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NBC ACQUISITION CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
(Edgar Glimpses Via Acquire Media NewsEdge) FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reorganization under Chapter 11 of the U.S. Bankruptcy Code
On the Petition Date, we filed voluntary petitions for reorganization relief
under chapter 11 of the Bankruptcy Code in the Court. The Chapter 11 Proceedings
are being jointly administered as Case No. 11-12005 under the caption "In re
Nebraska Book Company Inc., et al." We continue to operate our business as
"debtors-in-possession" under the jurisdiction of the Court and in accordance
with the applicable provisions of the Bankruptcy Code and orders of the Court.
The Chapter 11 Proceedings were initiated in response to our inability to fully
refinance our existing debt and vendors' unwillingness to extend credit to us
under normal terms due to refinancing uncertainties. Under Section 362 of the
Bankruptcy Code, the filing of a bankruptcy petition automatically stays most
actions against a debtor, including most actions to collect pre-petition
indebtedness or to exercise control over our property. Absent an order of the
Court, substantially all pre-petition liabilities are subject to settlement
under a plan of reorganization. While operating as debtors-in-possession under
the Bankruptcy Code and subject to approval of the Court or otherwise as
permitted in the ordinary course of business, we may sell or dispose of assets
and liquidate or settle liabilities for amounts other than those reflected in
the condensed consolidated financial statement. Further, a confirmed plan of
reorganization or other arrangement could materially change the amounts and
classifications in the condensed consolidated financial statements.
Subsequent to the Petition Date, we received approval from the Court to pay or
otherwise honor certain pre-petition obligations generally designed to stabilize
our operations including employee obligations, tax matters, and, from limited
available funds, pre-petition claims of certain critical vendors, certain
customer programs, and certain other pre-petition claims. Additionally, we have
been paying and intend to continue to pay undisputed post-petition claims in the
ordinary course of business.
Chapter 11 Financing
We are currently funding post-petition operations under a $200.0 million DIP
Credit Agreement, consisting of a $125.0 million DIP Term Loan Facility issued
at a discount of $1.2 million and a $75.0 million DIP Revolving Facility. For
additional details related to the DIP Credit Agreement see Note 6 to the
condensed consolidated financial statements.
Plan of Reorganization
To successfully emerge from the Chapter 11 Proceedings, in addition to obtaining
exit financing, the Court must confirm a plan of reorganization, which
determines the rights and satisfaction of claims of various creditors and
security holders.
On July 17, 2011, we filed a joint plan of reorganization and related disclosure
statement with the Court. On August 22, 2011, we filed with the Court a first
amended disclosure statement, which contained a first amended proposed plan of
reorganization (the "Amended Plan").
The Amended Plan calls for the issuance of (i) new senior secured notes,
(ii) new senior unsecured notes, (iii) new common equity interests in us in an
amount equal to 78% of the Company to the holders of the Pre-Petition Senior
Subordinated Notes, and (iv) new common equity interests in us in an amount
equal to 22% of the Company to the holders of the Pre-Petition Senior Discount
Notes. The Amended Plan allows for the issuance of pro rata share of new
warrants to holders of our existing equity securities to purchase up to three
percent or five percent of new common equity interests in us exercisable at
certain strike prices as outlined in the Amended Plan. We continue to have
ongoing discussions and negotiations with the noteholders supporting our Amended
Plan and other stakeholders. In addition, we are continuing to address
objections received to the Amended Plan. Discussions with these parties will
likely continue until a plan of reorganization is approved by the Bankruptcy
Court. Such discussions and negotiations may lead to substantial revisions and
amendments to the terms of the Amended Plan and resubmission of such plan to the
Bankruptcy Court. The ultimate recovery to creditors and/or our shareholders, if
any, will not be determined until confirmation and consummation of a plan of
reorganization.
On the Petition Date, we, our parent company NBC Holdings, Corp. and the
subsidiaries of NBC entered into the Support Agreement, pursuant to which the
participating holders have agreed, among other things, to support the
restructuring to be effected pursuant to the Chapter 11 Proceedings.
Because a Court confirmed plan of reorganization will determine the rights and
satisfaction of claims of various creditors and security holders, the ultimate
settlement of such claims is subject to various uncertainties. Accordingly, no
assurance can be provided as to what values, if any, will be ascribed in the
Chapter 11 Proceedings to these or any other constituencies with respect
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to what types or amounts of distributions, if any, will be received. If certain
requirements of the Bankruptcy Code are met, a plan of reorganization can be
confirmed without acceptance by all constituents and without the receipt or
retention of any property on account of all interests under the plan. Under any
plan of reorganization, our presently outstanding equity securities could have
no value and could be canceled and we urge that caution be exercised with
respect to existing and future investments in any of our securities.
Going Concern
Our audited consolidated financial statements for the year ended March 31, 2011
and our unaudited condensed consolidated financial statements have been prepared
assuming that we will continue as a going concern. However, our ability to:
(i) comply with terms of the DIP Credit Agreement; (ii) comply with various
orders entered by the Court in connection with the Chapter 11 Proceedings;
(iii) maintain adequate cash on hand; (iv) generate sufficient cash from
operations; (v) achieve confirmation of a plan of reorganization under the
Bankruptcy Code; (vi) obtain financing to facilitate an exit from bankruptcy;
and (vii) achieve profitability following such confirmation is uncertain and
could have a material impact on our financial statements.
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. We have experienced, and we believe we will
continue to experience, increasing competition from alternative sources of
textbooks, including renting of textbooks from both online and local campus
marketplace competitors and alternative media, increasing competition for the
supply of used textbooks from other companies, including other textbook
wholesalers and from student-to-student transactions, competition for
contract-management opportunities and other challenges. These factors, among
others, have contributed to declines in our same-store sales over the last
several back-to-school periods, primarily for our off-campus bookstore
locations. These declines have, in turn, negatively impacted EBITDA and Adjusted
EBITDA. While we believe that our plans for future changes in operations will
increase our off-campus bookstore competitiveness, there can be no assurance
that our expectations will be realized or that EBITDA or Adjusted EBITDA will
improve as a result of those plans.
We believe that there continues to be attractive opportunities related to
contract-management of bookstores, although we may not be successful in
competing for contracts to manage additional institutional bookstores. We expect
that our capital expenditures will remain modest for a company of our size.
Finally, we are uncertain what impact the current economy might have on our
business.
Overview
Revenue Results. Consolidated revenues for the quarter ended December 31, 2011
increased $7.2 million, or 10.4%, from the quarter ended December 31, 2010. The
increase was primarily due to an increase in same-store sales in the Bookstore
Division as a result of a $13.2 million increase in textbook rental revenue,
which were partially offset by decreased new and used textbook sales revenues.
Adjusted EBITDA Results. Consolidated Adjusted EBITDA for the quarter ended
December 31, 2011 increased $4.6 million, or 51.6%, from the quarter ended
December 31, 2010 primarily due to higher revenues and gross profit. EBITDA and
Adjusted EBITDA are considered non-GAAP measures, and therefore you should refer
to the more detailed explanation of the measures that is provided later in this
Item 2.
EBITDA is defined as earnings before interest, taxes, depreciation, and
amortization. Adjusted EBITDA is EBITDA adjusted for impairment and
reorganization items. There were no impairments or reorganization items for the
quarter or 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 2, 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.
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With respect to covenant compliance calculations, EBITDA, as defined in the DIP
Credit Agreement (hereinafter, referred to as "Credit Facility EBITDA"),
includes additional adjustments to EBITDA. Credit Facility EBITDA is defined in
the DIP Credit Agreement as: (1) consolidated net income, as defined therein,
which allows for an adjustment to recognize rentals consistent with prior
practice and does not include any effect for any deferral of revenue of rental
income; 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; (g) any costs, fees, expenses or disbursements
of attorneys, consultants or advisors incurred in connection with the events
leading up to and the ongoing administration of the Chapter 11 Proceedings, a
plan of reorganization and any other restructuring and any upfront, arrangement
or other fees paid in connection with the DIP Credit Agreement; and (h) charges,
premiums and expenses associated with the discharge of pre-petition debt, 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 minimum cumulative consolidated
EBITDA under the DIP Credit Agreement, which beginning July 1, 2011, requires
Credit Facility EBITDA to be at least equal to certain amounts set forth in the
DIP Credit Agreement.
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
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, impairment, and reorganization
items, 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.
Subsequent Events. On January 17, 2012, we received Court authorization to
reject certain leases and ancillary contracts effective February 29, 2012,
including leases for the following off-campus bookstores: GotUsed Bookstore in
Pittsburgh, Pennsylvania; The College Store in Akron, Ohio; Spirit Shop in
Lubbock, Texas; Traditions Bookstore - Woodstone in College Station, Texas;
Chattanooga Books in Chattanooga, Tennessee; Madison Textbooks in Madison,
Wisconsin; and Florida Book Store Volume III in Gainesville, Florida. Estimated
damage costs associated with these rejected leases approximates $0.4 million. In
addition to rejecting these leases, we will continue to evaluate the performance
of approximately forty additional off-campus bookstore locations through
April 30, 2012, at which time we will either assume or reject those off-campus
leases.
The note receivable from stockholder reflected as a component of stockholders'
equity pertains to the remaining balance of a note obtained from an NBC
executive officer in conjunction with the issuance of shares of our common stock
in January 1999. The note, which was due to mature January of 2013, has been
paid in full subsequent to the quarter ended December 31, 2011.
Acquisitions. Our Bookstore Division continues to grow its number of bookstores
through acquisitions of on-campus contract-managed bookstores and start-up
locations. We established two start-up locations (one on-campus contract-managed
bookstore and one off-campus store), acquired four bookstore locations (all of
which are on-campus contract-managed bookstores) and closed three locations (one
on-campus contract-managed bookstore and two off-campus bookstores) during the
quarter ended December 31, 2011. We believe there are attractive opportunities
for us to continue to expand our chain of bookstores across the country.
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Quarter Ended December 31, 2011 Compared With Quarter Ended December 31, 2010.
Revenues. Revenues for the quarters ended December 31, 2011 and 2010 and the
corresponding change in revenues were as follows:
Change
2011 2010 Amount Percentage
Bookstore Division $ 48,489,658 $ 40,373,778 $ 8,115,880 20.1 %
Textbook Division 31,698,448 32,018,162 (319,714 ) (1.0 )%
Complementary Services Division 7,083,026 8,588,978 (1,505,952 ) (17.5 )%
Intercompany Eliminations (10,828,003 ) (11,751,528 ) 923,525 (7.9 )%
$ 76,443,129 $ 69,229,390 $ 7,213,739 10.4 %
For the quarter ended December 31, 2011, Bookstore Division revenues increased
$8.1 million, or 20.1%, from the quarter ended December 31, 2010. The increase
in Bookstore Division revenues was primarily attributable to the recognition of
deferred rental revenue and to additional revenue from new bookstores, which
were partially offset by a decrease in revenues as a result of certain store
closings. We have added thirty-eight bookstore locations through acquisitions or
start-ups since April 1, 2010. The new bookstores provided an additional $1.7
million of revenue for the quarter ended December 31, 2011. Same-store sales for
the quarter ended December 31, 2011 increased $7.0 million, or 18.4%,
(off-campus same-store sales increased $5.2 million, or 22.8%, and on-campus
same-store sales increased $1.8 million, or 12.0%) from the quarter ended
December 31, 2010. Same-store sales increases were primarily due to a $13.2
million increase in new and used textbook rental revenues, which were partially
offset by decreased new and used textbook sales revenues. Same-store sales would
have been down 15.7% (off-campus bookstores 18.6% and on-campus bookstores
11.4%), excluding the recognition of deferred rental revenue. We define
same-store sales for the quarter ended December 31, 2011 as sales, including
internet sales, from any store, even if expanded or relocated, that we have
operated since the start of fiscal year 2011. Revenues declined $0.6 million for
the quarter ended December 31, 2011 as a result of twenty-one store closings
since April 1, 2010.
For the quarter ended December 31, 2011, Textbook Division revenues decreased
$0.3 million from the quarter ended December 31, 2010 primarily due to an
increase in returns. Complementary Services Division revenues decreased $1.5
million, or 17.5%, from the quarter ended December 31, 2010, primarily due to a
$1.3 million decrease in revenues in our systems business due to decreased
hardware and software sales as a result of a decrease in customer upgrades and
to a $0.8 million decrease in revenues from our distance education business
primarily as a result of a decrease in the number of schools served.
Intercompany eliminations decreased $0.9 million primarily as a result of a
decrease in intercompany revenues in our systems business in the Complementary
Services Division.
Gross profit. Gross profit for the quarter ended December 31, 2011 increased
$1.7 million, or 6.5%, to $29.3 million from $27.6 million for the quarter ended
December 31, 2010. The increase in gross profit was primarily attributable to an
increase in rental revenue in the Bookstore Division. The consolidated gross
margin percentage decreased to 38.4% for the quarter ended December 31, 2011
from 39.8% for the quarter ended December 31, 2010. The decrease in our
consolidated gross margin percentage is primarily attributable to a lower gross
margin percentage for the Textbook Division.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the quarter ended December 31, 2011 decreased $2.8
million, or 7.8%, to $33.7 million from $36.5 million for the quarter ended
December 31, 2010. Selling, general and administrative expenses as a percentage
of revenues were 44.0% and 52.7% for the quarters ended December 31, 2011 and
2010, respectively. The decrease in selling, general and administrative expenses
was primarily attributable to a $1.2 million decrease in professional fees, a
$1.0 million decrease in personnel expenses and a $1.0 million decrease in
shipping and commission expense related to sales on the internet involving
third-party websites.
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Earnings before interest, taxes, depreciation, amortization, and reorganization
items (Adjusted EBITDA). Adjusted EBITDA for the quarters ended December 31,
2011 and 2010 and the corresponding change in Adjusted EBITDA were as follows:
Change
2011 2010 Amount Percentage
Bookstore Division $ (5,867,008 ) $ (8,368,721 ) $ 2,501,713 29.9 %
Textbook Division 5,545,332 5,818,598 (273,266 ) (4.7 )%
Complementary Services Division 1,548,486 625,382 923,104 147.6 %
Corporate Administration (5,552,243 ) (7,018,082 ) 1,465,839 20.9 %
$ (4,325,433 ) $ (8,942,823 ) $ 4,617,390 51.6 %
Bookstore Division EBITDA loss decreased $2.5 million from the quarter ended
December 31, 2010 primarily due to higher textbook rental revenues and gross
profit, which includes recognition of $7.8 million of deferred rental textbook
gross profit. The $0.3 million, or 4.7%, decrease in Textbook Division EBITDA
from the quarter ended December 31, 2010, was primarily due to decreased
revenues and gross margin percentage, which were partially offset by a decrease
in selling, general and administrative expenses. Complementary Services Division
EBITDA increased $0.9 million primarily due to increased gross profit and a
decrease in selling, general and administrative expenses. Corporate
Administration's Adjusted EBITDA loss decreased $1.5 million from the quarter
ended December 31, 2010, primarily due to a decrease in professional fees.
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,
2011 2010
Net loss $ (18,691,818 ) $ (16,292,686 )
Interest expense, net 8,645,901 12,797,759
Income tax benefit (3,480,000 ) (9,792,000 )
Depreciation and amortization 3,853,162 4,344,104
EBITDA (9,672,755 ) (8,942,823 )
Reorganization items 5,347,322 -
Adjusted EBITDA (4,325,433 ) (8,942,823 )
Share-based compensation 8,544 8,973
Interest income - 55,694
Reorganization items (4,883,301 ) -
Provision for losses on receivables 475,580 616,457
Cash paid for interest (7,474,742 ) (10,296,317 )
Cash refunded for income taxes (244,299 ) (240,371 )
Loss on disposal of assets 19,553 101,369
Changes in operating assets and liabilities, net
of effect of acquisitions (1) (46,671,247 ) (72,552,134 )
Net Cash Flows from Operating Activities $ (63,095,345 ) $ (91,249,152 )
Net Cash Flows from Investing Activities $ (2,537,210 ) $ (2,554,530 )
Net Cash Flows from Financing Activities $ (1,256,735 ) $ 15,250,616
(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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Reorganization items. Costs directly attributable to the Chapter 11 Proceedings
were $5.3 million for the quarter ended December 31, 2011 and primarily are
advisor fees related to the Chapter 11 Proceedings. Reorganization items include
$1.1 million associated with modifications to the DIP Credit Agreement.
Interest expense, net. Interest expense, net for the quarter ended December 31,
2011 decreased $4.2 million to $8.6 million from $12.8 million for the quarter
ended December 31, 2010, primarily due to a $5.9 million decrease in interest on
the Pre-Petition Senior Subordinated Notes and Pre-Petition Senior Discount
Notes as a result of ceasing to pay and record interest at the Petition Date.
This decrease was partially offset by a $2.6 million increase in interest for
the DIP Term Loan Facility, which was issued subsequent to the Petition Date.
Income taxes. Income tax benefit for the quarter ended December 31, 2011 was
$3.5 million compared to $9.8 million for the quarter ended December 31, 2010.
Our effective tax rates for the quarters ended December 31, 2011 and 2010 were
15.6% and 37.5%, respectively. The effective tax rate for the quarter ended
December 31, 2011 differs from the statutory federal tax rate primarily due to
the impact of the portion of goodwill impairment that is attributable to
non-deductible tax goodwill and bankruptcy costs. The effective tax rate for the
quarter ended December 31, 2010 differs from the statutory federal tax rate
primarily due to certain states taxing on a gross receipts methodology,
increased interest expense which is not deductible in some states for state
taxes, and the relatively low pre-tax income.
Nine Months Ended December 31, 2011 Compared With Nine Months Ended December 31,
2010.Revenues. Revenues for the nine months ended December 31, 2011 and 2010 and the
corresponding change in revenues were as follows:
Change
2011 2010 Amount Percentage
Bookstore Division $ 280,604,745 $ 308,604,806 $ (28,000,061 ) (9.1 )%
Textbook Division 113,124,896 113,421,984 (297,088 ) (0.3 )%
Complementary Services Division 22,667,580 27,563,148 (4,895,568 ) (17.8 )%
Intercompany Eliminations (34,157,672 ) (35,169,237 ) 1,011,565 (2.9 )%
$ 382,239,549 $ 414,420,701 $ (32,181,152 ) (7.8 )%
For the nine months ended December 31, 2011, Bookstore Division revenues
decreased $28.0 million, or 9.1%, from the nine months ended December 31, 2010.
The decrease in Bookstore Division revenues was attributable to a decrease in
same-store sales and a decrease in revenues as a result of certain store
closings, which were offset by additional revenues from new bookstores.
Same-store sales for the nine months ended December 31, 2011 decreased $31.8
million, or 11.0%, (off-campus same-store sales decreased $27.7 million, or
16.6%, and on-campus same-store sales decreased $4.1 million, or 3.3%) from the
nine months ended December 31, 2010. We define same-store sales for the nine
months ended December 31, 2011 as sales from any store, even if expanded or
relocated, that we have operated since the start of fiscal year 2011. In
addition, revenues declined $4.1 million as a result of twenty-one store
closings since April 1, 2010. We have added thirty-eight bookstore locations
through acquisitions or start-ups since April 1, 2010. The new bookstores
provided an additional $7.9 million of revenue for the nine months ended
December 31, 2011.
For the nine months ended December 31, 2011, Textbook Division revenues
decreased $0.3 million from the nine months ended December 31, 2010. A 5.8%
decrease in units sold and an increase in returns was partially offset by a 6.5%
increase in average price per book sold. Complementary Services Division
revenues decreased $4.9 million, or 17.8%, from the nine months ended
December 31, 2010 primarily due to a $3.8 million decrease in revenues in our
distance education business primarily as a result of a decrease in number of
schools served and to a $2.9 million decrease in revenues in our systems
business due to decreased hardware and software sales as a result of a decrease
in customer upgrades. These decreases in the Complementary Services Division
revenues were offset by a $1.5 million increase in consulting services revenues.
Intercompany eliminations for the nine months ended December 31, 2011 decreased
$1.0 million, or 2.9%, from the nine months ended December 31, 2010 primarily as
a result of a decrease in intercompany revenues in the systems business in the
Complementary Services Division.
Gross profit. Gross profit for the nine months ended December 31, 2011 decreased
$12.3 million, or 7.7%, to $148.2 million from $160.5 million for the nine
months ended December 31, 2010. The decrease in gross profit was primarily
attributable to a decrease in the Bookstore Division gross profit as a result of
the aforementioned decrease in revenues. The consolidated gross margin
percentage increased to 38.8% for the nine months ended December 31, 2011 from
38.7% for the nine months ended December 31, 2010. The increase in our
consolidated gross margin percentage is primarily attributable to the overall
change in business mix primarily due to a decrease in gross profit for our
Bookstore Division. Due to the decrease in gross profit for our Bookstore
Division, the Textbook Division gross profit contributes more to overall gross
profit and has an overall higher gross margin percentage than the Bookstore
Division; therefore, the change in mix of gross profit increased our gross
margin percentage.
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Selling, general and administrative expenses. Selling, general and
administrative expenses for the nine months ended December 31, 2011 increased
$1.6 million, or 1.2%, to $126.1 million from $124.5 million for the nine months
ended December 31, 2010. Selling, general and administrative expenses as a
percentage of revenues were 33.0% and 30.0% for the nine months ended
December 31, 2011 and 2010, respectively. The increase in selling, general and
administrative expenses was primarily attributable to a $3.1 million increase in
professional fees primarily related to $4.7 million in reorganization costs
incurred prior to the Petition Date, which was offset by a $1.5 million decrease
in general professional fees. In addition, selling, general and administrative
expenses increased due to a $1.2 million increase in advertising costs. These
increases in selling, general and administrative expenses were partially offset
by a $1.4 million decrease in personnel expense.
Earnings before interest, taxes, depreciation, amortization, impairment and
reorganization items (Adjusted EBITDA). EBITDA for the nine months ended
December 31, 2011 and 2010 and the corresponding change in Adjusted EBITDA were
as follows:
Change
2011 2010 Amount Percentage
Bookstore Division $ 7,211,136 $ 18,153,253 $ (10,942,117 ) (60.3 )%
Textbook Division 29,325,258 30,180,524 (855,266 ) (2.8 )%
Complementary Services Division 2,821,265 2,394,576 426,689 17.8 %
Corporate Administration (17,255,143 ) (14,719,699 ) (2,535,444 ) (17.2 )%
$ 22,102,516 $ 36,008,654 $ (13,906,138 ) (38.6 )%
Bookstore Division Adjusted EBITDA for the nine months ended December 31, 2011
decreased $10.9 million from the nine months ended December 31, 2010, primarily
due to lower revenues and gross profit. Textbook Division EBITDA decreased $0.9
million from the nine months ended December 31, 2010, primarily due to lower
gross profit as a result of lower gross margin percentages. Complementary
Services Division EBITDA increased $0.4 million primarily due to lower selling,
general and administrative expenses, which were partially offset by decreased
revenues. Corporate Administration's Adjusted EBITDA loss increased $2.5 million
from the nine months ended December 31, 2010, primarily due to an increase in
professional fees related to our reorganization costs incurred prior to the
Petition Date.
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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 income,
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,
2011 2010
Net loss $ (134,062,229 ) $ (12,516,649 )
Interest expense, net 30,813,392 38,364,705
Income tax benefit (29,828,000 ) (2,841,000 )
Depreciation and amortization 11,926,616 13,001,598
EBITDA $ (121,150,221 ) $ 36,008,654
Impairment 122,638,927 -
Reorganization items 20,613,810 -
Adjusted EBITDA $ 22,102,516 $ 36,008,654
Share-based compensation 26,004 438,810
Interest income 14,476 139,770
Reorganization items (8,289,977 ) -
Provision for losses on receivables 661,549 1,317,433
Cash paid for interest (25,527,534 ) (32,789,130 )
Cash received for income taxes 296,899 1,328,208
Loss on disposal of assets 58,983 155,235
Changes in operating assets and liabilities,
net of effect of acquisitions (1) (100,436,982 ) (49,378,579 )
Net Cash Flows from Operating Activities $ (111,094,066 ) $ (42,779,599 )
Net Cash Flows from Investing Activities $ (7,913,828 ) $ (15,178,129 )
Net Cash Flows from Financing Activities $ 115,874,272 $ 14,712,325
(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.
Impairment. As a result of underperformance of our Bookstore Division during the
fall 2011 back-to-school period, we revised our financial projections of future
periods during the quarter ended September 30, 2011. These revisions indicated a
potential impairment of goodwill and, as such, the estimated fair value of our
reporting units was assessed to determine if their book value exceeded their
estimated fair value at September 30, 2011. As a result of this assessment, we
determined that the book value of goodwill exceeded the estimated fair value in
the Bookstore Division reporting unit and recognized a $121.8 million goodwill
impairment charge during the nine months ended December 31, 2011. In addition,
we performed a recoverability test and an impairment test for property, plant
and equipment and the intangibles covenants not to compete and contract-managed
relationships associated with underperforming bookstores. The results of
undiscounted cash flow analysis indicated potential impairment. We compared
carrying values to estimated fair values and recorded impairment charges during
the nine months ended December 31, 2011 of $0.5 million for property, plant and
equipment, $0.2 million for impairment of contract-managed relationships and
$0.1 million for impairment of covenants not-to-compete.
Reorganization items. Costs directly attributable to the Chapter 11 Proceedings
were $20.6 million for the nine months ended December 31, 2011 and primarily are
advisor fees related to the Chapter 11 Proceedings.
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Interest expense, net. Interest expense, net for the nine months ended
December 31, 2011 decreased $7.6 million to $30.8 million from $38.4 million for
the nine months ended December 31, 2010, primarily due to a $12.1 million
decrease in interest on the Pre-Petition Senior Subordinated Notes and
Pre-Petition Senior Discount Notes as a result of ceasing to pay and record
interest at the Petition Date. This decrease was partially offset by a $5.4
million increase in interest on the DIP Term Loan Facility, which was issued
subsequent to the Petition Date.
Income taxes. Income tax benefit for the nine months ended December 31, 2011 was
$29.8 million compared to $2.8 million for the nine months ended December 31,
2010. Our effective tax rates for the nine months ended December 31, 2011 and
2010 were 18.2% and 18.5%, respectively. The effective tax rate for the nine
months ended December 31, 2011 differs from the statutory federal tax rate
primarily due to the impact of the portion of goodwill impairment that is
attributable to non-deductible tax goodwill. The effective tax rate for the nine
months ended December 31, 2010 differs from the statutory federal tax rate
primarily due to certain states taxing on a gross receipts methodology,
increased interest expense which is not deductible in some states for state
taxes, and the relatively low pre-tax income.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's 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, accrued incentives, 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 for March 31, 2011, 2010 and 2009 were approximately 26.4%, 24.8%, and
22.9% of sales, respectively. 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 December 31, 2011 was 26.6% of Textbook Division gross
external sales. Estimated product returns at March 31, 2011 and December 31,
2011 were $4.9 million and $7.4 million, respectively.
Revenue for textbook rentals is recognized over the rental period. During the
quarter and nine months ended December 31, 2011, textbook rental revenue was
$15.8 million and $28.5 million, 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 customer's financial position,
historical collection experience, and other economic and industry factors. Net
charge-offs over the past three fiscal years have been between $1.1 million and
$2.2 million, or 0.2% to 0.5% of revenues. We have maintained an allowance for
doubtful accounts of approximately $1.3 million, or 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 are stated at the lower of
cost or market. The cost of used textbook inventories is determined using the
weighted-average method. Over the rental period, we depreciate our rental
textbooks down to the lower of cost or market. 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, 2011 and December 31, 2011, used textbook inventory was subject to
an obsolescence reserve of $2.4 million and $2.2 million, respectively. The
obsolescence reserve at March 31, 2010 and 2009 was $2.3 million and $2.4
million, respectively. 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 FASB ASC. In accordance with such standards,
we evaluate impairment on goodwill and certain identifiable intangibles annually
at March 31 and evaluate impairment on all intangibles whenever events or
changes in circumstances indicate that the carrying amounts of such assets may
not be recoverable. We are required to make certain assumptions and estimates
regarding the fair value of intangible assets when assessing such assets for
impairment. We evaluate goodwill at the reporting unit level and have identified
our reportable segments, the Textbook Division, Bookstore Division and
Complementary Services Division, as our reporting units. Our reporting units are
determined based on the way management organizes the segments for making
operating decisions and assessing performance. Management has organized our
reporting segments based upon differences in products and services provided. The
Bookstore Division and Textbook Division reporting units have been assigned
goodwill and are thus required to be tested for impairment.
During the quarter ended September 30, 2011, we revised our financial
projections of future periods for the Bookstore Division primarily as a result
of underperformance in our off-campus bookstores during the fall 2011
back-to-school period. Underperformance in our off-campus bookstores was
primarily due to increasing competition from alternative sources of textbooks,
including renting of textbooks from both online and local campus marketplace
competitors. These revisions indicated a potential impairment of goodwill and,
as such, the estimated fair value of our reporting units was assessed to
determine if their carrying value exceeded their estimated fair value at
September 30, 2011. As a result of this assessment, we determined that the
carrying value of goodwill exceeded the estimated fair value in the Bookstore
Division reporting unit and recognized a $121.8 million goodwill impairment
charge at September 30, 2011.
In the first step of our goodwill impairment test conducted at September 30,
2011, fair value was determined using a combination of the market approach,
based primarily on a multiple of revenue and Adjusted EBITDA, and the income
approach, based on a discounted cash flow model. The market approach requires
that we estimate a certain valuation multiple of revenue and Adjusted EBITDA for
each reporting unit derived from comparable companies to estimate the fair value
of the reporting unit. The discounted cash flow model discounts projected cash
flows for each reporting unit to present value and includes critical assumptions
such as long-term growth rates, projected revenues and earnings and cash flow
forecasts for the reporting units, as well as an appropriate discount rate. The
multiples applied to our trailing-twelve-month ("TTM") and next-twelve-month
("NTM") revenues were 0.2x for both TTM and NTM and to Adjusted EBITDA were 5.0x
and 5.2x, respectively for the Bookstore Division reporting unit. The multiples
applied to our TTM and NTM revenues for the Textbook Division reporting unit
were 1.0x and 0.9x and to Adjusted EBITDA were 5.4x and 4.8x, respectively.
Discount rates were determined separately for each reporting unit by estimating
the weighted average cost of capital using the capital asset pricing model. The
discounted cash flow model assumed a discount rate of 10.5% and 11.1% for the
Bookstore and Textbook Division reporting units, respectively, based on the
weighted-average cost of capital derived from public companies considered to be
reasonably comparable to ours. The discounted cash flow model also assumed a
terminal growth rate of 2.5% and 1.0% for the Bookstore and Textbook Division
reporting units, respectively.
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 unit's goodwill.
We determined in the first step of our goodwill impairment test conducted at
September 30, 2011 that the carrying values of the Bookstore Division reporting
unit exceeded their fair value, indicating that goodwill may be impaired. Having
determined that goodwill may be impaired, we performed the second step of the
goodwill impairment test for the Bookstore Division reporting unit 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 $121.8 million for the quarter ended
September 30, 2011, which resulted in all goodwill in the Bookstore Division
being written off. The fair value of the Textbook Division exceeded is carrying
value by approximately 15.0% at September 30, 2011. We continue to monitor
events and circumstances which may affect the fair value of the Textbook
Division reporting unit, including current market conditions, and we believe
that the reporting unit is still at risk of failing step one of the impairment
test. No events or circumstances arose during the quarter ended December 31,
2011 which would have indicated that the carrying amount of goodwill was not
recoverable and triggered step one of the goodwill impairment test.
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The use of different assumptions, estimates, or judgments in either step of the
goodwill impairment testing process could materially increase or decrease the
fair value of the reporting unit and/or its net assets and, accordingly, could
materially increase or decrease any related impairment charge. Our goodwill
impairment charge, at September 30, 2011, may have been approximately $10.0
million less for the Bookstore Division if we had used a growth rate and
discount rate that were increased or decreased by 50 basis points and revenue
and Adjusted EBITDA multiples that were increased by 10%.
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.
During the quarter ended September 30, 2011, we performed an impairment test for
the finite lived intangibles covenants not to compete and contract-managed
relationships in the Bookstore Division and determined, based on the results of
an undiscounted cash flow analysis that impairment adjustments were necessary.
We recorded impairment charges of $0.1 million and $0.2 million for impairment
of covenant not to compete and contract-managed relationships, respectively, in
the Bookstore Division at September 30, 2011.
The impairment test for intangible assets not subject to amortization involves a
comparison of the estimated fair value of the intangible asset with its carrying
value. If the carrying value of the intangible asset exceeds its fair value, an
impairment loss is recognized in an amount equal to the excess. The impairment
evaluation for indefinite lived intangible assets, which for us is our
tradename, is conducted at March 31 each year or, more frequently, if events or
changes in circumstances indicate that an asset might be impaired. Significant
judgments and assumptions inherent in this analysis include assumptions about
appropriate long-term growth rates, royalty rates, discount rate, and cash flow
forecasts. We conducted our annual assessment of indefinite lived intangibles in
the fourth quarter of fiscal 2011 and again for the second quarter of fiscal
2012 and no impairment was indicated. The estimated fair value of the tradename
exceeded its carrying value by over 15% at September 30, 2011.
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 our financial performance, the economy or debt markets or a
significant delay in the expected recovery, could in the future require us to
further write down a portion of our goodwill or write down a portion of our
identifiable intangibles and record related non-cash impairment charges.
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 6.4% and 17.9%
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, 2011 and December 31, 2011 were $5.8 million and $5.1 million,
respectively, including estimated forfeitures, however, if we accrued for
rebates earned and unused as of March 31, 2011 and December 31, 2011, assuming
no forfeitures, our accrued incentives would have been $6.5 million and $5.7
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. At December 31,
2011, we have not provided for any effects of the bankruptcy reorganization
efforts in our analysis of the realization of deferred tax assets. Any impacts
on deferred tax assets as a result of our reorganization will be reflected in
the consolidated financial statements at the time of emergence from bankruptcy.
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LIQUIDITY AND CAPITAL RESOURCES
Financing Activities
Following our chapter 11 filing on June 27, 2011, our primary liquidity
requirements are for debt service, working capital, income tax payments, capital
expenditures and certain contract-managed acquisitions. We have historically
funded these requirements primarily through internally generated cash flows and
funds borrowed under our revolving credit facility. At December 31, 2011, our
total indebtedness was $578.4 million, consisting of $200.0 million of
Pre-Petition Senior Secured Notes (included in liabilities subject to
compromise), $175.0 million of Pre-Petition Senior Subordinated Notes (included
in liabilities subject to compromise), $77.0 million of Pre-Petition Senior
Discount Notes (included in liabilities subject to compromise), $125.0 million
DIP Term Loan Facility issued with original issue discount of $1.2 million with
unamortized bond discount of $0.6 million, $0.2 million of other indebtedness
and $1.8 million of capital lease obligations (included in liabilities subject
to compromise).
Effective December 28, 2011, the DIP Credit Agreement was amended to change the
applicable margin with respect to term loans to 6.5% in the case of base rate
loans and 7.5% in the case of Eurodollar loans. The applicable margin with
respect to revolving credit loans was also amended to 4.0% in the case of base
rate loans and to 5.0% in the case of Eurodollar loans. In addition, the fee
paid on the amount committed to the revolving facility was amended to 0.75%.
Finally, the minimum liquidity and cumulative consolidated EBITDA tests were
amended, including a waiver of compliance with the cumulative consolidated
EBITDA test for the period ending November 30, 2011.
See note 6 of the notes to our condensed consolidated financial statements for
further information regarding the DIP Credit Agreement.
Principal and interest payments under the DIP Term Loan Facility, DIP Revolving
Facility, the Pre-Petition Senior Secured Notes, the Pre-Petition Senior
Subordinated Notes, and the Pre-Petition Senior Discount Notes represent
significant liquidity requirements for us. Effective June 27, 2011, we ceased
recording interest expense on outstanding pre-petition debt instruments
classified as liabilities subject to compromise including the Pre-Petition
Senior Subordinated Notes and Pre-Petition Senior Discount Notes. Interest
payments on the Pre-Petition Senior Secured Notes (not subject to compromise)
and the DIP Term Loan Facility will be paid monthly while under the protections
of chapter 11 of the Bankruptcy Code.
Investing Cash Flows
Our capital expenditures were $5.2 million and $5.0 million for the nine months
ended December 31, 2011 and 2010, respectively. Capital expenditures consist
primarily of leasehold improvements and furnishings for new bookstores,
bookstore renovations, computer upgrades and warehouse improvements. We expect
capital expenditures to be between $6.5 million and $7.5 million for fiscal year
2012.
Business acquisition and contract-management renewal expenditures were $1.2
million and $9.3 million for the nine months ended December 31, 2011 and 2010,
respectively. During the nine months ended December 31, 2011, twelve bookstore
locations were acquired in five separate transactions (all of which were
contract-managed locations). During the nine months ended December 31, 2010,
nineteen bookstore locations were acquired in fifteen separate transactions
(thirteen of which were contract-managed locations). Our ability to make
acquisition expenditures is subject to certain restrictions under the DIP Credit
Agreement and we expect to have similar restrictions under financing obtained
upon emergence from the Chapter 11 Proceedings.
During the nine months ended December 31, 2011 and 2010, we capitalized $1.6
million and $0.9 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 DIP Revolving
Facility and DIP Term Loan Facility. Usage of the DIP Revolving Facility to meet
our liquidity needs may fluctuate throughout the fiscal year due to our distinct
buying and selling periods, increasing substantially in July/August and December
for purchases of new textbooks and general merchandise due to tightening of
vendor credit terms and at the end of each college semester (May and December)
for purchases of used textbooks. Net cash flows used by operating activities for
the nine months ended December 31, 2011 were $111.1 million, up $68.3 million
from $42.8 million for the nine months ended December 31, 2010. The increase in
cash used by operating activities is primarily due to an increase in cash paid
for inventory and merchandise due to tightening of creditor terms, an increase
in cash paid for professional fees related to our reorganization and
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lower operating results. These increases in cash used were partially offset by a
decrease in cash paid for interest primarily due to ceasing to pay interest on
the Pre-Petition Senior Subordinated Notes and Pre-Petition Senior Discount
Notes as a result of the Chapter 11 Proceedings.
As of December 31, 2011, we had $53.3 million in cash available to help fund
working capital requirements. At certain times of the year, we also invest in
cash equivalents. At December 31, 2011, we did not hold any investments in cash
equivalents. Any investments in cash equivalents are subject to restrictions
under the DIP Credit Agreement. The DIP 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 & Poor's
or P-1 by Moody's, (4) certain money market funds which invest exclusively in
assets otherwise allowable by the DIP Credit Agreement and (5) certain other
similar short-term investments. We expect to have similar restrictions under
financing obtained upon emergence from the Chapter 11 Proceedings. 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.
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 DIP Revolving 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 DIP 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, NBC may pay
dividends to us to pay corporate overhead expenses not to exceed $250,000 per
fiscal year and any taxes we owe. The DIP Revolving Facility allows for
revolving credit commitments up to $75.0 million (less outstanding letters of
credit and subject to a borrowing base). The calculated borrowing base as of
December 31, 2011 was $75.0 million, of which $4.1 million was outstanding under
letters of credit and $70.9 million was unused.
Under the DIP Credit Agreement, we are required to maintain a minimum liquidity
and a minimum cumulative consolidated EBITDA, which requires liquidity and the
Credit Facility EBITDA to be at least equal to certain amounts set forth in the
DIP Credit Agreement. As a result of not meeting the November cumulative
consolidated EBITDA test, the DIP Credit Agreement was amended, effective
December 28, 2011, to waive the November 30, 2011 cumulative consolidated EBITDA
test, to increase the minimum liquidity and to change the cumulative
consolidated EBITDA test. At December 31, 2011 our liquidity calculated under
the DIP Credit Agreement was $124.2 million and Credit Facility EBITDA was $33.8
million.
As of December 31, 2011, we were in compliance with all of our debt covenants
under the DIP Credit Agreement, however, due to the commencement of the Chapter
11 Proceedings, substantially all of our pre-petition debt is in default
including $200.0 million principal amount due under the Pre-Petition Senior
Secured Notes, $175.0 million principal amount due under the Pre-Petition Senior
Subordinated Notes and $77.0 million principal amount due under the Pre-Petition
Senior Discount Notes.
Our debt covenants use Credit Facility EBITDA in the minimum cumulative
consolidated EBITDA calculation mentioned above. For a discussion of EBITDA,
Adjusted EBITDA and Credit Facility EBITDA, see "Adjusted EBITDA Results"
earlier in this Item 2 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, 2011 Compared
With Quarter Ended December 31, 2010" and "Nine Months Ended December 31, 2011
Compared With Nine Months Ended December 31, 2011" earlier in this Item 2.
Sources of and Needs for Capital
We are currently funding post-petition operations with the DIP Credit Agreement,
which consists of a $125.0 million DIP Term Loan Facility and a $75.0 million
DIP Revolving Facility. Borrowings under the DIP Credit Agreement may be used to
finance working capital purposes, including without limitation, for the payment
of fees and expenses incurred in connection with entering into the DIP Credit
Agreement, the Chapter 11 Proceedings and the repayment of loans outstanding
under the Pre-Petition ABL Credit Agreement.
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Liquidity after Chapter 11 Bankruptcy Filing
We have incurred and expect to continue to incur significant costs associated
with the Chapter 11 Proceedings and our reorganization. Following the
commencement of the Chapter 11 Proceedings, our most significant sources of
liquidity are funds generated by borrowings under the DIP Credit Agreement and
cash generated by operating activities. Our working capital requirements
fluctuate throughout the fiscal year, increasing substantially in July/August
and December for purchases of new textbooks and general merchandise due to
tightening of vendor credit terms and in May and December as a result of the
used textbook buying periods. In addition to standard financial covenants and
events of default, the DIP Credit Agreement provides for events of default
specific to the Chapter 11 Proceedings, including, among others, defaults
arising from our failure to maintain certain financial covenants including a
minimum liquidity and cumulative consolidated EBITDA or our failure to obtain
Court approval for a plan of reorganization acceptable to our lenders. The
occurrence of an event of default under the DIP Credit Agreement would give our
lenders the right to terminate their lending commitments and exercise other
remedies available to them under the DIP Credit Agreement.
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 payment terms, and borrowings under the DIP Revolving
Facility and DIP Term Loan Facility will be sufficient to finance our current
operations, cash interest requirements, income tax payments, planned capital
expenditures 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 DIP Revolving Facility and DIP
Term Loan Facility in an amount sufficient to enable us to service our debt or
to fund our liquidity needs.
We and NBC Holdings Corp., our parent, have separate understandings that
(a) with respect to each option granted by NBC Holdings Corp., pursuant to its
2004 Stock Option Plan, we have granted, and will continue to grant, an option
to purchase an equivalent number of shares of our common stock at the same
exercise price to NBC Holdings Corp. and (b) with respect to each share of
capital stock issued by NBC Holdings Corp., pursuant to its 2005 Restricted
Stock Plan, we have issued, and will continue to issue, an equivalent number of
shares of our common stock at the same purchase price per share to NBC Holdings
Corp.
Off-Balance Sheet Arrangements
As of December 31, 2011, 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 September 2011, the FASB issued Update 2011-08. Update 2011-08 allows an
entity the option to make a qualitative evaluation about the likelihood of
goodwill impairment to determine whether it should calculate the fair value of a
reporting unit. Update 2011-08 becomes effective for us in fiscal year 2013.
Management has determined that the update will not have a material impact on the
consolidated financial statements.
In June 2011, the FASB issued Update 2011-05. Update 2011-05 eliminates the
option to report other comprehensive income and its components in the statement
of changes in equity. Update 2011-05 requires that all non-owner changes in
stockholders' equity be presented in either a single continuous statement of
comprehensive income or in two separate but consecutive statements. In December
2011, the FASB issued Accounting Standards Update 2011-12 ("Update 2011-12")
which defers certain requirements within Update 2011-05. These amendments are
being made to allow the FASB time to redeliberate whether to present on the face
of the financial statements the effects of reclassifications out of accumulated
other comprehensive income on the components of net income and other
comprehensive income in all periods presented. Update 2011-05 becomes effective
for us in fiscal year 2013 and should be applied retrospectively. Early adoption
is permitted. Management has determined that the update will not have a material
impact on the consolidated financial statements.
In May 2011, the FASB issued Update 2011-04. Update 2011-04 changes the wording
used to describe many of the requirements in U.S. GAAP for measuring fair value
and for disclosing information about fair value measurements to ensure
consistency between U.S. GAAP and IFRS. Update 2011-04 also expands the
disclosure for fair value measurements that are estimated using significant
unobservable (level 3) inputs. This new guidance is to be applied prospectively.
We expect to apply this standard on a prospective basis beginning January 1,
2012. Management has determined that the update will not have a material impact
on the consolidated financial statements.
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"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995
Certain statements contained or incorporated in this Quarterly Report on Form
10-Q made by us which are not statements of historical fact constitute
"Forward-Looking Statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements give current
expectations or forecasts of future events. Words such as "anticipate",
"expect", "intend", "plan", "believe", "seek", "estimate" and other words and
terms of similar meaning in connection with discussions of future operating or
financial performance signify forward-looking statements. These statements
reflect our current views with respect to future events and are based on
assumptions and estimates, which are subject to risks and uncertainties.
Accordingly, undue reliance should not be placed on these forward-looking
statements. Also, these forward-looking statements represent our estimates and
assumptions only as of the date of this report. We do not intend to update any
of these forward-looking statements to reflect circumstances or events that
occur after the statement is made and qualifies all of its forward-looking
statements by these cautionary statements.
You should understand that various factors, in addition to those discussed
elsewhere in this document, could affect our future results and could cause
results to differ materially from those expressed in such forward-looking
statements, including:
• our ability to satisfy our future capital and liquidity requirements; our
ability to access the credit and capital markets at the times and in the
amounts needed and on terms acceptable to us; our ability to comply with
covenants applicable to us; and the continuation of acceptable supplier
payment terms;
• the potential adverse impact of the Chapter 11 Proceedings on our
business, financial condition or results of operations, including our ability to maintain contracts and other customer and vendor relationships
that are critical to our business and the actions and decisions of our
creditors and other third parties with interests in the Chapter 11
Proceedings;
• our ability to maintain adequate liquidity to fund our operations during
the Chapter 11 Proceedings and to fund a plan of reorganization and
thereafter, including obtaining sufficient "exit" financing; maintaining
current terms with our vendors and service providers during the Chapter 11
Proceedings and complying with the covenants and other terms of our
financing agreements;
• our ability to obtain court approval with respect to motions in the Chapter 11 Proceedings prosecuted from time to time and to develop,
prosecute, confirm and consummate one or more plans of reorganization with
respect to the Chapter 11 Proceedings and to consummate all of the
transactions contemplated by one or more such plans of reorganization or
upon which consummation of such plans may be conditioned;
• increased competition from other companies that target our markets;
• increased competition from alternative sources of textbooks for students
and alternative media, including the renting of textbooks from both online
and local campus marketplace competitors, digital or other educational
content sold directly to students and increased competition for the
purchase and sale of used textbooks from student-to-student transactions;
• 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;
• our ability to obtain financing upon emergence from the Chapter 11
Proceedings on terms acceptable to us or at all;
• our inability to successfully start-up or contract-manage additional
bookstores or to integrate those additional bookstores and/or to
cost-effectively maintain our current contract-managed bookstores;
• our inability to purchase a sufficient supply of used textbooks;
• changes in pricing of new and/or used textbooks or in publisher practices
regarding new editions and materials packaged with new textbooks;
43
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• the loss or retirement of key members of management;
• the impact of seasonality of the wholesale and bookstore operations;
• 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 SEC filings, all of which are difficult or
impossible to predict accurately and many of which are beyond our control.
The risks and uncertainties and the terms of any reorganization plan ultimately
confirmed can affect the value of our various pre-petition liabilities, common
stock and/or other securities. No assurance can be given as to what values, if
any, will be ascribed in the Chapter 11 Proceedings to each of these
constituencies. A plan of reorganization could result in holders of our
liabilities and/or securities receiving no value for their interests. Because of
such possibilities, the value of these liabilities and/or securities is highly
speculative. Accordingly, we urge that caution be exercised with respect to
existing and future investments in any of these liabilities and/or securities.
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