Attached files
file | filename |
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EX-32.2 - EXHIBIT 32.2 - NEBRASKA BOOK CO | c96100exv32w2.htm |
EX-32.1 - EXHIBIT 32.1 - NEBRASKA BOOK CO | c96100exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - NEBRASKA BOOK CO | c96100exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - NEBRASKA BOOK CO | c96100exv31w2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2009
OR
o | 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 incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
4700 South 19th Street | ||
Lincoln, Nebraska (Address of principal executive offices) |
68501-0529 (Zip Code) |
Registrants 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 o No o (NOTE: Nebraska Book
Company, Inc. is a voluntary filer and is not subject to the filing requirements of Section 13 or
15(d) of the Securities and Exchange Act of 1934. Although not subject to these filing
requirements, Nebraska Book Company, Inc. has filed all reports required under Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months.)
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to
submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Total number of shares of common stock outstanding as of February 12, 2010: 100 shares
Total Number of Pages: 47
Exhibit Index: Page 47
PART I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS.
NEBRASKA BOOK COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 31, | March 31, | December 31, | ||||||||||
2009 | 2009 | 2008 | ||||||||||
ASSETS |
||||||||||||
CURRENT ASSETS: |
||||||||||||
Cash and cash equivalents |
$ | 16,815,036 | $ | 44,038,468 | $ | 18,307,027 | ||||||
Receivables, net |
75,572,125 | 61,301,636 | 74,477,996 | |||||||||
Inventories |
173,437,403 | 93,115,663 | 164,253,279 | |||||||||
Recoverable income taxes |
6,910,271 | 2,869,583 | 5,794,462 | |||||||||
Deferred income taxes |
7,654,801 | 6,581,802 | 7,339,093 | |||||||||
Prepaid expenses and other assets |
3,461,500 | 3,950,874 | 3,208,187 | |||||||||
Total current assets |
283,851,136 | 211,858,026 | 273,380,044 | |||||||||
PROPERTY AND EQUIPMENT, net of depreciation & amortization |
43,194,981 | 45,638,522 | 45,625,017 | |||||||||
GOODWILL |
215,571,126 | 215,436,126 | 322,409,155 | |||||||||
CUSTOMER RELATIONSHIPS, net of amortization |
81,338,200 | 85,644,340 | 87,079,720 | |||||||||
TRADENAME |
31,320,000 | 31,320,000 | 31,320,000 | |||||||||
OTHER IDENTIFIABLE INTANGIBLES, net of amortization |
5,804,983 | 9,172,622 | 9,945,864 | |||||||||
DEBT ISSUE COSTS, net of amortization |
10,289,115 | 6,875,122 | 3,732,897 | |||||||||
OTHER ASSETS |
3,716,768 | 2,121,949 | 2,147,778 | |||||||||
$ | 675,086,309 | $ | 608,066,707 | $ | 775,640,475 | |||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||
CURRENT LIABILITIES: |
||||||||||||
Accounts payable |
$ | 69,266,116 | $ | 26,865,614 | $ | 63,017,035 | ||||||
Accrued employee compensation and benefits |
9,547,912 | 13,780,209 | 10,186,133 | |||||||||
Accrued interest |
6,175,189 | 678,516 | 4,557,106 | |||||||||
Accrued incentives |
6,231,547 | 6,110,700 | 6,518,368 | |||||||||
Accrued expenses |
7,388,275 | 4,277,105 | 3,012,561 | |||||||||
Deferred revenue |
2,865,460 | 959,274 | 2,367,009 | |||||||||
Current maturities of long-term debt |
52,967 | 6,917,451 | 2,581,009 | |||||||||
Current maturities of capital lease obligations |
813,609 | 748,692 | 728,715 | |||||||||
Revolving credit facility |
23,100,000 | | 42,000,000 | |||||||||
Total current liabilities |
125,441,075 | 60,337,561 | 134,967,936 | |||||||||
LONG-TERM DEBT, net of current maturities |
374,258,315 | 361,445,728 | 366,806,962 | |||||||||
CAPITAL LEASE OBLIGATIONS, net of current maturities |
2,627,370 | 3,298,658 | 3,510,759 | |||||||||
OTHER LONG-TERM LIABILITIES |
2,115,997 | 5,304,166 | 4,855,175 | |||||||||
DEFERRED INCOME TAXES |
51,681,458 | 54,313,459 | 53,231,415 | |||||||||
DUE TO PARENT |
22,998,189 | 20,130,189 | 19,758,151 | |||||||||
COMMITMENTS (Note 4) |
||||||||||||
STOCKHOLDERS EQUITY: |
||||||||||||
Common stock, voting, authorized 50,000 shares
of $1.00 par value; issued and outstanding 100 shares |
100 | 100 | 100 | |||||||||
Additional paid-in capital |
148,165,505 | 148,135,923 | 138,120,891 | |||||||||
Retained earnings (deficit) |
(52,201,700 | ) | (44,899,077 | ) | 54,389,086 | |||||||
Total stockholders equity |
95,963,905 | 103,236,946 | 192,510,077 | |||||||||
$ | 675,086,309 | $ | 608,066,707 | $ | 775,640,475 | |||||||
See notes to condensed consolidated financial statements.
2
NEBRASKA BOOK COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarter Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
REVENUES, net of returns |
$ | 66,658,584 | $ | 66,658,136 | $ | 412,138,559 | $ | 418,794,376 | ||||||||
COSTS OF SALES (exclusive of depreciation shown below) |
38,597,654 | 39,924,915 | 252,368,739 | 259,187,334 | ||||||||||||
Gross profit |
28,060,930 | 26,733,221 | 159,769,820 | 159,607,042 | ||||||||||||
OPERATING EXPENSES: |
||||||||||||||||
Selling, general and administrative |
34,078,959 | 34,581,196 | 117,281,571 | 121,838,141 | ||||||||||||
Depreciation |
2,124,972 | 1,777,646 | 6,218,426 | 5,467,645 | ||||||||||||
Amortization |
2,684,564 | 2,846,353 | 8,320,843 | 8,539,069 | ||||||||||||
38,888,495 | 39,205,195 | 131,820,840 | 135,844,855 | |||||||||||||
INCOME (LOSS) FROM OPERATIONS |
(10,827,565 | ) | (12,471,974 | ) | 27,948,980 | 23,762,187 | ||||||||||
OTHER EXPENSES: |
||||||||||||||||
Interest expense |
10,650,185 | 7,820,666 | 30,032,285 | 23,795,302 | ||||||||||||
Interest income |
(60,744 | ) | (162,890 | ) | (104,441 | ) | (342,610 | ) | ||||||||
Loss on early extinguishment of debt |
3,065,759 | | 3,065,759 | | ||||||||||||
Loss on derivative financial instrument |
| | | 102,000 | ||||||||||||
13,655,200 | 7,657,776 | 32,993,603 | 23,554,692 | |||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES |
(24,482,765 | ) | (20,129,750 | ) | (5,044,623 | ) | 207,495 | |||||||||
INCOME TAX EXPENSE (BENEFIT) |
(9,597,000 | ) | (8,052,000 | ) | (1,977,000 | ) | 83,000 | |||||||||
NET INCOME (LOSS) |
$ | (14,885,765 | ) | $ | (12,077,750 | ) | $ | (3,067,623 | ) | $ | 124,495 | |||||
See notes to condensed consolidated financial statements.
3
NEBRASKA BOOK COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(UNAUDITED)
Accumulated | ||||||||||||||||||||||||
Additional | Retained | Other | ||||||||||||||||||||||
Common | Paid-in | Earnings | Comprehensive | Comprehensive | ||||||||||||||||||||
Stock | Capital | (Deficit) | Income (Loss) | Total | Income (Loss) | |||||||||||||||||||
BALANCE, April 1, 2008 |
$ | 100 | $ | 138,087,705 | $ | 58,499,591 | $ | (748,000 | ) | $ | 195,839,396 | |||||||||||||
Contributed capital |
| 1,161 | | | 1,161 | $ | | |||||||||||||||||
Share-based compensation
attributable to NBC
Holdings Corp. stock
options |
| 32,025 | | | 32,025 | | ||||||||||||||||||
Net income |
| | 124,495 | | 124,495 | 124,495 | ||||||||||||||||||
Dividends declared |
| (4,235,000 | ) | | (4,235,000 | ) | | |||||||||||||||||
Other comprehensive
income, net of taxes: |
||||||||||||||||||||||||
Unrealized gain on
interest rate swap
agreement, net of taxes
of $473,000 |
| | | 748,000 | 748,000 | 748,000 | ||||||||||||||||||
BALANCE, December 31, 2008 |
$ | 100 | $ | 138,120,891 | $ | 54,389,086 | $ | | $ | 192,510,077 | $ | 872,495 | ||||||||||||
BALANCE, April 1, 2009 |
$ | 100 | $ | 148,135,923 | $ | (44,899,077 | ) | $ | | $ | 103,236,946 | |||||||||||||
Contributed capital |
| (3,628 | ) | | | (3,628 | ) | $ | | |||||||||||||||
Share-based compensation
attributable to NBC
Holdings Corp. stock
options |
| 33,210 | | | 33,210 | | ||||||||||||||||||
Net loss |
| | (3,067,623 | ) | | (3,067,623 | ) | (3,067,623 | ) | |||||||||||||||
Dividends declared |
| | (4,235,000 | ) | | (4,235,000 | ) | | ||||||||||||||||
BALANCE, December 31, 2009 |
$ | 100 | $ | 148,165,505 | $ | (52,201,700 | ) | $ | | $ | 95,963,905 | $ | (3,067,623 | ) | ||||||||||
See notes to condensed consolidated financial statements.
4
NEBRASKA BOOK COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended December 31, | ||||||||
2009 | 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income (loss) |
$ | (3,067,623 | ) | $ | 124,495 | |||
Adjustments to reconcile net income (loss) to net cash flows from operating activities: |
||||||||
Share-based compensation |
789,162 | 748,223 | ||||||
Provision for losses on receivables |
414,247 | 89,592 | ||||||
Depreciation |
6,218,426 | 5,467,645 | ||||||
Amortization |
11,675,812 | 9,925,435 | ||||||
Loss on early extinguishment of debt |
3,065,759 | | ||||||
Amortization of bond discount |
60,614 | | ||||||
Loss on derivative financial instrument |
| 102,000 | ||||||
Loss on disposal of assets |
140,783 | 56,752 | ||||||
Deferred income taxes |
(3,705,000 | ) | (3,787,000 | ) | ||||
Changes in operating assets and liabilities, net of effect of acquisitions: |
||||||||
Receivables |
(15,429,548 | ) | (17,169,055 | ) | ||||
Inventories |
(79,043,123 | ) | (63,083,666 | ) | ||||
Recoverable income taxes |
(4,040,688 | ) | (5,771,389 | ) | ||||
Prepaid expenses and other assets |
639,374 | (658,118 | ) | |||||
Other assets |
(319,543 | ) | 249,489 | |||||
Accounts payable |
42,631,870 | 33,929,165 | ||||||
Accrued employee compensation and benefits |
(4,232,297 | ) | (1,914,507 | ) | ||||
Accrued interest |
5,496,673 | 3,897,169 | ||||||
Accrued incentives |
120,847 | (590,489 | ) | |||||
Accrued expenses |
(856,976 | ) | (159,561 | ) | ||||
Income taxes payable |
| (847,370 | ) | |||||
Deferred revenue |
1,906,186 | 1,504,015 | ||||||
Other long-term liabilities |
(190,334 | ) | (254,803 | ) | ||||
Net cash flows from operating activities |
(37,725,379 | ) | (38,141,978 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchases of property and equipment |
(4,025,625 | ) | (5,973,226 | ) | ||||
Acquisitions, net of cash acquired |
(2,304,343 | ) | (5,651,919 | ) | ||||
Proceeds from sale of property and equipment |
93,674 | 30,822 | ||||||
Software development costs |
(441,156 | ) | (264,436 | ) | ||||
Net cash flows from investing activities |
(6,677,450 | ) | (11,858,759 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Proceeds from issuance of long-term debt |
199,000,000 | | ||||||
Payment of financing costs |
(9,834,721 | ) | | |||||
Principal payments on long-term debt |
(193,112,511 | ) | (1,045,862 | ) | ||||
Principal payments on capital lease obligations |
(606,371 | ) | (530,699 | ) | ||||
Net increase in revolving credit facility |
23,100,000 | 42,000,000 | ||||||
Dividends paid to parent |
(4,235,000 | ) | (4,235,000 | ) | ||||
Capital contributions |
| 4,869 | ||||||
Change in due to parent |
2,868,000 | 2,788,000 | ||||||
Net cash flows from financing activities |
17,179,397 | 38,981,308 | ||||||
NET DECREASE IN CASH AND CASH EQUIVALENTS |
(27,223,432 | ) | (11,019,429 | ) | ||||
CASH AND CASH EQUIVALENTS, Beginning of period |
44,038,468 | 29,326,456 | ||||||
CASH AND CASH EQUIVALENTS, End of period |
$ | 16,815,036 | $ | 18,307,027 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 21,120,029 | $ | 18,511,767 | ||||
Income taxes |
2,900,688 | 7,700,759 | ||||||
Noncash investing and financing activities: |
||||||||
Accumulated other comprehensive income: |
||||||||
Unrealized gain on interest rate swap agreement, net of income taxes |
| 748,000 | ||||||
Deferred taxes resulting from unrealized gain on interest rate swap agreement |
| 473,000 | ||||||
Unpaid consideration associated with bookstore acquisitions |
450,000 | 460,000 |
See notes to condensed consolidated financial statements.
5
NEBRASKA BOOK COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(UNAUDITED)
1. | Basis of Presentation The condensed consolidated balance sheet of Nebraska Book Company,
Inc. (the Company) and its wholly-owned subsidiaries (Specialty Books, Inc., NBC Textbooks
LLC, College Book Stores of America, Inc. (CBA), Campus Authentic LLC and Net Textstore
LLC), at March 31, 2009 was derived from the Companys audited consolidated balance sheet as
of that date. The Company is a wholly-owned subsidiary of NBC Acquisition Corp. (NBC). All
other condensed consolidated financial statements contained herein are unaudited and reflect
all adjustments which are, in the opinion of management, necessary to present fairly the
financial position of the Company and the results of its operations and cash flows for the
periods presented. All of these adjustments are of a normal recurring nature. All
intercompany balances and transactions are eliminated in consolidation. Because of the
seasonal nature of the Companys operations, results of operations of any single reporting
period should not be considered as indicative of results for a full fiscal year. |
These condensed consolidated financial statements should be read in conjunction with the
Companys audited consolidated financial statements for the fiscal year ended March 31, 2009
included in the Companys Annual Report on Form 10-K. A description of our significant
accounting policies is included in our 2009 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. |
In June 2009, the Financial Accounting Standards Board (FASB) Accounting Standards
Codification (Codification) became the single source of authoritative accounting principles
generally accepted in the United States (GAAP). The Codification did not create any
additional GAAP standards but incorporated existing accounting and reporting standards into a
new topical structure with a new referencing system to identify authoritative accounting
standards, replacing the prior references to Statement of Financial Accounting Standards
(SFAS), Emerging Issues Task Force, FASB Staff Position, etc. Authoritative standards
included in the Codification are designated by their Accounting Standards Codification (ASC)
topical reference, and new standards are designated as Accounting Standards Updates with a year
and assigned sequence number. References to prior standards have been updated in this interim
report for the third quarter of fiscal year 2010 to reflect the new referencing system. |
We have evaluated subsequent events through February 12, 2010, the filing date of this Form 10-Q
and address such subsequent events in this Form 10-Q where applicable. |
2. | Inventories Inventories are summarized as follows: |
December 31, | March 31, | December 31, | ||||||||||
2009 | 2009 | 2008 | ||||||||||
Bookstore Division |
$ | 152,507,300 | $ | 59,785,703 | $ | 143,650,769 | ||||||
Textbook Division |
17,200,765 | 30,571,333 | 17,384,427 | |||||||||
Complementary Services Division |
3,729,338 | 2,758,627 | 3,218,083 | |||||||||
$ | 173,437,403 | $ | 93,115,663 | $ | 164,253,279 | |||||||
3. | Goodwill and Other
Identifiable Intangibles During the nine months ended December 31, 2009,
ten bookstore locations were acquired in eight separate transactions. The total purchase
price, net of cash acquired, of such acquisitions was $2.3 million, of which $0.1 million was
assigned to tax deductible goodwill, $0.1 million was assigned to non-tax deductible covenants
not to compete with an amortization period of two years, and $0.2 million was assigned to
contract-managed acquisition costs with amortization periods of up to nine years. As of
December 31, 2009, $0.5 million of the $2.3 million purchase price remained to be paid.
During the nine months ended December 31, 2009, we paid $0.1 million of previously accrued
consideration for bookstore acquisitions and contract-managed acquisition costs occurring in
prior periods. |
|
Goodwill assigned to corporate administration represents the goodwill that arose when Weston
Presidio gained a controlling interest in NBC on March 4, 2004 (the March 4, 2004
Transaction), as all goodwill was assigned to corporate administration. As is the case with a
portion of our assets, such goodwill is not allocated between our reportable segments when
management makes operating decisions and assesses performance. We have identified the Textbook
Division, Bookstore Division and Complementary Services Division as our reporting units. Such
goodwill is allocated to our reporting units for purposes of testing goodwill for impairment and
calculating any gain or loss on the disposal of all or, where applicable, a portion of a
reporting unit. |
6
The changes in the carrying amount of goodwill, in total, by reportable segment and assigned to
corporate administration, are as follows: |
Bookstore | Corporate | |||||||||||
Division | Administration | Total | ||||||||||
Balance, April 1, 2008 |
$ | 51,305,398 | $ | 269,061,875 | $ | 320,367,273 | ||||||
Additions to goodwill: |
||||||||||||
Bookstore acquisitions |
2,041,882 | | 2,041,882 | |||||||||
Balance, December 31, 2008 |
$ | 53,347,280 | $ | 269,061,875 | $ | 322,409,155 | ||||||
Balance, April 1, 2009 |
$ | 53,346,251 | $ | 269,061,875 | $ | 322,408,126 | ||||||
Impairment Loss |
| (106,972,000 | ) | $ | (106,972,000 | ) | ||||||
53,346,251 | 162,089,875 | 215,436,126 | ||||||||||
Additions to goodwill: |
||||||||||||
Bookstore acquisitions |
135,000 | | 135,000 | |||||||||
Balance, December 31, 2009 |
$ | 53,481,251 | $ | 162,089,875 | $ | 215,571,126 | ||||||
Due to the economic downturn and changes in comparable company market multiples, we determined
in the first step of our goodwill impairment test conducted at March 31, 2009 that the carrying
value of the Textbook and Bookstore Divisions exceeded their fair values, indicating that
goodwill may be impaired. Having determined that goodwill may be impaired, we performed the
second step of the goodwill impairment test which involves calculating the implied fair value of
goodwill by allocating the fair value of the reporting unit to all of its assets and liabilities
other than goodwill (including both recognized and unrecognized intangible assets) and comparing
the residual amount to the carrying value of goodwill. As a result, we recorded an impairment
charge of $107.0 million in fiscal year 2009. The carrying value of goodwill in excess of the
implied fair value was $67.0 million and $40.0 million for the Textbook and Bookstore Divisions
at March 31, 2009, respectively. At March 31, 2009, the date of the most recent step one test,
after adjusting the carrying values for goodwill impairment, the fair value of the Textbook
Division exceeded the carrying value of $213.0 million by 10.5% and the Bookstore Division fair
value approximated the carrying value. Remaining goodwill at March 31, 2009 assigned to the
Textbook Division was $34.6 million and to the Bookstore Division was $180.8 million. The
impairment charge reduced our goodwill carrying value to $215.4 million as of March 31, 2009. |
Fair value was determined using a market approach based primarily on an EBITDA multiple, and was
deemed to be the most indicative of the Companys fair value and is consistent in principle with
the methodology used for goodwill evaluation in prior years. The EBITDA multiple approach
requires that we estimate a certain valuation multiple of EBITDA derived from comparable
companies and apply that multiple to our latest twelve month pro forma EBITDA. We reviewed
comparable company information to determine the EBITDA multiple and concluded that 7.0x was an
appropriate EBITDA multiple. This total company fair value is allocated to the reporting units
based upon their percentage of EBITDA. The fair value was also calculated using the income
approach (discounted cash flow approach) and we concluded
that it was supportive of the fair value based upon the EBITDA multiple approach. Determining
the fair value of a reporting unit is judgmental in nature and requires the use of significant
estimates and assumptions about future economic conditions and comparable company market
multiples, among others. In the second step of the goodwill impairment test, we are required to
estimate the fair value of reporting unit assets and liabilities, including intangible assets,
to derive the fair value of the reporting units goodwill. For purposes of the second step of
the goodwill impairment test, we estimated the fair value of our intangible assets tradename,
customer relationships and developed technology using the relief-from-royalty market approach,
excess earnings method income approach and replacement cost approach, respectively. |
7
The following table presents the gross carrying amount and accumulated amortization of
identifiable intangibles subject to amortization, in total and by asset class: |
December 31, 2009 | ||||||||||||
Gross | Net | |||||||||||
Carrying | Accumulated | Carrying | ||||||||||
Amount | Amortization | Amount | ||||||||||
Customer relationships |
$ | 114,830,000 | $ | (33,491,800 | ) | $ | 81,338,200 | |||||
Developed technology |
13,527,173 | (11,728,170 | ) | 1,799,003 | ||||||||
Covenants not to compete |
3,958,699 | (2,530,782 | ) | 1,427,917 | ||||||||
Contract-managed acquisition costs |
4,305,740 | (2,079,989 | ) | 2,225,751 | ||||||||
Other |
1,585,407 | (1,233,095 | ) | 352,312 | ||||||||
$ | 138,207,019 | $ | (51,063,836 | ) | $ | 87,143,183 | ||||||
March 31, 2009 | ||||||||||||
Gross | Net | |||||||||||
Carrying | Accumulated | Carrying | ||||||||||
Amount | Amortization | Amount | ||||||||||
Customer relationships |
$ | 114,830,000 | $ | (29,185,660 | ) | $ | 85,644,340 | |||||
Developed technology |
13,086,017 | (10,069,126 | ) | 3,016,891 | ||||||||
Covenants not to compete |
6,614,699 | (4,069,131 | ) | 2,545,568 | ||||||||
Contract-managed acquisition costs |
4,816,378 | (1,954,878 | ) | 2,861,500 | ||||||||
Other |
1,585,407 | (836,744 | ) | 748,663 | ||||||||
$ | 140,932,501 | $ | (46,115,539 | ) | $ | 94,816,962 | ||||||
December 31, 2008 | ||||||||||||
Gross | Net | |||||||||||
Carrying | Accumulated | Carrying | ||||||||||
Amount | Amortization | Amount | ||||||||||
Customer relationships |
$ | 114,830,000 | $ | (27,750,280 | ) | $ | 87,079,720 | |||||
Developed technology |
12,716,690 | (9,524,649 | ) | 3,192,041 | ||||||||
Covenants not to compete |
6,679,699 | (3,675,075 | ) | 3,004,624 | ||||||||
Contract-managed acquisition costs |
4,549,378 | (1,680,959 | ) | 2,868,419 | ||||||||
Other |
1,585,407 | (704,627 | ) | 880,780 | ||||||||
$ | 140,361,174 | $ | (43,335,590 | ) | $ | 97,025,584 | ||||||
Effective September 1, 2007, we entered into an agreement whereby we agreed to pay $1.7 million
over a period of thirty-six months to a software company in return for certain rights related to
that companys products that are designed to enhance web-based sales. This other identifiable
intangible is being amortized on a straight-line basis over the thirty-six month base term of
the agreement. The asset and corresponding liability were recorded based upon the present value
of the future payments assuming an imputed interest rate of 6.7%, resulting in a discount of
$0.1 million which is recorded as interest expense over the base term of the agreement utilizing
the effective interest method of accounting. |
8
Information regarding aggregate amortization expense for identifiable intangibles subject to
amortization is presented in the following table: |
Amortization | ||||
Expense | ||||
Quarter ended December 31, 2009 |
$ | 2,684,564 | ||
Quarter ended December 31, 2008 |
2,846,353 | |||
Nine months ended December 31, 2009 |
8,320,843 | |||
Nine months ended December 31, 2008 |
8,539,069 | |||
Estimated amortization expense for the
fiscal years ending March 31: |
||||
2010 |
$ | 10,832,751 | ||
2011 |
7,806,238 | |||
2012 |
6,735,274 | |||
2013 |
6,349,688 | |||
2014 |
6,022,393 |
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. The tradename was
determined to have an indefinite life based on our current intentions. We periodically review
the underlying factors relative to this intangible asset. If factors were to change that would
indicate the need to assign a definite life to this asset, we would do so and commence
amortization. |
4. | Long-Term Debt Indebtedness at December 31, 2009 includes an amended and restated
bank-administered credit agreement (the ABL Credit Agreement), which provides for a $75.0
million asset-based revolving credit facility (the ABL Facility), of which $23.1 was
outstanding at December 31, 2009; $200.0 million of 10.0% senior secured notes (the Senior
Secured Notes) issued at a discount of $1.0 million with unamortized bond discount of $0.9
million at December 31, 2009 (effective rate of 10.14%); $175.0 million of 8.625% senior
subordinated notes (the Senior Subordinated Notes); $0.3 million of other indebtedness; and
$3.4 million of capital leases. The ABL Facility is scheduled to expire on the earlier of
October 2, 2012 or the date that is 91 days prior to the earliest maturity of the Senior
Secured Notes (due December 1, 2011), the Senior Subordinated Notes (due March 15, 2012),
NBCs $77.0 million of 11% senior discount notes (the Senior Discount Notes, due March 15,
2013), or any refinancing thereof. |
On October 2, 2009, in conjunction with the completion of the offering of the Senior Secured
Notes, we entered into the ABL Credit Agreement, which provides for the ABL Facility mentioned
previously. Borrowings under the ABL Facility are subject to the Eurodollar interest rate, not
to be less than 1.5%, plus an applicable margin ranging from 4.25% to 4.75% or a base interest
rate. The base interest rate is the greater of a) the prime rate, b) the federal funds rate
plus 0.5%, or c) the one-month Eurodollar loan rate plus 1.0%, not to be less than 2.5%, plus an
applicable margin ranging from 3.25% to 3.75%. In addition, the applicable margin will increase
1.5% during the time periods from April 15 to June 29 and from December 1 to January 29 of each
year. The interest rate as of December 31, 2009 was 8.25%. There also is a commitment fee for
the average daily unused amount of the ABL Facility ranging from 0.75% to 1.0% of such unused
amount. |
The Senior Secured Notes pay cash interest semi-annually and mature on December 1, 2011. The
Senior Subordinated Notes pay cash interest semi-annually and mature on March 15, 2012. |
Prior to entering into the ABL Credit Agreement and issuing the Senior Secured Notes on October
2, 2009, indebtedness included an amended and restated bank-administered senior credit facility
(the Senior Credit Facility) provided to us through a syndicate of lenders, which consisted of
a term loan (the Term Loan) and a revolving credit facility (the Revolving Credit Facility).
Borrowings on the Term Loan and Revolving Credit Facility were subject to the Eurodollar
interest rate or the base interest rate. The Eurodollar interest rate was not to be less than
3.25% plus the applicable margin of 6.0%. The base interest rate was the greater of a) the
prime rate, b) the federal funds rate plus 0.5%, or c) the one-month Eurodollar loan rate plus
1.0%, not to be less than 4.25% plus the applicable margin of 5.0%. Accrued interest on the
Term
Loan and Revolving Credit Facility was due quarterly. Additionally, there was a 0.75%
commitment fee for the average daily unused amount of the Revolving Credit Facility. |
9
The Senior Credit Facility also stipulated that excess cash flows, as defined therein, should be
applied towards prepayment of the Term Loan. An excess cash flow payment of $6.0 million was
paid in September of 2009 for fiscal year ended March 31, 2009. There was no excess cash flow
obligation for the fiscal year ended March 31, 2008. |
A loss from early extinguishment of debt totaling $3.1 million was recorded in the third quarter
of fiscal year 2010 related to the write-off of debt issue costs as a result of the termination
of the Term Loan and Revolving Credit Facility under the Senior Credit Facility. |
The ABL Credit Agreement requires us to maintain certain financial ratios and contains a number
of other covenants that among other things, restricts our ability to incur additional
indebtedness, dispose of assets, make capital expenditures, investments, acquisitions, 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 fiscal year and any taxes
owed by us. In addition, under the ABL Facility, if availability, as defined in the ABL Credit
Agreement, is less than the greater of 20% of the total revolving credit commitments and $15.0
million, we will be required to maintain a fixed charge coverage ratio of at least 1.10x
measured for the last twelve-month period on a pro forma basis in order to maintain access to
the funds under that facility. The calculated borrowing base as of December 31, 2009 was $75.0
million, of which $23.1 million was outstanding under revolving lines of credit, $1.0 million
was outstanding under a letter of credit and $50.9 million was unused. At December 31, 2009,
our pro forma fixed charge coverage ratio was 1.50x. |
The indenture governing the Senior Secured Notes restricts our ability and the ability of
certain of our subsidiaries to pay dividends or make certain other payments, subject to certain
exceptions, unless certain conditions are met, including (i) no default under the indenture has
occurred, (ii) we and our subsidiaries maintain a consolidated coverage ratio of 2.0 to 1.0 on a
pro forma basis and (iii) the amount of the dividend or payment may not exceed 50% of aggregate
income from January 1, 2004 to the end of the most recent fiscal quarter plus cash proceeds
received from the issuance of stock less the aggregate of payments made under this restriction.
The indentures governing the Senior Subordinated Notes and the Senior Discount Notes contain
similar restrictions on our ability and the ability of certain of our subsidiaries and the
ability of NBC and certain of its subsidiaries to pay dividends or make certain other payments.
In addition, if there is no availability under the restricted payment calculation mentioned
above, but we maintain the 2.0 to 1.0 consolidated coverage ratio on a pro forma basis, we may
make dividends to NBC to meet the interest payments on the Senior Discount Notes. If we do not
maintain the 2.0 to 1.0 ratio on a pro forma basis, we may still make payments, including
dividends to NBC, up to $15.0 million in the aggregate. At December 31, 2009, our pro forma
consolidated coverage ratio calculated under the indenture to the Senior Subordinated Notes was
1.9 to 1.0 and the ratio calculated under the indenture to the Senior Secured Notes was 2.0 to
1.0. The pro forma consolidated coverage ratio calculated under the indenture to the Senior
Subordinated Notes differs from the ratio calculated under the indenture to the Senior Secured
Notes because the indenture to the Senior Subordinated Notes excludes debt issue cost
amortization for all debt instruments outstanding at the March 4, 2004 Transaction date from the
calculation and the indenture to the Senior Secured Notes excludes only debt issue cost
amortization for the Senior Secured Notes and the ABL Facility from the same calculation. At
December 31, 2009, the amount distributable under the most restrictive indenture was $15.0
million. Such restrictions are not expected to affect our ability to meet our cash obligations
for the next twelve months. |
At December 31, 2009, we were in compliance with all of our debt covenants. |
5. | Derivative Financial
Instruments The Derivatives and Hedging Topic of the FASB ASC 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. Until our interest rate swap agreement expired on September 30,
2008, we utilized derivative financial instruments to manage the risk that changes in interest
rates would affect the amount of our future interest payments on portions of our variable rate
debt. |
Our primary market risk exposure was fluctuation in variable interest rates on the Term Loan.
Exposure to interest rate fluctuations was managed by maintaining fixed interest rate debt
(primarily the Senior Subordinated Notes); and,
historically, by entering into interest rate swap agreements that qualified as cash flow hedging
instruments to convert certain variable rate debt into fixed rate debt. We had a three-year
amortizing interest rate swap agreement whereby a portion of the variable rate Term Loan was
effectively converted into debt with a fixed rate of 6.844% (4.344% plus an applicable margin as
defined by the Senior Credit Facility). This agreement expired on September 30, 2008. Notional
amounts under the agreement were reduced periodically until reaching $130.0 million. |
10
Effective September 30, 2005, the interest rate swap agreement qualified as a cash flow hedge
instrument as the following criteria were met: |
(1) | Formal documentation of the hedging relationship and our risk management
objective and strategy for undertaking the hedge were in place. |
(2) | The interest rate swap agreement was expected to be highly effective in
offsetting the change in the value of the hedged portion of the interest payments
attributable to the Term Loan. |
We estimated the effectiveness of the interest rate swap agreement utilizing the hypothetical
derivative method. Under this method, the fair value of the actual interest rate swap agreement
is compared to the fair value of a hypothetical swap agreement that has the same critical terms
as the portion of the debt instrument being hedged. To the extent that the agreement is 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 agreement and any
subsequent changes in such fair value are immediately recognized in earnings as gain or loss on
derivative financial instruments. To the extent that the agreement is 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
agreement are immediately recognized in earnings as interest expense. |
Under hedge accounting, interest rate swap agreements are reflected at fair value in the balance
sheet and the related gains or losses on these agreements are generally recorded in
stockholders equity, net of applicable income taxes (as accumulated other comprehensive income
(loss)). Gains or losses recorded in accumulated other comprehensive income (loss) are
reclassified into earnings as an adjustment to interest expense in the same periods in which the
related interest payments being hedged are recognized in earnings. Except as described below,
the net effect of this accounting on our condensed consolidated results of operations was that
interest expense on a portion of the Term Loan was generally being recorded based on fixed
interest rates until the interest rate swap agreement expired on September 30, 2008. |
In accordance with our risk management policy, the interest rate swap agreement was intended as
a hedge against certain future interest payments under the Term Loan from the agreements
inception on July 15, 2005. However, formal documentation designating the interest rate swap
agreement as a hedge against certain future interest payments under the Term Loan was not put in
place until September 30, 2005 (the effective date of the interest rate swap agreement). As a
result, the interest rate swap agreement did not qualify as a cash flow hedge until September
30, 2005. Accordingly, the $0.7 million increase in the fair value of the interest rate swap
agreement from inception to September 30, 2005 was recognized in earnings as a gain on
derivative financial instruments. Changes in the fair value of this portion of the interest
rate swap agreement were also recognized as a gain (loss) on derivative financial instruments
in the condensed consolidated statements of operations. |
Subsequent to September 30, 2005, the change in fair value of a September 30, 2005 hypothetical
swap was recorded, net of income taxes, in accumulated other comprehensive income (loss) in
the condensed consolidated balance sheets. Changes in the fair value of the interest rate swap
agreement were reflected in the condensed consolidated statements of cash flows as either gain
(loss) on derivative financial instruments or as noncash investing and financing activities. |
11
Information regarding the fair value of the interest rate swap agreement designated as a hedging
instrument is presented in the following table: |
Portion of Agreement Subsequent to September 30, 2005 Hedge Designation: |
||||
Increase in fair value of swap agreement: |
||||
Quarter ended December 31, 2008 |
$ | | ||
Nine months ended December 31, 2008 |
1,221,000 | |||
Year ended March 31, 2009 |
1,221,000 | |||
Portion of Agreement Prior to September 30, 2005 Hedge Designation: |
||||
Decrease in fair value of swap agreement: |
||||
Quarter ended December 31, 2008 |
$ | | ||
Nine months ended December 31, 2008 |
(102,000 | ) | ||
Year ended March 31, 2009 |
(102,000 | ) |
6. | Fair Value
Measurements The Fair Value Measurements and Disclosures Topic of the FASB ASC
defines fair value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. The standard excludes lease classification or measurement
(except in certain instances). |
A three-level hierarchal disclosure framework that prioritizes and ranks the level of market
price observability is used in measuring assets and liabilities at fair value on a recurring
basis in the statement of financial position. Market price observability is impacted by a
number of factors, including the type of asset or liability and its characteristics. Assets and
liabilities with readily available active quoted prices or for which fair value can be measured
from actively quoted prices generally will have a higher degree of market price observability
and a lesser degree of judgment used in measuring fair value. |
The three levels are defined
as follows: (1) Level 1 inputs to the valuation methodology are
unadjusted quoted prices for identical assets or liabilities in active markets; (2) Level 2
inputs to the valuation methodology include quoted prices for similar assets and liabilities in
active markets and inputs that are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial instrument; and (3) Level 3
inputs to the valuation methodology are unobservable and significant to the fair value
measurement. |
The Fair Value Measurements and Disclosures Topic of the FASB ASC also applies to disclosures of
fair value for all financial instruments disclosed under the Financial Instruments Topic of the
FASB ASC. The Financial Instruments Topic requires disclosures about fair value for all
financial instruments, whether recognized or not recognized in the statement of financial
position. For financial instruments recognized at fair value on a recurring basis in the
statement of financial position, the three-level hierarchal disclosure requirements also apply. |
Cash equivalents are measured at estimated fair value on a recurring basis in the statement of
financial position, therefore, falling under the three-level hierarchal disclosure requirements.
At December 31, 2009, we did not hold any investments in cash equivalents. |
12
Our revolving credit facility and long-term debt are not measured at estimated fair value on a
recurring basis in the statement of financial position so they do not fall under the three-level
hierarchal disclosure requirements. The fair value of our revolving credit facility
approximates carrying value due to its short-term nature. At December 31, 2009, the estimated
fair value of the Senior Subordinated Notes (fixed rate) and the Senior Secured Notes (fixed
rate) was determined utilizing the market approach based upon quoted prices for these
instruments in markets that are not active. Other fixed rate debt (including capital lease
obligations) estimated fair values are determined utilizing the income approach, calculating a
present value of future payments based upon prevailing interest rates for similar obligations. |
Estimated fair values for our revolving credit facility and our fixed rate and variable rate
long-term debt at December 31, 2009 and March 31, 2009 are summarized in the following table: |
December 31, | March 31, | |||||||
2009 | 2009 | |||||||
Carrying Values: |
||||||||
Revolving credit facility |
$ | 23,100,000 | $ | | ||||
Fixed rate debt |
377,752,261 | 179,334,183 | ||||||
Variable rate debt |
| 193,076,346 | ||||||
Fair Values: |
||||||||
Revolving credit facility |
$ | 23,100,000 | $ | | ||||
Fixed rate debt |
357,178,000 | 90,367,000 | ||||||
Variable rate debt |
| 160,253,000 |
On October 2, 2009, our Term Loan (variable rate) was paid in full upon the issuance of the
Senior Secured Notes. At December 31, 2009 we did not have any long-term variable rate debt. |
7. | Segment Information Our operating segments are determined based on the way that management
organizes the segments for making operating decisions and assessing performance. Management
has organized our operating segments based upon differences in products and services provided.
We have three operating segments: Bookstore Division, Textbook Division, and Complementary
Services Division. The Bookstore and Textbook Divisions qualify as reportable operating
segments, while separate disclosure of the Complementary Services Division is provided as
management believes that information about this operating segment is useful to the readers of
our condensed consolidated financial statements. The Bookstore Division segment encompasses
the operating activities of our college bookstores located on or adjacent to college campuses.
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 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. |
We primarily account for intersegment sales as if the sales were to third parties (at current
market prices). Certain assets, net interest expense and taxes (excluding interest and taxes
incurred by our wholly-owned subsidiaries, NBC Textbooks LLC, Net Textstore LLC, CBA, Campus
Authentic LLC, and Specialty Books, Inc.) are not allocated between our segments; instead, such
balances are accounted for in a corporate administrative division. |
Earnings before interest, taxes, depreciation and amortization (EBITDA) and earnings before
interest, taxes, depreciation, amortization and loss on early extinguishment of debt (Adjusted
EBITDA) are important measures of segment profit or loss utilized by the Chief Executive
Officer and President (chief operating decision makers) in making decisions about resources to
be allocated to operating segments and assessing operating segment performance. |
13
The following table provides selected information about profit or loss (excluding the
impact of our interdivisional administrative fee see Note 11, Condensed Consolidating
Financial Information, to the condensed consolidated financial statements) on a segment basis:
Complementary | ||||||||||||||||
Bookstore | Textbook | Services | ||||||||||||||
Division | Division | Division | Total | |||||||||||||
Quarter ended December 31, 2009: |
||||||||||||||||
External customer revenues |
$ | 35,946,154 | $ | 23,643,734 | $ | 7,068,696 | $ | 66,658,584 | ||||||||
Intersegment revenues |
628,558 | 8,990,245 | 1,402,820 | 11,021,623 | ||||||||||||
Depreciation and amortization expense |
2,255,745 | 1,518,921 | 682,558 | 4,457,224 | ||||||||||||
Adjusted earnings (loss) before interest, taxes,
depreciation and amortization (Adjusted EBITDA) |
(6,432,938 | ) | 5,960,451 | 556,068 | 83,581 | |||||||||||
Quarter ended December 31, 2008: |
||||||||||||||||
External customer revenues |
$ | 33,440,314 | $ | 26,658,354 | $ | 6,559,468 | $ | 66,658,136 | ||||||||
Intersegment revenues |
360,662 | 9,542,273 | 1,231,080 | 11,134,015 | ||||||||||||
Depreciation and amortization expense |
2,222,917 | 1,522,303 | 661,184 | 4,406,404 | ||||||||||||
Earnings (loss) before interest, taxes,
depreciation and amortization (EBITDA) |
(7,883,504 | ) | 6,291,744 | (66,309 | ) | (1,658,069 | ) | |||||||||
Nine months ended December 31, 2009: |
||||||||||||||||
External customer revenues |
$ | 305,403,467 | $ | 85,424,032 | $ | 21,311,060 | $ | 412,138,559 | ||||||||
Intersegment revenues |
1,385,982 | 31,728,270 | 4,581,679 | 37,695,931 | ||||||||||||
Depreciation and amortization expense |
6,885,874 | 4,559,710 | 2,042,835 | 13,488,419 | ||||||||||||
Adjusted earnings before interest, taxes,
depreciation and amortization (Adjusted EBITDA) |
22,175,114 | 31,831,524 | 1,669,013 | 55,675,651 | ||||||||||||
Nine months ended December 31, 2008: |
||||||||||||||||
External customer revenues |
$ | 304,630,395 | $ | 93,373,159 | $ | 20,790,822 | $ | 418,794,376 | ||||||||
Intersegment revenues |
1,160,271 | 31,910,719 | 4,751,375 | 37,822,365 | ||||||||||||
Depreciation and amortization expense |
6,550,212 | 4,563,513 | 1,972,308 | 13,086,033 | ||||||||||||
Earnings before interest, taxes,
depreciation and amortization (EBITDA) |
17,884,424 | 32,115,491 | 657,971 | 50,657,886 |
14
The following table reconciles segment information presented above with consolidated
information as presented in our condensed consolidated financial statements:
Quarter Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues: |
||||||||||||||||
Total for reportable segments |
$ | 77,680,207 | $ | 77,792,151 | $ | 449,834,490 | $ | 456,616,741 | ||||||||
Elimination of intersegment revenues |
(11,021,623 | ) | (11,134,015 | ) | (37,695,931 | ) | (37,822,365 | ) | ||||||||
Consolidated total |
$ | 66,658,584 | $ | 66,658,136 | $ | 412,138,559 | $ | 418,794,376 | ||||||||
Depreciation and Amortization Expense: |
||||||||||||||||
Total for reportable segments |
$ | 4,457,224 | $ | 4,406,404 | $ | 13,488,419 | $ | 13,086,033 | ||||||||
Corporate Administration |
352,312 | 217,595 | 1,050,850 | 920,681 | ||||||||||||
Consolidated total |
$ | 4,809,536 | $ | 4,623,999 | $ | 14,539,269 | $ | 14,006,714 | ||||||||
Income (Loss) Before Income Taxes: |
||||||||||||||||
Total Adjusted EBITDA for reportable segments (1) |
$ | 83,581 | $ | (1,658,069 | ) | $ | 55,675,651 | $ | 50,657,886 | |||||||
Corporate Administration Adjusted EBITDA loss
(including interdivision profit elimination) (1) |
(6,101,610 | ) | (6,189,906 | ) | (13,187,402 | ) | (12,888,985 | ) | ||||||||
(6,018,029 | ) | (7,847,975 | ) | 42,488,249 | 37,768,901 | |||||||||||
Depreciation and amortization |
(4,809,536 | ) | (4,623,999 | ) | (14,539,269 | ) | (14,006,714 | ) | ||||||||
Consolidated income (loss) from operations |
(10,827,565 | ) | (12,471,974 | ) | 27,948,980 | 23,762,187 | ||||||||||
Interest and other expenses, net |
(13,655,200 | ) | (7,657,776 | ) | (32,993,603 | ) | (23,554,692 | ) | ||||||||
Consolidated income (loss) before income taxes |
$ | (24,482,765 | ) | $ | (20,129,750 | ) | $ | (5,044,623 | ) | $ | 207,495 | |||||
(1) | Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization
and loss on early extinguishment of debt. There was no loss on early extinguishment of debt
in the quarter and nine months ended December 31, 2008; therefore, Adjusted EBITDA equals
EBITDA for those periods. |
Our 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. | Accounting Pronouncements Not Yet Adopted In January 2010, the FASB issued Accounting
Standards Update 2010-06, Improving Disclosures about Fair Value Measurements (Update
2010-06). Update 2010-06 provides amendments to current standards to require new disclosures
for transfers of assets and liabilities between Levels 1 and 2 and for activity in Level 3
fair value measurements. Furthermore, the update provides amendments to clarify that a
reporting entity should provide fair value measurement disclosures for each class of assets
and liabilities and should provide disclosures about the valuation techniques and inputs used
to measure fair value for both recurring and nonrecurring fair value measurements for those
measurements that fall in either Level 2 or Level 3. Update 2010-06 becomes effective for us
in fiscal year 2011. Management has determined that the update will not have a material
impact on the consolidated financial statements. |
In October 2009, the
FASB issued Accounting Standards Update 2009-13, Multiple Deliverable
Arrangements (Update 2009-13). Update 2009-13 addresses the accounting for
multiple-deliverable arrangements to enable vendors to account for products or services
(deliverables) separately rather than as a combined unit. The update addresses how to separate
deliverables and how to measure and allocate arrangement considerations to one or more units of
account. Update 2009-13 becomes effective prospectively for revenue arrangements entered into
or materially modified in fiscal years beginning on or after June 15, 2010, with earlier
application permitted. An entity may elect to adopt the standard on a retrospective basis. We
expect to apply this standard on a prospective basis beginning April 1, 2011. Management has
not yet determined if the update will have a material impact on the consolidated financial
statements. |
In October 2009, the FASB issued Accounting Standards Update 2009-14, Certain Revenue
Arrangements That Include Software Elements (Update 2009-14). Update 2009-14 clarifies what
guidance should be used in allocating and
measuring revenue from vendors that sell or lease tangible products in an arrangement that
contains software that is more than incidental to the tangible product as a whole. The
amendments in this update do not affect software revenue arrangements that do not include
tangible products nor do they affect software revenue arrangements that include services if the
software is essential to the functionality of those services. Update 2009-14 becomes effective
prospectively for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with earlier application permitted. An entity may elect to
adopt the standard on a retrospective basis. We expect to apply this standard on a prospective
basis beginning April 1, 2011. Management has determined that the update will not have a
material impact on the consolidated financial statements. |
15
9. | Related Party Transactions In accordance with our debt covenants, we declared and paid $4.2
million in dividends to NBC during the nine months ended December 31, 2009 and 2008 to provide
funding for interest due and payable on NBCs Senior Discount Notes. |
10. | Subsequent Event On January 14, 2010, NBC Holdings Corp. (NBCs parent) amended the 2004
Stock Option Plan (the Plan), increasing the number of options available for issuance under
the Plan to 100,306 options from 85,306 options. NBCs Board of Directors approved the grant
of 4,238 options under the 2004 Stock Option Plan on February 3, 2010. |
11. | Condensed Consolidating Financial Information Effective January 26, 2009, we
established Campus Authentic LLC, a wholly-owned subsidiary which was separately
incorporated under the laws of the State of Delaware. On April 24, 2007, we established
Net Textstore LLC as a wholly-owned subsidiary separately incorporated under the laws of
the State of Delaware. On May 1, 2006, we acquired all of the outstanding stock of CBA, an
entity separately incorporated under the laws of the State of Illinois and now accounted
for as one of our wholly-owned subsidiaries. Effective January 1, 2005, our textbook
division was separately formed under the laws of the State of Delaware as NBC Textbooks
LLC, one of our wholly-owned subsidiaries. Effective July 1, 2002, our distance education
business was separately incorporated under the laws of the State of Delaware as Specialty
Books, Inc., one of our wholly-owned subsidiaries. In connection with their incorporation,
Campus Authentic LLC, Net Textstore LLC, CBA, NBC Textbooks LLC, and Specialty Books, Inc.
have unconditionally guaranteed, on a joint and several basis, full and prompt payment and
performance of our obligations, liabilities, and indebtedness arising under, out of, or in
connection with the Senior Subordinated Notes and the Senior Secured Notes. As of December
31, 2009, our wholly-owned subsidiaries were also a party to the First Lien Amended and
Restated Guarantee and Collateral Agreement related to the ABL Credit Agreement. 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 guarantors (Campus Authentic LLC (from January
26, 2009), Net Textstore LLC, CBA, NBC Textbooks LLC, and Specialty Books, Inc.),
consolidating eliminations, and consolidated totals. |
16
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2009
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2009
Nebraska | ||||||||||||||||
Book | Subsidiary | Consolidated | ||||||||||||||
Company, Inc. | Guarantors | Eliminations | Totals | |||||||||||||
ASSETS |
||||||||||||||||
CURRENT ASSETS: |
||||||||||||||||
Cash and cash equivalents |
$ | 8,292,431 | $ | 8,522,605 | $ | | $ | 16,815,036 | ||||||||
Intercompany receivables |
23,513,510 | 25,009,714 | (48,523,224 | ) | | |||||||||||
Receivables, net |
23,399,403 | 52,172,722 | | 75,572,125 | ||||||||||||
Inventories |
116,911,937 | 56,525,466 | | 173,437,403 | ||||||||||||
Recoverable income taxes |
6,910,271 | | | 6,910,271 | ||||||||||||
Deferred income taxes |
2,154,801 | 5,500,000 | | 7,654,801 | ||||||||||||
Prepaid expenses and other assets |
2,918,494 | 543,006 | | 3,461,500 | ||||||||||||
Total current assets |
184,100,847 | 148,273,513 | (48,523,224 | ) | 283,851,136 | |||||||||||
PROPERTY AND EQUIPMENT, net |
37,798,186 | 5,396,795 | | 43,194,981 | ||||||||||||
GOODWILL |
199,900,018 | 15,671,108 | | 215,571,126 | ||||||||||||
CUSTOMER RELATIONSHIPS, net |
4,392,630 | 76,945,570 | | 81,338,200 | ||||||||||||
TRADENAME |
31,320,000 | | | 31,320,000 | ||||||||||||
OTHER IDENTIFIABLE INTANGIBLES, net |
4,111,586 | 1,693,397 | | 5,804,983 | ||||||||||||
INVESTMENT IN SUBSIDIARIES |
168,394,390 | | (168,394,390 | ) | | |||||||||||
OTHER ASSETS |
12,521,407 | 1,484,476 | | 14,005,883 | ||||||||||||
$ | 642,539,064 | $ | 249,464,859 | $ | (216,917,614 | ) | $ | 675,086,309 | ||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||
CURRENT LIABILITIES: |
||||||||||||||||
Accounts payable |
$ | 53,211,464 | $ | 16,054,652 | $ | | $ | 69,266,116 | ||||||||
Intercompany payables |
25,009,714 | 23,513,510 | (48,523,224 | ) | | |||||||||||
Accrued employee compensation and benefits |
7,349,818 | 2,198,094 | | 9,547,912 | ||||||||||||
Accrued interest |
6,175,189 | | | 6,175,189 | ||||||||||||
Accrued incentives |
21,347 | 6,210,200 | | 6,231,547 | ||||||||||||
Accrued expenses |
6,775,764 | 612,511 | | 7,388,275 | ||||||||||||
Income taxes payable |
(3,391,744 | ) | 3,391,744 | | | |||||||||||
Deferred revenue |
2,858,701 | 6,759 | | 2,865,460 | ||||||||||||
Current maturities of long-term debt |
52,967 | | | 52,967 | ||||||||||||
Current maturities of capital lease obligations |
813,609 | | | 813,609 | ||||||||||||
Revolving credit facility |
23,100,000 | | | 23,100,000 | ||||||||||||
Total current liabilities |
121,976,829 | 51,987,470 | (48,523,224 | ) | 125,441,075 | |||||||||||
LONG-TERM DEBT, net of current maturities |
374,258,315 | | | 374,258,315 | ||||||||||||
CAPITAL LEASE OBLIGATIONS, net of current
maturities |
2,627,370 | | | 2,627,370 | ||||||||||||
OTHER LONG-TERM LIABILITIES |
1,755,997 | 360,000 | | 2,115,997 | ||||||||||||
DEFERRED INCOME TAXES |
22,958,459 | 28,722,999 | | 51,681,458 | ||||||||||||
DUE TO PARENT |
22,998,189 | | | 22,998,189 | ||||||||||||
COMMITMENTS |
||||||||||||||||
STOCKHOLDERS EQUITY |
95,963,905 | 168,394,390 | (168,394,390 | ) | 95,963,905 | |||||||||||
$ | 642,539,064 | $ | 249,464,859 | $ | (216,917,614 | ) | $ | 675,086,309 | ||||||||
17
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2009
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2009
Nebraska | ||||||||||||||||
Book | Subsidiary | Consolidated | ||||||||||||||
Company, Inc. | Guarantors | Eliminations | Totals | |||||||||||||
ASSETS |
||||||||||||||||
CURRENT ASSETS: |
||||||||||||||||
Cash and cash equivalents |
$ | 40,811,478 | $ | 3,226,990 | $ | | $ | 44,038,468 | ||||||||
Intercompany receivables |
17,795,278 | 31,381,837 | (49,177,115 | ) | | |||||||||||
Receivables, net |
34,406,593 | 26,895,043 | | 61,301,636 | ||||||||||||
Inventories |
47,625,966 | 45,489,697 | | 93,115,663 | ||||||||||||
Recoverable income taxes |
2,869,583 | | | 2,869,583 | ||||||||||||
Deferred income taxes |
2,350,802 | 4,231,000 | | 6,581,802 | ||||||||||||
Prepaid expenses and other assets |
3,648,635 | 302,239 | | 3,950,874 | ||||||||||||
Total current assets |
149,508,335 | 111,526,806 | (49,177,115 | ) | 211,858,026 | |||||||||||
PROPERTY AND EQUIPMENT, net |
40,057,891 | 5,580,631 | | 45,638,522 | ||||||||||||
GOODWILL |
199,900,017 | 15,536,109 | | 215,436,126 | ||||||||||||
CUSTOMER RELATIONSHIPS, net |
4,625,181 | 81,019,159 | | 85,644,340 | ||||||||||||
TRADENAME |
31,320,000 | | | 31,320,000 | ||||||||||||
OTHER IDENTIFIABLE INTANGIBLES, net |
7,071,442 | 2,101,180 | | 9,172,622 | ||||||||||||
INVESTMENT IN SUBSIDIARIES |
151,290,937 | | (151,290,937 | ) | | |||||||||||
OTHER ASSETS |
8,388,921 | 608,150 | | 8,997,071 | ||||||||||||
$ | 592,162,724 | $ | 216,372,035 | $ | (200,468,052 | ) | $ | 608,066,707 | ||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||
CURRENT LIABILITIES: |
||||||||||||||||
Accounts payable |
$ | 22,728,714 | $ | 4,136,900 | $ | | $ | 26,865,614 | ||||||||
Intercompany payables |
31,381,837 | 17,795,278 | (49,177,115 | ) | | |||||||||||
Accrued employee compensation and benefits |
9,705,781 | 4,074,428 | | 13,780,209 | ||||||||||||
Accrued interest |
678,516 | | | 678,516 | ||||||||||||
Accrued incentives |
42,593 | 6,068,107 | | 6,110,700 | ||||||||||||
Accrued expenses |
3,804,787 | 472,318 | | 4,277,105 | ||||||||||||
Income taxes payable |
(2,187,068 | ) | 2,187,068 | | | |||||||||||
Deferred revenue |
959,274 | | | 959,274 | ||||||||||||
Current maturities of long-term debt |
6,917,451 | | | 6,917,451 | ||||||||||||
Current maturities of capital lease obligations |
748,692 | | | 748,692 | ||||||||||||
Total current liabilities |
74,780,577 | 34,734,099 | (49,177,115 | ) | 60,337,561 | |||||||||||
LONG-TERM DEBT, net of current maturities |
361,445,728 | | | 361,445,728 | ||||||||||||
CAPITAL LEASE OBLIGATIONS, net of current maturities |
3,298,658 | | | 3,298,658 | ||||||||||||
OTHER LONG-TERM LIABILITIES |
5,234,166 | 70,000 | | 5,304,166 | ||||||||||||
DEFERRED INCOME TAXES |
24,036,460 | 30,276,999 | | 54,313,459 | ||||||||||||
DUE TO PARENT |
20,130,189 | | | 20,130,189 | ||||||||||||
COMMITMENTS |
||||||||||||||||
STOCKHOLDERS EQUITY |
103,236,946 | 151,290,937 | (151,290,937 | ) | 103,236,946 | |||||||||||
$ | 592,162,724 | $ | 216,372,035 | $ | (200,468,052 | ) | $ | 608,066,707 | ||||||||
18
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2008
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2008
Nebraska | ||||||||||||||||
Book | Subsidiary | Consolidated | ||||||||||||||
Company, Inc. | Guarantors | Eliminations | Totals | |||||||||||||
ASSETS |
||||||||||||||||
CURRENT ASSETS: |
||||||||||||||||
Cash and cash equivalents |
$ | 11,729,483 | $ | 6,577,544 | $ | | $ | 18,307,027 | ||||||||
Intercompany receivables |
25,819,943 | 2,088,177 | (27,908,120 | ) | | |||||||||||
Receivables, net |
19,508,405 | 54,969,591 | | 74,477,996 | ||||||||||||
Inventories |
111,770,835 | 52,482,444 | | 164,253,279 | ||||||||||||
Recoverable income taxes |
5,794,462 | | | 5,794,462 | ||||||||||||
Deferred income taxes |
2,282,092 | 5,057,001 | | 7,339,093 | ||||||||||||
Prepaid expenses and other assets |
2,849,856 | 358,331 | | 3,208,187 | ||||||||||||
Total current assets |
179,755,076 | 121,533,088 | (27,908,120 | ) | 273,380,044 | |||||||||||
PROPERTY AND EQUIPMENT, net |
40,253,860 | 5,371,157 | | 45,625,017 | ||||||||||||
GOODWILL |
306,873,046 | 15,536,109 | | 322,409,155 | ||||||||||||
CUSTOMER RELATIONSHIPS, net |
4,702,698 | 82,377,022 | | 87,079,720 | ||||||||||||
TRADENAME |
31,320,000 | | | 31,320,000 | ||||||||||||
OTHER IDENTIFIABLE INTANGIBLES, net |
7,757,819 | 2,188,045 | | 9,945,864 | ||||||||||||
INVESTMENT IN SUBSIDIARIES |
146,395,806 | | (146,395,806 | ) | | |||||||||||
OTHER ASSETS |
5,212,773 | 667,902 | | 5,880,675 | ||||||||||||
$ | 722,271,078 | $ | 227,673,323 | $ | (174,303,926 | ) | $ | 775,640,475 | ||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||
CURRENT LIABILITIES: |
||||||||||||||||
Accounts payable |
$ | 49,210,174 | $ | 13,806,861 | $ | | $ | 63,017,035 | ||||||||
Intercompany payables |
2,088,177 | 25,819,943 | (27,908,120 | ) | | |||||||||||
Accrued employee compensation and benefits |
7,354,692 | 2,831,441 | | 10,186,133 | ||||||||||||
Accrued interest |
4,557,106 | | | 4,557,106 | ||||||||||||
Accrued incentives |
27,136 | 6,491,232 | | 6,518,368 | ||||||||||||
Accrued expenses |
2,581,521 | 431,040 | | 3,012,561 | ||||||||||||
Income taxes payable |
(976,668 | ) | 976,668 | | | |||||||||||
Deferred revenue |
2,364,677 | 2,332 | | 2,367,009 | ||||||||||||
Current maturities of long-term debt |
2,581,009 | | | 2,581,009 | ||||||||||||
Current maturities of capital lease obligations |
728,715 | | | 728,715 | ||||||||||||
Revolving credit facility |
42,000,000 | | | 42,000,000 | ||||||||||||
Total current liabilities |
112,516,539 | 50,359,517 | (27,908,120 | ) | 134,967,936 | |||||||||||
LONG-TERM DEBT, net of current maturities |
366,806,962 | | | 366,806,962 | ||||||||||||
CAPITAL LEASE OBLIGATIONS, net of current
maturities |
3,510,759 | | | 3,510,759 | ||||||||||||
OTHER LONG-TERM LIABILITIES |
4,785,175 | 70,000 | | 4,855,175 | ||||||||||||
DEFERRED INCOME TAXES |
22,383,415 | 30,848,000 | | 53,231,415 | ||||||||||||
DUE TO PARENT |
19,758,151 | | | 19,758,151 | ||||||||||||
COMMITMENTS |
||||||||||||||||
STOCKHOLDERS EQUITY |
192,510,077 | 146,395,806 | (146,395,806 | ) | 192,510,077 | |||||||||||
$ | 722,271,078 | $ | 227,673,323 | $ | (174,303,926 | ) | $ | 775,640,475 | ||||||||
19
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED DECEMBER 31, 2009
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED DECEMBER 31, 2009
Nebraska | ||||||||||||||||
Book | Subsidiary | Consolidated | ||||||||||||||
Company, Inc. | Guarantors | Eliminations | Totals | |||||||||||||
REVENUES, net of returns |
$ | 31,185,653 | $ | 44,664,776 | $ | (9,191,845 | ) | $ | 66,658,584 | |||||||
COSTS OF SALES (exclusive of depreciation shown below) |
17,946,287 | 30,123,113 | (9,471,746 | ) | 38,597,654 | |||||||||||
Gross profit |
13,239,366 | 14,541,663 | 279,901 | 28,060,930 | ||||||||||||
OPERATING EXPENSES (INCOME): |
||||||||||||||||
Selling, general and administrative |
23,986,143 | 9,812,915 | 279,901 | 34,078,959 | ||||||||||||
Depreciation |
1,676,774 | 448,198 | | 2,124,972 | ||||||||||||
Amortization |
1,159,526 | 1,525,038 | | 2,684,564 | ||||||||||||
Intercompany administrative fee |
(1,353,000 | ) | 1,353,000 | | | |||||||||||
Equity in earnings of subsidiaries |
(973,006 | ) | | 973,006 | | |||||||||||
24,496,437 | 13,139,151 | 1,252,907 | 38,888,495 | |||||||||||||
INCOME FROM OPERATIONS |
(11,257,071 | ) | 1,402,512 | (973,006 | ) | (10,827,565 | ) | |||||||||
OTHER EXPENSES: |
||||||||||||||||
Interest expense |
10,650,114 | 71 | | 10,650,185 | ||||||||||||
Interest income |
(28,179 | ) | (32,565 | ) | | (60,744 | ) | |||||||||
Loss on early extinguishment of debt |
3,065,759 | | | 3,065,759 | ||||||||||||
13,687,694 | (32,494 | ) | | 13,655,200 | ||||||||||||
INCOME BEFORE INCOME TAXES |
(24,944,765 | ) | 1,435,006 | (973,006 | ) | (24,482,765 | ) | |||||||||
INCOME TAX EXPENSE |
(10,059,000 | ) | 462,000 | | (9,597,000 | ) | ||||||||||
NET INCOME |
$ | (14,885,765 | ) | $ | 973,006 | $ | (973,006 | ) | $ | (14,885,765 | ) | |||||
20
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED DECEMBER 31, 2008
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED DECEMBER 31, 2008
Nebraska | ||||||||||||||||
Book | Subsidiary | Consolidated | ||||||||||||||
Company, Inc. | Guarantors | Eliminations | Totals | |||||||||||||
REVENUES, net of returns |
$ | 29,298,865 | $ | 47,061,351 | $ | (9,702,080 | ) | $ | 66,658,136 | |||||||
COSTS OF SALES (exclusive of depreciation shown below) |
18,770,118 | 31,294,850 | (10,140,053 | ) | 39,924,915 | |||||||||||
Gross profit |
10,528,747 | 15,766,501 | 437,973 | 26,733,221 | ||||||||||||
OPERATING EXPENSES (INCOME): |
||||||||||||||||
Selling, general and administrative |
23,291,526 | 10,851,697 | 437,973 | 34,581,196 | ||||||||||||
Depreciation |
1,382,712 | 394,934 | | 1,777,646 | ||||||||||||
Amortization |
1,285,738 | 1,560,615 | | 2,846,353 | ||||||||||||
Intercompany administrative fee |
(1,230,900 | ) | 1,230,900 | | | |||||||||||
Equity in earnings of subsidiaries |
(1,146,439 | ) | | 1,146,439 | | |||||||||||
23,582,637 | 14,038,146 | 1,584,412 | 39,205,195 | |||||||||||||
INCOME (LOSS) FROM OPERATIONS |
(13,053,890 | ) | 1,728,355 | (1,146,439 | ) | (12,471,974 | ) | |||||||||
OTHER EXPENSES: |
||||||||||||||||
Interest expense |
7,820,666 | | | 7,820,666 | ||||||||||||
Interest income |
(152,806 | ) | (10,084 | ) | | (162,890 | ) | |||||||||
7,667,860 | (10,084 | ) | | 7,657,776 | ||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES |
(20,721,750 | ) | 1,738,439 | (1,146,439 | ) | (20,129,750 | ) | |||||||||
INCOME TAX EXPENSE (BENEFIT) |
(8,644,000 | ) | 592,000 | | (8,052,000 | ) | ||||||||||
NET INCOME (LOSS) |
$ | (12,077,750 | ) | $ | 1,146,439 | $ | (1,146,439 | ) | $ | (12,077,750 | ) | |||||
21
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2009
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2009
Nebraska | ||||||||||||||||
Book | Subsidiary | Consolidated | ||||||||||||||
Company, Inc. | Guarantors | Eliminations | Totals | |||||||||||||
REVENUES, net of returns |
$ | 246,489,116 | $ | 198,005,827 | $ | (32,356,384 | ) | $ | 412,138,559 | |||||||
COSTS OF SALES (exclusive of depreciation shown below) |
158,084,624 | 127,440,885 | (33,156,770 | ) | 252,368,739 | |||||||||||
Gross profit |
88,404,492 | 70,564,942 | 800,386 | 159,769,820 | ||||||||||||
OPERATING EXPENSES (INCOME): |
||||||||||||||||
Selling, general and administrative |
82,863,682 | 33,617,503 | 800,386 | 117,281,571 | ||||||||||||
Depreciation |
4,900,807 | 1,317,619 | | 6,218,426 | ||||||||||||
Amortization |
3,683,562 | 4,637,281 | | 8,320,843 | ||||||||||||
Intercompany administrative fee |
(4,059,000 | ) | 4,059,000 | | | |||||||||||
Equity in earnings of subsidiaries |
(17,103,452 | ) | | 17,103,452 | | |||||||||||
70,285,599 | 43,631,403 | 17,903,838 | 131,820,840 | |||||||||||||
INCOME FROM OPERATIONS |
18,118,893 | 26,933,539 | (17,103,452 | ) | 27,948,980 | |||||||||||
OTHER EXPENSES: |
||||||||||||||||
Interest expense |
30,031,350 | 935 | | 30,032,285 | ||||||||||||
Interest income |
(45,593 | ) | (58,848 | ) | | (104,441 | ) | |||||||||
Loss on early extinguishment of debt |
3,065,759 | | | 3,065,759 | ||||||||||||
33,051,516 | (57,913 | ) | | 32,993,603 | ||||||||||||
INCOME BEFORE INCOME TAXES |
(14,932,623 | ) | 26,991,452 | (17,103,452 | ) | (5,044,623 | ) | |||||||||
INCOME TAX EXPENSE (BENEFIT) |
(11,865,000 | ) | 9,888,000 | | (1,977,000 | ) | ||||||||||
NET INCOME |
$ | (3,067,623 | ) | $ | 17,103,452 | $ | (17,103,452 | ) | $ | (3,067,623 | ) | |||||
22
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2008
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2008
Nebraska | ||||||||||||||||
Book | Subsidiary | Consolidated | ||||||||||||||
Company, Inc. | Guarantors | Eliminations | Totals | |||||||||||||
REVENUES, net of returns |
$ | 252,728,858 | $ | 198,520,746 | $ | (32,455,228 | ) | $ | 418,794,376 | |||||||
COSTS OF SALES (exclusive of depreciation shown below) |
164,493,705 | 128,270,222 | (33,576,593 | ) | 259,187,334 | |||||||||||
Gross profit |
88,235,153 | 70,250,524 | 1,121,365 | 159,607,042 | ||||||||||||
OPERATING EXPENSES (INCOME): |
||||||||||||||||
Selling, general and administrative |
83,158,473 | 37,558,303 | 1,121,365 | 121,838,141 | ||||||||||||
Depreciation |
4,327,127 | 1,140,518 | | 5,467,645 | ||||||||||||
Amortization |
3,921,895 | 4,617,174 | | 8,539,069 | ||||||||||||
Intercompany administrative fee |
(3,692,700 | ) | 3,692,700 | | | |||||||||||
Equity in earnings of subsidiaries |
(14,812,505 | ) | | 14,812,505 | | |||||||||||
72,902,290 | 47,008,695 | 15,933,870 | 135,844,855 | |||||||||||||
INCOME FROM OPERATIONS |
15,332,863 | 23,241,829 | (14,812,505 | ) | 23,762,187 | |||||||||||
OTHER EXPENSES: |
||||||||||||||||
Interest expense |
23,795,302 | | | 23,795,302 | ||||||||||||
Interest income |
(310,934 | ) | (31,676 | ) | | (342,610 | ) | |||||||||
Loss on derivative financial instrument |
102,000 | | | 102,000 | ||||||||||||
23,586,368 | (31,676 | ) | | 23,554,692 | ||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES |
(8,253,505 | ) | 23,273,505 | (14,812,505 | ) | 207,495 | ||||||||||
INCOME TAX EXPENSE (BENEFIT) |
(8,378,000 | ) | 8,461,000 | | 83,000 | |||||||||||
NET INCOME |
$ | 124,495 | $ | 14,812,505 | $ | (14,812,505 | ) | $ | 124,495 | |||||||
23
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2009
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2009
Nebraska | ||||||||||||||||
Book | Subsidiary | Consolidated | ||||||||||||||
Company, Inc. | Guarantors | Eliminations | Totals | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
$ | (46,006,989 | ) | $ | 8,281,610 | $ | | $ | (37,725,379 | ) | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||||||
Purchases of property and equipment |
(2,982,415 | ) | (1,097,913 | ) | 54,703 | (4,025,625 | ) | |||||||||
Acquisitions, net of cash acquired |
(305,641 | ) | (1,998,702 | ) | | (2,304,343 | ) | |||||||||
Proceeds from sale of property and equipment |
37,757 | 110,620 | (54,703 | ) | 93,674 | |||||||||||
Software development costs |
(441,156 | ) | | | (441,156 | ) | ||||||||||
Net cash flows from investing activities |
(3,691,455 | ) | (2,985,995 | ) | | (6,677,450 | ) | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||||||
Proceeds from issuance of long-term debt |
199,000,000 | | | 199,000,000 | ||||||||||||
Payment of financing costs |
(9,834,721 | ) | | | (9,834,721 | ) | ||||||||||
Principal payments on long-term debt |
(193,112,511 | ) | | | (193,112,511 | ) | ||||||||||
Principal payments on capital lease obligations |
(606,371 | ) | | | (606,371 | ) | ||||||||||
Net increase in revolving credit facility |
23,100,000 | | | 23,100,000 | ||||||||||||
Dividends paid to parent |
(4,235,000 | ) | (4,235,000 | ) | ||||||||||||
Change in due to parent |
2,868,000 | | | 2,868,000 | ||||||||||||
Net cash flows from financing activities |
17,179,397 | | | 17,179,397 | ||||||||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
(32,519,047 | ) | 5,295,615 | | (27,223,432 | ) | ||||||||||
CASH AND CASH EQUIVALENTS, Beginning of period |
40,811,478 | 3,226,990 | | 44,038,468 | ||||||||||||
CASH AND CASH EQUIVALENTS, End of period |
$ | 8,292,431 | $ | 8,522,605 | $ | | $ | 16,815,036 | ||||||||
24
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2008
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2008
Nebraska | ||||||||||||||||
Book | Subsidiary | Consolidated | ||||||||||||||
Company, Inc. | Guarantors | Eliminations | Totals | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
$ | (43,014,685 | ) | $ | 4,872,707 | $ | | (38,141,978 | ) | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||||||
Purchases of property and equipment |
(4,827,556 | ) | (1,177,190 | ) | 31,520 | (5,973,226 | ) | |||||||||
Acquisitions, net of cash acquired |
(2,756,420 | ) | (2,895,499 | ) | | (5,651,919 | ) | |||||||||
Proceeds from sale of property and equipment |
23,142 | 39,200 | (31,520 | ) | 30,822 | |||||||||||
Software development costs |
(264,436 | ) | | | (264,436 | ) | ||||||||||
Net cash flows from investing activities |
(7,825,270 | ) | (4,033,489 | ) | | (11,858,759 | ) | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||||||
Principal payments on long-term debt |
(1,045,862 | ) | | | (1,045,862 | ) | ||||||||||
Principal payments on capital lease obligations |
(530,699 | ) | | | (530,699 | ) | ||||||||||
Net increase in revolving credit facility |
42,000,000 | | | 42,000,000 | ||||||||||||
Dividends paid to parent |
(4,235,000 | ) | | | (4,235,000 | ) | ||||||||||
Capital contributions |
4,869 | | | 4,869 | ||||||||||||
Change in due to parent |
2,788,000 | 2,788,000 | ||||||||||||||
Net cash flows from financing activities |
38,981,308 | | | 38,981,308 | ||||||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
(11,858,647 | ) | 839,218 | | (11,019,429 | ) | ||||||||||
CASH AND CASH EQUIVALENTS, Beginning of period |
23,588,130 | 5,738,326 | | 29,326,456 | ||||||||||||
CASH AND CASH EQUIVALENTS, End of period |
$ | 11,729,483 | $ | 6,577,544 | $ | | $ | 18,307,027 | ||||||||
25
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
Acquisitions. Our Bookstore Division continues to grow its number of bookstores through
acquisitions and start-up locations. We added 1 start-up location and opened an off-campus
bookstore to replace an on-campus location in the same market during the quarter ended December 31,
2009. We believe there are attractive opportunities for us to continue to expand our chain of
bookstores across the country.
Revenue Results. Consolidated revenues for the quarter ended December 31, 2009 were
comparable to the quarter ended December 31, 2008. An increase in revenues in the Bookstore and
Complementary Services Divisions was offset by a decrease in revenues in the Textbook Division. The
increase in revenues in the Bookstore Division was due to an increase in same-store sales and sales
from new stores and the increase in revenues in the Complementary Services Division was due to an
increase in our distance education, e-commerce and systems businesses. The decrease in revenues in
the Textbook Division was primarily due to a decrease in units sold and, to a lesser extent, a
decrease in average price per book sold.
Adjusted EBITDA Results. Consolidated Adjusted EBITDA for the quarter ended December 31, 2009
increased $1.8 million, or 23.3%, from the quarter ended December 31, 2008. The consolidated
Adjusted EBITDA increase was primarily attributable to an increase in revenues in the Bookstore and
Complementary Services Divisions and lower selling, general and administrative expenses for the
Textbook and Complementary Services Divisions. EBITDA and Adjusted EBITDA are considered non-GAAP
measures by the SEC, and therefore you should refer to the more detailed explanation of those
measures that is provided below.
EBITDA is defined as earnings before interest, taxes, depreciation, and amortization.
Adjusted EBITDA is EBITDA adjusted for loss on early extinguishment of debt. There was no loss on
early extinguishment of debt in the quarter and nine months ended December 31, 2008; therefore,
Adjusted EBITDA equals EBITDA for those periods. As we are highly-leveraged and as our equity is
not publicly-traded, management believes that the non-GAAP measures, EBITDA and Adjusted EBITDA,
are useful in evaluating our results and provide additional information for determining our ability
to meet debt service requirements. That belief is driven by the consistent use of the measures in
the computations used to establish the value of our equity over the past 15 years and the fact that
our debt covenants also use those measures, as further described below, to measure and monitor our
financial results. Due to the importance of EBITDA and Adjusted EBITDA to our equity and debt
holders, our chief operating decision makers and other members of management use EBITDA and
Adjusted EBITDA to measure our overall performance, to assist in resource allocation
decision-making, to develop our budget goals, to determine incentive compensation goals and
payments, and to manage other expenditures among other uses.
Adjusted EBITDA is defined in the ABL Credit Agreement as: (1) consolidated net income, as
defined therein; plus (2) the following items, to the extent deducted from consolidated net income:
(a) income tax expense; (b) interest expense, amortization or write-off of debt discount and debt
issuance costs and commissions, discounts and other fees and charges associated with indebtedness;
(c) depreciation and amortization expense; (d) amortization of intangibles and organization costs;
(e) any non-cash extraordinary, unusual or non-recurring expenses or losses; (f) any other non-cash
charges; and (g) charges incurred on or prior to September 30, 2010 in connection with the
restricted stock plan not to exceed $5.0 million in the aggregate; minus (3) the following items,
to the extent included in the statement of net income for such period; (i) interest income; (ii)
any extraordinary, unusual or non-recurring income or gains; and (iii) any other non-cash income.
Adjusted EBITDA is similarly defined in the indentures to the Senior Subordinated Notes and the
Senior Secured Notes except that charges incurred in connection with the restricted stock plan are
not added back to consolidated net income. Adjusted EBITDA is utilized when calculating the pro
forma fixed charge coverage ratio under the ABL Credit Agreement and the pro forma consolidated
coverage ratio under the indentures to the Senior Subordinated Notes and the Senior Secured Notes.
See Note 4, Long-Term Debt, to the condensed consolidated financial statements for disclosure of
certain of our financial covenants.
There are material limitations associated with the use of EBITDA and Adjusted EBITDA. EBITDA
and Adjusted EBITDA do not represent and should not be considered as alternatives to net cash flows
from operating activities or net income as determined by GAAP. Furthermore, EBITDA and Adjusted
EBITDA do not necessarily indicate whether cash flows will be sufficient for cash requirements
because the measures do not include reductions for cash payments for our obligation to service our
debt, fund our working capital, make capital expenditures and make acquisitions or pay our income
taxes and dividends; nor is it a measure of our profitability because it does not include costs and expenses identified
below. We believe EBITDA and Adjusted EBITDA when viewed with both our GAAP results and the
reconciliations to operating cash flows and net income provide a more complete understanding of our
business than could otherwise be obtained absent this disclosure. Items excluded from EBITDA and
Adjusted EBITDA, such as interest, taxes, depreciation, amortization, and loss on early
extinguishment of debt, are significant components in understanding and assessing our financial
performance. EBITDA and Adjusted EBITDA measures presented may not be comparable to similarly
titled measures presented by other companies.
26
Subsequent Events. On January 14, 2010, NBC Holdings Corp. (NBCs parent) amended the 2004
Stock Option Plan (the Plan), increasing the number of options available for issuance under the
Plan to 100,306 options from 85,306 options. NBCs Board of Directors approved the grant of 4,238
options under the 2004 Stock Option Plan on February 3, 2010.
Robert A. Rupe, Senior Vice President of the Bookstore Division has elected to retire
effective upon the hiring of his replacement and transition of responsibilities. Mr. Rupe will
continue to serve in his current role until such time as his replacement is found and a transition
period has occurred, which is anticipated to occur in the next three to four months.
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 and, in addition, new and different challenges and opportunities
given the general instability in the credit markets and in the economy. We have experienced, and
we believe we will continue to experience, increasing competition for the supply of used textbooks
from other companies, including other textbook wholesalers and from student-to-student
transactions, increasing 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.
Finally, we are uncertain what impact the current economy and the instability in the financial
markets might have on our business. Despite these challenges, we expect that we will continue to
grow EBITDA on a consolidated basis in fiscal year 2010. We also expect that our capital
expenditures will remain modest for a company of our size.
Quarter Ended December 31, 2009 Compared With Quarter Ended December 31, 2008.
Revenues. Revenues for the quarters ended December 31, 2009 and 2008 and the corresponding
change in revenues were as follows:
Change | ||||||||||||||||
2009 | 2008 | Amount | Percentage | |||||||||||||
Bookstore Division |
$ | 36,574,712 | $ | 33,800,976 | $ | 2,773,736 | 8.2 | % | ||||||||
Textbook Division |
32,633,979 | 36,200,627 | (3,566,648 | ) | (9.9 | )% | ||||||||||
Complementary Services Division |
8,471,516 | 7,790,548 | 680,968 | 8.7 | % | |||||||||||
Intercompany Eliminations |
(11,021,623 | ) | (11,134,015 | ) | 112,392 | (1.0 | )% | |||||||||
$ | 66,658,584 | $ | 66,658,136 | $ | 448 | 0.0 | % | |||||||||
The increase in Bookstore Division revenues was attributable to an increase in same-store
sales and additional revenues from new bookstores, which was partially offset by a decrease in
revenues as a result of certain store closings. Same-store sales for the quarter ended December
31, 2009 increased $1.9 million, or 6.0%, from the quarter ended December 31, 2008, primarily due
to increased textbook revenues, which was partially offset by a decrease in clothing and insignia
wear revenues. We define same-store sales for the quarter ended December 31, 2009 as sales from
any store, even if expanded or relocated, that we have operated since the start of fiscal year
2009. In addition, we have added 37 bookstore locations through acquisitions or start-ups since
April 1, 2008. The new bookstores provided an additional $1.5 million of revenue for the quarter
ended December 31, 2009. Revenues declined $0.6 million for the quarter ended December 31, 2009 as
a result of certain store closings since April 1, 2008.
For the quarter ended December 31, 2009, Textbook Division revenues decreased $3.6 million, or
9.9%, from the quarter ended December 31, 2008, due primarily to a 5.2% decrease in units sold and
a 2.1% decrease in average price per book sold. Complementary Services Division revenues increased
$0.7 million, or 8.7%, from the quarter ended December 31, 2008, primarily due to an increase in
revenues from our distance education, e-commerce and systems businesses. Intercompany eliminations
decreased $0.1 million, or 1.0%.
27
Gross profit. Gross profit for the quarter ended December 31, 2009 increased $1.4 million, or
5.0%, to $28.1 million from $26.7 million for the quarter ended December 31, 2008. The increase in
gross profit was primarily attributable to an increase in revenues and gross profit in the
Bookstore and Complementary Services Divisions. The consolidated gross margin percentage increased
to 42.1% for the quarter ended December 31, 2009 from 40.1% for the quarter ended December 31,
2008. The increase in our consolidated gross margin percentage is attributable to increases in the
gross margin percentage for the Bookstore and Textbook Divisions.
Selling, general and administrative expenses. Selling, general and administrative expenses for
the quarter ended December 31, 2009 decreased $0.5 million, or 1.5%, to $34.1 million from $34.6
million for the quarter ended December 31, 2008. Selling, general and administrative expenses as a
percentage of revenues were 51.1% and 51.9% for the quarters ended December 31, 2009 and 2008,
respectively. The decrease in selling, general and administrative expenses was primarily
attributable to a $0.6 million decrease in personnel costs and a $0.5 million decrease in
advertising and travel expenses primarily due to cost cutting measures implemented during the last
quarter of fiscal year 2009. These decreases were partially offset by a $0.7 million increase in
commission expense primarily due to increased sales on the internet involving third-party websites
and a $0.2 million increase in rent expense primarily due to an increase in the number of stores.
Earnings (loss) before interest, taxes, depreciation, amortization, and loss on early
extinguishment of debt (Adjusted EBITDA). Adjusted EBITDA for the quarters ended December 31, 2009
and 2008 and the corresponding change in Adjusted EBITDA were as follows:
Change | ||||||||||||||||
2009 | 2008 | Amount | Percentage | |||||||||||||
Bookstore Division |
$ | (6,432,938 | ) | $ | (7,883,504 | ) | $ | 1,450,566 | 18.4 | % | ||||||
Textbook Division |
5,960,451 | 6,291,744 | (331,293 | ) | (5.3 | )% | ||||||||||
Complementary Services Division |
556,068 | (66,309 | ) | 622,377 | 938.6 | % | ||||||||||
Corporate Administration |
(6,101,610 | ) | (6,189,906 | ) | 88,296 | 1.4 | % | |||||||||
$ | (6,018,029 | ) | $ | (7,847,975 | ) | $ | 1,829,946 | 23.3 | % | |||||||
Bookstore Division Adjusted EBITDA loss decreased $1.5 million, or 18.4%, from the quarter
ended December 31, 2008, primarily due to an increase in revenues and gross profit. The $0.3
million, or 5.3%, decrease in Textbook Division Adjusted EBITDA from the quarter ended December 31,
2008, was primarily due to the previously mentioned decrease in revenues, which was partially
offset by a decrease in selling, general and administrative expenses. Complementary Services
Division Adjusted EBITDA increased $0.6 million from the quarter ended December 31, 2008, primarily
due to improved results in the distance education, e-commerce and systems businesses. Corporate
Administrations Adjusted EBITDA loss decreased $0.1 million from the quarter ended December 31,
2008.
28
For an explanation of why EBITDA and Adjusted EBITDA are useful measures in evaluating our
operating results and provide additional information for determining our ability to meet debt
service requirements, see Adjusted EBITDA Results elsewhere in Managements Discussion and
Analysis of Financial Condition and Results of Operations. The following presentation reconciles
Net Loss, which we believe to be the closest GAAP performance measure, to EBITDA and Adjusted
EBITDA and reconciles EBITDA and Adjusted EBITDA to net cash flows from operating activities, which
we believe to be the closest GAAP liquidity measure, and also sets forth net cash flows from
investing and financing activities as presented in the condensed consolidated statements of cash
flows:
Quarter Ended December 31, | ||||||||
2009 | 2008 | |||||||
Net loss |
$ | (14,885,765 | ) | $ | (12,077,750 | ) | ||
Interest expense, net |
10,589,441 | 7,657,776 | ||||||
Income tax benefit |
(9,597,000 | ) | (8,052,000 | ) | ||||
Depreciation and amortization |
4,809,536 | 4,623,999 | ||||||
EBITDA |
$ | (9,083,788 | ) | $ | (7,847,975 | ) | ||
Loss on early extinguishment of debt |
3,065,759 | | ||||||
Adjusted EBITDA |
$ | (6,018,029 | ) | $ | (7,847,975 | ) | ||
Share-based compensation |
309,421 | 262,791 | ||||||
Interest income |
60,744 | 162,890 | ||||||
Provision for losses on receivables |
280,618 | 75,442 | ||||||
Cash paid for interest |
(3,760,284 | ) | (3,545,118 | ) | ||||
Cash paid for income taxes |
(4,205,015 | ) | (5,768,926 | ) | ||||
(Gain) Loss on disposal of assets |
22,640 | (5,081 | ) | |||||
Change in due to parent |
(1,530,000 | ) | (1,437,000 | ) | ||||
Changes in operating assets and
liabilities, net of effect of
acquisitions (1) |
(100,156,701 | ) | (96,263,122 | ) | ||||
Net Cash Flows from Operating Activities |
$ | (114,996,606 | ) | $ | (114,366,099 | ) | ||
Net Cash Flows from Investing Activities |
$ | (1,603,108 | ) | $ | (2,070,521 | ) | ||
Net Cash Flows from Financing Activities |
$ | 27,330,237 | $ | 43,242,807 | ||||
(1) | Changes in operating assets and liabilities, net of effect of
acquisitions, 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. |
Depreciation expense. Depreciation expense for the quarter ended December 31, 2009 increased
$0.3 million to $2.1 million from $1.8 million for the quarter ended December 31, 2008, due
primarily to additional bookstores.
Amortization expense. Amortization expense for the quarter ended December 31, 2009 decreased
$0.1 million to $2.7 million from $2.8 million for the quarter ended December 31, 2008, primarily
due to a decrease in amortization of non-compete agreements associated with bookstore acquisitions.
Interest expense, net. Interest expense, net for the quarter ended December 31, 2009 increased
$2.9 million to $10.6 million from $7.7 million for the quarter ended December 31, 2008, primarily
due to a $1.9 million increase in interest, which is due to higher interest on the Senior Secured
Notes which replaced the Term Loan and a $0.9 million increase in amortization of additional
prepaid loan costs related to the issuance of the Senior Secured Notes and entering into the ABL
Credit Agreement.
Loss on extinguishment of debt. The loss on extinguishment of debt of $3.1 million for the
quarter ended December 31, 2009 relates to the write-off of debt issue costs as a result of the
termination of the Term Loan and Revolving Credit Facility.
29
Income taxes. Income tax benefit for the quarter ended December 31, 2009 increased $1.5
million to $9.6 million from $8.1 million for the quarter ended December 31, 2008. Our effective
tax rate for the quarters ended December 31, 2009 and 2008 was 39.2% and 40.0%, respectively. Our
effective tax rate differs from the statutory tax rate primarily as a result of state income taxes.
Nine Months Ended December 31, 2009 Compared With Nine Months Ended December 31, 2008.
Revenues. Revenues for the nine months ended December 31, 2009 and 2008 and the corresponding
change in revenues were as follows:
Change | ||||||||||||||||
2009 | 2008 | Amount | Percentage | |||||||||||||
Bookstore Division |
$ | 306,789,449 | $ | 305,790,666 | $ | 998,783 | 0.3 | % | ||||||||
Textbook Division |
117,152,302 | 125,283,878 | (8,131,576 | ) | (6.5 | )% | ||||||||||
Complementary Services Division |
25,892,739 | 25,542,197 | 350,542 | 1.4 | % | |||||||||||
Intercompany Eliminations |
(37,695,931 | ) | (37,822,365 | ) | 126,434 | (0.3 | )% | |||||||||
$ | 412,138,559 | $ | 418,794,376 | $ | (6,655,817 | ) | (1.6 | )% | ||||||||
The increase in Bookstore Division revenues was attributable to additional revenues from new
bookstores, which was mostly offset by decreases in revenues due to a decrease in same-store sales
and certain store closings. We have added 37 bookstore locations through acquisitions or start-ups
since April 1, 2008. The new bookstores provided an additional $13.8 million of revenue for the
nine months ended December 31, 2009. Same-store sales for the nine months ended December 31, 2009
decreased $6.5 million, or 2.3%, from the nine months ended December 31, 2008, primarily due to
decreased new textbook revenues and to a smaller decrease in clothing and insignia wear revenues,
which was slightly offset by an increase in used textbook revenues. We define same-store sales for
the nine months ended December 31, 2009 as sales from any store, even if expanded or relocated,
that we have operated since the start of fiscal year 2009. In addition, revenues declined $6.3
million as a result of certain store closings since April 1, 2008.
For the nine months ended December 31, 2009, Textbook Division revenues decreased $8.1
million, or 6.5%, from the nine months ended December 31, 2008, due to a 4.7% decrease in units
sold and a 0.2% decrease in average price per book sold. Complementary Services Division revenues
increased $0.4 million, or 1.4%, from the nine months ended December 31, 2008, as increases in
revenues in our distance education and e-commerce businesses were mostly offset by a decrease in
revenues from our consulting business. Intercompany eliminations decreased $0.1 million, or 0.3%.
Gross
profit. Gross profit for the nine months ended December 31, 2009 increased $0.2
million, or 0.1%, to $159.8 million from $159.6 million for the nine months ended December 31,
2008. The increase in gross profit was primarily attributable to increased revenues and gross
profit in the Bookstore and Complementary Services Divisions. The consolidated gross margin
percentage increased to 38.8% for the nine months ended December 31, 2009 from 38.1% for the nine
months ended December 31, 2008. The increase in our consolidated gross margin percentage is
primarily attributable to increases in the gross margin percentage for all of our operating
divisions.
Selling,
general and administrative expenses. Selling, general and administrative expenses for
the nine months ended December 31, 2009 decreased $4.5 million, or 3.7%, to $117.3 million from
$121.8 million for the nine months ended December 31, 2008. Selling, general and administrative
expenses as a percentage of revenues were 28.5% and 29.1% for the nine months ended December 31,
2009 and 2008, respectively. The decrease in selling, general and administrative expenses is
primarily attributable to a $5.4 million decrease in personnel costs and a $2.5 million decrease in
advertising and travel expenses, which were primarily due to cost cutting measures implemented
during the last quarter of fiscal year 2009. These decreases were partially offset by a $2.5
million increase in commission expense, primarily due to an increase in sales on the internet
involving third-party websites and a $1.4 million increase in rent expense, primarily due to an
increase in the number of stores.
30
Earnings (loss) before interest, taxes, depreciation, amortization, and loss on early
extinguishment of debt (Adjusted EBITDA). Adjusted EBITDA for the nine months ended December 31,
2009 and 2008 and the corresponding change in Adjusted EBITDA were as follows:
Change | ||||||||||||||||
2009 | 2008 | Amount | Percentage | |||||||||||||
Bookstore Division |
$ | 22,175,114 | $ | 17,884,424 | $ | 4,290,690 | 24.0 | % | ||||||||
Textbook Division |
31,831,524 | 32,115,491 | (283,967 | ) | (0.9 | )% | ||||||||||
Complementary Services Division |
1,669,013 | 657,971 | 1,011,042 | 153.7 | % | |||||||||||
Corporate Administration |
(13,187,402 | ) | (12,888,985 | ) | (298,417 | ) | (2.3 | )% | ||||||||
$ | 42,488,249 | $ | 37,768,901 | $ | 4,719,348 | 12.5 | % | |||||||||
Bookstore Division Adjusted EBITDA increased $4.3 million, or 24.0%, from the nine months
ended December 31, 2008, due to a decrease in selling, general and administrative expenses and an
increase in revenues and gross profit. The decrease in Textbook Division Adjusted EBITDA from the
nine months ended December 31, 2008 was primarily due to the decrease in revenues which was mostly
offset by a decrease in selling, general and administrative expenses. Complementary Services
Division Adjusted EBITDA increased $1.0 million from the nine months ended December 31, 2008,
primarily due to improved results in our distance education, e-commerce and systems businesses.
Corporate Administrations Adjusted EBITDA loss increased slightly from the nine months ended
December 31, 2008, primarily due to an increase in professional services.
For an explanation of why EBITDA and Adjusted EBITDA are useful measures in evaluating our
operating results and provide additional information for determining our ability to meet debt
service requirements, see Adjusted EBITDA Results elsewhere in Managements Discussion and
Analysis of Financial Condition and Results of Operations. The following presentation reconciles
Net Income (Loss), which we believe to be the closest GAAP performance measure, to EBITDA and
Adjusted EBITDA and reconciles EBITDA and Adjusted EBITDA to net cash flows from operating
activities, which we believe to be the closest GAAP liquidity measure, and also sets forth net cash
flows from investing and financing activities as presented in the condensed consolidated statements
of cash flows:
Nine Months Ended December 31, | ||||||||
2009 | 2008 | |||||||
Net income (loss) |
$ | (3,067,623 | ) | $ | 124,495 | |||
Interest expense, net |
29,927,844 | 23,554,692 | ||||||
Income tax expense (benefit) |
(1,977,000 | ) | 83,000 | |||||
Depreciation and amortization |
14,539,269 | 14,006,714 | ||||||
EBITDA |
$ | 39,422,490 | $ | 37,768,901 | ||||
Loss on early extinguishment of debt |
3,065,759 | | ||||||
Adjusted EBITDA |
$ | 42,488,249 | $ | 37,768,901 | ||||
Share-based compensation |
789,162 | 748,223 | ||||||
Interest income |
104,441 | 342,610 | ||||||
Provision for losses on receivables |
414,247 | 89,592 | ||||||
Cash paid for interest |
(21,120,029 | ) | (18,511,767 | ) | ||||
Cash paid for income taxes |
(2,900,688 | ) | (7,700,759 | ) | ||||
Loss on disposal of assets |
140,783 | 56,752 | ||||||
Change in due to parent |
(2,868,000 | ) | (2,788,000 | ) | ||||
Changes in operating assets and
liabilities, net of effect of
acquisitions (1) |
(54,773,544 | ) | (48,147,530 | ) | ||||
Net Cash Flows from Operating Activities |
$ | (37,725,379 | ) | $ | (38,141,978 | ) | ||
Net Cash Flows from Investing Activities |
$ | (6,677,450 | ) | $ | (11,858,759 | ) | ||
Net Cash Flows from Financing Activities |
$ | 17,179,397 | $ | 38,981,308 | ||||
(1) | Changes in operating assets and liabilities, net of effect of
acquisitions, 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. |
31
Depreciation expense. Depreciation expense for the nine months ended December 31, 2009
increased $0.7 million to $6.2 million from $5.5 million for the nine months ended December 31,
2008, due primarily to additional bookstores.
Amortization expense. Amortization expense for the nine months ended December 31, 2009
decreased by $0.2 million to $8.3 million from $8.5 million for the nine months ended December 31,
2008, primarily due to a decrease in amortization of non-compete agreements associated with
bookstore acquisitions, which was partially offset by an increase in amortization of
contract-managed acquisition costs primarily associated with bookstore acquisitions and
contract-management renewals and an increase in amortization of capitalized software development
costs.
Interest expense, net. Interest expense, net for the nine months ended December 31, 2009
increased $6.3 million to $29.9 million from $23.6 million for the nine months ended December 31,
2008, primarily due to a $4.7 million increase in interest on the Term Loan and Senior Secured
Notes mainly due to higher interest rates and a $2.0 million increase in amortization of additional
prepaid loan costs related to the issuance of the Senior Secured Notes and entering into the ABL
Credit Agreement. These increases were partially offset by a $0.6 million decline in interest on
the Revolving Credit Facility due to lower outstanding indebtedness.
Loss on extinguishment of debt. The loss on extinguishment of debt of $3.1 million for the
nine months ended December 31, 2009 relates to the write-off of debt issue costs as a result of the
termination of the Term Loan and Revolving Credit Facility.
Income taxes. Income tax benefit for the nine months ended December 31, 2009 increased $2.1
million to $2.0 million from an expense of $0.1 million for the nine months ended December 31,
2008. Our effective tax rate for the nine months ended December 31, 2009 and 2008 was 39.2% and
40.0%, respectively. Our effective tax rate differs from the statutory tax rate primarily as a
result of state income taxes.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Managements Discussion and Analysis of Financial Condition and Results of Operations
discusses our condensed consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America. The preparation of
these condensed 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 condensed 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 returns, bad debts, inventory valuation and
obsolescence, goodwill and 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 management believes 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
condensed consolidated financial statements:
Revenue Recognition. 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.
External customer returns over the past three fiscal years have ranged from approximately
23.0% to 23.5% of sales. Additional reductions to revenue and costs of sales may be required if
the actual rate of returns exceeds the estimated rate of returns. Consistent with prior years, the
estimated rate of returns is determined utilizing actual historical return experience. The accrual
rate for customer returns at March 31, 2009 was approximately 23.3% of sales.
Bad Debts. We maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. Consistent with prior years, in
determining the adequacy of the allowance, we analyze the aging of the receivable, the customers
financial position, historical collection experience, and other economic and industry factors. Net
charge-offs over the past three fiscal years have been between $0.5 million and $1.1 million, or
0.1% to 0.2% of revenues. We have maintained an allowance for doubtful accounts between $1.0
million and $1.3 million, or 0.2% to 0.3% of revenues, over the past three fiscal years. 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.
32
Inventory
Valuation and Obsolescence. Inventories are stated at the lower of cost or market.
The cost of used textbook inventories is determined using the weighted-average method. Our
Bookstore Division uses the retail inventory method to determine cost for new textbook and
non-textbook inventories. The cost of other inventories is determined on a first-in, first-out
cost method. Consistent with prior years, we account for inventory obsolescence based upon
assumptions about future demand and market conditions. At March 31, 2009, used textbook inventory
was subject to an obsolescence reserve of $2.4 million. For the past three fiscal years, the
obsolescence reserve has been between $2.0 million and $2.4 million. 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 factors.
Goodwill
and Intangible Assets. Our acquisitions of college bookstores result in the
application of the acquisition method of accounting as of the acquisition date. In certain
circumstances, our management performs valuations where appropriate to determine the fair value of
assets acquired and liabilities assumed. The goodwill in such transactions is determined by
calculating the difference between the consideration transferred and the fair value of net assets
acquired. We evaluate the impairment of the carrying value of our goodwill and identifiable
intangibles in accordance with applicable accounting standards, including the Intangibles
Goodwill and Other Topic of the Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) and the Property, Plant and Equipment Topic of the FASB ASC. In accordance
with such standards, we evaluate impairment on goodwill and certain identifiable intangibles
annually at March 31 and evaluate impairment on all intangibles whenever events or changes in
circumstances indicate that the carrying amounts of such assets may not be recoverable. We are
required to make certain assumptions and estimates regarding the fair value of intangible assets
when assessing such assets for impairment. We evaluate goodwill at the reporting unit level and
have identified our reportable segments, the Textbook Division, Bookstore Division and
Complementary Services Division, as our reporting units. Our reporting units are determined based
on the way management organizes the segments for making operating decisions and assessing
performance. Management has organized our reporting segments based upon differences in products
and services provided.
Due to the economic downturn and changes in comparable company market multiples, we determined
in the first step of our goodwill impairment test conducted at March 31, 2009, that the carrying
values of the Textbook and Bookstore Divisions exceeded their fair values, indicating that goodwill
may be impaired. Having determined that goodwill may be impaired, we performed the second step of
the goodwill impairment test which involves calculating the implied fair value of goodwill by
allocating the fair value of the reporting unit to all of its assets and liabilities other than
goodwill (including both recognized and unrecognized intangible assets) and comparing the residual
amount to the carrying value of goodwill. As a result, we recorded an impairment charge of $107.0
million in fiscal year 2009. The carrying value of goodwill in excess of the implied fair value at
March 31, 2009 was $67.0 million and $40.0 million for the Textbook and Bookstore Divisions,
respectively. At March 31, 2009, the date of the most recent step one test, after adjusting the
carrying values for goodwill impairment, the fair value of the Textbook Division exceeded the
carrying value of $213.0 million by 10.5% and the Bookstore Division fair value approximated the
carrying value. Remaining goodwill, at March 31, 2009, assigned to the Textbook Division was $34.6
million and to the Bookstore Division was $180.8 million. We continue to monitor events and
circumstances which may affect the fair values of both reporting units, including current market
conditions, and we believe that both reporting units are still at risk of failing step one of the
impairment test.
In the first step of our goodwill impairment test, fair value is determined using a market
approach based primarily on an EBITDA multiple, and is deemed to be the most indicative of the
Companys fair value. The EBITDA multiple approach requires that we estimate a certain valuation
multiple of EBITDA derived from comparable companies and apply that multiple to our latest twelve
month pro forma EBITDA. We reviewed comparable company information to determine the EBITDA
multiple and concluded that 7.0x was an appropriate EBITDA multiple. This total company fair value
is allocated to the reporting units based upon their percentage of EBITDA. The fair value was also calculated using the income approach
(discounted cash flow approach) and we concluded that it was supportive of the fair value based
upon the EBITDA multiple approach. In the second step of the goodwill impairment test, we are
required to estimate the fair value of reporting unit assets and liabilities, including intangible
assets, to derive the fair value of the reporting units goodwill. For purposes of the second test
of the goodwill impairment test, we estimated the fair value of our intangible assets tradename,
customer relationships and developed technology using the relief-from-royalty market approach,
excess earnings method income approach and replacement cost approach, respectively.
33
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.
We monitor relevant circumstances, including industry trends, general economic conditions, and
the potential impact that such circumstances might have on the valuation of our goodwill and
identifiable intangibles. It is possible that changes in such circumstances, or in the numerous
variables associated with the judgments, assumptions and estimates made by us in assessing the
appropriate valuation of our goodwill and identifiable intangibles, including a further
deterioration in the economy or debt markets or a significant delay in the expected recovery, could
in the future require us to further write down a portion of our goodwill or write down a portion of
our identifiable intangibles and record related non-cash impairment charges. If we were to have
used a multiple of 6.5x, we would have recorded an impairment charge of approximately $124.0
million in fiscal year 2009.
Accrued Incentives. Our Textbook Division offers certain incentive programs to its customers
that allow the participating customers the opportunity to earn rebates for used textbooks sold to
the Textbook Division. The rebates can be redeemed in a number of ways, including to pay for
freight charges on textbooks sold to the customer or to pay for certain products or services we
offer through our Complementary Services Division. The customer can also use the rebates to pay
for the cost of textbooks sold by the Textbook Division to the customer; however, a portion of the
rebates earned by the customer are forfeited if the customer chooses to use rebates in this manner.
If the customer fails to comply with the terms of the program, rebates earned during the year are
forfeited. Significant judgment is required in estimating the expected level of forfeitures on
rebates earned. Although we believe that our estimates of anticipated forfeitures, which have
consistently been based upon historical experience, are reasonable, actual results could differ
from these estimates resulting in an ultimate redemption of rebates which differs from that which
is reflected in accrued incentives in the condensed consolidated financial statements. For the
past three fiscal years, actual forfeitures have ranged between 13.7% and 16.7% of rebates earned
within those years. Accrued incentives at March 31, 2009 were $6.1 million, including estimated
forfeitures, however, if we accrued for rebates earned and unused as of March 31, 2009, assuming no
forfeitures, our accrued incentives would have been $6.7 million.
Income
Taxes. We account for income taxes by recording taxes payable or refundable for the
current fiscal year and deferred tax assets and liabilities for future tax consequences of events
that have been recognized in our condensed 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 different from that which is reflected in
the condensed consolidated financial statements.
Changes in Accounting Standards. In June 2009, the FASB Accounting Standards Codification
(Codification) became the single source of authoritative GAAP. The Codification did not create
any additional GAAP standards but incorporated existing accounting and reporting standards into a
new topical structure with a new referencing system to identify authoritative accounting standards,
replacing the prior references to Statement of Financial Accounting Standards, Emerging Issues Task
Force, FASB Staff Position, etc. Authoritative standards included in the Codification are
designated by their topical reference, and new standards are designated as Accounting Standards
Updates with a year and assigned sequence number. References to prior standards have been updated
in this interim report for the third quarter of fiscal year 2010 to reflect the new referencing
system.
LIQUIDITY AND CAPITAL RESOURCES
Financing Activities
Our primary liquidity requirements are for debt service under the ABL Credit Agreement, the
Senior Secured Notes, the Senior Subordinated Notes and other outstanding indebtedness, for
dividends to fund interest payments due at our parent company, NBC Acquisition Corp. (NBC), for
working capital, for income tax payments, 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, 2009,
our total indebtedness was $400.9 million, consisting of a $75.0 million ABL Facility, of which
$23.1 million was outstanding at December 31, 2009, $200.0 million of Senior Secured Notes issued
at a discount of $1.0 million with unamortized bond discount of $0.9 million, $175.0 million of
Senior Subordinated Notes, and $3.7 million of other indebtedness, including capital lease
obligations. To provide additional financing to fund the March 4, 2004 Transaction, NBC issued
senior discount notes, the balance of which at December 31, 2009 was $77.0 million (face value)
(the Senior Discount Notes).
34
Principal and interest payments under the ABL Facility, the Senior Secured Notes, the Senior
Subordinated Notes, and NBCs Senior Discount Notes represent significant liquidity requirements
for us. An excess cash flow payment of $6.0 million for fiscal year ended March 31, 2009 under the
Senior Credit Facility was paid in September 2009. There was no excess cash flow obligation for
the fiscal year ended March 31, 2008.
On October 2, 2009, in conjunction with the completion of the offering of the Senior Secured
Notes and payment in full of the Term Loan, we entered into the ABL Credit Agreement which provides
for the ABL Facility and replaced the Revolving Credit Facility. The ABL Facility is scheduled to
mature on the earlier of October 2, 2012 or the date that is 91 days prior to the earliest maturity
of the Senior Secured Notes (due December 1, 2011), the Senior Subordinated Notes (due March 15,
2012), NBCs Senior Discount Notes (due March 15, 2013), or any refinancing thereof. Borrowings
under the ABL Facility are subject to the Eurodollar interest rate, not to be less than 1.5%, plus
an applicable margin ranging from 4.25% to 4.75% or a base interest rate. The base interest rate
is the greater of a) the prime rate, b) the federal funds rate plus 0.5%, or c) the one-month
Eurodollar loan rate plus 1.0%, not to be less than 2.5%, plus an applicable margin ranging from
3.25% to 3.75%. In addition, the applicable margin will increase 1.5% during the time periods from
April 15 to June 29 and from December 1 to January 29 of each year. There also is a commitment fee
for the average daily unused amount of the ABL Facility ranging from 0.75% to 1.0% for such unused
amount.
The Senior Secured Notes require semi-annual interest payments at a fixed rate of 10.0% and
mature December 1, 2011. 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 which began on September 15, 2008 at a fixed rate of 11.0% and mature on
March 15, 2013.
We file a consolidated federal income tax return with our parent company, NBC, and follow a
policy of recording income taxes equal to that which would have been incurred had we filed a
separate return. We are responsible for remitting tax payments and collecting tax refunds for the
consolidated group. The $2.9 million increase in the due to parent balance for the nine months
ended December 31, 2009 represents the current period tax savings resulting from operating losses
generated by NBC from which we derive the benefit through reduced tax payments on the consolidated
return.
Investing Cash Flows
Our capital expenditures were $4.0 million and $6.0 million for the nine months ended December
31, 2009 and 2008, respectively declining largely as a result of decreased acquisition activity.
Capital expenditures consist primarily of leasehold improvements and furnishings for new
bookstores, bookstore renovations, computer upgrades and warehouse improvements. The ABL Credit
Agreement does not have a limitation on capital expenditures other than as part of the pro forma
fixed charge coverage ratio. We expect capital expenditures to be between $5.0 million and $7.0
million for fiscal year 2010.
Business acquisition and contract-management renewal expenditures were $2.3 million and $5.7
million for the nine months ended December 31, 2009 and 2008, respectively. During the nine months
ended December 31, 2009, 10 bookstore locations were acquired in 8 separate transactions (all of
which were contract-managed locations). During the nine months ended December 31, 2008, 18
bookstore locations were acquired in 15 separate transactions (15 of which were contract-managed
locations). Our ability to make acquisition expenditures is subject to certain restrictions under
the ABL Credit Agreement.
During the nine months ended December 31, 2009 and 2008, we capitalized $0.4 million and $0.3
million, respectively, in software development costs associated with new software products and
enhancements to existing software products.
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 ABL Facility, which replaced the Revolving Credit
Facility. Usage of the ABL Facility to meet our liquidity needs will fluctuate throughout the fiscal 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 by operating activities for the nine months ended December 31, 2009 were $37.7 million,
down $0.4 million from $38.1 million for the nine months ended December 31, 2008.
35
As of December 31, 2009, we had $16.8 million in cash available to help fund working capital
requirements. At certain times of the year, we also invest in cash equivalents. The ABL Credit
Agreement allows investments in (1) certain short-term securities issued by, or unconditionally
guaranteed by, the federal government, (2) certain short-term deposits in banks that have combined
capital and surplus of not less than $500 million, (3) certain short-term commercial paper of
issuers rated at least A-1 by Standard & Poors or P-1 by Moodys, (4) certain money market funds
which invest exclusively in assets otherwise allowable by the ABL Credit Agreement and (5) certain
other similar short-term investments. Although we invest in compliance with our credit agreement
and generally seek to minimize the risk associated with investments by investing in investment
grade, highly liquid securities, we cannot give assurances that the cash equivalents in our
investment portfolio will not lose value or become impaired in the future.
Covenant Restrictions
We have a substantial level of indebtedness. Our debt agreements impose significant financial
restrictions, which could prevent us from incurring additional indebtedness and taking certain
other actions and could result in all amounts outstanding being declared due and payable if we are
not in compliance with such restrictions. Access to borrowings under the ABL Facility is subject
to the calculation of a borrowing base, which is a function of eligible accounts receivable and
inventory, up to the maximum borrowing limit (less outstanding letters of credit). The ABL Credit
Agreement restricts our ability and the ability of certain of our subsidiaries to make investments,
acquisitions, 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 fiscal
year and any taxes owed by NBC. In addition, under the ABL Facility, if availability, as defined
in the credit agreement, is less than the greater of 20% of the total revolving credit commitments
and $15.0 million, we will be required to maintain a fixed charge coverage ratio of at least 1.10x
measured for the last twelve-month period on a pro forma basis in order to maintain access to the
funds under that Facility. At December 31, 2009, we had up to $75.0 million of total revolving
credit commitments under the ABL Facility (less outstanding letters of credit and subject to a
borrowing base). The calculated borrowing base as of December 31, 2009 was $75.0 million, of which
$23.1 million was outstanding under revolving lines of credit, $1.0 million was outstanding under a
letter of credit and $50.9 million was unused. At December 31, 2009, and our pro forma fixed
charge coverage ratio was 1.50x.
The indenture governing the Senior Secured Notes restricts our ability and the ability of
certain of our subsidiaries to pay dividends or make certain other payments, subject to certain
exceptions, unless certain conditions are met, including (i) no default under the indenture has
occurred, (ii) we and our subsidiaries maintain a consolidated coverage ratio of 2.0 to 1.0 on a
pro forma basis and (iii) the amount of the dividend or payment may not exceed 50% of aggregate
income from January 1, 2004 to the end of the most recent fiscal quarter plus cash proceeds
received from the issuance of stock less the aggregate of payments made under this restriction. The
indentures governing the Senior Subordinated Notes and the Senior Discount Notes contain similar
restrictions on our ability and the ability of certain of our subsidiaries and the ability of NBC
and certain of its subsidiaries to pay dividends or make certain other payments. In addition,
under the indentures to the Senior Secured Notes and the Senior Subordinated Notes, if there is no
availability under the restricted payment calculation mentioned above, but we maintain the 2.0 to
1.0 consolidated coverage ratio on a pro forma basis, we may make payments, including dividends to
NBC to meet the interest payments on the Senior Discount Notes. If we do not maintain the 2.0 to
1.0 ratio on a pro forma basis, we may still make payments, including dividends, up to $15.0
million in the aggregate. At December 31, 2009, our pro forma consolidated coverage ratio
calculated under the indenture to the Senior Subordinated Notes was 1.9 to 1.0 and the ratio
calculated under the indenture to the Senior Secured Notes was 2.0 to 1.0. The pro forma
consolidated coverage ratio calculated under the indenture to the Senior Subordinated Notes differs
from the ratio calculated under the indenture to the Senior Secured Notes because the indenture to
the Senior Subordinated Notes excludes debt issue cost amortization for all debt instruments
outstanding at the March 4, 2004 Transaction date from the calculation and the indenture to the
Senior Secured Notes excludes only debt issue cost amortization for the Senior Secured Notes and
the ABL Facility from the same calculation. At December 31, 2009, the amount distributable under
the most restrictive indenture was $15.0 million. Such restrictions are not expected to affect our
ability to meet our cash obligations for the next twelve months.
As of December 31, 2009, we were in compliance with all of our debt covenants.
Our debt covenants use EBITDA and Adjusted EBITDA in the ratio calculations mentioned above.
For a discussion of EBITDA and Adjusted EBITDA, see Adjusted EBITDA Results elsewhere in
Managements Discussion and Analysis of Financial Condition and Results of Operations and for a presentation reconciling EBITDA and
Adjusted EBITDA to net cash flows from operating activities, which we believe to be the closest
GAAP liquidity measure, see Quarter Ended December 31, 2009 Compared With Quarter Ended December
31, 2008 and Nine Months Ended December 31, 2009 Compared With Nine Months Ended December 31,
2008 elsewhere in Managements Discussion and Analysis of Financial Condition and Results of
Operations.
36
Sources of and Needs for Capital
As of December 31, 2009, we had up to $75.0 million of total revolving credit commitments
under the ABL Facility (less outstanding letters of credit and subject to a borrowing base). The
calculated borrowing base as of December 31, 2009 was $75.0 million, of which $23.1 million was
outstanding under lines of credit, $1.0 million was outstanding under a letter of credit and $50.9
million was unused. Amounts drawn under the ABL Facility are permitted to be used for working
capital and general corporate purposes (including up to $10.0 million for letters of credit),
subject to certain limitations.
On October 2, 2009, in conjunction with the completion of the offering of the Senior Secured
Notes, we entered into the ABL Credit Agreement which provides for the ABL Facility (collectively
the Refinancing). Although our overall indebtedness did not materially increase upon
consummation of the Refinancing, our liquidity requirements have increased, primarily due to
increased interest payment obligations. After giving effect to the Refinancing, our three
principal tranches of debt (the Senior Secured Notes, the ABL Facility and the Senior Subordinated
Notes) each will mature within a period of six months of each other. The ABL Facility will mature
on the earlier of October 2, 2012 or the date that is 91 days prior to the earliest maturity of the
$200.0 million Senior Secured Notes (which mature on December 1, 2011), the $175.0 million Senior
Subordinated Notes (which mature on March 15, 2012), NBCs $77.0 million Senior Discount Notes
(which mature on March 15, 2013), or any refinancing thereof. As a consequence, we may be required
to refinance the other tranches of debt in our capital structure as well as NBCs Senior Discount
Notes, in order to refinance the ABL Facility. Due to our highly leveraged capital structure, in
the absence of a significant improvement in our credit profile and/or the financial markets, we may
not be able to refinance our indebtedness, or NBC may not be able to refinance its indebtedness, on
terms acceptable to us or our parent company.
Our ability to satisfy our debt obligations and to pay principal and interest on our debt,
fund working capital and make anticipated capital expenditures will depend on our future
performance, which is subject to general economic conditions and other factors, some of which are
beyond our control. We believe that funds generated from operations, existing cash, and borrowings
under the ABL Facility will be sufficient to finance our current operations, cash interest
requirements, income tax payments, planned capital expenditures, dividends to NBC, and internal
growth for the foreseeable future. Future acquisitions, if any, may require additional debt or
equity financing. As noted previously, we also cannot give assurance that we will generate
sufficient cash flow from operations or that future borrowings will be available under the ABL
Facility in an amount sufficient to enable us to service our debt or to fund our liquidity needs.
Off-Balance Sheet Arrangements
As of December 31, 2009, we had no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources.
37
The following tables present aggregated information as of December 31, 2009 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 |
$ | 374,311,282 | $ | 52,967 | $ | 374,185,171 | $ | 73,144 | $ | | ||||||||||
Interest on long-term debt |
77,793,245 | 35,118,137 | 42,670,774 | 4,334 | | |||||||||||||||
Capital lease obligations |
3,440,979 | 813,609 | 1,130,630 | 647,849 | 848,891 | |||||||||||||||
Interest on capital lease obligations |
880,209 | 252,465 | 336,421 | 192,990 | 98,333 | |||||||||||||||
Operating leases |
79,333,702 | 19,291,560 | 28,480,773 | 15,547,483 | 16,013,886 | |||||||||||||||
Uncertain tax position liabilities |
| | | | | |||||||||||||||
Unconditional purchase obligations |
| | | | | |||||||||||||||
Total |
$ | 535,759,417 | $ | 55,528,738 | $ | 446,803,769 | $ | 16,465,800 | $ | 16,961,110 | ||||||||||
Total | Amount of Commitment Expiration Per Period | |||||||||||||||||||
Other Commercial | Amounts | Less Than | 2-3 | 4-5 | Over 5 | |||||||||||||||
Commitments | Committed | 1 Year | Years | Years | Years | |||||||||||||||
Line of credit (1) |
$ | 75,000,000 | $ | | $ | 75,000,000 | $ | | $ | | ||||||||||
(1) | Interest is not estimated on the line of credit due to uncertainty surrounding the
timing and extent of usage of the line of credit. |
We have recorded other long-term liabilities of $2.1 million, which consist primarily of
deferred payments related to acquisitions of $0.9 million; certain lease related liabilities of
$0.8 million to appropriately recognize rent expense over the rental term; and deferred
compensation of $0.4 million, which are excluded from the preceding table primarily because we
cannot reasonably estimate the timing of the long-term payments.
Accounting Standards Not Yet Adopted
In January 2010, the FASB issued Accounting Standards Update 2010-06, Improving Disclosures
about Fair Value Measurements (Update 2010-06). Update 2010-06 provides amendments to current
standards to require new disclosures for transfers in and out of Levels 1 and 2 and for activity in
Level 3 fair value measurements. Furthermore, the update provides amendments to clarify that a
reporting entity should provide fair value measurement disclosures for each class of assets and
liabilities and should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements for those
measurements that fall in either Level 2 or Level 3. Update 2010-06 becomes effective for us in
fiscal year 2011. Management has determined that the update will not have a material impact on the
consolidated financial statements.
In October 2009, the FASB issued Accounting Standards Update 2009-13, Multiple Deliverable
Arrangements (Update 2009-13). Update 2009-13 addresses the accounting for multiple-deliverable
arrangements to enable vendors to account for products or services (deliverables) separately rather
than as a combined unit. The update addresses how to separate deliverables and how to measure and
allocate arrangement considerations to one or more units of account. Update 2009-13 becomes
effective prospectively for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010, with earlier application permitted. An entity may elect
to adopt the standard on a retrospective basis. We expect to apply this standard on a prospective
basis beginning April 1, 2011. Management has not yet determined if the update will have a
material impact on the consolidated financial statements.
38
In October 2009, the FASB issued Accounting Standards Update 2009-14, Certain Revenue
Arrangements That Include Software Elements (Update 2009-14). Update 2009-14 clarifies what
guidance should be used in allocating and measuring revenue for vendors that sell or lease tangible
products in an arrangement that contains software that is more than incidental to the tangible
product as a whole. The amendments in this update do not affect software revenue arrangements that
do not include tangible products nor do they affect software revenue arrangements that include
services if the software is essential to the functionality of those services. Update 2009-14
becomes effective prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, with earlier application permitted. An entity
may elect to adopt the standard on a retrospective basis. We expect to apply this standard on a
prospective basis beginning April 1, 2011. Management has determined that the update will not have
a material impact on the consolidated financial statements.
Transactions with Related and Certain Other Parties
During the nine months ended December 31, 2009 and 2008, we declared and paid $4.2 million in
dividends to NBC to provide funding for interest due and payable on NBCs Senior Discount Notes.
We file a consolidated federal income tax return with our parent company, NBC, and follow a
policy of recording income taxes equal to that which would have been incurred had we filed a
separate return. We are responsible for remitting tax payments and collecting tax refunds for the
consolidated group. The due to parent balance, totaling $23.0 million and $19.8 million at
December 31, 2009 and 2008, respectively, represents the cumulative tax savings resulting from
operating losses generated by NBC from which we derive the benefit through reduced tax payments on
the consolidated return.
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
and Adjusted EBITDA growth, our ability to extend, refinance or repay our indebtedness, or
statements expressing general optimism or pessimism about future results of operations, 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, performances 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. Such factors
include, but are not limited to, the following: further deterioration in the economy and credit
markets; a decline in consumer spending; increased competition from other companies that target our
markets; increased competition from alternative media and alternative sources of textbooks for
students, including digital or other educational content sold or rented directly to students;
increased competition for the purchase and sale of used textbooks from student-to-student
transactions; the risks of operating with a substantial level of indebtedness including possible
increases in our costs of borrowing and/or our inability to extend or refinance debt as it matures;
our inability to successfully start-up, acquire or contract-manage additional bookstores or to
integrate those additional stores; our inability to cost-effectively maintain or increase the
number of contract-managed stores; our inability to purchase a sufficient supply of used textbooks;
changes in pricing of new and/or used textbooks; changes in publisher practices regarding new
editions and materials packaged with new textbooks; the loss or retirement of key members of
management; the impact of seasonality of the wholesale and bookstore operations; the impact of
being controlled by one principal equity holder; further goodwill impairment or impairment of
identifiable intangibles resulting in a non-cash write down of goodwill or identifiable
intangibles; our inability to successfully execute on our cost savings initiatives; 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, in particular
in our Annual Report on Form 10-K, 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.
39
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For the period ended December 31, 2009, our primary market risk exposure was fluctuation in
interest rates. Our exposure to market risk for changes in interest rates relates primarily to our
short-term investments and our revolving credit facility. All of our long-term debt that would
have exposed us to market risk due to fluctuation in variable interest rates has been paid in full.
Exposure to interest rate fluctuations for our long-term debt is managed by maintaining fixed
interest rate debt (primarily the Senior Subordinated Notes and the Senior Secured Notes). Because
we pay fixed interest on our long-term debt, market fluctuations do not impact our debt interest
payments. However, the fair value of our long-term debt fluctuates as a result of changes in
market interest rates, changes in our credit worthiness, and changes in the overall credit market.
We may invest in certain cash equivalents from time to time allowed by the ABL Credit
Agreement. At December 31, 2009, we did not hold any investments in cash equivalents.
Due to the short-term nature of the revolving credit facility, the estimated fair value was
considered to approximate the carrying value at December 31, 2009. The interest rate as of
December 31, 2009 was 8.25%.
Certain quantitative market risk disclosures have changed since March 31, 2009 as a result of
the payment in full of the Term Loan and issuance of the Senior Secured Notes, market fluctuations,
movement in interest rates and principal payments. The table below presents summarized market risk
information. The weighted-average variable rates are based on implied forward rates in the yield
curve as of the date presented.
December 31, | March 31, | |||||||
2009 | 2009 | |||||||
Carrying Values: |
||||||||
Revolving credit facility |
$ | 23,100,000 | $ | | ||||
Fixed rate debt |
377,752,261 | 179,334,183 | ||||||
Variable rate debt |
| 193,076,346 | ||||||
Fair Values: |
||||||||
Revolving credit facility |
$ | 23,100,000 | $ | | ||||
Fixed rate debt |
357,178,000 | 90,367,000 | ||||||
Variable rate debt |
| 160,253,000 | ||||||
Overall Weighted-Average Interest Rates: |
||||||||
Fixed rate debt |
9.35 | % | 8.63 | % | ||||
Variable rate debt |
| 9.25 | % |
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, 2009. This
evaluation was performed to determine if our disclosure controls and procedures were effective, in
that they are designed to ensure 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 Commissions rules and
regulations, including ensuring that such information is accumulated and communicated to
management, including our chief executive officer and chief financial officer, as appropriate to
allow timely decisions regarding required disclosure. Based on this evaluation, our chief
executive officer and chief financial officer concluded that, as of December 31, 2009, our
disclosure controls and procedures were effective.
Changes in internal control over financial reporting. During the quarter ended December 31,
2009, we completed a conversion to a general ledger/business planning and consolidation solution
from SAP, which is utilized for external financial reporting purposes. Various controls have been
modified due to the new solution, and additional controls over financial reporting, including
reconciliation and verification reports and tools, have been established to ensure the accuracy and
integrity of our financial statements.
40
PART II. OTHER INFORMATION
ITEM
1A. RISK FACTORS.
There have been no material changes in our risk factors from those disclosed in Part 1, Item
1A., Risk Factors of our Annual Report on Form 10-K for the fiscal year ended March 31, 2009,
which was filed with the Securities and Exchange Commission on June 25, 2009, except as set forth
below.
We face competition in our markets, which could adversely impact our revenue levels, profit
margins and ability to acquire an adequate supply of used textbooks. Our industry is highly
competitive. A large number of actual and potential competitors exist, some of which are larger
than us and have substantially greater resources than us. Revenue levels and profit margins could
be adversely impacted if we experience increased competition in the markets in which we currently
operate or in markets in which we will operate in the future.
Over the years, an increasing number of institution-owned college bookstores have decided to
outsource or contract-manage the operation of their bookstores. The leading managers of these
bookstores include two of our principal competitors in the wholesale textbook distribution
business. Contract-managed bookstores 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 bookstores 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 websites designed to rent or sell textbooks, and sell e-books,
other digital content and other merchandise directly to students; online resources; publishers
selling or renting directly to students; 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 sold through college bookstores. A substantial increase
in the availability or the acceptance of these alternatives as a source of textbooks and textbook
information could significantly reduce college students use of college bookstores and/or the use
of traditional textbooks and thus adversely impact our revenue levels and profit margins.
We are also experiencing growing competition from technology-enabled student-to-student
transactions that take place over the internet. These transactions, whereby a student enters into
a transaction directly with another student for the sale and purchase of a textbook, provide
competition by reducing the supply of textbooks available to us for purchase and by reducing the
sale of textbooks through college bookstores. While these transactions have occurred for many
years, prior to the internet these transactions were limited by geography, a lack of information
related to pricing and demand, and other factors. A significant increase in the number of these
transactions could adversely impact our revenue levels and profit margins.
We believe all of these competitive factors have contributed to a decline in textbooks sold in
the Textbook Division.
Our highly leveraged capital structure as well as the conditions of the financial markets
could affect our ability to extend or refinance debt in advance of its maturity, which would
negatively impact our liquidity and financial condition. Current global financial conditions have
been characterized by increased market volatility. The global credit markets have been
experiencing significant price volatility, dislocations and liquidity disruptions that have caused
the interest rate cost of debt financings to increase considerably.
These circumstances have materially impacted liquidity in the financial markets, making terms
of certain financings less attractive, and in some cases have resulted in the unavailability of
financing. Continued uncertainty in the credit markets may negatively impact our ability to extend
or refinance our existing debt on reasonable terms or at all, which may negatively affect our
business.
41
Our three tranches of debt (the Senior Secured Notes, the ABL Facility and the Senior
Subordinated Notes) each may mature within a period of six months of each other. The ABL Facility
may mature on the earlier of October 2, 2012 or the date that is 91 days prior to the earliest
maturity of the Senior Secured Notes (which mature on December 1, 2011), the Senior Subordinated
Notes (which mature on March 15, 2012), the Senior Discount Notes (which mature on March 15, 2013)
or any refinancing thereof. As a consequence, we may be required to refinance the other tranches of debt in our
capital structure as well as NBCs Senior Discount Notes, in order to refinance the ABL Facility.
Due to our highly leveraged capital structure, in the absence of a significant improvement in our
credit profile and/or the financial markets, we may not be able to refinance our indebtedness, or
NBC may not be able to refinance its indebtedness, at all or on terms acceptable to us.
We may not be able to successfully acquire or contract-manage additional bookstores or
integrate those additional stores, which could adversely impact our ability to grow revenues and
profit margins. Part of our business strategy is to expand sales for our college bookstore
operations by either acquiring privately-owned bookstores or being awarded additional contracts to
manage institutional bookstores. We may not be able to identify additional private bookstores for
acquisition or we may not be successful in competing for contracts to manage additional
institutional bookstores. Due to the seasonal nature of business in our bookstores, the
operations of the acquired or newly contract-managed bookstores may be affected by the time of the
fiscal year when a bookstore is acquired or contract-managed by us. The process may require
financial resources that would otherwise be available for our existing operations. Our integration
of these future bookstores may not be successful; or, the anticipated strategic benefits of these
future bookstores may not be realized or may not be realized within time frames contemplated by our
management. Acquisitions and additional contract-managed bookstores may involve a number of special
risks, including, but not limited to, adverse short-term effects on our reported results of
operations, diversion of managements 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
bookstores for these or other reasons, anticipated revenues and profit margins from these new
bookstores could be adversely impacted.
Our operations are subject to various laws, rules and regulations relating to protection of
the environment and of human health and safety. Our operations are subject to federal, state and
local laws relating to the protection of the environment and of human health and safety. As an
owner and operator of real property, we can be found jointly and severally liable under such laws
for costs associated with investigating, removing and remediating any hazardous or toxic substances
that may exist on, in or about our real property. This liability can be imposed without regard to
whether the owner or operator had knowledge of, or was actually responsible for causing, the
conditions being addressed. Some of our properties may have been impacted by the migration of
hazardous substances released at neighboring third-party locations. In addition, it is possible
that we may face claims alleging harmful exposure to, or property damage resulting from, the
release of hazardous or toxic substances at or from our locations or otherwise related to our
business. Environmental conditions relating to any former, current or future locations could
adversely impact our business and results of operations.
We may be unable to obtain a sufficient supply of used textbooks, which could adversely impact
our revenue levels and profit margins. Our ability to purchase a sufficient number of used
textbooks largely determines our used textbook sales for future periods. Successfully acquiring
books typically 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 a revolving credit facility or other financing alternatives to purchase the books. 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, thereby adversely impacting our revenue levels and profit margins.
Our wholesale and bookstore operations are seasonal in nature a significant reduction in
sales during our peak selling periods could adversely impact our ability to repay the ABL Facility,
thereby increasing interest expense and adversely impacting revenue levels by restricting our
ability to buy an adequate supply of used textbooks. Our wholesale and bookstore operations
experience two distinct selling periods and our 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 year 2009, 46%
of our annual revenues occurred in the second fiscal quarter (July-September), while 31% of our
annual revenues occurred in the fourth fiscal quarter (January-March). Accordingly, our working
capital requirements fluctuate throughout the fiscal year, increasing substantially in May and
December as a result of the buying periods. We fund our working capital requirements primarily
through the ABL Facility. We repay our ABL Facility with cash provided from operations. A
significant reduction in sales during our peak selling periods could adversely impact our ability
to repay the ABL Facility, increase the average balance outstanding under the ABL Facility (thereby
resulting in increased interest expense), and restrict our ability to buy an adequate supply of
used textbooks (thereby adversely impacting our revenue levels).
42
Our substantial indebtedness could limit cash flow available for our operations and could
adversely affect our ability to service debt or obtain additional financing, if necessary. As of
December 31, 2009, we had total outstanding debt of approximately $400.9 million. Our level of
indebtedness could have important consequences. For example, it could:
| make it more difficult to pay our debts as they become due, especially during general
negative economic and market industry conditions because if our revenues decrease due to
general economic or industry conditions, we may not have sufficient cash flow from
operations to make our scheduled debt payments; |
| limit our flexibility in planning for, or reacting to, changes in our business and
the industry in which we operate and, consequently, places us at a competitive
disadvantage to our competitors with less debt; |
| require us to dedicate a substantial portion of our cash flow from operations to
service our debt, thereby reducing the availability of our cash flow to fund working
capital, capital expenditures, acquisitions and other general corporate purposes; |
| limit our ability to make strategic acquisitions, invest in new products or capital
assets or take advantage of business opportunities; |
| limit our ability to obtain additional financing, particularly in the current
economic environment; and |
| render us more vulnerable to general adverse economic, regulatory and industry
conditions. |
Restrictive covenants may adversely affect our operations. The ABL Credit Agreement and the
indentures governing the Senior Secured Notes, the Senior Subordinated Notes, and the Senior
Discount Notes contain various covenants that limit our ability to, among other things:
| incur or assume additional debt or provide guarantees in respect of obligations of
other persons; |
| issue redeemable stock and preferred stock; |
| pay dividends or distributions or redeem or repurchase capital stock; |
| prepay, redeem or repurchase debt; |
| make loans, investments and capital expenditures; |
| incur liens; |
| engage in sale/leaseback transactions; |
| restrict dividends, loans or asset transfers from our subsidiaries; |
| sell or otherwise dispose of assets, including capital stock of subsidiaries; |
| consolidate or merge with or into, or sell substantially all of our assets to,
another person; |
| enter into transactions with affiliates; and |
| enter into new lines of business. |
In addition, the restrictive covenants in the ABL Credit Agreement require us to maintain
specified financial ratios and satisfy other financial condition tests. Our ability to meet those
financial ratios and tests can be affected by events beyond our control, and we cannot assure you
that we will meet them. A breach of any of these covenants could result in a default under the ABL
Facility. Moreover, the occurrence of a default under the ABL Facility could result in an event of
default under our other indebtedness including the Senior Subordinated Notes and the Senior Secured
Notes and NBCs Senior Discount Notes. Upon the occurrence of an event of default under the ABL
Facility, the lenders could elect to declare all amounts outstanding under the
ABL Facility to be immediately due and payable and terminate all commitments to extend further
credit. If we were unable to repay those amounts, the lenders under the ABL Facility could proceed
against the collateral granted to them to secure that indebtedness. We have pledged substantially
all of our assets as collateral under the ABL Facility. If the lenders under the ABL Facility
accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to
repay the ABL Facility and our other indebtedness or borrow sufficient funds to refinance such
indebtedness. Even if we are able to obtain new financing, it may not be on commercially
reasonable terms, or terms that are acceptable to us.
43
The amount of borrowings permitted under the ABL Facility may fluctuate significantly, and the
maturity of the ABL Facility may be accelerated under certain circumstances, which may adversely
affect our liquidity, financial position and results of operations. The amount of borrowings
permitted at any time under the ABL Facility is limited to a monthly (or more frequently under
certain circumstances) borrowing base valuation of our inventory, accounts receivable and certain
cash balances. As a result, access to credit under the ABL Facility is potentially subject to
significant fluctuations depending on the value of the eligible assets that comprise the borrowing
base as of any measurement date, as well as certain discretionary rights of the agent in respect of
the calculation of such borrowing base value. In addition, in the event that we fail to comply
with the covenants and restrictions of the ABL Facility, we may be in default, at which time
payment of the obligations and unpaid interest may be accelerated and become immediately due and
payable under the ABL Facility, which may adversely affect our liquidity, financial position and
results of operations.
We are the sole operating subsidiary of our parent company and will need to continue to
distribute funds to our parent to permit satisfaction of its obligations. Our parent company, NBC,
is a holding company and as such conducts substantially all of its operations through us and our
subsidiaries. Consequently, NBC does not have any income from its own operations and does not
expect to generate income from its own operations in the future. As a result, NBCs ability to
meet its debt service obligations, including its obligations under its $77.0 million (face value)
11% Senior Discount Notes, substantially depends upon our and our subsidiaries cash flow and
distribution of funds by us as dividends, loans, advances or other payments. Our ability to
distribute funds to NBC will be limited under certain circumstances under the terms of our
indentures and our other indebtedness. If in the future NBC were unable to satisfy its obligations
under the Senior Discount Notes, which could result from the application of these restrictions on
our ability to distribute funds to NBC, it could result in an event of default under the Senior
Discount Notes. An event of default under the Senior Discount Notes could result in cross-defaults
under our indebtedness, including the ABL Facility.
Increases in the price of raw materials used by our suppliers or the reduced availability of
raw materials to our suppliers could increase their cost of goods, which could be passed on to us
through higher prices in new textbooks, clothing and general merchandise, which may decrease our
profitability. The principal raw materials used by our suppliers are paper, various fabrics and
plastics. The prices we pay our suppliers for new textbooks, clothing and general merchandise are
dependent in part on the market price for raw materials used to produce them. The price and
availability of such raw materials may fluctuate substantially, depending on a variety of factors,
including demand, crop yields, weather, supply conditions, transportation costs, energy prices,
work stoppages, government regulation, economic climates and other unpredictable factors. Any and
all of these factors may be exacerbated by global climate change. Fluctuations in the price and
availability of raw materials to our suppliers have not materially affected our profitability in
recent years. However, increases in raw material costs, together with other factors, might cause
an increase in the cost of goods for our suppliers which may be passed onto us through higher
prices.
ITEM 5. OTHER INFORMATION.
We are not required to file reports with the Securities and Exchange Commission pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, but are filing this
Quarterly Report on Form 10-Q on a voluntary basis.
44
ITEM
6. EXHIBITS.
Exhibits | ||||
4.1 | Indenture, dated October 2, 2009, by and among Nebraska Book Company,
Inc., the Subsidiary Guarantors and Wilmington Trust FSB, as trustee and noteholder
collateral agent, filed as Exhibit 4.1 to Nebraska Book Company, Inc. Current Report
on Form 8-K filed October 7, 2009, is incorporated herein by reference. |
|||
4.2 | Form of 10% Senior Secured Note Due 2011 (included in Exhibit 4.1 as
Exhibit A to Nebraska Book Company, Inc. Current Report on Form 8-K filed October 7,
2009), is incorporated herein by reference. |
|||
4.3 | Pledge and Security Agreement, dated October 2, 2009, among Nebraska Book
Company, Inc., the Subsidiary Guarantors and Wilmington Trust FSB, as Noteholder
Collateral Agent, filed as Exhibit 4.3 to Nebraska Book Company, Inc. Current Report
on Form 8-K filed October 7, 2009, is incorporated herein by reference. |
|||
10.1 | Amended and Restated Credit Agreement, dated October 2, 2009, among
Nebraska Book Company, Inc., the Subsidiary Guarantors, the lenders party thereto,
JPMorgan Chase Bank, N.A., as administrative agent, Wells Fargo Bank, National
Association, as syndication agent, Bank of America, N.A., as documentation agent,
filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended
September 30, 2009, is incorporated herein by reference. |
|||
10.2 | First Lien Amended and Restated Guarantee and Collateral Agreement, dated
October 2, 2009, among Nebraska Book Company, Inc., the Subsidiary Guarantors and
Wilmington Trust FSB, as Collateral Agent, filed as Exhibit 10.2 to Nebraska Book
Company, Inc. Form 10-Q for the quarter ended September 30, 2009, is incorporated
herein by reference. |
|||
10.3 | Intercreditor Agreement, dated October 2, 2009, by and among Nebraska
Book Company, Inc., the Subsidiary Guarantors and Wilmington Trust FSB, as trustee,
filed as Exhibit 10.3 to Nebraska Book Company, Inc. Current Report on Form 8-K
filed October 7, 2009, is incorporated herein by reference. |
|||
10.4 | Registration Rights Agreement, dated as of October 2, 2009, by and among
Nebraska Book Company, Inc., the guarantors listed in Schedule 1 thereto, J.P.
Morgan Securities Inc., Banc of America Securities LLC, Wells Fargo Securities, LLC
and Piper Jaffray & Co., filed as Exhibit 10.28 to Nebraska Book Company, Inc.
Registration Statement on Form S-4 (File No. 333-164271) filed on January 8, 2010, is
incorporated herein by reference. |
|||
10.5 | * | Second Amendment, dated January 14, 2010, to the NBC Holdings Corp. 2004
Stock Option Plan, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Current
Report on Form 8-K filed January 19, 2010, is incorporated herein by reference. |
||
31.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
31.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, 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. |
* | | Management contract or compensatory plan. |
45
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized on
February 12, 2010.
NEBRASKA BOOK COMPANY, INC.
|
||
/s/ Mark W. Oppegard
|
||
Chief Executive Officer and Director |
||
(principal executive officer) |
||
/s/ Alan G. Siemek
|
||
Chief Financial Officer, Senior Vice President
of Finance and Administration, Treasurer and Assistant Secretary |
||
(principal financial and accounting officer) |
46
EXHIBIT INDEX
4.1 | Indenture, dated October 2, 2009, by and among Nebraska Book Company,
Inc., the Subsidiary Guarantors and Wilmington Trust FSB, as trustee and noteholder
collateral agent, filed as Exhibit 4.1 to Nebraska Book Company, Inc. Current Report
on Form 8-K filed October 7, 2009, is incorporated herein by reference. |
|||
4.2 | Form of 10% Senior Secured Note Due 2011 (included in Exhibit 4.1 as
Exhibit A to Nebraska Book Company, Inc. Current Report on Form 8-K filed October 7,
2009), is incorporated herein by reference. |
|||
4.3 | Pledge and Security Agreement, dated October 2, 2009, among Nebraska Book
Company, Inc., the Subsidiary Guarantors and Wilmington Trust FSB, as Noteholder
Collateral Agent, filed as Exhibit 4.3 to Nebraska Book Company, Inc. Current Report
on Form 8-K filed October 7, 2009, is incorporated herein by reference. |
|||
10.1 | Amended and Restated Credit Agreement, dated October 2, 2009, among
Nebraska Book Company, Inc., the Subsidiary Guarantors, the lenders party thereto,
JPMorgan Chase Bank, N.A., as administrative agent, Wells Fargo Bank, National
Association, as syndication agent, Bank of America, N.A., as documentation agent,
filed as Exhibit 10.1 to Nebraska Book Company, Inc. Form 10-Q for the quarter ended
September 30, 2009, is incorporated herein by reference. |
|||
10.2 | First Lien Amended and Restated Guarantee and Collateral Agreement, dated
October 2, 2009, among Nebraska Book Company, Inc., the Subsidiary Guarantors and
Wilmington Trust FSB, as Collateral Agent, filed as Exhibit 10.2 to Nebraska Book
Company, Inc. Form 10-Q for the quarter ended September 30, 2009, is incorporated
herein by reference. |
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10.3 | Intercreditor Agreement, dated October 2, 2009, by and among Nebraska
Book Company, Inc., the Subsidiary Guarantors and Wilmington Trust FSB, as trustee,
filed as Exhibit 10.3 to Nebraska Book Company, Inc. Current Report on Form 8-K
filed October 7, 2009, is incorporated herein by reference. |
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10.4 | Registration Rights Agreement, dated as of October 2, 2009, by and among
Nebraska Book Company, Inc., the guarantors listed in Schedule 1 thereto, J.P.
Morgan Securities Inc., Banc of America Securities LLC, Wells Fargo Securities, LLC
and Piper Jaffray & Co., filed as Exhibit 10.28 to Nebraska Book Company, Inc.
Registration Statement on Form S-4 (File No. 333-164271) filed on January 8, 2010, is
incorporated herein by reference. |
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10.5 | * | Second Amendment, dated January 14, 2010, to the NBC Holdings Corp. 2004
Stock Option Plan, filed as Exhibit 10.1 to Nebraska Book Company, Inc. Current
Report on Form 8-K filed January 19, 2010, is incorporated herein by reference. |
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31.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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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. |
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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. |
* | | Management contract or compensatory plan. |
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