Form 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
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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 001-34575
Cambium Learning Group, Inc.
(Exact Name of Registrant as Specified in its Charter)
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Delaware
(State or Other Jurisdiction of Incorporation or Organization)
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27-0587428
(I.R.S. Employer Identification No.) |
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1800 Valley View Lane, Suite 400, Dallas, Texas
(Address of Principal Executive Offices)
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75234-8923
(Zip Code) |
Registrant’s telephone number, including area code:
(214) 932-9500
Securities registered pursuant to Section 12(b) of the Act:
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| Common Stock, par value $0.001 per share |
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The NASDAQ Global Market |
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(Name of exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
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.
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Non-accelerated filer þ
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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
The common stock of the registrant commenced publicly trading on December 9, 2009. Accordingly,
there was no public market for the registrant’s common stock as of June 30, 2009, the last business
day of the registrant’s most recently completed second fiscal quarter.
The number of shares of the
registrant’s common stock, $0.001 par value, outstanding as of March 19,
2010 was 43,858,676.
Documents Incorporated by Reference:
Part III incorporates certain information by reference from the registrant’s definitive proxy
statement for the 2010 Annual Meeting of Stockholders, which definitive proxy statement will be
filed by the registrant with the Securities and Exchange Commission within 120 days after the end
of the registrant’s fiscal year ended December 31, 2009.
PART I
Cautionary Note Regarding Forward-looking Statements.
This report contains forward-looking statements within the meaning of the federal securities
laws that involve risks and uncertainties, and which are based on beliefs, expectations,
estimates, projections, forecasts, plans, anticipations, targets, outlooks, initiatives, visions,
objectives, strategies, opportunities, drivers and intents of our management. Such statements are
made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. All statements other than statements of historical facts included in this report,
including statements regarding our future financial position, economic performance and results of
operations, as well as our business strategy, objectives of management for future operations, and
the information set forth under “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” are forward-looking statements.
Statements that are not historical facts, including statements about our beliefs and
expectations, are forward-looking statements. Forward-looking statements can be identified by,
among other things, the use of forward-looking language, such as “believes,” “expects,”
“estimates,” “projects,” “forecasts,” “plans,” “anticipates,” “targets,” “outlooks,”
“initiatives,” “visions,” “objectives,” “strategies,” “opportunities,” “drivers,” “intends,”
“scheduled to,” “seeks,” “may,” “will,” or “should” or the negative of those terms, or other
variations of those terms or comparable language, or by discussions of strategy, plans, targets,
models or intentions. Forward-looking statements speak only as of the date they are made, and
except for our ongoing obligations under the federal securities laws, we undertake no obligation
to publicly update any forward-looking statements, whether as a result of new information, future
events, or otherwise or to update the reasons actual results could differ materially from those
anticipated in these forward-looking statements. Accordingly, you are cautioned that
any such forward-looking statements are not guarantees of future performance and are subject to
certain risks, uncertainties and assumptions that are difficult to predict. Although we believe
that the expectations reflected in such forward-looking statements are reasonable as of the date
made, expectations may prove to have been materially different from the results expressed or
implied by such forward-looking statements, as it is impossible for us to anticipate all factors
that could affect our actual results. We discuss certain of these risks in greater detail under
the heading “Risk Factors” in Item 1A of this report. Unless otherwise required by law, we also
disclaim any obligation to update our view of any such risks or uncertainties or to announce
publicly the results of any revisions to the forward-looking statements made in this report.
Item 1. Business.
Unless otherwise expressly indicated in this Item 1, the discussions set forth herein are as
of December 31, 2009.
Cambium Learning Group, Inc. (the “Company”, “we”, “us”, or “our”) was incorporated under
the laws of the State of Delaware in June 2009. On December 8, 2009, we completed the mergers of
Voyager Learning Company (“VLCY”) and VSS-Cambium Holdings II Corp. (“Cambium”) into two of our
wholly owned subsidiaries, resulting in VLCY and Cambium becoming our wholly owned subsidiaries.
Following the completion of the mergers, all of the outstanding capital stock of VLCY’s operating
subsidiaries, Voyager Expanded Learning, Inc. and LAZEL, Inc., were transferred to Cambium
Learning, Inc., Cambium’s operating subsidiary (“Cambium Learning”). The results of VLCY are
included in the Company’s operations beginning with the December 8, 2009 merger date; therefore,
the 2009 financial information contained in this report consists of the results of the Company
for the full year but only include VLCY for the last 23 days of the year.
The transaction was accounted for as an “acquisition” of VLCY by Cambium, as that term is
used under U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), for accounting and
financial reporting purposes under the applicable accounting guidance for business combinations.
In making this determination, management considered that (a) the newly developed entity did not
have any significant pre-combination activity and, therefore, did not qualify to be the
accounting acquirer, and (b) the former sole stockholder of Cambium is the majority holder of the
combined entity, while the prior owners of VLCY became minority holders in the combined entity.
As a result, the historical financial statements of Cambium have become the historical financial
statements of the Company.
We currently operate in three business segments: Voyager, a comprehensive intervention
business; Sopris, a supplemental solutions business; and Cambium Learning Technologies, an
education technology business. Throughout our three business segments, we provide research-based
education solutions for students in Pre-K through 12th grade, including intervention
curricula, educational technologies and services focused almost exclusively on serving the needs
of the nation’s most at risk students and learners challenged in realizing their full potential.
We have extensive experience in information aggregation and dissemination, content development
and educational publishing.
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Cambium Learning was founded in December 2002 to create a leading company focused on the
at-risk and special student populations. In 2007, Cambium Learning was acquired by a consortium
of equity sponsors led by Veronis Suhler Stevenson (“VSS”). A significant portion of Cambium
Learning’s growth has resulted from the acquisition and growth of companies acquired by Cambium
Learning and from newly introduced programs developed by authors and researchers. In October
2003, Cambium Learning acquired Metropolitan Teaching & Learning, Inc. Metropolitan Teaching &
Learning, Inc. was founded in 1998, and has developed culturally responsive instructional
materials and customized programs for use in urban markets, with particular emphasis on
mathematics. In February 2004, Cambium Learning acquired Sopris West Educational Services, Inc.,
a provider of intervention programs in literacy, mathematics, and behavior. In April 2005,
Cambium Learning acquired Kurzweil Education Systems, Inc., which develops reading enabling
technologies for struggling readers and individuals with visual impairments. In February 2006,
Cambium Learning acquired IntelliTools, Inc., a provider of assistive hardware and software
technologies for the special education and at-risk market segments in math and literacy.
VLCY’s predecessor company, Bell & Howell Company, was incorporated in Delaware in 1907. On
January 31, 2005, VLCY completed the acquisition of Voyager Expanded Learning, Inc., in support
of its long-term strategy to grow its educational business for grades K-12. On June 30, 2007,
ProQuest Company amended Article I of its certificate of incorporation solely to change the
corporate name from ProQuest Company to Voyager Learning Company. The name change and amendment
were completed pursuant to a merger of VLCY’s wholly owned subsidiary with and into VLCY.
Overview
Our mission is to deliver solutions that bring all of America’s students to their learning
potential. We currently focus on six areas related to Pre-K-12 education: reading programs and
resources; math and science programs and resources; professional development programs;
intervention solutions; services; and learning technologies. Our intervention solutions address
both the behavioral and academic needs of the students we serve. We are a leading provider of
results-driven reading and math intervention programs, professional development programs
regarding the teaching of reading and math, subscription-based online supplemental reading, online and
print based math and science resources and programs, and a core reading program for school
districts throughout the United States. We are also a leading company focused on the tools and
resources for the greatest at-risk and special education students.
Our products have achieved acceptance across a broad, economically and geographically
diverse customer base. Our customer base and sales force cover every state in the United
States, from small to large districts. We count some of the nation’s largest districts among our
major customers, including Los Angeles, Clark County, Nevada, Houston, New York City, Buffalo,
Richmond, Virginia, Cleveland, Milwaukee, and Miami-Dade County. The breadth of this customer
base provides us with a national platform from which to launch new products, address new markets,
and cross-sell products to existing customers.
Our customers generally purchase our reading, math, intervention or professional development
programs along with any necessary implementation services or training for a single school year.
For many of our products, in subsequent school years, customers wishing to serve the same number
of students generally need to purchase new student materials or renew access to online content,
but do not typically repurchase teacher materials. Our Learning A-Z and ExploreLearning
businesses’ online subscriptions generally run for a twelve-month period.
Strategy for Growth and Development
Our strategy for growth and development is based upon the following:
We focus our efforts on the Pre-K-12 at-risk and special education markets. We believe that
the Pre-K-12 at-risk and special education markets represent approximately 40% of the U.S.
student population and that these markets have traditionally been under-served by major providers
of educational programs and services. Key federal and state programs address the specific needs
of at-risk and special student populations. We believe the intervention category will experience
growth as greater funding, resources and education focus are diverted to the at-risk student
population.
We offer content-driven products and services designed to provide school districts with
tools to improve the performance of at-risk and special student populations. We have developed
relationships with authors who are known for their expertise in improving the cognitive and
behavioral performance of at-risk and special education students. These authors are engaged by us
to develop content and then to refine that content once feedback is obtained from our customers.
We also employ both in-house and contracted developers of curriculum and on-line content. Our
content is designed to benefit from our assistive technology platforms, which feature student
facing practice components, data management, and formative assessment reporting, which enable
teachers to build upon core concepts and enable students to scaffold from a limited educational
base to more highly developed educational experiences.
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We employ a multi-faceted sales strategy to increase market penetration. We employ multiple
interrelated sales channels to market and sell our products and services. These channels include
selling efforts by our own direct sales force as well as by our authors, supplemented by product
training sessions, strategic sales initiatives, direct catalog marketing, special customer events
and resellers. Marketing and sales are focused on those schools and school districts having the
significant percentages of at-risk and special student populations.
We intend to explore strategic acquisitions. We operate in a highly fragmented market. We
believe that this fragmentation is likely to continue to present viable consolidation
opportunities. We intend to explore strategic product, service and company acquisitions in the
future.
Our growth prospects derive from several other potential sources. We believe that our
growth will be driven by a number of factors, including:
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expanding at-risk and special education populations; |
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prospective increases in federal funding aimed at our primary student constituency, or
at-risk students; |
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positive student results achieved in school districts using our programs; |
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growth in services, such as teacher training and professional development; and |
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new programs addressing adjacent markets characterized by different student learning
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Funding Sources for Our Solutions
The recent recession, declines in the property tax base, and high unemployment in many
states has caused most state and local governments to face large budget deficits, creating
constrictions in education funding across the country. As a result of state and local government
spending cuts, including reduced spending on education, overall funding for our solutions has
been negatively impacted since the 2008 recession. The magnitude and duration of the state and
local budget crisis and its impact on education funding can not be forecasted but is at least
expected to continue throughout 2010.
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States federal funding in education historically has represented approximately 10% of
the money spent on public education in America. However, the federal education programs play a
prominent role in our sales as they provide funds to school districts to specifically supplement
state and local funding for at-risk students. Federal funding is distributed to school districts
in order for them to provide supplemental services and materials targeted to at-risk students
which allowed schools to focus on academic intervention for struggling students and on closing
the achievement gap between subgroups of students. School districts use these federal funds, in
part to purchase our solutions which are largely geared for the at-risk student population. Two
such important and historically long lasting funding sources are the Title I and Title III
portions of the Elementary and Secondary Education Act (ESEA) for economically disadvantaged
children and the Individuals with Disabilities Education Act (IDEA) for students with
disabilities eligible for special education. In 2009, the American Recovery and Reinvestment
Act (ARRA) provided unprecedented increases in funding to Title I and IDEA. While our sales
benefited from ARRA funds, schools have used the majority of these funds to augment declining
overall budgets and specifically to retain teaching staff.
While the ARRA funds have provided a much needed economic boost in the face of the state and
local budget crisis, the ARRA funds are temporary and are available for use only through the 2010
— 2011 government fiscal year. The Obama Administration with the Congress has used a portion of
the ARRA funds to create additional funding opportunities for state education agencies and the
15,000 school districts across our country. These programs include “Race to the Top” and
“Investing in Innovation” which allow states and local districts to compete for new funding
targeted toward reforms in education, including turning around the county’s lowest performing
schools.
On March 13, 2010, the U.S. Department of Education released “A Blueprint for Reform; The
Reauthorization of the Elementary and Secondary Education Act.” This Blueprint provides
incentives for states to adopt common academic standards that prepare students to succeed in
college and the workplace as well as to create data and accountability systems that are capable
of measuring student growth. Measuring academic growth in students must also be incorporated
into evaluating teacher and principal performance. “Race to the
Top” funding will be provided to
allow states and local districts to implement the reforms outlined in the Blueprint, as a prelude
to ESEA Reauthorization.
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Product Overview
Prior to the merger transaction completed on December 8, 2009, we had two reportable
segments: Published Products and Learning Technologies. Subsequent to the merger transaction,
we operate as three reportable segments with separate management teams and infrastructures that
offer various products and services, as follows:
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Voyager, our comprehensive intervention business; |
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Sopris, our supplemental solutions business; and |
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Cambium Learning Technologies, our technology based education product
business. |
During 2009, net sales were $52.9 million for Voyager, $25.2 million for Sopris and $22.9
million for Cambium Learning Technologies. We also have shared services such as accounting,
information technology, human resources, legal, facilities and corporate management that are not
allocated to these segments. Note, however, that while combined
revenues for the two pre-merger companies
was approximately $200 million in 2009, assuming no merger had
occured, we report only $101 million for 2009 because we only
include VCLY financial results for the last 23 days of 2009 under business combination accounting.
Voyager
Educating at-risk and special education student populations requires intervention efforts
that differ in approach and intensity from traditional instructional materials that largely
address on-grade level students. Our comprehensive intervention business is conducted under the
Voyager business segment. These products offer a complete suite of comprehensive intervention
products, blending content, services and technology to meet student needs. We offer reading
programs, math programs and professional development programs under the Voyager business unit.
Voyager Reading Programs. The reading programs in the Voyager business unit consist of:
Voyager Passporttm; LANGUAGE!; Passport Reading Journeystm; Read Well;
Voyager Universal Literacy System®; Ticket to Read®; TimeWarp®
Plus; Voyager Pasaportetm; and We Can!.
Voyager Passport is a comprehensive reading intervention system for grades K-5. Voyager
Passport provides direct, systematic instruction in each of the five essential reading components
(phonemic awareness, phonics, fluency, vocabulary, and comprehension) and is designed as an
intervention program for grade K-5 students for whom a core reading program is not sufficient.
The lessons are typically daily and run 30 to 40 minutes in duration. They are based on the
latest scientific research regarding effective reading instruction and are carefully designed to
effectively and efficiently address each of the strategies and skills necessary to improve the
reading ability of struggling readers.
LANGUAGE!, our principal literacy offering, is a complete literacy program that targets
students in grades 3-12 achieving at or below the 35th percentile. The program consists of a
36-unit curriculum organized into six levels that cover phonemic awareness and phonics, word
recognition and spelling, vocabulary and morphology, grammar and usage, listening and reading
comprehension and speaking and writing. LANGUAGE! is designed for special education students, as
well as students learning to speak English. The curriculum is a mastery-based curriculum.
Students exit as soon as they achieve grade-level proficiency, which will vary depending on the
specific needs of the student and where the student enters the program.
Passport Reading Journeys is a targeted intervention program designed to accelerate reading
for struggling readers in middle school and high school, grades 6-9. The lesson format integrates
reading, comprehension, vocabulary, fluency and writing. Age-appropriate content, real-life
journeys on DVDs, online interactive lessons, and captivating text hold student interest and
motivate students to read for both information and enjoyment. The program targets the affective
domain as much as the cognitive domain as many struggling readers have lost confidence, are not
engaged, and are close to dropping out. The program meets all of the instructional
recommendations of the Reading Next Report, which is a research report outlining the key elements
of effective literacy intervention for middle and high school students, and provides teachers
with the tools necessary to help students become successful readers.
Read Well targets at-risk students in grades K-2. The program is a research-based and
data-driven reading curriculum that addresses all five components of effective reading
instruction — phonemic awareness, phonics, vocabulary, comprehension and fluency.
The Voyager Universal Literacy System is a comprehensive core reading curriculum for grades
K-3 that explicitly and systematically teaches the five essential components of reading
instruction as outlined by the National Reading Panel in 2000.
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Ticket to Read (www.tickettoread.com) is an interactive web-based program offered with
Voyager’s Passport and Universal Literacy System programs. Ticket to Read is designed to improve
reading by allowing students to practice various aspects of reading skills. Instruction is
leveled, self-paced and teacher-monitored. Students are motivated by a leader board, a virtual
clubhouse that includes earning online tickets and other rewards, games, and engaging
self-selected passages on a variety of topics as they build vocabulary, fluency, phonics and
reading comprehension skills. Approximately one-quarter of the use takes place after school
hours, including weekends, further enabling students to reinforce what they have
learned in the classroom and enabling parents and/or guardians to become more involved in
their children’s education.
TimeWarp Plus is a four-to-six week summer reading intervention program which immerses grade
K-9 students in reading adventures to build essential reading skills that can prevent summer
learning loss and prepare students for the coming year. TimeWarp Plus is a balanced,
research-based reading program offered as a two-to-four hour daily reading instruction focused
around exciting, adventure-based themes and hands-on learning experiences. Student engagement and
maximizing teacher time are key components of the program.
Voyager Pasaporte provides students in grades K-3 with targeted reading intervention in
Spanish, using a similar scientifically-based reading research and framework as Voyager Passport.
The lessons typically run daily for 30 to 40 minutes in duration. They are based on the latest
scientific research regarding effective reading instruction and are carefully designed to
effectively and efficiently address each of the strategies and skills necessary to improve the
reading ability of struggling Spanish-speaking children who cannot read effectively in any
language. Built-in assessment and progress monitoring tools provide teachers with vital
information about student learning so they can adjust instruction as needed.
We Can! is a multilingual early childhood program which is designed to develop both social
and academic skills. The program offers flexible lesson plans for customized instruction, a
classroom management system and learning center choices. We Can! also fits within a variety of
Pre-K settings.
Voyager Math Programs. The math programs in the Voyager business unit consist of:
Vmath®, Vmath Summer Adventure, TransMath, Algebra Rescue and Voyages.
Vmath is a targeted, systematic intervention system that is aligned with the tenets of the
National Council of Teachers of Mathematics and is designed to complement and enhance all major
math programs by building upon and reinforcing the concepts, skills, and strategies of a core
math program. Through 30 to 40 minutes of daily instruction, Vmath helps struggling students
build a foundation in math and learn the skills and concepts crucial to achieving grade-level
success. VmathLive is a standalone or complementary online math capability, targeting additional
student practice for grades 3-8.
Vmath Summer Adventure targets math students who may need summer intervention to prevent
summer learning loss in math as well as in reading. Vmath Summer Adventure combines explicit
instruction in essential math concepts and skills and real-life adventures to stimulate student
interest and understanding over a shortened summer school program for grades K-8.
TransMath targets students in the 25th percentile and below in grades 5-12. TransMath
provides students with in-depth, sequential skill building of foundational math concepts through
reform-based and procedural instruction. Multisensory strategies are designed to promote
problem-solving proficiency, vocabulary development and mathematical discourse.
Algebra Rescue targets students at risk of failure in algebra and teaches them a variety of
core objectives through activities intended to make learning fun. Students may participate in
Algebra Rescue in small groups, as a supplement to basal curricula, or as a stand-alone algebra
intervention program.
Voyages targets grades K-5 and is a core mathematics program designed by teachers, for
teachers. Educators may utilize Voyages as a core program, as an intervention program or as part
of a gifted and talented program.
Voyager Professional Development Programs. The professional development programs in the
Voyager business unit include VoyagerU®, our professional development program for
teachers, coaches and administrators consisting of courses in literacy and math. VoyagerU is a
professional development program delivered to teachers, coaches and educators in collaboration
with state-wide and school district-wide professional development initiatives. It is designed to
improve teacher effectiveness by providing a consistent approach to teaching reading and math.
The program blends independent student instruction with facilitator-led training. We offer
courses that are comprehensive or targeted for specific skills. Participants may earn college
credit and hours toward professional development requirements. VoyagerU is designed to improve
teacher instruction and student reading performance.
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Sopris
The Sopris business unit is our supplemental education materials business. Supplemental
interventions are typically smaller “footprint” offerings as measured either by the cost per
student to implement or their more targeted (less comprehensive) skills coverage. These products
typically are used to complement core programs by focusing on specific skill deficits and
providing intense remediation of those deficits. The Sopris business unit is a collection of
many products,
titles and resources. Sopris’ primary products are Step Up to Writing; Rewards; Dynamic
Indicators of Basic Early Literacy Skills (DIBELS/IDEL); Language Essentials for Teachers of
Reading and Spelling (LETRS); The Six Minute Solution; and Algebra Ready.
Step Up to Writing is a strategies-based program that spans grades K-12 and addresses
students who score at or below the basic skill level in writing. The program teaches students to
write both narrative and expository pieces, actively engage with reading materials and develop
study skills. Step Up to Writing is designed to fit alongside a school district’s existing
reading program and to be integrated into any standard curriculum or instructional system.
Rewards is a research-based, reading intervention program designed for general and special
education, remedial reading, summer school and after-school programs. The program focuses on
de-coding, fluency, vocabulary, comprehension, test-taking abilities and content-area reading and
writing.
DIBELS/IDEL is a literary screening and progress monitoring tool. Students from grades K-3
take benchmark assessments three times a year in order to measure the critical areas of early
reading: awareness, phonics, fluency, comprehension and vocabulary. Students in grades 4-6 are
assessed in the areas of fluency and comprehension. For those with reading difficulties, progress
monitoring assessments are given to determine the effectiveness of the interventions being used.
IDEL offers DIBELS materials for Spanish-speaking students.
LETRS is a stand-alone professional development program for educators. The training program
is delivered through a combination of print materials, online courses, software and face-to-face
training. LETRS Institutes are grouped into a series of three-day sessions presented by certified
national LETRS trainers and engage educators through group activities and hands-on practice.
The Six Minute Solution targets grades K-12 and helps students improve reading fluency. This
peer-mentoring and feedback system is designed to complement a reading curriculum.
Algebra Ready teaches students fundamental mathematics and is designed to prepare them for
algebra and geometry. Students can utilize Algebra Ready during summer school, extended days, or
as a supplement to a core math curriculum.
Growth for Sopris is partially dependent on new product additions. In late 2009, we added
DISE (Direct Instruction Spoken English), an intervention program for English learners at grades
4-12. Additionally, we recently announced that we had signed an agreement with a well-known
author to publish RAVE-O (Reading through Automaticity, Vocabulary, Engagement, and Orthography),
an intensive, multisensory, small group reading intervention for primary through intermediate
grades. RAVE-O is expected to be available in summer 2010.
Cambium Learning Technologies
Cambium Learning Technologies leverages technology to help students reach their potential.
The technology solutions are offered under four different industry leading brands: Learning A-Z,
ExploreLearning, Kurzweil Educational Systems and IntelliTools.
Learning A-Z. Learning A-Z is a group of related websites known as Reading
A-Ztm, Raz-Kidstm, Reading-Tutorstm, Vocabulary A-Ztm
and Writing A-Ztm, which provide online supplemental reading, writing and vocabulary
lessons, books, and other resources for students and teachers. Science A-Z tm, a
Learning A-Z website, is aimed at the supplemental science market.
We sell online supplemental reading, math and science products under the Learning A-Z brand.
There are three free websites (LearningPagetm, Sites for Teachers and Sites for
Parents), which aid in directing interested parents, teachers, schools and districts to six
subscription-based sites: Reading A-Z, Raz-Kids, Reading-Tutors, Vocabulary A-Z, Writing A-Z, and
Science A-Z. Each of these websites offers products available for purchase through online
subscriptions.
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Reading A-Z offers thousands of research-based, printable teacher materials to teach guided
reading, phonological awareness, phonics, comprehension, fluency, letter recognition and
formation, high-frequency words, poetry and vocabulary. The teaching resources include
professionally developed downloadable leveled books (27 levels), a systematic phonics program
that includes decodable books, high-frequency word books, poetry books, nursery rhymes,
vocabulary books, read-aloud books, lesson plans, worksheets, graphic organizers and reading
assessments. All leveled books, worksheets, graphic organizers and quizzes are available as
printable PDF files and as projectables for use on interactive and non-interactive whiteboards.
The leveled books and a variety of other books are available in Spanish and French, as well as a
version with UK spellings.
Raz-Kids is a student-centered online collection of interactive leveled books and quizzes
designed to guide and motivate emergent and reluctant readers, as well as improve the skills of
fluent readers. Students can listen to and read books as well as record their reading and then
take an online quiz while receiving immediate feedback. Students earn stars for their reading
activity. The stars can then be spent in each student’s personal clubhouse-like environment for
purchasing a catalog full of items that include aliens and other fun characters. The program
currently consists of over 300 online books along with companion quizzes and worksheets spread
over 27 levels of difficulty. The website also features a classroom management system for
teachers to build rosters, assign books and review student reading activity.
Reading-Tutors is a low-cost, easy-to-use collection of research-based resource packets for
tutors. Each of the 400 packets contains items tutors need to help emerging readers gain key
literacy skills in the alphabet, phonological awareness, phonics, high-frequency words, fluency
and comprehension. It also has all the resources needed to train tutors as well as set up and
administer a successful tutoring program.
Vocabulary A-Z provides customized and pre-made vocabulary lessons for use by teachers to
improve student vocabularies. Vocabulary A-Z has thousands of vocabulary words that can be used
to generate custom vocabulary lessons and assessments. Word activities and worksheets are
available based on the word lists the user generates. The Vocabulary A-Z lesson generator
incorporates best practices from current educational research.
Writing A-Z provides teachers with a comprehensive collection of resources to enhance the
writing proficiency of students in grades K-6. The site provides core writing lessons grouped by
genre, including student packets with leveled materials, mini-lessons that target key writing
processes and skills, and writing tools for organizing and improving writing.
Science A-Z provides teachers with an online collection of resources to improve student
skills in both science and reading. The website offers a collection of downloadable resources
organized into thematic units aligned with state standards. The materials are categorized into
four scientific domains: life, earth, physical and process science. The thematic units are
organized into three grade-level groupings: K-2, 3-4, and 5-6. The themed packs include lessons,
books, high- interest information sheets, career sheets, and process activities. Within each
grade span, all books and information sheets are written to a high, medium and low level of
difficulty. The website includes many other science resources, including science fair resources
and a monthly “Science In the News” feature.
ExploreLearning. ExploreLearningtm is a subscription-based online library of
interactive simulations in math and science for grades 3-12. ExploreLearning supplies online
simulations in math and science. ExploreLearning has won National Science Foundation funding,
supports the tenets of the National Council of Teachers of Mathematics and has received positive
mention in books published by the Association of Supervision and Curriculum Development and the
National Science Teachers Association. ExploreLearning materials are correlated to state
standards and over 120 math and science textbooks. Like Learning A-Z, ExploreLearning is an
online subscription-based business.
Kurzweil Educational Systems. Kurzweil Educational Systems is a program that primarily
targets students in middle school through higher education struggling with reading and writing,
specifically those students with ADHD, dyslexia and visual impairments. Kurzweil Educational
Systems produces the following two software products for individuals with learning difficulties
and for those who are visually impaired:
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Kurzweil 3000. Kurzweil 3000 is a reading, writing and learning software package for
students with dyslexia, attention deficit disorder or other learning difficulties, including
physical impairments or language learning needs. |
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Kurzweil 1000. Kurzweil 1000 provides visually impaired users access to printed and
electronic materials. Documents and digital files are converted from text to speech and read
aloud in a variety of voices that can be modified to suit individual preferences. In addition,
this software provides users with document creation and editing, studying and study skills for
note-taking, summarizing and outlining text. |
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IntelliTools. IntelliTools offers hardware products that target students with physical,
visual and cognitive disabilities that make using a standard keyboard and mouse difficult.
IntelliTools also offers software products that target elementary and middle school special
education students struggling with reading and math. IntelliTools’ products include:
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IntelliKeys® USB, which is a programmable alternative keyboard with supporting
software for students or adults who have difficulty using a standard keyboard. |
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IntelliTools Classroom Suite, which is an authoring and application tool intended to
boost achievement on standards-based tests and help meet adequate yearly progress goals
under the No Child Left Behind Act. |
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IntelliTools, which offers software products with a simple interface for students to use.
The software includes lessons, activities and assessments that reinforce reading, writing
and math skills with the capability to generate reports and provide detailed data tracking. |
Marketing and Distribution
Curriculum Development
We continually seek to take advantage of new product and technology opportunities and view
product development to be essential to maintaining and growing our market position. We have
developed relationships with authors who are known for their expertise in improving the cognitive
and behavioral performance of at-risk and special education students. Many authors are leaders in
their respective fields, such as literacy, mathematics, and positive school climate. These
authors are engaged by us to develop content and then to refine that content once feedback is
obtained from our customers. We also employ both in-house and contracted developers of
curriculum and on-line content. We generally conduct an extensive refresh of our products every
three to five years to incorporate the latest research, bring images current, and update factual
content. The web-based products are enhanced continuously. Between the product refreshes, we
often develop variations, expansions (i.e., more grade levels) and other basic enhancements of
our products. As of December 31, 2009, we had 112 employees in curriculum development. Research
and development expense was $5.6 million for 2009 and $6.4 million for 2008. In addition, we
capitalize certain expenditures also related to curriculum and technology development.
Sales and Marketing
Sales Force Organization
We generally organize our marketing and sales force around our Voyager, Sopris and Cambium
Learning Technologies business units. We have separate sales forces by unit and sales producers
sell all available products in the unit and are generalist relationship managers. They are
supported by product or subject matter experts as well as a corporate marketing team. As of
December 31, 2009, our sales force consisted of 91 field and 43 inside sales producers for a
total of 134 direct sales producers, excluding sales management and marketing. Where we elect to
use both field and inside sales producers in a business unit, we tend to segment the customers
primarily based on size of a territory, whereby larger territories are covered by field
representatives and smaller territories are covered more effectively by inside sales employees.
We also use direct marketing through catalogs and are increasingly making use of e-commerce and
the Internet to sell our products. Sales and marketing expense was $23.4 million for 2009 and
$24.6 million for 2008.
Competition
The market for our products is highly competitive. We compete with a wide range of companies
from large publishers covering a broad array of products to small providers who specialize in
very limited areas. We compete with:
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Basal text book suppliers, which often offer intervention products as part of
their core reading programs, including Houghton Mifflin/Harcourt (Riverdeep),
Scott Foresman (Pearson), and The McGraw-Hill Companies; |
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Supplemental suppliers, including School Specialty, Haights Cross
Communications and The Hampton-Brown Company; |
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Technology suppliers, including Scientific Learning, Educational Resources,
Renaissance Learning, and Plato Learning; and |
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Service providers, including Sylvan Learning and Kaplan Early Learning
Company. |
Concentration Risk
We are not overly dependent upon any one customer or a few customers, the loss of which
would have a material adverse effect on our business. We have a broad customer base; in the
three years ended December 31, 2009 for both VLCY and the Company, no single customer accounted
for more than 10% of our total net sales in any one year. On a combined basis, our top ten
customers accounted for less than 17% of our net sales in 2009.
8
Seasonality
Our quarterly operating results fluctuate due to a number of factors, including the academic
school year, funding cycles, the amount and timing of new products and spending patterns. In
addition, customers experience cyclical funding issues that can impact revenue patterns.
Historically, we have experienced our lowest sales and earnings in the first and
fourth fiscal quarters with our highest sales and earnings in the second and third fiscal
quarters.
Governmental Regulations
Our operations are governed by laws and regulations relating to equal employment
opportunity, workplace safety, information privacy, and worker health, including the Occupational
Safety and Health Act and regulations under that Act. Additionally, as a company that often bids
on various state, local and federally funded programs, we are subject to various governmental
procurement policies and regulations. We believe that we are in compliance in all material
respects with applicable laws and regulations and that future compliance will not have a material
adverse effect upon our consolidated operations or financial condition.
Employees
Our future success is substantially dependent on the performance of our management team and
our ability to attract and retain qualified technical and managerial personnel. As of December
31, 2009, we had a total of 622 employees. None of our employees are represented by collective
bargaining agreements. We regard our relationship with our employees to be good.
Executive Officers
Ronald Klausner. Ronald Klausner, age 56, currently serves as a Class III director and our
Chief Executive Officer. Mr. Klausner has served as one of our directors since December 8, 2009.
Mr. Klausner served as President of Voyager Expanded Learning from October 2005 until December 8,
2009, when he became our Chief Executive Officer. Prior to that, Mr. Klausner served as President
of ProQuest Information and Learning Company (a subsidiary of VLCY until it was sold in 2007)
from April 2003 to October 2005. Mr. Klausner came to VLCY from D&B (formerly known as Dun &
Bradstreet), a global business information and technology solutions provider, where he worked for
27 years. He most recently served as D&B’s Senior Vice President, U.S. Sales, leading a segment
with more than $900 million in revenue. Previously, Mr. Klausner led global data and operations,
and customer service, providing business-to-business, credit, marketing and purchasing
information in over 200 countries.
David F. Cappellucci. David F. Cappellucci, age 53, currently serves as a Class I director
and our President. Mr. Cappellucci has served as one of our directors since December 8, 2009.
Mr. Cappellucci served as the Chief Executive Officer of Cambium from April 2007 until December
8, 2009 and has 24 years of experience in the education industry. Before co-founding Cambium in
December of 2002, Mr. Cappellucci spent 13 years with Houghton Mifflin Company, where he served
in a variety of senior management positions, overseeing strategy, mergers and acquisitions,
planning and operations at both the corporate level and within a number of business units,
including the K-12 School Publishing Group and the Educational and Business Software Divisions.
In 2000, Mr. Cappellucci co-founded Classwell Learning Group, an education company formed within
the Houghton Mifflin organization. Through 2002, Mr. Cappellucci served as President and Chief
Executive Officer of Classwell Learning Group, which was described as the “best new brand in the
education market” by a major industry magazine in 2002. From 1992 to 1997, Mr. Cappellucci served
as Senior Vice President of Elementary Education for Simon & Schuster. Prior to that, Mr.
Cappellucci was Vice President of Finance, Planning and Operations for Houghton Mifflin’s K-12
school and assessment businesses.
Bradley C. Almond. Bradley C. Almond, age 43, currently serves as our Senior Vice President
and Chief Financial Officer. Mr. Almond served as Chief Financial Officer of VLCY since January
2009 and continues to serve as our subsidiary’s Chief Financial Officer. Mr. Almond joined VLCY
in November 2006 as Chief Financial Officer of the Voyager Expanded Learning operating unit.
Before joining VLCY, Mr. Almond was Chief Financial Officer, Treasurer and Vice President of
Administration at Zix Corporation, a publicly traded email encryption and e-prescribing service
provider located in Dallas, Texas, since 2003. From 1998 to 2003, Mr. Almond worked at Entrust
Inc., where he held a variety of management positions, including president of Entrust Japan,
general manager of Entrust Asia and Latin America, vice president of finance and vice president
of sales and customer operations. Mr. Almond is a licensed Certified Public Accountant.
9
John Campbell. John Campbell, age 49, currently serves as Senior Vice President and the
President of the Cambium Learning Technologies business unit. Mr. Campbell served as Chief
Operating Officer of Voyager Expanded Learning from January 2004 until December 8, 2009. Before
joining VLCY, Mr. Campbell served as Chief Operating Officer and business unit head of a research
based reading company (Breakthrough to Literacy) within McGraw-Hill. Prior to joining
Breakthrough/McGraw-Hill, he served as Director of Technology for Tribune Education.
Additionally, Mr. Campbell has experience as General Manager of a software start-up (Insight) and
as Director of Applications and Technical Support for a hardware manufacturer (Commodore
International).
George A. Logue. George A. Logue, age 58, currently serves as Executive Vice President and
the President of the Supplemental Solutions business unit. Mr. Logue served as the Executive Vice
President of Cambium from June 2003 until December 8, 2009 and has 35 years of education industry
experience. Before joining Cambium, Mr. Logue spent 18 years in various leadership roles with
Houghton Mifflin Company. At Houghton Mifflin, Mr. Logue served as Executive Vice President of
the School Division from 1996 to 2003. Prior to serving as Executive Vice President of Houghton
Mifflin, Mr. Logue was Vice President for Sales and Marketing from 1994 to 1996.
Carolyn W. Getridge. Carolyn W. Getridge, age 65, currently serves as our Senior Vice
President of Human Resources and Urban Development. She joined VLCY in 1997 as a member of the
team that launched the company after a distinguished 30-year career in public education.
Immediately prior to joining Voyager, Ms. Getridge was Superintendent of the Oakland Unified
School District. Ms. Getridge also served as Associate Superintendent of Curriculum and
Instruction in Oakland and as Director of Education Programs for the Alameda (CA) County Office
of Education.
Todd W. Buchardt. Todd W. Buchardt, age 50, currently serves as our Senior Vice President,
General Counsel and Secretary. Mr. Buchardt served VLCY as Senior Vice President since November
2002, Vice President since March 2000, and General Counsel and Secretary since 1998. Before
joining VLCY, Mr. Buchardt held various legal positions with First Data Corporation from 1986 to
1998.
Proprietary Rights
We regard a substantial portion of our technologies and content as proprietary and rely
primarily on a combination of patent, copyright, trademark and trade secret laws, and employee or
vendor non-disclosure agreements, to protect our rights.
We have developed relationships with authors who are known for their expertise in improving
the cognitive and behavioral performance of at-risk and special education students. Many authors
are leaders in their respective fields, such as literacy, mathematics, and positive school
climate. These authors are engaged by us to develop content and then to refine that content once
feedback is obtained from our customers. We act as exclusive agents for these well-known
authors, whereby we publish their works under a royalty arrangement. We also derive a
substantial amount of our curriculum content through in-house development efforts. To a much
lesser degree, we also license from third parties published works, certain technology content or
services upon which we rely to deliver certain products and services. Curriculum developed
in-house or developed through the use of independent contractors is our proprietary property.
Certain curriculum might be augmented or complemented with third party products, which may
include printed materials, videos or photographs. This additional third party content may be
sourced from various providers who retain the appropriate trademarks and copyrights to the
material and agree to our use under a nonexclusive, fee-based arrangement.
We use U.S.-registered trademarks to identify various products which we develop. The
trademarks survive as long as they are in use and the registration of these trademarks is
renewed.
Website Access to Company Reports
We make available free of charge through our website, www.cambiumlearning.com, our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Forms 3, 4 and
5 filed on behalf of our directors, officers and other affiliate persons, and all amendments to
those reports as soon as reasonably practical after such material is electronically filed with,
or furnished to, the Securities and Exchange Commission (“SEC”). We also will provide any of the
foregoing information without charge upon written request to Cambium Learning Group, Inc., 1800
Valley View Lane, Suite 400, Dallas, Texas 75234-8923, Attention: Investor Relations.
We are providing the address to our website solely for the information of our investors. Our
website and the information contained therein or incorporated therein are not intended to be
incorporated into this Annual Report on Form 10-K.
10
Code of Ethics
We have adopted a Senior Financial Officers Code of Ethics and a Code of Business Conduct to
promote such standards as (1) honest and ethical conduct; (2) full, fair, accurate, timely and
understandable disclosure in our periodic reports; and (3) compliance with applicable
governmental rules and regulations. Amendments to, or waivers from, the code of ethics will be
posted on our website. A copy of the code of ethics and the code of business conduct are posted
on our website, www.cambiumlearning.com, within the “Investor Relations” section under the
heading “Corporate Governance”. The code of ethics is also available in print to anyone who
requests it by writing to the Company at the following address: Cambium Learning Group, Inc.,
1800 Valley View Lane, Suite 400, Dallas, Texas 75234-8923, Attention: Investor
Relations.
We have also implemented a whistleblower hotline, as required under the Sarbanes-Oxley Act
of 2002, by engaging a third party service that provides anonymous reporting for serious
workplace ethical issues via telephone and/or the Internet.
Item 1A. Risk Factors.
This section should be read in conjunction with the Consolidated Financial Statements of the
Company and the notes thereto included in this Annual Report on Form 10-K for the year ended
December 31, 2009.
Risks Related to our Business
Changes in funding for public schools could cause the demand for our products to decrease.
We derive a significant portion of our revenues from public schools, which are heavily
dependent on federal, state and local government funding. In addition, the school appropriations
process is often slow, unpredictable and subject to many factors outside of our control. Budget
cuts, curtailments, delays, changes in leadership, shifts in priorities or general reductions in
funding could reduce or delay our revenues. Funding difficulties experienced by schools, which have
been exacerbated by the current economic downturn and state budget deficits, could also cause those
institutions to demand price reductions and could slow or reduce purchases of intervention
products, which in turn could materially harm our business.
Our business may be adversely affected by changes in educational funding at the federal, state
or local level, resulting from changes in legislation, changes in state procurement processes,
changes in government leadership, emergence of other funding or legislative priorities and changes
in the condition of the local, state or U.S. economy. While state and federal funding for
elementary and high school education has steadily increased over the long term, recent reductions
in related appropriations and other declines in budgeted revenues in states that have traditionally
purchased products and services have caused some school districts to reduce spending on the types
of products and services that we sell, and both have been affected by these reductions. Moreover,
future reductions in federal funding provided to the states or reductions in the state and local
tax bases could create an unfavorable environment, leading to budget shortfalls resulting in
decreases in educational funding. Any decreased funding for public schools may harm our recurring
and new business materially if our customers are not able to find and obtain alternative sources of
funding.
On March 13, 2010, the U.S. Department of Education released “A Blueprint for Reform: The
Reauthorization of the Elementary and Secondary Education Act.” The blueprint provides incentives
for states to adopt academic standards that prepare students to succeed in college and the
workplace and create accountability systems that measure student growth toward meeting the goal
that all children graduate and succeed in college. The blueprint builds on the following key
priorities: (1) college- and career-ready students; (2) great teachers and leaders in every school;
(3) equity and opportunity for all students; (4) raise the bar and reward excellence; and (5)
promote innovation and continuous improvement. This blueprint could provide a means for
overhauling the No Child Left Behind Act, although we do not yet know how any legislation resulting
from this blueprint will affect funding for our products and services.
We receive significant sales from certain states and reductions in public school education spending
in those states could cause the demand for our products to decrease.
In 2009, VLCY
and Cambium, on a combined basis, derived significant sales from the following
three states in the following approximate percentages: California — 10%; Florida — 9%; and Texas
— 12%. California and Florida experienced significant budget problems in 2009 as a result of the
current economic downturn and have announced that they anticipate reductions in their 2010 spending
for education relative to fiscal 2008/2009 levels. To the extent that the economic situation in any
of these states causes reductions in public school spending, our sales to these states could be
materially reduced which could harm our business and financial condition.
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We participate in state adoptions and sales may be materially reduced if we are not able to replace
sales in years subsequent to the first year of adoption or if states elect to defer or eliminate
adoption purchases.
We participate in state-wide adoptions for education products, as well as intervention
products when states issue specific adoption calls for intervention products. The cost of
participating in such adoptions is high, with no guarantee of future sales. In addition, sales are
traditionally high in the first year of adoption but decline in subsequent years, making it
difficult to replace first year sales. After an adoption has occurred, states may elect to allow
school districts to use adoption funds for alternative purposes other than the purposes stated in
the initial adoption, as has occurred in Florida in 2009. Postponements of district-level adoptions
could also limit market potential in other states. We may not be able to recover costs we incur
for participating in adoptions and sales may be materially reduced if we are not able to replace
sales in years subsequent to adoption years or if states elect to defer or eliminate adoption
purchases.
Changes in school procurement policies may adversely affect our business.
School districts choose to procure educational materials in various ways which can change
quickly necessitating a change in our sales strategy or sales investments. Districts and states
may switch procurement decisions from a centralized (district-wide) to a decentralized (school by
school) decision, states may switch from state-wide standard adoptions to flexible district level
procurement, and customers could increasingly utilize competitive requests for proposals (RFP) or
procurement via the Internet. Any of these changes could cause us to modify our sales strategy
or cause us to expend greater sales effort to win business and if we are slow to respond the
result could be a material loss of market share.
Our failure to expand our customer base could diminish incremental revenues from certain products.
We sell products that require customers to purchase certain replenishment materials year after
year if they chose to continue serving the same number of students. Sales of these consumable
items and replacement materials typically involve considerably less revenue than the initial sale.
Therefore, our ability to maintain and grow sales and profitability will depend significantly upon
the ability to acquire new customers or increase sales to existing customers. Acquiring new
customers or expanding student use within existing customers could prove challenging as a result of
competition from larger competitors, reductions in state and local funding, customer preferences
and any requirement to provide enhancements to product capabilities. We may also be adversely
affected by existing customers who reduce or discontinue use of our products and services, which
may occur if our product offering is less competitive with those of our competitors, or as a result
of budgetary constraints which have become increasingly acute in the current economic downturn. If
we are not successful in continuing to acquire additional customers or expanding business from our
existing customers, our earnings may be adversely affected.
Our sales growth and profitability will depend, in part, on our ability to attract and retain
productive resellers.
Historically, we have used resellers as a sales channel for certain products. Entities that
resell our products may discontinue selling the products or choose to substitute a competing
product, or they may not dedicate sufficient attention and resources to our products that they are
selling. Should any of our current or future resellers perform below our expectations, or should we
lose one or more relationships with one of our current resellers, or fail to establish
relationships with additional or replacement resellers, our sales and profitability could be
adversely affected.
We may be unable to integrate successfully the businesses of Cambium and VLCY and realize the
anticipated benefits of the mergers.
The mergers of Cambium and VLCY involved the combination of two companies which, prior to the
mergers, operated as independent companies. We have devoted and will continue to be required to
devote significant management attention and resources to integrating the businesses practices and
operations of the two previously separate companies. Potential difficulties we may encounter in the
integration process include, without limitation, the following:
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the inability to successfully combine the businesses of Cambium and VLCY in a manner that
permits us to achieve the cost savings and revenue synergies anticipated to result from the
mergers, which would result in the anticipated benefits of the mergers not being realized
partly or wholly in the time frame currently anticipated or at all; |
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lost sales and customers as a result of certain customers of either of the two companies
deciding not to do business with us, including the risks associated with changing the
customer relationship from one sales representative to another sales representative; |
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complexities associated with managing the combined businesses; and |
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integrating personnel from the two companies while maintaining focus on providing
consistent, high-quality products and customer service. |
In addition, it is possible that the integration process could result in the diversion of
management’s attention, the disruption or interruption of, or the loss of momentum in, ongoing
business of the combined company or inconsistencies in products, services, standards, controls,
procedures and policies, any of which could adversely affect our ability to maintain relationships
with customers and employees, or our ability to achieve the anticipated benefits of the mergers, or
could reduce the earnings or otherwise adversely affect our business and financial results. The
integration process may be difficult, unpredictable and subject to substantial delay because the
businesses are complex, were developed independently and were designed without regard to such
integration. Moreover, prior to the mergers, the businesses were headquartered in different
geographical regions, which may further complicate integration efforts and make integration of the
two companies more challenging. In some instances, Cambium and VLCY historically served the same
customers, and some of these customers may decide that it is desirable to seek out additional or
different vendors in order to ensure that we are competitive with other companies. If we cannot
successfully integrate these businesses and continue to provide customers with products, services
and new features on a timely basis, we may lose customers and our business and results of
operations may be harmed materially. We also may incur additional unanticipated costs in the
integration of the businesses of Cambium and VLCY.
Our sales and profitability will depend on our ability to continue to develop new products and
services that appeal to customers and end users and respond to changing customer preferences.
We operate in markets that are characterized by continuous and rapid change, including product
introductions and enhancements, changes in customer demands and evolving industry standards. In a
period of rapid change, the technological and curriculum life cycles of our products are difficult
to estimate. The demand for some of our more “mature” products and services has begun to migrate to
other, newer products and services. As a result, we will need to continuously reassess our product
and service offerings. We could make investments in new products and services that may not be
profitable, or whose profitability may be significantly lower than what we have experienced
historically. If we are unable to anticipate trends and develop new products or services responding
to changing customer preferences, our revenues and profitability could be adversely affected. Our
business could be harmed if we are unable to develop new products and invest in existing products
in an appropriate balance to keep our company competitive in the marketplace.
Our business is anticipated to be seasonal and our operating results are anticipated to fluctuate
seasonally.
Our business is likely to be subject to seasonal fluctuations. Historically, revenue and
income from operations have been higher during the second and third calendar quarters. In addition,
the quarterly results of operations have fluctuated in the past, and our quarterly results of
operations can be expected to continue to fluctuate in the future, as a result of many factors,
including:
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general economic trends; |
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state and local budgets for education; |
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the traditional cyclical nature of educational material sales; |
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school, library and consumer purchasing decisions; |
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unpredictable funding of schools and libraries by federal, state and local governments; |
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consumer preferences and spending trends; |
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the need to increase inventories in advance of the primary selling season; and |
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the timing of introductions of new products and services. |
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If we are unable to compete effectively, we may be unable to successfully attract and retain
customers and our profitability could be materially harmed.
The market for our products and services is highly competitive and is characterized by
frequent product developments and enhancements of existing products. We cannot assure you that
products or services introduced by others will not adversely affect our business.
Many companies,
both privately and publicly owned, develop products and services similar to
our products. These competitors include basal text book suppliers, which often offer
intervention products as part of their core reading
programs, supplemental suppliers, technology suppliers and service providers. Several of our
competitors have substantially greater financial, research and development, manufacturing and
marketing resources than us as well as greater name recognition and larger customer bases.
Accordingly, our competitors may be able to respond more quickly to new technologies and changes in
customer requirements, have more favorable access to suppliers and devote greater resources to the
development and sale of their products and services. These competitors may be successful in
developing products and services that are more effective or less costly than any products or
services that we may provide currently or may develop in the future. Any incursions by competitors
could materially and adversely affect our ability to attract and retain customers and thus may
materially harm our business.
Our intellectual property protection may be inadequate, which may allow others to use our
technologies and thereby reduce our ability to compete.
The technology underlying our services and products may be vulnerable to attack by our
competitors. We rely on a combination of trademark, copyright and trade secret laws, employee and
third party nondisclosure agreements and other contracts to establish and protect our technology
and other intellectual property rights. The steps that we have taken in order to protect our
proprietary technology may not be adequate to prevent misappropriation of our technology or to
prevent third parties from developing similar technology independently.
Technology content licensed from third parties may not continue to be available.
We license from third parties technology content upon which we rely to deliver products and
services to customers. This technology may not continue to be available to us on commercially
reasonable terms or at all. Moreover, we may face claims from persons who claim that our licensed
technologies infringe upon or violate those persons’ proprietary rights. These types of claims,
regardless of the outcome, may be costly to defend and may divert management’s efforts and
resources.
Our products could infringe on the intellectual property of others, which may cause us to engage in
costly litigation and to pay substantial damages or restrict or prohibit us from selling our
products.
Third parties may assert infringement or other intellectual property claims against us based
on their intellectual property rights. If any of these claims are successful, we may be required to
pay substantial damages, possibly including treble damages, for past infringement. We also may be
prohibited from selling our products or providing certain content without first obtaining a license
from the third party, which, if available at all, may require us to pay additional fees or
royalties to the third party. Even if infringement claims against us are without merit, defending a
lawsuit takes significant time, is often expensive and may divert management attention away from
other business concerns.
Our success will depend in part on our ability to attract and retain key personnel.
Our success depends in part on our ability to attract and retain highly qualified executives
and management, as well as creative and technical personnel. Members of our senior management team
have substantial industry experience that is critical to the execution of our business plan. If
they or other key employees were to leave the Company, and we were unable to find qualified and
affordable replacements for these individuals, our business could be harmed materially.
Our customer contracts are not likely to insulate us from potential reductions in revenues.
We provide products and services to several governmental agencies, school districts and
educational facilities under contractual arrangements that, in most cases, are terminable at-will.
We may have no recourse in the event of a customer’s cancellation of a contract that is terminable
at-will. In addition, contracts awarded pursuant to a procurement process are subject to challenge
by competitors and other parties during and after that process. The termination or successful
challenge of significant contracts could materially and adversely affect our business, financial
condition, results of operations and liquidity.
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Increases in operating costs and expenses, many of which are beyond our control, could materially
and adversely affect our operating performance.
We must control our employee compensation expenses and our printing, paper and distribution
(such as postage, shipping and fuel) costs in order to be profitable. Our ability to control
compensation expenses is limited by our need to offer our employees competitive salaries and
benefit packages in order to attract and retain the quality of employees required to grow and
expand our business. Our ability to control compensation expenses is also limited by general
economic factors, including those affecting costs of health insurance, as well as by trends
specific to the employee skills that we require.
Paper prices fluctuate based on worldwide demand and supply for paper, in general, as well as
for the specific types of paper we use. If there is a significant disruption in the supply of paper
or a significant increase in paper costs, which would generally be beyond our control, or if our
strategies to manage these costs are ineffective, our results of operations could be materially and
adversely affected.
Acquisitions, if completed, could adversely affect our operations.
We may seek potential acquisitions of products, technologies and businesses in the education
industry that could complement or expand our current product and service offerings and businesses.
In the event that we identify appropriate acquisition candidates, we may not be able to
successfully negotiate, finance or integrate the acquired products, technologies or businesses.
Furthermore, such an acquisition could cause a diversion of management’s time and resources. Any
particular acquisition, if completed, may materially and adversely affect our business, results of
operations, financial condition or liquidity.
The failure to manage growth properly could have a material adverse effect upon our business,
results of operations, financial condition or liquidity.
The educational products industry is a fragmented industry. If this industry becomes more
concentrated over time, it will be important for us to grow and to manage our growth effectively.
Our ability to manage our growth, if any, will require us to expand our management team and assure
that our systems and controls are designed to support this growth. Any measurable growth in
business will result in additional demands on customer support, sales, marketing, administrative
and technical resources, and upon our related systems and controls. We may not be able to
successfully address these additional demands, and our operating and financial control systems may
not be adequate to support our future operations and anticipated growth.
We use the Internet extensively, and federal or state governments may adopt laws or regulations
that could expose us to substantial liability and/or taxation in connection with these activities.
As a result of increasing usage of the Internet, federal and state governments may adopt laws
or regulations regarding commercial online services, the Internet, user privacy, intellectual
property rights, content and taxation of online communications. Laws and regulations directly
applicable to online commerce or Internet communications are becoming more prevalent and could
expose us to substantial liability. Furthermore, various proposals at the federal, state and local
levels could impose additional taxes on Internet sales. These laws, regulations and proposals could
decrease Internet commerce and other Internet uses and adversely affect the success of our online
products and business.
We could experience system failures, software errors or capacity constraints, any of which would
cause interruptions in the delivery of electronic content to customers and ultimately may cause us
to lose customers.
Any significant delays, disruptions or failures in the systems, or errors in the software,
that we use for the technology-based component of our products, as well as for internal operations,
could harm our business materially. We have occasionally suffered computer and telecommunication
outages or related problems in the past. The growth of our customer base, as well as the number of
websites we provide, could strain our systems in the future and will likely magnify the
consequences of any computer and telecommunications problems that we may experience.
Many of the systems that we use to deliver our services to customers are located in multiple
facilities across several states. However, destruction or disruption at a single site can cause a
system-wide failure. Although we maintain property insurance on these premises, claims for any
system failure could exceed our coverage. In addition, our products could be affected by failures
associated with third party hosting providers or by failures of third party technology used in our
products, and we may have no control over remedying these failures.
Any failures or problems with our systems or software could force us to incur significant
costs to remedy the failure or problem, decrease customer demand for our products, tarnish our
reputation and harm our business materially.
15
Our systems face security risks and we need to ensure the privacy of our customers.
Our systems and websites may be vulnerable to unauthorized access by hackers, computer viruses
and other disruptive problems. Any security breaches or problems could lead to misappropriation of
our customers’ information, our websites, our intellectual property and other rights, as well as
disruption in the use of our systems and websites. Any security breach related to our websites
could tarnish our reputation and expose us to damages and litigation. We also may incur significant
costs to maintain our security precautions or to correct problems caused by security breaches.
Furthermore, to maintain these security measures, we may be required to monitor our customers’
access to our websites, which may cause
disruption to customers’ use of our systems and websites. These disruptions and interruptions
could harm our business materially.
We have a single distribution center and could experience significant disruption of business and
ultimately lose customers in the event it was damaged or destroyed.
In the first quarter of 2010, we completed the integration of VLCY’s Dallas, Texas
distribution facility into Cambium’s distribution facility in Frederick, Colorado. As a result, we
store and distribute the majority of our printed materials through this single warehouse in
Frederick, Colorado. In the event that this distribution facility was damaged or destroyed, we
would be delayed in responding to customer requests. Customers often purchase materials very close
to the school year and such delivery delays could cause our customers to turn to competitors for
products they need immediately. While we maintain adequate property insurance, the loss of
customers could have a long-term, detrimental impact on our reputation and business.
The complexity of our distribution operations may subject us to technological risk.
Our distribution center is highly automated, which means that their operations are complicated
and may be subject to a number of risks related to computer viruses, the proper operation of
software and hardware, electronic or power interruptions and other system failures. Risks
associated with upgrading or expanding the warehouse may significantly disrupt or increase the cost
of operating this center.
Our business may not grow as anticipated if we are not able to maintain and enhance our brands.
We believe that maintaining and enhancing our brands is important to attracting and retaining
customers. Our success in growing brand awareness will depend in part on our ability to continually
provide high quality programs and solutions that enhance the learning process. Competitors may
offer goods and services similar to those offered by us, which may diminish the value of our brand.
In addition, some of our brand names are new, or have changed or may be changed, and we may not
successfully maintain and grow the brand equity.
Failure to efficiently manage our direct marketing initiatives could negatively affect our
business.
We use various direct marketing strategies to market our products, including direct mailings,
catalogs, online marketing and telemarketing. In each case, we rely on our customer list, which is
a database containing information about our current and prospective customers. We use this database
to develop and implement our direct marketing campaigns. Managing the frequency of our direct
marketing campaigns and delivering appropriately tailored products in these campaigns is crucial to
maintaining and increasing our customer base and achieving adequate results from our direct
marketing efforts. We also face the risk of unauthorized access to our customer database or the
corruption of our database as a result of technology failure or otherwise. Enhancing and refreshing
the database, maintaining the ability to use the information available from the database, and
properly using the available information is vital to the success of our business, and our failure
to do so could lead to decreased sales and could materially and adversely affect our results of
operations, financial condition and liquidity.
Both Cambium and VLCY have been subjected to material accounting irregularities in recent years,
which could result in enhanced regulatory scrutiny in the future and could undermine the confidence
that some investors may have in the integrity of our financial statements.
During 2008, Cambium discovered certain irregularities relating to the control and use of cash
and certain other general ledger items which revealed a substantial misappropriation of assets
spanning fiscal 2004 through fiscal 2008. These irregularities were perpetrated by a former
employee, resulting in embezzlement losses, before the effect of income taxes, amounting to $14.0
million. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.” In early 2006, VLCY (then known as ProQuest Company) announced that it had identified
potential material irregularities in its accounting that were to be investigated by VLCY’s audit
committee, with the assistance of outside experts. In July 2006, VLCY announced that its audit
committee had completed its investigation and issued a statement that detailed the key findings,
including that the evidence indicated that a single individual was responsible for the
misstatements. After completion of that investigation, VLCY restated certain of its previously
filed financial statements. The fact that both Cambium and VLCY have experienced material
accounting irregularities within the past six years could result in enhanced regulatory scrutiny
and could impair the confidence of investors, financing sources, research analysts and potential
acquirers in the integrity of our financial statements.
16
Risks Related to Ownership of our Common Stock
An active, liquid trading market for our common stock may not develop.
Prior to the listing of our common stock on the NASDAQ Global Market in December 2009, there
has been no public market for our securities in the United States or elsewhere. Accordingly, we
cannot assure you that an active trading market will develop or be sustained or that the market
price of our common stock will not decline. The price at which our common stock has traded has
been highly volatile. The stock market has experienced extreme volatility that often has been
unrelated to the performance of its listed companies. Moreover, only a limited number of our shares
are traded each day, which could increase the volatility of the price of our stock. These market
fluctuations might cause our stock price to fall regardless of our performance. The market price of
our common stock might fluctuate significantly in response to many factors, some of which are
beyond our control, including the following:
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actual or anticipated fluctuations in our annual and quarterly results of operations; |
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changes in securities analysts’ expectations; |
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variations in our operating results, which could cause us to fail to meet analysts’ or investors’ expectations; |
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announcements by state governments regarding spending on educational programs; |
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announcements by our competitors or us of significant new products, contracts, acquisitions, strategic partnerships,
joint ventures or capital commitments; |
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conditions and trends in our industry; |
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general market, economic, industry and political conditions; |
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changes in market values of comparable companies; |
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additions or departures of key personnel; |
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stock market price and volume fluctuations attributable to inconsistent trading volume levels; and |
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future sales of equity or debt securities, including sales which dilute existing investors. |
We do not foresee paying cash dividends in the foreseeable future and, as a result, our investors’
sole source of gain, if any, will depend on capital appreciation, if any.
We do not plan to declare or pay any cash dividends on our shares of common stock in the
foreseeable future and currently intend to retain future earnings, if any, for future operation,
debt reduction and expansion. Any decision to declare and pay dividends in the future will be made
at the discretion of our board of directors and will depend on, among other things, our results of
operations, financial condition, restrictions imposed by applicable law, business and investment
strategy, contractual limitations and other factors that our board of directors may deem relevant.
In addition, our ability to pay dividends may be limited by covenants of any existing and future
indebtedness we or our subsidiaries incur, including the Cambium Learning senior secured credit
agreement and the Cambium Learning senior unsecured credit agreement. As a result, our stockholders
may not receive any return on an investment in our common stock unless they sell our common stock
for a price greater than that which they paid for it. Moreover, investors may not be able to
resell their shares of the Company at or above the price they paid for them.
17
Our majority stockholder has a contractual right to increase its percentage of ownership in
our company which, if exercised, would dilute the ownership percentage of all other stockholders
and could reduce the price of our common stock.
Our majority stockholder, VSS-Cambium Holdings III, LLC,
the holding company through which VSS owns its interest in the
company, and funds managed or controlled by
VSS, have the right to increase their percentage ownership of our company at a discount from market
price. Under a stockholders agreement entered into in connection with the mergers, at any time and
from time to time at or prior to December 8, 2011, VSS-Cambium Holdings III, LLC and funds managed
or controlled by VSS have the right to purchase from us, in cash, at a 10% discount from market
price, up to the lesser of 7,500,000 shares of our common stock or shares of our common stock with
an aggregate purchase price of $20 million. VSS-Cambium Holdings III, LLC also holds a warrant
which was exercisable for up to 526,834 shares of our common stock at December 31, 2009 and may
become exercisable for more shares in the future. If VSS-Cambium Holdings III, LLC decides to
exercise its right to purchase shares of our common stock under the stockholders agreement or
exercises its warrant, it could result in a reduction to the price of our common stock.
The existence of a majority stockholder may adversely affect the market price of our common stock
and could delay, hinder or prevent a change in corporate control or result in the entrenchment of
management and the board of directors, and our majority stockholder has a contractual right to
maintain its percentage ownership in our company.
VSS-Cambium Holdings III, LLC, owns a majority of our outstanding common stock. Accordingly,
VSS-Cambium Holdings III, LLC will likely have the ability to determine the outcome of matters
submitted to our stockholders for approval, including the election and removal of directors and any
merger, consolidation or sale of all or substantially all our assets. In addition, VSS-Cambium
Holdings III, LLC will likely have the ability to control our management, affairs and operations.
Accordingly, this concentration of ownership may harm the market price of our common stock by
delaying, deferring or preventing a change in control or impeding a merger, consolidation, takeover
or other business combination.
The ownership of a large block of stock by a single stockholder may reduce our market
liquidity. Should VSS-Cambium Holdings III, LLC determine to sell any of its position in the
future, sales of substantial amounts of our common stock on the market, or even the possibility of
these sales, may adversely affect the market price of our common stock. These sales, or even the
possibility of these sales, also may make it more difficult for us to raise capital through the
issuance of equity securities at a time and at a price it deems appropriate.
Moreover, VSS-Cambium Holdings III, LLC has a contractual right to maintain its percentage
ownership in our company. Specifically, under the terms of a stockholders agreement entered into in
connection with the mergers, if we were to engage in a new issuance of our securities, VSS-Cambium
Holdings III, LLC and funds managed or controlled by VSS would have preemptive rights to purchase
an amount of our securities that would enable them to maintain their same collective percentage of
ownership in our company following the new issuance. VSS-Cambium Holdings III, LLC and funds
managed or controlled by VSS would have these preemptive rights for so long as those entities
collectively beneficially own, in the aggregate, at least 25% of the outstanding shares of our
common stock. Thus, while other holders of our securities would risk suffering a reduction in
percentage ownership in connection with a new issuance of securities by us, VSS-Cambium Holdings
III, LLC and funds managed or controlled by VSS would, through this preemptive right, have the
opportunity to avoid a reduction in percentage ownership.
We are a “controlled company” within the meaning of the NASDAQ rules and, as a result, qualify for,
and rely on, exemptions from various corporate governance standards, which limits the presence of
independent directors on our board of directors and board committees.
Due to the fact that VSS-Cambium Holdings III, LLC owns a majority of our outstanding common
stock, we are deemed a “controlled company” for purposes of NASDAQ Rule 5615(c)(2). Under this
rule, a company of which more than 50% of the voting power for the election of directors is held by
an individual, a group or another company is a “controlled company” and is exempt from certain
NASDAQ corporate governance requirements, including requirements that a majority of the board of
directors consist of independent directors, that compensation of officers be determined or
recommended to the board of directors by a majority of independent directors or by a compensation
committee that is composed entirely of independent directors and that director nominees be selected
or recommended for selection by a majority of the independent directors or by a nominating
committee composed solely of independent directors. We intend to rely upon these exemptions.
Accordingly, our stockholders may not have the same protections afforded to stockholders of other
companies that are required to comply fully with the NASDAQ rules.
18
Since the “controlled company” exemption does not extend to the composition of audit
committees, we are required to have an audit committee that consists of at least three directors,
each of whom must be “independent” based on independence criteria set forth in Rule 10A-3 of the
Securities Exchange Act of 1934 (the “Exchange Act”). Our board of directors has adopted an audit committee charter which will govern our audit
committee. These three directors must also satisfy the requirements set forth in NASDAQ
Rule 5605(a) and (c). The audit committee is currently composed entirely of independent directors.
Cambium
Learning has a significant amount of senior secured and senior unsecured debt and will have the
obligation to make principal and interest payments on that debt, and to comply with restrictions
contained in credit agreements with our senior secured and senior unsecured lenders.
Cambium
Learning has an aggregate of $156.8 million of outstanding senior secured and senior unsecured debt
as of December 31, 2009, consisting of $97.2 million under senior secured term loans, $54.6 million
under senior unsecured notes, and $5.0 million drawn under a revolving credit facility. The amount
of leverage could have important consequences for holders of our securities, including:
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a substantial portion of the cash provided from operations will be committed to the
payment of our debt service and will not be available for other purposes; |
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our ability to obtain additional financing in the future for working capital, capital
expenditures or acquisitions may be limited; and |
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the level of indebtedness of our combined company may limit our flexibility in reacting
to changes in our business environment. |
Our senior secured and senior unsecured term loan facilities mature on April 11, 2013 and
April 11, 2014, respectively, and must be either repaid, refinanced or extended on those respective
dates. We may not be able to extend the debt at that time (or prior thereto in the case of
acceleration) and equity or debt financing may not be available to replace some or all of the
maturing debt on acceptable terms, if at all.
The failure of the original Cambium Learning investors to own at least 35% of our common stock or
the sale by the VSS
funds of more than 15% of their common stock would constitute an event of default under the Cambium
Learning credit agreements, entitling the lenders to accelerate the repayment of all outstanding
indebtedness.
Cambium Learning’s senior secured and senior unsecured credit agreements contain various
restrictions on changes in the direct or indirect ownership or control of Cambium Learning. These
restrictions are embodied in the credit agreements’ “Change in Control” definition and under their
“Events of Default” provisions. In addition to customary ownership and control changes, a “Change
in Control” would occur if at least 35% of our common stock were not owned by at least one of the
original investors in Cambium Learning or if the VSS funds sold more than 15% of our common stock
owned by them (through VSS-Cambium Holdings III, LLC). As of
December 31, 2009, the original Cambium
Learning investors, through VSS-Cambium Holdings III, LLC, own approximately 55% of our common
stock. Future issuances of common or other capital stock by us could dilute the original Cambium
Learning investors’ ownership percentage below the requisite 35% amount.
However,
the investment funds controlled by VSS, which are among the original Cambium Learning
investors, have the contractual right (but not the obligation) to subscribe for additional shares
of our common stock in order to maintain their ownership level and thereby prevent unwanted
dilution. This contractual right requires these investment funds to pay consideration to acquire
any such additional shares. We cannot assure you that these funds will at any time elect to
exercise their subscription right or will have the funds to do so.
The occurrence of a “Change in Control” would constitute an “Event of Default” under the
credit agreements. Either the administrative agent or a majority of the lenders have the right,
upon the occurrence of an “Event of Default,” to terminate all commitments to make revolving loans,
and to accelerate all outstanding revolving and term loans by declaring them immediately due and
payable. Neither we nor Cambium Learning is expected to have sufficient cash on hand to repay these
loans in full upon such an acceleration.
We may seek to raise additional funds, finance additional acquisitions or develop strategic
relationships by issuing additional securities, including capital stock.
In the future, we may seek to raise additional funds, finance additional acquisitions or
develop or engage in strategic relationships by issuing equity or debt securities. The issuance of
equity securities, including debt securities that are convertible into equity, would reduce the
percentage ownership of our existing stockholders. Furthermore, any newly issued equity securities
could have rights, preferences and privileges senior to those of the holders of our common stock.
The issuance of new debt securities could also subject us to covenants which constrain our ability to
grow or otherwise take steps that may be favored by our holders of common stock.
Under
the terms of a stockholders agreement that we entered into on
December 8, 2009 in compliance with the mergers, so long
as our sole stockholder and funds controlled by VSS beneficially own in the aggregate at least 25%
of the outstanding shares of our common stock, they will have preemptive rights which generally
give them the opportunity to purchase an amount of our securities in a new issuance of securities
by us that would enable them to maintain their same collective percentage ownership in us following
the new issuance. Thus, while other stockholders risk suffering a reduction in percentage ownership
in connection with an issuance of securities by us, VSS-Cambium Holdings III, LLC and funds managed
or controlled by VSS will have the opportunity to avoid a reduction in percentage ownership. In
addition, under the stockholders agreement, until December 8, 2011, VSS-Cambium Holdings III, LLC
and funds managed or controlled by VSS will have the right to purchase from us, in cash, at a 10%
discount from market price, up to the lesser of 7,500,000 shares of our common stock or shares of
our common stock with a discounted purchase price of $20 million. Any purchases of stock at a
discount from the market price may dilute the ownership percentage and equity ownership of all
other stockholders.
Provisions of our organizational documents and Delaware law may delay or deter a change of control.
Our organizational documents contain provisions that may have the effect of discouraging,
delaying or preventing a change of control of, or unsolicited acquisition proposals for, our
company. These include provisions that:
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vest our board of directors with the sole power to set the number of directors of our
company;
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19
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provide that our board of directors will be elected on a staggered term basis, so
that generally only one-third of the board will be elected at each annual meeting of
stockholders; |
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limit the persons that may call special meetings of stockholders; |
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establish advance notice requirements for stockholder proposals and director
nominations; and |
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limit stockholder action by written consent. |
Also, our board of directors has the authority to issue shares of preferred stock in one or
more series and to fix the rights and preferences of these shares, all without stockholder
approval. Any series of preferred stock is likely to be senior to our common stock with respect to
dividends, liquidation rights and, possibly, voting rights. The ability of our board of
directors to issue preferred stock also could have the effect of discouraging unsolicited
acquisition proposals, thus adversely affecting the market price of our common stock.
In addition, Delaware corporate law makes it difficult for stockholders that recently have
acquired a large interest in a corporation to cause the merger or acquisition of the corporation
against the directors’ wishes. Under Section 203 of the
Delaware General Corporate Law (the “DGCL”), a Delaware
corporation such as the Company may
not engage in any merger or other business combination with an interested stockholder or such
stockholder’s affiliates or associates for a period of three years following the date that such
stockholder became an interested stockholder, except in limited circumstances, including by
approval of the corporation’s board of directors.
If we are unable to favorably assess the effectiveness of our internal control over financial
reporting, or if our auditors are unable to provide an unqualified attestation report on our
internal control over financial reporting, the stock price of our common stock could be adversely
affected.
Pursuant to Sections 302 and 404 of the Sarbanes-Oxley Act of 2002, our management will be
required to certify to and report on, and our auditors will be required to attest to, the
effectiveness of our internal control over financial reporting. The rules governing the standards
that must be met for management to assess our internal control over financial reporting are
complex, and require significant documentation, testing and possible remediation. Our management
was not required to perform an assessment of internal control over financial reporting for the
fiscal year ended December 31, 2009. Our management expects to complete an assessment and
certification on, and for our auditors to attest to, the effectiveness of internal control over
financial reporting beginning with our annual report on Form 10-K for the fiscal year ending
December 31, 2010.
Compliance with regulatory requirements relating to internal controls is expensive and may
cause us to focus a significant amount of management time and other internal resources on these
matters. We also may encounter problems or delays in completing the implementation of any changes
necessary to make a favorable assessment of our internal control over financial reporting. In
addition, in connection with the attestation process by our auditors, we may encounter problems or
delays in completing the implementation of any identified improvements or receiving a favorable
attestation. If we cannot favorably assess the effectiveness of our internal control over financial
reporting, or if our auditors are unable to provide an unqualified attestation report on internal
control over financial reporting, investor confidence and the market price of our common stock
could be adversely affected.
20
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our principal corporate office is located in Dallas, Texas. We lease office and warehouse
facilities in Dallas, Texas, Charlottesville, Virginia, Tucson, Arizona, Frederick, Colorado,
Natick, Massachusetts and Ann Arbor, Michigan. Some leases contain renewal and escalation clauses
for a proportionate share of operating expenses. The Frederick, Colorado warehouse is under a
build-to-suit lease and so is included in our property, computers and equipment but is not
considered owned for purposes of the table below.
The following table provides summary information in square feet with respect to these
facilities as of December 31, 2009, excluding the 95,873 square
foot warehouse facility in Dallas, Texas,
which was integrated into the Frederick, Colorado warehouse in the first quarter of 2010.
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Total |
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(sq ft) |
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Owned |
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— |
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Leased |
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350,897 |
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Total |
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350,897 |
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We believe the buildings and equipment used in our continuing operations generally to
be in good condition and adequate for our current needs and that additional space will be
available as needed.
Item 3. Legal Proceedings.
We are not presently engaged in any pending legal proceeding material to our financial
condition, results of operations or liquidity.
Item 4. (Removed and Reserved).
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
Market
Information: Our common stock is traded on the NASDAQ Global Market under the symbol “ABCD.” Below
are the high and low sale prices for each quarter since our common
stock commenced publicly trading on December 9, 2009.
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2009 |
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2008 |
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| Fiscal Quarter |
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High |
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Low |
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High |
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Low |
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First |
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N/A |
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N/A |
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N/A |
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N/A |
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Second |
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N/A |
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N/A |
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N/A |
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N/A |
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Third |
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N/A |
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N/A |
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N/A |
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N/A |
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Fourth
(Since December 9, 2009) |
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$ |
14.80 |
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$ |
3.62 |
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N/A |
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N/A |
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Record
Holders: As of December 31, 2009, there were 104 holders of record of our common stock.
The holders of record at year-end 2009 do not include any previous VLCY stockholders who have not
yet returned their letters of transmittal to exchange their VLCY shares
for our shares of common stock in connection with the mergers.
Purchases
Of Equity Securities: We made no repurchases of our equity
securities in the fiscal year ended December 31, 2009.
Dividends:
We have not declared or paid any cash dividends to our stockholders. Any future
determination to pay dividends, if any, will be at the discretion of
our board of directors.
21
Securities
Authorized for Issuance Under Equity Compensation Plans: We have securities authorized for issuance under the Cambium Learning Group, Inc. 2009
Equity Incentive Plan (“Incentive Plan”). In connection with the then pending merger with VLCY,
on July 31, 2009, the Company’s board of directors and sole stockholder approved the Incentive
Plan. The general purposes of the Incentive Plan are to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional incentives to
employees, directors and consultants, and to promote the success of the Company.
Securities authorized for issuance under equity compensation plans at December 31, 2009 are
as follows:
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Number of securities |
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Number of securities to be |
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Weighted-average |
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remaining available for |
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issued upon exercise of |
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exercise price of |
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future issuance |
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| (in thousands, except per share amounts) |
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outstanding options |
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outstanding options |
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under equity |
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| Plan Category |
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and rights |
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and rights |
|
|
incentive plan (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved
by security holders |
|
|
2,256 |
|
|
$ |
6.03 |
|
|
|
2,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not
approved by security holders |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,256 |
|
|
$ |
6.03 |
|
|
|
2,744 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (a) |
|
Excludes securities reflected in the first column, “Number of securities to be issued upon
exercise of outstanding options and rights”. |
Recent
Sales of Unregistered Securities: The following is a
description of the Company’s securities that were issued or sold by the
Company during the period covered by this report and which were not registered
under the Securities Act of 1933, as amended (the “Securities Act”):
As described elsewhere
in this Annual Report on Form 10-K, on December 8, 2009, the Company
completed its acquisition of each of Cambium and VLCY pursuant to the terms of
the merger agreement entered into in connection with the transaction. With
respect to the acquisition of Cambium, under the terms of the merger agreement,
the Company acquired all of the common stock of Cambium through the merger of a
wholly owned subsidiary of the Company with and into Cambium, with Cambium
continuing as the surviving corporation (the “Cambium Merger”). As
a result of the effectiveness of the Cambium Merger, Cambium became a wholly
owned subsidiary of the Company.
Under the merger
agreement, as consideration for the Cambium Merger, the shares of
Cambium’s common stock held by VSS-Cambium Holdings III, LLC, the sole
stockholder of Cambium immediately prior to the Cambium Merger (the
“Cambium Stockholder”), were converted into the right to receive
20,491,870 shares of the Company’s common stock. In addition, as part of
the Cambium Merger consideration, the Cambium Stockholder received a warrant
(the “Warrant”) to purchase a number of shares of the
Company’s common stock determined by a formula set forth in the merger
agreement, which Warrant is currently exercisable for a total of 526,834
shares. Immediately prior to the effective time of the mergers, the Company
also issued the Cambium Stockholder an additional 3,846,154 shares of Company
common stock in exchange for a $25 million contribution the Cambium
Stockholder made to the Company.
All of the
above-described issuances and sales of securities of the Company (including
both of common stock of the Company and of the Warrant) to the Cambium
Stockholder were exempt from registration under Section 4(2) of the
Securities Act.
Stock Performance
Graph: No performance graph has been included in this report
since our common stock began publicly trading on December 9,
2009, and therefore only was publicly traded for the 23-day period from December 9, 2009 through
December 31, 2009 during our last fiscal year.
Item 6. Selected Financial Data.
The tables below present summary selected historical consolidated financial data derived
from our consolidated financial statements prepared in accordance with GAAP. You should read the
information set forth below in conjunction with our consolidated financial statements and related
notes, management’s discussion and analysis of financial condition and results of operations and
other financial information presented elsewhere herein.
The summary selected historical consolidated financial data for the year ended December 31,
2006, the period from January 1, 2007 through April 11, 2007 (the “2007 predecessor period”), the
period from January 29, 2007 through December 31, 2007 (the “2007 successor period”), the year
ended December 31, 2008 and the year ended December 31, 2009 have been derived from our audited
consolidated financial statements. The summary selected historical consolidated financial data
for the year ended December 31, 2005 have been derived from our unaudited consolidated financial
statements prepared on a basis consistent with the accounting policies used for our audited
financial statements.
On December 8, 2009, we completed the mergers of VLCY and Cambium into two of our
wholly-owned subsidiaries resulting in VLCY and Cambium becoming our wholly-owned subsidiaries.
Following the completion of the mergers, all of the outstanding capital stock of VLCY’s operating
subsidiaries, Voyager Expanded Learning, Inc. and LAZEL, Inc. were transferred to Cambium
Learning. The transaction was accounted for as an “acquisition” of VLCY by Cambium, as that term
is used under U.S. GAAP, for accounting and financial reporting purposes under the applicable
accounting guidance for business combinations. As a result, the historical financial statements
of Cambium have become the historical financial statements of the Company and the results of VLCY
are included from the merger date.
22
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Period from |
|
|
|
Predecessor |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
January 29, |
|
|
|
Period from |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
January 1, |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
(Inception) |
|
|
|
2007 |
|
|
Predecessor |
|
|
Predecessor |
|
| |
|
Year Ended |
|
|
Year Ended |
|
|
through |
|
|
|
through |
|
|
Year Ended |
|
|
Year Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
April 11, |
|
|
December 31, |
|
|
December 31, |
|
| (in thousands, except per share data) |
|
2009 |
|
|
2008 |
|
|
2007(1) |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
90,385 |
|
|
$ |
89,207 |
|
|
$ |
71,266 |
|
|
|
$ |
15,238 |
|
|
$ |
92,882 |
|
|
$ |
75,430 |
|
Service revenues |
|
|
10,663 |
|
|
|
10,524 |
|
|
|
9,581 |
|
|
|
|
3,176 |
|
|
|
13,542 |
|
|
|
9,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
101,048 |
|
|
|
99,731 |
|
|
|
80,847 |
|
|
|
|
18,414 |
|
|
|
106,424 |
|
|
|
85,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses, excluding in-process
research and development, impairment, and embezzlement |
|
|
(115,108 |
) |
|
|
(104,648 |
) |
|
|
(81,305 |
) |
|
|
|
(32,179 |
) |
|
|
(97,955 |
) |
|
|
(81,017 |
) |
Acquired in-process research and development |
|
|
— |
|
|
|
— |
|
|
|
(890 |
) |
|
|
|
— |
|
|
|
— |
|
|
|
(500 |
) |
Goodwill and other intangible asset impairment(3) |
|
|
(9,105 |
) |
|
|
(75,966 |
) |
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
(4,132 |
) |
Embezzlement and related expense(2) |
|
|
(129 |
) |
|
|
(7,254 |
) |
|
|
(5,732 |
) |
|
|
|
(1,000 |
) |
|
|
(3,261 |
) |
|
|
(290 |
) |
(Loss)
income before interest, other income (expense), and income taxes |
|
|
(23,294 |
) |
|
|
(88,137 |
) |
|
|
(7,080 |
) |
|
|
|
(14,765 |
) |
|
|
5,208 |
|
|
|
(783 |
) |
Gain from settlement with previous stockholders(4) |
|
|
— |
|
|
|
30,202 |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net (loss) income |
|
|
(35,765 |
) |
|
|
(69,560 |
) |
|
|
(13,931 |
) |
|
|
|
(11,812 |
) |
|
|
440 |
|
|
|
(1,212 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share |
|
$ |
(1.63 |
) |
|
$ |
(3.39 |
) |
|
$ |
(0.68 |
) |
|
|
$ |
(4.34 |
) |
|
$ |
0.16 |
|
|
$ |
(0.45 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of: |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
Predecessor |
|
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited) |
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
13,345 |
|
|
$ |
2,418 |
|
|
$ |
1,206 |
|
|
$ |
1,642 |
|
|
$ |
9,823 |
|
Total current assets |
|
|
74,316 |
|
|
|
31,617 |
|
|
|
26,601 |
|
|
|
25,007 |
|
|
|
32,672 |
|
Total assets |
|
|
393,841 |
|
|
|
270,477 |
|
|
|
369,138 |
|
|
|
138,028 |
|
|
|
115,034 |
|
Total current liabilities |
|
|
58,366 |
|
|
|
16,360 |
|
|
|
16,849 |
|
|
|
26,871 |
|
|
|
12,416 |
|
Total long term debt, less current portion |
|
|
150,487 |
|
|
|
153,787 |
|
|
|
176,402 |
|
|
|
17,500 |
|
|
|
17,500 |
|
Total liabilities |
|
|
254,069 |
|
|
|
202,273 |
|
|
|
239,058 |
|
|
|
59,133 |
|
|
|
49,414 |
|
Total
members’ interest and stockholders’ equity |
|
|
139,772 |
|
|
|
68,204 |
|
|
|
130,080 |
|
|
|
78,895 |
|
|
|
65,620 |
|
Footnotes to the Selected Financial Data:
| |
|
|
| (1) |
|
On January 29, 2007, VSS-Cambium Holdings, LLC was
formed for the purpose of acquiring all of the capital
stock of Cambium Learning. That acquisition was
completed on April 12, 2007. The consolidated financial
statements present the Company as of December 31, 2007
(Successor basis reflecting activity of the Company
from January 29, 2007 and including the results of
Cambium Learning from April 12, 2007) and the period
January 1, 2007 through April 11, 2007 (Predecessor
basis for the period prior to Company’s acquiring
Cambium Learning). |
| |
| (2) |
|
We discovered in 2008 that a former employee had
perpetrated a significant misappropriation of assets
during a period beginning in 2004 and extending through
April 2008. |
| |
| (3) |
|
Reflects the non-cash effect of the impairment
write-down of goodwill and other intangible assets
during 2009, 2008, and 2005 resulting from a reduction
in the fair value of assets. |
| |
| (4) |
|
For fiscal 2008, we received a settlement from our
previous stockholders relating to the embezzlement we
suffered. For further information, see Note 3 to our
Consolidated Financial Statements. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
This section should be read in conjunction with the Consolidated Financial Statements of the
Company and the notes thereto included in this Annual Report on Form
10-K for the year ended December 31,
2009.
23
Organization of Information
This
section includes the following sections:
| |
• |
|
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008 |
| |
• |
|
Year Ended December 31, 2008 (“fiscal 2008”) Compared to Period from January
29, 2007 through December 31, 2007 (“2007 successor period”) and Period from
January 1, 2007 through April 11, 2007 (“2007 predecessor period”) |
| |
• |
|
Liquidity and Capital Resources |
| |
• |
|
Capital Expenditures and Outlook |
| |
• |
|
Commitments and Contractual Obligations |
| |
• |
|
Off-Balance Sheet Arrangements |
| |
• |
|
Critical Accounting Policies and Estimates |
| |
• |
|
Recently Issued Financial Accounting Standards |
Overview
On December 8, 2009, we completed the business combination of Cambium and VLCY as contemplated
by the Agreement and Plan of Mergers, dated as of June 20, 2009, among us, VLCY, Vowel Acquisition
Corp., our wholly-owned subsidiary, Cambium, a wholly-owned subsidiary of VSS-Cambium Holdings III,
LLC, Consonant Acquisition Corp., our wholly owned subsidiary, and Vowel Representative, LLC, solely
in its capacity as stockholders’ representative. We refer to this agreement and plan of mergers in
this report as the merger agreement. Pursuant to the merger agreement, we acquired all of the
common stock of each of Cambium and VLCY through the merger of Consonant Acquisition Corp. with and
into Cambium, with Cambium continuing as the surviving corporation (the “Cambium Merger”), and the
concurrent merger of Vowel Acquisition Corp. with and into VLCY, with VLCY continuing as the
surviving corporation (the “Voyager Merger”). As a result of the effectiveness of the mergers,
Cambium and VLCY became our wholly owned subsidiaries.
Under the terms of the merger agreement, each outstanding share of VLCY’s common stock was
converted in the Voyager Merger into the right to receive at the election of each stockholder,
either (i) $6.50 in cash, without interest, or (ii) one share of our common stock, plus, regardless
of the election made, additional consideration consisting of cash and a contingent value right, as
described in the merger agreement. The amount of cash available to satisfy cash elections by the
VLCY stockholders was limited to $67.5 million in the aggregate. As anticipated, the cash
consideration payable to the former VLCY stockholders was insufficient to accommodate all of the
cash elections that were made. Accordingly, the amount of cash paid to the former VLCY
stockholders who elected to exchange shares of VLCY common stock for
cash was to be reduced, pro rata,
in accordance with agreed procedures set forth in the merger agreement. Pursuant to these
procedures, we paid $67.5 million in cash to the former holders of VLCY’s common stock and issued
to those stockholders a total of 19.5 million shares of common stock. The cash consideration paid
to the former VLCY stockholders consisted of $25 million contributed by VSS-Cambium Holdings III,
LLC and $42.5 million contributed by VLCY. In exchange for its contribution of $25 million,
VSS-Cambium Holdings III, LLC received 3.8 million shares of our common stock issued at the ascribed
value of $6.50 per share. The shares of Cambium’s common stock held by VSS-Cambium Holdings III,
LLC, its sole stockholder, were converted in the Cambium Merger into the right to receive 20.5
million shares of the our common stock. In addition, as part of the merger consideration,
VSS-Cambium Holdings III, LLC received a warrant to purchase a number
of shares of our common stock determined by
a formula set forth in the merger agreement, which is currently equal
to 0.5 million shares.
In connection with the consummation of this transaction we entered
into a stockholders agreement
pursuant to which we granted VSS-Cambium Holdings III, LLC and funds
managed and controlled by VSS the right to purchase up to 7.5 million
shares of our common stock as provided for in the stockholders agreement.
The merger transaction was accounted for as an “acquisition” of VLCY by Cambium, as that term
is used under U.S. GAAP, for accounting and financial reporting purposes under the applicable
accounting guidance for business combinations. In making this determination, management considered
that (a) the newly developed entity did not have any significant pre-combination activity and,
therefore, did not qualify to be the accounting acquirer, and (b) the former sole stockholder of
Cambium is the majority holder of the combined entity, while the prior owners of VLCY became
minority holders in the combined entity. As a result, the historical financial statements of
Cambium have become the historical financial statements of the Company. The results of VLCY are
included in the Company’s operations beginning with the
December 8, 2009 merger date; therefore, the
2009 financials include VLCY for the last 23 days of the year and the results of the Company for
the full year.
24
Prior to the merger transaction completed on December 8, 2009, we had two reportable segments:
Published Products and Learning Technologies. Subsequent to the merger transaction, we operate as
three reportable segments with separate management teams and infrastructures that offer various
products and services, as follows:
| |
• |
|
Voyager, our comprehensive intervention business; |
| |
| |
• |
|
Sopris, our supplemental solutions business; and |
| |
• |
|
Cambium Learning Technologies, our technology based education product
business. |
Our historical segment reporting results have been adjusted for comparative purposes to
reflect the current organizational structure. These reclassifications required certain assumptions
and estimates. See Note 21 to the financial statements for further information on our reportable
segments.
Results of Operations
Fiscal Year 2009 Compared to Fiscal Year 2008
Highlights
Throughout the first half of 2009, we continued to experience the adverse developments in
the education funding environment, including the reductions in Reading First funding and
reductions in available state and local funds as many state and local governments struggled with
deficits caused in part by the decline in property tax receipts, which significantly decreased
the funding available to schools to purchase our products and services. Some school districts
found it difficult to secure alternative funding sources in the midst
of these market conditions.
Additionally, we experienced declines in key adoption states, such as Alabama and Florida, where
we enjoyed significant sales success in 2008.
During the latter half of 2009, we began to see the positive impact, both directly and
indirectly, of the American Reinvestment and Recovery Act (ARRA) passed in February 2009. The Act
provides significant new federal funding for various education initiatives over the next two
years. While the education funding is for a broad set of education initiatives, we believe that
schools and districts directed and may continue to direct some of the new funding for programs
which use our products. In some instances, if ARRA funding is not used directly for programs
using our products, we may still be receiving an indirect benefit. When the ARRA funding is used
to assist schools to meet their overall financial needs, other funds may be freed up to use for
our programs. While success in winning some of these funds for our products is not certain at
this time, we believe it has the potential to continue to stabilize some of the negative funding
trends which emerged in 2008, continue in 2009 and are expected to prevail into 2010.
The following trends have or may have an impact on our revenues and profitability:
| |
• |
|
The acquisition of VLCY in late 2009 added several online
subscription-based products
to our portfolio. We expect to see growth in these products in the coming years. |
| |
• |
|
We have a growing portfolio to address the math needs of the market, including products
such as Vmath, Algebra Rescue, Transitional Math and ExploreLearning. We have experienced
success in the growth of our math capabilities and expect that the market for these
products will continue to be strong in 2010. |
| |
• |
|
We believe our product diversification, such as growth in the online offerings, math
intervention and new reading intervention products for higher grades, will allow us to
strengthen our ability to sustain market share in a troubled market and capture market
share when the market recovers. |
| |
• |
|
We believe our focus on product usage and an overall partnership approach with the
customer to implement our solutions with fidelity will result in higher success rates, and
such success, if achieved, will lead to customer retention and growth through reference
sales. |
| |
• |
|
We believe there is a trend to direct greater funding to special needs or at risk
children in the United States. New funding sources, such as Race to the Top, could
provide additional funds for our products should recipients of these funding sources chose
to direct them to programs that utilize our products and services. |
| |
• |
|
We believe that the economic crisis faced by many states and local entities will
continue in 2010 and have a continued depressive effect on general spending and thus could
negatively impact our short term sales prospects. |
| |
• |
|
Efforts taken in 2009 by both VLCY and Cambium to reduce their cost structures,
including a reduction in force, better align our cost structure to current market
conditions. We expect to achieve further significant cost savings throughout 2010 and 2011
as we integrate VLCY and Cambium, which will be partially offset by one-time integration
cots to achieve these synergies. |
25
| |
• |
|
We performed a goodwill impairment analysis in the second quarter of 2009 and as a
result of the execution of the
merger agreement in late June, which was considered a triggering event, and in consideration
of the continuing impact of adverse marketplace and economic conditions. As a result of this
analysis, we recorded a goodwill impairment charge of $9.1 million in the second quarter. |
The
following tables set forth information regarding Cambium’s net sales, costs and expenses,
operating loss and other components of our statements of operations. The results and percentages
for the years ended December 31, 2009 and 2008, the successor period from January 29, 2007
(inception) through December 31, 2007 and the predecessor period from January 1, 2007 through
April 11, 2007 are set forth in the tables below. Due to purchase accounting adjustments, some
amounts may not be comparable between each period presented.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Period, |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from January 29, |
|
|
Predecessor Period |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 (inception) |
|
|
from January 1, |
|
| |
|
Year Ended |
|
|
Year Ended |
|
|
through December |
|
|
2007 through April |
|
| |
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
31, 2007 |
|
|
11, 2007 |
|
| |
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
| (in thousands) |
|
Amount |
|
|
Sales |
|
|
Amount |
|
|
Sales |
|
|
Amount |
|
|
Sales |
|
|
Amount |
|
|
Sales |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyager |
|
$ |
44,329 |
|
|
|
43.9 |
% |
|
$ |
40,424 |
|
|
|
40.5 |
% |
|
$ |
35,827 |
|
|
|
44.3 |
% |
|
$ |
4,132 |
|
|
|
22.4 |
% |
Sopris |
|
|
23,431 |
|
|
|
23.2 |
% |
|
|
27,495 |
|
|
|
27.6 |
% |
|
|
21,496 |
|
|
|
26.6 |
% |
|
|
5,136 |
|
|
|
27.9 |
% |
Cambium Learning Technologies |
|
|
22,625 |
|
|
|
22.4 |
% |
|
|
21,288 |
|
|
|
21.3 |
% |
|
|
13,943 |
|
|
|
17.2 |
% |
|
|
5,970 |
|
|
|
32.4 |
% |
Service revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyager |
|
|
8,594 |
|
|
|
8.5 |
% |
|
|
7,924 |
|
|
|
7.9 |
% |
|
|
7,275 |
|
|
|
9.0 |
% |
|
|
2,287 |
|
|
|
12.4 |
% |
Sopris |
|
|
1,754 |
|
|
|
1.7 |
% |
|
|
2,217 |
|
|
|
2.2 |
% |
|
|
2,064 |
|
|
|
2.6 |
% |
|
|
773 |
|
|
|
4.2 |
% |
Cambium Learning Technologies |
|
|
315 |
|
|
|
0.3 |
% |
|
|
383 |
|
|
|
0.4 |
% |
|
|
242 |
|
|
|
0.3 |
% |
|
|
116 |
|
|
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
|
101,048 |
|
|
|
100.0 |
% |
|
|
99,731 |
|
|
|
100.0 |
% |
|
|
80,847 |
|
|
|
100.0 |
% |
|
|
18,414 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyager |
|
|
10,678 |
|
|
|
10.6 |
% |
|
|
11,214 |
|
|
|
11.2 |
% |
|
|
13,106 |
|
|
|
16.2 |
% |
|
|
1,136 |
|
|
|
6.2 |
% |
Sopris |
|
|
6,350 |
|
|
|
6.3 |
% |
|
|
6,003 |
|
|
|
6.0 |
% |
|
|
4,755 |
|
|
|
5.9 |
% |
|
|
1,699 |
|
|
|
9.2 |
% |
Cambium Learning Technologies |
|
|
2,537 |
|
|
|
2.5 |
% |
|
|
3,029 |
|
|
|
3.0 |
% |
|
|
1,888 |
|
|
|
2.3 |
% |
|
|
1,061 |
|
|
|
5.8 |
% |
Shared Services |
|
|
26 |
|
|
|
0.0 |
% |
|
|
— |
|
|
|
0.0 |
% |
|
|
— |
|
|
|
0.0 |
% |
|
|
— |
|
|
|
0.0 |
% |
Cost of service revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyager |
|
|
5,992 |
|
|
|
5.9 |
% |
|
|
5,721 |
|
|
|
5.7 |
% |
|
|
4,877 |
|
|
|
6.0 |
% |
|
|
1,384 |
|
|
|
7.5 |
% |
Sopris |
|
|
1,093 |
|
|
|
1.1 |
% |
|
|
1,489 |
|
|
|
1.5 |
% |
|
|
1,316 |
|
|
|
1.6 |
% |
|
|
460 |
|
|
|
2.5 |
% |
Cambium Learning Technologies |
|
|
172 |
|
|
|
0.2 |
% |
|
|
253 |
|
|
|
0.3 |
% |
|
|
119 |
|
|
|
0.1 |
% |
|
|
64 |
|
|
|
0.3 |
% |
Amortization expense |
|
|
17,527 |
|
|
|
17.3 |
% |
|
|
15,966 |
|
|
|
16.0 |
% |
|
|
11,719 |
|
|
|
14.5 |
% |
|
|
3,392 |
|
|
|
18.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
44,375 |
|
|
|
43.9 |
% |
|
|
43,675 |
|
|
|
43.8 |
% |
|
|
37,780 |
|
|
|
46.7 |
% |
|
|
9,196 |
|
|
|
49.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense |
|
|
5,611 |
|
|
|
5.6 |
% |
|
|
6,416 |
|
|
|
6.4 |
% |
|
|
5,247 |
|
|
|
6.5 |
% |
|
|
1,737 |
|
|
|
9.4 |
% |
Sales and marketing expense |
|
|
23,368 |
|
|
|
23.1 |
% |
|
|
24,600 |
|
|
|
24.7 |
% |
|
|
15,059 |
|
|
|
18.6 |
% |
|
|
6,393 |
|
|
|
34.7 |
% |
General and administrative expense |
|
|
30,519 |
|
|
|
30.2 |
% |
|
|
16,156 |
|
|
|
16.2 |
% |
|
|
11,142 |
|
|
|
13.8 |
% |
|
|
13,676 |
|
|
|
74.3 |
% |
Shipping costs |
|
|
1,512 |
|
|
|
1.5 |
% |
|
|
2,348 |
|
|
|
2.4 |
% |
|
|
2,739 |
|
|
|
3.4 |
% |
|
|
445 |
|
|
|
2.4 |
% |
Depreciation and amortization expense |
|
|
9,723 |
|
|
|
9.6 |
% |
|
|
11,453 |
|
|
|
11.5 |
% |
|
|
9,338 |
|
|
|
11.6 |
% |
|
|
732 |
|
|
|
4.0 |
% |
Acquired in-process research and development |
|
|
— |
|
|
|
0.0 |
% |
|
|
— |
|
|
|
0.0 |
% |
|
|
890 |
|
|
|
1.1 |
% |
|
|
— |
|
|
|
0.0 |
% |
Goodwill impairment charge |
|
|
9,105 |
|
|
|
9.0 |
% |
|
|
75,966 |
|
|
|
76.2 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Embezzlement and related expense |
|
|
129 |
|
|
|
0.1 |
% |
|
|
7,254 |
|
|
|
7.3 |
% |
|
|
5,732 |
|
|
|
7.1 |
% |
|
|
1,000 |
|
|
|
5.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before interest, other income (expense) and income taxes |
|
|
(23,294 |
) |
|
|
(23.1 |
)% |
|
|
(88,137 |
) |
|
|
(88.4 |
)% |
|
|
(7,080 |
) |
|
|
(8.8 |
)% |
|
|
(14,765 |
) |
|
|
(80.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense) |
|
|
(19,477 |
) |
|
|
(19.3 |
)% |
|
|
(18,434 |
) |
|
|
(18.5 |
)% |
|
|
(13,132 |
) |
|
|
(16.2 |
)% |
|
|
(742 |
) |
|
|
(4.0 |
)% |
Gain from settlement with previous stockholders |
|
|
— |
|
|
|
— |
|
|
|
30,202 |
|
|
|
30.3 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Loss on extinguishment of debt |
|
|
— |
|
|
|
— |
|
|
|
(5,632 |
) |
|
|
(5.6 |
)% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other income (expense), net |
|
|
(698 |
) |
|
|
(0.7 |
)% |
|
|
(981 |
) |
|
|
(1.0 |
)% |
|
|
(1,557 |
) |
|
|
(1.9 |
)% |
|
|
1 |
|
|
|
0.0 |
% |
Income tax benefit |
|
|
7,704 |
|
|
|
7.6 |
% |
|
|
13,422 |
|
|
|
13.5 |
% |
|
|
7,838 |
|
|
|
9.7 |
% |
|
|
3,694 |
|
|
|
20.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(35,765 |
) |
|
|
(35.4 |
)% |
|
$ |
(69,560 |
) |
|
|
(69.7 |
)% |
|
$ |
(13,931 |
) |
|
|
(17.2 |
)% |
|
$ |
(11,812 |
) |
|
|
(64.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Net sales
Net sales for the year ended December 31, 2009 increased $1.3 million, or 1.3%, to $101.0
million from $99.7 million in the same period for 2008. Our net sales for 2009 were impacted by
several significant declines, such as the nationwide economic slowdown, which caused the amount of
funding available to schools to decline, a decline in our Sopris segment related to our assessment
product, and declines in key adoption states such as Alabama and Florida. Regarding the decline in
adoption states, we enjoyed increased sales performance in 2008 in these states but the nature of
the adoption leads to lower sales in the year following the adoption. Offsetting these declines
was the impact of the acquisition of VLCY, contributing an incremental $4.5 million in net sales,
and increases in sales of our math products as well as some growth in several new and existing
customers.
Voyager. The Voyager segment’s net sales in 2009 increased $4.6 million, or 9.5%, to
$52.9 million from net sales of $48.3 million in 2008. Product sales increased $3.9 million, or
9.7%, to $44.3 million from net sales of $40.4 million in 2008. Service revenues increased $0.7
million, or 8.5%, to $8.6 million from net sales of $7.9 million in 2008. The increase in year over
year net sales was due mainly to the impact of the acquisition of VLCY, contributing an incremental
$3.0 million in product sales and $0.8 million in service revenues. Additionally, Voyager was able
to offset the decline in the state adoption sales in Alabama and Florida and overcome the general
state and local funding crisis with increases in sales of our math products as well as some growth
in several new and existing customers.
Sopris. The Sopris segment’s net sales in 2009 decreased $4.5 million, or 15.2%, to $25.2
million from net sales of $29.7 million in 2008. The decline in sales of supplementary program
sales was mainly due to a decrease in sales of DIBELS in Florida, as Florida developed its own
assessment program. Additionally, we renegotiated and extended a relationship with a customer in
2008 and were able to secure an additional up-front 2009 royalty payment that was recognized in
2008.
Cambium Learning Technologies. The Cambium Learning Technologies segment’s net sales in
2009 increased $1.3 million, or 5.9%, to $22.9 million from net sales of $21.7 million in 2008. The
increase in year over year net sales was due mainly to the impact of the acquisition of VLCY,
contributing an incremental $0.7 million in product sales.
Cost of product sales
Cost of product sales include expenses to print, purchase, handle and warehouse product,
as well as royalty costs. Cost of product sales for the year ended December 31, 2009 decreased
$0.7 million, or 3.2%, to $19.6 million from $20.2 million in 2008. The decrease in cost of sales
was mainly due to efficiency gains from cost-cutting measures. As a percentage of product sales,
cost of product sales decreased one percentage point to 21.7% for the year ended December 31, 2009
from 22.7% in the same period in 2008.
Voyager. The Voyager segment’s cost of product sales for the year ended December 31,
2009 decreased $0.5 million, or 4.8%, to $10.7 million from $11.2 million in 2008. The decrease in
cost of sales was mainly due to improved cost management performance.
Sopris. The Sopris segment’s cost of product sales for the year ended December 31, 2009
increased $0.3 million, or 5.8%, to $6.4 million from $6.0 million in 2008. The increase in cost of
sales was due to a change in product mix toward products with higher incremental costs.
Cambium Learning Technologies. The Cambium Learning Technologies segment’s cost of
product sales for the year ended December 31, 2009 decreased $0.5 million, or 16.2%, to $2.5
million from cost of sales of $3.0 million in 2008. The decrease in cost of sales was mainly due to
improved cost management performance.
Cost of service revenues
Cost of service revenues include all costs to provide services and support to customers.
Cost of service revenues for the year ended December 31, 2009 decreased $0.2 million, or 2.8%, to
$7.3 million from $7.5 million in 2008. The decrease in cost of sales was mainly due to efficiency
gains from cost-cutting measures. As a percentage of service revenues cost of service revenues decreased to
68.1% for the year ended December 31, 2009 from 70.9% in the same period in 2008.
27
Voyager. The Voyager segment’s cost of service revenues for the year ended December 31,
2009 increased $0.3 million, or 4.7%, to $6.0 million from $5.7 million in 2008. The increase was
driven by higher service revenues, partially offset by efficiency gains from cost-cutting measures.
Sopris. The Sopris segment’s cost of service revenues for the year ended December 31, 2009
decreased $0.4 million, or 26.6%, to $1.1 million from cost of service revenues of $1.5 million in
2008. The decrease was driven by lower service revenues and efficiency gains from cost-cutting
measures.
Cambium Learning Technologies. The Cambium Learning Technologies segment’s cost of
service revenues for the year ended December 31, 2009 remained relatively flat, decreasing $0.1
million, or 32.0%, to $0.2 million from $0.3 million in 2008.
Amortization expense
Amortization expense included in cost of sales includes amortization for acquired
pre-publication costs and technology, acquired publishing rights, and developed pre-publication and
technology. Amortization for 2009 increased $1.6 million, or 9.8%, to $17.5 million from $16.0
million in 2008. Approximately $0.7 million of the increase is related to the acquired
pre-publication costs and technology acquired in the VLCY acquisition. The remainder of the
increase was mainly due to higher pre-publication amortization as a result of investments made in
new programs.
Research and development expenses
Research and development expenditures include costs to research, evaluate and develop
educational products, net of capitalization. Research and development expenses for year ended
December 31, 2009 decreased $0.8 million, or 12.5%, to $5.6 million from $6.4 million in the same
period of 2008, due to planned spending decreases as a result of weak economic conditions in 2009.
As a percentage of sales, research and development expenses decreased to 5.6% of sales in 2009
compared to 6.4% in 2008.
Sales and marketing expense
Sales and marketing expenditures include all costs to maintain our various sales
channels, including the salaries and commission paid to our sales force, and costs related to our
advertising and marketing efforts. Sales and marketing expenses for year ended December 31, 2009
decreased $1.2 million, or 5.0%, to $23.4 million from $24.6 million in the same period of 2008. As
a percentage of sales, selling and marketing expenses decreased to 23.1% of sales in the 2009
compared to 24.7% in 2008. Selling costs decreased for the year ended December 31, 2009 in
comparison to the same period in 2008 due to the costs incurred in 2008 to participate in several
state adoption activities. We also experienced lower catalog and mailing costs due to a lower
volume of catalogs mailed in 2009 compared to 2008.
General and administrative expense
General and administrative expenses for year ended December 31, 2009 increased $14.4
million, or 88.9%, to $30.5 million from $16.2 million in the same period of 2008. The increase
was primarily due to the incurrence of $15.5 million in merger-related transaction and integration
expenses in 2009 with only immaterial amounts incurred in 2008. Excluding these costs, general and
administrative expenses were down $1.1 million, or 6.9% in 2009 compared to 2008, primarily as a
result of cost-cutting measures.
Shipping costs
Shipping costs for the year ended December 31, 2009 decreased $0.8 million, or 35.6%, to
$1.5 million from $2.3 million in 2008. The decrease in these shipping costs was due mainly to cost
containment and efficiencies.
Depreciation and amortization expense
Depreciation and amortization expense for the year ended December 31, 2009 decreased $1.7
million, or 15.1%, to $9.7 million from $11.5 million in the same period of 2008. The decrease in
this amortization was due mainly to lower contract and reseller network intangible amortization,
partially offset by the depreciation and amortization related to assets acquired in the VLCY
acquisition.
Goodwill impairment
We review the carrying value of goodwill for impairment at least annually and whenever
certain triggering events occur. As a result of the signing of the merger agreement, we assessed
the carrying values of our reporting units as of June 30, 2009. The first step of impairment
testing showed the carrying value of our Published Products unit exceeded its fair value and that a
step two analysis was needed. Step two impairment testing determined that the goodwill balance as
of the measurement date was partially impaired and a $9.1 million impairment charge was recorded.
28
Due to the weakening of the economy and the impact that economic conditions were having on our
customers and business in the latter portion of fiscal 2008, we identified deterioration in the
expected future financial performance of our published products segment. As a result, we recorded
an impairment loss of $76.0 million for this segment in 2008, reflecting the difference between the
fair value and recorded value for goodwill.
Under the new segment structure, both the 2008 and the 2009 goodwill impairment charges were
assigned to the Voyager segment.
Embezzlement and related expenses
In 2008, we discovered certain irregularities relating to the control and use of cash and
certain other general ledger items which revealed a misappropriation of assets over a period of
more than four years. These irregularities were perpetrated by a
former Cambium Learning employee, resulting in
substantial embezzlement losses and related expenses. Embezzlement and related expenses for the
year ended December 31, 2009 were $0.1 million compared to $7.3 million in the same period of 2008.
The decrease in the embezzlement and related expenses was mainly due to the non-recurring nature of
the embezzlement loss and related expenses that were incurred in the year ended December 31, 2008.
Net interest income (expense)
Net
interest income (expense) in the year ended December 31,
2009, increased $1.0 million, or 5.7%,
to $19.5 million from $18.4 million in the same period of 2008. This increase was mainly due to
higher interest expense on both our senior secured and senior unsecured debt as a result of the
permanent waiver and amendments to the credit agreement we signed on August 22, 2008. Under the
terms and conditions of the permanent waiver and amendment, the interest rates on Cambium’s senior
secured and senior unsecured debt were increased. See “— Liquidity and Capital Resources — Long
Term Debt.”
Income taxes
In 2009, we recorded an income tax benefit of $7.7 million. Pre-tax losses at statutory tax
rates provided a federal tax benefit of approximately $15.2 million. The impairment charge to
non-deductible goodwill did not result in a tax benefit which is $3.2 million less than the amount
expected based on the federal statutory tax rate. Certain merger costs are non-deductible and did
not result in a tax benefit which is $4.7 million less than the amount expected based on the
federal statutory tax rate. Furthermore, after the merger with VLCY, we established a valuation
allowance on our net Federal deferred tax assets.
In 2008, we recorded an income tax benefit of $13.4 million. Pre-tax losses at statutory rates
provided a federal tax benefit of approximately $29.0 million. The impairment charge to
non-deductible goodwill did not result in a tax benefit which is approximately $26.6 million less
than the amount expected based on the federal statutory rate. We also recorded non-taxable book
income related to a purchase adjustment, which resulted in a tax
benefit of $10.2 million.
Gain from settlement with previous stockholders
For fiscal 2008, we received a total settlement from previous stockholders of $30.2 million
relating to the embezzlement we suffered. The total settlement consisted of $20 million in escrowed
funds, together with additional payments of $9.3 million and interest income of $0.9 million. The
total settlement amount of $30.2 million was used to cover costs and to pay down a portion of a
senior secured credit facility. Because the embezzlement was discovered after the initial purchase
allocation was made in connection with the acquisition, the entire settlement amount was recorded
on our consolidated statement of operations as a gain from settlement with the previous
stockholders.
Loss on extinguishment of debt
For fiscal 2008, we recorded a loss on the extinguishment of debt of $5.6 million related to
the modification of our senior secured credit facility and senior unsecured promissory notes
resulting from the execution of an amendment of those documents and the delivery by the lenders of
a permanent waiver. The associated unamortized deferred financing costs as of August 22, 2008 of
$4.6 million and amendment fees of $1.0 million related to the permanent waiver were recorded as a
loss on extinguishment of debt.
Year Ended December 31, 2008 (“fiscal 2008”) Compared to Period from January 29, 2007 through
December 31, 2007 (“2007 successor period”) and Period from January 1, 2007 through April 11, 2007
(“2007 predecessor period”)
Net sales
Net sales for fiscal 2008 were $99.7 million, compared to $80.8 million for the 2007 successor
period and $18.4 million for the 2007 predecessor period.
29
Voyager. The Voyager segment’s net sales for fiscal 2008 were $48.3 million, compared to
$43.1 million for the 2007 successor period and $6.4 million for the 2007 predecessor period. The
overall decrease of $1.2 million, or 2.4%, was due to a $1.7 million decrease in service revenues
partially offset by a $0.5 million increase in core product sales. The decline in service revenues
was mainly due to lower sales for conferences and institutes as the impact of state budget
shortfalls significantly affected attendance. The increase in core intervention programs sales was
principally attributable to a couple of key states and school districts, including Florida and
Milwaukee, funded and purchased Cambium’s core programs and services.
Sopris. The Sopris segment’s net sales for fiscal 2008 were $29.7 million, compared to $23.6
million for the 2007 successor period and $5.9 million for the 2007 predecessor period. The overall
increase of $0.2 million, or 0.8%, was due to a
$0.9 million increase in product sales partially offset
by a $0.7 million decrease in service revenues. The increase in supplementary program sales were
due to higher DIBELs license fees, partially offset by a decrease in sales across most titles as
the market for Sopris in general was weak due to state funding issues. The decline in service
revenues was mainly due to the impact of state budget shortfalls.
Cambium Learning Technologies. The Cambium Learning Technologies segment’s net sales for
fiscal 2008 were $21.7 million compared to $14.2 million for the 2007 successor period and $6.1
million for the 2007 predecessor period. The overall increase of $1.4 million, or 6.9%, was mainly
due to higher international sales.
Cost of product sales
Cost of product sales was $20.2 million for fiscal 2008, compared to $19.7 million for the
2007 successor period and $3.9 million for the 2007 predecessor period. The overall decrease of
$3.4 million, or 14.4%, was due to lower royalty costs as well as a $2.9 million adjustment for
inventory step-up associated with purchase accounting included in the 2007 successor period, offset
by a $0.3 million increase in employee severance costs associated with the December 2007 Petaluma,
California office closure. The lower royalty costs were the result of
a higher portion of total sales attributable to Cambium
Learning Technologies and Read Well products, which carry a lower royalty rate than other Cambium
products.
Voyager. The Voyager segment’s cost of product sales for fiscal 2008 decreased $3.0 million,
or 21.3%, to $11.2 million from cost of product sales of $13.1 million for the 2007 successor
period and $1.1 million for the 2007 predecessor period. The decrease in cost of sales was mainly
due to material cost improvements, lower inventory reserve provisions and a $1.8 million adjustment
for inventory step-up associated with purchase accounting included in the 2007 successor period.
Sopris. The Sopris segment’s cost of product sales for fiscal 2008 decreased $0.5 million, or
7.0%, to $6.0 million from cost of product sales of $4.8 million for the 2007 successor period and
$1.7 million for the 2007 predecessor period. The decrease in cost of sales was mainly due to a
$1.1 million adjustment for inventory step-up associated with purchase accounting included in the
2007 successor period, partially offset by increased costs commensurate with an increase in product
sales from 2007 to 2008.
Cambium Learning Technologies. The Cambium Learning Technologies segment’s cost of product
sales for fiscal 2008 increased $0.1 million, or 2.7%, to $3.0 million from cost of product sales
of $1.9 million for the 2007 successor period and $1.1 million for the 2007 predecessor period. The
increase in cost of sales is mainly due to increased net sales.
Cost of service revenues
Cost of service revenues was $7.5 million for fiscal 2008, compared to $6.3 million for
the 2007 successor period and $1.9 million for the 2007 predecessor period. The decrease resulted
from lower service revenues.
Voyager. The Voyager segment’s cost of service revenues for fiscal 2008 decreased $0.6
million, or 8.6%, to $5.7 million from cost of service revenues of $4.9 million for the 2007
successor period and $1.4 million for the 2007 predecessor period. The decrease resulted from lower
net sales.
Sopris. The Sopris segment’s cost of service revenues for fiscal 2008 decreased $0.3 million,
or 16.2%, to $1.5 million from cost of service revenues of $1.3 million for the 2007 successor
period and $0.5 million for the 2007 predecessor period. The decrease resulted from lower net
sales.
Cambium Learning Technologies. Cost of service revenues for fiscal 2008 increased $0.1
million, or 38.3%, to $0.3 million from cost of service revenues of $0.1 million for the 2007
successor period and $0.1 million for the 2007 predecessor period.
30
Amortization expense
Amortization expense was $16.0 million for fiscal 2008, compared to $11.7 million for the 2007
successor period and $3.4 million for the 2007 predecessor period. The overall increase of $0.9 million, or 5.7%, was
mainly due to the revaluation of publishing rights and developed technology intangible assets as a
result of the purchase of Cambium by VSS-Cambium Holdings, LLC. This revaluation resulted in higher
amortization in the 2007 successor period and fiscal 2008.
Research and development expense
Our research and development expense was $6.4 million for fiscal 2008, $5.2 million for the
2007 successor period and $1.7 million for the 2007 predecessor period. The overall decrease from
2007 to 2008 of $0.6 million, or 8.1%, was mainly due to reductions in contracted development
spending.
Sales and marketing expense
Our sales and marketing expense was $24.6 million for fiscal 2008, $15.1 million for the 2007
successor period and $6.4 million for the 2007 predecessor period. The overall increase from 2007
to 2008 of $3.1 million, or 14.7%, was mainly due to higher selling costs in 2008 in anticipation
of increased sales opportunities in adoption states.
General and administrative expenses
Our general and administrative expenses were $16.2 million for fiscal 2008, $11.1 million for
the 2007 successor period and $13.7 million for the 2007 predecessor period. The overall decrease
from 2007 to 2008 of $8.7 million, or 34.9%, was mainly due to $5.1 million of acquisition related
costs and a $2.9 million charge related to the modification of our stock option plan included in
the 2007 predecessor period.
Shipping costs
Shipping costs were $2.3 million in fiscal 2008, compared to $2.7 million in the 2007
successor period and $0.4 million in the 2007 predecessor period. The overall decrease of $0.8
million, or 26.3%, was due to increased shipping efficiencies.
Depreciation and amortization expense
Depreciation and amortization expense was $11.5 million in fiscal 2008, compared to $9.3
million in the 2007 successor period and $0.7 million in the 2007 predecessor period. The overall
increase of $1.4 million, or 13.7%, was due to the acquisition of Cambium by VSS-Cambium Holdings,
LLC. As a result of the acquisition, other intangible assets were revalued, resulting in an
increase in amortization in the 2007 successor period and fiscal 2008.
Embezzlement and related expenses
We discovered in fiscal 2008 that a former employee of Cambium Learning had perpetrated a
significant misappropriation of assets during a period beginning in 2004 and extending through
April 2008. We identified $14.0 million of embezzlement losses, which included $1.8 million for
fiscal 2008, $5.7 million for the 2007 successor period and $1.0 million for the 2007 predecessor
period. In addition, we incurred fees and expenses of $5.5 million in investigating and responding
to this embezzlement matter in fiscal 2008. This amount is net of the $1.6 million appraised value
of five boats that were seized by the Company from the former employee, who had used embezzled
funds to acquire those boats.
Goodwill impairment
A total of $192.3 million of goodwill was recorded in connection with the acquisition of
Cambium Learning by VSS-Cambium Holdings, LLC. Due to the weakening of the economy and the impact
that economic conditions were having on our customers and business in the latter portion of fiscal
2008, we identified significant deterioration in the expected future financial performance of our
published products product line. As a result, we recorded an impairment loss of $76.0 million
within our published products unit for 2008, reflecting the difference between the fair value and
recorded value for goodwill. The fair value was determined based upon management’s forecasts, which
are dependent on multiple assumptions and estimates, including estimates regarding anticipated
future educational funding and the actual performance and future projections of the Company.
Under the new segment structure, the 2008 goodwill impairment charge was assigned to the
Voyager segment.
Net interest income (expense)
Net interest income (expense) was $18.4 million for fiscal 2008, compared to $13.1 million for
the 2007 successor period and $0.7 million for the 2007 predecessor period. The overall increase of
$4.6 million, or 32.9%, was due principally to higher interest expense as a result of the
acquisition of Cambium by VSS-Cambium Holdings, LLC on April 11, 2007 and the higher interest rate
incurred in 2008 as a result of the embezzlement we suffered.
31
Gain from settlement with previous stockholders
For fiscal 2008, we received a total settlement from previous stockholders of $30.2 million
relating to the embezzlement we suffered. The total settlement consisted of $20 million in escrowed
funds, together with additional payments of $9.3 million and interest income of $0.9 million. The
total settlement amount of $30.2 million was used to cover costs and to pay down a portion of a
senior secured credit facility. Because the embezzlement was discovered after the initial purchase
allocation was made in connection with the acquisition, the entire settlement amount was recorded
on our consolidated statement of operations as a gain from settlement with the previous
stockholders.
Loss on extinguishment of debt
For fiscal 2008, we recorded a loss on the extinguishment of debt of $5.6 million related to
the modification of our senior secured credit facility and senior unsecured promissory notes
resulting from the execution of an amendment of those documents and the delivery by the lenders of
a permanent waiver. The associated unamortized deferred financing costs as of August 22, 2008 of
$4.6 million and amendment fees of $1.0 million related to the permanent waiver were recorded as a
loss on extinguishment of debt.
Income tax benefit
In 2008, we recorded an income tax benefit of $13.4 million. Pre-tax losses at statutory rates
provided a Federal tax benefit of approximately $29.0 million. The impairment charge to
non-deductible goodwill did not result in a tax benefit which is approximately $26.6 million less
than the amount expected based on the federal statutory rate. We also recorded non-taxable book
income related to a purchase adjustment, which resulted in a tax
benefit of $10.2 million.
We recorded a $7.8 million income tax benefit in the 2007 successor period and a $3.7 million
benefit in the 2007 predecessor period. The 2007 predecessor period includes non-deductible
transaction costs of $5.1 million.
Liquidity and Capital Resources
Because sales seasonality affects operating cash flow, we normally incur a net cash deficit
from all of our activities through the early part of the third quarter of the year. We typically
fund these seasonal deficits through the drawdown of cash, supplemented by borrowings on our
revolving senior credit facility. The primary source of liquidity is cash flow from operations and
the primary liquidity requirements relate to debt service, pre-publication costs, capital
investments and working capital. We believe that based on current and anticipated levels of
operating performances, cash flow from operations and availability under the senior secured
revolving credit facility, we will be able to make required payments of principal and interest on
our debt and fund our working capital and capital expenditure requirements for the next 12 months.
Long-term debt
Our
long-term debt is held by our subsidiary, Cambium Learning, and as of December 31, 2009
consists of:
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$97.2 million of floating rate senior secured notes due April 11, 2013; and |
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• |
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$54.6 million of 13.75% senior unsecured notes due April 11, 2014 |
Senior Secured Notes. The senior secured notes were issued pursuant to a senior secured
credit facility consisting of a $30 million revolving loan and a
$128 million term loan. The term loan requires quarterly principal payments of $320,000. Our senior notes
are secured by all of Cambium Learning’s personal property. The interest rate on the senior notes
is based on the one-, three- or six-month LIBOR or Alternative Base
Rate (ABR) plus a spread tied to Cambium Learning’s credit ratings, subject to a floor on each of the two rates. Based
on the credit ratings as of yearend 2009, the spread for LIBOR was 6.5%. The LIBOR rate cannot be less than
3.0%, and the ABR rate cannot be less than 4.0%. As of December 31, 2009, the interest rate on the
senior secured notes was 9.5%. As of December 31, 2009, we had borrowings of $5.0 million under the
revolver and, subject to borrowing base capacity limitations for outstanding letters of credit, had
$23.5 million available to borrow under the revolver.
In the first quarter of 2010, our credit ratings were upgraded by Standard & Poor’s and
Moody’s Investor Services. As a result of the credit rating upgrades, the spread for LIBOR
decreased from 6.5% to 5.0%, with a continued LIBOR floor of 3.0% and the effective interest rate
became 8.0%.
32
Senior Unsecured Notes. The senior unsecured notes require cash interest payments equal to 10%
on a quarterly basis. Any additional interest beyond the 10% rate is added to the principal of the
notes (paid in kind) and is not payable until April 11, 2014. The initial interest rate on the
senior unsecured notes was 11.75% per annum. That rate was increased by 200 basis points in
connection with the negotiation of the permanent waiver and credit agreement amendments in 2008.
The rate was further increased by an additional 50 basis points as of March 31, 2009 by virtue of
the Company’s total leverage ratio (as defined under the senior unsecured notes) exceeding 5.5 to 1
as of March 31, 2009; however, as a result of the merger with
VLCY, the total leverage decreased below 5.5 to 1 and the rate was decreased by 50 basis points. Thus, as of December 31, 2009, the
interest rate on the subordinated notes was 13.75% per annum. Assuming the all-in interest rate on
the senior unsecured notes were to remain at 13.75% until April 11, 2014, the value of these notes,
including accrued interest, will be $64.2 million.
Covenants. The senior secured credit facility includes a total leverage ratio financial
covenant. The ratio is calculated quarterly using an adjusted EBITDA calculation, which is defined as earnings
before interest, taxes, depreciation, and amortization, and other
adjustments allowed under the
terms of the senior secured credit agreement, on a rolling 12-month basis. The facility also contains customary
covenants, including limitations on Cambium Learning’s ability to incur debt, and events of default
as defined by the agreement. The senior secured credit facility limits Cambium Learning’s ability
to pay dividends, to make advances and to otherwise engage in inter-company transactions. Effective
as of the quarter ended March 31, 2009, the senior secured credit facility requires the total
leverage ratio to be no greater than 6.5:1.
The senior unsecured notes include a financial covenant, which requires that beginning with
the quarter ended March 31, 2009, we maintain as of the end of each fiscal quarter consolidated
adjusted EBITDA of not less than $25.0 million (adjusted EBITDA is also on a rolling 12-month basis
and is defined in substantially the same manner as under the senior secured credit facility). The
senior unsecured notes also contain customary covenants, including limitations on our ability to
incur debt.
If Cambium Learning fails to comply with these financial covenants, the Company has the right
to make a cash contribution to the capital of Cambium Learning, the aggregate amount not to be in
excess of the minimum amount necessary to cure the relevant failure to comply with the financial
covenant. This right to make a cash contribution is available for no more than one fiscal quarter
in a fiscal year. Cambium Learning’s total leverage ratio was
7.33:1 for the four-quarter period
ended June 30, 2009, which ratio was greater than the maximum permitted under the credit facility,
and its adjusted EBITDA was $23.1 million for the four-quarter period ended June 30, 2009, or $1.9
million less than the minimum required $25.0 million. Accordingly, as of August 14, 2009, Cambium
Learning was in non-compliance with these covenants. On August 14, 2009, Cambium notified both its
senior secured lenders and its senior unsecured lenders that VSS-Cambium Holdings, LLC intended to
cure the non-compliance. On August 17, 2009, $3.0 million of capital was contributed to Cambium
Learning by its stockholder to fund the cure. On August 20, 2009, the $3.0 million was paid by
Cambium Learning to the senior secured lenders and the principal amount outstanding on our senior
secured credit agreement was reduced by a corresponding amount. For purposes of calculating
covenant compliance, the amount of the capital contribution will be included in the adjusted EBITDA
calculations through the quarter ending March 31, 2010. We are permitted one such cure right in
each fiscal year. Therefore, under the existing credit agreements, we are in compliance with our
financial covenants for the year ended December 31, 2009 and, based on our performance to date, we
expect to be in compliance with our financial covenants for the quarter ending March 31, 2010. The
required total leverage ratio changes each year and will be 5.5:1 for fiscal year 2010, 4.5:1 for
fiscal year 2011, and 4.0:1 thereafter. We are still completing our
debt compliance reporting, but based on the calculation of adjusted EBITDA per the credit
agreement, as shown in “Non-GAAP Measures” below we expect to report a total leverage ratio for the year ended
December 31, 2009 of approximately 3.0, which is in compliance with the debt covenant requirement
that the total leverage ratio be no greater than 6.5:1. Further, we are in compliance with the
requirement that adjusted EBITDA per the credit agreement be in excess of $25.0 million.
Our ability to satisfy our debt service and maintain compliance with loan covenants in the
future will depend in part on the operating performance of our Company, which will in turn be
affected in part by prevailing economic conditions in the markets we serve and other factors, many
of which are beyond our control. If a default in our covenants were
to occur in the future, and we were unable to cure such default (if
such default were curable under the credit agreement), our
lenders may accelerate the indebtedness under the credit agreements
and, upon any such acceleration, Cambium Learning
would be required to repay or refinance all such indebtedness.
Neither we nor Cambium Learning may have sufficient funds
to repay the indebtedness and there may not be equity or debt financing opportunities available to
us on acceptable terms, or at all.
See
“Non-GAAP Measures” below for a reconciliation among net loss, EBITDA and adjusted EBITDA for
purposes of measuring operating performance and adjusted EBITDA under our credit agreements. The
calculation of adjusted EBITDA used for purposes of the credit agreements supplements the
adjustments to EBITDA we use for purposes of measuring operating performance with additional
adjustments to EBITDA recognized by Cambium Learning’s lenders.
33
Amendment to Notes. Cambium Learning entered into an amendment to each of its credit
agreements on October 29, 2009. Since the senior secured credit agreement and the senior unsecured
credit agreement are substantially similar agreements, each of the amendments is substantially
similar to the other. The amendments were permitted under the terms of the merger agreement, and
provide for the following important modifications to the credit agreements:
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Change in Control Definition. Prior to the amendment, the original investors
in Cambium Learning were required to own or control a majority of the outstanding
economic or voting interests of Cambium Learning. This majority threshold is being
reduced to 35%. |
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VSS Funds Ownership. VSS is not permitted to sell or otherwise transfer any
of the Company’s common stock that it directly or indirectly owns, unless it
continues to directly or indirectly own or control at least 35% of the outstanding
Company common stock, and it has not sold or otherwise transferred, in the aggregate,
more than 15% of its Company common stock. |
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Increase in Material Indebtedness. An event of default would occur if a
“change in control” occurred under any of Cambium Learning’s other “material
indebtedness.” The term “material indebtedness” includes the senior unsecured notes,
as well as any other debt, the principal amount of which exceeds a specified
threshold. The $5 million threshold is being increased under the amendment to $7.5
million. |
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Exceptions to Restricted Payments. Cambium Learning is prohibited from paying
dividends, unless the specific type of payment is permitted. Additional types of
payments are being permitted to allow the following: |
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Up to $3.0 million to fund public company, administrative, overhead, franchise tax
and related costs incurred by the Company; and |
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Up to $750,000 in annual board of director compensation and expenses. |
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The annual monitoring fee previously payable to VSS is being eliminated. |
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Permitted Acquisition Basket Reset. The amount of consideration payable
in an acquisition is limited under the credit agreements, and the limitations
are being reset after giving effect to the acquisition of Voyager Expanded
Learning by Cambium Learning in connection with the mergers. The limitation
will be reset to a cumulative $150 million amount, but any single acquisition
is limited to $20 million until the ratio of senior secured debt to EBITDA (as
calculated under the credit agreements) does not exceed 2.50 to 1.0, and the
ratio of total leverage to EBITDA (as calculated under the credit agreements)
does not exceed 3.50 to 1.0, at which time the single acquisition limit will be
increased to $100 million. |
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Definition of Consolidated EBITDA. The definition of Consolidated
EBITDA, which is used for calculating leverage ratios under the senior secured
credit agreement, and the minimum EBITDA covenant under the senior unsecured
credit agreement are being modified to allow additional add-backs for the
following items: |
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Deferred revenue associated with a permitted acquisition; |
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Up to $24.0 million in M&A costs related to the mergers; |
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Up to $2.0 million in costs incurred in closing of locations or lease terminations in
connection with the mergers; |
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Up to $5.0 million in severance costs incurred in connection with the mergers; |
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Up to $3.0 million in integration costs incurred connection with the mergers; and |
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M&A costs for future transactions (whether or not completed) of up to $5.0 million
for closed transactions and $0.5 million for failed transactions in any calendar year,
and $2.0 million in the aggregate. |
In addition, the amendments ratify and approve the mergers and the related transactions.
Each of the lenders who executed the amendment on or before October 28, 2009 received a fee
equal to 20 basis points of the amount of its loans and commitments under the credit agreements,
for an aggregate fee payable to all lenders equal to approximately $0.3 million.
34
Cash flows
In 2009, cash provided from operating activities was $1.9 million. Cash from operations was
partially offset by cash outflows of $11.6 million of transaction costs related to the merger
transaction.
Cash from operations is seasonal with more cash generated in the second half of the year
than in the first half of the year. Cash is historically generated during the second half of the
year because the buying cycle of school districts generally starts at the beginning of each new
school year in the fall.
Other significant inflows of cash during fiscal 2009 included:
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$25.0 million of capital contributed by Cambium’s stockholders related to the
VLCY acquisition; and |
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$3.0 million of capital contributed by Cambium’s stockholders to fund the
cure to a senior secured credit agreement financial covenant regarding Cambium
Learning’s total leverage ratio for the second quarter of 2009. |
Other significant uses of cash during fiscal 2009 included:
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$9.7 million of cash paid for the VLCY acquisition, net of cash acquired; |
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$5.9 million for principal payments on debt and capital leases; and |
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$3.4 million of expenditures related to property, plant, equipment, pre-publication costs, and software. |
Non-GAAP Measures
Our historical financial statements include VLCY results only for the 23-day period
subsequent to the December 8, 2009 acquisition date. Further, the net losses for both the
Company and VLCY as reported on a GAAP basis include material non-recurring and non-operational
items. We believe that earnings (loss) from operations before interest and other income
(expense), income taxes, and depreciation and amortization, or EBITDA, and Adjusted EBITDA, which
further excludes non-recurring and non-operational items, provide useful information for
investors to assess the results of the ongoing business of the combined company.
EBITDA and Adjusted EBITDA are not prepared in accordance with GAAP and may be different
from similarly named, non-GAAP financial measures used by other companies. Non-GAAP financial measures should not
be considered a substitute for, or superior to, measures of financial performance prepared in
accordance with GAAP. We believe that Adjusted EBITDA provides useful information to investors
because it reflects the underlying performance of the ongoing operations of the combined company
and provides investors with a view of the combined company’s operations from management’s
perspective. Adjusted EBITDA excludes items that do not reflect the underlying performance of the
combined company by removing significant one-time or certain non-cash items from earnings. We use
Adjusted EBITDA to monitor and evaluate the operating performance of the combined company and as
the basis to set and measure progress towards performance targets, which directly affect
compensation for employees and executives. We generally use these non-GAAP measures as measures
of operating performance and not as measures of liquidity.
35
Below is a reconciliation between net loss and Adjusted EBITDA for the years ended December
31, 2009 and 2008.
Reconciliation Between Net Loss and Adjusted EBITDA for the Year Ended December 31, 2009
(in thousands)
(Unaudited)
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VLCY |
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Non-recurring or non-operating costs excluded from Adjusted EBITDA: |
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Pre-Merger |
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Total |
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Legacy |
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Stock-based |
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Embezzlement |
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Adj Related |
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Total |
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Results |
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Combined |
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Transaction |
|
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Integration |
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VLCY |
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Compensation |
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|
and |
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to Purchase |
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Goodwill |
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Adjusted |
|
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|
GAAP |
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(342 days) |
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Results |
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Costs |
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Costs |
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Corporate |
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Expense |
|
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Related |
|
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Accounting |
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Impairment |
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|
EBITDA |
|
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|
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(a) |
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(b) |
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|
(c) |
|
|
(d) |
|
|
(e) |
|
|
(f) |
|
|
(g) |
|
|
|
|
|
Voyager |
|
$ |
52,923 |
|
|
$ |
77,758 |
|
|
$ |
130,681 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
509 |
|
|
$ |
— |
|
|
$ |
131,190 |
|
Sopris |
|
|
25,185 |
|
|
|
— |
|
|
|
25,185 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25,185 |
|
Cambium Learning Technologies |
|
|
22,940 |
|
|
|
20,970 |
|
|
|
43,910 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
883 |
|
|
|
— |
|
|
|
44,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
|
101,048 |
|
|
|
98,728 |
|
|
|
199,776 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,392 |
|
|
|
— |
|
|
|
201,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
26,848 |
|
|
|
30,839 |
|
|
|
57,687 |
|
|
|
— |
|
|
|
(71 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
148 |
|
|
|
— |
|
|
|
57,764 |
|
Cost of sales — amortization |
|
|
17,527 |
|
|
|
16,220 |
|
|
|
33,747 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
33,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
44,375 |
|
|
|
47,059 |
|
|
|
91,434 |
|
|
|
— |
|
|
|
(71 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
148 |
|
|
|
— |
|
|
|
91,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense |
|
|
5,611 |
|
|
|
4,331 |
|
|
|
9,942 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,942 |
|
Sales and marketing expenses |
|
|
23,368 |
|
|
|
28,753 |
|
|
|
52,121 |
|
|
|
— |
|
|
|
(155 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
108 |
|
|
|
— |
|
|
|
52,074 |
|
General and administrative expense |
|
|
30,519 |
|
|
|
24,740 |
|
|
|
55,259 |
|
|
|
(23,507 |
) |
|
|
(2,027 |
) |
|
|
(2,304 |
) |
|
|
(216 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
27,205 |
|
Shipping costs |
|
|
1,512 |
|
|
|
1,875 |
|
|
|
3,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,387 |
|
Depreciation and amortization |
|
|
9,723 |
|
|
|
2,081 |
|
|
|
11,804 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
11,804 |
|
Embezzlement and related |
|
|
129 |
|
|
|
— |
|
|
|
129 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(129 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Goodwill impairment |
|
|
9,105 |
|
|
|
27,175 |
|
|
|
36,280 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(36,280 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(23,294 |
) |
|
|
(37,286 |
) |
|
|
(60,580 |
) |
|
|
23,507 |
|
|
|
2,253 |
|
|
|
2,304 |
|
|
|
216 |
|
|
|
129 |
|
|
|
1,136 |
|
|
|
36,280 |
|
|
|
5,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
10 |
|
|
|
70 |
|
|
|
80 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
80 |
|
Interest expense |
|
|
(19,487 |
) |
|
|
(628 |
) |
|
|
(20,115 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(20,115 |
) |
Other income (expense) |
|
|
(698 |
) |
|
|
3,279 |
|
|
|
2,581 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,581 |
|
Income tax benefit |
|
|
7,704 |
|
|
|
190 |
|
|
|
7,894 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(35,765 |
) |
|
|
(34,375 |
) |
|
|
(70,140 |
) |
|
|
23,507 |
|
|
|
2,253 |
|
|
|
2,304 |
|
|
|
216 |
|
|
|
129 |
|
|
|
1,136 |
|
|
|
36,280 |
|
|
|
(4,315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Normal EBITDA Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
27,250 |
|
|
|
18,301 |
|
|
|
45,551 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
45,551 |
|
Interest income |
|
|
(10 |
) |
|
|
(70 |
) |
|
|
(80 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(80 |
) |
Interest expense |
|
|
19,487 |
|
|
|
628 |
|
|
|
20,115 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
20,115 |
|
Other income |
|
|
698 |
|
|
|
(3,279 |
) |
|
|
(2,581 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,581 |
) |
Income tax |
|
|
(7,704 |
) |
|
|
(190 |
) |
|
|
(7,894 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,894 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
3,956 |
|
|
$ |
(18,985 |
) |
|
$ |
(15,029 |
) |
|
$ |
23,507 |
|
|
$ |
2,253 |
|
|
$ |
2,304 |
|
|
$ |
216 |
|
|
$ |
129 |
|
|
$ |
1,136 |
|
|
$ |
36,280 |
|
|
$ |
50,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Reconciliation Between Net Loss and Adjusted EBITDA for the Year Ended December 31, 2008
(in thousands)
(Unaudited)
|
| |
| |
|
|
|
|
|
VLCY |
|
|
|
|
|
|
Non-recurring or non-operating costs excluded from Adjusted EBITDA: |
|
|
|
|
| |
|
GAAP |
|
|
Pre-Merger |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
Legacy |
|
|
Stock-based |
|
|
Embezzlement |
|
|
|
|
|
|
Lease |
|
|
|
|
| |
|
Results |
|
|
Results |
|
|
Combined |
|
|
Transaction |
|
|
Integration |
|
|
VLCY |
|
|
Compensation |
|
|
and |
|
|
Goodwill |
|
|
Termination |
|
|
Adjusted |
|
| |
|
Cambium |
|
|
(FY 2008) |
|
|
Results |
|
|
Costs |
|
|
Costs |
|
|
Corporate |
|
|
Expense |
|
|
Related |
|
|
Impairment |
|
|
Costs |
|
|
EBITDA |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
|
(d) |
|
|
(e) |
|
|
(g) |
|
|
(h) |
|
|
|
|
|
Voyager |
|
$ |
48,348 |
|
|
$ |
80,743 |
|
|
$ |
129,091 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
129,091 |
|
Sopris |
|
|
29,712 |
|
|
|
— |
|
|
|
29,712 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
29,712 |
|
Cambium Learning Technologies |
|
|
21,671 |
|
|
|
17,788 |
|
|
|
39,459 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
39,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
|
99,731 |
|
|
|
98,531 |
|
|
|
198,262 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
198,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
27,709 |
|
|
|
33,761 |
|
|
|
61,470 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
61,470 |
|
Cost of sales — amortization |
|
|
15,966 |
|
|
|
18,497 |
|
|
|
34,463 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
34,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
43,675 |
|
|
|
52,258 |
|
|
|
95,933 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
95,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense |
|
|
6,416 |
|
|
|
5,302 |
|
|
|
11,718 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
11,718 |
|
Sales and marketing expenses |
|
|
24,600 |
|
|
|
33,734 |
|
|
|
58,334 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
58,334 |
|
General and administrative expense |
|
|
16,156 |
|
|
|
30,660 |
|
|
|
46,816 |
|
|
|
(26 |
) |
|
|
(287 |
) |
|
|
(18,069 |
) |
|
|
(878 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
27,556 |
|
Shipping costs |
|
|
2,348 |
|
|
|
2,178 |
|
|
|
4,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,526 |
|
Depreciation and amortization |
|
|
11,453 |
|
|
|
2,861 |
|
|
|
14,314 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14,314 |
|
Embezzlement and related |
|
|
7,254 |
|
|
|
— |
|
|
|
7,254 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,254 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Goodwill impairment |
|
|
75,966 |
|
|
|
43,141 |
|
|
|
119,107 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(119,107 |
) |
|
|
— |
|
|
|
— |
|
Lease termination costs |
|
|
— |
|
|
|
11,673 |
|
|
|
11,673 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(11,673 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(88,137 |
) |
|
|
(83,276 |
) |
|
|
(171,413 |
) |
|
|
26 |
|
|
|
287 |
|
|
|
18,069 |
|
|
|
878 |
|
|
|
7,254 |
|
|
|
119,107 |
|
|
|
11,673 |
|
|
|
(14,119 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
86 |
|
|
|
1,485 |
|
|
|
1,571 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,571 |
|
Interest expense |
|
|
(18,520 |
) |
|
|
(510 |
) |
|
|
(19,030 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(19,030 |
) |
Other income (expense) |
|
|
23,589 |
|
|
|
(363 |
) |
|
|
23,226 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
23,226 |
|
Income tax benefit |
|
|
13,422 |
|
|
|
1,160 |
|
|
|
14,582 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (income) |
|
|
(69,560 |
) |
|
|
(81,504 |
) |
|
|
(151,064 |
) |
|
|
26 |
|
|
|
287 |
|
|
|
18,069 |
|
|
|
878 |
|
|
|
7,254 |
|
|
|
119,107 |
|
|
|
11,673 |
|
|
|
6,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Normal EBITDA Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
27,419 |
|
|
|
21,358 |
|
|
|
48,777 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
48,777 |
|
Interest income |
|
|
(86 |
) |
|
|
(1,485 |
) |
|
|
(1,571 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,571 |
) |
Interest expense |
|
|
18,520 |
|
|
|
510 |
|
|
|
19,030 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19,030 |
|
Other income |
|
|
(23,589 |
) |
|
|
363 |
|
|
|
(23,226 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(23,226 |
) |
Income tax |
|
|
(13,422 |
) |
|
|
(1,160 |
) |
|
|
(14,582 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(14,582 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
(60,718 |
) |
|
$ |
(61,918 |
) |
|
$ |
(122,636 |
) |
|
$ |
26 |
|
|
$ |
287 |
|
|
$ |
18,069 |
|
|
$ |
878 |
|
|
$ |
7,254 |
|
|
$ |
119,107 |
|
|
$ |
11,673 |
|
|
$ |
34,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (a) |
|
Adjustment is to eliminate
external incremental costs
incurred by the Company and VLCY
that are directly related to the
merger transaction. |
| |
| (b) |
|
Adjustment is to eliminate costs
directly associated with the
integration of the Company and
VLCY, including severance and
other costs incurred to achieve
synergies and the cost of
retention and change in control
agreements directly related to the
merger. Integration costs also
include approximately $0.3 million
in 2008 related to the closure of
our IntelliTools office in
Petaluma, California, representing
rent and other operating costs for
the Petaluma office from the time
we leased a smaller facility in
January 2008 until its closure. |
36
| |
|
|
| (c) |
|
Represents corporate overhead
costs for VLCY that are primarily
related to the restatement of
VLCY’s financial statements and
the related activities for VLCY to
become current with its SEC
filings, costs to transition
VLCY’s corporate office from Ann
Arbor, Michigan to Dallas, Texas,
and internal costs required to
complete the strategic
alternatives process that
culminated in the proposed merger
transaction. Going forward, we
expect to incur ongoing corporate
overhead and public company costs
of approximately $4 million
annually. For the year ended
December 31, 2008, the adjustment
represents the total costs of
these activities less the $4
million estimate which we consider
to be ongoing. Because VLCY’s
restatement process and the
relocation of VLCY’s corporate
headquarters were substantially
completed by the end of fiscal
2008, non-recurring corporate
costs for the pre-merger period of
2009 are primarily related to
internal costs of VLCY’s strategic
alternative process. |
| |
| (d) |
|
For the period from January 1,
2007 through April 11, 2007, we
held in escrow $0.6 million in
connection with stock-based
awards. As a result of the
settlement with the former
stockholders in 2008, the rights
to the $0.6 million held in escrow
were foregone. This amount was
recorded as income in interest and
other expenses in our historical
statement of operations for 2008
and, accordingly, is excluded from
EBITDA. Voyager’s historical
statements of operations include
stock-based compensation expense
of $0.9 million for 2008 and $0.2
million for the pre-merger period
of 2009. As of the merger date,
2.3 million stock options were
granted to executives resulting in
stock-based compensation expense
of approximately $37,000 included
in the Company’s Consolidated
Statements of Operations for the
year ended December 31, 2009. |
| |
| (e) |
|
During 2008, the Company
discovered certain irregularities
relating to the control and use of
cash and certain other general
ledger items which revealed a
substantial misappropriation of
assets over a period of more than
four years. These irregularities
were perpetrated by a former
employee, resulting in
embezzlement losses, net of
recoveries. For further
information, see Note 3 to our
Consolidated Financial Statements
included herein. |
| |
| (f) |
|
Under applicable accounting
guidance for business
combinations, an acquiring entity
is required to recognize all of
the assets acquired and
liabilities assumed in a
transaction at the acquisition
date fair value. In our
Consolidated Financial Statements
for 2009, net sales have been
reduced by $1.4 million due to the
write-down of deferred revenue to
its estimated fair value as of the
merger date. The write-down was
determined by estimating the cost
to fulfill the related future
customer obligations plus a normal
profit margin. Partially
offsetting this impact, cost of
sales and marketing expenses were
reduced by $0.3 million for other
purchase accounting adjustments,
primarily a write-down of deferred
costs to zero at the acquisition
date. The adjustment of deferred
revenue and deferred costs to fair
value is required only at the
purchase accounting date;
therefore, its impact on net
sales, cost of sales, and sales
and marketing expense is
non-recurring. |
| |
| (g) |
|
For additional information on
goodwill impairment charges, see
Note 8 to our Consolidated
Financial Statements included
herein. |
| |
| (h) |
|
Lease termination charges are for
the discontinuance of office space
and other leases resulting from
the transition of VLCY’s corporate
headquarters from Ann Arbor,
Michigan to Dallas, Texas. |
Our senior secured credit agreement and our senior unsecured credit agreement contain a
financial covenant regarding a total leverage ratio based on adjusted
EBITDA and the senior unsecured credit agreement also contains a
financing covenant regarding minimum adjusted
EBITDA (calculated as set forth in the credit agreements) as of the end of each fiscal quarter.
In addition to the adjustments shown in Adjusted EBITDA in the table above, our credit agreements
allow additional adjustments that permit the add-back of specified non-operational expenses that,
in the view of the lenders, are reasonable adjustments to EBITDA. These are shown in the table
below. We have not presented these additional adjustments as part of the Unaudited EBITDA and
Adjusted EBITDA data above because they are adjustments that management would not commonly make
in internal use of Adjusted EBITDA for establishing and measuring operational performance
targets. These additional adjustments are set forth in the table below to provide a
reconciliation of the adjusted EBITDA allowed by our credit agreements to our Adjusted EBITDA as
presented above and represent the adjusted EBITDA per the credit
agreement for 2009 that we expect to report to our
lenders at the end of the first quarter.
37
| |
|
|
|
|
| |
|
2009 Adjusted |
|
| |
|
EBITDA per |
|
| (In thousands) |
|
Credit Agreement |
|
| |
|
(unaudited) |
|
Adjusted EBITDA per table above |
|
$ |
50,796 |
|
Additional adjustments allowed to EBITDA per
the Company’s credit agreement: |
|
|
|
|
Equity cure |
|
|
2,959 |
|
Certain operating taxes |
|
|
1,249 |
|
Management fees |
|
|
200 |
|
Employee severance (non-integration) |
|
|
107 |
|
Certain legal costs |
|
|
342 |
|
Amendment fees in excess of amount allowed |
|
|
(171 |
) |
Other |
|
|
20 |
|
|
|
|
|
Adjusted EBITDA per the credit agreement |
|
$ |
55,502 |
|
|
|
|
|
We
are still completing our debt compliance reporting, but based on the above adjusted EBITDA
per the credit agreement, we expect to report a total leverage ratio for the year
ended December 31, 2009 of approximately 3.0, which is in compliance with the debt covenant
requirement that the total leverage ratio be no greater than 6.5:1. Further, we are in
compliance with the requirement that adjusted EBITDA per the credit agreement be in excess of
$25.0 million.
Capital Expenditures and Outlook
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Period from |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
January 29, 2007 |
|
|
Period from |
|
| |
|
Year Ended |
|
|
Year Ended |
|
|
(Inception) |
|
|
January 1, 2007 |
|
| |
|
December 31, |
|
|
December 31, |
|
|
through December 31, |
|
|
through April 11, |
|
| (Dollars in millions) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2007 |
|
Pre-publication costs |
|
$ |
2.4 |
|
|
$ |
2.2 |
|
|
$ |
2.7 |
|
|
$ |
0.4 |
|
Fixed capital |
|
|
1.0 |
|
|
|
1.0 |
|
|
|
0.7 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenditures for property, equipment,
and pre-publication costs |
|
$ |
3.4 |
|
|
$ |
3.2 |
|
|
$ |
3.4 |
|
|
$ |
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital spending in 2010 will increase relative to 2009 due to the VLCY acquisition. VLCY
historically spent more on capital items and in house development as compared to Cambium. The
2010 expenditures are expected to range between $10.0 million and $13.0 million. Capital
expenditures for 2010 will be concentrated primarily on ongoing and
new product development, which
management believes will generate future sales growth. Additionally, 2010 will include
capitalized items related to expenditures which will facilitate the integration of VLCY and the Company.
We believe that current cash, cash equivalents and short term investment balances, expected
income tax refunds, and cash generated from operations will be adequate to fund the working
capital and capital expenditures necessary to support our currently expected sales for the
foreseeable future.
Commitments and Contractual Obligations
We have various contractual obligations which are recorded as liabilities in our
Consolidated Financial Statements. Other items, such as certain purchase commitments and other
executory contracts, are not recognized as liabilities in our Consolidated Financial Statements
but are required to be disclosed.
38
The following table summarizes our significant operational and contractual obligations and
commercial commitments at December 31, 2009 showing the future periods in which such obligations
are expected to be settled in cash:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in millions) |
|
Total |
|
|
2010 |
|
|
2011 & 2012 |
|
|
2013 & 2014 |
|
|
After 2014 |
|
Senior secured revolving credit as of December 31, 2009 |
|
$ |
5.0 |
|
|
$ |
5.0 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Senior secured notes as of December 31, 2009 |
|
|
126.4 |
|
|
|
10.3 |
|
|
|
20.3 |
|
|
|
95.8 |
|
|
|
— |
|
Senior
unsecured notes as of December 31, 2009 |
|
|
64.2 |
|
|
|
— |
|
|
|
— |
|
|
|
64.2 |
|
|
|
— |
|
Build-to-suit lease obligations as of December 31, 2009 |
|
|
7.5 |
|
|
|
1.0 |
|
|
|
2.1 |
|
|
|
2.2 |
|
|
|
2.2 |
|
Other capital lease obligations as of December 31, 2009 |
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
— |
|
|
|
— |
|
Operating lease obligations as of December 31, 2009 |
|
|
6.2 |
|
|
|
2.3 |
|
|
|
2.7 |
|
|
|
1.1 |
|
|
|
0.1 |
|
Contingent value rights as of December 31, 2009 |
|
|
9.6 |
|
|
|
4.0 |
|
|
|
5.6 |
|
|
|
— |
|
|
|
— |
|
As of December 31, 2009, we also have $11.7 million in obligations with respect to our
pension plan. For further information, see Note 15 to our Consolidated Financial Statements
included herein.
We have letters of credit outstanding as of December 31, 2009 in the amount of $2.3 million
to support workers’ compensation insurance coverage, certain of our credit card programs, the
build-to-suit lease, and performance bonds for certain contracts. We maintain a $1.1 million
certificate of deposit as collateral for the workers’ compensation insurance and credit card
program letters of credit and for our Automated Clearinghouse (ACH) programs. The certificate of
deposit is recorded in other assets.
As of December 31, 2009, we had approximately $1.3 million of long-term income tax
liabilities that have a high degree of uncertainty regarding the timing of the future cash
outflows. We are unable to reasonably estimate the years when settlement will occur with the
respective tax authorities.
We incurred $3.0 million to an affiliate of VSS at the closing of the mergers in
consideration of providing advisory services with respect to the transaction. One million dollars
of this fee was paid in cash at closing, and the balance becomes payable if and when Cambium
Learning’s ratio of total outstanding debt to adjusted EBITDA drops below 3.0:1. Three-quarters
of this remaining balance will be allocated pro rata among VSS and certain of the members of
VSS-Cambium Holdings III, LLC. For purposes of determining when this fee is to be paid, adjusted
EBITDA is calculated in the same manner as that measure is calculated under Cambium Learning’s
senior unsecured credit agreement.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that have or are reasonably likely to have
a current or future material effect on the Company’s financial condition, changes in financial
conditions, revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources.
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements are prepared in accordance with accounting principles
generally accepted in the U.S., which require management to make estimates and assumptions that
affect the reported amount of assets, liabilities, revenue, expenses, and related disclosure of
contingent assets and liabilities.
On an ongoing basis, we evaluate our estimates including those related to accounting for
revenue recognition, impairment, capitalization and depreciation, allowances for doubtful
accounts and sales returns, inventory reserves, income taxes, and other contingencies. We base
our estimates on historical experience and other assumptions we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying value
of assets and liabilities that may not be readily available from other sources. Actual results
may differ from these estimates, which could have a material impact on our financial statements.
Certain accounting policies require higher degrees of judgment than others in their
application. We consider the following to be critical accounting policies due to the judgment
involved in each. For a detail discussion of our significant
accounting policies see Note 2 to
our Consolidated Financial Statements included herein.
Revenue Recognition. Revenues are derived from sales of reading, math and science,
and professional development solutions to school districts primarily
in the United States Sales include
printed materials and often online access to educational materials for individual students,
teachers, and classrooms. Revenue from the sale of printed materials for reading and math
products is recognized when the product is shipped to or received by the customer. Revenue for
product support, training and implementation services, and online subscriptions is recognized
over the period services are delivered. Revenue for our professional development courses, which
include an Internet delivery component, is recognized over the contractual delivery period,
typically nine to twelve months. ExploreLearning and Learning A-Z derive revenue exclusively from
sales of online subscriptions to their reading, math and science teaching websites. Typically,
the subscriptions are for a twelve month period and the revenue is recognized ratably over the
period the online access is available to the customer.
39
The division of revenue between shipped materials, online materials, and ongoing support and
services is determined in accordance with applicable accounting guidance for revenue arrangements
with multiple deliverables. Revenue for the online content sold separately or included with
certain curriculum materials is recognized ratably over the subscription period, typically a
school year.
Revenues related to maintenance and support are recognized on a straight-line basis over the
period that maintenance and support are provided. In certain instances, telephone support and
software repairs are provided for free within the first year of licensing the software. The cost
of providing this service is insignificant, and is accrued at the time of revenue recognition.
Maintenance and support services include telephone support, bug fixes, and for certain products,
rights to upgrades and enhancements on a when-and-if available basis. Revenues under
multiple-element software license arrangements, which may include several different software
products and services sold together, including training and maintenance and support, is allocated
to each element based on the residual method in accordance with accounting guidance for software
revenue recognition.
We enter into agreements to license certain book publishing rights and content. We recognize
the revenue from these agreements when the license amount is fixed and determinable, collection
is reasonably assured, and the license period has commenced. For those license agreements that
require us to deliver additional materials as part of the license agreement, the revenue is
recognized when the product is received by the customer. Shipments to school book depositories are on consignment and revenue is recognized
based on shipments from the depositories to the schools.
Impairment of Goodwill. We review the carrying value of goodwill for impairment at
least annually. The annual analysis is performed as of December 1 or when certain triggering
events occur. The applicable accounting guidance requires that a two-step impairment test be
performed on goodwill. In the first step, the fair value of each reporting unit is compared to
its carrying value. If the fair value of a reporting unit exceeds the carrying value of that
unit, goodwill is not impaired and no further testing is required. If the carrying value of the
reporting unit exceeds the fair value of that unit, then a second step must be performed to
determine the implied fair value of the reporting entity’s goodwill. If the carrying value of a
reporting unit’s goodwill exceeds its implied fair value, then an impairment loss equal to the
difference is recorded.
Determining the fair value of a reporting unit is judgmental in nature, and involves the use
of significant estimates and assumptions. These estimates and assumptions may include revenue
growth rates and operating margins used to calculate projected future cash flows, risk-adjusted
discount rates, future economic and market conditions, and determination of appropriate market
comparables. In addition, we make certain judgments and assumptions in allocating shared assets
and liabilities to determine the carrying values of our reporting units.
2009 Quarterly Impairment Reviews. In June 2009 we determined that the signing of the
merger agreement was a triggering event requiring us to review goodwill for impairment. At the
time of this review, we had two reporting units: Published Products and Learning Technologies. In
the first step of the impairment test for the second quarter of 2009, the fair market value of
each reporting unit was determined using an income approach and was dependent on multiple
assumptions and estimates, including future cash flow projections with a terminal value multiple
and the discount rate used to determine the expected present value of the estimated future cash
flows. Future cash flow projections were based on management’s best estimates of economic and
market conditions over the projected period including industry fundamentals such as the state of
educational funding, revenue growth rates, future costs and operating margins, working capital
needs, capital and other expenditures, and tax rates. The discount rate applied to the future
cash flows was a weighted-average cost of capital and took into consideration market and industry
conditions, returns for comparable companies, the rate of return an outside investor would expect
to earn, and other relevant factors. The first step of impairment testing as of June 30, 2009
showed that the carrying value of our Published Products unit exceeded its fair value and that
the second step of testing was required for this unit.
The second step of the goodwill impairment analysis requires the allocation of the fair
value of the reporting unit to all of the assets and liabilities of that reporting unit as if the
reporting unit had been acquired in a business combination. The fair values included in the
second step of the second quarter 2009 goodwill impairment analysis were dependent on multiple
assumptions and estimates, including the projected cash flows and discount rate used for the
first step of the analysis, as well as the percentage of future revenues and cash flows
attributable to the intangible assets, asset lives used to generate future cash flows, royalty
relief savings attributable to our trademarks, normal profit margins applicable to deferred
revenues, and other assumptions used in determining the fair value of assets and liabilities in a
hypothetical purchase accounting allocation. As a result of the second step of the second quarter
2009 impairment test, the goodwill balance for the reporting unit as of the measurement date was
determined to be partially impaired, and an impairment charge of $9.1 million was recorded as of
June 30, 2009.
40
We also reviewed goodwill for impairment as of September 30, 2009. For that review, the
first step in the impairment test showed that the fair value of each reporting unit exceeded its
carrying value and goodwill was therefore not impaired.
Year End Impairment Review. We currently have three reporting units for purposes of the
annual goodwill impairment review: Voyager, Sopris and Cambium Learning Technologies. In the
first step of the impairment test for fiscal year 2009, the fair market value of each reporting
unit was determined using an income approach and was dependent on multiple assumptions and
estimates, including future cash flow projections with a terminal value multiple and the discount
rate used to determine the expected present value of the estimated future cash flows. Future cash
flow projections were based on management’s best estimates of economic and market conditions over
the projected period including industry fundamentals such as the state of educational funding,
revenue growth rates, future costs and operating margins, working capital needs, capital and
other expenditures, and tax rates. The discount rate applied to the future cash flows was a
weighted-average cost of capital and took into consideration market and industry conditions,
returns for comparable companies, the rate of return an outside investor would expect to earn,
and other relevant factors. The first step of impairment testing for fiscal 2009 showed that the
fair value of each reporting unit exceeded its carrying value; therefore, no second step of
testing was required.
The adverse developments in the education funding environment that affected our operations
during fiscal year 2008 and 2009 may continue to have an impact, and potentially increase the
impact, on our future sales, profits, cash flows and carrying value of assets. Although
management has included its best estimates of the impact of these and other factors in our cash
flow projections, the projection of future cash flows is inherently uncertain and requires a
significant amount of judgment. Actual results that are significantly different than these cash
flow projections or a change in the discount rate could significantly affect the fair value
estimates used to value our reporting units in step one of the goodwill analysis or the fair
values of our other asset and liability balances used in step two of the goodwill analysis, and
could result in future goodwill impairments.
Impairment of Long Lived Assets. We review the carrying value of long lived assets
for impairment whenever events or changes in circumstances indicate net book value may not be
recoverable from the estimated undiscounted future cash flows. If our review indicates any assets
are impaired, the impairment of those assets is measured as the amount by which the carrying
amount exceeds the fair value as estimated by discounted cash flows. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less cost of disposal. For fiscal year
2009, no impairment was indicated.
The determination whether our definite-lived intangible assets are impaired involves
significant assumptions and estimates, including projections of future cash flows, the percentage
of future revenues and cash flows attributable to the intangible assets, asset lives used to
generate future cash flows, and royalty charges attributable to trademarks. The impairment
calculations are most sensitive to the future cash flow assumptions. Future cash flow projections
are based on management’s best estimates of economic and market conditions over the projected
period including industry fundamentals such as the state of educational funding, revenue growth
rates, future costs and operating margins, working capital needs, and capital and other
expenditures. Adverse developments in the education funding environment, including the reductions
in Reading First funding that occurred in 2008 and reductions in available state and local funds
as property taxes decline have affected our operations during 2009 and may continue to have an
impact, and potentially increase the impact, on our future sales, profits, cash flows and
carrying value of assets. However, we have seen recent improvements in the funding environment
and management expects that the impact of these adverse developments will stabilize in 2010.
Pre-Publication
Costs. We capitalize certain pre-publication costs of our curriculum,
including art, prepress, editorial, and other costs incurred in the creation of the master copy
of our curriculum products. Pre-publication costs are amortized over the expected life of the
education program, generally on an accelerated basis over a period of five years. The amortization
methods and periods chosen reflect the expected sales generated by the education programs. We
periodically review the recoverability of the capitalized costs based on expected net realizable
value.
Royalty Advances. Royalty advances to authors are capitalized and represent amounts
paid in advance of the sale of an author’s product. These costs are then amortized as the related
publication is sold. We evaluate advances periodically to determine if they are expected to be
recovered and reserve any portion of a royalty advance that is not expected to be recovered.
Accounts Receivable. Accounts receivable are stated net of allowances for doubtful
accounts and estimated sales returns. The allowance for doubtful accounts is based on a review of
the outstanding balances and historical collection experience. The reserve for sales returns is
based on historical rates of returns as well as other factors that in our judgment could
reasonably be expected to cause sales returns to differ from historical experience. Actual
returns could differ from our estimates.
Inventory.
Inventory is stated at the lower of cost, determined using the first-in,
first-out (FIFO) method, or market, and consists of finished
goods. We reduce slow-moving or obsolete inventory to net realizable
value. Inventory values are maintained at an amount that management considers appropriate based
on factors such as the
inventory aging, historical usage of the product, future sales forecasts, and product development
plans. These factors involve management’s judgment and changes in estimates could result in
increases or decreases to the inventory values. Inventory values are reviewed on a periodic basis.
41
Derivative Instruments. We use an interest rate derivative instrument to hedge our
exposure to interest rate volatility resulting from the senior secured credit agreement. We are
required to report all derivative instruments on our balance sheet at fair value. Applicable FASB
accounting guidance sets forth the criteria for designation and effectiveness of hedging
relationships, and provides generally that all designations must be made at the inception of each
instrument. As we did not make such initial designations at inception, we are required to
recognize changes in the fair value of the derivative instrument in the current period as other
income or expense. We determine the fair value of the interest rate swap from a third-party
quote. This value represents the estimated amount that we would receive or pay to terminate the
swap agreement taking into consideration current interest rates.
Income Taxes. Provision is made for the expense, or benefit, associated with taxes
based on income. The provision for income taxes is based on laws currently enacted in every
jurisdiction in which we do business and considers laws mitigating the taxation of the same
income by more than one jurisdiction. Significant judgment is required in determining income tax
expense, current tax receivables and payables, deferred tax assets and liabilities, and valuation
allowance recorded against the net deferred tax assets. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, taxable income in prior
carryback years, loss carryforward limitations, and tax planning strategies in assessing whether
deferred tax assets will be realized in future periods. If, after consideration of these factors,
management believes it is more likely than not that a portion of the deferred tax assets will not
be realized, a valuation allowance is established. The amount of the deferred tax asset
considered realizable could be reduced if estimates of future taxable income during the
carryforward period are reduced.
We recognize liabilities for uncertain tax positions based on a two-step process. The first
step is to evaluate the tax position for recognition by determining if available evidence
indicates that it is more likely than not that the position will be sustained on audit. The
second step requires us to estimate and measure the tax benefit as the largest amount that is
more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and
subjective to estimate these amounts, since this requires management to determine the probability
of various possible outcomes. We reevaluate our uncertain tax positions on a periodic basis,
based on factors such as changes in facts and circumstances, changes in tax law, effectively
settled issues under audit and new audit activity.
Contingent Value Rights (CVRs). CVRs were issued to VLCY stockholders as
part of the merger. Each CVR represents the right to receive a cash
amount equal to the sum of the following amounts (minus specified agreed-upon liabilities,
including agreed contingencies, potential working capital adjustments and expenses of the
stockholders’ representative) under the merger agreement:
| • |
|
specified VLCY tax refunds received after the effective time
of the merger, plus |
| • |
|
the lesser of $4.0 million or the amount of specified post-signing tax refunds
of VLCY received after the date of the merger agreement and on or prior to the
date of the closing, which was $1.6 million, plus |
| • |
|
any portion of the 280G Escrow Account (as defined in the
merger agreement) which is not paid to its beneficiary, plus |
| • |
|
other amounts specified in the escrow agreement, |
divided
by the total number of shares of VLCY common stock outstanding as of
the effective time of the mergers.
The ultimate value of the CVRs is not known at this time; however it is not expected to be
more than $11 million and could be as low as zero. As of the merger date, a fair value of $9.6
million has been recorded as a liability for the CVR payments. The determination of fair value
of the CVRs involves significant assumptions and estimates regarding the likelihood, amount and
timing of cash flows related to the elements of the CVRs. Future changes in the estimate of the
fair value of the CVRs will impact results of operations and could be material. As of December
31, 2009, restricted assets in an escrow account for the benefit of the CVR were $7.9 million.
Other Contingencies. Other contingencies are recorded when it is probable that a
liability exists and the value can be reasonably estimated.
42
We have a potential indemnification liability related to state income taxes that have been
assessed against a former subsidiary of VLCY sold in 2007. Management believes that it is likely
that our position will be upheld and we do not have a liability accrued. This contingency was
identified as an agreed contingency for the CVR and, as such, any amount paid would potentially
offset payments due under the CVR in accordance with the merger agreement terms. As of yearend
2009, the fair value of the CVR includes a reduction of $0.9 million related to this state income
tax issue, calculated
using management assumptions related to the likelihood, amount and timing of any cash
outflows for this agreed-upon contingency. If the former subsidiary’s tax position is not
upheld, we could incur significant indemnification expense in future periods to our Statements of
Operations and amounts payable to prior VLCY stockholders for the CVR could be materially reduced
from our estimate as of December 31, 2009. The former subsidiary has appealed the assessment and
is awaiting an administrative decision by the state taxing authority. If the administrative
decision by the state taxing authority is unfavorable, the former subsidiary plans to appeal the
decision. We expect the final resolution of any tax litigation or potential settlement could
range from zero to approximately $17.5 million (including interest). To the extent funds are
available in the CVR escrow account, our cash exposure could be reduced by up to fifty percent.
Recently Issued Financial Accounting Standards
Information regarding recently issued accounting standards is included in Note 2 to the
Consolidated Financial Statements, which is included in Item 8 of this Annual Report on Form
10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We
have outstanding at year end $102.2 million of indebtedness under Cambium Learning’s senior secured
credit facility (including $5.0 million in revolving credit outstanding but not including $2.3
million in outstanding letters of credit) and have outstanding at
year end $54.6 million of the senior
unsecured notes due on April 11, 2014, which were issued on April 12, 2007. Cambium Learning will have $63.2 million of its debt
under Cambium Learning’s senior secured credit facility bearing interest at variable rates.
Assuming that Cambium Learning does not have in effect any interest rate swaps or cap agreements
applicable to its variable rate facilities, an increase in the variable component used in
determining the interest rates on Cambium Learning’s variable rate facilities would result in the
interest rates under these facilities being limited by the maximum interest rate applicable to
the facilities. Giving effect to the foregoing assumptions and assumed applicable tax rate of
38.5%, we expect that our annual earnings would decrease by approximately $0.4 million for each
one percentage point increase in the rates applicable to Cambium
Learning’s variable debt, and by $3.9 million
for a ten percent increase in the variable component used in determining the interest rates
applicable to Cambium Learning’s variable debt.
At present, Cambium Learning has in place an interest rate swap agreement that hedges
against the risk on $39 million of its credit agreement debt, that the three-month LIBOR will
exceed 5.417% per annum. Cambium Learning makes payments to the counterparty under the swap
agreement to the extent that the three-month LIBOR is below 5.417% and is entitled to receive
payments from the counterparty to the extent that the three-month LIBOR exceeds 5.417%. The
three-month LIBOR was 0.26% at December 31, 2009. Giving effect to the foregoing assumptions
and assumed applicable tax rate of 38.5%, Cambium Learning expects that its annual earnings would
decrease by approximately $0.2 million for each one percentage point decrease in the three-month
LIBOR rate below the 5.417% fixed maximum rate and expects that its annual earnings would
increase by approximately $0.2 million for each one percentage point increase in the three-month
LIBOR rate above the 5.417% fixed maximum rate.
Foreign Currency Risk
We do not have material exposure to changes in foreign currency rates. As of December 31,
2009, we do not have any outstanding foreign currency forwards or option contracts.
43
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Cambium Learning Group, Inc.
We have audited the accompanying consolidated balance sheet of Cambium Learning Group, Inc. and
subsidiaries (the “Company”), as of December 31, 2009, and the related consolidated statements of
operations, stockholders’ equity and comprehensive income (loss), and cash flows for the year then
ended. In connection with our audit of the consolidated financial statements, we have also audited
financial statement schedule II. The Company’s management is responsible for these financial
statements and financial statement schedule. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. An audit includes consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements and financial statement schedule referred to
above present fairly, in all material respects, the financial position of the Company, as of
December 31, 2009, and the results of their operations and their cash flows for the year then ended
in conformity with accounting principles generally accepted in the United States of America.
/s/
Whitley Penn LLP
Dallas, Texas
March 26, 2010
44
Report of Independent Registered Public Accounting Firm
To the Board of Managers and Members of VSS-Cambium Holdings, LLC:
We have audited the accompanying consolidated balance sheet of VSS-Cambium Holdings, LLC (a
Delaware limited liability company) and subsidiaries (the “Company”) as of December 31, 2008, and
the related consolidated statements of operations, members’ equity, and cash flows for the year
then ended. Our audit of the basic financial statements included the financial statement schedule,
Schedule II: Valuation and Qualifying Accounts for the year ended December 31, 2008 appearing
under Item 15(a) 2. These financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of VSS-Cambium Holdings, LLC and subsidiaries as of
December 31, 2008, and the results of their operations and their cash flows for the year then ended
in conformity with accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement schedule for the year ended December 30, 2008, when
considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ Grant Thornton LLP
Boston, Massachusetts
October 8, 2009 except for
Note 21, as to which the date
is October 29, 2009 and except for
Note 1 (Segments), as to which the date is March 26, 2010
45
Report of Independent Registered Public Accounting Firm
The Board
of Managers and Members of VSS-Cambium Holdings, LLC
We have audited the accompanying consolidated statements of operations,
stockholders’/members’ equity, and cash flows of VSS-Cambium Holdings,
LLC for the period from January 29, 2007 (inception) through December
31, 2007 (Successor basis), and the period from January 1, 2007 to April
11, 2007 (Predecessor basis). In connection with our audits of the consolidated
financial statements, we have also audited financial statement schedule II for
the period from January 29, 2007 (inception) through December
31, 2007 (Successor basis), and the period from January 1, 2007 to April 11, 2007
(Predecessor basis). These financial statements and schedule are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
We were not engaged to perform an audit of the Company’s internal control
over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects,
the consolidated results of VSS-Cambium Holdings, LLC’s operations and its cash flows for the period
from January 29, 2007 (inception) through December 31, 2007 (Successor basis), and the period from
January 1, 2007 to April 11, 2007 (Predecessor basis), in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
/s/ Ernst
& Young LLP
Boston, Massachusetts
September 3, 2008
Except for Notes 5 and 21,
relating to 2006 and 2007,
as to which the date is October 8, 2009
46
Cambium Learning Group, Inc. and Subsidiaries (Successor)
Cambium Learning, Inc. (Predecessor)
Consolidated Statements of Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Successor Period |
|
|
|
Predecessor |
|
| |
|
|
|
|
|
|
|
|
|
From January 29, |
|
|
|
Period From |
|
| |
|
For the Year |
|
|
For the Year |
|
|
2007 through |
|
|
|
January 1, 2007 |
|
| |
|
Ended December 31, |
|
|
Ended December 31, |
|
|
December 31, |
|
|
|
through April 11, |
|
| (In thousands, except per share data) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
2007 |
|
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
90,385 |
|
|
$ |
89,207 |
|
|
$ |
71,266 |
|
|
|
$ |
15,238 |
|
Service revenues |
|
|
10,663 |
|
|
|
10,524 |
|
|
|
9,581 |
|
|
|
|
3,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
|
101,048 |
|
|
|
99,731 |
|
|
|
80,847 |
|
|
|
|
18,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales |
|
|
19,591 |
|
|
|
20,246 |
|
|
|
19,749 |
|
|
|
|
3,896 |
|
Cost of service revenues |
|
|
7,257 |
|
|
|
7,463 |
|
|
|
6,312 |
|
|
|
|
1,908 |
|
Amortization expense |
|
|
17,527 |
|
|
|
15,966 |
|
|
|
11,719 |
|
|
|
|
3,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
44,375 |
|
|
|
43,675 |
|
|
|
37,780 |
|
|
|
|
9,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense |
|
|
5,611 |
|
|
|
6,416 |
|
|
|
5,247 |
|
|
|
|
1,737 |
|
Sales and marketing expense |
|
|
23,368 |
|
|
|
24,600 |
|
|
|
15,059 |
|
|
|
|
6,393 |
|
General and administrative expense |
|
|
30,519 |
|
|
|
16,156 |
|
|
|
11,142 |
|
|
|
|
13,676 |
|
Shipping costs |
|
|
1,512 |
|
|
|
2,348 |
|
|
|
2,739 |
|
|
|
|
445 |
|
Depreciation and amortization expense |
|
|
9,723 |
|
|
|
11,453 |
|
|
|
9,338 |
|
|
|
|
732 |
|
Acquired in-process research and development |
|
|
— |
|
|
|
— |
|
|
|
890 |
|
|
|
|
— |
|
Goodwill impairment |
|
|
9,105 |
|
|
|
75,966 |
|
|
|
— |
|
|
|
|
— |
|
Embezzlement and related expense |
|
|
129 |
|
|
|
7,254 |
|
|
|
5,732 |
|
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs
and expenses |
|
|
124,342 |
|
|
|
187,868 |
|
|
|
87,927 |
|
|
|
|
33,179 |
|
| |
Loss before interest, other income (expense)
and income taxes |
|
|
(23,294 |
) |
|
|
(88,137 |
) |
|
|
(7,080 |
) |
|
|
|
(14,765 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
10 |
|
|
|
86 |
|
|
|
144 |
|
|
|
|
24 |
|
Interest expense |
|
|
(19,487 |
) |
|
|
(18,520 |
) |
|
|
(13,276 |
) |
|
|
|
(766 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense) |
|
|
(19,477 |
) |
|
|
(18,434 |
) |
|
|
(13,132 |
) |
|
|
|
(742 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from settlement with previous stockholders |
|
|
— |
|
|
|
30,202 |
|
|
|
— |
|
|
|
|
— |
|
Loss on extinguishment of debt |
|
|
— |
|
|
|
(5,632 |
) |
|
|
— |
|
|
|
|
— |
|
Other income (expense), net |
|
|
(698 |
) |
|
|
(981 |
) |
|
|
(1,557 |
) |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(43,469 |
) |
|
|
(82,982 |
) |
|
|
(21,769 |
) |
|
|
|
(15,506 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
|
7,704 |
|
|
|
13,422 |
|
|
|
7,838 |
|
|
|
|
3,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(35,765 |
) |
|
$ |
(69,560 |
) |
|
$ |
(13,931 |
) |
|
|
$ |
(11,812 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per common share |
|
$ |
(1.63 |
) |
|
$ |
(3.39 |
) |
|
$ |
(0.68 |
) |
|
|
$ |
(4.34 |
) |
Diluted net loss per common share |
|
$ |
(1.63 |
) |
|
$ |
(3.39 |
) |
|
$ |
(0.68 |
) |
|
|
$ |
(4.34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares and equivalents outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
21,994 |
|
|
|
20,493 |
|
|
|
20,493 |
|
|
|
|
2,721 |
|
Diluted |
|
|
21,994 |
|
|
|
20,493 |
|
|
|
20,493 |
|
|
|
|
2,721 |
|
The accompanying Notes to the Consolidated Financial Statements are an integral part of these
statements.
47
Cambium Learning Group, Inc. and Subsidiaries (Successor)
Cambium Learning, Inc. (Predecessor)
Consolidated Balance Sheets
As of December 31, 2009 and December 31, 2008
| |
|
|
|
|
|
|
|
|
| (In thousands, except per share data) |
|
2009 |
|
|
2008 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
13,345 |
|
|
$ |
2,418 |
|
Accounts receivable, net |
|
|
19,127 |
|
|
|
10,550 |
|
Inventory |
|
|
19,812 |
|
|
|
12,850 |
|
Deferred tax assets |
|
|
6,267 |
|
|
|
4,618 |
|
Restricted assets, current |
|
|
9,755 |
|
|
|
— |
|
Other current assets |
|
|
6,010 |
|
|
|
1,181 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
74,316 |
|
|
|
31,617 |
|
|
|
|
|
|
|
|
|
|
Property, equipment and software at cost |
|
|
24,951 |
|
|
|
20,769 |
|
Accumulated depreciation and amortization |
|
|
(4,294 |
) |
|
|
(2,459 |
) |
|
|
|
|
|
|
|
Net property, equipment and software |
|
|
20,657 |
|
|
|
18,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
151,915 |
|
|
|
116,373 |
|
Acquired curriculum and technology intangibles, net |
|
|
44,695 |
|
|
|
3,847 |
|
Acquired publishing rights, net |
|
|
52,312 |
|
|
|
66,261 |
|
Other intangible assets, net |
|
|
28,133 |
|
|
|
28,488 |
|
Pre-publication costs, net |
|
|
5,464 |
|
|
|
3,838 |
|
Restricted assets, less current portion |
|
|
14,930 |
|
|
|
— |
|
Other assets |
|
|
1,419 |
|
|
|
1,743 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
393,841 |
|
|
$ |
270,477 |
|
|
|
|
|
|
|
|
The accompanying Notes to the Consolidated Financial Statements are an integral part of these
statements.
48
Cambium Learning Group, Inc. and Subsidiaries (Successor)
Cambium Learning, Inc. (Predecessor)
Consolidated Balance Sheets
As of December 31, 2009 and December 31, 2008
| |
|
|
|
|
|
|
|
|
| (In thousands, except per share data) |
|
2009 |
|
|
2008 |
|
LIABILITIES AND STOCKHOLDERS’/MEMBERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Notes payable — line of credit |
|
$ |
5,000 |
|
|
$ |
5,000 |
|
Current portion of long-term debt |
|
|
1,280 |
|
|
|
1,280 |
|
Current portion of capital lease obligations |
|
|
443 |
|
|
|
375 |
|
Accounts payable |
|
|
2,308 |
|
|
|
3,035 |
|
Contingent value rights, current |
|
|
3,950 |
|
|
|
— |
|
Accrued expenses |
|
|
23,920 |
|
|
|
5,190 |
|
Deferred revenue, current |
|
|
21,465 |
|
|
|
1,480 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
58,366 |
|
|
|
16,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities: |
|
|
|
|
|
|
|
|
Long-term debt, less current portion |
|
|
150,487 |
|
|
|
153,787 |
|
Capital lease obligations, less current portion |
|
|
12,695 |
|
|
|
12,960 |
|
Deferred revenue, less current portion |
|
|
2,716 |
|
|
|
430 |
|
Contingent value rights, less current portion |
|
|
5,649 |
|
|
|
— |
|
Other liabilities |
|
|
24,156 |
|
|
|
18,736 |
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
195,703 |
|
|
|
185,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (See Note 19) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ and members’ equity: |
|
|
|
|
|
|
|
|
Preferred stock ($.001 par value, 15,000 shares authorized,
zero shares issued and outstanding at December 31, 2009) |
|
|
— |
|
|
|
— |
|
Common stock ($.001 par value, 150,000 shares authorized,
43,859 shares issued and outstanding at
December 31, 2009) |
|
|
44 |
|
|
|
— |
|
Capital surplus |
|
|
258,789 |
|
|
|
— |
|
Members’ interest |
|
|
— |
|
|
|
151,707 |
|
Accumulated deficit |
|
|
(119,268 |
) |
|
|
(83,503 |
) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Pension and postretirement plans |
|
|
206 |
|
|
|
— |
|
Net unrealized gain on securities |
|
|
1 |
|
|
|
— |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
|
207 |
|
|
|
— |
|
|
|
|
|
|
|
|
Total stockholders’ and members’ equity |
|
|
139,772 |
|
|
|
68,204 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders’/members’ equity |
|
$ |
393,841 |
|
|
$ |
270,477 |
|
|
|
|
|
|
|
|
The accompanying Notes to the Consolidated Financial Statements are an integral part of these
statements.
49
Cambium Learning Group, Inc. and Subsidiaries (Successor)
Cambium Learning, Inc. (Predecessor)
Consolidated Statements of Cash Flows
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Successor Period |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
from January |
|
|
|
Predecessor |
|
| |
|
|
|
|
|
|
|
|
|
29, 2007 |
|
|
|
Period from |
|
| |
|
Year Ended |
|
|
Year Ended |
|
|
(Inception) |
|
|
|
January 1, 2007 |
|
| |
|
December 31, |
|
|
December 31, |
|
|
through December 31, |
|
|
|
through April 11, |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
2007 |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(35,765 |
) |
|
$ |
(69,560 |
) |
|
$ |
(13,931 |
) |
|
|
$ |
(11,812 |
) |
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
|
27,250 |
|
|
|
27,419 |
|
|
|
21,057 |
|
|
|
|
4,123 |
|
Acquired in-process research and development |
|
|
— |
|
|
|
— |
|
|
|
890 |
|
|
|
|
— |
|
Inventory step-up |
|
|
|
|
|
|
— |
|
|
|
2,931 |
|
|
|
|
— |
|
Goodwill impairment |
|
|
9,105 |
|
|
|
75,966 |
|
|
|
— |
|
|
|
|
— |
|
Gain from settlement with previous stockholders |
|
|
— |
|
|
|
(30,202 |
) |
|
|
— |
|
|
|
|
— |
|
Gain from recovery of property held for sale |
|
|
— |
|
|
|
(1,578 |
) |
|
|
— |
|
|
|
|
— |
|
Loss on extinguishment of debt — unamortized debt issuance costs |
|
|
— |
|
|
|
4,594 |
|
|
|
— |
|
|
|
|
— |
|
Non-cash interest expense |
|
|
2,309 |
|
|
|
1,701 |
|
|
|
642 |
|
|
|
|
— |
|
Amortization of deferred financing costs |
|
|
— |
|
|
|
604 |
|
|
|
679 |
|
|
|
|
— |
|
Loss (gain) on derivative instruments |
|
|
(1,390 |
) |
|
|
848 |
|
|
|
1,534 |
|
|
|
|
— |
|
Loss on disposal of assets |
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
Stock-based compensation — employee awards |
|
|
37 |
|
|
|
(618 |
) |
|
|
— |
|
|
|
|
(69 |
) |
Stock-based compensation — subscription rights |
|
|
2,222 |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
Deferred income taxes |
|
|
(7,975 |
) |
|
|
(13,526 |
) |
|
|
(8,365 |
) |
|
|
|
(4,553 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
2,306 |
|
|
|
(1,041 |
) |
|
|
306 |
|
|
|
|
(769 |
) |
Inventory |
|
|
4,725 |
|
|
|
(3,152 |
) |
|
|
(867 |
) |
|
|
|
(499 |
) |
Other current assets |
|
|
3,022 |
|
|
|
(355 |
) |
|
|
488 |
|
|
|
|
1,732 |
|
Other assets |
|
|
1,579 |
|
|
|
(15 |
) |
|
|
724 |
|
|
|
|
40 |
|
Restricted assets |
|
|
(7,948 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
Accounts payable |
|
|
(1,812 |
) |
|
|
(2,941 |
) |
|
|
(1,183 |
) |
|
|
|
3,856 |
|
Accrued expenses |
|
|
4,980 |
|
|
|
(2,651 |
) |
|
|
(8,162 |
) |
|
|
|
4,049 |
|
Deferred revenue |
|
|
497 |
|
|
|
480 |
|
|
|
861 |
|
|
|
|
154 |
|
Other long-term liabilities |
|
|
(1,115 |
) |
|
|
172 |
|
|
|
(369 |
) |
|
|
|
(4 |
) |
Other, net |
|
|
(95 |
) |
|
|
— |
|
|
|
(469 |
) |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
1,934 |
|
|
|
(13,855 |
) |
|
|
(3,234 |
) |
|
|
|
(3,732 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions, net of cash acquired |
|
|
(9,697 |
) |
|
|
(112 |
) |
|
|
(303,236 |
) |
|
|
|
— |
|
Expenditures for property, equipment, and pre-publication costs |
|
|
(3,395 |
) |
|
|
(3,201 |
) |
|
|
(3,370 |
) |
|
|
|
(1,100 |
) |
Settlement proceeds from previous stockholders |
|
|
— |
|
|
|
30,202 |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(13,092 |
) |
|
|
26,889 |
|
|
|
(306,606 |
) |
|
|
|
(1,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt |
|
|
— |
|
|
|
— |
|
|
|
172,105 |
|
|
|
|
— |
|
Repayment of debt |
|
|
(5,585 |
) |
|
|
(24,280 |
) |
|
|
(960 |
) |
|
|
|
— |
|
Principal payments under capital lease obligations |
|
|
(289 |
) |
|
|
(226 |
) |
|
|
(195 |
) |
|
|
|
(26 |
) |
Borrowings under revolving credit agreement |
|
|
10,000 |
|
|
|
5,000 |
|
|
|
4,500 |
|
|
|
|
3,600 |
|
Payment of revolving credit facility |
|
|
(10,000 |
) |
|
|
— |
|
|
|
(4,500 |
) |
|
|
|
— |
|
Proceeds from capital contributions |
|
|
2,959 |
|
|
|
684 |
|
|
|
140,108 |
|
|
|
|
— |
|
Proceeds from issuance of common stock in connection with the merger |
|
|
25,000 |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
Borrowings from affiliates |
|
|
— |
|
|
|
7,000 |
|
|
|
— |
|
|
|
|
— |
|
Distribution to members |
|
|
— |
|
|
|
— |
|
|
|
(12 |
) |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
22,085 |
|
|
|
(11,822 |
) |
|
|
311,046 |
|
|
|
|
3,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
10,927 |
|
|
|
1,212 |
|
|
|
1,206 |
|
|
|
|
(1,258 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year |
|
|
2,418 |
|
|
|
1,206 |
|
|
|
— |
|
|
|
|
1,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
13,345 |
|
|
$ |
2,418 |
|
|
$ |
1,206 |
|
|
|
$ |
384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid (refunded) |
|
$ |
(3,080 |
) |
|
$ |
742 |
|
|
$ |
(337 |
) |
|
|
$ |
278 |
|
Interest paid |
|
|
16,936 |
|
|
|
16,215 |
|
|
|
11,983 |
|
|
|
|
799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash acquisition costs paid |
|
|
86,546 |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
Rollover in capital contribution |
|
|
— |
|
|
|
— |
|
|
|
3,915 |
|
|
|
|
— |
|
Conversion of unsecured notes payable — affiliates |
|
|
— |
|
|
|
7,000 |
|
|
|
— |
|
|
|
|
— |
|
Assets received in settlement — property held for sale |
|
|
— |
|
|
|
1,578 |
|
|
|
— |
|
|
|
|
— |
|
The accompanying Notes to the Consolidated Financial Statements are an integral part of these
statements.
50
Cambium Learning Group, Inc. and Subsidiaries (Successor)
Cambium Learning, Inc. (Predecessor)
Consolidated Statements of Stockholders’ and Members’ Equity and Comprehensive Income (Loss)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Series A Convertible |
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
| |
|
Preferred Stock |
|
|
Common Stock |
|
|
Paid in |
|
|
Accumulated |
|
|
|
|
| (in thousands) |
|
Shares |
|
|
Value |
|
|
Shares |
|
|
Par Value |
|
|
Capital |
|
|
Deficit |
|
|
Total |
|
Predecessor Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
84,700 |
|
|
$ |
84,655 |
|
|
|
2,721 |
|
|
$ |
27 |
|
|
$ |
6,895 |
|
|
$ |
(12,682 |
) |
|
$ |
78,895 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(69 |
) |
|
|
— |
|
|
|
(69 |
) |
Conversion of preferred stock to common stock |
|
|
(84,700 |
) |
|
|
(84,655 |
) |
|
|
84,700 |
|
|
|
85 |
|
|
|
84,570 |
|
|
|
— |
|
|
|
— |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(11,812 |
) |
|
|
(11,812 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 11, 2007 |
|
|
— |
|
|
$ |
— |
|
|
|
87,421 |
|
|
$ |
112 |
|
|
$ |
91,396 |
|
|
$ |
(24,494 |
) |
|
$ |
67,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Accumulated Other |
|
|
|
|
|
|
|
| |
|
Common Stock |
|
|
Paid in |
|
|
Members’ |
|
|
Comprehensive |
|
|
Accumulated |
|
|
|
|
| (Dollars and shares in thousands) |
|
Shares |
|
|
Par Value |
|
|
Capital |
|
|
Interest |
|
|
Income |
|
|
Deficit |
|
|
Total |
|
Successor Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 29, 2007 (inception): |
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution by members |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
144,023 |
|
|
|
— |
|
|
|
— |
|
|
|
144,023 |
|
Distribution to members |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(12 |
) |
|
|
(12 |
) |
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(13,931 |
) |
|
|
(13,931 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
144,023 |
|
|
|
— |
|
|
|
(13,943 |
) |
|
|
130,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution by members |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,684 |
|
|
|
— |
|
|
|
— |
|
|
|
7,684 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(69,560 |
) |
|
|
(69,560 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
151,707 |
|
|
|
— |
|
|
|
(83,503 |
) |
|
|
68,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution by members |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,959 |
|
|
|
— |
|
|
|
— |
|
|
|
2,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of members’ interests to common shares in
connection with the merger (a) |
|
|
20,493 |
|
|
|
20 |
|
|
|
154,646 |
|
|
|
(154,666 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to members in exchange for a
$25 million capital contribution in connection
with the merger |
|
|
3,846 |
|
|
|
4 |
|
|
|
24,996 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25,000 |
|
Issuance of common stock to Voyager stockholders in
connection with the merger |
|
|
19,520 |
|
|
|
20 |
|
|
|
76,888 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
76,908 |
|
Issuance of subscription rights in connection with
the merger |
|
|
— |
|
|
|
— |
|
|
|
2,222 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,222 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
37 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(35,765 |
) |
|
|
(35,765 |
) |
Pension plan |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
206 |
|
|
|
— |
|
|
|
206 |
|
Unrealized gain on securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,558 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
43,859 |
|
|
$ |
44 |
|
|
$ |
258,789 |
|
|
$ |
— |
|
|
$ |
207 |
|
|
$ |
(119,268 |
) |
|
$ |
139,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (a) |
|
As the previous members are also majority stockholders in Cambium Learning Group, Inc., the
common shares issued on December 8, 2009 in connection with the merger will be considered
outstanding for all successor periods presented for purposes of calculating earnings per share. |
The accompanying Notes to the Consolidated Financial Statements are an integral part of these
statements.
51
Cambium Learning Group, Inc. and Subsidiaries (Successor)
Cambium Learning, Inc. (Predecessor)
Notes to the Consolidated Financial Statements
Note 1 — Basis of Presentation
Cambium
Learning Group, Inc. (Successor). Cambium Learning Group, Inc. (the “Company”) was
incorporated under the laws of the State of Delaware in June 2009. On December 8, 2009, the
Company completed the mergers of Voyager Learning Company (“VLCY”) and VSS-Cambium Holdings II
Corp. (“Cambium”) into two of our wholly-owned subsidiaries, resulting in VLCY and Cambium
becoming wholly-owned subsidiaries. Following the completion of the mergers, all of the
outstanding capital stock of VLCY’s operating subsidiaries, Voyager Expanded Learning, Inc. and
LAZEL, Inc., were transferred to Cambium Learning, Inc., Cambium’s operating subsidiary (“Cambium
Learning”).
The results of VLCY are included in the Company’s operations beginning with the December 8,
2009 merger date; therefore the 2009 financials include VLCY for the last 23 days of the year and
the results of the Company for the full year. The transaction was accounted for as an
“acquisition” of VLCY by Cambium, as that term is used under U.S. GAAP, for accounting and
financial reporting purposes under the applicable accounting guidance for business combinations.
In making this determination, management considered that (a) the newly developed entity did not
have any significant pre-combination activity and, therefore, did not qualify to be the
accounting acquirer and (b) the former sole stockholder of Cambium is the majority holder of the
combined entity, while the prior owners of VLCY became minority holders in the combined entity.
As a result, the historical financial statements of Cambium have become the historical financial
statements of the Company.
Cambium Learning, Inc. (Predecessor). VSS-Cambium Holdings, LLC was formed on
January 29, 2007. VSS-Cambium Holdings, LLC was formed to enter into a stock purchase agreement,
dated as of January 29, 2007, by and among Cambium Learning, the former stockholders of Cambium
Learning and VSS-Cambium Holdings, LLC, and to acquire all of the capital stock of Cambium
Learning. On February 7, 2007, VSS-Cambium Management, LLC was formed. VSS-Cambium Management,
LLC was formed for the purpose of providing selected key employees of Cambium Learning with an
equity participation in the future appreciation in the value of Cambium Learning. VSS-Cambium
Management, LLC is a member of VSS-Cambium Holdings, LLC and holds an equity interest in
VSS-Cambium Holdings, LLC. On April 12, 2007, VSS-Cambium Holdings, LLC acquired 100% of the
capital stock of Cambium Learning. The operating results of VSS-Cambium Holdings, LLC include
Cambium Learning’s operating results from the acquisition date.
In accordance with the requirements of purchase accounting, the assets and liabilities of
Cambium Learning were adjusted to their estimated fair values and the resulting goodwill computed
as of the acquisition date. Accordingly, and because of other effects of purchase accounting, the
accompanying consolidated financial statements as of and for the period prior to the VSS-Cambium
Holdings, LLC acquisition are not comparable. Therefore, the consolidated financial statements
present the Company as of December 31, 2007 (Successor basis reflecting activity of the Company
from January 29, 2007 and including the results of Cambium Learning from April 12, 2007) and the
period January 1, 2007 through April 11, 2007 (Predecessor basis for the period prior to the
Company’s acquiring Cambium Learning).
Fiscal Year. The consolidated financial statements present the Company as of a
calendar year ending on December 31.
Nature of Operations. The Company currently operates in three business segments:
Voyager, a comprehensive intervention business; Sopris, a supplemental solutions business; and
Cambium Learning Technologies, a technology based education product business. Prior to the
merger transaction completed on December 8, 2009, the Company had two reportable segments:
Published Products and Learning Technologies.
The reading programs in the Voyager business unit consist of: Voyager Passport; Voyager
Universal Literacy System; Ticket to Read; Passport Reading Journeys; TimeWarp Plus; Voyager
Pasaporte; LANGUAGE!; Read Well and We Can!. The math programs in the Voyager business unit
consist of: Vmath; Vmath Summer Adventure; TransMath; Algebra Rescue
and Voyages. The Voyager business unit also includes
professional development programs.
The Sopris business unit comprises products making up the supplemental solutions business.
Sopris’ primary products consist of Step Up to Writing, Rewards, Dynamic Indicators of Basic
Early Literacy Skills (DIBELS/IDEL), Language Essentials for Teachers of Reading and Spelling
(LETRS), The Six Minute Solution, and Algebra Ready.
52
Cambium Learning Technologies offers products under four different brands. Learning A-Z is
a group of related websites known as Reading A-Z, Raz-Kids, Reading-Tutors, Vocabulary A-Z and
Writing A-Z, which provide online
supplemental reading, writing and vocabulary lessons, books, and other resources for
students and teachers. Science A-Z, a Learning A-Z website, is aimed at the supplemental
science market. ExploreLearning is a subscription-based online library of interactive
simulations in math and science for grades 3-12. ExploreLearning supplies online simulations in
math and science. Kurzweil Educational Systems is a program that primarily targets students in
middle school through higher education struggling with reading and writing, specifically those
students with ADHD, dyslexia and visual impairments. IntelliTools offers hardware products that
target students with physical, visual and cognitive disabilities that make using a standard
keyboard and mouse difficult. IntelliTools also offers software products that target elementary
and middle school special education students struggling with reading and math.
Reclassifications. Certain reclassifications to the Consolidated Financial
Statements for all prior periods presented have been made to conform to the 2009 presentation.
Such reclassifications include the following adjustments from the Statements of Operations
presented in previous reports: (1) amortization expense related to
tradenames and trademarks has been re-allocated from cost of sales and included as a component of the
line item depreciation and amortization expense (See Note 2); (2) research and development expense, previously
included with cost of sales, is now a separate line item within
operating expenses; and (3)
previously reported selling, general and administrative expense is now presented as four separate
line items including sales and marketing expense, general and administrative expense, shipping
costs, and depreciation and amortization expense.
Segments. Prior to the merger transaction completed on December 8, 2009, the Company had
two reportable segments: Published Products and Learning Technologies. Subsequent to the merger
transaction, the Company operates as three reportable segments with separate management teams and
infrastructures that offer various products and services: Voyager, our comprehensive intervention
business; Sopris, our supplemental solutions business; and Cambium Learning Technologies, our
technology based education product business. The Company’s historical segment reporting results
have been re-allocated for comparative purposes to reflect the current organizational structure.
These reclassifications required certain assumptions and estimates. See Note 21 to the financial
statements for further information on the Company’s reportable segments.
Note 2 — Significant Accounting Policies
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management 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 financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Subsequent actual results may differ from
those estimates.
Principles of Consolidation. The Successor consolidated financial statements of the
Company include the accounts of the Company and its wholly owned
subsidiaries: Voyager Learning
Company, Voyager Expanded Learning, Inc., LAZEL, Inc., Cambium Learning, Inc., Cambium Learning
(New York), Inc., Sopris West Educational Services, Inc., Kurzweil Educational Systems, Inc., and
IntelliTools, Inc. All inter-company accounts and transactions are eliminated in consolidation.
The Predecessor consolidated financial statements for the period from January 1, 2007
through April 11, 2007 include the accounts of Cambium Learning and its wholly owned
subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.
Revenue Recognition. Revenues are derived from sales of reading, math and science,
and professional development solutions to school districts primarily
in the United States. Sales include
printed materials and often online access to educational materials for individual students,
teachers, and classrooms. Revenue from the sale of printed materials for reading and math
products is recognized when the product is shipped to or received by the customer based on
shipping terms. Revenue for product support, training and implementation services, and online
subscriptions is recognized over the period services are delivered. Revenue for our professional
development courses, which include an Internet delivery component, is recognized over the
contractual delivery period, typically nine to twelve months. ExploreLearning and Learning A-Z
derive revenue exclusively from sales of online subscriptions to their reading, math and science
teaching websites. Typically, the subscriptions are for a twelve-month period and the revenue is
recognized ratably over the period the online access is available to the customer.
The division of revenue between shipped materials, online materials, and ongoing support and
services is determined in accordance with applicable accounting guidance for revenue arrangements
with multiple deliverables. Revenue for the online content sold separately or included with
certain curriculum materials is recognized ratably over the subscription period, typically a
school year.
53
Revenues related to maintenance and support are recognized on a straight-line basis over the
period that maintenance and support are provided. In certain instances, telephone support and
software repairs are provided for free within the first year of licensing the software. The cost
of providing this service is insignificant, and is accrued at the time of revenue recognition.
Maintenance and support services include telephone support, bug fixes, and for certain products,
rights to upgrades and enhancements on a when-and-if available basis. Revenues under
multiple-element software license arrangements, which may include several different software
products and services sold together, including training and maintenance and support, is allocated
to each element based on the residual method in accordance with accounting guidance for software
revenue recognition.
The Company enters into agreements to license certain book publishing rights and content.
Revenue from these agreements is recognized when the license amount is fixed and determinable,
collection is reasonably assured, and the license period has commenced. For those license
agreements that require us to deliver additional materials as part of the license agreement, the
revenue is recognized when the product is received by the customer. Shipments to school book depositories are on consignment and revenue is recognized
based on shipments from the depositories to the schools.
Accounts Receivable. Accounts receivable are stated net of allowances for doubtful
accounts and estimated sales returns. The allowance for doubtful accounts and estimated sales
returns totaled $0.3 million and $0.7 million at year end 2009 and 2008, respectively. The
allowance for doubtful accounts is based on a review of the outstanding balances and historical
collection experience. The reserve for sales returns is based on historical rates of returns as
well as other factors that in our judgment could reasonably be expected to cause sales returns to
differ from historical experience.
Net Earnings (Loss) per Common Share. Basic net earnings (loss) per common share is
computed by dividing net earnings (loss) by the weighted average number of common shares
outstanding during the period. Diluted net earnings (loss) per common share is computed by
dividing net earnings (loss) by the weighted average number of common shares outstanding during
the period, including the potential dilution that could occur if all of our outstanding stock
awards that are in-the-money were exercised, using the treasury stock method. A reconciliation of
the weighted average number of common shares and equivalents outstanding used in the calculation
of basic and diluted net earnings per common share are shown in the table below for the periods
indicated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Successor Period |
|
|
|
Predecessor Period |
|
| |
|
|
|
|
|
|
|
|
|
From January 29, |
|
|
|
From January 1, |
|
| |
|
For the Year Ended |
|
|
For the Year Ended |
|
|
2007 through |
|
|
|
2007 through |
|
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
April 11, |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
21,994 |
|
|
|
20,493 |
|
|
|
20,493 |
|
|
|
|
2,721 |
|
Dilutive effect of awards |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
21,994 |
|
|
|
20,493 |
|
|
|
20,493 |
|
|
|
|
2,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following were not included in the computation of diluted net income per share
because their effect would have been antidilutive: options to purchase shares of 2.3 million,
zero, zero, and 5.9 million for the year ended December 31, 2009, the year ended December 31,
2008, for the period from January 29, 2007 to December 31, 2007 and for the period from January
1, 2007 to April 11, 2007, respectively; subscription rights to purchase shares of 4.7 million
for the year ended December 31, 2009; and a warrant to purchase shares of 0.1 million for the
year ended December 31, 2009.
As the previous members of VSS-Cambium Holdings, LLC are also majority stockholders in
Cambium Learning Group, Inc., 20.5 million of common shares issued on December 8, 2009 in
connection with the merger will be considered outstanding for the periods from January 1, 2009 to
the merger date, the year ended December 31, 2008 and the period from January 29, 2007 to
December 31, 2007. The 20.5 million shares reflect the number of shares issued to the sole
stockholder of Cambium at the merger date in consideration of its pre-merger equity interest.
The weighted-average shares outstanding for the year ended December 31, 2009 includes an
additional 3.8 million shares issued to the sole stockholder in exchange for a $25 million
contribution made at the time of the merger and 19.5 million shares issued to VLCY stockholders,
as well as 0.4 million shares related to a warrant issued to the sole stockholder for which all
contingencies have been resolved and that requires little consideration to exercise.
Cash and Cash Equivalents. The Company considers all highly liquid investments with
maturities of three months or less (when purchased) to be cash equivalents. The carrying amount
reported in the Consolidated Balance Sheets approximates fair value.
Inventory. Inventory is stated at the lower of cost, determined using the first-in,
first-out (FIFO) method, or market, and consists of finished goods. The Company
reduces slow-moving or obsolete inventory to net realizable value.
54
Restricted Assets. Restricted assets consist of funds placed in a rabbi trust
pursuant to the merger agreement for the purpose of funding certain obligations acquired in
the VLCY merger, mostly deferred compensation, pension, and severance obligations, and an escrow
of funds subject to the Contingent Value Rights (“CVRs”) described in Note 4.
Property and Equipment. Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed over the assets’ estimated useful lives
using the straight-line method. Estimated lives are as follows.
| |
|
|
| |
|
Estimated Useful Life |
| |
|
|
Building
|
|
35 years |
Land improvements
|
|
19 years |
Machinery and equipment
|
|
8 – 15 years |
Furniture and fixtures
|
|
8 years |
Computer equipment and software
|
|
2 – 5 years |
Leasehold improvements
|
|
Lesser of useful life or lease term |
Expenditures for maintenance and repairs, as well as minor renewals, are charged to
operations as incurred, while improvements and major renewals are capitalized.
Purchased and Developed Software. Purchased and developed software includes the
costs to purchase third party software and to develop internal-use software. The Company follows
applicable guidance for the costs of computer software developed or obtained for internal use for
capitalizing software projects. Software costs are amortized over the expected economic life of
the product, generally three to five years. At December 31, 2009 and 2008, unamortized
capitalized software was $3.4 million and $1.8 million, respectively, which included amounts of
software under development of $0.6 million and $0.1 million, respectively.
Acquired Curriculum and Technology. Acquired curriculum and technology represents
curriculum and developed technology acquired in the acquisitions of VLCY in 2009, certain assets
of Tobii Assistive Technology, Inc. in 2008 and Cambium Learning in 2007 and is the initial
purchase accounting value placed on the past development and refinement of the core
methodologies, processes, measurement techniques, and technologies by which the Company structures
curriculum. Acquired curriculum and technology is being amortized using an accelerated method
over six to seven years, as it has an economic benefit declining over the estimated useful life. Acquired
curriculum and technology is presented net of accumulated amortization of $4.3 million and $2.5
million as of yearend 2009 and 2008, respectively.
Acquired Publishing Rights. A publishing right allows the Company to publish and
republish existing and future works, as well as transform, adapt, or create new works based on
previously published materials. The Company determines the fair market value of the publishing
rights arising from business combinations by discounting the after-tax cash flows projected to be
derived from the publishing rights and titles to their net present value using a rate of return
that accounts for the time value of money and the appropriate degree of risk. The useful life of
the publishing rights is based on the lives of the various titles involved, which is generally
ten years. The Company calculates amortization using either the straight-line method or the
percentage of the projected discounted cash flows derived from the titles in the current year as
a percentage of the total estimated discounted cash flows over the remaining useful life. The
Company periodically reviews the recoverability of the publishing rights based on expected net
realizable value, and generally retire the assets once fully depreciated. Acquired publishing
rights are presented net of accumulated amortization of $38.0 million and $24.0 million as of
yearend 2009 and 2008, respectively.
Pre-Publication Costs. The Company capitalizes certain pre-publication costs of its
curriculum including art, prepress, editorial, and other costs incurred in the creation of the
master copy of its curriculum products. Pre-publication costs are amortized over the expected
life of the education program, generally on accelerated basis over a period of five years. The
amortization methods and periods chosen reflect the expected sales generated by of the education
programs. The Company periodically reviews the recoverability of the capitalized costs based on
expected net realizable value, and generally retires the assets once fully depreciated.
Pre-publication costs are presented net of accumulated amortization of $2.9 million and $1.2
million as of yearend 2009 and 2008, respectively.
Goodwill and Other Intangible Assets. Goodwill and other intangible assets are
related to the acquisitions of VLCY in 2009, certain assets of Tobii Assistive Technology, Inc.
in 2008 and Cambium Learning in 2007. Other intangible assets include tradenames/trademarks,
reseller networks, customer relationships/lists, and conference attendee relationships, which are
being amortized on a straight-line basis over estimated lives ranging from six to sixteen years,
and non-compete agreements and contracts, which are being amortized on a straight-line basis over
their contractual lives of three to four years. Other intangible assets are presented net of
accumulated amortization of $26.2 million and $18.3 million as of year end 2009 and 2008,
respectively.
55
See Note 8 herein for further discussion of our review of goodwill and the related
impairment charges recognized in the years ended December 31, 2009 and December 31, 2008.
Depreciation and Amortization. Depreciation and amortization for the year ended
December 31, 2009, for the year ended December 31, 2008, for the period from January 29, 2007 to
December 31, 2007 and for the period from January 1, 2007 to April 11, 2007 was broken out as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
For the Period From |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
January 31, 2007 |
|
|
For the Period From |
|
| |
|
For the Year Ended |
|
|
For the Year Ended |
|
|
through |
|
|
January 1, 2007 through |
|
| (in thousands) |
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
|
April 11, 2007 |
|
Acquired publishing rights |
|
$ |
13,949 |
|
|
$ |
13,566 |
|
|
$ |
10,473 |
|
|
$ |
2,283 |
|
Acquired curriculum and technology |
|
|
1,852 |
|
|
|
1,328 |
|
|
|
1,146 |
|
|
|
621 |
|
Pre-publication costs |
|
|
1,707 |
|
|
|
1,072 |
|
|
|
100 |
|
|
|
488 |
|
Internally developed software related to product |
|
|
19 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization included in cost of sales |
|
|
17,527 |
|
|
|
15,966 |
|
|
|
11,719 |
|
|
|
3,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames and trademarks |
|
|
1,349 |
|
|
|
1,330 |
|
|
|
1,130 |
|
|
|
120 |
|
Other intangible assets |
|
|
6,555 |
|
|
|
8,650 |
|
|
|
7,222 |
|
|
|
311 |
|
Property, equipment and software |
|
|
1,819 |
|
|
|
1,473 |
|
|
|
986 |
|
|
|
301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
included in operating expenses |
|
|
9,723 |
|
|
|
11,453 |
|
|
|
9,338 |
|
|
|
732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization |
|
$ |
27,250 |
|
|
$ |
27,419 |
|
|
$ |
21,057 |
|
|
$ |
4,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of Long Lived Assets. The Company reviews the carrying value of long
lived assets for impairment whenever events or changes in circumstances indicate net book value
may not be recoverable from the estimated undiscounted future cash flows. If the review indicates
any assets are impaired, the impairment of those assets is measured as the amount by which the
carrying amount exceeds the fair value as estimated by either quoted market prices or discounted
cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair
value less cost of disposal. The determination whether our definite-lived intangible assets are
impaired involves significant assumptions and estimates, including projections of future cash
flows, the percentage of future revenues and cash flows attributable to the intangible assets,
asset lives used to generate future cash flows, and royalty relief savings attributable to
trademarks. For the year ended December 31, 2009, the year ended December 31, 2008, for the
period from January 29, 2007 to December 21, 2007 and for the period from January 1, 2007 to
April 11, 2007, no impairment was indicated.
Deferred Costs. Certain up-front costs associated with completing the sale of the
Company’s products are deferred and recognized as the related revenue is recognized.
Advertising Costs. The Company, from time to time, ships products to prospective
customers as samples. Samples costs are expensed to sales and marketing expense upon shipment and
totaled $1.5 million, $1.6 million, $1.0 million and $0.3 million for the year ended December 31,
2009, the year ended December 31, 2008, for the period from January 29, 2007 to December 21, 2007
and for the period from January 1, 2007 to April 11, 2007, respectively. Other costs of
advertising, which include advertising, print, and photography expenses, are expensed as incurred
and totaled $2.9 million, $4.5 million, $2.5 million and $2.4 million for the year ended December
31, 2009, the year ended December 31, 2008, for the period from January 29, 2007 to December 21,
2007 and for the period from January 1, 2007 to April 11, 2007, respectively. The Company
recognizes catalog expense when the catalog is mailed to potential customers. The cost to print
the catalog is recorded in prepaid expenses on the Consolidated Balance Sheet until such time
that the catalog is mailed.
Income Taxes. Provision is made for the expense, or benefit, associated with taxes
based on income. The provision for income taxes is based on laws currently enacted in every
jurisdiction in which the Company does business and considers laws mitigating the taxation of the
same income by more than one jurisdiction. Significant judgment is required in determining income
tax expense, current tax receivables and payables, deferred tax assets and liabilities, and
valuation allowance recorded against the net deferred tax assets. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income, taxable income
in prior carryback years, loss carryforward limitations, and tax planning strategies in assessing
whether deferred tax assets will be realized in future periods. If, after consideration of these
factors, management believes it is more likely than not that a portion of the deferred tax assets
will not be realized, a valuation allowance is established. The amount of the deferred tax asset
considered realizable could be reduced if estimates of future taxable income during the
carryforward period are reduced.
56
The Company recognizes liabilities for uncertain tax positions based on a two-step process.
The first step is to evaluate the tax position for recognition by determining if available
evidence indicates that it is more likely than not that the position will be sustained on audit.
The second step requires the Company to estimate and measure the tax benefit as the largest
amount that is more than 50% likely to be realized upon ultimate settlement. The Company
reevaluates its uncertain tax positions on a periodic basis, based on factors such as changes in
facts and circumstances, changes in tax law, effectively settled issues under audit and new audit
activity. The Company accrues interest and penalties, if any, related to unrecognized tax
benefits as a component of income tax expense.
Royalty Advances. Royalty advances to authors are capitalized and represent amounts
paid in advance of the sale of an author’s product. These costs
are then expensed as the related
publication is sold. The Company evaluates advances periodically to determine if they are
expected to be utilized and reserves any portion of a royalty advance that is not expected to be
recovered.
Sales Taxes. The Company reports sales taxes collected from customers and remitted
to governmental authorities on a net basis. Sales tax collected from customers is excluded from
revenues. Collected but unremitted sales tax is included as part of accrued expenses in the
accompanying consolidated balance sheets.
Derivative
Instruments and Hedging Activities. The Company uses an interest rate
derivative instrument to hedge its exposure to interest rate
volatility resulting from its senior credit facility. Accounting guidance for derivatives and hedging requires that all derivative
instruments be reported on the balance sheet at fair value, and establishes criteria for
designation and effectiveness of hedging relationships, including a requirement that all
designations must be made at the inception of each instrument. As such initial designations were
not made by the Company at inception, changes in the fair value of the derivative instrument are
required to be recognized in the current period Statement of Operations as other income or
expense.
Derivative financial instruments involve, to a varying degree, elements of market and credit
risk not recognized in the consolidated financial statements. The market risk associated with
these instruments resulting from interest rate movements is expected to offset the market risk of
the underlying transactions, assets and liabilities being hedged. The counterparty to the
agreement relating to the Company’s interest rate instrument is a major financial
institution. The Company does not believe that there is significant risk of nonperformance by
this counterparty. While the contract or notional amounts of the derivative financial instrument
provide one measure of the volume of these transactions, they do not represent the amount of the
Company’s exposure to credit risk. The amounts potentially subject to credit risk (arising from
the possible inability of counterparties to meet the terms of their contracts) are generally
limited to the amounts, if any, by which the counterparties’ obligations under the contracts
exceed the obligations of the Company to the counterparties. The Company does not hold or use any
derivative financial instruments for trading purposes.
The fair value of the interest rate swap is obtained from a third-party quote. This value
represents the estimated amount the Company would receive or pay to terminate the agreement
taking into consideration current interest rates.
Stock-Based Compensation. The Company accounts for its stock based compensation in
accordance with applicable accounting guidance for share based payments. This guidance requires
all share-based payments to be recognized in the income statement based on their fair values.
Compensation costs for awards with graded vesting are recognized on a straight-line basis over
the anticipated vesting period.
Recently Issued Financial Accounting Standards.
In
December 2007, the Financial Accounting Standards Board, or FASB, issued new accounting guidance on business combinations.
This guidance establishes principles and requirements for how an acquirer accounts for business
combinations. This issuance includes guidance for the recognition and measurement of the
identifiable assets acquired, the liabilities assumed, and any noncontrolling or minority
interest in the acquiree. It also provides guidance for the measurement of goodwill, the
recognition of contingent consideration, the accounting for pre-acquisition gain and loss
contingencies and acquisition- related transaction costs, and the recognition of changes in the acquirer’s income tax
valuation allowance. This accounting guidance applies prospectively and is effective for business
combinations made by the Company beginning January 1, 2009. The provisions are effective as of
the Company’s first quarter ended March 31, 2009. The Company followed this guidance in
accounting for the VLCY acquisition described in Note 4.
In April 2008, the FASB issued new accounting guidance on the determination of the
useful life of intangible assets. The new guidance amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under previous guidance for goodwill and other intangible assets. This issuance
is effective for fiscal years beginning after December 15, 2008. The provisions are effective as
of the Company’s first quarter ended March 31, 2009. The Company followed this guidance in
determining the useful lives of the intangibles recognized as a result of the VLCY acquisition
described in Note 4.
57
In April 2009, the FASB issued new accounting guidance on interim disclosures about
fair value of financial instruments, which amends previous guidance on disclosures about fair
value of financial instruments to require disclosure about fair value of financial instruments in
interim financial statements. This new guidance is effective for interim and annual periods
ending after June 15, 2009. The provisions were effective as of the Company’s second quarter
ended June 30, 2009. The Company will make these interim disclosures as appropriate.
In October 2009, new guidance was issued regarding multiple-deliverable revenue arrangements
and certain arrangements that include software elements. This guidance requires entities to
allocate revenue in an arrangement using estimated selling prices of the delivered goods and
services based on a selling price hierarchy. The guidance eliminates the residual method of
revenue allocation and requires revenue to be allocated using the relative selling price method.
It also removes tangible products from the scope of software revenue guidance and provides
guidance on determining whether software deliverables in an arrangement that includes a tangible
product are covered by the scope of the software revenue guidance. This guidance will be applied
on a prospective basis for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010 with early adoption permitted. The Company is currently
evaluating the impact of this standard on its consolidated financial condition, results of
operations and cash flows.
Note 3 — Embezzlement
On April 26, 2008, the Company began an internal investigation that revealed irregularities
over the control and use of cash and certain other general ledger accounts of the Company,
revealing a misappropriation of assets (the “Embezzlement Matter”). These irregularities were
perpetrated by a former employee over more than a three-year period beginning in 2004 and
continuing through April 2008. The embezzlement loss incurred in each year, before the effect of
income taxes, is as follows:
| |
|
|
|
|
| Year/Period |
|
Amount |
|
| |
|
(in thousands) |
|
|
|
|
|
|
2004 |
|
$ |
1,913 |
|
2005 |
|
|
290 |
|
2006 |
|
|
3,261 |
|
January 1, 2007 — April 11, 2007 |
|
|
1,000 |
|
|
|
|
|
Total — Predecessor |
|
|
6,464 |
|
April 12, 2007 — December 31, 2007 |
|
|
5,732 |
|
2008 |
|
|
1,800 |
|
|
|
|
|
Total — Successor |
|
|
7,532 |
|
|
|
|
|
|
|
|
|
|
Total Embezzlement Loss |
|
$ |
13,996 |
|
|
|
|
|
In addition to these losses, the Company has incurred fees and expenses as a result of
the embezzlement totaling $5.5 million in 2008, net of recoveries. In 2008, the Company took
possession of five boats which were purchased by the former employee using the embezzled funds.
As of December 31, 2008, the boats had an appraised value of $1.6 million and were netted against
the fees and expenses incurred as a result of the embezzlement and
are included in other assets on the Consolidated Balance Sheet. In the year ended December 31, 2009, the Company
has incurred fees and expenses as a result of the embezzlement totaling $0.1 million, net of
recoveries.
As more fully described in Note 4, $20.0 million of the purchase price of Cambium Learning
was held in escrow. Pursuant to an agreement dated July 10, 2008 by and between the former
stockholders of the predecessor company and the members of the successor company, the remaining
escrow amount was distributed in its entirety to VSS-Cambium Settlement Fund, LLC (Settlement
Fund), acting as an agent for Cambium Learning. Also, the former stockholders of the predecessor
company agreed to contribute an additional $9.3 million to the Settlement Fund. The total
settlement of $30.2 million, including interest income of
$0.9 million, was distributed to Cambium
Learning and used to cover costs and pay down a portion of the senior credit facility. Since the
embezzlement was discovered after the initial purchase allocation, the entire settlement amount
was recorded as a gain from settlement with previous stockholders on the accompanying
Consolidated Statements of Operations. The former stockholders also agreed to forego any claims or
rights to any amount held in escrow in exchange for which the members of VSS-Cambium Holdings,
LLC indemnified the former stockholders from any claims in connection with the Embezzlement
Matter.
58
Note 4 — Acquisitions
Acquisition
of VLCY
On December 8, 2009, the Company acquired VLCY and its subsidiaries. The Company determined
that the merger could capitalize upon potential strategic, operational and financial synergies to
generate significant cash flow and strengthen the leadership position of Cambium and VLCY in
education solutions for the pre-K-12 market. In reaching its decision to acquire VLCY, which
resulted in the recognition of $44.6 million of goodwill, there were a number of reasons why the
Company believed the acquisition would be beneficial. These potential benefits include:
| |
• |
|
Capitalizing on the complementary nature of the companies’ products to
enhance certain products with minimal development costs, achieve critical mass
in certain markets, facilitate the cross-selling of each other’s products to
established customers, and expand sales and marketing reach. |
| |
• |
|
Leveraging the companies’ combined implementation services and robust
technological capabilities. |
| |
• |
|
Combining two experienced management teams to spread “best practices”,
attract leading authors and programs, and acquire additional product lines and
business as opportunities arise. |
| |
• |
|
Increasing sales into existing and new markets of certain products through
complementary sales channels. |
The acquisition was accounted for as a purchase transaction. The consolidated financial
statements of the Company include the results of VLCY from December 8, 2009, the date of
acquisition. The purchase price was allocated among tangible and intangible assets acquired and
liabilities assumed based on fair values at the transaction date. The excess of the purchase
price over the acquired tangible and intangible assets and liabilities was recorded as goodwill.
The Company acquired the stock of VLCY and, therefore, the additional goodwill resulting from
this transaction is not expected to be tax deductible. Acquisition costs of $13.6 million and
$26,000 are included in general and administrative expenses in the Consolidated Statements of
Operations for the years ended December 31, 2009 and 2008, respectively.
Consideration to the VLCY shareholders consisted of:
| |
• |
|
at the election of the stockholder, either, |
| |
• |
|
one share of Company common stock, or |
| |
• |
|
$6.50 in cash, limited to a maximum of $67.5 million in the aggregate
and prorated in accordance with the merger agreement; |
| |
• |
|
plus, regardless of the election made, |
| |
• |
|
an amount in cash equal to the amount of certain tax refunds specified
in the merger agreement and received by VLCY prior to the closing of the
mergers (reduced by the amount of the VLCY tax refunds contractually
required to be placed in escrow at closing), divided by the total number
of shares of VLCY common stock outstanding immediately prior to the
effective time of the mergers; plus |
| |
• |
|
a Contingent Value Right (“CVR”) to receive cash in an amount
equal to the aggregate amount of specified tax refunds received after the
closing of the mergers and various other amounts deposited in escrow on
or after the closing date, reduced by any payments to be made under the
escrow agreement entered into in connection with the mergers, with
respect to agreed contingencies, a potential working capital adjustment
and allowed expenses, divided by the total number of shares of VLCY
common stock outstanding immediately prior to the effective time of the
mergers. |
The
ultimate value of the CVRs is not known at this time; however, it is not expected to be
more than $11 million and could be as low as zero. As of the
merger date and as of December 31, 2009, a fair value of $9.6
million has been recorded as a liability for the CVR payments. The determination of fair value
of the CVRs involves significant assumptions and estimates regarding the likelihood, amount and
timing of cash flows related to the elements of the CVRs. Future changes in the estimate of the
fair value of the CVRs will impact results of operations and could be material. CVR payments will be made in accordance
with the escrow agreement on the nine and eighteen month anniversaries of the
effective date of the merger, with a final payment, if any, to be made in
October 2013 that is related to certain potential 280G tax gross up
indemnity obligations placed in escrow. The amounts that will be paid at these
dates could vary materially from the amounts recorded in the Company’s
financial statements at December 31, 2009. As of December
31, 2009, restricted assets in an escrow account for the benefit of the CVR were $7.9 million.
Additionally, under the merger agreement, share-based awards held by employees of VLCY were
required to be converted into rights or options for shares of the Company with the same terms and
conditions that were applicable to the rights or options for VLCY shares. Therefore, in
accordance with applicable accounting guidance for business combinations, the fair value, prior
to conversion, of replacement equity awards issued for pre-combination services at the date of
acquisition is included in the calculation of the purchase price.
59
The following represents the components of the purchase price:
| |
|
|
|
|
| (in thousands) |
|
|
|
|
|
|
|
|
|
Cash paid to shareholders making the cash election |
|
$ |
67,499 |
|
Cash paid to shareholders for specified tax refunds |
|
|
15,523 |
|
Fair value of shares of Company issued to shareholders |
|
|
76,907 |
|
Fair value of equity awards converted at acquisition |
|
|
22 |
|
Fair value of the Contingent Value Rights |
|
|
9,617 |
|
|
|
|
|
|
|
|
|
|
Total consideration |
|
$ |
169,568 |
|
|
|
|
|
The following represents the allocation of the purchase price:
| |
|
|
|
|
| (in thousands) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
73,325 |
|
Accounts receivable |
|
|
10,883 |
|
Income tax receivable |
|
|
4,713 |
|
Inventory |
|
|
11,687 |
|
Other current assets |
|
|
11,919 |
|
Property, plant and equipment |
|
|
3,216 |
|
Intangible assets |
|
|
50,249 |
|
Curriculum in development |
|
|
909 |
|
Other assets |
|
|
11,891 |
|
Accounts payable and accrued expenses |
|
|
(14,835 |
) |
Deferred revenue |
|
|
(21,774 |
) |
Capital lease obligations |
|
|
(187 |
) |
Other liabilities |
|
|
(17,075 |
) |
Goodwill |
|
|
44,647 |
|
|
|
|
|
|
|
|
|
|
Total net assets acquired |
|
$ |
169,568 |
|
|
|
|
|
Other identified intangibles acquired consist of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Cambium
Learning |
|
|
|
|
| |
|
Voyager |
|
|
Technologies |
|
|
Useful Life |
|
| |
|
(in thousands) |
|
|
|
|
|
Curriculum and technology |
|
$ |
23,700 |
|
|
$ |
19,000 |
|
|
7 years |
Customer relationships |
|
|
3,880 |
|
|
|
1,500 |
|
|
7 years |
Tradenames and trademarks |
|
|
1,610 |
|
|
|
559 |
|
|
15 years |
Goodwill purchased in the acquisition has been
allocated to the Company’s Voyager and Cambium Learning
Technologies reporting units as $24.9 million and $19.7 million,
respectively. Valuations were established giving consideration to the three basic approaches to
value with the method or methods applied for each asset depending on the nature of the asset and
the type and reliability of information available for the analysis and were based upon the
Company’s projected revenue growth assumptions through each asset’s estimated useful life. Discounted
cash flows were based upon the Company’s weighted-average cost of capital of 25% and an estimated
effective tax rate of 38%. Curriculum and technology and customer relationships were valued using
a form of the income approach known as the excess earnings method. Tradenames and trademarks were
valued using a form of the income approach known as the relief-from-royalty method.
Supplemental Pro Forma Information
Since the December 8, 2009 acquisition date, the VLCY acquisition has contributed $4.5
million of net sales and a pretax loss of $1.5 million to the
Company’s consolidated results. The following unaudited supplemental pro forma information presents the results of
operations as if the VLCY acquisition had occurred at the beginning of the respective reporting
periods:
60
| |
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| (in thousands) (unaudited) |
|
2009 |
|
|
2008 |
|
Net sales |
|
$ |
188,211 |
|
|
$ |
187,123 |
|
Loss before income taxes |
|
|
(59,582 |
) |
|
|
(170,403 |
) |
Net loss |
|
|
(59,582 |
) |
|
|
(157,441 |
) |
|
|
|
|
|
|
|
|
|
Net loss per share — basic and diluted |
|
$ |
(1.34 |
) |
|
$ |
(3.55 |
) |
The supplemental pro forma information has been adjusted to include:
| |
• |
|
the pro forma impact of the amortization of intangible assets and the reduction in
deferred revenue and related deferred costs based on the purchase price allocation; |
| |
• |
|
the pro forma impact of reduced interest income lost as a result of the $58.0
million of cash used in the purchase price consideration (net of $25.0 million
contributed by the sole stockholder of the Company at the time of the merger); |
| |
• |
|
the pro forma impact of certain employment agreements and stock option grants
entered into on the effective date of the merger; |
| |
• |
|
the elimination of merger transaction costs incurred by the Company and VLCY;
and |
| |
• |
|
the pro forma tax effect of the merger, which was estimated using a combined
company effective tax rate of 0% for 2009 and 7.6% for 2008. |
Basic and diluted loss per share is calculated using share equivalents outstanding at the
merger date of 44.3 million. The supplemental pro forma information does not include an
adjustment for certain contractual obligations, severance, retention, and other payments that
became payable as a result of the merger. The majority of such payments are recorded in the
historical financial statements of the Company or VLCY. Approximately $1.6 million of such
payments subject to subsequent service requirements will be recorded as expense in 2010.
The pro forma results are presented for illustrative purposes only and do not reflect the
realization of potential cost savings, or any integration costs. Certain cost savings may result
from the acquisition; however, there can be no assurance that these cost savings will be
achieved. These pro forma results do not purport to be indicative of the results that would have
actually been obtained if the acquisition occurred at the beginning of the respective reporting
periods, nor is the pro forma data intended to be a projection of future results.
Acquisition of Cambium Learning, Inc.
On April 12, 2007, the Company acquired Cambium Learning and its subsidiaries: Cambium
Learning (New York), Inc., Sopris West Educational Services, Inc. (Sopris West), Kurzweil
Educational Systems, Inc., and IntelliTools, Inc. The Company determined that combining their
media expertise and capital with the strong growth potential that
existed in the pre-K – 12
educational marketplace for the types of products and services provided by Cambium would create a
more competitive company. In reaching its decision to acquire Cambium, which resulted in the
recognition of $192.3 million of goodwill, there were a number of reasons why the Company believed the acquisition would be
beneficial. These potential benefits include:
| |
• |
|
Capitalizing on a growing market and the need for accountability. |
| |
• |
|
Increasing program penetration by expanding sales from current customers. |
| |
• |
|
Exploring acquisition opportunities in a fragmented market. |
The acquisition was funded through a combination of $140.1 million of cash, $3.9 million of
executive rollover shares, and $172.1 million of debt, net of issuance costs. The aggregate
purchase price, net of cash acquired and executive rollover shares, was $303.2 million, of which
$21.0 million was held in escrow. The $21.0 million held in escrow consisted of $1.0 million held
in a Purchase Price Escrow and $20.0 million held in an Indemnity Escrow. The Purchase Price
Escrow fund was established to support a post-closing working capital adjustment. The Indemnity
Escrow was established to support any deficiencies in the Purchase Price Escrow and to secure the
payment of any indemnification claims made by the purchaser pursuant to the acquisition
agreement. The acquisition agreement contained customary general indemnification protection for
breaches of representations and warranties during a specified post-closing survival period. At
the time of closing, the purchaser
61
had no reason to believe that any such representations or
warranties would prove to be inaccurate,
and, consequently, no reason to believe it would assert
any claims against the Indemnity Escrow. The accounting guidance that was in effect at the time
of closing prescribes the accounting treatment for escrows such as the Indemnity Escrow. It
requires certain future contingent consideration to be included in the purchase price of an
acquisition only after the contingency has occurred and the consideration has been delivered to
the sellers, and pending occurrence of the contingency, the amount of such consideration is to be
recorded on the balance sheet as a liability and not included in purchase price. However, where
the expectation of making the future payment is beyond a reasonable doubt, then it is not deemed
contingent. A release of consideration from an indemnity escrow which secured claims for breaches
of representations and warranties is deemed to be beyond a reasonable doubt, based upon the
assumption that representations and warranties are accurate when made. Escrowed amounts which
secured such breaches, like the Indemnity Escrow, are, therefore, not deemed to be contingent,
absent a pre-acquisition contingency that was subject to the escrow. Thus, the amount of
consideration placed in the Indemnity Escrow at closing was included in the purchase price. In
2007, $1.0 million of the Purchase Price Escrow was released for a purchase price adjustment
related to net working capital. As disclosed in Note 3, Cambium Learning suffered a loss
resulting from an embezzlement that was discovered in late April 2008. The purchaser asserted
indemnity claims against the sellers with respect to that loss, and settled those claims in July
2008. The settlement negotiations were memorialized in an agreement dated July 10, 2008 by and
between the former stockholders of the predecessor company and the members of the successor
company, and resulted in the remaining Indemnity Escrow being distributed in its entirety to
VSS-Cambium Settlement Fund, LLC (Settlement Fund), acting as an agent for Cambium Learning.
Also, the former stockholders of the predecessor company agreed to contribute an additional $9.3
million to the Settlement Fund. The total settlement of $30.2 million, including interest income
of $0.9 million, was distributed by the Settlement Fund to Cambium Learning and used to cover
costs and pay down a portion of the senior credit facility and is reflected in gain from
settlement with previous stockholders in the Consolidated Statements of Operations. The
Settlement Fund was designated as the agent to act as a receiving and paying agent, since the
settlement monies had to be received from the several sellers and then distributed to several
parties, consisting of the various lenders and professional advisors; having the Settlement Fund
act as agent facilitated this flow of funds at a time when the Company was concluding its
internal investigation. Despite these escrow releases, the expected accuracy of the
representations and warranties provided a reasonable basis to find sufficient certainty with
respect to the sellers’ entitlement to the escrows and, consequently, to include them in the
purchase price at closing.
The acquisition was accounted for as a purchase transaction. The consolidated financial
statements of the Company include the results of Cambium Learning from the date of acquisition.
The purchase price was allocated among tangible and intangible assets acquired and liabilities
assumed based on fair values at the transaction date. The excess of the purchase price over the
acquired tangible and intangible assets and liabilities was recorded as goodwill. The Company
acquired the stock and, therefore, the additional goodwill resulting from this transaction is not
expected to be tax deductible. The Company has established deferred taxes on the other
nondeductible intangible assets as part of the purchase price.
In connection with the acquisition, certain executives carried over a portion of their
investment to the Company. The rollover shares were valued at $3.9 million based on the fair
value of their equity interest in Cambium at the time of the acquisition. This amount was
converted into a membership interest which was based on the percentage of $3.9 million to the
total $144.0 million of contributed capital.
The following represents the allocation of the purchase price:
| |
|
|
|
|
| (in thousands) |
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
30,259 |
|
Property, plant and equipment |
|
|
19,152 |
|
Other long-term assets |
|
|
235 |
|
Goodwill |
|
|
192,287 |
|
Other identified intangible assets |
|
|
143,380 |
|
Current liabilities |
|
|
(23,891 |
) |
Long-term deferred tax liabilities |
|
|
(39,808 |
) |
Other liabilities |
|
|
(15,353 |
) |
In-process research and development |
|
|
890 |
|
|
|
|
|
|
|
|
|
|
Purchase price |
|
$ |
307,151 |
|
|
|
|
|
62
Other identified intangibles acquired consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Estimated |
|
| (in thousands) |
|
Fair Value |
|
|
Useful Life |
|
|
|
|
|
|
|
|
|
|
Publishing rights |
|
$ |
90,300 |
|
|
11 years |
Developed technology |
|
|
6,300 |
|
|
6 years |
Trademarks |
|
|
15,580 |
|
|
16 years |
Reseller networks |
|
|
12,300 |
|
|
11 years |
Customer relationships |
|
|
13,700 |
|
|
6 – 11 years |
Noncompetes |
|
|
2,600 |
|
|
3 years |
Contracts |
|
|
2,100 |
|
|
4 years |
Conference attendee relationships |
|
|
500 |
|
|
8 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other identified intangibles |
|
$ |
143,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill purchased in the acquisition was allocated
to the Company’s Publishing and Learning Technologies reporting
units as $153.5 million and $38.8 million, respectively, based on
their relative fair values. Valuations were established giving consideration to the three basic
approaches to value with the method or methods applied for each asset depending on the nature of
the asset and the type and reliability of information available for the analysis and were based
upon the Company’s projected revenue growth assumptions through each asset’s estimated useful
life. Discounted cash flows were based upon the Company’s weighted-average cost of capital of 12%
and an estimated effective tax rate of 40%. Publishing rights were valued using a form of the
income approach known as the excess earnings method. Trademarks and developed technology were
valued using a form of the income approach known as the relief-from-royalty method. Customer
relationships, conference attendees and reseller networks were valued using the residual cash
flow method and customer contracts were valued using various forms of the income approach
depending on the nature of the individual contract. Non-compete agreements were valued using a
form of the income approach known as the profit differential method.
Acquisition of Certain Assets of Tobii Assistive Technology, Inc.
On July 25, 2008, Cambium acquired certain intellectual property rights and an inventory of
titles with related author agreements of Tobii Assistive Technology, Inc., a Massachusetts
corporation, for $112,003. The cash used to fund this acquisition came from the Company’s general
working capital. The purchase price was allocated as follows: $52,003 to goodwill (deductible for
tax purposes), $39,000 to customer lists and $21,000 to developed technology. The customer lists
and developed technology will be amortized on a straight-line basis over their useful lives of
two years and three years, respectively.
Note 5 — Income Taxes
Losses before income taxes for the year ended December 31, 2009, for the year ended December 31,
2008, for the period from January 29, 2007 to December 31, 2007, and for the period from January
1, 2007 to April 11, 2007 were all attributable to the U.S.
Income tax benefit attributable to income included the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Period from |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
January 29, 2007 |
|
|
Period from |
|
| |
|
Year Ended |
|
|
Year Ended |
|
|
(inception) |
|
|
January 1, 2007 |
|
| |
|
December 31, |
|
|
December 31, |
|
|
through December 31, |
|
|
through April 11, |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2007 |
|
Current income tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States federal |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
18 |
|
|
$ |
501 |
|
State and local |
|
|
272 |
|
|
|
103 |
|
|
|
508 |
|
|
|
357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense |
|
|
272 |
|
|
|
103 |
|
|
|
526 |
|
|
|
858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States federal |
|
|
(5,571 |
) |
|
|
(11,951 |
) |
|
|
(7,110 |
) |
|
|
(4,309 |
) |
State and local |
|
|
(2,405 |
) |
|
|
(1,574 |
) |
|
|
(1,254 |
) |
|
|
(243 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax benefit |
|
|
(7,976 |
) |
|
|
(13,525 |
) |
|
|
(8,364 |
) |
|
|
(4,552 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
$ |
(7,704 |
) |
|
$ |
(13,422 |
) |
|
$ |
(7,838 |
) |
|
$ |
(3,694 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
63
Reconciliation of income tax benefit and the domestic federal statutory income tax
benefit is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Period from |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
January 29, 2007 |
|
|
Period from |
|
| |
|
Year Ended |
|
|
Year Ended |
|
|
(inception) |
|
|
January 1, 2007 |
|
| |
|
December 31, |
|
|
December 31, |
|
|
through December 31, |
|
|
through April 11, |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2007 |
|
Statutory federal income tax benefit |
|
$ |
(15,214 |
) |
|
$ |
(29,044 |
) |
|
$ |
(7,624 |
) |
|
$ |
(5,427 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (reduction) from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes (net of federal benefit) |
|
|
(1,378 |
) |
|
|
(1,057 |
) |
|
|
(484 |
) |
|
|
(428 |
) |
Goodwill impairment |
|
|
3,187 |
|
|
|
26,588 |
|
|
|
— |
|
|
|
— |
|
Purchase price adjustment |
|
|
— |
|
|
|
(10,244 |
) |
|
|
— |
|
|
|
— |
|
Merger transaction expenses |
|
|
4,745 |
|
|
|
— |
|
|
|
— |
|
|
|
1,674 |
|
Change in valuation allowance |
|
|
625 |
|
|
|
122 |
|
|
|
— |
|
|
|
373 |
|
Other |
|
|
331 |
|
|
|
213 |
|
|
|
270 |
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
$ |
(7,704 |
) |
|
$ |
(13,422 |
) |
|
$ |
(7,838 |
) |
|
$ |
(3,694 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes are primarily provided for temporary differences between the
financial reporting basis and the tax basis of our assets and liabilities. The tax effects of
each type of temporary difference and carryforward that give rise to a significant portion of
deferred tax assets (liabilities) at the end of fiscal 2009 and 2008 were as follows:
| |
|
|
|
|
|
|
|
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
Deferred tax assets are attributable to: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
25,916 |
|
|
$ |
9,403 |
|
Tax credit carryforwards |
|
|
7,670 |
|
|
|
— |
|
Reserves |
|
|
7,164 |
|
|
|
190 |
|
Inventory |
|
|
4,435 |
|
|
|
4,004 |
|
Deferred financing costs |
|
|
2,317 |
|
|
|
2,437 |
|
Embezzlement loss |
|
|
1,528 |
|
|
|
1,894 |
|
Fixed assets |
|
|
1,039 |
|
|
|
— |
|
Other |
|
|
738 |
|
|
|
1,718 |
|
|
|
|
|
|
|
|
Total gross deferred tax assets |
|
|
50,807 |
|
|
|
19,646 |
|
Valuation allowance |
|
|
(14,312 |
) |
|
|
(2,858 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
36,495 |
|
|
|
16,788 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities are attributable to: |
|
|
|
|
|
|
|
|
Intangibles |
|
|
(33,981 |
) |
|
|
(26,457 |
) |
Fixed assets |
|
|
— |
|
|
|
(880 |
) |
Deferred revenue |
|
|
(4,403 |
) |
|
|
— |
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities |
|
|
(38,384 |
) |
|
|
(27,337 |
) |
|
|
|
|
|
|
|
Net deferred tax liability: |
|
$ |
(1,889 |
) |
|
$ |
(10,549 |
) |
|
|
|
|
|
|
|
The deferred tax asset (liability) is classified as follows:
| |
|
|
|
|
|
|
|
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
Short-term deferred tax asset |
|
$ |
6,267 |
|
|
$ |
4,617 |
|
Long-term deferred tax liability |
|
|
(8,156 |
) |
|
|
(15,166 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability) |
|
$ |
(1,889 |
) |
|
$ |
(10,549 |
) |
|
|
|
|
|
|
|
The net increase in the valuation allowance in 2008 was $1.8 million. The valuation
allowance increased during 2008 primarily related to state net operating loss carryforwards that
are not expected to be realized. As of December 31, 2009, there is not any amount of the
valuation allowance for which subsequently recognized benefits will be allocated to reduce
goodwill or other intangible assets.
64
The net increase in the valuation allowance in 2009 was $11.5 million. The valuation
allowance increased during 2008 primarily because of the acquisition of VLCY. VLCY had
established a valuation allowance of $12.1 million as of the date of acquisition against all of
its Federal and unitary state net deferred tax assets. The inclusion of Cambium’s net deferred
tax liabilities decreased VLCY’s valuation allowance approximately $1.8 million. Post
acquisition, increases in the Company’s deferred tax assets were offset by increases in the
valuation allowance. As of December 31, 2009, there is not any amount of the valuation allowance
for which subsequently recognized benefits will be allocated to reduce goodwill or other
intangible assets.
At December 31, 2009, the amounts and expiration dates of loss and tax credit carryforwards
were as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Amount as of |
|
|
Expire or start expiring |
|
| (in thousands) |
|
year ended 2009 |
|
|
at the end of: |
|
U.S. net operating loss (1) |
|
$ |
62,791 |
|
|
|
2028 |
|
|
|
|
|
|
|
|
|
|
State net operating loss carryforward (net): |
|
|
|
|
|
|
|
|
State tax net operating losses (2) |
|
|
4,441 |
|
|
|
2012 – 2028 |
|
|
|
|
|
|
|
|
|
|
Tax credits: |
|
|
|
|
|
|
|
|
Minimum tax credit |
|
|
7,254 |
|
|
|
Carry forward indefinitely |
|
Research and development tax credit |
|
|
416 |
|
|
|
2014 – 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax credits |
|
|
7,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
$38.3 million of the U.S. net operating loss (NOL) above is related to the VLCY
acquisition. The utilization of this NOL is subject to an annual limitation of $7.1 million. |
| |
| (2) |
|
$2.9 million of the state NOL above are expected to expire unutilized. These
NOLs are associated with specific legal entities that are not expected to generate taxable income
within the statute of limitation period. The Company has established a valuation allowance against
these deferred tax assets. |
Income
taxes refunded, net of tax payments, were $3.1 million for
fiscal year 2009. $3.4
million of the income taxes received were deposited into escrow
pursuant to the CVR obligation in connection with the merger agreement. Income
taxes paid, net of refunds, for fiscal year 2008 were $0.7 million. Income taxes refunded, net
of tax payments, were $0.3 million for the period from January 29, 2007 to December 31, 2007.
Income taxes paid, net of tax refunds, were $0.3 million for the period from January 1, 2007 to
April 11, 2007. The Company has refunds receivable from taxing authorities of $1.3 million as of
fiscal year end 2009. Approximately $1.0 million of this receivable will be deposited into escrow when
it is received as part of the CVR obligation.
VLCY was formerly known as ProQuest Company. Under sale agreements with Snap-On
Incorporated and Cambridge Scientific Abstracts, LP (“CSA”), the Company is liable to indemnify
Snap-On Incorporated or CSA for any income taxes assessed against ProQuest Business Solutions
(“PQBS”) or ProQuest Information and Learning (“PQIL”) for periods prior to the sale of PQBS or
PQIL. The Company has established a contingent liability for those matters where it is not
probable that the position will be sustained. The amount of the liability is based on
management’s best estimate given the Company’s history with similar matters and interpretations
of current laws and regulations.
Uncertain Tax Positions
The Company recognizes the financial statement effects of a tax return position when it is
more likely than not, based on the technical merits, that the position will ultimately be
sustained. For tax positions that meet this recognition threshold, we apply our judgment, taking
into account applicable tax laws, our experience in managing tax audits and relevant GAAP, to
determine the amount of tax benefits to recognize in our financial statements. For each position,
the difference between the benefit realized on our tax return and the benefit reflected in our
financial statements is recorded on our balance sheet as an unrecognized tax benefit (“UTB”). We
update our unrecognized tax benefits at each financial statement date to reflect the impacts of
audit settlements and other resolution of audit issues, expiration of statutes of limitation,
developments in tax law and ongoing discussions with taxing authorities. A reconciliation of the
change in the UTB balance from January 1, 2009 to December 31, 2009, and January 1, 2008 to
December 31, 2008, is as follows:
| |
|
|
|
|
|
|
|
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
Balance at the beginning of the year |
|
$ |
— |
|
|
$ |
— |
|
Increases for acquisitions during the period |
|
|
14,685 |
|
|
|
— |
|
Increases for tax positions taken during the period |
|
|
752 |
|
|
|
— |
|
Decreases relating to settlements |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the year |
|
$ |
15,437 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
65
The Company estimates it is reasonably possible that approximately $6.1 million in
unrecognized tax benefits will be recognized in 2010 due to the statute of limitations expiring.
Of this amount and included in the balance of unrecognized tax benefits at December 31, 2009 are approximately $1.1 million of tax
benefits that, if recognized, would affect the effective tax rate. The recognition of the
remaining uncertain tax positions would not affect the effective tax rate, but would instead
increase or would have increased available tax attributes. However, the recognition of the tax
attribute would be offset by an increase in the deferred tax asset valuation allowance resulting
in no net impact in the effective tax rate.
The Company recognizes interest accrued related to unrecognized tax benefits and penalties
as income tax expense. Related to the unrecognized tax benefits noted above, the Company
recognized penalties of zero and immaterial amounts for interest (gross) during 2009 and, as of
December 31, 2009, has a liability for penalties of zero and interest (gross) of approximately
$0.1 million.
The Company files income tax returns in the U.S. federal jurisdiction and various state
jurisdictions. All U.S. tax years prior to 2008 related to the VLCY acquired entities have been
audited by the Internal Revenue Service. Cambium and its subsidiaries have been examined by the
Internal Revenue Service through the end of 2006. Various state tax authorities are in the
process of examining income tax returns for various tax years through 2007.
Note 6 — Performance Share Plan
At the time of the acquisition of Cambium Learning, the Company agreed to pay for a
long-term incentive plan for Sopris West employees. The Company recorded a liability at fair
value on the date of acquisition due to the commitment being fixed. The aggregate amount accrued
as of April 11, 2007 and paid on June 30, 2007 under this plan was $7.6 million. No further
amounts were due at December 31, 2009 or December 31, 2008.
Note 7 — Property, Equipment and Software
Balances of major classes of assets and accumulated depreciation and amortization consist of
the following:
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
| |
|
2009 |
|
|
2008 |
|
Land and building |
|
$ |
13,360 |
|
|
$ |
13,360 |
|
Furniture and fixtures |
|
|
775 |
|
|
|
287 |
|
Machinery, computers and equipment |
|
|
5,867 |
|
|
|
4,535 |
|
Software |
|
|
4,619 |
|
|
|
2,435 |
|
Leasehold improvements |
|
|
330 |
|
|
|
152 |
|
|
|
|
|
|
|
|
Total |
|
|
24,951 |
|
|
|
20,769 |
|
Less accumulated depreciation and amortization |
|
|
4,294 |
|
|
|
2,459 |
|
|
|
|
|
|
|
|
Property, equipment and software, net |
|
$ |
20,657 |
|
|
$ |
18,310 |
|
|
|
|
|
|
|
|
66
Note 8 — Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the years ended December 31, 2009 and
December 31, 2008 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
Publishing |
|
|
Voyager |
|
|
Sopris |
|
|
CLT |
|
|
Total |
|
Balance as of December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
153,533 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
38,754 |
|
|
$ |
192,287 |
|
Accumulated impairment losses |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153,533 |
|
|
|
— |
|
|
|
— |
|
|
|
38,754 |
|
|
|
192,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill from acquisitions |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
52 |
|
|
|
52 |
|
Goodwill impairment |
|
|
(75,966 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(75,966 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
153,533 |
|
|
|
— |
|
|
|
— |
|
|
|
38,806 |
|
|
|
192,339 |
|
Accumulated impairment losses |
|
|
(75,966 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(75,966 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,567 |
|
|
|
— |
|
|
|
— |
|
|
|
38,806 |
|
|
|
116,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment |
|
|
(9,105 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(9,105 |
) |
Allocation of Publishing goodwill
among Voyager and Sopris segments |
|
|
(68,462 |
) |
|
|
51,162 |
|
|
|
17,300 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill from acquisitions |
|
|
— |
|
|
|
24,923 |
|
|
|
— |
|
|
|
19,724 |
|
|
|
44,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
— |
|
|
|
161,156 |
|
|
|
17,300 |
|
|
|
58,530 |
|
|
|
236,986 |
|
Accumulated impairment losses |
|
|
— |
|
|
|
(85,071 |
) |
|
|
— |
|
|
|
— |
|
|
|
(85,071 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
— |
|
|
$ |
76,085 |
|
|
$ |
17,300 |
|
|
$ |
58,530 |
|
|
$ |
151,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with applicable accounting guidance, goodwill and other indefinite-lived
intangible assets are no longer amortized but are instead reviewed for impairment at least
annually and if a triggering event is determined to have occurred in an interim period. The
Company’s annual impairment testing is performed as of December 1 of each year. In June 2009, we
determined that the signing of the merger agreement was a triggering event requiring us to review
goodwill for impairment. At the time of this review, the Company had two reporting units:
Published Products and Learning Technologies. The first step of impairment testing as of June 30,
2009 showed that the carrying value of the Published Products unit exceeded its fair value and
that the second step of testing was required for this unit. The second step requires the
allocation of fair value of a reporting unit to all of the assets and liabilities of that
reporting unit as if the reporting unit had been acquired in a business combination. The fair
value was determined using an income approach based on forecasted operating results. As a result
of the second step of our second quarter 2009 impairment test, the goodwill balance for the
reporting unit as of the measurement date was determined to be partially impaired, and an
impairment charge of $9.1 million was recorded as of June 30, 2009. As of second quarter 2009,
the estimated fair market value of the reporting unit was estimated to have fallen below the book
value as a result of worsening and prolonged adverse developments in the overall education
funding environment, including the reductions in Reading First funding effective 2008 and the
reductions in available state and local funds.
In conducting our annual goodwill impairment testing for fiscal 2008, we compared the book
value of goodwill attributed to the Published Products and Learning Technologies segments with
the estimated fair market values of these segments. As of yearend 2008, the estimated fair market
value of the Published Products segment was estimated to be less than the book value as a result
of lower future cash flow projections, driven by adverse developments in the education funding
environment at the federal and local level. An impairment charge of $76.0 million related to
Published Products was recorded in 2008 as a result of these factors. These estimates of fair
market are dependent on multiple assumptions and inputs, including industry fundamentals such as
the state of educational funding and the actual performance and future projections of the
Company.
67
Our definite lived intangible assets and related accumulated amortization at the end of
fiscal 2009 and 2008 consist of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at
December 31, |
|
|
|
|
|
|
Impairment |
|
|
Balance at
December 31, |
|
|
|
|
|
|
Impairment |
|
|
Balance at
December 31, |
|
| (in thousands) |
|
2007 |
|
|
Additions |
|
|
Charge |
|
|
2008 |
|
|
Additions |
|
|
Charge |
|
|
2009 |
|
Goodwill |
|
$ |
192,287 |
|
|
$ |
52 |
|
|
$ |
(75,966 |
) |
|
$ |
116,373 |
|
|
$ |
44,647 |
|
|
$ |
(9,105 |
) |
|
$ |
151,915 |
|
Other intangible assets — gross book value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing rights |
|
|
90,300 |
|
|
|
— |
|
|
|
— |
|
|
|
90,300 |
|
|
|
— |
|
|
|
— |
|
|
|
90,300 |
|
Trademark |
|
|
15,580 |
|
|
|
— |
|
|
|
— |
|
|
|
15,580 |
|
|
|
2,169 |
|
|
|
— |
|
|
|
17,749 |
|
Customer relationships |
|
|
13,700 |
|
|
|
39 |
|
|
|
— |
|
|
|
13,739 |
|
|
|
5,380 |
|
|
|
— |
|
|
|
19,119 |
|
Contracts |
|
|
2,100 |
|
|
|
— |
|
|
|
— |
|
|
|
2,100 |
|
|
|
— |
|
|
|
— |
|
|
|
2,100 |
|
Acquired curriculum and technology |
|
|
6,300 |
|
|
|
21 |
|
|
|
— |
|
|
|
6,321 |
|
|
|
42,700 |
|
|
|
— |
|
|
|
49,021 |
|
Reseller network |
|
|
12,300 |
|
|
|
— |
|
|
|
— |
|
|
|
12,300 |
|
|
|
— |
|
|
|
— |
|
|
|
12,300 |
|
Conference attendees |
|
|
500 |
|
|
|
— |
|
|
|
— |
|
|
|
500 |
|
|
|
— |
|
|
|
— |
|
|
|
500 |
|
Non-compete |
|
|
2,600 |
|
|
|
— |
|
|
|
— |
|
|
|
2,600 |
|
|
|
— |
|
|
|
— |
|
|
|
2,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangibles — gross book value |
|
|
143,380 |
|
|
|
60 |
|
|
|
— |
|
|
|
143,440 |
|
|
|
50,249 |
|
|
|
— |
|
|
|
193,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets — accumulated amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing rights |
|
|
(10,473 |
) |
|
|
(13,566 |
) |
|
|
— |
|
|
|
(24,039 |
) |
|
|
(13,949 |
) |
|
|
— |
|
|
|
(37,988 |
) |
Trademark |
|
|
(1,130 |
) |
|
|
(1,330 |
) |
|
|
— |
|
|
|
(2,460 |
) |
|
|
(1,349 |
) |
|
|
— |
|
|
|
(3,809 |
) |
Customer relationships |
|
|
(3,371 |
) |
|
|
(3,804 |
) |
|
|
— |
|
|
|
(7,175 |
) |
|
|
(2,915 |
) |
|
|
— |
|
|
|
(10,090 |
) |
Contracts |
|
|
(440 |
) |
|
|
(1,047 |
) |
|
|
— |
|
|
|
(1,487 |
) |
|
|
(555 |
) |
|
|
— |
|
|
|
(2,042 |
) |
Acquired curriculum and technology |
|
|
(1,146 |
) |
|
|
(1,328 |
) |
|
|
— |
|
|
|
(2,474 |
) |
|
|
(1,852 |
) |
|
|
— |
|
|
|
(4,326 |
) |
Reseller network |
|
|
(2,636 |
) |
|
|
(2,790 |
) |
|
|
— |
|
|
|
(5,426 |
) |
|
|
(2,132 |
) |
|
|
— |
|
|
|
(7,558 |
) |
Conference attendees |
|
|
(151 |
) |
|
|
(142 |
) |
|
|
— |
|
|
|
(293 |
) |
|
|
(86 |
) |
|
|
— |
|
|
|
(379 |
) |
Non-compete |
|
|
(624 |
) |
|
|
(866 |
) |
|
|
— |
|
|
|
(1,490 |
) |
|
|
(867 |
) |
|
|
— |
|
|
|
(2,357 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangibles — accumulated amortization |
|
|
(19,971 |
) |
|
|
(24,873 |
) |
|
|
— |
|
|
|
(44,844 |
) |
|
|
(23,705 |
) |
|
|
— |
|
|
|
(68,549 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets, net |
|
$ |
123,409 |
|
|
$ |
(24,813 |
) |
|
$ |
— |
|
|
$ |
98,596 |
|
|
$ |
26,544 |
|
|
$ |
— |
|
|
$ |
125,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated aggregate amortization expense expected for each of the next five years
related to intangibles subject to amortization is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amortization - |
|
|
Amortization - |
|
|
Total |
|
| (in thousands) |
|
Cost of Sales |
|
|
Operating Expense |
|
|
Amortization |
|
2010 |
|
$ |
25,238 |
|
|
$ |
6,000 |
|
|
$ |
31,238 |
|
2011 |
|
|
21,785 |
|
|
|
4,296 |
|
|
|
26,081 |
|
2012 |
|
|
17,519 |
|
|
|
3,440 |
|
|
|
20,959 |
|
2013 |
|
|
12,710 |
|
|
|
2,779 |
|
|
|
15,489 |
|
2014 |
|
|
8,978 |
|
|
|
2,781 |
|
|
|
11,759 |
|
Thereafter |
|
|
10,779 |
|
|
|
8,835 |
|
|
|
19,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
97,009 |
|
|
$ |
28,131 |
|
|
$ |
125,140 |
|
|
|
|
|
|
|
|
|
|
|
Note 9 — Other Current Assets
Other current assets at the end of fiscal 2009 and 2008 consist of the following:
| |
|
|
|
|
|
|
|
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Settlement receivable |
|
$ |
2,400 |
|
|
$ |
— |
|
Prepaid expenses |
|
|
2,019 |
|
|
|
1,181 |
|
Income taxes receivable |
|
|
1,322 |
|
|
|
— |
|
Deferred costs |
|
|
269 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,010 |
|
|
$ |
1,181 |
|
|
|
|
|
|
|
|
The settlement receivable amount relates to an amount due from a subsidiary sold by
VLCY in the years prior to the merger with Cambium. The receivable was allocated a portion of
the purchase price at the acquisition date and is also included in the CVRs obligation created in
the merger with Cambium, as described in Note 4.
68
Note 10 — Accrued Expenses
Accrued expenses at the end of fiscal 2009 and 2008 consist of the following:
| |
|
|
|
|
|
|
|
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
Salaries, bonuses and benefits |
|
$ |
12,428 |
|
|
$ |
1,613 |
|
Accrued royalties |
|
|
1,770 |
|
|
|
1,432 |
|
Pension and post-retirement medical benefits |
|
|
1,293 |
|
|
|
— |
|
Interest rate swap |
|
|
992 |
|
|
|
— |
|
Deferred compensation |
|
|
633 |
|
|
|
— |
|
Other |
|
|
6,804 |
|
|
|
2,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
23,920 |
|
|
$ |
5,190 |
|
|
|
|
|
|
|
|
Salaries, bonuses and
benefits accrued as of December 31, 2009 include severance and other
amounts owed to employees and former employees that are related to the merger
agreement between the Company and VLCY. As of the merger date, funds related to
these obligations, as well as obligations related to certain deferred
compensation and pension liabilities, were placed in a rabbi trust pursuant to
the merger agreement. As of December 31, 2009, the funds in this rabbi
trust totaled $16.7 million.
See Note 15 for further description of our pension benefits.
Note 11 — Other Liabilities
Other liabilities at the end of fiscal 2009 and 2008 consist of the following:
| |
|
|
|
|
|
|
|
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
Pension and post-retirement medical benefits, long-term portion |
|
$ |
10,509 |
|
|
$ |
— |
|
Long-term deferred tax liability |
|
|
8,156 |
|
|
|
15,166 |
|
Long-term income tax payable |
|
|
1,255 |
|
|
|
— |
|
Long-term deferred compensation |
|
|
1,179 |
|
|
|
182 |
|
Interest rate swap |
|
|
— |
|
|
|
2,382 |
|
Other |
|
|
3,057 |
|
|
|
1,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
24,156 |
|
|
$ |
18,736 |
|
|
|
|
|
|
|
|
See Note 15 for further description of our pension benefits.
Note 12 — Leases
Capital Lease Obligations
The Company leases certain facilities and equipment for selling and administrative purposes
under capital lease agreements with original lease terms up to 10 years. Capital leases that
exist as of year-end 2009 expire no later than 2016.
The Company has a build-to-suit lease for warehouse space in Frederick, Colorado. The lease
requires minimum monthly rents that expire on October 31, 2016. The lease is renewable at the
Company’s option for two additional periods of five years each. The Company has an outstanding
letter of credit in the amount of $1.0 million to secure the lease. The Company evaluated the
provisions of the accounting guidance relating to the effect of a lessee’s involvement in an
asset construction and concluded that due to the Company’s collateral to the landlord, in the
form of the $1.0 million letter of credit, that it is deemed the owner of the land and building
for accounting purposes. As a result, the related capitalized costs for the warehouse space in
Frederick, Colorado are classified as “land, land improvements, and building” and are
included in property, plant and equipment, net, in the accompanying Consolidated Balance Sheets.
A liability for the same amount is included in the current portion of capital lease obligations and
capital lease obligations, less current portion, representing the short- and long-term
components. Due to the acquisition of Cambium, the Company recorded an increase of $4.8 million
in purchase accounting related to the fair market value of land, land improvements, and building
for the warehouse space on the date of acquisition. The related liability has been adjusted
accordingly. The cost of the building is being depreciated over a 35-year useful life. The amount
of the depreciation expense was $0.4 million, $0.4 million, $0.2 million and $0.1 million for the
year ended December 31, 2009, the year ended December 31, 2008, for the period of January 29,
2007 through December 31, 2007 and for the period of January 1, 2007 through April 11, 2007,
respectively. Additionally, the obligation will be reduced over the life of the lease at an
interest rate of 5.54%. At the end of the original lease term, the land and building, net of
accumulated depreciation, will be equal to the remaining liability.
The gross value of other leased capital assets was $0.4 million and zero at December 31,
2009 and December 31, 2008, respectively, which are included in the Machinery, computers and
equipment category in Property, Equipment and Software. The accumulated amortization of leased
capital assets was $0.1 million and zero at December 31, 2009 and December 31, 2008,
respectively. Amortization of capital lease assets is recognized over the term of the lease on a
straight line basis and included in depreciation expense.
69
Operating Leases
The Company leases certain facilities and equipment for production, selling and
administrative purposes under agreements with original lease periods up to 10 years. Leases
generally include provisions requiring payment of taxes, insurance, and maintenance on the leased
property. Some leases include renewal options and rent escalation clauses, and certain leases
include options to purchase the leased property during or at the end of the lease term.
Rent holidays and rent escalation provisions are considered in determining straight-line
rent expense to be recorded over the lease term. The lease term begins on the date of initial
term of the lease. Lease renewal periods are considered on a lease-by-lease basis and are
generally not included in the initial lease term. Operating rent expense was $1.1 million, $1.2
million, $0.9 million and $0.4 million for the year ended December 31, 2009, for the year ended
December 31, 2008, for the period from January 29, 2007 to December 31, 2007 and for the period
from January 1, 2007 to April 11, 2007, respectively.
Future minimum build-to-suit and capital lease payments under long-term non-cancelable
leases, and the related present value of capital lease payments at December 31, 2009 are as
follows:
| |
|
|
|
|
| (in thousands) |
|
|
|
|
|
|
|
|
|
2010 |
|
$ |
1,160 |
|
2011 |
|
|
1,073 |
|
2012 |
|
|
1,110 |
|
2013 |
|
|
1,092 |
|
2014 |
|
|
1,138 |
|
Thereafter |
|
|
2,127 |
|
|
|
|
|
Total minimum lease payments |
|
|
7,700 |
|
Less: Amount representing interest |
|
|
(4,409 |
) |
|
|
|
|
Present value of net minimum lease payments |
|
|
3,291 |
|
Less: Current portion |
|
|
(443 |
) |
Add: Remaining liability at end of build-to-suit lease |
|
|
9,847 |
|
|
|
|
|
Capital leases obligations, less current portion |
|
$ |
12,695 |
|
|
|
|
|
Future minimum payments under all remaining non-cancelable operating leases are payable
as follows:
| |
|
|
|
|
| (in thousands) |
|
|
|
|
|
|
|
|
|
2010 |
|
$ |
2,260 |
|
2011 |
|
|
1,334 |
|
2012 |
|
|
1,373 |
|
2013 |
|
|
869 |
|
2014 |
|
|
291 |
|
Thereafter |
|
|
48 |
|
|
|
|
|
Total minimum lease payments |
|
$ |
6,175 |
|
|
|
|
|
Note 13 — Fair Value of Financial Instruments
Effective January 1, 2008, the Company adopted the accounting guidance for fair value
measurements and disclosures for its financial assets and liabilities. The new guidance
establishes a new framework for measuring fair value and expands disclosure requirements. In
addition, the new guidance defines fair value as the price that would be received to sell an
asset, or paid to transfer a liability (exit price), in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants on the
measurement date.
Under the new guidance, valuation techniques are based on observable or unobservable inputs.
Observable inputs reflect market data obtained from independent sources, while unobservable
inputs reflect the Company’s market assumptions. These two types of inputs have created the
following fair value hierarchy:
| |
• |
|
Level 1 — Quoted prices for identical instruments in active markets. |
| |
• |
|
Level 2 — Quoted prices for similar instruments in active markets; quoted
prices for identical or similar instruments in markets that are not active; and
model-derived valuations in which significant value drivers are observable. |
| |
• |
|
Level 3 — Valuations derived from valuation techniques in which significant
value drivers are unobservable. |
70
The guidance requires an entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value.
As of December 31, 2009, financial instruments include $13.3 million of cash and cash
equivalents, restricted assets of $24.7 million, the $5.0 million revolver, the $97.2 million
senior secured credit facility, the $54.6 million senior unsecured notes, $0.3 million of
warrants, $9.6 million in CVRs, and the $1.0 million interest rate swap contract. As of December
31, 2008, the financial instruments include $2.4 million of cash and cash equivalents, the $5.0
million revolver, the $102.8 million senior secured credit facility, the $52.3 million senior
unsecured notes and the $2.4 million interest rate swap contract. The fair market values of cash
equivalents and the restricted assets are equal to their carrying value as these investments are
recorded based on quoted market prices and/or other market data for the same or comparable
instruments and transactions as of the end of the reporting period. The fair value of the
revolver is equal to its carrying value due to the short-term nature of the instrument and the
interest rate being variable. The fair market value of the senior credit facility and senior
unsecured notes are subject to market conditions; however, a limited trading market restricts the
ability to freely trade the debt. The senior credit facility bears interest at a variable rate
and management believes that the carrying value of the senior credit facility approximates its
fair value. The fair value of the interest rate swap is obtained from a third-party valuation.
This value represents the estimated amount the Company would receive or pay to terminate the
agreement taking into consideration current interest rates. This estimate was determined using a
discounted cash flows model predicated upon observable market inputs, primarily forward LIBOR
rates from a yield curve derived from market data.
Assets and liabilities measured at fair value on a recurring basis are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Fair Value at Reporting Date Using |
|
|
|
|
| |
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
in Active |
|
|
Significant |
|
|
|
|
|
|
|
| |
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
| |
|
Year Ended |
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
Total |
|
| (in thousands) |
|
December 31, |
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
Gains |
|
| Description |
|
2009 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
(Losses) |
|
Restricted Assets Money Market |
|
$ |
24,686 |
|
|
$ |
24,686 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Warrant |
|
|
280 |
|
|
|
— |
|
|
|
280 |
|
|
|
— |
|
|
|
1 |
|
Interest rate swap |
|
|
992 |
|
|
|
— |
|
|
|
992 |
|
|
|
— |
|
|
|
1,390 |
|
CVRs |
|
|
9,617 |
|
|
|
— |
|
|
|
— |
|
|
|
9,617 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Fair Value at Reporting Date Using |
|
|
|
|
| |
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
in Active |
|
|
Significant |
|
|
|
|
|
|
|
| |
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
| |
|
Year Ended |
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
Total |
|
| (in thousands) |
|
December 31, |
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
Gains |
|
| Description |
|
2008 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
(Losses) |
|
Interest rate swap |
|
$ |
2,382 |
|
|
$ |
— |
|
|
$ |
2,382 |
|
|
$ |
— |
|
|
$ |
(848 |
) |
The fair value of the interest rate swap is obtained from a third-party valuation. This
value represents the estimated amount the Company would receive or pay to terminate the agreement
taking into consideration current interest rates. This estimate was determined using a
discounted cash flows model predicated upon observable market inputs, primarily forward LIBOR
rates from a yield curve derived from market data. The warrant was valued as described in Note 17
below. The CVRs were valued as described in Note 4 above.
71
Assets and liabilities measured at fair value on a non-recurring basis are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Fair Value at Reporting Date Using |
|
|
|
|
| |
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
Significant |
|
|
|
|
| |
|
Year Ended |
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
|
| (in thousands) |
|
December 31, |
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
|
Total Gains |
|
| Description |
|
2009 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
(Losses) |
|
Goodwill |
|
$ |
151,915 |
|
|
|
|
|
|
|
|
|
|
$ |
151,915 |
|
|
$ |
(9,105 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Fair Value at Reporting Date Using |
|
|
|
|
| |
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
in Active |
|
|
Significant |
|
|
|
|
|
|
|
| |
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
| |
|
Year Ended |
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
Total |
|
| (in thousands) |
|
December 31, |
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
Gains |
|
| Description |
|
2008 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
(Losses) |
|
Goodwill |
|
$ |
116,373 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
116,373 |
|
|
$ |
(75,966 |
) |
In accordance with the provisions in the accounting guidance for intangibles—goodwill and
other, for the year ended December 31, 2009, goodwill with a carrying amount of $161.0 million
was written down to its implied fair value of $151.9 million, resulting in an impairment charge
of $9.1 million, which was included in earnings for the period. Also, for the year ended December
31, 2008, goodwill with a carrying amount of $192.3 million was written down to its implied fair
value of $116.3 million, resulting in an impairment charge of $76.0 million, which was included
in earnings for the period.
The table below sets forth a summary of changes in the estimated fair value of the Company’s
Level 3 financial assets and liabilities measured on a recurring basis as of December 31, 2009.
| |
|
|
|
|
| |
|
Fair Value |
|
| |
|
Measurements Using |
|
| |
|
Significant |
|
| |
|
Unobservable |
|
| |
|
Inputs (Level 3) |
|
| (in thousands) |
|
CVRs |
|
Beginning balance |
|
$ |
— |
|
Initial valuation of obligation |
|
|
9,617 |
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
9,617 |
|
|
|
|
|
|
|
|
|
|
Gains(losses) for the period included in
earnings attributable to the change in
unrealized gains or losses related to
liabilities still held as of December 31, 2009 |
|
$ |
— |
|
|
|
|
|
Note 14 — Debt
Long-term debt consists of the following:
| |
|
|
|
|
|
|
|
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
$128.0 million of floating rate senior secured notes
due April 11, 2013, interest payable quarterly |
|
$ |
97,169 |
|
|
$ |
102,760 |
|
|
|
|
|
|
|
|
|
|
$64.2 million of 13.75% senior unsecured notes due
April 11, 2014, interest payable quarterly |
|
|
54,598 |
|
|
|
52,307 |
|
|
|
|
|
|
|
|
|
|
|
151,767 |
|
|
|
155,067 |
|
|
|
|
|
|
|
|
|
|
Less: Current portion of long-term debt |
|
|
(1,280 |
) |
|
|
(1,280 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
150,487 |
|
|
$ |
153,787 |
|
|
|
|
|
|
|
|
72
Permanent Waiver
As a result of the Embezzlement Matter and the relevant investigation, the Company was
unable to issue its 2007 financial statements until after April 14, 2008, causing a financial
reporting default under the senior secured credit facility (the “Senior Facility”) and Senior
Unsecured Notes Agreement. Pursuant to waivers entered into among the Company, the administrative
agent under the Senior Facility, and the required lenders, and waivers entered into among the
Company, the administrative agent under the Senior Unsecured Notes Agreement, and the required
noteholders on May 20, 2008, the required lenders under the Senior Facility and the required
noteholders under the Senior Unsecured Note Agreement each temporarily waived the financial
reporting defaults, and extended the date upon which the Company was required to deliver the
relevant financial reports until August 15, 2008. During the period of temporary waiver, interest
on the senior secured loans made pursuant to the Senior Facility and Senior Unsecured Notes was
calculated at 2% higher than the original rate, as called for in the agreements. The additional
interest for the Senior Unsecured Notes was added to the principal of the notes and is payable at
maturity.
While in default, including the period of temporary waiver, the Company was prohibited from
borrowing against the revolving loans made pursuant to the Senior Facility. In order to assist
the Company in meeting its seasonal, short-term financing requirements, three members of the
Company made unsecured loans to the Company totaling $7.0 million, payable October 11, 2014, with
interest at 14% per year, payable quarterly beginning June 30, 2008.
On August 22, 2008, the Company entered into a Permanent Waiver and Amendment (“Permanent
Waiver”) with its Senior Facility and Senior Unsecured Notes lenders. Under the terms and
conditions of the Permanent Waiver, the lenders waived the default arising from the embezzlement
and resulting financial reporting default, and agreed to other terms and conditions further
described in this note.
The EBITDA definition in the credit agreement, as amended, was modified to include
adjustments related to losses and expenses incurred as a result of the Embezzlement Matter.
The Permanent Waiver required the Company to pay an amendment fee and increased the interest
rate on the Senior Facility and Senior Unsecured Notes.
In connection with the Permanent Waiver, the $7.0 million in unsecured loans described above
were converted to capital stock on June 30, 2008.
Deferred financing costs were capitalized in other assets, net of accumulated amortization,
and were amortized over the term of the related debt using the effective interest method. In
connection with the successor financings above, the Company incurred $5.9 million in financing
costs. Capitalized deferred financing costs at August 22, 2008 (date of Permanent Waiver) and at
December 31, 2007 were $4.6 million and $5.2 million, respectively.
In accordance with the accounting guidance for modifications or exchanges of debt
instruments, the modifications to the Senior Facility and Senior Unsecured Notes
resulting from the Permanent Waiver were analyzed to determine whether the refinancing would be
recorded as an extinguishment of debt or a modification of debt. Based upon this analysis, it was
determined that the modification qualified as extinguishment of debt, with associated unamortized
deferred financing costs and amendment fees included in debt extinguishment gain or loss. The
Company recognized a total pre-tax charge of $5.6 million consisting of deferred financing costs
of $4.6 million and amendment fees of $1.0 million, recorded as loss on extinguishment of debt in
the accompanying Consolidated Statement of Operations.
Senior Secured Credit Facility
On April 12, 2007, Cambium Learning entered into the $158 million Senior Facility with
several banks for which the Company is a guarantor. The Senior Facility was comprised of a $30
million revolving credit agreement (the “Revolver”) and a $128 million loan agreement. The Senior
Facility, including the Revolver for which Cambium pays annual commitment fees, expires on
April 11, 2013. The Senior Facility is collateralized by all of Cambium’s personal property.
Under the original agreement, the interest rate on the Senior Facility was based upon either the
one-, three- or six-month LIBOR rate plus 2.75%. The loan agreement requires quarterly principal payments of $0.3
million.
Due to the Permanent Waiver, the interest rate on the Senior Facility is now based on
one-, three- or six-month LIBOR or ABR rate plus a spread as determined by the Company’s credit
ratings. Based on ratings as of year end 2009, the spread is LIBOR plus 6.50%. The Permanent
Waiver also places a floor on the two rates. The LIBOR rate will not be less than 3.00%, and the
ABR rate will not be less than 4.00%. As of December 31, 2009, the interest rate on the Senior
Facility was 9.5%.
As of December 31, 2009, Cambium had borrowings of $5.0 million under the Revolver, and
subject to certain borrowing base capacity limitations for outstanding letters of credit, had
$23.5 million available to borrow. At December 31, 2009, the interest rate on the Revolver was
9.5%.
73
On August 27, 2008, in accordance with the terms of the Permanent Waiver, $23.0 million was
used to prepay the Tranche B Loans of the Senior Facility. In addition, proceeds from the
recovery of the embezzled funds have been and will be used to make prepayments on the Senior
Facility.
In the first quarter
of 2010, the Company’s credit ratings were upgraded by Standard &
Poor’s and Moody’s Investor Services. As a result of the credit
rating upgrades, the spread for LIBOR decreased from 6.5% to 5.0%, with a
continued LIBOR floor of 3.0%, and the effective interest rate became
8.0%.
Senior Unsecured Notes
On April 12, 2007, Cambium Learning entered into a Note Purchase Agreement and sold
11.75% notes due April 11, 2014 (the “Senior Unsecured Notes”), generating gross proceeds of
$50 million, in a private placement. The Senior Unsecured Notes are guaranteed by the Company and
pay cash interest equal to 10.0% on a quarterly basis. Any additional interest beyond the 10%
rate is added to the principal of the notes and is not payable until April 11, 2014. The initial
interest rate on the senior unsecured notes was 11.75% per annum. That rate was increased by
200 basis points in connection with the negotiation of the Permanent Waiver and credit agreement
amendments in 2008 and was increased by an additional 50 basis points as of March 31, 2009 by
virtue of Cambium’s total leverage ratio (as defined under the senior unsecured notes) exceeding
5.5 to 1 as of March 31, 2009; however, as a result of the merger with VLCY, the total leverage
ratio fell below 5.5 to 1 and the rate was decreased by 50 basis points. Thus, as of December 31,
2009, the interest rate on the subordinated notes was 13.75% per annum. Assuming the all-in
interest rate on the senior unsecured notes remains at 13.75% until April 11, 2014, the value of
these notes, including accrued interest, will be $64.2 million.
Covenants under the Senior Facility and Senior Unsecured Notes
The Senior Facility includes a financial covenant which is a total leverage ratio. The ratio
is calculated quarterly using an adjusted EBITDA, which is defined as earnings before interest
paid, taxes, depreciation, and amortization, and other adjustments allowed under the terms of the
agreement, on a rolling 12-month basis. It also contains customary covenants, including
limitations on Cambium Learning’s ability to incur debt, and events of default as defined by the
agreement. The Senior Facility also limits Cambium Learning’s ability to pay dividends, to make
advances, and otherwise engage in inter-company transactions. The Senior Facility requires the
total leverage ratio to be no greater than 6.50:1 for fiscal 2009, 5.5:1 for fiscal 2010, 4.5:1
for fiscal 2011, and 4.0:1 thereafter.
The senior unsecured notes include a financial covenant which requires that beginning with
the quarter ended March 31, 2009, the Company maintains as of the end of each fiscal quarter
consolidated adjusted EBITDA of not less than $25.0 million, which is defined as earnings before
interest paid, taxes, depreciation, and amortization, and other adjustments allowed under the
terms of the agreement, on a rolling 12-month basis. The senior unsecured notes also contain
customary covenants, including limitations on the Company’s ability to incur debt.
In the event that Cambium Learning fails to comply with the financial covenant, the Company
has the right to make a cash contribution to the capital of Cambium Learning, the aggregate
amount not to be in excess of the minimum amount necessary to cure the relevant failure to comply
with the financial covenant. Upon receipt by Cambium of such cash, the financial covenant will be
recalculated giving effect to the pro forma adjustments. EBITDA shall be increased by the amount
of cash contributed, solely for the purpose of measuring the financial covenant. This right to
make a cash contribution is available for no more than one fiscal quarter in a fiscal year. For
the fiscal quarter ended June 30, 2009, Cambium Learning’s total leverage ratio was greater than
the maximum permitted 6.5:1, and Cambium Learning’s adjusted EBITDA was less than the minimum
required $25 million. As of August 14, 2009, Cambium Learning was in non-compliance with these
covenants. On August 14, 2009, the Company notified both its senior secured lenders and senior
unsecured debt holders that VSS-Cambium Holdings, LLC intended to cure the non-compliance. On
August 17, 2009, $3.0 million of capital was contributed to Cambium Learning by its stockholder
to fund the cure. On August 20, 2009, the $3.0 million was paid to the senior secured lenders and
reduced the principal amount outstanding on Cambium Learning’s senior secured credit agreement.
An uncured default with respect to either of these financial covenants could, if not waived by
the lenders and the noteholders, result in acceleration of the indebtedness under Cambium
Learning’s credit facilities. Cambium Learning may not have sufficient funds to repay the
indebtedness, and there may not be equity or debt financing
opportunities available to Cambium Learning on acceptable terms, or at all. Cambium Learning
is in compliance with its financial covenants with respect to the year ended December 31, 2009.
74
Amendments to the Senior Facility and Senior Unsecured Notes
Cambium Learning entered into an amendment to each of its credit agreements on October 29,
2009. Since the senior secured credit agreement and the senior unsecured credit agreement are
substantially similar agreements, each of the amendments is substantially similar to the other. The
amendments were permitted under the terms of the merger agreement, and provide for the following
important modifications to the credit agreements:
| |
• |
|
Change in Control Definition. Prior to the amendment, the original investors
in Cambium Learning were required to own or control a majority of the outstanding
economic or voting interests of Cambium Learning. This majority threshold is being
reduced to 35%. |
| |
• |
|
VSS Funds Ownership. VSS is not permitted to sell or otherwise transfer any
of the Company’s common stock that it directly or indirectly owns, unless it
continues to directly or indirectly own or control at least 35% of the outstanding
Company common stock, and it has not sold or otherwise transferred, in the aggregate,
more than 15% of its Company common stock. |
| |
• |
|
Increase in Material Indebtedness. An event of default would occur if a
“change in control” occurred under any of Cambium Learning’s other “material
indebtedness.” The term “material indebtedness” includes the senior unsecured notes,
as well as any other debt, the principal amount of which exceeds a specified
threshold. The $5 million threshold is being increased under the amendment to
$7.5 million. |
| |
• |
|
Exceptions to Restricted Payments. Cambium Learning is prohibited from paying
dividends, unless the specific type of payment is permitted. Additional types of
payments are being permitted to allow the following: |
| |
• |
|
Up to $3.0 million to fund public company, administrative, overhead, franchise tax
and related costs incurred by the Company; and |
| |
| |
• |
|
Up to $750,000 in annual board of director compensation and expenses. |
| |
• |
|
The annual monitoring fee previously payable to VSS is being eliminated. |
| |
• |
|
Permitted Acquisition Basket Reset. The amount of consideration payable
in an acquisition is limited under the credit agreements, and the limitations
are being reset after giving effect to the acquisition of Voyager Expanded
Learning by Cambium Learning in connection with the mergers. The limitation
will be reset to a cumulative $150 million amount, but any single acquisition
is limited to $20 million until the ratio of senior secured debt to EBITDA (as
calculated under the credit agreements) does not exceed 2.50 to 1.0, and the
ratio of total leverage to EBITDA (as calculated under the credit agreements)
does not exceed 3.50 to 1.0, at which time the single acquisition limit will be
increased to $100 million. |
| |
• |
|
Definition of Consolidated EBITDA. The definition of Consolidated
EBITDA, which is used for calculating leverage ratios under the senior secured
credit agreement, and the minimum EBITDA covenant under the senior unsecured
credit agreement are being modified to allow additional add-backs for the
following items: |
| |
• |
|
Deferred revenue associated with a permitted acquisition; |
| |
| |
• |
|
Up to $24.0 million in M&A costs related to the mergers; |
| |
| |
• |
|
Up to $2.0 million in costs incurred in closing of locations or lease terminations in
connection with the mergers; |
| |
| |
• |
|
Up to $5.0 million in severance costs incurred in connection with the mergers; |
| |
| |
• |
|
Up to $3.0 million in integration costs incurred connection with the mergers; and |
| |
| |
• |
|
Merger and acquisition costs for future transactions (whether or not completed) of up
to $5.0 million for closed transactions and $0.5 million for failed transactions in any
calendar year, and $2.0 million in the aggregate. |
In addition, the amendments ratify and approve the mergers and the related transactions.
Each of the lenders who executed the amendment on or before October 28, 2009 received a fee
equal to 20 basis points of the amount of its loans and commitments under the credit agreements,
for an aggregate fee payable to all lenders equal to approximately $0.3 million, which is included
in other income (expense) of the Consolidated Statements of Operations.
75
At December 31, 2009, the future minimum repayments under long-term debt, including
paid-in-kind interest of $9.6 million in 2014, are payable as follows:
| |
|
|
|
|
| (in thousands) |
|
2009 |
|
|
|
|
|
|
2010 |
|
$ |
1,280 |
|
2011 |
|
|
1,280 |
|
2012 |
|
|
1,280 |
|
2013 |
|
|
93,329 |
|
2014 |
|
|
64,202 |
|
Thereafter |
|
|
— |
|
|
|
|
|
Total debt repayment |
|
$ |
161,371 |
|
|
|
|
|
In June 2007, the Company entered into an interest rate swap contract, with a notional
amount of $39.0 million, which expires in June 2010. Under the agreement, to the extent that
LIBOR exceeds a fixed maximum rate, the Company will receive payments on the notional amount. The
total fair value of this financial instrument at December 31, 2009 and December 31, 2008 amounted
to a liability of approximately $1.0 million and $2.4 million, respectively, and is included in
accrued expenses at December 31, 2009 and other long-term liabilities at December 31, 2008 in the
accompanying Consolidated Balance Sheets. For the year ended December 31, 2009, the Company
recognized a gain of $1.4 million and for the year ended December 31, 2008 and for the period
from January 29, 2007 through December 31, 2007, the Company recognized losses of $0.8 million
and $1.5 million, respectively, on changes in fair market value of the interest rate swap, which
has been included in other income (expense) in the accompanying Consolidated Statements of
Operations.
Note 15 — Profit-Sharing, Pension, and Other Postretirement Benefit Plans
Defined Contribution Plans
Cambium has established a defined contribution retirement plan, the Cambium Learning 401(k)
Savings Plan, which conforms to Section 401(k) of the Internal Revenue Code and covers
substantially all of Cambium’s eligible employees. Participants may elect to contribute a
percentage of their compensation subject to an annual limit. Cambium provides a matching
contribution in amounts up to 4.5% of employee compensation. The 401(k) matching contribution
expense was $0.6 million, $0.7 million, $0.5 million and $0.3 million for the year ended
December 31, 2009, for the year ended December 31, 2008, for the period from January 29, 2007 to
December 31, 2007 and for the period from January 1, 2007 to April 11, 2007, respectively.
On January 1, 2010, the Company’s 401(k) plan was consolidated with VLCY’s plan. Under this
plan, the Company will match 50% of participant contributions up to 4%. Additionally, the
Company may make discretionary contributions based upon exceeding
company performance targets of up to 2% of eligible earnings for all employees
regardless of participation.
As a result of the acquisition of VLCY, the Company also has contractual obligations under a
frozen replacement benefit plan (“RBP”) for a small number of terminated and retired executives
and one current employee. Because the RBP is frozen, no participant can make or is entitled to
additional contributions. Instead, the Company has accrued a liability totaling $1.4 million as of
yearend 2009 to reflect its estimated future obligation for RBP. The current portion of the RBP
liability, which was $0.5 million at year end 2009, is included on the line “Deferred
compensation” in Note 10 of these financial statements. The long-term portion of the RBP
liability, which was $0.9 million at year end 2009, is
included on the line “Long-term deferred compensation” in Note 11 of these financial
statements.
Defined Benefit Plan
As a result of the acquisition of VLCY, the Company also has a frozen defined benefit
pension plan covering certain terminated and retired former domestic employees. The benefits are
primarily based on years of service and/or compensation during the years immediately preceding
retirement. The Company uses a measurement date of December 31 for its pension and postretirement
benefit plans.
Applicable accounting guidance for employers’ accounting for defined benefit pension and
other postretirement plans requires reporting of the funded status of defined benefit
postretirement plans as an asset or liability in the statement of financial position, recognizing
changes in the funded status due to gains or losses, prior service costs, and net transition
assets or obligations in other comprehensive income in the year the changes occur, adjusting
other comprehensive income when the gains or losses, prior service costs, and net transition
assets or obligations are recognized as components of net period benefit cost through
amortization, and measuring the funded status of a plan as of the date of the statement of
financial position, with limited exceptions.
76
The net cost of our defined benefit pension plan for the period from December 8, 2009
through December 31, 2009 is as follows:
| |
|
|
|
|
| |
|
U.S. Defined Benefit |
|
| |
|
Pension Plan |
|
| (in thousands) |
|
2009 |
|
|
|
|
|
|
Service cost |
|
$ |
— |
|
Interest cost |
|
|
36 |
|
Recognized net actuarial loss/(gain) |
|
|
(206 |
) |
|
|
|
|
Net pension and other postretirement
benefit cost (income) |
|
$ |
(170 |
) |
|
|
|
|
Obligation and Funded Status
The funded status of our defined benefit pension plan at the end of fiscal 2009 is as
follows:
| |
|
|
|
|
| |
|
U.S Defined Benefit |
|
| |
|
Pension Plan |
|
| (in thousands) |
|
2009 |
|
Change in Benefit Obligation |
|
|
|
|
Benefit obligation, beginning of period |
|
$ |
12,010 |
|
Service cost |
|
|
— |
|
Interest cost |
|
|
36 |
|
Actuarial (gain)/loss |
|
|
(206 |
) |
Benefits paid |
|
|
(106 |
) |
|
|
|
|
Benefit obligation, end of year |
|
$ |
11,734 |
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets |
|
|
|
|
Fair value, beginning of period |
|
$ |
— |
|
Company contributions |
|
|
106 |
|
Benefits paid |
|
|
(106 |
) |
|
|
|
|
Fair value, end of year |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
Funded/(unfunded) status |
|
$ |
(11,734 |
) |
|
|
|
|
Accrued benefit cost |
|
$ |
(11,734 |
) |
|
|
|
|
|
|
|
|
|
Amounts Recognized in the Consolidated Balance Sheets |
|
|
|
|
Current accrued benefit liability |
|
|
(1,266 |
) |
Non-current accrued benefit liability |
|
|
(10,468 |
) |
|
|
|
|
Net amount recognized |
|
$ |
(11,734 |
) |
|
|
|
|
At December 31, 2009, we had a net actuarial gain of $0.2 million for our U.S. pension plan.
This amount is included in Accumulated Other Comprehensive Income (Loss) in our Consolidated
Balance Sheets. Of this amount, we expect immaterial amounts to be recognized as a component of
net pension cost (income) during 2010.
77
Plan Assumptions
| |
|
|
|
|
| |
|
U.S. Defined Benefit |
|
| |
|
Pension Plan |
|
| |
|
2009 |
|
| |
|
|
|
Discount rate |
|
|
5.25 |
% |
The discount rate is determined by analyzing the average returns of high-quality fixed
income investments defined as AA-rated or better. We also utilize an interest rate yield curve
for instruments with maturities corresponding to our benefit obligations.
Additional Information
For our pension plan, the projected benefit obligation and accumulated benefit obligation at
the end of fiscal 2009 is as follows:
| |
|
|
|
|
| |
|
U.S. Defined Benefit |
|
| |
|
Pension Plan |
|
| (in thousands) |
|
2009 |
|
Projected benefit obligation |
|
$ |
11,734 |
|
Accumulated benefit obligation |
|
$ |
11,734 |
|
Future Contributions
Total contributions expected to be paid under our frozen U.S. retirement plans or to the
beneficiaries thereof during fiscal 2010 are $1.7 million, consisting of $1.2 million to our U.S.
defined benefit plan and $0.5 million to RBP.
Gross benefit payment obligations under our continuing defined benefit plans for the next
ten years are anticipated to be as follows:
| |
|
|
|
|
| |
|
U.S. Retirement Plans |
|
| (in thousands) |
|
(Pension Plan and RBP) |
|
|
|
|
|
|
2010 |
|
$ |
1,745 |
|
2011 |
|
|
1,589 |
|
2012 |
|
|
1,242 |
|
2013 |
|
|
1,192 |
|
2014 |
|
|
1,112 |
|
2015 – 2019 |
|
|
4,788 |
|
Note 16 — STOCKHOLDERS’/MEMBERS’ EQUITY
Common Stock
Shares Authorized and Outstanding. The Company is authorized to issue
150,000,000 shares of common stock, par value $0.001 per share. As of December 31, 2009, there
were 43,858,676 shares of common stock outstanding and an additional 5,000,000 shares of common
stock reserved for issuance pursuant to the 2009 Equity Incentive Plan.
Shares of the Company’s common stock are not convertible into or exchangeable for shares of
any other class of capital stock. There are no redemption or sinking fund provisions applicable
to the common stock.
At the time of the merger between the Company and VLCY:
| |
• |
|
20.5 million shares were issued to the former sole stockholder in consideration of
its pre-merger interest; |
| |
• |
|
3.8 million shares were issued to the former sole stockholder as consideration
for a $25.0 million capital contribution made in conjunction with the merger; and |
| |
• |
|
19.5 million shares were issued to the former VLCY stockholders as part of the
purchase price consideration for the acquisition. |
Voting Rights. Each holder of shares of the Company’s common stock is entitled to
one vote for each share held of record on the applicable record date on all matters submitted to
a vote of stockholders, including the election of directors.
Dividend Rights. Holders of the Company’s common stock are entitled to receive
dividends when, as and if declared by the board of directors out of funds legally available for
payment, subject to the rights of holders of the Company’s preferred stock, if any. The Company
does not expect to pay dividends in the short term.
78
Rights Upon Liquidation. In the event of a voluntary or involuntary liquidation,
dissolution or winding up, the holders of the Company’s common stock will be entitled to share
equally in any of the assets available for distribution after payment in full of all debts and
after the holders of all series of the Company’s outstanding preferred stock, if any, have
received their liquidation preferences in full.
Preemptive Rights; Subscription Rights. In general, holders of the Company’s common
stock have no preemptive rights to purchase, subscribe for or otherwise acquire any unissued or
treasury shares or our other securities. However, under the terms of the stockholders agreement,
entered into in connection with the mergers (the “Stockholders Agreement”) except with respect to specified exempt issuances, for so long as VSS-Cambium Holdings III, LLC
and funds managed or controlled by VSS (collectively “VSS”) beneficially own in the aggregate at
least 25% of the outstanding shares of the Company’s common stock, VSS has preemptive rights to
purchase the Company’s common stock (or other securities that may be approved by the audit
committee of the board of directors), in connection with any proposed securities offering by the
Company. These preemptive rights generally give VSS the opportunity to purchase an amount of
common stock (or such other securities as may be approved by the audit committee) in the new
issuance sufficient to enable VSS to maintain their same collective percentage ownership
following the new issuance.
In addition, under the Stockholders Agreement, the Company granted VSS a subscription right
that would permit them to purchase, at any time and from time to time until December 8, 2011, a
number of shares of the Company’s common stock up to the lesser of: (i) 7,500,000 shares of
common stock (subject to adjustment in the event of any dividend, stock split, combination or
similar recapitalization event); or (ii) the number of shares of common stock that VSS may
purchase from time to time during the 24-month subscription period for an aggregate purchase
price of $20 million. The purchase price per share in connection with the subscription rights is
equal to 90% of the volume weighted average price of the Company’s common stock measured over the
ten-trading-day period immediately preceding the issuance and sale of the shares of the common
stock.
Preferred Stock
Shares Authorized and Outstanding. The Company is authorized to issue
15,000,000 shares of preferred stock, par value $0.001 per share. As of December 31, 2009, there
are no shares of preferred stock issued or outstanding.
Blank Check Preferred Stock. Under the certificate of incorporation, without
further stockholder action, the board of directors is authorized to provide for the issuance of
shares of preferred stock in one or more series, to establish from time to time the number of
shares to be included in each such series, and to fix the designation, powers, preferences and
rights of the shares of each such series and any qualifications, limitations or restrictions on
such shares. The board of directors may authorize the issuance of preferred stock with voting or
conversion rights that could adversely affect the voting power or other rights of the holders of
the Company’s common stock.
Members’ Interest — Successor Period through December 8, 2009
VSS-Cambium
Holdings, LLC. VSS-Cambium Holdings, LLC was formed on January 29,
2007, and on that date entered into a stock purchase agreement that provided for the purchase by
VSS-Cambium Holdings, LLC of all of the outstanding stock of Cambium Learning. Each Investor and
Executive Member (Member) contributed capital which totaled $144.0 million, including cash and
carryover interest, and was issued a membership interest in the Company. The capital contributed
was then used to purchase the outstanding stock of Cambium Learning on April 12, 2007. On
January 15, 2008, $0.8 million of capital was contributed by a new investor for a membership
interest in the Company. $7 million in unsecured loans (see Note 14), were converted to equity of
the Company’s sole stockholder in late August 2008. A capital stock issuance fee of $0.1 million
was paid by the Company. In August 2009 the Company’s sole stockholder made a capital
contribution of $3.0 million to fund a cure for a debt covenant violation (see Note 14). No
future capital contribution is required to the Company by its former Members. At the time of the
merger between the Company and VLCY, all membership interests were converted to 20.5 million
shares of common stock.
VSS-Cambium
Management, LLC. VSS-Cambium Management, LLC (Management LLC) is a
Delaware limited liability company formed on February 7, 2007. Management LLC was a member and
held up to a $50,000 equity interest in VSS-Cambium Holdings, LLC. Its members were individuals
admitted as Management Members including some which were also Members of the Company. Management
Members could include employees of and consultants to the Company. Management LLC was authorized
to sell a total of 100,000 Management LLC units. As of December 8, 2009 and December 31, 2008,
65,762 units for a total of $32,881 have been sold and distributed to certain employees of
Cambium. The units were valued at $0.50 per unit and reflect the fair value at the date of
purchase as determined by the Company’s Board of Managers.
There are no further obligations related to these units.
79
Cambium Learning, Inc. — Predecessor Period
The rights and preferences of each of Cambium Learning’s classes of stock were as follows:
Common Stock. Cambium Learning had authorized 110,000,000 shares of common stock,
of which 2,720,718 were issued, 100,000,000 were reserved for the conversion of preferred stock,
and 7,000,000 were reserved for issuance upon exercise of common stock options, of which
5,860,750 options were issued.
Voting. Each share of common stock of Cambium Learning had identical rights
and privileges in every respect. The holders of shares of common stock were entitled to vote upon
all matters submitted to a vote of the stockholders of Cambium Learning, and were entitled to
one vote for each share of common stock held.
Dividends. No dividends were declared or paid through April 11, 2007.
Series A Preferred Stock. Cambium Learning had authorized 100,000,000 shares of
preferred stock, of which 100,000,000 have been designated as Series A Preferred Stock.
Ranking. Series A Preferred Stock ranked senior to all other equity securities
of Cambium Learning, including any other series or class of Cambium Learning’s preferred stock,
common stock, or other capital stock, at any time authorized, unless by its terms such
series or class of equity securities ranked senior to or pari passu with the Series A Preferred
Stock, and such series or class of equity securities had been authorized and approved in
accordance with the provisions of the agreement by the holders of a majority of the
then-outstanding shares of Series A Preferred Stock.
Voting Rights. In addition to any voting rights provided by law, the holders of
shares of Series A Preferred Stock had the following voting rights:
Each share of Series A Preferred Stock entitled the holder thereof to vote, in person
or by proxy, on all matters voted on by holders of common stock, voting together as a single
class with the holders of the common stock, and with holders of all other shares entitled to vote
thereon.
Each share of Series A Preferred Stock entitled the holder to the number of votes with
respect to such share as was equal to the number of votes that such holder would be entitled to
cast assuming that such share of Series A Preferred Stock had been converted on the record date
into the number of shares of common stock then issuable upon conversion of such share of Series A
Preferred Stock.
Conversion. Each share of Series A Preferred Stock was convertible, at the
option of the holder thereof, at any time or from time to time, into a number of shares of common
stock equal to a fraction, the numerator of which was the
Series A Liquidation Preference and the denominator of which was the Adjusted Conversion
Price then in effect. At April 11, 2007, immediately prior to the acquisition of Cambium
Learning by the Company, each share of Series A Preferred Stock outstanding converted into one
share of common stock.
Note 17 — Stock-Based Compensation and Expense
As of December 31, 2009, the Company has one stock-based compensation plan, which is
described below. The total amount of pre-tax (expense) benefit for stock-based compensation
recognized in general and administrative expense, excluding the impact of the modification described below,
was $(2.3) million, zero, zero, and $0.1 million
for the year ended December 31, 2009, for the year ended December 31, 2008, for the period from
January 29, 2007 to December 31, 2007, and for the period from January 1, 2007 to April 11, 2007,
respectively. The total income tax (expense) benefit recognized for book purposes in the
consolidated statement of operations related to stock-based compensation was zero, $(0.2
million), zero and $0.2 million for the year ended December 31, 2009, for the year ended December 31,
2008, for the period from January 29, 2007 to December 31, 2007, and for the period from
January 1, 2007 to April 11, 2007, respectively. The total tax benefit realized was zero for all
years presented.
As a result of the April 11, 2007 acquisition of Cambium Learning by the Company, all
unvested stock options outstanding on February 28, 2007 were accelerated and vested in full
effective immediately prior to the closing. At that time, all outstanding options were canceled
and converted to the right to receive a lump-sum cash payment in an amount equal to the excess of
$2.5476 per share over the exercise price for each option. For certain employees, a portion of
their lump-sum cash payment was held in escrow in accordance with the acquisition agreement. The
stock option plan was subsequently terminated.
80
For the period January 1, 2007 through April 11, 2007, the Company recorded stock-based
compensation of $2.9 million, of which $2.3 million was paid in cash in connection with
stock-based awards accounted for in accordance with the revised guidance and $0.6 was held in
escrow. As a result of the settlement with the former stockholders (discussed under Embezzlement
Loss in Note 3 above), in 2008 the $0.6 million held in escrow was reversed and recorded as
income in interest and other expenses in the accompanying Consolidated Statements of Operations.
Stock Option Plan
In fiscal 2009, the Company adopted the Cambium Learning Group, Inc. 2009 Equity Incentive
Plan (“Incentive Plan”). Under the Incentive Plan, 5,000,000 shares of common stock were reserved
for issuance. The Incentive Plan is administered by the board of directors which has the
authority to establish the terms and conditions of awards granted under the Incentive Plan. Under
the Incentive Plan, the Company can grant incentive stock options, non-statutory stock options,
stock appreciation rights (“SARs”), restricted stock, restricted stock units, conversion stock
options, conversion SARs, and other stock or cash awards.
Warrant
In connection with the completion of the merger on December 8, 2009, the Company issued to VSS-Cambium
Holdings III, LLC a warrant to purchase shares of our common stock (the “Holdings Warrant”). As
of December 31, 2009, the Holdings Warrant was exercisable for 526,834 shares of the Company’s
common stock at an exercise price of $0.01 per share. The Holdings Warrant expires on December
8, 2014. The number of shares of common stock issuable pursuant to the Holdings Warrant may
increase in the future upon the occurrence of certain events described below. The number of
shares of our common stock issuable under the Holdings Warrant is based upon the calculation of
three separate amounts, described herein as the Cambium Specified Asset Recoupment Amount, the
Additional Share Amount and the Formula Amount. The 526,834 shares
currently exercisable represent 71,604 shares originating from the Cambium Specified
Asset Recoupment Amount and 455,230 shares originating from the
Formula Amount, which are summarized as follows:
• The Cambium Specified Asset Recoupment Amount is based upon the net amount of recoveries
that the Company receives or received on and after June 1, 2009, including periods after the
effective time of the mergers, with respect to the embezzlement matter that was discovered in
April 2008. As of December 31, 2009, the Company has received net recoveries of approximately
$1.0 million with respect to this matter, although the actual amount of net recoveries that the
Company will ultimately receive is not known at this time. The Cambium Specified Asset Recoupment
Amount equals 0.45 multiplied by the quotient of the aggregate net recoveries divided by $6.50.
Therefore as of December 31, 2009, 71,604 shares are exercisable under the Holdings Warrant
related to the Cambium Specified Asset Recoupment Amount. In accordance with applicable
accounting guidance for distinguishing liabilities from equity, this award is recorded as a
liability in the other liabilities line on the balance sheet and measured at fair value. The
initial recording and any subsequent increases in the value of the award attributable to
embezzlement recoveries is recorded to embezzlement loss on the income statement. Subsequent
changes in fair value are recorded to other income or expense. The warrant was valued at $0.3
million on December 31, 2009 with the Black-Sholes pricing model. Due to the low exercise price
of the warrants, the model assumptions do not significantly impact the valuation.
• The Additional Share Amount is calculated over a period commencing at the effective time
of the mergers with VLCY and Cambium and ending two years thereafter. The Additional Share Amount
will equal the number of shares of VLCY common stock, if any, that are surrendered upon
consummation of the VLCY merger in excess of the sum of the 29,874,145 shares that were known to
be outstanding plus the number of shares of VLCY common stock that are issued upon the exercise
of options known to be outstanding, provided that the maximum Additional Share Amount is capped
at a maximum of 145,000 shares and provided, further, that an adjustment to the number of shares
VSS-Cambium Holdings III, LLC received in connection with the merger of Cambium was not already
made under the terms of the merger agreement. Following completion of the merger with VLCY,
29,999 shares of VLCY common stock in excess of 29,874,145 shares were surrendered and, pursuant
to the merger agreement, the number of shares of the Company’s common stock issuable to
VSS-Cambium Holdings III, LLC was adjusted to increase the number of shares it received. At the
effective time of the merger with VLCY all outstanding stock options were terminated. Thus, the
Company does not believe that the Holdings Warrant shall be issuable with respect to any shares
relating to the Additional Share Amount.
• The Formula Amount adds shares to the Holdings Warrant only if, prior to completion of the
mergers with Cambium and VLCY, equity cure payments were made under Cambium’s existing credit
agreements, debt was retired under those agreements or payments were made to obtain
default-related waivers under those agreements. The only applicable event was an equity cure
payment of $3.0 million made in August 2009 (see Note 14). The Formula Amount equals the equity
cure payment of $3.0 million divided by $6.50, or 455,230 shares. Thus, 455,230 shares of the
Company’s common stock are currently exercisable under the Holdings Warrant with respect to the
Formula Amount. In accordance with applicable accounting guidance for distinguishing liabilities
from equity, this award is recorded to equity with the offset going against the capital
contribution made to affect the debt cure.
81
Subscription Right
In connection with the merger with Cambium, the Company granted VSS a subscription right
that permits them to purchase, at any time and from time to time until December 8, 2011, a number
of shares of common stock up to the lesser of:
• 7,500,000 shares of common stock (subject to adjustment in the event of any dividend,
stock split, combination or similar recapitalization event); or
• the number of shares of common stock that VSS may purchase from time to time during the
24-month subscription period for an aggregate purchase price of $20.0 million (based upon the per
share purchase price described below).
The purchase price per share in connection with the subscription rights is equal to 90% of
the volume weighted average price of the common stock measured over the ten-trading-day period
immediately preceding the issuance and sale of the shares of common stock. These rights are
accounted for as equity with the offsetting grant date fair value of $2.2 million recorded to
general and administrative expense.
Fair Value of Stock Option and SAR Grants
The fair value of each stock-based compensation award granted is estimated on the date of
grant using the Black-Scholes option-pricing model.
In connection with the merger with VLCY, the Company issued conversion stock options to
purchase 105,910 shares and conversion SARs with respect to 200,000 shares. These were issued in
replacement of share-based awards held by employees of VLCY that were required to be converted
into rights or options for shares of the Company with the same terms and conditions that were
applicable to the rights or options for VLCY shares, including exercise prices ranging from $8.55
to $36.00 per share. The conversion SARs are recorded as a liability at December 31, 2009 in
other liabilities in the Consolidated Balance Sheets. For more information see Note 4. The
following assumptions were used during the periods presented to estimate the fair value of
conversion awards:
| |
|
|
|
|
| |
|
2009 |
|
| |
|
|
|
Expected stock volatility |
|
|
35.00 |
% |
Risk-free interest rate |
|
|
1.02 |
% |
Expected years until exercise |
|
|
2.56 – 0.1 |
|
Dividend yield |
|
|
0.00 |
% |
All other stock option and SAR grants are calculated using the Black-Scholes option-pricing
model. The following assumptions were used during the periods presented to estimate the fair
value of other awards:
| |
|
|
|
|
| |
|
2009 |
|
| |
|
|
|
Expected stock volatility |
|
|
35.00 |
% |
Risk-free interest rate |
|
|
2.69 |
% |
Expected years until exercise |
|
|
6.25 |
|
Dividend yield |
|
|
0.00 |
% |
Due to a lack of exercise history or other means to reasonably estimate future exercise
behavior, the Company used the simplified method as described in applicable accounting guidance
for stock based compensation to estimate the expected years until exercise on new awards.
82
Summary of Stock Option and SAR Activity
A summary of the stock option and stock appreciation right transactions for the year ended
December 31, 2009 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock Option Grantees |
|
|
SAR Grantee |
|
| |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
| |
|
Shares |
|
|
Exercise |
|
|
Shares |
|
|
Exercise |
|
| |
|
(000s) |
|
|
Price |
|
|
(000s) |
|
|
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
2,256 |
|
|
$ |
6.03 |
|
|
|
200 |
|
|
$ |
8.55 |
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Forfeited/cancelled |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards outstanding at
December 31, 2009 |
|
|
2,256 |
|
|
$ |
6.03 |
|
|
|
200 |
|
|
$ |
8.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards exercisable at
December 31, 2009 |
|
|
127 |
|
|
$ |
23.26 |
|
|
|
200 |
|
|
$ |
8.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of
awards granted during the
year ended December 31, 2009 |
|
$ |
1.16 |
|
|
|
|
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options outstanding and exercisable as of December 31, 2009 was
zero. The aggregate intrinsic value is calculated as the difference between the exercise price of
the underlying awards and the closing stock price of $3.92 of our common stock on December 31,
2009. The total grant date fair value of stock options vested during the year ended December 31,
2009 was $2.4 million.
As of December 31, 2009, there was $2.3 million of unrecognized compensation cost related to
outstanding stock options and stock appreciation rights, net of forecasted forfeitures. This
amount is expected to be recognized over a weighted average period of 3.9 years. To the extent
the forfeiture rate is different than what we have anticipated, stock-based compensation related
to these awards will be adjusted in accordance with applicable accounting guidance for stock
based compensation.
The following tables provide additional information with respect to stock options and stock
appreciation rights outstanding at the end of fiscal 2009:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Awards Outstanding |
|
|
Awards Exercisable |
|
| |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
| |
|
|
|
|
|
Average |
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
Weighted |
|
| |
|
Number |
|
|
Remaining |
|
|
Average |
|
|
Number |
|
|
Remaining |
|
|
Average |
|
| Range of |
|
Outstanding |
|
|
Contractual |
|
|
Exercise |
|
|
Exercisable |
|
|
Contractual |
|
|
Exercise |
|
| Exercise Price |
|
(000’s) |
|
|
Life (Years) |
|
|
Price |
|
|
(000’s) |
|
|
Life (Years) |
|
|
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$4.50 and below |
|
|
1,612 |
|
|
|
9.9 |
|
|
$ |
4.50 |
|
|
|
16 |
|
|
|
9.9 |
|
|
$ |
4.50 |
|
$4.51 – $6.50 |
|
|
538 |
|
|
|
9.9 |
|
|
|
6.50 |
|
|
|
5 |
|
|
|
9.9 |
|
|
|
6.50 |
|
$6.51 – $36.00 |
|
|
106 |
|
|
|
1.4 |
|
|
|
26.93 |
|
|
|
106 |
|
|
|
1.4 |
|
|
|
26.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,256 |
|
|
|
9.5 |
|
|
$ |
6.03 |
|
|
|
127 |
|
|
|
1.6 |
|
|
$ |
23.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
Securities Authorized for Issuance
Securities authorized for issuance under equity compensation plans at December 31, 2009 are
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Number of securities |
|
| |
|
Number of securities to be |
|
|
Weighted-average |
|
|
remaining available for |
|
| |
|
issued upon exercise of |
|
|
exercise price of |
|
|
future issuance |
|
| (in thousands, except per share amounts) |
|
outstanding options |
|
|
outstanding options |
|
|
under equity |
|
| Plan Category |
|
and rights |
|
|
and rights |
|
|
incentive plan (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved
by security holders |
|
|
2,256 |
|
|
$ |
6.03 |
|
|
|
2,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not
approved by security holders |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,256 |
|
|
$ |
6.03 |
|
|
|
2,744 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (a) |
|
Excludes securities reflected in the first column, “Number of securities to be issued upon
exercise of outstanding options and rights”. |
Note 18 — Restructuring
In December 2007, the Company developed, approved, and communicated a plan to consolidate
the Petaluma, California, office and reduce the work force, with consolidation completed by
September 30, 2009 the Company’s total restructuring charge amounted to $0.7 million. The Company
expensed $0.1 million for the year ended December 31, 2009, classified as cost of sales in the
accompanying Consolidated Statement of Operations in the Cambium Learning Technologies segment.
The following table summarizes the Petaluma restructuring plan:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred in |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Period |
|
| |
|
|
|
|
|
Total |
|
|
Incurred in |
|
|
Incurred in |
|
|
from January 29, |
|
| |
|
Total Amount |
|
|
Incurred as |
|
|
Year Ended |
|
|
Year Ended |
|
|
2007 through |
|
| |
|
Expected to |
|
|
of December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| (in thousands) |
|
be Incurred |
|
|
2009 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-time termination benefits |
|
$ |
314 |
|
|
$ |
314 |
|
|
$ |
16 |
|
|
$ |
238 |
|
|
$ |
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other associated costs |
|
|
348 |
|
|
$ |
348 |
|
|
|
40 |
|
|
|
307 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
662 |
|
|
$ |
662 |
|
|
$ |
56 |
|
|
$ |
545 |
|
|
$ |
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the activity in the Company’s restructuring reserve, which is
included in accrued expenses in the accompanying Consolidated Balance Sheets.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Period from |
|
| |
|
Year Ended |
|
|
Year Ended |
|
|
January 29, 2007 |
|
| |
|
December 31, |
|
|
December 31, |
|
|
through December 31, |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Beginning Balance |
|
$ |
48 |
|
|
$ |
60 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
One-time termination benefits |
|
|
16 |
|
|
|
238 |
|
|
|
60 |
|
Facility-related expenses |
|
|
40 |
|
|
|
307 |
|
|
|
— |
|
Cash Payments: |
|
|
|
|
|
|
|
|
|
|
|
|
One-time termination benefits |
|
|
(64 |
) |
|
|
(250 |
) |
|
|
— |
|
Facility-related expenses |
|
|
(40 |
) |
|
|
(307 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Ending Balance |
|
$ |
— |
|
|
$ |
48 |
|
|
$ |
60 |
|
|
|
|
|
|
|
|
|
|
|
As a result of the merger with VLCY on December 8, 2009, the Company plans to reduce its
combined work force and will close its Dallas, Texas distribution facility and transfer all
inventory to its distribution facility in Frederick, Colorado. The Company expects to incur
approximately $1.2 million in severance related costs, which will impact all segments, and $0.5
million in warehouse move costs, which will impact the Voyager segment.
84
During
the 23-day post-merger period of 2009, the Company incurred severance-related expense
of $0.5 million and made cash payments of $28,000. The expense was recorded to the following
line items in the Consolidated Statements of Operations: $0.1 million to Cost of Sales, $0.1
million to Sales and Marketing, and $0.3 million to General and Administrative. The remainder of the
severance-related expenses and the warehouse move costs are expected to be incurred in the first
half of 2010.
Note 19 — Contingent Liabilities
The
Company is involved in various legal proceedings incidental to its business. Management
believes that the outcome of these proceedings will not have a material adverse effect upon the
Company’s consolidated operations or financial condition and the Company has recognized
appropriate liabilities as necessary based on facts and circumstances known to management. The
Company expenses legal costs related to legal contingencies as incurred.
The
Company has a potential indemnification liability related to state income taxes that have been
assessed against a former subsidiary of VLCY sold in 2007. Management believes that it is likely
that our position will be upheld and the Company does not have a liability accrued. This contingency was
identified as an agreed contingency for the CVR and, as such, any amount paid would potentially
offset payments due under the CVR in accordance with the merger
agreement terms. As of year-end
2009, the fair value of the CVR includes a reduction of $0.9 million related to this state income
tax issue, calculated using management assumptions related to the likelihood, amount and timing
of any cash outflows for this agreed-upon contingency. If the former subsidiary’s tax position
is not upheld, the Company could incur significant indemnification expense in future periods to our
Statements of Operations and amounts payable to prior VLCY shareholders for the CVR could be
materially reduced from our estimate as of December 31, 2009. The former subsidiary has appealed
the assessment and is awaiting an administrative decision by the state taxing authority. If the
administrative decision by the state taxing authority is unfavorable, the former subsidiary plans
to appeal the decision. The Company expects the final resolution of any tax litigation or
potential settlement could range from zero to approximately $17.5 million (including interest).
To the extent funds are available in the CVR escrow account, the
Company’s cash exposure could be reduced
by up to fifty percent.
The Company has letters of credit outstanding as of December 31, 2009 in the amount of
$2.3 million to support workers’ compensation insurance coverage, certain of our credit card
programs, the build-to-suit lease, and performance bonds for certain contracts. The Company
maintains a $1.1 million certificate of deposit as collateral for the workers’ compensation
insurance and credit card program letters of credit and for the Automated Clearinghouse (ACH)
programs.
The certificate of deposit is recorded in other assets.
Note 20 — Related Party Transactions
Agreements with VSS
Jeffrey
Stevenson and Scott Troeller, each of whom serves on our board of
directors, are both partners
of VSS. Funds managed by VSS own a majority of the equity interests of VSS-Cambium Holdings III,
LLC, which holds approximately 55% of the Company’s outstanding common stock.
Cambium Learning entered into a management services agreement with VSS, effective on
April 12, 2007. Under the term of the agreement, VSS has provided Cambium Learning with the
following services: (i) advice in connection with the negotiation of agreements, contracts,
documents, and instruments necessary to provide Cambium Learning with financing from banks on
terms and conditions satisfactory to Cambium, and (ii) financial,
managerial, and operational advice in connection with Cambium’s day-to-day operations, including,
without limitation, advice with respect to the development and implementation of strategies for
improving the operating, marketing and financial performance of Cambium.
Pursuant to the management services agreement, Cambium Learning paid VSS an annual
monitoring fee of $0.2 million, plus out-of-pocket expenses, payable semi-annually in arrears, in
exchange for these services. Cambium Learning expensed $0.2 million, $0.2 million and $0.1
million for monitoring fees for the year ended December 31, 2009, for the year ended December 31,
2008 and for the period of January 29, 2007 to December 31, 2007, respectively. The management
services agreement was terminated on December 8, 2009, at the
effective time of the mergers, and
VSS is no longer compensated under such agreement.
85
Pursuant to an agreement with an affiliate of VSS, Cambium Learning was obligated to pay
such VSS affiliate fees in the event that additional equity or debt financings were completed by
Cambium Learning. On December 8, 2009, that fee agreement was replaced by a consulting fee
agreement between the Company and VSS entitling VSS to the following fees: (i) a fee equal to 1%
of the gross proceeds of any debt or equity financing by us, and (ii) a fee equal to 1% of the
enterprise value of any entities acquired or disposed of by us. These obligations will remain in
effect until the earlier of the date on which funds managed by VSS cease to beneficially own at
least 10% of the Company’s outstanding common stock or, unless our audit committee renews the
consulting fee agreement, January 1, 2015.
The Company incurred $3.0 million to an affiliate of VSS at the closing of the mergers in
consideration of providing advisory services with respect to the transaction. One million dollars
of this fee was paid in cash at closing, and the balance becomes payable if and when Cambium
Learning’s ratio of total outstanding debt to adjusted EBITDA drops below 3.0:1. Three-quarters
of this remaining balance will be allocated pro rata among VSS and certain of the members of
VSS-Cambium Holdings III, LLC. For purposes of determining when this fee is to be paid, adjusted
EBITDA is calculated in the same manner as that measure is calculated under Cambium Learning’s
senior unsecured credit agreement.
VSS currently receives an annual retainer of $65,000 each for the services of Mr. Stevenson
and Mr. Troeller on the board of directors. In addition, VSS receives an annual retainer of
$70,000 for the services of Mr. Troeller as chairman of the board of directors. In total, VSS
receives $0.2 million in cash annually related to the services of these directors, plus
reimbursement of out-of-pocket expenses.
Stockholders Agreement
The Company entered into the Stockholders Agreement on December 8, 2009, at the effective
time of the mergers, with VSS-Cambium Holdings III, LLC and Vowel Representative, LLC, the
stockholder representative for the former VLCY stockholders.
Board of Directors. The Stockholders Agreement contains several agreements among the
parties with respect to the board of directors. These provisions include an agreement by
VSS-Cambium Holdings III, LLC to vote its shares of the Company’s common stock as necessary to
ensure that the size of the board of directors is set at and remains at nine directors until
December 8, 2012. These provisions also include an agreement by VSS-Cambium Holdings III, LLC not
to vote its shares or take any other action to remove or disqualify any of the VLCY designees
named as Class II directors (the “Voyager Class II designees”) or as Class III directors (the
“Voyager Class III designees”), in each case other than for “cause” as determined in accordance
with Delaware law, until the earliest to occur of:
| |
• |
|
the written consent of Vowel Representative, LLC, which consent
may be granted or withheld in its sole and absolute discretion; |
| |
| |
• |
|
the full distribution by the escrow agent of the CVR escrow fund in
accordance with the terms of the escrow agreement entered into in
connection with the merger transaction; |
| |
| |
• |
|
the second anniversary of the effective time of the mergers with respect to the
Voyager Class II designees and the third anniversary of the
effective time with respect to the Voyager Class III designees; or |
| |
| |
• |
|
the date on which funds managed or controlled by VSS cease to
collectively beneficially own in the aggregate at least 10% of the
issued and outstanding shares of the Company’s common stock. |
VSS-Cambium Holdings III, LLC also has agreed that, until December 8, 2012, for so long as
VSS-Cambium Holdings III, LLC and funds managed or controlled by VSS collectively beneficially
own in the aggregate at least 10% of the issued and outstanding shares of our common stock:
| |
• |
|
none of the funds managed or controlled by VSS nor VSS-Cambium
Holdings III, LLC will vote or otherwise take any action to amend,
modify or repeal the Company’s certificate of incorporation or
bylaws to eliminate the Class II or Class III director classes, to
increase or decrease the size of the board of directors or in any
other manner that would result in a breach of the Stockholders
Agreement; and |
| |
| |
• |
|
VSS-Cambium Holdings III, LLC and funds managed or controlled by
VSS will vote or act by written consent to maintain a classified or
staggered board of directors, with the director classes and other
terms as set forth in our certificate of incorporation and bylaws. |
Preemptive Rights. Except with respect to specified exempt issuances that are described
below, so long as VSS-Cambium Holdings III, LLC and funds managed or controlled by VSS
beneficially own in the aggregate at least 25% of the outstanding shares of the Company’s common
stock, they will have preemptive rights to purchase the Company’s common stock (or such other
securities as may be approved by the audit committee) in connection with any proposed issuance of
securities after December 8, 2009 that does not constitute an exempt issuance. These preemptive
rights generally give the holders of those rights the opportunity to purchase an amount of the
Company’s securities in the new issuance that would enable the holders of those rights to
maintain their same collective percentage ownership following the new issuance. Certain
specified issuances of securities by us constitute “exempt issuances” and will not be subject to the
preemptive rights of VSS-Cambium Holdings III, LLC and funds managed or controlled by VSS.
86
Subscription Rights. VSS-Cambium Holdings III, LLC and funds managed or controlled by VSS
have the right, at any time and from time to time until December 8, 2011, to purchase a number of
shares of the Company’s common stock up to the lesser of: (i) 7,500,000 shares of common stock
(subject to adjustment in the event of any dividend, stock split, combination or similar
recapitalization event); or (ii) the number of shares of common stock that VSS-Cambium Holdings
III, LLC and funds managed or controlled by VSS may purchase from time to time during the
24-month subscription period for an aggregate purchase price of $20,000,000. The purchase price
per share in connection with the subscription rights is equal to 90% of the volume weighted
average price of our common stock measured over the ten-trading-day period immediately preceding
the issuance and sale of the shares our common stock.
Other Agreements
Shortly after discovering the financial misappropriation at Cambium Learning in late April 2008,
VSS notified Cambium Learning’s lenders of the circumstances, and, as a result, the ability to
draw down on the revolving loan under Cambium Learning’s credit agreement was promptly suspended.
In order to provide needed working capital over the course of the next three months during the
pendency of the internal investigation into the misappropriation, VSS, through its funds,
advanced $7.0 million to Cambium Learning in the form of subordinated loans with interest at 14%
per year, payable quarterly beginning June 30, 2008. In connection with the permanent waiver and
amendment to the senior secured and senior unsecured credit agreements that restored the
revolving loan following the misappropriation, these subordinated loans were converted into
equity of the Company’s sole stockholder in late August 2008. At the time of this conversion, the
Company paid VSS a capital stock issuance fee of $0.1 million.
The Company ultimately recovered $30.2 million from the former stockholders of Cambium
Learning upon discovery of the financial misappropriation. Since David Cappellucci, Cambium
Learning’s former Chief Executive Officer and the Company’s President, David Caron, Cambium
Learning’s former Chief Financial Officer, and George Logue, Cambium Learning’s Executive Vice
President and the Company’s President of Supplemental Solutions, were also former stockholders of
the predecessor Cambium Learning, they each contributed a pro rata portion to this recovery as
former stockholders, and not in their capacity as employees.
Note 21 — Segment Reporting
The Company’s geographic area of operation is predominantly the United States. Export or
foreign sales to locations outside the United States for the year ended December 31, 2009
accounted for 12% of total sales, with 7% of total sales shipped to Canada. No single customer
accounts for more than 10% of consolidated net sales. For the year ended December 31, 2009, no
single customer constituted 10% or more of total sales or accounts receivable. Although the loss
of a single customer or a few customers would not have a material adverse effect on the Company’s
business, schedules of school adoptions and market acceptance of the Company’s products can
materially affect year-to-year revenue performance. The Company evaluates the performance of its
operating segments based on income (loss) from operations before
depreciation and amortization, interest income and expense,
income taxes, and nonrecurring and extraordinary items. The significant accounting policies of
the reportable segments are the same as those for the Company. There were no inter-segment sales
or transfers.
Prior
to the merger transaction completed on December 8, 2009, the Company had
two reportable segments: Published Products and Learning Technologies.
Subsequent to the merger transaction, the Company operates as three reportable
segments with separate management teams and infrastructures that offer various
products and services, as follows:
Voyager:
Voyager intervention programs serve as the anchor of the Company’s product portfolio,
generally providing a full-year’s worth of literacy or math instruction to at-risk students.
Sopris:
Sopris programs are offered in the areas of literacy, mathematics, and behavior to
supplement core programs, and include assessments and instructional resources for students and
professional development materials for educators.
Cambium Learning Technologies:
This operating segment includes assistive and instructional technology and related services.
The principal markets for these products are elementary and secondary schools.
87
Other:
This consists of unallocated shared services, such as accounting,
legal and human resources and corporate related items. Depreciation
and amortization expense, interest income and expense, other income and expense, and taxes are
included in other.
The
historical segment reporting results have been adjusted for comparative
purposes to reflect the current organizational structure. These
reclassifications required certain assumptions and estimates.
The following table represents the revenue, gross profit and income (loss) from operations
which are used by the Company’s chief operating decision maker to measure the segment’s operating
performance. The Company does not track assets directly by segment and the chief operating
decision maker does not use assets or capital expenditures to measure a segment’s operating
performance, therefore this information is not presented. The accounting policies of each segment
are the same as those described in the summary of significant accounting policies.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Cambium |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Learning |
|
|
|
|
|
|
|
| (in thousands) |
|
Voyager |
|
|
Sopris |
|
|
Technologies |
|
|
Other |
|
|
Consolidated |
|
Predecessor Period from January 1, 2007 through April 11, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
4,132 |
|
|
$ |
5,136 |
|
|
$ |
5,970 |
|
|
$ |
— |
|
|
$ |
15,238 |
|
Service revenues |
|
|
2,287 |
|
|
|
773 |
|
|
|
116 |
|
|
|
— |
|
|
|
3,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
6,419 |
|
|
|
5,909 |
|
|
|
6,086 |
|
|
|
— |
|
|
|
18,414 |
|
Cost of product sales |
|
|
1,136 |
|
|
|
1,699 |
|
|
|
1,061 |
|
|
|
— |
|
|
|
3,896 |
|
Cost of service revenues |
|
|
1,384 |
|
|
|
460 |
|
|
|
64 |
|
|
|
— |
|
|
|
1,908 |
|
Amortization |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,392 |
|
|
|
3,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
2,520 |
|
|
|
2,159 |
|
|
|
1,125 |
|
|
|
3,392 |
|
|
|
9,196 |
|
Segment net (loss) income |
|
$ |
(7 |
) |
|
$ |
(912 |
) |
|
$ |
2,348 |
|
|
$ |
(13,241 |
) |
|
$ |
(11,812 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Period, from January 29, 2007 (inception)
through December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
35,827 |
|
|
$ |
21,496 |
|
|
$ |
13,943 |
|
|
$ |
— |
|
|
$ |
71,266 |
|
Service revenues |
|
|
7,275 |
|
|
|
2,064 |
|
|
|
242 |
|
|
|
— |
|
|
|
9,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
43,102 |
|
|
|
23,560 |
|
|
|
14,185 |
|
|
|
— |
|
|
|
80,847 |
|
Cost of product sales |
|
|
13,106 |
|
|
|
4,755 |
|
|
|
1,888 |
|
|
|
— |
|
|
|
19,749 |
|
Cost of service revenues |
|
|
4,877 |
|
|
|
1,316 |
|
|
|
119 |
|
|
|
— |
|
|
|
6,312 |
|
Amortization |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
11,719 |
|
|
|
11,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
17,983 |
|
|
|
6,071 |
|
|
|
2,007 |
|
|
|
11,719 |
|
|
|
37,780 |
|
Segment net (loss) income |
|
$ |
9,767 |
|
|
$ |
9,960 |
|
|
$ |
4,834 |
|
|
$ |
(38,492 |
) |
|
$ |
(13,931 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
40,424 |
|
|
$ |
27,495 |
|
|
$ |
21,288 |
|
|
$ |
— |
|
|
$ |
89,207 |
|
Service revenues |
|
|
7,924 |
|
|
|
2,217 |
|
|
|
383 |
|
|
|
— |
|
|
|
10,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
48,348 |
|
|
|
29,712 |
|
|
|
21,671 |
|
|
|
— |
|
|
|
99,731 |
|
Cost of product sales |
|
|
11,214 |
|
|
|
6,003 |
|
|
|
3,029 |
|
|
|
— |
|
|
|
20,246 |
|
Cost of service revenues |
|
|
5,721 |
|
|
|
1,489 |
|
|
|
253 |
|
|
|
— |
|
|
|
7,463 |
|
Amortization |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
15,966 |
|
|
|
15,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
16,935 |
|
|
|
7,492 |
|
|
|
3,282 |
|
|
|
15,966 |
|
|
|
43,675 |
|
Segment net (loss) income |
|
$ |
10,949 |
|
|
$ |
8,658 |
|
|
$ |
7,732 |
|
|
$ |
(96,899 |
) |
|
$ |
(69,560 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
44,329 |
|
|
$ |
23,431 |
|
|
$ |
22,625 |
|
|
$ |
— |
|
|
$ |
90,385 |
|
Service revenues |
|
|
8,594 |
|
|
|
1,754 |
|
|
|
315 |
|
|
|
— |
|
|
|
10,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
52,923 |
|
|
|
25,185 |
|
|
|
22,940 |
|
|
|
— |
|
|
|
101,048 |
|
Cost of product sales |
|
|
10,678 |
|
|
|
6,350 |
|
|
|
2,537 |
|
|
|
26 |
|
|
|
19,591 |
|
Cost of service revenues |
|
|
5,992 |
|
|
|
1,093 |
|
|
|
172 |
|
|
|
— |
|
|
|
7,257 |
|
Amortization |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
17,527 |
|
|
|
17,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
16,670 |
|
|
|
7,443 |
|
|
|
2,709 |
|
|
|
17,553 |
|
|
|
44,375 |
|
Segment net (loss) income |
|
$ |
16,417 |
|
|
$ |
7,734 |
|
|
$ |
11,235 |
|
|
$ |
(71,151 |
) |
|
$ |
(35,765 |
) |
88
Note 22 — Interim Financial Information (Unaudited)
The following table presents our quarterly results of operations for fiscal 2009 and fiscal
2008.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
Total |
|
| (in thousands, except per share data) |
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Year |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
15,794 |
|
|
$ |
20,976 |
|
|
$ |
40,972 |
|
|
$ |
23,306 |
|
|
$ |
101,048 |
|
Operating expenses |
|
|
22,268 |
|
|
|
31,918 |
|
|
|
30,016 |
|
|
|
40,140 |
|
|
|
124,342 |
|
Earnings (loss) before income taxes |
|
|
(11,214 |
) |
|
|
(15,950 |
) |
|
|
5,811 |
|
|
|
(22,116 |
) |
|
|
(43,469 |
) |
Income tax (expense) benefit |
|
|
4,317 |
|
|
|
2,099 |
|
|
|
(1,373 |
) |
|
|
2,661 |
|
|
|
7,704 |
|
Net income (loss) |
|
$ |
(6,897 |
) |
|
$ |
(13,851 |
) |
|
$ |
4,438 |
|
|
$ |
(19,455 |
) |
|
$ |
(35,765 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share |
|
|
(0.34 |
) |
|
|
(0.68 |
) |
|
|
0.22 |
|
|
|
(0.74 |
) |
|
|
(1.63 |
) |
Diluted income (loss) per share |
|
|
(0.34 |
) |
|
|
(0.68 |
) |
|
|
0.22 |
|
|
|
(0.74 |
) |
|
|
(1.63 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
17,071 |
|
|
$ |
29,721 |
|
|
$ |
35,263 |
|
|
$ |
17,676 |
|
|
$ |
99,731 |
|
Operating expenses |
|
|
26,617 |
|
|
|
33,405 |
|
|
|
30,423 |
|
|
|
97,423 |
|
|
|
187,868 |
|
Earnings (loss) before income taxes |
|
|
(15,031 |
) |
|
|
(7,190 |
) |
|
|
24,413 |
|
|
|
(85,174 |
) |
|
|
(82,982 |
) |
Income tax benefit |
|
|
5,712 |
|
|
|
2,732 |
|
|
|
2,329 |
|
|
|
2,649 |
|
|
|
13,422 |
|
Net income (loss) |
|
$ |
(9,319 |
) |
|
$ |
(4,458 |
) |
|
$ |
26,742 |
|
|
$ |
(82,525 |
) |
|
$ |
(69,560 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share |
|
|
(0.45 |
) |
|
|
(0.22 |
) |
|
|
1.30 |
|
|
|
(4.03 |
) |
|
|
(3.39 |
) |
Diluted income (loss) per share |
|
|
(0.45 |
) |
|
|
(0.22 |
) |
|
|
1.30 |
|
|
|
(4.03 |
) |
|
|
(3.39 |
) |
The net losses for the second quarter 2009 and fourth quarter 2008 include goodwill
impairment charges of $9.1 million and $76.0 million, respectively.
89
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Management’s Report on Internal Control Over Financial Reporting
(a) Evaluation of Disclosure Controls and Procedures
Management of the Company, with the participation of the Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure
controls and procedures (as such term is defined in
Rule 13a-15(e) and Rule 15d-15(e) under the
Securities Exchange Act of 1934) pursuant to Rule 13a-15 under the Exchange Act. The Company’s
disclosure controls and procedures are designed to ensure that information required to be
disclosed by the Company in the reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported on a timely basis and that such information is communicated to
management, including the Chief Executive Officer, Chief Financial
Officer and the Company’s Board of
Directors, to allow timely decisions regarding required disclosure.
Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were effective as of December 31,
2009.
(b) Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act.
Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
It should be noted that the Company’s management, including the Chief Executive Officer and
Chief Financial Officer, do not expect that the Company’s internal controls will necessarily
prevent all errors or fraud. A control system, no matter how well conceived or operated, can
provide only reasonable, not absolute, assurance that the objectives of the control system are
met. Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs.
A material weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a material
misstatement of the Company’s annual or interim financial statements will not be prevented or
detected on a timely basis.
This Annual Report on Form 10-K does not include a report of management’s assessment
regarding internal control over financial reporting or an attestation report of the Company’s
independent registered public accounting firm due to a transition period established by rules of
the SEC for newly public companies.
(c) Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during
the last fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
90
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The Company intends to file with the SEC a definitive proxy statement on Schedule 14A in
connection with the Company’s 2010 Annual Meeting of Stockholders (the “Proxy Statement”) within
120 days after the end of the year covered by this Annual Report on Form 10-K. The information
required to be furnished pursuant to this Item 10 will be set forth in the Proxy Statement and is
incorporated herein by reference.
Item 11. Executive Compensation.
The information required to be furnished pursuant to this Item 11 will be set forth in the
Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
The information required to be furnished pursuant to this Item 12 will be set forth in the
Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required to be furnished pursuant to this Item 13 will be set forth in the
Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required to be furnished pursuant to this Item 14 will be set forth in the
Proxy Statement and is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) 1.
Financial Statements:
The
following Consolidated Financial Statements of Cambium Learning Group,
Inc. are included in Part II,
Item 8, Financial Statements and Supplementary Data:
| |
• |
|
Reports of Independent Registered Public Accounting Firms |
| |
| |
• |
|
Consolidated Statements of Operations for the years ended December 31,
2009 and 2008, the period from January 29, 2007 through December 31,
2007 (Successor), and the period from January 1, 2007 through April
11, 2007 (Predecessor) |
| |
| |
• |
|
Consolidated Balance Sheets at December 31, 2009 and 2008 |
| |
| |
• |
|
Consolidated Statements of Cash Flows for the years ended December 31,
2009 and 2008, the period from January 29, 2007 through December 31,
2007 (Successor), and the period from January 1, 2007 through April
11, 2007 (Predecessor) |
| |
| |
• |
|
Consolidated Statements of Stockholders’ and Members’ Equity and
Comprehensive Income (Loss) for the years ended December 31, 2009 and
2008, the period from January 29, 2007 through December 31, 2007
(Successor), and the period from January 1, 2007 through April 11,
2007 (Predecessor) |
| |
| |
• |
|
Notes to the Consolidated Financial Statements |
91
2.
Financial Statement Schedules:
Schedule II: Valuation and Qualifying Accounts
| |
|
|
|
|
| |
|
Accounts |
|
| |
|
receivable |
|
| (in thousands) |
|
reserve |
|
Balance as of December 31, 2006 (Predecessor) |
|
$ |
502 |
|
Charged to costs and expenses |
|
|
(4 |
) |
Charged to other accounts (1) |
|
|
61 |
|
Recoveries |
|
|
— |
|
Write-offs |
|
|
(2 |
) |
Other |
|
|
— |
|
|
|
|
|
Balance as of April 11, 2007 (Predecessor) |
|
$ |
557 |
|
|
|
|
|
Balance as of April 11, 2007 (Successor) |
|
$ |
557 |
|
Charged to costs and expenses |
|
|
157 |
|
Charged to other accounts (1) |
|
|
(10 |
) |
Recoveries |
|
|
— |
|
Write-offs |
|
|
(9 |
) |
Other |
|
|
— |
|
|
|
|
|
Balance as of December 31, 2007 (Successor) |
|
$ |
695 |
|
|
|
|
|
Charged to costs and expenses |
|
|
18 |
|
Charged to other accounts (1) |
|
|
(5 |
) |
Recoveries |
|
|
— |
|
Write-offs |
|
|
(2 |
) |
Other |
|
|
— |
|
|
|
|
|
Balance as of December 31, 2008 (Successor) |
|
$ |
706 |
|
|
|
|
|
Charged to costs and expenses |
|
|
5 |
|
Charged to other accounts (1) |
|
|
12 |
|
Recoveries |
|
|
11 |
|
Write-offs |
|
|
(418 |
) |
Other |
|
|
— |
|
|
|
|
|
Balance as of December 31, 2009 (Successor) |
|
$ |
316 |
|
|
|
|
|
| |
|
|
| (1) |
|
Charges to other accounts include sales returns |
All other schedules have been omitted because they are not required, not applicable, or the
required information is otherwise included.
92
3. Exhibits:
The following exhibits are filed with this Annual Report on Form 10-K. Exhibit
numbers preceded by
an asterisk (*) indicate exhibits previously filed and are hereby incorporated herein by reference.
Exhibit numbers preceded by a plus sign (+) indicate a management contract or compensatory plan or
arrangement.
| |
|
|
Exhibit
Number |
|
Description |
| |
|
|
*2.1
|
|
Agreement and Plan of Mergers, dated as of June 20, 2009, among
Cambium Learning Group, Inc., Voyager Learning Company, VSS-Cambium
Holdings II Corp., Consonant Acquisition Corp., Vowel Acquisition
Corp. and Vowel Representative, LLC. (incorporated by reference to
Annex A to Amendment No. 3 to the Registration Statement on Form S-4
of Cambium Learning Group, Inc. (File No. 333-161075) filed with the
SEC on November 10, 2009). |
| |
|
|
*3.1
|
|
Second Amended and Restated Certificate of Incorporation of
Cambium-Voyager Holdings, Inc. (incorporated by reference to Annex C
to Amendment No. 3 to the Registration Statement on Form S-4 of
Cambium Learning Group, Inc. (File No. 333-161075) filed with the
SEC on November 10, 2009). |
| |
|
|
*3.2
|
|
Amended and Restated Bylaws of Cambium Learning Group, Inc.
(incorporated by reference to Annex D to Amendment No. 3 to the
Registration Statement on Form S-4 of Cambium Learning Group, Inc.
(File No. 333-161075) filed with the SEC on November 10, 2009). |
| |
|
|
*4.1
|
|
Specimen share certificate of Cambium Learning Group, Inc.
(incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the
Registration Statement on Form S-4 of Cambium Learning Group, Inc.
(File No. 333-161075) filed with the SEC on October 9, 2009). |
| |
|
|
*4.2
|
|
Form of Cambium Learning Group, Inc. Warrant. (incorporated by
reference to Exhibit 4.2 to the Registration Statement on Form S-4
of Cambium Learning Group, Inc. (File No. 333-161075) filed with the
SEC on August 6, 2009). |
| |
|
|
*10.1
|
|
Limited Guarantee given by certain funds managed by VSS Fund
Management LLC. (incorporated by reference to Annex G to Amendment
No. 3 to the Registration Statement on Form S-4 of Cambium Learning
Group, Inc. (File No. 333-161075) filed with the SEC on November 10,
2009). |
| |
|
|
*10.2 |
|
Voting and Support Agreement given to Voyager Learning Company by
VSS-Cambium Holdings III, LLC. (incorporated by reference to Annex H
to Amendment No. 3 to the Registration Statement on Form S-4 of
Cambium Learning Group, Inc. (File No. 333-161075) filed with the
SEC on November 10, 2009). |
| |
|
|
*10.3 |
|
Form of Voting and Support Agreement given to Cambium-Voyager
Holdings, Inc. (incorporated by reference to Annex I to Amendment
No. 3 to the Registration Statement on Form S-4 of Cambium Learning
Group, Inc. (File No. 333-161075) filed with the SEC on November 10,
2009). |
| |
|
|
*10.4
|
|
Form of Contingent Rights Agreement by and among Cambium-Voyager
Holdings, Inc., Vowel Representative, LLC and Wells Fargo Bank,
National Association. (incorporated by reference to Annex J to
Amendment No. 3 to the Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with the SEC on
November 10, 2009). |
| |
|
|
*10.5
|
|
Form of Escrow Agreement by and among Cambium-Voyager Holdings,
Inc., Vowel Representative, LLC, Voyager Learning Company, Richard
Surratt and Wells Fargo Bank, National Association. (incorporated by
reference to Annex K to Amendment No. 3 to the Registration
Statement on Form S-4 of Cambium Learning Group, Inc. (File No.
333-161075) filed with the SEC on November 10, 2009). |
| |
|
|
*10.6
|
|
Form of Stockholders Agreement by and among Cambium-Voyager
Holdings, Inc., VSS-Cambium Holdings III, LLC and Vowel
Representative, LLC. (incorporated by reference to Annex L to
Amendment No. 3 to the Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with the SEC on
November 10, 2009). |
| |
|
|
*10.7
|
|
Cambium Learning Group, Inc. 2009 Equity Incentive Plan.
(incorporated by reference to Exhibit 10.7 to the Registration
Statement on Form S-4 of Cambium Learning Group, Inc. (File No.
333-161075) filed with the SEC on August 6, 2009). |
| |
|
|
*10.8
|
|
Senior Secured Credit Agreement dated as of April 12, 2007 among
VSS-Cambium Merger Corp. as the Borrower (the predecessor to Cambium
Learning, Inc.); VSS-Cambium Holdings, LLC and other Guarantors; the
Lenders; Credit Suisse Securities (USA) LLC and Barclays Capital,
the investment banking division of Barclays Bank PLC, as Co-Lead
Arrangers and Joint Bookmanagers; Barclays Bank PLC, as
Administrative Agent and Collateral Agent; Credit Suisse Securities
(USA) LLC, as Co-Syndication Agent; BNP Paribas, as Co-Syndication
Agent; and TD Securities (USA) LLC, as Documentation Agent.
(incorporated by reference to Exhibit 10.8 to Amendment No. 2 to the
Registration Statement on Form S-4 of Cambium Learning Group, Inc. (File No. 333-161075)
filed with the SEC on October 30, 2009). |
| |
|
|
*10.9
|
|
Limited Waiver and Amendment, dated as of May 20,
2008, by and among, Cambium Learning, Inc., as the
Borrower (the successor to VSS-Cambium Merger Corp.),
Barclays Bank PLC, as Administrative Agent and the
required lenders, to the Senior Secured Credit
Agreement, dated as of April 12, 2007. (incorporated
by reference to Exhibit 10.9 to Amendment No. 1 to
the Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on October 9, 2009). |
| |
|
|
*10.10
|
|
Letter Agreement, dated July 15, 2008, by and among
Cambium Learning, Inc., as the Borrower, Barclays
Bank PLC, as Administrative Agent and the required
lenders. (incorporated by reference to Exhibit 10.10
to the Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on August 6, 2009). |
| |
|
|
*10.11 |
|
Permanent Waiver and Amendment No. 2, dated as of
August 22, 2008, by and among, Cambium Learning,
Inc., as the Borrower (the successor to VSS-Cambium
Merger Corp.), Barclays Bank PLC, as Administrative
Agent and the required lenders to the Senior Secured
Credit Agreement, dated as of April 12, 2007, as
amended. (incorporated by reference to Exhibit 10.11
to Amendment No. 2 to the Registration Statement on
Form S-4 of Cambium Learning Group, Inc. (File No.
333-161075) filed with the SEC on October 30, 2009). |
93
| |
|
|
Exhibit
Number |
|
Description |
*10.12
|
|
Note Purchase Agreement dated as of April 12, 2007
among VSS-Cambium Merger Corp., as Company (the
predecessor to Cambium Learning, Inc.); VSS-Cambium
Holdings, LLC, as Guarantor; TCW/Crescent Mezzanine
Partners IV, L.P., TCW/Crescent Mezzanine Partners
IVB, L.P., MAC Capital, Ltd., New York Life
Investment Management Mezzanine Partners II, LP,
NYLIM Mezzanine Partners II Parallel Fund, LP,
Goldentree Capital Solutions Fund Financing,
Goldentree Capital Opportunities, LP, as Purchasers;
and TCW/Crescent Mezzanine Partners IV, L.P., as
Administrative Agent. (incorporated by reference to
Exhibit 10.12 to Amendment No. 2 to the Registration
Statement on Form S-4 of Cambium Learning Group, Inc.
(File No. 333-161075) filed with the SEC on October
30, 2009). |
| |
|
|
*10.13
|
|
Temporary Waiver and Amendment, dated as of May 20,
2008, by and among Cambium Learning, Inc., (the
successor to VSS-Cambium Merger Corp.), TCW/Crescent
Mezzanine Partners IV, L.P., as Administrative Agent
and the required note holders, to the Note Purchase
Agreement, dated as of April 12, 2007. (incorporated
by reference to Exhibit 10.13 to Amendment No. 1 to
the Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on October 9, 2009). |
| |
|
|
*10.14 |
|
Letter Agreement, dated July 15, 2008, by and among
Cambium Learning, Inc., TCW/Crescent Mezzanine
Partners IV, L.P., as Administrative Agent and the
required note holders. (incorporated by reference to
Exhibit 10.14 to the Registration Statement on Form
S-4 of Cambium Learning Group, Inc. (File No.
333-161075) filed with the SEC on August 6, 2009). |
| |
|
|
*10.15
|
|
Permanent Waiver and Amendment No. 2 dated as of
August 22, 2008, by and among Cambium Learning, Inc.,
(the successor to VSS-Cambium Merger Corp.),
TCW/Crescent Mezzanine Partners IV, L.P., as
Administrative Agent and the required note holders,
to the Note Purchase Agreement, dated as of April 12,
2007, as amended. (incorporated by reference to
Exhibit 10.15 to Amendment No. 1 to the Registration
Statement on Form S-4 of Cambium Learning Group, Inc.
(File No. 333-161075) filed with the SEC on October
9, 2009). |
| |
|
|
*10.16
|
|
Promissory Note, dated April 12, 2007, made by
Cambium Learning, Inc. in favor of TCW/Crescent
Mezzanine Partners IV, L.P. in the aggregate
principal amount of $12,973,131.22. (incorporated by
reference to Exhibit 10.16 to the Registration
Statement on Form S-4 of Cambium Learning Group, Inc.
(File No. 333-161075) filed with the SEC on August 6,
2009). |
| |
|
|
*10.17
|
|
Promissory Note, dated April 12, 2007, made by
Cambium Learning, Inc. in favor of TCW/Crescent
Mezzanine Partners IVB, L.P. in the aggregate
principal amount of $9,526,868.78. (incorporated by
reference to Exhibit 10.17 to the Registration
Statement on Form S-4 of Cambium Learning Group, Inc.
(File No. 333-161075) filed with the SEC on August 6,
2009). |
| |
|
|
*10.18
|
|
Promissory Note, dated April 12, 2007, made by
Cambium Learning, Inc. in favor of MAC Capital LTD in
the aggregate principal amount of $2,500,000.
(incorporated by reference to Exhibit 10.18 to the
Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on August 6, 2009). |
| |
|
|
*10.19
|
|
Promissory Note, dated April 12, 2007, made by
Cambium Learning, Inc. in favor of NYLIM Mezzanine
Partners II Parallel Fund, L.P. in the aggregate
principal amount of $3,063,436.24. (incorporated by
reference to Exhibit 10.19 to the Registration
Statement on Form S-4 of Cambium Learning Group, Inc.
(File No. 333-161075) filed with the SEC on August 6,
2009). |
| |
|
|
*10.20
|
|
Promissory Note, dated April 12, 2007, made by
Cambium Learning, Inc. in favor of NY Life Investment
Management Mezzanine Partners II, L.P. in the
aggregate principal amount of $8,936,536.76.
(incorporated by reference to Exhibit 10.20 to the
Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on August 6, 2009). |
| |
|
|
*10.21
|
|
Promissory Note, dated April 12, 2007, made by
Cambium Learning, Inc. in favor of Goldentree Capital
Solutions Fund Financing in the aggregate principal
amount of $10,000,000. (incorporated by reference to
Exhibit 10.21 to the Registration Statement on Form
S-4 of Cambium Learning Group, Inc. (File No.
333-161075) filed with the SEC on August 6, 2009). |
| |
|
|
*10.22
|
|
Promissory Note, dated April 12, 2007, made by
Cambium Learning, Inc. in favor of Goldentree Capital
Opportunities in the aggregate principal amount of
$3,000,000. (incorporated by reference to Exhibit
10.22 to the Registration Statement on Form S-4 of
Cambium Learning Group, Inc. (File No. 333-161075)
filed with the SEC on August 6, 2009). |
| |
|
|
*10.23
|
|
Employment Agreement, dated April 12, 2007, by and
between Cambium Learning, Inc. and David Cappellucci.
(incorporated by reference to Exhibit 10.23 to the
Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on August 6, 2009). |
| |
|
|
*10.24
|
|
Amendment, dated June 26, 2009, by and among David
Cappellucci, Cambium Learning, Inc. and Cambium
Voyager Holdings, Inc. to Employment Agreement, dated
April 12, 2007. (incorporated by reference to Exhibit
10.24 to the Registration Statement on Form S-4 of
Cambium Learning Group, Inc. (File No. 333-161075)
filed with the SEC on August 6, 2009). |
| |
|
|
*10.25
|
|
Restrictive Covenants Agreement, dated November 28,
2006 by and between ProQuest Company and Snap-on
Incorporated. (incorporated by reference to Exhibit
10.25 to the Registration Statement on Form S-4 of
Cambium Learning Group, Inc. (File No. 333-161075)
filed with the SEC on August 6, 2009). |
| |
|
|
*+10.26
|
|
Employment agreement dated April 9, 2009, between
Voyager Learning Company and Ron Klausner.
(incorporated by reference to Exhibit 10.26 to the
Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on August 6, 2009). |
| |
|
|
*+10.27
|
|
Employment agreement dated June 19, 2009, between
Voyager Expanded Learning and Brad Almond.
(incorporated by reference to Exhibit 10.27 to the
Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on August 6, 2009). |
| |
|
|
*+10.28
|
|
Employment agreement dated May 8, 2009, between
Voyager Learning Company and Richard Surratt.
(incorporated by reference to Exhibit 10.28 to the
Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on August 6, 2009). |
| |
|
|
*+10.29
|
|
Retention Agreement, dated July 13, 2006, by and
between Voyager Learning Company (f/k/a ProQuest
Company) and Todd Buchardt. (incorporated by
reference to Exhibit 10.29 to Amendment No. 1 to the
Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on October 9, 2009). |
| |
|
|
*+10.30
|
|
Employment agreement dated May 8, 2009, between
Voyager Learning Company and Todd Buchardt.
(incorporated by reference to Exhibit 10.30 to the
Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on August 6, 2009). |
| |
|
|
*+10.31
|
|
Employment agreement dated March 4, 2009, between
Voyager Expanded Learning and John Campbell.
(incorporated by reference to Exhibit 10.31 to the
Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on August 6, 2009). |
94
| |
|
|
Exhibit
Number |
|
Description |
| |
|
|
*10.32
|
|
Letter Agreement, dated June 20, 2009, by and among
Voyager Learning Company, Cambium-Voyager Holdings,
Inc. (f/k/a Cambium Holdings, Inc.), VSS-Cambium
Holdings III and VSS Cambium Holdings II Corp.
(incorporated by reference to Exhibit 10.32 to the
Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on August 6, 2009). |
| |
|
|
*10.33
|
|
Letter Agreement, dated July 24, 2009, by and between
Cambium-Voyager Holdings, Inc. and VSS Fund
Management LLC. (incorporated by reference to Exhibit
10.33 to the Registration Statement on Form S-4 of
Cambium Learning Group, Inc. (File No. 333-161075)
filed with the SEC on August 6, 2009). |
| |
|
|
*+10.34
|
|
Voyager Supplemental Retirement Plan. (incorporated
by reference to Exhibit 10.34 to Amendment No. 1 to
the Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on October 9, 2009). |
| |
|
|
*+10.35
|
|
Voyager Amended and Restated Replacement Benefit
Plan. (incorporated by reference to Exhibit 10.35 to
Amendment No. 1 to the Registration Statement on Form
S-4 of Cambium Learning Group, Inc. (File No.
333-161075) filed with the SEC on October 9, 2009). |
| |
|
|
*+10.36
|
|
Amendment to Employment Agreement dated as of August
7, 2009, by and among Cambium-Voyager Holdings, Inc.,
Voyager Learning Company and Ronald Klausner.
(incorporated by reference to Exhibit 10.36 to
Amendment No. 1 to the Registration Statement on Form
S-4 of Cambium Learning Group, Inc. (File No.
333-161075) filed with the SEC on October 9, 2009). |
| |
|
|
*10.37
|
|
Amendment No. 3, dated as of October 29, 2009, by and
among Cambium Learning, Inc., as the Borrower (the
successor to VSS-Cambium Merger Corp.), Barclays Bank
PLC, as Administrative Agent, and the required
lenders to the Senior Secured Credit Agreement, dated as of April 12, 2007, as amended. (incorporated by reference
to Exhibit 10.37 to Amendment No. 2 to the Registration Statement on Form S-4
of Cambium Learning Group, Inc. (File No. 333-161075) filed with the SEC on
October 30, 2009). |
| |
|
|
*10.38
|
|
Amendment No. 3, dated as of October 29, 2009, by and
among Cambium Learning, Inc., (the successor to
VSS-Cambium Merger Corp.), TCW/Crescent Mezzanine
Partners IV, L.P., as Administrative Agent, and the
required note holders, to the Note Purchase
Agreement, dated as of April 12, 2007, as amended.
(incorporated by reference to Exhibit 10.38 to
Amendment No. 2 to the Registration Statement on Form
S-4 of Cambium Learning Group, Inc. (File No.
333-161075) filed with the SEC on October 30, 2009). |
| |
|
|
21.1
|
|
Subsidiaries of Cambium Learning Group, Inc. |
| |
|
|
23.1
|
|
Consent of Ernst & Young LLP. |
| |
|
|
23.2
|
|
Consent of Grant Thornton LLP. |
| |
|
|
23.3
|
|
Consent of Whitley Penn LLP. |
| |
|
|
31.1
|
|
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
| |
|
|
31.2
|
|
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
| |
|
|
32.1
|
|
Certification of the 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 the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
95
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned,
therefore duly authorized.
| |
|
|
|
|
| Date: March 26, 2010 |
Cambium Learning Group, Inc.
|
|
| |
By: |
/s/ Bradley C. Almond
|
|
| |
|
Bradley C. Almond |
|
| |
|
Senior Vice President and
Chief Financial Officer |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
| |
|
|
|
|
| Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Ronald Klausner
Ronald Klausner
|
|
Director and Chief Executive Officer
(Principal Executive Officer)
|
|
March 26, 2010 |
|
|
|
|
|
/s/ David F. Cappellucci
David F. Cappellucci
|
|
Director and President
|
|
March 26, 2010 |
|
|
|
|
|
/s/
Bradley C. Almond
Bradley C. Almond
|
|
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
|
|
March 26, 2010 |
|
|
|
|
|
/s/ Barbara Benson
Barbara Benson
|
|
Controller
(Principal Accounting
Officer)
|
|
March 26, 2010 |
|
|
|
|
|
/s/ Harold O. Levy
Harold O. Levy
|
|
Director
|
|
March 26, 2010 |
|
|
|
|
|
/s/ Thomas Kalinske
Thomas Kalinske
|
|
Director
|
|
March 26, 2010 |
|
|
|
|
|
/s/ Neil Weiner
Neil Weiner
|
|
Director
|
|
March 26, 2010 |
|
|
|
|
|
/s/ Frederick J. Schwab
Frederick J. Schwab
|
|
Director
|
|
March 26, 2010 |
|
|
|
|
|
/s/ Scott J. Troeller
Scott J. Troeller
|
|
Director
|
|
March 26, 2010 |
|
|
|
|
|
/s/ Richard J. Surratt
Richard J. Surratt
|
|
Director
|
|
March 26, 2010 |
|
|
|
|
|
/s/ Jeffrey T. Stevenson
Jeffrey T. Stevenson
|
|
Director
|
|
March 26, 2010 |
96
3. Exhibits:
The following exhibits are filed with this Annual Report on Form 10-K. Exhibit
numbers preceded by
an asterisk (*) indicate exhibits previously filed and are hereby incorporated herein by reference.
Exhibit numbers preceded by a plus sign (+) indicate a management contract or compensatory plan or
arrangement.
| |
|
|
Exhibit
Number |
|
Description |
| |
|
|
*2.1
|
|
Agreement and Plan of Mergers, dated as of June 20, 2009, among
Cambium Learning Group, Inc., Voyager Learning Company, VSS-Cambium
Holdings II Corp., Consonant Acquisition Corp., Vowel Acquisition
Corp. and Vowel Representative, LLC. (incorporated by reference to
Annex A to Amendment No. 3 to the Registration Statement on Form S-4
of Cambium Learning Group, Inc. (File No. 333-161075) filed with the
SEC on November 10, 2009). |
| |
|
|
*3.1
|
|
Second Amended and Restated Certificate of Incorporation of
Cambium-Voyager Holdings, Inc. (incorporated by reference to Annex C
to Amendment No. 3 to the Registration Statement on Form S-4 of
Cambium Learning Group, Inc. (File No. 333-161075) filed with the
SEC on November 10, 2009). |
| |
|
|
*3.2
|
|
Amended and Restated Bylaws of Cambium Learning Group, Inc.
(incorporated by reference to Annex D to Amendment No. 3 to the
Registration Statement on Form S-4 of Cambium Learning Group, Inc.
(File No. 333-161075) filed with the SEC on November 10, 2009). |
| |
|
|
*4.1
|
|
Specimen share certificate of Cambium Learning Group, Inc.
(incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the
Registration Statement on Form S-4 of Cambium Learning Group, Inc.
(File No. 333-161075) filed with the SEC on October 9, 2009). |
| |
|
|
*4.2
|
|
Form of Cambium Learning Group, Inc. Warrant. (incorporated by
reference to Exhibit 4.2 to the Registration Statement on Form S-4
of Cambium Learning Group, Inc. (File No. 333-161075) filed with the
SEC on August 6, 2009). |
| |
|
|
*10.1
|
|
Limited Guarantee given by certain funds managed by VSS Fund
Management LLC. (incorporated by reference to Annex G to Amendment
No. 3 to the Registration Statement on Form S-4 of Cambium Learning
Group, Inc. (File No. 333-161075) filed with the SEC on November 10,
2009). |
| |
|
|
*10.2 |
|
Voting and Support Agreement given to Voyager Learning Company by
VSS-Cambium Holdings III, LLC. (incorporated by reference to Annex H
to Amendment No. 3 to the Registration Statement on Form S-4 of
Cambium Learning Group, Inc. (File No. 333-161075) filed with the
SEC on November 10, 2009). |
| |
|
|
*10.3 |
|
Form of Voting and Support Agreement given to Cambium-Voyager
Holdings, Inc. (incorporated by reference to Annex I to Amendment
No. 3 to the Registration Statement on Form S-4 of Cambium Learning
Group, Inc. (File No. 333-161075) filed with the SEC on November 10,
2009). |
| |
|
|
*10.4
|
|
Form of Contingent Rights Agreement by and among Cambium-Voyager
Holdings, Inc., Vowel Representative, LLC and Wells Fargo Bank,
National Association. (incorporated by reference to Annex J to
Amendment No. 3 to the Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with the SEC on
November 10, 2009). |
| |
|
|
*10.5
|
|
Form of Escrow Agreement by and among Cambium-Voyager Holdings,
Inc., Vowel Representative, LLC, Voyager Learning Company, Richard
Surratt and Wells Fargo Bank, National Association. (incorporated by
reference to Annex K to Amendment No. 3 to the Registration
Statement on Form S-4 of Cambium Learning Group, Inc. (File No.
333-161075) filed with the SEC on November 10, 2009). |
| |
|
|
*10.6
|
|
Form of Stockholders Agreement by and among Cambium-Voyager
Holdings, Inc., VSS-Cambium Holdings III, LLC and Vowel
Representative, LLC. (incorporated by reference to Annex L to
Amendment No. 3 to the Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with the SEC on
November 10, 2009). |
| |
|
|
*10.7
|
|
Cambium Learning Group, Inc. 2009 Equity Incentive Plan.
(incorporated by reference to Exhibit 10.7 to the Registration
Statement on Form S-4 of Cambium Learning Group, Inc. (File No.
333-161075) filed with the SEC on August 6, 2009). |
| |
|
|
*10.8
|
|
Senior Secured Credit Agreement dated as of April 12, 2007 among
VSS-Cambium Merger Corp. as the Borrower (the predecessor to Cambium
Learning, Inc.); VSS-Cambium Holdings, LLC and other Guarantors; the
Lenders; Credit Suisse Securities (USA) LLC and Barclays Capital,
the investment banking division of Barclays Bank PLC, as Co-Lead
Arrangers and Joint Bookmanagers; Barclays Bank PLC, as
Administrative Agent and Collateral Agent; Credit Suisse Securities
(USA) LLC, as Co-Syndication Agent; BNP Paribas, as Co-Syndication
Agent; and TD Securities (USA) LLC, as Documentation Agent.
(incorporated by reference to Exhibit 10.8 to Amendment No. 2 to the
Registration Statement on Form S-4 of Cambium Learning Group, Inc. (File No. 333-161075)
filed with the SEC on October 30, 2009). |
| |
|
|
*10.9
|
|
Limited Waiver and Amendment, dated as of May 20,
2008, by and among, Cambium Learning, Inc., as the
Borrower (the successor to VSS-Cambium Merger Corp.),
Barclays Bank PLC, as Administrative Agent and the
required lenders, to the Senior Secured Credit
Agreement, dated as of April 12, 2007. (incorporated
by reference to Exhibit 10.9 to Amendment No. 1 to
the Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on October 9, 2009). |
| |
|
|
*10.10
|
|
Letter Agreement, dated July 15, 2008, by and among
Cambium Learning, Inc., as the Borrower, Barclays
Bank PLC, as Administrative Agent and the required
lenders. (incorporated by reference to Exhibit 10.10
to the Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on August 6, 2009). |
| |
|
|
*10.11 |
|
Permanent Waiver and Amendment No. 2, dated as of
August 22, 2008, by and among, Cambium Learning,
Inc., as the Borrower (the successor to VSS-Cambium
Merger Corp.), Barclays Bank PLC, as Administrative
Agent and the required lenders to the Senior Secured
Credit Agreement, dated as of April 12, 2007, as
amended. (incorporated by reference to Exhibit 10.11
to Amendment No. 2 to the Registration Statement on
Form S-4 of Cambium Learning Group, Inc. (File No.
333-161075) filed with the SEC on October 30, 2009). |
97
| |
|
|
Exhibit
Number |
|
Description |
*10.12
|
|
Note Purchase Agreement dated as of April 12, 2007
among VSS-Cambium Merger Corp., as Company (the
predecessor to Cambium Learning, Inc.); VSS-Cambium
Holdings, LLC, as Guarantor; TCW/Crescent Mezzanine
Partners IV, L.P., TCW/Crescent Mezzanine Partners
IVB, L.P., MAC Capital, Ltd., New York Life
Investment Management Mezzanine Partners II, LP,
NYLIM Mezzanine Partners II Parallel Fund, LP,
Goldentree Capital Solutions Fund Financing,
Goldentree Capital Opportunities, LP, as Purchasers;
and TCW/Crescent Mezzanine Partners IV, L.P., as
Administrative Agent. (incorporated by reference to
Exhibit 10.12 to Amendment No. 2 to the Registration
Statement on Form S-4 of Cambium Learning Group, Inc.
(File No. 333-161075) filed with the SEC on October
30, 2009). |
| |
|
|
*10.13
|
|
Temporary Waiver and Amendment, dated as of May 20,
2008, by and among Cambium Learning, Inc., (the
successor to VSS-Cambium Merger Corp.), TCW/Crescent
Mezzanine Partners IV, L.P., as Administrative Agent
and the required note holders, to the Note Purchase
Agreement, dated as of April 12, 2007. (incorporated
by reference to Exhibit 10.13 to Amendment No. 1 to
the Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on October 9, 2009). |
| |
|
|
*10.14 |
|
Letter Agreement, dated July 15, 2008, by and among
Cambium Learning, Inc., TCW/Crescent Mezzanine
Partners IV, L.P., as Administrative Agent and the
required note holders. (incorporated by reference to
Exhibit 10.14 to the Registration Statement on Form
S-4 of Cambium Learning Group, Inc. (File No.
333-161075) filed with the SEC on August 6, 2009). |
| |
|
|
*10.15
|
|
Permanent Waiver and Amendment No. 2 dated as of
August 22, 2008, by and among Cambium Learning, Inc.,
(the successor to VSS-Cambium Merger Corp.),
TCW/Crescent Mezzanine Partners IV, L.P., as
Administrative Agent and the required note holders,
to the Note Purchase Agreement, dated as of April 12,
2007, as amended. (incorporated by reference to
Exhibit 10.15 to Amendment No. 1 to the Registration
Statement on Form S-4 of Cambium Learning Group, Inc.
(File No. 333-161075) filed with the SEC on October
9, 2009). |
| |
|
|
*10.16
|
|
Promissory Note, dated April 12, 2007, made by
Cambium Learning, Inc. in favor of TCW/Crescent
Mezzanine Partners IV, L.P. in the aggregate
principal amount of $12,973,131.22. (incorporated by
reference to Exhibit 10.16 to the Registration
Statement on Form S-4 of Cambium Learning Group, Inc.
(File No. 333-161075) filed with the SEC on August 6,
2009). |
| |
|
|
*10.17
|
|
Promissory Note, dated April 12, 2007, made by
Cambium Learning, Inc. in favor of TCW/Crescent
Mezzanine Partners IVB, L.P. in the aggregate
principal amount of $9,526,868.78. (incorporated by
reference to Exhibit 10.17 to the Registration
Statement on Form S-4 of Cambium Learning Group, Inc.
(File No. 333-161075) filed with the SEC on August 6,
2009). |
| |
|
|
*10.18
|
|
Promissory Note, dated April 12, 2007, made by
Cambium Learning, Inc. in favor of MAC Capital LTD in
the aggregate principal amount of $2,500,000.
(incorporated by reference to Exhibit 10.18 to the
Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on August 6, 2009). |
| |
|
|
*10.19
|
|
Promissory Note, dated April 12, 2007, made by
Cambium Learning, Inc. in favor of NYLIM Mezzanine
Partners II Parallel Fund, L.P. in the aggregate
principal amount of $3,063,436.24. (incorporated by
reference to Exhibit 10.19 to the Registration
Statement on Form S-4 of Cambium Learning Group, Inc.
(File No. 333-161075) filed with the SEC on August 6,
2009). |
| |
|
|
*10.20
|
|
Promissory Note, dated April 12, 2007, made by
Cambium Learning, Inc. in favor of NY Life Investment
Management Mezzanine Partners II, L.P. in the
aggregate principal amount of $8,936,536.76.
(incorporated by reference to Exhibit 10.20 to the
Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on August 6, 2009). |
| |
|
|
*10.21
|
|
Promissory Note, dated April 12, 2007, made by
Cambium Learning, Inc. in favor of Goldentree Capital
Solutions Fund Financing in the aggregate principal
amount of $10,000,000. (incorporated by reference to
Exhibit 10.21 to the Registration Statement on Form
S-4 of Cambium Learning Group, Inc. (File No.
333-161075) filed with the SEC on August 6, 2009). |
| |
|
|
*10.22
|
|
Promissory Note, dated April 12, 2007, made by
Cambium Learning, Inc. in favor of Goldentree Capital
Opportunities in the aggregate principal amount of
$3,000,000. (incorporated by reference to Exhibit
10.22 to the Registration Statement on Form S-4 of
Cambium Learning Group, Inc. (File No. 333-161075)
filed with the SEC on August 6, 2009). |
| |
|
|
*10.23
|
|
Employment Agreement, dated April 12, 2007, by and
between Cambium Learning, Inc. and David Cappellucci.
(incorporated by reference to Exhibit 10.23 to the
Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on August 6, 2009). |
| |
|
|
*10.24
|
|
Amendment, dated June 26, 2009, by and among David
Cappellucci, Cambium Learning, Inc. and Cambium
Voyager Holdings, Inc. to Employment Agreement, dated
April 12, 2007. (incorporated by reference to Exhibit
10.24 to the Registration Statement on Form S-4 of
Cambium Learning Group, Inc. (File No. 333-161075)
filed with the SEC on August 6, 2009). |
| |
|
|
*10.25
|
|
Restrictive Covenants Agreement, dated November 28,
2006 by and between ProQuest Company and Snap-on
Incorporated. (incorporated by reference to Exhibit
10.25 to the Registration Statement on Form S-4 of
Cambium Learning Group, Inc. (File No. 333-161075)
filed with the SEC on August 6, 2009). |
| |
|
|
*+10.26
|
|
Employment agreement dated April 9, 2009, between
Voyager Learning Company and Ron Klausner.
(incorporated by reference to Exhibit 10.26 to the
Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on August 6, 2009). |
| |
|
|
*+10.27
|
|
Employment agreement dated June 19, 2009, between
Voyager Expanded Learning and Brad Almond.
(incorporated by reference to Exhibit 10.27 to the
Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on August 6, 2009). |
| |
|
|
*+10.28
|
|
Employment agreement dated May 8, 2009, between
Voyager Learning Company and Richard Surratt.
(incorporated by reference to Exhibit 10.28 to the
Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on August 6, 2009). |
| |
|
|
*+10.29
|
|
Retention Agreement, dated July 13, 2006, by and
between Voyager Learning Company (f/k/a ProQuest
Company) and Todd Buchardt. (incorporated by
reference to Exhibit 10.29 to Amendment No. 1 to the
Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on October 9, 2009). |
| |
|
|
*+10.30
|
|
Employment agreement dated May 8, 2009, between
Voyager Learning Company and Todd Buchardt.
(incorporated by reference to Exhibit 10.30 to the
Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on August 6, 2009). |
| |
|
|
*+10.31
|
|
Employment agreement dated March 4, 2009, between
Voyager Expanded Learning and John Campbell.
(incorporated by reference to Exhibit 10.31 to the
Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on August 6, 2009). |
98
| |
|
|
Exhibit
Number |
|
Description |
| |
|
|
*10.32
|
|
Letter Agreement, dated June 20, 2009, by and among
Voyager Learning Company, Cambium-Voyager Holdings,
Inc. (f/k/a Cambium Holdings, Inc.), VSS-Cambium
Holdings III and VSS Cambium Holdings II Corp.
(incorporated by reference to Exhibit 10.32 to the
Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on August 6, 2009). |
| |
|
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*10.33
|
|
Letter Agreement, dated July 24, 2009, by and between
Cambium-Voyager Holdings, Inc. and VSS Fund
Management LLC. (incorporated by reference to Exhibit
10.33 to the Registration Statement on Form S-4 of
Cambium Learning Group, Inc. (File No. 333-161075)
filed with the SEC on August 6, 2009). |
| |
|
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*+10.34
|
|
Voyager Supplemental Retirement Plan. (incorporated
by reference to Exhibit 10.34 to Amendment No. 1 to
the Registration Statement on Form S-4 of Cambium
Learning Group, Inc. (File No. 333-161075) filed with
the SEC on October 9, 2009). |
| |
|
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*+10.35
|
|
Voyager Amended and Restated Replacement Benefit
Plan. (incorporated by reference to Exhibit 10.35 to
Amendment No. 1 to the Registration Statement on Form
S-4 of Cambium Learning Group, Inc. (File No.
333-161075) filed with the SEC on October 9, 2009). |
| |
|
|
*+10.36
|
|
Amendment to Employment Agreement dated as of August
7, 2009, by and among Cambium-Voyager Holdings, Inc.,
Voyager Learning Company and Ronald Klausner.
(incorporated by reference to Exhibit 10.36 to
Amendment No. 1 to the Registration Statement on Form
S-4 of Cambium Learning Group, Inc. (File No.
333-161075) filed with the SEC on October 9, 2009). |
| |
|
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*10.37
|
|
Amendment No. 3, dated as of October 29, 2009, by and
among Cambium Learning, Inc., as the Borrower (the
successor to VSS-Cambium Merger Corp.), Barclays Bank
PLC, as Administrative Agent, and the required
lenders to the Senior Secured Credit Agreement, dated as of April 12, 2007, as amended. (incorporated by reference
to Exhibit 10.37 to Amendment No. 2 to the Registration Statement on Form S-4
of Cambium Learning Group, Inc. (File No. 333-161075) filed with the SEC on
October 30, 2009). |
| |
|
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*10.38
|
|
Amendment No. 3, dated as of October 29, 2009, by and
among Cambium Learning, Inc., (the successor to
VSS-Cambium Merger Corp.), TCW/Crescent Mezzanine
Partners IV, L.P., as Administrative Agent, and the
required note holders, to the Note Purchase
Agreement, dated as of April 12, 2007, as amended.
(incorporated by reference to Exhibit 10.38 to
Amendment No. 2 to the Registration Statement on Form
S-4 of Cambium Learning Group, Inc. (File No.
333-161075) filed with the SEC on October 30, 2009). |
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|
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21.1
|
|
Subsidiaries of Cambium Learning Group, Inc. |
| |
|
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23.1
|
|
Consent of Ernst & Young LLP. |
| |
|
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23.2
|
|
Consent of Grant Thornton LLP. |
| |
|
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23.3
|
|
Consent of Whitley Penn LLP. |
| |
|
|
31.1
|
|
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
| |
|
|
31.2
|
|
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
| |
|
|
32.1
|
|
Certification of the Chief Executive 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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32.2
|
|
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
99