UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

NEBRASKA BOOK COMPANY, INC.

(Exact name of registrant as specified in its charter)

KANSAS (State or other jurisdiction of incorporation or organization)		47-0549819 (I.R.S. Employer Identification No.)
4700 South 19th Street Lincoln, Nebraska (Address of principal executive offices)		68501-0529 (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 o No o (NOTE: Nebraska Book Company, Inc. is a voluntary filer and is not subject to the filing requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934. Although not subject to these filing requirements, Nebraska Book Company, Inc. has filed all reports required under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NEBRASKA BOOK COMPANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

		September 30,				March 31,				September 30,
		2010				2010				2009
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	96,280,288			$	60,972,625			$	106,084,513
Receivables, net			102,425,611				57,987,794				85,032,944
Inventories			127,160,424				97,497,689				117,971,555
Recoverable income taxes			—				2,435,287				—
Deferred income taxes			9,892,559				6,247,559				8,602,801
Prepaid expenses and other assets			4,296,306				4,070,281				3,076,539
Total current assets			340,055,188				229,211,235				320,768,352
PROPERTY AND EQUIPMENT, net of depreciation & amortization			41,724,948				42,155,424				43,932,230
GOODWILL			218,356,730				215,571,126				215,571,126
CUSTOMER RELATIONSHIPS, net of amortization			77,032,060				79,902,820				82,773,580
TRADENAME			31,320,000				31,320,000				31,320,000
OTHER IDENTIFIABLE INTANGIBLES, net of amortization			5,869,686				5,295,324				6,874,747
DEBT ISSUE COSTS, net of amortization			6,493,731				9,198,683				5,086,222
OTHER ASSETS			3,742,834				2,850,632				3,178,826
		$	724,595,177			$	615,505,244			$	709,505,083
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable		$	119,323,946			$	26,387,040			$	118,676,798
Accrued employee compensation and benefits			8,042,938				9,401,468				9,526,518
Accrued interest			7,301,050				7,295,709				709,588
Accrued incentives			6,234,731				6,313,933				6,676,762
Accrued expenses			10,771,966				9,051,651				5,593,464
Income taxes payable			9,652,292				—				8,383,744
Deferred revenue			4,056,887				1,299,960				3,783,843
Current maturities of long-term debt			57,393				54,403				51,568
Current maturities of capital lease obligations			770,083				846,053				791,246
Total current liabilities			166,211,286				60,650,217				154,193,531
LONG-TERM DEBT, net of current maturities			374,555,562				374,343,069				361,658,564
CAPITAL LEASE OBLIGATIONS, net of current maturities			2,011,549				2,380,737				2,857,694
OTHER LONG-TERM LIABILITIES			1,994,793				2,278,963				5,819,820
DEFERRED INCOME TAXES			50,464,019				50,467,019				52,667,458
DUE TO PARENT			22,495,711				23,194,711				21,468,189
COMMITMENTS (Note 4)
STOCKHOLDER’S EQUITY:
Common stock, voting, authorized 50,000 shares of $1.00 par value; issued and outstanding 100 shares			100				100				100
Additional paid-in capital			148,254,699				148,197,307				148,155,662
Accumulated deficit			(41,392,542	)			(46,006,879	)			(37,315,935	)
Total stockholder’s equity			106,862,257				102,190,528				110,839,827
		$	724,595,177			$	615,505,244			$	709,505,083

See notes to condensed consolidated financial statements.

NEBRASKA BOOK COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

		Quarter Ended September 30,								Six Months Ended September 30,
		2010				2009				2010				2009
REVENUES, net of returns		$	272,769,345			$	276,716,102			$	345,191,311			$	345,479,975
COSTS OF SALES (exclusive of depreciation shown below)			170,030,172				173,427,401				212,229,549				213,771,085
Gross profit			102,739,173				103,288,701				132,961,762				131,708,890
OPERATING EXPENSES:
Selling, general and administrative			52,538,609				49,547,498				88,010,285				83,202,612
Depreciation			2,154,272				2,039,810				4,252,605				4,093,454
Amortization			2,208,934				2,799,197				4,404,889				5,636,279
			56,901,815				54,386,505				96,667,779				92,932,345
INCOME FROM OPERATIONS			45,837,358				48,902,196				36,293,983				38,776,545
OTHER EXPENSES:
Interest expense			10,629,693				9,665,973				21,276,722				19,382,100
Interest income			(36,991	)			(26,897	)			(84,076	)			(43,697	)
			10,592,702				9,639,076				21,192,646				19,338,403
INCOME BEFORE INCOME TAXES			35,244,656				39,263,120				15,101,337				19,438,142
INCOME TAX EXPENSE			14,470,000				15,391,000				6,252,000				7,620,000
NET INCOME		$	20,774,656			$	23,872,120			$	8,849,337			$	11,818,142

See notes to condensed consolidated financial statements.

NEBRASKA BOOK COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

(UNAUDITED)

						Additional
		Common				Paid-in				Accumulated								Comprehensive
		Stock				Capital				Deficit				Total				Income
BALANCE, April 1, 2009		$	100			$	148,135,923			$	(44,899,077	)		$	103,236,946
Contributed capital			—				(2,401	)			—				(2,401	)		$	—
Share-based compensation attributable to NBC Holdings Corp. stock options			—				22,140				—				22,140				—
Net income			—				—				11,818,142				11,818,142				11,818,142
Dividends declared to parent			—								(4,235,000	)			(4,235,000	)			—
BALANCE, September 30, 2009		$	100			$	148,155,662			$	(37,315,935	)		$	110,839,827			$	11,818,142
BALANCE, April 1, 2010		$	100			$	148,197,307			$	(46,006,879	)		$	102,190,528
Contributed capital			—				(2,361	)			—				(2,361	)		$	—
Share-based compensation attributable to NBC Holdings Corp. stock options			—				59,753				—				59,753				—
Net income			—				—				8,849,337				8,849,337				8,849,337
Dividends declared to parent			—				—				(4,235,000	)			(4,235,000	)			—
BALANCE, September 30, 2010		$	100			$	148,254,699			$	(41,392,542	)		$	106,862,257			$	8,849,337

See notes to condensed consolidated financial statements.

NEBRASKA BOOK COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

		Six Months Ended September 30,
		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	8,849,337			$	11,818,142
Adjustments to reconcile net income to net cash flows from operating activities:
Share-based compensation			429,837				479,741
Provision for losses on receivables			700,976				133,629
Depreciation			4,252,605				4,093,454
Amortization			4,404,889				5,636,279
Amortization of debt issue costs and bond discount			3,013,568				1,991,283
Loss on disposal of assets			53,866				118,143
Deferred income taxes			(3,568,000	)			(3,667,000	)
Changes in operating assets and liabilities, net of effect of acquisitions:
Receivables			(45,095,607	)			(23,867,338	)
Inventories			(26,237,581	)			(23,577,275	)
Recoverable income taxes			2,435,287				2,869,583
Prepaid expenses and other assets			(214,109	)			1,024,335
Other assets			(937,749	)			(522,785	)
Accounts payable			93,061,371				92,042,552
Accrued employee compensation and benefits			(1,358,530	)			(4,253,691	)
Accrued interest			5,341				31,072
Accrued incentives			(79,202	)			566,062
Accrued expenses			1,350,231				1,316,359
Income taxes payable			9,652,292				8,383,744
Deferred revenue			2,756,927				2,824,569
Other long-term liabilities			(72,196	)			(169,631	)
Net cash flows from operating activities			53,403,553				77,271,227
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(3,679,919	)			(2,597,252	)
Acquisitions, net of cash acquired			(8,298,041	)			(2,291,018	)
Proceeds from sale of property and equipment			14,552				75,664
Software development costs			(660,191	)			(261,736	)
Net cash flows from investing activities			(12,623,599	)			(5,074,342	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of financing costs			(66,660	)			(202,383	)
Principal payments on long-term debt			(26,473	)			(6,653,047	)
Principal payments on capital lease obligations			(445,158	)			(398,410	)
Borrowings under revolving credit facility			18,800,000				52,500,000
Payments under revolving credit facility			(18,800,000	)			(52,500,000	)
Dividends paid to parent			(4,235,000	)			(4,235,000	)
Change in due to parent			(699,000	)			1,338,000
Net cash flows from financing activities			(5,472,291	)			(10,150,840	)
NET INCREASE IN CASH AND CASH EQUIVALENTS			35,307,663				62,046,045
CASH AND CASH EQUIVALENTS, Beginning of period			60,972,625				44,038,468
CASH AND CASH EQUIVALENTS, End of period		$	96,280,288			$	106,084,513
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash (received) paid during the period for:
Interest		$	18,257,813			$	17,359,745
Income taxes			(1,568,579	)			(1,304,327	)
Noncash investing and financing activities:
Unpaid consideration associated with bookstore acquisitions			—				450,000

See notes to condensed consolidated financial statements.

NEBRASKA BOOK COMPANY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.

Basis of Presentation — The condensed consolidated balance sheet of Nebraska Book Company, Inc. (the “Company”) and its wholly-owned subsidiaries (Specialty Books, Inc., NBC Textbooks LLC, College Book Stores of America, Inc. (“CBA”), Campus Authentic LLC and Net Textstore LLC), at March 31, 2010 was derived from the Company’s audited consolidated balance sheet as of that date. The Company is a wholly-owned subsidiary of NBC Acquisition Corp. (“NBC”). All other condensed consolidated financial statements contained herein are unaudited and reflect all adjustments which are, in the opinion of management, necessary to present fairly the financial position of the Company and the results of its operations and cash flows for the periods presented. All of these adjustments are of a normal recurring nature. All intercompany balances and transactions are eliminated in consolidation. Because of the seasonal nature of the Company’s operations, results of operations of any single reporting period should not be considered as indicative of results for a full fiscal year.

These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended March 31, 2010 included in the Company’s Annual Report on Form 10-K. A description of our significant accounting policies is included in our 2010 Annual Report on Form 10-K. References in this Quarterly Report on Form 10-Q to the terms “we,” “our,” “ours,” and “us” refer collectively to the Company and its subsidiaries, except where otherwise indicated and except where the context requires otherwise.

In our accompanying September 30, 2009 Condensed Consolidated Statement of Cash Flows we have revised our presentation of proceeds from, and principal payments of, our revolving credit facility to reflect the cash flows in connection with the borrowings and repayments under this revolver. Related amounts had previously been presented on a net basis, rather than in accordance with ASC Topic 230, “Statement of Cash Flows”, on a gross basis. This revision had no impact on the net proceeds from, and principal repayments of, this revolver or on our net cash flows from financing activities.

We have evaluated subsequent events through the filing date of this Form 10-Q.

2.

Inventories — Inventories are summarized as follows:

		September 30,				March 31,				September 30,
		2010				2010				2009
Bookstore Division		$	108,016,445			$	68,765,952			$	97,467,481
Textbook Division			16,005,592				26,132,007				16,905,358
Complementary Services Division			3,138,387				2,599,730				3,598,716
		$	127,160,424			$	97,497,689			$	117,971,555

3.

Goodwill and Other Identifiable Intangibles — During the six months ended September 30, 2010, sixteen bookstore locations were acquired in thirteen separate transactions. The total purchase price, net of cash acquired, of such acquisitions was $7.8 million, of which $2.8 million was assigned to goodwill, $0.5 million was assigned to covenants not to compete with a weighted-average amortization period of 2.7 years, and $0.8 million was assigned to contract-managed relationships with a weighted-average amortization period of five years. The weighted-average amortization period for all covenants not to compete and contract-managed relationships entered into in connection with acquisitions occurring during the six months ended September 30, 2010 was 4.2 years. Costs incurred to renew contract-managed relationships during the six months ended September 30, 2010 were $0.2 million with a weighted-average amortization period of five years before the next renewal of such contracts. As of September 30, 2010, $0.3 million of prior year acquisition costs remained to be paid. During the six months ended September 30, 2010, we paid $0.3 million of previously accrued consideration for bookstore acquisitions and contract-managed relationships occurring in prior periods.

Goodwill assigned to corporate administration represents the goodwill that arose when Weston Presidio gained a controlling interest in NBC on March 4, 2004 (the “March 4, 2004 Transaction”), as all goodwill was assigned to corporate administration. As is the case with a portion of our assets, such goodwill is not allocated between our reportable segments when management makes operating decisions and assesses performance. We have identified the Textbook Division, Bookstore Division and Complementary Services Division as our reporting units. Such goodwill is allocated to our reporting units for purposes of testing goodwill for impairment and calculating any gain or loss on the disposal of all or, where applicable, a portion of a reporting unit.

The changes in the carrying amount of goodwill, in total, by reportable segment and assigned to corporate administration, are as follows:

		Bookstore				Corporate
		Division				Administration				Total
Balance, April 1, 2009		$	53,346,251			$	162,089,875			$	215,436,126
Additions to goodwill:
Bookstore acquisitions			135,000				—				135,000
Balance, September 30, 2009		$	53,481,251			$	162,089,875			$	215,571,126
Balance, April 1, 2010		$	53,481,251			$	162,089,875			$	215,571,126
Additions to goodwill:
Bookstore acquisitions			2,785,604				—				2,785,604
Balance, September 30, 2010		$	56,266,855			$	162,089,875			$	218,356,730

The following table presents the gross carrying amount and accumulated impairment charge of goodwill:

		Gross carrying				Accumulated				Net carrying
		amount				impairment				amount
Balance, April 1, 2009		$	322,408,126			$	(106,972,000	)		$	215,436,126
Additions			135,000				—				135,000
Balance, September 30, 2009		$	322,543,126			$	(106,972,000	)		$	215,571,126
Balance, April 1, 2010		$	322,543,126			$	(106,972,000	)		$	215,571,126
Additions			2,785,604				—				2,785,604
Balance, September 30, 2010		$	325,328,730			$	(106,972,000	)		$	218,356,730

We perform a test for goodwill impairment annually or more frequently if impairment indicators exist. We completed the annual test for goodwill impairment by reporting unit during the fourth quarter for the year ended March 31, 2010 and no goodwill impairment was indicated. Due to the economic downturn and changes in comparable company market multiples, we determined in the first step of the goodwill impairment test conducted at March 31, 2009 that the carrying value of the Textbook and Bookstore Divisions exceeded their fair values, indicating that goodwill may be impaired. Having determined that goodwill may be impaired, we performed the second step of the goodwill impairment test which involves calculating the implied fair value of goodwill by allocating the fair value of the reporting unit to all of its assets and liabilities other than goodwill (including both recognized and unrecognized intangible assets) and comparing the residual amount to the carrying value of goodwill. As a result, we recorded an impairment charge of $107.0 million in fiscal year 2009. The impairment charge reduced our goodwill carrying value to $215.4 million as of March 31, 2009.

Fair value was determined using a market approach based primarily on a multiple of earnings before interest, taxes, depreciation and amortization (“EBITDA”), and was deemed to be the most indicative of the Company’s fair value and was consistent in principle with the methodology used for goodwill evaluation in prior years. The EBITDA multiple approach requires that we estimate a certain valuation multiple of EBITDA derived from comparable companies and apply that multiple to our last twelve-month pro forma EBITDA. This total company fair value is allocated to the reporting units based upon their percentage of EBITDA. The fair value was also calculated using the income approach (discounted cash flow approach) and we concluded that it was supportive of the fair value based upon the EBITDA multiple approach. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions about future economic conditions and comparable company market multiples, among others. If we fail the first step of the goodwill impairment test, we are required, in the second step, to estimate the fair value of reporting unit assets and liabilities, including intangible assets, to derive the fair value of the reporting unit’s goodwill.

The following table presents the gross carrying amount and accumulated amortization of identifiable intangibles subject to amortization, in total and by asset class:

		September 30, 2010
		Gross								Net
		Carrying				Accumulated				Carrying
		Amount				Amortization				Amount
Customer relationships		$	114,830,000			$	(37,797,940	)		$	77,032,060
Developed technology			14,369,980				(12,352,816	)			2,017,164
Covenants not to compete			3,879,300				(2,808,629	)			1,070,671
Contract-managed relationships			5,009,594				(2,227,743	)			2,781,851
Other			1,585,407				(1,585,407	)			—
		$	139,674,281			$	(56,772,535	)		$	82,901,746

		March 31, 2010
		Gross								Net
		Carrying				Accumulated				Carrying
		Amount				Amortization				Amount
Customer relationships		$	114,830,000			$	(34,927,180	)		$	79,902,820
Developed technology			13,709,789				(12,137,672	)			1,572,117
Covenants not to compete			3,416,000				(2,268,172	)			1,147,828
Contract-managed relationships			4,555,740				(2,200,557	)			2,355,183
Other			1,585,407				(1,365,211	)			220,196
		$	138,096,936			$	(52,898,792	)		$	85,198,144

		September 30, 2009
		Gross								Net
		Carrying				Accumulated				Carrying
		Amount				Amortization				Amount
Customer relationships		$	114,830,000			$	(32,056,420	)		$	82,773,580
Developed technology			13,243,373				(11,069,405	)			2,173,968
Covenants not to compete			6,613,699				(4,857,178	)			1,756,521
Contract-managed relationships			4,305,740				(1,845,911	)			2,459,829
Other			1,585,407				(1,100,978	)			484,429
		$	140,578,219			$	(50,929,892	)		$	89,648,327

Information regarding aggregate amortization expense for identifiable intangibles subject to amortization is presented in the following table:

		Amortization
		Expense
Quarter ended September 30, 2010		$	2,208,934
Quarter ended September 30, 2009			2,799,197
Six months ended September 30, 2010			4,404,889
Six months ended September 30, 2009			5,636,279
Estimated amortization expense for the fiscal years ending March 31:
2011		$	8,455,088
2012			7,350,234
2013			6,840,530
2014			6,410,012
2015			6,211,208

Identifiable intangibles not subject to amortization consist solely of the tradename asset arising out of the March 4, 2004 Transaction and total $31,320,000. The tradename was determined to have an indefinite life based on our current intentions. We periodically review the underlying factors relative to this intangible asset. If factors were to change that would indicate the need to assign a definite life to this asset, we would do so and commence amortization.

4.

Long-Term Debt — Indebtedness at September 30, 2010 includes an amended and restated bank-administered credit agreement (the “ABL Credit Agreement”), which provides for a $75.0 million asset-based revolving credit facility (the “ABL Facility”), of which $0.9 million was outstanding under a letter of credit at September 30, 2010; $200.0 million of 10.0% senior secured notes (the “Senior Secured Notes”) issued at a discount of $1.0 million with unamortized bond discount of $0.6 million at September 30, 2010 (effective rate of 10.14%); $175.0 million of 8.625% senior subordinated notes (the “Senior Subordinated Notes”); $0.2 million of other indebtedness; and $2.8 million of capital leases. The ABL Facility is scheduled to expire on the earlier of October 2, 2012 or the date that is 91 days prior to the earliest maturity of the Senior Secured Notes (due December 1, 2011), the Senior Subordinated Notes (due March 15, 2012), NBC’s $77.0 million of 11% senior discount notes (the “Senior Discount Notes”, due March 15, 2013), or any refinancing thereof.

Borrowings under the ABL Facility are subject to the Eurodollar interest rate, not to be less than 1.5%, plus an applicable margin ranging from 4.25% to 4.75% or a base interest rate. The base interest rate is the greater of a) the prime rate, b) the federal funds rate plus 0.5%, or c) the one-month Eurodollar loan rate plus 1.0%, not to be less than 2.5%, plus an applicable margin ranging from 3.25% to 3.75%. In addition, the applicable margin will increase 1.5% during the time periods from April 15 to June 29 and from December 1 to January 29 of each year. The interest rate as of September 30, 2010 was 6.5%. There also is a commitment fee for the ABL Facility ranging from 0.75% to 1.0%. The ABL Facility is secured by a first priority interest in substantially all of our and our subsidiaries’ property and assets, which also secure the Senior Secured Notes on a second priority basis.

The Senior Secured Notes pay cash interest semi-annually and mature on December 1, 2011. The Senior Subordinated Notes pay cash interest semi-annually and mature on March 15, 2012.

The ABL Credit Agreement requires us to maintain certain financial ratios and contains a number of other covenants that among other things, restricts our ability and the ability of certain of our subsidiaries to incur additional indebtedness, dispose of assets, make capital expenditures, investments, acquisitions, loans or advances and pay dividends, except that, among other things, we may pay dividends to NBC (i) in an amount not to exceed the amount of interest required to be paid on the Senior Discount Notes and (ii) to pay corporate overhead expenses not to exceed $250,000 per fiscal year and any taxes we may owe. In addition, under the ABL Facility, if availability, as defined in the ABL Credit Agreement, is less than the greater of 20% of the total revolving credit commitments and $15.0 million, we will be required to maintain a fixed charge coverage ratio of at least 1.10x measured for the last twelve-month period on a pro forma basis in order to maintain access to the funds under the ABL Facility. The calculated borrowing base as of September 30, 2010 was $72.4 million, of which $0.9 million was outstanding under a letter of credit and $71.5 million was unused. At September 30, 2010, our pro forma fixed charge coverage ratio was 1.4x.

The indenture governing the Senior Secured Notes restricts our ability and the ability of certain of our subsidiaries to pay dividends or make certain other payments, subject to certain exceptions, unless certain conditions are met, including (i) no default under the indenture has occurred, (ii) we and certain of our subsidiaries maintain a consolidated coverage ratio of 2.0 to 1.0 on a pro forma basis and (iii) the amount of the dividend or payment may not exceed 50% of aggregate income from January 1, 2004 to the end of the most recent fiscal quarter plus cash proceeds received from the issuance of stock less the aggregate of payments made under this restriction (the “Restricted Payment Calculation”). The indentures governing the Senior Subordinated Notes and NBC’s Senior Discount Notes contain similar restrictions on our ability and the ability of certain of our subsidiaries and the ability of NBC to pay dividends or make certain other payments. In addition, if there is no availability under the Restricted Payment Calculation, but we maintain the 2.0 to 1.0 consolidated coverage ratio on a pro forma basis, we may make dividends to NBC to meet the interest payments on the Senior Discount Notes. If we do not maintain the 2.0 to 1.0 ratio on a pro forma basis, we may still make payments, including dividends to NBC, up to $15.0 million in the aggregate. At September 30, 2010, our pro forma consolidated coverage ratio calculated under the indenture to the Senior Subordinated Notes was 1.7 to 1.0 and the ratio calculated under the indenture to the Senior Secured Notes was 1.9 to 1.0. The pro forma consolidated coverage ratio calculated under the indenture to the Senior Subordinated Notes differs from the ratio calculated under the indenture to the Senior Secured Notes because the indenture to the Senior Subordinated Notes excludes debt issue cost amortization only for debt instruments outstanding at the March 4, 2004 Transaction date from the calculation, whereas the indenture to the Senior Secured Notes excludes the higher debt issue cost amortization for the Senior Secured Notes and the ABL Facility, which were issued in October of 2009, from the same calculation. At September 30, 2010, the amount distributable under the most restrictive indenture was $6.5 million after applying $8.5 million of dividends paid to NBC for the March 15, 2010 and September 15, 2010 interest on NBC’s Senior Discount Notes. Such restrictions are not expected to affect our ability to meet our cash obligations for the remainder of fiscal year 2011.

At September 30, 2010, we were in compliance with all of our debt covenants.

5.

Fair Value Measurements — The Fair Value Measurements and Disclosures Topic of the FASB ASC defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The standard excludes lease classification or measurement (except in certain instances).

A three-level hierarchal disclosure framework that prioritizes and ranks the level of market price observability is used in measuring assets and liabilities at fair value on a recurring basis in the statement of financial position. Market price observability is impacted by a number of factors, including the type of asset or liability and its characteristics. Assets and liabilities with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

The three levels are defined as follows: Level 1 — inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets; Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The Fair Value Measurements and Disclosures Topic of the FASB ASC also applies to disclosures of fair value for all financial instruments disclosed under the Financial Instruments Topic of the FASB ASC. The Financial Instruments Topic requires disclosures about fair value for all financial instruments, whether recognized or not recognized in the statement of financial position. For financial instruments recognized at fair value on a recurring basis in the statement of financial position, the three-level hierarchal disclosure requirements also apply.

Our long-term debt is not measured at estimated fair value on a recurring basis in the statement of financial position so it does not fall under the three-level hierarchal disclosure requirements. The estimated fair value of the Senior Subordinated Notes and the Senior Secured Notes, both of which are at a fixed rate, is determined utilizing the “market approach” based upon quoted prices for these instruments in markets that are not active. Other fixed rate debt (including capital lease obligations) estimated fair values are determined utilizing the “income approach”, calculating a present value of future payments based upon prevailing interest rates for similar obligations.

Estimated fair value for our fixed rate long-term debt at September 30, 2010, March 31, 2010 and September 30, 2009 is summarized in the following table:

		September 30,				March 31,				September 30,
		2010				2010				2009
Carrying Values:
Fixed rate debt		$	377,394,587			$	377,624,262			$	178,911,987
Variable rate debt			—				—				186,447,085
Fair Values:
Fixed rate debt		$	374,293,000			$	372,317,000			$	154,589,000
Variable rate debt			—				—				186,447,085

Our Term Loan, which was at a variable rate, was paid in full on October 2, 2009 upon the issuance of the Senior Secured Notes. At September 30, 2010 and March 31, 2010 we did not have any long-term variable rate debt outstanding.

6.

Segment Information — Our operating segments are determined based on the way that management organizes the segments for making operating decisions and assessing performance. Management has organized our operating segments based upon differences in products and services provided. We have three operating segments: Bookstore Division, Textbook Division, and Complementary Services Division. The Bookstore and Textbook Divisions qualify as reportable operating segments, while separate disclosure of the Complementary Services Division is provided as management believes that information about this operating segment is useful to the readers of our condensed consolidated financial statements. The Bookstore Division segment encompasses the operating activities of our college bookstores located on or adjacent to college campuses. The Textbook Division segment consists primarily of selling used textbooks to college bookstores, buying them back from students or college bookstores at the end of each college semester and then reselling them to college bookstores. The Complementary Services Division segment includes book-related services such as distance education materials, computer hardware and software systems, e-commerce technology, consulting services and a centralized buying service.

We primarily account for intersegment sales as if the sales were to third parties (at current market prices). Certain assets, net interest expense and taxes (excluding interest and taxes incurred by our wholly-owned subsidiaries, NBC Textbooks LLC, Net Textstore LLC, CBA, Campus Authentic LLC, and Specialty Books, Inc.) are not allocated between our segments; instead, such balances are accounted for in a corporate administrative division.

EBITDA is an important measure of segment profit or loss utilized by the Chief Executive Officer and President (chief operating decision makers) in making decisions about resources to be allocated to operating segments and assessing operating segment performance.

The following table provides selected information about profit or loss (excluding the impact of our interdivisional administrative fee — see Note 9, Condensed Consolidating Financial Information, to the condensed consolidated financial statements) on a segment basis:

										Complementary
		Bookstore				Textbook				Services
		Division				Division				Division				Total
Quarter ended September 30, 2010:
External customer revenues		$	220,212,268			$	44,532,578			$	8,024,499			$	272,769,345
Intersegment revenues			53,912				11,428,669				2,089,579				13,572,160
Depreciation and amortization expense			2,275,176				1,520,658				242,671				4,038,505
Earnings before interest, taxes, depreciation and amortization (EBITDA)			32,373,258				19,582,255				895,676				52,851,189
Quarter ended September 30, 2009:
External customer revenues		$	224,345,824			$	44,615,434			$	7,754,844			$	276,716,102
Intersegment revenues			414,912				14,418,899				1,692,840				16,526,651
Depreciation and amortization expense			2,281,091				1,520,206				683,847				4,485,144
Earnings before interest, taxes, depreciation and amortization (EBITDA)			34,108,196				20,711,713				718,220				55,538,129
Six months ended September 30, 2010:
External customer revenues		$	268,141,364			$	62,288,752			$	14,761,195			$	345,191,311
Intersegment revenues			89,664				19,115,070				4,212,975				23,417,709
Depreciation and amortization expense			4,455,492				3,041,456				479,853				7,976,801
Earnings before interest, taxes, depreciation and amortization (EBITDA)			26,521,975				24,361,925				1,769,194				52,653,094
Six months ended September 30, 2009:
External customer revenues		$	269,457,313			$	61,780,298			$	14,242,364			$	345,479,975
Intersegment revenues			757,424				22,738,025				3,178,859				26,674,308
Depreciation and amortization expense			4,630,129				3,040,789				1,360,277				9,031,195
Earnings before interest, taxes, depreciation and amortization (EBITDA)			28,608,052				25,871,073				1,112,945				55,592,070

The following table reconciles segment information presented above with consolidated information as presented in our condensed consolidated financial statements:

		Quarter Ended September 30,								Six Months Ended September 30,
		2010				2009				2010				2009
Revenues:
Total for reportable segments		$	286,341,505			$	293,242,753			$	368,609,020			$	372,154,283
Elimination of intersegment revenues			(13,572,160	)			(16,526,651	)			(23,417,709	)			(26,674,308	)
Consolidated total		$	272,769,345			$	276,716,102			$	345,191,311			$	345,479,975
Depreciation and Amortization Expense:
Total for reportable segments		$	4,038,505			$	4,485,144			$	7,976,801			$	9,031,195
Corporate Administration			324,701				353,863				680,693				698,538
Consolidated total		$	4,363,206			$	4,839,007			$	8,657,494			$	9,729,733
Income Before Income Taxes:
Total EBITDA for reportable segments		$	52,851,189			$	55,538,129			$	52,653,094			$	55,592,070
Corporate Administration EBITDA loss (including interdivision profit elimination)			(2,650,625	)			(1,796,926	)			(7,701,617	)			(7,085,792	)
			50,200,564				53,741,203				44,951,477				48,506,278
Depreciation and amortization			(4,363,206	)			(4,839,007	)			(8,657,494	)			(9,729,733	)
Consolidated income from operations			45,837,358				48,902,196				36,293,983				38,776,545
Interest and other expenses, net			(10,592,702	)			(9,639,076	)			(21,192,646	)			(19,338,403	)
Consolidated income before income taxes		$	35,244,656			$	39,263,120			$	15,101,337			$	19,438,142

Our revenues are attributed to countries based on the location of the customer. Substantially all revenues generated are attributable to customers located within the United States.

7.

Accounting Pronouncements Not Yet Adopted — In October 2009, the FASB issued Accounting Standards Update 2009-13, “Revenue Recognition (Topic 605) — Multiple Deliverable Arrangements” (“Update 2009-13”). Update 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. The update addresses how to separate deliverables and how to measure and allocate arrangement considerations to one or more units of account. Update 2009-13 becomes effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. An entity may elect to adopt the standard on a retrospective basis. We expect to apply this standard on a prospective basis beginning April 1, 2011. Management has determined that the update will not have a material impact on the consolidated financial statements.

In October 2009, the FASB issued Accounting Standards Update 2009-14, “Software (Topic 985) - Certain Revenue Arrangements That Include Software Elements” (“Update 2009-14”). Update 2009-14 clarifies what guidance should be used in allocating and measuring revenue from vendors that sell or lease tangible products in an arrangement that contains software that is more than incidental to the tangible product as a whole. The amendments in this update do not affect software revenue arrangements that do not include tangible products nor do they affect software revenue arrangements that include services if the software is essential to the functionality of those services. Update 2009-14 becomes effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. An entity may elect to adopt the standard on a retrospective basis. We expect to apply this standard on a prospective basis beginning April 1, 2011. Management has determined that the update will not have a material impact on the consolidated financial statements.

8.

Related Party Transactions — In accordance with our debt covenants, we declared and paid $4.2 million in dividends to NBC during the six months ended September 30, 2010 and 2009 to provide funding for interest due and payable on NBC’s Senior Discount Notes.

9.

Condensed Consolidating Financial Information — Effective January 26, 2009, we established Campus Authentic LLC, a wholly-owned subsidiary which was separately formed under the laws of the State of Delaware. On April 24, 2007, we established Net Textstore LLC as a wholly-owned subsidiary separately formed under the laws of the State of Delaware. On May 1, 2006, we acquired all of the outstanding stock of CBA, an entity separately incorporated under the laws of the State of Illinois and now accounted for as one of our wholly-owned subsidiaries. Effective January 1, 2005, our textbook division was separately formed under the laws of the State of Delaware as NBC Textbooks LLC, one of our wholly-owned subsidiaries. Effective July 1, 2002, our distance education business was separately incorporated under the laws of the State of Delaware as Specialty Books, Inc., one of our wholly-owned subsidiaries. Campus Authentic LLC, Net Textstore LLC, CBA, NBC Textbooks LLC, and Specialty Books, Inc. unconditionally guarantee, on a joint and several basis, full and prompt payment and performance of our obligations, liabilities, and indebtedness arising under, out of, or in connection with the Senior Subordinated Notes and the Senior Secured Notes. As of September 30, 2010, our wholly-owned subsidiaries were also a party to the First Lien Amended and Restated Guarantee and Collateral Agreement related to the ABL Credit Agreement. Condensed consolidating balance sheets, statements of operations, and statements of cash flows are presented on the following pages which reflect financial information for the parent company (Nebraska Book Company, Inc.), subsidiary guarantors (Campus Authentic LLC, Net Textstore LLC, CBA, NBC Textbooks LLC, and Specialty Books, Inc.), consolidating eliminations, and consolidated totals.

NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

SEPTEMBER 30, 2010

(UNAUDITED)

		Nebraska
		Book				Subsidiary								Consolidated
		Company, Inc.				Guarantors				Eliminations				Totals
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	89,480,540			$	6,799,748			$	—			$	96,280,288
Intercompany receivables			18,335,142				67,376,469				(85,711,611	)			—
Receivables, net			46,130,683				56,294,928				—				102,425,611
Inventories			84,198,861				42,961,563				—				127,160,424
Deferred income taxes			3,484,559				6,408,000				—				9,892,559
Prepaid expenses and other assets			2,502,787				1,793,519				—				4,296,306
Total current assets			244,132,572				181,634,227				(85,711,611	)			340,055,188
PROPERTY AND EQUIPMENT, net			35,796,371				5,928,577				—				41,724,948
GOODWILL			202,685,622				15,671,108				—				218,356,730
CUSTOMER RELATIONSHIPS, net			4,160,079				72,871,981				—				77,032,060
TRADENAME			31,320,000				—				—				31,320,000
OTHER IDENTIFIABLE INTANGIBLES, net			3,489,738				2,379,948				—				5,869,686
INVESTMENT IN SUBSIDIARIES			185,082,593				—				(185,082,593	)			—
OTHER ASSETS			9,146,870				1,089,695				—				10,236,565
		$	715,813,845			$	279,575,536			$	(270,794,204	)		$	724,595,177
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable		$	86,631,582			$	32,692,364			$	—			$	119,323,946
Intercompany payables			67,376,469				18,335,142				(85,711,611	)			—
Accrued employee compensation and benefits			5,867,637				2,175,301				—				8,042,938
Accrued interest			7,301,050				—				—				7,301,050
Accrued incentives			7,866				6,226,865				—				6,234,731
Accrued expenses			9,028,747				1,743,219				—				10,771,966
Income taxes payable			4,644,325				5,007,967				—				9,652,292
Deferred revenue			4,018,801				38,086				—				4,056,887
Current maturities of long-term debt			57,393				—				—				57,393
Current maturities of capital lease obligations			770,083				—				—				770,083
Total current liabilities			185,703,953				66,218,944				(85,711,611	)			166,211,286
LONG-TERM DEBT, net of current maturities			374,555,562				—				—				374,555,562
CAPITAL LEASE OBLIGATIONS, net of current maturities			2,011,549				—				—				2,011,549
OTHER LONG-TERM LIABILITIES			1,794,793				200,000				—				1,994,793
DEFERRED INCOME TAXES			22,390,020				28,073,999				—				50,464,019
DUE TO PARENT			22,495,711				—				—				22,495,711
COMMITMENTS
STOCKHOLDER’S EQUITY			106,862,257				185,082,593				(185,082,593	)			106,862,257
		$	715,813,845			$	279,575,536			$	(270,794,204	)		$	724,595,177

NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

MARCH 31, 2010

(UNAUDITED)

		Nebraska
		Book				Subsidiary								Consolidated
		Company, Inc.				Guarantors				Eliminations				Totals
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	55,410,821			$	5,561,804			$	—			$	60,972,625
Intercompany receivables			17,716,457				57,770,424				(75,486,881	)			—
Receivables, net			32,613,517				25,374,277				—				57,987,794
Inventories			55,017,307				42,480,382				—				97,497,689
Recoverable income taxes			2,435,287				—				—				2,435,287
Deferred income taxes			1,690,559				4,557,000				—				6,247,559
Prepaid expenses and other assets			3,494,754				575,527				—				4,070,281
Total current assets			168,378,702				136,319,414				(75,486,881	)			229,211,235
PROPERTY AND EQUIPMENT, net			36,815,903				5,339,521				—				42,155,424
GOODWILL			199,900,018				15,671,108				—				215,571,126
CUSTOMER RELATIONSHIPS, net			4,315,113				75,587,707				—				79,902,820
TRADENAME			31,320,000				—				—				31,320,000
OTHER IDENTIFIABLE INTANGIBLES, net			3,455,593				1,839,731				—				5,295,324
INVESTMENT IN SUBSIDIARIES			171,532,241				—				(171,532,241	)			—
OTHER ASSETS			10,892,382				1,156,933				—				12,049,315
		$	626,609,952			$	235,914,414			$	(247,019,122	)		$	615,505,244
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable		$	22,622,816			$	3,764,224			$	—			$	26,387,040
Intercompany payables			57,770,424				17,716,457				(75,486,881	)			—
Accrued employee compensation and benefits			6,921,873				2,479,595				—				9,401,468
Accrued interest			7,295,709				—				—				7,295,709
Accrued incentives			31,148				6,282,785				—				6,313,933
Accrued expenses			8,195,313				856,338				—				9,051,651
Income taxes payable			(3,651,775	)			3,651,775				—				—
Deferred revenue			1,299,960				—				—				1,299,960
Current maturities of long-term debt			54,403				—				—				54,403
Current maturities of capital lease obligations			846,053				—				—				846,053
Total current liabilities			101,385,924				34,751,174				(75,486,881	)			60,650,217
LONG-TERM DEBT, net of current maturities			374,343,069				—				—				374,343,069
CAPITAL LEASE OBLIGATIONS, net of current maturities			2,380,737				—				—				2,380,737
OTHER LONG-TERM LIABILITIES			1,918,963				360,000				—				2,278,963
DEFERRED INCOME TAXES			21,196,020				29,270,999				—				50,467,019
DUE TO PARENT			23,194,711				—				—				23,194,711
COMMITMENTS
STOCKHOLDER’S EQUITY			102,190,528				171,532,241				(171,532,241	)			102,190,528
		$	626,609,952			$	235,914,414			$	(247,019,122	)		$	615,505,244