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, 2000
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 (Zip Code)
executive offices)
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
OCTOBER 30, 2000: 100 SHARES
TOTAL NUMBER OF PAGES: 15
EXHIBIT INDEX: PAGE 15
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEBRASKA BOOK COMPANY, INC.
<TABLE>
<CAPTION>
BALANCE SHEETS
(UNAUDITED)
---------------------------------------------------------------------------------------------------
September 30, March 31, September 30,
2000 2000 1999
-------------- ------------- --------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 27,895,200 $ 4,450,887 $ 22,588,568
Receivables 38,966,264 24,248,183 33,134,286
Inventories 59,754,056 61,809,630 53,341,309
Deferred income taxes 1,598,793 1,598,793 1,491,693
Prepaid expenses and other assets 360,537 427,302 273,258
------------ ------------- -------------
Total current assets 128,574,850 92,534,795 110,829,114
PROPERTY AND EQUIPMENT 37,600,135 36,558,620 34,242,974
Less accumulated depreciation (12,237,831) (10,797,795) (9,183,529)
------------ ------------- -------------
25,362,304 25,760,825 25,059,445
GOODWILL AND OTHER INTANGIBLES, net of amortization 39,072,340 43,183,145 40,935,484
OTHER ASSETS 4,961,830 4,676,047 4,064,919
------------ ------------- -------------
$197,971,324 $ 166,154,812 $ 180,888,962
============ ============= =============
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 37,956,253 $ 16,145,566 $ 29,756,939
Accrued employee compensation and benefits 4,607,651 6,301,111 3,926,125
Accrued interest 1,937,293 1,349,224 1,345,438
Accrued expenses 600,425 819,010 754,046
Income tax payable 4,826,002 553,893 3,249,301
Deferred revenue 452,374 552,251 308,896
Current maturities of long-term debt 5,026,108 4,456,324 3,674,093
Current maturities of capital lease obligations 28,995 59,181 104,744
------------ ------------- -------------
Total current liabilities 55,435,101 30,236,560 43,119,582
LONG-TERM DEBT, net of current maturities 159,611,396 161,721,590 164,637,504
CAPITAL LEASE OBLIGATIONS, net of current maturities 38,202 64,856 164,338
OTHER LONG-TERM LIABILITIES 220,052 202,231 212,239
DUE TO PARENT 5,671,631 4,606,191 3,379,893
STOCKHOLDER'S DEFICIT:
Common stock, voting, authorized 50,000 shares of
$1.00 par value; issued and outstanding 100 shares 100 100 100
Additional paid-in capital 46,526,502 45,884,463 41,257,722
Accumulated deficit (69,531,660) (76,561,179) (71,882,416)
------------ ------------- -------------
Total stockholder's deficit (23,005,058) (30,676,616) (30,624,594)
------------ ------------- -------------
$197,971,324 $ 166,154,812 $ 180,888,962
============ ============= =============
</TABLE>
See notes to financial statements.
2
<PAGE>
NEBRASKA BOOK COMPANY, INC.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
(UNAUDITED)
---------------------------------------------------------------------------------------------------------
Three Months Ended September 30, Six Months Ended September 30,
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES, net of returns $ 129,214,540 $ 111,501,930 $ 168,991,717 $ 143,801,821
COSTS OF SALES 81,483,590 69,385,832 106,079,449 88,962,938
-------------- -------------- -------------- --------------
Gross profit 47,730,950 42,116,098 62,912,268 54,838,883
OPERATING EXPENSES:
Selling, general and administrative 19,056,358 16,633,049 35,142,992 29,610,496
Depreciation 791,675 620,142 1,324,727 1,206,127
Amortization 2,670,647 2,106,785 5,416,437 3,694,542
-------------- -------------- -------------- --------------
22,518,680 19,359,976 41,884,156 34,511,165
-------------- -------------- -------------- --------------
INCOME FROM OPERATIONS 25,212,270 22,756,122 21,028,112 20,327,718
OTHER EXPENSES (INCOME):
Interest expense 4,643,300 4,524,359 9,263,181 9,019,845
Interest income (146,879) (79,155) (168,541) (99,535)
Other income (486,216) (289,681) (977,934) (530,972)
-------------- -------------- -------------- --------------
4,010,205 4,155,523 8,116,706 8,389,338
-------------- -------------- -------------- --------------
INCOME BEFORE INCOME TAXES 21,202,065 18,600,599 12,911,406 11,938,380
INCOME TAX EXPENSE 8,576,025 7,546,648 5,881,887 5,368,901
-------------- -------------- -------------- --------------
NET INCOME $ 12,626,040 $ 11,053,951 $ 7,029,519 $ 6,569,479
============== ============== ============== ==============
</TABLE>
See notes to financial statements.
3
<PAGE>
NEBRASKA BOOK COMPANY, INC.
<TABLE>
<CAPTION>
STATEMENTS OF STOCKHOLDER'S DEFICIT
(UNAUDITED)
---------------------------------------------------------------------------------------
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
-------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
BALANCE, April 1, 1999 $ 100 $ 30,904,931 $ (78,451,895) $ (47,546,864)
Contributed capital - 10,352,791 - 10,352,791
Net income - - 6,569,479 6,569,479
-------- ------------- -------------- -------------
BALANCE, September 30, 1999 $ 100 $ 41,257,722 $ (71,882,416) $ (30,624,594)
======== ============= ============== =============
BALANCE, April 1, 2000 $ 100 $ 45,884,463 $ (76,561,179) $ (30,676,616)
Contributed capital - 642,039 - 642,039
Net income - - 7,029,519 7,029,519
-------- ------------- -------------- -------------
BALANCE, September 30, 2000 $ 100 $ 46,526,502 $ (69,531,660) $ (23,005,058)
======== ============= ============== =============
</TABLE>
See notes to financial statements.
4
<PAGE>
NEBRASKA BOOK COMPANY, INC.
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
(UNAUDITED)
-----------------------------------------------------------------------------------------
Six Months Ended September 30,
2000 1999
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,029,519 $ 6,569,479
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation 1,324,727 1,206,127
Amortization of intangibles 6,100,611 4,382,551
Loss on disposal of assets 13,464 9,860
Changes in operating assets and liabilities,
net of effect of acquisitions:
Receivables (14,718,081) (12,163,698)
Inventories 2,262,232 1,465,312
Recoverable income tax - 319,630
Prepaid expenses and other assets 66,765 238,098
Other assets (256,509) 553,107
Accounts payable 21,810,687 19,529,994
Accrued employee compensation and benefits (1,693,460) (143,525)
Accrued interest 588,069 (81,071)
Accrued expenses (218,585) 72,321
Income taxes payable 4,272,109 3,248,336
Deferred revenue (99,877) (67,660)
Other long-term liabilities 17,821 21,165
Due to parent 1,065,440 1,102,627
------------ ------------
Net cash flows from operating activities 27,564,932 26,262,653
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (959,408) (1,119,433)
Bookstore acquisitions, net of cash acquired (2,113,387) (15,852,506)
Proceeds from sale of property and equipment and other 122,289 52,969
Software development costs (214,902) (156,992)
------------- -------------
Net cash flows from investing activities (3,165,408) (17,075,962)
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs - (32,478)
Principal payments on long-term debt (1,540,410) (945,730)
Principal payments on capital lease obligations (56,840) (32,366)
Capital contribution 642,039 10,352,791
------------- -------------
Net cash flows from financing activities (955,211) 9,342,217
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 23,444,313 18,528,908
CASH AND CASH EQUIVALENTS, Beginning of period 4,450,887 4,059,660
------------- -------------
CASH AND CASH EQUIVALENTS, End of period $27,895,200 $22,588,568
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest $ 7,990,938 $ 8,412,907
Income taxes 544,338 $ 706,483
</TABLE>
See notes to financial statements.
5
<PAGE>
NEBRASKA BOOK COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------------------------------------------
1. MANAGEMENT REPRESENTATIONS - The balance sheet of Nebraska Book Company,
Inc. (the "Company") at March 31, 2000 was obtained from the Company's
audited balance sheet as of that date. All other financial statements
contained herein are unaudited and reflect all adjustments which are, in the
opinion of management, necessary to summarize fairly the financial position
of 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, 2000
included in the Company's Annual Report on Form 10-K.
2. INVENTORIES - Inventories are summarized as follows:
September 30, March 31, September 30,
2000 2000 1999
-------------------------------------------------------------------
Wholesale $17,572,525 $25,413,484 $18,763,400
College bookstores 37,888,638 31,137,643 31,323,686
Complementary services 4,292,893 5,258,503 3,254,223
-------------------------------------------------------------------
$59,754,056 $61,809,630 $53,341,309
===================================================================
3. LONG-TERM DEBT - The Company's indebtedness includes a bank-administered
senior credit facility (the "Senior Credit Facility") provided through a
syndicate of lenders. The facility is comprised of a $27.5 million term loan
(the "Tranche A Loan"), a $32.5 million term loan (the "Tranche B Loan") and
a $50.0 million revolving credit facility (the "Revolving Credit Facility").
The Revolving Credit Facility, which was unused at September 30, 2000 and
1999, expires on March 31, 2004. Availability under the Revolving Credit
Facility is determined by the calculation of a borrowing base that at any
time is equal to a percentage of eligible accounts receivable and inventory,
up to a maximum of $50.0 million. The borrowing base at September 30, 2000
was $50.0 million. The interest rate on the Senior Credit Facility is prime
plus an applicable margin of up to 1.50% or, on Eurodollar borrowings, the
Eurodollar rate plus an applicable margin of up to 2.50%. The Senior Credit
Facility requires excess cash flows as defined in the credit agreement dated
February 13, 1998 (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. There was no excess cash
flow payment obligation for fiscal 2000. Additional indebtedness includes
$110.0 million face amount of 8.75% senior subordinated notes due 2008 (the
"Senior Subordinated Notes").
4. SEGMENT INFORMATION - The Company's operating segments are determined based
on the way that management organizes the segments for making operating
decisions and assessing performance. Management has organized the Company's
segments based upon differences in products and services provided. The
Company has three reportable segments: wholesale operations, college
bookstore operations and complementary services. The wholesale operations
segment consists primarily of selling used textbooks to college bookstores,
buying them back from students or college bookstores at the end of each
college semester and then reselling them to college bookstores. The college
bookstore operations segment encompasses the operating activities of the
Company's 100 college bookstores located on or adjacent to college campuses.
The complementary services segment includes book-related services such as a
centralized buying service, distance education materials, and computer
hardware and software.
6
<PAGE>
The Company primarily accounts for intersegment sales as if the sales were
to third parties (at current market prices). Assets (excluding cash and cash
equivalents, certain receivables and other assets, and inventories), net
interest expense and taxes are not allocated between the Company's segments;
instead, such balances are accounted for in a corporate administrative
division. The following table provides selected information about profit or
loss on a segment basis for the quarters and six months ended September 30,
2000 and 1999:
<TABLE>
<CAPTION>
College
Wholesale Bookstore Complementary
Operations Operations Services Total
-------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Quarter ended September 30, 2000:
External customer revenues $ 39,910,152 $ 83,122,810 $ 6,181,578 $ 129,214,540
Intersegment revenues 8,953,818 191,182 348,126 9,493,126
Depreciation and amortization expense 73,719 2,419,558 368,655 2,861,932
Income (loss) before interest and taxes 16,644,271 10,280,874 (265,828) 26,659,317
Quarter ended September 30, 1999:
External customer revenues $ 38,773,891 $ 68,204,799 $ 4,523,240 $ 111,501,930
Intersegment revenues 8,000,713 70,853 580,872 8,652,438
Depreciation and amortization expense 71,880 1,601,522 526,426 2,199,828
Income (loss) before interest and taxes 15,526,024 8,978,045 (579,516) 23,924,553
Six months ended September 30, 2000:
External customer revenues $ 57,512,794 $100,308,880 $11,170,043 $ 168,991,717
Intersegment revenues 15,120,981 239,606 799,018 16,159,605
Depreciation and amortization expense 148,182 4,814,806 819,621 5,782,609
Income (loss) before interest and taxes 21,372,665 5,643,223 (631,995) 26,383,893
Six months ended September 30, 1999:
External customer revenues $ 55,177,974 $ 81,260,086 $ 7,363,761 $ 143,801,821
Intersegment revenues 12,888,326 70,853 866,921 13,826,100
Depreciation and amortization expense 142,457 2,660,320 988,622 3,791,399
Income (loss) before interest and taxes 19,849,891 5,933,611 (1,159,900) 24,623,602
</TABLE>
The following table reconciles segment information presented above with
information as presented in the financial statements for the quarters and
six months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Quarter Ended September 30, Six Months Ended September 30,
2000 1999 2000 1999
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Total for reportable segments $ 138,707,666 $120,154,368 $185,151,322 $157,627,921
Elimination of intersegment revenues (9,493,126) (8,652,438) (16,159,605) (13,826,100)
------------- ------------- -------------- --------------
Financial statement total $ 129,214,540 $111,501,930 $168,991,717 $143,801,821
============= ============= ============== ==============
Depreciation and Amortization Expense:
Total for reportable segments $ 2,861,932 $ 2,199,828 $ 5,782,609 $ 3,791,399
Corporate administration 600,390 527,099 958,555 1,109,270
------------- ------------- -------------- --------------
Financial statement total $ 3,462,322 $ 2,726,927 $ 6,741,164 $ 4,900,669
============= ============= ============== ==============
Income Before Interest and Taxes:
Total for reportable segments $ 26,659,317 $ 23,924,553 $ 26,383,893 $ 24,623,602
Corporate administrative costs (960,831) (878,750) (4,377,847) (3,764,912)
------------- ------------- -------------- --------------
Income before interest and taxes 25,698,486 23,045,803 22,006,046 20,858,690
Interest expense, net (4,496,421) (4,445,204) (9,094,640) (8,920,310)
------------- ------------- -------------- --------------
Income before income taxes $ 21,202,065 $ 18,600,599 $ 12,911,406 $ 11,938,380
============= ============= ============== ==============
</TABLE>
The Company's revenues are attributed to countries based on the location of
the customer. Substantially all revenues generated are attributable to
customers located within the United States.
5. NEW ACCOUNTING STANDARDS - In July 2000, the Emerging Issues Task Force
completed discussion on Issue No. 00-10, Accounting for Shipping and
Handling Fees and Costs, which provides guidance on the classification of
amounts billed to a customer for shipping and handling in the statement of
operations. Such guidance becomes effective for the Company, and will be
adopted by the Company, in the fourth quarter of fiscal 2001. The impact on
the Company's results of operations has not yet been determined; however,
implementation is not expected to change the Company's net income for any
period presented.
7
<PAGE>
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, REVENUE
RECOGNITION, which provides guidance and interpretations on the recognition,
presentation, and disclosure of revenue in financial statements filed with
the SEC. Subsequently, Staff Accounting Bulletin No. 101B was issued
delaying the implementation date of Staff Accounting Bulletin No. 101. As a
result, Staff Accounting Bulletin No. 101 becomes effective for the Company,
and will be adopted by the Company, in the fourth quarter of fiscal 2001.
The impact on the Company's financial position and results of operations is
not expected to be material.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities. The Statement becomes effective, and will be adopted
by the Company, in the first quarter of fiscal 2002. The impact on the
Company's financial position and results of operations is not expected to be
material.
6. RELATED PARTY TRANSACTIONS - During the first quarter of fiscal 2001, the
Company entered into several agreements related to its WebPRISM and
CampusHub E-commerce software capabilities with a newly created entity,
TheCampusHub.com, Inc., which is partially owned by NBC's majority owner.
Such agreements included an equity option agreement providing the Company
the opportunity to acquire 25% of the initial common shares outstanding of
TheCampusHub.com, Inc.; a management services agreement effective for a
period of three years that reimburses the Company for certain direct costs
incurred on behalf of TheCampusHub.com, Inc. and also pays the Company
$500,000 per year for certain shared management and administrative support
and space; and a technology sale and license agreement that provides for the
Company to license its E-commerce software capabilities to TheCampusHub.com,
Inc. for $500,000 per year over a period of three years and provides
TheCampusHub.com, Inc. with an option to purchase such software capabilities
from the Company during that three year period. The Company's Senior Credit
Facility was amended in April, 2000 to provide for these transactions. For
the quarter and six months ended September 30, 2000, revenues attributable
to the management services and technology sale and license agreements
totaled $0.2 million and $0.4 million, respectively, and reimbursable direct
costs incurred on behalf of TheCampusHub.com, Inc. totaled $0.2 million and
$0.3 million, respectively.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 1999.
REVENUES. Revenues for the quarters ended September 30, 2000 and 1999 and the
corresponding increase (decrease) in revenues were as follows:
Increase (Decrease)
----------------------
2000 1999 Amount Percentage
------------- ------------- ----------- ----------
Wholesale operations $ 48,863,970 $ 46,774,604 $ 2,089,366 4.5%
College bookstore operations 83,313,992 68,275,652 15,038,340 22.0%
Complementary services 6,529,704 5,104,112 1,425,592 27.9%
Intercompany eliminations (9,493,126) (8,652,438) (840,688) 9.7%
------------- ------------- ------------ ---------
$129,214,540 $111,501,930 $17,712,610 15.9%
============= ============= ============ =========
The increase in wholesale revenues for the quarter ended September 30, 2000 was
due primarily to publisher price increases. The increase in college bookstore
revenues was attributable to the net addition of 13 new college bookstores
either through acquisition or startup since July 1, 1999. Of the $15.0 million
increase in college bookstore revenues, $11.9 million was attributable to new
college bookstores with the remainder accounted for by a 5.8% increase in same
store revenues. Revenues from complementary services increased primarily due to
growth in the Company's distance education program. Such growth was partially
offset by a decrease in revenues from the Company's system sales and support
programs. 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, 2000 increased
$5.6 million, or 13.3%, to $47.7 million from $42.1 million for the quarter
ended September 30, 1999. This increase was primarily due to higher revenues,
partially offset by a decrease in gross margin percent. Gross margin for the
quarter ended September 30, 2000 decreased to 36.9% from 37.8% for the quarter
ended September 30, 1999, primarily due to revenue mix. Lower-margin revenues
from college bookstore operations and complementary services comprised 64.8% of
total revenues for the quarter ended September 30, 2000 as compared to 61.1% for
the quarter ended September 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the quarter ended September 30, 2000 increased $2.5
million, or 14.6%, to $19.1 million from $16.6 million for the quarter ended
September 30, 1999. Selling, general and administrative expenses as a percentage
of revenues were 14.7% and 14.9% for the quarters ended September 30, 2000 and
1999, respectively. Approximately $1.4 million of the increase in expenses
resulted from the expected higher expense base associated with the Company's
expansion of its operations through bookstore acquisitions and startups. The
Company has also experienced increased expenses in its distance education
program as a result of the revenue growth previously discussed.
AMORTIZATION EXPENSE. Amortization expense for the quarter ended September 30,
2000 increased $0.6 million, or 26.8%, to $2.7 million from $2.1 million for the
quarter ended September 30, 1999. This increase was primarily the result of
additional amortization of goodwill related to recent acquisitions.
9
<PAGE>
INCOME (LOSS) BEFORE INTEREST AND TAXES. Income (loss) before interest and taxes
for the quarters ended September 30, 2000 and 1999 and the corresponding
increase (decrease) in income (loss) before interest and taxes were as follows:
Increase (Decrease)
-----------------------
2000 1999 Amount Percentage
------------ ----------- ------------ ----------
Wholesale operations $ 16,644,271 $ 15,526,024 $ 1,118,247 7.2 %
College bookstore operations 10,280,874 8,978,045 1,302,829 14.5 %
Complementary services (265,828) (579,516) 313,688 54.1 %
Corporate administration (960,831) (878,750) (82,081) (9.3)%
------------ ----------- ---------- ---------
$ 25,698,486 $ 23,045,803 $ 2,652,683 11.5 %
============ =========== ========== =========
The increase in wholesale income before interest and taxes was due primarily to
increased revenues. The income before interest and taxes for college bookstore
operations increased primarily as a result of the Company's expansion of its
operations through bookstore acquisitions and startups. The improvement in the
complementary service loss before interest and taxes was due primarily to
increased revenues.
INCOME TAXES. The Company's effective tax rate for the quarter ended September
30, 2000 was 40.4% as compared to 40.6% for the quarter ended September 30,
1999. The Company's effective tax rate exceeds the statutory tax rate primarily
as a result of state income taxes and non-deductible amortization of goodwill
associated with recent acquisitions.
SIX MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH SIX MONTHS ENDED SEPTEMBER 30,
1999.
REVENUES. Revenues for the six months ended September 30, 2000 and 1999 and the
corresponding increase (decrease) in revenues were as follows:
Increase (Decrease)
-----------------------
2000 1999 Amount Percentage
------------- -------------- ------------ ----------
Wholesale operations $ 72,633,775 $ 68,066,300 $ 4,567,475 6.7%
College bookstore operations 100,548,486 81,330,939 19,217,547 23.6%
Complementary services 11,969,061 8,230,682 3,738,379 45.4%
Intercompany eliminations (16,159,605) (13,826,100) (2,333,505) 16.9%
------------- -------------- ------------ ---------
$168,991,717 $143,801,821 $25,189,896 17.5%
============= ============== ============ =========
The increase in wholesale revenues for the six months ended September 30, 2000
was due primarily to publisher price increases. The increase in college
bookstore revenues was attributable to the net addition of 35 new college
bookstores either through acquisition or startup since April 1, 1999. Of the
$19.2 million increase in college bookstore revenues, $15.9 million was
attributable to new college bookstores with the remainder accounted for by a
5.2% increase in same store revenues. Complementary service revenues increased
primarily due to growth in the Company's distance education program. Such growth
was partially offset by a decrease in revenues from the Company's system sales
and support programs. 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, 2000 increased
$8.1 million, or 14.7%, to $62.9 million from $54.8 million for the six months
ended September 30, 1999. This increase was primarily due to higher revenues,
partially offset by a decrease in gross margin percent. Gross margin for the six
months ended September 30, 2000 decreased to 37.2% from 38.1% for the six months
ended September 30, 1999, primarily due to revenue mix. Lower-margin revenues
from college bookstore operations and complementary services comprised 60.8% of
total revenues for the six months ended September 30, 2000 as compared to 56.8%
for the six months ended September 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the six months ended September 30, 2000 increased
$5.5 million, or 18.7%, to $35.1 million from $29.6 million for the six months
ended September 30, 1999. Selling, general and administrative expenses as a
percentage of revenues were 20.8% and 20.6% for the six months ended September
30, 2000 and 1999, respectively. Approximately $3.4 million of the increase in
expenses resulted from the expected higher expense base associated with the
Company's expansion of its operations through bookstore acquisitions and
startups. Additionally, the Company has experienced increased expenses in its
distance education program as a result of the revenue growth previously
10
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discussed. Finally, the Company has incurred higher corporate-level expenses,
primarily due to additional personnel and other costs designed to help manage
its continued growth.
AMORTIZATION EXPENSE. Amortization expense for the six months ended September
30, 2000, increased $1.7 million, or 46.6%, to $5.4 million from $3.7 million
for the six months ended September 30, 1999. This increase was primarily the
result of additional amortization of goodwill related to recent acquisitions.
INCOME (LOSS) BEFORE INTEREST AND TAXES. Income (loss) before interest and taxes
for the six months ended September 30, 2000 and 1999 and the corresponding
increase (decrease) in income (loss) before interest and taxes were as follows:
Increase (Decrease)
----------------------
2000 1999 Amount Percentage
------------- ------------ ------------ ----------
Wholesale operations $21,372,665 $19,849,891 $ 1,522,774 7.7 %
College bookstore operations 5,643,223 5,933,611 (290,388) (4.9)%
Complementary services (631,995) (1,159,900) 527,905 45.5 %
Corporate administration (4,377,847) (3,764,912) (612,935) (16.3)%
------------- ------------ ------------- --------
$22,006,046 $20,858,690 $ 1,147,356 5.5 %
============= ============ ============= ========
The increase in wholesale income before interest and taxes was due primarily to
increased revenues. The income before interest and taxes for college bookstore
operations decreased slightly, despite increased revenues and stable gross
margins, primarily as a result of additional amortization of goodwill related to
recent acquisitions. The improvement in the complementary service loss before
interest and taxes was due primarily to increased revenues. As described above,
corporate administrative costs have increased primarily as a result of costs
incurred to help manage the Company's growth.
INCOME TAXES. The Company's effective tax rate for the six months ended
September 30, 2000 was 45.6% as compared to 45.0% for the six months ended
September 30, 1999. The Company's effective tax rate exceeds the statutory tax
rate primarily as a result of state income taxes and non-deductible amortization
of goodwill associated with recent 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, for capital expenditures and for certain
acquisitions. The Company has historically funded these requirements primarily
through internally generated cash flow and funds borrowed under the Company's
Revolving Credit Facility. At September 30, 2000, the Company's total
indebtedness was approximately $164.7 million, consisting of $54.1 million in
Term Loans, $110.0 million of Senior Subordinated Notes, and $0.6 million of
other indebtedness, including capital lease obligations.
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 scheduled to make
principal payments totaling approximately $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. Such
scheduled principal payments are subject to change upon the annual payment and
application of excess cash flows (as defined in the Credit Agreement underlying
the Senior Credit Facility) towards Tranche A and B Loan principal balances.
There was no excess cash flow payment obligation for fiscal 2000. 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 $1.0 million and $1.1 million for the
six months ended September 30, 2000 and 1999, respectively. Capital expenditures
consist primarily of leasehold improvements and furnishings for new bookstores,
bookstore renovations, computer upgrades and miscellaneous warehouse
improvements. The Company's ability to make capital expenditures is subject to
certain restrictions under the Senior Credit Facility.
Business acquisition expenditures were $2.1 million and $15.9 million for the
six months ended September 30, 2000 and 1999, respectively. The fiscal 2000
expenditures include primarily the acquisition of Triro, Inc. for $15.0 million,
net of cash acquired. Approximately $10.3 million of capital raised by NBC
through the issuance of 197,001 shares of NBC's Class A Common Stock to NBC's
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majority owner and members of senior management was contributed to the Company
to assist in financing the acquisition of Triro, Inc. Future acquisitions, if
any, may require additional capital contributions.
During the first quarter of fiscal 2001, the Company entered into several
agreements related to its WebPRISM and CampusHub E-commerce software
capabilities with a newly created entity, TheCampusHub.com, Inc., which is
partially owned by NBC's majority owner. Such agreements included an equity
option agreement providing the Company the opportunity to acquire 25% of the
initial common shares outstanding of TheCampusHub.com, Inc.; a management
services agreement effective for a period of three years that reimburses the
Company for certain direct costs incurred on behalf of TheCampusHub.com, Inc.
and for certain shared management and administrative support and space; and a
technology sale and license agreement that provides for the Company to license
its E-commerce software capabilities to TheCampusHub.com, Inc. over a period of
three years and provides TheCampusHub.com, Inc. with an option to purchase such
software capabilities from the Company during that three year period. The
Company's Senior Credit Facility was amended in April, 2000 to provide for these
transactions.
The Company's principal sources of cash to fund its future liquidity needs will
be cash from operating activities and borrowings under the Revolving Credit
Facility. Usage of the Revolving Credit Facility to meet the Company's liquidity
needs fluctuates throughout the year due to the Company's distinct buying and
selling periods, increasing substantially at the end of each college semester
(May and December). Net cash flows from operating activities for the six months
ended September 30, 2000 were $27.6 million, an increase of $1.3 million from
$26.3 million for the six months ended September 30, 1999. This increase was
primarily due to the combination of increased revenues and relatively stable
profit margins.
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, up
to a maximum of $50.0 million. 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 owed 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 affect the
Company's ability to meet its cash obligations for the foreseeable future.
As of September 30, 2000, the Company could borrow up to $50.0 million under the
Revolving Credit Facility. The Revolving Credit Facility was unused at September
30, 2000. 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 under the Senior Credit
Facility.
The Company believes that funds generated from operations, existing cash, and
borrowings under the Revolving Credit Facility will be sufficient to finance its
current operations, planned capital expenditures and internal growth for the
foreseeable future. Future acquisitions, if any, may require additional debt or
capital contributions.
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 college semester in August and December. The buying periods for the
wholesale operations occur at the end of each college semester in late December
and May. The primary selling periods for the bookstore operations are in
September and January. In fiscal 2000, approximately 42% of the Company's annual
revenues were earned in the second fiscal quarter (July-September), while
approximately 30% of the Company's annual revenues were earned in the fourth
fiscal quarter (January-March). Accordingly, the Company's working capital
requirements fluctuate throughout the year, increasing substantially at the end
of each college 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.
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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 not been material. However,
there can be no assurance that during a period of significant inflation, the
Company's results of operations will not be adversely affected.
"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," "expects," "anticipates," or the negation thereof, or similar
expressions, which constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). All
statements which address operating performance, events or developments that are
expected or anticipated to occur in the future, including statements relating to
volume and revenue growth, earnings per share 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
to raise 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; the impact of the
internet and E-books on the Company's operations; and other risks detailed in
the Company's Securities and Exchange Commission filings, in particular the
Company's Registration Statement on Form S-4 (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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk exposure is, and is expected to continue to
be, fluctuation in Eurodollar interest rates. Of the $164.7 million in long-term
debt and capital lease obligations outstanding at September 30, 2000,
approximately $54.1 million is subject to fluctuations in the Eurodollar rate.
As provided in the Company's Senior Credit Facility, exposure to interest rate
fluctuations is managed by maintaining fixed interest rate debt (primarily the
Senior Subordinated Notes) and by entering into interest rate swap agreements to
effectively convert certain variable rate debt into fixed rate debt. The Company
has 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 rate of 5.815% plus
an applicable margin (as defined in the Credit Agreement). The notional amount
under each agreement as of September 30, 2000 was approximately $27.05 million.
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.
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Certain quantitative market risk disclosures have changed significantly since
March 31, 2000 as a result of market fluctuations, movement in interest rates,
and principal payments. The following table includes market risk disclosures
that have changed significantly since March 31, 2000 (the weighted average
variable rate is based on implied forward rates in the yield curve as of the
date presented):
September 30, March 31,
2000 2000
------------ ------------
Fair Values:
Fixed rate debt $ 88,151,259 $ 88,223,075
Variable rate debt 54,093,750 55,625,000
Interest rate swaps 907,319 1,735,657
Overall Weighted Average Interest Rates:
Fixed rate debt 8.76% 8.76%
Variable rate debt 9.08% 9.46%
Interest rate swaps receive rate 6.58% 6.96%
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule [EDGAR filing only]
(b) Reports On Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended September 30, 2000.
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
October 30, 2000.
NEBRASKA BOOK COMPANY, INC.
/s/ Mark W. Oppegard
--------------------------------------
Mark W. Oppegard
President, Chief Executive Officer and
Director
/s/ Alan G. Siemek
--------------------------------------
Alan G. Siemek
Treasurer, Chief Financial
Officer and Assistant Secretary
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