--------------- --------------- --------------- --------------
Consolidated total $174,229,606 $172,693,104 $226,524,951 $227,454,287
=============== =============== =============== ==============
Depreciation and Amortization Expense:
Total for reportable segments $ 3,077,887 $ 1,157,508 $ 6,076,564 $ 2,033,765
Corporate administration 58,069 43,260 114,844 80,627
--------------- --------------- --------------- --------------
Consolidated total $ 3,135,956 $ 1,200,768 $ 6,191,408 $ 2,114,392
=============== =============== =============== ==============
Income Before Income Taxes:
Total EBITDA for reportable segments $ 38,390,480 $ 37,812,206 $ 41,328,366 $ 41,211,810
Corporate administrative costs (288,801) (515,615) (4,481,439) (4,285,167)
--------------- --------------- --------------- --------------
38,101,679 37,296,591 36,846,927 36,926,643
Depreciation and amortization (3,135,956) (1,200,768) (6,191,408) (2,114,392)
--------------- --------------- --------------- --------------
Consolidated income from operations 34,965,723 36,095,823 30,655,519 34,812,251
Interest and other expenses, net (7,599,462) (5,278,196) (15,164,359) (10,912,150)
--------------- --------------- --------------- --------------
Consolidated income before income taxes $ 27,366,261 $ 30,817,627 $ 15,491,160 $ 23,900,101
=============== =============== =============== ==============
14
EBITDA is defined as earnings before interest, taxes, depreciation, and
amortization. As the Company is highly-leveraged and as the Company's
equity is not publicly-traded, management believes that EBITDA is useful in
measuring its liquidity and provides additional information for determining
its ability to meet debt service requirements. The Senior Subordinated
Notes, Senior Discount 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 Successor Predecessor
--------------- --------------- --------------- ----------------
Quarter ended September 30, Six Months ended September 30,
2004 2003 2004 2003
--------------- --------------- --------------- ----------------
EBITDA $ 38,101,679 $ 37,296,591 $ 36,846,927 $ 36,926,643
Adjustments to reconcile EBITDA to
net cash flows from operating activities:
Interest income 133,496 102,963 133,496 111,721
Provision for losses on accounts receivable 31,179 47,168 14,674 54,235
Cash paid for interest (10,319,943) (9,758,333) (13,625,515) (10,649,317)
Cash (paid) refunded for income taxes (102,869) 528,985 3,961,422 126,192
Loss on disposal of assets 15,546 258,693 15,546 264,932
Other 10,802 - - -
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals (1) 52,384,651 53,171,512 23,095,325 22,956,333
--------------- --------------- --------------- ----------------
Net Cash Flows from Operating Activities $ 80,254,541 $ 81,647,579 $ 50,441,875 $ 49,790,739
=============== =============== =============== ================
Net Cash Flows from Investing Activities $ (3,316,406) $ (2,084,914) $ (9,910,628) $ (4,045,829)
=============== =============== =============== ================
Net Cash Flows from Financing Activities $ (9,025,530) $(17,371,041) $ (179,254) $ (16,503,414)
=============== =============== =============== ================
(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.
9. ACCOUNTING PRONOUNCEMENTS - In March, 2004 the Financial Accounting
Standards Board ("FASB") issued an exposure draft, SHARE-BASED PAYMENT, AN
AMENDMENT OF FASB STATEMENTS NO. 123 AND 95. If finalized as drafted, the
Company will be required to record compensation costs based on the fair
value of the awards granted to employees. Although stock options granted
and outstanding at September 30, 2004 were fully-vested and thus would not
be impacted by this proposed standard, future grants of stock options would
likely result in the recording of compensation costs.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE SUMMARY
OVERVIEW
ACQUISITIONS. We completed the acquisition, initiated the
contract-management, or established the start-up of seven bookstore locations in
the first six months of fiscal 2005: two locations in Jacksonville, Florida; and
single locations in Ypsilanti, Michigan; Alma, Michigan; Starkville,
Mississippi; Glendale, Arizona; and Pullman, Washington. Subsequent to September
30, 2004, we acquired bookstore operations in Tallahassee, Florida, Normal,
Illinois, and Morehead, Kentucky. Our ability to make acquisition expenditures
is subject to certain restrictions under the Senior Credit Facility. Effective
October 20, 2004, the Credit Agreement was amended, primarily to provide for a
temporary incremental revolving credit facility, to increase the allowable
aggregate principal amount of outstanding capital lease obligations to $10.0
million, and to exclude certain acquisitions from the $15.0 million annual
acquisition limitation. The incremental revolving credit facility effectively
increases amounts available under the Revolving Credit Facility by $10.0 million
for the period from October 20, 2004 through June 30, 2005. These changes were
made in connection with the October, 2004 acquisitions of the bookstore
locations in Normal, Illinois and Tallahassee, Florida, whose combined annual
gross revenues exceeded $20 million. We believe that there continue to be
attractive opportunities for us to expand our chain of bookstores across the
country.
REVENUE RESULTS. Consolidated revenues for the quarter ended September 30,
2004 increased $1.5 million, or 0.9% from the quarter ended September 30, 2003.
Increased revenues attributable to the addition of 16 new college bookstores
through acquisition or start-up since April 1, 2003 were partially offset by
decreases attributable to declining external customer revenues in the Textbook
Division and the loss of the distance education program's largest customer.
EBITDA RESULTS. Consolidated EBITDA for the quarter ended September 30,
2004 increased $0.8 million, or 2.2% from the quarter ended September 30, 2003.
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 Management's Discussion & Analysis. EBITDA growth in the Bookstore
Division attributable in part to the new bookstores acquired or started up since
April 1, 2003 was partially offset by the decline in Complementary Services
Division revenues and a decline in Textbook Division revenues and gross margin
percentages.
CAPITAL EXPENDITURES. Capital expenditures for the six months ended
September 30, 2004 have increased over the six months ended September 30, 2003.
This increase is attributable to a number of college bookstore renovations which
we have undertaken to repair, maintain, modernize, or restructure certain
bookstore locations; as well as a project to expand the Textbook Division
Nebraska warehouse which added approximately 8,500 square feet of space and
mechanized the warehouse receiving process.
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 and alternative
sources of textbooks, 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 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.
16
QUARTER ENDED SEPTEMBER 30, 2004 COMPARED
WITH QUARTER ENDED SEPTEMBER 30, 2003.
REVENUES. Revenues for the quarters ended September 30, 2004 and 2003 and
the corresponding change in revenues were as follows:
Successor Predecessor Change
---------------- --------------- ---------------------------
2004 2003 Amount Percentage
---------------- --------------- ------------- -------------
Textbook Division $ 55,217,079 $ 55,896,520 $ (679,441) (1.2)%
Bookstore Division 119,116,153 110,623,512 8,492,641 7.7 %
Complementary Services Division 10,124,859 15,056,306 (4,931,447) (32.8)%
Intercompany eliminations (10,228,485) (8,883,234) (1,345,251) 15.1 %
---------------- --------------- ------------- -------------
$ 174,229,606 $ 172,693,104 $ 1,536,502 0.9 %
=============== =============== ============= =============
Textbook Division revenues were down 1.2% due to a decline in units sold,
offset in part by price increases. 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 bookstores through acquisition or start-up since April 1, 2003.
The new bookstores provided an additional $8.4 million of revenue in the quarter
ended September 30, 2004. Same store sales were relatively unchanged from the
quarter ended September 30, 2003 as a slight increase in sales of used textbooks
was offset by a slight decrease in sales of new textbooks and declines in sales
of clothing and insignia wear and supplies. Complementary Services Division
revenues decreased primarily due to the decision by the distance education
program's largest customer to gradually discontinue the use of our services for
delivery of education materials. 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 September 30, 2004
increased $0.5 million, or 0.8%, to $65.1 million from $64.6 million for the
quarter ended September 30, 2003. The increase in gross profit was primarily
attributable to the slight increase in revenues for the period. Gross margin
percentage was relatively stable at approximately 37.4% for the quarters ended
September 30, 2004 and 2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the quarter ended September 30, 2004 decreased $0.3
million, or 0.9%, to $27.0 million from $27.3 million for the quarter ended
September 30, 2003. Selling, general and administrative expenses as a percentage
of revenues were 15.5% and 15.8% for the quarters ended September 30, 2004 and
2003, respectively. Higher expenses in the quarter ended September 30, 2003 is
primarily attributable to a $0.2 million loss on abandonment of leasehold
improvements incurred upon moving one college bookstore location and also due to
focused attention in the current period towards expense reductions.
EARNINGS (LOSS) BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION
(EBITDA). EBITDA for the quarters ended September 30, 2004 and 2003 and the
corresponding change in EBITDA were as follows:
Successor Predecessor Change
---------------- ---------------- ---------------------------
2004 2003 Amount Percentage
---------------- ---------------- --------------- -----------
Textbook Division $ 17,295,349 $ 18,481,067 $ (1,185,718) (6.4)%
Bookstore Division 20,515,051 18,135,558 2,379,493 13.1 %
Complementary Services Division 580,080 1,195,581 (615,501) (51.5)%
Corporate administration (288,801) (515,615) 226,814 44.0 %
----------------- --------------- --------------- -----------
$ 38,101,679 $ 37,296,591 $ 805,088 2.2 %
================= =============== =============== ===========
The decrease in EBITDA in the Textbook Division was primarily attributable
to the decrease in revenues accompanied by a decline in used textbook margin
percentages. The increase in Bookstore Division EBITDA was primarily due to the
previously described growth in revenues combined with slightly higher gross
margin percentages. The decrease in EBITDA in the Complementary Services
Division was primarily due to a decrease in the distance education program
revenues as previously discussed, in part offset by a corresponding decrease in
selling, general, and administrative expenses.
17
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, Senior Discount
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.
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 September 30,
2004 2003
-------------- ---------------
EBITDA $ 38,101,679 $ 37,296,591
Adjustments to reconcile EBITDA to net cash
flows from operating activities:
Interest income 133,496 102,963
Provision for losses on accounts receivable 31,179 47,168
Cash paid for interest (10,319,943) (9,758,333)
Cash (paid) refunded for income taxes (102,869) 528,985
Loss on disposal of assets 15,546 258,693
Other 10,802 -
Changes in operating assets and liabilities,
net of effect of acquisitions/disposits (1) 52,384,651 53,171,512
-------------- ---------------
Net Cash Flows from Operating Activities $ 80,254,541 $ 81,647,579
============== ===============
Net Cash Flows from Investing Activities $ (3,316,406) $ (2,084,914)
============== ===============
Net Cash Flows from Financing Activities $ (9,025,530) $(17,371,041)
============== ===============
(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 September
30, 2004 increased $0.3 million, or 38.1%, to $1.1 million from $0.8 million for
the quarter ended September 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 September
30, 2004 increased $1.6 million to $2.0 million from $0.4 million for the
quarter ended September 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
September 30, 2004 increased $2.3 million, or 42.4%, to $7.6 million from $5.3
million for the quarter ended September 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 September 30, 2004 was $410.6
million compared to $202.9 million at September 30, 2003.
INCOME TAXES. Income tax expense for the quarter ended September 30, 2004
decreased $1.3 million, or 9.9%, to $11.1 million from $12.4 million for the
quarter ended September 30, 2003. Our effective tax rate for the quarters ended
September 30, 2004 and 2003 was 40.7% and 40.1%, 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.
18
SIX MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH
SIX MONTHS ENDED SEPTEMBER 30, 2003.
REVENUES. Revenues for the six months ended September 30, 2004 and 2003 and
the corresponding change in revenues were as follows:
Successor Predecessor Change
--------------- --------------- --------------------------
2004 2003 Amount Percentage
--------------- --------------- ------------- ------------
Textbook Division $ 80,773,056 $ 80,925,670 $ (152,614) (0.2)%
Bookstore Division 143,251,419 132,876,768 10,374,651 7.8 %
Complementary Services Division 20,063,241 28,502,454 (8,439,213) (29.6)%
Intercompany eliminations (17,562,765) (14,850,605) (2,712,160) 18.3 %
--------------- --------------- ------------- ------------
$ 226,524,951 $ 227,454,287 $ (929,336) (0.4)%
=============== =============== ============= ============
Textbook Division revenues were about even with the same period in the
prior year, although units sold are down for the six months ended September 30,
2004 compared to September 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 bookstores through acquisition or start-up since April 1, 2003.
The new bookstores provided an additional $11.3 million of revenue in the six
months ended September 30, 2004. This increase was offset by a decrease in same
store sales of 0.6%, or $0.8 million, as a slight increase in sales of used
textbooks was entirely offset by a slight decrease in sales of new textbooks and
declines in sales of clothing and insignia wear and supplies. Complementary
Services Division revenues decreased primarily due to the decision by the
distance education program's largest customer to gradually discontinue the use
of our services for delivery of education materials. Corresponding to the
overall growth in the number of company-owned college bookstores, our
intercompany transactions also increased.
GROSS PROFIT. Gross profit for the six months ended September 30, 2004
decreased $0.4 million, or 0.5%, to $85.9 million from $86.3 million for the six
months ended September 30, 2003. Gross margin percentage was relatively stable
at approximately 38.0% for the six months ended September 30, 2004 and 2003. The
decrease in gross profit was primarily attributable to the previously described
decrease in revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the six months ended September 30, 2004 decreased
$0.3 million, or 0.7%, to $49.1 million from $49.4 million for the six months
ended September 30, 2003. Selling, general and administrative expenses as a
percentage of revenues were 21.7% for both the six months ended September 30,
2004 and 2003. Higher expenses in the six months ended September 30, 2003 is
primarily attributable to a $0.2 million loss on abandonment of leasehold
improvements incurred upon moving one college bookstore location and also due to
focused attention in the current period towards expense reductions.
EARNINGS (LOSS) BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION
(EBITDA). EBITDA for the six months ended September 30, 2004 and 2003 and the
corresponding change in EBITDA were as follows:
Successor Predecessor Change
--------------- -------------- ---------------------------
2004 2003 Amount Percentage
--------------- -------------- -------------- ------------
Textbook Division $ 21,984,846 $ 23,132,782 $ (1,147,936) (5.0)%
Bookstore Division 17,993,755 15,767,042 2,226,713 14.1 %
Complementary Services Division 1,349,765 2,311,986 (962,221) (41.6)%
Corporate administration (4,481,439) (4,285,167) (196,272) (4.6)%
--------------- -------------- -------------- ------------
$ 36,846,927 $ 36,926,643 $ (79,716) (0.2)%
=============== ============== ============== ============
The decrease in EBITDA in the Textbook Division was primarily attributable
to a declining gross margin percentage attributable in part to increased costs
associated with the Textbook Division's incentive programs. The increase in
Bookstore Division EBITDA was primarily due to revenue growth resulting from the
addition of new bookstores and continued improvement in gross margin
percentages. The decrease in EBITDA in the Complementary Services Division was
primarily due to a decrease in the distance education program revenues as
previously discussed and a decrease in the system sales division revenues.
19
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, Senior Discount
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.
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
--------------- ---------------
Six Months ended September 30,
2004 2003
--------------- ---------------
EBITDA $ 36,846,927 $ 36,926,643
Adjustments to reconcile EBITDA to net
cash flows from operating activities:
Interest income 133,496 111,721
Provision for losses on accounts receivable 14,674 54,235
Cash paid for interest (13,625,515) (10,649,317)
Cash refunded for income taxes 3,961,422 126,192
Loss on disposal of assets 15,546 264,932
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals (1) 23,095,325 22,956,333
--------------- ---------------
Net Cash Flows from Operating Activities $ 50,441,875 $ 49,790,739
=============== ===============
Net Cash Flows from Investing Activities $ (9,910,628) $ (4,045,829)
=============== ===============
Net Cash Flows from Financing Activities $ (179,254) $(16,503,414)
=============== ===============
(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 six months ended
September 30, 2004 increased $0.6 million, or 38.6%, to $2.2 million from $1.6
million for the six months ended September 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 six months ended
September 30, 2004 increased $3.5 million to $4.0 million from $0.5 million for
the six months ended September 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 six months ended
September 30, 2004 increased $4.2 million, or 38.2%, to $15.2 million from $11.0
million for the six months ended September 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 September 30, 2004 was $410.6
million compared to $202.9 million at September 30, 2003.
INCOME TAXES. Income tax expense for the six months ended September 30,
2004 decreased $3.3 million, or 34.1%, to $6.4 million from $9.7 million for the
six months ended September 30, 2003. Our effective tax rate for the six months
ended September 30, 2004 and 2003 was 41.2% and 40.5%, 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.
20
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.
21
INCOME TAXES. We account for income taxes by recording taxes payable or
refundable for the current year and deferred tax assets and liabilities for
future tax consequences of events that have been recognized in our consolidated
financial statements or consolidated income tax returns.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITIES
Our primary liquidity requirements are for debt service under the Senior
Credit Facility, the Senior Subordinated Notes, the Senior Discount 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 NBC's
Revolving Credit Facility. At September 30, 2004, our total indebtedness was
$410.6 million, consisting of a $179.1 million Term Loan, $175.0 million of
Senior Subordinated Notes, $53.2 million of Senior Discount Notes, and $3.3
million of other indebtedness, including capital lease obligations.
Principal and interest payments under the Senior Credit Facility, the
Senior Subordinated Notes, and the Senior Discount Notes represent significant
liquidity requirements for us. Under the terms of the Senior Credit Facility's
Term Loan, NBC is 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 NBC. 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 the former 8.75% senior subordinated notes and the 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,
including payment of interest and call premiums, was funded through $27.1
million of restricted cash held in escrow.
INVESTING CASH FLOWS
Our capital expenditures were $5.3 million and $1.8 million for the six
months ended September 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 $4.7 million and $2.2 million for
the six months ended September 30, 2004 and 2003, respectively. For the six
months ended September 30, 2004, single bookstore locations were acquired
serving Eastern Michigan University, Alma College, and Mississippi State
University; 2 bookstore locations were acquired serving the University of North
Florida and Florida Community College at Jacksonville; and single bookstore
location start-ups serving Washington State University and Arizona State
University-West Campus were established. For the six months ended September 30,
2003, single bookstore locations were acquired serving Western International
University, Mesa Community College, Marshall University and Wayne State College;
and 3 bookstore locations were acquired serving Michigan State University. Our
ability to make acquisition expenditures is subject to certain restrictions
under the Senior Credit Facility.
During the six months ended September 30, 2004, no bookstore locations were
closed. During the six months ended September 30, 2003, four bookstores were
either closed or the contract-managed lease was not renewed.
Subsequent to September 30, 2004, we acquired bookstore operations in
Tallahassee, Florida, Normal, Illinois, and Morehead, Kentucky. Effective
October 20, 2004, the Credit Agreement was amended, primarily to provide for a
temporary incremental revolving credit facility, to increase the allowable
aggregate principal amount of outstanding capital lease obligations to $10.0
million, and to exclude certain acquisitions from the $15.0 million annual
22
acquisition limitation. The incremental revolving credit facility effectively
increases amounts available under the Revolving Credit Facility by $10.0 million
for the period from October 20, 2004 through June 30, 2005. These changes were
made in connection with the October, 2004 acquisitions of the bookstore
locations in Normal, Illinois and Tallahassee, Florida, whose combined annual
gross revenues exceeded $20 million.
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 provided from operating activities for the six months ended
September 30, 2004 were $50.4 million, up $0.6 million from $49.8 million for
the six months ended September 30, 2003. Increases in cash paid for interest
were more than offset by a refund of fiscal 2004 estimated tax payments,
resulting in very little change in net cash flows provided from operating
activities for the periods presented.
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 NBC's ability to make loans
or advances and pay dividends, except that, among other things, NBC may pay
dividends to the Company (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 the
Company. The indenture governing the Senior Discount 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 Subordinated Notes
contains similar restrictions on the ability of NBC and its Restricted
Subsidiaries (as defined in the indenture) to pay dividends or make other
Restricted Payments (as defined in the indenture) to their respective
stockholders. These restrictions are not expected to affect our ability to meet
our cash obligations for the foreseeable future.
In accordance with such covenant restrictions, NBC declared and paid $0.1
million in dividends to the Company during the six months ended September 30,
2004 for costs associated with the March 4, 2004 Transaction. During the six
months ended September 30, 2003, NBC declared and paid a $4.1 million dividend
to the Company for interest due and payable on the former senior discount
debentures.
SOURCES OF AND NEEDS FOR CAPITAL
As of September 30, 2004, NBC could borrow up to $50.0 million under the
Revolving Credit Facility, which was unused at September 30, 2004. 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 or equity financing.
23
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following tables present aggregated information as of September 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 (3) $431,549,826 $ 1,830,469 $ 3,671,652 $ 3,688,753 $ 422,358,952
Interest on long-term debt (1) 226,130,000 24,201,000 52,330,000 67,596,000 82,003,000
Capital lease obligations 2,862,991 206,307 599,277 787,352 1,270,055
Interest on capital lease obligations 1,403,725 305,947 524,081 367,903 205,794
Operating leases 47,669,000 10,301,000 17,761,000 10,250,000 9,357,000
Unconditional purchase obligations - - - - -
-------------- -------------- -------------- -------------- ---------------
Total $709,615,542 $ 36,844,723 $ 74,886,010 $82,690,008 $ 515,194,801
============== ============== ============== ============== ===============
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) $ 50,000,000 $ - $ - $50,000,000 $ -
============== ============== ============== ============== ===============
(1) Interest on the variable rate debt is estimated based upon implied
forward rates in the yield curve at September 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.
(3) Balance includes $23,826,124 of remaining original issue discount
amortization on the Senior Discount Notes at September 30, 2004.
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 the Company'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 six months
ended September 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.
24
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.
ACCOUNTING PRONOUNCEMENTS
In March, 2004 the Financial Accounting Standards Board ("FASB") issued an
exposure draft, SHARE-BASED PAYMENT, AN AMENDMENT OF FASB STATEMENTS NO. 123 AND
95. If finalized as drafted, the Company will be required to record compensation
costs based on the fair value of the awards granted to employees. Although stock
options granted and outstanding at September 30, 2004 were fully-vested and thus
would not be impacted by this proposed standard, future grants of stock options
would likely result in the recording of compensation costs.
"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 and alternative sources of textbooks; 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 July 31, 2004, approximately 29% 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.
25
We are also experiencing growing competition from alternative media and
alternative sources of textbooks, 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 alternatives 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.
26
THE INDENTURES GOVERNING THE SENIOR SUBORDINATED NOTES AND 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 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 NBC from prepaying other indebtedness.
In addition, NBC is 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. NBC's ability to meet these
financial ratios and tests can be affected by events beyond our control, and we
cannot give assurances that NBC 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
Senior Discount Notes could elect to declare all amounts under such notes
immediately due and payable. If NBC were unable to repay its 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 the assets of NBC would be
sufficient to repay in full such indebtedness and other indebtedness, including
the Senior Subordinated Notes and 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 the Company'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.
27
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 $410.6 million in total
indebtedness outstanding at September 30, 2004, $179.1 million is subject to
fluctuations in the Eurodollar rate. As provided in the Senior Credit Facility,
exposure to interest rate fluctuations is managed by maintaining fixed interest
rate debt (primarily the Senior Subordinated Notes and Senior Discount 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. 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 September 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):
September 30, March 31,
2004 2004
-------------- -------------
Fair Values:
Fixed rate debt $ 229,942,758 $ 255,167,121
Variable rate debt (excluding Revolving Credit Facility) 179,100,000 180,000,000
Overall Weighted-Average Interest Rates:
Fixed rate debt 9.38% 9.37%
Variable rate debt (excluding Revolving Credit Facility) 6.70% 6.63%
ITEM 4. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our management, with the
participation of our Chief Executive Officer and Treasurer (our principal
executive officer and principal financial officer), evaluated the effectiveness
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of September 30, 2004. Based on this
evaluation, our Chief Executive Officer and Treasurer concluded that, as of
September 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 Treasurer 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 September 30, 2004 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of President/Chief Executive Officer pursuant to Rules
13a-15(e) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial and Accounting Officer pursuant
to Rules 13a-15(e) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of President/Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial and Accounting Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
September 30, 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 November 10, 2004.
NBC ACQUISITION CORP.
/s/ Mark W. Oppegard /s/ Alan G. Siemek
- --------------------- -------------------
Mark W. Oppegard Alan G. Siemek
President/Chief Executive Officer, Vice President and Treasurer
Secretary and Director (Principal Financial and
Accounting Officer)
29
EXHIBIT INDEX
31.1 Certification of President/Chief Executive Officer pursuant to Rules
13a-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial and Accounting Officer pursuant to
Rules 13a-15(e) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of President/Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification of Principal Financial and Accounting Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
30