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

For the quarterly period ended December 31, 2010


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

For the transition period from to

Commission file number: 333-48221

NEBRASKA BOOK COMPANY, INC.

(Exact name of registrant as specified in its charter)


KANSAS		47-0549819
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

4700 South 19^th Street
Lincoln, Nebraska		68501-0529
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (402) 421-7300

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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). o Yes o No

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

Total number of shares of common stock outstanding as of February 14, 2011: 100 shares

Total Number of Pages: 39

Exhibit Index: Page 39

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	ITEM 1A. RISK FACTORS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS
SIGNATURE
EXHIBIT INDEX
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NEBRASKA BOOK COMPANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	December 31,			March 31,			December 31,
	2010			2010			2009
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	17,727,222		$	60,972,625		$	16,815,036
Receivables, net		74,824,680			57,987,794			75,572,125
Inventories		167,855,569			97,497,689			173,437,403
Recoverable income taxes		3,238,079			2,435,287			6,910,271
Deferred income taxes		7,311,559			6,247,559			7,654,801
Prepaid expenses and other assets		5,382,424			4,070,281			3,461,500

Total current assets		276,339,533			229,211,235			283,851,136
PROPERTY AND EQUIPMENT, net of depreciation & amortization		40,710,170			42,155,424			43,194,981
GOODWILL		218,356,730			215,571,126			215,571,126
CUSTOMER RELATIONSHIPS, net of amortization		75,596,680			79,902,820			81,338,200
TRADENAME		31,320,000			31,320,000			31,320,000
OTHER IDENTIFIABLE INTANGIBLES, net of amortization		5,784,128			5,295,324			5,804,983
DEBT ISSUE COSTS, net of amortization		5,097,203			9,198,683			10,289,115
OTHER ASSETS		4,011,313			2,850,632			3,716,768


	$	657,215,757		$	615,505,244		$	675,086,309

LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable	$	70,043,168		$	26,387,040		$	69,266,116
Accrued employee compensation and benefits		7,091,449			9,401,468			9,547,912
Accrued interest		6,137,984			7,295,709			6,175,189
Accrued incentives		5,962,172			6,313,933			6,231,547
Accrued expenses		4,621,111			9,051,651			7,388,275
Deferred revenue		2,975,106			1,299,960			2,865,460
Current maturities of long-term debt		199,585,345			54,403			52,967
Current maturities of capital lease obligations		661,733			846,053			813,609
Revolving credit facility		15,500,000			—			23,100,000

Total current liabilities		312,578,068			60,650,217			125,441,075
LONG-TERM DEBT, net of current maturities		175,138,755			374,343,069			374,258,315
CAPITAL LEASE OBLIGATIONS, net of current maturities		1,884,334			2,380,737			2,627,370
OTHER LONG-TERM LIABILITIES		1,601,801			2,278,963			2,115,997
DEFERRED INCOME TAXES		50,741,019			50,467,019			51,681,458
DUE TO PARENT		22,029,711			23,194,711			22,998,189
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		148,262,445			148,197,307			148,165,505
Accumulated deficit		(55,020,476	)		(46,006,879	)		(52,201,700	)

Total stockholder’s equity		93,242,069			102,190,528			95,963,905


	$	657,215,757		$	615,505,244		$	675,086,309

See notes to condensed consolidated financial statements.

NEBRASKA BOOK COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Quarter Ended December 31,						Nine Months Ended December 31,
	2010			2009			2010			2009

REVENUES, net of returns	$	69,229,390		$	66,658,584		$	414,420,701		$	412,138,559

COSTS OF SALES (exclusive of depreciation shown below)		41,674,309			38,597,654			253,903,858			252,368,739


Gross profit		27,555,081			28,060,930			160,516,843			159,769,820

OPERATING EXPENSES:
Selling, general and administrative		36,497,904			34,078,959			124,508,189			117,281,571
Depreciation		2,192,044			2,124,972			6,444,649			6,218,426
Amortization		2,152,060			2,684,564			6,556,949			8,320,843


		40,842,008			38,888,495			137,509,787			131,820,840


INCOME (LOSS) FROM OPERATIONS		(13,286,927	)		(10,827,565	)		23,007,056			27,948,980


OTHER EXPENSES:
Interest expense		10,654,701			10,650,185			31,931,423			30,032,285
Interest income		(55,694	)		(60,744	)		(139,770	)		(104,441	)
Loss on early extinguishment of debt		—			3,065,759			—			3,065,759


		10,599,007			13,655,200			31,791,653			32,993,603


LOSS BEFORE INCOME TAXES		(23,885,934	)		(24,482,765	)		(8,784,597	)		(5,044,623	)

INCOME TAX BENEFIT		(10,258,000	)		(9,597,000	)		(4,006,000	)		(1,977,000	)


NET LOSS	$	(13,627,934	)	$	(14,885,765	)	$	(4,778,597	)	$	(3,067,623	)

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		—		(3,628	)		—			(3,628	)	$	—

Share-based compensation attributable to NBC Holdings Corp. stock options		—		33,210			—			33,210			—

Net loss		—		—			(3,067,623	)		(3,067,623	)		(3,067,623	)

Dividends declared to parent		—		—			(4,235,000	)		(4,235,000	)		—


BALANCE, December 31, 2009	$	100	$	148,165,505		$	(52,201,700	)	$	95,963,905		$	(3,067,623	)


BALANCE, April 1, 2010	$	100	$	148,197,307		$	(46,006,879	)	$	102,190,528

Contributed capital		—		(3,630	)		—			(3,630	)	$	—

Share-based compensation attributable to NBC Holdings Corp. stock options		—		68,768			—			68,768			—

Net loss		—		—			(4,778,597	)		(4,778,597	)		(4,778,597	)

Dividends declared to parent		—		—			(4,235,000	)		(4,235,000	)		—


BALANCE, December 31, 2010	$	100	$	148,262,445		$	(55,020,476	)	$	93,242,069		$	(4,778,597	)

See notes to condensed consolidated financial statements.

NEBRASKA BOOK COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Nine Months Ended December 31,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(4,778,597	)	$	(3,067,623	)
Adjustments to reconcile net loss to net cash flows from operating activities:
Share-based compensation		438,810			789,162
Provision for losses on receivables		1,317,433			414,247
Depreciation		6,444,649			6,218,426
Amortization		6,556,949			8,320,843
Amortization of debt issue costs and bond discount		4,535,018			3,415,583
Loss on early extinguishment of debt		—			3,065,759
Loss on disposal of assets		155,235			140,783
Deferred income taxes		(710,000	)		(3,705,000	)
Changes in operating assets and liabilities, net of effect of acquisitions:
Receivables		(18,107,676	)		(15,429,548	)
Inventories		(66,299,510	)		(79,043,123	)
Recoverable income taxes		(802,792	)		(4,040,688	)
Prepaid expenses and other assets		(1,300,227	)		639,374
Other assets		(1,210,911	)		(319,543	)
Accounts payable		43,780,593			42,631,870
Accrued employee compensation and benefits		(2,310,019	)		(4,232,297	)
Accrued interest		(1,157,725	)		5,496,673
Accrued incentives		(351,761	)		120,847
Accrued expenses		(4,430,540	)		(856,976	)
Deferred revenue		1,675,146			1,906,186
Other long-term liabilities		(823,674	)		(190,334	)

Net cash flows from operating activities		(37,379,599	)		(37,725,379	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(4,965,710	)		(4,025,625	)
Acquisitions, net of cash acquired		(9,317,813	)		(2,304,343	)
Proceeds from sale of property and equipment		21,708			93,674
Software development costs		(916,314	)		(441,156	)

Net cash flows from investing activities		(15,178,129	)		(6,677,450	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Contributed capital		(42	)		—
Proceeds from issuance of long-term debt		—			199,000,000
Payment of financing costs		(66,660	)		(9,834,721	)
Principal payments on long-term debt		(40,250	)		(193,112,511	)
Principal payments on capital lease obligations		(680,723	)		(606,371	)
Borrowings under revolving credit facility		43,700,000			85,000,000
Payments under revolving credit facility		(28,200,000	)		(61,900,000	)
Dividends paid to parent		(4,235,000	)		(4,235,000	)
Change in due to parent		(1,165,000	)		2,868,000

Net cash flows from financing activities		9,312,325			17,179,397


NET DECREASE IN CASH AND CASH EQUIVALENTS		(43,245,403	)		(27,223,432	)

CASH AND CASH EQUIVALENTS, Beginning of period		60,972,625			44,038,468

CASH AND CASH EQUIVALENTS, End of period	$	17,727,222		$	16,815,036


SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash (received) paid during the period for:
Interest	$	28,554,130		$	21,120,029
Income taxes		(1,328,208	)		2,900,688
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)

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 December 31, 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.

Inventories — Inventories are summarized as follows:


	December 31,		March 31,		December 31,
	2010		2010		2009
Bookstore Division	$	150,054,277	$	68,765,952	$	152,507,300
Textbook Division		15,448,373		26,132,007		17,200,765
Complementary Services Division		2,352,919		2,599,730		3,729,338

	$	167,855,569	$	97,497,689	$	173,437,403

Goodwill and Other Identifiable Intangibles — During the nine months ended December 31, 2010, nineteen bookstore locations were acquired in fifteen separate transactions. The total purchase price, net of cash acquired, of such acquisitions was $8.7 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 $1.0 million was assigned to contract-managed relationships with a weighted-average amortization period of 4.7 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 nine months ended December 31, 2010 was 4.1 years. Costs incurred to renew contract-managed relationships during the nine months ended December 31, 2010 were $0.3 million with a weighted-average amortization period of five years before the next renewal of such contracts. As of December 31, 2010, $0.3 million of prior year acquisition costs remained to be paid. During the nine months ended December 31, 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, December 31, 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, December 31, 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, December 31, 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, December 31, 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:


	December 31, 2010
	Gross					Net
	Carrying		Accumulated			Carrying
	Amount		Amortization			Amount
Customer relationships	$	114,830,000	$	(39,233,320	)	$	75,596,680
Developed technology		14,626,104		(12,496,117	)		2,129,987
Covenants not to compete		1,977,300		(1,135,783	)		841,517
Contract-managed relationships		5,292,261		(2,479,637	)		2,812,624
Other		1,585,407		(1,585,407	)		—

	$	138,311,072	$	(56,930,264	)	$	81,380,808


	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


	December 31, 2009
	Gross					Net
	Carrying		Accumulated			Carrying
	Amount		Amortization			Amount
Customer relationships	$	114,830,000	$	(33,491,800	)	$	81,338,200
Developed technology		13,527,173		(11,728,170	)		1,799,003
Covenants not to compete		3,958,699		(2,530,782	)		1,427,917
Contract-managed relationships		4,305,740		(2,079,989	)		2,225,751
Other		1,585,407		(1,233,095	)		352,312

	$	138,207,019	$	(51,063,836	)	$	87,143,183

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


	Amortization
	Expense

Quarter ended December 31, 2010	$	2,152,060
Quarter ended December 31, 2009		2,684,564
Nine months ended December 31, 2010		6,556,949
Nine months ended December 31, 2009		8,320,843

Estimated amortization expense for the fiscal years ending March 31:
2011	$	8,121,263
2012		7,531,804
2013		6,997,101
2014		6,566,583
2015		6,363,644

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.

Long-Term Debt — Indebtedness at December 31, 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 $15.5 million was outstanding under revolving lines of credit and $0.9 million was outstanding under a letter of credit at December 31, 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 $0.5 million at December 31, 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 $2.6 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 December 31, 2010 was 8.0%. 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 December 31, 2010 was $74.1 million, of which $15.5 million was outstanding under revolving lines of credit, $0.9 million was outstanding under a letter of credit and $57.7 million was unused. At December 31, 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 December 31, 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 1.8 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 December 31, 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 December 31, 2010, we were in compliance with all of our debt covenants.

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 revolving credit facility and long-term debt are not measured at estimated fair value on a recurring basis in the statement of financial position so they do not fall under the three-level hierarchal disclosure requirements. The fair value of our revolving credit facility approximates carrying value due to its short-term nature. 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 values for our revolving credit facility and our fixed rate long-term debt at December 31, 2010, March 31, 2010 and December 31, 2009 is summarized in the following table:


	December 31,		March 31,		December 31,
	2010		2010		2009
Carrying Values:

Revolving credit facility	$	15,500,000	$	—	$	23,100,000
Fixed rate debt		377,270,167		377,624,262		377,752,261

Fair Values:

Revolving credit facility	$	15,500,000	$	—	$	23,100,000
Fixed rate debt		352,730,000		372,317,000		357,178,000

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 and earnings before interest, taxes, depreciation, amortization and loss on early extinguishment of debt (“Adjusted EBITDA”) are important measures 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 December 31, 2010:
External customer revenues	$	40,268,360		$	22,894,766	$	6,066,264	$	69,229,390
Intersegment revenues		105,418			9,123,396		2,522,714		11,751,528
Depreciation and amortization expense		2,300,835			1,531,120		269,516		4,101,471
Earnings before interest, taxes, depreciation and amortization (EBITDA)		(8,368,722	)		5,818,599		625,382		(1,924,741	)

Quarter ended December 31, 2009:
External customer revenues	$	35,946,154		$	23,643,734	$	7,068,696	$	66,658,584
Intersegment revenues		628,558			8,990,245		1,402,820		11,021,623
Depreciation and amortization expense		2,255,745			1,518,921		682,558		4,457,224
Earnings before interest, taxes, depreciation, amortization and loss on early extinguishment of debt (Adjusted EBITDA)		(6,432,938	)		5,960,451		556,068		83,581

Nine months ended December 31, 2010:
External customer revenues	$	308,409,724		$	85,183,518	$	20,827,459	$	414,420,701
Intersegment revenues		195,082			28,238,466		6,735,689		35,169,237
Depreciation and amortization expense		6,756,327			4,572,576		749,369		12,078,272
Earnings before interest, taxes, depreciation and amortization (EBITDA)		18,153,253			30,180,524		2,394,576		50,728,353

Nine months ended December 31, 2009:
External customer revenues	$	305,403,467		$	85,424,032	$	21,311,060	$	412,138,559
Intersegment revenues		1,385,982			31,728,270		4,581,679		37,695,931
Depreciation and amortization expense		6,885,874			4,559,710		2,042,835		13,488,419
Earnings before interest, taxes, depreciation, amortization and loss on early extinguishment of debt (Adjusted EBITDA)		22,175,114			31,831,524		1,669,013		55,675,651

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


	Quarter Ended December 31,						Nine Months Ended December 31,
	2010			2009			2010			2009
Revenues:
Total for reportable segments	$	80,980,918		$	77,680,207		$	449,589,938		$	449,834,490
Elimination of intersegment revenues		(11,751,528	)		(11,021,623	)		(35,169,237	)		(37,695,931	)

Consolidated total	$	69,229,390		$	66,658,584		$	414,420,701		$	412,138,559


Depreciation and Amortization Expense:
Total for reportable segments	$	4,101,471		$	4,457,224		$	12,078,272		$	13,488,419
Corporate Administration		242,633			352,312			923,326			1,050,850

Consolidated total	$	4,344,104		$	4,809,536		$	13,001,598		$	14,539,269


Income Before Income Taxes:
Total Adjusted EBITDA for reportable segments	$	(1,924,741	)	$	83,581		$	50,728,353		$	55,675,651

Corporate Administration Adjusted EBITDA loss (including interdivision profit elimination)		(7,018,082	)		(6,101,610	)		(14,719,699	)		(13,187,402	)

		(8,942,823	)		(6,018,029	)		36,008,654			42,488,249
Depreciation and amortization		(4,344,104	)		(4,809,536	)		(13,001,598	)		(14,539,269	)

Consolidated income (loss) from operations		(13,286,927	)		(10,827,565	)		23,007,056			27,948,980
Interest and other expenses, net		(10,599,007	)		(13,655,200	)		(31,791,653	)		(32,993,603	)


Consolidated loss before income taxes	$	(23,885,934	)	$	(24,482,765	)	$	(8,784,597	)	$	(5,044,623	)

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.

Accounting Pronouncements Not Yet Adopted — In December 2010, the FASB issued Accounting Standards Update 2010-28, “Intangibles — Goodwill and Other (Topic 350) — When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts” (“Update 2010-28”). Update 2010-28 amends the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. Update 2010-28 becomes effective for us in fiscal year 2012 and any impairment to be recorded upon adoption will be recognized as an adjustment to beginning retained earnings. Early adoption is not permitted. Management has not yet determined if the update will have a material impact on the consolidated financial statements.

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.

Related Party Transactions — In accordance with our debt covenants, we declared and paid $4.2 million in dividends to NBC during the nine months ended December 31, 2010 and 2009 to provide funding for interest due and payable on NBC’s Senior Discount Notes.

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 December 31, 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
DECEMBER 31, 2010
(UNAUDITED)


	Nebraska
	Book			Subsidiary					Consolidated
	Company, Inc.			Guarantors		Eliminations			Totals
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	8,842,112		$	8,885,110	$	—		$	17,727,222
Intercompany receivables		26,829,171			44,173,384		(71,002,555	)		—
Receivables, net		21,756,408			53,068,272		—			74,824,680
Inventories		105,575,463			62,280,106		—			167,855,569
Recoverable income taxes		3,238,079			—		—			3,238,079
Deferred income taxes		2,312,559			4,999,000		—			7,311,559
Prepaid expenses and other assets		2,309,750			3,072,674		—			5,382,424

Total current assets		170,863,542			176,478,546		(71,002,555	)		276,339,533
PROPERTY AND EQUIPMENT, net		34,966,861			5,743,309		—			40,710,170
GOODWILL		202,685,622			15,671,108		—			218,356,730
CUSTOMER RELATIONSHIPS, net		4,082,562			71,514,118		—			75,596,680
TRADENAME		31,320,000			—		—			31,320,000
OTHER IDENTIFIABLE INTANGIBLES, net		3,319,252			2,464,876		—			5,784,128
INVESTMENT IN SUBSIDIARIES		183,999,791			—		(183,999,791	)		—
OTHER ASSETS		8,089,951			1,018,565		—			9,108,516


	$	639,327,581		$	272,890,522	$	(255,002,346	)	$	657,215,757

LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable	$	48,762,620		$	21,280,548	$	—		$	70,043,168
Intercompany payables		44,173,384			26,829,171		(71,002,555	)		—
Accrued employee compensation and benefits		5,005,107			2,086,342		—			7,091,449
Accrued interest		6,137,984			—		—			6,137,984
Accrued incentives		11,374			5,950,798		—			5,962,172
Accrued expenses		3,671,866			949,245		—			4,621,111
Income taxes payable		(4,010,750	)		4,010,750		—			—
Deferred revenue		2,972,228			2,878		—			2,975,106
Current maturities of long-term debt		199,585,345			—		—			199,585,345
Current maturities of capital lease obligations		661,733			—		—			661,733
Revolving credit facility		15,500,000			—		—			15,500,000

Total current liabilities		322,470,891			61,109,732		(71,002,555	)		312,578,068
LONG-TERM DEBT, net of current maturities		175,138,755			—		—			175,138,755
CAPITAL LEASE OBLIGATIONS, net of current maturities		1,884,334			—		—			1,884,334
OTHER LONG-TERM LIABILITIES		1,401,801			200,000		—			1,601,801
DEFERRED INCOME TAXES		23,160,020			27,580,999		—			50,741,019
DUE TO PARENT		22,029,711			—		—			22,029,711
COMMITMENTS
STOCKHOLDER’S EQUITY		93,242,069			183,999,791		(183,999,791	)		93,242,069


	$	639,327,581		$	272,890,522	$	(255,002,346	)	$	657,215,757

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

NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2009
(UNAUDITED)


	Nebraska
	Book			Subsidiary					Consolidated
	Company, Inc.			Guarantors		Eliminations			Totals
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	8,292,431		$	8,522,605	$	—		$	16,815,036
Intercompany receivables		23,513,510			25,009,714		(48,523,224	)		—
Receivables, net		23,399,403			52,172,722		—			75,572,125
Inventories		116,911,937			56,525,466		—			173,437,403
Recoverable income taxes		6,910,271			—		—			6,910,271
Deferred income taxes		2,154,801			5,500,000		—			7,654,801
Prepaid expenses and other assets		2,918,494			543,006		—			3,461,500

Total current assets		184,100,847			148,273,513		(48,523,224	)		283,851,136
PROPERTY AND EQUIPMENT, net		37,798,186			5,396,795		—			43,194,981
GOODWILL		199,900,018			15,671,108		—			215,571,126
CUSTOMER RELATIONSHIPS, net		4,392,630			76,945,570		—			81,338,200
TRADENAME		31,320,000			—		—			31,320,000
OTHER IDENTIFIABLE INTANGIBLES, net		4,111,586			1,693,397		—			5,804,983
INVESTMENT IN SUBSIDIARIES		168,394,390			—		(168,394,390	)		—
OTHER ASSETS		12,521,407			1,484,476		—			14,005,883


	$	642,539,064		$	249,464,859	$	(216,917,614	)	$	675,086,309

LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable	$	53,211,464		$	16,054,652	$	—		$	69,266,116
Intercompany payables		25,009,714			23,513,510		(48,523,224	)		—
Accrued employee compensation and benefits		7,349,818			2,198,094					9,547,912
Accrued interest		6,175,189			—		—			6,175,189
Accrued incentives		21,347			6,210,200		—			6,231,547
Accrued expenses		6,775,764			612,511		—			7,388,275
Income taxes payable		(3,391,744	)		3,391,744		—			—
Deferred revenue		2,858,701			6,759		—			2,865,460
Current maturities of long-term debt		52,967			—		—			52,967
Current maturities of capital lease obligations		813,609			—		—			813,609
Revolving credit facility		23,100,000			—		—			23,100,000

Total current liabilities		121,976,829			51,987,470		(48,523,224	)		125,441,075
LONG-TERM DEBT, net of current maturities		374,258,315			—		—			374,258,315
CAPITAL LEASE OBLIGATIONS, net of current maturities		2,627,370			—		—			2,627,370
OTHER LONG-TERM LIABILITIES		1,755,997			360,000		—			2,115,997
DEFERRED INCOME TAXES		22,958,459			28,722,999		—			51,681,458
DUE TO PARENT		22,998,189			—		—			22,998,189
COMMITMENTS
STOCKHOLDER’S EQUITY		95,963,905			168,394,390		(168,394,390	)		95,963,905


	$	642,539,064		$	249,464,859	$	(216,917,614	)	$	675,086,309

NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED DECEMBER 31, 2010
(UNAUDITED)


	Nebraska
	Book			Subsidiary						Consolidated
	Company, Inc.			Guarantors			Eliminations			Totals

REVENUES, net of returns	$	34,423,021		$	44,200,395		$	(9,394,026	)	$	69,229,390

COSTS OF SALES (exclusive of depreciation shown below)		22,482,053			28,893,767			(9,701,511	)		41,674,309


Gross profit		11,940,968			15,306,628			307,485			27,555,081

OPERATING EXPENSES (INCOME):
Selling, general and administrative		25,358,569			10,831,850			307,485			36,497,904
Depreciation		1,699,697			492,347			—			2,192,044
Amortization		504,125			1,647,935			—			2,152,060
Intercompany administrative fee		(2,171,391	)		2,171,391			—			—
Equity in earnings of subsidiaries		1,082,802			—			(1,082,802	)		—


		26,473,802			15,143,523			(775,317	)		40,842,008


INCOME (LOSS) FROM OPERATIONS		(14,532,834	)		163,105			1,082,802			(13,286,927	)


OTHER EXPENSES:
Interest expense		10,654,670			31			—			10,654,701
Interest income		(20,570	)		(35,124	)		—			(55,694	)


		10,634,100			(35,093	)		—			10,599,007


INCOME (LOSS) BEFORE INCOME TAXES		(25,166,934	)		198,198			1,082,802			(23,885,934	)

INCOME TAX EXPENSE (BENEFIT)		(11,539,000	)		1,281,000			—			(10,258,000	)


NET LOSS	$	(13,627,934	)	$	(1,082,802	)	$	1,082,802		$	(13,627,934	)

NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED DECEMBER 31, 2009
(UNAUDITED)


	Nebraska
	Book			Subsidiary						Consolidated
	Company, Inc.			Guarantors			Eliminations			Totals

REVENUES, net of returns	$	31,185,653		$	44,664,776		$	(9,191,845	)	$	66,658,584

COSTS OF SALES (exclusive of depreciation shown below)		17,946,287			30,123,113			(9,471,746	)		38,597,654


Gross profit		13,239,366			14,541,663			279,901			28,060,930

OPERATING EXPENSES (INCOME):
Selling, general and administrative		23,986,143			9,812,915			279,901			34,078,959
Depreciation		1,676,774			448,198			—			2,124,972
Amortization		1,159,526			1,525,038			—			2,684,564
Intercompany administrative fee		(1,353,000	)		1,353,000			—			—
Equity in earnings of subsidiaries		(973,006	)		—			973,006			—


		24,496,437			13,139,151			1,252,907			38,888,495


INCOME (LOSS) FROM OPERATIONS		(11,257,071	)		1,402,512			(973,006	)		(10,827,565	)


OTHER EXPENSES:
Interest expense		10,650,114			71			—			10,650,185
Interest income		(28,179	)		(32,565	)		—			(60,744	)
Loss on early extinguishment of debt		3,065,759			—			—			3,065,759


		13,687,694			(32,494	)		—			13,655,200


INCOME (LOSS) BEFORE INCOME TAXES		(24,944,765	)		1,435,006			(973,006	)		(24,482,765	)

INCOME TAX EXPENSE (BENEFIT)		(10,059,000	)		462,000			—			(9,597,000	)


NET INCOME (LOSS)	$	(14,885,765	)	$	973,006		$	(973,006	)	$	(14,885,765	)

NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2010
(UNAUDITED)


	Nebraska
	Book			Subsidiary						Consolidated
	Company, Inc.			Guarantors			Eliminations			Totals

REVENUES, net of returns	$	239,235,201		$	204,179,319		$	(28,993,819	)	$	414,420,701

COSTS OF SALES (exclusive of depreciation shown below)		153,007,110			130,681,323			(29,784,575	)		253,903,858


Gross profit		86,228,091			73,497,996			790,756			160,516,843

OPERATING EXPENSES (INCOME):
Selling, general and administrative		85,789,255			37,928,178			790,756			124,508,189
Depreciation		5,064,620			1,380,029			—			6,444,649
Amortization		1,758,504			4,798,445			—			6,556,949
Intercompany administrative fee		(6,514,173	)		6,514,173			—			—
Equity in earnings of subsidiaries		(12,467,552	)		—			12,467,552			—


		73,630,654			50,620,825			13,258,308			137,509,787


INCOME FROM OPERATIONS		12,597,437			22,877,171			(12,467,552	)		23,007,056


OTHER EXPENSES:
Interest expense		31,931,384			39			—			31,931,423
Interest income		(53,350	)		(86,420	)		—			(139,770	)


		31,878,034			(86,381	)		—			31,791,653


INCOME (LOSS) BEFORE INCOME TAXES		(19,280,597	)		22,963,552			(12,467,552	)		(8,784,597	)

INCOME TAX EXPENSE (BENEFIT)		(14,502,000	)		10,496,000			—			(4,006,000	)


NET INCOME (LOSS)	$	(4,778,597	)	$	12,467,552		$	(12,467,552	)	$	(4,778,597	)

NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2009
(UNAUDITED)


	Nebraska
	Book			Subsidiary						Consolidated
	Company, Inc.			Guarantors			Eliminations			Totals

REVENUES, net of returns	$	246,489,116		$	198,005,827		$	(32,356,384	)	$	412,138,559

COSTS OF SALES (exclusive of depreciation shown below)		158,084,624			127,440,885			(33,156,770	)		252,368,739


Gross profit		88,404,492			70,564,942			800,386			159,769,820

OPERATING EXPENSES (INCOME):
Selling, general and administrative		82,863,682			33,617,503			800,386			117,281,571
Depreciation		4,900,807			1,317,619			—			6,218,426
Amortization		3,683,562			4,637,281			—			8,320,843
Intercompany administrative fee		(4,059,000	)		4,059,000			—			—
Equity in earnings of subsidiaries		(17,103,452	)		—			17,103,452			—


		70,285,599			43,631,403			17,903,838			131,820,840


INCOME FROM OPERATIONS		18,118,893			26,933,539			(17,103,452	)		27,948,980


OTHER EXPENSES:
Interest expense		30,031,350			935			—			30,032,285
Interest Income		(45,593	)		(58,848	)		—			(104,441	)
Loss on early extinguishment of debt		3,065,759			—			—			3,065,759


		33,051,516			(57,913	)		—			32,993,603


INCOME (LOSS) BEFORE INCOME TAXES		(14,932,623	)		26,991,452			(17,103,452	)		(5,044,623	)

INCOME TAX EXPENSE (BENEFIT)		(11,865,000	)		9,888,000			—			(1,977,000	)


NET INCOME (LOSS)	$	(3,067,623	)	$	17,103,452		$	(17,103,452	)	$	(3,067,623	)

NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2010
(UNAUDITED)


	Nebraska
	Book			Subsidiary						Consolidated
	Company, Inc.			Guarantors			Eliminations			Totals

CASH FLOWS FROM OPERATING ACTIVITIES	$	(46,211,471	)	$	8,831,872		$	—		$	(37,379,599	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(3,152,137	)		(1,820,688	)		7,115			(4,965,710	)
Acquisitions, net of cash acquired		(5,619,270	)		(3,698,543	)		—			(9,317,813	)
Proceeds from sale of property and equipment		18,158			10,665			(7,115	)		21,708
Software development costs		(916,314	)		—			—			(916,314	)


Net cash flows from investing activities		(9,669,563	)		(5,508,566	)		—			(15,178,129	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Contributed capital		(42	)		—			—			(42	)
Payment of financing costs		(66,660	)		—			—			(66,660	)
Principal payments on long-term debt		(40,250	)		—			—			(40,250	)
Principal payments on capital lease obligations		(680,723	)		—			—			(680,723	)
Borrowings under revolving credit facility		43,700,000			—			—			43,700,000
Payments under revolving credit facility		(28,200,000	)		—			—			(28,200,000	)
Dividends paid to parent		(4,235,000	)		—			—			(4,235,000	)
Change in due to parent		(1,165,000	)		—			—			(1,165,000	)


Net cash flows from financing activities		9,312,325			—			—			9,312,325


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(46,568,709	)		3,323,306			—			(43,245,403	)

CASH AND CASH EQUIVALENTS, Beginning of period		55,410,821			5,561,804			—			60,972,625


CASH AND CASH EQUIVALENTS, End of period	$	8,842,112		$	8,885,110		$	—		$	17,727,222

NEBRASKA BOOK COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2009
(UNAUDITED)


	Nebraska
	Book			Subsidiary						Consolidated
	Company, Inc.			Guarantors			Eliminations			Totals

CASH FLOWS FROM OPERATING ACTIVITIES	$	(46,006,989	)	$	8,281,610		$	—		$	(37,725,379	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(2,982,415	)		(1,097,913	)		54,703			(4,025,625	)
Acquisitions, net of cash acquired		(305,641	)		(1,998,702	)		—			(2,304,343	)
Proceeds from sale of property and equipment		37,757			110,620			(54,703	)		93,674
Software development costs		(441,156	)		—			—			(441,156	)


Net cash flows from investing activities		(3,691,455	)		(2,985,995	)		—			(6,677,450	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt		199,000,000			—			—			199,000,000
Payment of financing costs		(9,834,721	)		—			—			(9,834,721	)
Principal payments on long-term debt		(193,112,511	)		—			—			(193,112,511	)
Principal payments on capital lease obligations		(606,371	)		—			—			(606,371	)
Borrowings under revolving credit facility		85,000,000			—			—			85,000,000
Payments under revolving credit facility		(61,900,000	)		—			—			(61,900,000	)
Dividends paid to parent		(4,235,000	)		—			—			(4,235,000	)
Change in due to parent		2,868,000			—			—			2,868,000


Net cash flows from financing activities		17,179,397			—			—			17,179,397


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(32,519,047	)		5,295,615			—			(27,223,432	)

CASH AND CASH EQUIVALENTS, Beginning of period		40,811,478			3,226,990			—			44,038,468


CASH AND CASH EQUIVALENTS, End of period	$	8,292,431		$	8,522,605		$	—		$	16,815,036

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Acquisitions. Our Bookstore Division continues to grow its number of bookstores through acquisitions. We acquired three contract-managed bookstore locations in two separate transactions during the quarter ended December 31, 2010. We believe there are attractive opportunities for us to continue to expand our chain of bookstores across the country.

Revenue Results. Consolidated revenues for the quarter ended December 31, 2010 increased $2.6 million, or 3.9%, from the quarter ended December 31, 2009. The increase was primarily due to an increase in revenues in the Bookstore Division, which was partially offset by a decrease in revenues in the Textbook Division. Revenues increased in the Bookstore Division primarily due to an increase in additional revenue from new bookstores and to an increase in same-store sales. Revenues decreased in the Textbook Division primarily as a result of a decrease in units sold.

Adjusted EBITDA Results. Consolidated Adjusted EBITDA for the quarter ended December 31, 2010 decreased $2.9 million from the quarter ended December 31, 2009 primarily due to lower gross profit and higher selling, general and administrative expenses. EBITDA and Adjusted EBITDA are considered non-GAAP measures by the SEC, and therefore you should refer to the more detailed explanation of the measures that is provided later in this Item.

EBITDA is defined as earnings before interest, taxes, depreciation, and amortization. Adjusted EBITDA is EBITDA adjusted for loss on early extinguishment of debt. There was no loss on early extinguishment of debt for the quarter and nine months ended December 31, 2010; therefore, Adjusted EBITDA equals EBITDA for those periods. As we are highly-leveraged and as our equity is not publicly-traded, management believes that the non-GAAP measures, EBITDA and Adjusted EBITDA, are useful in evaluating our results and provide additional information for determining our ability to meet debt service requirements. That belief is driven by the consistent use of the measures in the computations used to establish the value of our equity over the past 15 years and the fact that our debt covenants also use the measures, as further described later in this Item, to measure and monitor our financial results. Due to the importance of EBITDA and Adjusted EBITDA to our equity and debt holders, our chief operating decision makers and other members of management use EBITDA and Adjusted EBITDA to measure our overall performance, to assist in resource allocation decision-making, to develop our budget goals, to determine incentive compensation goals and payments, and to manage other expenditures among other uses.

With respect to covenant compliance calculations, EBITDA, as defined in the ABL Credit Agreement (hereinafter, referred to as “Credit Facility EBITDA”), includes additional adjustments to EBITDA. Credit Facility EBITDA is defined in the ABL Credit Agreement as: (1) consolidated net income, as defined therein; plus (2) the following items, to the extent deducted from consolidated net income: (a) income tax expense; (b) interest expense, amortization or write-off of debt discount and debt issuance costs and commissions, discounts and other fees and charges associated with indebtedness; (c) depreciation and amortization expense; (d) amortization of intangibles and organization costs; (e) any non-cash extraordinary, unusual or non-recurring expenses or losses; (f) any other non-cash charges; and (g) charges incurred on or prior to September 30, 2010 in connection with the restricted stock plan not to exceed $5.0 million in the aggregate; minus (3) the following items, to the extent included in the statement of net income for such period; (i) interest income; (ii) any extraordinary, unusual or non-recurring income or gains; and (iii) any other non-cash income. Credit Facility EBITDA is utilized when calculating the pro forma fixed charge coverage ratio under the ABL Credit Agreement. The pro forma consolidated coverage ratio under the indentures to the Senior Subordinated Notes and the Senior Secured Notes uses EBITDA and the indentures define EBITDA similar to Credit Facility EBITDA except that charges incurred in connection with the restricted stock plan are not added back to consolidated net income. See Note 4 to the condensed consolidated financial statements for disclosure of certain of our financial covenants.

There are material limitations associated with the use of EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA do not represent and should not be considered as alternatives to net cash flows from operating activities or net income as determined by GAAP. Furthermore, EBITDA and Adjusted EBITDA do not necessarily indicate whether cash flows will be sufficient for cash requirements because the measures do not include reductions for cash payments for our obligation to service our debt, fund our working capital, make capital expenditures and make acquisitions or pay our income taxes and dividends; nor are they a measure of our profitability because they do not include costs and expenses such as interest, taxes, depreciation, amortization, and loss on early extinguishment of debt, which are significant components in understanding and assessing our financial performance. Even with these limitations, we believe EBITDA and Adjusted EBITDA, when viewed with both our GAAP results and the reconciliations to operating cash flows and net income, provide a more complete understanding of our business than otherwise could be obtained absent this disclosure. EBITDA and Adjusted EBITDA measures presented may not be comparable to similarly titled measures presented by other companies.

Challenges and Expectations

We expect that we will continue to face challenges and opportunities similar to those which we have faced in the recent past and, in addition, new and different challenges and opportunities. Our three tranches of debt (the Senior Secured Notes, the ABL Facility and the Senior Subordinated Notes) each may mature within a period of six months of each other starting with the ABL Facility, which may mature on the earlier of October 2, 2012 or 91 days prior to the earliest maturity of the Senior Secured Notes, the Senior Subordinated Notes, NBC’s Senior Discount Notes, or any refinancing thereof, effectively September 1, 2011. As a consequence, we may be required to refinance the other tranches of debt in our capital structure in order to refinance the ABL Facility. We are currently working on a refinancing with our investment bankers. Due to our highly leveraged capital structure as well as reliance on market-based vendor payment terms, continued uncertainty in the credit markets and our future results of operations may negatively impact our ability to extend or refinance our existing debt on reasonable terms, or at all and to continue to utilize existing vendor payment terms. We have experienced, and we believe we will continue to experience, increasing competition for the supply of used textbooks from other companies, including other textbook wholesalers and from student-to-student transactions, increasing competition from alternative media and alternative sources of textbooks for students, including renting of textbooks from both online and local campus marketplace competitors, competition for contract-management opportunities and other challenges. We also believe that although there continues to be attractive opportunities related to acquisitions, we may not be able to identify additional bookstores for acquisition or we may not be successful in competing for contracts to manage additional institutional bookstores. Finally, we are uncertain what impact the current economy might have on our business. We expect that our capital expenditures will be consistent with prior periods.

Quarter Ended December 31, 2010 Compared With Quarter Ended December 31, 2009.

Revenues. Revenues for the quarters ended December 31, 2010 and 2009 and the corresponding change in revenues were as follows:


							Change
	2010			2009			Amount			Percentage
Bookstore Division	$	40,373,778		$	36,574,712		$	3,799,066			10.4	%
Textbook Division		32,018,162			32,633,979			(615,817	)		(1.9	)%
Complementary Services Division		8,588,978			8,471,516			117,462			1.4	%
Intercompany Eliminations		(11,751,528	)		(11,021,623	)		(729,905	)		6.6	%

	$	69,229,390		$	66,658,584		$	2,570,806			3.9	%

For the quarter ended December 31, 2010, Bookstore Division revenues increased $3.8 million, or 10.4%, from the quarter ended December 31, 2009. The increase in Bookstore Division revenues was attributable to additional revenue from new bookstores and to an increase in same-store sales, which were partially offset by a decrease in revenues as a result of certain store closings. We have added 39 bookstore locations through acquisition or start-ups since April 1, 2009. The new bookstores provided an additional $2.9 million of revenue for the quarter ended December 31, 2010. Same-store sales for the quarter ended December 31, 2010 increased $1.6 million, or 4.7%, from the quarter ended December 31, 2009, primarily due to increased clothing and insignia wear and electronics revenues. We define same-store sales for the quarter ended December 31, 2010 as sales from any store, even if expanded or relocated, that we have operated since the start of fiscal year 2010. Revenues declined $0.7 million for the quarter ended December 31, 2010 as a result of certain store closings since April 1, 2009.

For the quarter ended December 31, 2010, Textbook Division revenues decreased $0.6 million, or 1.9%, from the quarter ended December 31, 2009 primarily due to a 4.2% decrease in units sold, which was partially offset by a 0.5% increase in average price per book sold. In addition, the decrease in revenues was partially offset by an increase in revenues from textbook rentals to third-parties. Complementary Services Division revenues increased $0.1 million, or 1.4%, from the quarter ended December 31, 2009, primarily due to an increase in revenues from our systems business, which was mostly offset by a decrease in revenues from our distance education business. Intercompany eliminations increased $0.7 million primarily as a result of an increase in intercompany revenues in our systems business.

Gross profit. Gross profit for the quarter ended December 31, 2010 decreased $0.5 million, or 1.8%, to $27.6 million from $28.1 million for the quarter ended December 31, 2009. The decrease in gross profit was attributable to a decrease in the Bookstore Division gross profit, which was partially offset by an increase in the Textbook Division gross profit. The consolidated gross margin percentage decreased to 39.8% for the quarter ended December 31, 2010 from 42.1% for the quarter ended December 31, 2009. The decrease in our consolidated gross margin percentage is primarily attributable to a decrease in the gross margin percentage for the Bookstore Division.

Selling, general and administrative expenses. Selling, general and administrative expenses for the quarter ended December 31, 2010 increased $2.4 million, or 7.1%, to $36.5 million from $34.1 million for the quarter ended December 31, 2009. Selling, general and administrative expenses as a percentage of revenues were 52.7% and 51.1% for the quarters ended December 31, 2010 and 2009, respectively. The increase in selling, general and administrative expenses was primarily attributable to a $1.4 million increase in consulting services related to expense reduction and top line growth initiatives such as inventory and pricing optimization and to a $0.8 million increase in rent expense primarily due to an increase in the number of bookstores. These increases were partially offset by a $0.6 million decrease in personnel costs primarily due to lower incentive compensation costs.

Earnings before interest, taxes, depreciation, amortization, and loss on early extinguishment of debt (Adjusted EBITDA). Adjusted EBITDA for the quarters ended December 31, 2010 and 2009 and the corresponding change in Adjusted EBITDA were as follows:


							Change
	2010			2009			Amount			Percentage
Bookstore Division	$	(8,368,721	)	$	(6,432,938	)	$	(1,935,783	)		(30.1	)%
Textbook Division		5,818,598			5,960,451			(141,853	)		(2.4	)%
Complementary Services Division		625,382			556,068			69,314			12.5	%
Corporate Administration		(7,018,082	)		(6,101,610	)		(916,472	)		(15.0	)%

	$	(8,942,823	)	$	(6,018,029	)	$	(2,924,794	)		(48.6	)%

Bookstore Division Adjusted EBITDA loss increased $1.9 million from the quarter ended December 31, 2009 primarily due to lower gross profit and to higher selling, general and administrative expenses. The $0.2 million, or 2.4%, decrease in Textbook Division Adjusted EBITDA from the quarter ended December 31, 2009, was primarily due to an increase in selling, general and administrative expenses. Corporate Administration’s Adjusted EBITDA loss increased $0.9 million from the quarter ended December 31, 2009, primarily due to an increase in consulting services expense.

For an explanation of why EBITDA and Adjusted EBITDA are useful measures in evaluating our operating results and how they provide additional information for determining our ability to meet debt service requirements, see “Adjusted EBITDA Results” earlier in this Item. The following presentation reconciles net loss, which we believe to be the closest GAAP performance measure, to EBITDA and Adjusted EBITDA and reconciles EBITDA and Adjusted EBITDA to net cash flows from operating activities, which we believe to be the closest GAAP liquidity measure, and also sets forth net cash flows from investing and financing activities:


	Quarter Ended December 31,
	2010			2009

Net loss	$	(13,627,934	)	$	(14,885,765	)

Interest expense, net		10,599,007			10,589,441
Income tax benefit		(10,258,000	)		(9,597,000	)
Depreciation and amortization		4,344,104			4,809,536


EBITDA	$	(8,942,823	)	$	(9,083,788	)

Loss on early extinguishment of debt		—			3,065,759


Adjusted EBITDA	$	(8,942,823	)	$	(6,018,029	)

Share-based compensation		8,973			309,421
Interest income		55,694			60,744
Provision for losses on receivables		616,457			280,618
Cash paid for interest		(10,296,317	)		(3,760,284	)
Cash paid for income taxes		(240,371	)		(4,205,015	)
Loss on disposal of assets		101,369			22,640
Change in due to parent		466,000			(1,530,000	)
Changes in operating assets and liabilities, net of effect of acquisitions (1)		(72,552,134	)		(100,156,701	)

Net Cash Flows from Operating Activities	$	(90,783,152	)	$	(114,996,606	)


Net Cash Flows from Investing Activities	$	(2,554,530	)	$	(1,603,108	)


Net Cash Flows from Financing Activities	$	14,784,616		$	27,330,237


(1)		Changes in operating assets and liabilities, net of effect of acquisitions, include the changes in the balances of receivables, inventories, prepaid expenses and other current assets, other assets, accounts payable, accrued employee compensation and benefits, accrued incentives, accrued expenses, deferred revenue, and other long-term liabilities.

Amortization expense. Amortization expense for the quarter ended December 31, 2010 decreased $0.5 million to $2.2 million from $2.7 million for the quarter ended December 31, 2009, primarily due to a decrease in amortization of software development costs and to a decrease in amortization of non-compete agreements associated with bookstore acquisitions.

Loss on early extinguishment of debt. The loss on early extinguishment of debt of $3.1 million for the quarter ended December 31, 2009 relates to the write-off of debt issue costs as a result of the termination of the Term Loan and Revolving Credit Facility in October of 2009.

Income taxes. Income tax benefit for the quarter ended December 31, 2010 increased $0.7 million to $10.3 million from $9.6 million for the quarter ended December 31, 2009. Our effective tax rate for the quarters ended December 31, 2010 and 2009 was 42.9% and 39.2%, respectively. The change in the effective tax rate is primarily due to certain states taxing on a gross receipts methodology. Our effective tax rate differs from the statutory tax rate primarily as a result of state income taxes.

Nine Months Ended December 31, 2010 Compared With Nine Months Ended December 31, 2009.

Revenues. Revenues for the nine months ended December 31, 2010 and 2009 and the corresponding change in revenues were as follows:


							Change
	2010			2009			Amount			Percentage
Bookstore Division	$	308,604,806		$	306,789,449		$	1,815,357			0.6	%
Textbook Division		113,421,984			117,152,302			(3,730,318	)		(3.2	)%
Complementary Services Division		27,563,148			25,892,739			1,670,409			6.5	%
Intercompany Eliminations		(35,169,237	)		(37,695,931	)		2,526,694			(6.7	)%

	$	414,420,701		$	412,138,559		$	2,282,142			0.6	%

For the nine months ended December 31, 2010, Bookstore Division revenues increased $1.8 million, or 0.6%, from the nine months ended December 31, 2009. The increase in Bookstore Division revenues was attributable to additional revenues from new bookstores, which were mostly offset by a decrease in same-store sales and a decrease in revenues as a result of certain store closings. We have added 39 bookstore locations through acquisitions or start-ups since April 1, 2009. The new bookstores provided an additional $20.9 million of revenue for the nine months ended December 31, 2010. Same-store sales for the nine months ended December 31, 2010 decreased $16.0 million, or 5.4%, from the nine months ended December 31, 2009, primarily due to decreased textbook revenues, which were partially offset by an increase in clothing and insignia wear and electronics revenues. The same-store sales decrease in textbooks is partly attributable to the rental program which we began implementing in our bookstores in the fourth quarter of fiscal year 2010. If the textbooks rented would have been sold instead, we estimate that same-store sales would have been approximately $8.8 million higher, lowering the same-store sales decrease to 2.4% for the nine months ended December 31, 2010. We define same-store sales for the nine months ended December 31, 2010 as sales from any store, even if expanded or relocated, that we have operated since the start of fiscal year 2010. In addition, revenues declined $3.1 million as a result of certain store closings since April 1, 2009.

For the nine months ended December 31, 2010, Textbook Division revenues decreased $3.7 million, or 3.2%, from the nine months ended December 31, 2009, due primarily to a 2.7% decrease in units sold and a 0.3% decrease in average price per book sold, which were partially offset by an increase in revenues from textbook rentals to third-parties. Complementary Services Division revenues increased $1.7 million, or 6.5%, from the nine months ended December 31, 2009, as an increase in revenue in our systems business was partially offset by a decrease in revenue from our distance education business. Intercompany eliminations for the nine months ended December 31, 2010 decreased $2.5 million, or 6.7%, from the nine months ended December 31, 2009 primarily due to a decrease in intercompany revenues in the Textbook Division.

Gross profit. Gross profit for the nine months ended December 31, 2010 increased $0.7 million, or 0.5%, to $160.5 million from $159.8 million for the nine months ended December 31, 2009. The increase in gross profit was primarily attributable to the increase in gross profit in the Bookstore Division. The consolidated gross margin percentage decreased slightly to 38.7% for the nine months ended December 31, 2010 from 38.8% for the nine months ended December 31, 2009. The decrease in our consolidated gross margin percentage was attributable to a decrease in the gross margin percentage for the Complementary Services Division, which was offset by increases in the Textbook Division and Bookstore Division gross margin percentages. The increase in the Bookstore Division gross margin percentage was primarily due to the rental program. Although the rental of a textbook through the Bookstore Division rental program has lower revenue compared to the sale of a textbook, the gross profit on the rental of a textbook has been comparable to gross profit on the sale of a textbook; therefore, the gross margin percentage on the rental of a textbook is generally higher.

Selling, general and administrative expenses. Selling, general and administrative expenses for the nine months ended December 31, 2010 increased $7.2 million, or 6.2%, to $124.5 million from $117.3 million for the nine months ended December 31, 2009. Selling, general and administrative expenses as a percentage of revenues were 30.0% and 28.5% for the nine months ended December 31, 2010 and 2009, respectively. The increase in selling, general and administrative expenses was primarily attributable to a $2.9 million increase in rent expense primarily due to an increase in the number of bookstores, a $2.3 million increase in commission and shipping expense primarily due to increased sales on the internet involving third-party websites, a $1.5 million increase in consulting services related to expense reduction and top line growth initiatives such as inventory and pricing optimization and a $1.5 million increase in advertising and travel and entertainment expenses. These increases were partially offset by a $2.0 million decrease in personnel costs primarily due to lower incentive compensation costs.

Earnings before interest, taxes, depreciation, amortization, and loss on early extinguishment of debt (Adjusted EBITDA). Adjusted EBITDA for the nine months ended December 31, 2010 and 2009 and the corresponding change in Adjusted EBITDA were as follows:


							Change
	2010			2009			Amount			Percentage
Bookstore Division	$	18,153,253		$	22,175,114		$	(4,021,861	)		(18.1	)%
Textbook Division		30,180,524			31,831,524			(1,651,000	)		(5.2	)%
Complementary Services Division		2,394,576			1,669,013			725,563			43.5	%
Corporate Administration		(14,719,699	)		(13,187,402	)		(1,532,297	)		(11.6	)%

	$	36,008,654		$	42,488,249		$	(6,479,595	)		(15.3	)%

Bookstore Division Adjusted EBITDA for the nine months ended December 31, 2010 decreased $4.0 million, or 18.1%, from the nine months ended December 31, 2009 primarily due to lower same-store sales and to an increase in selling, general and administrative expenses. Textbook Division Adjusted EBITDA for the nine months ended December 31, 2010 decreased $1.7 million, or 5.2%, from the nine months ended December 31, 2009, primarily due to a decrease in revenues and an increase in selling, general and administrative expenses. Complementary Services Division Adjusted EBITDA increased $0.7 million from the nine months ended December 31, 2009, primarily due to improved results in our systems business, which was partially offset by lower results in our distance education business. Corporate Administration’s Adjusted EBITDA loss increased $1.5 million, or 11.6%, from the nine months ended December 31, 2009, primarily due to an increase in consulting services expense.


	Nine Months Ended December 31,
	2010			2009
Net loss	$	(4,778,597	)	$	(3,067,623	)

Interest expense, net		31,791,653			29,927,844
Income tax benefit		(4,006,000	)		(1,977,000	)
Depreciation and amortization		13,001,598			14,539,269


EBITDA	$	36,008,654		$	39,422,490

Loss on early extinguishment of debt		—			3,065,759


Adjusted EBITDA	$	36,008,654		$	42,488,249

Share-based compensation		438,810			789,162
Interest income		139,770			104,441
Provision for losses on receivables		1,317,433			414,247
Cash paid for interest		(28,554,130	)		(21,120,029	)
Cash (paid) refunded for income taxes		1,328,208			(2,900,688	)
Loss on disposal of assets		155,235			140,783
Change in due to parent		1,165,000			(2,868,000	)
Changes in operating assets and liabilities, net of effect of acquisitions (1)		(49,378,579	)		(54,773,544	)

Net Cash Flows from Operating Activities	$	(37,379,599	)	$	(37,725,379	)


Net Cash Flows from Investing Activities	$	(15,178,129	)	$	(6,677,450	)


Net Cash Flows from Financing Activities	$	9,312,325		$	17,179,397


(1)		Changes in operating assets and liabilities, net of effect of acquisitions, include the changes in the balances of receivables, inventories, prepaid expenses and other current assets, other assets, accounts payable, accrued employee compensation and benefits, accrued incentives, accrued expenses, deferred revenue, and other long-term liabilities.

Amortization expense. Amortization expense for the nine months ended December 31, 2010 decreased by $1.7 million to $6.6 million from $8.3 million for the nine months ended December 31, 2009, primarily due to a decrease in amortization of software development costs and to a decrease in amortization of non-compete agreements associated with bookstore acquisitions.

Interest expense, net. Interest expense, net for the nine months ended December 31, 2010 increased $1.9 million to $31.8 million from $29.9 million for the nine months ended December 31, 2009, primarily due to a $1.2 million increase in interest on the Senior Secured Notes which replaced the Term Loan and a $0.8 million increase in amortization of additional prepaid loan costs related to the issuance of the Senior Secured Notes and entering into the ABL Credit Agreement.

Loss on early extinguishment of debt. The loss on early extinguishment of debt of $3.1 million for the nine months ended December 31, 2009 relates to the write-off of debt issue costs as a result of the termination of the Term Loan and Revolving Credit Facility in October of 2009.

Income taxes. Income tax benefit for the nine months ended December 31, 2010 increased to $4.0 million from $2.0 million for the nine months ended December 31, 2009. Our effective tax rate for the nine months ended December 31, 2010 and 2009 was 45.6% and 39.2%, respectively. The change in the effective tax rate is primarily due to certain states taxing on a gross receipts methodology. Our effective tax rate differs from the statutory tax rate primarily as a result of state income taxes.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to returns, bad debts, inventory valuation and obsolescence, goodwill and intangible assets, rebate programs, income taxes, and contingencies and litigation. We base our estimates and judgments on historical experience and on various other factors that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements:

Revenue Recognition. We recognize revenue from Textbook Division sales at the time of shipment. We have established a program which, under certain conditions, enables our customers to return textbooks. We record reductions to revenue and costs of sales for the estimated impact of textbooks with return privileges which have yet to be returned to the Textbook Division. External customer returns over the past three fiscal years have ranged from approximately 22.9% to 24.8% of sales. Additional reductions to revenue and costs of sales may be required if the actual rate of returns exceeds the estimated rate of returns. Consistent with prior years, the estimated rate of returns is determined utilizing actual historical return experience. The accrual rate for customer returns at March 31, 2010 and December 31, 2010 was approximately 24.5% and 24.75% of sales, respectively.

Bad Debts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Consistent with prior years, in determining the adequacy of the allowance, we analyze the aging of the receivable, the customer’s financial position, historical collection experience, and other economic and industry factors. Net charge-offs over the past three fiscal years have been between $0.5 million and $1.4 million, or 0.1% to 0.3% of revenues. We have maintained an allowance for doubtful accounts between $1.0 million and $1.2 million, or 0.2% to 0.3% of revenues, over the past three fiscal years. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Inventory Valuation and Obsolescence. Inventories, including rental inventory, are stated at the lower of cost or market. The cost of used textbook inventories is determined using the weighted-average method. Our Bookstore Division uses the retail inventory method to determine cost for new textbook and non-textbook inventories. The cost of other inventories is determined on a first-in, first-out cost method. Consistent with prior years, we account for inventory obsolescence based upon assumptions about future demand and market conditions. At March 31, 2010 and December 31, 2010, used textbook inventory was subject to an obsolescence reserve of $2.3 million. For the two prior fiscal years, the obsolescence reserve was between $2.3 million and $2.4 million. If actual future demand or market conditions are less favorable than those projected by us, inventory write-downs may be required. In determining inventory adjustments, we consider amounts of inventory on hand, projected demand, new editions, and industry factors.

Goodwill and Intangible Assets. Our acquisitions of college bookstores result in the application of the acquisition method of accounting as of the acquisition date. In certain circumstances, our management performs valuations where appropriate to determine the fair value of assets acquired and liabilities assumed. The goodwill in such transactions is determined by calculating the difference between the consideration transferred and the fair value of net assets acquired. We evaluate the impairment of the carrying value of our goodwill and identifiable intangibles in accordance with applicable accounting standards, including the Intangibles — Goodwill and Other and the Property, Plant and Equipment Topics of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). In accordance with such standards, we evaluate impairment on goodwill and certain identifiable intangibles annually at March 31 and evaluate impairment on all intangibles whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. We are required to make certain assumptions and estimates regarding the fair value of intangible assets when assessing such assets for impairment. We evaluate goodwill at the reporting unit level and have identified our reportable segments, the Textbook Division, Bookstore Division and Complementary Services Division, as our reporting units. Our reporting units are determined based on the way management organizes the segments for making operating decisions and assessing performance. Management has organized our reporting segments based upon differences in products and services provided.

In the first step of our goodwill impairment test, fair value is determined using a market approach based primarily on an EBITDA multiple, and is deemed to be the most indicative of the Company’s fair value. 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. After reviewing comparable company information and third-party valuations of the Company, we concluded that 6.76x was an appropriate EBITDA multiple at March 31, 2010 and 7.0x was appropriate at March 31, 2009. 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. 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.

Due to the economic downturn and changes in comparable company market multiples, we determined in the first step of our goodwill impairment test conducted at March 31, 2009, that the carrying values 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 carrying value of goodwill in excess of the implied fair value at March 31, 2009 was $67.0 million and $40.0 million for the Textbook and Bookstore Divisions, respectively. At March 31, 2010, the date of the most recent step one test, after adjusting the carrying values for goodwill impairment, the fair value of the Textbook Division exceeded the carrying value of $210.7 million by 4.8% and the Bookstore Division fair value exceeded the carrying value of $244.5 million by 4.7%. We continue to monitor events and circumstances which may affect the fair values of both reporting units, including current market conditions, and we believe that both reporting units are still at risk of failing step one of the impairment test.

We are also required to make certain assumptions and estimates when assigning an initial value to covenants not to compete arising from bookstore acquisitions. Changes in the fact patterns underlying such assumptions and estimates could ultimately result in the recognition of impairment losses on intangible assets.

We monitor relevant circumstances, including industry trends, general economic conditions, and the potential impact that such circumstances might have on the valuation of our goodwill and identifiable intangibles. It is possible that changes in such circumstances, or in the numerous variables associated with the judgments, assumptions and estimates made by us in assessing the appropriate valuation of our goodwill and identifiable intangibles, including a further deterioration in the economy or debt markets, could in the future require us to further write down a portion of our goodwill or write down a portion of our identifiable intangibles and record related non-cash impairment charges. If we were to have used a multiple of 6.44x or below at March 31, 2010, we would have performed the second step of the goodwill impairment test to determine the goodwill impairment, if any.

Accrued Incentives. Our Textbook Division offers certain incentive programs to its customers that allow the participating customers the opportunity to earn rebates for used textbooks sold to the Textbook Division. The rebates can be redeemed in a number of ways, including to pay for freight charges on textbooks sold to the customer or to pay for certain products or services we offer through our Complementary Services Division. The customer can also use the rebates to pay for the cost of textbooks sold by the Textbook Division to the customer; however, a portion of the rebates earned by the customer are forfeited if the customer chooses to use rebates in this manner. If the customer fails to comply with the terms of the program, rebates earned during the year are forfeited. Significant judgment is required in estimating the expected level of forfeitures on rebates earned. Although we believe that our estimates of anticipated forfeitures, which have consistently been based upon historical experience, are reasonable, actual results could differ from these estimates resulting in an ultimate redemption of rebates which differs from that which is reflected in accrued incentives in the condensed consolidated financial statements. For the past three fiscal years, actual forfeitures have ranged between 9.4% and 16.6% of rebates earned within those years. After adjusting for estimated forfeitures, rebates earned are accrued at a rate of approximately 13.5% of the dollar value of eligible textbooks purchased by the Textbook Division. Accrued incentives at March 31, 2010 and December 31, 2010 were $6.3 million and $6.0 million, respectively, including estimated forfeitures, however, if we accrued for rebates earned and unused as of March 31, 2010 and December 31, 2010, assuming no forfeitures, our accrued incentives would have been $7.0 million and $6.6 million, respectively.

Income Taxes. We account for income taxes by recording taxes payable or refundable for the current fiscal year and deferred tax assets and liabilities for future tax consequences of events that have been recognized in our condensed consolidated financial statements or the consolidated income tax returns. Significant judgment is required in determining the provision for income taxes and related accruals, deferred tax assets, and deferred tax liabilities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, the consolidated income tax returns are subject to audit by various tax authorities. Although we believe that our estimates are reasonable, actual results could differ from these estimates resulting in a final tax outcome that may be different from that which is reflected in the condensed consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

Financing Activities

Our primary liquidity requirements are for debt service under the ABL Credit Agreement, the Senior Secured Notes, the Senior Subordinated Notes and other outstanding indebtedness, for dividends to fund interest payments due at our parent company, NBC Acquisition Corp. (“NBC”), for working capital, for income tax payments, for capital expenditures and for certain acquisitions. We have historically funded these requirements primarily through internally generated cash flows and funds borrowed under our revolving credit facility. At December 31, 2010, our total indebtedness was $392.8 million, consisting of a $75.0 million ABL Facility, of which $15.5 million was outstanding under revolving lines of credit and $0.9 million was outstanding under a letter of credit at December 31, 2010, $200.0 million of Senior Secured Notes issued at a discount of $1.0 million with unamortized bond discount of $0.5 million, $175.0 million of Senior Subordinated Notes, and $2.8 million of other indebtedness, including capital lease obligations. To provide additional financing to fund the March 4, 2004 Transaction, NBC issued senior discount notes, the balance of which at September 30, 2010 was $77.0 million (face value) (the “Senior Discount Notes”).

Principal and interest payments under the ABL Facility, the Senior Secured Notes, the Senior Subordinated Notes, and NBC’s Senior Discount Notes represent significant liquidity requirements for us.

The ABL Facility is scheduled to mature 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 Senior Discount Notes (due March 15, 2013), or any refinancing thereof, effectively September 1, 2011. 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. There also is a commitment fee 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 require semi-annual interest payments at a fixed rate of 10.0% and mature December 1, 2011. The Senior Subordinated Notes require semi-annual interest payments at a fixed rate of 8.625% and mature on March 15, 2012. NBC’s Senior Discount Notes require semi-annual cash interest payments which began on September 15, 2008 at a fixed rate of 11.0% and mature on March 15, 2013.

We file a consolidated federal income tax return with our parent company, NBC, and follow a policy of recording income taxes equal to that which would have been incurred had we filed a separate return. We are responsible for remitting tax payments and collecting tax refunds for the consolidated group. The $1.2 million decrease in the due to parent balance for the nine months ended December 31, 2010 represents the net result of the difference between our estimated annual tax rate and that of our parent, NBC.

Investing Cash Flows

Our capital expenditures were $5.0 million and $4.0 million for the nine months ended December 31, 2010 and 2009, respectively. Capital expenditures consist primarily of leasehold improvements and furnishings for new bookstores, bookstore renovations, computer upgrades and warehouse improvements. The ABL Credit Agreement does not have a limitation on capital expenditures other than as part of the pro forma fixed charge coverage ratio. We expect capital expenditures to be between $6.0 million and $7.0 million for fiscal year 2011.

Business acquisition and contract-management renewal expenditures were $9.3 million and $2.3 million for the nine months ended December 31, 2010 and 2009, respectively. During the nine months ended December 31, 2010, nineteen bookstore locations were acquired in fifteen separate transactions (thirteen of which were contract-managed locations). During the nine months ended December 31, 2009, ten bookstore locations were acquired in eight separate transactions (all of which were contract-managed locations). Our ability to make acquisition expenditures is subject to certain restrictions under the ABL Credit Agreement.

During the nine months ended December 31, 2010 and 2009, we capitalized $0.9 million and $0.4 million, respectively, in software development costs associated with new software products and enhancements to existing software products.

Operating Cash Flows

Our principal sources of cash to fund our future operating liquidity needs will be cash from operating activities and borrowings under the ABL Facility. Usage of the ABL Facility to meet our liquidity needs will fluctuate throughout the fiscal year due to our distinct buying and selling periods, increasing substantially at the end of each college semester (May and December). Net cash flows used by operating activities for the nine months ended December 31, 2010 were $37.4 million, down $0.3 million from $37.7 million for the nine months ended December 31, 2009. Lower cash payments for income taxes and a lower investment in inventories was mostly offset by an increase in cash paid for interest and payments in connection with shares issued under the 2005 Restricted Stock Plan, which vested on September 30, 2010.

As of December 31, 2010, we had $17.7 million in cash available to help fund working capital requirements. At certain times of the year, we also invest in cash equivalents. Any investments in cash equivalents are subject to restrictions under the ABL Credit Agreement. The ABL Credit Agreement allows investments in (1) certain short-term securities issued by, or unconditionally guaranteed by, the federal government, (2) certain short-term deposits in banks that have combined capital and surplus of not less than $500 million, (3) certain short-term commercial paper of issuers rated at least A-1 by Standard & Poor’s or P-1 by Moody’s, (4) certain money market funds which invest exclusively in assets otherwise allowable by the ABL Credit Agreement and (5) certain other similar short-term investments. Although we invest in compliance with our credit agreement and generally seek to minimize the risk associated with investments by investing in investment grade, highly liquid securities, we cannot give assurances that the cash equivalents that are in or will be selected to be in our investment portfolio will not lose value or become impaired in the future.

Covenant Restrictions

We have a substantial level of indebtedness. Our debt agreements impose significant financial restrictions, which could prevent us from incurring additional indebtedness and taking certain other actions and could result in all amounts outstanding being declared due and payable if we are not in compliance with such restrictions. Access to borrowings under the ABL Facility is subject to the calculation of a borrowing base, which is a function of eligible accounts receivable and inventory, up to the maximum borrowing limit (less outstanding letters of credit). The ABL Credit Agreement 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 NBC’s Senior Discount Notes and (ii) to pay corporate overhead expenses not to exceed $250,000 per fiscal year and any taxes owed by NBC. 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. At December 31, 2010, we had up to $75.0 million of total revolving credit commitments under the ABL Facility (less outstanding letters of credit and subject to a borrowing base). The calculated borrowing base as of December 31, 2010 was $74.1 million, of which $15.5 million was outstanding under revolving lines of credit, $0.9 million was outstanding under a letter of credit and $57.7 million was unused. At December 31, 2010, our pro forma fixed charge coverage ratio was 1.4x.

As of December 31, 2010, we were in compliance with all of our debt covenants.

Our debt covenants use Credit Facility EBITDA in the ratio calculations mentioned above. For a discussion of EBITDA, Adjusted EBITDA and Credit Facility EBITDA, see “Adjusted EBITDA Results” earlier in this Item and for a presentation reconciling EBITDA and Adjusted EBITDA to net cash flows from operating activities, which we believe to be the closest GAAP liquidity measure, see “Quarter Ended December 31, 2010 Compared With Quarter Ended December 31, 2009” and “Nine Months Ended December 31, 2010 Compared With Nine Months Ended December 31, 2009” earlier in this Item.

Sources of and Needs for Capital

As of December 31, 2010, we had up to $75.0 million of total revolving credit commitments under the ABL Facility (less outstanding letters of credit and subject to a borrowing base). The calculated borrowing base as of December 31, 2010 was $74.1 million, of which $15.5 million was outstanding under revolving lines of credit, $0.9 million was outstanding under a letter of credit and $57.7 million was unused. Amounts drawn under the ABL Facility may be used for working capital and general corporate purposes (including up to $10.0 million for letters of credit), subject to certain limitations.

Our three principal tranches of debt (the Senior Secured Notes, the ABL Facility and the Senior Subordinated Notes) each will mature within a period of six months of each other. The ABL Facility will mature on the earlier of October 2, 2012 or the date that is 91 days prior to the earliest maturity of the $200.0 million Senior Secured Notes (which mature on December 1, 2011), the $175.0 million Senior Subordinated Notes (which mature on March 15, 2012), NBC’s $77.0 million Senior Discount Notes (which mature on March 15, 2013), or any refinancing thereof, effectively September 1, 2011. As a consequence, we may be required to refinance the other tranches of debt in our capital structure as well as NBC’s Senior Discount Notes, in order to refinance the ABL Facility. We are currently working on a refinancing with our investment bankers. Due to our highly leveraged capital structure, in the absence of a significant improvement in our credit profile and/or the financial markets, we may not be able to refinance our indebtedness, or NBC may not be able to refinance its indebtedness, on terms acceptable to us or our parent company.

Our ability to satisfy our debt obligations and to pay principal and interest on our debt, fund working capital and make anticipated capital expenditures will depend on our future performance and maintaining normal terms with our vendors, which is subject to general economic conditions and other factors, some of which are beyond our control. We believe that funds generated from operations, existing cash, vendor payments terms, and borrowings under the ABL Facility will be sufficient to finance our current operations, cash interest requirements, income tax payments, planned capital expenditures, dividends to NBC, and internal growth; however, as noted previously, we cannot give assurance that we will generate sufficient cash flow from operations or that future borrowings will be available under the ABL Facility in an amount sufficient to enable us to service our debt or to fund our liquidity needs. Future acquisitions, if any, may require additional debt or equity financing.

Off-Balance Sheet Arrangements

As of December 31, 2010, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Accounting Standards Not Yet Adopted

In December 2010, the FASB issued Accounting Standards Update 2010-28, “Intangibles — Goodwill and Other (Topic 350) — When to Perform Step2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts” (“Update 2010-28”). Update 2010-28 amends the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. Update 2010-28 becomes effective for us in fiscal year 2012 and any impairment to be recorded upon adoption will be recognized as an adjustment to beginning retained earnings. Early adoption is not permitted. Management has not yet determined if the update will 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 for 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.

Transactions with Related and Certain Other Parties

During the nine months ended December 31, 2010, we declared and paid $4.2 million in dividends to NBC to provide funding for interest due and payable on NBC’s Senior Discount Notes.

We file a consolidated federal income tax return with our parent company, NBC, and follow a policy of recording income taxes equal to that which would have been incurred had we filed a separate return. We are responsible for remitting tax payments and collecting tax refunds for the consolidated group. The due to parent balance, totaling $22.0 million and $23.0 million at December 31, 2010 and 2009, respectively, represents the cumulative tax savings resulting from operating losses generated by NBC from which we derive the benefit through reduced tax payments on the consolidated return.

“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995

This Quarterly Report on Form 10-Q contains or incorporates by reference certain statements that are not historical facts, including, most importantly, information concerning possible or assumed future results of our operations, such as, but not limited to, statements relating to EBITDA and Adjusted EBITDA, the opportunity and our ability to expand our business, expected growth or changes in certain segments, our ability to extend, refinance or repay our indebtedness, expressions of general optimism or pessimism about the future, and statements preceded by, followed by or that include the words “may,” “believes,” “expects,” “feels,” “anticipates,” or the negation thereof, or similar expressions, which constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). These forward-looking statements, for which we claim the protection of the safe harbor contained in the Reform Act, involve risks, uncertainties and other factors which may cause our actual performance or achievements to be materially different from any future results, performances or achievements expressed or implied by such forward-looking statements. Several important factors could affect our future results and could cause those results to differ materially from those expressed in the forward-looking statements contained herein. These factors include, but are not limited to, the following: (1) the risks of operating with a substantial level of indebtedness including possible increases in our costs of borrowing, our inability to pay interest as it comes due, repay debt, extend or refinance debt as it matures, and obtain additional financing, and the possibility that the maturity of our credit facility may be accelerated and that cash flow will be diverted away from operations; (2) increased competition from other companies that target our markets; (3) increased competition from alternative media and alternative sources of textbooks for students from both online and local campus marketplace competitors, including digital or other education content sold or rented directly to students and increased competition for the purchase and sale of used textbooks from student-to-student transactions; (4) 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; (5) our inability to successfully start-up, acquire or contract-manage additional bookstores or to integrate those additional bookstores and/or to cost-effectively maintain our current contract-managed bookstores; (6) our inability to purchase a sufficient supply of used textbooks; (7) changes in pricing of new and/or used textbooks or in publisher practices regarding new editions and materials packaged with new textbooks; (8) the loss or retirement of key members of management; (9) the impact of seasonality of the wholesale and bookstore operations; (10) further goodwill impairment or impairment of identifiable intangibles resulting in a non-cash write down of goodwill or identifiable intangibles; and other risks detailed in our Securities and Exchange Commission filings, in particular in our Annual Report on Form 10-K, all of which are difficult or impossible to predict accurately and many of which are beyond our control. We will not undertake and specifically decline any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our primary market risk exposure is, and is expected to continue to be, fluctuation in interest rates. Our exposure to market risk for changes in interest rates relates to our short-term investments and borrowings under the ABL Facility. Exposure to interest rate fluctuations for our long-term debt is managed by maintaining fixed interest rate debt (primarily the Senior Subordinated Notes and the Senior Secured Notes). Because we pay fixed interest on our notes, market fluctuations do not impact our debt interest payments. However, the fair value of our notes fluctuates as a result of changes in market interest rates, changes in our credit worthiness, and changes in the overall credit market.

We may invest in certain cash equivalents from time to time allowed by the ABL Credit Agreement. At December 31, 2010, we did not hold any investments in cash equivalents.

Due to the short-term nature of the revolving credit facility, the estimated fair value is considered to approximate the carrying value at December 31, 2010. The interest rate as of December 31, 2010 was 8.0%.

Certain quantitative market risk disclosures have changed since March 31, 2010 as a result of market fluctuations, movement in interest rates and principal payments. The table below presents summarized market risk information.


	December 31,			March 31,
	2010			2010
Carrying Values:
Revolving credit facility	$	15,500,000		$	—
Fixed rate debt		377,270,167			377,624,262

Fair Values:
Revolving credit facility	$	15,500,000		$	—
Fixed rate debt		352,730,000			372,317,000

Overall Weighted-Average Interest Rates:
Fixed rate debt		9.41	%		9.35	%

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of disclosure controls and procedures. Our management, with the participation of our chief executive officer and chief financial officer (our principal executive officer and principal financial officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2010. This evaluation was performed to determine if our disclosure controls and procedures were effective, in that they are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and regulations, including ensuring that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2010, our disclosure controls and procedures were effective.

Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) which occurred during the quarter ended December 31, 2010 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

There have been no material changes in our risk factors from those disclosed in Part 1, Item 1A., “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2010, which was filed with the Securities and Exchange Commission on June 25, 2010.

ITEM 5. OTHER INFORMATION.

We are not required to file reports with the Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, but are filing this Quarterly Report on Form 10-Q on a voluntary basis.

ITEM 6. EXHIBITS


Exhibits

	31.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on February 14, 2011.


NEBRASKA BOOK COMPANY, INC.

/s/ Mark W. Oppegard

Mark W. Oppegard
Chief Executive Officer and Director
(principal executive officer)

/s/ Alan G. Siemek

Alan G. Siemek
Chief Financial Officer, Senior Vice President of Finance and Administration, Treasurer and Assistant Secretary
(principal financial and accounting officer)

EXHIBIT INDEX


	31.1			Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2			Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1			Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2			Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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NEBRASKA BOOK CO 10-Q