UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

Commission File Number: 001-34575

Cambium Learning Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware		27-0587428
(State or Other Jurisdiction of		(I.R.S. Employer Identification No.)
Incorporation or Organization)
17855 North Dallas Parkway, Suite 400, Dallas, Texas		75287
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (214) 932-9500

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 þ No o

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

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

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

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of July 31, 2011 was 42,271,153.

 

 

TABLE OF CONTENTS

		Page
PART I FINANCIAL INFORMATION			1
Item 1. Financial Statements			1
Condensed Consolidated Statements of Operations (Unaudited) for the Three Months and Six Months Ended June 30, 2011 and June 30, 2010			1
Condensed Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010			2
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2011 and June 30, 2010			4
Notes to the Condensed Consolidated Financial Statements (Unaudited)			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			32
Item 4. Controls and Procedures			33
PART II OTHER INFORMATION			33
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			34
Item 6. Exhibits			35
SIGNATURE PAGE			36
EXHIBITS			37
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

Part I. Financial Information

Item 1.		Financial Statements.

Cambium Learning Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2011				2010				2011				2010
Net revenues		$	57,191			$	47,901			$	87,886			$	76,123
Cost of revenues:
Cost of revenues			17,819				15,217				28,786				26,529
Amortization expense			6,844				7,245				13,462				13,987
Total cost of revenues			24,663				22,462				42,248				40,516
Research and development expense			2,515				2,563				4,894				5,573
Sales and marketing expense			12,874				11,176				23,777				22,233
General and administrative expense			5,529				5,605				11,341				13,543
Shipping and handling costs			817				1,168				1,151				1,712
Depreciation and amortization expense			1,748				2,360				3,484				4,937
Embezzlement and related expense (recoveries)			40				11				(2,396	)			30
Total costs and expenses			48,186				45,345				84,499				88,544
Income (loss) before interest, other income (expense) and income taxes			9,005				2,556				3,387				(12,421	)
Net interest expense			(4,882	)			(4,614	)			(9,287	)			(8,982	)
Other income (expense), net			2				(85	)			365				(95	)
Income (loss) before income taxes			4,125				(2,143	)			(5,535	)			(21,498	)
Income tax expense			(318	)			(34	)			(415	)			(119	)
Net income (loss)		$	3,807			$	(2,177	)		$	(5,950	)		$	(21,617	)
Net income (loss) per common share:
Basic net income (loss) per common share		$	0.09			$	(0.05	)		$	(0.14	)		$	(0.49	)
Diluted net income (loss) per common share		$	0.09			$	(0.05	)		$	(0.14	)		$	(0.49	)
Average number of common shares and equivalents outstanding:
Basic			43,610				44,324				43,979				44,321
Diluted			44,431				44,324				43,979				44,321

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

Cambium Learning Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

		June 30,				December 31,
		2011				2010
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	12,578			$	11,831
Accounts receivable, net			35,837				31,627
Inventory			24,926				22,015
Deferred tax assets			3,703				3,703
Restricted assets, current			1,463				3,064
Assets held for sale			2,727				—
Other current assets			3,791				3,937
Total current assets			85,025				76,177
Property, equipment and software at cost			36,881				32,944
Accumulated depreciation and amortization			(10,052	)			(7,838	)
Property, equipment and software, net			26,829				25,106
Goodwill			151,915				151,915
Acquired curriculum and technology intangibles, net			28,045				33,063
Acquired publishing rights, net			32,784				38,707
Other intangible assets, net			19,984				22,132
Pre-publication costs, net			8,972				7,834
Restricted assets, less current portion			11,707				12,641
Other assets			22,262				15,487
Total assets		$	387,523			$	383,062

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

Cambium Learning Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except per share data)

		June 30,				December 31,
		2011				2010
		(unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	—			$	1,280
Current portion of capital lease obligations			422				378
Accounts payable			4,937				6,465
Contingent value rights, current			—				1,623
Accrued expenses			25,388				22,888
Deferred revenue, current			28,007				34,140
Total current liabilities			58,754				66,774
Long-term liabilities:
Long-term debt, less current portion			174,083				150,850
Capital lease obligations, less current portion			12,092				12,317
Deferred revenue, less current portion			3,574				3,416
Contingent value rights, less current portion			5,896				5,746
Other liabilities			19,370				19,947
Total long-term liabilities			215,015				192,276
Commitments and contingencies (See Note 14)
Stockholders’ equity:
Preferred stock ($.001 par value, 15,000 shares authorized, zero shares issued and outstanding at June 30, 2011 and December 31, 2010)			—				—
Common stock ($.001 par value, 150,000 shares authorized, 43,915 and 43,869 shares issued, and 42,271 and 43,869 shares outstanding at June 30, 2011 and December 31, 2010, respectively)			44				44
Capital surplus			260,510				259,887
Accumulated deficit			(141,168	)			(135,218	)
Treasury stock at cost (1,644 and zero shares at June 30, 2011 and December 31, 2010, respectively)			(4,931	)			—
Other comprehensive income (loss):
Pension and postretirement plans			(702	)			(702	)
Net unrealized gain on securities			1				1
Accumulated other comprehensive income (loss)			(701	)			(701	)
Total stockholders’ equity			113,754				124,012
Total liabilities and stockholders’ equity		$	387,523			$	383,062

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

Cambium Learning Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

		Six Months Ended
		June 30,				June 30,
		2011				2010
Operating activities:
Net loss		$	(5,950	)		$	(21,617	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization expense			16,946				18,924
Gain from recovery of property held for sale			(2,727	)			—
Non-cash interest expense			639				1,052
Gain on derivative instruments			—				(992	)
Change in fair value of contingent value rights obligation			520				—
Loss on disposal of assets			—				38
Stock-based compensation and expense			604				533
Changes in operating assets and liabilities:
Accounts receivable, net			(4,210	)			(11,030	)
Inventory			(2,911	)			(4,830	)
Other current assets			146				1,359
Other assets			625				(551	)
Restricted assets			2,535				1,926
Accounts payable			(1,528	)			6,070
Accrued expenses			2,500				(2,829	)
Deferred revenue			(5,975	)			(538	)
Other long-term liabilities			(558	)			(637	)
Net cash provided by (used in) operating activities			656				(13,122	)
Investing activities:
Cash paid for acquisitions			(1,993	)			—
Expenditures for property, equipment, software and pre-publication costs			(6,718	)			(5,361	)
Net cash used in investing activities			(8,711	)			(5,361	)
Financing activities:
Proceeds from debt			174,024				—
Repayment of debt			(152,130	)			(640	)
Deferred financing costs			(7,980	)			—
Principal payments under capital lease obligations			(181	)			(242	)
Borrowings under revolving credit agreement			10,000				13,000
Payment of revolving credit facility			(10,000	)			—
Stock repurchases			(4,931	)			—
Return of pre-merger member contributions			—				(30	)
Net cash provided by financing activities			8,802				12,088
Increase (decrease) in cash and cash equivalents			747				(6,395	)
Cash and cash equivalents, beginning of period			11,831				13,345
Cash and cash equivalents, end of period		$	12,578			$	6,950

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

Cambium Learning Group, Inc. and Subsidiaries

Note 1 — Basis of Presentation

Cambium Learning Group, Inc. 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 its 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., was transferred to Cambium Learning, Inc., Cambium’s operating subsidiary (“Cambium Learning”).

The transaction was accounted for as an “acquisition” of VLCY by Cambium, as that term is used under United States 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.

Presentation. The Condensed Consolidated Financial Statements include the accounts of the Company and are unaudited. The condensed balance sheet as of December 31, 2010 has been derived from audited financial statements. All intercompany transactions are eliminated.

As permitted under the Securities and Exchange Commission (“SEC”) requirements for interim reporting, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted. The Company believes that these financial statements include all necessary and recurring adjustments for the fair presentation of the interim period results. These financial statements should be read in conjunction with the Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010. Due to seasonality, the results of operations for the three and six month periods ended June 30, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2011.

The preparation of financial statements in conformity with GAAP 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.

Nature of Operations. The Company operates in three business segments: Voyager, a comprehensive intervention business; Sopris, a supplemental solutions education business; and Cambium Learning Technologies, a technology-based education business.

Note 2 — 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 $1.0 million at June 30, 2011, compared to $0.6 million at December 31, 2010. 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 return as well as other factors that in the Company’s judgment could reasonably be expected to cause sales returns to differ from historical experience.

Note 3 — Stock-Based Compensation and Expense

The total amount of pre-tax expense for stock-based compensation recognized in the quarters ended June 30, 2011 and 2010 and the six month periods ended June 30, 2011 and 2010 was $0.3 million, $0.3 million, $0.6 million, and $0.5 million, respectively. The stock-based compensation expense recorded was allocated as follows:

		Three Months Ended June 30,								Six Months Ended June 30,
(in thousands)		2011				2010				2011				2010
Cost of revenues		$	15			$	21			$	30			$	30
Research and development expense			33				44				65				63
Sales and marketing expense			40				48				78				68
General and administrative expense			226				186				431				372
Total		$	314			$	299			$	604			$	533

On February 1, 2011, the Company granted 212,500 options under the Cambium Learning Group, Inc. 2009 Equity Incentive Plan (the “Plan”) with a total grant date fair value, net of forecasted forfeitures, of $0.2 million. Seventy-five percent of these options have a per-share exercise price equal to $4.50 and twenty-five percent of these options have an exercise price equal to $6.50. These options vest equally over a four year service period and the term of the options is ten years from the date of grant. The following assumptions were used in the Black-Scholes option-pricing model to estimate the fair value of these awards:

		2011				2010
Expected stock volatility			35.00	%			35.00	%
Risk-free interest rate			2.50	%			2.87	%
Expected years until exercise			6.25				6.25
Dividend yield			0.00	%			0.00	%

The Company did not issue any options under the Plan in the quarter ended June 30, 2011.

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.

During the quarter ended March 31, 2011, 22,306 of the options granted on January 27, 2010 and 1,507 of the options granted on May 25, 2010 were forfeited. During the quarter ended June 30, 2011, 128,418 of the options granted on January 27, 2010 and 10,000 of the options granted on February 1, 2011 were forfeited. The impact to expense during the period as a result of these forfeitures was zero.

Restricted common stock awards of 43,855 and 9,900 shares were issued during the quarters ended March 31, 2011 and June 30, 2011, respectively, in connection with the Company’s Board of Directors compensation program. The restrictions on the common stock awards will lapse on the one-year anniversary of the grant date or upon a change in control of the Company. Additionally, restricted common stock awards of 1,000 shares were issued during the quarter ended June 30, 2011. The restrictions on the common stock awards will lapse equally over a four-year period on the anniversary of the grant date or upon a change in control of the Company. Each of the restricted common stock awards issued was valued based on the Company’s closing stock price on the date of grant.

On May 17, 2011, as previously announced by the Company, Frederick J. Schwab tendered his resignation as a director of the Company. Mr. Schwab’s decision not to stand for reelection and submit his resignation was not the result of any disagreement with the Company on any matter, including those relating to the Company’s operations, policies or practices. As a result of this resignation, 8,771 of the restricted shares issued during the first quarter of 2011 were cancelled.

During the first quarter of 2010, 10,000 shares of the Company’s stock were issued as restricted stock awards.

Note 4 — Net Income (Loss) per Common Share

Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period, including the potential dilution that could occur if all of the Company’s 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 income (loss) per common share is shown in the table below for the periods indicated:

		Three Months Ended June 30,								Six Months Ended June 30,
(Shares in thousands)		2011				2010				2011				2010
Basic			43,610				44,324				43,979				44,321
Dilutive effect of awards			821				—				—				—
Diluted			44,431				44,324				43,979				44,321
Antidilutive securities:
Options			3,807				3,810				3,807				3,810
Warrants			—				72				141				72
Subscription rights			—				4,663				6,645				5,231

Note 5 — Fair Value Measurements

Fair value is defined 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. 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.

Applicable guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

As of June 30, 2011, financial instruments include $12.6 million of cash and cash equivalents, restricted assets of $13.2 million, collateral investments of $2.0 million, $174.1 million of senior secured notes, $0.5 million of warrants, assets held for sale of $2.7 million, and $5.9 million in contingent value rights (or “CVRs”) issued as part of the VLCY merger consideration. As of December 31, 2010, financial instruments included $11.8 million of cash and cash equivalents, restricted assets of $15.7 million, collateral investments of $2.0 million, the $95.4 million senior secured credit facility, $56.7 million in senior unsecured notes, $0.4 million of warrants, and $7.4 million in CVRs. The fair market values of cash equivalents and 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 senior secured notes approximates its carrying value based on quoted prices in active markets for these debt instruments when traded as assets. The fair values of the properties held for sale were determined by an independent appraisal conducted by a licensed realtor based on the values of similar properties in the area. These properties were acquired by the Company as a result of its recovery efforts in connection with the employee embezzlement matter described in Note 17 below.

Assets and liabilities measured at fair value on a recurring basis are as follows:

						Fair Value at Reporting Date Using
						Quoted Prices in								Significant
						Active Markets for				Significant Other				Unobservable				Total
(in thousands)		As of June 30,				Identical Assets				Observable Inputs				Inputs				Gains
Description		2011				(Level 1)				(Level 2)				(Level 3)				(Losses)
Restricted Assets:
Money Market		$	13,170			$	13,170			$	—			$	—			$	—
Collateral Investments:
Money Market			901				901				—				—				—
Certificate of Deposit			1,064				1,064				—				—				—
Warrant			475				—				475				—				16
Assets held for sale			2,727				—				2,727				—				—
CVRs			5,896				—				—				5,896				(520	)
						Fair Value at Reporting Date Using
						Quoted Prices in								Significant
						Active Markets for				Significant Other				Unobservable				Total
(in thousands)		As of December 31,				Identical Assets				Observable Inputs				Inputs				Gains
Description		2010				(Level 1)				(Level 2)				(Level 3)				(Losses)
Restricted Assets:
Money Market		$	15,705			$	15,705			$	—			$	—			$	—
Collateral Investments:
Money Market			901				901				—				—				—
Certificate of Deposit			1,063				1,063				—				—				—
Warrant			360				—				360				—				23
Interest rate swap			—				—				—				—				992
CVRs			7,369				—				—				7,369				1,124

The warrant was valued using the Black-Scholes pricing model. Due to the low exercise price of the warrants, the model assumptions do not significantly impact the valuation.

In accordance with the provisions in the accounting guidance for intangibles — goodwill and other, the Company’s goodwill balance of $151.9 million was tested for impairment in 2010. In the first step of the annual impairment test for fiscal 2010, 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 education 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. Based on the significant unobservable inputs used in this analysis, this valuation was considered a Level 3 valuation based on the fair value hierarchy described above. The first step of impairment testing for fiscal 2010 showed that the fair value of each reporting unit exceeded its carrying value by at least 10%; therefore, no second step of testing was required and no impairment was indicated. As the Company determined that no impairment indicators were present in the three and six months ended June 30, 2011, no impairment analysis was conducted during the period.

The fair value of the liability for the CVRs is determined using a probability weighted cash flow analysis which takes into consideration the likelihood, amount and timing of cash flows of each element of the pool of assets and liabilities included in the CVR. The determination of fair value of the CVRs involves significant assumptions and estimates, which are reviewed at each quarterly reporting date. As of June 30, 2011, a fair value of $5.9 million has been recorded as a liability for the remaining CVR payments. During the quarter ended June 30, 2011, a loss of $0.2 million was recorded in general and administrative expense to reflect an increase in the estimated fair value of the CVR liability. The ultimate value of the CVRs is not known at this time; however, it is not expected to be more than $10 million and could be as low as the $3.1 million already distributed. Future changes in the estimate of the fair value of the CVRs will impact results of operations and could be material.

The first and second CVR payment dates were in September 2010 and June 2011, with $1.1 million and $2.0 million, respectively, distributed to the escrow agent at those times for distribution to holders of the CVRs. The next scheduled distribution, if any, will be made no later than October 2013 and relates to a potential tax indemnity obligation. Additionally, as described in Note 14 below, any amounts due to CVR holders as a result of refunds received related to the Michigan tax payment will be distributed upon the final resolution of this agreed contingency.

A detail of the elements included in the CVR is as follows:

		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		CVRs
		(In thousands)
		Estimated Fair Value				Loss from Changes				Estimated Fair Value
		as of December 31, 2010				in Estimated CVR Liability				as of June 30, 2011
Components of CVR Liability:
Tax refunds received before closing of the merger		$	1,583			$	—			$	1,583
Other specified tax refunds			4,501				296				4,797
Tax indemnity obligation			1,717				—				1,717
Legal receivable			2,400				—				2,400
Michigan state tax liability			(1,040	)			—				(1,040	)
Other specified tax related liabilities			(132	)			79				(53	)
Costs incurred to collect tax refunds and by stockholders’ representative			(554	)			145				(409	)
Estimated fair value of CVR liability			8,475				520				8,995
Payments to holders of CVRs			1,106								3,099
Remaining estimated CVR liability		$	7,369							$	5,896

As of June 30, 2011, restricted assets in an escrow account for the benefit of the CVRs were $3.1 million, with activity as detailed in the table below. The escrow account includes $3.0 million for a potential tax indemnity obligation, which, if such obligation is not triggered, will benefit the CVRs by $1.9 million with the remainder reverting back to the Company as unrestricted cash.

		CVR Escrow Trust
		(In thousands)
Balance as of December 31, 2010		$	4,179
Tax refunds received			1,053
Payments to holders of CVRs			(1,993	)
Costs incurred to collect tax refunds and by stockholders’ representative			(167	)
Balance as of June 30, 2011			3,072

Note 6 — Comprehensive Income (Loss)

The Company recorded no other comprehensive income or loss for the three and six month periods ended June 30, 2011 and 2010. Therefore, comprehensive income (loss) is equal to the net income (loss) for these periods.

Note 7 — Other Current Assets

Other current assets at June 30, 2011 and December 31, 2010 consisted of the following:

		As of
		June 30,				December 31,
(in thousands)		2011				2010
Prepaid expenses		$	2,080			$	1,463
Deferred costs			1,711				2,163
Income taxes receivable			—				249
Other current assets			—				62
Total		$	3,791			$	3,937

Note 8 — Other Assets

Other assets at June 30, 2011 and December 31, 2010 consisted of the following:

		As of
		June 30,				December 31,
(in thousands)		2011				2010
Tax receivables		$	10,438			$	11,168
Deferred financing costs			8,532				1,542
Collateral investments			1,965				1,964
Other			1,327				813
Total		$	22,262			$	15,487

Note 9 — Accrued Expenses

Accrued expenses at June 30, 2011 and December 31, 2010 consisted of the following:

		As of
		June 30,				December 31,
(in thousands)		2011				2010
Salaries, bonuses and benefits		$	8,632			$	10,183
Accrued interest			6,335				—
Accrued royalties			3,421				3,220
Pension and post-retirement medical benefits			1,209				1,209
Deferred compensation			169				525
Other			5,622				7,751
Total		$	25,388			$	22,888

Note 10 — Other Liabilities

Other liabilities at June 30, 2011 and December 31, 2010 consisted of the following:

		As of
		June 30,				December 31,
(in thousands)		2011				2010
Pension and post-retirement medical benefits, long-term portion		$	10,527			$	10,847
Long-term deferred tax liability			4,529				4,529
Long-term income tax payable			804				847
Long-term deferred compensation			535				613
Other			2,975				3,111
Total		$	19,370			$	19,947

Note 11 — Pension Plan

The net pension costs of the Company’s defined benefit pension plan were comprised solely of interest costs and totaled $0.1 million for the three month periods ended June 30, 2011 and 2010 and $0.3 million for the six month periods ended June 30, 2011 and 2010.

Note 12 — Restructuring

As a result of the merger with VLCY on December 8, 2009, the Company has acted upon plans to reduce its combined work force and has closed its Dallas, Texas distribution facility and transferred all inventory to its distribution facility in Frederick, Colorado. The following table summarizes the amounts incurred in connection with the restructuring plan:

										Total				Total
						Total				Incurred in				Incurred in
		Total Amount				Incurred as				Six Months				Year Ended
		Expected to				of June 30,				Ended June 30,				December 31,
(in thousands)		be Incurred				2011				2011				2010
One-time termination benefits		$	1,260			$	1,260			$	(26	)		$	743
Warehouse move costs			570				570				—				570
		$	1,830			$	1,830			$	(26	)		$	1,313

The change in the accrual for one-time termination benefits, which does not impact a segment and so is included in unallocated shared services, for the six months ended June 30, 2011 is as follows:

		One-Time
		Termination
(in thousands)		Benefits
Balance as of December 31, 2010		$	85
Accrual changes			(26	)
Payments made			(59	)
Balance as of June 30, 2011		$	—

Note 13 — Uncertain Tax Positions

The Company recognizes the financial statement impacts of a tax return position when it is more likely than not, based on technical merits, that the position will ultimately be sustained. For tax positions that meet this recognition threshold, the Company applies judgment, taking into account applicable tax laws, experience 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 the Company’s tax return and the benefit reflected in our financial statements is recorded on our condensed consolidated balance sheet as an unrecognized tax benefit (“UTB”). The Company updates its UTBs 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 tax authorities. The balance of UTBs was $7.1 million and $7.2 million at June 30, 2011 and December 31, 2010, respectively. The decrease was due primarily to the expiration of statutes of limitation.

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 14 — Commitments and Contingencies

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.

As previously reported in our Annual Report on Form 10-K for the year ended December 31, 2010, the Company is involved in a tax litigation matter related to a Michigan state tax issue. The final resolution of the tax litigation or potential settlement could result in a refund ranging from zero to approximately $10.4 million of which fifty percent (50%), net of expenses incurred, would be payable to the holders of the CVRs. If the Company’s position is not ultimately upheld, the Company could incur up to $10.4 million of indemnification expense in future periods on its Statements of Operations, partially offset by any reduction to the CVRs liability. Management believes it is more likely than not that the Company’s position will be upheld and a $10.4 million tax receivable for the expected refund is recorded in other assets on the Condensed Consolidated Balance Sheets as of June 30, 2011.

From time to time, the Company may enter into firm purchase commitments for printed materials included in inventory which the Company expects to use in the ordinary course of business. These commitments are typically for terms less than one year and require the Company to buy minimum quantities of materials with specific delivery dates at a fixed price over the term. As of June 30, 2011, these open purchase commitments totaled $1.8 million.

The Company has letters of credit outstanding as of June 30, 2011 in the amount of $2.9 million to support workers’ compensation insurance coverage, certain 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 Automated Clearinghouse (ACH) programs. The Company also maintains a $0.9 million money market fund investment as collateral for a travel card program. The certificate of deposit and money market fund investment are recorded in other assets.

Note 15 — Long-Term Debt

Long-term debt consists of the following at June 30, 2011 and December 31, 2010:

		June 30,				December 31,
(in thousands)		2011				2010
$175.0 million of 9.75% senior secured notes due February 15, 2017, interest payable semiannually		$	175,000			$	—
Less: Unamortized discount			(917	)			—
Total 9.75% senior secured notes			174,083				—
$128.0 million of floating rate senior secured notes due April 11, 2013, interest payable quarterly			—				95,408
$64.2 million of 13.75% senior unsecured notes due April 11, 2014, interest payable quarterly			—				56,722
			174,083				152,130
Less: Current portion of long-term debt			—				(1,280	)
Total long-term debt		$	174,083			$	150,850

On February 17, 2011, the Company closed an offering of $175 million aggregate principal amount of 9.75% senior secured notes due 2017 (the “Notes”) and entered into a new asset-based revolving credit facility with potential for up to $40 million in borrowing capacity. The Company used a portion of the net proceeds from the offering to repay in full outstanding indebtedness under the Company’s senior facility and senior unsecured notes that existed as of yearend 2010 and to pay related fees and expenses. Total fees incurred in the closing of the Notes and revolving credit facility totaled $9.1 million, including $1.75 million paid to an affiliate of Veronis Suhler Stevenson (VSS) pursuant to the consulting fee agreement between the Company and VSS. Deferred financing costs are capitalized in other assets in the condensed consolidated balance sheets, net of accumulated amortization, and are to be amortized over the term of the related debt using the effective interest method. Unamortized capitalized deferred financing costs at June 30, 2011 were $8.5 million.

The Offering was a private placement exempt from the registration requirements under the Securities Act of 1933 (the “Securities Act”). Interest on the Notes will accrue at a rate of 9.75% per annum from the date of original issuance and will be payable semi-annually in arrears on each February 15 and August 15, commencing on August 15, 2011, to the holders of record of the Notes on the immediately preceding February 1 and August 1. No principal repayments are due until the maturity date of the Notes.

The Notes are secured by (i) a first priority lien on substantially all of the Company’s assets (other than inventory and accounts receivable and related assets of the ABL Credit Parties in connection with the ABL Facility (each as defined and discussed below) and subject to certain exceptions), including capital stock of the guarantors (which are certain of the Company’s subsidiaries), and (ii) a second-priority lien on substantially all of the inventory and accounts receivable and related assets of the ABL Credit Parties, in each case, subject to certain permitted liens. The Notes also contain customary covenants, including limitations on the Company’s ability to incur debt, and events of default as defined by the agreement. The Company may, at its option, redeem the Notes prior to their maturity based on the terms included in the agreement.

Registration Rights Agreement. In connection with the Offering, the Company entered into a Registration Rights Agreement that requires that the Company (i) file with the SEC within 180 days after the issue date of the Notes (or February 17, 2011), a registration statement under the Securities Act (the “Exchange Offer Registration Statement”), relating to an offer to exchange the Notes (the “Exchange Offer”) for new notes (the “Exchange Notes”) on terms substantially identical to the Notes, except that the Exchange Notes will not be subject to the same restrictions on transfer; (ii) use commercially reasonable efforts to cause the Exchange Offer Registration Statement to become effective within 270 days after the date of the Notes; and (iii) within 60 days of the Exchange Offer Registration Statement becoming effective, complete the Exchange Offer and issue the Exchange Notes in exchange for all Notes validly tendered in the Exchange Offer.

In August 2011, the Exchange Offer Registration Statement filed with the SEC on May 6, 2011 was deemed effective. The Company anticipates the Exchange Offer will be completed within the prescribed deadlines set forth in the Registration Rights Agreement.

New Credit Facility (ABL Facility). On February 17, 2011, the Company’s wholly owned subsidiary, Cambium Learning, Inc. (together with its wholly owned subsidiaries, the “ABL Credit Parties”), entered into the New Credit Facility (the “ABL Facility”) pursuant to a Loan and Security Agreement (the “ABL Loan Agreement”), by and among the ABL Credit Parties, Harris N.A., individually and as Agent (the “Agent”) for any ABL Lender (as hereinafter defined) which is or becomes a party to said ABL Loan Agreement, certain other lenders party thereto (together with Harris N. A. in its capacity as a lender, the “ABL Lenders”), Barclays Bank PLC, individually and as Collateral Agent, and BMO Capital Markets and Barclays Capital, as Joint Lead Arrangers and Joint Book Runners. The ABL Facility consists of a four-year $40.0 million revolving credit facility, which includes a $5.0 million subfacility for swing line loans and a $5.0 million subfacility for letters of credit. In addition, the ABL Facility provides that the ABL Credit Parties may increase the aggregate principal amount of the ABL Facility by up to an additional $20.0 million, subject to the consent of the Agent (whose consent shall not be unreasonably withheld) and subject to the satisfaction of certain other conditions.

The interest rate for the ABL Facility will be, at the ABL Credit Parties’ option, either an amount to be determined (ranging from 2.75% to 3.25%, depending upon the ABL Credit Parties’ fixed charge coverage ratio at the time) above the London Interbank Offered Rate or at an amount to be determined (ranging from 1.75% to 2.25%, depending upon the ABL Credit Parties’ fixed charge coverage ratio at the time) above the “base rate.” On any day, the base rate will be the greatest of (i) the Agent’s then-effective prime commercial rate, (ii) an average federal funds rate plus 0.50% and (iii) the LIBOR quoted rate plus 1.00%. The ABL Facility is subject to certain exceptions, secured by a first-priority lien on the ABL Credit Parties’ inventory and accounts receivable and related assets and a second-priority lien (junior to the lien securing the ABL Credit Parties’ obligations with respect to the Notes) on substantially all of the ABL Credit Parties’ other assets.

As of June 30, 2011, the balances of accounts receivable and inventory collateralizing the ABL Facility were $35.8 million and $24.9 million, respectively. As of June 30, 2011, the Company has a borrowing base under the ABL Loan Agreement of up to $32.5 million.

Revolving loans under the ABL Facility may be used solely for (i) the satisfaction of existing indebtedness of the ABL Credit Parties under their prior senior secured credit facility and outstanding pursuant to their prior existing senior unsecured notes, (ii) general operating capital needs of the ABL Credit Parties in a manner consistent with the provisions of the ABL Facility and all applicable laws, (iii) working capital and other general corporate purposes in a manner consistent with the provisions of the ABL Facility and all applicable laws, (iv) the payment of certain fees and expenses incurred in connection with the ABL Facility and/or the Notes, and (v) other purposes permitted under the ABL Loan Agreement.

The ABL Facility contains a financial covenant that generally requires the ABL Credit Parties to maintain, on a consolidated basis, either (i) excess availability of at least the greater of $8 million and 15% of the revolver commitment or (ii) a fixed charge coverage ratio of 1.1 to 1.0. The ABL Credit Parties will be required to pay, quarterly in arrears, an unused line fee equal to the product of (x) either 0.375% or 0.50% (depending upon the ABL Credit Parties’ fixed charge coverage ratio at the time) and (y) the average daily unused amount of the revolver.

Note 16 — Segment Reporting

The Company has three reportable segments with separate management teams and infrastructures that offer various products and services, as follows:

Voyager:

Voyager offers reading, math and professional development programs targeted towards the at-risk and special education student populations. Voyager materials, offered online and via print, are tailored to meet the needs of these students and differ considerably from traditional instructional materials in design, approach and intensity. Lessons are based on scientific research and are carefully designed to effectively and efficiently address each of the strategies and skills necessary to improve the abilities of struggling students.

Sopris:

Sopris focuses on providing a diverse, yet comprehensive, collection of printed and electronic supplemental education materials to complement core programs and to provide intense remediation aimed at specific skill deficits. When compared to products offered by the Company’s other business units, Sopris products tend to be more narrowly-tailored and target a smaller, more specific audience.

Cambium Learning Technologies:

Cambium Learning Technologies leverages technology to deliver subscription-based websites, online libraries, software and equipment designed to help students reach their potential in grades Pre-K through 12 and beyond. Cambium Learning Technologies products are offered under four different industry leading brands: Learning A-Z, ExploreLearning, Kurzweil Educational Systems and IntelliTools.

Other:

This consists of unallocated shared services, such as accounting, legal, human resources and corporate related items. Depreciation and amortization expense, interest income and expense, other income and expense, and income taxes are also included in other, as the Company and its chief operating decision maker evaluate the performance of operating segments excluding these captions.

The following table represents the net revenues, operating expenses 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, and therefore this information is not presented.

										Cambium
										Learning
		Voyager				Sopris				Technologies				Other				Consolidated
Quarter Ended June 30, 2011
Net revenues		$	35,254			$	8,370			$	13,567			$	—			$	57,191
Cost of revenues			13,947				2,568				1,232				72				17,819
Amortization			—				—				—				6,844				6,844
Total cost of revenues			13,947				2,568				1,232				6,916				24,663
Other operating expenses			9,227				2,594				5,811				4,103				21,735
Embezzlement and related expense (recoveries)			—				—				—				40				40
Depreciation and amortization			—				—				—				1,748				1,748
Net interest expense			—				—				—				4,882				4,882
Other income, net			—				—				—				(2	)			(2	)
Income tax expense			—				—				—				318				318
Segment net income (loss)		$	12,080			$	3,208			$	6,524			$	(18,005	)		$	3,807
Quarter Ended June 30, 2010
Net revenues		$	32,600			$	6,408			$	8,893			$	—			$	47,901
Cost of revenues			11,902				2,161				1,122				32				15,217
Amortization			—				—				—				7,245				7,245
Total cost of revenues			11,902				2,161				1,122				7,277				22,462
Other operating expenses			9,601				1,923				4,127				4,861				20,512
Embezzlement and related expense			—				—				—				11				11
Depreciation and amortization			—				—				—				2,360				2,360
Net interest expense			—				—				—				4,614				4,614
Other expense, net			—				—				—				85				85
Income tax expense			—				—				—				34				34
Segment net income (loss)		$	11,097			$	2,324			$	3,644			$	(19,242	)		$	(2,177	)

										Cambium
										Learning
		Voyager				Sopris				Technologies				Other				Consolidated
Six Months Ended June 30, 2011
Net revenues		$	49,946			$	12,555			$	25,385			$	—			$	87,886
Cost of revenues			21,940				4,238				2,455				153				28,786
Amortization			—				—				—				13,462				13,462
Total cost of revenues			21,940				4,238				2,455				13,615				42,248
Other operating expenses			16,820				4,910				10,972				8,461				41,163
Embezzlement and related expense (recoveries)			—				—				—				(2,396	)			(2,396	)
Depreciation and amortization			—				—				—				3,484				3,484
Net interest expense			—				—				—				9,287				9,287
Other income, net			—				—				—				(365	)			(365	)
Income tax expense			—				—				—				415				415
Segment net income (loss)		$	11,186			$	3,407			$	11,958			$	(32,501	)		$	(5,950	)
Six Months Ended June 30, 2010
Net revenues		$	48,472			$	10,311			$	17,340			$	—			$	76,123
Cost of revenues			18,972				3,748				2,618				1,191				26,529
Amortization			—				—				—				13,987				13,987
Total cost of revenues			18,972				3,748				2,618				15,178				40,516
Other operating expenses			18,709				3,909				8,505				11,938				43,061
Embezzlement and related expense			—				—				—				30				30
Depreciation and amortization			—				—				—				4,937				4,937
Net interest expense			—				—				—				8,982				8,982
Other expense, net			—				—				—				95				95
Income tax expense			—				—				—				119				119
Segment net income (loss)		$	10,791			$	2,654			$	6,217			$	(41,279	)		$	(21,617	)

Note 17 — 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. These irregularities were perpetrated by a former employee over more than a three-year period beginning in 2004 and continuing through April 2008 and the losses incurred by the Company totaled $14.0 million. Charges included in the condensed consolidated statement of operations after April 2008 represent expenses incurred by the Company to recover property purchased by the former employee using the embezzled funds, net of any recoveries.

During the six months ended June 30, 2011, the Company received cash recoveries of $0.5 million and title to two properties purchased by the former employee with embezzled funds that had an appraised fair value of approximately $2.6 million, net of estimated selling costs. These recoveries were recorded as reductions to Embezzlement and related expense (recoveries) in the condensed consolidated statements of operations and the properties were recorded in the condensed consolidated balance sheets as Assets Held for Sale. During the three months ended June 30, 2011, a majority of the costs to prepare the properties for listing were incurred which resulted in an increase in the value of the Assets Held for Sale in the condensed consolidated balance sheets as the remaining costs to sell are now comprised solely of real estate agent commissions.

Ongoing expenses incurred related to the Company’s recovery efforts totaled $0.1 million during the first half of 2011.

Warrants to purchase 36,531 shares of the Company’s common stock were issued to VSS-Cambium Holdings III, LLC as a result of the cash recoveries during the first quarter of 2011, in accordance with the terms of such warrants. Upon the sale of the recovered properties the Company will be required to issue additional warrants based on the amount of cash received, net of related expenses. The number of warrants to be issued will equal 0.45 multiplied by the quotient of the net cash recovery divided by $6.50. The Company will be obligated to issue these warrants upon the sale of the properties; therefore an estimated liability of $0.6 million was recorded as Embezzlement and related expense (recoveries) in the condensed consolidated statements of operations during the first quarter of 2011. The estimated liability was recorded in Accrued expenses in the condensed consolidated balance sheets and totals $0.6 million as of June 30, 2011.

The charges incurred in the three and six months ended June 30, 2010 relate solely to the Company’s ongoing recovery efforts.

Note 18 — Stock Repurchase

On May 20, 2011, the Company entered into a stock purchase agreement with a group of investors. The transaction was settled the same day with the Company purchasing 1,643,507 shares for a total cost of $4.9 million. Upon repurchase these treasury shares are no longer registered shares of the Company. These shares are recorded to the treasury stock line as an offset to common stock and additional paid in capital.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This section should be read in conjunction with the audited Consolidated Financial Statements of Cambium Learning Group, Inc. and its subsidiaries (the “Company,” “we,” “us,” or “our”) and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010.

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 fact 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. These risks and uncertainties include, but are not limited to, those described in “Risk Factors” in Part II, Item 1A and elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2010, and those described from time to time in our future reports filed with the SEC. 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.

Our Company

We are one of the largest providers of proprietary intervention curricula, educational technologies and other research-based education solutions for students in the Pre-K through 12 ^th grade education market in the United States. The intervention market where we focus provides supplemental education solutions to at-risk and special education students. We offer a distinctive blended intervention solution that combines different forms of current instruction techniques, including text books, education games, data management and e-learning. We believe that our approach builds a more effective learning environment that combines teacher-led instruction and technology and that this approach sets us apart from our competitors as we believe it has proven to better engage at-risk students, leading to more favorable results. Our solutions are designed to enable the most challenged learners to achieve their potential by utilizing a range of content that primarily focuses on reading and math.

Our mission is to deliver educational solutions that enable students to reach grade level academic standards. We take a holistic approach to learning and our intervention solutions address both the behavioral and cognitive needs of the students we serve. We believe our focus on the Pre-K through 12 ^th grade intervention market and our significantly greater scale and scope of operations compared to those companies primarily focused on the intervention market gives us a competitive edge relative to our peers. Further, our products and services are highly results-oriented and enable school districts and parents across the country to improve student performance and better satisfy rigorous accountability standards.

Our primary business units include:

	•		Voyager, our comprehensive intervention business;
	•		Sopris, our supplemental solutions education business; and
	•		Cambium Learning Technologies (“CLT”), our technology-based education business.

Unallocated shared services, such as accounting, legal, human resources and corporate related items, are recorded in a “Shared Services” category. Depreciation and amortization expense, goodwill impairment, interest income and expense, other income and expense, and taxes are included in this category.

Overview

We continue to experience adverse conditions in the education funding environment as a result of the continued depressed circumstance of certain state and local budgets. As school districts rely upon state and local budgets, some of our customers have found it difficult to secure alternative funding sources in the midst of these market conditions. Additionally, potential customers are more frequently utilizing a request for proposal process to complete purchases, which elongates the time required to complete a sale.

We have experienced some positive impact, both directly and indirectly, from the American Reinvestment and Recovery Act (ARRA) passed in February 2009. The ARRA provides significant new federal funding for various education initiatives through September 2011. While the education funding is for a broad set of education initiatives, we believe that schools and districts have directed, and may continue to direct, some of the new funding for programs that use our products and services. 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.

The following trends have had or may have an impact on our net revenues, profitability and EBITDA:

	•		We believe our product diversification will strengthen our ability to sustain market share in a troubled market and capture market share when the market recovers.
	•		We believe our focus on student outcomes through product usage and an overall partnership approach with the customer to implement our solutions, in the manner that the program was designed, results in higher student success rates, and such success, if achieved, will lead to customer retention and growth through reference sales.
	•		We believe there is a trend of student accountability resulting in greater funding being directed to at-risk children in the United States with new funding sources, such as Race to the Top, which could provide additional funds for our products and services.
	•		We continue to face budgetary pressures resulting from the economic crisis faced by many states and local entities and intense competition. We expect governmental spending austerity will continue over the next two to three years and have a continued depressive effect on general spending and, therefore, make order volume growth challenging.
	•		We have experienced growth in our online subscription-based products and our Sopris supplemental education materials and we expect that growth to continue.
	•		We have experienced a trend of growth in our portfolio of math products, including products such as Vmath, Transitional Math and Gizmos (ExploreLearning).
	•		In 2010, we achieved significant cost savings as part of an effort to achieve merger related synergies, which included a reduction in force. We will continue to reduce costs through productivity initiatives and redeploy those savings into growth investments, but the magnitude of the reductions in 2010 are not expected to be replicated.
	•		We will focus on several key areas in 2011, including: continued investment in our digital assets such as ExploreLearning, Learning A-Z, Kurzweil, Intellitools, Ticket To Read, VocabJourney and Sopris; emphasizing our new adaptive solutions; designing and launching an online individualized intervention curriculum; and investment in our student data management system.
	•		We expect to benefit from continuity of our leadership team and sales organization, who have now worked together for more than a year.

Second Quarter of Fiscal 2011 Compared to the Second Quarter of Fiscal 2010

		Three Months Ended																Year Over Year Change
		June 30, 2011								June 30, 2010								Favorable/(Unfavorable)
						% of								% of
(in thousands)		Amount				Revenues				Amount				Revenues				$				%
Net revenues:
Voyager		$	35,254				61.6	%		$	32,600				68.1	%		$	2,654				8.1	%
Sopris			8,370				14.6	%			6,408				13.4	%			1,962				30.6	%
Cambium Learning Technologies			13,567				23.7	%			8,893				18.6	%			4,674				52.6	%
Total net revenues			57,191				100.0	%			47,901				100.0	%			9,290				19.4	%
Cost of revenues:
Voyager			13,947				24.4	%			11,902				24.8	%			(2,045	)			(17.2	)%
Sopris			2,568				4.5	%			2,161				4.5	%			(407	)			(18.8	)%
Cambium Learning Technologies			1,232				2.2	%			1,122				2.3	%			(110	)			(9.8	)%
Shared Services			72				0.1	%			32				0.1	%			(40	)			(125.0	)%
Amortization expense			6,844				12.0	%			7,245				15.1	%			401				5.5	%
Total cost of revenues			24,663				43.1	%			22,462				46.9	%			(2,201	)			(9.8	)%
Research and development expense			2,515				4.4	%			2,563				5.4	%			48				1.9	%
Sales and marketing expense			12,874				22.5	%			11,176				23.3	%			(1,698	)			(15.2	)%
General and administrative expense			5,529				9.7	%			5,605				11.7	%			76				1.4	%
Shipping costs			817				1.4	%			1,168				2.4	%			351				30.1	%
Depreciation and amortization expense			1,748				3.1	%			2,360				4.9	%			612				25.9	%
Embezzlement and related expense (recoveries)			40				0.1	%			11				0.0	%			(29	)			(263.6	)%
Income before interest, other income (expense) and income taxes			9,005				15.7	%			2,556				5.3	%			6,449				252.3	%
Net interest expense			(4,882	)			(8.5	)%			(4,614	)			(9.6	)%			(268	)			(5.8	)%
Other income (expense), net			2				0.0	%			(85	)			(0.2	)%			87				102.4	%
Income tax expense			(318	)			(0.6	)%			(34	)			(0.1	)%			(284	)			(835.3	)%
Net income (loss)		$	3,807				6.7	%		$	(2,177	)			(4.5	)%		$	5,984				274.9	%