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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO ______
COMMISSION FILE NUMBER: 333-48221
NEBRASKA BOOK COMPANY, INC.
(Exact name of registrant as specified in its charter)
KANSAS 47-0549819
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4700 SOUTH 19TH STREET
LINCOLN, NEBRASKA 68501-0529
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 421-7300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] NO [X]
TOTAL NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF FEBRUARY 11, 2005:
100 SHARES
TOTAL NUMBER OF PAGES: 40
EXHIBIT INDEX: PAGE 40
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------
Successor Predecessor
--------------------------- --------------
December 31, March 31, December 31,
2004 2004 2003
------------- ------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,658,451 $ 33,276,181 $ 15,423,613
Restricted cash - 27,065,000 -
Receivables 55,352,771 30,412,590 58,657,326
Inventories 100,541,115 70,139,222 90,095,729
Recoverable income taxes 5,297,294 5,351,480 3,578,415
Deferred income taxes 6,189,015 6,102,015 5,429,743
Prepaid expenses and other assets 521,917 873,167 632,471
------------- ------------- ------------
Total current assets 178,560,563 173,219,655 173,817,297
PROPERTY AND EQUIPMENT, net of depreciation & amortization 41,620,381 36,133,256 28,344,685
GOODWILL 283,072,719 268,646,931 34,079,919
IDENTIFIABLE INTANGIBLES, net of amortization 154,473,025 157,505,632 1,568,083
DEBT ISSUE COSTS, net of amortization 9,325,315 10,001,172 6,467,913
OTHER ASSETS 2,135,476 2,216,565 2,177,710
------------- ------------- ------------
$669,187,479 $647,723,211 $246,455,607
============= ============= ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 29,237,555 $ 29,300,768 $ 25,769,228
Accrued employee compensation and benefits 8,271,354 9,118,730 7,364,052
Accrued interest 6,682,875 2,041,957 3,694,265
Accrued incentives 7,272,567 6,982,304 6,528,926
Accrued expenses 130,249 1,211,448 885,367
Deferred revenue 1,193,046 898,658 886,349
Current maturities of long-term debt 1,831,295 17,238,881 778,119
Current maturities of capital lease obligations 204,267 167,433 154,507
Revolving credit facility 30,900,000 - -
------------- ------------- -------------
Total current liabilities 85,723,208 66,960,179 46,060,813
LONG-TERM DEBT, net of current maturities 352,261,217 353,634,999 184,692,511
CAPITAL LEASE OBLIGATIONS, net of current maturities 2,596,892 2,138,151 2,184,125
OTHER LONG-TERM LIABILITIES 1,050,024 317,287 313,130
DEFERRED INCOME TAXES 60,773,744 61,849,744 -
DUE TO PARENT 16,917,881 16,836,358 14,715,520
COMMITMENTS (Note 5)
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock, voting, authorized 50,000 shares
of $1.00 par value; issued and outstanding 100 shares 100 100 100
Additional paid-in capital 137,958,931 137,957,716 56,919,950
Retained earnings (accumulated deficit) 11,905,482 8,028,677 (58,430,542)
------------- ------------- -------------
Total stockholder's equity (deficit) 149,864,513 145,986,493 (1,510,492)
------------- ------------- -------------
$669,187,479 $647,723,211 $246,455,607
============= ============= =============
See notes to consolidated financial statements.
2
NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------
Successor Predecessor Successor Predecessor
-------------- -------------- -------------- --------------
Quarter Quarter Nine Months Nine Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
REVENUES, net of returns $ 53,895,023 $ 56,783,112 $280,419,974 $284,237,399
COSTS OF SALES 31,828,329 34,060,843 172,448,646 175,176,903
-------------- -------------- -------------- --------------
Gross profit 22,066,694 22,722,269 107,971,328 109,060,496
OPERATING EXPENSES:
Selling, general and administrative 23,506,715 23,568,218 72,564,422 72,979,802
Depreciation 1,229,325 824,136 3,397,729 2,389,054
Amortization 2,106,000 373,599 6,129,004 923,073
Stock-based compensation - 186,057 - 186,057
-------------- -------------- -------------- --------------
26,842,040 24,952,010 82,091,155 76,477,986
-------------- -------------- -------------- --------------
INCOME (LOSS) FROM OPERATIONS (4,775,346) (2,229,741) 25,880,173 32,582,510
-------------- -------------- -------------- --------------
OTHER EXPENSES (INCOME):
Interest expense 6,949,097 3,678,825 19,402,230 10,483,887
Interest income (211,349) (81,651) (344,845) (193,372)
Gain on derivative financial instruments - - - (57,296)
-------------- -------------- -------------- --------------
6,737,748 3,597,174 19,057,385 10,233,219
-------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES (11,513,094) (5,826,915) 6,822,788 22,349,291
INCOME TAX EXPENSE (BENEFIT) (4,496,714) (2,220,524) 2,813,517 8,815,132
-------------- -------------- -------------- --------------
NET INCOME (LOSS) $ (7,016,380) $ (3,606,391) $ 4,009,271 $ 13,534,159
============== ============== ============== ==============
See notes to consolidated financial statements.
3
NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------
Retained Accumulated
Additional Earnings Other
Common Paid-in (Accumulated Comprehensive Comprehensive
Stock Capital Deficit) Income (Loss) Total Income
-------- ------------- -------------- -------------- ------------- -------------
BALANCE, April 1, 2003 (Predecessor) $ 100 $ 46,986,333 $(33,379,701) $ (418,631) $ 13,188,101
Contributed capital - 9,933,617 - - 9,933,617 $ -
Net income - - 13,534,159 - 13,534,159 13,534,159
Dividends declared - - (38,585,000) - (38,585,000) -
Other comprehensive income,
net of taxes:
Unrealized gains on interest rate
swap agreements, net of taxes
of $256,145 - - - 418,631 418,631 418,631
-------- ------------- -------------- ------------- ------------- -------------
BALANCE, December 31, 2003 (Predecessor) $ 100 $ 56,919,950 $(58,430,542) $ - $ (1,510,492) $ 13,952,790
======== ============= ============== ============= ============= =============
BALANCE, April 1, 2004 (Successor) $ 100 $137,957,716 $ 8,028,677 $ - $145,986,493
Contributed capital - 1,215 - - 1,215 $ -
Net income - - 4,009,271 - 4,009,271 4,009,271
Dividends declared - - (132,466) - (132,466) -
-------- ------------- -------------- ------------- ------------- -------------
BALANCE, December 31, 2004 (Successor) $ 100 $137,958,931 $ 11,905,482 $ - $149,864,513 $ 4,009,271
======== ============= ============== ============= ============= =============
See notes to consolidated financial statements.
4
NEBRASKA BOOK COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
Successor Predecessor
------------- ------------
Nine Months Nine Months
Ended Ended
December 31, December 31,
2004 2003
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,009,271 $ 13,534,159
Adjustments to reconcile net income to
net cash flows from operating activities:
Provision for losses on receivables 103,651 34,429
Depreciation 3,397,729 2,389,054
Amortization 7,217,937 2,376,907
Noncash interest income from derivative financial instruments - (1,030)
Gain on derivative financial instruments - (169,863)
Loss on disposal of assets 68,014 266,861
Deferred income taxes (1,320,000) 3,532,000
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals:
Receivables (24,902,991) (28,577,261)
Inventories (27,789,004) (19,858,680)
Recoverable income taxes (230,557) (3,553,415)
Prepaid expenses and other assets 366,560 235,502
Other assets 140,192 (108,928)
Accounts payable (331,560) 5,075,762
Accrued employee compensation and benefits (931,081) (3,362,661)
Accrued interest 4,640,918 2,181,532
Accrued incentives 290,263 1,010,043
Accrued expenses (1,107,502) (195,367)
Income taxes payable - (89,932)
Deferred revenue 294,388 348,119
Other long-term liabilities (6,263) 12,307
Due to parent 81,523 2,343,674
------------- ------------
Net cash flows from operating activities (36,008,512) (22,576,788)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (6,957,004) (2,898,756)
Acquisitions, net of cash acquired (20,159,367) (2,355,487)
Proceeds from sale of property and equipment and other 12,324 8,774
Software development costs - (134,016)
------------- ------------
Net cash flows from investing activities (27,104,047) (5,379,485)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - 75,000,000
Payment of financing costs (413,076) (3,779,331)
Principal payments on long-term debt (16,781,368) (30,466,360)
Principal payments on capital lease obligations (148,143) (99,634)
Net increase in revolving credit facility 30,900,000 -
Dividends paid to parent (132,466) (36,904,000)
Decrease in restricted cash 27,065,000 -
Capital contributions 4,882 223,829
------------- ------------
Net cash flows from financing activities 40,494,829 3,974,504
------------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (22,617,730) (23,981,769)
CASH AND CASH EQUIVALENTS, Beginning of period 33,276,181 39,405,382
------------- ------------
CASH AND CASH EQUIVALENTS, End of period $ 10,658,451 $ 15,423,613
============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest $ 13,672,379 $ 6,962,118
Income taxes 4,282,551 6,607,805
Noncash investing and financing activities:
Acquisition of TheCampusHub.com, Inc. through issuance of
NBC 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
Dividends declared but unpaid - 1,681,000
See notes to consolidated financial statements.
5
NEBRASKA BOOK COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION - The consolidated balance sheet of Nebraska Book
Company, Inc. (the "Company") and its wholly-owned subsidiary, Specialty
Books, Inc., at March 31, 2004 was derived from the Company's audited
consolidated balance sheet as of that date. The Company is a wholly-owned
subsidiary of NBC Acquisition Corp. ("NBC"). All other consolidated
financial statements contained herein are unaudited and reflect all
adjustments which are, in the opinion of management, necessary to summarize
fairly the financial position of the Company and the results of the
Company's operations and cash flows for the periods presented. All of these
adjustments are of a normal recurring nature. All intercompany balances and
transactions have been eliminated in consolidation. Because of the seasonal
nature of the Company's operations, results of operations of any single
reporting period should not be considered as indicative of results for a
full year. Certain reclassifications have been made to prior period
consolidated financial statements to conform with current year presentation.
These consolidated financial statements should be read in conjunction with
the Company's audited consolidated financial statements for the year ended
March 31, 2004 included in the Company's Annual Report on Form 10-K.
References in this Quarterly Report on Form 10-Q to the terms "we," "our,"
"ours," and "us" refer collectively to the Company and its subsidiaries,
except where otherwise indicated.
On March 4, 2004, Weston Presidio gained controlling interest in NBC through
(i) the formation of two new corporations, NBC Holdings Corp. and New NBC
Acquisition Corp.; (ii) a $28.2 million equity investment by Weston Presidio
in NBC Holdings Corp., funds for which were ultimately paid to NBC in the
form of a capital contribution; (iii) Weston Presidio's purchase of 36,455
shares of NBC's common stock directly from its holders; (iv) the
cancellation of 870,285 shares of NBC's common stock upon payment by NBC of
merger consideration of $180.4 million to the shareholders of record for
such shares; (v) the exchange of 397,711 shares of NBC's common stock for
512,799 shares of New NBC Acquisition Corp. capital stock in the merger of
the two entities with NBC as the surviving entity; and (vi) the exchange of
512,799 shares of NBC's common stock by Weston Presidio and current and
former members of management for a like number of shares of NBC Holdings
Corp. capital stock. Payment of the $180.4 million of merger consideration
was funded through proceeds from the $28.2 million capital contribution,
available cash, and proceeds from $405.0 million in new debt financing, of
which $261.0 million was utilized by NBC and the Company to retire certain
debt instruments outstanding at March 4, 2004 or to place funds in escrow
for untendered debt instruments called for redemption on March 4, 2004 and
redeemed on April 3, 2004. As a result of this transaction, the Company's
results of operations, financial position and cash flow's prior to the
transaction are presented as the "Predecessor." The Company's results of
operations, financial position and cash flows thereafter are presented as
the "Successor."
We generally refer to all of the above steps and transactions that comprise
this entire transaction, collectively, as the "March 4, 2004 Transaction."
The March 4, 2004 Transaction was accounted for as a purchase at NBC
Holdings Corp. with the related purchase accounting pushed-down to NBC and
the Company as of the date of the transaction. The March 4, 2004 Transaction
was accounted for as a purchase in accordance with Statement of Financial
Accounting Standards ("SFAS") No.141, BUSINESS COMBINATIONS and Emerging
Issues Task Force ("EITF") Issue No. 88-16, BASIS IN LEVERAGED BUYOUT
TRANSACTIONS. Accordingly, the Company was revalued at the time of the March
4, 2004 Transaction to fair value to the extent of the majority
stockholder's (Weston Presidio's) 96.9% controlling interest in NBC. The
remaining 3.1% was accounted for at the continuing stockholders' (current
and former members of management) carryover basis in NBC. The excess of the
purchase price over the historical basis of the net assets acquired has been
applied to adjust net assets to their fair values to the extent of Weston
Presidio's 96.9% ownership of outstanding common stock of NBC. Fair value
was determined in part using an independent third-party appraisal.
6
The following unaudited pro forma financial information for the quarter and
nine months ended December 31, 2003 was prepared as if the March 4, 2004
Transaction had occurred on April 1, 2003.
Predecessor
-----------------------------------
Quarter Ended Nine Months Ended
December 31, December 31,
2003 2003
---------------- -----------------
Revenues, net of returns $ 56,783,112 $ 284,237,399
Net income (loss) (5,991,718) 5,296,800
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 Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO. 123. SFAS No. 148 amends
SFAS No. 123 to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements. The following table illustrates the effect on net
income (loss) if the fair-value-based method had been applied to all
outstanding and unvested awards in each period:
Successor Predecessor Successor Predecessor
-------------- ------------- ---------------- ---------------
Quarter Ended December 31, Nine Months Ended December 31,
2004 2003 2004 2003
-------------- ------------- ---------------- ---------------
Income (loss), as reported $ (7,016,380) $ (3,606,391) $ 4,009,271 $ 13,534,159
Add: Stock-based employee compensation expense
included in reported net income, net of related tax
effects - 111,634 - 111,634
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (28,564) (24,445) (28,564) (73,335)
-------------- -------------- -------------- --------------
Pro forma net income (loss) $ (7,044,944) $ (3,519,202) $ 3,980,707 $ 13,572,458
============== ============== ============== ==============
Effective November 9, 2004, options to purchase 12,611 shares of NBC
Holdings Corp. capital stock were granted to selected employees and
officers of NBC and its affiliates at an exercise price of $160, which
approximated the fair market value of such shares at the time of grant.
Stock options granted in conjunction with the March 4, 2004 Transaction
were fully vested at the date of grant.
7
In December, 2004 the FASB issued SFAS No. 123 (revised 2004), SHARE-BASED
PAYMENT. SFAS No. 123 (revised 2004) focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based
payment transactions and requires an entity to, in most cases, measure the
cost of such services based on the grant-date fair value of the award. This
Statement is a revision of SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION and supersedes APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, thereby eliminating the intrinsic value method of accounting
for stock-based compensation currently utilized by the Company. SFAS No.
123 (revised 2004) will become effective for the Company in fiscal 2007,
applying to all awards granted or modified after April 1, 2006.
3. INVENTORIES - Inventories are summarized as follows:
Successor Predecessor
------------------------------ --------------
December 31, March 31, December 31,
2004 2004 2003
--------------- -------------- --------------
Textbook Division $ 18,670,373 $ 31,247,606 $ 19,317,249
Bookstore Division 73,789,169 35,313,780 63,727,565
Complementary Services Division 8,081,573 3,577,836 7,050,915
--------------- -------------- --------------
$ 100,541,115 $ 70,139,222 $ 90,095,729
=============== ============== ==============
8
4. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLES - The following table presents
the changes in the carrying amount of goodwill, by reportable segment and
in total, for the nine months ended December 31, 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.
For the nine months ended December 31, 2004, nine bookstores locations were
acquired in seven separate transactions. The total purchase price, net of
cash acquired, of such acquisitions was $20.9 million, of which $3.1
million was assigned to covenants not to compete with amortization periods
of three to five years; and $14.4 million was assigned to goodwill, $6.2
million of which was not deductible for income tax purposes.
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, December 31, 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 14,410,433 - - 14,410,433
-------------- -------------- ---------------- ---------------
Balance, December 31, 2004 (Successor) $ 15,942,693 $ - $267,130,026 $283,072,719
============== ============== ================ ===============
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 December 31, 2004, March 31, 2004, and December
31, 2003:
December 31, 2004 (Successor)
-----------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
--------------- --------------- ---------------
Customer relationships $ 114,830,000 $ (4,784,200) $ 110,045,800
Developed technology 11,473,750 (1,593,244) 9,880,506
Covenants not to compete 3,779,333 (552,614) 3,226,719
--------------- --------------- ---------------
$ 130,083,083 $ (6,930,058) $ 123,153,025
=============== =============== ===============
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
=============== =============== ===============
December 31, 2003 (Predecessor)
----------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------------- --------------- ---------------
Developed technology $ 3,002,596 $ (1,535,590) $ 1,467,006
Covenants not to compete 647,333 (546,256) 101,077
-------------- --------------- ---------------
$ 3,649,929 $ (2,081,846) $ 1,568,083
============== =============== ===============
Information regarding aggregate amortization expense for the quarter and
nine months ended December 31, 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 December 31, 2004 (Successor) $ 2,103,867
Quarter ended December 31, 2003 (Predecessor) 371,466
Nine months ended December 31, 2004 (Successor) 6,122,607
Nine months ended December 31, 2003 (Predecessor) 916,676
Estimated amortization expense for the
fiscal years ending March 31:
2005 $ 8,250,000
2006 8,462,000
2007 8,448,000
2008 8,160,000
2009 8,153,000
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
5. LONG-TERM DEBT - Indebtedness at December 31, 2004 includes an amended and
restated bank-administered senior credit facility (the "Senior Credit
Facility") provided to the Company through a syndicate of lenders,
consisting of an $180.0 million term loan (the "Term Loan") and a $50.0
million revolving credit facility (the "Revolving Credit Facility");
$175.0 million of 8.625% senior subordinated notes (the "Senior
Subordinated Notes"), and capital leases. The Revolving Credit Facility
expires on March 4, 2009. Availability under the Revolving Credit
Facility, outstanding indebtedness under which was $30.9 million at
December 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 December 31, 2004 was $50.0 million. Borrowings under the
temporary incremental revolving credit facility described below are not
subject to the borrowing base restrictions.
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.
In conjunction with the March 4, 2004 Transaction, certain of the notes
under our former 8.75% senior subordinated notes and NBC's former 10.75%
senior discount debentures were not tendered by the holders, but were
instead called for redemption on March 4, 2004 and redeemed on April 3,
2004. Such redemption was funded through $27.1 million of restricted cash
held in escrow, of which $16.1 million related to principal, accrued
interest, and call premiums on our remaining 8.75% senior subordinated
notes and $11.0 million related to principal, accrued interest, and call
premiums on NBC's remaining 10.75% senior discount debentures.
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.
6. DERIVATIVE FINANCIAL INSTRUMENTS - The FASB has issued Statement SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as
amended by SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133;
SFAS No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN
HEDGING ACTIVITIES; and SFAS No. 149, AMENDMENT OF STATEMENT 133 ON
DERIVATIVE INSTRUMENTS AND HEDGING Activities. This standard requires that
all derivative instruments be recorded in the balance sheet at fair value.
Changes in the fair value of derivatives are recorded in earnings or other
comprehensive income (loss), based on whether the instrument is designated
as part of a hedge transaction and, if so, the type of hedge transaction.
In the past, the Company has utilized derivative financial instruments
primarily to manage the risk that changes in interest rates will affect
the amount of its future interest payments on its variable rate debt and
adopted SFAS No. 133 effective April 1, 2001.
The Company's primary market risk exposure is, and is expected to continue
to be, fluctuation in variable interest rates. As provided in the Company's
Senior Credit Facility, exposure to interest rate fluctuations is managed
by maintaining fixed interest rate debt (primarily the Senior Subordinated
Notes) and, in the past, by entering into interest rate swap agreements
that qualify as cash flow hedging instruments to convert certain variable
rate debt into fixed rate debt. The Company had separate five-year
amortizing interest rate swap agreements with two financial institutions
whereby the Company's variable rate term debt was converted into debt with
a fixed rate of 5.815% plus an applicable margin (as defined in the
then-existing credit agreement). Such agreements expired on July 31, 2003.
Notional amounts under the agreements were reduced periodically by amounts
equal to the originally-scheduled principal payments on the term debt.
11
General information regarding the Company's exposure to fluctuations in
variable interest rates is presented in the following table:
Successor Predecessor
------------------------------- ---------------
December 31, March 31, December 31,
2004 2004 2003
--------------- --------------- ---------------
Total indebtedness outstanding $ 387,793,671 $373,179,464 $ 187,809,262
Term debt subject to Eurodollar fluctuations 178,650,000 180,000,000 75,000,000
Revolving credit facility subject to Prime rate fluctuations 30,900,000 - -
Fixed interest rate indebtedness 178,243,671 193,179,464 112,809,262
Variable interest rate, including applicable margin:
Term Debt - Term Loan 4.67% 3.84% 3.88%
Revolving Credit Facility 7.00% - -
The interest rate swap agreements qualified as cash flow hedge instruments
as the following criteria were met:
(1) Formal documentation of the hedging relationship and the Company's
risk management objective and strategy for undertaking the hedge
occurred at the inception of the agreements.
(2) The interest rate swap agreements were expected to be highly
effective in offsetting the change in the value of the interest
payments attributable to the Company's term debt.
The Company estimated the effectiveness of the interest rate swap
agreements utilizing the hypothetical derivative method. Under this method,
the fair value of the actual interest rate swap agreements was compared to
the fair value of hypothetical swap agreements that had the same critical
terms as the term debt, including notional amounts and repricing dates. To
the extent that the agreements were not considered to be highly effective
in offsetting the change in the value of the interest payments being
hedged, the fair value relating to the ineffective portion of such
agreements and any subsequent changes in such fair value were immediately
recognized in earnings as "gain or loss on derivative financial
instruments". To the extent that the agreements were considered highly
effective but not completely effective in offsetting the change in the
value of the interest payments being hedged, any changes in fair value
relating to the ineffective portion of such agreements were immediately
recognized in earnings as interest expense.
Under hedge accounting, 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 stockholder's 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
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.
12
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
---------------
December 31,
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 income recorded due to hedge ineffectiveness -
Changes in the fair value of the interest rate swap agreements are
reflected in the consolidated statements of cash flows as either "noncash
interest income from derivative financial instruments", "gain on derivative
financial instruments", or as noncash investing and financing activities.
7. SEGMENT INFORMATION - The Company's operating segments are determined
based on the way that management organizes the segments for making
operating decisions and assessing performance. Management has organized
the Company's segments based upon differences in products and services
provided. The Company has three reportable segments: Textbook Division,
Bookstore Division, and Complementary Services Division. The Textbook
Division segment consists primarily of selling used textbooks to college
bookstores, buying them back from students or college bookstores at the
end of each college semester and then reselling them to college
bookstores. The Bookstore Division segment encompasses the operating
activities of the Company's 124 college bookstores as of December 31, 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 nine months ended December 31, 2004 and
2003, respectively:
Complementary
Textbook Bookstore Services
Division Division Division Total
------------- ---------------- -------------- --------------
Quarter ended December 31, 2004 (Successor):
External customer revenues $27,330,632 $ 20,704,487 $ 5,859,904 $ 53,895,023
Intersegment revenues 6,908,087 356,129 882,395 8,146,611
Depreciation and amortization expense 1,501,002 1,100,091 682,420 3,283,513
Earnings (loss) before interest, taxes,
depreciation and amortization (EBITDA) 5,187,612 (1,885,399) 158,746 3,460,959
Quarter ended December 31, 2003 (Predecessor):
External customer revenues $25,373,656 $ 19,284,401 $12,125,055 $ 56,783,112
Intersegment revenues 5,304,144 349,997 642,926 6,297,067
Depreciation and amortization expense 213,673 491,418 457,147 1,162,238
Earnings (loss) before interest, taxes,
depreciation and amortization (EBITDA) 5,206,119 (1,574,643) 252,730 3,884,206
Nine months ended December 31, 2004 (Successor):
External customer revenues $92,787,634 $ 163,190,705 $24,441,635 $ 280,419,974
Intersegment revenues 22,224,141 1,121,330 2,363,905 25,709,376
Depreciation and amortization expense 4,499,705 2,794,330 2,066,042 9,360,077
Earnings before interest, taxes,
depreciation and amortization (EBITDA) 27,172,458 16,108,356 1,508,511 44,789,325
Nine months ended December 31, 2003 (Predecessor):
External customer revenues $92,962,816 $ 151,555,354 $39,719,229 $ 284,237,399
Intersegment revenues 18,640,654 955,812 1,551,206 21,147,672
Depreciation and amortization expense 638,619 1,513,416 1,043,968 3,196,003
Earnings before interest, taxes,
depreciation and amortization (EBITDA) 28,338,901 14,192,399 2,564,716 45,096,016
The following table reconciles segment information presented above with
information as presented in the consolidated financial statements for the
quarters and nine months ended December 31, 2004 and 2003, respectively:
Successor Predecessor Successor Predecessor
--------------- --------------- --------------- ---------------
Quarter Ended December 31, Nine Months Ended December 31,
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Revenues:
Total for reportable segments $ 62,041,634 $ 63,080,179 $ 306,129,350 $ 305,385,071
Elimination of intersegment revenues (8,146,611) (6,297,067) (25,709,376) (21,147,672)
--------------- --------------- --------------- ---------------
Consolidated total $ 53,895,023 $ 56,783,112 $ 280,419,974 $ 284,237,399
=============== =============== =============== ===============
Depreciation and Amortization Expense:
Total for reportable segments $ 3,283,513 $ 1,162,238 $ 9,360,077 $ 3,196,003
Corporate administration 51,812 35,497 166,656 116,124
--------------- --------------- --------------- ---------------
Consolidated total $ 3,335,325 $ 1,197,735 $ 9,526,733 $ 3,312,127
=============== =============== =============== ===============
Income (Loss) Before Income Taxes:
Total EBITDA for reportable segments $ 3,460,959 $ 3,884,206 $ 44,789,325 $ 45,096,016
Corporate administrative costs (4,900,980) (4,916,212) (9,382,419) (9,201,379)
--------------- --------------- --------------- ---------------
(1,440,021) (1,032,006) 35,406,906 35,894,637
Depreciation and amortization (3,335,325) (1,197,735) (9,526,733) (3,312,127)
--------------- --------------- --------------- ---------------
Consolidated income (loss) from operations (4,775,346) (2,229,741) 25,880,173 32,582,510
Interest and other expenses, net (6,737,748) (3,597,174) (19,057,385) (10,233,219)
--------------- --------------- --------------- ---------------
Consolidated income (loss) before income taxes $(11,513,094) $ (5,826,915) $ 6,822,788 $ 22,349,291
=============== =============== =============== ===============
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 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. In addition, EBITDA measures as presented by the
Company 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 December 31, Nine Months ended December 31,
2004 2003 2004 2003
--------------- -------------- -------------- ----------------
EBITDA $ (1,440,021) $ (1,032,006) $ 35,406,906 $ 35,894,637
Adjustments to reconcile EBITDA to net cash
flows from operating activities:
Interest income 211,349 81,651 344,845 193,372
Provision for losses on accounts receivable 88,977 (19,806) 103,651 34,429
Cash paid for interest (570,692) (397,801) (13,672,379) (6,962,118)
Cash paid for income taxes (8,243,973) (6,733,997) (4,282,551) (6,607,805)
Loss on disposal of assets 52,468 1,929 68,014 266,861
Changes in operating assets and liabilities,
net of effect of acquistions/disposals (1) (66,043,495) (68,352,497) (53,976,998) (45,396,164)
--------------- -------------- -------------- ----------------
Net Cash Flows from Operating Activities $ (75,945,387) $(76,452,527) $(36,008,512) $ (22,576,788)
=============== ============== ============== ================
Net Cash Flows from Investing Activities $ (17,193,419) $ (1,333,656) $(27,104,047) $ (5,379,485)
=============== ============== ============== ================
Net Cash Flows from Financing Activities $ 30,169,083 $ 24,562,918 $ 40,494,829 $ 3,974,504
=============== ============== ============== ================
(1) Changes in operating assets and liabilities, net of effect of
acquisitions/disposals, include the changes in the balances of
receivables, inventories, prepaid expenses and other current assets,
other assets, accounts payable, accrued employee compensation and
benefits, accrued incentives, accrued expenses, deferred revenue, and
other long-term liabilities.
The Company's revenues are attributed to countries based on the location of
the customer. Substantially all revenues generated are attributable to
customers located within the United States.
8. RELATED PARTY TRANSACTIONS - In accordance with the Company's debt
covenants, the Company declared and paid $0.1 million in dividends to NBC
during the nine months ended December 31, 2004 for costs associated with
the March 4, 2004 Transaction. During the nine months ended December 31,
2003, the Company declared and paid a $4.1 million dividend to NBC for
interest due and payable on the former senior discount debentures on August
15, 2003 and declared a $34.5 million dividend to NBC in conjunction with
the common stock and option purchase on December 10, 2003, of which $1.7
million remained in accounts payable at December 31, 2003.
9. ACCOUNTING PRONOUNCEMENTS - In November, 2004 the FASB issued SFAS No. 151,
INVENTORY COSTS, which amends the guidance in Accounting Research Bulletin
No. 43, Chapter 4, INVENTORY PRICING to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). The Statement becomes effective for the Company in
fiscal 2007 and is not expected to have a significant impact on the
Company's consolidated financial statements.
15
10. CONDENSED CONSOLIDATING FINANCIAL INFORMATION - Effective July 1, 2002, the
Company's distance education business was separately incorporated under the
laws of the State of Delaware as Specialty Books, Inc., a wholly-owned
subsidiary of the Company. In connection with its incorporation, Specialty
Books, Inc. has unconditionally guaranteed, on a joint and several basis,
full and prompt payment and performance of the Company's obligations,
liabilities, and indebtedness arising under, out of, or in connection with
the Senior Subordinated Notes. Specialty Books, Inc. is also a party to the
Guarantee and Collateral Agreement related to the Senior Credit Facility.
Condensed consolidating balance sheets, statements of operations, and
statements of cash flows are presented on the following pages which reflect
financial information for the parent company (Nebraska Book Company, Inc.),
subsidiary guarantor (Specialty Books, Inc.), consolidating eliminations,
and consolidated totals.
Effective January 1, 2005, the Company entered into a series of agreements
with NBC Textbooks LLC, a new wholly-owned subsidiary of the Company,
through which the Company transferred the Textbook Division to NBC
Textbooks LLC. In connection with its incorporation, NBC Textbooks LLC has
unconditionally guaranteed, on a joint and several basis, full and prompt
payment and performance of the Company's obligations, liabilities, and
indebtedness arising under, out of, or in connection with the Senior
Subordinated Notes. NBC Textbooks LLC is also a party to the Guarantee and
Collateral Agreement related to the Senior Credit Facility. As of and for
the periods ended December 31, 2004 and prior, the Textbook Division is
included in the Nebraska Book Company, Inc. column of the condensed
consolidating financial information presented on the following pages.
Beginning with the condensed consolidating financial information for the
fiscal year ended March 31, 2005, NBC Textbooks LLC will be included in a
subsidiary guarantor column of such condensed consolidating financial
information which will reflect the operations of both Specialty Books, Inc.
and NBC Textbooks LLC.
16
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2004 (SUCCESSOR)
- ---------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
------------- ------------ ------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,612,856 $ 45,595 $ - $ 10,658,451
Receivables 61,971,457 1,737,967 (8,356,653) 55,352,771
Inventories 92,948,299 7,592,816 - 100,541,115
Recoverable income taxes 5,297,294 - - 5,297,294
Deferred income taxes 6,189,015 - - 6,189,015
Prepaid expenses and other assets 519,489 2,428 - 521,917
------------- ------------ ------------- -------------
Total current assets 177,538,410 9,378,806 (8,356,653) 178,560,563
PROPERTY AND EQUIPMENT, net 41,134,870 485,511 - 41,620,381
GOODWILL 283,072,719 - - 283,072,719
IDENTIFIABLE INTANGIBLES, net 152,556,435 1,916,590 - 154,473,025
OTHER ASSETS 14,043,535 17,077 (2,599,821) 11,460,791
------------- ------------ ------------- -------------
$668,345,969 $11,797,984 $(10,956,474) $669,187,479
============= ============ ============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 29,237,555 $ 8,356,653 $ (8,356,653) $ 29,237,555
Accrued employee compensation and benefits 8,181,745 89,609 - 8,271,354
Accrued interest 6,682,875 - - 6,682,875
Accrued incentives 7,272,567 - - 7,272,567
Accrued expenses 144,984 (14,735) - 130,249
Deferred revenue 1,193,046 - - 1,193,046
Current maturities of long-term debt 1,831,295 - - 1,831,295
Current maturities of capital lease
obligations 204,267 - - 204,267
Revolving credit facility 30,900,000 - - 30,900,000
------------- ------------ ------------- -------------
Total current liabilities 85,648,334 8,431,527 (8,356,653) 85,723,208
LONG-TERM DEBT, net of current maturities 352,261,217 - - 352,261,217
CAPITAL LEASE OBLIGATIONS,
net of current maturities 2,596,892 - - 2,596,892
OTHER LONG-TERM LIABILITIES 1,050,024 - - 1,050,024
DEFERRED INCOME TAXES 60,007,108 766,636 - 60,773,744
DUE TO PARENT 16,917,881 - - 16,917,881
COMMITMENTS
STOCKHOLDER'S EQUITY 149,864,513 2,599,821 (2,599,821) 149,864,513
------------- ------------ ------------- -------------
$668,345,969 $11,797,984 $(10,956,474) $669,187,479
============= ============ ============= =============
17
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2004 (SUCCESSOR)
- ---------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
------------- -------------- -------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 33,142,420 $ 133,761 $ - $ 33,276,181
Restricted cash 27,065,000 - - 27,065,000
Receivables 33,022,016 1,660,458 (4,269,884) 30,412,590
Inventories 67,142,492 2,996,730 - 70,139,222
Recoverable income taxes 5,351,480 - - 5,351,480
Deferred income taxes 6,102,015 - - 6,102,015
Prepaid expenses and other assets 868,761 4,406 - 873,167
------------- ------------ ------------- -------------
Total current assets 172,694,184 4,795,355 (4,269,884) 173,219,655
PROPERTY AND EQUIPMENT, net 35,615,009 518,247 - 36,133,256
GOODWILL 268,646,931 - - 268,646,931
IDENTIFIABLE INTANGIBLES, net 155,514,045 1,991,587 - 157,505,632
OTHER ASSETS 14,388,466 17,077 (2,187,806) 12,217,737
------------- ------------ ------------- -------------
$646,858,635 $ 7,322,266 $ (6,457,690) $647,723,211
============= ============== ============== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 29,300,768 $ 4,269,884 $ (4,269,884) $ 29,300,768
Accrued employee compensation and benefits 9,062,590 56,140 - 9,118,730
Accrued interest 2,041,957 - - 2,041,957
Accrued incentives 6,982,304 - - 6,982,304
Accrued expenses 1,199,647 11,801 - 1,211,448
Deferred revenue 898,658 - - 898,658
Current maturities of long-term debt 17,238,881 - - 17,238,881
Current maturities of capital lease
obligations 167,433 - - 167,433
------------- ------------ ------------- -------------
Total current liabilities 66,892,238 4,337,825 (4,269,884) 66,960,179
LONG-TERM DEBT, net of current maturities 353,634,999 - - 353,634,999
CAPITAL LEASE OBLIGATIONS,
net of current maturities 2,138,151 - - 2,138,151
OTHER LONG-TERM LIABILITIES 317,287 - - 317,287
DEFERRED INCOME TAXES 61,053,109 796,635 - 61,849,744
DUE TO PARENT 16,836,358 - - 16,836,358
COMMITMENTS
STOCKHOLDER'S EQUITY 145,986,493 2,187,806 (2,187,806) 145,986,493
------------- ------------ ------------- -------------
$646,858,635 $ 7,322,266 $ (6,457,690) $647,723,211
============= ============ ============= =============
18
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2003 (PREDECESSOR)
- --------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
------------- ------------ -------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15,356,479 $ 67,134 $ - $ 15,423,613
Receivables 63,476,777 3,971,475 (8,790,926) 58,657,326
Inventories 84,037,082 6,058,647 - 90,095,729
Recoverable income taxes 3,578,415 - - 3,578,415
Deferred income taxes 5,429,743 - - 5,429,743
Prepaid expenses and other assets 627,760 4,711 - 632,471
------------- ------------ -------------- -----------
Total current assets 172,506,256 10,101,967 (8,790,926) 173,817,297
PROPERTY AND EQUIPMENT, net 27,814,436 530,249 - 28,344,685
GOODWILL 34,079,919 - - 34,079,919
IDENTIFIABLE INTANGIBLES, net 1,568,083 - - 1,568,083
OTHER ASSETS 10,300,568 17,077 (1,672,022) 8,645,623
------------- ------------ -------------- -----------
$246,269,262 $10,649,293 $(10,462,948) $246,455,607
============= ============ ============== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 25,769,228 $ 8,790,926 $ (8,790,926) $ 25,769,228
Accrued employee compensation and benefits 7,237,086 126,966 - 7,364,052
Accrued interest 3,694,265 - - 3,694,265
Accrued incentives 6,528,926 - - 6,528,926
Accrued expenses 825,988 59,379 - 885,367
Deferred revenue 886,349 - - 886,349
Current maturities of long-term debt 778,119 - - 778,119
Current maturities of capital
lease obligations 154,507 - - 154,507
------------- ------------ -------------- ------------
Total current liabilities 45,874,468 8,977,271 (8,790,926) 46,060,813
LONG-TERM DEBT, net of current maturities 184,692,511 - - 184,692,511
CAPITAL LEASE OBLIGATIONS,
net of current maturities 2,184,125 - - 2,184,125
OTHER LONG-TERM LIABILITIES 313,130 - - 313,130
DUE TO PARENT 14,715,520 - - 14,715,520
COMMITMENTS
STOCKHOLDER'S EQUITY (DEFICIT) (1,510,492) 1,672,022 (1,672,022) (1,510,492)
------------- ------------ -------------- -------------
$246,269,262 $10,649,293 $(10,462,948) $246,455,607
============= ============ ============== =============
19
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED DECEMBER 31, 2004 (SUCCESSOR)
- ------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
-------------- ------------- -------------- ------------
REVENUES, net of returns $ 50,342,420 $ 3,567,179 $ (14,576) $ 53,895,023
COSTS OF SALES 29,631,567 2,211,944 (15,182) 31,828,329
-------------- ------------- -------------- ------------
Gross profit 20,710,853 1,355,235 606 22,066,694
OPERATING EXPENSES (INCOME):
Selling, general and administrative 22,362,438 1,143,671 606 23,506,715
Depreciation 1,214,855 14,470 - 1,229,325
Amortization 2,081,001 24,999 - 2,106,000
Equity in earnings of subsidiary (103,257) - 103,257 -
-------------- ------------- -------------- ------------
25,555,037 1,183,140 103,863 26,842,040
-------------- ------------- -------------- ------------
INCOME (LOSS) FROM OPERATIONS (4,844,184) 172,095 (103,257) (4,775,346)
OTHER EXPENSES (INCOME):
Interest expense 6,949,097 - - 6,949,097
Interest income (211,349) - - (211,349)
-------------- ------------- -------------- ------------
6,737,748 - - 6,737,748
-------------- ------------- -------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES (11,581,932) 172,095 (103,257) (11,513,094)
INCOME TAX EXPENSE (BENEFIT) (4,565,552) 68,838 - (4,496,714)
-------------- ------------- -------------- ------------
NET INCOME (LOSS) $ (7,016,380) $ 103,257 $ (103,257) $ (7,016,380)
============== ============= ============== ============
20
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED DECEMBER 31, 2003 (PREDECESSOR)
- -------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
-------------- -------------- ------------- -------------
REVENUES, net of returns $ 46,776,937 $ 10,012,872 $ (6,697) $ 56,783,112
COSTS OF SALES 26,905,560 7,163,208 (7,925) 34,060,843
-------------- -------------- ------------- -------------
Gross profit 19,871,377 2,849,664 1,228 22,722,269
OPERATING EXPENSES (INCOME):
Selling, general and administrative 20,892,349 2,674,641 1,228 23,568,218
Depreciation 803,504 20,632 - 824,136
Amortization 373,599 - - 373,599
Stock-based compensation 186,057 - - 186,057
Equity in earnings of subsidiary (92,635) - 92,635 -
-------------- -------------- ------------- -------------
22,162,874 2,695,273 93,863 24,952,010
-------------- -------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS (2,291,497) 154,391 (92,635) (2,229,741)
OTHER EXPENSES (INCOME):
Interest expense 3,678,825 - - 3,678,825
Interest income (81,651) - - (81,651)
-------------- -------------- ------------- -------------
3,597,174 - - 3,597,174
-------------- -------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES (5,888,671) 154,391 (92,635) (5,826,915)
INCOME TAX EXPENSE (BENEFIT) (2,282,280) 61,756 - (2,220,524)
-------------- -------------- ------------- -------------
NET INCOME (LOSS) $ (3,606,391) $ 92,635 $(92,635) $ (3,606,391)
============== ============== ============= =============
21
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2004 (SUCCESSOR)
- -----------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
-------------- -------------- ------------ --------------
REVENUES, net of returns $ 264,193,502 $ 16,305,825 $ (79,353) $ 280,419,974
COSTS OF SALES 161,196,181 11,335,902 (83,437) 172,448,646
-------------- -------------- ------------ --------------
Gross profit 102,997,321 4,969,923 4,084 107,971,328
OPERATING EXPENSES (INCOME):
Selling, general and administrative 68,397,409 4,162,929 4,084 72,564,422
Depreciation 3,352,424 45,305 - 3,397,729
Amortization 6,054,007 74,997 - 6,129,004
Equity in earnings of subsidiary (412,015) - 412,015 -
-------------- -------------- ------------ --------------
77,391,825 4,283,231 416,099 82,091,155
-------------- -------------- ------------ --------------
INCOME FROM OPERATIONS 25,605,496 686,692 (412,015) 25,880,173
OTHER EXPENSES (INCOME):
Interest expense 19,402,230 - - 19,402,230
Interest income (344,845) - - (344,845)
-------------- -------------- ------------ --------------
19,057,385 - - 19,057,385
-------------- -------------- ------------ --------------
INCOME BEFORE INCOME TAXES 6,548,111 686,692 (412,015) 6,822,788
INCOME TAX EXPENSE 2,538,840 274,677 - 2,813,517
-------------- -------------- ------------ --------------
NET INCOME $ 4,009,271 $ 412,015 $(412,015) $ 4,009,271
============== ============== ============ ==============
22
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2003 (PREDECESSOR)
- -----------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
-------------- ------------- -------------- -------------
REVENUES, net of returns $ 253,276,479 $ 31,032,191 $ (71,271) $284,237,399
COSTS OF SALES 153,689,894 21,567,468 (80,459) 175,176,903
-------------- ------------- -------------- -------------
Gross profit 99,586,585 9,464,723 9,188 109,060,496
OPERATING EXPENSES (INCOME):
Selling, general and administrative 64,784,364 8,186,250 9,188 72,979,802
Depreciation 2,325,899 63,155 - 2,389,054
Amortization 923,073 - - 923,073
Stock-based compensation 186,057 - - 186,057
Equity in earnings of subsidiary (729,191) - 729,191 -
-------------- ------------- -------------- -------------
67,490,202 8,249,405 738,379 76,477,986
-------------- ------------- -------------- -------------
INCOME FROM OPERATIONS 32,096,383 1,215,318 (729,191) 32,582,510
OTHER EXPENSES (INCOME):
Interest expense 10,483,887 - - 10,483,887
Interest income (193,372) - - (193,372)
Gain on derivative financial instruments (57,296) - - (57,296)
-------------- ------------- -------------- -------------
10,233,219 - - 10,233,219
-------------- ------------- -------------- -------------
INCOME BEFORE INCOME TAXES 21,863,164 1,215,318 (729,191) 22,349,291
INCOME TAX EXPENSE 8,329,005 486,127 - 8,815,132
-------------- ------------- -------------- -------------
NET INCOME $ 13,534,159 $ 729,191 $ (729,191) $ 13,534,159
============== ============= ============== =============
23
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2004 (SUCCESSOR)
- ---------------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
-------------- ------------ ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES $(35,932,915) $ (75,597) $ - $(36,008,512)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (6,944,435) (12,569) - (6,957,004)
Acquisitions, net of cash acquired (20,159,367) - - (20,159,367)
Proceeds from sale of property and equipment
and other 12,324 - - 12,324
------------- ------------ ------------ -------------
Net cash flows from investing activities (27,091,478) (12,569) - (27,104,047)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of financing costs (413,076) - - (413,076)
Principal payments on long-term debt (16,781,368) - - (16,781,368)
Principal payments on capital lease obligations (148,143) - - (148,143)
Net increase in revolving credit facility 30,900,000 - - 30,900,000
Dividends paid to parent (132,466) - - (132,466)
Decrease in restricted cash 27,065,000 - - 27,065,000
Capital contributions 4,882 - - 4,882
------------- ------------ ------------ -------------
Net cash flows from financing activities 40,494,829 - - 40,494,829
------------- ------------ ------------ -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (22,529,564) (88,166) - (22,617,730)
CASH AND CASH EQUIVALENTS, Beginning of period 33,142,420 133,761 - 33,276,181
------------- ------------ ------------ -------------
CASH AND CASH EQUIVALENTS, End of period $ 10,612,856 $ 45,595 $ - $ 10,658,451
============= ============ ============ =============
24
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2003 (PREDECESSOR)
- ---------------------------------------------------------------------------------------------------------
Nebraska Specialty
Book Books, Consolidated
Company, Inc. Inc. Eliminations Totals
------------ ------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES $(22,548,126) $ (28,662) $ - $(22,576,788)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,858,555) (40,201) - (2,898,756)
Acquisitions, net of cash acquired (2,355,487) - - (2,355,487)
Proceeds from sale of property and
equipment and other 8,774 - - 8,774
Software development costs (134,016) - - (134,016)
------------- ------------- ------------- -----------
Net cash flows from investing activities (5,339,284) (40,201) - (5,379,485)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 75,000,000 - - 75,000,000
Payment of financing costs (3,779,331) - - (3,779,331)
Principal payments on long-term debt (30,466,360) - - (30,466,360)
Principal payments on capital lease obligations (99,634) - - (99,634)
Dividends paid to parent (36,904,000) - - (36,904,000)
Capital contributions 223,829 - - 223,829
------------- ------------- ------------- -------------
Net cash flows from financing activities 3,974,504 - - 3,974,504
------------- ------------- ------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (23,912,906) (68,863) - (23,981,769)
CASH AND CASH EQUIVALENTS, Beginning of period 39,269,385 135,997 - 39,405,382
------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, End of period $ 15,356,479 $ 67,134 $ - $ 15,423,613
============= ============= ============= =============
25
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 eleven bookstore locations
in the first nine months of fiscal 2005: two locations each in Jacksonville and
Tallahassee, Florida; and single locations in Ypsilanti, Michigan; Alma,
Michigan; Starkville, Mississippi; Glendale, Arizona; Pullman, Washington;
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 to, among
other things, exclude certain acquisitions from the $15.0 million annual
acquisition limitation. The 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 December 31,
2004 decreased $2.9 million, or 5.1% from the quarter ended December 31, 2003.
Although revenues were up slightly in the Textbook and Bookstore Divisions for
this seasonally-slow revenue quarter, such increases were more than offset by
revenue declines in the Complementary Services Division attributable to the loss
of the distance education program's largest customer.
EBITDA RESULTS. Consolidated EBITDA for the quarter ended December 31, 2004
decreased $0.4 million, or 39.5% from the quarter ended December 31, 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. The EBITDA decline is primarily
attributable to growth in the Bookstore Division, resulting in increased
expenses in this seasonally-slow revenue quarter.
CAPITAL EXPENDITURES. Capital expenditures for the nine months ended
December 31, 2004 have increased over the nine months ended December 31, 2003
from $2.9 million to $7.0 million. 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 for students, 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.
26
QUARTER ENDED DECEMBER 31, 2004 COMPARED WITH QUARTER ENDED DECEMBER 31, 2003.
REVENUES. Revenues for the quarters ended December 31, 2004 and 2003 and
the corresponding change in revenues were as follows:
Successor Predecessor Change
-------------- -------------- -------------------------
2004 2003 Amount Percentage
-------------- -------------- ------------- -----------
Textbook Division $ 34,238,719 $ 30,677,800 $ 3,560,919 11.6 %
Bookstore Division 21,060,616 19,634,398 1,426,218 7.3 %
Complementary Services Division 6,742,299 12,767,981 (6,025,682) (47.2)%
Intercompany eliminations (8,146,611) (6,297,067) (1,849,544) 29.4 %
-------------- -------------- ------------- -----------
$ 53,895,023 $ 56,783,112 $ (2,888,089) (5.1)%
============== ============== ============= ===========
Textbook Division revenues were up 11.6% due to an increase in units sold
and price increases. The unit sales increase was due primarily to certain
operational changes in our Lincoln, Nebraska warehouse which increased inventory
available for sale in the third quarter of this fiscal year. 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 $2.0 million of revenue in the quarter ended December 31, 2004.
This increase was offset by a decrease in same store sales of 3.5%, or $0.6
million, attributable primarily to a slight decrease in sales of new textbooks,
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 December 31, 2004
decreased $0.6 million, or 2.9%, to $22.1 million from $22.7 million for the
quarter ended December 31, 2003. The decrease in gross profit was primarily
attributable to the decrease in revenues for the period. Gross margin percentage
improved to 40.9% for the quarter ended December 31, 2004 from 40.0% for the
quarter ended December 31, 2003, thereby partially offsetting the impact of the
decline in revenues. The increase in gross margin percentage was in part
attributable to the decline in lower-margin distance education program revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the quarter ended December 31, 2004 decreased $0.1
million, or 0.3%, to $23.5 million from $23.6 million for the quarter ended
December 31, 2003. Selling, general and administrative expenses as a percentage
of revenues were 43.6% and 41.5% for the quarters ended December 31, 2004 and
2003, respectively.
EARNINGS (LOSS) BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION
(EBITDA). EBITDA for the quarters ended December 31, 2004 and 2003 and the
corresponding change in EBITDA were as follows:
Successor Predecessor Change
-------------- -------------- ------------- ------------
2004 2003 Amount Percentage
-------------- -------------- ------------- ------------
Textbook Division $ 5,187,612 $ 5,206,119 $ (18,507) (0.4)%
Bookstore Division (1,885,399) (1,574,643) (310,756) (19.7)%
Complementary Services Division 158,746 252,730 (93,984) (37.2)%
Corporate administration (4,900,980) (4,916,212) 15,232 0.3 %
-------------- -------------- ------------- ------------
$ (1,440,021) $ (1,032,006) $ (408,015) (39.5)%
============== ============== ============= ============
The small change in EBITDA in the Textbook Division was primarly due to
the impact of increased revenues being offset by a decline in gross margin
percentage. The decrease in Bookstore Division EBITDA was primarily due to
increased expenses resulting from growth in the number of college bookstores,
compounded by the fact that the third quarter is a seasonally-slow revenue
quarter for the Bookstore Division. The decrease in EBITDA in the Complementary
Services Division was primarily due to a decrease in the distance education
program revenues as previously discussed, in part offset by a corresponding
decrease in selling, general, and administrative expenses.
27
EBITDA is defined as earnings before interest, taxes, depreciation, and
amortization. As we are highly-leveraged and as our equity is not
publicly-traded, management believes that EBITDA is useful in measuring our
liquidity and provides additional information for determining our ability to
meet debt service requirements. The Senior Subordinated Notes and Senior Credit
Facility also utilize EBITDA, as defined in those agreements, to test certain
financial covenants. EBITDA does not represent and should not be considered as
an alternative to net cash flows from operating activities as determined by
accounting principles generally accepted in the United States of America, and
EBITDA does not necessarily indicate whether cash flows will be sufficient for
cash requirements. Items excluded from EBITDA, such as interest, taxes,
depreciation and amortization, are significant components in understanding and
assessing our financial performance. In addition, EBITDA measures as presented
by the Company 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 December 31,
2004 2003
-------------- --------------
EBITDA $ (1,440,021) $ (1,032,006)
Adjustments to reconcile EBITDA to
net cash flows from operating activities:
Interest income 211,349 81,651
Provision for losses on accounts receivable 88,977 (19,806)
Cash paid for interest (570,692) (397,801)
Cash paid for income taxes (8,243,973) (6,733,997)
Loss on disposal of assets 52,468 1,929
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals (1) (66,043,495) (68,352,497)
-------------- --------------
Net Cash Flows from Operating Activities $(75,945,387) $(76,452,527)
============== ==============
Net Cash Flows from Investing Activities $(17,193,419) $ (1,333,656)
============== ==============
Net Cash Flows from Financing Activities $ 30,169,083 $ 24,562,918
============== ==============
(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 December
31, 2004 increased $0.4 million, or 49.2%, to $1.2 million from $0.8 million for
the quarter ended December 31, 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 December
31, 2004 increased $1.7 million to $2.1 million from $0.4 million for the
quarter ended December 31, 2003, primarily due to additional amortization
associated with the step-up in basis of assets occurring in conjunction with the
March 4, 2004 Transaction.
STOCK-BASED COMPENSATION EXPENSE. Stock-based compensation expense for the
quarter ended December 31, 2003 was incurred in conjunction with NBC's December
10, 2003 purchase of certain stock options outstanding.
INTEREST EXPENSE, NET. Interest expense, net for the quarter ended December
31, 2004 increased $3.1 million, or 87.3%, to $6.7 million from $3.6 million for
the quarter ended December 31, 2003, primarily due to additional interest
expense related to long-term indebtedness arising out of the March 4, 2004
Transaction. Total debt outstanding at December 31, 2004 was $387.8 million
compared to $187.8 million at December 31, 2003.
INCOME TAXES. Income tax benefit for the quarter ended December 31,
2004 increased $2.3 million to $4.5 million from $2.2 million for the quarter
ended December 31, 2003. Our effective tax rate for the quarters ended December
31, 2004 and 2003 was 39.1% and 38.1%, 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.
28
NINE MONTHS ENDED DECEMBER 31, 2004 COMPARED WITH NINE MONTHS
ENDED DECEMBER 31, 2003.
REVENUES. Revenues for the nine months ended December 31, 2004 and 2003 and
the corresponding change in revenues were as follows:
Successor Predecessor Change
--------------- --------------- ----------------------------
2004 2003 Amount Percentage
--------------- --------------- --------------- ------------
Textbook Division $ 115,011,775 $ 111,603,470 $ 3,408,305 3.1 %
Bookstore Division 164,312,035 152,511,166 11,800,869 7.7 %
Complementary Services Division 26,805,540 41,270,435 (14,464,895) (35.0)%
Intercompany eliminations (25,709,376) (21,147,672) (4,561,704) 21.6 %
--------------- --------------- --------------- ------------
$ 280,419,974 $ 284,237,399 $ (3,817,425) (1.3)%
=============== =============== =============== ============
Textbook Division revenues are up from the same period in the prior year,
although units sold are down for the nine months ended December 31, 2004
compared to December 31, 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 $13.3 million of revenue in the nine
months ended December 31, 2004. This increase was offset by a decrease in same
store sales of 1.0%, or $1.4 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 nine months ended December 31, 2004
decreased $1.1 million, or 1.0%, to $108.0 million from $109.1 million for the
nine months ended December 31, 2003. Gross margin percentage was relatively
stable at 38.5% and 38.4% for the nine months ended December 31, 2004 and 2003,
respectively. 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 nine months ended December 31, 2004 decreased
$0.4 million, or 0.6%, to $72.6 million from $73.0 million for the nine months
ended December 31, 2003. Selling, general and administrative expenses as a
percentage of revenues were 25.9% and 25.7% for the nine months ended December
31, 2004 and 2003, respectively. Higher expenses in the nine months ended
December 31, 2003 is partly attributable to a $0.2 million loss on abandonment
of leasehold improvements incurred upon moving one college bookstore location
and $0.2 million of costs incurred in conjunction with the December 10, 2003
debt refinancing.
EARNINGS (LOSS) BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION
(EBITDA). EBITDA for the nine months ended December 31, 2004 and 2003 and the
corresponding change in EBITDA were as follows:
Successor Predecessor Change
-------------- --------------- ----------------------------
2004 2003 Amount Percentage
-------------- --------------- --------------- ------------
Textbook Division $ 27,172,458 $ 28,338,901 $ (1,166,443) (4.1)%
Bookstore Division 16,108,356 14,192,399 1,915,957 13.5 %
Complementary Services Division 1,508,511 2,564,716 (1,056,205) (41.2)%
Corporate administration (9,382,419) (9,201,379) (181,040) (2.0)%
-------------- --------------- --------------- ------------
$ 35,406,906 $ 35,894,637 $ (487,731) (1.4)%
============== =============== =============== ============
The decrease in EBITDA in the Textbook Division was primarily attributable
to a declining gross margin percentage due 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 and gross margin percentage.
29
EBITDA is defined as earnings before interest, taxes, depreciation, and
amortization. As we are highly-leveraged and as our equity is not
publicly-traded, management believes that EBITDA is useful in measuring our
liquidity and provides additional information for determining our ability to
meet debt service requirements. The Senior Subordinated Notes and Senior Credit
Facility also utilize EBITDA, as defined in those agreements, to test certain
financial covenants. EBITDA does not represent and should not be considered as
an alternative to net cash flows from operating activities as determined by
accounting principles generally accepted in the United States of America, and
EBITDA does not necessarily indicate whether cash flows will be sufficient for
cash requirements. Items excluded from EBITDA, such as interest, taxes,
depreciation and amortization, are significant components in understanding and
assessing our financial performance. In addition, EBITDA measures as presented
by the Company 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
--------------- ---------------
Nine Months ended December 31,
2004 2003
--------------- ---------------
EBITDA $ 35,406,906 $ 35,894,637
Adjustments to reconcile EBITDA to
net cash flows from operating activities:
Interest income 344,845 193,372
Provision for losses on accounts receivable 103,651 34,429
Cash paid for interest (13,672,379) (6,962,118)
Cash paid for income taxes (4,282,551) (6,607,805)
Loss on disposal of assets 68,014 266,861
Changes in operating assets and liabilities,
net of effect of acquisitions/disposals (1) (53,976,998) (45,396,164)
--------------- ---------------
Net Cash Flows from Operating Activities $ (36,008,512) $ (22,576,788)
=============== ===============
Net Cash Flows from Investing Activities $ (27,104,047) $ (5,379,485)
=============== ===============
Net Cash Flows from Financing Activities $ 40,494,829 $ 3,974,504
=============== ===============
(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 nine months ended
December 31, 2004 increased $1.0 million, or 42.2%, to $3.4 million from $2.4
million for the nine months ended December 31, 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 nine months ended
December 31, 2004 increased $5.2 million to $6.1 million from $0.9 million for
the nine months ended December 31, 2003, primarily due to additional
amortization associated with the step-up in basis of assets occurring in
conjunction with the March 4, 2004 Transaction.
STOCK-BASED COMPENSATION EXPENSE. Stock-based compensation expense for the
nine months ended December 31, 2003 was incurred in conjunction with NBC's
December 10, 2003 purchase of certain stock options outstanding.
INTEREST EXPENSE, NET. Interest expense, net for the nine months ended
December 31, 2004 increased $8.8 million, or 85.2%, to $19.1 million from $10.3
million for the nine months ended December 31, 2003, primarily due to additional
interest expense related to long-term indebtedness arising out of the March 4,
2004 Transaction. Total debt outstanding at December 31, 2004 was $387.8 million
compared to $187.8 million at December 31, 2003.
30
INCOME TAXES. Income tax expense for the nine months ended December 31,
2004 decreased $6.0 million, or 68.1%, to $2.8 million from $8.8 million for the
nine months ended December 31, 2003. Our effective tax rate for the nine months
ended December 31, 2004 and 2003 was 41.2% and 39.4%, respectively. The increase
in the effective tax rate is primarily attributable to the impact of permanent
differences on substantially lower income before income taxes for the nine
months ended December 31, 2004 and 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.
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.
31
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 the consolidated income tax returns. Significant
judgment is required in determining the provision for income taxes and related
accruals, deferred tax assets, and deferred tax liabilities. In the ordinary
course of business, there are transactions and calculations where the ultimate
tax outcome is uncertain. Additionally, the consolidated income tax returns are
subject to audit by various tax authorities. Although we believe that our
estimates are reasonable, actual results could differ from these estimates
resulting in a final tax outcome that may be materially different from that
which is reflected in the consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITIES
Our primary liquidity requirements are for debt service under the Senior
Credit Facility, the Senior Subordinated Notes and other outstanding
indebtedness, for working capital, for capital expenditures and for certain
acquisitions. We have historically funded these requirements primarily through
internally generated cash flows and funds borrowed under our Revolving Credit
Facility. At December 31, 2004, our total indebtedness was $387.8 million,
consisting of a $178.7 million Term Loan, $175.0 million of Senior Subordinated
Notes, $30.9 million of outstanding indebtedness under the Revolving Credit
Facility, and $3.2 million of other indebtedness, including capital lease
obligations. To provide additional financing to fund the March 4, 2004
Transaction, NBC issued Senior Discount Notes which provided $50.0 million in
net proceeds (face value of $77.0 million less original issue discount of $27.0
million).
Principal and interest payments under the Senior Credit Facility, the
Senior Subordinated Notes, and NBC's Senior Discount Notes represent significant
liquidity requirements for us. Under the terms of the Senior Credit Facility's
Term Loan, we are scheduled to make principal payments totaling $1.8 million in
each of fiscals 2005-2010 and $169.2 million in fiscal 2011. These scheduled
principal payments are subject to change upon the annual payment and application
of excess cash flows (as defined in the Credit Agreement underlying the Senior
Credit Facility), if any, towards Term Loan principal balances. Loans under the
Senior Credit Facility bear interest at floating rates based upon the borrowing
option selected by us. The Senior Subordinated Notes require semi-annual
interest payments at a fixed rate of 8.625% and mature on March 15, 2012. The
Senior Discount Notes require semi-annual cash interest payments commencing
September 15, 2008 at a fixed rate of 11.0% and mature on March 15, 2013.
In conjunction with the March 4, 2004 Transaction, certain of the notes
under our former 8.75% senior subordinated notes and NBC's former 10.75% senior
discount debentures were not tendered by the holders, but were instead called
for redemption on March 4, 2004 and redeemed on April 3, 2004. Such redemption
was funded through $27.1 million of restricted cash held in escrow, of which
$16.1 million related to principal, accrued interest, and call premiums on the
remaining 8.75% senior subordinated notes and $11.0 million related to
principal, accrued interest, and call premiums on NBC's remaining 10.75% senior
discount debentures.
INVESTING CASH FLOWS
Our capital expenditures were $7.0 million and $2.9 million for the nine
months ended December 31, 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 $20.2 million and $2.4 million for
the nine months ended December 31, 2004 and 2003, respectively. For the nine
months ended December 31, 2004, single bookstore locations were acquired serving
Eastern Michigan University, Alma College, Mississippi State University,
Illinois State University, and Morehead State University; two bookstore
locations were acquired serving the University of North Florida and Florida
Community College at Jacksonville and two bookstore locations were acquired
serving Florida State University; and single bookstore location start-ups
serving Washington State University and Arizona State University-West Campus
were established. For the nine months ended December 31, 2003, single bookstore
locations were acquired serving East Tennessee State University, Western
International University, Mesa Community College, Marshall University and Wayne
State College; and 3 bookstore locations were acquired serving Michigan State
University. Our ability to make acquisition expenditures is subject to certain
restrictions under the Senior Credit Facility.
32
During the nine months ended December 31, 2004, no bookstore locations were
closed. During the nine months ended December 31, 2003, four bookstores were
either closed or the contract-managed lease was not renewed.
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.
OPERATING CASH FLOWS
Our principal sources of cash to fund our future operating liquidity needs
will be cash from operating activities and borrowings under the Revolving Credit
Facility. Usage of the Revolving Credit Facility to meet our liquidity needs
fluctuates throughout the year due to our distinct buying and selling periods,
increasing substantially at the end of each college semester (May and December).
Net cash flows used for operating activities for the nine months ended December
31, 2004 were $36.0 million, up $13.4 million from $22.6 million for the nine
months ended December 31, 2003. The increase in cash used was attributable, in
large part, to an $11.0 million decline in accounts payable relating to the
portion of the restricted cash held in escrow that was utilized to redeem NBC's
untendered former senior discount debentures on April 3, 2004.
COVENANT RESTRICTIONS
Access to our principal sources of cash is subject to various restrictions.
The availability of additional borrowings under the Revolving Credit Facility,
excluding the temporary incremental revolving credit facility described above,
is subject to the calculation of a borrowing base, which at any time is equal to
a percentage of eligible accounts receivable and inventory, up to a maximum of
$50.0 million. The Senior Credit Facility restricts our ability to make loans or
advances and pay dividends, except that, among other things, we may pay
dividends to NBC (i) in an amount not to exceed the amount of interest required
to be paid on the Senior Discount Notes and (ii) to pay corporate overhead
expenses not to exceed $250,000 per year and any taxes owed by NBC. The
indenture governing the Senior Subordinated Notes restricts the ability of the
Company and its Restricted Subsidiaries (as defined in the indenture) to pay
dividends or make other Restricted Payments (as defined in the indenture) to
their respective stockholders, subject to certain exceptions, unless certain
conditions are met, including that (i) no default under the indenture shall have
occurred and be continuing, (ii) the Company shall be permitted by the indenture
to incur additional indebtedness and (iii) the amount of the dividend or payment
may not exceed a certain amount based on, among other things, the Company's
consolidated net income. The indenture governing the Senior Discount Notes
contains similar restrictions on NBC's ability and the ability of its Restricted
Subsidiaries (as defined in the indenture) to pay dividends or make other
Restricted Payments (as defined in the indenture) to their respective
stockholders. These restrictions are not expected to affect our ability to meet
our cash obligations for the foreseeable future.
In accordance with such covenant restrictions, we declared and paid $0.1
million in dividends to NBC during the nine months ended December 31, 2004 for
costs associated with the March 4, 2004 Transaction. During the nine months
ended December 31, 2003, we declared and paid a $4.1 million dividend to NBC for
interest due and payable on the former senior discount debentures on August 15,
2003 and declared a $34.5 million dividend to NBC in conjunction with the common
stock and option purchase on December 10, 2003, of which $1.7 million remained
in accounts payable at December 31, 2003.
SOURCES OF AND NEEDS FOR CAPITAL
As of December 31, 2004, we could borrow up to $60.0 million under the
Revolving Credit Facility, outstanding indebtedness under which was $30.9
million. 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.
33
We believe that funds generated from operations, existing cash, and
borrowings under the Revolving Credit Facility will be sufficient to finance our
current operations, any required excess cash flow payments, increased cash
interest requirements resulting from the March 4, 2004 Transaction, planned
capital expenditures and internal growth for the foreseeable future. Future
acquisitions, if any, may require additional debt financing or capital
contributions.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following tables present aggregated information as of December 31, 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 $ 354,092,512 $ 1,831,295 $ 3,673,595 $ 3,691,161 $344,896,461
Interest on long-term debt (1) 182,119,869 25,486,399 52,959,254 54,747,041 48,927,175
Capital lease obligations 2,801,159 204,267 626,434 814,574 1,155,884
Interest on capital lease obligations 1,299,225 274,030 506,830 345,366 172,999
Borrowings under line of credit (2) 30,900,000 30,900,000 - - -
Operating leases 50,523,000 11,223,000 19,181,000 10,927,000 9,192,000
Unconditional purchase obligations - - - - -
-------------- -------------- -------------- -------------- --------------
Total $ 621,735,765 $ 69,918,991 $76,947,113 $ 70,525,142 $404,344,519
============== ============== ============== ============== ==============
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) $ 29,100,000 $ 10,000,000 $ - $ 19,100,000 $ -
============== ============== ============== ============== ==============
(1) Interest on the variable rate debt is estimated based upon implied forward
rates in the yield curve at December 31, 2004 and does not reflect any
potential management of interest rate fluctuations through interest rate
swap agreements or other similar instruments.
(2) Interest is not estimated on the line of credit due to uncertainty
surrounding the timing and extent of usage of the line of credit.
TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES
In fiscal 2001, we entered into several agreements with a newly created
entity, TheCampusHub.com, Inc., which was partially owned by NBC's then-majority
owner. TheCampusHub.com, Inc. was created to provide college bookstores with a
way to sell in-store inventory and virtual brand name merchandise over the
Internet utilizing technology originally developed by us. Such agreements
(including an equity option agreement, a management services agreement, and a
technology sale and license agreement) terminated effective July 1, 2003 upon
our acquisition of all of the outstanding shares of common stock of
TheCampusHub.com, Inc. This business combination was accounted for by us in
accordance with Statement of Financial Accounting Standards No. 141, BUSINESS
COMBINATIONS. The total purchase price, net of cash acquired, of such
acquisition was $10.0 million, of which $3.7 million was assigned to
non-deductible goodwill. The management services agreement reimbursed us for
certain direct costs incurred on behalf of TheCampusHub.com, Inc., as well as
$0.3 million per year for certain shared management and administrative support.
Complementary Services Division revenue resulting from the management services
agreement was recognized as the services were performed. For the nine months
ended December 31, 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.
34
In accordance with our debt covenants, we declared and paid $0.1 million in
dividends to NBC during the nine months ended December 31, 2004 for costs
associated with the March 4, 2004 Transaction. During the nine months ended
December 31, 2003, we declared and paid a $4.1 million dividend to NBC for
interest due and payable on the former senior discount debentures on August 15,
2003 and declared a $34.5 million dividend to NBC in conjunction with the common
stock and option purchase on December 10, 2003, of which $1.7 million remained
in accounts payable at December 31, 2003.
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 November, 2004 the FASB issued SFAS No. 151, INVENTORY COSTS, which
amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, INVENTORY
PRICING to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). The Statement becomes
effective for the Company in fiscal 2007 and is not expected to have a
significant impact on the Company's consolidated financial statements.
In December, 2004 the FASB issued SFAS No. 123 (revised 2004), SHARE-BASED
PAYMENT. SFAS No. 123 (revised 2004) focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions and requires an entity to, in most cases, measure the cost of such
services based on the grant-date fair value of the award. This Statement is a
revision of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION and supersedes
APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, thereby
eliminating the intrinsic value method of accounting for stock-based
compensation currently utilized by the Company. SFAS No. 123 (revised 2004) will
become effective for the Company in fiscal 2007, applying to all awards granted
or modified after April 1, 2006.
"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 or pessimism about future operating results, are
forward-looking statements within the meaning of the Reform Act. Such
forward-looking statements involve risks, uncertainties and other factors which
may cause 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 for students; 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.
35
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.
We are also experiencing growing competition from alternative media and
alternative sources of textbooks for students, such as on-line resources and
on-line textbook sellers, 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 textbooks and textbook information could significantly reduce college
students' use of the college bookstore and/or the 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.
36
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.
THE INDENTURES GOVERNING THE SENIOR SUBORDINATED NOTES AND NBC'S SENIOR
DISCOUNT NOTES, AS WELL AS THE SENIOR CREDIT FACILITY, IMPOSE SIGNIFICANT
OPERATING AND FINANCIAL RESTRICTIONS, WHICH MAY PREVENT US FROM INCURRING
ADDITIONAL INDEBTEDNESS AND TAKING SOME ACTIONS. The indentures governing the
Senior Subordinated Notes and NBC's Senior Discount Notes restrict our ability
to do the following: incur additional indebtedness; pay dividends or make other
restricted payments; consummate certain asset sales; create liens on assets;
enter into transactions with affiliates; make investments, loans or advances;
consolidate or merge with or into any other person; and convey, transfer or
lease all or substantially all of our assets or change the business we conduct.
The Senior Credit Facility prohibits us from prepaying other indebtedness.
In addition, we are required to comply with and maintain specified financial
ratios and tests, including minimum interest coverage ratios, maximum leverage
ratios and a minimum fixed charge coverage ratio. Our ability to meet these
financial ratios and tests can be affected by events beyond our control, and we
cannot give assurances that we will satisfy these requirements in the future. A
breach of any of these covenants could result in a default under the Senior
Credit Facility or the indentures. Upon an event of default under the Senior
Credit Facility, the lenders could elect to declare all amounts and accrued
interest outstanding under the Senior Credit Facility to be due and payable and
could terminate their commitments to make further extensions of credit under the
Senior Credit Facility and the holders of the Senior Subordinated Notes and
NBC's Senior Discount Notes could elect to declare all amounts under such notes
immediately due and payable. If we were unable to repay our indebtedness under
the Senior Credit Facility, the lenders could proceed against the collateral
securing the indebtedness. If the indebtedness under the Senior Credit Facility
were accelerated, we cannot give assurances that our assets would be sufficient
to repay in full such indebtedness and other indebtedness, including the Senior
Subordinated Notes and NBC's Senior Discount Notes. Substantially all of our
assets are pledged as security under the Senior Credit Facility.
WE ARE CONTROLLED BY ONE PRINCIPAL EQUITY HOLDER, WHO HAS THE POWER TO TAKE
UNILATERAL ACTION. Following the March 4, 2004 Transaction, Weston Presidio
beneficially owns approximately 84.4% of NBC's issued and outstanding common
stock (taking into account for such percentage calculation options outstanding
and options available for future grant under the 2004 Stock Option Plan). As a
result, Weston Presidio is able to control all matters, including the election
of a majority of our board of directors, the approval of amendments to NBC's and
our certificates of incorporation and fundamental corporate transactions such as
mergers and asset sales. The interests of Weston Presidio may not in all cases
be aligned with the interests of other affected parties. In addition, Weston
Presidio may have an interest in pursuing acquisitions, divestitures and other
transactions that, in their judgment, could enhance their equity investment,
even though such transactions might involve risks to other affected parties.
37
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 $387.8 million in total
indebtedness outstanding at December 31, 2004, $178.7 million is subject to
fluctuations in the Eurodollar rate and $30.9 million is subject to fluctuations
in the Prime rate. As provided in our Senior Credit Facility, exposure to
interest rate fluctuations is managed by maintaining fixed interest rate debt
(primarily the Senior Subordinated Notes) and, in the past, by entering into
interest rate swap agreements that qualified as cash flow hedging instruments to
convert certain variable rate debt into fixed rate debt. 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 December 31, 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):
December 31, March 31,
2004 2004
-------------- --------------
Fair Values:
Fixed rate debt $ 182,748,384 $ 194,361,088
Variable rate debt (excluding Revolving Credit Facility) 178,650,000 180,000,000
Overall Weighted-Average Interest Rates:
Fixed rate debt 8.65% 8.65%
Variable rate debt (excluding Revolving Credit Facility) 6.78% 6.63%
ITEM 4. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our management, with the
participation of our Chief Executive Officer and Chief Financial Officer (our
principal executive officer and principal financial officer), evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2004. Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of December 31, 2004, our disclosure controls and procedures
were (1) designed to ensure that material information relating to us, including
our consolidated subsidiaries, is made known to our Chief Executive Officer and
Chief Financial Officer by employees and others within those entities,
particularly during the period in which this report was being prepared and (2)
effective, in that they provide reasonable assurance that information required
to be disclosed by us in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
CHANGES IN INTERNAL CONTROLS. No change in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) occurred during the quarter ended December 31, 2004 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
38
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibits
10.1 Second Amendment, dated as of October 20, 2004, to the Amended and
Restated Credit Agreement, dated as of March 4, 2004, by and among
NBC Holdings Corp., NBC Acquisition Corp., Nebraska Book Company,
Inc., the Several Lenders parties thereto, JPMorgan Chase Bank as
Administrative Agent and Collateral Agent, Citigroup Global Markets
Inc. as Syndication Agent, and Fleet National Bank and Wells Fargo
Bank N.A., as Co-Documentation Agents, filed as Exhibit 10.1 to
Nebraska Book Company, Inc. Current Report on Form 8-K dated and
filed on October 26, 2004, is incorporated herein by reference.
10.2 Supplemental Indenture, dated as of December 31, 2004, by and among
NBC Textbooks LLC, Nebraska Book Company, Inc., each other then
existing Subsidiary Guarantor under the Indenture, and the Trustee,
filed as Exhibit 10.1 to Nebraska Book Company, Inc. Current Report
on Form 8-K dated and filed on January 6, 2005, is incorporated
herein by reference.
10.3 Assumption Agreement, dated as of December 31, 2004, made by NBC
Textbooks LLC, in favor of JPMorgan Chase Bank, N.A., as
administrative agent for the banks and other financial institutions
parties to the Credit Agreement, filed as Exhibit 10.2 to Nebraska
Book Company, Inc. Current Report on Form 8-K dated and filed on
January 6, 2005, is incorporated herein by reference.
31.1 Certification of Chief Executive Officer pursuant to Rules 13a-15(e)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rules 13a-15(e)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on February 11, 2005.
NEBRASKA BOOK COMPANY, INC.
/s/ Mark W. Oppegard /s/ Alan G. Siemek
- -------------------------------------- ------------------------------------
Mark W. Oppegard Alan G. Siemek
Chief Executive Officer, President and Chief Financial Officer, Senior Vice
Director President of Finance and
Administration, Treasurer and
Assistant Secretary
39
EXHIBIT INDEX
10.1 Second Amendment, dated as of October 20, 2004, to the Amended and
Restated Credit Agreement, dated as of March 4, 2004, by and among
NBC Holdings Corp., NBC Acquisition Corp., Nebraska Book Company,
Inc., the Several Lenders parties thereto, JPMorgan Chase Bank as
Administrative Agent and Collateral Agent, Citigroup Global Markets
Inc. as Syndication Agent, and Fleet National Bank and Wells Fargo
Bank N.A., as Co-Documentation Agents, filed as Exhibit 10.1 to
Nebraska Book Company, Inc. Current Report on Form 8-K dated and
filed on October 26, 2004, is incorporated herein by reference.
10.2 Supplemental Indenture, dated as of December 31, 2004, by and among
NBC Textbooks LLC, Nebraska Book Company, Inc., each other then
existing Subsidiary Guarantor under the Indenture, and the Trustee,
filed as Exhibit 10.1 to Nebraska Book Company, Inc. Current Report
on Form 8-K dated and filed on January 6, 2005, is incorporated
herein by reference.
10.3 Assumption Agreement, dated as of December 31, 2004, made by NBC
Textbooks LLC, in favor of JPMorgan Chase Bank, N.A., as
administrative agent for the banks and other financial institutions
parties to the Credit Agreement, filed as Exhibit 10.2 to Nebraska
Book Company, Inc. Current Report on Form 8-K dated and filed on
January 6, 2005, is incorporated herein by reference.
31.1 Certification of Chief Executive Officer pursuant to Rules 13a-15(e)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rules 13a-15(e)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
40