September FY15 FS -11.27.14 final - Nebraska Book...

NEEBO, INC.

Rule 144(c) Current Public Information Data Sheet and

Unaudited Condensed Consolidated Financial Statements

Three and Six Months Ended September 30, 2014 and 2013

The current public information data sheet and unaudited condensed consolidated financial statements have been prepared to fulfill the requirements of (1) Rule 144(c) under the Securities Act of 1933, as amended (2) Rule 15c2-11(a) (5) under the Securities Exchange Act of 1934, as amended and (3) the company’s by-laws. It is intended as information to be used by securities brokers and dealers in submitting or publishing quotations on the common stock of the company as contemplated by Rule 15c2-11.

No broker, dealer, salesperson, or any other person has been authorized to give any information or to make any representations not contained herein in connection with the company. Any representations not contained herein must not be relied upon as having been made or authorized by the company.

This statement has not been filed by the company with the Securities and Exchange Commission (SEC) or any other regulatory agency.

NEEBO, INC.

Table of Contents

Page

Rule 144(c) Current Public Information Data Sheet:

Introduction 1

Unaudited Condensed Consolidated Financial Statements:

Balance Sheets 5

Statements of Operations 6

Statements of Stockholders’ Equity (Deficit) 7

Statements of Cash Flows 8

Notes to Financial Statements 9

Management’s Discussion and Analysis 25

Forward-Looking Statements 32

1

Introduction

Neebo, Inc. (the Company or the issuer) is a nonreporting issuer described in Rule 144(c)(2) promulgated under the Securities Act of 1933, as amended and is providing the following current public information to comply with the current public information requirements set forth under said Rule 144(c). This information is further described in the applicable provisions of Rule 15c2-11 promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Unless the context otherwise requires, the term “Company,” as used herein includes the Company and its subsidiaries, including Nebraska Book Company, Inc. (Nebraska Book Company). Unless otherwise indicated, the information set forth below is provided as of September 30, 2014:

(i) The exact name of the issuer and its predecessor (if any):

a. Name of the issuer: Neebo, Inc.

b. Name of predecessor: NBC Acquisition Corp. Neebo, Inc. and its subsidiaries succeeded to the business and assets of NBC Acquisition Corp. and its subsidiaries on June 29, 2012, the effective date of the emergence of NBC Acquisition Corp. and its subsidiaries from Chapter 11 (the Effective Date). The Company has adopted the consolidated historical financial information of NBC Acquisition Corp. as its own.

c. The Senior Secured Notes Due 2016, referenced below, are guaranteed by each of the following direct and indirect subsidiaries of Neebo, Inc.:

• Neebo Holding Company, a Delaware corporation

• Nebraska Book Company, Inc., a Delaware corporation

• Specialty Books, Inc., a Delaware corporation

• NBC Textbooks LLC, a Delaware limited liability company

• Campus Authentic LLC, a Delaware limited liability company

• Net Textstore LLC, a Delaware limited liability company

(ii) The address of the principal executive office of Neebo, Inc. and each subsidiary is:

• 4700 South 19th Street, Lincoln, NE 68512

(iii) The state of incorporation, if it is a corporation: Delaware

(iv) The exact title and class of each security:

a. Common Stock

b. Tranche A Warrants

c. Tranche B Warrants

d. Senior Secured Notes Due 2016

(v) The par or stated value of the security:

a. Common Stock – $0.001 Par Value

b. Tranche A Warrants – Exercisable for 1 share of Common Stock at a price of $14.88

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c. Tranche B Warrants – Exercisable for 1 share of Common Stock at a price of $22.32

d. Senior Secured Notes Due 2016 – N/A

(vi) The number of shares or total amount of the securities outstanding for each class of securities as of the end of the issuer’s most recent fiscal year:

a. Common Stock – 6,721,765 shares

b. Tranche A Warrants – 693,054 warrants

c. Tranche B Warrants – 1,485,135 warrants

d. Senior Secured Notes Due 2016 – $110,000,000

(vii) The name and address of the transfer agent:

a. Common Stock – Transfer Agent:

• American Stock Transfer & Trust Company LLC 6201 15th Avenue, Brooklyn, New York 11219 PH: 718-921-8210

b. Tranche A Warrants – Warrant Agent:


c. Tranche B Warrants – Warrant Agent:


d. Senior Secured Notes Due 2016 – Indenture Trustee, Registrar, Paying Agent and Collateral Agent:

• Wilmington Trust, National Association Attn: Joseph O’Donnell 246 Goose Lane, Suite 105, Guilford, Connecticut 06437 PH: 203-453-4060

(viii) The nature of the issuer’s business: Neebo, Inc. is a holding company and the beneficial owner of Nebraska Book Company. Nebraska Book Company participates in the college bookstore industry, offering the products and services described in item (ix) below.

(ix) The nature of products or services offered: Nebraska Book Company participates in the college bookstore industry primarily by operating its own college bookstores, by providing used textbooks to college bookstore operators, by providing distance education products and service, and by providing proprietary college bookstore information and e-commerce systems, consulting and other services. Nebraska Book Company is also a provider of distance education materials to students in nontraditional courses, which include correspondence and corporate education courses. Furthermore, Nebraska Book Company provides

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the college bookstore industry with a variety of services including propriety information and e-commerce systems, in-store promotions, buying programs, and consulting services.

(x) The nature and extent of the issuer’s facilities:

Corporate Offices:

4700 South 19th Street (owned) Lincoln, Nebraska 68512

At September 30, 2014, Nebraska Book Company’s College Stores locations consisted of the following: (i) 2 owned off-campus store locations, (ii) 1 owned on-campus store location (iii) 46 leased off-campus store locations, and (iii) 165 leased on-campus (contract-managed) store locations serving university and postgraduate educational institutions throughout the United States. Nebraska Book Company owns its two Textbooks division warehouses (totaling 253,000 square feet) in Lincoln, Nebraska (one of which is also the location of its headquarters).

(xi) The name of the chief executive officer and members of the board of directors:

a. Chief Executive Officer: Steven Clemente

b. Board of Directors:

• Peter Reed

• Justin Bonner

• Adam Kleinman

• Matthew Rothfleisch

• Alison Abraham

• Benjamin Ng

• Steven Clemente

(xii) The issuer’s most recent balance sheet and profit and loss and retained earnings statements: See the unaudited condensed consolidated financial statements included herein and available on the Company’s website at http://www.nebook.com.

(xiii) Similar financial information for such part of the two preceding fiscal years the issuer or its predecessor has been in existence: See the Company’s most recent consolidated financial statements available on the Company’s website at http://www.nebook.com.

NEEBO, INC.

Unaudited Condensed Consolidated Financial Statements Three and Six Months Ended September 30, 2014 and 2013

NEEBO, INC.

Condensed Consolidated Balance Sheets

(Unaudited where noted)

(In thousands, except share amounts and par value)

September 30, March 31,Assets 2014 2014

(Unaudited)

Current assets:Cash $ 14,621 12,316 Receivables, less allowance for doubtful accounts of $1,066 at September 30, 2014

and $1,022 at March 31, 2014 73,669 26,111 Inventories 119,162 79,729 Income tax receivable 71 263 Deferred income taxes — 1,387 Prepaid expenses and other assets 13,852 8,660

Total current assets 221,375 128,466

Property and equipment, net 30,551 31,447 Customer relationships, net 45,493 47,429 Trade names, net 9,882 10,539 Other identifiable intangibles, net 20,212 17,010 Debt issue costs, net 1,932 1,771 Deferred income taxes 65 — Other assets 1,680 1,661

Total assets $ 331,190 238,323

Liabilities and Stockholders’ Equity (Deficit)

Current liabilities:

Short-term financing debt $ 43,586 3,000 Accounts payable 85,468 38,144 Accrued employee compensation and benefits 6,964 6,282 Accrued interest 58 57 Accrued incentives 3,169 3,622 Accrued expenses 3,147 3,189 Deferred revenue 24,692 8,332 Deferred income taxes 65 — Current maturities of long-term debt 6,216 —

Total current liabilities 173,365 62,626

Long-term debt, net of current maturities 113,029 118,538 Other long-term liabilities 8 11 Deferred income taxes — 1,387

Total liabilities 286,402 182,562

Stockholders’ equity:Common stock, $0.001 par value, 14,000,000 shares authorized, 6,721,765 issued

and outstanding at September 30, 2014 and March 31, 2014 7 7 Additional paid-in capital 85,595 85,322 Retained deficit (40,814) (29,568)

Total stockholders’ equity 44,788 55,761

Total liabilities and stockholders’ equity $ 331,190 238,323

See accompanying notes to condensed consolidated financial statements.

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NEEBO, INC.

Condensed Consolidated Statements of Operations

(In thousands, unaudited)

September 30, September 30, September 30, September 30, 2014 2013 2014 2013

Revenues, net of returns $ 147,347 156,603 202,103 213,763 Costs of sales 91,015 92,031 121,119 127,259

Gross profit 56,332 64,572 80,984 86,504

Operating expenses:Selling, general, and administrative 41,825 39,008 70,760 67,724 Depreciation 1,507 1,520 3,137 3,335 Amortization 2,293 2,189 4,559 4,292

Total operating expenses 45,625 42,717 78,456 75,351

Income from operations 10,707 21,855 2,528 11,153

Other (income) expenses:Interest expense 6,733 11,774 12,901 27,864 Interest income (3) (4) (8) (5)

6,730 11,770 12,893 27,859

Income (loss) from continuing operationsbefore income taxes 3,977 10,085 (10,365) (16,706)

Income tax expense (benefit) 35 4,625 66 (6,204)

Income (loss) from continuing operations 3,942 5,460 (10,431) (10,502)

Income (loss) from discontinued operations, net of tax (661) 997 (815) 16

Net income (loss) $ 3,281 6,457 (11,246) (10,486)


Three months ended Six months ended

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NEEBO, INC.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(Unaudited)

(In thousands, except share amounts)

Additional RetainedCommon stock paid-in earnings

Shares Value capital (deficit) Total

Balance, March 31, 2013 6,721,765 $ 7 85,074 4,939 90,020 Share-based compensation attributable to

stock options — — 132 — 132 Net loss — — — (10,486) (10,486)

Balance, September 30, 2013 6,721,765 $ 7 85,206 (5,547) 79,666

Balance, March 31, 2014 6,721,765 $ 7 85,322 (29,568) 55,761 Share-based compensation attributable to

stock options — — 273 — 273 Net income — — — (11,246) (11,246)

Balance, September 30, 2014 6,721,765 $ 7 85,595 (40,814) 44,788


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NEEBO, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands, unaudited)

September 30, September 30, 2014 2013

Cash flows from operating activities:Net loss $ (11,246) (10,486) Adjustments to reconcile net loss to net cash flows from operating activities:

Share-based compensation 273 132 Provision for losses on receivables 789 743 Depreciation 3,173 3,514 Amortization 4,558 4,363 Amortization of debt issue costs and bond discount 2,035 6,432 Loss on disposal of assets 71 426 Deferred income taxes — (6,471) Accretion of debt premium 707 717 Debt change in control provision — 10,000 Changes in operating assets and liabilities net of effect of acquisitions:

Receivables (48,347) (36,744) Inventories (37,647) (16,800) Income tax receivable 192 — Prepaid expense and other assets (5,192) 181 Other assets (19) 137 Accounts payable 47,324 49,928 Accrued employee compensation and benefits 682 (522) Accrued interest 1 (154) Accrued incentives (453) (217) Accrued expense (42) 381 Income taxes payable — 197 Deferred revenue 16,360 10,633 Other long-term liabilities (3) (85)

Net cash flows from (used in) operating activities (26,784) 16,305

Cash flows from investing activities:Purchases of property and equipment (2,398) (3,399) Acquisitions, net of cash acquired (3,561) (1,799) Proceeds from sale of property and equipment 49 3,360 Proceeds from sale of intangibles — 2,669 Software development costs (3,391) (2,066)

Net cash flows used in investing activities (9,301) (1,235)

Cash flows from financing activities:Payment of financing costs (2,196) (509) Principal payments on long-term debt — (20,000) Borrowings under revolving credit facility 53,100 29,888 Payments under revolving credit facility (12,514) (39,500)

Net cash flows from (used in) financing activities 38,390 (30,121)

Net increase (decrease) in cash 2,305 (15,051)

Cash, beginning of period 12,316 27,769

Cash, end of period $ 14,621 12,718

Supplemental disclosures of cash flows information:

Cash paid (received) during the period for:Interest $ 10,159 10,868 Income taxes (126) (249)

Noncash investing and financing activities:Accretion of debt premium (707) (717) Additional principal for change in control provision — 10,000


Six months ended

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NEEBO, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2014 and 2013

(Unaudited)

9 (Continued)

(1) Business

Upon the effectiveness of the Third Amended Plan of Reorganization (the Plan) on June 29, 2012 (the Effective Date), all assets of Nebraska Book Company, Inc., a Kansas corporation (Old NBC) and its subsidiaries were transferred to Nebraska Book Company, Inc., a Delaware corporation (f/k/a New Nebraska Book Company, Inc.; NBC) and a wholly owned subsidiary of Neebo Holding Company, which in turn is a wholly owned subsidiary of Neebo, Inc. (Neebo, Inc. being the Successor, we, us, our, ours, or the Company). We thereby became the beneficial owner of the Nebraska Book Company business, and have adopted as our own the historical financial information of NBC Acquisition Corp. (Predecessor), the prior holding company of Old NBC. The Company does not conduct significant activities apart from its investment in Neebo Holding Company and NBC. Operational matters discussed in this report, including the acquisition of college bookstores and other related businesses, refer to the operations of NBC.

We participate in the college bookstore industry primarily by operating our own college bookstores, by supplying used textbooks to college bookstore operators, by providing distance education products and service, and by selling proprietary college bookstore information and e-commerce systems, consulting, and other services. At September 30, 2014, we operated 214 college bookstores. We believe we are one of the largest wholesale distributors of used college textbooks in North America, offering over 159,000 textbook titles and selling or renting over 7.2 million books annually, primarily to college bookstores serving campuses located in the United States. We are also a provider of distance education materials to students in nontraditional courses, which include correspondence and corporate education courses. Furthermore, we provide the college bookstore industry with a variety of services including propriety information and e-commerce systems, in-store promotions, and consulting services.

Our wholesale and college bookstore operations experience two distinct selling periods and our 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 July/August and November/December. The buying periods for the wholesale operations occur at the end of each school semester in May and December. The primary selling periods for the college bookstore operations are in August/September and January. A significant portion of our annual net sales are recognized during the second and fourth fiscal quarters.

Basis of Presentation

The financial statements include the condensed consolidated results of the Company. The condensed consolidated financial statements contained herein have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). All intercompany balances and transactions are eliminated in consolidation. Certain reclassifications have been made in our financial statements of the prior years to conform to the current year presentation.

Accordingly, certain information and footnote disclosures typically included in Company’s annual financial statements have been condensed or omitted for this quarterly report. The accompanying condensed consolidated financial statements are unaudited. However, in the opinion of management, such financial statements include all adjustments, which consist of only normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. Interim results are not necessarily indicative of results for a full year.

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(Unaudited)

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We have included the following condensed consolidated financial statements for the Company: The condensed consolidated balance sheets as of September 30, 2014 and March 31, 2014; the condensed consolidated statements of operations for the three and six months ended September 30, 2014 and 2013; the condensed consolidated statements of stockholders’ equity (deficit); and the condensed consolidated statements of cash flows for the three and six months ended September 30, 2014 and 2013.

(2) Ownership and Capital Structure

Under the Plan, we issued 6,721,765 shares of new common stock, par value $0.001 per share (New Common Equity), on the Effective Date. As of September 30, 2014, there were 6,721,765 shares outstanding.

(3) Receivables

Receivables are summarized as follows:

September 30, March 31,2014 2014

Trade receivables, less allowance for doubtfulaccounts of $1.1 million at September 30, 2014 and

$1.0 million at March 31, 2014 , respectively $ 43,564 10,509 Receivables from book publishers for returns 14,283 10,153 Advances for book buybacks 19 291 Letters of credit 553 590 Other 15,250 4,568

$ 73,669 26,111

Trade receivables include the effect of estimated product returns. The amount of estimated product returns at September 30, 2014 and March 31, 2014 was $13.7 million and $8.2 million, respectively.

(4) Inventories

Inventories are summarized as follows:


College Stores $ 93,669 50,571 Textbooks 24,502 28,245

Complementary Services 991 913

$ 119,162 79,729

NEEBO, INC.



(Unaudited)

11 (Continued)

(5) Property, Plant, and Equipment

Fixed assets consisted of the following:


Land $ 3,065 3,065 Buildings and improvements 12,006 12,006 Leasehold improvements 7,712 7,697 Furniture and fixtures 11,403 11,378 Information systems 8,299 7,205 Automobile and trucks 1,043 1,043 Machinery 513 518 Projects in process 1,105 21

45,146 42,933

Less accumulated depreciation andamortization (14,595) (11,486)

$ 30,551 31,447

(6) Other Identifiable Intangibles

Other identifiable intangible assets consisted of the following:

September 30, 2014Gross

carrying Accumulated Net carryingamount amortization amount

Trade names 12,840 (2,958) 9,882 Customer relationships 54,205 (8,712) 45,493

Other Intangibles:

Developed technology 22,204 (5,642) 16,562 Contract-managed relationships 5,516 (1,894) 3,622 Other 28 — 28

Total other intangibles 27,748 (7,536) 20,212

Total intangibles $ 94,793 (19,206) 75,587

NEEBO, INC.



(Unaudited)

12 (Continued)

March 31, 2014Gross

carrying Accumulated Net carryingamount amortization amount

Trade names 12,840 (2,301) 10,539 Customer relationships 54,205 (6,776) 47,429

Other Intangibles:

Developed technology 18,814 (4,193) 14,621 Contract-managed relationships 3,764 (1,400) 2,364 Other 25 — 25

Total other intangibles 22,603 (5,593) 17,010

Total intangibles $ 89,648 (14,670) 74,978

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

Amortizationexpense

Estimated amortization expense for the fiscal years ending March 31:

Remaining 2015 $ 4,610 2016 8,944 2017 8,676 2018 7,182 2019 5,957

NEEBO, INC.



(Unaudited)

13 (Continued)

(7) Debt

Debt outstanding consisted of the following:


Term loan facility $ — 6,216 Senior secured notes 113,029 112,322

113,029 118,538

Short-term portion:Credit and security agreement 43,586 3,000 Term loan facility 6,216 —

$ 162,831 121,538

(a) The Credit and Security Agreement

The Company entered into a Credit and Security Agreement on March 4, 2013. The Credit and Security Agreement as subsequently amended provided available borrowings of $55.0 million and matures December 31, 2014. Borrowings under the Credit and Security Agreement as of September 30, 2014 totaled $43.6 million.

Neebo, Inc., and each of its other subsidiaries, as guarantors (the Credit and Security Guarantors) have guaranteed the obligations under the Credit and Security Agreement, and the credit facilities are secured by first-priority liens on, and a first-priority security interest in, substantially all of the assets of NBC and certain of its subsidiaries (the Credit and Security Borrowers) and the assets of the Credit and Security Guarantors, including all of the capital stock of substantially all of the direct and indirect subsidiaries of Neebo, Inc. and all intercompany debt. The security interests are evidenced by the Credit and Security Agreement and other related agreements, including certain intellectual property security agreements, a deposit account control agreement, and mortgages.

The Company is not required to make periodic payments of principal prior to the maturity date but the Company is required to make principal prepayments from the net proceeds of specified types of asset sales, insurance recoveries, and equity offerings. The Company is also required to make mandatory prepayments if the Company generates excess cash flow (as defined in the Credit and Security Agreement) during the monthly period most recently ended prior to each month. The Company may make voluntary prepayments at any time. Once principal balances are prepaid, they cannot be borrowed again.

The Credit and Security Agreement contains affirmative and negative covenants, representations and warranties, and events of default customarily applicable to senior secured credit facilities of this type. It does not contain any financial maintenance covenants.

NEEBO, INC.



(Unaudited)

14 (Continued)

Pursuant to a certain Intercreditor Agreement (Intercreditor Agreement) dated as of June 29, 2012, among the respective administrative agents of the Credit and Security Agreement and Term Loan Facility and the trustee for the Senior Secured Notes, the liens securing our obligations under the Credit and Security Agreement are senior to the liens securing our obligations under the Term Loan Facility and the Senior Secured Notes, and the liens securing our obligations under the Term Loan Facility are senior to the liens securing our obligations under the Senior Secured Notes. The Intercreditor Agreement also requires that, after an event of default under any of the Credit and Security Agreement, the Term Loan Facility, or the Senior Secured Notes, any proceeds of enforcement with respect to collateral will be applied, first, to the obligations under the Credit and Security Agreement until paid in full, second, to the obligations under the Term Loan Facility until paid in full, and, third, to the obligations under the Senior Secured Notes.

(b) The Term Loan Facility

On the Effective Date, NBC and certain of its subsidiaries, as borrowers (the Term Borrowers), and Neebo, Inc. and each of its other subsidiaries, as guarantors (the Term Guarantors), entered into the Term Loan Facility pursuant to a certain Term Loan and Security Agreement (the Term Loan Agreement) with U.S. Bank National Association, as the Administrative Agent, and the lenders party thereto from time to time (the Term Lenders). Pursuant to the Term Loan Agreement, the Term Lenders have committed to provide senior secured loans in an aggregate amount up to $80.0 million (the Term Loans) on the Effective Date. On such date, the Company borrowed Term Loans with an aggregate principal amount of $80.0 million. Certain fees payable in connection with the Term Loan Agreement were paid in kind on the Effective Date and as a result, the aggregate principal balance of the Term Loans on the Effective Date was $86.5 million. The Term Loan Agreement was amended on March 4, 2013 to primarily increase the permitted asset disposition amount allowed under the agreement. At September 30, 2014, the outstanding principal balance on the Term Loans was $6.2 million.

The Term Guarantors have guaranteed the obligations under the Term Loan Agreement, and the credit facilities are secured by second-priority liens on, and a second-priority security interest in, substantially all the assets of the Term Borrowers and the assets of the Term Guarantors, including all of the capital stock of substantially all of the direct and indirect subsidiaries of Neebo, Inc. and all intercompany debt. The security interests are evidenced by the Term Loan Agreement and other related agreements, including certain intellectual property security agreements, deposit account control agreement and mortgages (together with the Term Loan Agreement, the Term Loan Documents).

The balance of the Term Loans is due on June 29, 2015 (the Term Maturity Date). The Company is not required to make periodic payments of principal prior to the Term Maturity Date but the Company is required to make principal prepayments of the Term Loans from specified excess cash flows from operations and from the net proceeds of specified types of asset sales, insurance recoveries, and equity offerings. The Term Loan Credit Agreement requires the Company to make mandatory prepayments if the Company generates excess cash flow (as defined in the Term Loan Credit Agreement) during the period from March 1 of each year to September 30 of the same year and from October 1 of each year to the last day of February of the following year, payable on

NEEBO, INC.



(Unaudited)

15 (Continued)

October 30 and March 31 of each year. Any mandatory prepayments due are reduced dollar-for-dollar by the amount the Company is required to repay under the Credit and Security Agreement with respect to such excess cash flow or other net proceeds. The Company may voluntarily prepay the Term Loans at any time without premium or penalty (except as described in the next sentences). All repayments of the Term Loans made after the first anniversary of the Effective Date, but prior to the second anniversary of the Effective Date, whether voluntary or mandatory, required the payment of a prepayment premium in an amount equal to 5.0% of the principal amount of Term Loans repaid or prepaid on such date.

Interest on the Term Loans accrues at an annual rate equal to (a) 8.0% during the first year following the Effective Date, (b) 11.0% during the second year following the Effective Date and (c) 12.0% during the third year following the Effective Date. An additional 2.0% default rate also applies in certain instances described in the Term Loan Credit Agreement.

The Term Loan Credit Agreement contains affirmative and negative covenants, representations and warranties, and events of default customarily applicable to senior secured credit facilities of this type. In addition, the Term Loan Credit Agreement contains a financial covenant that requires the Company to maintain a certain consolidated net leverage ratio. The consolidated net leverage ratio, as defined in the Term Loan Credit Agreement, is the ratio of (1) (a) total debt minus (b) unrestricted cash, to (2) consolidated EBITDA (earnings before interest, taxes, depreciation, and amortization with further adjustments made for the effect of deferred rent, restructuring related charges, and other noncash charges). The Term Loan Credit Agreement does not permit the consolidated net leverage ratio to exceed (a) 6.5 to 1.0 for the first year following the Effective Date, (b) 5.5 to 1.0 for the second year following the Effective Date, and (c) 4.5 to 1.0 for the third year following the Effective Date. As of September 30, 2014, the Company’s consolidated net leverage ratio was 5.5. As a result, the Administrative Agent and the Lenders under the Term Loan Credit Agreement waived the September 30, 2014 net leverage ratio requirement, with such waiver retroactively effective as of September 29, 2014.

(c) The Senior Secured Notes

On the Effective Date, Neebo, Inc. (the Notes Issuer) issued $100.0 million aggregate principal amount of our 15% Senior Secured Notes (the Senior Secured Notes), which were transferred to the holders of the Prepetition Senior Secured Notes in partial satisfaction of their bankruptcy claim with respect thereto. The Senior Secured Notes were issued by the Notes Issuer pursuant to an Indenture (the Indenture), dated as of the Effective Date, with Wilmington Trust, National Association, as trustee and collateral agent.

The Senior Secured Notes are guaranteed by all of our subsidiaries (the Notes Guarantors) and are secured by liens on, and a security interest in, substantially all the assets of the Notes Issuer and the assets of the Notes Guarantors, including all of the capital stock of substantially all of the direct and indirect subsidiaries of Neebo, Inc. and all intercompany debt, which liens and security interest are junior to the liens and security interests securing the obligations under the new Credit and Security Agreement and the Term Loan Facility. The security interests are evidenced by a Pledge and Security Agreement (the Notes Security Agreement), dated as of the Effective Date, by the Notes

NEEBO, INC.



(Unaudited)

16 (Continued)

Issuer and the Notes Guarantors in favor of the collateral agent, and other related agreements, including certain intellectual property security agreements, deposit account control agreements, and mortgages (together with the Notes Security Agreement and the Notes Documents).

The Senior Secured Notes mature on June 30, 2016 (the Notes Maturity Date). On the Notes Maturity Date, the Company is required to pay to the holders of the Senior Secured Notes a principal amount equal to 105% of the face amount of the Senior Secured Notes, plus accrued and unpaid interest. If the Company underwent a “Steering Committee Change of Control,” as defined in the Indenture, the Company was required to increase the principal amount of the Senior Secured Notes by an amount equal to 10.0% of the outstanding principal amount of the Senior Secured Notes on such date, and to issue additional Senior Secured Notes to the holders thereof, on a pro rata basis, in such increased amount.

On May 31, 2013, funds managed by MAST Capital Management, LLC acquired additional shares of the Company’s common stock that increased its beneficial ownership of such shares above 50%, prompting a Steering Committee Change of Control. As a result of this acquisition and in accordance with the Indenture, the Company automatically increased the principal amount of the 15.0% Senior Secured Notes by $10.0 million (an amount equal to 10% of the principal amount outstanding on May 31, 2013) and issued them to the then existing holders of the 15.0% Senior Secured Notes on a pro rata basis consistent with such holder’s holdings at such time. The Company recorded this $10.0 million as a component of interest expense.

The Company may redeem the Senior Secured Notes at any time at a redemption price equal to 105% of the aggregate principal amount so redeemed, plus accrued and unpaid interest, if any, to the redemption date. In addition, as long as any Senior Secured Notes remain outstanding, the Company is required to make an offer to purchase each holders’ Senior Secured Notes in each of the following instances:

• If the Company effects a defined “Asset Disposition,” the Company must, on the 361st day following the Asset Disposition, offer to purchase at a price equal to 100% of the aggregate principal amount of the Senior Secured Notes, plus accrued and unpaid interest, if any, to the repurchase date, such outstanding Senior Secured Notes as may be purchased, on a pro rata basis, with 100% of the defined “Excess Proceeds” from the Asset Disposition; any proceeds of the Asset Disposition that are applied to permanently reduce permitted secured indebtedness of the Company or invested in permitted permanent assets are not considered Excess Proceeds.

• If the Company undergoes a “Non-Steering Committee Change of Control,” as provided in the Indenture, unless the Company exercises its right to redeem all outstanding Senior Secured Notes within 30 days of the Non-Steering Committee Change of Control, as described above, the Company must offer to purchase each holder’s Senior Secured Notes at a price equal to 110% of the aggregate principal amount of the Senior Secured Notes, plus accrued and unpaid interest, if any, to the repurchase date.

NEEBO, INC.



(Unaudited)

17 (Continued)

• After the repayment in full of the Term Loan Facility, the Company must offer to purchase each holder’s Senior Secured Notes at a price equal to 102.5% of the aggregate principal amount of the Senior Secured Notes, plus accrued and unpaid interest, if any, to the repurchase date, to the extent such Senior Secured Notes may be purchased, on a pro rata basis, with a specified portion of any “Excess Cash Flow” (as defined in the Indenture) generated during the period from March 1 of each year to September 30 of the same year and from October 1 of each year to the last day of February of the following year. The Company is required to make such offer, if required under the Indenture and permitted under the Intercreditor Agreement, within 50 days of each such date. The amount of the offer required to be made from such excess cash flow shall be a portion equal to 75%, 50%, 25%, or 15% of such Excess Cash Flow depending upon the result of a consolidated net leverage ratio, as defined in the Indenture and described below.

Interest on the Senior Secured Notes accrues at an annual rate equal to 15%. Interest is payable in cash semiannually on September 30 and March 31 of each year. An additional 1% default rate also applies in certain instances described in the Indenture.

The Indenture contains affirmative and negative covenants, representations and warranties, and events of default customarily applicable to Senior Secured Notes facilities of this type. In addition, the Indenture contains a financial covenant that requires the Company to maintain a certain consolidated net leverage ratio. The consolidated net leverage ratio, as defined in the Indenture, is the ratio of (1) (a) total debt minus (b) unrestricted cash, to (2) consolidated EBITDA (earnings before interest, taxes, depreciation, and amortization with further adjustments made for the effect of deferred rent, restructuring related charges, and other noncash charges). The Indenture does not permit the consolidated net leverage ratio to be in excess of (a) 6.5 to 1.0 for the first year following the Effective Date, (b) 5.5 to 1.0 for the second year following the Effective Date, (c) 4.5 to 1.0 for the third year following the Effective Date, and (d) 4.0 to 1.0 for the fourth year following the Effective Date. As noted above with respect to the Term Loan Credit Agreement, the Company was not in compliance with this covenant as of September 30, 2014. In addition to the waiver obtained under the Term Loan Credit Agreement, the Company also obtained a waiver of this covenant with respect to September 30, 2014 from the requisite holders of the Senior Secured Notes.

The Company incurred fees of $8.8 million associated with the emergence financing, which will be amortized over the term of the debt using the straight-line method.

(8) Leases

Total rent expense for all operating leases was as follows:

Three months ended

September 30, September 30, September 30, September 30,

2014 2013 2014 2013

Total rent expense $ 11,094 10,414 16,085 14,899

Six months ended

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18 (Continued)

Future aggregate minimum lease payments under non-cancelable operating leases in effect at September 30, 2014 were as follows for the following fiscal years:

Operatingleases

Fiscal year:Remaining 2015 $ 8,530 2016 13,270 2017 9,773 2018 7,161 2019 5,553 Thereafter 8,074

Total minimum leasepayments $ 52,361

(9) Income Taxes

For interim financial reporting purposes, tax expense or benefit is calculated based on the estimated effective tax rate, adjusted to give effect to anticipated permanent differences. The effective tax rates for the three months ended September 30, 2014 and 2013 were 0.9% and 45.9%, respectively. The effective tax rates for the six months ended September 30, 2014 and 2013 were 0.6% and 37.1%, respectively. The difference in the effective rate and the federal statutory rate for the three and six months ended September 30, 2014 is primarily due to a valuation allowance. For the three and six months ended September 30, 2013, the difference in the effective rate and the federal statutory rate is primarily due to state tax expense.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management determines its estimates of future taxable income based upon the scheduled reversal of deferred tax liabilities, projected future taxable income exclusive of reversing temporary differences, and tax planning strategies. The Company establishes valuation allowances for deferred tax assets when it is estimated to be more likely than not that the tax assets will not be realized. At September 30, 2014 the Company had a valuation allowance of $15.1 million. A valuation allowance was not determined to be necessary at September 30, 2013.

(10) Discontinued Operations

The Company completed the closure of certain college bookstores within our College Stores segment. The determination to take this action was based on the operating performance of the store. College bookstores are considered discontinued and the results of operations for these are reflected in our condensed consolidated statements of operations as “Income (loss) from discontinued operations, net of tax.” All corresponding prior period operating results presented in our condensed consolidated statements of operations and the accompanying notes have been reclassified to reflect the operations of these as discontinued operations.

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19 (Continued)

Results of discontinued operations are summarized as follows:

Three months endedSeptember 30, September 30, September 30, September 30,

2014 2013 2014 2013

Revenue from discontinued operations $ 89 7,360 1,226 10,861

Income (loss) from discontinuedoperations before tax $ (661) 1,094 (815) (303)

Income tax expense (benefit) — 97 — (319)

Income (loss) from discontinued

operations, net of tax $ (661) 997 (815) 16

Six months ended

(11) Fair Value Measurements

Accounting Standards Codification (ASC) 820, Fair Value Measurements, 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.

ASC 820 also applies to disclosures of fair value for all financial instruments disclosed under ASC 825, Financial Instruments. ASC 825 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.

Due to the relatively short maturity of these financial instruments including cash, accounts receivable, short-term financing, and accounts payable, carrying values approximate fair value as of September 30, 2014 and March 31, 2014.

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20 (Continued)

Estimated fair values for our short-term and long-term debt at September 30, 2014 and March 31, 2014 are summarized in the following table:


Carrying values:Short-term debt $ 49,802 3,000 Long-term debt 113,029 118,538

Fair values:Short-term debt 49,104 3,000

Long-term debt 92,717 98,558

Estimated fair values for long-term debt are determined utilizing the “income approach,” calculating a present value of future payments based upon prevailing interest rates for similar obligations, which are considered Level 2 inputs.

(12) Share-Based Compensation

The Company measures and recognizes compensation expense for all share-based payments based on the grant-date fair value of those awards. All of the Company’s existing stock option awards and restricted stock units have been determined to be equity-classified awards. The Company recorded compensation expense related to equity awards as a component of selling, general, and administrative expense of $0.3 million for the six months ended September 30, 2014 and $0.1 million for the six months ended September 30, 2013.

As a result of the Plan, the Company adopted and implemented the 2012 Equity Incentive Plan. The 2012 Equity Incentive Plan provides for the granting of stock options and restricted stock up to an aggregate of 1,000,000 shares of the Company’s common stock. Options granted are nonqualified. Options and restricted stock vest over four years following the date of grant. At September 30, 2014, there were 393,875 shares available for issuance pursuant to future grants under the 2012 Equity Incentive Plan.

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21 (Continued)

There were no options to purchase shares of the Company’s common stock granted during the three and six months ended September 30, 2014 and 2013. The Company had granted options to purchase 189,131 shares of the Company’s common stock as of March 31, 2014. Options to purchase shares of common stock are granted with exercise prices approximately equal to the fair value of the common stock on the date of the grant. The fair value of existing stock options granted was estimated using the Black-Scholes option pricing model with the following assumptions:

Fiscal year Fiscal yearending ending2014 2013

Expected dividend yield at date of grant —% —%Expected stock price volatility 51.7 94.9Risk-free interest rate 1.8 1.0Expected life of options (in years) 6.6 6.0

The risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of the grant. The expected volatility was based on historical monthly price changes of the Company’s stock and historical volatility of guideline companies over the expected period. The expected life of options is the average of the contractual life of the option and the vesting time period on a weighted average basis. The Company considers groups of associates that have similar historical exercise behavior separately for valuation purposes.

Stock option activity under the Company’s 2012 Equity Incentive Plan for the six months ended September 30, 2014 is summarized as follows:

WeightedWeighted averageaverage remaining Aggregate

Number of exercise contractual intrinsicoptions price terms value

Outstanding at March 31, 2014 189,131 $ 10.19 8.8 $ — Granted — — Exercised — — Forfeited — —

Outstanding at September 30, 2014 189,131 10.19 8.3 —

Exercisable at September 30, 2014 45,058 $ 10.19 8.6 $ —

As of September 30, 2014, the total unrecognized compensation cost related to nonvested stock option awards was approximately $0.2 million, which is expected to be recognized over a weighted average period of 2.0 years.

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22 (Continued)

Information regarding restricted stock units under the 2012 Equity Incentive Plan for the six months ended September 30, 2014 is summarized as follows:

Weightedaverage

grant dateShares fair value

outstanding per share

Outstanding at March 31, 2014 416,993 $ 2.74 Granted — — Forfeited — —

Outstanding at September 30, 2014 416,993 2.74

Vested but unissued at September 30, 2014 199,163 $ 0.54

As of September 30, 2014, the total unrecognized compensation cost related to restricted stock units was approximately $0.6 million and is expected to be recognized over a weighted average period of 2.0 years.

(13) 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: College Stores, Textbooks, and Complementary Services. College Stores and Textbooks qualify as reportable operating segments, while separate disclosure of Complementary Services is provided as management believes that information about this operating segment is useful to the readers of our condensed consolidated financial statements. The College Stores segment encompasses the operating activities of our college bookstores located on or adjacent to college campuses. The Textbooks 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 segment includes book-related services such as distance education materials, computer hardware and software systems, e-commerce technology, and consulting services.

We primarily account for intersegment sales as if the sales were to third parties (at current market prices). Certain assets, net interest expense, reorganization items, and taxes (excluding interest and taxes incurred by Neebo, Inc. 100% owned subsidiaries, NBC Textbooks LLC, Net Textstore LLC, Campus Authentic LLC, and Specialty Books, Inc.) are not allocated between our segments; instead, such balances are accounted for in a Corporate Administrative division.

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23

Selected information about profit or loss on a segment basis is summarized as follows:

College Complementary Corporate IntercompanyStores Textbooks Services Administration Eliminations Total

Three months ended:September 30, 2014

External customer revenues $ 106,516 36,530 4,301 — — 147,347 Intersegment revenues — 9,628 1,273 — (10,901) — Depreciation and amortization

expense 1,422 1,620 328 430 — 3,800 Income (loss) from operations 3,175 13,249 (533) (5,296) 112 10,707

Three months ended:September 30, 2013


expense 1,415 1,622 315 357 — 3,709 Income (loss) from operations 8,199 16,913 (357) (3,794) 894 21,855

College Complementary Corporate IntercompanyStores Textbooks Services Administration Eliminations Total

Six months ended:September 30, 2014


expense 2,935 3,240 659 862 — 7,696 Income (loss) from operations 247 16,649 (842) (11,280) (2,246) 2,528

Six months ended:September 30, 2013


expense 2,996 3,309 659 663 — 7,627 Income (loss) from operations 2,209 20,512 (886) (8,691) (1,991) 11,153

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.

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24

(14) Commitments and Contingencies

From time to time, we are involved in certain claims and litigation arising in the normal course of business. Management assesses the probability of loss for such contingencies and recognizes a liability when a loss is probable and estimable. We are not currently a party to any legal or regulatory proceedings, the adverse outcome of which, individually or in the aggregate, would have a material adverse effect on the Company’s financial position or results of operations.

(15) Subsequent Events

In November 2014, the Company closed on a $60.0 million 5-year revolving credit facility with a new lender. As part of the new facility, the Company’s existing Credit and Security Agreement lenders agreed to provide an additional $20.0 million of liquidity support. The Company repaid the $43.6 million principal amount outstanding on the existing Credit and Security Agreement with a portion of the borrowing capacity obtained with the new credit facility and cash on hand.

The Company evaluated subsequent events from the balance sheet date through November 28, 2014, the date at which the financial statements were issued, and concluded there are no other items to disclose.

NEEBO, INC.

Management’s Discussion and Analysis


(Unaudited)

25

Results of Operations

Three and six months ended September 30, 2014 compared with the three and six months ended September 30, 2013.

Revenues

Revenues from operations and revenues by reportable business segment for the periods indicated are summarized as follows:

Three months endedSeptember 30, September 30, Change September 30, September 30, Change

2014 2013 $ % 2014 2013 $ %

College Stores $ 106,516 109,009 (2,493) (2.3)% $ 141,365 143,920 (2,555) (1.8)%Textbooks 46,158 53,100 (6,942) (13.1) 69,277 77,953 (8,676) (11.1)Complementary Services 5,574 5,418 156 2.9 10,184 10,834 (650) (6.0)Intercompany Eliminations (10,901) (10,924) 23 (0.2) (18,723) (18,944) 221 (1.2)

$ 147,347 156,603 (9,256) (5.9)% $ 202,103 213,763 (11,660) (5.5)%

Six months ended

College Stores

College Stores revenues decreased $2.5 million, or 2.3%, to $106.5 million for the three months ended September 30, 2014, compared to the three months ended September 30, 2013. College Stores revenues decreased $2.6 million, or 1.8%, to $141.4 million for the six months ended September 30, 2014, compared to the six months ended September 30, 2013. The decrease in College Stores revenues was primarily attributable to the decrease in the number of transactions and the transition from textbook sales to textbook rentals, which generate lower revenue.

Same-store sales for the three months ended September 30, 2014 decreased $11.8 million, or 11.2%, (off-campus same-store sales decreased $2.8 million, or 9.4%, and on-campus same-store sales decreased $9.0 million, or 12.0%) from the three months ended September 30, 2013. Same-store sales for the six months ended September 30, 2014 decreased $13.5 million, or 9.8%, (off-campus same-store sales decreased $3.9 million, or 9.4%, and on-campus same-store sales decreased $9.6 million, or 9.9%) from the six months ended September 30, 2013. We define same-store sales as sales, including internet sales, from any store, even if expanded or relocated, that we have operated since April 1, 2013.

Store openings and closures during the following periods are summarized as follows:

Six months ended

September 30, September 30,2014 2013

Stores in operation, beginning of period 207 217 Store closures (16) (19) Stores opened 23 13

Stores in operation, end of period 214 211

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26

Textbooks

Textbooks revenues decreased $6.9 million, or 13.1%, to $46.2 million for the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The revenue decrease was primarily due to a 15.7% decrease in units sold, which was partially offset by a 4.4% increase in average price per book sold. Fewer units sold was driven by lower inventory levels resulting from fewer units acquired during buyback. The increase in average price per book sold was due to routine increases in publisher list prices. Lower revenue is partially offset by a $2.0 million decrease in returns due to lower units sold. In addition, $0.3 million of the lower revenues resulted from the Company’s decision to discontinue sourcing books for third-party online rental.

Textbooks revenues decreased $8.7 million, or 11.1%, to $69.3 million for the six months ended September 30, 2014, compared to the six months ended September 30, 2013. The revenue decrease was primarily due to a 15.3% decrease in units sold, which was partially offset by a 5.8% increase in average price per book sold. Fewer units sold was driven by lower inventory levels resulting from fewer units acquired during buyback. The increase in average price per book sold was due to routine increases in publisher list prices. Lower revenue is partially offset by a $3.1 million decrease in returns due to lower units sold. In addition, $0.6 million of the lower revenues resulted from the Company’s decision to discontinue sourcing books for third-party online rental.

Complementary Services

Complementary Services revenues increased $0.2 million, or 2.9%, to $5.6 million for the three months ended September 30, 2014, compared to the three months ended September 30, 2013. Complementary Services revenues decreased $0.6 million, or 6.0%, to $10.2 million for the six months ended September 30, 2014, compared to the six months ended September 30, 2013. The revenue increase was primarily due to an increase in College Stores consulting service revenues in the second quarter and System Sales revenues in both the three month and six month periods offset by a decrease in the distance education business as a result of the loss of a school served.

Gross Profit

Gross profit on a consolidated basis and by reportable business segment for the periods indicated are summarized as follows:

Three months endedPercent Percent Percent Percent

September 30, of net September 30, of net September 30, of net September 30, of net2014 revenues 2013 revenues 2014 revenues 2013 revenues

College Stores $ 34,698 32.6% $ 37,491 34.4% $ 50,387 35.6% $ 49,455 34.4%Textbooks 19,263 41.7 23,793 44.8 28,139 40.6 33,686 43.2Complementary Services 2,204 39.5 2,457 45.4 4,375 43.0 5,053 46.6Intercompany Eliminations 167 (1.5) 831 (7.6) (1,917) 10.2 (1,690) 8.9

$ 56,332 38.2% $ 64,572 41.2% $ 80,984 40.1% $ 86,504 40.5%

Six months ended

College Stores

College Stores gross profit decreased $2.8 million, or 7.4%, to $34.7 million for the three months ended September 30, 2014, compared to the three months ended September 30, 2013. Gross profit as a percentage of sales was 32.6% in the fiscal 2015 three month period as compared to 34.4% in the fiscal 2014 three month

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27

period. College Stores gross profit increased $0.9 million, or 1.9%, to $50.4 million for the six months ended September 30, 2014, compared to the six months ended September 30, 2013. Gross profit as a percentage of sales was 35.6% in the fiscal 2015 six month period as compared to 34.4% in the fiscal 2014 six month period. $2.5 million of the $0.9 million gross profit increase was a result of out-of-period costs impacting the six months ended September 30, 2013 which should have been recorded in fiscal year 2013. If the out-of-period costs had been correctly recorded in fiscal 2013, College Stores gross profit would have decreased $1.5 million, or 3.0% and gross profit as a percentage of sales would have decreased to 35.6% from 36.1% for the six months ended September 30, 2014, compared to the six months ended September 30, 2013. The gross profit decrease for both the three and six month periods was primarily due to a reduction in used textbook sales, partially offset by higher margin rentals.

Textbooks

Textbooks gross profit decreased $4.5 million, or 19.0%, to $19.3 million for the three months ended September 30, 2014, compared to the three months ended September 30, 2013. Gross profit as a percentage of sales was 41.7% in the fiscal 2015 three month period as compared to 44.8% in the fiscal 2014 three month period. Textbooks gross profit decreased $5.5 million, or 16.5%, to $28.1 million for the six months ended September 30, 2014, compared to the six months ended September 30, 2013. Gross profit as a percentage of sales was 40.6% in the fiscal 2015 six month period as compared to 43.2% in the fiscal 2014 six month period. The decrease in both the three and six month periods was primarily due to lower revenue. The decrease in gross profit as a percentage of sales was due primarily to higher average book cost to remain competitive in acquiring books.

Complementary Services

Complementary Services gross profit decreased $0.3 million, or 10.3%, to $2.2 million for the three months ended September 30, 2014, compared to the three months ended September 30, 2013. Gross profit as a percentage of sales was 39.5% in the fiscal 2015 three month period as compared to 45.4% in the fiscal 2014 three month period. Complementary Services gross profit decreased $0.7 million, or 13.4%, to $4.4 million for the six months ended September 30, 2014, compared to the six months ended September 30, 2013. Gross profit as a percentage of sales was 43.0% in the fiscal 2015 six month period as compared to 46.6% in the fiscal 2014 six month period. The decrease in gross profit for both the three and six month periods was due to a decline in our distance education business.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses include occupancy costs associated with our stores and corporate facility, advertising expenses, commissions, credit costs, and corporate administrative functions.

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Selling, general, and administrative expenses on a consolidated basis and by reportable business segment are summarized as follows:

Three months ended

Percent Percent Percent Percent

September 30, of net September 30, of net September 30, of net September 30, of net2014 revenues 2013 revenues 2014 revenues 2013 revenues

College Stores $ 30,102 28.3% $ 27,877 25.6% $ 47,204 33.4% $ 44,250 30.7%

Textbooks 4,394 9.5 5,258 9.9 8,250 11.9 9,865 12.7

Complementary Services 2,409 43.2 2,500 46.1 4,559 44.8 5,280 48.7

Corporate Administration 4,865 — 3,437 — 10,419 — 8,027 —

Intercompany Eliminations 55 (0.5) (64) 0.5 328 (1.8) 302 (1.6)

$ 41,825 28.4% $ 39,008 24.9% $ 70,760 35.0% $ 67,724 31.7%

Six months ended

Consolidated selling, general, and administrative expenses increased $2.8 million, or 7.2%, to 41.8 million for the three months ended September 30, 2014, compared to the three months ended September 30, 2013. Consolidated selling, general, and administrative expenses increased $3.0 million, or 4.6%, to 70.8 million for the six months ended September 30, 2014, compared to the six months ended September 30, 2013. The increase in both the three month and six month periods was driven by higher professional fees, higher rent due to new store additions, increased advertising and salary expenses related to e-commerce initiatives, and higher commissions due to higher third-party online revenue, partially offset by lower personnel costs resulting from store closings and a reduction in headcount. Management believes that a substantial portion of the increased professional fees will not recur over the next twelve months. The Company had lower selling, general, and administrative expenses in its Textbooks and Complementary Services Divisions in both the three month and six month periods ended September 30, 2014 as compared to the prior period, as a result of cost-control initiatives.

Consolidated selling, general, and administrative expenses as a percentage of consolidated revenues were 28.6% and 24.9% for the three months ended September 30, 2014 and September 30, 2013, respectively. Consolidated selling, general, and administrative expenses as a percentage of consolidated revenues were 35.2% and 31.7% for the six months ended September 30, 2014 and September 30, 2013, respectively.

Other (Income) Expense, Net

Other (income) expense consists of net interest expense. Other (income) expense for the periods indicated is summarized as follows:


2014 2013 2014 2013

Net interest expense $ 6,730 11,770 12,893 27,859

Six months ended

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Interest Expense, Net

Interest expense, net decreased $5.0 million, or 42.8%, to $6.7 million for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. Interest expense, net decreased $15.0 million, or 53.7%, to $12.9 million for the six months ended September 30, 2014 compared to the six months ended September 30, 2013. The decrease in the three month period was due to lower debt levels in fiscal 2015 and charges in fiscal 2014 that were not repeated in fiscal 2015 related to accelerated amortization of debt issue costs and prepayment premium paid on debt. The Company made a voluntary paydown of debt during the three months ended September 30, 2013, which resulted in additional interest expense from a prepayment premium and accelerated amortization of debt issue costs related to the debt paydown. The decrease in the six month period ended September 30, 2014 was primarily driven by the Steering Committee Change of Control, as well as being impacted by the factors discussed above with respect to the three month period. The Steering Committee Change of Control that occurred during the three months ended June 30, 2013 resulted in a $10.0 million increase in the principal amount outstanding on the 15% Senior Secured Notes, which was recorded as interest expense.

Income Taxes

The effective tax rates for the six months ended September 30, 2014 and 2013 were 0.6% and 37.1% respectively. For the six months ended September 30, 2014, the difference in the effective rate and the federal statutory rate was primarily due to a valuation allowance. For the six months ended September 30, 2013, the difference in the effective rate and the federal statutory rate was primarily due to state tax expense.

EBITDA and Adjusted EBITDA

The common definition of EBITDA is “Earnings Before Interest, Taxes, Depreciation and Amortization.” In evaluating financial performance, the Company uses Adjusted EBITDA to evaluate, assess, and benchmark its operational results. Adjusted EBITDA consists of EBITDA adjusted to exclude the effects of certain specified items of revenue or gain and expense or loss. The Company’s definition of Adjusted EBITDA is EBITDA items that impacted EBITDA yet are not considered a part of our normal operations, such as: cost and benefits related to the Chapter 11 process and our restructuring, discontinued operations, one-time severance and voluntary costs, and site closure costs and cost related to our store divestiture plan. Inter-divisional profit impacts are also excluded with respect to each business segment in connection with computing segment Adjusted EBITDA. In addition, we also exclude certain non-cash data, including share-based compensation.

EBITDA and Adjusted EBITDA are not measures of financial performance under generally accepted accounting principles (GAAP). They should not be considered in isolation or as a substitute for net income (loss) or cash flows from operations in accordance with GAAP. Adjusted EBITDA excludes components that are significant in understanding and assessing our results of operations and cash flows. In addition, the Company’s measure of Adjusted EBITDA, as presented in this document, may not be comparable to similarly titled measures used by other companies.

However, Adjusted EBITDA is presented as management believes the measure is relevant and useful information widely used by analysts, investors and other interested parties in our industry. The Company understands certain investors use it to measure the Company’s operating performance. Accordingly, management is disclosing this information to permit a more comprehensive analysis of the Company’s operating performance. Adjusted

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30

EBITDA financial information is comparable to net income (loss). The following is a reconciliation of Adjusted EBITDA to the Company’s GAAP disclosure of net income (loss):


2014 2013 2014 2013EBITDA:

Net Income (loss) $ 3,281 6,457 (11,246) (10,486) Interest expense, net 6,730 11,770 12,893 27,859 Provision (benefit) for income taxes 35 4,625 66 (6,204)

Depreciation 1,507 1,520 3,137 3,335 Amortization 2,293 2,189 4,559 4,292

EBITDA $ 13,846 26,561 9,409 18,796

Adjusted EBITDA:EBITDA $ 13,846 26,561 9,409 18,796 Discontinued operations 661 (997) 815 (16) Severance and voluntary costs 18 234 106 364 Share-based compensation 163 53 267 123 Other miscellaneous one-time costs 1,382 291 3,511 4,320

Adjusted EBITDA $ 16,070 26,142 14,108 23,587

Six months ended

The following table provides Adjusted EBITDA on a consolidated and a segment basis:


2014 2013 2014 2013

College Stores $ 4,629 9,783 3,691 8,551

Textbooks 14,970 18,535 20,007 23,839

Complementary Services (58) (42) 12 (202)

Corporate Administration (3,583) (3,189) (7,357) (6,770)

Intercompany Eliminations 112 1,055 (2,245) (1,831)

Total Adjusted EBITDA $ 16,070 26,142 14,108 23,587

Six months ended

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Liquidity and Capital Resources

At September 30, 2014, we had $48.0 million of working capital, including cash and cash equivalents of $14.6 million. For the six months ended September 30, 2014, net cash used in operating activities was $26.8 million. Operating cash flow decreased $43.1 million from the prior year, primarily as a result of lower receivable collections, lower change in accounts payable balances, a higher investment in inventory, and higher prepayment of expense for the six months ended September 30, 2014 as compared to the prior period.

For the six months ended September 30, 2014, we used $9.3 million of cash for investing activities. This use of cash included $5.7 million to purchase property, equipment, and intangibles and $3.6 million in new store acquisitions. In the prior comparable period, cash for investing activities was a $1.2 million use of cash, as the Company’s purchases of property, equipment, intangibles, and acquisitions of $7.2 million were offset by receipts of $6.0 million in proceeds from asset sales.

For the six months ended September 30, 2014, our financing activities resulted in the receipt of $38.4 million of cash. This was the result of $40.6 million of net borrowings on the Credit and Security Agreement and prepayment of financing costs of $2.2 million on the Credit and Security Agreement.

At September 30, 2014, our long-term debt, inclusive of current maturities of $6.2 million, included Senior Secured Notes in the principal amount of $110.0 million, an amortized portion of the debt premium due at maturity on the Senior Secured Notes of $3.0 million, and Term Loans in the principal amount of $6.2 million. A summary of the terms of these obligations is set forth in note 7 of our condensed consolidated financial statements.

NEEBO, INC.

Forward-Looking Statements


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Our financial statements and Management’s Discussion and Analysis contain forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or prove incorrect, could cause our business and results of operations to differ materially from those expressed or implied by such forward-looking statements. You can identify these and other forward-looking statements by the use of words such as “will,” “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative of such terms, or other comparable terminology. Such forward-looking statements include, without limitation, statements related to the impact of litigation; statements related to our accounting estimates and assumptions; statements related to our income tax provision and effective tax rate; and all other statements that discuss management’s beliefs and assumptions.

Risks and uncertainties that may affect our results and could cause results to differ materially from those expressed in such forward-looking statements include the following:

• Our ability to satisfy our future capital and liquidity requirements; our ability to access the credit and capital markets at the times and in the amounts needed and on terms acceptable to us; our ability to comply with covenants applicable to us; and the continuation of acceptable supplier payment terms; in the past we have defaulted on covenants contained in our loan documents and obtained waivers, but there is no guarantee that we will not default again in the future or that we will be able to obtain additional waivers for any such defaults

• Increased competition from other companies that target our markets

• Increased competition from alternative sources of textbooks for students and alternative media, including the renting of textbooks from both online and local campus marketplace competitors, digital or other educational content sold directly to students, and increased competition for the purchase and sale of used textbooks from student-to-student transactions

• Further deterioration in the economy and credit markets, a decline in consumer spending, and/or changes in general economic conditions in the markets in which we compete or may compete

• Our inability to successfully start-up or contract-manage additional college stores or to integrate those additional stores and/or to cost-effectively maintain our current contract-managed stores

• Our inability to purchase a sufficient supply of used textbooks

• Changes in pricing of new and/or used textbooks or in publisher practices regarding new editions and materials packaged with new textbooks

• The loss or retirement of key members of management

• The impact of seasonality of the wholesale and college store operations

• Impairment of identifiable intangibles resulting in a noncash write down of identifiable intangibles.

NEEBO, INC.



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You should keep in mind that any forward-looking statement made in our financial statements or in our Management’s Discussion and Analysis speaks only as of November 28, 2014. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in our financial statements or in our Management’s Discussion and Analysis, except as may be required by law.

September FY15 FS -11.27.14 final - Nebraska Book...

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