Attached files
file | filename |
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EX-31.1 - EXHIBIT 31.1 - NEBRASKA BOOK CO | c12385exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - NEBRASKA BOOK CO | c12385exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - NEBRASKA BOOK CO | c12385exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - NEBRASKA BOOK CO | c12385exv32w2.htm |
Table of Contents
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, 2010
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 | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
4700 South 19th Street | ||
Lincoln, Nebraska | 68501-0529 | |
(Address of principal executive offices) | (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).
o Yes o No
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 | Smaller reporting company o | |||
(do not check if a smaller reporting company) |
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 14, 2011: 100 shares
Total Number of Pages: 39
Exhibit Index: Page 39
TABLE OF CONTENTS
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEBRASKA BOOK COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 31, | March 31, | December 31, | ||||||||||
2010 | 2010 | 2009 | ||||||||||
ASSETS |
||||||||||||
CURRENT ASSETS: |
||||||||||||
Cash and cash equivalents |
$ | 17,727,222 | $ | 60,972,625 | $ | 16,815,036 | ||||||
Receivables, net |
74,824,680 | 57,987,794 | 75,572,125 | |||||||||
Inventories |
167,855,569 | 97,497,689 | 173,437,403 | |||||||||
Recoverable income taxes |
3,238,079 | 2,435,287 | 6,910,271 | |||||||||
Deferred income taxes |
7,311,559 | 6,247,559 | 7,654,801 | |||||||||
Prepaid expenses and other assets |
5,382,424 | 4,070,281 | 3,461,500 | |||||||||
Total current assets |
276,339,533 | 229,211,235 | 283,851,136 | |||||||||
PROPERTY AND EQUIPMENT, net of depreciation & amortization |
40,710,170 | 42,155,424 | 43,194,981 | |||||||||
GOODWILL |
218,356,730 | 215,571,126 | 215,571,126 | |||||||||
CUSTOMER RELATIONSHIPS, net of amortization |
75,596,680 | 79,902,820 | 81,338,200 | |||||||||
TRADENAME |
31,320,000 | 31,320,000 | 31,320,000 | |||||||||
OTHER IDENTIFIABLE INTANGIBLES, net of amortization |
5,784,128 | 5,295,324 | 5,804,983 | |||||||||
DEBT ISSUE COSTS, net of amortization |
5,097,203 | 9,198,683 | 10,289,115 | |||||||||
OTHER ASSETS |
4,011,313 | 2,850,632 | 3,716,768 | |||||||||
$ | 657,215,757 | $ | 615,505,244 | $ | 675,086,309 | |||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||
CURRENT LIABILITIES: |
||||||||||||
Accounts payable |
$ | 70,043,168 | $ | 26,387,040 | $ | 69,266,116 | ||||||
Accrued employee compensation and benefits |
7,091,449 | 9,401,468 | 9,547,912 | |||||||||
Accrued interest |
6,137,984 | 7,295,709 | 6,175,189 | |||||||||
Accrued incentives |
5,962,172 | 6,313,933 | 6,231,547 | |||||||||
Accrued expenses |
4,621,111 | 9,051,651 | 7,388,275 | |||||||||
Deferred revenue |
2,975,106 | 1,299,960 | 2,865,460 | |||||||||
Current maturities of long-term debt |
199,585,345 | 54,403 | 52,967 | |||||||||
Current maturities of capital lease obligations |
661,733 | 846,053 | 813,609 | |||||||||
Revolving credit facility |
15,500,000 | | 23,100,000 | |||||||||
Total current liabilities |
312,578,068 | 60,650,217 | 125,441,075 | |||||||||
LONG-TERM DEBT, net of current maturities |
175,138,755 | 374,343,069 | 374,258,315 | |||||||||
CAPITAL LEASE OBLIGATIONS, net of current maturities |
1,884,334 | 2,380,737 | 2,627,370 | |||||||||
OTHER LONG-TERM LIABILITIES |
1,601,801 | 2,278,963 | 2,115,997 | |||||||||
DEFERRED INCOME TAXES |
50,741,019 | 50,467,019 | 51,681,458 | |||||||||
DUE TO PARENT |
22,029,711 | 23,194,711 | 22,998,189 | |||||||||
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 |
148,262,445 | 148,197,307 | 148,165,505 | |||||||||
Accumulated deficit |
(55,020,476 | ) | (46,006,879 | ) | (52,201,700 | ) | ||||||
Total stockholders equity |
93,242,069 | 102,190,528 | 95,963,905 | |||||||||
$ | 657,215,757 | $ | 615,505,244 | $ | 675,086,309 | |||||||
See notes to condensed consolidated financial statements.
2
Table of Contents
NEBRASKA BOOK COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarter Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
REVENUES, net of returns |
$ | 69,229,390 | $ | 66,658,584 | $ | 414,420,701 | $ | 412,138,559 | ||||||||
COSTS OF SALES (exclusive of
depreciation shown below) |
41,674,309 | 38,597,654 | 253,903,858 | 252,368,739 | ||||||||||||
Gross profit |
27,555,081 | 28,060,930 | 160,516,843 | 159,769,820 | ||||||||||||
OPERATING EXPENSES: |
||||||||||||||||
Selling, general and administrative |
36,497,904 | 34,078,959 | 124,508,189 | 117,281,571 | ||||||||||||
Depreciation |
2,192,044 | 2,124,972 | 6,444,649 | 6,218,426 | ||||||||||||
Amortization |
2,152,060 | 2,684,564 | 6,556,949 | 8,320,843 | ||||||||||||
40,842,008 | 38,888,495 | 137,509,787 | 131,820,840 | |||||||||||||
INCOME (LOSS)
FROM OPERATIONS |
(13,286,927 | ) | (10,827,565 | ) | 23,007,056 | 27,948,980 | ||||||||||
OTHER EXPENSES: |
||||||||||||||||
Interest expense |
10,654,701 | 10,650,185 | 31,931,423 | 30,032,285 | ||||||||||||
Interest income |
(55,694 | ) | (60,744 | ) | (139,770 | ) | (104,441 | ) | ||||||||
Loss on early extinguishment of debt |
| 3,065,759 | | 3,065,759 | ||||||||||||
10,599,007 | 13,655,200 | 31,791,653 | 32,993,603 | |||||||||||||
LOSS BEFORE INCOME TAXES |
(23,885,934 | ) | (24,482,765 | ) | (8,784,597 | ) | (5,044,623 | ) | ||||||||
INCOME TAX BENEFIT |
(10,258,000 | ) | (9,597,000 | ) | (4,006,000 | ) | (1,977,000 | ) | ||||||||
NET LOSS |
$ | (13,627,934 | ) | $ | (14,885,765 | ) | $ | (4,778,597 | ) | $ | (3,067,623 | ) | ||||
See notes to condensed consolidated financial statements.
3
Table of Contents
NEBRASKA BOOK COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(UNAUDITED)
Additional | ||||||||||||||||||||
Common | Paid-in | Accumulated | Comprehensive | |||||||||||||||||
Stock | Capital | Deficit | Total | Income | ||||||||||||||||
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 to parent |
| | (4,235,000 | ) | (4,235,000 | ) | | |||||||||||||
BALANCE, December 31, 2009 |
$ | 100 | $ | 148,165,505 | $ | (52,201,700 | ) | $ | 95,963,905 | $ | (3,067,623 | ) | ||||||||
BALANCE, April 1, 2010 |
$ | 100 | $ | 148,197,307 | $ | (46,006,879 | ) | $ | 102,190,528 | |||||||||||
Contributed capital |
| (3,630 | ) | | (3,630 | ) | $ | | ||||||||||||
Share-based compensation
attributable to NBC
Holdings Corp. stock
options |
| 68,768 | | 68,768 | | |||||||||||||||
Net loss |
| | (4,778,597 | ) | (4,778,597 | ) | (4,778,597 | ) | ||||||||||||
Dividends declared to parent |
| | (4,235,000 | ) | (4,235,000 | ) | | |||||||||||||
BALANCE, December 31, 2010 |
$ | 100 | $ | 148,262,445 | $ | (55,020,476 | ) | $ | 93,242,069 | $ | (4,778,597 | ) | ||||||||
See notes to condensed consolidated financial statements.
4
Table of Contents
NEBRASKA BOOK COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended December 31, | ||||||||
2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (4,778,597 | ) | $ | (3,067,623 | ) | ||
Adjustments to reconcile net loss to net cash flows from operating activities: |
||||||||
Share-based compensation |
438,810 | 789,162 | ||||||
Provision for losses on receivables |
1,317,433 | 414,247 | ||||||
Depreciation |
6,444,649 | 6,218,426 | ||||||
Amortization |
6,556,949 | 8,320,843 | ||||||
Amortization of debt issue costs and bond discount |
4,535,018 | 3,415,583 | ||||||
Loss on early extinguishment of debt |
| 3,065,759 | ||||||
Loss on disposal of assets |
155,235 | 140,783 | ||||||
Deferred income taxes |
(710,000 | ) | (3,705,000 | ) | ||||
Changes in operating assets and liabilities, net of effect of acquisitions: |
||||||||
Receivables |
(18,107,676 | ) | (15,429,548 | ) | ||||
Inventories |
(66,299,510 | ) | (79,043,123 | ) | ||||
Recoverable income taxes |
(802,792 | ) | (4,040,688 | ) | ||||
Prepaid expenses and other assets |
(1,300,227 | ) | 639,374 | |||||
Other assets |
(1,210,911 | ) | (319,543 | ) | ||||
Accounts payable |
43,780,593 | 42,631,870 | ||||||
Accrued employee compensation and benefits |
(2,310,019 | ) | (4,232,297 | ) | ||||
Accrued interest |
(1,157,725 | ) | 5,496,673 | |||||
Accrued incentives |
(351,761 | ) | 120,847 | |||||
Accrued expenses |
(4,430,540 | ) | (856,976 | ) | ||||
Deferred revenue |
1,675,146 | 1,906,186 | ||||||
Other long-term liabilities |
(823,674 | ) | (190,334 | ) | ||||
Net cash flows from operating activities |
(37,379,599 | ) | (37,725,379 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchases of property and equipment |
(4,965,710 | ) | (4,025,625 | ) | ||||
Acquisitions, net of cash acquired |
(9,317,813 | ) | (2,304,343 | ) | ||||
Proceeds from sale of property and equipment |
21,708 | 93,674 | ||||||
Software development costs |
(916,314 | ) | (441,156 | ) | ||||
Net cash flows from investing activities |
(15,178,129 | ) | (6,677,450 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Contributed capital |
(42 | ) | | |||||
Proceeds from issuance of long-term debt |
| 199,000,000 | ||||||
Payment of financing costs |
(66,660 | ) | (9,834,721 | ) | ||||
Principal payments on long-term debt |
(40,250 | ) | (193,112,511 | ) | ||||
Principal payments on capital lease obligations |
(680,723 | ) | (606,371 | ) | ||||
Borrowings under revolving credit facility |
43,700,000 | 85,000,000 | ||||||
Payments under revolving credit facility |
(28,200,000 | ) | (61,900,000 | ) | ||||
Dividends paid to parent |
(4,235,000 | ) | (4,235,000 | ) | ||||
Change in due to parent |
(1,165,000 | ) | 2,868,000 | |||||
Net cash flows from financing activities |
9,312,325 | 17,179,397 | ||||||
NET DECREASE IN CASH AND CASH EQUIVALENTS |
(43,245,403 | ) | (27,223,432 | ) | ||||
CASH AND CASH EQUIVALENTS, Beginning of period |
60,972,625 | 44,038,468 | ||||||
CASH AND CASH EQUIVALENTS, End of period |
$ | 17,727,222 | $ | 16,815,036 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: |
||||||||
Cash (received) paid during the period for: |
||||||||
Interest |
$ | 28,554,130 | $ | 21,120,029 | ||||
Income taxes |
(1,328,208 | ) | 2,900,688 | |||||
Noncash investing and financing activities: |
||||||||
Unpaid consideration associated with bookstore acquisitions |
| 450,000 |
See notes to condensed consolidated financial statements.
5
Table of Contents
NEBRASKA BOOK COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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, 2010 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, 2010
included in the Companys Annual Report on Form 10-K. A description of our significant
accounting policies is included in our 2010 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 and except where the context
requires otherwise. |
In our accompanying December 31, 2009 Condensed Consolidated Statement of Cash Flows we have
revised our presentation of proceeds from, and principal payments of, our revolving credit
facility to reflect the cash flows in connection with the borrowings and repayments under this
revolver. Related amounts had previously been presented on a net basis, rather than in
accordance with ASC Topic 230, Statement of Cash Flows, on a gross basis. This revision had
no impact on the net proceeds from, and principal repayments of, this revolver or on our net
cash flows from financing activities. |
We have evaluated subsequent events through the filing date of this Form 10-Q. |
2. | Inventories Inventories are summarized as follows:
|
December 31, | March 31, | December 31, | ||||||||||
2010 | 2010 | 2009 | ||||||||||
Bookstore Division |
$ | 150,054,277 | $ | 68,765,952 | $ | 152,507,300 | ||||||
Textbook Division |
15,448,373 | 26,132,007 | 17,200,765 | |||||||||
Complementary Services
Division |
2,352,919 | 2,599,730 | 3,729,338 | |||||||||
$ | 167,855,569 | $ | 97,497,689 | $ | 173,437,403 | |||||||
3. | Goodwill and Other
Identifiable Intangibles During the nine months ended December 31,
2010, nineteen bookstore locations were acquired in fifteen separate transactions. The total
purchase price, net of cash acquired, of such acquisitions was $8.7 million, of which $2.8
million was assigned to goodwill, $0.5 million was assigned to covenants not to compete with a
weighted-average amortization period of 2.7 years, and $1.0 million was assigned to
contract-managed relationships with a weighted-average amortization period of 4.7 years. The
weighted-average amortization period for all covenants not to compete and contract-managed
relationships entered into in connection with acquisitions occurring during the nine months
ended December 31, 2010 was 4.1 years. Costs incurred to renew contract-managed relationships
during the nine months ended December 31, 2010 were $0.3 million with a weighted-average
amortization period of five years before the next renewal of such contracts. As of December
31, 2010, $0.3 million of prior year acquisition costs remained to be paid. During the nine
months ended December 31, 2010, we paid $0.3 million of previously accrued consideration for
bookstore acquisitions and contract-managed relationships 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
Table of Contents
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, 2009 |
$ | 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 | ||||||
Balance, April 1, 2010 |
$ | 53,481,251 | $ | 162,089,875 | $ | 215,571,126 | ||||||
Additions to goodwill: |
||||||||||||
Bookstore acquisitions |
2,785,604 | | 2,785,604 | |||||||||
Balance, December 31, 2010 |
$ | 56,266,855 | $ | 162,089,875 | $ | 218,356,730 | ||||||
The following table presents the gross carrying amount and accumulated impairment charge of
goodwill: |
Gross carrying | Accumulated | Net carrying | ||||||||||
amount | impairment | amount | ||||||||||
Balance, April 1, 2009 |
$ | 322,408,126 | $ | (106,972,000 | ) | $ | 215,436,126 | |||||
Additions |
135,000 | | 135,000 | |||||||||
Balance, December 31, 2009 |
$ | 322,543,126 | $ | (106,972,000 | ) | $ | 215,571,126 | |||||
Balance, April 1, 2010 |
$ | 322,543,126 | $ | (106,972,000 | ) | $ | 215,571,126 | |||||
Additions |
2,785,604 | | 2,785,604 | |||||||||
Balance, December 31, 2010 |
$ | 325,328,730 | $ | (106,972,000 | ) | $ | 218,356,730 | |||||
We perform a test for goodwill impairment annually or more frequently if impairment indicators
exist. We completed the annual test for goodwill impairment by reporting unit during the fourth
quarter for the year ended March 31, 2010 and no goodwill impairment was indicated. Due to the
economic downturn and changes in comparable company market multiples, we determined in the first
step of the 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 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 a multiple of earnings
before interest, taxes, depreciation and amortization (EBITDA), and was deemed to be the most
indicative of the Companys fair value and was 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 last twelve-month pro forma EBITDA. 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. If we fail the first step of the goodwill impairment test, we are
required, in the second step, to estimate the fair value of reporting unit assets and
liabilities, including intangible assets, to derive the fair value of the reporting units
goodwill. |
7
Table of Contents
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, 2010 | ||||||||||||
Gross | Net | |||||||||||
Carrying | Accumulated | Carrying | ||||||||||
Amount | Amortization | Amount | ||||||||||
Customer relationships |
$ | 114,830,000 | $ | (39,233,320 | ) | $ | 75,596,680 | |||||
Developed technology |
14,626,104 | (12,496,117 | ) | 2,129,987 | ||||||||
Covenants not to compete |
1,977,300 | (1,135,783 | ) | 841,517 | ||||||||
Contract-managed
relationships |
5,292,261 | (2,479,637 | ) | 2,812,624 | ||||||||
Other |
1,585,407 | (1,585,407 | ) | | ||||||||
$ | 138,311,072 | $ | (56,930,264 | ) | $ | 81,380,808 | ||||||
March 31, 2010 | ||||||||||||
Gross | Net | |||||||||||
Carrying | Accumulated | Carrying | ||||||||||
Amount | Amortization | Amount | ||||||||||
Customer relationships |
$ | 114,830,000 | $ | (34,927,180 | ) | $ | 79,902,820 | |||||
Developed technology |
13,709,789 | (12,137,672 | ) | 1,572,117 | ||||||||
Covenants not to compete |
3,416,000 | (2,268,172 | ) | 1,147,828 | ||||||||
Contract-managed
relationships |
4,555,740 | (2,200,557 | ) | 2,355,183 | ||||||||
Other |
1,585,407 | (1,365,211 | ) | 220,196 | ||||||||
$ | 138,096,936 | $ | (52,898,792 | ) | $ | 85,198,144 | ||||||
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
relationships |
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 | ||||||
8
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Information regarding aggregate amortization expense for identifiable intangibles subject to
amortization is presented in the following table: |
Amortization | ||||
Expense | ||||
Quarter ended December 31, 2010 |
$ | 2,152,060 | ||
Quarter ended December 31, 2009 |
2,684,564 | |||
Nine months ended December 31, 2010 |
6,556,949 | |||
Nine months ended December 31, 2009 |
8,320,843 | |||
Estimated amortization expense for the fiscal years
ending March 31: |
||||
2011 |
$ | 8,121,263 | ||
2012 |
7,531,804 | |||
2013 |
6,997,101 | |||
2014 |
6,566,583 | |||
2015 |
6,363,644 |
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, 2010 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 $15.5 million was
outstanding under revolving lines of credit and $0.9 million was outstanding under a letter of
credit at December 31, 2010; $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 $0.5 million at
December 31, 2010 (effective rate of 10.14%); $175.0 million of 8.625% senior subordinated
notes (the Senior Subordinated Notes); $0.2 million of other indebtedness; and $2.6 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. |
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, 2010 was 8.0%. There also is a commitment fee for the ABL
Facility ranging from 0.75% to 1.0%. The ABL Facility is secured by a first priority interest
in substantially all of our and our subsidiaries property and assets, which also secure the
Senior Secured Notes on a second priority basis. |
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. |
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 and the ability of certain of
our subsidiaries 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 we may owe. 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 the ABL Facility. The calculated borrowing
base as of December 31, 2010 was $74.1 million, of which
$15.5 million was outstanding under revolving lines of credit, $0.9 million was outstanding
under a letter of credit and $57.7 million was unused. At December 31, 2010, our pro forma
fixed charge coverage ratio was 1.4x. |
9
Table of Contents
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 certain of 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 Restricted Payment Calculation). The indentures governing the Senior
Subordinated Notes and NBCs Senior Discount Notes contain similar restrictions on our ability
and the ability of certain of our subsidiaries and the ability of NBC to pay dividends or make
certain other payments. In addition, if there is no availability under the Restricted Payment
Calculation, 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, 2010, our pro forma
consolidated coverage ratio calculated under the indenture to the Senior Subordinated Notes was
1.7 to 1.0 and the ratio calculated under the indenture to the Senior Secured Notes was 1.8 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 only for debt instruments outstanding at the March 4, 2004 Transaction date from
the calculation, whereas the indenture to the Senior Secured Notes excludes the higher debt
issue cost amortization for the Senior Secured Notes and the ABL Facility, which were issued in
October of 2009, from the same calculation. At December 31, 2010, the amount distributable
under the most restrictive indenture was $6.5 million after applying $8.5 million of dividends
paid to NBC for the March 15, 2010 and September 15, 2010 interest on NBCs Senior Discount
Notes. Such restrictions are not expected to affect our ability to meet our cash obligations
for the remainder of fiscal year 2011. |
At December 31, 2010, we were in compliance with all of our debt covenants. |
5. | 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: Level 1 inputs to the valuation methodology are
unadjusted quoted prices for identical assets or liabilities in active markets; 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 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. |
10
Table of Contents
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. The estimated fair value of the
Senior Subordinated Notes and the Senior Secured Notes, both of which are at a fixed rate, is
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 long-term debt at
December 31, 2010, March 31, 2010 and December 31, 2009 is summarized in the following table: |
December 31, | March 31, | December 31, | ||||||||||
2010 | 2010 | 2009 | ||||||||||
Carrying Values: |
||||||||||||
Revolving credit facility |
$ | 15,500,000 | $ | | $ | 23,100,000 | ||||||
Fixed rate debt |
377,270,167 | 377,624,262 | 377,752,261 | |||||||||
Fair Values: |
||||||||||||
Revolving credit facility |
$ | 15,500,000 | $ | | $ | 23,100,000 | ||||||
Fixed rate debt |
352,730,000 | 372,317,000 | 357,178,000 |
6. | 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 systems, e-commerce technology, consulting services 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. |
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. |
11
Table of Contents
The following table provides selected information about profit or loss (excluding the impact of
our interdivisional administrative fee see Note 9, 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, 2010: |
||||||||||||||||
External customer revenues |
$ | 40,268,360 | $ | 22,894,766 | $ | 6,066,264 | $ | 69,229,390 | ||||||||
Intersegment revenues |
105,418 | 9,123,396 | 2,522,714 | 11,751,528 | ||||||||||||
Depreciation and amortization
expense |
2,300,835 | 1,531,120 | 269,516 | 4,101,471 | ||||||||||||
Earnings
before interest, taxes, depreciation and amortization
(EBITDA) |
(8,368,722 | ) | 5,818,599 | 625,382 | (1,924,741 | ) | ||||||||||
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 | ||||||||||||
Earnings before interest, taxes,
depreciation, amortization and loss
on early extinguishment of debt
(Adjusted EBITDA) |
(6,432,938 | ) | 5,960,451 | 556,068 | 83,581 | |||||||||||
Nine months ended December 31, 2010: |
||||||||||||||||
External customer revenues |
$ | 308,409,724 | $ | 85,183,518 | $ | 20,827,459 | $ | 414,420,701 | ||||||||
Intersegment revenues |
195,082 | 28,238,466 | 6,735,689 | 35,169,237 | ||||||||||||
Depreciation and amortization
expense |
6,756,327 | 4,572,576 | 749,369 | 12,078,272 | ||||||||||||
Earnings
before interest, taxes, depreciation and amortization
(EBITDA) |
18,153,253 | 30,180,524 | 2,394,576 | 50,728,353 | ||||||||||||
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 | ||||||||||||
Earnings before interest, taxes,
depreciation, amortization and
loss on early extinguishment of
debt
(Adjusted EBITDA) |
22,175,114 | 31,831,524 | 1,669,013 | 55,675,651 |
12
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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, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Total for reportable segments |
$ | 80,980,918 | $ | 77,680,207 | $ | 449,589,938 | $ | 449,834,490 | ||||||||
Elimination of intersegment revenues |
(11,751,528 | ) | (11,021,623 | ) | (35,169,237 | ) | (37,695,931 | ) | ||||||||
Consolidated total |
$ | 69,229,390 | $ | 66,658,584 | $ | 414,420,701 | $ | 412,138,559 | ||||||||
Depreciation and Amortization Expense: |
||||||||||||||||
Total for reportable segments |
$ | 4,101,471 | $ | 4,457,224 | $ | 12,078,272 | $ | 13,488,419 | ||||||||
Corporate Administration |
242,633 | 352,312 | 923,326 | 1,050,850 | ||||||||||||
Consolidated total |
$ | 4,344,104 | $ | 4,809,536 | $ | 13,001,598 | $ | 14,539,269 | ||||||||
Income Before Income Taxes: |
||||||||||||||||
Total Adjusted EBITDA for
reportable segments |
$ | (1,924,741 | ) | $ | 83,581 | $ | 50,728,353 | $ | 55,675,651 | |||||||
Corporate Administration Adjusted
EBITDA loss (including interdivision profit elimination) |
(7,018,082 | ) | (6,101,610 | ) | (14,719,699 | ) | (13,187,402 | ) | ||||||||
(8,942,823 | ) | (6,018,029 | ) | 36,008,654 | 42,488,249 | |||||||||||
Depreciation and amortization |
(4,344,104 | ) | (4,809,536 | ) | (13,001,598 | ) | (14,539,269 | ) | ||||||||
Consolidated income (loss)
from operations |
(13,286,927 | ) | (10,827,565 | ) | 23,007,056 | 27,948,980 | ||||||||||
Interest and other expenses, net |
(10,599,007 | ) | (13,655,200 | ) | (31,791,653 | ) | (32,993,603 | ) | ||||||||
Consolidated loss
before income taxes |
$ | (23,885,934 | ) | $ | (24,482,765 | ) | $ | (8,784,597 | ) | $ | (5,044,623 | ) | ||||
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. |
7. | Accounting
Pronouncements Not Yet Adopted In December 2010, the FASB issued Accounting
Standards Update 2010-28, Intangibles Goodwill and Other (Topic 350) When to Perform
Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying
Amounts (Update 2010-28). Update 2010-28 amends the criteria for performing Step 2 of the
goodwill impairment test for reporting units with zero or negative carrying amounts and
requires performing Step 2 if qualitative factors indicate that it is more likely than not
that a goodwill impairment exists. Update 2010-28 becomes effective for us in fiscal year
2012 and any impairment to be recorded upon adoption will be recognized as an adjustment to
beginning retained earnings. Early adoption is not permitted. 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 2009-13, Revenue Recognition
(Topic 605) 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 determined that the update will not have a material impact on the consolidated
financial statements. |
13
Table of Contents
In October 2009, the FASB issued Accounting Standards Update 2009-14, Software (Topic 985) -
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. |
8. | 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, 2010 and 2009 to
provide funding for interest due and payable on NBCs Senior Discount Notes. |
9. | Condensed
Consolidating Financial Information
Effective January 26, 2009, we established
Campus Authentic LLC, a wholly-owned subsidiary which was separately formed under the laws of
the State of Delaware. On April 24, 2007, we established Net Textstore LLC as a wholly-owned
subsidiary separately formed 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. Campus
Authentic LLC, Net Textstore LLC, CBA, NBC Textbooks LLC, and Specialty Books, Inc.
unconditionally guarantee, 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, 2010, 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, Net Textstore LLC,
CBA, NBC Textbooks LLC, and Specialty Books, Inc.), consolidating eliminations, and
consolidated totals. |
14
Table of Contents
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2010
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2010
(UNAUDITED)
Nebraska | ||||||||||||||||
Book | Subsidiary | Consolidated | ||||||||||||||
Company, Inc. | Guarantors | Eliminations | Totals | |||||||||||||
ASSETS |
||||||||||||||||
CURRENT ASSETS: |
||||||||||||||||
Cash and cash equivalents |
$ | 8,842,112 | $ | 8,885,110 | $ | | $ | 17,727,222 | ||||||||
Intercompany receivables |
26,829,171 | 44,173,384 | (71,002,555 | ) | | |||||||||||
Receivables, net |
21,756,408 | 53,068,272 | | 74,824,680 | ||||||||||||
Inventories |
105,575,463 | 62,280,106 | | 167,855,569 | ||||||||||||
Recoverable income taxes |
3,238,079 | | | 3,238,079 | ||||||||||||
Deferred income taxes |
2,312,559 | 4,999,000 | | 7,311,559 | ||||||||||||
Prepaid expenses and other assets |
2,309,750 | 3,072,674 | | 5,382,424 | ||||||||||||
Total current assets |
170,863,542 | 176,478,546 | (71,002,555 | ) | 276,339,533 | |||||||||||
PROPERTY AND EQUIPMENT, net |
34,966,861 | 5,743,309 | | 40,710,170 | ||||||||||||
GOODWILL |
202,685,622 | 15,671,108 | | 218,356,730 | ||||||||||||
CUSTOMER RELATIONSHIPS, net |
4,082,562 | 71,514,118 | | 75,596,680 | ||||||||||||
TRADENAME |
31,320,000 | | | 31,320,000 | ||||||||||||
OTHER IDENTIFIABLE INTANGIBLES, net |
3,319,252 | 2,464,876 | | 5,784,128 | ||||||||||||
INVESTMENT IN SUBSIDIARIES |
183,999,791 | | (183,999,791 | ) | | |||||||||||
OTHER ASSETS |
8,089,951 | 1,018,565 | | 9,108,516 | ||||||||||||
$ | 639,327,581 | $ | 272,890,522 | $ | (255,002,346 | ) | $ | 657,215,757 | ||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||
CURRENT LIABILITIES: |
||||||||||||||||
Accounts payable |
$ | 48,762,620 | $ | 21,280,548 | $ | | $ | 70,043,168 | ||||||||
Intercompany payables |
44,173,384 | 26,829,171 | (71,002,555 | ) | | |||||||||||
Accrued employee compensation and benefits |
5,005,107 | 2,086,342 | | 7,091,449 | ||||||||||||
Accrued interest |
6,137,984 | | | 6,137,984 | ||||||||||||
Accrued incentives |
11,374 | 5,950,798 | | 5,962,172 | ||||||||||||
Accrued expenses |
3,671,866 | 949,245 | | 4,621,111 | ||||||||||||
Income taxes payable |
(4,010,750 | ) | 4,010,750 | | | |||||||||||
Deferred revenue |
2,972,228 | 2,878 | | 2,975,106 | ||||||||||||
Current maturities of long-term debt |
199,585,345 | | | 199,585,345 | ||||||||||||
Current maturities of capital lease obligations |
661,733 | | | 661,733 | ||||||||||||
Revolving credit facility |
15,500,000 | | | 15,500,000 | ||||||||||||
Total current liabilities |
322,470,891 | 61,109,732 | (71,002,555 | ) | 312,578,068 | |||||||||||
LONG-TERM DEBT, net of current maturities |
175,138,755 | | | 175,138,755 | ||||||||||||
CAPITAL LEASE OBLIGATIONS, net of current
maturities |
1,884,334 | | | 1,884,334 | ||||||||||||
OTHER LONG-TERM LIABILITIES |
1,401,801 | 200,000 | | 1,601,801 | ||||||||||||
DEFERRED INCOME TAXES |
23,160,020 | 27,580,999 | | 50,741,019 | ||||||||||||
DUE TO PARENT |
22,029,711 | | | 22,029,711 | ||||||||||||
COMMITMENTS |
||||||||||||||||
STOCKHOLDERS EQUITY |
93,242,069 | 183,999,791 | (183,999,791 | ) | 93,242,069 | |||||||||||
$ | 639,327,581 | $ | 272,890,522 | $ | (255,002,346 | ) | $ | 657,215,757 | ||||||||
15
Table of Contents
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2010
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2010
(UNAUDITED)
Nebraska | ||||||||||||||||
Book | Subsidiary | Consolidated | ||||||||||||||
Company, Inc. | Guarantors | Eliminations | Totals | |||||||||||||
ASSETS |
||||||||||||||||
CURRENT ASSETS: |
||||||||||||||||
Cash and cash equivalents |
$ | 55,410,821 | $ | 5,561,804 | $ | | $ | 60,972,625 | ||||||||
Intercompany receivables |
17,716,457 | 57,770,424 | (75,486,881 | ) | | |||||||||||
Receivables, net |
32,613,517 | 25,374,277 | | 57,987,794 | ||||||||||||
Inventories |
55,017,307 | 42,480,382 | | 97,497,689 | ||||||||||||
Recoverable income taxes |
2,435,287 | | | 2,435,287 | ||||||||||||
Deferred income taxes |
1,690,559 | 4,557,000 | | 6,247,559 | ||||||||||||
Prepaid expenses and other assets |
3,494,754 | 575,527 | | 4,070,281 | ||||||||||||
Total current assets |
168,378,702 | 136,319,414 | (75,486,881 | ) | 229,211,235 | |||||||||||
PROPERTY AND EQUIPMENT, net |
36,815,903 | 5,339,521 | | 42,155,424 | ||||||||||||
GOODWILL |
199,900,018 | 15,671,108 | | 215,571,126 | ||||||||||||
CUSTOMER RELATIONSHIPS, net |
4,315,113 | 75,587,707 | | 79,902,820 | ||||||||||||
TRADENAME |
31,320,000 | | | 31,320,000 | ||||||||||||
OTHER IDENTIFIABLE INTANGIBLES, net |
3,455,593 | 1,839,731 | | 5,295,324 | ||||||||||||
INVESTMENT IN SUBSIDIARIES |
171,532,241 | | (171,532,241 | ) | | |||||||||||
OTHER ASSETS |
10,892,382 | 1,156,933 | | 12,049,315 | ||||||||||||
$ | 626,609,952 | $ | 235,914,414 | $ | (247,019,122 | ) | $ | 615,505,244 | ||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||
CURRENT LIABILITIES: |
||||||||||||||||
Accounts payable |
$ | 22,622,816 | $ | 3,764,224 | $ | | $ | 26,387,040 | ||||||||
Intercompany payables |
57,770,424 | 17,716,457 | (75,486,881 | ) | | |||||||||||
Accrued employee compensation and benefits |
6,921,873 | 2,479,595 | | 9,401,468 | ||||||||||||
Accrued interest |
7,295,709 | | | 7,295,709 | ||||||||||||
Accrued incentives |
31,148 | 6,282,785 | | 6,313,933 | ||||||||||||
Accrued expenses |
8,195,313 | 856,338 | | 9,051,651 | ||||||||||||
Income taxes payable |
(3,651,775 | ) | 3,651,775 | | | |||||||||||
Deferred revenue |
1,299,960 | | | 1,299,960 | ||||||||||||
Current maturities of long-term debt |
54,403 | | | 54,403 | ||||||||||||
Current maturities of capital lease obligations |
846,053 | | | 846,053 | ||||||||||||
Total current liabilities |
101,385,924 | 34,751,174 | (75,486,881 | ) | 60,650,217 | |||||||||||
LONG-TERM DEBT, net of current maturities |
374,343,069 | | | 374,343,069 | ||||||||||||
CAPITAL LEASE OBLIGATIONS, net of current
maturities |
2,380,737 | | | 2,380,737 | ||||||||||||
OTHER LONG-TERM LIABILITIES |
1,918,963 | 360,000 | | 2,278,963 | ||||||||||||
DEFERRED INCOME TAXES |
21,196,020 | 29,270,999 | | 50,467,019 | ||||||||||||
DUE TO PARENT |
23,194,711 | | | 23,194,711 | ||||||||||||
COMMITMENTS |
||||||||||||||||
STOCKHOLDERS EQUITY |
102,190,528 | 171,532,241 | (171,532,241 | ) | 102,190,528 | |||||||||||
$ | 626,609,952 | $ | 235,914,414 | $ | (247,019,122 | ) | $ | 615,505,244 | ||||||||
16
Table of Contents
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2009
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2009
(UNAUDITED)
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
Table of Contents
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED DECEMBER 31, 2010
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED DECEMBER 31, 2010
(UNAUDITED)
Nebraska | ||||||||||||||||
Book | Subsidiary | Consolidated | ||||||||||||||
Company, Inc. | Guarantors | Eliminations | Totals | |||||||||||||
REVENUES, net of returns |
$ | 34,423,021 | $ | 44,200,395 | $ | (9,394,026 | ) | $ | 69,229,390 | |||||||
COSTS OF SALES (exclusive of depreciation shown below) |
22,482,053 | 28,893,767 | (9,701,511 | ) | 41,674,309 | |||||||||||
Gross profit |
11,940,968 | 15,306,628 | 307,485 | 27,555,081 | ||||||||||||
OPERATING EXPENSES (INCOME): |
||||||||||||||||
Selling, general and administrative |
25,358,569 | 10,831,850 | 307,485 | 36,497,904 | ||||||||||||
Depreciation |
1,699,697 | 492,347 | | 2,192,044 | ||||||||||||
Amortization |
504,125 | 1,647,935 | | 2,152,060 | ||||||||||||
Intercompany administrative fee |
(2,171,391 | ) | 2,171,391 | | | |||||||||||
Equity in earnings of subsidiaries |
1,082,802 | | (1,082,802 | ) | | |||||||||||
26,473,802 | 15,143,523 | (775,317 | ) | 40,842,008 | ||||||||||||
INCOME (LOSS) FROM OPERATIONS |
(14,532,834 | ) | 163,105 | 1,082,802 | (13,286,927 | ) | ||||||||||
OTHER EXPENSES: |
||||||||||||||||
Interest expense |
10,654,670 | 31 | | 10,654,701 | ||||||||||||
Interest income |
(20,570 | ) | (35,124 | ) | | (55,694 | ) | |||||||||
10,634,100 | (35,093 | ) | | 10,599,007 | ||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES |
(25,166,934 | ) | 198,198 | 1,082,802 | (23,885,934 | ) | ||||||||||
INCOME TAX EXPENSE (BENEFIT) |
(11,539,000 | ) | 1,281,000 | | (10,258,000 | ) | ||||||||||
NET LOSS |
$ | (13,627,934 | ) | $ | (1,082,802 | ) | $ | 1,082,802 | $ | (13,627,934 | ) | |||||
18
Table of Contents
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED DECEMBER 31, 2009
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED DECEMBER 31, 2009
(UNAUDITED)
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 (LOSS) 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 (LOSS) BEFORE INCOME TAXES |
(24,944,765 | ) | 1,435,006 | (973,006 | ) | (24,482,765 | ) | |||||||||
INCOME TAX EXPENSE (BENEFIT) |
(10,059,000 | ) | 462,000 | | (9,597,000 | ) | ||||||||||
NET INCOME (LOSS) |
$ | (14,885,765 | ) | $ | 973,006 | $ | (973,006 | ) | $ | (14,885,765 | ) | |||||
19
Table of Contents
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2010
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2010
(UNAUDITED)
Nebraska | ||||||||||||||||
Book | Subsidiary | Consolidated | ||||||||||||||
Company, Inc. | Guarantors | Eliminations | Totals | |||||||||||||
REVENUES, net of returns |
$ | 239,235,201 | $ | 204,179,319 | $ | (28,993,819 | ) | $ | 414,420,701 | |||||||
COSTS OF SALES (exclusive of
depreciation shown below) |
153,007,110 | 130,681,323 | (29,784,575 | ) | 253,903,858 | |||||||||||
Gross profit |
86,228,091 | 73,497,996 | 790,756 | 160,516,843 | ||||||||||||
OPERATING EXPENSES (INCOME): |
||||||||||||||||
Selling, general and administrative |
85,789,255 | 37,928,178 | 790,756 | 124,508,189 | ||||||||||||
Depreciation |
5,064,620 | 1,380,029 | | 6,444,649 | ||||||||||||
Amortization |
1,758,504 | 4,798,445 | | 6,556,949 | ||||||||||||
Intercompany administrative fee |
(6,514,173 | ) | 6,514,173 | | | |||||||||||
Equity in earnings of subsidiaries |
(12,467,552 | ) | | 12,467,552 | | |||||||||||
73,630,654 | 50,620,825 | 13,258,308 | 137,509,787 | |||||||||||||
INCOME FROM OPERATIONS |
12,597,437 | 22,877,171 | (12,467,552 | ) | 23,007,056 | |||||||||||
OTHER EXPENSES: |
||||||||||||||||
Interest expense |
31,931,384 | 39 | | 31,931,423 | ||||||||||||
Interest income |
(53,350 | ) | (86,420 | ) | | (139,770 | ) | |||||||||
31,878,034 | (86,381 | ) | | 31,791,653 | ||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES |
(19,280,597 | ) | 22,963,552 | (12,467,552 | ) | (8,784,597 | ) | |||||||||
INCOME TAX EXPENSE (BENEFIT) |
(14,502,000 | ) | 10,496,000 | | (4,006,000 | ) | ||||||||||
NET INCOME (LOSS) |
$ | (4,778,597 | ) | $ | 12,467,552 | $ | (12,467,552 | ) | $ | (4,778,597 | ) | |||||
20
Table of Contents
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2009
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2009
(UNAUDITED)
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 (LOSS) 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 (LOSS) |
$ | (3,067,623 | ) | $ | 17,103,452 | $ | (17,103,452 | ) | $ | (3,067,623 | ) | |||||
21
Table of Contents
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2010
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2010
(UNAUDITED)
Nebraska | ||||||||||||||||
Book | Subsidiary | Consolidated | ||||||||||||||
Company, Inc. | Guarantors | Eliminations | Totals | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
$ | (46,211,471 | ) | $ | 8,831,872 | $ | | $ | (37,379,599 | ) | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||||||
Purchases of property and equipment |
(3,152,137 | ) | (1,820,688 | ) | 7,115 | (4,965,710 | ) | |||||||||
Acquisitions, net of cash acquired |
(5,619,270 | ) | (3,698,543 | ) | | (9,317,813 | ) | |||||||||
Proceeds from sale of property and equipment |
18,158 | 10,665 | (7,115 | ) | 21,708 | |||||||||||
Software development costs |
(916,314 | ) | | | (916,314 | ) | ||||||||||
Net cash flows from investing activities |
(9,669,563 | ) | (5,508,566 | ) | | (15,178,129 | ) | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||||||
Contributed capital |
(42 | ) | | | (42 | ) | ||||||||||
Payment of financing costs |
(66,660 | ) | | | (66,660 | ) | ||||||||||
Principal payments on long-term debt |
(40,250 | ) | | | (40,250 | ) | ||||||||||
Principal payments on capital lease obligations |
(680,723 | ) | | | (680,723 | ) | ||||||||||
Borrowings under revolving credit facility |
43,700,000 | | | 43,700,000 | ||||||||||||
Payments under revolving credit facility |
(28,200,000 | ) | | | (28,200,000 | ) | ||||||||||
Dividends paid to parent |
(4,235,000 | ) | | | (4,235,000 | ) | ||||||||||
Change in due to parent |
(1,165,000 | ) | | | (1,165,000 | ) | ||||||||||
Net cash flows from financing activities |
9,312,325 | | | 9,312,325 | ||||||||||||
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS |
(46,568,709 | ) | 3,323,306 | | (43,245,403 | ) | ||||||||||
CASH AND CASH EQUIVALENTS, Beginning of period |
55,410,821 | 5,561,804 | | 60,972,625 | ||||||||||||
CASH AND CASH EQUIVALENTS, End of period |
$ | 8,842,112 | $ | 8,885,110 | $ | | $ | 17,727,222 | ||||||||
22
Table of Contents
NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2009
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2009
(UNAUDITED)
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 | ) | ||||||||||
Borrowings under revolving credit facility |
85,000,000 | | | 85,000,000 | ||||||||||||
Payments under revolving credit facility |
(61,900,000 | ) | | | (61,900,000 | ) | ||||||||||
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 (DECREASE) 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 | ||||||||
23
Table of Contents
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. We acquired three contract-managed bookstore locations in two separate transactions
during the quarter ended December 31, 2010. 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, 2010 increased $2.6
million, or 3.9%, from the quarter ended December 31, 2009. The increase was primarily due to an
increase in revenues in the Bookstore Division, which was partially offset by a decrease in
revenues in the Textbook Division. Revenues increased in the Bookstore Division primarily due to
an increase in additional revenue from new bookstores and to an increase in same-store sales.
Revenues decreased in the Textbook Division primarily as a result of a decrease in units sold.
Adjusted EBITDA Results. Consolidated Adjusted EBITDA for the quarter ended December 31, 2010
decreased $2.9 million from the quarter ended December 31, 2009 primarily due to lower gross profit
and higher selling, general and administrative expenses. EBITDA and Adjusted EBITDA are considered
non-GAAP measures by the SEC, and therefore you should refer to the more detailed explanation of
the measures that is provided later in this Item.
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 for the quarter and nine months ended December 31, 2010; 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 the measures, as further described later in this Item, 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.
With respect to covenant compliance calculations, EBITDA, as defined in the ABL Credit
Agreement (hereinafter, referred to as Credit Facility EBITDA), includes additional adjustments
to EBITDA. Credit Facility 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. Credit Facility EBITDA is utilized when calculating the pro forma fixed
charge coverage ratio under the ABL Credit Agreement. The pro forma consolidated coverage ratio
under the indentures to the Senior Subordinated Notes and the Senior Secured Notes uses EBITDA and
the indentures define EBITDA similar to Credit Facility EBITDA except that charges incurred in
connection with the restricted stock plan are not added back to consolidated net income. See Note
4 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 are they a measure of our profitability because they do not include costs
and expenses such as interest, taxes, depreciation, amortization, and loss on early extinguishment
of debt, which are significant components in understanding and assessing our financial performance.
Even with these limitations, 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 otherwise could be obtained absent this disclosure. EBITDA and Adjusted EBITDA
measures presented may not be comparable to similarly titled measures presented by other companies.
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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.
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 starting with the ABL Facility,
which may mature on the earlier of October 2, 2012 or 91 days prior to the earliest maturity of the
Senior Secured Notes, the Senior Subordinated Notes, NBCs Senior Discount Notes, or any
refinancing thereof, effectively September 1, 2011. As a consequence, we may be required to
refinance the other tranches of debt in our capital structure in order to refinance the ABL
Facility. We are currently working on a refinancing with our investment bankers. Due to our
highly leveraged capital structure as well as reliance on market-based vendor payment terms,
continued uncertainty in the credit markets and our future results of operations may negatively
impact our ability to extend or refinance our existing debt on reasonable terms, or at all and to
continue to utilize existing vendor payment terms. 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,
including renting of textbooks from both online and local campus marketplace competitors,
competition for contract-management opportunities and other challenges. We also believe that
although there continues to be attractive opportunities related to acquisitions, we may not be able
to identify additional bookstores for acquisition or we may not be successful in competing for
contracts to manage additional institutional bookstores. Finally, we are uncertain what impact the
current economy might have on our business. We expect that our capital expenditures will be
consistent with prior periods.
Quarter Ended December 31, 2010 Compared With Quarter Ended December 31, 2009.
Revenues. Revenues for the quarters ended December 31, 2010 and 2009 and the corresponding
change in revenues were as follows:
Change | ||||||||||||||||
2010 | 2009 | Amount | Percentage | |||||||||||||
Bookstore Division |
$ | 40,373,778 | $ | 36,574,712 | $ | 3,799,066 | 10.4 | % | ||||||||
Textbook Division |
32,018,162 | 32,633,979 | (615,817 | ) | (1.9 | )% | ||||||||||
Complementary Services Division |
8,588,978 | 8,471,516 | 117,462 | 1.4 | % | |||||||||||
Intercompany Eliminations |
(11,751,528 | ) | (11,021,623 | ) | (729,905 | ) | 6.6 | % | ||||||||
$ | 69,229,390 | $ | 66,658,584 | $ | 2,570,806 | 3.9 | % | |||||||||
For the quarter ended December 31, 2010, Bookstore Division revenues increased $3.8 million,
or 10.4%, from the quarter ended December 31, 2009. The increase in Bookstore Division revenues
was attributable to additional revenue from new bookstores and to an increase in same-store sales,
which were partially offset by a decrease in revenues as a result of certain store closings. We
have added 39 bookstore locations through acquisition or start-ups since April 1, 2009. The new
bookstores provided an additional $2.9 million of revenue for the quarter ended December 31, 2010.
Same-store sales for the quarter ended December 31, 2010 increased $1.6 million, or 4.7%, from the
quarter ended December 31, 2009, primarily due to increased clothing and insignia wear and
electronics revenues. We define same-store sales for the quarter ended December 31, 2010 as sales
from any store, even if expanded or relocated, that we have operated since the start of fiscal year
2010. Revenues declined $0.7 million for the quarter ended December 31, 2010 as a result of
certain store closings since April 1, 2009.
For the quarter ended December 31, 2010, Textbook Division revenues decreased $0.6 million, or
1.9%, from the quarter ended December 31, 2009 primarily due to a 4.2% decrease in units sold,
which was partially offset by a 0.5% increase in average price per book sold. In addition, the
decrease in revenues was partially offset by an increase in revenues from textbook rentals to
third-parties. Complementary Services Division revenues increased $0.1 million, or 1.4%, from the
quarter ended December 31, 2009, primarily due to an increase in revenues from our systems
business, which was mostly offset by a decrease in revenues from our distance education business.
Intercompany eliminations increased $0.7 million primarily as a result of an increase in
intercompany revenues in our systems business.
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Gross profit. Gross profit for the quarter ended December 31, 2010 decreased $0.5 million, or
1.8%, to $27.6 million from $28.1 million for the quarter ended December 31, 2009. The decrease in
gross profit was attributable to a decrease in the Bookstore Division gross profit, which was
partially offset by an increase in the Textbook Division gross profit. The consolidated gross
margin percentage decreased to 39.8% for the quarter ended December 31, 2010 from 42.1% for the
quarter ended December 31, 2009. The decrease in our consolidated gross margin percentage is
primarily attributable to a decrease in the gross margin percentage for the Bookstore Division.
Selling, general and administrative expenses. Selling, general and administrative expenses for
the quarter ended December 31, 2010 increased $2.4 million, or 7.1%, to $36.5 million from $34.1
million for the quarter ended December 31, 2009. Selling, general and administrative expenses as a
percentage of revenues were 52.7% and 51.1% for the quarters ended December 31, 2010 and 2009,
respectively. The increase in selling, general and administrative expenses was primarily
attributable to a $1.4 million increase in consulting services related to expense reduction and top
line growth initiatives such as inventory and pricing optimization and to a $0.8 million increase
in rent expense primarily due to an increase in the number of bookstores. These increases were
partially offset by a $0.6 million decrease in personnel costs primarily due to lower incentive
compensation costs.
Earnings before interest, taxes, depreciation, amortization, and loss on early extinguishment
of debt (Adjusted EBITDA). Adjusted EBITDA for the quarters ended December 31, 2010 and 2009 and
the corresponding change in Adjusted EBITDA were as follows:
Change | ||||||||||||||||
2010 | 2009 | Amount | Percentage | |||||||||||||
Bookstore Division |
$ | (8,368,721 | ) | $ | (6,432,938 | ) | $ | (1,935,783 | ) | (30.1 | )% | |||||
Textbook Division |
5,818,598 | 5,960,451 | (141,853 | ) | (2.4 | )% | ||||||||||
Complementary Services Division |
625,382 | 556,068 | 69,314 | 12.5 | % | |||||||||||
Corporate Administration |
(7,018,082 | ) | (6,101,610 | ) | (916,472 | ) | (15.0 | )% | ||||||||
$ | (8,942,823 | ) | $ | (6,018,029 | ) | $ | (2,924,794 | ) | (48.6 | )% | ||||||
Bookstore Division Adjusted EBITDA loss increased $1.9 million from the quarter ended December
31, 2009 primarily due to lower gross profit and to higher selling, general and administrative
expenses. The $0.2 million, or 2.4%, decrease in Textbook Division Adjusted EBITDA from the
quarter ended December 31, 2009, was primarily due to an increase in selling, general and
administrative expenses. Corporate Administrations Adjusted EBITDA loss increased $0.9 million
from the quarter ended December 31, 2009, primarily due to an increase in consulting services
expense.
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For an explanation of why EBITDA and Adjusted EBITDA are useful measures in evaluating our
operating results and how they provide additional information for determining our ability to meet
debt service requirements, see Adjusted EBITDA Results earlier in this Item. 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:
Quarter Ended December 31, | ||||||||
2010 | 2009 | |||||||
Net loss |
$ | (13,627,934 | ) | $ | (14,885,765 | ) | ||
Interest expense, net |
10,599,007 | 10,589,441 | ||||||
Income tax benefit |
(10,258,000 | ) | (9,597,000 | ) | ||||
Depreciation and amortization |
4,344,104 | 4,809,536 | ||||||
EBITDA |
$ | (8,942,823 | ) | $ | (9,083,788 | ) | ||
Loss on early extinguishment of debt |
| 3,065,759 | ||||||
Adjusted EBITDA |
$ | (8,942,823 | ) | $ | (6,018,029 | ) | ||
Share-based compensation |
8,973 | 309,421 | ||||||
Interest income |
55,694 | 60,744 | ||||||
Provision for losses on receivables |
616,457 | 280,618 | ||||||
Cash paid for interest |
(10,296,317 | ) | (3,760,284 | ) | ||||
Cash paid for income taxes |
(240,371 | ) | (4,205,015 | ) | ||||
Loss on disposal of assets |
101,369 | 22,640 | ||||||
Change in due to parent |
466,000 | (1,530,000 | ) | |||||
Changes in operating assets and
liabilities, net of effect of
acquisitions (1) |
(72,552,134 | ) | (100,156,701 | ) | ||||
Net Cash Flows from Operating Activities |
$ | (90,783,152 | ) | $ | (114,996,606 | ) | ||
Net Cash Flows from Investing Activities |
$ | (2,554,530 | ) | $ | (1,603,108 | ) | ||
Net Cash Flows from Financing Activities |
$ | 14,784,616 | $ | 27,330,237 | ||||
(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. |
Amortization expense. Amortization expense for the quarter ended December 31, 2010 decreased
$0.5 million to $2.2 million from $2.7 million for the quarter ended December 31, 2009, primarily
due to a decrease in amortization of software development costs and to a decrease in amortization
of non-compete agreements associated with bookstore acquisitions.
Loss on early extinguishment of debt. The loss on early 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 in October of 2009.
Income taxes. Income tax benefit for the quarter ended December 31, 2010 increased $0.7
million to $10.3 million from $9.6 million for the quarter ended December 31, 2009. Our effective
tax rate for the quarters ended December 31, 2010 and 2009 was 42.9% and 39.2%, respectively. The
change in the effective tax rate is primarily due to certain states taxing on a gross receipts
methodology. Our effective tax rate differs from the statutory tax rate primarily as a result of
state income taxes.
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Nine Months Ended December 31, 2010 Compared With Nine Months Ended December 31, 2009.
Revenues. Revenues for the nine months ended December 31, 2010 and 2009 and the corresponding
change in revenues were as follows:
Change | ||||||||||||||||
2010 | 2009 | Amount | Percentage | |||||||||||||
Bookstore Division |
$ | 308,604,806 | $ | 306,789,449 | $ | 1,815,357 | 0.6 | % | ||||||||
Textbook Division |
113,421,984 | 117,152,302 | (3,730,318 | ) | (3.2 | )% | ||||||||||
Complementary Services Division |
27,563,148 | 25,892,739 | 1,670,409 | 6.5 | % | |||||||||||
Intercompany Eliminations |
(35,169,237 | ) | (37,695,931 | ) | 2,526,694 | (6.7 | )% | |||||||||
$ | 414,420,701 | $ | 412,138,559 | $ | 2,282,142 | 0.6 | % | |||||||||
For the nine months ended December 31, 2010, Bookstore Division revenues increased $1.8
million, or 0.6%, from the nine months ended December 31, 2009. The increase in Bookstore Division
revenues was attributable to additional revenues from new bookstores, which were mostly offset by a
decrease in same-store sales and a decrease in revenues as a result of certain store closings. We
have added 39 bookstore locations through acquisitions or start-ups since April 1, 2009. The new
bookstores provided an additional $20.9 million of revenue for the nine months ended December 31,
2010. Same-store sales for the nine months ended December 31, 2010 decreased $16.0 million, or
5.4%, from the nine months ended December 31, 2009, primarily due to decreased textbook revenues,
which were partially offset by an increase in clothing and insignia wear and electronics revenues.
The same-store sales decrease in textbooks is partly attributable to the rental program which we
began implementing in our bookstores in the fourth quarter of fiscal year 2010. If the textbooks
rented would have been sold instead, we estimate that same-store sales would have been
approximately $8.8 million higher, lowering the same-store sales decrease to 2.4% for the nine
months ended December 31, 2010. We define same-store sales for the nine months ended December 31,
2010 as sales from any store, even if expanded or relocated, that we have operated since the start
of fiscal year 2010. In addition, revenues declined $3.1 million as a result of certain store
closings since April 1, 2009.
For the nine months ended December 31, 2010, Textbook Division revenues decreased $3.7
million, or 3.2%, from the nine months ended December 31, 2009, due primarily to a 2.7% decrease in
units sold and a 0.3% decrease in average price per book sold, which were partially offset by an
increase in revenues from textbook rentals to third-parties. Complementary Services Division
revenues increased $1.7 million, or 6.5%, from the nine months ended December 31, 2009, as an
increase in revenue in our systems business was partially offset by a decrease in revenue from our
distance education business. Intercompany eliminations for the nine months ended December 31, 2010
decreased $2.5 million, or 6.7%, from the nine months ended December 31, 2009 primarily due to a
decrease in intercompany revenues in the Textbook Division.
Gross profit. Gross profit for the nine months ended December 31, 2010 increased $0.7
million, or 0.5%, to $160.5 million from $159.8 million for the nine months ended December 31,
2009. The increase in gross profit was primarily attributable to the increase in gross profit in
the Bookstore Division. The consolidated gross margin percentage decreased slightly to 38.7% for
the nine months ended December 31, 2010 from 38.8% for the nine months ended December 31, 2009.
The decrease in our consolidated gross margin percentage was attributable to a decrease in the
gross margin percentage for the Complementary Services Division, which was offset by increases in
the Textbook Division and Bookstore Division gross margin percentages. The increase in the
Bookstore Division gross margin percentage was primarily due to the rental program. Although the
rental of a textbook through the Bookstore Division rental program has lower revenue compared to
the sale of a textbook, the gross profit on the rental of a textbook has been comparable to gross
profit on the sale of a textbook; therefore, the gross margin percentage on the rental of a
textbook is generally higher.
Selling, general and administrative expenses. Selling, general and administrative expenses for
the nine months ended December 31, 2010 increased $7.2 million, or 6.2%, to $124.5 million from
$117.3 million for the nine months ended December 31, 2009. Selling, general and administrative
expenses as a percentage of revenues were 30.0% and 28.5% for the nine months ended December 31,
2010 and 2009, respectively. The increase in selling, general and administrative expenses was
primarily attributable to a $2.9 million increase in rent expense primarily due to an increase in
the number of bookstores, a $2.3 million increase in commission and shipping expense primarily due
to increased sales on the internet involving third-party websites, a $1.5 million increase in
consulting services related to expense reduction and top line growth initiatives such as inventory
and pricing optimization and a $1.5 million increase in advertising and travel and entertainment
expenses. These increases were partially offset by a $2.0 million decrease in personnel costs
primarily due to lower incentive compensation costs.
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Earnings before interest, taxes, depreciation, amortization, and loss on early extinguishment
of debt (Adjusted EBITDA). Adjusted EBITDA for the nine months ended December 31, 2010 and 2009 and
the corresponding change in Adjusted EBITDA were as follows:
Change | ||||||||||||||||
2010 | 2009 | Amount | Percentage | |||||||||||||
Bookstore Division |
$ | 18,153,253 | $ | 22,175,114 | $ | (4,021,861 | ) | (18.1 | )% | |||||||
Textbook Division |
30,180,524 | 31,831,524 | (1,651,000 | ) | (5.2 | )% | ||||||||||
Complementary Services Division |
2,394,576 | 1,669,013 | 725,563 | 43.5 | % | |||||||||||
Corporate Administration |
(14,719,699 | ) | (13,187,402 | ) | (1,532,297 | ) | (11.6 | )% | ||||||||
$ | 36,008,654 | $ | 42,488,249 | $ | (6,479,595 | ) | (15.3 | )% | ||||||||
Bookstore Division Adjusted EBITDA for the nine months ended December 31, 2010 decreased $4.0
million, or 18.1%, from the nine months ended December 31, 2009 primarily due to lower same-store
sales and to an increase in selling, general and administrative expenses. Textbook Division
Adjusted EBITDA for the nine months ended December 31, 2010 decreased $1.7 million, or 5.2%, from
the nine months ended December 31, 2009, primarily due to a decrease in revenues and an increase in
selling, general and administrative expenses. Complementary Services Division Adjusted EBITDA
increased $0.7 million from the nine months ended December 31, 2009, primarily due to improved
results in our systems business, which was partially offset by lower results in our distance
education business. Corporate Administrations Adjusted EBITDA loss increased $1.5 million, or
11.6%, from the nine months ended December 31, 2009, primarily due to an increase in consulting
services expense.
For an explanation of why EBITDA and Adjusted EBITDA are useful measures in evaluating our
operating results and how they provide additional information for determining our ability to meet
debt service requirements, see Adjusted EBITDA Results earlier in this Item. 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 included in Item 1, Financial Statements:
Nine Months Ended December 31, | ||||||||
2010 | 2009 | |||||||
Net loss |
$ | (4,778,597 | ) | $ | (3,067,623 | ) | ||
Interest expense, net |
31,791,653 | 29,927,844 | ||||||
Income tax benefit |
(4,006,000 | ) | (1,977,000 | ) | ||||
Depreciation and amortization |
13,001,598 | 14,539,269 | ||||||
EBITDA |
$ | 36,008,654 | $ | 39,422,490 | ||||
Loss on early extinguishment of debt |
| 3,065,759 | ||||||
Adjusted EBITDA |
$ | 36,008,654 | $ | 42,488,249 | ||||
Share-based compensation |
438,810 | 789,162 | ||||||
Interest income |
139,770 | 104,441 | ||||||
Provision for losses on receivables |
1,317,433 | 414,247 | ||||||
Cash paid for interest |
(28,554,130 | ) | (21,120,029 | ) | ||||
Cash (paid) refunded for income taxes |
1,328,208 | (2,900,688 | ) | |||||
Loss on disposal of assets |
155,235 | 140,783 | ||||||
Change in due to parent |
1,165,000 | (2,868,000 | ) | |||||
Changes in operating assets and
liabilities, net of effect of
acquisitions (1) |
(49,378,579 | ) | (54,773,544 | ) | ||||
Net Cash Flows from Operating Activities |
$ | (37,379,599 | ) | $ | (37,725,379 | ) | ||
Net Cash Flows from Investing Activities |
$ | (15,178,129 | ) | $ | (6,677,450 | ) | ||
Net Cash Flows from Financing Activities |
$ | 9,312,325 | $ | 17,179,397 | ||||
(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. |
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Amortization expense. Amortization expense for the nine months ended December 31, 2010
decreased by $1.7 million to $6.6 million from $8.3 million for the nine months ended December 31,
2009, primarily due to a decrease in amortization of software development costs and to a decrease
in amortization of non-compete agreements associated with bookstore acquisitions.
Interest expense, net. Interest expense, net for the nine months ended December 31, 2010
increased $1.9 million to $31.8 million from $29.9 million for the nine months ended December 31,
2009, primarily due to a $1.2 million increase in interest on the Senior Secured Notes which
replaced the Term Loan and a $0.8 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 early extinguishment of debt. The loss on early 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 in October of 2009.
Income taxes. Income tax benefit for the nine months ended December 31, 2010 increased to
$4.0 million from $2.0 million for the nine months ended December 31, 2009. Our effective tax rate
for the nine months ended December 31, 2010 and 2009 was 45.6% and 39.2%, respectively. The change
in the effective tax rate is primarily due to certain states taxing on a gross receipts
methodology. 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 22.9% to 24.8% 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, 2010 and December 31, 2010 was approximately 24.5% and 24.75% of sales,
respectively.
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 $1.4 million, or
0.1% to 0.3% of revenues. We have maintained an allowance for doubtful accounts between $1.0
million and $1.2 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.
Inventory Valuation and Obsolescence. Inventories, including rental inventory, 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, 2010
and December 31, 2010, used textbook inventory was subject to an obsolescence reserve of $2.3
million. For the two prior fiscal years, the obsolescence reserve was between $2.3 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.
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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 and the Property, Plant and Equipment Topics of the Financial Accounting
Standards Board (FASB) Accounting Standards Codification (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.
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 last
twelve-month pro forma EBITDA. After reviewing comparable company information and third-party
valuations of the Company, we concluded that 6.76x was an appropriate EBITDA multiple at March 31,
2010 and 7.0x was appropriate at March 31, 2009. 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. If we fail the first step of the goodwill
impairment test, we are required, in the second step, to estimate the fair value of reporting unit
assets and liabilities, including intangible assets, to derive the fair value of the reporting
units goodwill.
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, 2010, 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 $210.7 million by 4.8% and the Bookstore Division fair value exceeded the
carrying value of $244.5 million by 4.7%. 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.
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, 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 6.44x or below at March 31, 2010, we would have
performed the second step of the goodwill impairment test to determine the goodwill impairment, if
any.
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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 9.4% and 16.6% of rebates earned
within those years. After adjusting for estimated forfeitures, rebates earned are accrued at a
rate of approximately 13.5% of the dollar value of eligible textbooks purchased by the Textbook
Division. Accrued incentives at March 31, 2010 and December 31, 2010 were $6.3 million and $6.0
million, respectively, including estimated forfeitures, however, if we accrued for rebates earned
and unused as of March 31, 2010 and December 31, 2010, assuming no forfeitures, our accrued
incentives would have been $7.0 million and $6.6 million, respectively.
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.
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, 2010, our total
indebtedness was $392.8 million, consisting of a $75.0 million ABL Facility, of which $15.5 million
was outstanding under revolving lines of credit and $0.9 million was outstanding under a letter of
credit at December 31, 2010, $200.0 million of Senior Secured Notes issued at a discount of $1.0
million with unamortized bond discount of $0.5 million, $175.0 million of Senior Subordinated
Notes, and $2.8 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 September 30, 2010 was $77.0 million (face value) (the Senior Discount
Notes).
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.
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, effectively September 1, 2011. 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 ranging from 0.75%
to 1.0%. The ABL Facility is secured by a first priority interest in substantially all of our and
our subsidiaries property and assets, which also secure the Senior Secured Notes on a second
priority basis.
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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. NBCs 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 $1.2 million decrease in the due to parent balance for the nine months
ended December 31, 2010 represents the net result of the difference between our estimated annual
tax rate and that of our parent, NBC.
Investing Cash Flows
Our capital expenditures were $5.0 million and $4.0 million for the nine months ended December
31, 2010 and 2009, respectively. 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 $6.0 million and $7.0 million for fiscal year 2011.
Business acquisition and contract-management renewal expenditures were $9.3 million and $2.3
million for the nine months ended December 31, 2010 and 2009, respectively. During the nine months
ended December 31, 2010, nineteen bookstore locations were acquired in fifteen separate
transactions (thirteen of which were contract-managed locations). During the nine months ended
December 31, 2009, ten bookstore locations were acquired in eight separate transactions (all 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, 2010 and 2009, we capitalized $0.9 million and $0.4
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. 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, 2010 were $37.4 million,
down $0.3 million from $37.7 million for the nine months ended December 31, 2009. Lower cash
payments for income taxes and a lower investment in inventories was mostly offset by an increase in
cash paid for interest and payments in connection with shares issued under the 2005 Restricted
Stock Plan, which vested on September 30, 2010.
As of December 31, 2010, we had $17.7 million in cash available to help fund working capital
requirements. At certain times of the year, we also invest in cash equivalents. Any investments
in cash equivalents are subject to restrictions under the ABL Credit Agreement. 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 that are in or
will be selected to be in our investment portfolio will not lose value or become impaired in the
future.
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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 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 NBCs 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 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 the ABL Facility. At December 31, 2010, 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, 2010 was $74.1 million, of which $15.5
million was outstanding under revolving lines of credit, $0.9 million was outstanding under a
letter of credit and $57.7 million was unused. At December 31, 2010, our pro forma fixed charge
coverage ratio was 1.4x.
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 certain of 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 Restricted Payment Calculation). The indentures governing the Senior
Subordinated Notes and NBCs Senior Discount Notes contain similar restrictions on our ability and
the ability of certain of our subsidiaries and the ability of NBC to pay dividends or make certain
other payments. In addition, if there is no availability under the Restricted Payment Calculation,
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, 2010, our pro forma consolidated coverage
ratio calculated under the indenture to the Senior Subordinated Notes was 1.7 to 1.0 and the ratio
calculated under the indenture to the Senior Secured Notes was 1.8 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 only for debt instruments
outstanding at the March 4, 2004 Transaction date from the calculation, whereas the indenture to
the Senior Secured Notes excludes the higher debt issue cost amortization for the Senior Secured
Notes and the ABL Facility, which were issued in October of 2009, from the same calculation. At
December 31, 2010, the amount distributable under the most restrictive indenture was $6.5 million
after applying $8.5 million of dividends paid to NBC for the March 15, 2010 and September 15, 2010
interest on NBCs Senior Discount Notes. Such restrictions are not expected to affect our ability
to meet our cash obligations for the remainder of fiscal year 2011.
As of December 31, 2010, we were in compliance with all of our debt covenants.
Our debt covenants use Credit Facility EBITDA in the ratio calculations mentioned above. For
a discussion of EBITDA, Adjusted EBITDA and Credit Facility EBITDA, see Adjusted EBITDA Results
earlier in this Item 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, 2010 Compared With Quarter Ended December 31, 2009 and Nine Months
Ended December 31, 2010 Compared With Nine Months Ended December 31, 2009 earlier in this Item.
Sources of and Needs for Capital
As of December 31, 2010, 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, 2010 was $74.1 million, of which $15.5 million was
outstanding under revolving lines of credit, $0.9 million was outstanding under a letter of credit
and $57.7 million was unused. Amounts drawn under the ABL Facility may be used for working capital
and general corporate purposes (including up to $10.0 million for letters of credit), subject to
certain limitations.
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, effectively
September 1, 2011. 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. We are currently working on a refinancing with our investment bankers. 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.
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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 and maintaining normal terms with our vendors, 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, vendor payments terms, 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; however, as
noted previously, we 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. Future acquisitions,
if any, may require additional debt or equity financing.
Off-Balance Sheet Arrangements
As of December 31, 2010, 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.
Accounting Standards Not Yet Adopted
In December 2010, the FASB issued Accounting Standards Update 2010-28, Intangibles
Goodwill and Other (Topic 350) When to Perform Step2 of the Goodwill Impairment Test for
Reporting Units with Zero or Negative Carrying Amounts (Update 2010-28). Update 2010-28 amends
the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or
negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is
more likely than not that a goodwill impairment exists. Update 2010-28 becomes effective for us in
fiscal year 2012 and any impairment to be recorded upon adoption will be recognized as an
adjustment to beginning retained earnings. Early adoption is not permitted. 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 2009-13, Revenue Recognition
(Topic 605) 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
determined that the update will not have a material impact on the consolidated financial
statements.
In October 2009, the FASB issued Accounting Standards Update 2009-14, Software (Topic 985) -
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.
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Transactions with Related and Certain Other Parties
During the nine months ended December 31, 2010, 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 $22.0 million and $23.0 million at
December 31, 2010 and 2009, 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, such as, but not limited to, statements relating to
EBITDA and Adjusted EBITDA, the opportunity and our ability to expand our business, expected growth
or changes in certain segments, our ability to extend, refinance or repay our indebtedness,
expressions of general optimism or pessimism about the future, and statements preceded by, followed
by or that include the words may, believes, expects, feels, 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). These forward-looking
statements, for which we claim the protection of the safe harbor contained in the Reform Act,
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. 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. These factors include, but are not limited to, the
following: (1) the risks of operating with a substantial level of indebtedness including possible
increases in our costs of borrowing, our inability to pay interest as it comes due, repay debt,
extend or refinance debt as it matures, and obtain additional financing, and the possibility that
the maturity of our credit facility may be accelerated and that cash flow will be diverted away
from operations; (2) increased competition from other companies that target our markets; (3)
increased competition from alternative media and alternative sources of textbooks for students from
both online and local campus marketplace competitors, including digital or other education content
sold or rented directly to students and increased competition for the purchase and sale of used
textbooks from student-to-student transactions; (4) further deterioration in the economy and credit
markets; a decline in consumer spending; and/or changes in general economic conditions in the
markets in which we compete or may compete; (5) our inability to successfully start-up, acquire or
contract-manage additional bookstores or to integrate those additional bookstores and/or to
cost-effectively maintain our current contract-managed bookstores; (6) our inability to purchase a
sufficient supply of used textbooks; (7) changes in pricing of new and/or used textbooks or in
publisher practices regarding new editions and materials packaged with new textbooks; (8) the loss
or retirement of key members of management; (9) the impact of seasonality of the wholesale and
bookstore operations; (10) further goodwill impairment or impairment of identifiable intangibles
resulting in a non-cash write down of goodwill or identifiable intangibles; 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our primary market risk exposure is, and is expected to continue to be, fluctuation in
interest rates. Our exposure to market risk for changes in interest rates relates to our
short-term investments and borrowings under the ABL Facility. 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
notes, market fluctuations do not impact our debt interest payments. However, the fair value of
our notes 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, 2010, we did not hold any investments in cash equivalents.
Due to the short-term nature of the revolving credit facility, the estimated fair value is
considered to approximate the carrying value at December 31, 2010. The interest rate as of
December 31, 2010 was 8.0%.
Certain quantitative market risk disclosures have changed since March 31, 2010 as a result of
market fluctuations, movement in interest rates and principal payments. The table below presents
summarized market risk information.
December 31, | March 31, | |||||||
2010 | 2010 | |||||||
Carrying Values: |
||||||||
Revolving credit facility |
$ | 15,500,000 | $ | | ||||
Fixed rate debt |
377,270,167 | 377,624,262 | ||||||
Fair Values: |
||||||||
Revolving credit facility |
$ | 15,500,000 | $ | | ||||
Fixed rate debt |
352,730,000 | 372,317,000 | ||||||
Overall Weighted-Average Interest Rates: |
||||||||
Fixed rate debt |
9.41 | % | 9.35 | % |
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, 2010. 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, 2010, our
disclosure controls and procedures were effective.
Changes in internal control over financial reporting. There were no changes in our internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) which occurred during the quarter ended December 31, 2010 that materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
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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, 2010,
which was filed with the Securities and Exchange Commission on June 25, 2010.
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.
ITEM 6. EXHIBITS
Exhibits | ||||
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. |
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 14, 2011.
NEBRASKA BOOK COMPANY, INC.
|
||
/s/ Mark W. Oppegard |
||
Mark W. Oppegard |
||
Chief Executive Officer and Director |
||
(principal executive officer) |
||
/s/ Alan G. Siemek |
||
Alan G. Siemek |
||
Chief Financial Officer, Senior Vice President
of Finance and Administration, Treasurer and
Assistant Secretary |
||
(principal financial and accounting officer) |
38
Table of Contents
EXHIBIT INDEX
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. |
39