UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ______
Commission file number: 333-48225
NBC ACQUISITION CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0793347
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4700 South 19th Street
Lincoln, Nebraska 68501-0529
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 421-7300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X] No [ ]
Total number of shares of Class A common stock outstanding as of November 11,
1998: 953,027 shares
Total Number of Pages: 13
Exhibit Index: Page 13
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PART I. FINANCIAL INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
NBC ACQUISITION CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, March 31, September 30,
1998 1998 1997
ASSETS ------------ ----------- --------------
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents $ 13,810,986 $ 5,806,890 $ 17,504,788
Receivables 34,299,451 21,383,146 25,322,079
Inventories 48,989,391 48,810,714 43,086,351
Recoverable income tax - 4,374,048 -
Deferred income tax benefit 1,183,529 1,183,529 1,156,540
Prepaid expenses and other assets 117,568 189,950 85,970
----------- ---------- ----------
Total current assets 98,400,925 81,748,277 87,155,728
PROPERTY AND EQUIPMENT 30,427,825 28,716,839 27,108,262
Less accumulated depreciation (6,914,186) (5,984,932) (4,596,827)
----------- ---------- ----------
23,513,639 22,731,907 22,511,435
GOODWILL AND OTHER INTANGIBLES, net of amortization 40,849,831 44,866,800 31,610,509
OTHER ASSETS 2,773,148 2,798,270 1,491,430
----------- ---------- ----------
$ 165,537,543 $ 152,145,254 $ 142,769,102
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 25,425,404 $ 14,418,843 $ 18,648,416
Accrued employee compensation and benefits 3,009,538 3,797,242 2,777,296
Accrued interest 1,788,867 1,788,547 1,396,020
Accrued expenses 624,957 498,740 494,872
Income tax payable 550,705 - 1,151,508
Deferred revenue 1,885,360 463,917 -
Current maturities of long-term debt 1,984,782 1,327,696 264,405
Revolving credit facility - 5,400,000 -
----------- ---------- ----------
Total current liabilities 35,269,613 27,694,985 24,732,517
LONG-TERM DEBT, net of current maturities 216,392,461 214,869,495 79,327,628
OTHER LONG-TERM LIABILITIES 170,802 150,604 749,609
STOCKHOLDERS' EQUITY (DEFICIT):
Class A common stock, voting, authorized 5,000,000
shares at September 30, 1998 and March 31, 1998 and
4,500,000 shares at September 30, 1997 of $.01 par value;
issued and outstanding 953,027, 953,027 and
2,755,776 shares, respectively 9,530 9,530 27,558
Class B common stock, non-voting, none authorized
at September 30, 1998 and March 31, 1998, and 500,000
shares authorized at September 30, 1997 at $.01 par value;
issued and outstanding 48,148 shares at September 30, 1997 - - 481
Additional paid-in capital 49,025,135 49,025,135 31,119,111
Notes receivable from stockholders (177,080) (211,800) (236,110)
Retained earnings (deficit) (135,152,918) (139,392,695) 7,048,308
----------- ---------- ----------
Total stockholders' equity (deficit) (86,295,333) (90,569,830) 37,959,348
----------- ---------- ----------
$ 165,537,543 $ 152,145,254 $ 142,769,102
=========== =========== ===========
See notes to consolidated financial statements.
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NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended September 30, Six Months Ended September 30,
1998 1997 1998 1997
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES, net of returns $ 96,852,839 $ 83,134,255 $ 127,131,017 $ 110,661,846
COSTS OF SALES 61,061,954 53,342,157 78,623,723 69,648,343
---------- ---------- ---------- ----------
Gross profit 35,790,885 29,792,098 48,507,294 41,013,503
OPERATING EXPENSES:
Selling, general and administrative 13,321,242 11,498,114 25,132,617 22,123,427
Depreciation 530,167 579,876 1,059,451 1,128,052
Amortization 1,600,371 1,184,089 3,367,422 2,293,281
Stock compensation costs - 236,470 - 236,470
---------- ---------- ---------- ----------
15,451,780 13,498,549 29,559,490 25,781,230
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 20,339,105 16,293,549 18,947,804 15,232,273
OTHER EXPENSES (INCOME):
Interest expense 5,872,634 2,743,522 11,763,761 5,470,087
Interest income (77,981) (66,608) (96,880) (100,563)
Other income (109,366) (143,149) (187,419) (255,189)
---------- ---------- ---------- ----------
5,685,287 2,533,765 11,479,462 5,114,335
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 14,653,818 13,759,784 7,468,342 10,117,938
INCOME TAX EXPENSE 5,681,086 5,329,235 3,228,565 4,002,919
---------- ---------- ---------- ----------
NET INCOME $ 8,972,732 $ 8,430,549 $ 4,239,777 $ 6,115,019
========== ========== ========== ==========
EARNINGS PER SHARE:
Basic $ 9.41 $ 3.01 $ 4.45 $ 2.18
========== ========== ========== ==========
Diluted $ 9.41 $ 2.81 $ 4.45 $ 2.04
========== ========== ========== ==========
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 953,027 2,801,962 953,027 2,800,981
========== ========== ========== ==========
Diluted 953,027 3,003,705 953,027 3,002,724
========== ========== ========== ==========
See notes to consolidated financial statements.
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NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
--------------------------------------------------------------------------------------------------------------------------
Notes
Common Common Additional Receivable Retained
Stock Stock Paid-in From Earnings
A B Capital Stockholders (Deficit) Total
----------- -------- ------------- ------------ --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, April 1, 1997 $ 27,519 $ 481 $30,972,000 $ (236,110) $ 933,289 $ 31,697,179
Proceeds from stock issued
Class A common 39 - 147,111 - - 147,150
Net income - - - - 6,115,019 6,115,019
----------- -------- ------------- ------------ --------------- --------------
BALANCE, September 30, 1997 $ 27,558 $ 481 $31,119,111 $ (236,110) $ 7,048,308 $ 37,959,348
=========== ======== ============= ============ =============== ==============
BALANCE, April 1, 1998 $ 9,530 $ - $49,025,135 $ (211,800) $ (139,392,695) $ (90,569,830)
Payment on stockholder note - - - 34,720 - 34,720
Net income - - - - 4,239,777 4,239,777
----------- -------- ------------- ------------ --------------- --------------
BALANCE, September 30, 1998 $ 9,530 $ - $49,025,135 $ (177,080) $ (135,152,918) $ (86,295,333)
=========== ======== ============= ============ =============== ==============
See notes to consolidated financial statements.
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NBC ACQUISITION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended September 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES: ----------- -----------
<S> <C> <C>
Net income $ 4,239,777 $ 6,115,019
Adjustment to reconcile net income to net cash flows
from operating activities:
Depreciation 1,059,451 1,128,052
Amortization of intangibles 4,192,698 2,630,799
Original issue discount amortization 2,468,697 150,000
Loss on disposal of assets 22,392 80,451
Changes in operating assets and liabilities,
net of effect of acquisitions:
Receivables (12,916,305) (9,999,804)
Inventories (178,677) 1,202,041
Recoverable income tax 4,374,048 574,375
Prepaid expenses and other assets 72,382 244,553
Other assets 166,588 315,127
Accounts payable 11,006,561 7,777,596
Accrued employee compensation and benefits (787,704) (182,779)
Accrued interest 320 130,140
Accrued expenses 126,217 141,930
Income taxes payable 550,705 1,151,508
Deferred revenue 1,421,443 -
Other liabilities 20,198 250,923
---------- ----------
Net cash flows from operating activities 15,838,791 11,709,931
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,895,458) (1,835,727)
Bookstore acquisitions, net of cash acquired - (674,000)
Acquisition of other businesses - (1,451,928)
Proceeds from sale of property and equipment 31,883 18,345
Software development costs (107,230) (157,152)
---------- ----------
Net cash flows from investing activities (1,970,805) (4,100,462)
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs (209,965) -
Principal payments on long-term debt (288,645) (81,645)
Net payments on revolving credit facility (5,400,000) -
Proceeds from payment on stockholder note 34,720 -
--------- --------
Net cash flows from financing activities (5,863,890) (81,645)
--------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,004,096 7,527,824
CASH AND CASH EQUIVALENTS, Beginning of period 5,806,890 9,976,964
---------- ----------
CASH AND CASH EQUIVALENTS, End of period $13,810,986 $17,504,788
========== ==========
Supplemental disclosures of cash flow information:
Interest $ 8,233,975 $ 4,727,878
========== ==========
Income taxes $(1,696,188) $ 2,274,205
========== ==========
Noncash investing and financing activities:
Common stock issued for business acquisitions $ - $ 147,150
========== ==========
See notes to consolidated financial statements.
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NBC ACQUISITION CORP.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- -------------------------------------------------------------------------------
1. Management Representations - The accompanying unaudited consolidated
financial statements and notes thereto reflect all adjustments which are,
in the opinion of management, necessary to summarize fairly the financial
position of NBC Acquisition Corp. (the "Company") and its wholly-owned
subsidiary, Nebraska Book Company, Inc. ("NBC") and the results of the
Company's operations for the periods presented. All of these adjustments
are of a normal recurring nature. Because of the seasonal nature of the
Company's operations, results of operations of any single reporting period
should not be considered as indicative of results for a full year. Certain
reclassifications have been made to prior period financial statements to
conform with current year presentation. These statements should be read in
conjunction with the Company's audited consolidated financial statements
for the year ended March 31, 1998 included in the Company's Form S-4
Registration Statement (No. 333-48225).
2. Recapitalization - On February 13, 1998, the Company consummated a merger
among NBC Merger Corp. (a newly created, indirect wholly-owned subsidiary
of HWH Capital Partners, LP. ["HWH"]), the Company and certain shareholders
of the Company pursuant to which the Company's outstanding debt and stock
were restructured (the "Recapitalization"). As the new investor did not
acquire substantially all of the common stock of the Company, a new basis
of accounting was not established in connection with the Recapitalization.
Significant components of the Recapitalization, together with the
applicable accounting effects, were as follows:
(i) HWH contributed $45.6 million in capital to NBC Merger Corp., which was
then merged into the Company, with the Company being the surviving
corporation.
(ii)Existing management shareholders of the Company reinvested
approximately $4.4 million in the Company. HWH and management
shareholders were reissued surviving corporation shares of Class A
Common Stock.
(iii)The Company obtained approximately $215.0 million in new debt
financing and retired substantially all of its existing debt. The early
extinguishment of debt resulted in an extraordinary loss on the
transaction.
(iv)The Company agreed to purchase management's outstanding options under
its 1995 Stock Incentive Plan, for a cash payment in lieu of the
options. This resulted in stock based compensation of approximately $8.3
million for the year ended March 31, 1998. In addition, the Company
agreed to purchase all outstanding warrants for approximately $16.7
million, which was charged to additional paid-in capital and retained
earnings.
(v) The Company reacquired the outstanding shares of Class A and Class B
Common Stock of certain shareholders for approximately $149.2 million.
This reacquisition of shares was accounted for as a treasury stock
transaction, and such reacquired shares were retired.
In connection with the Recapitalization, a transaction fee of $4.0 million
was paid to HWH. Additionally, the Company reimbursed HWH approximately $0.1
million for expenses incurred by HWH in conjunction with the Recapitization.
Approximately $600,000 of such costs were charged to additional paid-in
capital as non-deductible costs of the Recapitalization. The remaining $3.5
million was recorded as debt issue costs and is being amortized over the
life of the related debt.
3. Earnings Per Share - Earnings per share are calculated in accordance with
Statement of Financial Accounting Standard (SFAS) No. 128, Earnings Per
Share. SFAS 128 requires dual presentation of Basic and Diluted Earnings Per
Share (EPS), as well as restatement of EPS for all periods for which an
income statement or summary of earnings is presented. Basic earnings per
share data are based on the weighted-average number of common shares
outstanding during the period. Diluted earnings per share data are based on
the weighted-average number of common shares outstanding and the dilutive
effect of potential common shares including stock options and warrants.
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4. Inventories - Inventories are summarized as follows:
September 30, 1998 March 31, 1998 September 30, 1997
-----------------------------------------------------------------------
Wholesale $17,224,988 $23,974,308 $15,212,909
College bookstores 29,623,300 21,889,631 26,764,137
Other 2,141,103 2,946,775 1,109,305
-----------------------------------------------------------------------
Inventories $48,989,391 $48,810,714 $43,086,351
========================================================================
5. Long-Term Debt - On February 13, 1998, the Company obtained new financing
as part of the Recapitalization. Such financing included a
bank-administered Senior Credit Facility provided through a syndicate of
lenders. The facility is comprised of a $27,500,000 term loan (Tranche A
Loan), a $32,500,000 term loan (Tranche B Loan) and a $50,000,000 Revolving
Credit Facility. The Revolving Credit Facility expires on March 31, 2004.
Availability under the Revolving Credit Facility is determined by the
calculation of a borrowing base which at any time is equal to a percentage
of eligible accounts receivable and inventory. The borrowing base at
September 30, 1998 was $38.7 million. The interest rate on the Senior
Credit Facility is prime plus an applicable margin of up to 1.50% or, on
Eurodollar borrowings, LIBOR plus an applicable margin of up to 2.50%.
Effective for fiscal years ending on or after March 31, 1999, the Senior
Credit Facility requires excess cash flows as defined in the Credit
Agreement to be applied initially towards prepayment of the term loans and
then utilized to permanently reduce commitments under the Revolving Credit
Facility. Additional funding of the Recapitalization included the proceeds
of the issuance by NBC of $110,000,000 face amount of 8.75% Senior
Subordinated Notes due 2008 and the issuance by the Company of $76,000,000
face amount of 10.75% Senior Discount Debentures due 2009. The Debentures
were issued at a discount in the amount of $31,002,680 and will accrete in
value at the rate of 10.75% compounded semiannually until February 15,
2003, at which time interest payments will begin.
During the quarter ended June 30, 1998, the Company and NBC filed Form S-4
Registration Statements with the Securities and Exchange Commission for
purposes of registering debt securities to be issued in exchange for the
Company's Senior Discount Debentures and NBC's Senior Subordinated Notes.
Such Registration Statements were declared effective by the Securities and
Exchange Commission on July 14, 1998. All notes were tendered in the offer
to exchange which was completed on August 13, 1998.
During the quarter ended September 30, 1998, the Company entered into
separate five-year amortizing interest rate swap agreements with two
financial institutions whereby the Company's variable rate Tranche A and B
Term Loans have been effectively converted into debt with a fixed LIBOR
rate of 5.815% plus the applicable margin. The initial notional amount
under each agreement is $29,859,375. Such notional amounts are reduced
periodically by amounts equal to the scheduled principal payments on the
Tranche A and B Term Loans. The Company is exposed to credit loss in the
event of nonperformance by the counterparties to the interest rate swap
agreements. The Company anticipates the counterparties will be able to
fully satisfy their obligations under the agreements.
6. New Accounting Pronouncement - In June 1997, the Financial Accounting
Standards Board adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS 131, effective for fiscal 1999,
redefines how operating segments are determined and requires disclosure of
certain financial and descriptive information about a company's operating
segments. The Statement does not need to be applied to interim financial
statements in the initial year of application. The required disclosure
under this Statement will be provided in the Company's fiscal 1999 Form
10-K filing.
7. Stock Based Compensation - On June 30, 1998, the Company's Board of
Directors adopted the NBC Acquisition Corp. 1998 Performance Stock Option
Plan (the "Plan"). This Plan provides for the granting of options to
purchase 52,000 shares of the Company's Class A Common Stock to selected
members of senior management of the Company and its affiliates. All options
granted are intended to be nonqualified stock options, although the Plan
also provides for incentive stock options. The Company will grant a portion
of the available options in fiscal years 1999-2002 upon the attainment of
pre-established financial targets. Twenty-five percent of the options
granted become exercisable immediately upon granting, with the remaining
options becoming exercisable in 25% increments over the subsequent three
years on the anniversary of the date of grant. The options will have an
exercise price of not less than fair market value on the date the options
are granted and expire ten years from the date of grant. No options were
granted as of September 30, 1998.
On June 30, 1998, the Company's Board of Directors adopted the NBC
Acquisition Corp. 1998 Stock Option Plan (the "Option Plan"). This Option
Plan provides for the granting of options to purchase 31,000 shares of the
Company's Class A
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Common Stock to selected employees, officers, and directors of the Company
and its affiliates. All options granted are intended to be nonqualified
stock options, although the Option Plan also provides for incentive stock
options. The Company will grant such options at the discretion of a
committee designated by the Board of Directors (the "Committee").
Twenty-five percent of the options granted become exercisable immediately
upon granting, with the remaining options becoming exercisable in 25%
increments over the subsequent three years on the anniversary of the date
of grant. Incentive stock options will have an exercise price of not less
than fair market value on the date the options are granted, while the
Committee will determine the exercise price for nonqualified options, which
may be below fair market value, at the time of grant. All options expire
ten years from the date of grant. Subsequent to September 30,1998,
nonqualified stock options to purchase 13,200 shares of the Company's Class
A Common Stock were granted at an exercise price of $52.47 per share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Quarter Ended September 30, 1998 Compared With Quarter Ended September 30, 1997.
Revenues. Revenues for the quarters ended September 30, 1998 and 1997 were as
follows:
1998 1997
-------------------------
Wholesale operations $45,465,854 $40,127,752
College bookstore operations 52,720,955 45,860,352
Complimentary services 5,048,473 2,525,848
Intercompany eliminations (6,382,443) (5,379,697)
-------------------------
$96,852,839 $83,134,255
=========================
Revenues for the quarter ended September 30, 1998 increased $13.8 million, or
16.5%, to $96.9 million from $83.1 million for the quarter ended September 30,
1997. This increase was due to a $5.4 million, or 13.3%, increase in wholesale
sales, a $6.8 million, or 15.0%, increase in college bookstore sales and a $2.5
million, or 99.9%, increase in revenues related to complementary services.
Wholesale sales for the quarter ended September 30, 1998 increased to $45.5
million from $40.1 million for the quarter ended September 30, 1997. This
increase in wholesale sales was due primarily to publisher price increases and
unit volume sales growth. College bookstore sales for the quarter ended
September 30, 1998 increased to $52.7 million from $45.9 million for the quarter
ended September 30, 1997. The increase in college bookstore sales was primarily
the result of five bookstores opened or acquired during the last half of fiscal
1998, the opening of one new store during the second quarter of fiscal 1999 and
same store sales increases of 6.1%. Complimentary services sales for the quarter
ended September 30, 1998 increased to $5.0 million from $2.5 million for the
quarter ended September 30, 1997 due to the acquisition of Collegiate Stores
Corporation on January 23, 1998. As the Company's wholesale and college
bookstore operations have grown, the Company's intercompany transactions have
also increased.
Gross profit. Gross profit for the quarter ended September 30, 1998 increased
$6.0 million, or 20.1%, to $35.8 million from $29.8 million for the quarter
ended September 30, 1997. This increase was primarily due to higher revenues,
combined with an increase in gross margin percent. Gross margin for the quarter
ended September 30, 1998 increased to 37.0% from 35.8% for the quarter ended
September 30, 1997. This increase was primarily due to sales mix, including an
increase in used textbook sales through the Company's bookstores, which generate
an average gross margin of 58.0% compared to an average gross margin of 37.0%
for wholesale sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the quarter ended September 30, 1998 increased $1.8
million, or 15.9%, to $13.3 million from $11.5 million for the quarter ended
September 30, 1997. Selling, general and administrative expenses as a percentage
of revenues remained stable at 13.8% for the quarters ended September 30, 1998
and September 30, 1997. The increase in expense resulted primarily from the
higher expense base associated with the Company's expansion of its operations in
fiscal 1998 through bookstore and other business acquisitions.
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Amortization expense. Amortization expense for the quarter ended September 30,
1998 increased $0.4 million, or 35.2%, to $1.6 million from $1.2 million for the
quarter ended September 30, 1997. This increase resulted primarily from a full
quarter of amortization on the goodwill associated with the fiscal 1998
acquisitions.
Interest expense, net. Interest expense, net for the quarter ended September 30,
1998 increased by $3.1 million, or 116.5%, to $5.8 million from $2.7 million for
the quarter ended September 30, 1997 as a result of the additional debt incurred
relating to the Recapitalization which occurred on February 13, 1998.
Income taxes. Income taxes for the quarter ended September 30, 1998 were
recorded at an effective tax rate of 38.8% as compared with an effective tax
rate of 38.7% for the quarter ended September 30, 1997.
Six Months Ended September 30, 1998 Compared With Six Months Ended September 30,
1997.
Revenues. Revenues for the six months ended September 30, 1998 and 1997 were as
follows:
1998 1997
-------------------------
Wholesale operations $64,522,785 $58,251,549
College bookstore operations 64,905,894 56,924,646
Complimentary services 8,432,584 5,091,108
Intercompany eliminations (10,730,246) (9,605,457)
-------------------------
$127,131,017 $110,661,846
=========================
Revenues for the six months ended September 30, 1998 increased $16.4 million, or
14.9%, to $127.1 million from $110.7 million for the six months ended September
30, 1997. This increase was due to a $6.2 million, or 10.8%, increase in
wholesale sales, a $8.0 million, or 14.0%, increase in college bookstore sales
and a $3.3 million, or 65.6%, increase in revenues related to complementary
services. Wholesale sales for the six months ended September 30, 1998 increased
to $64.5 million from $58.3 million for the six months ended September 30, 1997.
This increase in wholesale sales was due primarily to publisher price increases
and unit volume sales growth. College bookstore sales for the six months ended
September 30, 1998 increased to $64.9 million from $56.9 million for the six
months ended September 30, 1997. The increase in college bookstore sales was
primarily the result of five bookstores opened or acquired during the last half
of fiscal 1998, the opening of one new store during the second quarter of fiscal
1999 and same store sales increases of 5.3%. Complimentary services sales for
the six months ended September 30, 1998 increased to $8.4 million from $5.1
million for the six months ended September 30, 1997 due to the acquisitions of
Specialty Books, Inc. on May 1, 1997 and Collegiate Stores Corporation on
January 23, 1998. As the Company's wholesale and college bookstore operations
have grown, the Company's intercompany transactions have also increased.
Gross profit. Gross profit for the six months ended September 30, 1998 increased
$7.5 million, or 18.3%, to $48.5 million from $41.0 million for the six months
ended September 30, 1997. This increase was primarily due to higher revenues,
combined with an increase in gross margin percent. Gross margin for the six
months ended September 30, 1998 increased to 38.2% from 37.1% for the six months
ended September 30, 1997. This increase was primarily due to sales mix,
including an increase in used textbook sales through the Company's bookstores,
which generate an average gross margin of 58.0% compared to an average gross
margin of 37.0% for wholesale sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the six months ended September 30, 1998 increased
$3.0 million, or 13.6%, to $25.1 million from $22.1 million for the six months
ended September 30, 1997. Selling, general and administrative expenses as a
percentage of revenues decreased to 19.8% for the six months ended September 30,
1998 from 20.0% for the six months ended September 30, 1997. The increase in
expense resulted primarily from the higher expense base associated with the
Company's expansion of its operations in fiscal 1998 through bookstore and other
business acquisitions.
Amortization expense. Amortization expense for the six months ended September
30, 1998 increased $1.1 million, or 46.8%, to $3.4 million from $2.3 million for
the six months ended September 30, 1997. This increase resulted primarily from a
full six months of amortization on the goodwill associated with the fiscal 1998
acquisitions.
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Interest expense, net. Interest expense, net for the six months ended September
30, 1998 increased by $6.3 million, or 117.3%, to $11.7 million from $5.4
million for the six months ended September 30, 1997 as a result of the
additional debt incurred relating to the Recapitalization which occurred on
February 13, 1998.
Income taxes. Income taxes for the six months ended September 30, 1998 were
recorded at an effective tax rate of 43.2% as compared with an effective tax
rate of 39.6% for the six months ended September 30, 1997. This increase is
primarily the result of non-deductible amortization on goodwill associated with
the fiscal 1998 acquisitions.
Liquidity and Capital Resources
The Company's primary liquidity requirements are for debt service under
the Senior Credit Facility, the Senior Subordinated Notes and other outstanding
indebtedness, for working capital, and for capital expenditures. The Company has
historically funded these requirements primarily through internally generated
cash flow and funds borrowed under the Company's credit facility. At September
30, 1998, the Company's total indebtedness was approximately $218.4 million,
consisting of approximately $59.7 million in Term Loans, $110.0 million of the
Senior Subordinated Notes, $48.1 million of the Senior Discount Debentures and
$0.6 million of other indebtedness.
Principal and interest payments under the Senior Credit Facility and the
Senior Subordinated Notes represent significant liquidity requirements for the
Company. Under the terms of the Tranche A and B Loans, NBC is required to make
principal payments totaling approximately $1.3 million in fiscal 1999, $3.1
million in fiscal 2000, $4.4 million in fiscal 2001, $6.3 million in fiscal
2002, $6.8 million in fiscal 2003, $8.5 million in fiscal 2004, $11.2 million in
fiscal 2005 and $18.4 million in fiscal 2006. Loans under the Senior Credit
Facility bear interest at floating rates based upon the interest rate option
selected by the Company. The Senior Subordinated Notes require semi-annual
interest payments at a fixed rate of 8.75% and mature on February 15, 2008. The
Senior Discount Debentures require semi-annual interest payments commencing
August 15, 2003 at a fixed rate of 10.75% and mature on February 15, 2009.
The Company's capital expenditures were $1.9 million and $1.8 million
for the six months ended September 30, 1998 and 1997, respectively. The Company
estimates that for fiscal 1999, approximately $2.5 million of capital
expenditures will be required, primarily for maintenance. Capital expenditures
consist primarily of bookstore opening costs, bookstore renovations and
miscellaneous maintenance requirements. The Company believes that as a result
of the availability of excess capacity in its distribution facilities, it will
be able to pursue its strategy over the next several years without making
significant additional capital expenditures to expand capacity. The Company's
ability to make capital expenditures is subject to certain restrictions under
the Senior Credit Facility.
There were no business acquisition expenditures in the six months ended
September 30, 1998. Business acquisition expenditures were $2.1 million for the
six months ended September 30, 1997. The Company estimates that for fiscal
1999, it will make approximately $2.0 million of business acquisition
expenditures.
The Company's principal sources of cash to fund its future liquidity
needs will be net cash from operating activities and borrowings under the
Revolving Credit Facility. Net cash flows from operating activities for the six
months ended September 30, 1998 were $15.8 million, an increase of $4.1 million
from $11.7 million for the six months ended September 30, 1997. This increase
was primarily due to higher uses of cash in the six months ended September 30,
1997 to fund estimated income tax liabilities.
Access to the Company's principal sources of cash is subject to various
restrictions. The availability of additional borrowings under the Revolving
Credit Facility is subject to the calculation of a borrowing base which at any
time is equal to a percentage of eligible accounts receivable and inventory.
The Senior Credit Facility restricts the Company's ability to make loans or
advances and pay dividends, except that, among other things, NBC may pay
dividends to the Company (i) after August 15, 2003 in an amount not to exceed
the amount of interest required to be paid on the Senior Discount Debentures
and (ii) to pay corporate overhead expenses not to exceed $250,000 per year and
any taxes due by the Company. The Indenture governing the Senior Discount
Debentures (the "Indenture") restricts the ability of the Company and its
Restricted Subsidiaries (as defined in the Indenture) to pay dividends or make
other Restricted Payments (as defined in the Indenture) to their respective
stockholders, subject to certain exceptions, unless certain conditions are met,
including that (i) no default under the Indenture shall have occurred and be
continuing, (ii) the Company shall be permitted by the Indenture to incur
additional indebtedness and (iii) the amount of the dividend or payment may not
exceed a certain amount based on, among other things, the
10
<PAGE>
Company's consolidated net income. The indenture governing the Senior
Subordinated Notes contains similar restrictions on the ability of NBC and its
Restricted Subsidiaries to pay dividends or make other Restricted Payments to
their respective stockholders. Such restrictions are not expected to affect the
Company's ability to meet its cash obligations.
As of September 30, 1998, the Company could borrow up to $38.7 million
under the Revolving Credit Facility. The Revolving Credit Facility was unused
at September 30, 1998. Amounts available under the Revolving Credit Facility
may be used for working capital and general corporate purposes (including up to
$10.0 million for letters of credit), subject to certain limitations contained
in the Senior Credit Facility.
Seasonality
The Company's wholesale and bookstore operations experience two distinct
selling periods and the wholesale operations experience two distinct buying
periods. The peak selling periods for the wholesale operations occur prior to
the beginning of each school semester in August and December. The buying
periods for the wholesale operations occur at the end of each school semester
in late December and May. In fiscal 1998, approximately 42% of the Company's
annual revenues occurred in the second fiscal quarter (July-September), while
approximately 27% of the Company's annual revenues occurred in the fourth
fiscal quarter (January-March). The primary selling periods for the bookstore
operations are in September and January. Accordingly, the Company's working
capital requirements fluctuate throughout the year, increasing substantially at
the end of each semester, in May and December, as a result of the buying
periods. The Company funds its working capital requirements primarily through a
revolving credit facility, which historically has been repaid with cash
provided from operations.
Impact of Inflation
The Company's results of operations and financial condition are
presented based upon historical costs. While it is difficult to accurately
measure the impact of inflation due to the imprecise nature of the estimates
required, the Company believes that the effects of inflation, if any, on its
results of operations and financial condition have been minor. However, there
can be no assurance that during a period of significant inflation, the
Company's results of operations would not be adversely affected.
Impact of Year 2000
Some of the Company's older computer programs were written using two
digits rather than four to define the applicable year. As a result, those
programs recognize a date using "00" as the year 1900 rather than the year 2000
(the "Year 2000 Issue"). This problem could cause a system failure or
miscalculations resulting in disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar routine business activities.
The Company has completed an assessment of the impact of the Year 2000
Issue on its operations, and has been modifying and will continue to modify and
replace portions of its software so that its internal computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company has been addressing the Year 2000 Issue consistently as part of its
regular program of updating and rewriting its internal corporate applications
during the last seven years. As a result, all of the Company's own retail
applications have been modified completely. The only remaining internal
corporate application that remains to be replaced is the general ledger
application, which the Company is currently in the process of addressing by
evaluating commercial software solutions. The Company expects the cost to
replace its current general ledger software with a commercial application that
is "Year 2000 compliant" will not be significant. The Company plans to have
such new application in place during 1999.
The Company is currently in the process of identifying and evaluating
potential risks associated with the Year 2000 Issue on non-information
technology systems (i.e. telecommunications, heating and cooling, security,
electrical, and freight). Although potentially disruptive, management does not
believe that such Year 2000 Issue system difficulties will adversely affect
day-to-day operations at the Company's retail locations. Difficulties
encountered with the telecommunications and freight systems could potentially
hinder the Company's ability to receive and ship wholesale orders. Contingency
plans are being developed to minimize the effect of any such disruptions on
day-to-day operations.
11
<PAGE>
The Company has also distributed questionnaires to its vendors to assess
exposure to vendors failing to be Year 2000 compliant. Based upon responses to
such questionnaires, discussions with certain vendors, and information provided
in trade publications, the Company believes that its vendors are taking steps
to address the Year 2000 Issue and that there is not a material risk to the
Company relating to vendor failure to address the Year 2000 Issue. Nonetheless,
there can be no guarantee that the systems of other companies on which the
Company's systems rely will be corrected in a timely manner.
"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 operations of the
Company and statements preceded by, followed by or that include the words "may,"
"believes," "experts," "anticipates," or the negation thereof, or similar
expressions, which constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). All
statements which address operating performance, events or developments that are
expected or anticipated to occur in the future, including statements relating to
volume and revenue growth, earnings per share growth or statements expressing
general optimism about future operating results, are forward-looking statements
within the meaning of the Reform Act. Such forward-looking statements involve
risks, uncertainties and other factors which may cause the actual performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. For those statements, the Company claims the protection of the safe
harbor for forward-looking statements contained in the Reform Act. Several
important factors could affect the future results of the Company and could cause
those results to differ materially from those expressed in the forward-looking
statements contained herein. The factors that could cause actual results to
differ materially include, but are not limited to, the following: increased
competition; ability to integrate recent acquisitions; loss or retirement of key
members of management; increases in the Company's cost of borrowing or inability
or unavailability of additional debt or equity capital; inability to purchase a
sufficient supply of used textbooks; changes in pricing of new and/or used
textbooks; changes in general economic conditions and/or in the markets in which
the Company competes or may, from time to time, compete; and other risks
detailed in the Company's Securities and Exchange Commission filings, in
particular the aforementioned Form S-4 Registration Statement (No. 333-48225),
all of which are difficult or impossible to predict accurately and many of which
are beyond the control of the Company. The Company will not undertake and
specifically declines 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.
12
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS
(a) Exhibits
27 Financial Data Schedule [EDGAR filing only]
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 in the City of Lincoln, Nebraska, on
November 11, 1998.
NBC ACQUISITION CORP.
/s/ Mark W. Oppegard
----------------------
Mark W. Oppegard
President and Director
/s/ Bruce E. Nevius
--------------------
Bruce E. Nevius
Vice President and Secretary
(Principal Financial and Accounting Officer)
13
<PAGE>
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<PERIOD-END> SEP-30-1998
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