Neebo Reports Fiscal Second Quarter Financial Results

Rental Penetration Increase Reaches Record Levels; New $80 million Working Capital Facility Enhances Long Term Liquidity and Reduces Interest Expense

LINCOLN, Neb.--(BUSINESS WIRE)--Nebraska Book Company | Neebo (OTC Pink: NEEB+), a leading operator of more than 200 college bookstores nationwide and one of the largest distributors in the textbook wholesale industry, supporting more than 2,000 college related stores, today announced financial results for the fiscal year 2015 second quarter ended September 30, 2014. Milestones achieved during the second quarter include significant sales growth in the College Stores Division, the highest level of textbook rental penetration in the company’s history and the closing of a new $80 million working capital facility designed to support the company’s operations and growth strategies while considerably reducing interest expense.

“We remain focused on investing in our future and generating sales through continued growth in rental penetration and our on-campus store fleet,” said Steve Clemente, President and Chief Executive Officer of Neebo, Inc. “The return on investments made in Business Intelligence and ecommerce in fiscal year 2014 can be seen in our increased store count and rental unit penetration. Coupled with our enhanced ecommerce experience and Neebo Student Network offering, we are excited about the growth opportunities ahead.”

Fiscal 2015 Financial Results (three months ended September 30, 2014)

• Neebo further expanded its industry-leading rental unit penetration to 42%, up 900 bps from the 33% level the company generated for the three months ended September 30, 2013 and significantly higher than the industry rental unit penetration of 25% (a)
• College Stores cash sales (total revenue plus deferred rental revenue) increased $3.1million (2.5%) to $126.0 million for the three months ended September 30, 2014 compared to $122.9 million for the prior year period, driven by higher rental revenue from increased rental penetration and new on-campus store acquisitions (b)
• Rental adjusted cash sales increased $15.8 million (12.9%) to $137.6 million for the three months ended September 30, 2014 compared to $121.9 million for the prior year period (c)

(a) Industry rental unit penetration rate obtained from Crux Research, Inc. College Tracking Survey

(b) See Financial Impact of Textbook Rental section below for further details regarding the impact the continued growth in rental penetration is expected to have on the company’s financial results

(c) Rental adjusted sales for textbook rentals reflect the retail selling price of a new or used textbook when rented, rather than solely the rental fee received and amortized over the rental period

Financial Impact of Textbook Rental

The company’s continued growth in rental penetration has caused a significant shift in its GAAP revenue and EBITDA from the second to the third quarter. Historically, revenue from textbook sales in the fall back to school season would be received and recognized under GAAP in the second quarter (July/August/September). However, for textbook rentals, GAAP requires the company to recognize the revenue and expense over the life of the rental period, typically five calendar months. As a result, a material portion of the GAAP revenue and EBITDA that the company would have previously recognized in the second quarter is now recognized in the third quarter. The table below, which has been included solely for illustrative purposes, assists in explaining the impact on the financial statements when converting from a sale to a rental. All information below is for sample purposes only:

ASSUMPTIONS
Rental Period
-- School Term:	Aug 15th - Dec 15th
-- Transaction Date:	Aug 15th
New Textbook Sale		New Textbook Rental
-- Sale Price:	$120	-- Rental Price:	$80
-- Cost:	$90	-- Cost (Depreciated):	$40
-- Gross Profit:	$30	-- Gross Profit:	$40
-- Gross Margin:	25%	-- Gross Margin:	50%

	Q2								Q3
	Aug			Sep		QTD			Oct		Nov		Dec		QTD		YTD
Sale
Revenue	$	120		$	-	$	120		$	-	$	-	$	-	$	-	$	120
Gross Profit		30			-		30			-		-		-		-		30
Rental
Revenue	$	10		$	20	$	30		$	20	$	20	$	10	$	50	$	80
Gross Profit		5			10		15			10		10		5		25		40
Variance
Revenue	$	(110	)	$	20	$	(90	)	$	20	$	20	$	10	$	50	$	(40	)
Gross Profit		(25	)		10		(15	)		10		10		5		25		10

For the fiscal year 2015 second quarter, the conversion from sales to rentals and accompanying EBITDA shift resulted in the majority of the $5.2 million quarterly EBITDA variance in College Stores referenced below. As the company continues to expand rental unit penetration and convert sales to rentals, it expects that an increasing portion of College Stores EBITDA will be recognized in the third quarter rather than second quarter and in the first quarter rather than fourth quarter for the fall and spring back to school seasons, respectively.

College Stores Division

College Stores Adjusted EBITDA in the fiscal year 2015 second quarter decreased by $5.2 million (52.7%) to $4.6 million for the three months ended September 30, 2014 compared to $9.8 million for the prior year period, primarily driven by the rental revenue and GAAP EBITDA shift described above. Additional drivers impacting results include higher advertising costs related to timing of new marketing initiatives and higher rent commission costs from new on-campus stores, partially offset by lower personnel costs. Despite the revenue and EBITDA shift, the company views the conversion from sales to rentals favorably, as rental offers higher gross margins and, in the long-term, lower working capital requirements given Neebo’s increased control over the supply chain. Moreover, rental delivers value to students by providing a more cost-effective solution for their required course materials.

Textbook Division

Textbook sales in the fiscal year 2015 second quarter decreased by $6.9 million (13.1%) to $46.2 million for the three months ended September 30, 2014 compared to $53.1 million for the prior year period. The decrease primarily resulted from lower unit demand from our existing customer base and a more challenging environment in sourcing supply from our existing base. Textbook gross margin rate for the three months ended September 30, 2014 was 41.7% compared to 44.8% for the prior year period; the decrease was primarily due to a 15.7% increase in average per unit book costs needed to remain competitive in acquiring books. However, proper management of personnel and shipping costs helped to minimize the impact on EBITDA. The reduction in sales and margins, partially offset by cost controls, negatively impacted EBITDA by $3.6 million as compared to the second quarter of fiscal year 2014. The company currently is executing numerous strategies to expand its supply of books heading into December, the second peak selling season for the Textbooks Division.

Complementary Services Division

Complementary Services adjusted EBITDA in the fiscal year 2015 second quarter was flat for the three months ended September 30, 2014 compared to the prior year period. Net revenues increased $0.2 million (2.9%) to $5.6 million for the three months ended September 30, 2014 from $5.4 million for the prior year period mainly due to higher College Store Design results related to an increase in projects and installations and higher system sales. Gross profit decreased $0.3 million (10.3%) to $2.2 million for the three months ended September 30, 2014 compared to $2.5 million for the prior year period, which was offset by lower SG&A and personnel-related costs that naturally flex with this division.

Working Capital Facility

The company closed on a $60 million 5-year revolving credit facility with PNC Bank, N.A. on November 13, 2014. Under the revolving credit facility, the company will borrow at LIBOR plus 175, 200 or 225 basis points subject to an availability grid. As part of this new facility, the company’s existing ABL lenders have also agreed to provide an additional $20 million of liquidity support to enhance the company’s growing rental program and expanded ecommerce platform. The new credit facility will replace the company’s existing facility, and will significantly extend the term, reduce interest expense and increase the commitment available to support the company’s seasonal working capital needs. “We are excited to announce the new facility and partnership with PNC Bank, N.A.,” said Jon Otterberg, Chief Financial Officer of Neebo.

The following table presents selected financial data for continuing operations as of and for the quarters ended September 30, 2014 and 2013 ($ in 000’s).

	Three months ended
	September 30, 2014			September 30, 2013			Percent Change
Total assets	$	331,190		$	324,403		2.1	%
Long-term debt		113,029			124,167		(9.0	)%
Revenues, net of returns		147,347			156,603		(5.9	)%
Adjusted EBITDA*		16,070			26,142		(38.5	)%
Adjusted EBITDA Margin		10.9	%		16.7	%
	Six months ended
	September 30, 2014			September 30, 2013			Percent Change
Net cash flows from (used in) operating activities		(26,784	)		16,305		(264.3	)%
Net cash flows used in investing activities		(9,301	)		(1,235	)	(653.1	)%
Net cash from (used in) financing activities		38,390			(30,121	)	227.5	%

* Adjusted EBITDA is a non-GAAP financial measure. See additional disclosure below.

Conference Call

Management will hold a conference call on Wednesday, December 3, 2014, from 9:00 a.m. to 9:30 a.m. CST to report the company’s fiscal year 2015 second quarter financial results.

To participate in the conference call, interested parties should call [phone] or [phone] (international) and dial in 10 minutes prior to the start time of the call. The participant access code is 345112.

A replay of the conference call will be available from December 3, 2014, at 11:00 a.m. CST through December 17, 2014, at 11:59 p.m. CST. To access the replay, callers should dial 800-475-6701 or 320-365-3844 (international) and use access code 345112.

The unaudited condensed consolidated financial statements as of and for the three and six months ended September 30, 2014 and 2013 are located on the Financial Filings page of the company’s website at http://www.nebook.com/financial/company_filings.asp.

About Nebraska Book Company|Neebo

Nebraska Book Company Inc. was founded 100 years ago with a store near the University of Nebraska Lincoln campus. The company pioneered used textbook distribution and expanded to campuses across the country and is today a leader in solutions for the college store marketplace supporting more than 2,000 college-related retail stores. It is now owned by Neebo, Inc., an online retailer and operator of more than 200 college stores across the nation. Neebo provides millions of students, parents, faculty, fans and alumni with the most complete selection of rental, used and new textbooks, as well as college-branded apparel, gear and accessories. Neebo is the complete college outfitter, dedicated to making college—one of life’s best experiences—even better. For more information, on Nebraska Book Company, visit www.nebook.com. For more information on Neebo, visit http://www.neebo.com.

+Neebo, Inc. common stock is not listed, traded or quoted on any U.S. stock exchange but is quoted on the OTC Pink Market under the symbol NEEB.

Notice Regarding Forward-Looking Statements

This press release contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or prove incorrect, could cause the company’s business and results of operations to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include statements that discuss management’s beliefs and assumptions and can be identified by the use of words such as “will,” “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue” or the negative of such terms, or other comparable terminology. These forward-looking statements, which include the company’s plans and expectations related to refinancing its working capital facility, and whether the company has sufficient liquidity to meet its cash needs, speak only as of the date of this press release. The company’s ability to refinance its working capital facility is subject to a number of risks, including the current and future status of the credit markets and lenders as well as the company’s continued financial health and performance, and there is no guarantee that the company will be able to refinance the facility on a timely basis, on acceptable terms or at all. The company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by applicable law. Additional information regarding forward-looking statements, as well as additional risks and uncertainties that may affect results and could cause results to differ materially from those expressed in such forward-looking statements, is contained in the Management’s Discussion and Analysis that was posted on the company’s website today.

Selected Financial Data

The information contained herein is more fully detailed and explained in the company’s Audited Consolidated Financial Statements and Management’s Discussion and Analysis, which are available at http://www.nebook.com/financial/company_filings.asp.

Consolidated Statement of Operations ($ in 000’s)
	Three months ended						Six months ended
	September 30,			September 30,			September 30,			September 30,
	2014			2013			2014			2013
Revenues, net of returns	$	147,347		$	156,603		$	202,103		$	213,763
Costs of sales		91,015			92,031			121,119			127,259
Gross profit		56,332			64,572			80,984			86,504
Operating expenses:
Selling, general, and administrative		41,825			39,008			70,760			67,724
Depreciation		1,507			1,520			3,137			3,335
Amortization		2,293			2,189			4,559			4,292
		45,625			42,717			78,456			75,351
Income from operations		10,707			21,855			2,528			11,153
Other (income) expenses:
Interest expense		6,733			11,774			12,901			27,864
Interest income		(3	)		(4	)		(8	)		(5	)
		6,730			11,770			12,893			27,859
Income (loss) from continuing operations before income taxes		3,977			10,085			(10,365	)		(16,706	)
Income tax expense (benefit)		35			4,625			66			(6,204	)
Income (loss) from continuing operations		3,942			5,460			(10,431	)		(10,502	)
Income (loss) from discontinued operations, net of tax		(661	)		997			(815	)		16
Net income (loss)	$	3,281		$	6,457		$	(11,246	)	$	(10,486	)

Net Revenues by Segment ($ in 000’s)
	Three months ended						Six months ended
	September 30,			September 30,			September 30,			September 30,
	2014			2013			2014			2013
College Stores	$	106,516		$	109,009		$	141,365		$	143,920
Textbooks		46,158			53,100			69,277			77,953
Complementary Services		5,574			5,418			10,184			10,834
Intercompany Eliminations		(10,901	)		(10,924	)		(18,723	)		(18,944	)
Total net revenues	$	147,347		$	156,603		$	202,103		$	213,763

Gross Profit by Segment ($ in 000’s)
	Three months ended				Six months ended
	September 30,		September 30,		September 30,			September 30,
	2014		2013		2014			2013
College Stores	$	34,698	$	37,491	$	50,387		$	51,928
Textbooks		19,263		23,793		28,139			33,686
Complementary Services		2,204		2,457		4,375			5,053
Intercompany Eliminations		167		831		(1,917	)		(1,690	)
Total gross profit	$	56,332	$	64,572	$	80,984		$	88,977

EBITDA and Adjusted EBITDA ($ in 000’s)
	Three months ended					Six months ended
	September 30,		September 30,			September 30,			September 30,
	2014		2013			2014			2013
EBITDA
Net income (loss)	$	3,281	$	6,457		$	(11,246	)	$	(10,486	)
Interest expense, net		6,730		11,770			12,893			27,859
Provision (benefit) for income taxes		35		4,625			66			(6,204	)
Depreciation		1,507		1,520			3,137			3,335
Amortization		2,293		2,189			4,559			4,292
EBITDA		13,846		26,561			9,409			18,796
Adjusted EBITDA
EBITDA		13,846		26,561			9,409			18,796
Discontinued operations		661		(997	)		815			(16	)
Severance and voluntary costs		18		234			106			364
Share-based compensation		163		53			267			123
Other miscellaneous one-time costs		1,382		291			3,511			4,320
Adjusted EBITDA	$	16,070	$	26,142		$	14,108		$	23,587

The following table provides Adjusted EBITDA on a segment basis ($ in 000’s)
	Three months ended						Six months ended
	September 30,			September 30,			September 30,			September 30,
	2014			2013			2014			2013
College Stores	$	4,629		$	9,783		$	3,691		$	8,551
Textbooks		14,970			18,535			20,007			23,839
Complementary Services		(58	)		(42	)		12			(202	)
Corporate Administration		(3,583	)		(3,189	)		(7,357	)		(6,770	)
Intercompany Eliminations		112			1,055			(2,245	)		(1,831	)
Total Adjusted EBITDA	$	16,070		$	26,142		$	14,108		$	23,587

Non-GAAP Financial Information

The common definition of EBITDA is “Earnings before Interest, Taxes, Depreciation and Amortization.” In evaluating financial performance, the company uses Adjusted EBITDA to evaluate, assess and benchmark its operational results. The company’s definition of Adjusted EBITDA is EBITDA plus adjustments to exclude the effects of certain items of revenue or gain and expense or loss.

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

However, EBITDA and Adjusted EBITDA are presented, as management believes the measures are relevant and useful information widely used by analysts, investors and other interested parties in our industry. The company understands certain investors use them to measure the company’s operating performance. Accordingly, management is disclosing this information to permit a more comprehensive analysis of the company’s operating performance and to provide an additional measure of performance. EBITDA and Adjusted EBITDA financial information are reconciled to net income (loss).