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: 333-48221
NEBRASKA BOOK COMPANY, INC.
(Exact name of registrant as specified in its charter)
KANSAS 47-0549819
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4700 South 19th Street
Lincoln, Nebraska 68501-0529
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 421-7300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X] No [ ]
Total number of shares of common stock outstanding as of November 11, 1998: 100
shares
Total Number of Pages: 13
Exhibit Index: Page 13
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PART I. FINANCIAL INFORMATION
- ------------------------------------------------------------------------------
NEBRASKA BOOK COMPANY, INC.
BALANCE SHEETS
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 - 4,125,957 -
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 81,500,186 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 37,634,516 41,498,725 31,610,509
OTHER ASSETS 2,773,148 2,798,270 1,491,430
----------- ---------- ----------
$ 162,322,228 $ 148,529,088 $ 142,769,102
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S 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 1,794,696 - 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 36,513,604 27,694,985 24,732,517
LONG-TERM DEBT, net of current maturities 168,311,596 169,257,327 79,327,628
OTHER LONG-TERM LIABILITIES 170,802 150,604 749,609
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock, authorized 50,000
shares of $1.00 par value;
issued and outstanding 100 shares 100 100 100
Additional paid-in capital 30,967,876 30,935,250 30,910,940
Retained earnings (deficit) (73,641,750) (79,509,178) 7,048,308
----------- ---------- ----------
Total stockholder's equity (deficit) (42,673,774) (48,573,828) 37,959,348
----------- ---------- ----------
$ 162,322,228 $ 148,529,088 $ 142,769,102
=========== =========== ===========
See notes to financial statements.
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2
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<CAPTION>
NEBRASKA BOOK COMPANY, INC.
- ------------------------------------------------------------------------------------------------------------------------------------
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 4,536,229 2,743,522 9,140,210 5,470,087
Interest income (77,981) (66,608) (96,880) (100,563)
Other income (109,366) (143,149) (187,419) (255,189)
---------- ---------- ---------- ----------
4,348,882 2,533,765 8,855,911 5,114,335
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 15,990,223 13,759,784 10,091,893 10,117,938
INCOME TAX EXPENSE 6,200,663 5,329,235 4,224,465 4,002,919
---------- ---------- ---------- ----------
NET INCOME $ 9,789,560 $ 8,430,549 $ 5,867,428 $ 6,115,019
========== ========== ========== ===========
See notes to financial statements.
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3
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<CAPTION>
NEBRASKA BOOK COMPANY, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(UNAUDITED)
-------------------------------------------------------------------------------------------------------------------------
Additional Retained
Common Paid-in Earnings
Stock Capital (Deficit) Total
------------ ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
BALANCE, April 1, 1997 $ 100 $ 30,763,790 $ 933,289 $ 31,697,179
Contributed capital - 147,150 - 147,150
Net income - - 6,115,019 6,115,019
-------- ---------------- -------------- ---------------
BALANCE, September 30, 1997 $ 100 $ 30,910,940 $ 7,048,308 $ 37,959,348
======== ================ ============== ===============
BALANCE, April 1, 1998 $ 100 $ 30,935,250 $ (79,509,178) $ (48,573,828)
Contributed capital - 32,626 - 32,626
Net income - - 5,867,428 5,867,428
-------- ---------------- -------------- ---------------
BALANCE, September 30, 1998 $ 100 $ 30,967,876 $ (73,641,750) $ (42,673,774)
======== ================ ============== ===============
See notes to financial statements.
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4
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<CAPTION>
NEBRASKA BOOK COMPANY, INC.
- ------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended September 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES: --------- ---------
<S> <C> <C>
Net income $ 5,867,428 $ 6,115,019
Adjustment to reconcile net income to net cash flows
from operating activities:
Depreciation 1,059,451 1,128,052
Amortization 4,037,844 2,630,799
Original issue discount amortization - 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 4,125,957 574,375
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 1,794,696 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)
Bookstores 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 (207,871) -
Principal payments on long-term debt (288,645) (81,645)
Net payments on revolving credit facility (5,400,000) -
Capital contribution 32,626 -
---------- ----------
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:
Cash paid (refunded) during the period for:
Interest $ 8,233,975 $ 4,727,878
========== ==========
Income taxes $ (1,696,188) $ 2,274,205
========== ==========
Noncash investing and financing activities:
Common stock of parent contributed for
acquisition of other businesses $ - $ 147,150
========== ==========
See notes to financial statements.
</TABLE>
5
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NEBRASKA BOOK COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
1. Management Representations - The accompanying unaudited financial
statements and notes thereto reflect all adjustments which are, in the
opinion of management, necessary to summarize fairly the financial position
of Nebraska Book Company, Inc. (the "Company") 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 financial statements for the year
ended March 31, 1998 included in the Company's Form S-4 Registration
Statement (No. 333-48221).
2. Recapitalization - On February 13, 1998, the Company's parent, NBC
Acquisition Corp. ("NBC") consummated a merger among NBC Merger Corp. (a
newly created, indirect wholly-owned subsidiary of HWH Capital Partners,
LP. ["HWH"]), NBC and certain shareholders of NBC pursuant to which the
Company's outstanding debt and NBC's stock were restructured (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 NBC, with NBC being the surviving corporation.
(ii)Existing management shareholders of NBC reinvested approximately $4.4
million in NBC. HWH and management shareholders were reissued surviving
corporation shares of NBC Class A Common Stock.
(iii)The Company obtained approximately $170.0 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)NBC obtained approximately $45.0 million in debt financing through the
issuance of Senior Discount Debentures.
(v) The Company paid a dividend of approximately $72.7 million to NBC to be
utilized in the repurchase of NBC Common Stock and accrued approximately
$2.6 million for additional costs of the Recapitalization.
(vi)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, NBC agreed to
purchase all outstanding warrants for approximately $16.7 million.
(vii) NBC reacquired its outstanding shares of Class A and Class B Common
Stock of certain shareholders for approximately $149.2 million. NBC
accounted for this reacquisition of shares as a treasury stock
transaction, and such reacquired shares were retired. As the new
investor did not acquire substantially all of the common stock of NBC, a
new basis of accounting was not established in connection with the
Recapitalization.
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
Recapitalization. NBC charged approximately $600,000 of such costs to
additional paid-in capital as non-deductible costs of the Recapitalization.
The Company recorded the remaining $3.5 million as debt issue costs and is
amortizing such costs over the life of the related debt.
3. 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
========================================================================
6
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4. 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 $110,000,000 face amount of 8.75% Senior Subordinated Notes due 2008.
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 Subordinated Notes and NBC's Senior Discount Debentures.
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.
5. New Accounting Pronouncement - In June 1997, the Financial Accounting
Standards Board adopted Statement of Financial Accounting Standard (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.
6. Stock Based Compensation - On June 30, 1998, NBC'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 NBC's Class A Common Stock to selected members of senior
management of NBC and its affiliates. All options granted are intended to
be nonqualified stock options, although the Plan also provides for
incentive stock options. NBC 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, NBC'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 NBC's Class A
Common Stock to selected employees, officers, and directors of NBC and its
affiliates. All options granted are intended to be nonqualified stock
options, although the Option Plan also provides for incentive stock
options. NBC 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 NBC's Class A Common Stock were
granted at an exercise price of $52.47 per share.
7
<PAGE>
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.
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 $1.8 million, or 66.5%, to $4.5 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.
8
<PAGE>
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.
Interest expense, net. Interest expense, net for the six months ended September
30, 1998 increased by $3.6 million, or 68.4%, to $9.0 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 41.9% 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
9
<PAGE>
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 $170.3 million,
consisting of $59.7 million in Term Loans, $110.0 million of the Senior
Subordinated Notes, 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, the Company 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 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 spend approximately $2.0 million on 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, the Company may
pay dividends to NBC (i) after August 15, 2003 in an amount not to exceed the
amount of interest required to be paid on NBC's Senior Discount Debentures and
(ii) to pay corporate overhead expenses not to exceed $250,000 per year and
any taxes due by NBC. The Indenture governing the Senior Subordinated Notes
(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 Company's
consolidated net income. Such restrictions are not expected to impact 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
10
<PAGE>
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.
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-
11
<PAGE>
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. 333-48221), 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.
NEBRASKA BOOK COMPANY, INC.
/s/ Mark W. Oppegard
------------------------------
Mark W. Oppegard
Chief Executive Officer
/s/ Bruce E. Nevius
------------------------------
Bruce E. Nevius
Chief Financial Officer and Treasurer
13
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<NAME> NEBRASKA BOOK COMPANY, INC.
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<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
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<RECEIVABLES> 34,464,280
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<TOTAL-LIABILITY-AND-EQUITY> 162,322,228
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